CAIXA ECONÓMICA MONTEPIO GERAL 2017 CONSOLIDATED RESULTS Lisbon, 8 February 2018 (Year-on-year changes, unless when stated otherwise) Unaudited financial information This document is a free translation into English of the original Portuguese version. Due to the complexities of language translation, translations are not always precise. In case of doubt or misinterpretation, the Portuguese version will prevail. Consolidated net income of 30.1Mn Commercial activity results 1 increased 96.2% to 135.2Mn Cost to Income 3 of 53.1% Common Equity Tier 1 (CET1 4 ) of 13.5% LCR 5 of 153.4% HIGHLIGHTS Consolidated net income of 30.1Mn, representing an increase of 116.6Mn; Commercial activity results 1 increased by 96.2% to 135.2Mn; Commercial net interest income 2 rising 8.8% supported on the reduction of the funding costs; Commissions generated by the business increased 15.3%, substantiating the strategic goal of diversifying the business returns; Improvement of operational efficiency, with the Cost to Income ratio 3 at 53.1%, grounding the business sustainability; Common Equity Tier 1 (CET1 4 ) ratio increased to 13.5%, benefiting from the organic own funds generation, from the strengthening of the own capital base and from the reduction of the risk-weighted assets (RWAs) in 843.0Mn; 1
Capital ratios incorporate the effect of the adherence to the deferred tax assets (DTAs) special regime, estimated to be of +0.1 p.p. (0.7 p.p. fully implemented); Credit at risk ratio decreased to 12.7%, with the credit at risk amount presenting its lowest level since 2011; Cost of risk reached 94bps, 25bps lower when compared to 119bps recorded in 2016, benefiting from the strict credit granting policy. The coverage of the credit at risk stood at 119.3%, considering impairments and real estate collaterals; Strong liquidity position the LCR 5 ratio reached 153.4%, which is 73.4 p.p. above the minimum regulatory requirement of 80%; Strong growth of the customer deposits in the second half of 2017, reaching 12,561Mn (+ 933Mn comparing to Jun-17), representing 62.1% of the funding sources, as a consequence of the strengthening of the commercial dynamics accomplished towards year end; Return to the Covered Bond (CB) market with the first Portuguese CB issue in the Conditional Pass-Through (CPT) format, in the amount of 750Mn with a 5 year term and with a fixed interest rate of 0.875% per year. The demand surpassed 6 times the initial amount; Secutization in November 2017, with a public rating, of a non-performing loans portfolio in a total amount of 580.6Mn. This securitization (Évora Finance) was placed in the market under competitive conditions. 2
PROFITABILITY Net income improves to 30.1Mn Net income increased by 116.6Mn, reaching 30.1Mn in 2017, based on the favorable performance of the net operating income, as it benefited from the recovery of the core business, of the operating costs and of the impairments; Net interest income recorded a 4.3% growth when compared to the same period of the previous year, supported by the cost of funding reduction, namely the cost of term deposits and issued debt; Net Commissions rose by 15.3%, to 117.0Mn, benefiting from the commercial dynamics through the price adequacy to the value of the services provided; Core net operating income 6 increased 26.3Mn (+7.4%), boosted by the positive performance of the core business, both through the performance of the net interest income and the commissions; Operating Costs 7 fell 9.3%, reflecting the impact of staff resizing efforts and the synergies obtained in the external services and supplies. CAPITAL Solid capital position The core capital ratio (CET14) rose to 13.5% and the Total Capital ratio4 to 13.6% (+.31p.p. and +2.7p.p., respectively); The capital position strengthening incorporates the positive effects of the organic capital generation, the strengthening of the own capital base and the risk-weighted adjusted assets reduction to 11.987Mn (- 843Mn when compared to Dec-16). The capital ratios surpass the new prudential levels that will be required from 1 July 2018 onwards according to Basel Pillar 2 (under SREP Supervisory Review and Evaluation Process). 3
ASSET QUALITY Sustained reduction in the cost of risk The cost of credit risk reached 94bps, -25bps when compared to 119bps recorded in 2016, benefiting from the changes made on the risk analysis policy in credit granting; Reduction of 52% in the amount of new loans in default, as a result of the improvement of the credit risk management; Decrease of the credit at risk ratio by 2.5p.p., standing at 12.7%, benefiting from the NPL securitization transaction, and recording the lowest historical level of the credit at risk amount since 2011; Coverage of the credit risk by 56.6%, which rises to 119.3% taking into consideration the impairments and the related real estate collateral. LIQUIDITY Strong liquidity position Strong liquidity position, with the LCR5 ratio at 153.4%, 73.4p.p. above the minimum regulatory requirement of 80%; Strong Customer Deposits base, reaching 12,561Mn (+ 969Mn when compared to the end of March 2017), reflecting the effect of the commercial dynamics accomplished in 2017, and representing 62.1% of the funding sources; ECB net exposure 8 decreased to 6Mn. ECB funding stood at 1,558Mn (-32.9% when comparing to 2016), whereas the deposits amount in the central bank account amounted to 1,552Mn. High liquidity assets and cash reach an amount of 2.6Bn; Return to the capital markets with the placement of a 750Mn Covered Bonds (CB) issue. The demand surpassed 6 times the initial issuance amount; First Portuguese issue of Conditional Pass-Through Covered Bonds, with a 5 year term and a fixed interest rate of 0.875% per year. 4
1 Commercial Net Interest Income + Net Commissions Operating costs. 2 Interest received from customer loans Interest paid for customer deposits. 3 Operating costs / Net operating income. 4 According to the CRD IV/CRR Phasing-in (ratios as of 31 December 2017 are estimates and include the effect of the adherence to the special regime of deferred tax assets, under law nr 61/2014, and the cumulative net income of the year). 5 LCR Liquidity Coverage Ratio. 6 Net interest income + net commissions. 7 Excluding the impacts associated with the resizing of the operational structure program implemented in 2016. 8 ECB funding deposits in central bank. 5
PROFITABILITY CEMG achieved a positive net income of 30.1Mn in 2017, which compares to the negative result of 86.5Mn in 2016. This performance had the contribution of: The positive performance of the core business, with a 10.8Mn increase of the net interest income (+4.3%); The 15.5Mn growth of the net commissions (+15.3%); The operating costs 2 reduction of 27.6Mn (-9.3%), substantiating the synergies obtained by the staff adjustment and by the renegotiation of the external supplies and services. The positive performance of the results from financial operations, benefiting from gains obtained with the sale of securities, and other operating income, reflecting the positive contribution associated with real estate assets; The lower impairments and provisions charges, by including the effects of the measures taken regarding the loans approval, granting and control. The net interest income stood at 263.9Mn in 2017, compared with 253.2Mn in 2016. This performance was achieved by the reduction of the funding costs, namely the cost of the term deposits and the issued debt, which surpassed the decrease of interest and return of the loan portfolio, in the context of historically low market interest rates. Commissions amounted to 117.0Mn in 2017, representing an increase of 15.3% when compared to the previous year, as a consequence of the favorable impact from the pricing revision as well as the improved business dynamics, substantiating the strategic goal of diversifying the business returns. These favorable performances in 2017 led to the core net operating income 1 increase of 7.4% when comparing to the value recorded in 2016. The results from financial operations amounted to 72.8Mn in 2017, which represents an increase of 35.8Mn when compared to the previous year, benefiting from the realized capital gains on the Portuguese sovereign debt portfolio, in an amount of 73.4Mn. Operating costs as at the end of 2017 decreased by 9.3% 2, on a comparable basis, reaching 268.3Mn, to which contributed the rationalization process of the operational platform, providing improved operational efficiency and contributing to the reduction of Cost to Income 3 ratio to 53.1%. Staff costs in 2017 decreased by 21.2Mn (-11.9%) when compared to the same period of the last year, excluding costs incurred in the operational structure resizing in 2016. The cost of credit risk was reduced to 0.94% in 2017, compared to 1.19% recorded in 2016, as a result of the effects of the measures taken regarding the loans approval, granting and control. Total impairments and provisions in 2017 decreased by 35.9% when compared to 2016, standing at 167.7Mn, to which contributed the decrease of credit impairments, of other assets impairments and of the financial assets impairments. The CEMG Group's international activity develops in three jurisdictions: Angola, Mozambique and Cape Verde. In Angola, the net income of Finibanco Angola reached 7.1Mn in 2017, decreasing 1 Net Interest Income + Net Commissions 2 On a comparable basis. As reported, the variation amounts to -5.9% 3 Operating costs / Net operating income. 6
34.1% when compared to the 10.8Mn net income reached in 2016. In Mozambique, the BTM presented a positive net income of 90 thou. in 2017, which compares to a positive net income of 68 thou. in 2016. In Cape Verde, Banco MG Cabo Verde presented a negative net income of 94 thou. in 2017, which compares to a negative net income of 13 thou. in 2016. CAPITAL On 31 December 2017, the Common Equity Tier 1 (CET1) and the Total Capital ratios evolved favorably to 13.5% and 13.6%, respectively. This evolution reflects the strengthening of core capital ( 1,618Mn as of 31 December 2017, vs 1,331Mn as of 31 December 2016), reflecting the organic capital generation, the increase of own funds capital base and the decrease of 843Mn in riskweighted assets (RWAs) as a consequence of the non-strategic assets disposal and the changes implemented to the underwriting policies. The capital ratios as of 31 December 2017 are estimates and include the effect of the adherence to the special regime of deferred tax assets, under law nr 61/2014, and the cumulative net income of the year. (million euros) Dec-16 Dec-17 BASEL III - CRD IV / CRR Total Capital 1 392 1 626 Eligible instruments to CET1 2 163 2 420 Common Equity Tier 1 capital 1 331 1 618 Tier 1 capital 1 331 1 618 Tier 2 capital 74 24 Risk weighted assets 12 830 11 987 Total Capital ratio (phasing-in) 10.9% 13.6% Tier 1 ratio (phasing-in) 10.4% 13.5% CET1 ratio (phasing-in) 10.4% 13.5% In accordance with the phasing-in rules in force as of the reference date. (1) The capital ratios as of 31 December 2017 are estimates and include the effect of the adherence to the special regime of deferred tax assets and the cumulative net income of the year. As of 31 December 2017, the fully implemented CEMG's capital ratios also improved favorably, with CET1 at 12.5% and the total capital ratio at 12.7% (including the positive effects associated to adherence to the deferred tax assets special regime, estimated to be of 0.7p.p.). As of 31 December 2017, the capital ratios reported by CEMG surpass the new prudential levels that will be required from 1 July 2018 onwards, as decided by the Bank of Portugal following the annual supervisory process known as Supervisory Review and Evaluation Process (SREP), under Pillar 2. The prudential capital requirements to be met from that date on will be: CET1 of 9.4%, Tier1 of 10.9% and Total Capital of 12.9%. 7
ASSET QUALITY At the end of 2017, gross loans and advances to customers totaled 14,064Mn, a decrease of 6.5% compared with the same period of the previous year, evidencing a strict repricing and risk management policy in the underwriting criteria, as well as the non-recurrent effect of the loans assignment under the NPL securitization (Évora Finance). During 2017, there was a decrease of 27% of the number of new loans in default (NPL 4 ), reflecting into a negative change of 52% in terms of outstanding principal ( 247.8Mn as of 31 December 2017, vs 512.0Mn as of 31 December 2016). The coverage of credit risk by impairments rose to 56.6% in 31 December 2017, indicating a strengthening of 5.0 p.p. from the 51.6% recorded as of 31 December 2016, a ratio that increases to 119.3% if real estate collateral is considered. LIQUIDITY The LCR ratio reached 153.4% at the end of 2017, which is 73.4 p.p. above the minimum regulatory requirement in force of 80%, at year-end. At the end of 2017, the issued debt reduced by 390Mn compared to 31 December 2016 due to the maturity payments and early repayments of domestic bonds in an amount of 264.4Mn and 401.6Mn, respectively, as well as the reduction of subordinated liabilities in an amount of 15Mn. On the other hand, the covered bonds amount increased by 482Mn when comparing to 2016. Additionally, in 2017, CEMG reduced the exposure to the European Central Bank (ECB) in an amount of 765Mn (-32.9%) compared to the same period of the previous year, with the refinancing at the ECB standing at 1.558Mn, raised under the medium-term operations closed within the framework of the European monetary policy measures (TLTRO-Targeted Longer Term Refinancing Operations). At the end of 2017, customers deposits continued to be the main source of funding of the balance sheet, representing 62.1% of total funding sources, recording an increase of 969,0Mn compared to March 2017. RATING At the end of 2017, the credit ratings assigned to CEMG were as shown in the table below: Rating Agency CPT Covered Bonds Long Term Short Term Outlook Fitch Ratings (1) A+ B+ B Stable Moody's Investors Service A3 B3 NP Developing DBRS A BB R-4 Negative * CPT - Conditional Pass Through Covered Bond Programme (1) Recently, on 24 January 2018, Fitch Ratings upgraded the Covered Bonds rating to AA- 4 Principal in arrears for more than 90 days and the related principal falling due 8
On 7 November 2017, the financial rating agency Moody's Investors Service changed the outlook of CEMG s long-term deposits rating from negative to developing. This change reflects Moody s expectations that the implementation of the 2016-2018 strategic plan will continue to have a positive impact on the risk profile of the bank, taking into account the capital framework and the asset quality challenges. In this regard, Moody s also emphasized the relevance of the securitization of a nonperforming loans portfolio, which positively accounted to the achievement of CEMG s strategic goals. On 24 November 2017, the rating agency Fitch Ratings announced the upgrade of CEMG s Covered Bonds rating to A+ from A, with a Stable Outlook. The aforementioned upgrade was carried out under the annual review of CEMG s Covered Bonds Programme and arose from the level of protection conferred by the quality of the outstanding Covered Bonds cover pool, following the implementation of the updated European RMBS Rating Criteria. On 21 December 2017, the rating agency Fitch Ratings announced the upgrade of CEMG s Long-Term IDR (Issuer Default Rating) from 'B' to 'B+', maintaining the Stable Outlook. The rating agency also announced the upgrade of the VR (Viability Rating) from b to b+, and affirmed the Short-Term IDR rating of 'B', maintaining the 'Stable' Outlook. The aforementioned rating decision was taken under the annual review and stems from the Agency's recognition of the progress made in implementing the 2016-2018 Strategic Plan, as the actions taken have enabled CEMG to improve its key indicators. The agency also pointed out that during 2017 CEMG showed clear signs of improvement in its financial profile, namely in terms of capitalization, asset quality and profitability. The agency welcomed the net positive results achieved in the 9 months ending on 2017, the reduction of operating costs and the reduction of assets at risk, with the significant contribution of the securitization of non-performing loans (NPL), revealing the management team's focus on the asset quality improvement and the commitment to the strategic goals outlined. SIGNIFICANT EVENTS IN 2017 Issue of Covered Bonds In October 2017 CEMG placed in the market a new covered bonds issuance, in the amount of 750Mn, with a tenor of 5 years and an fixed annual interest rate of 0,875%, representing a spread of 65 basis points, per year, over the 5Y mid-swaps rate. The investors demand (in excess of 140 institutional investors) allowed the order book to be more than four times the issued amount. The placement of the issue was organized and monitored by J.P. Morgan, Natwest Markets and UniCredit, three institutions with an undeniable experience and reputation with this type of securities and processes. Placement in the market of a non-performing loans portfolio securitization CEMG has placed in the market, under competitive conditions, a portfolio of non-performing loans with a total value of 580Mn. This transaction was structured through a credit securitization named Évora Finance where J.P.Morgan acted as sole arranger and placement agent. This securitization was subject to the assessment of Moody's and DBRS, which culminated with the assignment and public disclosure of its credit rating. This is the first securitization carried out in Portugal of a non-performing loans portfolio with public rating assigned and was placed with institutional investors through a competitive process. This operation is part of CEMG's non-core assets reduction process, as set forth in its Strategic Plan 2016-18. 9
Loss of the status of public limited company The request for the loss of the status of a public limited company was filed to CMVM following the decision taken at CEMG's extraordinary shareholders' meeting held on 9 October 2017, and the request was approved by CMVM on 13 October 2017. MGAM exercised its right of potestative acquisition over CEMG s shares Following the approval of the loss of the status of public limited company, MGAM maintained an over the counter purchase order to acquire all of CEMG's shares at a price of 1.00, which was followed by the exercise of its right of potestative acquisition of the remaining shares. Following this process, MGAM became CEMG s sole shareholder, holding 100% of its share capital on 31 December 2017. Superbrands 2017 Award For the 8 th time in its history, CEMG has once again been considered a Brand of Excellence by Superbrands, an independent international organization dedicated to the promotion of excellence brands in 88 countries. These brands are elected based on the opinions of consumers and market experts, and they have to be considered reliable, unique brands that deliver on their promises and bring something different to their consumers. 10
KEY INDICATORS Dec 2016 Dec 2017 ACTIVITY AND RESULTS (EUR million) Net Assets 21 346 20 215 Gross loans to Customers 15 041 14 064 Customers' Deposits 12 468 12 561 Net Income -86 30.1 SOLVENCY (a) Common Equity Tier 1 ratio (CRD IV / CRR, phasing-in) 10.4% 13.5% Tier 1 ratio (CRD IV / CRR, phasing-in) 10.4% 13.5% Total Capital ratio (CRD IV / CRR, phasing-in) 10.9% 13.6% Risk Weighted Assets (EUR million) 12 830 11 987 LEVERAGE RATIOS Net loans to Customers / Customers' Deposits (b) 111.2% 107.5% Net loans to Customers / On-Balance sheet Customers' resources (c) 96.3% 92.5% CREDIT RISK AND COVERAGE BY IMPAIRMENTS Cost of credit risk 1.2% 0.9% Ratio of loans and interest overdue by more than 90 days 9.1% 8.2% Non-performing loans ratio (b) 11.5% 9.8% Net non-performing loans ratio (b) 3.9% 2.8% Coverage of loans and interest overdue by more than 90 days 86.0% 88.2% Credit at risk ratio (b) 15.2% 12.7% Net credit at risk (b) 8.0% 5.9% Credit at risk coverage ratio 51.6% 56.6% Credit at risk coverage ratio, factoring-in related real estate collateral 120.0% 119.3% Restructured loans as a % of total loans (d) 8.9% 8.2% Restructured loans not included in credit at risk as a % of total loans (d) 3.2% 3.2% EFFICIENCY AND PROFITABILITY Net operating income / Average net assets (b) 1.7% 2.5% Earnings before Tax / Average net assets (b) (0.9%) 0.4% Earnings before Tax / Average equity (b) (12.3%) 4.8% Cost-to-Income (Operating costs / Net banking income) (b) 76.4% 53.1% Cost-to-Income, excluding specific effects (e) 88.4% 62.0% Staff costs / Net banking income (b) 44.5% 31.0% EMPLOYEES AND DISTRIBUTION NETWORK (Number) Employees Group total (f) 3 806 3 837 CEMG 3 588 3 630 Branches Domestic - CEMG 327 325 International 33 40 Finibanco Angola (g) 23 25 BTM (Mozambique) 10 10 Rep. Offices 6 5 (a) in accordance with the CRD IV/CRR (phasing-in); The ratios as of 31 December 2017 are estimates and include the effect of the adherence to the special regime of deferred tax assets, under law nr 61/2014, and the cumulative net income of the year. (b) in accordance with the statement of the Bank of Portugal no. 16/2004, on your existing version (c) On-Balance sheet Customers' resources = customer Deposits and liabilities represented by securities. Calculated in accordance with the financial statements attached to this report (d) in accordance with the statement of the Bank of Portugal no. 32/2013. (e) Excludes results of operations and financial impacts associated with f the operative structure resizing program and review of the ACT (f) Includes business centers 11
CONSOLIDATED BALANCE SHEET (million euro) Dec-16 Dec-17 Cash and deposits at central banks 381.3 1 733.6 Deposits at other credit institutions 69.6 50.2 Financial assets held for trading 78.2 184.1 Financial assets available for sale 2 399.5 2 197.3 Investments in credit institutions 559.1 310.1 Loans to customers 13 861.0 13 052.7 Investments held to maturity 1 126.1 Non-current assets held for sale 760.2 742.2 Non-current assets held for sale - Discontinuing operations 470.4 475.0 Investment properties 608.0 538.6 Other tangible assets 237.1 233.3 Intangible assets 34.9 31.4 Inv. in associates and subsidiaries 4.0 4.1 Current tax assets 11.9 7.3 Deferred tax assets 521.7 461.4 Other Assets 222.9 193.6 TOTAL NET ASSETS 21 345.9 20 214.8 Resources from central banks 2 322.9 1 557.8 Financial liabilities held for trading 26.1 16.2 Resources from other credit institutions 2 275.9 1 784.5 Resources from customers and other liabilities 12 467.8 12 561.0 Debt securities issued 1 920.0 1 545.0 Hedging derivatives 1.7 Financial liabilities associated to transferred assets-discontinuing operations 354.8 330.4 Provisions 21.8 28.1 Other subordinated liabilities 251.0 236.2 Current tax liabilities 1.9 5.3 Other liabilities 247.0 371.5 TOTAL LIABILITIES 19 889.4 18 437.8 Institutional Capital and Participation Fund 1 2 170.0 2 420.0 Other equity instruments 6.3 6.3 Own Securities -0.1 Reserves and retained earnings -656.5-712.2 Consolidated profit/ (loss) -86.5 30.1 Total equity attributable to the shareholders 1 433.3 1 744.2 Non-controlling interests 23.2 32.9 TOTAL EQUITY 1 456.5 1 777.0 TOTAL LIABILITIES AND EQUITY 21 345.9 20 214.8 (1) In September 2017 the institutional capital and the participation fund were converted into share capital 12
CONSOLIDATED INCOME STATEMENT (million euro) Dec-16 Dec-17 Interest and similar income 534.3 481.4 Interest and similar expense 281.2 217.5 NET INTEREST INCOME 253.2 263.9 Income from equity instruments 11.6 12.6 Income from services, fees and commissions 101.5 117.0 Net gains/losses from financial operations 37.0 72.8 Other operating income -31.8 38.8 NET OPERATING INCOME 371.5 505.2 Staff Costs 165.5 156.4 General and administrative expenses 94.0 87.0 Amortization and depreciation 24.3 24.8 OPERATING COSTS 283.8 268.3 Loan impairments 182.5 138.0 Other financial assets impairments 44.5 6.7 Other assets impairments 40.8 11.7 Other provisions -6.3 11.4 Earnings by equity method 0.2 0.2 EARNINGS BEFORE TAX AND NON-CONTROLLING INTERESTS -173.5 69.4 Tax -96.2 48.3 Non controlling interests 2.0 1.4 Results from discontinuing operations -7.2 10.4 NET INCOME -86.5 30.1 13
CEMG is in a negotiation process with the aim of refocusing the approach to the African market with a view to the deconsolidation of current financial investments held in Finibanco Angola and BTM, within the project "ARISE" in international partnership with Rabobank, NORFUND (the Norwegian sovereign wealth Fund) and FMO (Dutch development bank), within other alternatives which are in development. Taking into account the decisions already taken by the Executive Board of Directors, as well as the provisions of IFRS 5, the activities carried out by these subsidiaries were considered as discontinuing operations in 2016. In terms of profit, the results of these subsidiaries have been detected at a segregated account named "discontinuing operations results and, at the level of the balance sheet, under the so-called "non-current Assets held for sale Discontinuing Operations" and "noncurrent liabilities held for sale Discontinuing Operations". The financial information as of 31 December 2017 is not audited but it was prepared in accordance with the international financial reporting standards (IFRS International Financial Reporting Standards). Glossary CET1 Common Equity Tier 1 CRD IV/CRR applicable law in Basel III, in particular the 2013/36/EU Policy and regulation 575/2013 of the European Parliament and of the Council Cost of credit risk credit Impairment, annualized, as a percentage of average gross credit balance LCR liquidity coverage ratio RWA Risk-Weighted Assets (assets Weighted by Risk). 14