Portuguese Banking System

Recent Developments – 2nd quarter 2016

Prepared with data available up to 23rd September of 2016

2 •

Outline

• Portuguese banking system – Main highlights

• Macroeconomic and financial indicators

• Portuguese banking system

• Balance sheet

• Liquidity & funding

• Asset quality

• Profitability

• Solvency

• Recent measures with impact on the banking system

3 •

Portuguese Banking System – Main Highlights

I. Balance Sheet

• Banking system total assets continued to decrease in the second quarter of 2016, following the downward trendobserved in the previous quarters.

II. Liquidity & Funding

• Both the Loan-to-Deposits ratio and the commercial gap remained fairly stable.

• Eurosystem financing stood at similar level to that of the last quarter.

III. Asset/Credit Quality

• Credit-at-risk ratio increased during the second quarter of 2016, driven chiefly by a growth in NFC’s credit at risk.

IV. Profitability

• Although slightly positive, banking system profitability decreased in the first semester of 2016 on a year-on-yearbasis, due mainly to a considerable reduction in income from financial operations.

• Net interest income increased in the first semester of 2016 vis-à-vis the first semester of 2015; this growth wasoffset by a similar increase in the flow of credit impairments.

V. Solvency

• Banking system solvency level remained globally stable in the second quarter of 2016.

4 •

-6.0

-1.8

1.5 0.1 0.4 0.3 -0.6

1.5 2.11.6

1.5 1.20.6 0.7

-8

-6

-4

-2

0

2

4

6

2011 2012 2013 2014 2015 2016 Q1 2016 Q2

Capital Account Current Account

-1.8

-4.0

-1.1

0.91.5

0.2 0.3

-5

-4

-3

-2

-1

0

1

2

2011 2012 2013 2014 2015 2016 Q1 2016 Q2

GDP growth rate (%) – Volume

Macroeconomic and Financial Indicators (I/IV)

Current account and capital account, % of GDP

In 2016 Q2, the quarter-on-quarterGDP growth rate improved slightlyvis-à-vis the previous quarter.

The year-on-year growth rate stoodat 0.9%, as in 2016 Q1.

The current and capital accounts,although positive in 2016 Q2,recorded a decrease ofapproximately 0.9% of GDP from theprevious quarter, chiefly due to adecline in the first component.

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 -3.0-2.5

-2.8

-1.3

-8

-7

-6

-5

-4

-3

-2

-1

02011 2012 2013 2014 2015 2016 Q1 2016 Q2

12.9

15.8 16.5

14.112.6 12.1

11.2

0

3

6

9

12

15

18

2011 2012 2013 2014 2015 2016 Q1 2016 Q2

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 was11.2% in 2016 Q2, whichcorresponds to a decrease of 0.9p.p. from the previous quarter.

Public debt as a percentage ofGDP stood at 131.8% in 2016 Q2, anincrease of 2.9 p.p. of GDPcompared to the previous quarter.Deposits from the GeneralGovernment amounted toapproximately 10% of GDP.

Macroeconomic and Financial Indicators (II/IV)

111.4 126.2 129.0 130.2 129.0 128.9 131.8

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6 •

Net lending/borrowing of households, % of GDP

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

At the end of 2016 Q1, NFC debtamounted to 108.7% of GDP, whichcompares to 110.4% of GDP as ofend-2015.

In the year ended in 2016 Q2, netlending of NFC stood at 0.2% of GDP,as in the year ended in the previousquarter.

Households’ debt decreased to80.3% of GDP in 2016 Q1, whichrepresents a decline of roughly 1.4p.p. of GDP vis-à-vis end-2015.

In the year ended in 2016 Q2,households’ net lending amountedto 0.8% of GDP, which compares to0.7% of GDP in the year ended in theprevious quarter.

Chart 6

NFC debt(% of GDP)

Householdsdebt

(% of GDP)

Chart 5

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)

120.2 126.2 122.7 115.8 110.4 108.7 (2016 Q1) n.a.

92.6 92.9 89.4 85.8 81.7 80.3 (2016 Q1) n.a.

-3.5

-0.3

1.4 1.20.6 0.2 0.2

-4

-3

-2

-1

0

1

2

2011 2012 2013 2014 2015 2015 Q2 -2016 Q1

2015 Q3 -2016 Q2

2.62.9

3.6

2.2

1.00.7 0.8

0

2

4

6

2011 2012 2013 2014 2015 2015 Q2 -2016 Q1

2015 Q3 -2016 Q2

7 •

-2

0

2

4

6

8

10

12

14

16

18

20

Jul-13 Dec-13 May-14 Oct-14 Mar-15 Aug-15 Jan-16 Jun-16

Portugal Spain Italy Germany Greece

Source: Bloomberg and ECB

Sovereign debt yields 10Y (%)

ECB rates (%)

The Portuguese 10-yeargovernment remained fairly stable in2016Q2, slightly above 3%.

The interbank rates continued tobe negative for all maturities, just asin the previous quarter, reflecting thenon-conventional monetary policypursued 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)

-0.4

-0.2

0.0

0.2

0.4

0.6

0.8

Jul-13 Dec-13 May-14 Oct-14 Mar-15 Aug-15 Jan-16 Jun-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). Inparticular, the break in the time series arises from the fact that the assets/liabilities not transferred to the balancesheet of Novo Banco (NB) are not considered 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 theday of implementation of the resolution measure (closing balance sheet and statement of profit and loss), thereporting of BES on individual basis, with reference to 31 July 2014, was considered when determining theaggregate results of the banking system for the third quarter of 2014. However, it must be stressed that theadjustments stemming from the resolution measure applied to BES were not considered.

Changes in banking system liabilities represented by debt securities and equity items, in the fourth quarter of2015, somewhat reflect the re-transfer from NB to BES of five issuances of non-subordinated debt, which hadbeen originally transferred from BES to NB following the Decision of 3 August 2014.

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

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

9 •

0

200

400

600

2011 2012 2013 2014 2015 2016 Q1 2016 Q2

Capital & Others

Resources fromCentral Banks

Interbank Market

Securities

Deposits

513 496460

430 413 409 405

0

200

400

600

2011 2012 2013 2014 2015 2016 Q1 2016 Q2

Other Assets

Investment inCredit InstitutionsCapital Instruments

Debt Instruments

Credit

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Assets (€Bn) – Value at end of period

Balance Sheet

In 2016 Q2, banking system totalassets maintained its gradualdownward path.

Banking system financingstructure remained practicallyunchanged vis-à-vis the first quarterof the year.

Balance sheet structure wasaffected by the reclassification of“non-current assets/liabilities heldfor sale and discontinuedoperations” items into credit anddeposit items.

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 2.3 2.2

10 •

140128

117107 103 103 103

0

30

60

90

120

150

2011 2012 2013 2014 2015 2016 Q1 2016 Q2

46.052.8

47.9

31.226.2 24.5 24.8

4.7

3.43.3

2.52.1 2.5 2.1

0

20

40

60

2011 2012 2013 2014 2015 2016 Q1 2016 Q2

Monetary policy operations with Banco de PortugalOther 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)

Central banks financingcontinued to represent about 6.6%of the banking system total assetsin 2016 Q2, as in the previousquarter.

The Loan-to-Deposits ratioremained fairly unchanged in thisquarter.

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Chart 12

Chart 11

Source: Banco de Portugal

11 •

-2.5

5.8

9.8 10.613.4 12.8 12.9

-5.5

3.4

7.79.2

12.2 11.7 10.6

-8.2

1.33.4

6.78.9 8.1 7.8

-10

-5

0

5

10

15

2011 2012 2013 2014 2015 2016 Q1 2016 Q2

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

98.2

70.0

42.7

18.0

6.6 6.3 6.3

0

40

80

120

2011 2012 2013 2014 2015 2016 Q1 2016 Q2

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)

As in the previous quarter, thecommercial gap stood at 6.3 billioneuros in 2016 Q2.

Liquidity gaps for domesticinstitutions remained broadly stableat high levels.

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 Q1 2016 Q2

5.05.6 6.1 5.9 6.0 6.1 6.1

13.415.6 16.6 17.0

14.9 14.8 14.7

9.7

13.8

16.1

19.019.7 19.9 21.0

0

5

10

15

20

25

2011 2012 2013 2014 2015 2016 Q1 2016 Q2

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 Q2, the credit-at-risk ratioincreased 0.4 p.p. vis-à-vis theprevious quarter to 12.7%.

This development reflectsprimarily the rise in NFC’s credit atrisk.

Credit impairments stood at 8.2%of gross credit in 2016 Q2.

Chart 16

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Chart 15

Source: Banco de Portugal

13 •

-160

-120

-80

-40

0

40

80

120

2011 2012 2013 2014 2015 2015 H1 2016 H1

Other income

Commissions

Net interestincome

Impairments

Operationalcosts

Other costs

-6.3 -5.5

-11.6

-19.0

3.0 6.3

0.3-0.4 -0.3

-0.8

-1.3

0.2 0.5

0.0

-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 H1 2016 H1

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

ROA & ROE (%) – Value in the period

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

Profitability (I/II)

The return on equity and thereturn on assets were marginallypositive in 2016 H1. Both indicatorsdisplay a significant reduction on ayear-on-year basis.

This decline in profitability waslargely driven by a significantdecrease in income from financialoperations, which were considerablein 2015 H1.

Net interest income increased in2016 H1 vis-à-vis 2015 H1, reflectinga larger reduction in interest coststhan in interest income.

The flow of impairment lossesincreased on a year-on-year basis, inparticular those associated with thecapital instruments portfolio.

Chart 17

Chart 18

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Source: Banco de Portugal

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

14 •

0

20

40

60

80

0

2

4

6

8

10

2011 2012 2013 2014 2015 2015 H1 2016 H1

%

€B

n

Operational Costs Cost-to-Income - rhs

0

2

4

6

8

2011 2012 2013 2014 2015 2016 Q1 2016 Q2

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 (%)

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

Profitability (II/II)

Despite a slight decrease inoperational costs over 2016 H1, thecost-to-income ratio increased vis-à-vis the previous year as a reflex of agreater reduction in gross income.

Interest rates on new operationsmaintained its downward trend, withthe exception of new deposits fromNFC.

In 2016 Q2, interest rates on newloans for housing purchase and toNFC fell by 7 b.p. and 18 b.p.respectively.

The cost of new depositsdecreased by 6 b.p. for thehouseholds’ 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 12.1

0

2

4

6

8

10

12

14

2011 2012 2013 2014 2015 2016 Q1 2016 Q2

5.4

7.0 7.1 6.97.6 7.3 7.2

0

2

4

6

8

2011 2012 2013 2014 2015 2016 Q1 2016 Q2

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

Solvency

The ratio between Tier 1 capitaland total assets decreasedmarginally in 2016 Q2,accumulating a fall of 0.4 b.p. sinceend-2015, due to a decline incapital.

Both the CET 1 ratio and the TotalSolvency ratio remained virtuallyunchanged compared with theprevious quarter.

Note: In 2014, the transition to a newprudential regime determined theexistence of breaks in the series ofsolvency indicators justified bymethodological differences in thecalculation 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 13.0 13.1Total

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 (%)

16 •

Recent measures with impact on the banking system

Recent measures with impact on the banking system are available at:

http://www.bportugal.pt/en-US/EstabilidadeFinanceira/Legislacaoenormas/Pages/Legislacaoenormas.aspx

Portuguese Banking SystemRecent Developments – 2nd quarter 2016