Portuguese Banking System

Recent Developments – 3rd quarter 2016

Prepared with data available up to 23rd December of 2016

2 •

Outline

• Portuguese banking system – Main highlights

• Macroeconomic and financial indicators

• Portuguese banking system

• Balance sheet

• Liquidity & funding

• Asset quality

• Profitability

• Solvency

3 •

Portuguese Banking System – Main Highlights

I. Balance Sheet

• Banking system total assets continued to decrease gradually in the third quarter of 2016, reflectingdevelopments in credit.

II. Liquidity & Funding

• Both the Loan-to-Deposits ratio and the commercial gap decreased vis-à-vis the previous quarter, as did theEurosystem financing.

III. Asset/Credit Quality

• The credit-at-risk ratio diminished slightly during the third quarter of 2016, driven chiefly by developments inthe NFC segment.

IV. Profitability

• Although slightly positive, banking system profitability decreased in the first three quarters of 2016 on ayear-on-year basis, due mainly to a considerable reduction in income from financial operations, which wassubstantial in the same period of the previous year.

• Net interest income increased vis-à-vis the set of the first three quarters of 2015, as a result of a sharperreduction in interest expenses than the reduction observed in interest income.

V. Solvency

• The banking system solvency level increased slightly in the third quarter of 2016, due, chiefly, to a reductionin RWA.

4 •

-6.0

-1.8

1.5 0.1 0.4-0.5

0.5

1.5 2.11.6

1.5 1.20.7 1.2

-8

-6

-4

-2

0

2

4

6

2011 2012 2013 2014 2015 2016 Q2 2016 Q3

Capital Account Current Account

-1.8

-4.0

-1.1

0.91.6

0.30.8

-5

-4

-3

-2

-1

0

1

2

2011 2012 2013 2014 2015 2016 Q2 2016 Q3

GDP growth rate (%) – Volume

Macroeconomic and Financial Indicators (I/IV)

Current account and capital account, % of GDP

In 2016 Q3, the quarter-on-quarterGDP growth rate was positive (0.8%),significantly higher than in theprevious quarters.

The year-on-year growth rate stoodat 1.6%.

In 2016 Q3, the current and capitalaccounts grew by around 1.4 p.p. ofGDP vis-à-vis the second quarter of2016, mainly due to the increase inthe first component. The current andcapital accounts decreased by 0.4p.p. of GDP year-on-year.

In the first nine months of 2016, onyear-on-year terms, the current andcapital accounts balance decreasedby 0.6 p.p. of GDP to 1.0% of GDP.

Chart 1

Note: Quarterly figures correspond to q-on-q rates of change. National Accounts and Balance of Payments figures arealready presented according the rules of the European System of National and Regional Accounts (ESA 2010) and Balanceof Payments and International Investment Position Manual (BPM6).

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Note: Quarterly figures are seasonally adjusted.

Chart 2

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Source: Banco de Portugal and INE

5 •

-7.4-5.7

-4.8 -4.4-3.1 -2.6

-1.7

-2.8

-1.3

-8

-7

-6

-5

-4

-3

-2

-1

02011 2012 2013 2014 2015 2016 Q2 2016 Q3

12.9

15.8 16.5

14.112.6

11.2 10.9

0

3

6

9

12

15

18

2011 2012 2013 2014 2015 2016 Q2 2016 Q3

Unemployment rate, % of active population

Fiscal Balance, % of GDP

Source: Banco de Portugal and INE

Chart 4

Chart 3

PublicDebt

(% of GDP)

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Note: The unemployment rate corresponds to the figure of the central month of each quarter published by the NationalStatistical Institute. The fiscal deficit of 2014 reflects the inclusion of 4.9 billion Euros related to the capitalization of NovoBanco as a capital transfer (-2.8% of GDP). The fiscal deficit of 2015 reflects the inclusion of 2.3 billion euros as a capitaltransfer in the context of the Banif resolution in 2015Q4 (-1.3% of GDP).

The unemployment rate was10.9% in 2016 Q3, whichcorresponds to a decrease of 0.3p.p. from the previous quarter andto a decrease of 1.4 p.p. year-on-year.

Public debt as a percentage ofGDP stood at 133.2% in 2016 Q3, anincrease of 1.4 p.p. of GDPcompared to the previous quarter.This indicator, net of CentralGovernment deposits, stood at121.6% of GDP.

Macroeconomic and Financial Indicators (II/IV)

111.4 126.2 129.0 130.4 128.9 131.8 133.2

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6 •

2.62.9

3.6

2.2

1.00.6 0.8

0

2

4

6

2011 2012 2013 2014 2015 2015 Q3 -2016 Q2

2015 Q4 -2016 Q3

Net lending/borrowing of households, % of GDP

Net lending/borrowing of non-financial corporations, % of GDP

At the end of 2016 Q2, NFC debtamounted to 110.8% of GDP,remaining practically unchangedfrom the previous quarter (a 4.6p.p. decline year-on-year).

In the year ended in 2016 Q3,net lending of NFC stood at 0.4% ofGDP.

Households’ debt continued todecrease in 2016 Q2 to 78.2% ofGDP, which represents a decline ofroughly 1.5 p.p. of GDP vis-à-visend-2015.

In the year ended in 2016 Q3,households’ net lending amountedto 0.8% of GDP.

Chart 6

NFC debt(% of GDP)

Householdsdebt

(% of GDP)

Chart 5

n.a. – not available.

Note: National Sector Accounts were revised when Statistics Portugal released the Accounts for the fourth quarter of2014. These revisions reflect changes introduced in detailed Annual National Accounts for 2012 (final results), with animpact on subsequent years.

Source: Banco de Portugal and INE

Macroeconomic and Financial Indicators (III/IV)

120.2 126.8 124.7 117.7 111.7110.8

(2016 Q2)n.a.

(2016 Q3)

-3.5

-0.3

1.4 1.20.5 0.4 0.4

-4

-3

-2

-1

0

1

2

2011 2012 2013 2014 2015 2015 Q3 -2016 Q2

2015 Q4 -2016 Q3

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92.6 93.2 88.8 84.7 79.878.2

(2016 Q2)n.a.

(2016 Q3)

7 • Source: Bloomberg and ECB

Sovereign debt yields 10Y (%)

ECB rates (%)

The Portuguese 10-yeargovernment bond yield increasedabout 30 b.p. in 2016 Q3.

The interbank rates continued tobe negative for all maturities,reflecting the accommodatingmonetary policy pursued by the ECB.

ECB rates have been keptunchanged since March 2016: thedeposit facility interest rateat -0.40%, the main refinancingoperations interest rate at 0%, andthe marginal lending facility interestrate at 0.25%.

Chart 8

Chart 7

Macroeconomic and Financial Indicators (IV/IV)

-2

0

2

4

6

8

10

12

Oct-15 Nov-15 Dec-15 Jan-16 Feb-16 Mar-16 Apr-16 May-16 Jun-16 Jul-16 Aug-16 Sep-16

Portugal Spain Italy Germany Greece

-0.4

-0.2

0.0

0.2

Oct-15 Nov-15 Dec-15 Jan-16 Feb-16 Mar-16 Apr-16 May-16 Jun-16 Jul-16 Aug-16 Sep-16

Main Refinancing Rate Deposit Facility Rate

8 •

Portuguese Banking System

Comment on accounting and prudential information

The banking system data present the following breaks in time series:

• In the third quarter of 2014, resulting from the resolution measure applied to Banco Espírito Santo (BES). In particular, the break inthe time series arises from the fact that the assets/liabilities not transferred to the balance sheet of Novo Banco (NB) are notconsidered in the aggregate of the banking system from August 2014 onwards.

In the absence of accounting information for BES on a consolidated basis for the period from 30 June 2014 to the day ofimplementation of the resolution measure (closing balance sheet and statement of profit and loss), the reporting of BES on individualbasis, with reference to 31 July 2014, was considered when determining the aggregate results of the banking system for the thirdquarter of 2014. However, it must be stressed that the adjustments stemming from the resolution measure applied to BES were notconsidered.

Changes in banking system liabilities represented by debt securities and equity items, in the fourth quarter of 2015, somewhat reflectthe re-transfer from NB to BES of five issuances of non-subordinated debt, which had been originally transferred from BES to NBfollowing the Decision of 3 August 2014.

• In the fourth quarter of 2015, resulting from the resolution measure applied to BANIF – Banco Internacional do Funchal (Banif). Inparticular, the break in the time series arises from the fact that the assets/liabilities transferred to the financial vehicle – Oitante, S.A.– are not considered in the aggregate of the banking system from 20 December 2015 onwards.

In the absence of accounting information for Banif on a consolidated basis for the period from 30 September 2015 to the day ofimplementation of the resolution measure (statement of profit and loss), the reporting of Banif on individual basis, with reference to30 November 2015, was considered when determining the aggregate results of the banking system for the fourth quarter of 2015.However, it must be stressed that the adjustments resulting from the resolution measure applied to Banif were not considered.

• In the second quarter of 2016, resulting from the reclassification of some assets/liabilities from the "non-current assets and liabilitiesheld for sale and discontinued operations" category related to the acquisition of the Barclays operation in Portugal by Bankinter. Thisreclassification did not have an impact on the banking system total assets, but requires careful analysis regarding balance sheet items’rates of change. In addition, the deconsolidation of Banco Millennium Angola, also in the second quarter of 2016, was a non-recurringevent with a significant impact on balance sheet items.

9 •

0

200

400

600

2011 2012 2013 2014 2015 2016 Q2 2016 Q3

Capital & Others

Resources fromCentral Banks

Interbank Market

Securities

Deposits

513 496460

430 413 405 399

0

200

400

600

2011 2012 2013 2014 2015 2016 Q2 2016 Q3

Other Assets

Investment in CreditInstitutionsCapital Instruments

Debt Instruments

Credit

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Assets (€Bn) – Value at end of period

Balance Sheet

The banking system total assetsreduction continued in 2016 Q3,driven mainly by credit. Vis-à-vis end-2015, total assets decreased 3.4% andcredit 2.0%.

On a comparable basis (accountingfor time series’ breaks since thebeginning of the year), total assetsdecreased 2.5% between end-2015and 2016 Q3, whilst credit decreased3.0%.

In 2016 Q3, interbank fundingdecreased and, as in the previousquarter, deposits increased.Comparing to end-2015, interbankfunding and total deposits decreasedby 4.8% and 0.4% respectively (whilstnon-financial resident private sectordeposits increased by 3.3%).

On a comparable basis, interbankfunding decreased by 2.5% betweenend-2015 and 2016 Q3, whilst totaldeposits decreased by 0.7% (non-financial resident private sectordeposits increased by 2.1%).

Assets / GDP

Chart 9

Bank financing structure (€Bn) - Value at end of period

Chart 10

Source: Banco de Portugal

2.9 2.9 2.7 2.5 2.3 2.2 2.2

10 •

140128

117107 103 103 101

0

30

60

90

120

150

2011 2012 2013 2014 2015 2016 Q2 2016 Q3

46.052.8

47.9

31.226.2 24.8 23.5

4.7

3.43.3

2.52.1 2.1 2.6

0

20

40

60

2011 2012 2013 2014 2015 2016 Q2 2016 Q3

Monetary policy operations with Banco de Portugal Other resources from central banks

Central Banks Financing (€Bn) – Value at end of period

Loan-To-Deposits ratio (%) – Value at end of period

Liquidity & Funding (I/II)

In 2016 Q3, central banksfunding declined slightly,accounting for 6.5% of the bankingsystem total assets. This is thelowest figure since the beginningof the Economic and FinancialAssistance Programme (the highestwas recorded in June 2012: €64.1Bn, 12.5% of total assets).

The decrease in credit and, to aless extent, the increase incustomer resources vis-à-vis thesecond quarter led to a reductionof the Loan-to-Deposits ratio in2016 Q3.

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Chart 12

Chart 11

Source: Banco de Portugal

11 •

-2.5

5.8

9.8 10.613.4 12.9 12.2

-5.5

3.4

7.79.2

12.210.6 10.9

-8.2

1.33.4

6.78.9

7.7 8.5

-10

-5

0

5

10

15

2011 2012 2013 2014 2015 2016 Q2 2016 Q3

Up to 3 months Up to 6 months Up to 1 year

98.2

70.0

42.7

18.0

6.6 6.3 2.80

40

80

120

2011 2012 2013 2014 2015 2016 Q2 2016 Q3

Liquidity gap in cumulative maturity ladders for domestic institutions (% of stable assets) – Value at end of period

Commercial gap (€Bn) – Value at end of period

Liquidity & Funding (II/II)

The commercial gap (credit minusdeposits) decreased to €2.8 Bn in2016 Q3.

Liquidity gaps for domesticinstitutions remained at high levelsfor all maturities in 2016 Q3.

Chart 14

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Chart 13

Source: Banco de Portugal

Note: The liquidity gap is defined as the difference between liquid assets and volatile liabilities inproportion of the difference between total assets and liquid assets, for each cumulative maturityscale. An increase of this indicator reflects an improvement of banks’ liquidity position.

12 •

4.2

5.5

6.2

7.7 8.1 8.2 8.2

0

3

6

9

2011 2012 2013 2014 2015 2016 Q2 2016 Q3

5.05.6 6.1 5.9 6.0 6.1 6.0

13.415.6 16.6 17.0

14.9 14.6 14.9

9.7

13.8

16.1

19.019.7

21.020.2

0

5

10

15

20

25

2011 2012 2013 2014 2015 2016 Q2 2016 Q3

Housing Consumption & other purposes Non-financial corporations Total

Credit Impairments (% of gross credit) – Value at end of period

Credit at Risk ratio (% of gross credit) – Value at end of period

Asset Quality

In 2016 Q3, the credit-at-risk ratiodiminished by 0.1 p.p. vis-à-vis theprevious quarter to 12.6%.

This fall in the credit-at-risk ratioreflects primarily the developmentsin the NFC’s segment in whichoccurred a decrease in credit at risk(numerator effect) and an increase incredit (denominator effect).

In 2016 Q3, credit impairmentsstood at 8.2% of gross credit, as inthe two previous quarters.

Chart 16

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Chart 15

Source: Banco de Portugal

13 •

-6.3 -5.5

-11.6

-19.0

3.03.8

1.3-0.4 -0.3

-0.8

-1.3

0.20.3

0.1

-2.5

-2.0

-1.5

-1.0

-0.5

0.0

0.5

1.0

-25

-20

-15

-10

-5

0

5

10

2011 2012 2013 2014 2015 2015 Q1-Q3 2016 Q1-Q3

Return on Equity (ROE) Return on Assets (ROA) - rhs

-160

-120

-80

-40

0

40

80

120

2011 2012 2013 2014 2015 2015Q1-Q3

2016Q1-Q3

Other income

Commissions

Net interestincome

Impairments

Operationalcosts

Other costs

ROA & ROE (%) – Value in the period

Income and costs (% of gross income) – Value in the period

Profitability (I/II)

In the set of the first three quartersof 2016, the return on equity and thereturn on assets displayed a substantialreduction on a year-on-year basis.Notwithstanding, both ratios remainedpositive.

This decline in profitabilitycontinued to be largely driven by asignificant decrease in income fromfinancial operations, which wasconsiderable in 2015.

Net interest income increased 5.8%year-on-year in the set of the first threequarters of 2016, following the trendobserved since 2014. This increaseresulted from a sharper reduction ininterest expenses than the reductionregistered in interest income.

The flow of impairments increasedon a year-on-year basis, due exclusivelyto those associated with financialassets other than credit.

Chart 17

Chart 18

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Source: Banco de Portugal

Note: Return is measured by earnings before taxes and minority interests. Annualized figures.

14 •

0

20

40

60

80

0

2

4

6

8

10

2011 2012 2013 2014 2015 2015Q1-Q3

2016Q1-Q3

Operational Costs Cost-to-Income - rhs

0

2

4

6

8

2011 2012 2013 2014 2015 2016 Q2 2016 Q3

Loans to non-financial corporations Loans to households (housing)

Deposits of non-financial corporations Deposits of households

Banking interest rates (new business) – Average value of period (%)

Operational Costs (€Bn), Cost-to-Income (%) – Value in the period

Profitability (II/II)

Despite a reduction in operationalcosts over the first three quarters of2016, the cost-to-income ratioincreased vis-à-vis the same periodof the previous year, due to a greaterreduction in gross income.

Interest rates on new operationsdecreased slightly in 2016 Q3.

Compared to 2016 Q2, interestrates on new loans for housingpurchase and to NFC fell by 7 b.p.and 9 b.p., respectively.

The cost of new depositsdecreased by 7 b.p. for thehouseholds’ segment and by 1 b.p.for the NFC’s segment.

Chart 20

Chart 19

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Source: Banco de Portugal

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15 •

8.7

11.512.3

11.312.4 12.1 12.3

0

2

4

6

8

10

12

14

2011 2012 2013 2014 2015 2016 Q2 2016 Q3

5.4

7.0 7.1 6.97.6 7.3 7.5

0

2

4

6

8

2011 2012 2013 2014 2015 2016 Q2 2016 Q3

Tier 1 capital to Total Assets ratio – Value at end of period (%)

Solvency

The ratio between Tier 1 capitaland total assets increased by 0.2p.p. in 2016 Q3, as a result of adecline in total assets.

Both the CET 1 ratio and theTotal Solvency ratio increasedslightly vis-à-vis 2016 Q2, dueprimarily to a reduction in RWA.

Note: In 2014, the transition to a newprudential regime determined the existenceof breaks in the series of solvency indicatorsjustified by methodological differences inthe calculation of own funds components,affecting the comparability of ratios withprevious years.

Chart 22

Chart 21

9.8 12.6 13.3 12.3 13.3 13.1 13.2Total

Solvency Ratio (%)

Source: Banco de Portugal

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Core Tier 1 ratio (until 2013) and CET 1 ratio (from 2014) – Value at end ofperiod (%)

Portuguese Banking SystemRecent Developments – 3rd quarter 2016