Consolidated Banco BPI 2018 This page was intentionally left blank.

Index

REPORT

Key performance indicators 4
Statement of the Chairman of the Board of Directors 6
Statement of the Chairman of the Executive Committee 9
- Key corporate events 12
- BPI Business Model 14
  - Human resources 18
  - Digital banking 20
  - The BPI Brand 22
- Social responsibility 25
- Strategic Plan 2019-2021 26
- Background to operations 28
  - Commercial Banking 32
- Investment Banking 40 Equity holdings in BFA and BCI 41
  - Financial review 42
  - Risk management 61
    - Rating 73
- Annex Alternative performance measures 76
  - Proposed application of results 80
    - Final acknowledgements 82

CONSOLIDATED FINANCIAL STATEMENTS AND NOTES

Consolidated financial statements 83
Notes to the Consolidated Financial Statements 89
- Statement of the Board of Directors 241
- Statutory audit certification and audit report 242
- Report and opinion of the Supervisory Board 254
  - NON-FINANCIAL STATEMENT 267

CORPORATE GOVERNANCE REPORT 293

Key performance indicators

		(Consolidated amounts in M.€, unless otherwise stated)
	2014	2015	2016	2017	2018
Net profit	(163.6)	236.4	313.2	10.2	490.6
Adjusted operating expenses as % of commercial banking gross income	73%	64%	68%	65%	60%
Return on assets (ROA)	(0.1%)	0.9%	1.2%	0.0%	1.6%
Return on tangible equity (ROTE) 1	(7.2%)	10.6%	13.5%	0.4%	16.3%
Net profit per share (euros)	(0.12)	0.16	0.22	0.01	0.34
Weighted average no. of shares (in million)	1 422.3	1 450.4	1 451.0	1 456.2	1 456.8
Total assets (net)	42 629	40 673	38 285	29 640	31 568
Loans to Customers (gross)	26 261	25 225	23 401	22 223	23 487
Deposits and retail bonds	27 391	26 108	19 724	20 719 2	22 052
Total Customer resources	39 430	39 643	32 940	32 624 2	33 195
Loan to deposit ratio	85%	88%	110%	99%	100%
NPE ratio 3	7.5%	6.6%	6.6%	5.1%	3.5%
NPE coverage by impairments 4	41%	48%	39%	43%	53%
Cost of credit at risk 5	0.70%	0.48%	0.09%	(0.02%)	(0.20%)
Total past service liabilities	1 278	1 280	1 463	1 601	1 639
Coverage ratio of Employee pension liabilities 6	98%	109%	98%	98%	99%
Shareholders' equity attributable to BPI shareholders	2 127	2 407	2 440	2 824	3 206
Common Equity Tier I ratio, fully loaded	8.6%7	9.8%	11.1%	12.3%	13.8%8
Total capital ratio, fully loaded	8.7%7	10.2%	11.2%	14.0%	15.5%8
Leverage ratio (CRD IV / CRR), fully loaded	5.2%7	6.4%	7.4%	6.8%	7.3%8
Distribution network (no. units) 9	835	788	736	507	495
BPI Group Employees (no.) 10	8 506	8 529	8 157	4 931	4 888
Note: the comparability of the consolidated amounts with the historical series prior to 31 Dec. 2015 is biased due to the deconsolidation of BFA					Table 1

Note: the comparability of the consolidated amounts with the historical series prior to 31 Dec. 2015 is biased due to the deconsolidation of BFA (until then fully consolidated).

From 31 December 2016 the consolidated amounts of most of the balance sheet and income statement items are equal or very similar to those

for the activity in Portugal, since:

^j BFA was classified as a discontinued operation on 31 Dec. 2016; in 2017, following the reduction of the equity holding to 48.1%, BFA was equity accounted,

and at the end of 2018 it was reclassified to financial investments at fair value through other comprehensive income.

^j BCI Mozambique is equity accounted.

1) The average equity considered in the calculation of ROTE is deducted from the average balance of intangible assets and goodwill of equity holdings.

2) Proforma considering the sale of BPI Gestão de Ativos and BPI GIF.

3) Non performing exposures (NPE) in accordance with the EBA criteria.

4) Coverage by impairments for loans and guarantees accumulated on the balance sheet, without considering coverage by collaterals associated with these loans.

5) Impairment losses and provisions for loans and guarantees, net of loan recoveries previously written off from assets / Average value in the period of the performing loans portfolio.

6) The value of the pension funds considered includes contributions transferred to Employees' pension funds at the beginning of the following year (€47.0 million in 2014, €1.3 million in 2015, €75.5 million in 2016, €9.0 million in 2017 and €5.5 million in 2018).

7) Proforma figures considering the adherence to the special regime applied to deferred tax assets (DTA) and the change in the risk weights applied to BFA's exposure to the Angolan State and to BNA.

8) Capital ratios at 31 December 2018 considering the Board of Directors' dividend distribution proposal (€140 million), which is an integral part of this Management Report. The reported capital ratios for 31 December 2018 – CET1 and Tier1 of 13.2%, total ratio of 14.9% and leverage ratio of 7.0% – consider the upper limit (payout of 50%) foreseen in Banco BPI's dividend policy, as laid down in Article 2 (4, 5 and 6) of Delegated Regulation no. 241 / 2014.

9) Until Dec. 16, it included BFA's distribution network.

10) Staff (excludes temporary work) of fully consolidated subsidiaries. Until Dec. 16, includes BFA staff.

Net total assets

Common equity tier 1 ratio (consolidated; CRD IV / CRR fully loaded)

Leverage ratio

(consolidated; CRD IV / CRR fully loaded) %

Statement of the Chairman of the Board of Directors

Dear Shareholders, Clients and Employees

In 2018, economic growth in the Eurozone decelerated to 1.8% (from 2.5% in 2017). For 2019 the European Commission estimates that the economy will grow by 1.3%.

The inflation rate was 1.6% in 2018, below the central bank's target, and the monetary policy remained strongly accommodative. In the current context of slowing economic growth and low level of inflation, key rates are expected to suffer no changes before the first quarter of 2020. In this scenario, the Euribor rates remain close to historical levels.

In 2018, the Portuguese economy's growth decelerated to 2.1% (-0.7 p.p. relative to 2017), reflecting a less dynamic external demand. Private consumption, on the other hand, remained robust, supported by job creation. The labour market maintained a positive trend, with the rate of unemployment falling to 7.0%, down by 1.9 percentage points on 2017. The employed population swelled by 2.3% in 2018, this improvement being driven by the services industry, namely the public sector services.

Chairman of the Board of Directors Fernando Ulrich

The orientation of the Portuguese economy, now more outward-bent, combined with the improvement of household and business confidence and the recent dynamics of the construction activity, propelled a recovery in investment, which in 2018 grew by 4.4%, namely underpinned by increases of 6.0% in transport equipment and material, 3.1% in construction and 4.9% in R&D.

The average rate of inflation was 1.0%, which is 0.4 percentage points less than in 2017.

The economic momentum also supported fiscal consolidation, with the fiscal deficit reckoned to stand at around 0.7% of GDP in 2018. Reflecting the positive performance of the public finances and the confidence of international investors in the country's economic outlook, the three main rating agencies revised Portugal's rating to investment grade.

The latest indicators suggest that the Portuguese economy will maintain a robust growth pace, though lower than in 2018, at an estimated rate below 2.0% in 2019. It was against this economic background that Banco BPI developed its activity in 2018, achieving very good results, both at accounting level and in terms of the commercial performance. More details on this performance will be given by the Chairman of the Executive Committee, whom I wish to congratulate, along with all the other members

of the Executive Committee and all the Employees of the Bank, for the work done in a very challenging context, not only at regulatory and supervision level, but also due to the integration in CaixaBank Group and the increasingly fierce competition in the Portuguese banking sector.

I will now add some comments on four events that marked the life of BPI in 2018.

1) In February, Banco BPI and its Pension Fund agreed on the sale to VIOLAS SGPS of their shareholdings in VIACER, a company that holds 56% of the share capital of SUPERBOCK GROUP. As a result of this operation the Portuguese Violas Group increased its stake in VIACER from 46.5% to 71.5%, obtaining control of the majority of the share capital of SUPERBOCK GROUP, the largest Portuguese brewery group. The global amount of the transfer of the referred shareholdings was €233 million. Combining the historical cash flows with the sale value to VIOLAS SGPS, the rate of return on this investment for BPI Group was 14% per year since 1993.

This sale was part of CAIXABANK's strategy of fully focusing on the banking and insurance activity, and I am glad to note that it has been possible to maintain control of SUPERBOCK GROUP in Portuguese hands, through VIOLAS Group, which has been an exemplary partner since the foundation of SPI in 1981.

2) In May, CAIXABANK and ALLIANZ agreed to propose to the corporate bodies of Banco BPI and ALLIANZ PORTUGAL, which approved this proposal, the reorganization of the insurance business alliance in Portugal with respect to the distribution of non-life insurance products for the next ten years. As to the life insurance products from ALLIANZ PORTUGAL, BPI will continue to distribute them until the end of 2019. From 2020 onwards, BPI will distribute life insurance products from BPI Vida e Pensões, but the life insurance contracts subscribed by Banco BPI Customers with ALLIANZ PORTUGAL will continue in force on their own terms. Banco BPI will maintain a stake of 35% in ALLIANZ PORTUGAL.

It is with great pleasure that I witness the reorganisation of the insurance business partnership with ALLIANZ PORTUGAL initiated in 1995, even if CAIXABANK Group is one of, if not the, largest operator in the Spanish insurance market.

3) Also in May, CAIXABANK announced it had purchased from ALLIANZ 8.425% of the share capital of BPI, increasing its stake in the Bank to 92.935%. Following this acquisition, CAIXABANK set in motion the necessary procedures for the loss of status of publicly-held company of Banco BPI, and consequent delisting of its shares, and announced its intent to squeeze-out the remaining shares so as to reach a 100% holding of the Bank's share capital.

On 14 December, the CMVM's decision to approve BPI's loss of public company status concluded the first of these processes and BPI's shares ceased to be listed.

On 27 December CAIXABANK completed the squeeze-out acquisition of the shares it did not yet hold in BPI, achieving full ownership of the Bank.

The price paid by CAIXABANK to ALLIANZ Group and offered to all the other shareholders was €1.45 per share, which is 27.8% higher than the €1.134 per share paid in the tender offer of February 2017, in which CAIXABANK increased its holding in BPI's share capital from 45.5% to 84.5%.

Being 100 percent held by CAIXABANK, the largest financial group operating in Spain, BPI has all the conditions in place to fully harness the synergies and opportunities afforded by this situation.

4) Last but not least, a word about social responsibility. In 2018 BPI considerably reinforced its social commitment, affirming a public responsibility policy that has marked the identity of the institution since its first years in operation. As from last year, the Bank's social intervention, coordinated by a specialised Committee of the Board of Directors chaired by Artur Santos Silva, is articulated with the La Caixa Foundation, which, in addition to developing its own programmes in Portugal, now also joined BPI in supporting projects of social solidarity institutions and initiatives of cultural institutions, such as the Fundação de Serralves and Casa da Música. Together, the support provided by the Bank and the Foundation totalled 15.16 million euros, distributed by three major areas: social (43%), culture and education (34%), and research and scholarships (23%). This global sum, which should be trebled in the next three years, is already one of the more significant in the context of philanthropic activity in Portugal, definitely standing as a powerful differentiating factor of BPI's identity, and one that can hardly be replicated and is well represented in the motto "creating value with Values" that inspires the 2019-21 Strategic Plan.

Fernando Ulrich

Statement of the Chairman of the Executive Committee

Dear Shareholder,

It is with great pleasure that I present Banco BPI's management report for 2018, a year in which the Bank achieved its highest results ever.

During this year, which was one of great effort, challenge and strong pressure from our competitors, we had the satisfaction of maintaining the lead in values as important for the Group as service quality, reputation, and the confidence of our Clients in Portugal.

The excellent commercial results achieved in 2018, as reflected in an increase in recurring gross income in Portugal of 9%, were supported by strong commercial activity in Portugal and increasingly closer proximity to the Clients: Customer deposits, the Bank's most stable source of funding, increased by circa E1 800 million (+9.3%); and the total loan portfolio expanded by 5.7%, underpinned by a 16.1% increase in loans to companies in Portugal (+1 136 million). In turn, the Bank increased new production of residential mortgage loans, and

Chairman of the Executive Committee of the Board of Directors Pablo Forero

personal loans and car financing by 21% and 27%, respectively, surpassing the previous year's growth.

In the Portuguese market Banco BPI attained market shares of 9.9% in deposits, 15.2% in capitalisation insurance, and 10.1% in credit, consistently gaining market share in loans to companies (+1.1 p.p. to 9.5%) and raising the market share in residential mortgage loans to 11.4% (+0.2 p.p.).

Driven by its commercial dynamics, the Bank pursued its digital transformation path, being leader in homebanking penetration and continuing to equip its commercial teams and networks with all the means required to provide an increasingly high-quality and closer service to the Clients.

In our activity in Portugal, BPI reported a recurring net profit, i.e., excluding the extraordinary gains on the sale of equity holdings, of E218 million (+28.5%). These results correspond to a return on tangible equity (ROTE) of 8.8%.

Following a year when costs were cut by 5.3%, the growth of results in 2018 was mostly determined by the growth of income: recurring gross income increased by 9%, supported by the decisive contribution of net interest income, up by 8.8%, and fee and commission income, which increased by 5.6%. Notwithstanding the activity growth, recurring costs

contracted by 0.1%, while the Bank continued to stand out for the excellent quality of its loan portfolio.

2018 was also marked by important developments for BPI Group, which will have implications in the future and in the manner in which it will face new challenges in the coming years.

The holding in BFA, probably the best bank in Angola, deserves a special note. On the one hand, amidst a particularly challenging economic environment, marked by a sharp devaluation of the local currency (-47.5% against the euro) and high average inflation (19.6%), BFA, thanks to the quality of its management team, obtained the highest profit in its history, of which €212 million would be attributed to BPI. On the other hand, BPI changed the accounting classification of this holding from "associated company" to "shares at fair value through other comprehensive income", leading to a negative impact of E139 million on BFA's contribution to the Group's results. BPI believes that this is the more prudent accounting option and that it adequately reflects its current position in BFA (with no significant influence). After this change, the net profit of Banco BPI will reflect only BFA's dividends distributed to BPI instead of the appropriation of profits.

Concerning the Bank's strength, its high capitalisation levels deserve a note: the CET 1 and total capital ratios (fully loaded), considering the dividend distribution proposal, both increased by 1.5 p.p, to 13.8% and 15.5%, respectively.

Also worth stressing was the fact that in 2018 the three main international rating agencies raised their rating notations on BPI's long-term debt, which are currently 'investment grade' by Moody's, S&P and Fitch Ratings.

As to the public recognition earned by the Bank, I would highlight some of the many accolades received in 2018: BPI was elected "Best Bank in Portugal" in Euromoney excellence awards, and also "Trusted Brand in Banking" and "Brand of Excellence in Portugal", both for the fifth consecutive year, amongst many others received for its positioning in the digital area.

The Portuguese economy has pursued its recovery, however the general backdrop remains challenging on account of the level of interest rates and the competitive pressures.

2018 also saw the completion of the 2019-2021 Strategic Plan: a Plan that combines ambition and values, built around the motto "Creating Value with Values", and benefiting from the integration in the CaixaBank Group. Some of the Bank's main objectives are to achieve sustained profitability growth, the transformation of the Customer's experience, human capital development, improved efficiency and consolidation of the Bank's reputation. The challenge is to promote businesses with growth potential and profitability, leverage the Group's innovation capacity to maintain the lead of the digital transformation process in banking, provide a better experience to the Customer and pursue in the path of growth and conquest of market share gains.

BPI's mission will be to contribute to the financial well-being of its Clients and assert its role as a benchmark in socially responsible banking, based on the values of trust, service quality and social commitment.

Finally, I would like to express my recognition and gratitude to all those who daily allow ambitions to turn into successes: firstly, our Customers, who inspire us to be the reference bank in Portugal by honouring us with their preference and confidence, and all our Employees, for the dedication and competence with which they perform their functions in such a demanding context.

Pablo Forero

Executive Committee of the Board of Directors Ignacio Alvarez-Rendueles, José Pena do Amaral, João Pedro Oliveira e Costa, António Farinha Morais, Pablo Forero (Chairman), Alexandre Lucena e Vale, Pedro Barreto, Francisco Barbeira.

Key corporate events

2018

January

30 Disclosure of 2017 consolidated results: Net income from the activity in Portugal, excluding non-recurring results, increases to €191 million; Consolidated net income "as reported" of €10.2 million reflects non-recurring negative impacts of -€389 million (after taxes). BPI announces that it expects to reach in 2020 a cost-to-income close to 50% and a recurring return on tangible equity (recurring ROTE) in the domestic activity above 10%.

February

14 Institutional communication of launch of "la Caixa" Foundation in Portugal.
15 Banco BPI informs the market that Banco BPI and the Banco BPI Pension Fund had entered agreements to sell to Violas SGPS their shareholdings in Viacer – SGPS, the company that holds 56% of the share capital of Super Bock Group, SGPS.

March

1 BPI was recognised, for the fifth consecutive year, as the Portuguese most trusted banking brand, according to the Brand Trust survey that the Reader's Digest have organised for 18 years in 15 countries. 53% of the respondents considered BPI to be the most Trustworthy Bank.

April

10 Launch of 'Conta Valor' Campaign, featuring Portuguese supermodel Sara Sampaio, marks the return of BPI to the high-visibility advertising media.
20 At the Annual General Meeting, the Shareholders approved the Annual Report, the proposed appropriation of net profit of 2017 and the other motions put forward to the Shareholders.
20 Disclosure of consolidated results for the 1st quarter of 2018: consolidated net income of €210 million in 1st quarter of 2018, to which the activity in Portugal contributed with €118 million. Recurring net income from the activity in Portugal increases by 24% YoY, to €58 million.
20 Banco BPI informs the market on the completion of the sale of the entire share capital of BPI Gestão de Activos and BPI GIF to CaixaBank Asset Management SGIIC, S.A.U., following the agreement on this sale entered into on 23 November 2017.

May

6 and 7 Banco BPI informs about communication received from CaixaBank on 6 May: CaixaBank has agreed to acquire the 8.425% stake in Banco BPI held by the Allianz group, as a result of which it will own 92.935% of the share capital of Banco BPI (the transaction was concluded on 7 May). CaixaBank will request the convening of a shareholders meeting in order to approve the loss of Banco BPI's public company status, and upon completion of this process and consequent delisting of the BPI shares from trading in the stock exchange, CaixaBank intends to proceed with the compulsory acquisition of any remaining shares.

June

12 BPI's Investment Banking Equity Research and Sales once again stood out in the Extel Awards 2018's rankings of Iberian brokers: #2 Equity Sales, #4 Equity Research and #5 Leading Brokerage Firm.
29 The Shareholders, at the General Meeting, approved the loss of Banco BPI's public company status, the reduction in the number of members of the Board of Directors in the 2017-2019 term of office from twenty to eighteen, and the new dividend policy proposed by the Board of Directors.

July

12 BPI received in London the award for "Best Bank in Portugal", attributed by the Euromoney magazine in the Euromoney Awards for Excellence 2018.
17 Announcement of sponsorship to the Portuguese Football Federation. BPI became the Official Sponsor of the A Teams (men and women), the Under-21 Team, until 2022, and the Main Sponsor of the Women's Premier Football League, which was named the "BPI League".
19 BPI presents its new mobility project the BPI Mobile Branch. This innovative branch, which permits to provide full banking services, aims to reinforce proximity to the Clients and ensure a presence in places where BPI has no branches.
24 Disclosure of consolidated results for the 1st half of 2018: consolidated net income of €366.1 million in 1st half of 2018, to which the activity in Portugal contributed with €222.5 million. Recurring net income from the activity in Portugal increases by 32% YoY, to €104.2 million.

September

12 BPI distinguished by Superbrands as "Brand of Excellence". This award, received for the 5th year in a row, acknowledges the BPI brand growth strategy and the Bank's service quality and social commitment.

October

11 Fitch Ratings upgrades the Bank's long-term debt rating from 'BBB-' to 'BBB', which represents a one-notch increase in the investment grade scale. The outlook on the rating is stable.
16 Moody's rating agency upgrades the Bank's long-term debt rating by 2 notches, from 'Ba1' to 'Baa2', which means that Banco BPI is now rated investment grade by the three international rating agencies: Moody's, Fitch and S&P Global Ratings. Moody's also upgraded the long-term deposits rating, by two notches, from 'Baa3' to 'Baa1'. The Outlook for both long-term deposits and debt ratings is "Stable".
23 Disclosure of consolidated results for the 3rd quarter of 2018: consolidated net income totalled €529.1 million in the period of January to September 2018. The activity in Portugal generated net income of €324.4 million. Recurring net income from the activity in Portugal increases by 20% YoY, to €164.2 million.

November

27 BPI informs the market about its Strategic Plan for the period 2019-2021, which, under the motto "Create value with values", establishes five strategic priorities: increase profitability, enhance the Customer experience, develop human capital, boost operating efficiency and consolidate the Bank's reputation. Through the execution of the Strategic Plan, BPI expects to achieve in 2021 an efficiency ratio (cost to income) of close to 50% and a sustainable ROTE in Portugal of around 11%.

December

5 BPI's Investment Banking was distinguished in the StarMine Analyst Awards from Refinitiv as #1 Best Iberian Broker.
14 Loss of Banco BPI's public company status upon publication on this date of CMVM's favourable decision, and consequent delisting of the BPI shares from trading on the Euronext Lisbon regulated market, on 14 December 2018.
27 CaixaBank exercises its squeeze-out right on the remaining shares, after which it holds the entire share capital of Banco BPI.

2019

January

10 BPI is distinguished with the 2019 Five Stars Award, in the Digital Banking category, scoring a global satisfaction level of 76.3% in the surveys conducted to 1 595 Consumers, which reveals the high level of satisfaction and trust in the Bank's digital services.

February

1 Disclosure of 2018 consolidated results: Consolidated net income reaches €490.6 million in 2018. The activity in Portugal contributed with €396.3 million (81% of the total) to the consolidated net income. Net income from banking activity in Portugal, excluding non-recurring items, reached €218.3 million, which translates an improvement of 28.5% over the previous year.

BPI Business Model

BPI focuses on the commercial banking business in Portugal, offering a broad range of services and financial products to corporate, institutional and individual Customers. BPI is part of the CaixaBank Group, which since the end of 2018 holds the entire share capital of BPI.

BPI is the fifth largest financial institution operating in Portugal in terms of assets (€31.6 billion), with market shares of 10% in loans and Customer deposits.

In the insurance business, BPI has a joint venture with Allianz, reflected in BPI's stake in Allianz Portugal (35%) and in an insurance distribution agreement using the Bank's commercial network; in credit insurance, BPI holds a 50 percent stake in COSEC under a joint venture with Euler Hermes (a company of the Allianz Group), which holds the remaining 50 percent.

BPI also holds minority stakes in African banks (48.1% in BFA in Angola and 35.67% in BCI in Mozambique).

Figure 2

1) Companies accounted for by the equity method.

2) In partnership with Allianz, holder of 65% of the share capital.

3) In partnership with Euler Hermes, a company of the Allianz Group, holder of 50% of the share capital.

4) At the end of 2018 BPI changed the accounting classification of its equity holding in BFA, from "associated company", consolidated by the equity method, to "financial investment", recognised under "shares at fair value through other comprehensive income".

5) In partnership with Caixa Geral de Depósitos, which holds 61.51% of the share capital.

6) Following the agreement to sell BPI's investment banking businesses – equities and corporate finance – to CaixaBank, announced in November 2017, a Branch of CaixaBank was set up in Portugal, to which these investment banking businesses and the related assets and Employees were transferred. The CaixaBank Branch in Portugal started to operate on 7 January 2019. At the same time, the process of merger by incorporation of Banco Português de Investimento into Banco BPI is under way.

With the aim of improving and expanding over the medium and long term the commercial offer to BPI's Clients, create synergies with the CaixaBank Group, and allow BPI to focus on the core activity, and following the agreements signed and announced still in 2017, a set of subsidiaries and businesses were sold to CaixaBank: the subsidiaries BPI Vida and Pensões (still in 2017), BPI Gestão de Activos and BPI Global Investment Fund; the acquiring and cards businesses, and the investment banking business (equities and corporate finance).

In the context of this business reorganisation within the CaixaBank Group, BPI continues to offer those products and services to its Clients and to ensure the relationship with the Clients, acting as agent:

^j Investment and saving solutions investment funds, capitalisation insurance and pension funds – provided by BPI Vida, BPI Gestão de Activos and BPI Global Investment Fund, which were sold to CaixaBank Group companies (VidaCaixa and CaixaBank Asset Management).
^j Acquiring / Point of Sale Terminals (POS), now provided by Comercia Global Payments. Comercia Global Payments is market leader in Spain in automatic payment services, being held by CaixaBank and Global Payments.
^j Debit and credit cards, now issued and managed by CaixaBank Payments.
^j Brokerage, research and corporate finance businesses – previously conducted through Banco de Investimento, fully held by Banco BPI, are now centrally developed by the CaixaBank Branch in Portugal, which started to operate in January 2019.

BPI serves 1.93 million Customers in the domestic market, having relevant market shares in the various products and services offered.

Market shares

Market shares in Nov.18, except (*) in Sep.18 and (**) Dec. 18. Sources: APFIPP (Portuguese Association of Investment and Pension Funds and Asset Management Firms) APS (Portuguese Association of Insurers), INE (National Statistics Institute), BPI Gestão de Activos, BPI Vida e Pensões, BPI. Chart 1

The business model is based on the provision of a complete range of financial products and services, structured to meet the specific needs of each segment – Individuals, Companies, and the Public Sector and State Enterprise Sector – through a specialist, multichannel and fully integrated distribution network.

The distribution network comprises 495 business units, namely 421 retail branches, 1 mobile branch, 39 Premier centres, and specialist branches and units serving corporate and institutional Customers, including 31 corporate and institutional centres and 3 Corporate and Investment Banking centres. Canais – Quotas

The network articulates with the virtual channels, which include homebanking services (BPI Net and BPI Net Empresas), telephone banking (BPI Directo) and mobile applications (BPI Apps), thus ensuring banking services coverage of all Clients.

Banco BPI's business is organised around two main segments: (i) Individuals and Businesses, and (ii) Corporates and Institutional.

Individuals and Businesses

Individuals, Businesses and Premier Banking is responsible for commercial initiatives with individual Customers, small businesses and companies with turnover of up to €5 million. The branch network is geared towards mass-market Customers and small businesses. For the Affluent Customers – high net worth Customers or Customers with potential for wealth accumulation – BPI has a network of financial advisors, working at the Premier Centres or specific retail branches, which provide specialised financial advisory services.

BPI Private Banking, made up of a team of experts in Portugal and also comprising a 100% held subsidiary, in Switzerland – BPI Suisse – provides discretionary management and financial advice specialist services to high net worth individual Customers.

Corporates and Institutional

Corporate and Institutional Banking serves, through its specialist network, large and medium-sized companies with turnover of more than €2 million, operating in parallel with Individuals, Business and Premier Banking in the segment of up to €5 million. This network is also directed to Institutional Customers, namely Public Sector entities, State and Municipal Companies, State-owned Enterprises or other institutional entities with turnover above €2 million or liabilities with BPI of more than €500 thousand.

Corporate and Investment Banking manages the relationship with the largest Portuguese corporate groups, insurance companies and subsidiaries of the largest Spanish companies, under an Iberian approach aimed at providing the best level of service.

Customer Segmentation and distribution network in Portugal

Individuals and businesses Corporate and institutional

Business volume = gross loans + guarantees + total Customer resources (on-balance sheet and off-balance sheet). In the case of Private Banking, it corresponds to Discretionary management and advisory services, stable investments under custody and Loans and guarantees portfolio.

HNWI = High Net Worth Individuals. CIB = Corporate and Investment Banking. SOE = State-owned enterprises.

Human resources

Headcount evolution

On 31 December 2018, the number of BPI Employees totalled 4 888, which is 43 fewer (-1%) than in the previous year.

Following the integration of BPI-Gestão de Activos into CaixaBank Asset Management, in 2018, BPI ceased to have Employees in subsidiaries in Portugal.

The breakdown of Employees by gender maintains the same profile as in 2017, i.e., 56% are women and 44% are men.

The average length of service in the Bank was 16.4 years, and the average age of the Employees was 44 years.

Banco BPI Employees

Chart 2

BPI Employees

			End-of-period values			Period average values
			2017	2018	∆%	2017	2018	∆%
Activity in Portugal
Banco BPI		1	4 781	4 838	1%	5 110	4 791	(6%)
Banco Português de Investimento		2	33	28	(15%)	44	30	(32%)
Other subsidiaries		3	48	0	(100%)	68	0	(100%)
	[= Σ 1 to 3]	4	4 862	4 866	0%	5 222	4 821	(8%)
Branches and representative offices abroad		5	69	22	(68%)	94	51	(46%)
Total 1	[= 4 + 5]	6	4 931	4 888	(1%)	5 316	4 872	(8%)
								Table 2

Training and qualification

The qualification and development of its Employees is a pillar of BPI's strategy.

Training contents, drawn up in accordance with the Employees' needs and legal guidelines, were provided in a classroom model (classroom and on-the-job), online (e-learning, videos, webinars, video, conferences, gamification) and through blended learning.

Training investment amounted to E1.4 million in 2018, corresponding to 0.8% of the payroll.

In 2018, 4 812 Employees participated in training sessions (face-to-face and e-learning), with the number of training hours per Employee having significantly increased (+ 40%): 53.8 hours, which compares with 38.4 hours in 2017. Recursos humanos 1

The number of training hours provided in 2018 increased by 39% relative to 2017 (approximately 263 thousand hours vs 189 thousand hours in 2017), with a 63% reduction in face-to-face training and a very significant increase in online training.

The training offer in 2018 was essentially designed for the Employees of the Commercial Networks, who accounted for 66% of the total number of participants, vs. 34% of participants from the Central Services.

1) Includes fixed-term contracts and excludes temporary work of people with no employment relationship with BPI.

Training in anti-corruption and the prevention of labour risks involved approximately 2 800 and 550 Employees, respectively, and a total of 89 thousand training hours.

The Employee Certification project in MiFID II was pursued in 2018, covering 2 567 Employees and representing approximately 191 thousand training hours. 2 300 Employees had been certified by the end of 2018.

The certification project on the Mortgage Credit Directive was started, involving 725 Employees and more than 18 thousand hours of training, with 543 Employees certified at the end of the year. The certification of the remaining Employees will be concluded before the end of the first quarter of 2019.

There were also several training initiatives designed for senior officers, namely in Corporate Governance, which involved 45 Employees and a total of 1 625 training hours.

Main training indicators

	2017	2018
Investment (million euros)	2.1	1.4
Investment / payroll	1.2%	0.8%
Total participants (face-to-face and e-learning)	5 234	4 812
Total participations	47 300	47 045
Face-to-face	12 836	5 718
E-learning	34 464	41 327
Total training hours	189 474	262 781
Face-to-face	88 703	32 468
E-learning	100 771	230 313
No. of training hours per Employee	38.4	53.8
		Table 3

Digital banking

Digital transformation, a strategic priority for BPI, is based on three pillars in which significant progress was made during the year:

^j increase the use of the digital channels by BPI's Clients;
^j improve the Clients' experience through homebanking / mobile banking;
^j develop mobility and support solutions for the Commercial Managers.

BPI LEADS IN THE DIGITAL CHANNELS

The Bank is market leader in homebanking penetration, having reinforced in 2018 the number of active Digital Clients and significantly increased the number of users of the Mobile Banking channel.

Regular users

* Active Customers 1st account holders, individuals and companies.

In addition to receiving the "Five Stars" national award for being the best in Digital Banking, in 2018 BPI once again stood out in the indicators of use and adherence to the digital channels:

"BASEF Market Survey" (2018)

^j BPI #1 in "Internet Banking Service Penetration"
^j BPI #2 in "Mobile Banking Service Penetration"

"Barómetro Serviços Financeiros Empresas – BFin" (2018)

Banca Digital 1

^j BPI #1 in "Internet Banking Service Penetration"
^j BPI #2 in "Internet Banking Service Satisfaction"

"Brokerage Services – CMVM Ranking" (2018)

^j BPI #2 in Online Brokerage (Internet)

IMPROVED DIGITAL EXPERIENCE

With the aim of boosting service quality and sales through the digital channels, in 2018 BPI launched a set of new products and services in the BPI APP and BPI Net, namely:

^j Contracting credit cards and increasing cards' credit ceiling;
^j Cash advances on credit cards, also applying to payments and transfers;
^j Solutions for Clients' liquidity needs, with different alternatives in terms of credit and mobilisation of funds;
^j New investment area, permitting placements in investment funds through the BPI APP, and new saving and investment solutions;
^j Integration of MBWay service, allowing phone transfers and cardless cash withdrawals in ATMs;
^j Creation of the "My Data" area in the BPI App and BPI Net, enabling Clients to customise their Accounts and view their banking data;
^j Simplification of transactions authorisations in BPI NET and BPI App;
^j Immediate transfer option now available;
^j Subscription of 'Valor' Account;
^j Launch of BPI Protect service;

Chart 3

^j The service functionalities of BPI Net Empresas were reinforced at various levels, namely including new functionalities relating to factoring.

MOBILITY AND EFFECTIVENESS OF THE COMMERCIAL NETWORKS

At BPI the digital transformation at the service of the commercial networks involved not only the modernisation of equipment, but also the digitisation of operational and sale processes, and articulation with the digital channels to enable the Commercial Managers to actively support their Clients, anytime, anywhere.

The commercial network mobility and effectiveness solutions were reinforced in 2018, namely through the following:

^j Expansion of the new workstation (smartPC) to cover 50% of the Employees, boosting commercial proactivity and mobility in Customer service;
^j Contact with Manager functionality made available to Private Banking and Retail Clients, increasing points of contact and service between manager and Clients and enabling remote sale closing with the Employee's assistance;
^j New signature dematerialisation solutions, through digital signature, covering 86% of the transactions volume and promoting a faster and more effi cient service delivery experience;
^j New intranet: with a more appealing image, designed for touch interaction and a redesigned information layout, the new intranet permits new forms of communication with the Employees;
^j Simpler, faster and more effi cient sale processes, such as the capture of renting leads and the sale of preapproved credit cards;
^j Faster and more effi cient service delivery, namely to change Customer data or obtain consent for the processing of personal data.

Domestic and international recognition

BPI was the winner in the Digital Banking category of the 'Five Stars' national award. The award was based on a set of different methodologies, involving a survey of around 1600 consumers in which BPI scored a global satisfaction level of 76.3%, which reveals the high level of satisfaction and trust in the Bank's digital services.

In the "Portugal Digital Awards 2018" BPI was the winner in the "Best Digital Team" category, its Agile Methodology also earning an Honourable Mention in the "Best Digital Strategic Tools".

BPI was also the winner in the "Digital Transformation in Financial Services" category of the Outsystems 2018 Innovation Awards. These awards recognise the organisations and people that all over the world use the Portuguese lowcode platform to drive innovation and productivity in their technological development areas.

In the software development process, BPI obtained the CMMI DEV ML2 certifi cation awarded by the CMMI Institute, a subsidiary of ISACA that originated in the Carnegie Mellon University (USA) and certifi es the quality of these processes. Since March 2018 BPI is the only Portuguese fi nancial institution having obtained this certifi cation.

BPI was also a fi nalist in the 2018 PayTech Awards, the Financial Innovation Awards 2018, the Efma Banking Technology Awards and the NOS Innovation Awards.

The BPI Brand

In 2018 BPI was elected "Best Bank in Portugal" in the Euromoney magazine's awards for excellence, in recognition of the Bank's efficiency, quality, innovation and social commitment.

As a result of BPI's integration in the CaixaBank Group, the "la Caixa" Foundation started to implement its social work in Portugal, and will develop this work in articulation with the Bank.

At the end of the year BPI presented its Strategic Plan for the 2019-2021 period, under the motto "Creating Value with Values". BPI's mission is to contribute to the financial well-being of its Clients and to the progress of the entire community. BPI develops its activity and provides its services at all times based on the values of quality, trust and social commitment.

REPUTATION AND ACKNOWLEDGEMENT

In 2018, BPI's performance was recognised in several areas of the financial business. In addition to the Euromoney Award, already referred, the following accolades bestowed on the Bank by independent domestic and international entities warrant special mention:

^j The BPI brand obtains the best results ever in reputation and social responsibility

According to OnStrategy, a company that evaluates the reputation of brands in 30 industry sectors, the BPI brand scored an excellent level of awareness and the highest reputation and social responsibility indicators since the survey is conducted in Portugal. The Bank's indicators increased in practically all dimensions and in particular in Citizenship & Social Responsibility and Governance & Ethics. The BPI brand ranked in 2nd position in the financial sector in the reputation and social responsibility indices.

^j Trusted Brand

BPI was recognised, for the sixth consecutive year, as the Portuguese Most Trusted Banking Brand, according to the brand trust survey that the Reader's Digest have organised for 19 years in 15 countries: 45% of the respondents considered BPI to be the most Trustworthy Banking Brand in Portugal.

^j Best Digital Bank

BPI was for the first time elected the best Bank in the Digital banking category of the Five Stars Award, scoring a global satisfaction level of 76.3% in a survey conducted to 1 595 consumers, which reveals the high level of satisfaction and trust in the Bank's digital services.

^j Brand of Excellence in Portugal

For the 5th consecutive year, in accordance with Superbrands, an independent international organisation that promotes brands driven by values such as longevity, loyalty, acceptance, and goodwill. Superbrands analyses the performance of brands to identify those that perform above and beyond their competitors.

^j Satisfaction with Service Delivery

BASEF 2018 – Financial Capability Baseline Survey, published by Marktest, confirmed BPI as the Bank with the highest satisfaction level amongst the five largest banks in the Portuguese financial system with respect to Quality of Service – an indicator in which it has always led –, being also leader in the netbanking service penetration.

^j #1 in Satisfaction Index

The CSI – Consumer Satisfaction Index, conducted in the 1st half of the year and published by Marktest, ranks BPI in 1st place in the Satisfaction Index.

^j #1 in Mystery Client overall evaluation

In a survey carried out in the second half of the year and published by Metriang, a market surveys and opinion polls company, BPI ranked in 1st place in the overall evaluation. This survey assesses the quality, professionalism and technique in Customer service to a potential Client.

^j Best Digital Team

Attributed at the Portugal Digital Awards 2018, an initiative of Jornal de Negócios newspaper and IDC Portugal in partnership with Novabase and AXIANS, which distinguish innovative projects and teams that stand out in digital transformation.

^j Digital Transformation in Financial Services

BPI was also distinguished in the Outsystems 2018 Innovation Awards, in the "Digital Transformation in Financial Services" category. These awards recognise the organisations and people that all over the world use the Portuguese low-code platform to drive innovation and productivity and enhance their impact on value creation for the business.

^j Best Mutual Funds

BPI Gestão de Activos earned the awards for Best National Global Manager and Best National Bond Manager in the Morningstar 2018 Awards.

^j 4 Awards in 2018 Best Funds

Attributed by the Jornal de Negócios newspaper and the Portuguese Association of Investment and Pension Funds and Asset Management Firms (APFIPP), in the categories: 'Other Equity Funds' – BPI Reestruturações; 'Other Bond Funds' – BPI Obrigações Alto Rendimento Alto Risco; 'Best Equity Fund domiciled in other jurisdictions' – BPI Opportunities (Luxembourg); and 'Best Retirement savings plan with SRRI 2' – BPI Reforma Segura PPR.

^j Best Treasury and Cash Management Provider in Portugal

Distinction awarded for the 3rd consecutive year by the prestigious Global Finance Magazine.

^j #1 Corporate Bond House and Most Active Research House

Attributed in the NYSE Euronext Lisbon Awards 2018, in the categories 'Most Active Research House', for the 6th consecutive year, and '#1 Corporate Bond House'.

^j Best Research Company in the Iberian Market

CaixaBank BPI was elected by Refinitiv as #1 Research Company in the Iberian Market, in the Starmine Analyst Awards 2018.

^j # 1 Sales Individuals – EXTEL Awards

The Extel Awards ranked Francisco Pires as "#1 Sales Individuals", placing him at the top of the ranking of the most outstanding sales professionals.

INVESTMENT AND COMMUNICATION

In 2018, the financial sector remained the 9th largest investor in all business sectors, with a share of investment of 4%, up by 20% on a year earlier.

BPI reported an 8% share of investment within the financial sector, advancing its position in the investment ranking by 823% year-on-year and reaching the 3rd place.

This performance reflects the investment made in two multimedia campaigns – 'Conta Valor' (Value Account) and 'Crédito Habitação com Taxa Fixa' (fixed-rate Residential mortgage credit), which marked BPI's return to the high-visibility media. Portuguese supermodel Sara Sampaio was the star of the campaigns, becoming the image of the Bank throughout the year. These campaigns also marked the début of the new "BPI. CaixaBank Group. Together, With You" new signature, relaunching BPI into the first place in spontaneous recognition and TV proved recall, during the period of the campaigns.

The signature of an agreement with the Portuguese Football Federation, for four seasons, deserves a mention: BPI became the "Official Bank of the Teams", as the Official Sponsor of the A Teams (men and women), the Under-21 Team, and the Main Sponsor of the Women's Premier Football League, which was named the "BPI League".

The Bank's communication policy thus focused on the creation of permanent opportunities for communication along the year, based on three key dimensions: commercial communication, addressed to individuals and companies, sponsorships, and social commitment. Each of these issues is further developed in specific chapters of this report.

Social responsibility

BPI views its corporate social responsibility as the set of duties and obligations of the Institution towards the community in which it is integrated and the specific interest groups that depend upon its activity: Customers, Employees and Shareholder.

As a result of its integration in the CaixaBank Group, BPI exercises Social Responsibility in coordination with CaixaBank and the "la Caixa" Foundation, based on three axes:

^j Social, contributing to the wellbeing of the population and in particular of those in a more vulnerable situation;
^j Governance, defining organic responsibilities and standards of action that ensure a rigorous social conduct;
^j Environmental, stressing business practices that foster the rational, efficient and sustainable use of resources.

This coordinated action led to the harmonisation of strategic guidelines and objectives in this area with the CaixaBank Group, as reflected in BPI's Social Responsibility Policy, which highlights the aim of developing an efficient and responsible business model, with a strong social commitment component.

It was also following BPI's entry in the CaixaBank Group that the "la Caixa" Foundation started to establish itself in Portugal, with the mission of building a fairer and more balanced society, by supporting projects in the social sector, health research, education, science and culture. In 2018, the amount invested through the joint intervention of BPI and the "la Caixa" Foundation totalled €15.16 million.

Throughout the year the activity developed by BPI and the "la Caixa" Foundation" concentrated on five lines of intervention:

^j "la Caixa" Foundation" own programmes;
^j Calls for research grants in the area of biomedicine and health;
^j Specifically Portuguese projects;
^j Awards to support projects of social entities, attributed through application to calls;
^j Proximity projects promoted by BPI.

BPI's Social Responsibility activity is defined and coordinated by the Social Responsibility Committee, a specialised body of the Board of Directors having as mission to support and advise the Board on all matters related to the Bank's social responsibility policy. The Committee is chaired by Artur Santos Silva, honorary chairman of BPI and curator of the "la Caixa" Foundation", and has as members José Pena do Amaral, member of BPI's Executive Committee, Rafael Chueca, Corporate Manager of the "la Caixa" Foundation", António Barreto, advisor to the "la Caixa" Foundation", and Isabel Jonet.

According to OnStrategy, a company that specialises in evaluating the reputation of brands in more than 30 industry sectors, in 2018 BPI ranked in 2nd position in the financial sector reputation and social responsibility indicators, scoring the highest result since the survey is conducted in Portugal.

BPI includes in a specific Annex to the Annual Report a Non-Financial Statement that presents more complete information on the evolution and impact of BPI's Social Responsibility activities during the reporting year.

Strategic Plan 2019-2021

In November 2018 BPI presented its Strategic Plan for the 2019-21 period, focused on the activity in Portugal. Under the motto "Create value with values", BPI'S Strategic Plan establishes five priorities: increase profitability, enhance the Customer's experience, develop human capital, boost operating efficiency and consolidate the Bank's reputation.

With the implementation of the Strategic Plan, BPI expects to achieve at the end of 2021 an efficiency ratio of 50% and a recurring ROTE of 11% in the activity in Portugal.

STRATEGIC PRIORITIES FOR 2019-2021

The Bank has established five strategic priorities:

Sustainable increase in profitability

Supported by the expansion of corporate and businesses banking, consumer lending, and residential mortgage loans, and the sale of financial advisory products, including mutual funds and insurance.

Accelerate transformation of Customer experience

Accelerate the Bank's digital transformation process, contributing to improve the Customer's experience. Use of the new technologies to increase the capacity to analyse and respond to the needs of each Customer and to provide an increasingly innovative and multi-channel offering, with a clear focus on digital mobility and Customer service.

Develop BPI's human resources

Priority investment in human resources training and development at all levels of the institution, fostering the management of talent and an agile culture that enables the Bank to respond to the changing environment in the financial sector.

Improve operational and organisational efficiency

Simplification, digitisation and centralised management of processes, with the commercial teams exclusively concentrating on Customer service and the marketing and advisory services for financial products.

Consolidate BPI's reputation based on the quality of service to the Customer and society

Based on two main themes: maintaining the high levels of service quality that characterise the Bank; and affirming BPI as a benchmark in the area of social commitment and responsible management.

STRATEGIC PRIORITIES FOR 2019-2021

Sustainable increase in PROFITABILITY

^j Selective lending growth: consumer, mortgages, corporate
^j Promote Customer savings diversification
^j Focus on Customer payroll deposits
^j Reinforce insurance products distribution
^j Strengthen profitability analytics per operation
^j IRB adoption
^j Simplify product offering, services and pricing
^j Maintain a stable cost base

Accelerate transformation of CUSTOMER EXPERIENCE

^j Process-review focusing on Customer experience
^j Leverage advanced analytics to better know and understand Customer needs
^j Develop ecosystem potential (Life Journeys)
^j Provide adequate sales tools
^j Increase percentage of digital Customers

Develop the Bank's HUMAN RESOURCES

^j Foster training and development at all levels
^j Promote talent management
^j Promote an agile culture driving motivation and involvement
^j Promote cultural integration within the CaixaBank Group

Improve operational and organisational EFFICIENCY

^j Continuously review the distribution networks
^j Simplify processes
^j Centralise non-commercial processes
^j Differentiate service levels based on Customer potential value
^j Extensive use of digitalisation to improve efficiency

Consolidate reputation based on QUALITY of service to the Customer and society

^j Maintain a high quality of service to Customers
^j Position BPI as a benchmark in responsible management and social commitment

OBJECTIVES FOR 2021

Business Objectives

The Strategic Plan establishes business objectives that support the improvement of profitability through revenue growth, combined with stable recurring costs and a low cost of credit risk.

BPI aims to achieve average annual growth rates of 5% in credit, above the expected market growth and consequently leading to market share gains, and 3% in Customer resources, with emphasis on off-balance sheet funds (funds and insurance).

At the same time, the Bank will seek to strengthen the commercial relationship with its Clients, promoting their adhesion to payroll deposits, the regular use of the Bank's digital channels and the maintenance of high Customer satisfaction levels.

Business targets – 2019-2021 CAGR 19-21 Chart 5 2021 M.S. – market share. Customer loans Consumer lending Loans to companies and small businesses Customer resources Diversification2 Residential mortgages (M.S.) New personal loans (M.S. in origination) Payroll deposits (CAGR 19-21) Digital Customers3 Customer satisfaction4 ~5% ~8% ~5% ~3% ~6% 12.5% 15% ~6% >50% Top 3

Plano Estratégico 1

Financial objectives

With the implementation of the 2019-2021 Strategic Plan, BPI expects to achieve an average annual growth rate of 7% in core revenues, while maintaining recurring costs stable and continuing to improve asset quality indicators, consolidating the NPL ratio below 3%.

The Bank thus expects to attain in the activity in Portugal a core efficiency ratio of close to 50% and a sustainable ROTE of around 11% by 2021.

E – Estimate.

1) Recurring costs minus services provided to CaixaBank Group companies as % of core revenues.
2) Includes mutual funds, capitalisation insurance, retirement savings plans, variable income treasury bonds ("OTRV"); excludes short-term funds and guaranteed capital products.
3) Objective for end of 2021; Percentage calculated with no age restrictions. 4) Objective measured through overall satisfaction ranking of individuals and companies, and internet banking and digital channels satisfaction indices, according to independent market survey companies.

Background to operations

GLOBAL AND EUROPEAN ECONOMY

According to the International Monetary Fund (IMF)1, the world economy growth weakened in 2018 by 1 p.p. relative to the previous year, to 3.7%, due to a more subdued performance in Europe and Asia. The deceleration of the advanced economies affected all regions except for the US, where the activity expanded by 2.9% (2.2% in 2017), through the impact of the fiscal stimulus measures implemented. As to the remaining countries, there was a significant slowdown in Japan (to 0.9% in 2018 from 1.9% in 2017), the Eurozone (to 1.8% from 2.5%) and the United Kingdom (to 1.4% from 1.8%). Within the developing economies, the gradual deceleration of China stands out, with a growth rate of 6.6%, which is 0.3 p.p. less than in 2017.

For 2019, the IMF anticipates a new slowdown: the world GDP is expected to increase by around 3.5%.

Monetary policy at different paces

In 2018 the Federal Reserve lifted the benchmark interest rate in four movements, closing the year at the 2.25%- 2.50% interval. These four hikes, together with the three made in 2017, reveal that the North-American monetary policy is no longer accommodative and has entered a more neutral ground of the economic cycle, where it will likely remain in 2019.

The ECB, on the other hand, confirmed the end of its net asset purchases in December and affirmed its intent of maintaining interest rates unchanged, at least until after the summer of 2019. In addition, the European Central Bank reiterated its intention of staying present in the financial markets for a long period of time through the reinvestment of bonds at maturity, which means that the eurozone monetary policy should remain accommodative throughout 2019.

1) Source: World Economic Outlook, January 2019 Update.

PORTUGUESE ECONOMY

In 2018 the Portuguese economy grew by 2.1%, which represents a deceleration of economic activity relative to 2017 (-0.7 p.p.). This slackening pace resulted from a less dynamic external demand, in so far as private consumption remained strong (despite the slowdown), supported by job creation. Investment also gave a positive contribution to growth, essentially due to investment in equipment.

Albeit at a slower pace, the unemployment rate continued to fall, standing at 7.0% (-1.9 p.p. relative to 2017), the lowest level since 2004. At the same time, the employed population swelled by 2.3% year-on-year in 2018, this increase being driven by the services industry, namely the public sector services.

In 2018 the trade deficit in goods increased by E2.7 billion, to E17.1 billion, driven by a stronger growth in imports (8.0%) than in exports (5.3%). This reflected, on the one hand, the increase in imports of investment goods, but also temporary factors that constrained exports, namely the interruption in oil production at the start of the year, and the reduction in car exports during the last months of the year due to the strike in the Setúbal port.

Unemployment rate in Portugal

Source: European Commission.

Spain EMU

Enquadramento ENQ01

Source: INE. Unemployment rate adjusted by seasonality.

Enquadramento ENQ02

The deterioration in the trade deficit in goods was in part offset by the surplus in the balance of services, which, however, was not sufficient to prevent the current balance from returning to negative ground, at around -0.3% of GDP. In this scenario, the economy's financing capacity dropped to 0.5% of GDP in the year to September 2018, which is 0.6 p.p. less than in the same period in the previous year. This translates a balanced situation in the State sector and an improvement from 2017, but a deterioration in all other sectors. In the case of households, their financing capacity dropped to 0.4% of GDP, while their savings rate remained flat year-on-year, at 4% of disposable income.

On the public accounts front, the available information points to a general government balance (cash basis) of -E2 803 million at the end of the year (corresponding to -1.0% of GDP), an improvement of E472 million relative to 2017. This improvement resulted from a substantial increase in revenue, in particular tax and contributory revenue (+5.3% YoY), which alone contributed with 85% to the expansion in total revenue in 2018, and in turn is explained by the good performance of economic activity and the strength of the labour market. The expenditure implementation was in line with the Government's projections and therefore the official target (-0.7% of GDP, national accounts basis) may have been reached.

Based on preliminary information released by the Bank of Portugal concerning the public debt, it is estimated that the debt-to-GDP ratio decreased to 121.3% at the end of 2018 (124.8% at the end of 2017).

In 2018 the Treasury issued E16.8 billion of mediumand long-term debt. In December, Portugal made the last reimbursement of the IMF loans, contributing to lower the Republic's funding costs and to extend the average maturity of the public debt. In 2018 the cost of medium- and long-term debt issuance was 1.8%, and the average maturity of the issues was 11 years. In 2019 the Treasury expects to issue E15.4 billion in medium- and long-term debt (Treasury Bonds) and E1 billion in floating rate treasury bonds (OTRV).

1) Excluding energy.

(State Budget for 2019).

Outlook for 2019

The European Commission estimates that the pace of expansion of the Portuguese economy will slow to 1.7% in 2019, reflecting a lower contribution of external demand. At the same time, the growth of private consumption should slightly decelerate, with investment gradually picking up, underpinned by the incoming funds from the EU. Enquadramento Enquadramento

In an environment of growth consolidation, the labour market is expected to maintain a positive momentum, with the unemployment rate likely to stand at 6.5% in 2019. ENQ03 ENQ04

Concerning the fiscal consolidation process, the Government expects the fiscal deficit to shrink to 0.2% of GDP, benefiting from the continuation of a favourable economic and financial situation, as well as from other factors, such as the payment of dividends by the Bank of Portugal and Caixa Geral de Depósitos.

As to the external accounts, the current and capital account surplus is expected to flatline, based on the assumption that the improvement in competitiveness will be sustained, that companies will remain focused on the external market, that tourism revenues will remain stable and also taking into account the expected stabilisation of oil prices. However, the acceleration of imports, reflecting the high import content of some of the components of demand, alongside the deceleration of tourism, could translate into a worse than anticipated performance of the external balance.

Financial system

The private sector pursued a deleveraging process. According to Eurostat, the private sector corporate debt represented 102% of GDP in September 2018, which compares with 141% in March 2013; among individuals, this ratio was 68%, down by 25 pp on its peak observed in September 2009.

The loan-to-deposit ratio dropped to 89.4% in September 2018, which is 3.1 pp. less than in December 2017 and 69.4 p.p. less than in June 2010, when this ratio reached its highest level.

The common equity Tier I ratio closed the third quarter of 2018 at 13.5%, down by 0.4 p.p. year-to-date, while the total solvency ratio was 15.2% in June, which is 0.1 p.p. higher than at the end of 2017. The total non-performing

Enquadramento ENQ06

loans ratio in turn dropped by 2.0 p.p. year-to-date, to 11.3%, and by 6.6 p.p. from its peak in June 2016.

Funding from the ECB decreased to E18.7 billion in December 2018.

Loans

Loans to the resident non-financial private sector fell by 1.1% up to November, 1.1 p.p. less than a year earlier. Loans to Individuals stabilised, underpinned by a smaller contraction in residential mortgage loans and an increase of almost 10% in consumer loans up to November. The loan portfolio to non-financial companies contracted by 2.8% up to November, reflecting the sale of nonperforming loan portfolios. Without this effect, the loan portfolio would have increased by 1.1% in November. In 2019 loans to the private sector should tend to stabilise.

Deposits

The deposits of the non-financial private sector increased by 4.1% up to November, driven by the growth of sight deposits (+14.5%), while time deposits fell by 3.3% up to that date.

Individuals

Non-financial companies

Total lending to the private sector1

Note: Year-on-year growth rate. Source: Bank of Portugal.

1) Total lending to residents excluding public administration.

Enquadramento ENQ07

Individuals

Non-financial companies

Private sector

Note: Year-on-year growth rate. Source: Bank of Portugal.

Enquadramento ENQ08

Enquadramento ENQ05

FINANCIAL MARKETS

In the interbank market, the Euribor rates remained practically unchanged. The 3- and 12-month Euribor closed the year at -0.31% and -0.12%, respectively, up by 2 and 7 bps since the start of the year. In the US, the dollar interest rates performed in line with the Fed's monetary policy, with the 3-month Libor closing the year at 2.8% (up by 21 bps YoY).

In the fixed income market, the North-American benchmark rose by around 80 bps between January and October 2018, subsequently falling by circa 50 bps in the next two months and closing the year at 2.72%. In the Eurozone the behaviour was even more volatile, with the 10-year Bund starting the year on a strong rallying trend and reaching a high of close to 0.8% in February. However, this movement failed to consolidate and the European benchmark closed the year at around 0.25%. It is worth noting that all the international rating agencies placed Portugal in investment grade class.

In the European peripheral countries there was a widening of risk premia, especially in Italy where the spread required reached 325 bps and closed the year 113 bps higher than at the start of the year. The contagion of the Italian crisis to Spain and Portugal was contained, with the risk premia in these two countries closing the year at roughly the same level as at the start of 2018: 118 bps for the Spanish debt and 148 bps for the Portuguese debt.

10-years yields %

-1 0

escala ajustada escala ajustada

In the foreign exchange market, the exchange rate of the euro against the British pound remained relatively stable throughout the year, at just below 0.90 pounds to the euro. Against the US dollar, the euro lost 5%, to 1.14.

Equity market

2018 was marked by some volatility, particularly towards the end of the year, when all indices and the majority of funds reversed most of the gains accumulated until then. The benchmark European equities index Euro Stoxx 600 closed the year with a slump of 13%, while the S&P 500 – the leading North-American stock market index – ended 2018 with a 6% fall.

In Portugal, the PSI-20 benchmark index lost 12% in 2018, with only six stocks closing the year on positive ground, while in Spain the IBEX 35 index retreated by 15%, with a significant number of stocks losing more than 20%.

Turnover Secondary market

Source: Bloomberg.

S&P 500

Enquadramento ENQA1

Enquadramento ENQ09

German Bund US Treasury Source: Datastream.

10 11 12 13 14 15 16 17 18

Chart 17

OT Portugal

Enquadramento ENQ10

Commercial Banking

INDIVIDUALS, BUSINESSES, PREMIER AND PRIVATE BANKING

At the end of 2018, Individuals, Businesses and Premier Banking handled 1 644 thousand accounts, being responsible for a portfolio of Customer Resources of €25 136 million and a Loan, Guarantees and Credit Cards loan portfolio amounting to €14 794 million.

At year-end the segment's physical branch network was composed of a total of 421 Branches, 1 Mobile Branch and 39 Premier Centres.

CUSTOMER RESOURCES

At 31 December 2018 the total Customer resources of the Individuals, Businesses and Premier Banking segment reached c25 136 million, having increased by 3.5% year-on-year.

Customer resources		Amounts in m million
	2017	2018	∆%
Sight deposits	7 414	8 497	14.6%
Term deposits 1	7 124	7 554	6.0%
On-balance sheet Customer resources	14 537	16 050	10.4%
Investment funds 2	2 211	1 964	(11.2%)
Retirement savings plans 3	2 075	1 909	(8.0%)
Capitalisation insurance 2	2 469	2 480	0.4%
Third party bonds held by Customers	2 061	1 887	(8.4%)
Other securities held by Customers 4	923	846	(8.3%)
Other Customer resources	9 739	9 086	(6.7%)
Total Customer resources	24 277	25 136	3.5%

Note: The information presented is based on management information provided by the Individuals, Businesses and Premier banking business area. Table 4

1) Includes fixed interest rate, guaranteed-capital, limited-risk and total risk bonds and indexed deposits (guaranteed capital). The portfolio of these products placed with Customers totalled €34 million in 2017 and €16.5 million in 2018. 2) Excludes retirement savings plans.

3) Retirement savings plans in the form of investment funds + Retirement savings plans in the form of capitalisation insurance.

4) Includes third-party structured products placed with Customers. Excludes BPI securities.

The transition in 2018 to the new legal framework, resulting from the coming into force of the Markets in Financial Instruments Directive II (MIFiD II) and the packaged retail and insurance-based investment products (PRIIPs), brought an additional challenge to the activity developed during the year, due to the complexity of the task involved.

The growth of Customer resources was mainly concentrated in sight deposits, term deposits and savings accounts, which grew by 10.4%. These products were used by the Clients as an alternative to risk products, which were affected by market instability.

The reduction in off-balance sheet resources is in part explained by the devaluation of the securities portfolios of those products, reflecting the markets' unfavourable performance.

In 2018 the commercial priorities focused on securing the Customers' adherence to the (non-independent) advisory service, launched at the start of the year for Clients in the Premier and Private Banking networks.

Under agreements announced still in 2017, BPI sold BPI Vida e Pensões, BPI Gestão de Ativos and BPI GIF to CaixaBank. BPI continues to ensure the commercial relationship with the Clients and to provide, through its distribution network, an offer of investment funds, capitalisation insurance and pension funds, under distribution agreements for saving and investment products from CaixaBank's Insurance and Asset Management areas.

LOANS AND ADVANCES TO CUSTOMERS

At 31 December 2018 the portfolio of loans and guarantees and credit cards loan portfolio to the individuals and small businesses segment totalled c14 794 million, having expanded by c509 million (+3.6%), driven by increases in Consumer Loans (personal loans, and car finance) and loans to the small businesses segment.

	Loans and advances to Customers and guarantees	Amounts in m million
--	------------------------------------------------	----------------------

	2017	2018	∆%
Loans to individuals
Mortgage loans 1	11 080	11 170	0.8%
Personal loans 2	815	990	21.5%
Car finance	173	221	28.1%
Loans to individuals	12 068	12 382	2.6%
Loans to small businesses 3	1 957	2 154	10.0%
Total Loan Portfolio	14 025	14 535	3.6%
Guarantees and sureties	104	109	4.0%
Credit cards 4	156	150	(3.7%)
Total	14 285	14 794	3.6%

Note: The information presented is based on management information provided by the Individuals, Businesses and Premier banking business area. Table 5

1) Loans secured by real estate. Essentially home loans and loans for home improvements works.

2) Includes consumer loans and credit line for privatisations.

3) Includes equipment / real estate leasing, factoring / confirming, overdrafts, current account loans, discounted bills receivable and other loans included in the offer of credit products tailored to small businesses.

4) In 2017 corresponds to credit granted by Banco BPI. The cards business was sold to CaixaBank Payments in 2018, with the associated credit portfolio being transferred to CaixaBank Payments within the scope of this transaction. BPI continues to ensure the relationship with the Clients in the capacity of agent of Caixabank Payments, monitoring the evolution of credit cards' outstanding credit.

Mortgage loans, personal loans and car finance Mortgage loans

BPI offers a full range of Residential mortgage loan solutions, including at variable, mixed, and fixed rate, for all maturities.

New mortgage loans production reached €1 287 million in 2018, up by 20.6% on a year earlier and representing a market share of 11.2%.

The "Life changes. The rate does not" campaign launched in October allowed the Bank to reinforce its positioning in fixed-rate mortgage loans with maturity of up to 30 years. This solution allows families to know in advance one of their main expenditure items and maintain the stability of their family budget over the long term.

Personal Loans

New personal loans production reached €494 million in 2018, having grown by 29% year-on-year.

The personal loans portfolio also registered a significant increase, expanding by 21.5% and reaching €990 million at the end of 2018.

The Immediate Personal Loan product, which can be contracted through the APP and/or BPINet, should be highlighted. Transactions involving this product accounted for 19% of total Personal Loans in terms of the number of contracts. Education loans also reported a positive performance, with new production in 2018 increasing by 52%.

Car Finance

New car finance production reached €113.5 million, rising by 20% year-on-year, which is much more than the 2.8% year-on-year increase in the market for new vehicles.

At the end of 2018 the portfolio of car finance loans to Customers in the Individuals, Businesses and Premier segment reached €221 million, which represents an increase of 28% on a year earlier.

BPI, together with Arval, launched a Renting service giving Clients access to a vehicle with servicing and insurance included, against payment of a single monthly rent. In 2018, two Fiat and Nissan models were made available by the Bank to its Clients, under this scheme.

Commercial loans, leasing and factoring / confirming

In 2018 BPI continued to reinforce its positioning in the priority segments, namely the Exporting sector and the Agriculture and Tourism sectors.

Hence the credit products targeting small businesses registered a 10.0% increase, to €2 154 million.

The financing of small and medium-sized companies through the principal programmes launched by the Government was pursued, in particular through PME Investimentos. Overall, since the credit lines managed by PME Investimentos (PME Investe / Crescimento / Capitalizar) were launched, BPI has lent a total of €3 346 million (39 337 operations), corresponding to a market share of 18.6%.

ACCOUNTS AND CREDIT AND DEBIT CARDS Accounts

The year was marked by the redefinition and simplification of BPI's offer of Current accounts for Individual Clients, which entailed the launch and commercial promotion of accounts that include a vast number of services against payment of a singly monthly fee – the 'Conta Valor BPI' account and the 'Conta BPI Premier' account.

These new accounts, which are now the 'core offer' for the Individual Clients, numbered 639 thousand at the end of 2018 and represented a penetration rate of 45% of the total number of accounts with the conditions to adhere to this service. At the end of the year 68% of the Valor / Premier Accounts had Salary / Pension Direct Credit.

Credit and Debit Cards

At the end of the year there were 1 572 thousand cards placed with Clients, corresponding to a year-on-year increase of 1.4%. This increase was mainly underpinned by the redefinition of the Current accounts offer and commercial promotion of the 'Conta Valor BPI' and 'Conta BPI Premier' accounts, which include two debit cards and one credit card in the associated package of services.

The improvement of the economic situation contributed to drive up billing of debit cards, which increased by 8.3% year-on-year.

The performance of Point of Sale Terminals (POS) also deserves a note: the number of terminals increased by 7.9% and cumulative billing rose by 8.8% year-on-year, to €2 893 million, driven by the growth in the number of transactions, both through the Multibanco network and the Unicre network.

BANCASSURANCE

In the insurance business, BPI has a strategic joint venture with the German Allianz group. This association has been cemented through BPI's 35% stake in the capital of Allianz Portugal, and in a distribution agreement under which BPI sells Allianz insurance through its commercial network.

BPI thus offers a wide range of Life-Risk and Non-Life insurance solutions to its Individual and Corporate Clients.

The following figures reflect the performance of Bancassurance in 2018:

^j insurance commissions increased by 12%, to €51.1 million;
^j insurance premiums were up by 5% year-on-year;
^j the number of outstanding policies in life assurance was 461 thousand;
^j the number of outstanding policies in the non-life branches was 435 thousand.

Commissions

Intermediation of insurance products

Insurance Life-risk and non-life

Non-life insurance Life-risk insurance

Seguros 1-2

PRIVATE BANKING

2018 was characterised by an environment of great volatility in the markets, making portfolio management more difficult, and most assets closed the year with negative performances. Equity indices suffered a general devaluation, together with a fall in the bond market, thus also harming the investment portfolios with a more conservative profile.

At the end of December 2018, the business volume of BPI Private Banking amounted to €5 634 million, having contracted by 7.1% relative to the end of the previous year. Total Customer resources (including securities) dropped by 6.6% while loans and guarantees contracted by 15.7% in the period.

In this context, the Investment Funds, retirement savings plans and Capitalisation insurance set of products, which are issued by BPI Vida e Pensões and BPI Gestão de Activos, registered a small decrease (-2%), amounting to €1 285 million.

BPI Private Banking continued to attract new Clients, with new Customer acquisitions in 2018 accounting for 3.5% of the Customer base at the start of the year.

Private Banking

Selected indicators		Amounts in m million
		2017	2018	∆%
Discretionary management and advisory services	1	4 840	4 495	(7.1%)
Stable investments under custody	2	939	900	(4.1%)
Loans and guarantees portfolio	3	283	239	(15.7%)
Business volume [= Σ1 to 3]	4	6 062	5 634	(7.1%)

Note: The information presented is based on management information provided by the Private Banking business area. Table 6

CORPORATE AND INVESTMENT BANKING AND INSTITUTIONAL AND CORPORATE BANKING

The Corporate and Investment Banking (CIB) and Institutional and Corporate Banking gross loan portfolio reached €8 657 million at the end of 2018, which represents a 12.4% increase relative to the end of 2017.

Customer loans and Customer resources	Amounts in m million
	2017	2018	∆%
Corporate Loans 1
Corporate Banking	6 397.5	7 112.8	11.2%
Corporate and Investment Banking	2 071.8	2 550.2	23.1%
Large and Medium-sized Companies	4 325.6	4 562.7	5.5%
Public Sector	1 304.9	1 543.7	18.3%
Total	7 702.4	8 656.6	12.4%
Customer resources 2	3 438.0	3 594.7	4.6%
1) Gross Loans includes project finance.			Table 7

2) Includes sight and term deposits.

Customer resources of these segments amounted to €3 595 million, having grown by 4.6% year-on-year. In 2018 BPI focused on reinforcing its policy of proximity to its corporate Clients, with very positive results, among others an expressive gain in the market share in Loans to non-financial companies, which reached 9.5% in November (+1.1 p.p. relative to Dec. 17) and was the highest in the last 10 years.

By segment, the loan portfolio shows the following performance:

^j CIB, created to ensure differentiated monitoring of the largest national groups and branches of Spanish companies in Portugal, grew by 23.1%;
^j the Large and Medium-sized Companies segment posted a 5.5% increase in the loan portfolio, to approximately €4.6 billion; this good performance was achieved against a globally retracting market;
^j loans to Public Sector Customers also registered a very positive performance, growing by 18.3%.

BPI, THE BANK CLOSEST TO YOU

In 2018 BPI launched the initiative "Meetings with Companies", a cycle of 10 annual events aimed at reinforcing proximity to the Clients, where issues of interest to the different regions are analysed.

These events were held in 10 Portuguese cities and counted with the participation of more than 1 200 guests (entrepreneurs, managers and mayors) and the presence of reputed speakers.

For two years this initiative will travel through all the Portuguese districts.

BPI Meetings with Companies

Expert teams

In order to address the needs of Customers with specific technical or industry sector characteristics, the Bank has set up or reinforced teams of highly qualified technical staff, specialising in areas of expertise such as International Trade, Agriculture, Tourism, Urban Renewal, Entrepreneurship and Real Estate.

Partner in Portugal 2020

BPI takes a very active stance in relation to the Portugal 2020 programme (Partnership Agreement between Portugal and the European Commission for the application of Structural and Investment Funds in Portugal), monitoring the launch of new tenders, changes in the legislation, procedures, and any other relevant information.

All this information is analysed in depth and compiled into contents that are disclosed in newsletters, in the BPI website and in the social networks, to support companies in their investments.

BPI also offers the BPI P2020 and BPI PDR 2020 Lines, which include financing solutions for projects applying to Portugal 2020 funds, with disbursements provided at two moments: immediately after submission of the application (even before the decision on the attribution of the incentive) and after the incentive was granted.

BPI, THE BANK THAT BRINGS THE WORLD TO YOUR BUSINESS

International Trade

The international markets and corporate internationalisation processes are key elements for diversification and levers for sustained business growth. BPI has a strong tradition in this segment and is keen to act as a partner alongside these Clients.

To this end the Bank continuously develops innovative products and services designed for international trade – foreign trade support and financing solutions and risk hedging solutions – and capable of responding to the multiple needs faced by companies.

In 2018, BPI, in partnership with CaixaBank, organized the first edition of "Businesses with the World", a programme of face-to face customised advice sessions, in which companies willing to foster their international activity met with representatives from the CaixaBank Group international network and had the possibility to obtain information about the markets, clear doubts about how to do business in foreign countries and orient their international expansion projects.

In addition, under a partnership with COSEC, BPI offers credit risk hedging solutions, and in 2018 remained COSEC's #1 broker, with a share of 42% of the number of global policies.

BPI, THE FARMERS' BANK

In 2018 BPI continued to consolidate its position in support to agriculture, contributing to the sector's innovation and internationalisation through a diversified offer of solutions catering to the needs of these companies, and maintaining the lead in the main credit lines of support to agriculture:

^j 23% share in terms of the total number of guarantees issued by Agrogarante1;
^j 55% share in the total amount of advances on operating subsidies granted by the IFAP and validated by the CAP2;
^j 63% share in total farming-season credit granted under the IFAP short-term credit line to the agriculture, livestock and forestry sectors3.

The Bank sponsored the 7th edition of the National Agriculture Award (more than 1 000 submissions) and maintained its sponsorship of the sector's main events, namely the National Agriculture Trade Fair, Ovibeja, the National Corn Conference, Santiagro, and other initiatives in the agriculture, cattle breeding, forestry and sea sectors.

In 2018 BPI raffled a Gator John Deere multi-purpose vehicle among its Clients that took out loans in connection to the agricultural sector.

BPI, THE TOURISM BANK

BPI reinforced its support to the tourism industry, having endorsed the 'Qualificação da Oferta 2018' credit line under an agreement with Turismo de Portugal (the Portuguese Tourism Board), having been market leader in the

previous line by number and amount of projects supported.

For the third year running, the Bank was the official sponsor of BTL, the largest tourism trade fair in Portugal.

2018 also marked BPI's association with Turismo de Portugal, as founding partner of the Tourism Innovation Centre initiative.

BPI, THE URBAN RENEWAL BANK

BPI was one of the Banks selected to implement the IFRRU 2020 Line, a financial instrument financed by structural funds, by the European Investment Bank and the Council of Europe Development Bank, intended to support Urban Regeneration and Revitalisation operations.

Offering forms of reimbursement that favourably distinguish BPI from the competition, in December 2018 the Bank had a market share of 61% in credit granted under this line (IFRRU Management Entity data).

1) Source: Agrogarante – Sociedade de Garantia Mútua. Values up to 31/10/2018.

2) Source: Confederação dos Agricultores de Portugal (CAP) – (Portuguese Farmers Association). 2018 farming season data. Values on 22/11/2018.

3) Source: Instituto de Financiamento da Agricultura e Pescas (IFAP). 2018 farming season data. Values up to 31/10/2018.

ENTREPRENEUR AWARDS XXI

In 2018 BPI launched the 12th Edition of the Entrepreneur Awards XXI, under a partnership with CaixaBank.

This was the second edition of this initiative in Portugal, now extended to the participation of Portuguese companies, in line with the strategy of supporting innovation, entrepreneurship and a business enterprising spirit.

Aimed at identifying, rewarding and supporting the most innovative Portuguese companies in business with less than three years of activity, and showing the highest growth potential, this year's awards received 300 submissions in Portugal (961 in Portugal and Spain).

Overall, the awards will be granted to 37 companies, in cash and/or international monitoring programmes worth more than 500 thousand euros. The awards will be delivered in 2019.

FINANCING SOLUTIONS

BPI offers a wide range of investment solutions, including the following:

^j Linha Capitalizar 2018 (€1 600 million): the successor of the PME Investe and Crescimento Lines, it provides access to credit under favourable conditions.
^j Linha BPI / FEI Inovação III (€200 million): the Bank maintains its stance of support to Innovation, having already placed more than 70% of this line, leveraging on the 50% guarantee from the European Investment Fund.
^j Linha Capitalizar Mais (€1 000 million): subsidised credit line with mutual guarantee. In December 2018, following the rescheduling of Portugal 2020, the scope of the Linha Capitalizar Mais agreement was enlarged, now permitting to finance the reimbursable incentive component of the Innovation Incentives System (SI Innovation).
^j Linha BPI / BEI Eficiência Energética (€50 million): BPI pioneered in Portugal the launch of a community instrument of support to energy efficiency, and maintains its exclusive distribution in Portugal, under a partnership with the European Investment Bank; approximately €2.4 million have been placed to date under this line.
^j EIB funding lines (€400 million): BPI provides credit to SMEs and mid-caps under several funding lines made available by the European Investment Bank; this year it has closed the placement of the EIB Start-ups Line (€70 million) and EIB V Line (€400 million), under which it supported more than 2 600 projects.
^j Linha Apoio Desenvolvimento Negócio (€122 million): Credit line under an agreement between IAPMEI, Turismo de Portugal, SPGM and SGM, that replaced the Protocolo Geral com Garantia Mútua and the Finicia – Microcrédito and Early Stages lines, the last two intended to support start-ups.
^j Linha apoio à qualificação Oferta 2018 (€120 million): though the allocation of funds from Turismo de Portugal and BPI, this instrument aims to support all areas of the tourism industry, under very competitive conditions.
^j Linha Capitalizar Turismo 2018 / 2019 (€130 million): essentially intended to support investment in the creation or rehabilitation of tourism undertakings or establishments.
^j Linha Regressar Venezuela (€50 million): Intended to support entrepreneurs returning from Venezuela setting up and promoting new businesses in Portugal, contributing to the economic and social development of the host cities or regions.

CASH MANAGEMENT SOLUTIONS

BPI also offers advanced cash management solutions, such as:

^j Cash pooling single or multi-company to optimise cash management, either through the sending and reception of swift FIN messages, or through the parametrisation and automatic management of balances between accounts.
^j Automatic deposit solutions, to make deposits efficiently and with extended operating hours.

Investment Banking

EQUITIES Secondary Market

In 2018, the volume of share dealings brokered by BPI increased to €4.6 billion (€4.2 billion in 2017). In online stock brokerage, where Banco Português de Investimento acts as financial intermediary, BPI reported a market share of 21.7%, with trading volume of €1.8 billion (€2.2 billion in 2017).

Primary market

In 2018 BPI, in cooperation with CaixaBank, acted as Global Coordinator of the Public Offer for Sale of Solarpack (€110 million), and of the capital increase of Quabit (€63 million). The Bank was also Co-leader of the Public Offer for Sale of Metrovacesa (€646 million).

Research and sales

BPI continues to be one of the research houses with the largest coverage of listed companies in the Iberian market, with a total of 71 companies covered in Spain and 20 in Portugal at the end of 2018. It published 643 research reports during 2018.

BPI continued to organise numerous events with the goal of fostering closer relations between companies and the institutional investor community. Amongst these, it is worth noting the XV Iberian Conference held in Cascais on 5, 6 and 7 of September, at which 48 Iberian companies and approximately 70 institutional investors were present. Furthermore, BPI organised several roadshows with companies included in its coverage basis.

At the end of 2018, the Iberian team had 25 elements, of whom 14 in the Research team and 11 in the Sales and Trading team. This team was once again well placed in the rankings of Iberian brokers, namely earning the following awards: StarMine Analyst Awards from Refinitiv (#1 Best Iberian Broker), Extel Survey (#2 Equity Sales, #4 Equity Research and #5 Leading Brokerage Firm), Institutional Investor (# 4 Research Team Iberia) and Euronext Lisbon Awards (Most active Research House).

CORPORATE FINANCE

Based on Bloomberg data for financial advisory services in announced deals in 2018, there were 25 Merger & Acquisition operations in Portugal in 2018, which is slightly less than in 2017 (28). By value, the available data point to an expressive reduction in M&A activity in Portugal in 2018.

BPI Corporate Finance provided financial advisory services under a significant number of advisory mandates in connection to investment and financing decision-taking, economic and financial analyses, and business valuations and reorganisations, to various national and international entities, having reported an increase of approximately 15% in invoiced fees.

It should be noted that the Mergers and Acquisitions business was included in the set of businesses whose sale to CaixaBank was approved in November 2017. However, the teams in Portugal (Porto and Lisbon) will be maintained, now making part of a larger Iberian team.

ESTABLISHMENT OF CAIXABANK INVESTMENT BANKING BRANCH IN PORTUGAL

In May 2017, BPI and CaixaBank entered a joint venture to develop investment banking activities – equities and corporate finance. As from this date the teams of the two entities started working together.

In November 2017, BPI and CaixaBank announced they had entered an agreement to sell and transfer the referred investment banking activities (equities and corporate finance) to CaixaBank.

The CaixaBank Branch in Portugal started to operate on 7 January 2019. The integration of the Investment Banking teams of CaixaBank and BPI (which maintains its teams in Portugal) will reinforce the level of specialisation of the services provided to the Customers, in particular in corporate finance, in terms of both industry-specific skills, which will benefit from a larger and more diversified team, and in terms of geographical coverage, now spanning the wide reach of Caixabank and BPI groups in the Iberian market.

Equity holdings in BFA and BCI

BANCO DE FOMENTO ANGOLA (BFA)

BPI has a 48.1% equity holding, valued at €522 million, in Banco de Fomento Angola (BFA), which operates in commercial banking in Angola.

At the end of 2018 BFA had total assets of €4 826 million and served approximately 1.9 million Customers, ranking in second place in the Angolan banking system by volume of deposits, with a market share of 13.5%.

BFA contributed €73.2 million to BPI's consolidated net income in 2018; this result incorporates the €138.6 million negative impact from the change, at the end of 2018, in the accounting classification of its equity holding, which is now accounted for as a "financial investment", recognised under "shares at fair value through other comprehensive income".

BANCO COMERCIAL E DE INVESTIMENTOS (BCI)

BPI has a 35.7% equity holding (balance sheet value of €90 million) in Banco Comercial e de Investimentos (BCI), which operates in commercial banking in Mozambique.

BCI is market leader in the Mozambique banking system, with total net assets of €2 187 million, and market shares of 25.5% in assets, 29.3% in loans and 27.8% in deposits. At the end of the year BCI served approximately 1.8 million Customers.

BCI's contribution to BPI's consolidated net income in 2018, recognised by the equity method, was €20.5 million.

CHANGE OF ACCOUNTING CLASSIFICATION OF EQUITY HOLDING IN BFA

At the end of 2018 BPI changed the accounting classification of its equity holding in BFA, from "associated company", consolidated by the equity method, to "financial investment", recognised under "shares at fair value through other comprehensive income".

The change in the accounting method generated a negative impact of €138.6 million on BFA's contribution to the 2018 results, essentially explained by the recognition in the 2018 results of negative foreign exchange differences accumulated on conversion of BFA's financial statements

from kwanza to euro, through the transfer of reserves, and therefore with no impact on equity.

As from 1 January 2019, the consolidated profit of BPI will only recognise BFA's dividends paid to BPI and not the appropriation of profits, as was the case when this equity holding was recognised by the equity method.

See notes 2.1 and 17 to the financial statements.

Financial review

CONSOLIDATED OVERVIEW

Consolidated net profit

BPI reported a consolidated net profit of €490.6 million in 2018 and a consolidated return on tangible equity (ROTE) of 16.3%.

The activity in Portugal contributed with €396.3 million, or 81%, to the consolidated net profit. The contribution of the activity in Portugal benefited from non-recurring positive impacts of €178.0 million, essentially corresponding to gains on the sale of equity holdings and subsidiaries.

Recurring net profit from the activity in Portugal reached €218.3 million, having increased by 28.5% relative to the 2017 recurring net profit (€169.9 million).

The contribution of the equity holdings in BFA (48.1% held) and BCI (35.7% held) totalled €94.4 million in 20181. The 2018 contribution includes a €139 million negative impact from the reclassification of BFA at the end of 2018, from "associated company", consolidated by the equity method, to "financial investment", recognised under "shares at fair value through other comprehensive income". The negative impact is essentially explained by the recognition in the 2018 net income of negative accumulated foreign exchange translation differences2 through the transfer of reserves, and therefore with no impact on shareholders' equity.

Consolidated capital

In 2018 the Bank reinforced its capitalisation levels. At the end of 2018 and considering the dividend distribution proposal, the fully loaded CET 1 ratio3 was 13.8% and the fully loaded total capital ratio3 was 15.5%, both increasing 1.5 p.p. yoy.

The fully loaded leverage ratio3 – calculated as the ratio of Tier 1 capital to the total value of balance sheet assets and off-balance sheet items, not subject to risk weighting coefficients – was 7.3% at the end of 2018 (6.8% in 2017).

Contribution to the consolidated net income	Amounts in m million
	2017	2018
Net profit in Portugal
Recurring net profit	169.9	218.3
Non-recurring impacts 4	(46.2)	178.0
Net profit in Portugal	123.7	396.3
Contribution of BFA and BCI 1	(113.5) 5	94.4
Consolidated net income	10.2	490.6
		Table 8

Consolidated net income

Consolidated capital ratios (fully loaded)

6) Proforma figures considering the adherence to the special regime applied to deferred tax assets (DTA) and the change in the risk weights applied to BFA exposure to the Angolan State and to BNA.

CET1

Análise Financeira AF-C-1

¹⁾ Includes contribution of BPI Mozambique (€-0.7 million in 2017), which was sold in December 2017, and BPI Capital África (-€1.4 million in 2017 and €0.6 million in 2018), which was wound up in December 2018.

²⁾ Generated on translation of BFA's financial statements from AKZ to EUR, and recorded directly in shareholders' equity (under reserves).

³⁾ Capital ratios at 31 December 2018 considering the Board of Directors' dividend distribution proposal (€140 million), which is an integral part of this Management Report. The reported capital ratios for 31 December 2018 – CET1 and Tier1 of 13.2%, total ratio of 14.9% and leverage ratio of 7.0% – consider the upper limit (payout of 50%) of the interval foreseen in Banco BPI's dividend policy, as laid down in Article 2 (4, 5 and 6) of Delegated Regulation no. 241 / 2014.

⁴⁾ The detail of non-recurring impacts is presented in page 45.

⁵⁾ The contribution of the equity holdings in BFA and BCI in 2017 was sharply penalised by the €212 million negative impact from the sale of 2% of BFA and deconsolidation, of which €182 million correspond to the transfer to the year's net income of negative accumulated currency differences resulting from conversion of BFA's financial statements from AKZ to EUR.

ACTIVITY IN PORTUGAL

Results and profitability

In the activity in Portugal, Banco BPI reported a 28.5% increase in recurring net profit, to €218.3 million (+€48.4 million YoY).

The non-recurring impacts in 2018 were positive, amounting to €178.0 million, increasing net profit as reported to €396.3 million, which represents an expressive increase compared to the €123.7 million net profit reported in the previous year.

Net income from the activity in Portugal		Amounts in m million
	2017	2018
Recurring net profit	169.9	218.3
Non-recurring impacts 1
Gains on sale of equity holdings	8.6	193.1
Income from discontinued operations	22.0	2.5
Cost with early retirements and voluntary terminations, and other administrative expenses	(76.8)	(17.6)
Non-recurring impacts	(46.2)	178.0
Net Profit	123.7	396.3
		Table 9

Recurring ROTE from the activity in Portugal was 8.8% in 2018.

The Bank expects to achieve a recurring ROTE in the activity in Portugal of around 11% in 2021.

Return on tangible equity (ROTE)

	2017	2018
Activity in Portugal
Adjusted allocated capital (M.€) 2	2 036	2 477
Recurring ROTE	8.3%	8.8%
Pro memoria:
Consolidated ROTE (as reported)	0.4%	16.3%
		Table 10

Domestic activity net income as reported

Commercial activity

Banco BPI reported good commercial results, as shown by the expansion of both the Customer resources and the Customer loans portfolios:

^j Customer deposits were up by €1 792 million relative to Dec. 17 (+9.3% yoy);
^j the corporate loan book expanded by €1 136 million relative to Dec. 17 (+16.1% yoy);
^j the mortgage loan portfolio grew by 0.8% yoy, underpinned by a 21% increase in new loans production, to €1 287 million in 2018; Análise Financeira AF-C-1
^j the portfolio of other loans to individuals increased by 4.8% (+€63 million).

1) The detail of non-recurring impacts is presented in page 45.

2) The average capital considered in the calculation of ROTE is deducted from the average balance of intangible assets (average balance in the activity in Portugal in 2018: €44.1 million) and goodwill of equity holdings (average balance in the activity in Portugal in 2018: €9.8 million).

Asset quality

BPI continued to show a consistent improvement in credit quality indicators:

^j the NPE1 ratio decreased by 1.6 p.p., from 5.1% in Dec. 17 to 3.5% at the end of 2018;
^j the accumulated impairments for loans and guarantees on the balance sheet plus collaterals covered NPE at 127%;
^j reversals of impairments and provisions for loans and guarantees on the income statement totalled €7.9 million in 2018. In addition, a total of €36.9 million in loans previously written off from assets was recovered, corresponding to a gain of €44.8 million.

Funding and liquidity

BPI shows a balanced funding structure and a strong liquidity position:

^j on-balance sheet Customer resources represented 71% of total assets in the activity in Portugal;

Discontinued operations in accordance with IFRS 5

In accordance with IFRS 5 – Non-current assets held for sale and discontinued operations, BPI Vida e Pensões, BPI Gestão de Activos and BPI GIF were classified as discontinued operations on 31 December 2017, following the signature of the corresponding sale contracts disclosed to the market on 23 November 2017.

Consequently, the assets and liabilities of these units are presented in the consolidated balance sheet of Banco BPI in the captions non-current assets and disposal groups classified as held for sale and the respective contribution to consolidated results is presented under the caption net income from discontinued operations.

Adoption of the new financial statements' structure

With the entry into force of IFRS 9 at the beginning of 2018, Banco BPI decided to adopt a structure of the individual and consolidated financial statements consistent with the guidelines of Regulation (EU) 2017 / 1443 of 29 June 2017 and with the structure of the financial statements presented by CaixaBank (consolidating entity of Banco BPI).

^j the loan to deposit ratio was 100%;
^j the Liquidity Coverage Ratio (LCR) stood at 167%.

Reclassification of General Administrative Costs to Commissions paid

Up to December 2017, Banco BPI followed the Bank of Portugal's Plan of Accounts defined in Instruction no. 9 / 2005, which determined the inclusion of certain costs items under Other administrative expenses. Considering that this instruction was revoked and the alignment of accounting policies with CaixaBank, costs that depended on the evolution of the business and were offset by a revenue charged to the Clients, were reclassified from Other administrative expenses to Fee and commissions expenses.

Análise Financeira Restated 2017 income statement

AF-D-14 The 2017 income statement items presented in this document were restated to reflect the restatement of the contribution of BPI Vida e Pensões, BPI Gestão de Ativos and BPI GIF to the consolidated results in accordance with IFRS 5, the adoption of a new income statement structure as a result of the entry into force of IFRS 9 and the reclassification of Other administrative expenses to Fee and commission expenses, as described above.

1) "Non-performing exposures" in accordance with the European Banking Authority (EBA) criteria; considering the prudential supervision perimeter.

INCOME STATEMENT

The €48.4 million (+28.5% yoy) increase in recurring net profit from the activity in Portugal was underpinned by the following factors:

^j €59.5 million increase in recurring gross income (+9.0% yoy), driven by increases in net interest income (+8.8% or +€34.3 million) and in net fee and commission income (+5.6%, or +€14.8 million yoy);

^j 0.1% yoy reduction in recurring operating expenses;

^j reversals of total impairments and provisions in the amount of €47.7 million (gain) in 2018, which compares with reversals of impairments and provision of €0.5 million (gain) in 2017.

Income statement from the activity in Portugal Amounts in m million

			2017 restated			2018
			As reported	Non recurr.	Excl. non-recurr.	As reported	Non recurr.	Excl. non-recurr.	Excl. non-recurr.
Net interest income		1	388.3		388.3	422.6		422.6	8.8%
Dividend income		2	6.5		6.5	1.7		1.7	(73.6%)
Equity accounted income		3	13.4		13.4	7.5		7.5	(44.5%)
Net fee and commission income		4	263.0		263.0	277.8		277.8	5.6%
Gains / (losses) on financial assets and liabilities and other		5	14.5		14.5	84.6	59.6	25.1	73.4%
Other operating income and expenses		6	(23.5)		(23.5)	(12.9)		(12.9)	45.0%
Gross income	[=∑ (1 to 6)]	7	662.1		662.1	781.2	59.6	721.6	9.0%
Staff expenses		8	(368.7)	(105.8)	(262.9)	(262.2)	(21.1)	(241.1)	(8.3%)
Other administrative expenses		9	(150.6)		(150.6)	(172.9)	(3.1)	(169.8)	12.8%
Depreciation and amortisation		10	(21.8)		(21.8)	(23.8)		(23.8)	9.1%
Operating expenses	[=∑ (8 to 10)]	11	(541.1)	(105.8)	(435.3)	(458.9)	(24.2)	(434.7)	(0.1%)
Net operating income	[= 7 + 11]	12	121.1	(105.8)	226.9	322.3	35.4	286.9	26.5%
Impairment losses and other provisions		13	0.5		0.5	47.7		47.7
Gains and losses in other assets		14	12.2		12.2	85.0	98.8	(13.8)	(213.3%)
Net income before income tax	[=∑ (12 to 14)]	15	133.8	(105.8)	239.6	455.0	134.2	320.8	33.9%
Income tax		16	(40.7)	29.0	(69.7)	(122.9)	(20.4)	(102.5)	47.0%
Net income from continuing operations	[= 15 + 16]	17	93.1	(76.8)	169.9	332.1	113.7	218.3	28.5%
Net income from discontinued operations		18	30.6	30.6		64.2	64.2
Income attributable to non-controlling interests		19	(0.0)		(0.0)
Net income	[=∑ (17 to 19)]	20	123.7	(46.2)	169.9	396.3	178.0	218.3	28.5%
Non-recurring impacts on the activity in Portugal (amounts after taxes, save where otherwise specified):									Table 11

In 2017,

^j costs with voluntary terminations and early retirements of €76.8 million (€105.8 million before taxes);

^j €8.6 million gain (after taxes) on sale of BPI Vida e Pensões (recognised under "Net income from discontinued operations");

^j €22.0 million net income from discontinued operations (BPI Vida e Pensões, BPI Gestão de Ativos and BPI GIF);

In 2018,

^j €193.1 million gains on sale of the equity holdings and subsidiaries: €59.6 million on the sale of equity holding in Viacer, €61.8 million on the sale of BPI Gestão de Activos and BPI GIF (recognised under "Net income from discontinued operations") and €71.7 million on the sale of the acquiring and card issuance businesses (€98.8 million before taxes);

^j €15.3 million cost with early retirements (€21.1 million before taxes);

^j €2.2 million in non-recurring other administrative expenses (€3.1 million before taxes);

^j €2.5 million net income from discontinued operations.

Restated figures

The figures presented in the Management Report are "as reported", except where expressly stated that they are restated figures.

Gross income

Gross income from the activity in Portugal, excluding non-recurring impacts, increased by 9.0% in 2018, to €721.6 million.

Gross income as reported (including the €59.6 million gain on the sale of the stake in Viacer in 2018) was €781.2 million.

Gross income			Amounts in m million
			2017 restated	2018	∆%
Recurring gross income
Net interest income		1	388.3	422.6	+8.8%
Net fee and commission income		2	263.0	277.8	+5.6%
Equity accounted income and dividend income			20.0	9.2	(54.0%)
Gains / (losses) on financial assets and liabilities and other operating income and expenses		4	(9.1)	12.1	+233.7%
Recurring gross income	[=∑ (1 to 4)]	5	662.1	721.6	+9.0%
Non-recurring		6		59.6
Gross income as reported	[= 5 + 6]	7	662.1	781.2	+18.0%
					Table 12

Net interest income

Net interest income expanded by 8.8%, or €34.3 million, relative to 2017.

The main factor behind this increase was the expansion of the loan portfolio, which generated a volume effect of around +€17 million. The positive effect of the reduction in the average cost of term deposits (in euro currency) is now less expressive, around €3 million in 2018, since their average remuneration stands at 0.07% (0.03 p.p. lower than in 2017).

The annual average remuneration of the total loan portfolio remained stable, at 1.78%. New residential mortgage loans, contracted with higher spreads than those of loans repaid (especially the older loans), and the growth in the consumer credit and in loans to small businesses, has permitted to offset the reduction in spreads on new credit operations.

The unitary intermediation margin (defined as the difference between income from interest on loans1 and the cost of deposits in euro) stood at 1.75% in the 2018 (+0.02 p.p. yoy).

It should be noted that net interest income continued to be penalised by a context of Euribor interest rates at historical lows, close to zero or even negative, directly reflecting on the contraction in the average margin on sight deposits.

Unitary intermediation margin

Deposits2

Note: the values in the above charts refer to the average interest rates and unitary intermediation margin in the 4th quarter of each year.

Análise Financeira AF-D-10

1) Excluding loans to Employees

2) As from the 4th quarter of 2016 (including) refers to the remuneration of deposits contracted in euro.

Net interest income Amounts in m million
			2017 restated			2018
			Average balance	Average rate (%)	Interest	Average balance	Average rate (%)	Interest	∆ Interest (%)
Loans to Customers 1		1	21 027	1.78%	373.3	21 969	1.78%	390.6	4.6%
Customer Deposits in euro 2		2	19 576	0.04%	8.1	20 386	0.03%	6.1	(25.5%)
Intermediation margin		3		1.73%	365.2		1.75%	384.5	5.3%
Other revenues and costs 3		4			23.1			38.1	64.9%
Net interest income	[= 3 + 4]	5			388.3			422.6	8.8%
									Table 13

Net fee and commission income

Net fee and commission income increased by 5.6% (+€14.8 million) relative to 2017, despite the reduction in fee and commission income from Portuguese treasury floating rate bonds (OTRV) placed by BPI with Clients, from €11.5 million in 2017 to €2.3 million in 2018, and the sale of the acquiring and card issuance businesses.

The increase in fee and commission income occurred across all the main segments. Banking commissions were up by 6.5%, driven by the increase in commissions on loans and guarantees (+€4.0 million yoy) and on sight deposits and associated services (+€11.7 million), which made up for the reduction in commissions on the placement of Portuguese treasury floating rate bonds (OTRV). Investment funds and insurance placement fees, in turn, increased by 6.6% and 2.7%, respectively.

	Net fee and commission income			Amounts in m million
			2017 restated	2018	∆%
Banking commissions		1	160.5	171.1	6.5%
Investment Funds		2	37.6	40.0	6.6%
Insurance		3	64.9	66.7	2.7%
Total	[= 1 + 2 + 3]	4	263.0	277.8	5.6%
					Table 14

Net interest income

Net fee and commission

4) As reported.

Net interest income corresponds to financial margin (narrow sense) and net commissions relating to amortised cost; net fee and commission income includes the gross margin on unit links.

Análise Financeira AF-D-10

1) Excluding loans to Employees.

2) Term deposits in euro and sight deposits.

3) Includes increase in income from derivatives (+€6 million), covered bonds (+€3 million) and cost (+€4 million) of Tier II subordinated debt issued in Mar. 17 (€300 million, with remuneration corresponding to the 6-month Euribor + 5.74%).

Equity accounted income in the activity in Portugal

The contribution of the equity accounted associated companies amounted to €7.5 million in 2018 (€6.0 million less than in 2017).

Equity accounted income Amounts in m million					the Single Resolution Fund in the framework of the
		2017 restated	2018	∆ € million	European Single Resolution Mechanism (€11.8 million), the contribution to the National Resolution Fund (€5.5
Insurance companies: [= 2 + 3]	1	8.0	3.3	-4.7	million), subscriptions and donations (€2.8 million)
Allianz Portugal	2	2.5	(0.8)	-3.3	and, as from 2018, income from services provided to
Cosec	3	5.6	4.1	-1.4	CaixaBank Group (€6.3 million).
Unicre	4	5.5	4.2	-1.3
Inter-Risco	5	(0.07)	(0.03)	+0.0
Total [= ∑ 2 to 5]	6	13.4	7.5	-6.0	Other operating income and expenses	Amounts in m million
				Table 15		2017 2018

Gains / (losses) on financial assets and liabilities and other

In 2018 the gains / (losses) on financial assets and liabilities and other, in the amount of €84.6 million, include a €59.6 million gain on the sale of the stake in Viacer.

In 2017 the gains / (losses) on financial assets and liabilities and other totalled €14.5 million.

Other operating income and expenses

The "Other operating income and expenses" caption shows a negative amount of €12.9 million in 2018.

This amount essentially relates to the contributions to the Single Resolution Fund in the framework of the European Single Resolution Mechanism (€11.8 million), the contribution to the National Resolution Fund (€5.5 million), subscriptions and donations (€2.8 million) and, as from 2018, income from services provided to CaixaBank Group (€6.3 million).

		2017 restated	2018
Contribution to the National Resolution Fund	1	(3.9)	(5.5)
Contribution to the European Resolution Fund	2	(11.4)	(11.8)
Subscriptions and donations	3	(5.6)	(2.8)
Services provided to CaixaBank Group companies	4	0.0	6.3
Other	5	(2.6)	0.8
Total [= ∑ 1 to 5]	6	(23.5)	(12.9)
Pro memoria
Extraordinary Contribution Levied on the Banking Sector	7	14.3	15.2

Note: The Extraordinary Contribution Levied on the Banking Sector is booked in the "income tax" caption. With the creation of the Table 16

National Resolution Fund (Decree-Law no. 31-A / 2012 of 10 February) the extraordinary contribution levied on the banking sector was allocated to the funding of the Resolution Fund.

Operating expenses

Recurring operating expenses – recurring staff expenses, other administrative expenses, depreciation and amortisation – decreased by 0.1% yoy.

Staff expenses (excluding non-recurring) fell by 8.3% (-€21.7 million yoy), reflecting the average headcount reduction following the implementation in 2017 and 2018 of rationalisation and streamlining measures in the activity in Portugal.

Other administrative expenses (excluding non-recurring) increased by 12.8%. The largest part of this increase is explained by the investment required to implement the synergies plan, and by IT costs and legal and adaptation costs.

The increase in depreciation and amortisation expenses, up by 9.1% in 2018, reflects the implementation of the scheduled investment plan.

BPI continues to show an improving trend in efficiency levels. The "adjusted operating expenses1 -to-commercial banking gross income ratio2" improved by 4.5 p.p., dropping from 65% in 2017 to 60% in 2018.

BPI expects to achieve a cost-to-income in its activity in Portugal of close to 50% by 2021.

banking gross income (on a comparable basis)3

Operating expenses				Amounts in m million
		2017 restated	2018	∆%
Staff expenses, excluding non-recurring costs	1	262.9	241.1	(8.3%)
Other administrative expenses, excluding non-recurring costs	2	150.6	169.8	12.8%
Depreciation and amortisation	3	21.8	23.8	9.1%
Operating expenses, excluding non-recurring costs [= ∑ 1 to 3]	4	435.3	434.7	(0.1%)
Non-recurring costs	5	105.8	24.2 Análise Financeira	(77.1%)
Operating expenses, as reported [= 4 + 5]	6	541.1	458.9	(15.2%)
Adjusted operating expenses1 as % of commercial banking gross income2		65%	AF-D-12 60%	-4.5 p.p.
				Table 17

¹⁾ Operating expenses excluding costs with early retirements and voluntary terminations (€105.8 million in 2017 and €21.1 million in 2018) and non-recurring other administrative expenses (€3.1 million in 2018).

²⁾ Net interest income, net fee and commission income, dividend income and equity accounted income.

³⁾ In the calculation of the cost-to-income ratio, the contribution of costs and income of subsidiaries sold in 2017 and 2018 is excluded.

Employee pension liabilities

The present value of the Bank's total liabilities for Employees' past services amounted to €1 639 million at the end of 2018.

The net assets of the Employees' pension funds amounted to €1 618 million1, which guaranteed the funding of 99% of the pension liabilities.

In 2018, the Bank's pension funds' return was 5.5%, which was higher than the discount rate (2%).

Liabilities for Employee pensions

and pension funds		Amounts in m million
	31 Dec. 17	31 Dec. 18
Total past service liabilities	1 601	1 639
Net assets of the pension fund 1	1 574	1 618
Coverage ratio of pension liabilities	98%	99%
Pension funds return	13.1%	5.5%
		Table 18

Impairments and provisions for loans and guarantees

In 2018 BPI continued to post a reduction in the cost of credit risk, reflecting the improvement of the loan portfolio indicators and a more favourable economic environment, with a positive impact on the underlying credit risk, alongside a high coverage of credit risk exposure.

Impairments and provisions for loans and guarantees decreased from €25.2 million (cost) in 2017 to -€7.9 million in 2018 (gain), thus corresponding to reversals of impairments and provisions. As a percentage of the loan portfolio, impairments and provisions for loans and guarantees decreased from 0.11% in 2017 to -0.04% in 2018, which is considerably below their average historical value (0.44% in the previous 15 years2).

In addition, a total of €36.9 million in loans, interest and expenses previously written off from assets, were recovered (€29.8 million in 2017).

Note that the application of IFRS 9 led to a €35 million increase in loan impairments, which was directly recognised in shareholders' equity, and an impact on shareholders' equity of €26 million3 in the activity in Portugal.

Impairments and provisions for loans and guarantees Amounts in m million

			2018
			Impairments	as % of loan portfolio4	Recoveries of loans written off from assets	Cost of risk5	as % of loan portfolio4
Loans to individuals	[= 2 + 3]	1	(26.4)	(0.22%)	(3.8)	(30.3)	(0.25%)
Mortgage loans		2	(29.7)	(0.27%)	(1.7)	(31.4)	(0.29%)
Other loans to individuals		3	3.3	0.26%	(2.2)	1.1	0.09%
Companies in Portugal 6		4	4.2	0.06%	(33.0)	(28.8)	(0.38%)
Other		5	14.3	0.53%	0.0	14.3	0.53%
Total	[= 1 + 4 + 5]	6	(7.9)	(0.04%)	(36.9)	(44.8)	(0.20%)
							Table 19

1) Includes contributions to the pension fund made at the start of the following year (€9.0 million in Dec. 17 and €5.5 million in Dec. 18).

2) From 2003 to 2017 and including historical highs of 0.96% in 2012 and 1.04% in 2013.

3) Essentially corresponds to the impact on loan impairments after taxes in the activity in Portugal. In addition, the application of IFRS 9 to the equity holdings in BFA and BCI had a negative impact on shareholders' equity of €8 million.

4) As % of average performing loans portfolio.

5) Impairments after deducting recoveries of loans previously written off.

6) Large and medium-sized companies, Corporate & Investment Banking and small businesses (includes Private Banking loans to small businesses).

Impairments and provisions

for loans and guarantees		Amounts in m million
		2017 restated	2018
Impairments	1	25.2	(7.9)
as % of loan portfolio	2		0.11% (0.04%)
Recovery of loans written off from assets	3	(29.8)	(36.9)
Cost of risk [= 1 + 3]	4	(4.6)	(44.8)
as % of loan portfolio	5		(0.02%) (0.20%)
			Table 20

The non-performing exposures (NPE), calculated in accordance with the EBA criteria, decreased by 25% in 2018, to €1 055 million. The NPE ratio improved (decreased) by 1.6 p.p. to 3.5%.

The coverage of NPE by accumulated impairments on the balance sheet was 53%; considering accumulated impairments and also the collaterals associated to the NPE, the coverage of NPE ratio was 127%.

The portfolio of foreclosed properties held by BPI is not expressive. At the end of 2018, the stock of foreclosed properties held by BPI had a gross balance sheet value of €52 million, and a value net of accumulated impairments of €32.7 million. Their valuation value corresponded to 161% of net balance-sheet value.

BPI's exposure to the loan recovery funds Fundo de Recuperação, FCR and Fundo de Reestruturação Empresarial FCR totalled €52.8 million (net of impairments) at the end of 2018.

Gains or losses in other assets

In 2018, gains in other assets, in the amount of €85.0 million, include the €98.8 million gain (before taxes) on the sale of the acquiring and cards businesses.

In 2017 the gains on other assets totalled €12.2 million.

Impairments and provisions for loans and guarantees Impairments and provisions for loans and guarantees, net of recoveries of

loans previously written off from assets

Análise Financeira AF-C-1

NPE ratio (right scale)

Coverage of NPE %

Chart 35

(0.20)

(0.04)

(0.02)

0.11

0.15

As % of loan portfolio

NPE (left scale) Coverage by impairments

BALANCE SHEET

At the end of 2018 total assets (net) of the domestic activity amounted to €30.9 billion, and accounting shareholders' equity was €2 658 million1.

Net loans to Customers, in the amount of €22.9 billion, represented 74% of assets, and on-balance sheet Customer resources (€22.1 billion) were the main source of balance sheet funding (71% of assets).

BPI maintains a comfortable liquidity position and balanced funding structure:

^j the loan to deposit ratio2 was 100%;

^j BPI holds a portfolio of short-term Portuguese sovereign debt securities amounting to €0.5 billion with an average maturity of 0.5 years;
^j the portfolio of medium- and long-term sovereign debt securities totalled €2.6 billion (of which 34% corresponded to Portugal, 40% to Spain and 26% to Italy) and had an average residual maturity of 2.0 years;
^j funding from the ECB amounted to €1.4 billion; the Bank also has €9.5 billion in high-quality liquid assets and assets eligible as collateral in additional funding from the ECB;
^j the liquidity coverage ratio (LCR) stands at 167%3.

Domestic activity balance sheet structure in 2018

Chart 38

Análise Financeira

2) (Net loans to Customers – Funding obtained from the EIB, which is used to provide credit) / Deposits.

¹⁾ Banco BPI held 150 896 own shares since the beginning of 2018 that were sold on 27 December 2018 through CaixaBank's exercise of its right of squeeze-out, at the price of €1.47 per share. D-1

^{3) 12-}month average, in accordance with the EBA guidelines. Average value (last 12 months) of the LCR calculation components: Liquidity reserves (€3 930 million); Total net outflows (€2 348 million).

Loans to Customers

The portfolio of loans and advances to Customers (gross) expanded by 5.7% in 2018, with BPI continuing to gain market share in the corporate and individual Client segments.

The portfolio of loans to companies1 grew by 16.1% in 2018 (+€1 136 million). The market share in the corporate segment was 9.5% in October 2018, which represents an increase of 1.1 p.p. relative to the end of 2017.

Loans to individuals increased by 1.2% (+€150 million):

^j The mortgage loan portfolio grew by 0.8% as a result of the sharp expansion of new production, which increased by 21% yoy, to €1 287 million in 2018, surpassing the amount of redemptions in the period;
^j The portfolio of other loans to individuals personal loans, car financing and credit cards – grew by 4.8% (+€63 million)2.

th.M.€ Loans to Customers 2014 to 2018

Chart 39

Loans and advances to Customers (gross) Amounts in m million

		31 Dec. 17 restated	31 Dec. 18	∆%
Loans to individuals [= 2 + 3]	1	12 408	12 558	1.2%
Mortgage loans	2	11 084	11 171	0.8%
Other loans to individuals 2,3	3	1 324	1 387	4.8%
Loans to companies [= 7 + 8]	4	8 387	9 286	10.7%
Companies
Large and medium-sized companies and Corporate & Investment Banking	5	5 051	6 004	18.9%
Small businesses 3	6	1 990	2 173	9.2%
Total loans to companies [= 5 + 6]	7	7 041	Análise Financeira 8 177	16.1%
Project Finance	8	1 347	AF-D-5 1 109	(17.6%)
Public Sector	9	1 305	1 544	18.3%
Other	10	123	100	(18.9%)
Total [= 1 + 4 + 9 + 10]	11	22 223	23 487	5.7%
Pro memoria:
Net loan portfolio	12	21 638	22 949	6.1%

Note: Loans to Customers (gross) corresponds to Loans and advances to Customers (€21 898 million in Dec. 18), excluding collateral accounts and other assets (€124 million and €35 million in Dec. 18, respectively), added of debt securities issued by Customers (€1 749 million in Dec. 18), recognised under Financial assets at amortised cost.

1) Loans to large and medium-sized companies, small businesses, and Corporate & Investment Banking. Excludes project finance portfolio.

2) The performance of the "Other loans to individuals" segment was influenced by the transfer of the balance of cards loans (€144 million) following the sale of the cards business to CaixaBank Payments in the 4th quarter of 2018.

3) The "loans to individuals" portfolio under the responsibility of Private Banking, previously included in the "Small businesses" segment, is now included under "Other loans to individuals". To ensure the comparability of information, the portfolios of these segments at Dec. 17 were readjusted (reclassification of loans in the amount of €127.7 million).

Table 21

Financial assets portfolio

At 31 December 2018, BPI held a portfolio of sovereign debt securities in the amount of €3 050 million1, which is €449 million less than at the end of 2017.

In 2018 BPI reduced its exposure to Treasury Bills and reinforced the medium- and long-term portfolio through the acquisition of Portuguese, Spanish and Italian sovereign debt. The extension of the portfolio's average maturity was intended to increase the contribution of the securities portfolio to net interest income, in a context of negative yields in the short-term public debt market, without affecting the liquidity position (the securities purchased are also eligible for refinancing operations with the ECB).

At the end of 2018 the sovereign debt portfolio comprised the following:

^j short-term Portuguese sovereign debt (Treasury Bills) in the amount of €476 million and residual maturity of approximately 6 months;
^j medium- and long-term sovereign debt in the amount of €2.6 billion (of which 34% Portuguese, 40% Spanish and 26% Italian) with an average residual maturity of 2.0 years.

Table 22

			31 Dec. 17 Available-for-sale financial assets	31 Dec. 18
				Financial assets at fair value through other comprehensive income	Financial assets at amortised cost	Total
Short term (Treasury Bills, Portugal)		1	2 983	476		476
Medium- and long-term
Portugal		2	329	315	556	871
Spain		3		308	715	1 023
Italy		4	187	179	502	681
Medium- and long-term	[= 2 + 3 + 4]	5	516	802	1 772	2 574
Total	[= 1 + 5]	6	3 499	1 277	1 772	3 050

Sovereign debt securities portfolio1 Amounts in m million

1) Sovereign debt securities in financial asset portfolios at fair value through other comprehensive income (note 13) and financial asset portfolios at amortised cost (note 15.1). Does not include portfolio of financial assets held for trading.

Customer resources

Customer deposits increased by 9.3%, or €1 792 million, in 2018, to €21.2 billion.

The Bank has been actively reducing the volume of deposits of institutional investors to optimise the liquidity ratios (LCR), which explains the reduction in this component of resources in 2018 (-34%).

Off-balance sheet resources (assets under management and public subscription offerings) were adversely affected by volatility in the financial markets, contracting by 6.4%, or €762 million, in 2018. Part of this reduction is explained by the devaluation of the respective securities portfolios and the reduction in the amount of treasury floating rate bonds ("OTVR") placed by BPI with its Clients, due to the reduction of this type of issues by the State. Commercial activity was also conditioned by the adaptation to the new legal framework, resulting from the coming into force of the Markets in Financial Instruments Directive II (MiFID II) and the packaged retail and insurance-based investment products (PRIIPs).

Total Customer resources Breakdown at 31 Dec. 2018

On-balance sheet Off-balance sheet

Customer resources portfolio Amounts in m million
			31 Dec. 17	31 Dec. 17 proforma1	31 Dec. 18	∆%
On-balance sheet resources	[= 4 + 5]	1	20 686	20 719	22 052	6.4%
Customer deposits
Sight deposits		2	10 995	10 995	12 562	14.3%
Term deposits 2		3	8 373	8 373	8 598	2.7%
Customer deposits	[= 2 + 3]	4	19 368	19 368	21 160	9.3%
Deposits of institutional and financial investors		5	1 318	1 351	Análise Financeira 892	(33.9%)
Assets under management	[= 7 + 8]	6	10 123	9 754	AF-D-6 9 191	(5.8%)
Mutual funds		7	6 027	5 658	5 083	(10.2%)
Capitalisation insurance		8	4 096	4 096	4 107	0.3%
Public subscription offerings		9	2 151	2 151	1 952	(9.2%)
Total	[= 1+ 6 + 9]	10	32 960	32 624	33 195	1.8%
						Table 23

1) Proforma considering the sale of BPI Gestão de Ativos and BPI GIF.

2) Includes retail bonds of €35 million in Dec. 17 and €18 million in Dec. 18.

CONTRIBUTION OF EQUITY HOLDINGS IN BFA AND BCI

Contribution to the consolidated net income

Banco BPI holds minority equity holdings in two African banks:

^j 48.1% in Banco de Fomento Angola (BFA), which operates in commercial banking in Angola; and
^j 35.7% in Banco Comercial e de Investimentos (BCI)1, which operates in commercial banking in Mozambique.

BPI's equity holdings in BFA and BCI contributed with €94.4 million to the 2018 consolidated net income.

Contribution of the equity holdings in BFA and BCI

to consolidated net income		Amounts in m million
		2017	2018
BFA Contribution	1	(119.5)	73.2
Of which
Impact from sale of 2% of BFA and deconsolidation		(211.6)2
Impact of BFA reclassification			(138.6)
BCI Contribution	2	8.1	20.5
Other 3	3	(2.1)	0.6
Total [= 1 + 2 + 3]	4	(113.5)	94.4
			Table 24

BFA's contribution to the 2018 net income, in the amount of €73.2 million, incorporates the following impacts:

^j €50.6 million (after taxes) negative impact from the high level of inflation in 2018, in accordance with IAS 29 "inflation accounting", as well as high foreign exchange gains in BFA's net income through the devaluation of the kwanza (-47% to the euro). In 2018 BFA recorded large, non-recurring net income on financial assets and liabilities of which BPI appropriated €156 million (after taxes). This compares with an appropriation of €24 million in 2017;
^j €138.6 million impact from the change at the end of 2018 of the accounting classification of the equity holding in BFA.

BCI's contribution to the consolidated net income increased from €8.1 million in 2017 to €20.5 million in 2018.

BNA reference rates

	31 Dec. 17	31 Dec. 18	∆% (EUR or USD) / 1 AKZ 4
AKZ / 1 EUR	185.4	353.0	(47%)
AKZ / 1 USD	165.9	308.6	(46%)

Table 25

Average bid / ask prices 4) Change in the AKZ value when expressed in EUR or USD.

CHANGE OF ACCOUNTING CLASSIFICATION OF EQUITY HOLDING IN BFA

BPI believes that this is the more prudent accounting option and that it adequately reflects its current position in BFA (with no significant influence).

The change in the accounting method generated a negative €138.6 million impact on BFA's contribution to the 2018 net income.

This impact is essentially explained by the recognition in the 2018 net income of accumulated negative foreign exchange translation differences in the amount of €142

million, reflecting negative foreign exchange differences recognised on translation of BFA's financial statements from AKZ to EUR, which were taken directly to equity (under reserves).

The change in the accounting of the stake in BFA had no impact on the consolidated equity ratios.

For more information, see Notes to the financial statements 2.1 and 17.

¹⁾ Equity accounted.

²⁾ From the €212 million negative impact of the sale of 2% of BFA and deconsolidation, -€182 million corresponded to the transfer to the year's net income of negative foreign currency reserves accumulated on conversion of BFA's financial statements from AKZ to EUR.

³⁾ Contribution of BPI Moçambique (sold in Dec. 17) and BPI Capital África (wound up in Dec. 18).

CONSOLIDATED CAPITAL

Consolidated prudential capital

At 31 December 2018, considering the dividend distribution proposal, the fully loaded CET 1 ratio1 was 13.8% (+1.5 p.p. yoy) and the total capital ratio1 was 15.5% (+1.5 p.p. yoy).

The 1.5 p.p. increase in the fully-loaded CET1 relative to December 2017 is mainly explained by:

Positive impacts from,

^j the organic generation of capital by the activity in Portugal2 with a 0.9 p.p. impact;
^j capital gains on the sale of equity holdings and businesses (Viacer, BPI Gestão de Ativos and BPI GIF and cards and acquiring businesses), with a 1.3 p.p. impact;
^j dividends received from BFA relative to 2017, with a 0.25 p.p. impact;

Negative impacts from,

^j distribution of dividends in accordance with the Board of Directors' proposal, with a 0.8 p.p. negative impact;
^j full recognition of the impact of application of IFRS 9 (not making use of the phasing-in regime provided for that recognition), with a 0.2 p.p. negative impact.

Regulatory capital requirements ratio

In accordance with the fully loaded CRD IV /

CRR rules			Amounts in m million
				31 Dec. 17 31 Dec. 181
Common Equity Tier I		1	2 040.0	2 335.0
Tier I		2	2 040.0	2 335.0
Tier II		3	297.5	300.0
Total own funds		4	2 337.5	2 635.0
Risk weighted assets		5	16 644.1	16 976.8
CET1 ratio	[= 1 / 5]	6	12.3%	13.8%
T1 ratio	[= 2 / 5]	7	12.3%	13.8%
Total Ratio	[= 4 / 5]	8	14.0%	15.5%

Note: the minimum prudential requirements established by the ECB for 2018 (a decision based on the SREP results) for the fully loaded consolidated CET1, T1 and total ratios were 8.75%, 10.25% and 12.25%, respectively. Table 26

Leverage ratios (CRD IV / CRR)

The leverage ratio (CRD IV / CRR) is calculated as the ratio of Tier 1 capital to the total value of balance sheet assets and off-balance sheet items, and therefore is not subject to weighting coefficients as is the case in the calculation of risk-weighted assets. At the end of 2018 the fully-loaded leverage ratio was 7.3%1, considering the dividend distribution proposal.

Leverage ratio – fully loaded

		31 Dec. 17 31 Dec. 181
Leverage ratio	6.8%	7.3%
		Table 27

CET1 ratio (fully loaded) evolution in 2018

1) Capital ratios at 31 December 2018 considering the Board of Directors' dividend distribution proposal (€140 million), which is an integral part of this Management Report. The reported capital ratios for 31 December 2018 – CET1 and Tier1 of 13.2%, total ratio of 14.9% and leverage ratio of 7.0% – consider the upper limit (payout of 50%) of the interval foreseen in Banco BPI's dividend policy, as laid down in Article 2 (4, 5 and 6) of Delegated Regulation no. 241 / 2014.

2) Net income from the activity in Portugal excluding the capital gains on the sale of equity holdings and businesses, net of the increase in credit RWA (excluding DTA and without equity risk class).

Análise Financeira AF-D-14

Consolidated indicators of profitability and efficiency in accordance with Bank of Portugal instruction 16 / 2004, as amended by Instruction 6 / 2018

	2017 restated1	2018
Gross income / ATA	2.3%	3.4%
Net income before income tax and income attributable to non-controlling interests / ATA	0.2%	2.0%
Net income before income tax and income attributable to non-controlling interests / average shareholders' equity (including non-controlling interests)	2.4%	20.3%
Staff expenses / Gross income 2	34.1%	23.2%
Operating expenses / Gross income 2	56.5%	41.9%
Loan to deposit ratio	105%	104%
1) Considering the 2017 "restated" income statement, which reflects the restatement of the contribution of BPI Vida e Pensões,		Table 28

1) Considering the 2017 "restated" income statement, which reflects the restatement of the contribution of BPI Vida e Pensões,

BPI Gestão de Activos and BPI GIF to the consolidated net income in accordance with IFRS 5, the adoption of a new income statement structure as a result of the entry into force of IFRS 9, and the reclassification of some Other administrative expenses to Fee and commission expenses.

2) Excluding costs with early retirements.

ATA = Average total assets.

INDIVIDUAL FINANCIAL INFORMATION

Individual net income

The net income determined in Banco BPI's individual accounts for 2018 financial year was €914.3 million.

The 2018 individual net income includes €456.7 million that correspond to the recognition in income for the year of the net unrealised capital gain determined on the revaluation of the 48.1% equity holding in BFA1 due to its reclassification from associated company to financial investment at fair value through other comprehensive income.

Banco BPI's individual net income in 2018 also benefited from non-recurring net impacts of €191.7 million corresponding to:

^j €209.0 million realised capital gains (after taxes) on the sale of equity holdings and subsidiaries;
^j costs with early retirements and voluntary terminations totalling €17.2 million (€23.7 million before taxes).

The individual financial statements as of 31 December 2018 and the respective notes are presented in a separate book and are available for consultation on Banco BPI's website (www. ir.bpi.pt) and on the CMVM website (www.cmvm.pt).

Individual net income in 2018	Amounts in m million
	2018
Recurring net income Non-recurring impacts	265.9
Unrealised net capital gain on the revaluation of equity holding in BFA 2	456.7
Capital gains on the sale of equity holdings 3	209.0
Cost with early retirements and voluntary terminations, and other administrative expenses	(17.2)
Non-recurring impacts	648.4
Net income	914.3
	Table 29

Individual income statement				Amounts in m million
			2017 restated	2018	∆%
Net interest income		1	387.4	431.6	11.4%
Dividend income		2	83.4	71.2	(14.6%)
Net fee and commission income		3	244.0	256.7	5.2%
Gains / (losses) on financial assets and liabilities and other		4	9.7	72.5	649.6%
Other operating income and expenses		5	(31.5)	(17.6)	44.0%
Gross income	[= ∑ (1 to 5)]	6	692.9	814.4	17.5%
Staff expenses, recurring		7	(252.3)	(231.8)	(8.1%)
Other administrative expenses, recurring		8	(145.9)	(165.6)	13.5%
Depreciation and amortisation		9	(21.5)	(23.5)	9.4%
Recurring operating expenses	[=∑ (7 to 9)]	10	(419.6)	(420.8)	0.3%
Non-recurring operating expenses		11	(103.0)	(23.7)	(77.0%)
Operating expenses	[= 10 + 11]	12	(522.6)	(444.5)	(14.9%)
Net operating income	[= 6 + 12]	13	170.3	369.9	117.2%
Impairment losses and other provisions		14	(2.0)	44.5	-
Gains and losses in other assets		15	93.1	593.2	-
Net income before income tax	[=∑ (13 to 15)]	16	261.3	1007.6	285.5%
Income tax		17	(41.2)	(170.9)	314.8%
Net income from continuing operations	[= 16 + 17]	18	220.1	836.7	280.1%
Net income from discontinued operations		19	12.6	77.7	514.6%
Net income	[= 18 + 19]	20	232.8	914.3	292.8%
					Table 30

1) This equity holding was booked in the individual accounts at historical cost.

2) €507.4 million before taxes, recognised in "Gains and losses in other assets".

3) €59.6 million on the sale of the equity holding in Viacer (booked under "Gains / (losses) on financial assets and liabilities and other"), €77.7 million on the sale of BPI Gestão de Ativos and BPI GIF (booked under "Net income from discontinued operations"), €71.7 million on the sale of the acquiring and card issuance businesses (€98.8 million before taxes, booked under "Gains and losses in other assets").

The individual gross income totalled €814.4 million (including the €59.6 million gain on the sale of the equity holding in Viacer in 2018), which corresponds to an increase of 17.5% relative to the previous year. The net interest income and fee and commission income (individual accounts) grew by 11.4% and 5.2%, respectively, in 2018. The 'Dividend income' caption includes €70 million in dividends from companies included in Banco BPI 's consolidation perimeter.

Recurring operating expenses rose by 0.3% in Banco BPI's individual accounts.

On an individual basis, Banco BPI recorded reversals of total impairments and provisions, net of recoveries, in the amount of €44.5 million in 2018 (gain), which compares with total impairments and provision charges, net of recoveries, of €2.0 million (cost) in 2017.

Individual balance sheet

Net total assets of Banco BPI (individual basis) amounted to €35.8 billion at the end of 2018. Individual accounting shareholders' equity totalled €3 049 million1 at the end of December 2018.

Individual balance sheet indicators	Amounts in m million
	31 Dec. 17 restated	31 Dec. 18	∆%
Total assets (net)	33 260	35 786	7.6%
Loans to Customers (Gross)	22 197	23 488	5.8%
Deposits	20 735	22 236	7.2%
Shareholders' equity	2 135	3 049	42.8%

Banco BPI is the main business unit and is responsible for the development of the commercial banking business in Portugal.

In 2018 Banco BPI completed the process of closing down all its representative offices and offshore branches (Paris, Madrid and Cayman), the objective of which was

to focus BPI on the core banking activity in Portugal and at the same time promote a simpler and more efficient financial structure.

For the reasons pointed out, the description of Banco BPI's commercial performance on a consolidated basis is valid for the evolution of the various captions on an individual basis.

The portfolio of loans and advances to Customers (gross), on an individual basis, expanded by 5.8%, to €23.5 billion at the end of 2018. Total deposits increased by 7.2% in 2018, to €22.2 billion, while the Bank has been actively promoting the reduction of institutional investors' deposits viewing the optimisation of its liquidity ratios (LCR).

Individual capital ratios

At 31 December 2018, considering the dividend distribution proposal, the fully loaded CET 1 ratio (individual basis) was 13.3%2 (+1.2 p.p. yoy), the total capital ratio (individual basis) was 15.1%2 (+1.2 p.p. yoy), and the fully loaded leverage ratio (individual basis) was 6.3%2.

Fully loaded capital ratios (individual basis)			Amounts in m million
				31 Dec. 17 31 Dec. 182
Common Equity Tier I		1	2 021.3	2 276.8
Tier I		2	2 021.3	2 276.8
Tier II		3	297.5	300.0
Total own funds		4	2 318.9	2 576.8
Risk weighted assets		5	16 662.2	17 064.1
CET1 ratio	[= 1 / 5]	6	12.1%	13.3%
T1 ratio	[= 2 / 5]	7	12.1%	13.3%
Total ratio	[= 4 / 5]	8	13.9%	15.1%
Leverage ratio			5.9%	6.3%
Note:				Table 32

the minimum prudential requirements established for 2018 were: CET1 ratio of 6.50%, which includes: the regulatory minimum required under Pillar 1, of 4.5%; a capital conservation buffer of 1.875% (2.5% to be phased in over 4 years through to 2019); and an O-SII (Other Systemically Important Institutions) buffer of 0.125%, defined by Banco de Portugal (0.5% to be phased in over 4 years through to 2021).

Table 31

2) Capital ratios at 31 December 2018 considering the Board of Directors' dividend distribution proposal (€140 million), which is an integral part of this Management Report. The reported capital ratios (individual basis) at 31 December 2018 – CET1 and Tier1 of 12.8%, total ratio of 14.5% and leverage ratio of 6.0% – consider the upper limit (payout of 50%) of the interval foreseen in Banco BPI's dividend policy, as laid down in Article 2 (4, 5 and 6) of Delegated Regulation no. 241 / 2014.

¹⁾ Banco BPI held 150 896 own shares since the beginning of 2018 that were sold on 27 December 2018 through CaixaBank's exercise of its right of squeeze-out, at the price of €1.47 per share.

Risk management

BPI has devoted a continuous effort to the development of the risk management function, aligned to the best practices in the sector and responding to the ever more demanding regulatory requirements and to the evolution of the business. BPI seeks to ensure an adequate and effective risk management, based on the constant identification, evaluation, monitoring and reporting of the exposure to the various risks (credit risk, market risk, liquidity risk, operational risks and other), which is essential to ensure consistent maximisation of results against the risks assumed, within the risk appetite framework defined and in accordance with the Bank's global risk strategy.

Within the European Union regulatory framework, the size of the portfolio of non-performing assets remained in 2018 one of the main concerns of the European supervisory authorities, alongside the sector's current profitability levels. In March 2018 the European Union presented a set of initiatives intended to reduce the current level of non-performing exposures.

Other regulatory initiatives were also taken at European Union level concerning the adjustment of investment products to the needs of consumers, in terms of sustainability, namely revisions to the MiFID II and Insurance Distribution directives.

The EBA Guidelines on Risk Governance, in force as from June 2018, provide guidance on the internal governance systems, processes and arrangements of credit institutions (Guidelines on Internal Governance), with a strong impact on the banking sector's internal management of risk.

In Portugal's specific case, a set of Bank of Portugal recommendations that came into force on 1 July introduced limits to some of the criteria used to assess the solvency of Clients for purposes of granting new loans to individuals.

At Banco BPI, the risk model implemented at Group level was consolidated in 2018, focusing on the strengthening of the mechanisms to control, monitor and prevent the risks arising from its activity. Of particular importance were the initiatives related to:

^j the implementation of an internal risk adjusted return (RAR) model for the main risk segments;
^j the production / updating of internal risk policies, which transposed into the internal standards the regulatory or legislation changes occurred, or the changes to the business and risk strategy;
^j the drafting of Banco BPI' Strategic Plan for 2019 -2021, setting clearly defined targets for the Institution's Risk Appetite;
^j a commitment to the development of the skills of the risk control teams, so as to cover all the risks identified in the catalogue and reinforce the capacity to monitor changes in the business, namely arising from the increasing digital transformation under way and the development of new activity segments.

More information may be found on chapter 3 of the Annual Accounts, where BPI's Risk Management and Internal Control Model is described in detail.

ORGANISATION

BPI's risk organisation transposes the guidelines issued by the regulator and seeks to follow the sector's best practices. BPI's risk management function is currently structured into three lines of defence (3 LoD), which aim to guarantee that risk management is adequate to the level of risk taking (1LoD), control (2LoD) and audit (3LoD). This structure, set forth in the EBA Final Guidelines on Internal Governance, attributes a fundamental role to the 2LoD as guarantor of an adequate management and of a holistic vision of all the risks of the Institution.

The Risk Committee and the Audit and Internal Control Committee, as advisory bodies of the Board of Directors, represent the highest supervisory bodies with regard to BPI's risks.

The Risk Committee is responsible for supervising the activity of the 2LD, including 1st and 2nd tier Committees, and Departments under their dependence. The Risk Committee is composed of non-executive directors.

The meetings of the Risk Committee may be attended, if deemed appropriate and upon the Committee's request, without voting rights, by members of the Executive Committee, namely the Chief Risk Officer, the Chief Financial Officer, and other persons discharging managerial responsibilities, in view of their expertise in risk matters. The participation of the Head of the Risk Management Function (RMF), as secretary of the Risk Committee, is particularly relevant, guaranteeing access and reporting to an independent governance body.

The Risk Committee, without prejudice to the legal powers granted to the Supervisory Board, is responsible for monitoring the management policy of all risks of BPI's business, namely the liquidity, interest rate, currency rate, market, credit, operational, reputational, compliance and conduct risks, as well as for monitoring the management policy of the Company's Pension Fund. This Committee is also responsible for submitting to the Board of Directors any change to risk policies, and for reporting on main exposures and risk indicators.

It is also the responsibility of the Risk Committee to inform and advise the Board of Directors in decisionmaking that impacts on the Bank's current and future risk profile and strategy.

The Audit and Internal Control Committee is responsible for supervising the 3LoD activities, and for reviewing the works developed by the External Auditor and by the Divisions responsible for risk control (2LoD).

Under the aegis of the Risk Committee there are several first- and second-tier Committees, which, together with the Board of Directors and the Risk Committee itself, constitute the Risk Governance and Management Bodies of BPI.

For more information see Note 3 to the Financial Statements – Risk Management.

Figure 4

Structure of the Risk Committees

The following committees stand out, on account of their importance:

Global Risk Committee

The Global Risk Committee is responsible for the management, control and monitoring of risks at BPI. This body reports directly to the Risk Committee.

As part of its main duties, this Committee is responsible for guaranteeing that the risk levels and the decisions taken are in agreement with the risk strategy established by the Board of Directors in the Risk Appetite Framework.

The Global Risk Committee is responsible for monitoring the activity of the second-tier committees and for ensuring that the risk policies are duly updated and implemented.

Permanent Credit Committee

Matters related to loan granting are delegated by the Board of Directors to the Permanent Credit Committee.

Its scope of powers and duties includes the approval of operations, exposure limits, operations subject to internal divergences, limits or operations to be submitted to the Executive Committee of the Board of Directors or to BPI Board of Directors, and operations with Customers that are holders of high offices, Trade Unions, Political Parties or PEPs, under the terms foreseen in the policies in force in BPI.

In its decision-making, this body must ensure that the limits set for Major Exposures are met, both internally and at group level.

ALCO Committee

The ALCO Committee is responsible for managing structural liquidity, interest-rate, and exchange-rate risks. Within the powers and duties attributed to it there stand out the responsibility for optimising the profitability of the financial structure of BPI's balance sheet, including the net interest income and income from financial operations, for determining the transfer rates for the different businesses, and for the monitoring of prices, maturities and volumes of asset- and liability-generating activities, in accordance with the policies, risk appetite framework and risk limits approved by the Board of Directors.

Structure of the Risk Divisions

The structure of BPI's Risk Divisions is currently designed in accordance with the internal control model, and therefore organised on the basis of the "three lines of defence model".

First Line of Defence

The first line of defence is formed by the business areas, risk-takers, and their support functions. Their responsibility is to develop and maintain effective controls over the businesses, as well as to identify, manage and monitor, control, mitigate and report the main risks originated in the ongoing exercise of their activity. The following divisions stand out, on account of their importance:

^j The Credit Risk Division, which is in charge of the functions of independent analysis of proponents, sureties and operations, backed by the various risk indicators and scoring models produced by the Global Risk Management Division.
^j The Credit Recovery Division, which is in charge of managing the credit recovery processes of defaulting loans to Companies and Individuals.

Second line of defence

The second line of defence has the function of ensuring the implementation of adequate measures for the identification, control, monitoring, prevention and reporting of all the Bank's risks, acting independently from the first-line business and control areas. At Banco BPI, it is formed by:

^j Global Risk Management (RMF), which has the responsibility for identifying, monitoring, analysing, measuring, managing and reporting risks, gaining an overall vision of all the risks faced by the Bank.
^j Compliance, which identifies, monitors and controls the Reputation and Conduct risks and the risk of Compliance with Legal Provisions.
^j Internal validation of risk models, whose main objective is to issue an independent technical opinion on the adequacy of the internal models applied for internal management and/or of a regulatory nature used by the Bank.

Third line of defence

Held by the Internal Audit Division, which is functionally answerable to the Audit and Internal Control Committee and reports to the Chairman of the Board of Directors, so as to guarantee its independence and authority. Its main objective is to provide the Bank's management and supervision bodies a reasonable degree of assurance about compliance with the legislation in force, the internal policies and regulations, the reliability and integrity of the financial and operational information, and the effectiveness of the systems in place to mitigate the risks associated to the Bank's activities.

RISK APPETITE FRAMEWORK Background

After the 2008 crisis, the regulators reinforced the need for financial institutions to possess a Risk Appetite Framework defining control systems, metrics and limits for the material risks to which they are exposed, as well as the responsibilities for the management and control of those risks.

The Financial Stability Board published in November 2013 the document which set out the principal guidelines to be followed by financial institutions. This document also contains the guidelines for the responsibilities of the Board of Directors and other Risk Management bodies. Later, the European Banking Authority and the Single Supervisory Mechanism endorsed these recommendations, which now constitute one of the factors for assessment of the quality of corporate governance, with the ECB including them in the Supervisory Review and Evaluation Process (SREP).

In the first quarter of 2016, BPI, keeping abreast of the best practices in risk management, drew up its Risk Appetite Framework. In this document the Bank defined the types and levels of risk that it was prepared to assume in pursuance of its objectives, taking into consideration the Group's risk and business strategy.

Every year BPI updates its Risk Appetite Framework, as well as the other documents making part of the Risk Strategic Processes: the Risks Catalogue and the Risk Assessment, where the risks in which the Bank incurs or may come to incur are identified, defined and assessed.

Based on these processes the Bank ensures the permanent evaluation of its risk profile (current, future and potential under stress scenarios), calculating the expected evolution of the boundary values of the future risk profile, and revising them on a recurrent basis. In addition, in the years subject to regulatory supervision (ICAAP and ILAAP), the Bank makes projections of the evolution of its risk profile under baseline and stress scenarios, which give its governance bodies a vision about the Bank's resilience to internal and/or external events.

Description and structure

BPI, in a process consistent with its other strategic documents – Budget, Recovery Plan and Internal Capital Adequacy Assessment Process – defined its risk-appetite directives, which are incorporated into the Bank's culture and strategy and are at the core of all its activities.

In line with the sector's best practices, the Board of Directors approved a set of risk-appetite directives that summarise the principles by which the Bank must govern itself:

^j Protection against losses: BPI has set the objective of maintaining a medium-low risk profile and a comfortable capital adequacy position, strengthening Customer confidence through its financial strength;
^j Liquidity and funding: BPI is determined to have the conditions in place to at all times fulfil its contractual obligations and meet its funding needs in a timely manner, even under adverse market conditions, and to have a stable and diversified funding base, preserving and protecting the interests of its depositors;
^j Business composition: BPI seeks to establish a solid position in retail banking and to generate earnings in a balanced and diversified manner;
^j Non-financial risks: BPI assumes the commitment of maintaining high ethical and governance standards in its business and will actively seek to ensure operational excellence.

The Board of Directors is responsible for the approval, monitoring and for any corrections to the Framework metrics. The monitoring of the metrics is aided by a set of objectives, tolerance levels and limits laid down by the Board of Directors:

^j Objective: optimum risk level, that defines the risk appetite and is aligned with the return sought by the Bank or the strategic goal pursued.
^j Tolerance: risk level considered significant by the Bank, which should lead to a discussion and the assessment of a possible corrective action.
^j Limit: indicates the level at which risk represents a serious threat to the Bank's business, requiring immediate remedial measures, following an action plan prepared by the area responsible for risk control.

There is also a set of 'traffic lights' which serve as an alert system:

^j Green light: the risk is within the desired levels and the metric is within the tolerance level – no action needs to be taken.
^j Yellow light: alert within the tolerance level a remedial plan must be proposed within a month, to be reviewed and approved by the Board of Directors' Executive Committee and by the Board of Directors.
^j Red light: default a remedial plan must be proposed within 30 days, to be reviewed and approved by the Board of Directors' Executive Committee and by the Board of Directors.
^j Black light: defines the limit at which the measures and procedures described in the Bank's Recovery Plan must be put into practice.

BPI also has a Framework in place for level 2 metrics. More detailed metrics are defined that allow each division to manage risk in accordance with their individual specificities.

Monitoring and Governance of the Risk Appetite Framework

The Risk Appetite Framework is coordinated by the Global Risk Management Division, which is responsible for updating, monitoring and reporting on the Framework, under the guidance of the Board of Directors.

In order to ensure that the Risk Appetite Framework conforms to best international practices, a reporting structure was established to ensure its exhaustive monitoring by the relevant divisions and bodies.

Such monitoring follows a specific timetable:

^j monthly presentation to the Global Risk Committee, which assesses, reviews and discusses the current risk situation, instances of overstepped limits / tolerances and the status update of individual metrics;
^j quarterly presentation to the Risk Committee and Audit and Internal Control Committee in order to review and discuss the overall risk performance, assess the situation of breached metrics, discuss the situation of individual metrics, and verify the continued effectiveness and adequacy of the Risk Appetite Statement and Risk Appetite Framework;
^j half-yearly presentation to the Board of Directors, with the purpose of reviewing and discussing BPI's overall risk performance and deciding on critical situations.

FINANCIAL RISKS

Credit risk

Credit risk is defined as the risk of financial loss due to the loss of value of the Bank's assets as a result of the deterioration of the counterparties' capacity to honour their commitments.

Default levels, provisioning and recovery

Non-performing exposures (NPE), calculated under the EBA criteria (EBA NPE), contracted by 25% (-€353 million) year-on-year, to €1.05 billion at the end of 2018. The EBA NPE ratio improved by 1.6 p.p., dropping to 3.5% in December 2018, from 5.1% in December 2017.

The coverage of NPE by accumulated impairments on the balance sheet was 53% in December 2018; considering accumulated impairments and also the collaterals associated to the NPE, the coverage of NPE ratio was 127%.

Over the last few years there has been a consistent downward trend in the NPE ratio, alongside a gradual increase in the NPE coverage by impairments and collaterals.

Chart 44

NPE ratio (right scale)

Coverage of NPE

Activity in Portugal

NPE (left scale)	Coverage by impairments
------------------	-------------------------

"Non-performing exposures" in the activity in Portugal (EBA criteria) Amounts in m million
			31 Dec. 14	31 Dec. 15	31 Dec. 16	31 Dec. 17	31 Dec. 18
Gross credit risk exposure		1	28 741	26 842	27 081	27 520	29 721
Non-performing exposures (NPE) 1		2	2 581	2 074	1 790	1 408	1 055
NPE Ratio	[= 2 / 1]	3	9.0%	7.7%	6.6%	5.1%	3.5%
Impairments for loans and guarantees		4	977	895	706	603	561
Coverage by impairments	[= 4 / 2]	5	38%	43%	39%	43%	53%
Coverage by impairments and collaterals		6	- 2	- 2	110%	Gestão de riscos 117%	127%
Note: considering the prudential supervision perimeter.						1	Table 33

In the corporate segment3, the amount of NPE was €481 million at the end of 2018, corresponding to 6.4% of the gross credit exposure to the segment (9.1% in Dec. 17). The coverage by impairments of NPE in corporate loans was 67% (52% in Dec. 17).

In the mortgage loans segment, the amount of NPE was €510 million in December 2018, corresponding to a NPE ratio of 4.6% (6.0% in Dec. 17). The analysis of the coverage level should take into account the relevant effect of collaterals (tangible guarantees) in reducing the risk of loss in this segment.

Taking into account the classification of BFA as a discontinued operation at the end of 2016, and subsequent deconsolidation at the start of 2017, and the fact that BCI is equity accounted, most of the consolidated balance sheet and income statement items as from 31 December 2016 relate to the activity in Portugal.

Likewise, the consolidated loan portfolio quality indicators as from 31 December 2016 concern BPI's activity in Portugal.

¹⁾ Non-Performing exposures include positions in default and positions marked according to "Unlikely To Pay" subjective criteria. Total NPE correspond to the sum of nonperforming loans (NPL) and non-performing debt securities.

²⁾ Data for Dec. 2014 and Dec. 2015 not available.

³⁾ Companies in Portugal (large and medium-sized companies, corporate & investment banking, small businesses) and project finance.

Non-performing loans (Bank of Spain criteria)

Loans classified as "non-performing", calculated under the Bank of Spain's criteria, amounted to €1 043 million in December 2018 and represented 4.2% of the gross loan portfolio and guarantees, which is a marked improvement compared to December 2017.

The coverage of non-performing loans by accumulated impairments on the balance sheet was 54%; considering accumulated impairments and also the collaterals associated to the non-performing loans, the coverage ratio was 120% in December 2018.

Non-performing loans (Bank of Spain criteria) Amounts in m million

		31 Dec. 17	31 Dec. 18
Gross loan portfolio and guarantees	1	23 796	25 122
Non-performing loans	2	1 219	1 043
Non-performing loans ratio [= 2 / 1]	3	5.1%	4.2%
Impairments for loans and guarantees	4	603	561
Coverage by impairments [= 4 / 2]	5	50%	54%
Coverage by impairments and collaterals	6	118%	120%
			Table 34

Restructured loans

The amount of restructured loans (forborne loans, under the EBA criteria) was €813 million at the end of December 2018. Of this amount, 31% are performing loans (Performing Exposures, under the EBA criteria) and the remaining 69% are included in the balance of nonperforming exposures (NPE). The forborne ratio decreased from 4.1% on 31 December 2017 to 2.5% in December 2018.

In mortgage loans, the amount of restructured loans (forborne loans, under the EBA criteria) was €229 million at the end of December 2018 (2.0% of the gross credit exposure in this segment). Of this amount, €45 million correspond to performing loans and the remaining €184 million are included in NPE.

Cost of Credit Risk

The steady improvement in credit quality indicators and high coverage levels, have translated, on the income statement, in a reduction of the cost of credit risk. Reversals of impairments and provisions for loans and guarantees totalled €7.9 million in 2018; in addition, a total of €36.9 million in loans, interest and expenses previously written off from assets, was recovered. The cost of risk was therefore negative by €45 million (representing a gain).

Cost of credit risk1 as % of performing loan portfolio Activity in Portugal

Gestão de riscos 3

1) Impairments and provisions for loans and guarantees in the year, net of loan recoveries previously written off against assets.

2) In 2009, the impairment charges considered for the year excluded the extraordinary charge made in December of that year (€33.2 million). 3) In 2010 the use of the extraordinary charge made in December 2009 (€33.2 million) was added to the impairment charges for the year.

4) In 2011, loan impairment charges for Greek sovereign debt of €68.3 million were excluded from impairments charges for the year.

			31 Dec. 16		31 Dec. 17		31 Dec. 18
			Forborne loans	Forborne ratio	Forborne loans	Forborne ratio	Forborne loans	Forborne ratio
Performing loans		1	574	1.9%	571	1.9%	254	0.8%
Included in NPE		2	915	3.0%	682	2.2%	559	1.7%
Total	[= 1 + 2]	3	1 489	4.9%	1 253	4.1%	813	2.5%

Note: considering the prudential supervision perimeter. Table 35

Foreclosed properties

At the end of December 2018, the stock of foreclosed properties held by BPI had a gross balance sheet value of €52 million. Of this amount, €23 million concerned properties obtained through home-loan recoveries and €29 million referred to properties repossessed for the recoupment of other loans.

On the same date the accumulated amount of impairments for foreclosed properties was €19 million. Therefore, the net balance sheet value of these properties was €33 million. Their valuation value corresponded to 161% of net balance-sheet value.

Property repossessed from loans recovery in the activity in Portugal

Home loans

Foreclosed properties

By source of credit at 31 Dec. 18			Amounts in m million
	Home loans	Other	Total
Gross book value	22.6	29.0	51.6
Impairments	3.1	15.8	18.9
Net book value (NBV)	19.5	13.2	32.7
Valuation as % of NBV	145%	184%	161%
			Table 36

Holdings in corporate recovery and restructuring funds Banco BPI holds participation units in specialised loan recovery funds ("Fundo de Recuperação, FCR" and "Fundo de Reestruturação Empresarial FCR") which were subscribed against the transfer to these funds of Customer loans.

At the end of December 2018, the share capital subscribed by BPI in the Fundo de Recuperação, FCR and Fundo de Reestruturação Empresarial FCR amounted to €97.3 million. BPI's paid-up share capital in these funds was €88.0 million (€84.1 million in the Fundo de Recuperação, FCR and €3.9 million in the Fundo de Reestruturação Empresarial FCR).

Net exposure to these funds, after revaluation1, was €52.8 million.

Net exposure to corporate recovery and restructuring funds at 31 December 2018 Amounts in m million

	Subscribed	Paid up
Fundo Recuperação, FCR	92.7	84.1
Fundo de Reestruturação Empresarial, FCR	4.5	3.9
Total	97.3	88.0
Revaluation 1		(35.2)
Net Exposure	52.8
1) Includes €34.7 million of impairments booked in the P&L

account until 31 Dec. 2017 and €0.3 million of unrealised capital losses on the date of transition to IFRS 9.

68 Banco BPI | Annual Report 2018 Gestão de riscos

MARKET RISK

Market or price risk (interest rates, foreign exchange rates, equity prices, commodity prices and other) is defined as the possibility of incurring losses due to unexpected changes in the price of financial instruments or operations.

Since trading activity is a bet on the behaviour of prices, market risk is the fundamental element for this portfolio. However, the management and mitigation of market risks are equally important elements in the management of the banking book.

Trading activity at Banco BPI has had little expression in recent years and therefore the inherent market risk values are immaterial.

LIQUIDITY RISK

Management process

Globally, the definition of the risk appetite framework (RAF) and the liquidity risk management policy and strategy at Banco BPI is decided and monitored by the Board of Directors and its specialist Committees (ALCO, Executive Committee, Risk Committee and Audit and Internal Control Committee). The governance of liquidity risk management and control is based on a three-lines-ofdefence model.

The first line of defence is responsible for maintaining liquidity levels that allow to timely meet all commitments and develop the Bank's business, within the existing planning framework and the limits set by the internal risk framework (RAF). The ALCO Committee is responsible for liquidity risks management, monitoring and control, evaluating the development of the Bank's position and the external environment. In functional terms, the liquidity management is carried out by the Financial Department. Within the first line of defence, the Analysis and Special Projects Unit ensures the coordination of the ILAAP process (internal liquidity adequacy assessment).

The second line of defence is responsible for an independent control and monitoring of the liquidity risks. The Global Risk Committee is responsible for that control, which is, in functional terms, ensured by the Global Risk Management Division. The Model Validation Unit ensures the quality and efficiency of the models used, both for the first and the second lines.

The third line of defence is responsible for conducting an independent review of the management and control of the liquidity risks. The Audit and Internal Control Committee is responsible for that new control, which is functionally ensured by the Audit and Inspection Division.

Liquidity risk is managed and monitored in its various aspects: i) the ability to monitor assets growth and to meet cash requirements without incurring exceptional losses; ii) the maintenance in the portfolio of tradable assets that constitute a sufficient liquidity buffer; (iii) compliance with the various regulatory requirements in the context of liquidity risk.

With respect to the portfolio of assets, the various managers keep constant watch over possible transactions in the various instruments, according to several indicators (BPI market shares, number of days to unwind positions, size and volatility of spreads, etc.), duly observing the limits set for each market.

Liquidity management seeks to optimise the balance sheet structure in order to keep under control the time frame of maturities between assets and liabilities, considering the expected growth and the various market situations. The management is also subject to the need to maintain an appropriate level of liquidity buffer to maintain the levels of liquidity coverage requirements, in compliance with prudential and internal requirements.

Liquidity and funding

The Bank maintained a balanced liquidity position throughout 2018:

^j Customer resources are the main source of funding. The loan to deposits ratio stood at 100%;
^j the Bank reduced the amount of funding from the ECB by €0.64 billion, to €1.36 billion, upon the maturity in June of the TLTRO first series;
^j at the end of the year, the Bank held a portfolio of eurozone countries sovereign debt of €3 billion, of which €0.5 billion of short-term debt in Treasury Bills issued by the Portuguese Republic. This portfolio is fully discountable at the ECB for liquidity operations;
^j the portfolio of eligible assets for Eurosystem funding amounted to €10.9 billion at the end of the year. Of that sum, the amount not yet used and therefore capable of being converted into immediate liquidity with the ECB was €7.4 billion;
^j the average LCR throughout the year was 167%.

Short term gap

The Bank's short-term funding gap decreased from -€1.8 billion in December 2017 to -€1.3 billion in December 2018 (considering the ECB-TLTRO financing). The main explanatory factor for this behaviour was the €0.5 billion reduction in the sovereign debt portfolio.

At end-2018, short-term funding was broken down as follows:

^j net credit position on the money market of €1.6 billion and repos of securities of €1.6 billion;
^j ECB funding amounting to €1.36 billion.

ECB funding

By the end of 2018, the Bank had €1.36 billion of funding from the ECB. This amount is entirely made up of funds obtained under TLTRO II, 4-year fixed rate transaction, under special conditions, launched by the ECB with the purpose of promoting lending to the economy.

Liquid assets portfolio

At the end of 2018 the Bank had a portfolio of liquid assets totalling €9.5 billion, composed of €3.9 billion in high-quality liquid assets (HQLA) and €5.6 billion in other assets eligible for Eurosystem funding.

Total liquid assets

Net funding from ECB

as % of domestic activity net total assets

1) High Quality Liquid Assets.

STRUCTURAL INTEREST RATE RISK

This risk is defined at BPI as the risk of a negative financial impact on the Balance sheet economic value, or on the Net interest income, as a result of changes in the time structure of interest rates curves that affect asset, liability or off-balance sheet products not booked in the trading portfolio. Gestão de riscos

The management of interest rate positions in the banking book (therefore excluding trading activity) is delegated to the Financial Division, within the limits defined by the Executive Committee of the Board of Directors. Control of structural interest rate risk is the responsibility of the Bank's second line of defence, which uses a corporate tool for its measurement, applying best market practices and following the regulators' recommendations. -5 alt 5

The most salient objective of the management of interest rate risk in the banking book (IRRBB) is the systematic hedging of risk arising from interest rate positions above 1 year. The IRRBB management and control is the responsibility of the Global Risk Management Division.

Positions subject to banking book interest rate risk are evaluated and monitored using a model that calculates the evolution of the net interest income and economic value of the Bank for an analysis horizon both in a neutral position and in several scenarios of interest rates changes under stress.

OPERATIONAL RISK

Operational Risk is defined by BPI as the risk of loss resulting from inadequate or failed internal processes, people and systems or from external events, and includes legal risk. Strategic and reputational risks are excluded from this definition. This internally adopted definition is in conformity with Regulation (EU) No. 575 / 2013 of the European Parliament and of the Council, of 26 June 2013. The management of operational risk covers all the categories of risk included in the definition, namely the risk associated to non-compliance of legal and regulatory rules on management and reporting.

At BPI the management of this risk is based on risksensitive policies, processes, tools and methodologies designed to achieve three clearly defined objectives:

^j Identification and evaluation of operational risk through decentralised management, each Division of the Bank is responsible for identifying the operational risk inherent to the activities performed, and its evaluation and monitoring is carried out by a second Line of Defence Control Division of Banco BPI.
^j Identification and monitoring of operational risk events – the first line of defence is responsible for recording operational risk events in an internal application, incorporating the knowledge obtained from the critical analysis of events into the risk management cycle. The evaluation and critical analysis of events is performed by the control teams of the Bank's second Line of Defence.
^j Mitigation of operational risk each Division of the Bank is responsible for the task of detecting situations that trigger the need to devise risk Mitigation Measures, and for proposing such measures.

Breakdown of gross losses by type of risk In 2018

Chart 52

To guarantee that all operational risk sub-categories are correctly managed and controlled, minimising their probability of materialising or establishing concrete measures for the mitigation of events, BPI's Risks Catalogue defines the main categories, and establishes specific Risk Management internal functions for each of them:

Legal and Regulatory Risk – legal and regulatory risk is defined as the possibility of potential losses or reduction in the Bank's profitability as a result of legal or regulatory changes (of any nature, including tax), changes in their interpretation or application by the competent authorities, or their translation into court rulings or administrative or tax proceedings. Gestão de riscos 6

Risk of conduct and compliance – defined as the application of action principles that are contrary to the interests of the Bank's Clients or other stakeholders, or actions or omissions by the Bank that are out of step with the legal and regulatory framework or the internal policies, standards and procedures.

Technology risk – corresponds to the risk of losses arising due to the inadequacy of the technology infrastructures, or failures in its hardware and software, or from cyberattacks or other circumstance liable of compromising the availability, integrity, accessibility and security of infrastructures and data. This risk is divided into 5 categories: 1) Availability and continuity of Information and Communication Technologies; 2) Security of Information and Communication Technologies;

3) Changes to Information and Communication Technologies; 4) Integrity of IT Data; 5) Externalisation of Information and Communication Systems.

Risk of operational processes and external events – defined as the risk of losses or damages provoked by operational errors in the processes involved in BPI's activity due to external events outside the Group's control or provoked by third parties, either accidentally or intentionally. Includes, among others, suppliers' management errors, model errors and errors in the custody of securities.

Risk of reliability of financial information – covers the losses, economic or other, arising from failures in the accuracy, integrity and criteria for preparation of the data required for the assessment of the Bank's financial situation and networth.

For each of these Operational Risk categories the Bank stipulates policies, procedures, controls and responsibilities, clearly defined and designed in accordance with their specificities. In order to deal with the evolution of these risk categories and their potential impacts on the banking business, Banco BPI has been reinforcing its governance, making sure that the internal structure is prepared to adequately manage them.

REPUTATIONAL RISK

Reputational risk is defined internally as the loss of competitive capacity due to the deterioration of trust on the part of Clients, the financial community (financial analysts or investors), Employees, the media, regulators, suppliers, trade unions or the public opinion in general as a result of their perception of actions or omissions attributed to BPI or its Management or other Governance Bodies.

To prevent and monitor this risk, Banco BPI uses internal and external indicators that allow it to assess the perception and expectations of its various stakeholders. In addition, the development of internal reputational risk policies represents a fundamental tool for control and mitigation of this risk.

RISK TO BUSINESS PROFITABILITY

The risk to business profitability concerns the possibility of obtaining lower earnings than those expected by shareholders, or targeted by BPI, which ultimately may lead to not achieving sustainable profitability (above the cost of capital).

ACTUARIAL RISK

At BPI this risk is defined as the risk of loss or deterioration of the value of commitments assumed under insurance or pension agreements entered into with Clients or Employees, as a result of differences between the assumptions used to estimate the actuarial variables used to calculate the responsibilities and their actual evolution.

RISK OF DETERIORATION OF OTHER ASSETS

The risk of impairment of other assets relates to the reduction in the book value of the Group's equity holdings and non-financial assets. This type of risk is managed separately according to the nature of the risk: equity holdings and deferred tax assets (DTA).

RISK OF OWN FUNDS AND SOLVENCY

BPI maintains adequate capital levels, either in terms of regulatory capital or economic capital, and has in place internal management and control mechanisms that allow it to maintain a solid capital structure. In this manner the Bank ensures the mitigation of the risk of arising any problems to its capacity to comply with regulatory requirements concerning capital ratios, or of having to change its risk profile due to insufficient own funds.

More details on risk management at Banco BPI may be found in the Risk Management chapter of the Notes to the Financial Statements.

Rating

In 2018 the main international rating agencies continued to improve the ratings of Banco BPI, recognising the positive evolution of its credit profile. The Bank thus obtained investment grade status for its long-term debt, assigned by the three main international rating agencies: Fitch Ratings (BBB), Moody's (Baa2) and S&P Global Ratings (BBB-).

The mortgage covered bonds issued by BPI are rated AA (Low) by DBRS and Aa3 by Moody's and qualify as level 1 assets for purposes of calculation of the LCR ratio.

In their latest rating actions, the international agencies in general improved their assessment on Banco BPI:

^j On 9 October, S&P Global Ratings raised by two notches its standalone rating of Banco BPI, from bb- to bb+, and affirmed the long-term debt rating of BPI at BBB-, with positive Outlook. The rating and outlook on BPI are aligned to the rating and expected evolution of Portugal's rating.
^j On 11 October, Fitch Ratings raised by one notch its long-term debt rating of Banco BPI, from BBB- to BBB, with stable Outlook.
^j On 16 October Moody's upgraded Banco BPI's long-term debt rating by two notches, from Ba1 to Baa2, and the long-term deposits rating from Baa3 to Baa1. Moody's underlined the strengthening of BPI's capitalization levels, its good credit risk quality indicators, significantly above the industry average, and improved profitability in the domestic activity.

	DBRS	Fitch Ratings	Moody's	S&P Global Ratings
Banco BPI credit ratings
Long-Term Deposits			Baa1
Short-Term Deposits			Prime-2
Outlook on MLT deposits			Stable
Long-Term Debt		BBB	Baa2	BBB
Short-Term Debt		F2	Prime-2	A-3
Outlook on MLT debt		Stable	Negative	Positive
Individual Rating		bb+ (Viability rating)	ba1 (Baseline Credit Assessment)	bb+ [Stand-alone credit profile – (SACP)]
Collateralised senior debt
j Mortgage	AA (Low)		Aa3
j Public sector			A1
Subordinated debt		BB+	Ba1	BB
Junior subordinated debt			Ba2
Portuguese Republic sovereign risk 1
Long-Term	BBB	BBB	Baa3	BBB-u
Short-Term	R-2 (high)	F2	Prime-3	A-3u
Outlook	Stable	Stable	Stable	Positive

At 31 December 2018

1) The ratings attributed by S&P Global Ratings to the Portuguese Republic are unsolicited ("u").

ADOPTION OF THE FINANCIAL STABILITY FORUM (FSF) AND COMMITTEE OF EUROPEAN BANKING SUPERVISORS (CEBS) RECOMMENDATIONS ON THE TRANSPARENCY OF INFORMATION AND VALUATION OF ASSETS

The Bank of Portugal, through circular-letters 97 / 08 / DSBDR of 3 December 2008 and 58 / 09 / DSBDR of 5 August 2009, has recommended that within the accounting documents, a separate chapter or a specific annex be included in the Annual Report, designed to respond to the recommendations of the CEBS and of the FSF, taking into account the principle of proportionality and following the questionnaire presented as an annex to Bank of Portugal's circular-letter 46 / 08 / DSBDR.

In order to comply with Bank of Portugal's recommendation, the present chapter provides a response to the aforesaid questionnaire, using cross-references to the more detailed information presented in the 2018 Annual Report.

Recommendation Summary	Reference to 2018 Annual Report
I. BUSINESS MODEL
1. Description of the business model	MR – BPI Business Model, page 14. NFS – 7. Segments, page 168.
2. Description of strategies and objectives	MR – Statement of the Chairman of the Board of Directors, page 6; Statement of the Chairman of the Executive Committee, page 9; Financial review, page 42; Risk Management, page 61.
3. Description of the importance of the operations carried out and the respective contribution to business	MR – Commercial Banking, page 32; Investment banking, page 40; Equity holdings in BFA and BCI, page 41; Financial review, page 42; NFS – 7. Segments, page 168.
4. Description of the type of activities undertaken	MR – Commercial Banking, page 32; Investment banking, page 40;
5. Description of the objective and extent of the institution's involvement relating to each activity undertaken	Equity holdings in BFA and BCI, page 41; Background to operations, page 28; Financial review, page 42; Risk management, page 61.
II. RISKS AND RISK MANAGEMENT
6. Description of the nature and extent of the risks incurred in relation to the activities carried out and the instruments used	MR – Risk Management, page 61; NFS – 2.7. Impairment of financial assets, page 109, 3. Risk management, page 118 and Financial assets, notes 10 to 15, page 176 and following.
7. Description of major risk-management practices in operations	MR – Risk Management, page 61; NFS – 2.7. Impairment of financial assets, page 109, 3. Risk management, page 118 and Financial assets, notes 10 to 15, page 176 and following. GovR – Corporate Governance Report, page.293.
III. IMPACT OF THE PERIOD OF FINANCIAL TURMOIL ON THE RESULTS
8. Qualitative and quantitative description of the results	MR – Financial review, page 42
9. Breakdown of the write-downs / losses by types of products and instruments affected by the period of turmoil	NFS – 3. Risk management, page 118, Financial assets, notes 10 to 15, page 176, 32. Gains (losses) on financial assets and liabilities, page 222.
10. Description of the reasons and factors responsible for the impact suffered	MR – Financial review, page 42; Background to the operations, page 28.
11. Comparison of the i) impacts between (relevant) periods and ii) the financial statements before and after the period of turmoil	MR – Financial review, page 42.
12. Breakdown of write-downs between realised and non-realised	MR – Financial review, page 42; NFS – Financial assets, notes 10 to 15, page 176, 32. Gains (losses) on financial assets and liabilities, page 222.
13. Description of the influence of the financial turmoil on the behaviour of Banco BPI shares	The Banco BPI shares were excluded from trading on the Euronext Lisbon regulated market on 14 December 2018, following the CMVM's favourable decision on the loss of Banco BPI's public company status. On 27 December 2018 CaixaBank exercised its squeeze-out right on the remaining shares it did not yet hold, following which it now holds the entire share capital of Banco BPI.
14. Disclosure of the maximum loss risk	MR – Risk Management, page 61; NFS – 3. Risk management, page 118.
15. Disclosure of the impact that the trend in spreads associated with the institution's own liabilities had on earnings	MR – Financial review, page 42. The Bank did not revalue its liabilities.

MR – Management Report; NFS – Notes to the Financial Statements; GovR – Corporate Governance Report.

Recommendation Summary	Reference to 2018 Annual Report
IV. LEVEL AND TYPE OF EXPOSURES AFFECTED BY THE PERIOD OF FINANCIAL TURBULENCE
16. Nominal value (or amortised cost) and fair value of exposures	NFS –Financial assets, notes 10 to 15, page 176.
17. Information about credit risk mitigators and respective effects on existing exposures	MR – Risk Management, page 61 and following. NFS – 3.3 Credit risk, page 126 and following.
18. Detailed disclosure of exposures	MR – Risk Management, page 61; NFS –Financial assets, notes 10 to 15, page 176.
19. Movements in exposures occurred between the relevant reporting periods and the reasons for these movements (sales, write-downs, purchases, etc.)	MR – Financial review, page 42. NFS –Financial assets, notes 10 to 15, page 176.
20. Explanations about exposures which have not been consolidated (or which have been recognised during the crisis) and the associated reasons	Banco BPI consolidates all exposures in which it has control or significant influence, as provided for in IFRS 10, 11, IAS 28, IFRS 3 and IFRS 5. No changes were made to BPI Group's consolidation perimeter as a consequence of the period of turmoil in the financial markets.
21. Exposure to monoline insurers and quality of the assets insured	At 31 December 2018, BPI had no exposure to monoline insurers.
V. ACCOUNTING POLICIES AND VALUATION METHODS
22. Classification of transactions and structured products for accounting purposes and respective accounting treatment	NDF – 2.2 Financial instruments, page 105; 2.7 Impairment of financial assets, page 109; Financial assets, notes 10 to 15, page 176; 22. Financial liabilities at amortised cost, page 196.
23. Consolidation of Special Purpose Entities (SPE) and other vehicles and their reconciliation with the structured products affected by the period of turmoil	The vehicles through which Banco BPI's debt securitisation operations are carried out are recorded in the consolidated financial statements according to the BPI Group's continued involvement in these operations, determined on the basis of the percentage of the equity interest held in the respective vehicles.
24. Detailed disclosure of the fair value of financial instruments	NFS – Financial assets, notes 10 to 15, page 176.
25. Description of the modelling techniques used for valuing financial instruments	NFS – 2. Bases of presentation and main accounting policies, page 93 and Financial assets, notes 10 to 15, page 176 and following.
VI. OTHER RELEVANT ASPECTS OF DISCLOSURE
26. Description of the disclosure policies and principles used in financial reporting	GovR – Corporate Governance Report, page 293.

MR – Management Report; NFS – Notes to the Financial Statements; GovR – Corporate Governance Report.

Annex – Alternative performance measures

The European Securities and Markets Authority (ESMA) published on 5 October 2015 a set of guidelines relating to the disclosure of Alternative Performance Measures by entities (ESMA / 2015 / 1415). These guidelines are to be obligatorily applied with effect from 3 July 2016.

BPI uses a set of indicators for the analysis of performance and financial position, which are classified as Alternative Performance Measures, in accordance with the abovementioned ESMA guidelines.

The information relating to those indicators has already been the object of disclosure, as required by the ESMA guidelines.

In the present report, the information previously disclosed is inserted by way of cross-reference. A summarised list of the Alternative Performance Measures is presented next.

EARNINGS, EFFICIENCY AND PROFITABILITY INDICATORS

Reconciliation of income statement structure

The table below shows, for the income statement of the activity in Portugal, the reconciliation of the structure presented in the Management Report with the structure presented in the financial statements and respective notes.

Net interest income	422.6	422.6	Net interest income
Dividend income	1.7	1.7	Dividend income

Net commissions income	277.8	319.0	Fee and commission income
		(41.2)	Fee and commission expenses
Gains / (losses) on financial assets and liabilities and other			fair value through profit or loss, net



		11.7	Exchange differences (gain / loss), net
Other operating income and	(12.9)	11.5	Other operating income
expenses		(24.4)	Other operating expenses
Gross income	781.2	781.2	GROSS INCOME
Staff expenses	(262.2)	(262.2)	Staff expenses
Other administrative expenses	(172.9)	(172.9)	Other administrative expenses
Depreciation and amortisation	(23.8)	(23.8)	Depreciation and amortisation

Net operating income	322.3
Impairment losses and other	47.7	(1.3)	Provisions or reversal of provisions
provisions			fair value through profit or loss






Net income from continuing operations
Net income from discontinued operations
Income attributable to non controlling interests
			PARENT

Income statement from the activity in Portugal			Amounts in m million
Management Report structure	2018	2018	Structure of the Financial Statements and attached notes
Net interest income	422.6	422.6	Net interest income
Dividend income	1.7	1.7	Dividend income
Equity accounting income	7.5	7.5	Share of profit / (loss) of entities accounted for using the equity method
Net commissions income	277.8	319.0	Fee and commission income
		(41.2)	Fee and commission expenses
Gains / (losses) on financial assets and liabilities and other	84.6	1.5	Gains / (losses) on derecognition of financial assets and liabilities not measured at fair value through profit or loss, net
		9.8	Gains / (losses) on financial assets and liabilities held for trading, net
		60.3	Gains / (losses) on financial assets not designated for trading compulsorily measured at fair value through profit or loss, net
		1.4	Gains / (losses) from hedge accounting, net
		11.7	Exchange differences (gain / loss), net
Other operating income and	(12.9)	11.5	Other operating income
expenses		(24.4)	Other operating expenses
Gross income	781.2	781.2	GROSS INCOME
Staff expenses	(262.2)	(262.2)	Staff expenses
Other administrative expenses	(172.9)	(172.9)	Other administrative expenses
Depreciation and amortisation	(23.8)	(23.8)	Depreciation and amortisation
Operating expenses	(458.9)	(458.9)	Administrative expenses, depreciation and amortisation
Net operating income	322.3
Impairment losses and other	47.7	(1.3)	Provisions or reversal of provisions
provisions		49.0	Impairment / (reversal) of impairment losses on financial assets not measured at fair value through profit or loss
Gain / (loss) on other assets	85.0	(6.7)	Impairment (reversal) of impairment in subsidiaries joint ventures and associates
		(1.7)	Impairment / (reversal) of impairment on non-financial assets
		98.4	Gains / (losses) on derecognition of non-financial assets, net
		(5.1)	Profit / (loss) from non-current assets and disposal groups classified as held for sale not qualifying as discontinued operations
Net income before income tax	455.0	455.0	PROFIT / (LOSS) BEFORE TAX FROM CONTINUING OPERATIONS
Income taxes	(122.9)	(122.9)	Tax expense or income related to profit or loss from continuing operations
Net income from continuing operations	332.1	332.1	PROFIT / (LOSS) AFTER TAX FROM CONTINUING OPERATIONS
Net income from discontinued operations	64.2	64.2	Profit / (loss) after tax from discontinued operations
Income attributable to non controlling interests			Profit / (loss) for the period attributable to non-controlling interests
Net income	396.3	396.3	PROFIT / (LOSS) FOR THE PERIOD ATTRIBUTABLE TO OWNERS OF THE PARENT

The earnings, efficiency and profitability indicators are defined by reference to the aforementioned structure of the income statement presented in the Management Report.

EARNINGS, EFFICIENCY AND PROFITABILITY INDICATORS

Gross income = Net interest income + Dividend income + Net fee and commission income + Equity accounted income + Gains / (losses) on financial assets and liabilities and other + Other operating income and expenses

Commercial banking gross income = Net interest income + Dividend income + Net fee and commission income + Equity accounted income excluding the contribution of stakes in African banks

Operating expenses = Staff expenses + Other administrative expenses + Depreciation and amortisation

Adjusted Operating expenses = Staff expenses excluding cost with early retirements and voluntary terminations and (only in 2016) gains with the revision of the Collective Labour Agreement (ACT) + Other administrative expenses + Depreciation and amortisation

Net operating income = Gross income - Operating expenses

Net income before income tax = Net operating income – Impairment losses and other provisions + Gains and losses in other assets

Cost-to-income ratio (efficiency ratio) ¹= Operating expenses / Gross income

Adjusted Operating expenses-to-commercial banking gross income ¹= Operating expenses, excluding costs with early-retirements and voluntary terminations and (only in 2016) gains with the revision of the Collective Labour Agreement (ACT) / Commercial banking gross income

Return on Equity (ROE) ¹= Net income for the period / Average value in the period of shareholders' equity attributable to BPI shareholders after deduction of the fair value reserve (net of deferred taxes) related to available-for-sale financial assets

Return on Tangible Equity (ROTE) 1 = Net income for the period / Average value in the period of shareholders' equity attributable to BPI shareholders after deduction of intangible net assets and goodwill of equity holdings

Return on Assets (ROA) 1 = (Net income attributable to BPI shareholders + Income attributable to non-controlling interests - preference shares dividends paid) / Average value in the period of net total assets

Unitary intermediation margin = Loan portfolio (excluding loans to Employees) average interest rate - Deposits average interest rate

BALANCE SHEET AND FUNDING INDICATORS

On-balance sheet Customer resources = Deposits + Capitalisation insurance of fully consolidated subsidiaries + Participating units in consolidated investment funds

Where:

^jDeposits = Demand deposits and other + Term and savings deposits + Interest payable + Retail bonds (Fixed / variable rate bonds and structured products placed with Customers + Certificates of deposit + Subordinated bonds placed with Customers)

^jCapitalisation insurance of fully consolidated subsidiaries (BPI Vida e Pensões sold in Dec. 17) = Unit links capitalisation insurance and "Aforro" capitalisation insurance and others (Technical provisions + Guaranteed rate and guaranteed retirement capitalisation insurance)

Note: The amount of on-balance sheet Customer resources is not deducted of applications of off-balance sheet products (mutual funds and pension funds) in on-balance sheet products

Assets under management = Mutual funds + Capitalisation insurance + Pension funds

^jMutual funds = Unit trust funds + Real estate investment funds + Retirement-savings and equity-savings plans ("PPR" and "PPA" in Portuguese) + Hedge funds + Assets from funds under BPI Suisse management + Third-party unit trust funds placed with Customers

^j Capitalisation insurance = third-party capitalisation insurance placed with Customers

^j Pension Funds = pension funds under BPI management (includes BPI pension funds)

Notes:

(i) Amounts deducted of participation units in the Group banks' portfolios and of placements of off-balance sheet products (mutual funds and pension plans) in other off-balance sheet products.

(ii) Following the sale of BPI Vida e Pensões in Dec. 17, the capitalisation insurance placed with BPI's Customers was recognised off balance sheet, as "third-party capitalisation insurance placed with Customers" and pension funds management was excluded from BPI's consolidation perimeter.

Subscriptions in public offerings = Customer subscriptions of third-party public offerings

1) Ratio refers to the last 12 months, except where otherwise indicated. The ratio can be computed for the cumulative period since the beginning of the year, in annualised terms, in which case it will be clearly marked.

BALANCE SHEET AND FUNDING INDICATORS (CONT.)

Total Customer resources = On-balance sheet Customer resources + Assets under management + Subscriptions in public offerings

Gross loans to Customers = Gross Loans and advances to Customers (financial assets at amortized cost), excluding other assets (guarantee accounts and others) + Gross debt securities issued by Customers (financial assets at amortized cost)

Note: gross loans = performing loans + loans in arrears + interest receivable

Net loans to Customers = Gross loans to Customers – Impairments for loans to Customers

Loan to deposit ratio (CaixaBank criteria) = (Net loans to Customers - Funding obtained from the EIB, which is used to provide credit) / Deposits and retail bonds

ASSET QUALITY INDICATORS

Impairments for loans and guarantees as % of the loan portfolio 1 = Impairments and provisions for loans and guarantees, net (in income statement) / Average value in the period of the performing loan portfolio

Where:

^jImpairments and provisions for loans and guarantees (in income statement) = Impairment or reversal of impairment on financial assets not measured at fair value through profit or loss relative to loans and advances to Customers and debt securities issued by Customers (financial assets at amortised cost), before deduction of recoveries of loans previously written off from assets, interest and others + Provisions or reversal of provisions for commitments and guarantees

Cost of credit risk as % of loan portfolio 1 = (Impairments and provisions for loans and guarantees, net (in income statement) - Recoveries of loans previously written off from assets, interest and other) / Average value in the period of the performing loan portfolio.

Where:

Performing loans portfolio = Gross Customer loans - (Overdue loans and interest + Receivable interests and other)

NPE Ratio = Ratio of non-performing exposures (NPE) in accordance with the EBA criteria (prudential perimeter)

Coverage of NPE = [Impairments for loans and advances to Customers (financial assets at amortised cost) + Impairments for debt securities issued by Customers (financial assets at amortised cost) + Impairments and provisions for guarantees and commitments] / Non-performing exposures (NPE)

Coverage of NPE by impairments and associated collaterals = [Impairments for loans and advances to Customers (financial assets at amortised cost) + Impairments for debt securities issued by Customers (financial assets at amortised cost) + Impairments and provisions for guarantees and commitments + Collaterals associated to NPE) / Non-performing exposures (NPE)

Non-performing loans ratio ("credito dudoso", Bank of Spain criteria) = Non performing loans (Bank of Spain criteria) / (Gross Customer loans + guarantees)

Non-performing loans (Bank of Spain criteria) coverage ratio = [Impairments for loans and advances to Customers (financial assets at amortised cost) + Impairments for debt securities issued by Customers (financial assets at amortised cost) + Impairments and provisions for guarantees and commitments] / Non performing loans (Bank of Spain criteria)

Coverage of non-performing loans (Bank of Spain criteria) by impairments and associated collaterals = [Impairments for loans and advances to Customers (financial assets at amortised cost) + Impairments for debt securities issued by Customers (financial assets at amortised cost) + Impairments and provisions for guarantees and commitments] + Collateral associated to credit] / Non performing loans (Bank of Spain criteria)

Impairments cover of foreclosed properties = Impairments coverage of foreclosed properties = Impairments for real estate received in settlement of defaulting loans / Gross value of real estate received in settlement of defaulting loans

Proposed application of results

Whereas: a) Banco BPI, S.A. (hereinafter Banco BPI) reported a net profit of €490 638 121 in its consolidated accounts, and a net profit of €914 310 658.65 in its individual accounts for the financial year of 2018; b) In accordance with the provisions of Article 26 of Banco BPI's Memorandum and Articles of Association, the net profit for each year shall be allocated, namely, in the percentage prescribed by law, to the legal reserve, to the payment of priority dividends on any preference shares that the company may have issued, and the remainder, under the terms that the General Meeting, acting freely and under no obligatory distribution, may determine, including the allocation of the profits in question to reserves, their distribution as dividends, their allocation to other specific uses in the interest of the Company or in any combination of these purposes; c) On the other hand, the new Long-Term Dividend Policy of Banco BPI approved by the single shareholder, CaixaBank, S.A., by Unanimous Written Resolution on 31 January 2019, provides for the distribution of an annual dividend, tendentially between 30% and 50% of the net income reported in the individual accounts for the year to which it relates, where the exact amount to be proposed (by the Board of Directors to the General Meeting) shall be defined in light of a prudent judgement which takes into account, in view of the specific situation at the time of Banco BPI, the permanent satisfaction of adequate levels of liquidity and solvency; d) The net profit reported in the individual accounts of Banco BPI in financial year 2018 includes €456 676 252.23 resulting from the net unrealised capital gain on revaluation of the 48.1% equity holding in Banco de Fomento Angola arising from its reclassification from associated company to financial investment at fair value through other comprehensive income; e) In this framework, the proposed distribution of dividends in the global amount of €140 000 000.00 attributable to the 1 456 924 237 shares representing the share capital of Banco BPI at 31 December 2018 corresponds to 31% of the net profit reported in the individual accounts of Banco BPI for the 2018 financial year, excluding the aforementioned unrealised capital gain on the revaluation of the equity holding in BFA, in line with the threshold foreseen in the new Dividend Policy described in Recital c); f) In addition, the proposed distribution of dividends described in Recital e) does not jeopardise compliance with the target capital ratios of Banco BPI and respects the conclusions and guidelines of the ICAAP and RAF of Banco BPI; g) The financial statements of Banco BPI as at 31/12/2018 show in the individual balance sheet the amount of €27 556 274.98 corresponding to negative retained earnings resulting from the impact of adoption of accounting standard IFRS 9, which, prior to the distribution of dividends referred to in Recital e), will be covered through transfer of the amount of €27 556 274.98 from the "Other Reserves" caption;

BPI 1
----------

In view of the above, the Board of Directors proposes:

1. That, to cover the amount of €27 556 274.98 of negative retained earnings in the caption "Retained Earnings", the amount of €27 556 274.98 be transferred from "Other Reserves" to "Retained Earnings";
1. That the Net Profit for the 2018 financial year reported in Banco BPI's individual accounts be applied as follows:

Dividends:	€140 000 000.00
Legal Reserve*:	€91 431 065.87
Other Reserves:	€682 879 592.78

Net Profit for the 2018 financial year €914 310 658.65

Porto, 15 April 2019

The Board of Directors

* Under the provisions of Article 97 (1) of the Legal Framework of Credit Institutions and Financial Companies ("RGICSF").

Final acknowledgements

On 23 February 2018, Professor Fátima Barros was appointed by cooptation to the position of member of the Board of Directors, also becoming as from that date a member of the Audit and Internal Control Committee.

On 20 April 2018, Mr. António José Cabral was elected by the General Meeting of Shareholders as an independent member of the Board of Directors, also integrating Banco BPI's Risk Committee.

The company Allianz Europe Ltd., elected as member of the Board of Directors by the 2014 General Meeting of Shareholders, having as representatives Carla Sofia Pereira Bambulo and Vicente Tardio Barutel, sold in May 2018 its equity holding of 8.425% in the share capital of Banco BPI to CaixaBank. As a consequence, on 9 May 2018, both renounced their positions as members of the Board of Directors and of the Risk Committee of Banco BPI. Vicente Tardio Barutel also renounced his position as member of the Audit and Internal Control Committee. BPI wishes to thank Carla Sofia Pereira Bambulo and Vicente Tardio Barutel for their relevant contribution to the growth and affirmation of the Bank over several mandates, which they discharged with a high level of competence and dedication.

Following the renunciation handed in on 21 June 2018 by the member of the Board of Directors and member of the Nominations, Evaluation and Remuneration Committee, Juan Antonio Alcaraz Garcia, Natividad Capella Pifarré was coopted to take up these positions. The Board of Directors thanks Juan Antonio Alcaraz Garcia for his relevant collaboration.

Porto, 15 April 2019

The Board of Directors

Banco BPI S.A.

Consolidated financial statements at 31 December 2018

BANCO BPI, S.A. CONSOLIDATED BALANCE SHEETS AS OF 31 DECEMBER 2018 AND 2017

		(Amounts expressed in thousand euros)
	Notes	31-12-2018	31-12-2017 Restated
ASSETS
Cash and cash balances at central banks and other demand deposits	9	2 452 916	1 094 150
Financial assets held for trading	10	226 772	294 481
Financial assets not designated for trading compulsorily measured at fair value through profit or loss	11	228 582
Equity instruments		168 594
Debt securities		59 988
Financial assets designated at fair value through profit or loss	12		6 055
Financial assets at fair value through other comprehensive income	13	1 875 160
Equity instruments		597 740
Debt securities		1 277 420
Available-for-sale financial assets	14		3 875 370
Financial assets at amortised cost	15	25 671 943	22 506 670
Debt securities		3 516 814	1 306 130
Loans and advances - Central Banks and other Credit Institutions		790 659	816 783
Loans and advances - Customers		21 364 470	20 383 757
Derivatives - Hedge accounting	16	14 320	12 740
Fair value changes of the hedged items in portfolio hedge of interest rate risk	16	26 719	20 574
Investments in joint ventures and associates	17	209 144	794 483
Tangible assets	18	67 252	45 309

Intangible assets	19	55 126	42 315
Tax assets	27	352 763	453 183
Other assets	20	353 422	487 615
Non-current assets and disposal groups classified as held for sale	21	33 896	7 264
Total assets		31 568 015	29 640 209
LIABILITIES
Financial liabilities held for trading	10	141 335	170 048
Financial liabilities at amortised cost	22	27 515 745	25 961 415
Deposits - Central Banks		1 352 843	1 995 374
Deposits - Credit Institutions		1 853 501	1 982 648
Deposits - Customers		22 960 252	20 713 633
Debt securities issued		1 118 195	1 019 977
Memorandum items: subordinated liabilities		304 514	305 077
Other financial liabilities		230 954	249 783
Derivatives - Hedge accounting	16	56 010	69 880
Fair value changes of the hedged items in portfolio hedge of interest rate risk	16	3 594	218
Provisions	23	65 457	64 238
Pending legal issues and tax litigation		42 245	42 367
Commitments and guarantees given		23 212	18 441
Other provisions			3 430
Tax liabilities	27	73 802	70 622
Other liabilities	24	506 120	475 731
Liabilities included in disposal groups classified as held for sale	21		4 471
Total Liabilities		28 362 063	26 816 623
SHAREHOLDERS' EQUITY
Capital	26	1 293 063	1 293 063
Other equity	26	371	2 276
Accumulated other comprehensive income	26	( 253 402)	( 163 559)
Items that will not be reclassified to profit or loss		( 232 788)	( 313 417)
Tangible assets		703	703
Actuarial gains/ (losses) on defined benefit pension plans		( 288 248)	( 312 310)
Share of other recognised income and expense of investments in joint ventures and associates		( 1 858)	( 1 810)
Fair value changes of equity instruments measured at fair value through other comprehensive income		56 615
Items that may be reclassified to profit or loss		( 20 614)	149 858

Foreign currency translation		( 35 802)	43 104
Fair value changes of debt instruments measured at fair value through other comprehensive income		1 927
Available-for-sale financial assets			84 150
Share of other recognised income and expense of investments in joint ventures and associates		13 261	22 604
Retained earnings	26	1 548 458	944 225
Other reserves	26	126 824	737 934
Treasury shares	26		( 377)
Other accumulated comprehensive income relating to discontinued operations			( 185)
Profit/(loss) attributable to owners of the parent		490 638	10 209
Total Equity		3 205 952	2 823 586
Total Equity and Total Liabilities		31 568 015	29 640 209

The accompanying notes are an integral part of these financial statements

The Registered Accountant The Board of Directors

BANCO BPI, S.A. CONSOLIDATED STATEMENTS OF PROFIT OR LOSS FOR THE YEARS ENDED ON 31 DECEMBER 2018 AND 2017 RESTATED

Notes 31-12-2018 Interest income 29 510 264 Interest expenses 29 ( 87 688) NET INTEREST INCOME 422 576 Dividend income 1 723 Share of profit/(loss) of entities accounted for using the equity method 17 271 556 Fee and commission income 31 319 009 Fee and commission expenses 31 ( 41 239) Gains/(losses) on derecognition of financial assets and liabilities not measured at fair value through profit or loss, net 32 1 457 Gains/(losses) on financial assets and liabilities held for trading, net 32 39 027 Gains/(losses) on financial assets not designated for trading compulsorily measured at fair value through profit or loss, net 32 60 321 32 Gains/(losses) on financial assets and liabilities measured at fair value through profit or loss, net Gains/(losses) from hedge accounting, net 32 1 398 Exchange differences (gain/loss), net ( 25 328) Other operating income 33 11 487 Other operating expenses 33 ( 24 427) GROSS INCOME 1 037 560 Administrative expenses ( 435 092) Staff expenses 34 ( 262 214) Other administrative expenses 35 ( 172 878) Depreciation and amortisation ( 23 827) Provisions or reversal of provisions 23 ( 1 072) Commitments and guarantees given ( 4 161) Other provisions 3 089 Impairment/(reversal) of impairment losses on financial assets not measured at fair value through profit or loss 36 48 967 Available-for-sale financial assets Financial assets at amortised cost 48 967 Impairment/(reversal) of impairment in subsidiaries joint ventures and associates 17 ( 6 689) Impairment/(reversal) of impairment on non-financial assets 37 ( 1 672) Gains/(losses) on derecognition of non-financial assets, net 38 ( 55 181) Profit/(loss) from non-current assets and disposal groups classified as held for sale not qualifying as discontinued operations ( 5 131) PROFIT/(LOSS) BEFORE TAX FROM CONTINUING OPERATIONS 557 863 Tax expense or income related to profit or loss from continuing operations ( 131 439) PROFIT/(LOSS) AFTER TAX FROM CONTINUING OPERATIONS 426 424 Profit/(loss) after tax from discontinued operations 39 64 214 Profit/(loss) before tax from discontinued operations 64 955 Tax expense or income related to profit or loss from discontinued operations ( 741) PROFIT/(LOSS) FOR THE PERIOD 490 638	31-12-2017 Restated 482 077 ( 94 018) 388 059 6 525 124 753 313 454 ( 49 489) 4 342









	( 1 469)

	129
	1 438
	10 008
	4 426
	( 28 699)
	773 477

	( 520 634)
	( 369 710)
	( 150 924)
	( 21 877)
	2 109
	4 031
	( 1 922)
	( 2 259) ( 2 772)
	513

	4 759
	7 451

	243 026
	( 51 775)
	191 251
	( 181 031)
	( 137 273)
	( 43 758)
	10 220
PROFIT/(LOSS) FOR THE PERIOD ATTRIBUTABLE NO NON-CONTROLLING INTERESTS	( 11)
Profit/(loss) of non-controlling interests	( 11)

PROFIT OR LOSS (-) FOR THE PERIOD ATTRIBUTABLE TO OWNERS OF THE PARENT 40 490 638	10 209
Earnings per share (euros)
Basic 6 0.337	0.007
Diluted 6 0.337	0.007
Earnings per share from continuing operations (euros)
Basic 6 0.293	(0.009)
Diluted 6 0.293	(0.009)
Earnings per share from discontinued operations (euros)
Basic 6 0.044	0.016
Diluted 6 0.044	0.016

The accompanying notes are an integral part of these financial statements

The Registered Accountant The Board of Directors

BANCO BPI, S.A. CONSOLIDATED STATEMENTS OF PROFIT AND LOSS AND OTHER COMPREHENSIVE INCOME FOR THE YEARS ENDED ON 31 DECEMBER 2018 AND 2017 RESTATED

	(Amounts expressed in thousand euros)
		31-12-2017
	31-12-2018	Restated
PROFIT/(LOSS) FOR THE PERIOD	490 638	10 220
Other comprehensive income	( 67 103)	365 212
Items that will not be reclassified to profit or loss	19 955	22 534
Actuarial gains/ (losses) on defined benefit pension plans	( 6 367)	31 406
Share of other recognised income and expense of investments in joint ventures and associates	( 316)
Fair value changes of equity instruments measured at fair value through other comprehensive income	( 4 778)
Income tax relating to items that will not be reclassified	31 416	( 8 872)
Items that may be reclassified to profit or loss	( 87 058)	342 678
Foreign currency translation	( 87 764)	272 864
Translation gains/(losses) taken to equity	( 245 340)	90 743
Transferred to profit or loss	157 576	182 121
Debt securities classified as fair value financial assets through other comprehensive income	1 640
Valuation gains/(losses) taken to equity	1 562
Transferred to profit or loss	81
Other reclassifications	( 3)
Available-for-sale financial assets		72 483
Valuation gains/(losses) taken to equity		72 630
Transferred to profit or loss		( 147)
Share of other recognised income and expense of investments in joint ventures and associates	( 11 578)	12 640
Income tax relating to items that may be reclassified to profit or loss	10 644	( 15 309)
Total comprehensive income for the period	423 535	375 432
Attributable to minority interests (non-controlling interests)		11
Attributable to owners of the parent	423 535	375 421

The accompanying notes are an integral part of these financial statements

The Registered Accountant The Board of Directors

BANCO BPI, S.A. CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY FOR THE YEARS ENDED ON 31 DECEMBER 2018 AND 2017 RESTATED

								( Am oun	ed in t ts e xpr ess	hou d e s) san uro
	Cap ital	Oth ity er e qu ( 6) No te 2	Acc ula ted um oth er hen sive com pre inc om e ( te 2 6) No	ain ed Ret nin ear gs ( 6) No te 2	Oth er r ese rve s ( 6) No te 2	Tre asu ry sha res	ula ted Acc um oth er hen sive com pre lati inc om e re ng dis tin ued to con ion rat ope s	fit/ ( los s) for Pro the riod pe	No n llin tro con g inte ts res	Sha reh old ' ers ity equ
bal mb Op eni at 3 1 D er 2 016 ng anc es ece	1 2 93 063	4 3 09	( 0) 347 09	1 2 72 165	97 730	( 10 809	) ( 1) 182 12	313 23 0	468 04 8	2 9 08 525
Acc ula ted her reh ive inc lati to d isco ntin ued ot um co mp ens om e re ng ber ion 31 De 20 16 rat s at ope cem nsf d re tain ed nin Tra er t o re ser ves an ear gs			285	287 53 9	25 691		( ) 285	( 0) 313 23
olid f eq ho ldin o d la Dec atio uity in B e F o A ent ons n o g anc om ngo				( 1) 624 35	624 35 1				( 4) 466 27	( 4) 466 27
Div ide nds dis trib d by oci ute ate ass s				12 891	( 12 891 )
fer red sh div ide nds Pre are									( 29)	( 29)
e / Sal cha of p refe d s har pur se rre es									( 56) 1 7	( 56) 1 7
iab le r ( "RV A") Var ion rat em une pr ogr am		( 33) 2 0		( 23) 2 9		10 432				5 4 76
e / Sal cha of t sha pur se rea sur y res
Oth hen sive inc lati to d isco ntin ued tio er c om pre om e re ng op era ns							100			100
hen Com sive inc e in 20 17 pre om			183 24 6	( 255	)		182 12 1	10 209	11	375 33 2
Oth han in ity er c ges equ				( 841	) 3 0 53					2 2 12
bal mb Op eni at 3 1 D er 2 017 ng anc es ece	1 2 93 063	2 2 76	( 9) 163 55	944 22 5	737 93 4	( 377	) ( ) 185	10 209		2 8 23 586
Effe f ch in a ing licie s ( e 2 .A) ct o unt Not ang es cco po			( 22 740 )	( 2 9 57)	( 14 580 )					( 40 277 )
Op eni bal at 1 Jan 201 8 ng anc es uar y	1 2 93 063	2 2 76	( 9) 186 29	941 26 8	723 35 4	( 377	) ( ) 185	10 209		2 7 83 309
nsf d re ed Tra tain nin er t o re ser ves an ear gs				108 10 8	( ) 97 899			( ) 10 209
trib by Div ide nds dis d oci ute ate ass s				119 98 3	( 4) 119 98					( 1)
lass ific f eq ho ldin o d la Rec atio uity in B e F o A ent n o g anc om ngo				377 88 0	( 0) 377 88
( A") Var iab le R ion Pr "RV rat em une ogr am		( 05) 1 9		( 112	)					( 17) 2 0
e / Sal cha of t sha pur se rea sur res y						377				377
Oth hen sive inc lati dis tin ued tio to er c om pre om e re ng con op era ns							185			185
hen Com sive inc e in 20 18 pre om			( ) 67 103					490 63 8		423 53 5
Oth han in ity er c ges equ				1 3 30	( 767 )					563
Bal mb at 3 1 D er 2 018 anc es ece	1 2 93 063	371	( 2) 253 40	1 5 48 458	126 82 4			490 63 8		3 2 05 952

The accompanying notes are an integral part of these financial statements

The Registered Accountant The Board of Directors

BANCO BPI, S.A. CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED ON 31 DECEMBER 2018 AND 2017 RESTATED

					(Amounts expressed in thousand euros)
	Continuing	31-12-2018 Discontinued		31-12-2017 Restated Continuing Discontinued
	operations	operations	Total	operations	operations	Total
Cash flows from/(used in) operating activities
Interest, commissions and other income received	891 005	17 450	908 455	753 391	434 789	1 188 180
Interest, commissions and other expenses paid	( 299 528)	( 22 323)	( 321 851)	( 184 307)	( 397 792)	( 582 099)
Recovery of overdue loans and interest and gains/(losses) on the sale of real estate received in settlement of defaulting loans	138 521		138 521	37 219		37 219
Payments to staff and suppliers	( 415 300)	( 1 961)	( 417 261)	( 486 535)	( 6 973)	( 493 508)
Net cash flow from income and expenses	314 698	( 6 834)	307 864	119 768	30 024	149 792
Decreases (increases) in:
Financial assets held for trading, at fair value through profit or loss, at fair value through other comprehensive income and available-for-sale	2 439 666		2 439 666	176 031	( 974 155)	( 798 124)
Financial assets at amortised cost - Central Banks and other Credit Institutions	55 727		55 727	( 416 272)	190 904	( 225 368)
Financial assets at amortised cost - Customers	(3 104 644)		(3 104 644)	( 612 195)	864 960	252 765
Other operating assets	( 118 736)	560	( 118 176)	176 824	10 086	186 910
Net cash flow from operating assets	( 727 987)	560	( 727 427)	( 675 612)	91 795	( 583 817)
Increases (decreases) in:
Financial liabilities measured at amortised cost - Central Banks and other Credit	( 765 982)		( 765 982)	5 796		5 796
Institutions
Financial liabilities measured at amortised cost - Customers and other	2 193 081	6 536	2 199 617	783 539	95 446	878 985
Financial liabilities held for trading	( 28 713)		( 28 713)	( 42 665)		( 42 665)
Other operating liabilities	152 977	( 215)	152 762	( 55 550)	( 12 786)	( 68 336)
Net cash flow from operating liabilities	1 551 363	6 321	1 557 684	691 120	82 660	773 780
Contributions to Pension Funds	( 13 142)		( 13 142)	( 84 157)	( 199)	( 84 356)
Income tax paid	39 395	( 137)	39 258	( 24 403)	( 7 401)	( 31 804)
	1 164 327	( 90)	1 164 237	26 716	196 879	223 595
Cash flows from/(used in) investing activities
Sale of equity holding in BPI Vida				135 000		135 000
Sale of 2% equity holding in Banco de Fomento Angola				28 000		28 000
Sale of equity holding in BPI Gestão de Activos (Note 21)	75 000		75 000
Sale of equity holding in BPI GIF (Note 21)	8 000		8 000
Impact of deconsolidation of equity holdings sold Purchase of other tangible assets and intangible assets	( 65 120)	90	90 ( 65 120)	( 36 925)	( 183 889)	( 183 889) ( 36 925)
Sale of other tangible assets	1 800		1 800	44		44
Dividends received from Banco de Fomento Angola	63 763		63 763	38 855	9	38 864
Foreign currency hedge of BFA dividends	31 060		31 060
Dividends received and other income	14 969		14 969	19 416		19 416
	129 472	90	129 562	184 390	( 183 880)	510
Cash flows from /(used in) financing activities
Repurchases and reimbursements of securitisation operations (Note 22.3)	( 232 628)		( 232 628)	( 77 308)		( 77 308)
Issuance of debt securities and subordinated debt (Note 22.3)	550 452		550 452	310 090		310 090
Redemption of debt securities (Note 22.3)	( 216 956)		( 216 956)	( 287 572)		( 287 572)
Purchase and sale of own debt securities and subordinated debt (Note 22.3)	( 1 082)		( 1 082)	( 1 945)		( 1 945)
Sale/purchase of preferred shares				( 1 756)		( 1 756)
Interest on debt instruments and subordinated debt	( 16 758)		( 16 758)	( 10 629)	( 1)	( 10 630)
Preferred share dividends				( 29)		( 29)
Dividends received by BPI				12 635	( 12 635)
Purchase and sale of treasury shares	377		377	4 372		4 372
	83 405		83 405	( 52 142)	( 12 636)	( 64 778)
Net increase / (decrease) in cash and cash equivalents	1 377 204		1 377 204	158 964	363	159 327
Cash and cash equivalents at beginning of the period	1 398 569		1 398 569	1 239 604		1 239 604
Cash and cash equivalents at the end of the period	2 775 773		2 775 773	1 398 569	363	1 398 932
Cash and deposits at Central Banks (Note 9)	2 229 087		2 229 087	909 851		909 851
Deposits at other credit institutions (Note 9)	223 992		223 992	184 299	363	184 662
Cheques for collection and other cash items (Note 15.2)	51 428		51 428	92 055		92 055
Very short term applications (Note 15.2)	271 266		271 266	212 364		212 364
Cash and cash equivalents	2 775 773		2 775 773	1 398 569	363	1 398 932
Cash and cash equivalents by currency
EUR	2 406 107		2 406 107	1 123 785	363	1 124 148
USD	251 221		251 221	193 549		193 549
AKZ	30 293		30 293
Other currencies	88 152		88 152	81 234		81 234
Cash and cash equivalents	2 775 773		2 775 773	1 398 569	363	1 398 932

The accompanying notes are an integral part of these financial statements

Alberto Pitôrra Chairman Fernando Ulrich

The Registered Accountant The Board of Directors Vice-Chairmen Pablo Forero António Lobo Xavier Members Alexandre Lucena e Vale António Farinha Morais António José Cabral Cristina Rios Amorim Fátima Barros Francisco Barbeira Gonzalo Gortázar Rotaeche Ignacio Alvarez-Rendueles Javier Pano João Pedro Oliveira e Costa José Pena do Amaral Luís Vendrell Pi Natividad Capella Pedro Barreto Tomás Jervell

Banco BPI S.A.

Notes to the consolidated financial statements at 31 December 2018

(Amounts in thousand euros - t.euros - save where otherwise expressly indicated)

(These notes are a translation of notes originally issued in Portuguese – Note 44)

NOTES INDEX	PAGE
1. The financial group 91
2. Bases of presentation and main accounting policies 93
A) Bases of presentation 93
B) Main accounting policies 102
3. Risk management 118
4. Solvency management 163
5. Dividend distribution 166
6. Earnings per share 167
7. Segments 168
8. Disclosure of the remuneration of the corporate bodies 172
9. Cash and cash balances at central banks and other demand deposits 176
10. Financial assets and liabilities held for trading 176
11. Financial assets not designated for trading compulsorily measured at fair value through profit or loss 178
12. Financial assets designated at fair value through profit or loss 178
13. Financial assets at fair value through other comprehensive income 179
14. Available-for-sale financial assets 180
15. Financial assets at amortised cost 181
16. Derivatives - Hedge accounting 186
17. Investments in joint ventures and associates 188
18. Tangible assets 191
19. Intangible assets 191
20. Other assets 192
21. Non-current assets and liabilities and disposal groups classified as available for sale 193
22. Financial liabilities at amortised cost 196
23. Provisions and contingent liabilities 202
24. Other liabilities 206
25. Liabilities for pensions and other benefits 207
26. Shareholders' equity 213
27. Tax position 216
28. Off balance sheet items 218
29. Net interest income 220
30. Dividend income 221
31. Fee and commission income and expenses 221
32. Gains / (losses) on financial assets and liabilities 222
33. Other operating income and expenses 222
34. Staff expenses 223
35. Other administrative expenses 224
36. Impairment of financial assets not measured at fair value through profit or loss 225
37. Impairment/(reversal) of impairment on non-financial assets 225
38. Gains/(losses) on derecognition of non-financial assets 225
39. Profit/(loss) of discontinued operations 226
40. Profit 226
41. Information on fair value 227
42. Related Parties 234
43. Subsequent events 240
44. Note added for translation 240

1. THE FINANCIAL GROUP

Banco BPI S.A., (Hereinafter referred to as "Banco BPI", "BPI " or "Bank"), with corporate tax identification no. 501 214 534 and registered under the same number in the Commercial registry office of Porto, with registered office at Rua Tenente Valadim, no. 284, in Porto, is an entity focusing its activity on commercial banking in Portugal, and providing financial services and products to Individuals and Corporate and institutional Clients. The Bank serves a client base of 1.93 million Clients through a multi-specialist, multi-channel and fully integrated distribution network.

BPI started operating in 1981 with the foundation of SPI – Sociedade Portuguesa de Investimentos, S.A.R.L.. By public deed dated December 1984, SPI – Sociedade Portuguesa de Investimentos, S.A.R.L. changed its corporate name to BPI – Banco Português de Investimento, S.A., which was the first private investment bank created after the re-opening, in 1984, of the Portuguese banking sector to private investment. On 30 November 1995 BPI – Banco Português de Investimento, S.A. (BPI Investimentos) was transformed into BPI - SGPS, S.A., which operated exclusively as BPI's holding company. On 20 December, 2002, BPI SGPS, S.A. incorporated, by merger, the net assets and operations of Banco BPI and changed its corporate name to Banco BPI, S.A..

In the context of its public tender offer for the acquisition of all outstanding shares of Banco BPI, on 8 February 2017 (date of the "Regulated Market Special Session" conducted to announce the result of the public tender offer), CaixaBank acquired shares representative of 39.0% of Banco BPI voting rights. Considering CaixaBank previously owned 45.5%, its overall share ownership reached 84.5% of Banco BPI's voting rights. From February 2017, Banco BPI is included in the CaixaBank Group consolidation perimeter, and its financial statements are consolidated in accordance with the full consolidation method. Following the acquisition by CaixaBank of an 8.4% stake held by Allianz in the share capital of the Bank, and other acquisitions on the regulated market, on 29 June 2018 Banco BPI's General Meeting approved the Bank's loss of status of public company under the terms and for the purposes of Article 27-1-b) of the Securities Code. A request for approval of the loss of status of public company was submitted to the Securities and Exchange Commission (CMVM), and was approved on 14 December 2018. On 18 December 2018 CaixaBank launched a Tender Offer Aimed at Full Control and Compulsory Acquisition of Banco BPI S.A. shares. At 31 December 2018, CaixaBank holds 100% of the share capital of Banco BPI.

In November 2017 Banco BPI, S.A. entered an agreement to sell its holdings in BPI Vida e Pensões, BPI Gestão de Activos and BPI Global Fund Investment Management Company (BPI GIF) to the CaixaBank Group. The sale of BPI Vida e Pensões was completed before the end of 2017 and those of BPI Gestão de Activos and BPI GIF were concluded in April 2018, and therefore as from that date these companies were excluded from Banco BPI's consolidation (Note 21). At the end of 2017 the BPI Vida e Pensões, BPI Gestão de Activos and BPI GIF operations were classified as discontinued operations, in accordance with IFRS 5 – Non-current Assets Held for Sale and Discontinued Operations, with and all income and expenses generated by these entities in 2017 and 2018 being henceforth presented in a single line in the Consolidated Income Statement designated "profit / (loss) from discontinued operations". Also in accordance with IFRS 5, the total assets and liabilities of BPI Gestão de Ativos and BPI GIF as of 31 December 2017 are presented in the captions "Non-current assets and disposal groups classified as held for sale" and "Liabilities included in disposal groups classified as held for sale", respectively.

The winding-up process of Banco BPI Cayman, Ltd and BPI Capital Africa (Proprietary) Limited was concluded in 2018 and these two companies were closed down. These companies were fully held by BPI Madeira.

In 31 December 2018, Following the loss of Banco BPI's significant influence over Banco de Fomento Angola (BFA), the equity holding in BFA was reclassified in the consolidated balance sheet from Investments in joint ventures and associates to Financial assets at fair value through other comprehensive income - equity instruments, and revalued at fair value (Note 2.1).

During 2017, under the terms of IFRS 10, Banco BPI ceased to have control over BPI Alternative Fund: Iberian Equities Long/Short Fund (Lux), due to the percentage of participation units held in the fund decreasing to less than 20%. Accordingly, the BPI Alternative Fund ceased to be fully consolidated.

In 2017 BPI Capital Finance Ltd. was wound up and liquidated. The ordinary shares representing this entity's equity were fully owned by Banco BPI.

In 2017, BPI's equity holding in BPI Moçambique – Sociedade de Investimento, S.A. was sold. This company was fully held by BPI.

In 2017, as a result of an agreement entered into by Banco BPI and Caixa Geral de Depósitos with Insitec Capital, S.A., BPI increased its equity holding in Banco Comercial e de Investimentos, S.A. from 30% to 35.67%.

As of 31 December 2018, the BPI Group was made up of the following companies:

		Head office Shareholders ' equity 1	Assets	Net Income (loss) for the period	Direct holding	Effective holding	Consolidation / Recognition method
Banks
Banco BPI S.A.	Portugal	3 048 617	35 786 366	914 311
Banco Português de Investimento, S.A.	Portugal	24 391	29 688	2 083	100.00%		100.00% Full consolidation
Banco Comercial e de Investimentos, S.A.	Mozambique	236 020	2 187 067	57 310	35.67%	35.67%	Equity method
Asset management
BPI (Suisse), S.A.	Switzerland	9 626	11 398	2 936	100.00%		100.00% Full consolidation
Venture / development capital
BPI Private Equity - Sociedade de Capital de
Risco, S.A.	Portugal	30 988	34 731	1 066	100.00%		100.00% Full consolidation
Inter-Risco – Sociedade de Capital de Risco, S.A.	Portugal	934	1 194	( 61)		49.00%	Equity method
Insurance
Cosec – Companhia de Seguros de Crédito, S.A.	Portugal	46 508	115 247	5 504	50.00%	50.00%	Equity method
Companhia de Seguros Allianz Portugal, S.A.	Portugal	147 936	1 283 060	( 2 669)	35.00%	35.00%	Equity method
Other
BPI, Inc.	U.S.A.	743	744	( 5)	100.00%		100.00% Full consolidation
BPI Madeira, SGPS, Unipessoal, S.A.	Portugal	170 023	170 484	18 768	100.00%		100.00% Full consolidation
Unicre - Instituição Financeira de Crédito, S.A.	Portugal	102 391	349 749	15 343	21.01%	21.01%	Equity method

Note: Unless otherwise indicated, all amounts are as of 31 December 2018 (accounting balances before consolidation adjustments).

1 Includes net profit (loss) for the period.

The financial information provided in the above table was drawn from the unaudited financial statements of the relevant companies as of 31 December 2018. The Executive Committee of the Board of Directors believes that these are properly presented in the consolidated accounts of the Bank.

The vehicles through which Banco BPI's debt securitisation operations are effected are recorded in the consolidated financial statements according to BPI's continued involvement in these operations, determined on the basis of the percentage of the equity interest held in the respective vehicles. As of 31 December 2018 and 31 December 2017 BPI held 100% of the equity pieces in those vehicles, which are therefore fully consolidated. Securitisations, all issued through SAGRES - Sociedade de Titularização de Créditos, S.A., are as follows:

Securitisation of residential mortgage loans Douro Mortgages No. 1
Securitisation of residential mortgage loans Douro Mortgages No. 2
Securitisation of residential mortgage loans Douro Mortgages No. 3
Securitisation of loans to SMEs Douro SME No. 2

As of 31 December 2017, the BPI Group was made up of the following companies:

		Head office Shareholders ' equity1	Assets	Net Income (loss) for the period	Direct holding	Effective holding	Consolidation / Recognition method
Banks
Banco BPI S.A.	Portugal		2 135 424 33 260 476	232 774
Banco Português de Investimento, S.A.	Portugal	23 421	29 323	( 3 431)	100.00%	100.00%	Full consolidation
Banco Comercial e de Investimentos, S.A.	Mozambique	219 653	2 192 848	34 997	35.67%	35.67%	Equity method
Banco de Fomento Angola, S.A.	Angola	1 172 717	7 783 519	372 627	48.09%	48.09%	Equity method
	Cayman
Banco BPI Cayman, Ltd. 2	Islands	168 895	168 895	9 301		100.00%	Full consolidation
Asset management
BPI Gestão de Activos - Sociedade Gestora de
							Full consolidation
Fundos de Investimento Mobiliários, S.A	Portugal	16 200	36 064	7 329	100.00%	100.00%	(IFRS5)
BPI – Global Investment Fund Management
							Full consolidation
Company, S.A.	Luxembourg	2 559	9 200	1 958	100.00%	100.00%	(IFRS5)
BPI (Suisse), S.A.	Switzerland	14 988	15 689	3 935	100.00%	100.00%	Full consolidation
Venture / development capital
BPI Private Equity - Sociedade de Capital de
Risco, S.A.	Portugal	32 829	38 128	31	100.00%	100.00%	Full consolidation
Inter-Risco – Sociedade de Capital de Risco, S.A. Portugal		994	1 264	( 144)		49.00%	Equity method
Insurance

Cosec – Companhia de Seguros de Crédito, S.A.	Portugal	50 303	114 266	7 948	50.00%	50.00%	Equity method
Companhia de Seguros Allianz Portugal, S.A.	Portugal	178 961	1 303 015	6 375	35.00%	35.00%	Equity method
Other
BPI Capital Africa (Proprietary) Limited 2	South Africa	117	322	( 1 338)		100.00%	Full consolidation
BPI, Inc.	U.S.A	708	709	( 6)	100.00%	100.00%	Full consolidation
BPI Madeira, SGPS, Unipessoal, S.A.	Portugal	151 420	151 426	( 609)	100.00%	100.00%	Full consolidation
Unicre - Instituição Financeira de Crédito, S.A.	Portugal	102 658	350 623	24 309	21.01%	21.01%	Equity method

Note: Unless otherwise indicated, all amounts are as of 31 December 2017 (accounting balances before consolidation adjustments).

1 Includes net profit (loss) for the period.

2 Entity in liquidation process.

2. BASES OF PRESENTATION AND MAIN ACCOUNTING POLICIES

A) BASES OF PRESENTATION

The consolidated financial statements were prepared based on the accounting records of Banco BPI and its subsidiary and associated companies, in conformity with the International Accounting Standards / International Financial Reporting Standards (IAS/IFRS) as endorsed by the European Union and in force on 1 January 2018, in accordance with Regulation (EC) 1606/2002 of 19 July of the European Parliament and of the Council, transposed into Portuguese legislation through Bank of Portugal Notice no. 5/2015 of 30 December.

The consolidated financial statements have been prepared on a going concern basis, as provided for in IAS 1 – Presentation of financial statements.

In the preparation of the consolidated financial statements, BPI follows the historical cost convention, modified when applicable for the measurement at fair value of:

Financial assets and liabilities held for trading
Financial assets not designated for trading compulsorily measured at fair value through profit or loss
Financial assets at fair value through other comprehensive income
Derivatives

The figures are presented in thousands of euros (t.euros) unless the use of another monetary unit is stated. Certain financial information in these notes was rounded off and, consequently, the figures shown herein as totals may differ slightly from the arithmetic sum of the individual figures given before them.

With the entry into force of IFRS 9, Banco BPI decided to adopt a structure of the financial statements consistent with the guidelines of Regulation (EU) 2017/1443 of 29 June 2017 and with the structure of the financial statements presented by CaixaBank (consolidating entity of Banco BPI).

Adoption of standards (new or revised) issued by the International Accounting Standards Board (IASB) and interpretations issued by the International Financial Reporting Interpretations Committee (IFRIC), as endorsed by the European Union

On 1 January 2018, the following accounting standards came into force (Note 2. B - Main accounting policies):

Standards and Interpretations	Name
IFRS 9	Financial instruments
IFRS 15	Revenue from contracts with customers
Amendments to IFRS 4	Insurance contracts (application of IFRS 4 with IFRS 9)
Amendments to IFRS 2	Share-based payment
Amendments to IAS 40	Transfer of investment property
IFRIC 22	Foreign currency transactions and advance consideration
Improvements to standards 2014 - 2016	Various clarifications: IFRS 1, IFRS 12, IAS 28

On 1 January 2018, Banco BPI adopted the following accounting standards:

IFRS 9 (new), 'Financial instruments'. IFRS 9 replaces the requirements of IAS 39, regarding: (i) the classification and measurement of financial assets and liabilities; (ii) the recognition of impairment of receivables (through the expected loss model); and (iii) the requirements for the recognition and classification of hedge accounting. The impacts from adoption of this standard are described in this note - Comparability of the Information.
IFRS 15 (new), 'Revenue from contracts with customers'. This new standard applies only to contracts for the delivery of products or services to Customers, and requires an entity to recognise revenue when the contractual obligation to deliver assets or services is satisfied and in the amount that reflects the consideration to which the entity is entitled, as provided for in the "5 steps method". The amendments to this standard relating to the additional steps to be followed to determine the performance obligations of a contract, the timing of revenue recognition from a license of intellectual property, the review of the indicators for the classification of the principal versus agent relationship, and the new regimes foreseen to simplify the transition, are also applicable. There has been no material impact on the Bank's financial statements as a result of the adoption of this standard.
IFRS 4 (amendment), 'Insurance contracts (application of IFRS 4 with IFRS 9)' This amendment gives the entities that negotiate insurance contracts the option to recognise in Other comprehensive income, instead of in the Income statement, the volatility that may result from application of IFRS 9 before the new insurance contract standard is published. In addition, a temporary exemption is granted in respect of the application of IFRS 9 until 2021 to entities whose predominant activity is that of being an insurer. This exemption is optional and applies to consolidated financial statements that include an insurer entity. Banco BPI does not have subsidiaries operating in the insurance business and therefore no effects on the Bank's financial statements were produced due to adoption of this standard.
IFRS 2 (amendment), 'Classification and measurement of share-based payment transactions'. This amendment clarifies the measurement basis for cash-settled share-based payment transactions and the accounting for modifications in a share-based payment scheme from cash-settled to equity-settled. In addition, an exception was introduced in the principles of IFRS 2, which now requires that a share-based payment scheme be treated as fully equity-settled when the employer is required to withhold the tax due and to settle it with the tax authority on behalf of the employee. There has been no material impact on the Bank's financial statements as a result of the adoption of this standard.
IAS 40 (amendment) 'Transfer of investment properties'. This amendment clarifies that assets can only be transferred to and from the investment property category when there is evidence of change in use. The change of management's intention alone is not sufficient to effect the transfer. There has been no material impact on the Bank's financial statements as a result of the adoption of this standard.
Improvements to standards 2014 2016. This cycle of improvements affects the following standards: IFRS 1, IFRS 12 and IAS 28. There has been no material impact on the Bank's financial statements as a result of the adoption of improvements to these standards.
- IFRS 1, 'First-time Adoption of the IFRS'. This improvement eliminates the temporary exemptions for IFRS 7, IFRS 10 and IAS 19, as they no longer apply.
- IFRS 12 'Disclosure of interests in other entities'. This improvement aims to clarify that the standard's scope includes investments classified under IFRS 5 and that the only exemption concerns the disclosure of those entities' condensed financial information.
IAS 28, 'Investments in associates and joint ventures'. This improvement aims to clarify that Investments in associates and joint ventures held by venture capital companies may be individually measured at fair value in accordance with IFRS 9. It is also clarified that an entity that is not an investment entity but holds investments in associates and joint ventures that are investment entities may retain the fair value measurement of the holdings of the associates or joint ventures in their own subsidiaries. There have been no material impacts on the Bank's financial statements as a result of the adoption of the amendments to this standard.
IFRIC 22 (new), 'Foreign currency transactions and down payments'. This is an interpretation of IAS 21 'The effects of changes in exchange rates' and refers to the determination of the "transaction date" when an entity pays or receives in advance the consideration of contracts denominated in foreign currency. The "transaction date" determines the exchange rate to be used to convert foreign-currency transactions. There has been no material impact on the Bank's financial statements as a result of the adoption of this standard.

The standards (new and amendments) published by the IASB up 31 December 2018, which are of mandatory application for annual periods beginning on or after 1 January 2019, are as follows:

Standards and Interpretations issued by the IASB

Standards and Interpretations Name		Mandatory application for years starting on:
Endorsed by the European Union
IFRS 16	Leases	1 January 2019
Amendments to IFRS 9	Prepayment features with negative compensation	1 January 2019
Interpretation of IFRIC 23	Uncertainty about treatment of income tax	1 January 2019
Non Endorsed by the European Union
Amendments to IAS 19	Amendment, curtailment or settlement of defined benefit plans	1 January 2019
Amendments to IAS 28	Long-term interests in associates and joint ventures	1 January 2019
Amendments to IFRS 3	Definition of a business	1 January 2020
Amendments to IAS 1 and IAS 8	Definition of material	1 January 2020
	Improvements to standards 2015 - 2017 Various clarifications: IAS 23, IAS 12, IFRS 3 and IFRS 11	1 January 2019
Conceptual structure	Amendments to references to other IFRS	1 January 2020
IFRS 17	Insurance contracts	1 January 2021

• IFRS 16 (new), 'Leases' (to be applied to annual periods beginning on or after 1 January 2019). This new standard replaces IAS 17, with a significant impact on the accounting by lessees that are now obliged to recognise future lease liabilities reflecting lease payments and an asset for "right of use" for all lease contracts, except certain short-term leases and low-value assets. The definition of a lease was also changed, being now based on the "right to control the use of an identified asset". As regards the transitional regime, the new standard can be applied retrospectively or a modified retrospective approach can be followed.

The Bank decided to apply the new standard following the modified retrospective approach, which permits to estimate the value of the right of use by reference to the financial liability, therefore not requiring any adjustment to reserves. In addition, it was decided to exclude from this scope lease agreements whose term expires in the twelve months following the initial application date and where it was not determined whether the lease contained a leasing component in accordance with the criteria of the standard, it was exclusively applied to agreements that were identified as leases in accordance with the previous standard. However, the implementation of the new requirements involved making estimates on the duration of agreements and decisions on the disaggregation of components related to services that were included in the formalized lease agreements.

Accordingly, and considering the approach and assumptions that will be approved by the Board of Directors when formulating future accounts, the entry into force of this standard will result in a reduction of approximately 10 basis points in the Bank's CET1 capital ratio, this impact being estimated as at 1 January 2019, assuming the recognition of a right of use of approximately 130 million euros.

• IFRS 9 (amendment), 'Pre-payment features with negative compensation' (to be applied to annual periods beginning on or after 1 January 2019). This amendment introduces the possibility of classifying financial assets with conditions for pre-payment with negative compensation at amortised cost, instead of at fair value through profit or loss, providing specific conditions are met. The future adoption of this standard is not expected to have significant impacts on the Bank's financial statements.

IFRIC 23 (new), 'Uncertainty over Income Tax Treatments', (to be applied to annual periods beginning on or after 1 January 2019). IFRIC 23 provides an interpretation to IAS 12 - 'Income taxes' concerning the measurement and recognition requirements to be applied when there is uncertainty about whether a given tax treatment of income tax will be accepted by the Tax Authorities. If there is uncertainty about the position of the Tax Authorities regarding a specific transaction, the entity shall make its best estimate and recognise the income tax assets or liabilities according to IAS 12, rather than IAS 37 - "Provisions, contingent liabilities and contingent assets", based on the expected value or the most likely amount. IFRIC 23 may be applied using the full retrospective or modified retrospective approach. The future adoption of this standard is not expected to have significant impacts on the Bank's financial statements.
IAS 19 (amendment) 'defined benefit plan amendment, curtailment or settlement' (to be applied to annual periods beginning on or after 1 January 2019). This amendment is still subject to endorsement by the European Union. This amendment to IAS 19 requires an entity to: (I) use updated assumptions to determine current service cost and net interest for the remainder of the period after a plan amendment, curtailment or settlement; and (ii) recognise in profit or loss as part of past service cost, or a gain or loss on settlement any reduction in a surplus, even if that surplus was not previously recognised because of the impact of the asset ceiling. The impact on the asset ceiling is always recognised in Other comprehensive income and cannot be recycled through profit or loss. The future adoption of this standard is not expected to have significant impacts on the Bank's financial statements.
IAS 28 (amendment), 'Long-term interests in associates and joint ventures' (to be applied to annual periods beginning on or after 1 January 2019). This amendment is still subject to endorsement by the European Union. This amendment clarifies that long-term interests in an associate or joint venture that form part of the net investment in the associate or joint venture but to which the equity method is not applied, are accounted for under IFRS 9. Long-term interests in an associate or joint venture are subject to the expected loss impairment model prior to being added for impairment testing to the investment as a whole in an associate or joint venture, when there are impairment indicators. The future adoption of this standard is not expected to have significant impacts on the Bank's financial statements.
IFRS 3 (amendment), 'Definition of a business' (to be applied to annual periods beginning on or after 1 January 2020). This amendment is still subject to endorsement by the European Union. This amendment consists in a revision of the definition of a business for purposes of the accounting of business combinations. The new definition requires that an acquisition includes an input and a substantive process that together create outputs. Outputs are now defined as goods or services provided to Customers, that generate income from financial investments and other income, excluding return in the form of lower costs and other economic benefits to shareholders. 'Concentration tests' are now permitted to determine whether a transaction relates to the acquisition of an asset or a business. This amendment will apply to transactions occurring after its entry into force.
IAS 1 and IAS 8 (amendment), 'Definition of material' (effective for annual periods beginning on or after 1 January 2020). This amendment is still subject to endorsement by the European Union. This amendment introduces a modification to the concept of material. Includes clarifications to the reference to unclear information, where the effect is similar to omitting or misstating information in the overall context of financial statements; and also clarifications to the term "primary users of financial statements", defined as "current and future investors, finance providers and creditors" that depend on financial statements to obtain a significant part of the information they need. The future adoption of this standard is not expected to have significant impacts on the Bank's financial statements.
Improvements to standards 2015 2017, (to be applied for annual periods beginning on or after 1 January 2019). This cycle of improvements is still subject to endorsement by the European Union. This cycle of improvements affects the following standards: IAS 23, IAS 12, IFRS 3 and IFRS 11. The future adoption of these improvements is not expected to have significant impacts on the Bank's financial statements.
- IAS 23, 'Borrowing costs' (to be applied to annual periods beginning on or after 01 January 2019). This improvement clarifies that specific loans obtained that remain outstanding after the qualifying assets to which they refer are suitable for sale or use, should be added to the generic loans for the calculation of the average capitalisation rate of interest on other qualifying assets.
- IAS 12, (new), 'Income taxes' (to be applied to annual periods beginning on or after 1 January 2019). This improvement clarifies that the tax impact inherent to the dividends is recorded at the date when the entity records liability for the payment of dividends which are recorded in the income statement of the year, in other comprehensive income or in equity in accordance with the transaction or event that gave rise to the dividends.
IFRS 3, 'Business combinations' and IFRS 11, 'Joint arrangements' (to be applied to annual periods beginning on or after 1 January 2019). These improvements clarify that: i) upon obtaining control of a business that is a joint operation, the interests previously held by the investor are remeasured at fair value; and ii) when an investor in a joint operation which does not exercise joint control obtains joint control in an operation that is a business, the interest previously held is not remeasured.
Conceptual framework 'Amendments to references to other IFRS' (to be applied to annual periods beginning on or after 1 January 2020). These amendments are still subject to endorsement by the European Union. As a result of the publication of the new Conceptual Framework, the IASB introduced changes to the text of several standards and interpretations, namely IFRS 2, IFRS 3, IFRS 6, IFRS 14, IAS 1, IAS 8, IAS 34, IAS 37, IAS 38, IFRIC 12, IFRIC 19, IFRIC 20, IFRIC 22, and SIC 32, in order to clarify the application of the new definitions of asset / liability and expense / income, in addition to some of the characteristics of financial information. These amendments apply retrospectively save where impractical. The future adoption of these amendments is not expected to have significant impacts on the Bank's financial statements.
IFRS 17 (new), 'Insurance contracts' (to be applied to annual periods beginning on or after 1 January 2021). This standard is still subject to endorsement by the European Union. IFRS 17 replaces IFRS 4 and applies to all entities that issue insurance contracts, reinsurance contracts and investment contracts with discretionary participation features. IFRS 17 is based on the current measurement of technical liabilities at each reporting date. Current measurement can rely on a full model, the 'building block approach' or a simplified model, the 'premium allocation approach'. The recognition of the technical margin is different depending on whether this margin is positive or negative. IFRS 17 applies retrospectively. Banco BPI does not have subsidiaries operating in the insurance business and therefore no effects on the Bank's financial statements are expected as a result of adoption of this standard.

Responsibility for the information and for the main estimates made

BPI's consolidated financial statements as of 31 December 2018 were approved by the Board of Directors on 15 April 2019 and are still pending approval by the General Meeting of Shareholders. However, it is expected that they will be approved with no changes. The consolidated financial statements for the previous year were approved by the General Meeting of Shareholders on 20 April 2018.

The preparation of the consolidated financial statements required the Board of Directors to make certain judgements, estimates and assumptions in order to quantify some of the assets, liabilities, revenues, expenses and obligations recognised in them. These judgements, estimates and assumptions relate primarily to:

Impairment losses on financial assets and the associated guarantees based on their accounting classification imply the adoption of assumptions relating to: (i) the consideration of "significant increase in credit risk" (SICR), (ii) definition of default; and (iii) the inclusion of forward-looking information (Notes 2.7 and 3.3.2).
Fair value of some financial assets and liabilities (Note 41). The fair value of unlisted financial assets and derivatives was estimated based on valuation methods and financial theories, the results of which depend on the assumptions used.
Actuarial assumptions used to measure post-employment liabilities and commitments (Note 25) Retirement and survivor pension liabilities have been estimated based on actuarial tables, assumptions of the increase in pensions and salaries and discount rates. These assumptions are based on Banco BPI's expectations for the period during which the liabilities will be settled.
Current and deferred taxes have been recognised based on the tax legislation currently applicable to Banco BPI or on legislation already published for future application (Note 27). Different interpretations of tax legislation can influence the amount of income taxes. Deferred tax assets are recognised based on the assumption of future earnings and taxable income.
The measurement of investments in joint ventures and associates and determination of the share of profit/(loss) of these investments (Note 17).
The measurement of provisions and contingent liabilities and respective probability of occurring (Note 23).

Estimates used are based on the best information available at the time of preparation of the annual consolidated financial statements. Subsequent events may require changing the estimates in future periods. In accordance with the applicable legislation and BPI's governance systems, the effects of these changes would be accounted for on a prospective basis in the corresponding income statement, in accordance with IAS 8 - Accounting Policies, change in estimates and errors.

Comparability of the Information

The figures at 31 December 2017 contained in the consolidated financial statements are presented solely for purposes of comparison and were not affected by the adoption of IFRS9 due to the regime chosen by the Bank.

The transition, on 1 January 2018, to the IFRS 9 accounting standard - Financial instruments (which replaced the previous IAS 39) implied changes in the accounting policies applicable to financial instruments, namely resulting from the new requirements regarding: (i) the classification and measurement of financial assets and liabilities; (ii) the measurement and recognition of impairment based on an expected loss model; and (iii) hedge accounting.

Under the referred standard's new requirements for the calculation of impairment losses, these must be determined based on Expected Credit Losses (ECL), whereas IAS 39 only required the calculation of losses incurred. As foreseen under IFRS 9, the calculation of expected losses required the definition of new concepts, namely concerning: (i) the classification of assets into different stages depending on the evolution of their credit risk as from the date of initial recognition and not in relation to credit risk at the reporting date; and the inclusion of forward looking information that reflects future economic trends.

IFRS 9 also introduces new requirements regarding the classification and measurement of financial instruments, based on three criteria: (i) the business model under which the financial assets are managed; (ii) the type of financial instrument; e (iii) the characteristics of the contractual cash flows of debt financial instruments (that match only with principal and interest payments).

With the entry into force of IFRS 9, and considering that Banco de Portugal Instruction 18/2005 was revoked, Banco BPI decided to adopt a structure of the financial statements consistent with the guidelines of Regulation (EU) 2017/1443 of 29 June 2017 and with the structure of the financial statements presented by CaixaBank (consolidating entity of Banco BPI). This implied the following reclassifications between balance sheet and income statement captions with reference to 31 December 2017:

	31-12-2017 Restated	31/12/2017	Difference
ASSETS
Cash and cash balances at central banks and other demand deposits	1 094 150	1 186 205	( 92 055)
Financial assets held for trading at fair value through profit or loss	300 536	300 536
Available-for-sale financial assets	3 875 370	3 875 370
Financial assets at amortised cost	22 506 670	22 383 509	123 161
Debt securities	1 306 130	1 306 130
Loans and advances - Central Banks and other Credit Institutions	816 783	724 727	92 055
Loans and advances - Customers	20 383 757	20 352 652	31 105
Derivatives - Hedge accounting	12 740	12 740
Fair value changes of the hedged items in portfolio hedge of interest rate risk	20 574		20 574
Investments in joint ventures and associates	794 483	794 483
Tangible assets	45 309	45 309
Intangible assets	42 315	42 315
Tax assets	453 183	435 415	17 768
Other assets	487 615	557 063	( 69 448)
Non-current assets and disposal groups classified as held for sale	7 264	7 264
Total Consolidated Assets	29 640 209	29 640 209
LIABILITIES
Financial liabilities held for trading	170 048	170 048
Financial liabilities at amortised cost	25 961 415	25 781 894	179 521
Derivatives - Hedge accounting	69 880	69 880
Fair value changes of the hedged items in portfolio hedge of interest rate risk	218		218
Provisions	64 238	64 238
Tax liabilities	70 622	70 622
Other liabilities	475 731	655 470	( 179 739)
Liabilities included in disposal groups classified as held for sale	4 471	4 471
Total Consolidated Liabilities	26 816 623	26 816 623
Total Consolidated Shareholders' Equity	2 823 586	2 823 586
Total Consolidated Equity and Total Consolidated Liabilities	29 640 209	29 640 209

• Cheques and orders payable (92 055 t.euros) were reclassified from Deposits at other credit institutions to Loans and advances - Central Banks and other credit institutions.

Value adjustments in hedged assets (20 574 t.euros) included in Customer Loans were reclassified to the caption Fair value changes of the hedged items in portfolio hedge of interest rate risk.
The caption Debtors (51 680 t.euros) was reclassified from Other assets to Loans and advances Customers.
Recoverable VAT (17 768 t.euros) was reclassified from Other assets to Tax assets.
Value adjustments in hedged liabilities (218 t.euros) included in Resources of Customers and other debts were reclassified to the caption Fair value changes of the hedged items in portfolio hedge of interest rate risk.
The caption Creditors and other resources (179 739 t.euros) was reclassified from Other liabilities to Financial liabilities at amortised cost.

	31-12-2017 Restated	31-12-2017	Difference
NET INTEREST INCOME	388 059	367 229	20 830
Dividend income	6 525	6 525
Net commissions relating to amortised cost		20 830	( 20 830)
Share of profit/(loss) of entities accounted for using the equity method	124 753		124 753
Fee and commission income and expenses	263 965	276 398	( 12 433)
Gains/(losses) on derecognition of financial assets and liabilities not measured at fair value through profit
or loss, net	4 342
Gains/(losses) on financial assets and liabilities held for trading, net	( 1 469)
Gains/(losses) on financial assets not designated for trading compulsorily measured at fair value through
profit or loss, net
Gains/(losses) on financial assets and liabilities measured at fair value through profit or loss, net	129
Gains/(losses) from hedge accounting, net	1 438
Exchange differences (gain/loss), net	10 008
Gains/(losses) on financial assets and liabilities and other	14 448	13 842	606
Other operating income and expenses	( 24 273)	( 184 673)	160 400
Gross income	773 477	500 151	273 326
Administrative expenses	( 520 634)	( 532 461)	11 827
Staff expenses	( 369 710)	( 369 104)	( 606)
Other administrative expenses	( 150 924)	( 163 357)	12 433
Depreciation and amortisation	( 21 877)	( 21 877)
Recovery of overdue loans and interest		29 768	( 29 768)
Impairment losses and provisions for loans and guarantees, net		( 25 200)	25 200
Provisions or reversal of provisions
Commitments and guarantees given	4 031		4 031
Other provisions	( 1 922)	( 1 922)
Impairment/(reversal) of impairment losses on financial assets not measured at fair value through profit or loss	( 2 259)	( 2 796)	537
Impairment/(reversal) of impairment on non-financial assets	4 759	4 759
Recovery of overdue loans and interest, impairments and net provisions	4 609	4 609
Gains/(losses) on derecognition of non-financial assets, net	7 451		7451
PROFIT/(LOSS) BEFORE TAX FROM CONTINUING OPERATIONS	243 026	( 49 577)	292 603
Tax expense or income related to profit or loss from continuing operations	( 51 775)	( 87 655)	35 880
Share of profit/(loss) of entities accounted for using the equity method		124 753	( 124 753)
PROFIT/(LOSS) AFTER TAX FROM CONTINUING OPERATIONS	191 251	( 12 479)	203 730
Profit/(loss) after tax from discontinued operations
Profit/(loss) before tax from discontinued operations	( 137 273)	30 577	( 167 850)
Tax expense or income related to profit or loss from discontinued operations	( 43 758)	( 7 878)	( 35 880)
NET INCOME/(LOSS) FOR THE PERIOD	10 220	10 220
PROFIT/(LOSS) FOR THE PERIOD ATTRIBUTABLE NO NON-CONTROLLING INTERESTS	-11	-11
PROFIT/(LOSS) ATTRIBUTABLE TO OWNERS OF THE PARENT	10 209	10 209

The Commissions relating to amortised cost (20 830 t.euros) were included in Net interest income.
The share of profit/(loss) of entities accounted for using the equity method (124 753 t.euros) was reclassified to Gross income.
The costs with SIBS and external evaluators that depend on the evolution of the business (12 433 t.euros) were reclassified from the Other administrative expenses caption to the Fee and commission income and expenses caption.
The financial gain and loss with pensions (606 t.euros) were reclassified from the Gains/(losses) on financial assets and liabilities and other caption to the Staff expenses caption.
The gains/(losses) on non-financial assets (7 451 t.euros) were reclassified from the Other operating income and expenses caption to the Gains/(losses) on derecognition of non-financial assets caption.
The capital gains/losses on the sale of BFA (-175 528 t.euros) and BPI Vida (7 677 t.euros) were reclassified from the Other operating income and expenses caption to the Profit/(loss) before tax from discontinued operations caption.
The taxes on the capital gains/losses on the sale of BFA and BPI Vida were reclassified from the Tax expense or income related to profit or loss from continuing operations caption to the Tax expense or income related to profit or loss from discontinued operations caption.

As referred in the "Bases of Presentation" section of this note, Banco BPI adopted IFRS 9 "Financial instruments" for the first time on 1 January 2018. This required making changes in the classification and valuation of certain financial assets, with the following impacts:

Consolidated Assets - Impacts of first-time adoption of IFRS9:

	31-12-2017 Restated	Reclas sification of portfolios	Change In value	01-01-2018
Cash and cash balances at central banks and other demand deposits	1 094 150			1 094 150
Financial assets held for trading	294 481			294 481
Financial assets not designated for trading compulsorily measured at fair value through profit or loss		302 445		302 445
Equity instruments		241 994		241 994
Debt securities		60 451		60 451
Financial assets designated at fair value through profit or loss	6 055	( 6 055)
Financial assets at fair value through other comprehensive income		3 583 824		3 583 824
Equity instruments		85 170		85 170
Debt securities		3 498 654		3 498 654
Available-for-sale financial assets	3 875 370	(3 875 370)
Financial assets at amortised cost	22 506 670	( 4 845)	( 34 611)	22 467 214
Debt securities	1 306 130	( 5 053)	5 330	1 306 407
Loans and advances - Central Banks and other Credit Institutions	816 783			816 783
Loans and advances - Customers	20 383 757	208	( 39 941)	20 344 024
Derivatives - Hedge accounting	12 740			12 740
Fair value changes of the hedged items in portfolio hedge of interest rate risk	20 574			20 574
Investments in joint ventures and associates	794 483		( 15 134)	779 349
Tangible assets	45 309			45 309
Intangible assets	42 315			42 315
Tax assets	453 183		9 700	462 883
Other assets	487 615			487 615
Non-current assets and disposal groups classified as held for sale	7 264			7 264
Total Consolidated Assets	29 640 209		( 40 045)	29 600 163

On 1 January 2018, Banco BPI reclassified its financial assets to the portfolios established in IFRS 9 (Note 2.2):

The Customer loans portfolio (loans and debt securities of Customers) remains recorded in the portfolio of assets at amortised cost, except for debt securities for which it is not possible to conclude that their contractual cash flows are Solely Payments of Principal and Interest on the Principal outstanding ("SPPI tests") and which were reclassified to the portfolio of Financial assets not designated for trading compulsorily measured at fair value through profit or loss (5 053 t.euros).
The debt securities classified as available-for-sale financial assets at 31 December 2017 (3 554 053 t.euros) and managed under a 'hold to collect and sell' business model were reclassified to the financial assets portfolio at fair value through other comprehensive income (3 498 654 t.euros), with the exception of securities that did not pass the SPPI tests and were reclassified to Financial assets not designated for trading compulsorily measured at fair value through profit or loss (55 398 t.euros).
Banco BPI took the irrevocable option to classify the equity instruments (which are not classified in the trading book) in the portfolio of financial assets at fair value through other comprehensive income. Accordingly, the equity instruments classified as available-for-sale financial assets at 31 December 2017 (321 110 t.euros) were reclassified as follows:
- to the portfolio of financial assets at fair value through other comprehensive income: shares in the amount of 85 170 t.euros.
- to the portfolio of financial assets not designated for trading, compulsorily accounted for at fair value through profit or loss: 235 939 t.euros relating to investment funds (which, being considered "puttable instruments" under IAS 32, could not be included in the previous category) and shares expected to be sold in the short-term.

Consolidated Liabilities - Impacts of first-time adoption of IFRS9:

	31-12-2017 Restated	Change In value	01-01-2018
Financial liabilities held for trading	170 048		170 048
Financial liabilities at amortised cost	25 961 415		25 961 415
Deposits - Central Banks	1 995 374		1 995 374
Deposits - Credit Institutions	1 982 648		1 982 648
Deposits - Customers	20 713 633		20 713 633
Debt securities issued	1 019 977		1 019 977
Memorandum items: subordinated liabilities	305 077		305 077
Other financial liabilities	249 783		249 783
Derivatives - Hedge accounting	69 880		69 880
Fair value changes of the hedged items in portfolio hedge of interest rate risk	218		218
Provisions	64 238	785	65 023
Pending legal issues and tax litigation	42 367		42 367
Commitments and guarantees given	18 441	785	19 226
Other provisions	3 430		3 430
Tax liabilities	70 622	( 555)	70 067
Other liabilities	475 731		475 731
Liabilities included in disposal groups classified as held for sale	4 471		4 471
Total Consolidated Liabilities	26 816 623	231	26 816 854

For financial liabilities, the categories defined in IFRS 9 are similar to those defined in IAS 39.

Consolidated Shareholders Equity - Impacts of first-time adoption of IFRS9:

	31-12-2017 Restated	Reclas sification of portfolios	Change In value	01-01-2018
Capital	1 293 063			1 293 063
Other equity	2 276			2 276
Accumulated other comprehensive income	( 163 559)	( 22 740)		( 186 299)
Items that will not be reclassified to profit or loss	( 313 417)	60 673		( 252 744)
Items that may be reclassified to profit or loss	149 858	( 83 413)		66 445
Retained earnings	944 225	22 740	( 25 696)	941 269
Other reserves	737 934		( 14 580)	723 354
(-) Treasury shares	( 377)			( 377)
Other accumulated comprehensive income relating to discontinued operations	( 185)			( 185)
Profit/(loss) attributable to owners of the parent	10 209			10 209
Total Consolidated Shareholders' Equity	2 823 586		( 40 276)	2 783 310
Total Consolidated Equity and Total Consolidated Liabilities	29 640 209		( 40 045)	29 600 164

The impact on Shareholders' equity of the first-time adoption of IFRS 9, on 1 January 2018 (-40 276 t.euros after tax) resulted from the following:

(25 696) t.euros (after tax) from the change of the methodology used to estimate impairment losses in financial instruments, based on the expected loss concept defined in IFRS9, which implied an increase of impairment for loans, commitments and guarantees given in the amount of 35 396 t.euros¹ relatively to the method provided in IAS 39, based on the accounting of losses incurred through credit risk.
Banco de Fomento Angola and Banco Comercial e de Investimentos (Mozambique) also adopted the IFRS 9 for the first time in 2018. This had an impact on Banco BPI shareholders' equity of (4 991) t.euros relative to BFA and (9 589) t.euros relative to BCI.

Banco BPI's adoption of IFRS 9 caused a decrease in the fully-loaded CET 1 ratio of 18 basis points at transition date. Due to the limited impact, Banco BPI opted out of the voluntary phase-in period for absorbing the prudential impact of the first-time adoption of IFRS 9.

¹ Includes 38 188 t.euros increase in impairments for financial assets at amortised cost + 785 t.euros increase in impairments for commitments and guarantees given – 3 577 t.euros in interest not recognised under IAS39.

As a result of the reclassification of the financial assets to the portfolios established in IFRS 9, the unrealised gains and losses associated with available-for-sale financial assets accounted for in revaluation reserves at 31 December 2017 (84 150 t.euros after taxes) were reclassified to:

Retained earnings (22 740 t.euros), the unrealised gains and losses in debt and equity securities reclassified to the portfolio of financial assets not designated for trading compulsorily measured at fair value through profit or loss;
Other comprehensive income Items that will not be reclassified to profit or loss (60 673 t.euros), the unrealised gains and losses in equity instruments reclassified to the financial assets portfolio at fair value through other comprehensive income;
The remaining portion of unrealised gains and losses in debt securities reclassified to the financial assets portfolio at fair value through other comprehensive income (737 t.euros) remained accounted for in the caption Other comprehensive income - Items that may be reclassified to profit or loss.

Given the difficulty of retroactively estimating the impact arising from the adoption of IFRS 9, BPI has made use of the accounting standards provisions in order not to restate the opening balance at 1 January 2017 or the 2017 income statement. Similarly, based on the possibility allowed in IFRS 9, the breakdowns, at 31 December 2017, of certain balance sheet items referring to financial instruments have not been restated, which is why they cannot be compared with the information referring to 31 December 2018.

B) MAIN ACCOUNTING POLICIES

In the preparation of the consolidated financial statements for the year ended on 31 December 2018, the following accounting principles and policies and valuation criteria were applied:

2.1. Consolidation of subsidiaries and jointly controlled entities and recognition of associated companies (IFRS 10, IFRS 11, IAS 28 and IFRS 3)

Banco BPI has direct and indirect holdings in subsidiary and associated companies.

Subsidiaries are entities over which the Bank has control, which is evidenced when the following conditions are cumulatively met:

the power to conduct the company's relevant activities;
the ability to use this power over the investee to affect the amount of its variable returns;
exposure, or rights, to variable returns from its involvement with the investee.

As a rule, voting rights give the ability to direct the relevant activities of an investee. To calculate voting rights, all direct and indirect voting rights, as well as potential voting rights (e.g. call options on equity instruments of the investee) are considered. In some circumstances, a company may have power to direct the activities without holding a majority of the voting rights, or vice-versa. In these cases, the investor considers whether it has the practical ability to direct the relevant activities unilaterally (financial and operating decisions, or appointing and remunerating governing bodies, among others).

The financial statements of subsidiaries are consolidated using the full consolidation method. Significant intra-group transactions and account balances are eliminated in the consolidation process. The amount of share capital, reserves and net results corresponding to third party participation in these subsidiaries is reflected in the Non-controlling interests caption, except for investment funds which are recorded in the caption Resources of Customers. Associated companies are entities over which Banco BPI has direct or indirect significant influence over their management and financial policies but over which it does not have control. As a general rule, significant influence is understood to exist when the Bank holds 20% or more of the share capital of the investee. If it holds less than 20% of the voting rights, significant influence is evidenced by the circumstances indicated in IAS 28. These include representation on the Board of Directors of the investee, participation in financial and operational policy-making processes, material transactions between the Bank and its investee, interchange of managerial personnel or the provision of essential technical information.

Exceptionally, companies are not considered associates when more than 20% of the voting rights are held, but it can clearly be demonstrated that significant influence does not exist and, therefore, the Bank lacks the power to intervene in the investee's financial and operation policies. Based on these criteria, at 31 December 2018, the Bank held equity holdings ranging from 20% to 50% classified in the portfolio of Financial assets at fair value through other comprehensive income.

Associated companies are accounted for using the equity method. In accordance with this method, the amount of the investment, which is initially recognised at cost, is adjusted by post-acquisition changes in the net asset value of the associated companies, in proportion to BPI's participation.

When necessary, adjustments are made to the subsidiaries' financial statements to ensure their consistency with BPI's accounting policies.

Goodwill - arising from positive differences between the cost of acquisition (including expenses) and the fair value of the identifiable assets, liabilities and contingent liabilities of subsidiaries at first consolidation date - is recorded as an asset and is subject to impairment tests. When a subsidiary is sold, goodwill is included in the calculation of the gain or loss on the sale.

Goodwill related to associate companies is included in the book value of the investment. The book value of associated companies (including goodwill) is subject to impairment tests in accordance with IAS 36.

In the case of associated companies acquired in stages, goodwill is calculated at the time that the acquired company becomes an associate, being determined as the difference between the total acquisition cost of the investment and the proportion held of the fair value of the identifiable assets and liabilities of the associate as of that date. As provided for in IAS 28, total acquisition cost corresponds to the fair value of the original investment on the date that significant influence is achieved, plus the amount paid for the additional participation. In accordance with the policy established by BPI, gains or losses on the revaluation to fair value of the original investment are recognised as profit or loss on the date the acquired company becomes an associate.

Following the loss of significant influence over an associate, and in accordance with IAS 28, the equity holding is reclassified from the Investments in Associates portfolio to the Financial assets at fair value through other comprehensive income portfolio, the respective fair value being determined on the date significant influence is lost. The difference between the fair value of the equity holding and the cost of investment at that date is recognised as profit or loss.

In accordance with IFRS 1 and BPI's accounting policies, up to the date of transition to IAS/IFRS, goodwill on investments acquired up to 1 January 2004 was deducted in full from shareholders' equity.

Negative goodwill - arising from negative differences between the cost of acquisition (including expenses) and the fair value of the identifiable assets, liabilities and contingent liabilities of subsidiaries and associates at first consolidation date or at the date the equity method is first applied is immediately recognised as a profit or loss.

Consolidated net income is the sum of the individual net income of Banco BPI and the percentage of the net income of subsidiary, associated and joint venture companies, equivalent to Banco BPI's effective equity holding in them, considering the holding period, and after consolidation adjustments have been made, namely elimination of income and expenses resulting from inter-group transactions.

Foreign currency subsidiary and associated companies (IAS 21 and IAS 29)

The foreign currency financial statements of subsidiary and associated companies are included in the consolidated financial statements after being translated to Euro at the exchange rates published by Banco de Portugal and, in the case of BFA and BCI, by the Central Banks of Angola and Mozambique, respectively:

assets and liabilities expressed in foreign currencies are translated to Euro at the exchange rates in force at the balance sheet date;
income and expenses expressed in foreign currencies are translated to Euro at the exchange rates in force in the month in which they are recognised; and,
exchange differences resulting from translation to Euro are recognised directly in the shareholders' equity caption Revaluation reserves.

When a foreign entity is sold, the accumulated exchange difference is recognised in the income statement as a gain or loss on disposal.

The exchange rates used for the translation to Euro of the accounts of foreign subsidiaries and associated companies were as follows:

	31-12-2018	31-12-2017
Kwanza - Angola	353.015	185.400
Metical – Mozambique	70.25	70.700
Swiss Franc - Switzerland	1.1269	1.170
US dollar - U.S.A.	1.145	1.199

In 2017 and 2018 Angola was classified as a hyperinflationary economy by the main international audit firms, and in accordance with the criteria defined in IAS 29, considering the country's accumulated inflation rate of close to 100% in the past three years and the evolution of prices, wages and interest rates:

Angola	2015	2016	2017	2018
Consumer price index (base Dec14=100)	112.09	158.19	195.63	232.02
Annual rate of change	12%	41%	24%	19%

In this context, in order to determine the value of its participation (48.09%) in the net assets and results of Banco de Fomento Angola in 2017 and 2018, Banco BPI considered an estimate of the impact of application of IAS 29 – Financial reporting in hyperinflationary economies, on the financial statements of BFA. The financial statements of BFA were restated as of 31 December 2018 and 2017, before being included in BPI's consolidated financial statements:

the value of non-monetary items in BFA's balance sheet at cost, or cost minus depreciation, were restated considering the Angolan Consumer Price Index;
the loss on the net monetary position was included in BFA's net income.

Banco de Fomento Angola, SA (BFA)

In January 2017 Banco BPI sold 2% of the share capital of Banco de Fomento Angola to Unitel, reducing its holding in BFA to 48.1%, and entering into an agreement with BFA's shareholders under which BPI is entitled to appoint two, from a maximum of fifteen, members of the Board of Directors of BFA, as well as one member of its Supervisory Board, and one member of the Risk Committee and the Remuneration Committee. BPI's stake in BFA's share capital and participation in BFA's governing bodies, although minoritary and not proportional to the share capital held, permitted to presume the existence of significant influence over BFA, in accordance with the IAS 28 provisions. Therefore, following the sale of 2% of BFA, Banco BPI now classifies its holding in BFA as an associate.

As referred in Note 2.A), at each financial statements preparation date, Banco BPI revises the main estimates and uncertainties associated to the application of the accounting policies in the preparation of the financial information. Therefore, given the existence of indications of a possible loss of significant influence, at the date of preparation of these financial statements, the classification of Banco de Fomento Angola as an associate was revised. From the main issues considered, one of the most important concerned the absence of BPI representatives in the executive body of BFA - the Executive Committee, which is the body responsible for the bank's operational management -, which determined BPI's lack of real power to participate in the financial and operating policy decisions of BFA under the terms set forth in paragraph 6 of IAS 28. BPI's minority position in BFA's Board of Directors, alongside a shareholder that holds control, also prevented BPI from having a real capacity to exercise significant influence in the management of BFA. In this context, the weight of BPI's participation in BFA's financial and operating policy decisions was much curtailed relative to initial expectations, based on the past experience of shareholders' relationship, where BPI played a key role in the management of BFA.

Taking into account that increase in experience, assessment and knowledge about the shareholder relationship of BPI in BFA, it is considered that at the end of 2018 the circumstances on which the existence of real capacity on the part of BPI to exercise significant influence over BFA was based no longer exist. In view of these circumstances, at the end of 2018, BPI considered it appropriate to limit its presence in the committees and management bodies of BFA in which it was represented, maintaining only the minority presence in the aforementioned corporate bodies of BFA.

In accordance with the accounting standards, the loss of significant influence entailed, in Banco BPI's consolidated balance sheet, reclassifying the equity holding in BFA from Associate to Financial assets at fair value through other comprehensive income - Equity instruments, and its revaluation at fair value at 31 December 2018.

2.2. Financial instruments (IAS 32, IFRS 7, IFRS 9 and IFRS 13)

Classification of financial assets

Contractual cash flows	Business Model		Classification of Financial Assets
Solely payments of principal and	With the objective of receiving the contractual cash flows	Financial assets at amortised cost
interest (SPPI) on principal at the dates indicated (SPPI test)	With the objective of receiving the contractual cash flows and sale	Financial assets at fair value through other comprehensive income
Others - do not require SPPI test	Derivative instruments designated as accounting hedges	Derivatives - Hedge accounting
	Instruments originated or acquired with the aim of being realised in the short term		Financial assets held for trading
	Included in a group of financial instruments identified and managed together, for which there is evidence of a recent pattern of short-term profit-taking	Financial assets at fair value through profit/(loss)
	Derivative instruments that do not meet the definition of a financial guarantee contract and have not been designated as hedging instruments.
	Other	Financial assets not designated for trading compulsorily measured at fair value through profit or loss

Investments in equity instruments are an exception to the aforementioned general classification criteria. In general, at initial recognition the Bank irrevocably exercises the option of including - in the portfolio of financial assets at fair value through other comprehensive income - investments in equity instruments that are not classified as held for trading and that, in the event this option were not exercised, would be classified as financial assets compulsorily measured at fair value through profit or loss.

As for the assessment of the business model, this does not depend on the intentions for an individual instrument, but rather for a set of instruments, taking into account the frequency, amount and schedule of sales in previous years, the reasons for these sales and the expectations for futures sales. Infrequent or insignificant sales, sales near the maturity date of the asset and sales driven by a significant increase in the credit risk of the financial assets or to manage the concentration risk, among others, can be compatible with the model of holding assets to receive contractual cash flows.

If a financial asset is subject to a contractual clause under which the schedule or amount of its contractual cash flows can be modified (e.g. if the asset can be redeemed in advance or if maturity can be extended), the Bank determines whether the contractual cash flows the instrument generates over its life, as a result of the exercise of the aforementioned contractual clause, are solely principal and interest payments on the outstanding principal.

In the case of a financial asset with a periodic adjustment of the interest rate but where the frequency of that adjustment does not match the term of the reference interest rate (e.g., the interest rate is adjusted every three months), at the time of initial recognition the Bank assesses this mismatch in the interest component in order to determine whether the contractual cash flows represent solely principal and interest payments on the outstanding principal.

The contractual conditions contained in financial assets that, at the time of initial recognition, have a minimum effect on the cash flows or depend on exceptional and highly unlikely events taking place (such as liquidation by the issuer) do not prevent the asset from being classified in the amortised cost portfolio or fair value portfolio through other comprehensive income.

Classification of financial liabilities

Financial liabilities are classified under the following captions: "Financial liabilities held for trading", "Financial liabilities designated at fair value through profit or loss" and "Financial liabilities at amortised cost", save for liabilities that must be presented under "Liabilities included in disposal groups classified as held for sale" or relate to "Fair value changes of the hedged items in portfolio hedge of interest rate risk" or "Derivatives – Hedge accounting", which are presented separately.

The caption "Financial liabilities at amortised cost": includes financial liabilities not classified as financial liabilities held for trading or as other financial liabilities at fair value through profit or loss. The balances recognised in this category, irrespective of how they are used and their maturity, arise from the ordinary funding activities of credit institutions.

Initial recognition and measurement

Upon initial recognition, all financial instruments are recognised at fair value. For the financial instruments that are not subsequently valued at fair value through profit or loss, the fair value amount is adjusted, adding or deducting transaction costs directly attributable to the acquisition or issuance thereof. In the case of financial instruments at fair value through profit or loss, the directly attributable transaction costs are immediately recognised in the income statement.

The transaction costs are defined as expenses directly attributable to the acquisition or sale of a financial asset, or to the issuance or assumption of a financial liability, which would not have been incurred if the Bank had not made the transaction. These include, among others, fees paid to intermediaries (such as promoters) and mortgage arrangement expenses. Under no circumstances are the internal administrative expenses or those deriving from prior research and analysis considered transaction costs.

Subsequent measurement of financial instruments

After its initial recognition, the Bank recognises a financial instrument at amortised cost, at fair value through profit or loss, or at fair value through other comprehensive income.

Receivables for trading operations that do not have a significant financing component and the commercial loans and short-term debt securities that are initially measured by the price of the transaction or its outstanding principal, respectively, continue to be measured by said amount, deducted of impairment losses, as described in section 2.7.

Income and expenses of financial assets and liabilities

The income and expenses of financial instruments at amortised cost are recognised according to the following criteria:

Portfolio		Recognition of revenue and expenses
	At amortised Cost	• Accrued interest: On the income statement, with the effective interest rate of the operation on the gross book value of the operation (except for stage 3 assets, where the rate applies to the net book value). • Other changes in value: gains or losses when the financial instrument is derecognised from the balance sheet, reclassified, or when there are impairment losses or gains on its subsequent recovery.
Financial assets	At fair value through profit or loss	• Changes in fair value: changes in fair value are recognised directly in the income statement, distinguishing, for non-derivative instruments, between the part attributable to the instrument's return, which will be booked as interest or dividends in accordance with its nature, and the remainder, which will be booked as a gain or loss in financial operations, in the corresponding caption. • Accrued interest: in debt securities it is calculated using the effective interest rate method.
	At fair value through other comprehensive income (*)	• Accrued interest or dividends recognised in the income statement. Interest is recognised as in assets at amortised cost. • Foreign exchange differences in the income statement, when debt securities, and in other comprehensive income, when equity instruments. • Impairment losses, debt securities or gains for subsequent recovery in the income statement. • The remaining changes in value are recognised in other comprehensive income.
	At amortised cost	• Accrued interest: in the income statement, at the transaction's effective interest rate on the gross amount of the transaction. • Other changes in value: Gain or loss when the financial instrument is derecognised from the balance sheet or reclassified.
Financial Liabilities	At fair value through profit or loss	• Changes in fair value: changes in the value of a financial liability designated at fair value through profit or loss, when applicable, as follows: a) the change in the fair value of a financial liability attributable to a change in its own credit risk is recognised in other comprehensive income, which would be directly transferred to a reserves caption when the financial liability was derecognised. b) the remainder of the fair value change is recognised as a profit / (loss) for the year. • Accrued interest: in debt securities it is calculated using the effective interest rate method.

(*) Thus, when a debt security is recognised at fair value through other comprehensive income, the amounts recognised as profit or loss for the period are the same as those that would be recognised if measured at amortised cost. When a debt security measured at fair value through other comprehensive income is derecognised from the balance sheet, the gain or loss accumulated in other comprehensive income is reclassified as profit or loss for the period. On the other hand, when an equity instrument measured at fair value through other comprehensive income is derecognised from the balance sheet, the gain or loss recognised in other comprehensive income is not reclassified as a profit or loss for the period. For each of the above portfolios, the recognition would change if said instruments form part of a hedging relationship (Note 2.3.).

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Under the IFRS 9 requirements, reclassifications between financial instruments portfolios can only occur in the event the Bank decides to change its business model for the management of a financial assets portfolio. This reclassification would be carried out prospectively from the date of the reclassification. In accordance with the IFRS 9 approach, in general, changes in the business model occur very infrequently. Financial liabilities cannot be reclassified between portfolios.

2.3. Hedge accounting

Banco BPI uses financial derivatives as a financial risk management tool, mainly to hedge interest rate risk (Notes 3 and 16). When these transactions meet certain requirements, they qualify for hedge accounting.

The Bank applies the provisions of IFRS 9 relating to hedge accounting as from 1 January 2018, as it believes that this option is aligned to the CaixaBank Group's accounting policy and to the Bank's risk management strategy. IFRS9 introduces changes to hedge accounting relative to IAS 39 in a number of areas, such as hedged items, hedging instruments, the accounting of the time value of shares and the assessment of effectiveness, which enable the expansion of the transactions to which hedge accounting is applied and facilitate its application. Other than the attendant greater disclosure requirements, there were no significant quantitative impacts on Banco BPI's financial statements.

The Bank maintains the hedging relationship documentation, which includes the identification of the hedging instrument and of the hedged item, the nature of the risk to be hedged and the way in which the Bank assesses whether the hedging relationship meets the requirements of hedging effectiveness. In accordance with IFRS 9, to ensure that the effectiveness requirement is met:

a) there must be an economic relationship between the hedged item and the hedging instrument,
b) the credit risk of the hedged item's counterparty or of the hedging instrument should not have a dominant effect on changes in value resulting from said economic relationship, and
c) the coverage ratio of the hedge accounting relationship, understood as the share of the item hedged by the hedging instrument, must be the same as the coverage ratio used for management purposes.

Fair value hedges

Fair value hedges hedge the exposure to changes in fair value of financial assets and liabilities or unrecognised firm commitments, or an identified portion of such assets, liabilities or firm commitments, that is attributable to a particular risk and could affect the income statement.

In fair value hedges, value changes in the hedging instrument or in the hedged item for the portion attributable to the hedged risk are recognised in an asymmetrical way according to whether the hedged item is a debt instrument or an equity instrument:

In debt securities, value changes in the hedging instrument or in the hedged item for the portion attributable to the hedged risk are recognised in the income statement, in the "Gains/(losses) from hedge accounting, net" caption. In fair value macro-hedges, value changes in the hedged items are balanced in "Assets – Fair value changes of the hedged items in portfolio hedge of interest rate risk" or "Liabilities – Fair value changes of the hedged items in portfolio hedge of interest rate risk" depending on the substance of the hedged item, rather than in the captions under which the hedged items are recognised.

When hedging derivatives no longer meet the requirements for hedge accounting, they are reclassified as trading derivatives. Fair value changes in debt securities are recognised in profit or loss using the effective interest rate method, as from the date the hedge is interrupted.

Banco BPI does not have hedges for equity instruments.

2.4. Offsetting of financial assets and liabilities

A financial asset and a financial liability may be offset and the net amount presented in the balance sheet when, and only when, the Entity has a legally enforceable right to set off the recognised amounts and intends either to settle on a net basis, or to realise the asset and settle the liability simultaneously, taking the following into consideration:

The legally enforceable right to set off the recognised amounts should not be contingent on a future event and must be legally enforceable in all circumstances, including cases of default or insolvency of any or all of the counterparties;
Settlements are considered equivalent to 'net settlement' when they meet the following requirements: they totally eliminate or result in insignificant credit and liquidity risk; and settlement of the asset and liability is made in a single settlement process.

In BPI's financial statements, derivatives and repo security transactions that permit the offsetting of credit risk by counterparty are not offset for accounting purposes - the value of each transaction is recognised in assets or liabilities depending on whether it is positive or negative, respectively.

2.5. Derecognition of financial instruments

All or part of a financial asset is derecognised when the contractual rights to the cash flows from the financial asset expire or when they are transferred to a third party outside the entity.

The accounting treatment of transfers of financial assets depends on the manner and the extent to which the risks and rewards associated with ownership of the transferred assets are transferred to third parties:

If substantially all the risks and rewards of ownership of the transferred asset are transferred (such as in the case of, among others: unconditional sales, a sale with an option to repurchase the financial asset at its fair value at the time of repurchase, a sale of a financial asset together with a put or call option that is deeply out of the money, or asset securitisations in which the transferor does not retain any subordinated loans and does not provide any type of credit enhancement to the new owners), it is derecognised, and any rights or obligations retained or arising as a result of the transfer are simultaneously recognised;
If all the risks and rewards of ownership of the transferred financial asset are retained substantially (such as in the case of, among others: sale and repurchase transactions where the repurchase price is a fixed price or the sale price plus a lender's return, a securities lending agreement under which the borrower has the obligation to return the securities or similar) it is not derecognised and continues to be measured by the same criteria used before the transfer and the following are recognised:
A financial liability equal to the consideration received, which is subsequently measured at amortised cost, unless it meets the requirements to be classified under other liabilities at fair value through profit or loss.
The income generated on the transferred (but not derecognised) financial asset and the expenses of the new financial liability, without offset.

• If substantially all the risks and rewards of ownership of the transferred financial asset are neither transferred nor retained (such as in the case of, among others, a sale of a financial asset together with a put or call option, securitisations in which the transferor assumes a subordinated loan or other type of credit enhancement for part of the transferred asset), the following distinction is made:

If the transferor does not retain control over the financial asset transferred, it is derecognised and any right or obligation retained or arising from the transfer is recognised.
If the transferor retains control over the financial asset transferred, it continues to recognise the asset for an amount equal to its exposure to changes in value of the asset, recognising a liability associated with the financial asset transferred. The net amount of the transferred asset and the associated liability shall be the amortised cost of the rights and obligations retained, if the asset is measured at amortised cost, or at fair value of the rights and obligations retained, if the transferred asset is measured at fair value.

According to the terms of the transfer agreements in place, the portfolio of loans and receivables securitised by the Group does not meet the criteria for derecognition.

Financial liabilities shall equally be derecognised when the obligation specified in the contract is discharged or cancelled or expires.

2.6. Financial guarantees

Financial guarantees given

Financial guarantees are defined as contracts whereby the issuer thereof undertakes to make specific payments to reimburse the creditor for the loss incurred when a specific debtor fails to meet its payment obligations, irrespective of the legal form of the obligation (guarantee, surety, financial or technical guarantee, insurance contract or other types of contract).

Financial deposits comprise all manner of deposits that directly or indirectly guarantee debt securities such as loans, credit facilities, finance leases and deferred payment arrangements for all types of debt.

All these transactions are recognised as off balance sheet items.

Financial guarantees are reviewed periodically so as to determine the credit risk to which they are exposed and, if appropriate, estimate any impairment required. The criteria used in this process is similar to those established for quantifying impairment losses on debt securities measured at amortised cost as set out in Note 2.7 - Impairment of financial assets.

Impairment constituted for this type of arrangement are recognised under the "Provisions" balance sheet caption. Additions to and reversals of impairment are recognised in "Provisions or reversal of provisions" in the income statement.

Financial guarantees received

No significant guarantees or collateral were received with regard to which there is authorisation to sell or repledge, without default by the guarantor, except for the collateral inherent to Banco BPI's treasury activity.

2.7. Impairment of financial assets

The Bank determines impairment losses for debt securities that are measured at amortised cost and at fair value through other comprehensive income, as well as for other exposures that involve credit risk, such as granted financial guarantees and other granted commitments.

The aim of the IFRS 9 requirements as regards impairment is to ensure recognition of expected credit losses on operations, assessed collectively or individually, considering all the reasonable, reliable and duly substantiated information available at each reporting date, including forward looking information.

Impairment losses on debt securities in the period are recognised as an expense under the heading "Impairment/(reversal) of impairment losses on financial assets not measured at fair value through profit or loss" in the income statement. Impairment losses on debt securities that are measured at amortised cost are recognised against an accumulated impairment caption on the balance sheet, which reduces the book value of the asset, while impairments of assets measured at fair value through other comprehensive income are recognised against other comprehensive income, in the corresponding equity caption.

Impairment losses in exposures involving credit risk other than debt securities are recorded as a provision under the heading "Provisions – Commitments and guarantees given" on the liabilities side of the balance sheet. Additions to and reversals are recognised under the heading "Provisions or reversal of provisions for commitments and guarantees given" in the income statement.

For the purpose of accounting for impairment losses in debt securities, the following definitions must be taken into account:

• Credit losses: these correspond to the difference between all the contractual cash flows owed to the Bank in accordance with the financial asset's contractual conditions and all the cash flows that the Bank is due to receive (i.e. the entire cash flow shortfall), discounted at the original effective interest rate or, for financial assets that were purchased with or that originated with credit impairment, discounted at the effective interest rate adjusted to reflect credit quality, or the interest rate on the date referred to in the financial statements in the case of a variable rate.

In the case of granted loan commitments, the contractual cash flows that would be owed to the Bank in the event the loan commitment were drawn down are compared to the cash flows that it would expect to receive when the asset is recognised. In the case of granted financial guarantees, the Bank considers the payments that it expects to make less the cash flows it expects to receive from the guarantor holder, with medium hedges being applied, based on the Client's profile, on the estimated amount of payments which the Bank expects to make.

The Bank estimates the cash flows taking into account the contractual duration established for the operations. In the case of credit cards and overdrafts on current accounts of individual Clients, the Bank considers that the expected life of these operations is 12 months.

The calculation of cash flows also takes into account those deriving from the sale of collateral, taking into account the cash flows that would be obtained from the sale thereof, minus the costs required to obtain them, maintain them and subsequently sell them, or other credit improvements forming an integral part of the contractual conditions, such as financial guarantees received.

Expected credit losses: these correspond to the weighted average of the credit losses, using as weighting the respective probability of default events. The following distinction will be taken into account:
- i. Expected credit losses during the lifetime of the operation: these are expected credit losses resulting from all the possible default events during the expected lifetime of the operation.
- ii. Expected credit losses at 12 months: these are the part of the credit losses expected during the lifetime of the operation corresponding to the expected credit losses resulting from any default events relating to a financial instrument during the twelve months following the reference date.

The amount of the impairment loss is calculated according to whether there has been a significant increase in credit risk since the operation's initial recognition, and whether or not a default event has occurred:

	Improvement	Credit risk since initial recognition	Deterioration
Credit Risk Category	Stage 1	Stage 2	Stage 3
Impairment (Updated at each reporting date)	Expected credit losses at 12 months	Expected credit losses during lifetime
Classification Criteria	No material change in credit quality since initial recognition	Material increase in credit risk since initial recognition* • Tolerance matrix1 • Mandatory criteria • Scoring/Rating2 at reference date • Restructurings • Indications in Central Credit Register, List of high-risk users • > 2 active EWS3 (PARI) • > 30 days overdue • Combination of tolerance matrix with 1 active EWS • Indicators that, in accordance with market indicators/triggers, may determine a significant deterioration in risk	Credit classified as in default
Interest on income calculated based on: 1 To capture a significant deterioration in the probability of default (PD)	Effective interest rate on gross amount		Effective interest rate on amortised cost * The criteria indicated are considered in case

² Scoring / Rating above a given classification

³ Early Warning Signal

Regardless of its subsequent classification, in the event that an operation is bought or originates with credit impairment, its hedging would be equal to the accumulated amount of the changes in the credit losses after initial recognition and the interest income of these assets would be calculated by applying the effective interest rate adjusted to reflect credit quality, at the amortised cost.

2.8. Refinancing or restructuring operations

In 2018 Banco BPI's Board of Directors approved a Restructuring Policy that structures the treatment of loans restructured or renegotiated due to financial difficulties of the debtor, both from the standpoint of credit risk management and from the standpoint of their treatment for reporting purposes.

This policy and the procedures in place at Banco BPI to implement it aim to create the conditions for non-performing debtors to exit this status, and for preventing performing Clients from being transferred to non-performing status.

The policy provides guidance on the identification of feasible renegotiation solutions, based on a detailed analysis of the debtor's financial capacity, and establishes as principles (i) the attempt to reinforce guarantees, (ii) non increase of the exposure, relationship with other creditors in the financial system, (iii) no granting of debt relief, (iv) the recovery of interest, and (v) ensuring that BPI is entitled to revise the contractual conditions in case of an improvement in the debtor's financial situation.

In addition, short- and long-term restructuring measures are typified, as well as the situations in which such measures should be applied.

they apply to the risk segment

2.9. Foreign currency transactions

The Bank's functional and presentation currency is the euro. Consequently, all non-euro balances and transactions are foreign currency balances and transactions.

All foreign currency transactions are recorded, on initial recognition, by applying the indicative spot exchange rate between the functional currency and the foreign currency, disclosed by Banco de Portugal.

At the end of each reporting period, foreign currency balances are translated to euros at the indicative official foreign exchange rate disclosed by Banco de Portugal.

Unmatured forward foreign exchange purchase and sale transactions not considered as hedges are translated to euros at the yearend exchange rates on the forward currency market.

The exchange differences arising on the translation of foreign currency balances to BPI's reporting currency are generally recognised under "Exchange differences (net)" in the income statement. However, exchange differences arising from changes in the value of equity instruments recognised at fair value through other comprehensive income are recognised under "Equity – Other comprehensive income – Items that will not be reclassified to profit or loss"

Income and expenses expressed in foreign currencies are translated to Euro at the exchange rates in force on the day in which they are recognised.

2.10. Recognition of income and expenses

The main criteria applied to recognise income and expenses are summarised as follows:

	Characteristics		Recognition
Income and expenses from interest, dividends and similar	Income and expenses from interest and similar		Based on accrual period, through application of the effective interest rate method, regardless of the resulting cash or financial flow, as described above.
	Dividends received		As income at the time it is received (official announcement of dividend payment by the company's competent body)
Fee and Commissions charged/paid1	Credit Commissions – are an integral part of the effective revenue or expense	Commissions received for the creation or acquisition of financing operations that are not measured at fair value through profit or loss (i.e. payments for activities such as the evaluation of the borrower's financial situation, evaluation and registration of various guarantees, negotiation of the operation's terms, preparation and processing of the documentation and closing of the transaction).	Deferred and recognised over the life of the operation as an adjustment to the operation's effective income or cost.
	of a financing operation are received upfront.	Commissions agreed as compensation for the commitment to grant financing, when said commitment is not measured at fair value with changes in profit or loss and it is likely that the Group will enter a specific loan agreement.	Deferred as they are charged over the expected life of the financing as an adjustment to the operation's effective income or cost. If the commitment expires without the entity making the loan, the fee is recognised as revenue on expiry.
		Commissions paid on the issuance of financial liabilities at amortised cost.	Included, together with the respective direct costs, in the value of the financial liability, charged as an adjustment to the effective cost of the operation.
	Non-credit Commissions – Commissions derived from the provision of financial services other than financing operations.	Related to the execution of a service provided over time (i.e.: account maintenance fees).	Recognised over time, by measuring the finishing phase against full compliance with the performance obligation.
		Related with the provision of a service executed at a specific moment (such as signature of securities, foreign exchange, consultancy or loan syndication).	Recognised in the income at the time of collection.
Other non financial revenue and expenses 1	Other revenue from recurring activities		• As a general criterion, they are recognised when the goods or services contracted with the clients are delivered or provided. The amount of the consideration which the Bank expects to be entitled to exchange for such goods or services is recognised as a revenue over the duration of the contract. • If a client receives or is entitled to receive a consideration without the transfer of the goods or services, a liability is recognised and remains in the balance sheet until it is debited to the income statement. • The Group may transfer control over time or at a specific point in time (see steps in next table).

Exceptions: Commissions on financial instruments at fair value through profit or loss and unavailability commission (in operations where the offer of funds is optional for the borrower) are immediately recognised in the income statement.

Credit commissions are included in net interest income under interest income and expenses.

Commissions deriving from products or services that are typical of the financial business are presented separately from those deriving from products and services that are not typical of this activity, the latter being presented under the caption "Other operating income" in the income statement.

As for the accounting of the costs related to the contracts, the costs of obtaining a contract are those which the Bank incurs to obtain a contract with a Customer and which it would not have incurred if the Bank had not entered into said contract.

Costs are recognised as an asset if they are directly related to a contract that can be identified specifically and the Bank expects to recover them. In this case, they are amortised systematically and consistently with the transfer to the Customer of the contractually related goods or services. However, if the asset's repayment period is equal to or less than one year, these costs are not recognised as an asset and are recorded as an expense.

2.11. Employee benefits

Employee benefits include all forms of consideration given in exchange for services rendered to the Bank by Employees or for benefits payable after completion of employment. They can be classified into four categories:

Short-term employee benefits

These are employee benefits (other than termination benefits) which fall due wholly within 12 months after the end of the annual accounting statements period in which the employees render the related service. It includes wages, salary supplements, social security contributions and contributions to the medical and healthcare services for banking sector employees (SAMS), allowances (holidays, Christmas, meals, children, etc.), paid sick leave or other, variable remuneration, bonuses and non-monetary benefits payable to current employees such as health, life, personal accidents, and occupational hazards insurance, accommodation expenses and free or subsidised goods or services.

The cost of services rendered is recognised under "Administrative expenses – Staff expenses" of the income statement.

Credit facilities made available to Employees at below market rates are considered to be non-monetary benefits and are calculated as the difference between market rates and the rates agreed with Employees. The difference is recognised under "Administrative expenses – Staff expenses" with a balancing entry under "Interest income" in the income statement.

Post-employment benefits

Post-employment benefits are all those undertaken with employees, to be paid after completion of their employment with the Bank. They include retirement benefits, such as pensions and other post-employment benefits, such as post-employment medical care at the end of the employment relationship.

Defined contribution plans

The post-employment obligations with employees are deemed to be defined contribution obligations when the Bank makes predetermined contributions to a separate entity (fund) and has no legal or constructive obligation to make further contributions if the fund assets are not sufficient to pay the all the employee benefits relating to the service rendered in the current and prior periods. Contributions of this type made in each year are recognised under "Administrative expenses – Staff expenses" in the income statement. Post-employment obligations that do not meet the aforementioned conditions are considered defined benefit obligations.

Defined benefit plans

The present value of defined benefit post-employment obligations (pension liabilities), net of the fair value of the pension funds' assets, is recorded under "Other liabilities - Liabilities for pensions and other defined benefits", in the case of a coverage shortfall in the pension funds, or under "Other assets - Liabilities for pensions and other defined benefits" in the case of a coverage surplus.

Plan assets are defined as those assets that will be used to directly settle plan obligations and that meet the following conditions:

They are not owned by the Bank, but rather by a legally separate, non-related third party.
They are solely available to pay or fund post-employment benefits and are not available to the Bank's own creditors, even in bankruptcy. They cannot be returned to the Bank unless the remaining assets of the plan are sufficient to meet all the related post-employment benefit obligations of the plan or of the Bank, or are used to reimburse it for post-employment benefits the Bank has already paid to its Employees.

Post-employment benefits are recognised as follows:

Service cost is recognised in the income statement, in the caption "Administrative expenses Staff Expenses", and includes the following components:
- Current service cost, understood as the increase in the present value of obligations arising from employee service in the current period;
- Past service cost, resulting from amendments to existing post-employment benefits or the introduction of new benefits, and the cost of curtailments;
- Any gain or loss arising on settlement of a plan.
The interest cost/(income) on the net post-employment benefit liability/(asset), understood to be the change during the period in the net pension liability that arises from the passage of time, is recognised in "Administrative expenses - Staff expenses" in the income statement.
Remeasurements of the net liability/(asset) for defined benefit post-employment benefits are recognised in "Accumulated other comprehensive income" in the balance sheet. It includes:
Actuarial gains and losses arising in the period from differences between the previous actuarial assumptions and what has actually occurred and from changes in the actuarial assumptions used.
The return on plan assets, excluding the amounts included in the net interest on the liability/(asset) for defined benefit post-employment benefits.
Any change in the impact of the asset ceiling, excluding the amounts included in the net interest on the liability/(asset) for defined benefit post-employment benefits.

Termination benefits

These benefits are payable as a result of an Entity's decision to terminate an employee's employment, a valid expectation having been raised in the employee or an employee's decision to accept the Bank's irrevocable offer of those benefits in exchange for voluntary redundancy.

A liability and a non-recurring cost for termination benefits are recognised when there is no realistic possibility of withdrawing the offer to pay the termination benefits or when the costs for restructuring which involves the payment of termination benefits are recognised. These amounts are recognised as a liability under "Accrued costs - Staff Expenses" in the balance sheet until they are settled or transferred to Pension Liabilities.

2.12. Income tax

Banco BPI is subject to the tax regime set out in the Portuguese Corporate Income Tax Code and in the Statute of Tax Benefits.

The expense for income tax is recognised in the income statement, except when it results from a transaction recognised directly in equity, in which case the corresponding tax effect is also recognised in equity.

Income tax is calculated as the sum of the current tax for the year resulting from applying the tax rate legally in force to the taxable profit for the year and any changes in deferred tax assets and liabilities recognised in the year in the income statement.

Temporary differences, tax loss carryforwards and unused tax deductions are recognised as deferred tax assets and/or deferred tax liabilities. These amounts are recognised at the tax rates that are expected to apply when the asset is realised or the liability is settled, taking into account the applicable tax legislation.

All tax assets are recognised under "Tax assets" in the balance sheet as current, for amounts to be recovered in the next 12 months, or deferred, for amounts to be recovered in future reporting years. Deferred tax assets are only recognised when it is probable that they will be reversed in the foreseeable future and it is estimated that there will be sufficient taxable profit against which they can be used.

Deferred tax liabilities are recognised for all taxable differences that affect future taxable income.

Similarly, tax liabilities are recognised in "Tax liabilities" in the balance sheet, also split into current and deferred. Current tax liabilities are recognised as the amount of tax payable and deferred tax liabilities as the amount expected to be paid in future periods.

BPI does not recognise deferred tax assets or liabilities for deductible or taxable temporary differences relating to investments in subsidiaries as it is unlikely that such differences will be reversed in the foreseeable future.

The Bank does not recognise deferred tax assets or liabilities for deductible or taxable temporary differences relating to investments in associated companies, since the stake held by the BPI Group has exceeded 10% for more than one year, which enables it to be considered in the Participation Exemption regime, except for Banco Comercial e de Investimentos and Banco de Fomento Angola (until 31 December 2018), in which the deferred tax liabilities relating to taxation in Mozambique and Angola, respectively, of all the distributable profits, are recognised.

Net income distributed to Banco BPI by subsidiaries and associated companies, located in Portugal, is not taxed in Banco BPI as a result of applying the regime established in article 51 of the Corporate Income Tax Code, which provides for the elimination of double taxation of distributed net income.

2.13. Tangible assets

Tangible assets include the amount of property, land, furniture, vehicles, IT equipment and other facilities owned or acquired under a finance lease for the Bank's own use.

Tangible assets are generally stated at acquisition cost less accumulated depreciation and any impairment losses determined by comparing the carrying amount of each item to its recoverable amount.

Depreciation is calculated using the straight-line method on the basis of the acquisition cost of the assets. Land is not depreciated since it is considered to have an indefinite life.

The depreciation charge of tangible assets is recognised under the "Depreciation and amortisation" caption of the income statement and is calculated basically using the depreciation rates set out in the table below, which are based on the years of estimated useful life of the various assets.

Useful life of tangible assets

	Estimated years of useful life
Buildings	20 to 50
Works in owned property	10 to 50
Non-recoverable expenditure on leasehold property	3 to 10
Equipment	3 to 12
Other tangible assets	3 to 10

Upkeep and maintenance expenses are recognised under "Other administrative expenses" in the income statement.

2.14. Intangible assets

Intangible assets are identifiable non-monetary assets without physical substance acquired from third parties or developed internally.

The Bank recognises, in this caption, expenses relating to the development stage of projects implemented and to be implemented, as well as the cost of acquiring software, in both cases where the impact extends beyond the financial year in which the cost is incurred.

Intangible assets are amortised on a straight-line monthly basis over the estimated period of useful life of the assets which, in general, corresponds to a period of three years.

Computer software developed internally is recognised as an intangible asset when, among other requirements, it is capable of being used or sold, and it is identifiable and its ability to generate future economic benefits can be demonstrated.

Expenses incurred during the research phase are recognised directly in the income statement for the period in which they are incurred, and cannot subsequently be capitalised.

2.15. Assets received in settlement of defaulting loans and non-current assets held for sale and discontinued operations (IFRS 5)

This heading includes individual assets or disposal groups, or assets that form part of a line of business that will be disposed of (discontinued operation) whose sale is highly probable in their present condition within one year from the reporting date. Assets that will be disposed of within a year but where disposal is delayed by events and circumstances beyond the Group's control may also be classified as held for sale, when there is sufficient evidence that the Company is still committed to selling them.

The carrying amount of these assets will be recovered principally through a sale transaction.

Assets received in settlement of defaulting loans and other assets

Non-current assets (property, equipment or other) received as total or partial settlement of debtors' payment obligations in credit operations are recognised under "Non-current assets and disposal groups classified as held for sale" unless it has been decided to make continuing use of the assets.

In 2018 these assets were reclassified from "Other assets" to "Non-current assets held for sale" in view of the Bank's intention to sell them and in line with CaixaBank Group's accounting policies.

Such assets are recorded at the legal or tax acquisition amount or the amount stated in the settlement agreement. Assets recovered following the resolution of lease contracts are recorded at the outstanding amount due not invoiced.

These assets are subject to regular valuations, carried out by independent appraisers registered with the Portuguese Securities Market Regulator (CMVM).

After the initial recognition, the Bank compares the carrying amount with the estimated fair value (the lower of in-site appraisal, statistical valuation (RIMA) and promissory Contract of Purchase and Sale values), minus costs to sell, recognising any possible additional impairment or recoveries in the income statement (up to an amount equal to that of the previously recognised impairment losses). Changes in impairment losses on a non-current asset classified as held for sale are recognised under "Profit/(loss) from noncurrent assets and disposal groups classified as held for sale not qualifying as discontinued operations". Unrealised capital gains on these assets are not recognised in the balance sheet or in the income statement.

On the date of sale, the capital gains or losses realised on these assets are recognised in the income statement under "Gains/(losses) on derecognition of non-financial assets, net".

The Bank's tangible assets that are no longer in use (unused property and equipment) and are in the process of being sold, are also booked under this caption. Such assets are transferred from tangible assets at book value (cost less accumulated depreciation and impairment losses) on the date they become available for sale, and are subsequently revalued in the same manner as assets received in settlement of defaulting loans.

Non-current assets held for sale are not depreciated while remaining in this category.

Discontinued operations

A discontinued operation is a component of an entity that either has been disposed of or is classified as held for sale, and (i) represents either a separate major line of business or a geographical area of operations, (ii) is part of a single coordinated plan to dispose of a separate major line of business or geographical area of operations, or (iii) is a subsidiary acquired exclusively with a view to resale.

Assets classified in this caption are not depreciated and are valued at the lower of cost and fair value, less costs to be incurred with the sale.

If book value is greater than fair value less costs to sell, an impairment loss is recognised in the caption "Impairment losses and other provisions, net".

As a result of the agreement established between Banco BPI and CaixaBank for the sale of the equity holdings in BPI Gestão de Activos and BPI GIF, the assets and liabilities of these entities were reclassified to the captions "Non-current assets held for sale and discontinued operations" and "Non-current liabilities held for sale and discontinued operations", respectively, as provided for in IFRS 5 – Non-current assets held for sale and discontinued operations, at the end of 2017.

2.16. Leases

Finance leases

Leases that substantially transfer all the risks and rewards inherent in the asset to the lessee are considered finance leases.

Financial leases in which the Bank acts as the lessor are recognised as lending under "Financial assets at amortised cost" in the balance sheet at the sum of the present values of the lease payments receivable. These payments include the exercise price of the lessee's purchase option at expiry of the lease, where this price is sufficiently below the fair value of the asset at expiry of the purchase option making it reasonably certain that the option will be exercised.

When the Bank acts as the lessee, the cost of the leased asset is recognised in the related item in the balance sheet based on the nature of the leased asset, and, simultaneously, a liability is recognised for the same amount (which is the lower of the fair value of the leased asset and the sum of the present value of the lease payments payable to the lessor plus, if appropriate, the exercise price of the purchase option).

These assets are depreciated using the same criteria as for the rest of the items of tangible assets for own use.

Financial income, when the Bank acts as lessor, and financial expenses, when it acts as lessee, are recognised in the income statement under "Interest income" and "Interest expenses", respectively.

Operating leases

Operating leases are leases in which all the risks and rewards inherent in the asset and ownership of the asset are substantially retained by the lessor.

In operating leases in which the Bank acts as lessee, the lease costs are recognised under "Other administrative expenses" in the income statement.

2.17. Contingent assets

Contingent assets arise from unplanned or other unexpected events that give rise to the possibility of an inflow of economic benefits. Contingent assets are not recognised in financial statements, except where an inflow of economic benefits is practically certain. If there is a probable inflow of economic benefits, it will be referred in the explanatory notes on the corresponding contingent asset.

Contingent assets are assessed continually to ensure that developments are appropriately reflected in the financial statements.

2.18. Provisions and contingent liabilities

Provisions cover present obligations at the date of preparation of the annual financial statements arising from past events which could give rise to a loss considered likely to occur; and is certain as to its nature but uncertain as to its amount and/or timing.

The financial statements include all the material provisions with respect to which it is considered more likely than not that the obligation will have to be settled. Provisions are recognised on the liabilities side of the balance sheet.

Provisions, which are quantified based on the best information available on the consequences of the event giving rise to them and are re-estimated at the end of each reporting period, are used for specific expenditures for which the provision was originally recognised. Provisions are fully or partially reversed when the obligations cease to exist or are reduced.

When an obligation exists but an outflow of resources embodying economic benefits is not likely, the obligation is recognised as a contingent liability. Contingent liabilities may develop in a way not initially expected. Therefore, they are assessed continually to determine whether an outflow of resources embodying economic benefits has become probable. If it becomes more probable than not that an outflow of future economic benefits will be required, a provision is recognised in the balance sheet.

Provisions are recognised under "Provisions" on the liabilities side of the balance sheet. Contingent liabilities are disclosed in the notes to the financial statements.

2.19. Statements of cash flows

The following terms are used in the presentation of the statement of cash flows:

Cash flows: cash and cash equivalents include cash, cash and deposits at Central Banks and other Credit Institutions, very short-term applications in Credit Institutions and cheques for collection.
Operating activities: the indirect method is used to present cash flows from operating activities, which are the principal revenue-producing activities of credit institutions and other activities that are not investing or financing activities.
Investing activities: the acquisition, sale or other disposal of long-term assets, such as equity investments in subsidiaries and associates, acquisition of tangible and intangible assets and other strategic investments not included in operating activities.
Financing activities: activities that result in changes in the medium- and long-term financing activities of the Bank and which do not form part of operating activities, such as issuance of debt securities and subordinated debt, capital increases and dividend distributions.

2.20. Statement of income and other comprehensive income

This statement presents the revenues and expenses recognised as profit or loss from Banco BPI's activity in the year, distinguishing between the profit or loss recognised in the income statement and the other revenues and expenses recognised directly in equity.

2.21. Statement of changes in equity

This statement presents all changes in the Bank's equity, including those due to accounting policy changes and error corrections. This statement presents a reconciliation between the carrying amount of each component of net assets at the beginning and the end of the period, grouping movements by nature under the following headings:

Adjustments due to accounting policy changes and error corrections: includes changes in equity as a result of the retrospective restatement of financial statement balances, distinguishing between those resulting from changes in accounting policies from those representing the correction of errors.
Total income and expenditure recognized: represents the aggregate of all items recognised in the statement of income and other comprehensive income.
Other changes in equity: includes the remaining items recognised in equity, such as capital increases or decreases, distribution of dividends, treasury share transactions, equity-based payments, transfers between equity items, and any other increase or decrease in equity.

3. RISK MANAGEMENT

3.1. Environment and risk factors

The following risk factors had a significant influence on the BPI's risk management in 2018, due to their impact during the year and their long-term implications for the Bank:

• Macroeconomic environment

The global economy has been subject to a considerable degree of uncertainty, with a possible effect arising from the increase in interest rates in the U.S., and its impact on the more vulnerable economies, namely the emerging markets, which are typically more exposed to foreign-exchange risk and to capital flow changes. At the same time, the deceleration of China's growth pace and whether it is capable of addressing some of its imbalances, have also been noticeable factors. With regard to political and geopolitical uncertainty, the main source of uncertainty has been the development of trade strains between the U.S. and China and their potential impact on the European Union economy.

Furthermore, the context of risk in the Eurozone has been marked by geopolitical factors, mainly linked to the difficulties to reach an agreement for the United Kingdom to leave the EU (Brexit), and to the tension between Italy and the EU with regard to compliance of the transalpine country's budgetary stability. In this sense, doubts about the sustainability of the debt of certain member countries could affect the national financial sectors and give rise to financial stability problems.

However, the European economy remained on a growth path, growing by 1.8% in 2018 (2.5% in 2017), a slowdown for which the external sector was responsible. In addition, progress has been made in the process of the banking union, namely with regard to the European Deposit Insurance Scheme (EDIS), following the commitments assumed to reduce non-performing assets.

The Portuguese economy made considerable progress, growing by 2.1% in 2018. Although slowing down compared to 2017, Portugal surpassed its average growth rate in the last decade as well as the average for the Eurozone. Domestic demand remained the main driver of growth, with private consumption benefiting from the significant recovery of the labour market (the unemployment rate fell to 7%, an historical low since 2004). The orientation of the Portuguese economy, now more outwardbent, combined with the improvement of household and business confidence, and the recent buoyancy of the construction sector, propelled a recovery in investment, which nevertheless should remain below its pre-2008 crisis levels. This economic context also supported the fiscal consolidation, with the fiscal deficit reckoned to stand below 1% of GDP in 2018. In this context, and reflecting the positive performance of the public finances and the confidence of international investors in the country's economic outlook, the three main rating agencies revised Portugal's sovereign rating to investment grade.

On the monetary policy front, 2018 marks the end of the ECB's expansionary policy, with official interest rates expected to remain at their current level in Europe and worldwide. In this scenario, different stakeholders, such as the Financial Stability Board, have been warning about the risks that could arise from a sudden increase in interest rates, especially due to the increase in debt service, which could generate tensions related to the sustainability of the public and private debt of several countries, in particular the emerging ones.

• Regulatory Framework

The concentration in non-performing exposure remains one of the key areas of concern at regulatory level, in 2018, despite there being a clear reduction.

With the objective of reducing the high level of NPLs, in March 2018 the European Commission presented a package of measures, which included a proposed directive on credit intermediaries, loan purchasers and an accelerated mechanism to execute execute guarantees, a proposed amendment of the Capital Requirements Regulation (CRR), to ensure sufficient loss coverage, and, a technical blueprint for how to set up national asset management companies.

Additionally, the EBA has closed its consultation on the update to the guidelines on the management of impaired exposure, and another consultation on the disclosure of NPLs, restructured loans and respective exposure. The publication of detailed guidelines for consultation on the origin, supervision and internal management of bank loans is awaited.

Within the framework of its risk appetite framework, BPI regularly monitors the non-performing exposure ratios, and has defined strategic and operational policies for Non-performing Exposures, in accordance with the EBA definition, as well as policies for recovered assets and assets received in lieu of payment.

During 2018 BPI was engaged in the implementation of the Risk Data Aggregation (RDA) project, viewing compliance with the principles established by the Basel Supervision Committee in the RDA standard (BCBS 239) in January 2013. The project was started in 2017 and will be continued through 2019. This project involved the definition of information governance functions and bodies.

Several regulatory initiatives were taken in the EU financial sector, concerning the adjustment of investment products to the needs of consumers, in terms of sustainability, namely revisions to the MiFID II and Insurance Distribution directives.
Banco de Portugal, as the national macroprudential authority, published a set of recommendations on consumer solvency assessment, which BPI followed on schedule. The purpose of this measure was to promote prudent lending criteria, ensuring the resilience of Banks and their capacity to absorb potential adverse shocks, while also promoting the sustainable financing of families and minimising their risk of default. In addition, the measure also sought to prevent the financial sector from excessive risk-taking in new loans to consumers, within a context of sharp growth in consumer credit, reflecting the macroeconomic environment and a reduction of selectivity criteria in loan granting.
Throughout the year the EBA launched several public consultations on exposures considered as high risk or to be associated with a high risk, on the estimation of LGD under an economic downturn, and on information and communication technology risks.
Over the coming years the Bank will be faced with the challenges of adaptation to the Basel III global reform, namely with the entry into force of the rules on large exposures, on 1 January 2019, and the rules on the revised standardised approach for credit risk and the revised IRB, CVA and operational risk standards, on 1 January 2022.
The EBA guidelines on the internal governance arrangements, processes and mechanisms that credit institutions and investment firms must implement in accordance with Article 74(1) of Directive 2013/36/EU2 to ensure effective and prudent management, entered into force on 30 June 2018.

The annual Risk Assessment exercise and the revision of the Risks Catalogue permitted to identify emerging risks that may affect the Bank in the medium and long term. In addition to the emerging risks, there are also threats identified at CaixaBank Group level, which can also affect the fulfilment of the Strategic Plan's objectives, if they materialise in the future.

The more relevant emerging and strategic risks are the following:

• Persistence of an environment of low interest rates, which may affect business profitability, one of the risks identified in the Risks Catalogue.

At macroeconomic level there is the risk of a sudden rise in interest rates triggered by tensions provoked by the rising level of public and private debt and doubts about its sustainability in various countries.

Banco BPI manages the impacts of changes in interest rates through structural interest-rate risk management (risk integrated in its Risk Catalogue). This risk is managed not only according to the regulatory criteria, but also by following the best practices mentioned in the EBA and Basel Committee guidelines, with the risk being assessed from the perspective of both economic value and net interest income, and by aligning its internal methodologies with those of CaixaBank Group.

• Uncertainties with regard to the external and internal political environment / regulatory and supervisory pressure (Legal/Regulatory risk of the Risks Catalogue)

The possible emergence of political events or new regulatory standards may imply a direct or indirect impact on the macroeconomic variables or on the management of the Bank, resulting in an impact on the objectives and forecasts of the Strategic Plan.

Although this possible risk can potentially affect any management aspect of the Bank and can be related to any of the risks in the Catalogue, it is considered that it would mainly affect business profitability risk or capital adequacy/solvency risk. The Bank believes it has a robust capital position, enabling it to respond to events such as those described, and which is assessed on a permanent basis in the annual Internal Capital Adequacy Assessment Process (ICAAP), and regularly in the periodic monitoring reports.

• New competitors

The entry of new competitors (e.g. Fintechs) in the market should be expected, offering services and products liable of having negative impacts on the net interest income and fee and commission income, due to their flexibility, advanced technology and lighter cost structure.

The Bank considers that its integration in the CaixaBank Group, the synergies and expertise obtained, and its investment in digitisation and a deeper relationship with the Clients, transforming and expediting the business, are key tools to face with confidence the upcoming changes in the banking business.

• Cybercrime and data protection (as part of the technological risk of the Risks Catalogue).

The risk of cyberattacks and cybercrime is a threat to which the Bank is watchful in the management of its technological risk and in what concerns the integrity and confidentiality of information. On the other hand, the bank is also alert to the availability of its information systems and to business continuity within the management of technological risk.

• Increase of legal and customer protection risk

Legal and customer protection risk requires the Bank to pay constant attention to the privacy and protection of the personal data of its Clients, and to compliance, in the activity developed by its employees, with all legal and regulatory rules in order to avoid damaging the interests and rights of the Clients.

• Fake news

The emergence of fake news about its situation or performance leads the Bank to include the risk of fake news as part of reputational risk, monitoring any information that comes up and releasing clear and transparent contents that properly convey the news about the company.

In what concerns other emerging risks, BPI considers that it is important to manage the risks of reputation or economic loss due to a failure to identify or manage an existing or emerging sustainability risk, within the scope of the so-called ESG (Environmental, Social & Governance) risks.

3.2. Risk governance, management and control

To provide a comprehensive overview of the Bank's Risk Management and Control, the key elements of its risk management function are described below:

3.2.1. Governance and organisation

BPI's risk governance and management is schematised in the following chart:

Within Banco BPI's risk governance structure, the Risk Committee plays an important role as the body responsible for risk management. The main functions of the Risk Committee are to advise the Board of Directors on the risk strategy and global risk appetite, inform the Board of Directors on the Risk Appetite Framework (RAF) and propose risk policies.

One level below, three committees exercise the following relevant functions:

Global Risk Committee - Headed by the Central Manager of the Global Risk Management Division, the committee exercises global management, control and monitoring over the risks included in the Risks Catalogue and analyses the implications of risk appetite on solvency and capital consumption.

Permanent Credit Committee - Headed by the CRO, the committee monitors and decides on loan granting and recovery, obligatorily analysing all loan exposures (including operations fully hedged by financial assets qualifying as mitigators) within its powers.

ALCO Committee - Headed by the CFO, the committee manages, controls and monitors all Liquidity, Interest Rate and Exchange Rate structural risks within the scope of Banco BPI. In addition, it seeks to streamline and monetise the financial structure of the balance sheet, including the Net interest income and Net income from Financial Operations.

The Risk Management Function, performed by the Global Risk Management Division, is responsible for developing risk management and control and for the second line of defence. It acts independently from the risk-taking areas and has direct access to the Bank's governance bodies, in particular the Risk Committee, to which it regularly reports on the Bank's risk profile situation and expected evolution.

3.2.2. Risk management strategic processes

The Bank uses the following risk management strategic processes to identify, measure, follow-up, control and report risks:

Risk Assessment

The Bank carries out a semi-annual self-assessment process with the objective of identifying, assessing and reporting internally any significant changes in the risks inherently assumed through its business environment and business model. This semi-annual exercise also includes a self-assessment of the risk management, control and governance capabilities, as a tool to help detect best practices as well as any weaknesses in certain risks. All these exercises are reported to and analysed by the GRC.

The result of this self-assessment is also reported, at least on an annual basis, to the Risk Committee, for final approval by the Board of Directors.

Risks Catalogue

The Bank has a Risks Catalogue that helps with the internal and external monitoring and reporting of the risks:

Type of Risk	Risk definition
Business Model Risks
Business Profitability	• The risk of BPI posting results below market expectations and the targets set in its business plan and strategy, that prevent it from reaching a sustainable level of profitability above the cost of capital.
Capital/Solvency	• The risk of constraints to BPI's capacity to comply with regulatory requirements concerning capital ratios, or of a change in its risk profile due to insufficient own funds.
Liquidity and Funding	• Risk of insufficient liquid assets or limitations on access to market funding that prevent the Bank to meet contractual obligations at maturity, comply with regulatory requirements and provide for its investment needs.
	Risks Specific to Financial Activity
Credit	• Risk of financial loss due to the loss of value of the Bank's assets as a result of the deterioration of the counterparties' capacity to honour their commitments.
Losses in other assets	• Reduction in the book value of BPI's equity holdings or non-financial assets (material, immaterial, deferred tax assets, and other).
Market	• Risk of a decrease in the value of assets or increase in the value of liabilities included in BPI's trading or investment portfolio due to changes in interest rates, credit spreads, external factors or prices in the markets where these assets and liabilities are traded.
Banking Book Interest Rate	• Negative financial impact on the Balance sheet economic value, or on the Net interest income, as a result of changes in the time structure of interest rate curves that affect asset, liability or off-balance sheet products not booked in the trading portfolio.
Actuarial	• Risk of loss or decrease in the value of commitments assumed under insurance or pension agreements entered into with clients or employees, as a result of differences between the assumptions used to estimate the actuarial variables used to calculate the responsibilities and their actual performance.
	Operational, Reputational and Other Risks
Conduct and Compliance	• Application by BPI of action principles that are contrary to the interests of its clients or other stakeholders, or actions or omissions by the Bank that are out of step with the legal and regulatory framework or the internal policies, standards and procedures.
Operating Processes and External Events	• The risk of losses or damage caused by operational errors in the processes involved in BPI's activity, due to external events beyond the Bank's control, or provoked by third parties, either accidentally or fraudulently. It includes, among others, errors in the management of suppliers, in the model, and in the custody of securities.
Technological	• The risk of losses arising from inadequate technological infrastructures, or hardware or software failures, or due to cyberattacks or other circumstance liable of compromising the availability, integrity, accessibility and security of infrastructures and data.
Legal and Regulatory	• Potential losses or reduction in the Bank's profitability as a result of legal or regulatory changes (of any nature, including tax), changes in their interpretation or application by the competent authorities, or in the manner they are translated into court rulings or administrative or tax proceedings.
Reliability of the financial information	• The risk of deficiencies in the accuracy, integrity and criteria applied in the preparation of the data required to evaluate BPI's financial situation and networth.
Reputational	• The risk of loss of competitiveness due to the deterioration of trust in BPI by any of its stakeholders on account of the assessment made of acts or omissions, actual or alleged, by the Bank, its Senior Management or its Governance Bodies.

The Risks Catalogue is subject to regular review, particularly with regard to risks with a material impact. The Catalogue is reviewed at least annually, and the results are submitted to the Global Risk Committee and the Risk Committee, for final approval by the Board of Directors.

Risk Appetite Framework

The Risk Appetite Framework (RAF) is a management tool used by the Board of Directors to determine the types and thresholds of risk it is willing to assume in achieving the Group's strategic objectives. Based on the RAF, the Board of Directors sets the risk appetite assumed in the development of the Bank's activity.

Risk appetite framework:

	Responsible Body			Board of Directors (advised by the Risk Committee)	Global Risk Committee	Management areas / Risk and Human Resources controllers
			Equivalence in Risk Catalogue	Primary statements and metrics Level 1	Metrics that complement and develop the Level 1 metrics Level 2	Management levers Level 3
	Priority dimensions	Protection Against Losses The objective is to maintain a medium-low risk profile and a comfortable capital adequacy position, strengthening customer confidence through the Bank's financial strength Liquidity and Funding The certainty of being able to meet funding obligations and requirements, including in adverse conditions, through stable and diversified funding Business Composition Leadership in retail banking and balanced and diversified generation of income and capital Franchise Activity with high standards of ethics and governance, fostering sustainability, social action and operational excellence	• Business profitability • Own Funds and Solvency • Credit (Default) • Impairment in other assets • Market • Structural interest rates • Actuarial • Liquidity and Funding • Credit (Concentration) • Legal and Regulatory • Technological • Reputation • Conduct • Operational processes and events • Reliability of the financial information	• Regulatory solvency ratios • Cost of risk and Other Ratios • Internal Metrics • External Metrics • Indicators that promote diversification and minimise exposure to non-strategic assets • Quantitative metrics for non-financial risks (reputational, operational)	• Detailed metrics deriving from the factorial decomposition of Level 1 metrics or of other breakdowns. They also include more complex and specialised risk measurement parameters	• Training and Communication • Methodologies for risk measurement and valuation of assets and liabilitites (RAF monitoring) • Limits, policies and powers • Incentives and commitments • Tools and processes

				Alert System Reports
			Monthly to Global Risk Committee		Quarterly to Risk Committee	Half-yearly to BD
Level 1	Green	Tolerance • the Global Risk Committee promotes an action plan and establishes a timetable	Breach • Explanation of the reasons why the previous plan's corrective measures did not work and action proposals for approval by the Risk Committee	Recovery Plan • Recovery Plan Governance process to reduce chances of bankruptcy	• Metrics evolution and Level 1 projection • Non-compliance status and action plans	• Metrics evolution and Level 1 projection • Non-compliance status and action plans
Level 2	Based on limits

In addition to the processes referred, the Bank has processes and mechanisms in place to assess on an ongoing basis its risk profile (current, future and potential under stress scenarios). To this end, the Bank estimates the expected evolution of the boundary values of the future risk profile, and subjects them to permanent review. In addition, in the years subject to regulatory supervision (ICAAP and ILAAP), the Bank makes projections of the evolution of its risk profile under baseline and stress scenarios, which give its governance bodies a vision about the Bank's resilience to internal and/or external events.

3.2.3. Risk culture

General risk management principles

BPI's risk management principles are common to those of CaixaBank Group

Risk is inherent to the Bank's business.
Risk is the ultimate responsibility of the Board of Directors and requires involvement of Senior Management
Medium-low risk profile
Involvement of the entire organisation
Management throughout the full cycle of transactions
Joint decision-making, with a power delegation system
Independence of business and operating units
Approval based on the borrower's repayment ability and an appropriate return
The use of standard criteria and tools
Decentralised decision-making
Use of advanced techniques
Allocation of adequate resources

Training

In 2018 the Training initiatives in the area of Risk were addressed to Employees at different levels of the organisation: Management and Supervisory Bodies, Senior Management, Central Services Employees, and with greater frequency, Employees of the Commercial Networks (Individual and Corporate Clients).

The general purpose of the training contents was to impart knowledge and develop skills permitting anticipate and act upon critical risk issues, and included the theme Technological Risk - (IT Risk).

Training on Risk was particularly relevant and stressed in the Commercial Networks. An example of this was the training on Risk Groups Policy, which was provided to 964 Employees.

During the year, training projects initiated in previous years were pursued, namely focusing on Operational Risks and Customers' Risk Segmentation.The following table shows the main training initiatives on the issue of Risk developed in 2018:

Course	Addressees	No. of participants
	Management and Supervisory Body
Corporate Governance_Credit, Market, Operational and other Risks Management	(MSB)	16
	Management and Supervisory Body
Corporate Governance_Internal Audit, Internal Control and Financial Risk Management	(MSB)	16
	Management and Supervisory Body
Corporate Governance_Regulatory and Supervisory Risk Processes	(MSB)	10
	Management and Supervisory Body
Corporate Governance_Technological Risks	(MSB)	16
Submission of credit proposals in the current risk context	Commercial networks	40
Segmentation of the Customers' Risk	Commercial networks	28
Risk Management NPL (Non-Performing Loans)	Commercial networks	49
Risk Groups Policy	Commercial networks	964
	Commercial Networks, Central Services
Introduction to Operational Risk Management for OR Pivots	and BPI Vida Pensões	24
	Commercial Networks and Central
Credit Risk Management	Services	7
	Commercial Networks and Central
Interest Rate Risk Management - Derivatives and Fixed Rate	Services	2
	Commercial Networks and Central
Operational Risks	Services	369
	Commercial Networks and Central
Risk Management	Services	84
Data Protection Risk Analysis Workshop	Central Services	45
12th Annual Banking Operational Risk Management Summit	Central Services	1
Bank Risk and Finance Forum Conference	Central Services	2
FRM - Financial Risk Management Level II	BPI Asset Management	1

Performance assessment and remuneration

A risk-adjusted variable remuneration in the form of a bonus may be awarded to Executive Directors, based on performance measurement. Quantitative (financial) and qualitative (non-financial) criteria are used for performance measurement and assessment of individual results. The criteria used may include the risk appetite framework.

3.2.4. Internal control function

BPI has initiated a process of implementation of the internal control function, aligned to CaixaBank Group's methodologies as well as with the regulators' directives and best practices in the sector. This process should be fully implemented during 2019. BPI's internal control model is designed based on the "three lines of defence model".

First Line of Defence

The first line of defence is formed by the business areas, risk-takers, and their support functions. Their responsibility is to develop and maintain effective controls over the businesses, as well as to identify, manage and measure, control, mitigate and report the main risks originated in the ongoing exercise of their activity. Among others, they identify, assess and report their exposures, taking into account the Bank's risk appetite, and its policies, procedures and controls.

Second line of defence

The second line of defence acts independently from the business units and has the following functions:

The establishment of risk management and control policies in coordination with the first line of defence, subsequently assessing compliance therewith.
The identification, measurement and monitoring of risks (including emerging risks), contributing to the definition and implementation of risk indicators aligned with the RAF.
The identification of control weaknesses and the establishment and implementation of action plans.
The independent validation of internal models.
The coordination of the Risk Assessment, Risks Catalogue and RAF processes.

The activities of the second line of defence and respective outcomes are regularly reported to the bodies responsible for the control function, in accordance with the reporting lines established, as well as to the supervisor entities.

The second line of defence is formed by:

• Global Risk Management (GRM)

GRM is responsible for identifying, monitoring, analysing, measuring, managing and reporting risks, gaining an overall vision of all the risks faced by the Bank.

• Compliance

Directly answerable to the Bank's CEO, and reports directly, within the scope of its activities, to the governance bodies as well as to the supervision entities.

• Internal validation of risk models

The main objective is to issue an independent technical opinion on the adequacy of the internal models used for internal management and/or of a regulatory nature used by the Bank.

Third line of defence

Held by the Internal Audit Division, which is functionally answerable to the Audit and Internal Control Committee (AICC) and reports to the Chairman of the Board of Directors, so as to guarantee its independence and authority.

Its main objective is to provide the Bank's management and governance bodies a reasonable degree of assurance about compliance with the legislation in force, internal policies and regulations, the reliability and integrity of the financial and operational information, and the effectiveness of the systems in place to mitigate the risks associated to the Bank's activities.

3.3. Credit risk

3.3.1. Overview

Credit risk is the most significant risk item on the balance sheet, mainly arising from the banking business, treasury operations and the purchase of public and corporate debt securities.

At 31 December 2018 the maximum exposures to credit risk on the balance sheet, including counterparty risk, was as follows:

	Maximum exposure to credit risk	Impairment	Credit conversion factors (CCF)1
Financial assets held for trading
Equity instruments	81 171
Debt securities	13 893
Financial assets not designated for trading compulsorily measured at fair value through
profit or loss
Equity instruments	168 594
Debt securities	59 988
Financial assets at fair value through other comprehensive income
Equity instruments	597 740
Debt securities	1 277 420
Financial assets at amortised cost
Debt securities	3 521 342	( 4 528)
Loans and advances - Central Banks and other Credit Institutions	790 928	( 269)
Loans and advances - Customers	21 897 593	( 533 123)
Trading derivatives and hedge accounting	191 673
Total active exposure	28 600 342	( 537 920)
Total guarantees given and commitments	4 294 163	( 23 212)	(3 277 646)
Total	32 894 505	( 561 132)	(3 277 646)

¹CCF – Credit Conversion Factor for guarantees given and credit commitments.

At 31 December 2017 the maximum exposures to credit risk on the balance sheet, including counterparty risk, was as follows:

	Maximum exposure to credit risk	Impairment	Credit conversion factors (CCF)1
Financial assets held for trading
Equity instruments	134 336
Debt securities	23 368
Financial assets designated at fair value through profit or loss
Equity instruments	6 055
Available-for-sale financial assets
Equity instruments	321 109
Debt securities	3 554 053
Financial assets at amortised cost
Debt securities	1 315 852	( 9 722)
Loans and advances - Central Banks and other Credit Institutions	816 783
Loans and advances - Customers	20 959 033	( 575 276)
Trading derivatives and hedge accounting	218 595
Total active exposure	27 130 589	( 584 998)
Total guarantees given and commitments	4 858 363	( 19 226)	(3 872 534)
Total	31 988 952	( 604 224)	(3 872 534)

¹CCF – Credit Conversion Factor for guarantees given and credit commitments.

The maximum exposure to credit risk is the gross carrying amount, except in the case of derivatives, where it is the exposure value according to the mark-to-market method, which is calculated as the sum of current and potential exposures:

Current exposure: the highest value between zero and the market value of an operation or of a portfolio of operations with a counterparty which can be offset in the event of default by the counterparty, assuming that nothing from the value of the operations will be recovered in the event of insolvency or liquidation of the counterparty, except for the collateral received.
Potential risk: change in the credit exposure as a result of future changes in the valuation of an operation or in the valuation of operations that can be offset with a counterparty during the residual term to maturity.

Concerning BPI's commercial activity, the Bank gears its lending activity towards meeting the financing needs of families (consumer and residential mortgage loans) and businesses, seeking to maintain a medium-low risk profile, as established in the RAF and the 2019- 2021 Strategic Plan.

BPI shares with the CaixaBank Group the principles and policies that support credit risk management, which may be summarised as follows:

An adequate relationship between income and the commitments assumed by the consumers.
Documentary proof of the information provided by the borrower concerning its solvency.
Adequate pre-contractual information about the personal circumstances and characteristics of each Customer and operation.
Adequate independent assessment of real estate collateral.

3.3.2. Credit risk cycle

The full credit risk management cycle covers the entire life of the transaction, from feasibility studies to risk-taking in accordance with pre-established criteria. The management of the credit risk cycle is fundamental for the success of the transaction up to reimbursement.

Loan approval and granting

Credit risk management at BPI covers the entire life of the transactions. The process is designed to follow best market practices and is aligned with CaixaBank and the regulators' recommendations.

Credit risk-taking at Banco BPI is independent from the business areas, with the Credit Risk Division (CRD) being responsible for the analysis and granting of loans.

The CRD is organised into specialised teams according to the following areas of activity:

Individuals exposure to individuals, except for private banking clients;
Small Businesses and Private Banking exposure to individual entrepreneurs, companies with turnover of up to 2 million euros, loans to individuals for business purposes and loans to private banking clients;
Medium-sized Companies exposure to companies with turnover between 2 million and 50 million euros;
Large Companies, Structured Finance, Institutional Clients, Countries and Financial Institutions, which includes Risk Centres specialising in exposure to:
- Companies with turnover or total assets above 50 million euros;
- Project Finance;
- Financial entities, insurers (except non-life), sovereign risk and country risk;
- State business sector, Regional Administration, Municipalities, Catholic Church and Foundations (except Parish Councils).

The CRD Risk Centres are centralised in Lisbon and Porto. For the Small Businesses, Private Banking, Medium-sized Companies and Large Companies segments, the Clients monitored by each Risk Centre are distributed by regions, in line with the organisation of the Bank's commercial structure. However, the Bank has Risk Centres for Medium-sized Companies specialising in specific industries: construction, real estate and hotels.

This organisation ensures independence and at the same time close proximity with the specific dynamics of the regions, industry sectors and Clients, which is achieved through annually scheduled meetings with the commercial areas (which include training on credit risk issues) and with the Clients.

The analysis of the Customer risk and the approval of the loan is based on a system of internal ratings for each counterparty, taking into account the following:

The probability of default by counterparties and guarantors for the maturities in question;
The loss in case of default, taking into account any collateral;
The global value of the exposure in case of default, taking into account all on- and off-balance sheet transactions with the counterparty;
An historical and forward-looking analysis of the Client to assess its capacity to generate sufficient funds for the timely service of the debt;
The Clients global indebtedness to Banco BPI and in the financial system.

The most important bodies with delegated credit decision powers are the Credit Board and the Permanent Credit Committee (PCC). The Board of Directors (BD) also delegates powers to the Executive Committee of the Board of Directors (ECBD). This scheme ensures the approval of the largest exposures at the highest level of the organisation.

The delegation of decision powers for lower exposures is parametrised according to the global value of the exposure of the Customer in question, and also depends on the counterparty's rating, the existence of incidents and instances of default, and the individual value of the transactions and respective maturity. These powers are concentrated in the CRD.

Credit management, except for individual clients, is always undertaken from the perspective of Exposure Limits. These reflect a critical analysis of the Client's reimbursement capacity and the maximum credit involvement which, bearing in mind the commercial area's proposed credit relationship, Banco BPI deems acceptable to have with that Client, always based on prudent risk criteria.

The credit workflow is supported, from origination to contracting, by an analysis and decision software application that concentrates, discriminating the origin, all the information about the Client, the proposal, the analysis and the decisions of the competent bodies. The decision level is automatically established in accordance with each specific proposal by means of an algorithm that factors in the approval rules in force.

Exposure Limits are approved or renewed for a maximum period of one year, this period depending on the Client's rating. The Credit Risk Division is thus always called in to assess the exposure to each Client at least once a year, while at the same time the Bank has in place monitoring tools and early warnings of a deterioration in the risk of Customers or transactions, which, among others, may trigger a revision of the Exposure Limit-

This ensures an integrated vision of the relationship with the Client and the centralisation in the credit risk decision of the various factors - counterparty, amount, duration and guarantees for each category (of credit risk products considered homogeneous) and for special operations (which, on account of their specific characteristics, are not included in these categories, namely medium-and long term operations).

Moreover, this permits maximum flexibility and speed by the Commercial Divisions in the implementation of the operations throughout the duration of the Exposure Limit.

The pricing of the transactions is the responsibility of the Commercial Divisions, which for the purpose use tools that measure the Risk Adjusted Return (RAR) for each Client and transaction, bearing in mind market conditions.

Risk mitigation

Lending is always based on the assessment of the Client's capacity to generate sufficient funds for the timely service of the debt, and on a risk-adjusted pricing policy. The requirement of personal or real guarantees, as a risk mitigator, is always considered at the time of granting a loan.

In the decision to require guarantees, several factors are weighted, namely the rating assigned to the Client, and the nature and term of the operations. The term in particular is one of the more sensitive factors due to the uncertainty it entails, which is why medium and long-term transactions usually have associated real guarantees.

The rules on the acceptance of guarantees, control of their formalisation, and monitoring of their value during the transactions lifetime, through regular evaluations and their release are set out in specific internal regulations.

The guarantees foreseen in the internal regulations are those typified in the law, the most usual being personal guarantees (of individuals or companies) by endorsement or security, and in the case of real guarantees, the mortgage, the pledge of assets and the financial pledge. Financial instruments such as derivatives or repos are covered by standard agreements that establish the daily exchange of collaterals, guaranteeing coverage of the counterparty risk.

All guarantees are recorded in a dedicated software application. The funds are only made available to the Client after or upon verification of the guarantees provided.

The classification by stage of loans and advances and associated guarantees is as follows:

	31-12-2018
	Gross amount	Allowance for Impairment loss	Guarantees1
Stage 1:	19 248 322	( 25 133)	10 447 424
No associated collateral	6 712 857	( 13 227)
With real estate collateral	11 025 423	( 6 934)	10 081 688
With other collateral	1 510 042	( 4 972)	365 736
Stage 2:	1 472 225	( 52 875)	787 051
No associated collateral	355 715	( 14 362)
With real estate collateral	833 868	( 28 610)	726 602
With other collateral	282 642	( 9 903)	60 449
Stage 3:	1 017 326	( 453 659)	352 535
No associated collateral	205 964	( 123 838)
With real estate collateral	678 130	( 270 645)	348 951
With other collateral	133 232	( 59 176)	3 584
	21 737 873	( 531 667)	11 587 010

1 The value of the guarantee is the lower of the value of the guarantee received and the value of the loan, except for stage 3 operations, where fair value is calculated.

		31-12-2017 Restated
	Gross amount	Allowance for	Guarantees1
		Impairment loss
No associated collateral	6 933 178	( 230 251)
With real estate collateral	12 225 359	( 323 142)	10 840 705
With other collateral	1 748 727	( 21 792)	418 071
	20 907 264	( 575 185)	11 258 776

1 The value of the guarantee is the lower of the value of the guarantee received and the value of the loan, except for stage 3 operations, where fair value is calculated.

Monitoring and measurement of credit risk

The purpose of the monitoring process is to assess the quality of the risk taken in lending operations to a borrower and to decide on any actions that need to be taken, including the estimation of impairment. The targets of risk monitoring are borrowers that hold debt securities and off-balance-sheet exposures that bear credit risk, with the results being set as a reference for the future lending policy.

The monitoring of exposures is mainly performed according to the exposure and the risk level of the operations / borrowers, being segregated into different areas in accordance with the analysis methodology, as shown below:

1. Customised monitoring process

The customised monitoring procedures are applied in portfolios with material risk exposures and/or which have specific characteristics. These procedures consist of drafting regular reports on the borrowers' economic groups with the aim of assessing the existence of objective evidence of impairment and/or a significant increase in credit risk (SICR) since the initial recognition.

The triggers of a significant increase in credit risk (SICR) and/or default are grouped into the following categories:

Financial difficulties of the issuer or debtor (rating deterioration, defaults registered in the Banco de Portugal's Central Credit Register, lawsuits brought by third parties, etc.);
Breach of contract clauses, non-payments or delays in the payment of interest or principal on loans contracted with the Bank;
Restructuring or expected restructuring of the debtor's exposures due to risk deterioration;
Other indicators identified in specific Clients through the monitoring of their activity.

Whenever Clients with objective evidence of impairment and/or a significant increase in credit risk since the initial recognition are identified, a specific impairment is established (Individual Analysis of Impairment). For Clients classified as in default, individual impairment is determined on a going concern or gone concern basis, depending on the expectations of recovery for each borrower.

2. Quantification and classification of credit risk

Credit risk parameters

Risk measurement is based on the segmentation of risk and on the factors associated with the calculation of the expected loss:

• Exposure: Exposure at default (EAD) provides an estimate of the outstanding debt in the event of default. This measurement is significant for financial instruments with a repayment structure that varies according to customer drawdowns (credit accounts, credit cards and, in general, any revolving credit product).

The estimate is based on the observation of historical data for defaulting borrowers, comparing the drawdown levels between the time of default and during the 12 preceding months. This permits to estimate future drawdown levels according to product type, current drawdown levels and credit ceilings.

• Probability of default: the Bank uses management tools covering virtually all its loan portfolios and main risk segments to help predict the probability of default (PD) associated with each borrower.

These tools are an integral part of the credit granting and monitoring process, having been developed and calibrated in accordance with the Bank's past experience of defaults.

− Product-oriented tools are used mainly within the scope of authorisation of new loans to individuals and take account the debtor's characteristics, information on the relationship with the Customer, internal and external warnings, and the specific characteristics of the transaction - Admission Scoring.
− The monitoring tools for lending operations to individual Customers are also product-oriented, taking into account relationship variables relating to the Bank and the financial system - Behavioural Scoring.

Rating tools for companies and small businesses vary considerably depending on the risk segment. The assessment process for medium-sized Companies is based on a hybrid model that combines two components: (i) a quantitative algorithm that mainly draws information from the financial statements, and (ii) an expert analysis component that takes into account other quantitative and qualitative aspects, namely management quality, market position, and others.

For large companies, the Bank uses models that seek to replicate the ratings assigned by rating agencies and require the expert criteria of rating analysts. In view of the lack of sufficient statistical frequency of internal default delinquency in this segment, the models were built in line with Moody's methodology.

Individual clients' operations are scored on a monthly basis in order to keep the credit rating up-to-date. Companies' ratings are updated at least annually, and whenever significant events occur that can alter the borrower's credit quality. In this segment, qualitative information and information about the financial statements is updated on a regular basis so as to achieve the maximum level of coverage and update of the internal rating.

• loss given default (LGD): LGD is the percentage of debt that cannot be recovered in the event of default by the Client.

LGD is calculated based on internal historical information, taking into account the cash flows associated with contracts from the moment of default until the default has been corrected or until there cease to exist any relevant expectations of recovery. This calculation also includes estimates of loan recovery costs.

3. Determination of accounting classification

The accounting classification of operations with credit risk into the different IFRS 9 Stages is established according to whether there has been a significant increase in credit risk since the operation's initial recognition, and/or whether a default event has occurred.

A significant increase in credit risk, and consequent classification of the transaction in Stage 2, is deemed to have occurred, when there are indications of difficulties or weaknesses that could justify an expectation of significantly higher losses than at the time the credit was granted.

In the case of individually significant Clients (Single Names) the classification in Stage 2 (or 3) results from a case-by-case analysis of their financial situation, as part of the credit monitoring process of these Clients or groups of Clients. This process involves the ongoing assessment of evidence or indications of a deterioration in credit risk, namely a significant increase in risk since initial recognition. The monitoring process and corresponding staging of the operations is supported by a set of triggers associated to the Client or the transaction, which may represent indications of a deterioration of the asset. The analysts should value these indications and, on this basis, classify or not the operations in Stage 2 or 3.

Save in duly justified situations, the following operations are classified in Stage 2: i) Credit operations restructured due to financial difficulties, but not classified as in default (Stage 3); (ii) Operations with material arrears of more than 30 days; (iii) Operations with a significant increase in the PD; iv) Operations with Clients with significant arrears communicated through Banco de Portugal's Central Credit Register; v) Operations with Clients in watchlist or showing a series of early warning signals permitting to perceive a significant increase in credit risk.

Operations that no longer meet the conditions for classification in Stage 2 are reclassified to Stage 1.

An event of default is considered to have occurred (leading to the classification of the Client exposure in Stage 3) when there are significant amounts overdue and unsettled for more than 90 days.

In addition to the criterion for reclassification referred above, the following operations are classified in Stage 3: with impairment coverage above 20%, when resulting from individual analysis; ii) of Clients in litigation with the Bank; iii) of Clients that are insolvent or in "Special Revitalisation Process" or subject to lawsuits brought by third parties which signal a deterioration in credit risk; iv) of Clients with material amounts of credit written off from assets; v) that were restructured due to economic difficulties, leading to a significant economic loss; vi) that were restructured due to economic difficulties and classified as non-performing (or in probation period) with overdue and unsettled material amounts for more than 30 days; vii) that were restructured due to economic difficulties and classified as non-performing (or in probation period) and benefit from new restructuring measures due to financial difficulties; ix) in other situations indicating a high probability of defaulting on the conditions contracted.

Except for the Retail segments (residential mortgage loans, personal loans, etc), the classification of default is propagated to all the other operations of the same borrower. In the Retail segments, the other operations of the borrowers are classified in default whenever the portion that meets the above-mentioned criteria exceeds 20% of the total exposure of the operations in which the Client is involved as the holder.

From the moment each of the criteria for classification in Stage 3 cease to apply, the operations shall maintain the classification of default (Stage 3) for a minimum remedial period (of 4 to 12 months).

4. Determination of impairment coverage

In accordance with the IFRS9 requirements for a significant change in credit quality, expected credit losses in operations, assessed collectively or individually, considering all the reasonable and substantiated information available, including forward looking information, must be recognised.

Principles for measuring expected credit losses for the purpose of determining impairment coverage

The coverage or provision calculated is defined as the difference between the gross carrying amount of the operation and the present value of expected future cash flows, discounted at the effective interest rate of the operation and considering the guarantees received that are deemed effective.

The Bank estimates the expected credit losses of an operation so that these losses reflect:

an amount weighted for the unbiased probabilities of occurrence of a series of possible future results (probabilities of occurrence in the baseline, optimistic and pessimistic scenarios);
the time value of money; and
reasonable and sustainable information that is available at the reference date, at no disproportionate cost or effort, on past events, current conditions and forecasts of future economic conditions.

Under the applicable rules, the coverage calculation method is determined according to whether the borrower is individually significant or not and in accordance with its accounting category (operations staging).

• If, in addition to being individually significant, the customer has operations in default or in Stage 2, the specific impairment allowances for these operations are estimated through a detailed analysis of the Customer's capacity to generate cash flows through its activity (going concern approach) or of the cash flows that may result from the enforcement of the guarantees received from the Client (gone concern approach).

• In all other cases, impairment coverage is estimated collectively using internal methodologies, based on past experience of portfolio defaults and recoveries, including recoveries obtained through the enforcement of guarantees received.

Collective credit impairment is calculated using probability of default (PD) estimation models, loss given default (LGD) estimation models, models to estimate drawdowns on credit ceilings, and adjustments to factor in lifetime and forward-looking effects.

The models used are re-estimated or updated at least once a year and executed monthly so as to factor in at all times the economic context at the time and the credit performance. This makes it possible to reduce the differences between estimated loss and recent observations. The models include a forward-looking perspective to determine the expected loss, taking into account the more relevant macroeconomic factors: i) GDP growth, ii) the unemployment rate, iii) the 6-month EURIBOR, and iv) the evolution of home prices. Following on from this, the Group generates a baseline scenario, as well as a range of potential scenarios that make it possible to adjust the estimated expected loss, by weighting the probability of its occurrence.

The calculation process is structured in two steps:

Determination of the basis subject to impairment: Corresponds to the sum of the gross carrying amount of the operation at the time of calculation plus off-balance sheet amounts (available ceiling and guarantees) that could be expected to be disbursed after the Client is classified as impaired (stage 3).

Determination of the coverage to apply to the basis subject to impairment: This calculation is made based on the probability of the borrower defaulting on the operation obligations, and the expected loss in case of default (loss given default), Loss given default reflects, namely in the case of residential real estate collateral, the expected recoverable amount on the future sale of that collateral minus the costs incurred up to that sale.

For portfolios that are not materially relevant, or when past experience is not significant, the expected loss estimation approach is simplified.

In the specific case of exposures that, due to the nature of the borrower or guarantor, are classified as having low credit risk, the impairment coverage rate may be 0% (on the risk hedged).

The coverages estimated individually or collectively must be consistent in terms of the stages in which the operations may be classified. Thus, the coverage level for an operation must be equal to or higher than the coverage level it would have if it were classified in a lower credit risk category.

Any necessary improvements detected during the model revision exercises, namely through backtesting and benchmarking exercises, are introduced in the model. The models developed are documented so they can be replicated by a third party. The documentation contains key definitions, information regarding the process of data collection and processing, the methodological criteria adopted and the results obtained.

Banco BPI has a total of 50 models, in order to obtain the necessary parameters to calculate coverages based on a collective analysis. For each of the risk parameters, different models can be used according to each type of exposure:

The existing models are detailed below:

12 Scoring and Rating parameter models
10 PD parameter models
1 CCF parameter model
7 LGD parameter model
7 LGD in default parameter models
1 Haircut parameter model
12 forward looking PD and LGD macroeconomic models

Segments that do not have their own models are, broadly speaking, Project Finance (PF), the State Business Sector (SBS), Insurers (I), Financial companies (F), Individuals with Commercial Loans (ICL). It should be noted, however, that PD and LGD is estimated for these segments

Incorporation of forward-looking information into the expected loss models

The variables considered for the Portuguese economy are as follows:

Forward looking macroeconomic indicators

	2019	2020	2021
GDP growth1
Baseline scenario	2.1%	2.0%	1.8%
Upside range	2.9%	2.3%	1.8%
Downside range	1.1%	1.1%	1.8%
Unemployment rate2
Baseline scenario	6.9%	6.4%	6.4%
Upside range	5.8%	5.1%	5.1%
Downside range	9.1%	8.9%	8.9%
6-M Euribor3
Baseline scenario	0.09%	0.57%	0.88%
Upside range	0.23%	1.01%	1.49%
Downside range	-0.23%	0.09%	0.25%
Home prices evolution4
Baseline scenario	1.4%	1.8%	1.9%
Upside range	1.8%	2.1%	2.2%
Downside range	0.6%	1.0%	1.1%

¹Source: National Statistics Institute; Estimate for 2021 with reference to the month of June.

²Source: National Statistics Institute; Estimate for 2021 equal to Dec. 2020.

³Source: CaixaBank

⁴Source: National Statistics Institute; Estimate for 2021 with reference to the month of June.

Probability of occurrence of the forecast scenarios

	Scenario	Scenario	Scenario
	Baseline	Upside	Downside
Portugal	40%	30%	30%

A sensitivity analysis of the expected loss was performed based on changes in the key hypotheses applied separately to calculate the expected loss. The estimated sensitivity to a change in GDP projected growth in the next 12 months is shown below:

Exposure sensitivity analysis

	Change in
	Expected loss
GDP growth
+0.5%	( 7 000)
-0.5%	7 000

5. Determination of impairment of financial assets

A description of impairment of financial assets is given in Note 2.7. Impairment of financial assets.

NPL management

The identification, as soon as possible, of indicators of financial difficulties of clients to which BPI has credit exposure has been a priority for the Bank. In a first phase, it is the commercial network that takes action when a Client shows indications of financial difficulties, as, due to its capillarity and specialisation, it in a better position to know the client, detect the first indications of deterioration and promptly propose adequate measures.

Once these Clients have been identified, there are specific mechanisms for regularly reporting, by Client or portfolio, to specific Committees of Banco BPI. The purpose is to ensure that the Bank acts as soon as possible in order to maximise the amount of recovery.

When necessary, responsibility for monitoring the Client and the recovery process is transferred to a specialised unit (Credit Recovery Division), which uses an integrated model covering all the phases of recovery, including the management of the foreclosed assets.

In the case of loans to Companies or Small Businesses, as a rule the Bank seeks non-judicial restructuring of the debt which, when credible, may involve extending the maturity and possibly even a moratorium on principal with the payment of interest in arrears and reinforced security. Also as a rule, the Bank does not increase its exposure, accept payment in kind or convert debt into capital.

In the case of recovery of loans to Individuals, restructuring or renegotiation agreements are also a preferred path for recovery providing that there is the minimum prospect of their being complied with. The choice is largely dependent on the length of default and on the loan product, and it could involve extending the maturity and implementing a payment plan of outstanding and unpaid instalments, amongst other solutions.

Once a restructuring operation has been completed, the process is duly monitored. Non-compliance with the agreed plan sets into motion the judicial recovery of the debt. Where the debt restructuring is not feasible, the loan is subjected to judicial execution.

The information on the status of the recovery process and likelihood of its success is factored into the determination of individual impairment, considered the worst prospect for recovery.

		31-12-2018		31-12-2017 Restated
	Gross		Balance Sheet	Gross		Balance Sheet Value
	Value	Impairment	Value	Value	Impairment
Homes	22 591	3 093	19 498	35 215	1 163	34 052
Other	29 014	15 786	13 228	45 095	14 610	30 485
Total	51 605	18 879	32 726	80 310	15 773	64 537

The table below shows the book value and impairment of property foreclosed for the payment of debt:

Restructuring policies

A description of the restructuring policies is given in Note 2.8. Refinancing and restructuring operations.

Restructured loans

The breakdown of refinancing by industry sector is as follows:

31-12-2018

		al Tot
	tho olla Wi ut c	al ter	th col late ral Wi
	Nu mb f er o	Exp osu re	f tra Nu mb er o ctio nsa ns	Exp osu re	t of Ma xim th olla al ter um am oun e c tha n b ide red t ca e c ons		Imp airm ent
	ctio tra nsa ns				Rea l es tat e rtg mo age	Oth olla al ter er c
Pub lic a dm inis tio tra ns	24	6 3 40	4	11 819		11 818
Oth er f al c nd ind ivid ual rs ( fina al b s) ina nci tio nci usi tre orp ora ns a en pre neu nes	7	181	1	19	19		( 70)
n-f al c nd ind ivid ual No ina nci tio orp ora ns a s (n fina nci al b usi s) ent rep ren eur on- nes	1 9 69	164 81 3	427	370 64 0	152 73 8	75 958	( 4) 199 51
Ind ivid ual s	4 6 38	33 505	6 7 67	234 21 4	228 59 6	583	( ) 76 543
al Tot	6 6 38	204 83 9	7 1 99	616 69 2	381 35 3	88 359	( 7) 276 12

Note: Includes securitised loans, Customer loans and guarantees

	Of wh ich : St 3 age
	tho Wi ut c	olla al ter	th col late ral Wi
	Nu mb f er o ctio tra nsa ns		f tra Nu mb er o re ctio nsa ns		Ma xim t of th olla al ter um am oun e c tha n b ide red t ca e c ons		Imp airm ent
		Exp osu		Exp osu re	l es Rea tat e rtg mo age	Oth olla al ter er c
er f rs ( fina s) Oth ina nci al c tio nd ind ivid ual nci al b usi tre orp ora ns a en pre neu nes	4	106	1	19	19		( 66)
n-f ina nci al c tio nd ind ivid ual No orp ora ns a s (n fina al b s) nci usi ent rep ren eur on- nes	1 3 89	86 480	310	249 91 5	127 70 7	61 883	( 8) 194 03
ual Ind ivid s	2 4 48	21 423	5 3 98	182 64 2	177 72 1	230	( ) 74 320
al Tot	3 8 41	108 00 9	5 7 09	432 57 6	305 44 7	62 113	( 4) 268 42

Note: Includes securitised loans, customer loans, guarantees, and stage 3 loans

01-01-2018

	al Tot
	tho olla Wi ut c	al ter	th col late ral Wi
		f Exp osu re ns			t of Ma xim th olla al ter um am oun e c tha n b ide red t ca e c ons		Imp airm ent
	Nu mb er o ctio tra nsa		f tra Nu mb er o ctio nsa ns	Exp osu re
					Rea l es tat e rtg mo age	Oth olla al ter er c
Pub lic a dm inis tio tra ns	28	23 458	4	10 072		10 072	( 1)
Oth er f al c nd ind ivid ual rs ( fina al b s) ina nci tio nci usi tre orp ora ns a en pre neu nes	17	287	1	25	25		( ) 139
n-f al c nd ind ivid ual No ina nci tio orp ora ns a s (n fina al b s) nci usi ent rep ren eur on- nes	4 3 16	464 46 9	394	510 62 7	152 01 3	93 849	( 1) 228 65
Of wh ich for l es d d lop : Fi cin tion tat nst nt nan g rea e co ruc an eve me
Ind ivid ual s	6 8 39	62 262	6 8 36	236 21 8	229 18 9	874	( ) 91 445
al Tot	200 11	550 6 47	7 2 35	756 94 2	381 22 7	104 79 5	( 320 23 5)

Note: Includes securitised loans, Customer loans and guarantees

	Of wh ich : St 3 age
	Wi tho ut c	olla al ter	Wi th col late ral
					xim t of th olla al Ma ter um am oun e c tha n b ide red t ca e c ons		airm Imp ent
	mb f Nu er o ctio tra nsa ns	Exp osu re	f tra mb Nu er o ctio nsa ns	Exp osu re
					l es Rea tat e rtg mo age	Oth olla al ter er c
Pub lic a dm inis tio tra ns	1	32					( 1)
er f rs ( fina s) Oth ina nci al c tio nd ind ivid ual nci al b usi tre orp ora ns a en pre neu nes	13	210	1	25	25		( ) 138
n-f ina nci al c tio nd ind ivid ual No orp ora ns a s (n fina al b s) nci usi ent rep ren eur on- nes	3 7 33	196 45 2	282	165 03 2	75 124	7 9 64	( 8) 210 42
ual Ind ivid s	4 3 62	39 607	6 2 94	213 23 7	206 89 7	363	( ) 89 482
al Tot	8 1 09	236 30 2	6 5 77	378 29 4	282 04 6	8 3 27	( 0) 300 05

Note: Includes securitised loans, customer loans, guarantees, and stage 3 loans

The detail of guarantees received to secure restructured loans¹ at 31 December 2018 and 2017 is as follows

	31-12-2018	01-01-2018
Value of collateral	890 010	1 061 369
Of which: Stage 3 guarantee	634 501	676 046
Value of other guarantees	340 185	177 222
Of which: Stage 3 guarantee	310 229	24 147
	1 230 195	1 238 591

1 The value of the guarantee is the maximum amount of the guarantee received, except for stage 3 operations, where it is considered at fair value.

The movement in restructured loans is as follows:

	31-12-2018	31-12-2017 Restated
Opening balance	987 183	1 157 656
Restructurings in the year	191 856	353 312
Debt amortisation	( 205 294)	( 351 967)
Property recovered or foreclosed	( 669)	( 1 919)
Other changes	( 427 672)	( 169 899)
Of which:
Exit from restructuring	( 242 128)
Loan sales	( 57 501)
Balance at end of period	545 404	987 183

3.3.3. Concentration Risk

In Banco BPI's Risk Catalogue concentration risk is conceptually included within credit risk, and is calculated according to CaixaBank Group's best practices.

Banco BPI's Risk Appetite Framework (RAF) uses metrics to systematically identify overall exposure to a particular Customer or geographic location, as well as appetite limits to concentration risk.

Concentration in customers or in "large exposures"

As part of the risk-taking process, the Bank monitors compliance with the regulatory limits (25% of own funds) as well as with limits to concentration risk appetite. At the end of 2018 none of the established limits had been breached.

Concentration by geographic location

The breakdown of risk of financial assets and guarantees and sureties provided, by geographical location, is as follows:

31-12-2018

	Total		Portugal Other EU countries Other world countries
Central Banks and credit institutions	3 657 909	2 366 910	567 216	723 783
Public sector	4 661 776	2 729 873	1 710 069	221 834
Central government	3 583 269	1 651 366	1 710 069	221 834
Other public administrations	1 078 507	1 078 507
Other financial corporations and individual entrepreneurs (financial business)	813 544	364 315	387 047	62 182
Non-financial corporations and individual entrepreneurs (non-financial business)	10 177 278	9 628 010	512 203	37 065
Real estate construction and development	511 879	506 757	4 248	874
Civil construction	265 659	255 714	9 945
Other	9 399 740	8 865 539	498 010	36 191
Large companies	5 528 403	5 048 720	455 185	24 498
Small and medium-sized companies	3 871 337	3 816 819	42 825	11 693
Individuals	12 353 896	12 281 310	17 067	55 519
Homes	11 001 828	10 987 944	2 804	11 080
Consumer spending	958 897	913 961	11 703	33 233
Other	393 171	379 405	2 560	11 206
Total	31 664 403	27 370 418	3 193 602	1 100 383

Note: Includes deposits at central banks and credit institutions, financial assets not designated for trading compulsorily measured at fair value through profit or loss, financial assets at fair value through other comprehensive income, financial assets at amortised cost, investments in joint ventures and associates, and guarantees and sureties. Amounts net of impairments

31-12-2017 Restated

	Total		Portugal Other EU countries Other world countries
Central Banks and credit institutions	2 419 851	1 081 526	459 971	878 355
Public sector	4 910 728	4 527 059	197 633	186 036
Central government	3 999 526	3 615 857	197 633	186 036
Other public administrations	911 202	911 202
Other financial corporations and individual entrepreneurs (financial business)	634 543	388 576	167 700	78 267
Non-financial corporations and individual entrepreneurs (non-financial business)	9 392 570	8 775 282	582 520	34 768
Real estate construction and development	363 691	356 699	6 948	44
Civil construction	257 327	246 071	11 221	35
Other	8 771 552	8 172 512	564 351	34 689
Large companies	5 189 582	4 636 276	529 046	24 260
Small and medium-sized companies	3 581 970	3 536 236	35 305	10 429
Individuals	12 249 965	12 152 227	41 767	55 970
Homes	10 923 556	10 884 731	24 875	13 949
Consumer spending	785 792	751 204	12 098	22 489
Other	540 617	516 292	4 794	19 532
Total	29 607 657	26 924 670	1 449 591	1 233 396

Note: Includes deposits at central banks and credit institutions, financial assets at fair value through profit or loss, available-for-sale financial assets, financial assets at amortised cost and investments in joint ventures and associates.

Concentration by industry sector

Risk concentration by economic sector is subject to BPI's RAF limits (level 1), differentiating between private sector economic activities and public sector financing.

At 31 December 2018 and 2017, the breakdown of credit by industry sector, type of collateral and loan to value (LTV) was as follows:

31-12-2018

	Bal f et o anc e n imp airm ent s	Of wh ich al Col late rali sed loa ing Car : re ns ry am Of wh ich her : ot					t b d o n la aila ble isa l ( ) LTV tes t av oun ase ap pra
		est ate rtg mo age d sec ure	col late ral	≤ 4 0 %	> 4 0 % ≤ 60 %	> 6 0 % ≤ 80 %	> 8 0 % ≤ 100 %	> 1 00%
Cen l Ba nks d c red it in stit utio tra an ns	758 23 5
Pub lic s ect or	1 2 19 795	3 8 78	327 23 2	61 320	82 842	91 762	65 991	29 194
Cen l go tra ent ver nm	367 50 0		13 026					13 026
Oth ubl dm ic a inis tio tra er p ns	852 29 5	3 8 78	314 20 6	61 320	82 842	91 762	65 991	16 168
er f rs ( fina Oth ina nci al c tio nd ind ivid ual nci al tre orp ora ns a en pre neu bus ss) ine	216 23 6	7 2 93	32	4 3 35	40	2 0 99	16	835
n-f al c nd ind ivid ual No ina nci tio orp ora ns a s (n fina al b s) nci usi ent rep ren eur on- nes	7 4 08 745	1 2 53 511	1 2 28 046	517 87 7	378 94 2	347 36 1	239 42 7	997 94 7
l es nd dev elo Rea ctio tat tru ent e c ons n a pm	376 07 4	120 39 0	84 030	91 694	13 589	18 260	5 8 11	75 066
il co Civ tio nst ruc n	111 45 4	6 3 61	31 821	1 5 07	4 8 32	57	761	31 024
Oth er	6 9 21 217	1 1 26 760	1 1 12 195	424 67 6	360 52 1	329 04 4	232 85 5	891 85 7
Lar ies ge com pan	3 3 26 480	361 48 5	825 97 0	192 80 4	111 13 5	109 73 2	91 044	682 73 9
Sm all and diu ized ani me m-s co mp es	3 5 94 737	765 27 5	286 22 5	231 87 2	249 38 6	219 31 2	141 81 1	209 11 8
Ind ivid ual s	12 330 45 6	10 966 55 1	296 55 5	2 2 67 439	3 0 50 261	4 4 41 386	1 3 63 255	140 76 4
Ho me s	11 001 82 8	10 912 50 8	60 040	2 2 38 635	3 0 18 819	4 3 71 757	1 2 53 880	89 457
Con din sum er s pen g	958 89 7	51	187 94 7	6 3 55	241 14	42 950	87 114	37 338
Oth er	369 73 1	53 992	48 568	22 449	201 17	26 679	22 261	13 969
Tot al	21 933 46 7	12 231 23 3	1 8 51 865	2 8 50 971	3 5 12 085	4 8 82 608	1 6 68 689	1 1 68 740

Note: Includes Loans to central banks, credit institutions and Customers (does not include debt securities and other customer applications). Map built based on commercial segmentation.

31-12-2017 Restated

		Of wh ich al Col late rali sed loa t b d o n la aila ble Car ing tes t av : re ns ry am oun ase Bal f Of wh ich her et o : ot anc e n					l ( isa ap pra	) LTV
	imp airm ent s	est ate rtg mo age d sec ure	col late ral	≤ 4 0 %	> 4 0 % 60 % ≤	> 6 0 % 80 % ≤	> 8 0 % 100 % ≤	> 1 00%
l Ba nks d c red Cen it in stit utio tra an ns	732 51 7
Pub lic s ect or	06 235 1 1	089 11	273 87 0	337 54	89 341	87 533	101 44	9 6 47
Cen l go tra ent ver nm	326 05 9		61			61
Oth ubl ic a dm inis tio tra er p ns	780 17 6	11 089	273 80 9	54 337	89 341	87 472	44 101	9 6 47
Oth er f ina nci al c tio nd ind ivid ual rs ( fina nci al tre orp ora ns a en pre neu
bus ss) ine	124 78 0	7 0 66	379	6 0 13	38	363	1	1 0 29
n-f ina nci al c tio nd ind ivid ual No orp ora ns a s (n fina al b s) nci usi ent rep ren eur on- nes	6 8 92 276	1 0 17 199	1 1 29 633	387 84 6	317 31 4	272 27 7	221 91 2	947 48 3
l es nd dev elo Rea ctio tat tru ent e c ons n a pm	238 58 4	72 534	25 575	34 014	14 450	22 752	7 5 67	19 326
il co Civ tio nst ruc n	115 43 5	7 5 37	34 441	2 5 56	2 0 91	3 0 27	1 2 94	33 010
Oth er	6 5 38 257	937 12 8	1 0 69 617	351 27 6	300 77 3	246 49 8	213 05 1	895 14 6
ies Lar ge com pan	3 2 07 649	301 67 8	708 60 8	163 99 1	121 95 0	57 916	34 777	631 65 3
Sm all and diu ized ani me m-s co mp es	3 3 30 608	635 45 0	361 00 9	187 28 5	178 82 3	188 58 2	178 27 5	263 49 3
Ind ivid ual s	12 200 99 9	10 866 86 2	323 05 3	1 9 66 576	2 5 84 762	4 0 91 636	2 3 17 874	229 06 7
Ho me s	10 923 55 6	10 811 11 9	70 376	1 9 35 608	2 5 53 375	4 0 16 719	2 2 05 334	170 45 9
din Con sum er s pen g	785 79 2	81	177 27 2	5 7 79	13 923	39 294	83 733	34 624
Oth er	491 65 1	55 663	75 406	25 189	17 464	35 623	28 807	23 985
al Tot	21 056 80 7	902 21 6 11	26 935 1 7	2 4 14 771	2 9 91 456	809 4 4 51	2 5 83 889	87 226 1 1

Note: Includes Loans to central banks, credit institutions and Customers (does not include debt securities placed and other customer applications). Map built based on commercial segmentation.

Concentration by interest rate type and arrears status

The tables below show the detail of loans and advances to Customers and respective impairment by stage.

The breakdown of loans and advances to Customers (net of impairments) is as follows:

	31-12-2018			31-12-2017 Restated
	Stage 1	Stage 2	Stage 3	Total
By industry sector	19 378 871	1 420 360	565 239	20 383 757
Public sector	1 189 532	36 089	1 289	1 110 874
Other financial corporations and individual entrepreneurs (financial
business)	377 074	2 769	177	172 413
Non-financial corporations and individual
entrepreneurs (non-financial business)
Real estate construction and development	327 856	32 605	15 627	238 624
Civil engineering	94 729	15 035	1 696	115 436
Other
Large companies	2 897 568	328 146	108 762	3 212 859
Small and medium-sized companies	3 350 770	192 094	61 008	3 331 047
Individuals
Home loans	9 920 402	724 930	356 496	10 923 556
Consumer spending	867 491	75 211	16 195	785 792
Other	353 449	13 481	3 989	493 156
By interest rate type	19 378 871	1 420 360	565 239	20 383 757
Fixed rate	2 714 103	184 009	45 083	2 291 358
Variable rate	16 664 768	1 236 351	520 156	18 092 399
By number of days in arrears	19 378 871	1 420 360	565 239	20 383 757
Up to 30 days1	19 372 222	1 395 586	231 556	20 019 215
30 to 60 days	5 187	15 376	24 839	44 482
61 to 90 days	177	5 822	15 724	28 217
91 days to 6 months	181	3 070	41 795	42 404
6 to 12 months	90	249	48 423	28 218
More than 1 year	1 014	257	202 902	221 221

1 Includes regular credit (with no days of arrears).

The breakdown of Customer loan impairments by calculation method and stage is as follows:

		31-12-2018
	Stage 1	Stage 2	Stage 3	Total
Impairments determined individually / collectively
Specific determined individually		( 16 500)	( 183 111)	( 185 428)
Collective	( 25 186)	( 36 378)	( 271 948)	( 389 848)

Concentration by credit quality

The tables below show the concentration of credit risk by rating of exposures in debt securities held by the Bank:

Credit risk quality (rating)

The breakdown of debt securities by rating class at 31 December 2018 and 2017 is as follows:

31-12-2018

	Financial assets held for trading	Financial assets not designated for trading compulsorily measured at fair value through profit or loss	Financial assets at fair value through other comprehensive income	Financial assets at amortised cost	TOTAL
A+/A/A-				49 950	49 950
BBB+/BBB/BBB-	4 532	1 079	1 277 420	1 797 552	3 080 583
Investment grade	4 532	1 079	1 277 420	1 847 502	3 130 533
	33%	2%	100%	53%	64%
BB+/BB/BB-		53 868		269 991	323 859
B+/B/B
No rating	9 361	5 041		1 399 321	1 413 723
Non-investment grade	9 361	58 909		1 669 312	1 737 582
	67%	98%		47%	36%
	13 893	59 988	1 277 420	3 516 814	4 868 115

31-12-2017 Restated

	Financial assets held for trading	Available-for-sale financial Financial assets at amortised cost assets	TOTAL
A+/A/A-			57 103	57 103
BBB+/BBB/BBB-	11 185	3 500 116		3 511 301
Investment grade	11 185	3 500 116	57 103	3 568 404
	48%	98%	4%	73%
BB+/BB/BB-		53 937	101 887	155 824
B+/B/B-			54 362	54 362
No rating	12 184		1 092 778	1 104 962
Non-investment grade	12 184	53 937	1 249 027	1 315 148
	52%	2%	96%	27%
	23 369	3 554 053	1 306 130	4 883 552

The breakdown of loans and advances to Customers by rating class is as follows:
---------------------------------------------------------------------------------	--

			31-12-2018		31-12-2017 Restated
Non-Default Exposures			20 799 221	97%	19 583 347	96%
		AAA to AA-	111 511	1%
		A+ to A-	3 124	0%
		BBB+ to BBB-	870 114	4%	787 959	4%
	External Rating	BB+ to BB-	40 694	0%	46 265	0%
		B+ to B-	51 749	0%	57 208	0%
		< B-	34	0%	138	0%
		Strong	73 565	0%	88 062	0%
	Rating	Good	826 533	4%	929 734	5%
	Project Finance	Satisfactory	244 784	1%	136 786	1%
		Weak	17 891	0%	6 397	0%
		E01 to E03	875 301	4%	696 488	3%
	Rating	E04 to E06	1 973 240	9%	1 912 778	9%
Companies	E07 to E10	972 417	5%	905 314	4%
	ED1 to ED2	907	0%	5	0%
		N01 to N03	76 262	0%	62 165	0%
Rating Businessmen		N04 to N06	735 409	3%	639 549	3%
	Small Businesses	N07 to N10	800 144	4%	766 005	4%
		ND1 to ND2	3 162	0%	671	0%
		01 to 03	4 010 775	19%	4 277 096	21%
Scoring	04 to 06	5 083 357	24%	4 898 798	24%
	07 to 10	2 646 132	12%	2 254 734	11%
	D01 to D02	17 031	0%	13 767	0%
	No rating		1 365 085	6%	1 103 428	5%
Defaulting Exposures			565 249	3%	800 410	4%
			21 364 470	100%	20 383 757	100%

Note: Exposure net of impairments (the amounts shown include accrued interest)

CRR default criterion (Regulation (EU) 575/2013)

Concentration by sovereign risk

Banco BPI's exposure to entities with sovereign risk is subject to the general risk-taking policy, which ensures that all positions taken are aligned with the target risk profile. Therefore, metrics and limits of exposure to the Portuguese public sector and to the public sector of all other countries were established in the Risk Appetite Framework. The Bank's exposure to entities with sovereign risk is for the most part concentrated in Portugal, Spain and Italy.

Exposure to entities with sovereign risk

The table below shows the breakdown of BPI's exposure to sovereign debt:

31-12-2018

		Financial assets held for trading	Financial assets at fair value through other comprehensive income	Financial assets at amortised cost 1
Country	Residual maturity
	Less than 3 months		50 044	10 319
	3 months to 1 year		740 618	18 589
	1 to 2 years			53 415
Portugal	2 to 3 years	4 167		550 382
	3 to 5 years	365		143 777
	5 to 10 years			475 306
	More than 10 years			533 141
		4 532	790 662	1 784 929
Spain	2 to 3 years		307 939	712 423
			307 939	712 423
	Less than 3 months		178 819
	1 to 2 years			401 054
Italy	2 to 3 years			100 698
			178 819	501 752
Other	2 to 3 years			49 486
	3 to 5 years			9 698
	5 to 10 years			83 434
	More than 10 years			78 283
				220 901
		4 532	1 277 420	3 220 005

¹Does not include interest receivable.

31-12-2017 Restated

		Financial assets held for trading	Financial assets at fair value through other comprehensive income	Financial assets at amortised cost 1
Country	Residual maturity
	Less than 3 months		895 281	3 197
	3 months to 1 year		2 087 321	19 333
	1 to 2 years		328 781	15 778
	2 to 3 years			76 240
Portugal	3 to 5 years	5 466		83 156
	5 to 10 years			376 743
	More than 10 years			479 603
		5 466	3 311 383	1 054 050
	Less than 3 months	1 567
Spain		1 567
	3 months to 1 year	4 152
Italy	1 to 2 years		187 272
		4 152	187 272
	Less than 3 months			9
	1 to 2 years			6 811
Other	2 to 3 years			7
	3 to 5 years			98 724
	More than 10 years			78 283
				183 834
		11 185	3 498 655	1 237 884

¹Does not include interest receivable.

3.3.4. Relevant information regarding financing for property construction and development, home purchasing, and foreclosed assets

Relevant information regarding financing for property development, home purchasing, and assets delivered to the Bank for the payment of debts is provided in the following section.

Financing for real estate construction and development

The tables below show the level of financing provided to real estate construction and development at the end of 2018 and 2017:

31-12-2018
Loans and advances at amortised cost	Gross amount	Impairment	Value net of impairments	Excess over the maximum recoverable value of collateral
Real estate construction and development	430 347	( 54 273)	376 074	229 498
of which: Stage 3	64 959	( 49 331)	15 628	2 672
31-12-2017 Restated
Loans and advances at amortised cost	Gross amount	Impairment	Value net of impairments	Excess over the maximum recoverable value of collateral
Real estate construction and development	296 678	( 58 094)	238 584	143 498
of which: Stage 3	103 572	( 56 765)	46 807	4 320

The following table presents the value of financial guarantees given for real estate construction and development, which indicates the maximum level of exposure to credit risk (i.e. the amount the Bank would have to pay if the guarantee were called on).

	31-12-2018			31-12-2017 Restated
	Gross value	Impairments and provisions	Gross value	Impairments and provisions
Guarantees provided
Real estate construction and development	135 490	5 972	124 268	3 794

The table below provides information on guarantees received for real estate development loans, broken down by classification of customer insolvency risk:

		31-12-2018		31-12-2017 Restated
	Real estate	Other	Real estate	Other
	mortgage	collateral	mortgage	collateral
Real estate construction and development	468 950	46 194	320 804	41 042
of which: Non-performing	80 116	63	201 351	20

Home loans

The table below shows the evolution of home loans¹ :

		31-12-20183		3 31-12-2017 Restated
Not real estate mortgage secured	211 372	2%	214 668	2%
Of which: Default 2	25 636	0%	15 770	0%
Real estate mortgage secured	10 965 341	98%	10 894 872	98%
Of which: Default 2	478 966	4%	619 192	6%
Total home loans	11 176 713	100%	11 109 540	100%

1 Map built based on risk segmentation

2 CRR default criterion (Regulation (EU) 575/2013)

³Gross exposure (the amounts shown include accrued interest)

The table below shows the amount of residential mortgage loans, by LTV brackets:

		31-12-20181
	Total	Of which: Default 2	Total	Of which: Default 2
LTV ≤ 40%	2 132 801	46 544	1 849 148	49 903
40% < LTV ≤ 60%	3 036 091	83 734	2 563 075	86 344
60% < LTV ≤ 80%	4 418 373	155 251	4 043 403	161 854
80% < LTV ≤ 100%	1 257 433	105 445	2 221 239	189 593
LTV ≤ 100%	120 643	87 992	218 008	131 497
Total home loans	10 965 341	478 966	10 894 872	619 192

¹Gross exposure (the amounts shown include accrued interest)

2 CRR default criterion (Regulation (EU) 575/2013)

3.3.5. Derivatives and repos credit risk

Control of exposures in derivatives and repos at Banco BPI is an integral part of control of exposure to credit risk. In the case of derivatives, where exposure changes according to the change in the market price of the underlying asset, the characteristics of the operation are adapted to the system, by considering the maximum potential exposure (calculated with a statistical confidence level of 99%) and considering the derivative, for limits control purposes, as equivalent to a credit with the same value, maturity, counterparty and other characteristics. An additional control is made to determine whether the effective exposure remains within the limits through the lifetime of the operation.

The value of the maximum potential exposure in derivatives is reviewed periodically (for the main counterparties), or at request, in order to update the limits. In normal circumstances this revision will release limits in so far as, save in case of very strong market fluctuations, the potential exposure decreases with time.

Sales with repurchase agreement (reverse repos) are treated as applications and deposits for which there are associated guarantees, with limits being allocated at net value, taking into account the applicable haircuts.

For both derivatives and repos, it is legally possible to offset the value of the operations, providing there is an agreement to this effect between the two parties. In accordance with Banco BPI's policy, the derivative and repo agreements entered into by the Bank provide for this offsetting, i.e., even in case of bankruptcy, the amounts payable by the Bank to the counterparty correspond to the algebraic sum of the amounts payable or receivable for the set of transactions included in the agreement (therefore the normal obligation of paying immediately the amount of the operations for which the Bank is the debtor and entering the list of creditors in order to receive the amount of the operations for which it is the creditor does not exist).

In the case of repos and derivatives with other banks, the Bank enters collateral exchange agreements that allow the exposure to be maintained at a preset level. Receivable and payable collaterals for derivatives and repos are controlled on a daily basis, which permits to maintain a strict control of the exposure in those products and counterparties (the most important in terms of the Bank's exposure).

Finally, compliance with the European Market Infrastructure Regulation also plays a role in the mitigation of the counterparty credit risk in the derivatives portfolio, as it imposes that a significant part of over-the-counter (OTC) operations be made with central counterparties (CCP) and establishes strict control rules for OTC derivatives traded with all other counterparties.

The policies on the control and mitigation of credit risk arising from OTC derivative and repo trading with other banks or professional counterparties are based on the use of solid contractual instruments, such as:

ISDA contracts: Standard contract that regulates trading in the OTC derivatives market, usually used between two professional parties (such as two banks or possible one bank and a large company). ISDA contracts provide for the possibility referred above of offsetting the flows of outstanding collections and payments between the parties.
Credit support annex (CSA) to ISDA contract: Annex to the ISDA contract whereby each of the parties undertakes to provide collateral (usually a cash deposit) to the other as security for the net counterparty risk position arising from the set of derivatives traded between them under the CSA, on the basis of a prior close-out netting agreement included in the clauses of the ISDA contracts.
GMRA/ CME/ GMSLA contracts: standard contracts that regulate sale and repurchase agreements and reverse repurchase agreements (repos). These contracts also include exposure offsetting clauses as well as clauses on the exchange of collaterals to hedge the net remaining exposure.

• Central Counterparties (CCP) The use of CCPs in derivatives and repo transactions permits a substantial reduction in the associated counterparty risk, as these entities act as intermediaries between the two parties to the transaction, with the Bank absorbing the CCP risk and not the risk of a less creditworthy entity. The EMIR regulations set forth, among others, an obligation, for certain OTC derivatives, to transfer the counterparty credit risk to a CCP

For other counterparties (with which there is no interprofessional relationship), the Bank uses derivatives Framework Contracts, which were developed internally and are subject to Portuguese law. In certain situations an ISDA agreement may be entered into. As referred, the policy on derivatives trading is similar to the lending policy in terms of the control of exposure, for which it is the Bank's practice to require guarantees or collateral, which in this case hedge not only the credit exposure but also the derivatives exposure.

3.3.6. Risk associated with the investee portfolio

The risk of the investee portfolio is the risk associated with the possibility of incurring losses in the book value of equity holdings in portfolio within a medium to long term horizon as a result of fluctuations in macroeconomic conditions or in the specific financial situation of each investee.

In the case of investees with which there is a credit relationship and therefore credit risk, the Bank makes an analysis of the risk of financial loss due to the loss of value of the Bank's assets as a result of the deterioration of the counterparties' capacity to honour their commitments.

Control and financial analysis of the main investees are also performed through specialists exclusively responsible for monitoring changes in economic and financial data, based on documents provided by the companies in question. Regulatory changes and competition in the geographical areas and industry sectors where the investees operate are also analysed. This analysis is made in cooperation with other departments of the Bank, namely the Economic and Financial Studies Unit ("UEEF"), and in close collaboration with the areas in CaixaBank responsible for monitoring investees. As far as possible, the analysis is also supported by third-party documentation (from research houses, rating agencies or consultancy firms) in order to obtain an overall perspective of the possible risks to the value of the investees.

Banco BPI's equity holdings are registered in three major investee groups: Non-trading financial assets mandatorily accounted for at fair value through profit or loss, Financial assets at fair value through other comprehensive income, and Investments in subsidiaries, joint ventures and associates. For the more relevant investees, DCF and/or market multiples periodic valuations are made, in accordance with the nature of each investee, and also impairment tests to be recorded in the Bank's accounts.

3.4. Market risk

3.4.1. Overview

The market risk perimeter covers Banco BPI's trading portfolio as defined for risk purposes.

3.4.2. Market risk cycle

Monitoring and measurement of market risk

On a daily basis, the responsible departments realise and monitor the transactions in portfolio, calculate how changes in the market will affect the positions held (daily marked-to-market results), quantify the market risk taken and monitor compliance with the established limits. The results of these activities are compiled into daily position reports, which include the quantification of risks and the utilisation of risk limits, and these are distributed to the various levels in the hierarchy.

As a general rule, there are two types of measurements which constitute a common denominator and market standard for the measurement of market risk:

Sensitivity

Sensitivity represents risk as the impact a slight change in risk factors has on the value of positions, without providing any assumptions about the probability of such a change (e.g. one of the most common methods used to measure interest rate sensitivity is to project a change of one basis point in the interest rates curve).

Value-at-risk (VaR)

The benchmark market risk measurement is VaR, with a confidence level of 99% and a two-week (10 business days) time horizon based on a parametric model where the return on the risk factors considered follow a zero average normal distribution and the standard deviation is obtained from an historical series of values observed over one year. The diversification effect is considered based on correlations between the returns of the various factors considered (interest rates, exchange rates, equity prices). Total VaR results from the aggregation of VaR arising from fluctuations in interest rates, exchange rates and equity prices, taking into account the diversification effect.

The table below shows the values of average VaR at 99% with a time horizon of two weeks (10 business days) in accordance with BPI's different risk factors. The consumption levels are immaterial, with the highest risk being concentrated in equities. The risk values for the remaining factors are less significant. Compared to the previous year, VaR decreased due to a global reduction in the trading book.

	Total	Interest Rate	Exchange Rate	Share prices
Average VaR 2018	264	58	48	245
Average VaR 2017	526	240	109	459

In 2018 the average and the maximum value of the VaR at 99% with a time horizon of one day (adjusted for root of 10) in BPI's trading activities was 0.264 and 0.571 million euros, respectively.

Capital requirements for market risk are determined based on the standardised approach. The values calculated are insignificant, given the low representativeness of the portfolio. It should be noted that BPI's foreign-exchange risk mainly derives from its equity holdings in financial institutions outside the Eurozone.

3.4.3. Mitigation of market risk

As part of the required monitoring and control of the market risks taken, there is a structure of overall VaR limits complemented by the definition of sublimits, stop losses and sensitivity analyses for the various management units that could assume market risk.

The risk factors are managed using economic hedges on the basis of the return/risk ratio determined by market conditions and expectations, always within the assigned limits. Many of these hedges are back-to-back.

Beyond the trading portfolio, fair-value hedge accounting is used, which eliminates potential accounting mismatches in the balance sheet and the income statement caused by the different treatment of hedged instruments and their hedges at market values. Limits are established and monitored for each hedge, normally expressed as the ratio between the sensitivity of the hedging items and the sensitivity of the hedged items.

3.5. Operational risk

3.5.1. Overview

Operational Risk is included in BPI's Risks Catalogue, where it is defined as: "the risk of loss resulting from inadequate or failed internal processes, people and systems or from external events, and includes legal risk." This definition excludes strategy and reputational risks.

This definition is in line with that established in Regulation (EU) no. 575/2013. of the European Parliament and of the Council, of 26 June 2013.

Operational risk management at BPI essentially seeks to achieve an improvement in operating income and compliance with the legal and regulatory management and reporting rules.

The success of operational risk management depends on the timely identification and characterisation of operational risks, enabling the implementation of measures to mitigate any identified risks, when applicable.

The Operational Risk Management Policy is subordinated to the Bank's overall risk profile and Risk Appetite Framework (RAF).

3.5.2. Operational risk management cycle

Operational risk management at BPI is based on risk-sensitive policies, processes, tools and methodologies, in accordance with best market practices.

• Identification and assessment of operational risk

Each Division under the aegis of the Executive Committee is responsible for identifying the operational risk inherent in the activities carried out by the respective areas (OR self-assessment). This assessment should be made annually, although adjustments may be made more frequently, if necessary.

The operational risk management central unit, as the second line of defence, is responsible for assisting the Divisions in the assessment of operational risk, monitoring the corresponding processes and collecting inputs on specific OR categories, jointly promoting the enrichment of the operational risk evaluation process carried out by the Divisions.

OR self-assessment is made using forms obtained through an operational risk management software application, which stores all the operational risks identified, classified, evaluated and monitored at BPI.

The Global Risk Committee is responsible for ascertaining whether BPI's operational risk profile remains aligned to the Risk Appetite Statement and BPI's global risk profile.

Additionally, measurement via Operational Risk indicators (KRIs) is a quantitative/qualitative methodology that: i) permits to anticipate the development of operational risks, taking a forward-looking approach to their management and ii) provides information on the evolution of the operational risk profile and the underlying causes.

A KRI is a metric that detects and anticipates changes in OR levels, used to monitor and manage operational risk.

• Operational risk events

Within the scope of its risk monitoring and identification activity, the first line of defence records any operational risk events, i.e., operational risks that materialised, in an internal database, thus incorporating the knowledge obtained through a critical analysis of these occurrences into the risk management cycle.

The second line of defence has as main responsibilities to assess the consistence of the records of occurrences made by the Divisions, compiling and critically analysing this data to permit an effective analysis of the pattern of occurrences, thus improving the quality of risk management and regulatory reporting.

• Mitigation of operational risk

BPI's operational risk management model establishes that it is the responsibility of Divisions to detect any situations that trigger the need to assess whether it is pertinent, opportune and feasible to devise risk Mitigation Measures and to propose such measures.

These measures are planned and implemented to reduce or eliminate the probability of a future occurrence of a certain risk and/or the severity of its impacts.

3.6. Legal and regulatory risk

Legal and regulatory risk is defined as the possibility of potential losses or reduction in the Bank's profitability as a result of legal or regulatory changes (of any nature, including tax), changes in their interpretation or application by the competent authorities, or their translation into court rulings or administrative or tax proceedings.

In the realm of legal and regulatory risks mitigation, the following deserve particular attention: the analysis of the legal framework and the identification of any misalignments with the regulations; the analysis of the likelihood of changes in the legal/regulatory framework and their consequences; the clarification of the nature of contractual relationships and their interpretation by the counterparties; the analysis of products and their legal status; and the identification and proposal of measures capable of reducing possible litigation risks.

3.7. Conduct and compliance risk

Within the scope of operational risk, the risk of conduct and compliance is defined as the risk arising from the application by BPI of action principles that are contrary to the interests of its Clients or other stakeholders, or actions or omissions by the Bank that are not compliant with the legal and regulatory framework or the internal policies, standards and procedures. The objective of BPI is to minimise the probability of this risk occurring and, if it does, to promptly detect, report and address the weaknesses.

The management of compliance and conduct risk is undertaken across the entire institution, which, through its employees, must ensure compliance with the regulations in force and apply procedures that translate into their activity the application of these regulations.

In order to manage compliance and conduct risk, the values and principles set out in the Code of Ethics and Conduct and in the rules on conduct are actively promoted and spread to the management bodies and to all other managers and staff, who must assume compliance therewith as a guiding principle of their day-to-day activities.

3.8. Technological risk

Technological Risk refers to risk of losses due to hardware or software inadequacies or failures in technical infrastructure, due to cyberattacks or other circumstances, which could compromise the availability, integrity, accessibility and security of the infrastructures and data. This risk is divided into 5 categories: 1) Availability and continuity of Information and Communication Technologies; 2) Security of Information and Communication Technologies; 3) Changes to Information and Communication Technologies; 4) Integrity of IT Data; 5) Externalisation of Information and Communication Systems.

To prevent impacts caused by failures in IT infrastructures, BPI has implemented recovery mechanisms based on high availability solutions for both hardware and software applications and data. These solutions' speed and efficacy of response is systematically gauged through an annual testing plan.

Specifically, business continuity refers to the capability of an organisation to continue delivery of products or services at acceptable predefined levels following a disruptive incident. Therefore, Business Continuity management at BPI consists in identifying potential threats to the organisation and its activity, providing a framework for building organisational resilience and the capability for an effective response that safeguards the interests of its key stakeholders, its reputation, brand, and value - creating activities.

Accordingly, BPI has decided to align its Business Continuity Management System (BCMS) to the international standard ISO 22301:2012, and will obtain certification for this system in 2019.

Banco BPI maintains emergency plans, internal regulations and controls covering the various aspects of Information Security, in key areas such as: 1) cybersecurity; 2) the fight against Customer fraud and internal fraud; 3) data protection; 4) internal awareness raising about security; and 5) Supplier security.

3.9. Risk of operating processes and external events

Within the context of Operational Risk, this is defined as the risk of losses or damage caused by operational errors in processes related to BPI's activity, due to external events beyond its control, or provoked by third parties, either accidentally or fraudulently. It includes, among others, errors in the management of suppliers, in the model, and in the custody of securities.

Operational risks that arise from operating processes and external events are managed across all areas of BPI. This implies identifying, assessing, managing, controlling and reporting the operational risks of their activity and cooperating with the Bank's operational risk management area in the implementation of the management model.

3.10. Risk of reliability of financial reporting

The Risk of reliability of financial information covers the losses, economic or other, arising from deficiencies in the accuracy, integrity and criteria of the processes used in the preparation of the data required to evaluate the Bank's financial situation and networth.

To manage and monitor the risk of Reliability of Financial Information, the Bank has a system of internal control over financial reporting - the Preparation and Disclosure of Financial Information (PDFI) system -, defined as the set of procedures, controls and monitoring of these procedures and controls that are carried out to provide reasonable assurance on the reliability of the financial information published by the Bank in the markets.

The management of the risk of reliability of financial reporting implies the assessment of whether the following principles are complied with:

The transactions and other events reflected in the financial information in fact exist and were recorded at the right time (existence and occurrence).
The information includes the totality of transactions and other events in which the Bank is the affected party (completeness).
The transactions and other events are recorded and valued in accordance with applicable standards (valuation).
The transactions and other events are classified and presented in the financial information in accordance with applicable standards (presentation, detail and comparability).
The financial information shows, at the corresponding date, the entity's rights and obligations through the corresponding assets and liabilities, in accordance with applicable standards (rights and obligations).

3.11. Structural interest rate risk

The management of this market risk by Banco BPI seeks to i) optimise the net interest income and ii) preserve the economic value of the balance sheet, while at all times taking into account the metrics and thresholds of the risk appetite framework in terms of the volatility of the net interest income and the sensitivity of economic value. These objectives are defined in accordance with the policies established at CaixaBank Group level.

This risk is analysed considering a broad set of market interest rate scenarios, analysing the impact of the inherent shocks on possible sources of structural interest rate risk, i.e. repricing risk, curve risk, base risk and optionality risk. Optionality risk considers automatic optionality related to the behaviour of interest rates and the optionality of customer behaviour, which is not only dependent on interest rates.

Banco BPI applies best market practices and the recommendations of regulators in measuring the interest rate risk of the banking book, using various measurement techniques that make it possible to analyse its positioning and risk situation. These notably include:

Static gap: it shows the contractual distribution of maturities and interest rate repricings for applicable balance sheet and/or off-balance sheet aggregates at a particular date. GAP analysis is based on comparison of the values of assets and liabilities that are repriced or mature in the same particular period.
Sensitivity of net interest income: Sensitivity is measured by comparing the net interest income at 12 and 24 months, calculated for a baseline scenario, and for extreme scenarios of interest rate changes (instantaneous and progressive parallel shock with different intensities, and changes in slope of interest rate curves). The most likely scenario, which is obtained using the implicit market rates, including the business trend and hedge management forecasts, is compared with other scenarios of rising or falling interest rates with parallel and non-parallel movements in the slope of the curve. The difference between these stressed net interest income figures compared to the baseline scenario give us a measure of the sensitivity, or volatility, of net interest income.
Balance sheet economic value: it is calculated as the sum of i) the fair value of net interest-rate sensitive assets and liabilities on the balance sheet; ii) the fair value of off-balance sheet products (derivatives); and iii) the net carrying amounts of non interest-rate sensitive asset and liability items.
Economic value sensitivity: The economic value of interest-rate sensitive on- and off-balance sheet items is calculated at the current market rates (baseline scenario) and under different stressed interest-rate scenarios. The difference between the values obtained in the baseline scenario and those obtained in the stressed scenarios permit to assess the sensitivity of economic value to interest rate changes.

The sensitivity of net interest income and economic value are measurements that complement each other and provide an overview of the structural interest rate risk, the first focusing more on the short- and medium-term and the latter on the medium- and long-term.

The table below shows, using a static gap, the distribution of contractual maturities and interest rate repricings of interest-rate sensitive amounts in the banking book, at the end of 2018:

	1 year	2 years	3 years	4 years	5 years	> 5 years	TOTAL
ASSETS
Interbank and Central Banks	2 723 964						2 723 964
Loans and advances to Customers	19 681 053	550 090	298 871	204 604	129 933	656 642	21 521 194
Fixed income portfolio	1 844 872	404 046	1 605 562	22 313	4 631	181 690	4 063 115
Total Assets	24 249 890	954 136	1 904 433	226 918	134 564	838 333	28 308 273
LIABILITIES
Interbank and Central Banks	2 750 284	410 000	953 830				4 114 114
Customer deposits	14 873 541	1 045 851	1 600 965	1 106 239	1 105 301	2 209 721	21 941 619
Own issues	1 107 169	6 493	162				1 113 824
Total Liabilities	18 730 994	1 462 344	2 554 957	1 106 239	1 105 301	2 209 721	27 169 557
Assets minus Liabilities	5 518 896	( 508 208)	( 650 524)	( 879 322)	( 970 737)	(1 371 389)	1 138 717
Hedges	( 726 058)	985 279	491 306	( 122 429)	( 178 037)	( 442 917)	7 144
Total difference	4 792 838	477 070	( 159 217)	(1 001 751)	(1 148 774)	(1 814 305)	1 145 861

The table below shows the sensitivity of the net interest income and the economic value of interest rate-sensitive assets and liabilities to a 100 basis points interest rate instantaneous increase and decrease:

Amounts as % of baseline scenario	+100 bps	-100 bps3
Net interest income 1	-0.2%	-18.2%
Asset value (banking book)2	-0.7%	2.6%

1 Net interest income sensitivity at 1 year.

2 Base economic value sensitivity.

3 In the case of falling-rate scenarios the applied internal methodology accepts negative interest rates. Given the current level of interest rates, the methodology accepts an interest-rate decline shock of up to approximately -1%. For example, considering a EONIA curve interest rate of -0.40%, the interest rate subject to a shock of -100 bps in this curve could be as low as -1.40%.

To mitigate the banking book interest rate risk, the Bank actively manages this risk through hedging operations contracted in the financial markets which permit to correct situations where hedging is not provided naturally through operations carried out with the Clients or other counterparties.

3.12. Exchange rate risk

Banco BPI has foreign currency assets and liabilities in its balance sheet, mainly as a result of its commercial activity, including foreign currency assets and liabilities deriving from the transactions carried out to mitigate exchange rate risk in that activity. The Bank also has some foreign currency structural positions related to equity holdings in financial Institutions outside the Eurozone.

At 31 December 2018 the equivalent euro value of all foreign currency assets and liabilities was as follows:

	USD	AKZ	MZN	Other currencies
Cash and cash balances at central banks and other demand deposits	16 237	30 293		51 794
Financial assets held for trading	10 623			629
Financial assets not designated for trading compulsorily measured at fair value
through profit or loss	64 931
Financial assets at fair value through other comprehensive income	6 888	522 000		100
Financial assets at amortised cost	453 980			95 860
Derivatives - Hedge accounting	3 564			140
Fair value changes of the hedged items in portfolio hedge of interest rate risk	792
Investments in subsidiaries, joint ventures and associates			90 157
Tangible assets				319
Intangible assets
Tax assets
Other assets	191			2 771
Non-current assets and disposal groups classified as held for sale
Foreign exchange operations pending settlement and forward position operations	1 329 520			62 198
Total Assets	1 886 726	552 293	90 157	213 811
Financial liabilities held for trading	1 977			574
Financial liabilities at amortised cost	1 895 058			196 919
Derivatives - Hedge accounting	1 503			32
Fair value changes of the hedged items in portfolio hedge of interest rate risk	( 679)			( 34)
Provisions
Tax liabilities		50 748	8 038
Other liabilities	( 6 248)			( 68)
Total Liabilities	1 891 611	50 748	8 038	197 423

The exchange rate risk in the Bank's regular activity may be hedged through on-balance sheet operations (deposits or foreign currency investments) or through financial derivatives that mitigate the risk of positions in foreign currency. It should be noted that the nominal value of derivatives is not reflected directly in the balance sheet but in off-balance sheet accounts. The approach to foreign-exchange risk management at Banco BPI is to seek to minimise the positions assumed, which explains the Bank's low exposure to this risk.

The relevant foreign exchange positions held by Banco BPI result from the equity holdings in financial institutions of countries outside the Eurozone, notably in Banco de Fomento de Angola (position in Angolan Kwanzas) and Banco Comercial e de Investimentos S.A. (Positions in Mozambique Metical). BFA's fair value estimate factors in a projection of the foreign exchange devaluation of the Kwanza, and in the case of the equity holdings, the impact of foreign exchange changes also depends on the composition of the balance sheet of each of those companies.

Excluding the foreign currency positions in Kwanza and Metical resulting from the equity holdings in BFA and BCI, BPI's exposure and sensitivity to exchange rate risk is not significant, taking into account the existing hedges.

At 31 December 2017 the equivalent euro value of all foreign currency assets and liabilities was as follows:

	USD	AKZ	MZN	Other currencies
Cash and cash balances at central banks and other demand deposits	14 146			48 110
Financial assets held for trading	10 878	1 843		65
Financial assets not designated for trading compulsorily measured at fair value
through profit or loss	6 055
Available-for-sale financial assets	59 688			266
Financial assets at amortised cost	322 550			96 353
Derivatives - Hedge accounting	982			64
Fair value changes of the hedged items in portfolio hedge of interest rate risk
Investments in subsidiaries, joint ventures and associates		576 358	81 237
Tangible assets				417
Intangible assets
Tax assets				37
Other assets	123	57 627		2 047
Non-current assets and disposal groups classified as held for sale
Total Assets	414 422	635 828	81 237	147 359
Financial liabilities held for trading	2 441			( 38)
Financial liabilities at amortised cost	1 732 029			188 353
Derivatives - Hedge accounting	566			82
Fair value changes of the hedged items in portfolio hedge of interest rate risk	( 1 686)			( 124)
Provisions				227
Tax liabilities		56 192	6 100
Other liabilities	( 2 439)			687
Liabilities included in disposal groups classified as held for sale
Foreign exchange operations pending settlement and forward position operations	(1 315 836)			( 60 483)
Total Liabilities	415 075	56 192	6 100	128 704

3.13. Liquidity risk

3.13.1. Overview

Banco BPI manages liquidly risk with the objective of maintaining a level of liquidity allowing it at all times to meet all its payment obligations, without investment activities being affected by lack of funds, while maintaining a balanced balance sheet structure in the long term. Liquidity risk is managed in its various aspects: i) the ability to keep up with assets growth and to meet cash requirements without incurring exceptional losses; ii) the maintenance in the portfolio of tradable assets that constitute a sufficient liquidity buffer; (iii) compliance with the various regulatory requirements in the context of liquidity risk.

The strategic principles followed to reach this objective are:

Autonomous management of liquidity within Banco BPI's prudential consolidation scope, subject to governance practices aligned to those implemented by CaixaBank as well as to the recommendations and best practices set forth by the supervision authorities.
Active liquidity management, namely through the ongoing monitoring of liquid assets and the balance sheet structure.
Maintaining a sufficient level of liquid funds to meet obligations assumed, fund business plans and comply with regulatory requirements.
Sustainability and stability of the funding sources, based on i) funding structure mainly supported by Customer deposits ii) limited recourse to the ECB medium- and long-term facilities and reduced dependence on the capital and money markets.

The liquidity risk strategy and appetite for liquidity and financing risk involves:

Identification of significant liquidity risks for Banco BPI;
Formulation of the strategic objectives for each of these risks and definition of the management requirements to reach these objectives;
Definition of the relevant metrics for each of these risks;
Setting of limits and objectives for each of these metrics within the context of the Risk Appetite Framework;
Establishment of management, monitoring and control procedures for each of the risks, including mechanisms of regular internal and external reporting;
Definition of a stress testing framework and a Liquidity Contingency Plan to ensure the management of liquidity risk in situations of moderate and serious crisis;
Recovery Plan setting out scenarios and measures for extreme stress situations.

In particular, Banco BPI has specific strategies with regard to: i) management of intra-day liquidity; ii) management of short-term liquidity; iii) management of funding sources; iv) management of concentration risk; v) management of liquid assets; and vi) management of collateralised assets. In addition, Banco BPI has in place procedures to minimise liquidity risks in stress conditions through i) early detection; ii) proactive management to overcome potential situations of crisis; and iii) minimisation of negative impacts.

3.13.2. Mitigation of liquidity risk

On the basis of the principles referred in the previous section, a Contingency Plan has been drawn up which establishes action plans for each crisis scenario and sets out the measures to be taken at commercial, institutional and internal/external communication level to deal with each situation. In a stress situation, the main priority of the net liquid assets portfolio management is to minimise liquidity risk.

The usual liquidity management measures include:

• Resorting to funding from the ECB, for which a series of guarantees have been provided that permit to obtain immediate liquidity.

Available balance in the ECB facility

	31-12-2018	31-12-2017
Value of guarantees delivered as collateral	6 953 749	6 664 663
Drawn down
Targeted longer-term refinancing operations ("TLTROs") (Note 22)	1 363 830	2 000 830
Total available balance in the ECB facility	5 589 919	4 663 833

• Maintenance of debt issuance programmes with the objective of expediting formalisation of securities issuances in the market, or to keep these securities in the Bank's own portfolio, as eligible assets for obtaining funding from the ECB.

Banco BPI has a Euro Medium Term Notes (EMTN) Programme and a Mortgage Covered Bonds Programme, both with a maximum issuance amount of 7 000 million euros, and a Public Sector Covered Bonds Programme with a maximum issuance amount of 2 000 million euros. At 31 December 2018 the nominal amount issued under the EMTN, Mortgage Covered Bonds and Public Sector Covered Bonds programmes was 322 million euros, 6 500 million euros, and 600 million euros, respectively. Except for two issues of Mortgage Covered Bonds totalling 550 million euros made in September and December 2018, the outstanding issues of Mortgage Covered Bonds and Public Sector Covered Bonds were fully retained in portfolio by Banco BPI with the main objective of integrating the pool of assets eligible for funding from the ECB.

The potential for additional issues of Mortgage Covered Bonds and Public Sector Covered Bonds depends on the maximum amount of each Programme and the existence of available eligible mortgage and public sector loans in portfolio. The issues retained in portfolio may be partially or totally cancelled by decision of Banco BPI if it decides to make market issues for a higher amount than that currently available.

Debt issuance capacity

	Maximum amount	Nominal used
	of Programme	at 31-12-2018
Euro Medium Term Note (EMTN) Programme 1	7 000 000	321 578
Mortgage Covered Bonds Programme 2	7 000 000	6 500 000 3
Public Sector Covered Bonds Programme 4	2 000 000	600 000 5

1 Registered on Luxembourg's "Commission de surveillance du secteur financier" ("CSSF") on 20 March 2018.

2 Registered on the "Comissão do Mercado de Valores Mobiliários" ("CMVM") on 22 February 2018.

³Of which 5 950 million euros concern securities retained by Banco BPI and included in the portfolio of eligible assets for funding from the ECB.

4 Registered on the "Comissão do Mercado de Valores Mobiliários" ("CMVM") on 12 October 2017.

5 The securities have been retained by Banco BPI and included in the portfolio of eligible assets for funding from the ECB. • Covered bonds issuance capacity (mortgage and public sector covered bonds):

Capacity to issue collateralised and securitised debt

	31-12-2018	31-12-2017
Mortgage Bonds
use of retained issues	5 950 000	5 950 0001
issues with additional credit portfolio	87 000	132 0002
Public Sector Bonds
use of retained issues	600 000	600 0001
Securitisation of mortgage loans (senior tranche)	220 000	199 000
Securitisation of loans to SMEs (senior tranche)	1 190 000	1 173 000
1

The Bank may use the issues retained to place them with third parties, or cancel them and replace them by new issues to be subscribed by third parties.

2 Issuance capacity based on eligible credit portfolio, not included in the cover pool of the Mortgage Bonds.

Access to the short-term funding market:
- Interbank facilities with various national and international counterparties
- Access to the repos market with several types of assets
- Access to the London Clearing House (LCH Ltd) for repo business
The Contingency Plan and the Recovery Plan contain a series of measures that allow for liquidity to be generated in diverse crisis situations. The adequacy of each measure is assessed for each of the scenarios, and descriptions are provided of the steps necessary for their execution and expected period of execution.

3.13.3. Liquidity position

At 31 December 2018, Banco BPI held a set of highly liquid assets (total liquid assets) totalling 9 498 million euros (8 890 million euros on 31 December 2017). This portfolio of assets consists of high-quality liquid assets (HQLAs), which are used to calculate the Liquidity Coverage Ratio (LCR), and amounted to 3 897 million euros (4 227 million euros on 31 December 2017), and assets eligible as collateral for additional funding from the ECB, in the amount of 5 601 million euros (4 664 million euros on 31 December 2017).

The breakdown of BPI's total liquid assets is as follows:

Total liquid assets

31-12-2018		31-12-2017 Restated
Market value	Eligible value	Market value	Eligible value
3 853 627	3 853 627	4 225 870	4 225 870
50 695	43 091
		1 354	677
3 904 322	3 896 718	4 227 224	4 226 547
	5 600 891		4 663 833
	9 497 609		8 890 380

1 In accordance with the liquidity coverage ratio (LCR) calculation criteria

The average LCR ratio in the 12 months to 31 December 2018 was 167%. At 31 December 2017 (previous 12 months) the average LCR was 171%.

The table below shows the detail of the average value (last 12 months) of the LCR calculation components at 31 December 2018 and 2017:

Liquidity Coverage Ratio (LCR)

(Average in last 12 months)	31-12-2018	31-12-2017 Restated
High quality liquid assets (numerator)	3 930 433	3 857 148
Total net outflows (denominator)	2 347 632	2 263 267
Cash outflows	3 319 896	3 285 495
Cash inflows	972 264	1 022 228
LCR	167%	171%

Note: the table presents the simple arithmetic mean in the last 12 months of the LCR ratio and respective calculation components. According to Commission Delegated Regulation (EU) 2015/61 of 10 October 2014 to supplement Regulation (EU) No 575/2013 of the European Parliament and the Council with regard to liquidity coverage requirement for Credit Institutions. The established regulatory limit for the LCR ratio is 100% from 1 January 2018.

Regarding the NSFR (Net Stable Funding Ratio), its definition was approved by the Basel Committee in October of 2014. In November 2016, the European Commission sent proposed amendments to Directive 2013/36/EU (the "CRD IV" Directive) and Regulation 575/2013 (the "CRR" Directive) to the European Parliament and the European Commission, which included, among other aspects, the regulation of the NSFR. Therefore, their regulatory transposition is currently being awaited.

The NSFR ratio, currently calculated using Basel criteria, was 118.8% at 31 December 2018, reflecting the large weight of (more stable) customer deposits on Banco BPI's funding structure and limited use of markets for short-term funding.

The tables below show the main ratings assigned by international rating agencies to Banco BPI:

31-12-2018	Long-term debt	Short-term debt	Outlook	Date of last review	Mortgage covered bonds rating
DBRS Rating Limited	-	-	-	-	AA (Low)
Fitch Ratings	BBB 1	F2	Stable	6-12-2018	-
Moody's Investors Service	Baa2 2	P-2	Negative	4-12-2018	Aa3
Standard & Poor's Global Ratings	BBB- 3	A-3	Positive	9-10-2018	-

1 Long-term issuer default rating

2 Long term Debt Rating / Issuer rating

3 Long Term Issuer Credit Rating

31-12-2017	Long-term debt	Short-term debt	Outlook	Date of last review	Mortgage covered bonds rating
DBRS Rating Limited	-	-	-	-	A (High)
Fitch Ratings	BBB-1	F3	Positive	21-12-2017	-
Moody's Investors Service	Ba12	Not prime	Positive	07-12-2017	A1
Standard & Poor's Global Ratings	BBB-3	A-3	Stable	19-09-2017	-
1

Long-term issuer default rating 2

Long term Debt Rating / Issuer rating

3 Long Term Issuer Credit Rating

In the event of a downgrade of the current credit rating, additional collateral must be delivered to certain counterparties, or there are early redemption clauses.

The two issues of Mortgage Covered Bonds subscribed by the EIB, in the total amount of 550 million euros, contain an early redemption clause enforceable in case the rating of the bonds is downgraded below Baa1 by Moody's. Considering that the rating at 31 December 2018 was Aa3, this would only happen in the case of a 5-notch downgrade in the Mortgage Covered Bonds rating.

The breakdown of the impact on liquidity deriving from 1, 2 and 3-notch downgrading (not cumulative) is shown below:

Liquidity sensitivity to credit rating changes at 31 December 2018

	Downgrade	Downgrade	Downgrade
	1 notch	2 notches	3 notches
Trading in derivatives (CSA agreements)	8 686	8 686	10 607

Liquidity sensitivity to credit rating changes at 31 December 2017

	Downgrade	Downgrade	Downgrade
	1 notch	2 notches	3 notches
Trading in derivatives (CSA agreements)	1 834	1 834	1 834

3.13.4. Asset encumbrance

This note includes information about encumbered and unencumbered assets, as defined by Banco de Portugal in Instruction 28/2014, of 23 December. The amounts disclosed are median values for the last four quarters, as set forth in Title II of the EBA Guidelines (EBA/GL/2014/03). The information below concerns the prudential supervision perimeter, as defined in Regulation (EU) no. 575/2013, CRD IV / CRR-

An encumbered asset is considered as an asset explicitly or implicitly pledged as security, or subject to an agreement to secure, collaterise, or improve the credit quality in any operation from which it cannot be freely withdrawn.

At 31 December 2018 the breakdown of assets by encumbered and unencumbered was as follows:

Encumbered assets	Book value	Fair value
Portuguese sovereign debt securities
Debt securities sold with repurchase agreement	1 233 821	1 233 821
Commitments to the Deposit Guarantee Fund and Investors Compensation Scheme	49 347	49 347
Total Portuguese sovereign debt	1 283 168	1 283 168
Credit operations
Funding from the European Investment Bank (EIB) collateralised by mortgage bonds	1 382 990
Funding from the European Central Bank (ECB) collateralised by Public Sector bonds	1 938 685
Bonds collateralised by mortgage loans	145 515
Bonds collateralised by loans to the Public Sector	290
Securitisation operations	251 327
Total credit operations	3 718 806
Other assets
Derivatives	197 870
Other collateral	84 162
Total other assets	282 032
Total amount of encumbered assets	5 284 005
Unencumbered assets	Book value	Fair value
Equity instruments	443 186	443 186
Debt instruments	4 037 621	3 963 811
Credit	19 709 228
Other assets	2 013 080
Total amount of unencumbered assets	26 203 115

The encumbered assets included in this table correspond to operations that were given as a guarantee or collateral, without being derecognised from the Bank's assets, such as securities sold with repurchase agreements and autonomous pool of collateralised bonds.

As defined in Commission Implementing Regulation (EU) 2015/79 of 18 December 2014, assets included in the liquidity pool deposited in the European Central Bank and not used, or credit operations associated with mortgage bonds and Public Sector bonds and securitisations not placed on the market are not considered encumbered assets.

At 31 December 2018 the fair value of the encumbered collateral received was as follows:

	Fair value of collateral received
	Encumbered Free
Debt securities
Sovereign debt	3 535
Total debt securities	3 535
Other assets (derivatives)	12 322

This table includes the amount of collateral received that does not meet the conditions for recognition in the balance sheet, such as securities received as collateral for repo operations. These assets may or may not be reusable and provided as collateral in other operations.

At 31 December 2018 the liabilities associated with encumbered assets and collaterals received were as follows:

	Associated and	Assets and collateral received
	contingent liabilities
Financial Liabilities
Derivatives	203 950	292 231
Deposits
Funding from the European Central Bank	1 673 434	1 938 685
Funding from the European Investment Bank (EIB)	927 880	1 407 851
Debt securities sold with repurchase agreement	1 239 999	1 253 803
Other deposits	14 504
Securities issued
Bonds collateralised by mortgage loans	124 885	145 515
Bonds collateralised by loans to the Public Sector		290
Securitisation operations	241 573	251 327
	4 426 224	5 289 700
Other encumbrance sources
Commitment to the Deposit Guarantee Fund	45 429	43 373
Commitment to the Investor Compensation Scheme	11 471	5 972
European Central Bank liquidity facility		54
	56 900	49 398
Total amount of encumbrance sources	4 483 123	5 339 099

Intragroup asset encumbrance relates to guarantees provided by one of the BPI Group banks at the request of another in favour of third parties (essentially the Tax Authority) and to the deposit of BFA funds to guarantee liabilities with Banco BPI (essentially for confirmation of documentary credits).

Intragroup encumbrance

	Provided by	At the request of	Amount
Financial guarantees provided	Banco BPI	Banco Português de Investimento	3 061
Financial guarantees provided	Banco Português de Investimento	Banco BPI	79 320

Relevance of asset encumbrance in BPI's financing policy

Assets may be encumbered for several reasons, namely:

the existence of legal requirements, such as in the case of assets pledged as collateral for the Deposit Guarantee Fund and the Investor Compensation Scheme;
the existence of an initial or trading margin underlying financial derivative transactions;
the financing and liquidity needs of banking activity;

At Banco BPI, the main reason for asset encumbrance are liquidity and funding operations, namely with:

the European Central Bank
the European Investment Bank
using mortgage bonds and Public Sector bonds and credit securitisations placed on the market, and
through repo operations on securities of the Group's own portfolio.

3.13.5. Residual maturity of operations

The table below shows the breakdown of certain balance sheet items by contractual term to maturity, under normal market conditions:

Term to maturity of operations at 31 December 2018

	On demand	< 1 month	1-3 months	3-12 months	1-5 years	> 5 years	Total
Cash and cash balances at central banks and	2 452 916						2 452 916
other demand deposits
Derivatives
Financial assets held for trading	4 990	8 579	7 556	2 734	19 728	88 121	131 708
Hedge accounting		683	2 399	3 195	7 732	311	14 320
Debt securities
Financial assets held for trading					13 893		13 893
Financial assets not designated for
trading compulsorily measured at fair				1 079		58 909	59 988
value through profit or loss
Financial assets at fair value through			228 863	740 618	307 939		1 277 420
other comprehensive income
Financial assets at amortised cost		271 403	244 225	182 133	2 126 902	692 151	3 516 814
Loans and advances	280 519	892 242	952 498	1 193 153	3 386 794	15 449 923	22 155 129
Total Assets	2 738 425	1 172 907	1 435 541	2 122 912	5 862 988	16 289 415	29 622 188
Derivatives
Financial liabilities held for trading		8 781	7 686	2 435	21 514	100 919	141 335
Hedge accounting		84	4 009	12 220	15 861	23 836	56 010
Financial liabilities at amortised cost
Deposits
Central Banks					1 352 843		1 352 843
Credit Institutions	238 673	889 571	219 313	35 367		470 577	1 853 501
Customers	13 398 780	1 860 752	1 705 442	4 131 948	1 861 085	2 245	22 960 252
Debt securities issued
Mortgage bonds					300 000	250 000	550 000
Bonds		534	5 430	5 716	6 671		18 351
Liabilities relating to assets not
derecognised					89 782	155 550	245 330
in securitisation operations
Subordinated liabilities						304 514	304 514
Other financial liabilities	37 465	172 548	11 405	4 742	4 794		230 954
Total Liabilities	13 674 918	2 932 270	1 953 285	4 192 428	3 652 550	1 307 641	27 713 090
Of which wholesale funding:					389 782	710 063	1 099 845
Assets minus Liabilities	(10 936 493)	(1 759 363)	(517 744)	(2 069 516)	2 210 438	14 981 774	1 909 098

Term to maturity of operations at 31 December 2017

	On demand	< 1 month	1-3	3-12		> 5 years	Total
			months	months	years
Total Assets	1 674 953	1 607 271	1 380 515	3 141 037	4 211 323	15 312 659	27 327 758
Total Liabilities	13 439 208	2 066 293	1 663 618	3 294 615	4 931 827	805 782	26 201 343
Of which wholesale funding:		200 000	11 579	33 545	152 905	585 033	983 062
Assets minus Liabilities	(11 764 255)	( 459 022)	( 283 103)	( 153 578)	( 720 504)	14 506 877	1 126 415

The transaction maturities are projected according to their contractual and residual maturity, irrespective of any assumption that the assets and/or liabilities will be renewed. In order to assess the negative gap in the short term, the following aspects must be considered:

Banco BPI has high and stable retail funding (Customer resources) with probable renewal;
It has the capacity to obtain immediate additional funding from the European Central Bank and to issue mortgage and public sector covered bonds in the market or for retention in portfolio, reinforcing the portfolio of eligible assets for ECB funding.
Banco BPI's dependence on the wholesale debt markets is reduced.

The calculation does not consider growth assumptions, and consequently disregards internal strategies for raising liquidity, which are especially important in the retail market. Similarly, realisation of the available liquid assets is not considered.

3.14. Reputational Risk

Reputational risk is the risk of loss of competitive capacity due to the deterioration of trust on the part of clients, the financial community (financial analysts or investors), employees, the media, regulators, suppliers, trade unions or the public opinion in general as a result of their perception of actions or omissions attributed to BPI or its Management or Governance Bodies.

The risk is monitored using internal and external selected reputational indicators from various sources of stakeholder expectations and perception analysis. The indicators are weighted according to their strategic importance and are grouped in a balanced reputation scorecard that enables a Global Reputation Index (GRI) to be obtained. This metric permits to monitor the perception of the different stakeholders concerning the institution on an annual basis, to make comparisons with the competition, and to define the tolerance ranges in accordance with the Bank's risk appetite, thus enabling a more effective management of reputation.

Control and mitigation of reputational risk involve the development of policies that engage different areas of BPI.

3.15. Actuarial risk

The risk in the Pension Fund of Banco BPI, managed by BPI Vida e Pensões, is followed and monitored at level 1 and level 2 of the risk appetite framework (RAF), with tolerance objectives and ranges being defined.

The Pension Fund risks are analysed and monitored on an ongoing basis by the risk team of BPI Vida e Pensões, and these risks are monitored and annually quantified by the Bank in the ICAAP exercise, whereupon the Bank assesses whether or not economic capital must be allocated to the Pension Fund. The ICAAP analyses the Pension Fund's asset and liability risks separately.

In so far as the Fund's asset portfolio basically comprises shares, bonds, public debt, mutual fund participation units, and real estate, the risks inherent in the Fund's assets are those specifically inherent in the various types of investment (market risk, liquidity risk, etc.). The Fund's liabilities, which are liabilities for the payment of pensions, are subject to various risks that may have a negative impact on their value: inflation rate, growth of salaries and pensions, increase in the average life expectancy, discount rate.

3.16. Risk to business profitability

BPI's profitability objectives, backed by a process of financial planning, are defined in the strategic plan and in the budget.

3.17. Risk of deterioration of other assets

The risk of impairment of other assets relates to the reduction in the book value of the Bank's equity holdings and non-financial assets. This type of risk is managed separately according to the nature of the risk: equity holdings and deferred tax assets (DTA).

The risk of the investee portfolio corresponds to the risk associated with the possibility of incurring losses in the book value of equity positions in portfolio within a medium to long time horizon as a result of fluctuations in macroeconomic conditions or in the specific financial situation of each investee. Equity positions may result from explicit management decisions of investment, from the integration of other entities or from the restructuring or enforcement of guarantees in the context of credit operations.

These equity holdings are managed and monitored in the framework of Banco BPI's strategic objectives. This monitoring focuses on the evolution of the investees' economic and financial data, based on documents provided by the investee companies. Regulatory changes and competition in the geographical areas and industry sectors where the investees operate are also analysed. For the more relevant investees, DCF and/or market multiples periodic valuations are made, in accordance with the nature of each investee, and also impairment tests for purposes of recognition in the Bank's accounts.

3.18. Capital adequacy and solvency risk

BPI has set the objective of maintaining a medium-low risk profile and a solid capital position. The adequate level of capital to cover unexpected losses is measured under two different approaches: regulatory capital and economic capital.

As a complement to the assessment of capital adequacy relative to the risk-weighted assets on a regulatory basis, BPI measures the adequacy of its available own funds relative to its economic needs, this being the only metrics used to:

the self-assessment of capital, which is subject to presentation to and review by the Bank's relevant bodies;
update the economic capital ratio, as a control and monitoring tool
calculating the Risk Adjusted Return (RAR) and pricing adjusted return.

In contrast with regulatory capital, economic capital always requires an internal estimate, which the Entity adjusts according to its level of tolerance to risk, volume, and type of business activity. Hence, economic capital complements the regulatory vision of solvency to provide a closer view of the real profile of risk taken by the Bank, and to capture risks not considered, or only partially considered, in the regulatory requirements. To manage these risks, the Group uses the same confidence level as that used for calculations under Pillar I - a 99.9% confidence level, in accordance with the Basel III definition.

4. SOLVENCY MANAGEMENT

4.1. Regulatory framework

The global regulatory framework for supervision and prudential rules on solvency, known as Basel III, came into force in the European Union through Directive 2013/36 (CRD IV) and Regulation 575/2013 (CRR), in which a progressive schedule of implementation is established for the respective requirements.

Furthermore, the Supervisory Review and Evaluation Process (SREP), which configures Pillar II of the Basel regulatory framework, consists of an ongoing supervision process to evaluate the adequacy of capital, liquidity, corporate governance, and risk management and control, harmonised at European level by the EBA. The SREP process may require additional capital or liquidity, or other qualitative measures in response to any risks and weaknesses specifically detected. The SREP seeks to assess the individual viability of entities, considering cross-cutting analyses and comparisons against their peers. Any potential additional capital requirements are complemented by combined capital buffer requirements.

4.2. Capital management

At 31 December 2018, Banco BPI had a Common Equity Tier 1 (CET1) ratio of 13.8%, a Tier 1 ratio of 13.8% and a total ratio of 15.5%, taking into account the Board of Directors' dividend distribution proposal (140 million euros)² . During 2018, BPI did not make use of the transitional provisions set forth in Regulation (EU) no. 575/2013, i.e., the ratios reported for 2018 reflect the full implementation of the regulations.

² The capital ratios reported under COREP for 31 December 2018 - CET1 and Tier1 of 13.2%, total ratio of 14.9% and leverage ratio of 7.0% - consider the upper limit (payout of 50%) of the interval foreseen in Banco BPI's dividend policy, as laid down in Article 2 (4, 5 and 6) of Delegated Regulation (EU) no. 241/2014.

The following table shows the composition of Banco BPI consolidated own funds:

	31-12-20181		31-12-2017 Restated
	Amount	%	Amount	%
CET1 instruments	3 060 727		2 803 103
Accounting shareholders' equity	3 205 952		2 823 586
Dividends payable	( 140 000)
AVA adjustments and gains/(losses)	( 5 226)		( 20 483)
Deductions to CET1	( 725 689)		( 569 093)
Intangible assets	( 66 904)		( 46 062)
Pension funds assets
Deferred tax assets and financial investments	( 613 356)		( 479 008)
Other deductions	( 45 429)		( 44 022)
CET1	2 335 038	13.8%	2 234 010	13.2%
TIER 1	2 335 038	13.8%	2 234 010	13.2%
TIER2 instruments	300 000		300 611
Deductions to TIER2			( 62 148)
TIER2	300 000	1.8%	238 463	1.4%
TOTAL CAPITAL	2 635 038	15.5%	2 472 473	14.6%
RWA	16 976 755		16 962 066
Fully Loaded
CET1		13.8%		12.3%
T1		13.8%		12.3%
Total Capital		15.5%		14.0%

1 capital ratios at 31 December 2018 considering the Board of Directors' dividend distribution proposal (140 million euros), which is an integral part of the Management Report.

The following chart sets out a summary of the minimum regulatory capital requirements on a consolidated basis at 31 December 2018

31-12-2017 Restated
Amount	%

1 399 370	8.25%
1 653 801	9.75%
1 993 043	11.75%
10.25% 12.25%

The amounts are calculated considering the Board of Directors' dividend distribution proposal (140 million euros), which is an integral part of the Management Report.

2 Phased in in 2017 and fully loaded in 2018.

1 Includes the minimum requirement of Pillar I of 4.5% (2.50% in 2017 and 2.25% in 2018); the capital conservation buffer (1.25% in 2017 and 1.875% in 2018, 2.5% to be phased in over 4 years through to 2019); and the O-SII (Other Systemically Important Institution) buffer of 0.125% imposed in 2018 (0.5% to be phased in over 4 years through to 2021).

The following table shows the breakdown of the leverage ratio:

Leverage ratio

	31-12-20181			31-12-2017 Restated
	Amount	%	Amount	%
Exposure	31 963 096		30 314 016
Leverage ratio2		7.3%		7.4%

1 The amounts are calculated considering the Board of Directors' dividend distribution proposal (140 million euros), which is an integral part of the Management Report.

2 Calculation of TI phased in in 2017 and fully loaded in 2018. The changes in own funds are as follows:

Changes in own funds

	31-12-20181		31-12-2017 Restated
	Amount	%	Amount	%
CET1 at beginning of period	2 234 010	13.2%	2 754 666
Changes in CET1 instruments	257 624		( 7 902)
Profit/(loss)	490 638		10 209
Dividends payable	( 140 000)
Reserves	( 108 272)		372 732
Minority interests			( 382 557)
Value adjustments and other	15 258		( 8 286)
Changes in CET1 deductions	( 156 596)		( 512 753)
Intangible assets	( 20 841)		( 26 447)
Financial investments	( 97 792)		( 430 910)
Deferred tax assets	( 36 556)		425
Other CET1 deductions	( 69 733)		( 22 160)
AT1 deductions covered by CET1	68 326		( 33 662)
CET1 at end of period	2 335 038	13.8%	2 234 010	13.2%
Changes in CET1 deductions
AT1 deductions	68 326		( 33 662)
Deductions to be covered with CET1	( 68 326)		33 662
Level 2 own funds at beginning of period	238 463	1.4%
Changes in TIER2 instruments	( 611)		299 159
Subordinated issuances			300 000
Redemption of subordinated issuances	( 611)		( 841)
Changes in TIER2 deductions	62 148		( 60 696)
TIER2 at end of period	300 000	1.8%	238 463	1.4%

1 The amounts are calculated considering the Board of Directors' dividend distribution proposal (140 million euros), which is an integral part of the Management Report.

The main factors that influenced the evolution of the (fully loaded) CET1 ratio in 2018 are set out below:

CET1 Fully loaded

In 2018 the changes in the fully-loaded CET1 ratio essentially resulted from the capital gains on the sale of equity holdings to the CaixaBank Group (+129 bps) and from organic capital generation (+92 bps). The deduction due to the dividends to be distributed represented a reduction of 84 bps in the CET1 ratio. The entry into force of IFRS9 had an impact of -0.2 p.p.

In view of the solvency ratio levels achieved in 2018, there are no restrictions on the distribution of dividends.

The detail of risk weighted assets and breakdown by calculation method is given below:

Detail of risk-weighted assets by method

	31-12-20181
	Risk-weighted		Restated Risk-weighted
	assets	%	assets	%
Credit risk
Standardised Approach	14 663 299	86%	14 428 064	85%
Equity holdings risk
Simple method	770 969	5%	935 626	6%
Market risk
Standardised Approach	246 191	1%	317 078	2%
Operational risk
Standardised Approach	1 296 295	8%	1 281 298	8%
	16 976 755	100%	16 962 066	100%

1 The amounts are calculated considering the Board of Directors' dividend distribution proposal (140 million euros), which is an integral part of the Management Report.

5. DIVIDEND DISTRIBUTION

Dividend policy

In line with the amendment to the articles of association of Banco BPI approved at the General Shareholders' Meeting of 20 April 2006, these articles now include the following rule (Article 26- 3): "The General Shareholders' Meeting shall decide on the long-term dividend policy proposed by the Board of Directors, which shall justify any deviations from that policy."

For compliance with this statutory rule, Banco BPI's long-term dividend policy was approved on 31 January 2019, as follows:

1. General Principle

Subject to a proposal to be submitted by the Board of Directors to the General Meeting, distribution of an annual dividend tendentially between 30% and 50% of the net income reported in the individual accounts for the year to which it relates, with the exact amount to be proposed being defined in accordance with a prudent judgement that balances the situation of the Bank at the time with the need to maintain at all times adequate levels of liquidity and solvency.

2. Conditioning factors

The provisions of point 1 above represent a mere principle, which, as such, is not binding upon the General Meeting, which can at any time, not only change it, but also resolve on a percentage of distribution below the minimum 30% threshold or above the maximum 50% threshold therein referred, or on no distribution at all.

The provisions of item 1 are therefore only intended to:

i) give the shareholders and third parties a medium/long term perspective of the company's objectives in terms of dividend distribution;
ii) impose on the Board of Directors, when it intends to propose a dividend distribution outside the thresholds therein established, the duty of substantiating this option.

In addition, the distribution principle set out in the previous paragraph shall be subject to:

a) Compliance with the capital ratios at any time applicable to the Bank, whether under Pillar 1 or Pillar 2, as well as with other applicable legal provisions, namely those governing what is considered the "maximum distributable amount ";
b) When the net income determined in the individual accounts includes dividends from companies that have not yet been paid to the Bank, the Board of Directors shall exclude the amount of these dividends from the base used for the definition of the dividends to be distributed, whenever a prudent judgement so advises;
c) Respect for the findings and guidelines of the Bank's ICAAP and RAF at any time in force;
d) the absence of exceptional circumstances that justify, in the Board of Directors reasoned opinion, submitting to the Shareholders' deliberation the distribution of a dividend below the 30% threshold or above the 50% threshold.

The distribution of the 2018 net income proposed by the Board of Directors was as follows:

	2018
Net income reported in the individual accounts of Banco BPI	914 311
Net capital gain on revaluation of equity holding in BFA	( 456 676)
Net profit for dividend distribution purposes	457 635
Proposed appropriation of profit
To dividends	140 000
To legal reserve	91 431
To other reserves	682 880
Individual profit of Banco BPI in 2018	914 311
Payout ratio for dividend distribution purposes	30.6%

The table below shows the liquidity position on the balance sheet at 31 December 2018, which indicates that the Bank has sufficient liquidity to pay the dividends as per the 2018 dividend distribution proposal approved by the Board of Directors on 15 April 2019.

Balance sheet liquidity position

	2018
Actual liquidity1	3 542 181
Potential liquidity2	9 143 073
HQLA	3 896 718
Total liquid assets (HQLA + other non-HQLA)3	9 497 609
Maximum amount payable	9 497 609

1 Basically cash on hand, unencumbered sovereign debt, and deposits and placements with central banks and other credit institutions, excluding deposits to meet minimum cash requirements. 2 In addition to real liquidity, includes eligible assets as collateral for additional ECB funding.

3 Includes eligible assets as collateral for additional ECB funding, not included in the HQLA.

6. EARNINGS PER SHARE

Basic and diluted earnings per share, as per the consolidated profit of Banco BPI attributable to its shareholders, are calculated as follows:

	31-12-2018	31-12-2017
		Restated
Numerator (in thousand euros)
Profit/(loss) after tax and minority interests from continuing operations	426 424	( 12 491)
Profit/(loss) after tax from discontinued operations	64 214	22 700
Consolidated profit/(loss)	490 638	10 209
Denominator (in thousand shares)
Average number of outstanding shares	1 456 924	1 456 924
Average number of treasury shares	149	705
Adjusted number of shares (basic earnings per share) 1	1 456 775	1 456 219
Basic earnings per share (in euros)
Profit/(loss) per share from continuing operations	0.293	(0.009)
Profit/(loss) per share from discontinued operations	0.044	0.016
Consolidated basic earnings per share	0.337	0.007
Diluted earnings per share (in euros) 2
Diluted earnings per share from continuing operations	0.293	(0.009)
Diluted earnings per share from discontinued operations	0.044	0.016
Consolidated diluted earnings per share	0.337	0.007

1 Average number of shares outstanding, excluding the average number of treasury shares held during the period.

2 In the calculation of Banco BPI's diluted earnings per share, the weighted average number of shares was adjusted by adding the portfolio of treasury shares allocated to the attribution and execution of the Share-based variable remuneration programme that was in force until the end of 2016. No other dilution effects on earnings per share are calculated.

7. SEGMENTS

The objective of business segment reporting is to allow internal supervision and management of BPI's activity and consolidated income. The information is broken down into the various lines of business according to the Bank's organisational structure. The segments are defined and segregated taking into account the inherent risks and management characteristics of each segment. The information reporting used by management is essentially prepared on an accounting basis supported by the IFRS. Their preparation relies on i) the same presentation principles used for the Bank's management information, and ii) the same accounting principles and policies used to prepare the annual financial statements:

BPI's segment reporting considers the following segments:

Domestic operations: corresponds to the commercial banking business in Portugal (including the Madrid and Paris branches³ ), and the investment banking, private equity, asset management and insurance operations. Thus, domestic operations are divided into:
- o Commercial Banking
- o Asset Management
- o Investment Banking
- o Equity holdings and other
International operations: corresponds to the activity developed in Angola by Banco de Fomento, S.A., in Mozambique by Banco Comercial e de Investimentos, S.A.R.L. and BPI Moçambique – Sociedade de Investimento, S.A. and in South Africa by BPI Capital Africa (Proprietary) Limited.

Commercial Banking

Banco BPI's operations are focused mainly on commercial banking. Commercial banking includes:

Retail Banking Commercial operations with individual clients, individual entrepreneurs and companies with turnover of up to 5 million euros, developed through a multi-channel distribution network comprising traditional branches and investment centres. It also includes the Private Banking area, which is responsible for implementing strategies and submitting investment proposals to the Customers, and for the management of their financial assets.
Corporate Banking, Project Finance and Institutional Banking Commercial operations with companies with turnover above 2 million euros, operating alongside Retail banking in the segment of up to 5 million euros. Also includes project finance services and the relationship with Public Sector entities, state-owned and municipal Companies, the State Business Sector, Foundations and Associations. This segment operates through a network of corporate centres and institutional centres that cater to the area's business needs.

This segment also includes the Bank's residual activity, comprising segments that represent individually less than 10% of the Bank's total income, net profit and assets.

Asset Management

This segment includes the life insurance, pension fund management and investment fund management businesses conducted by BPI Vida e Pensões, BPI Gestão de Activos and BPI GIF. The commissions received by Banco BPI for the distribution of capitalisation life insurance and investment funds to its Customers (acting as agent for these entities) continue are included in the Commercial Banking segment.

Following the sale of these equity holdings to the CaixaBank Group, and as provided for in IFRS 5 - Non-current assets held for sale and discontinued operations, this segment includes:

The net income generated by BPI Vida e Pensões (in 2017) and by BPI Gestão de Ativos and BPI GIF (in 2017 and through to 31 March 2018), recognised under the caption Net income from discontinued operations;
The capital gains on the sale of the above mentioned companies (7 677 t.euros in 2017 and 61 755 t.euros in 2018).

³ The Paris, Madrid and Cayman branches were closed in 2018.

Investment Banking

Investment banking covers the following business areas:

Corporate Finance Consultancy services related to the structuring of merger and acquisition processes, capital market operations and advisory with the analysis of investment projects and decisions.
Equities Department Includes trading activity, activity in the primary market in financial instruments, brokerage and research.
Portfolio Management Includes services rendered to BPI Global Investment Fund Management Company, S.A. in connection to the management of the BPI Alternative Fund - Iberian Equities Long Short (until June 2017).

Equity investments

This segment essentially includes the activity related to Equity Holdings and Private Equity. The Private Equity area basically promotes investment in unlisted companies with the following objectives: the development of new products and technologies, the financing of investments in working capital, acquisitions, and the reinforcement of financial autonomy.

The amount of inter-segment transactions is presented based on the effective conditions of the transactions and in accordance with the accounting policies used to prepare BPI's consolidated financial statements.

At 31 December 2018 the income statement by business segment of BPI was as follows:

	stic tivi Do Ac ty me					tio nal tivi Inte Ac ty rna
	Com rcia l me kin Ban g	Inv est nt Ban me kin g	Ass et ma ent nag em	hol din Equ ity gs	Inte ent r-se gm tra ctio nsa ns	al Tot	BFA	Oth er2	al Tot	Ban BPI co - sol ida ted con
inc 1.In ter est om e	509 92 7	47		298	( 8)	510 26 4				510 26 4
2.In ter est ex pen se	( ) 87 673	( 22)			8	( ) 87 687		( 1)	( 1)	( ) 87 688
e [ ] 3.N et i t in 1+2 nte res com	422 25 4	25		298		422 57 7		( 1)	( 1)	422 57 6
e fr 4.In uity ins tru nts com om eq me	1 4 46			277		1 7 23				1 7 23
har f pr ofit / ( loss ) o f en ed for th tho d 5.S titi ing ity unt e o es a cco us e e qu me	( ) 832			8 2 88		7 4 56	241 64 5	22 455	264 10 0	271 55 6
and issi inc 6.F ee co mm on om e	308 30 7	12 209			( 07) 1 5	319 00 9				319 00 9
and issi 7.F ee co mm on exp ens es	( ) 41 892	( ) 847		( 7)	1 5 07	( ) 41 239				( ) 41 239
8.N et f and issi inc e [ 6+7 ] ee co mm on om	266 41 5	11 362		( 7)		277 77 0				277 77 0
s/ ( es) fin 9.G ain loss ial ion rat on anc ope s	22 949	2		61 688		84 639	( 64) 7 7		( 64) 7 7	76 875
10. Op ting inc nd era om e a exp ens es	( 12 874 )	( 65)		( 2)		( ) 12 941		1	1	( ) 12 940
[ ] 11. Gro ss i 3+4 +5+ 8+9 +10 nco me	699 35 8	11 324		70 542		781 22 4	233 88 1	22 455	256 33 6	1 0 37 560
ff e 12. Sta xpe nse s	( 3) 257 15	( 33) 5 0		( 28)		( 4) 262 21				( 4) 262 21
lier nd al s 13. Sup ices ext p s a ern erv	( 3) 170 01	( 27) 2 8		( 14)		( 4) 172 85		( 24)	( 24)	( 8) 172 87
14. Fixe d a rtis atio nd dep iati ts a sse mo n a rec on	( ) 23 697	( ) 130				( ) 23 827				( ) 23 827
s [ 14] 15. Op tin 12+ 13+ era g e xpe nse	( 3) 450 86	( 90) 7 9		( 42)		( 5) 458 89		( 24)	( 24)	( 9) 458 91
e [ 15] 16. Net tin inc 11+ op era g om	248 49 5	3 3 34		70 500		322 32 9	233 88 1	22 431	256 31 2	578 64 1
los fin ial 17. Imp airm ent ets ses on anc ass	806 44					806 44				806 44
Oth nd 18. er i airm visi ent mp s a pro ons	( ) 325			3 2 04		2 8 79		210	210	3 0 89
ins/ ( loss es) oth 19. Ga in ts er a sse	91 557	89		( 89) 6 6		84 957	( 0) 154 03	400	( 0) 153 63	( ) 68 673
fit/ 20. ( los s) bef [ 16+ 18+ 19] Pro tax 17+ ore	384 53 3	3 4 23		67 015		454 97 1	79 851	23 041	102 89 2	557 86 3
21. Inc e ta om x	( 7) 121 77	( ) 927		( ) 193		( 7) 122 89	( 34) 6 6	( 09) 1 9	( 43) 8 5	( 9) 131 43
fit/ ( s) [ 21] 22. Pro los fro inu ing tio 20+ ont m c op era ns	262 6 75	2 4 96		66 822		332 07 4	73 217	21 132	94 349	426 42 4
ofit / ( loss ) fro m d ued 23. Net isco ntin tio pr op era ns			64 214			64 214				64 214
fit/ ( loss ) at trib ble 24. Pro min orit inte uta to ts y res
/ ofit ( los s) [ 24] 25. Net 22+ 23+ pr	262 75 6	2 4 96	64 214	66 822		396 28 8	73 217	21 132	94 349	490 63 8

¹ Income statement structure presented in accordance with Banco BPI management information.

² Includes activity in Mozambique and South Africa.

The caption Gains/(losses) on financial operations, in the segment of equity investments, includes 59 581 t.euros relating to the capital gain on the sale of the equity holding in Viacer.

The caption Gains/(losses) in other assets, in the commercial banking segment, includes gains/(losses) on the sale of the legal positions in the merchant acquiring business to Comercia Global Payments, Entidad de Pago, S.L., in August 2018 (57 788 t.euros) and on the sale of the cards business to Caixabank Payments E.F.C. E.P., S.A., in November 2018 (41 054 t.euros).

At 31 December 2017 Restated, the income statement by business segment1 of BPI was as follows:

	stic tivi Do Ac ty me				tio nal tivi Inte Ac ty rna
	Com rcia l me kin Ban g	Inv est nt Ban me kin g	Ass et ma Equ ity hol din gs ent nag em	Inte ent r-se gm tra ctio nsa ns	Tot al	BFA	er2 Oth	Tot al	Inte ent r-se gm ctio tra nsa ns	Ban BPI co - sol ida ted con
1.In inc ter est om e	481 91 0	( 65)	356	( 145 )	482 05 6		45	45	( 24)	482 07 7
2.In ter est ex pen se	( ) 93 634	( ) 311		145	( ) 93 800		( ) 242	( ) 242	24	( ) 94 018
e [ ] 3.N et i t in 1+2 nte res com	388 27 6	( ) 376	356		388 25 6		( ) 197	( ) 197		388 05 9
e fr 4.In uity ins tru nts com om eq me	4 1 04		2 4 21		6 5 25					6 5 25
/ ( ) o 5.S har f pr ofit loss f en titi ed for ing th unt e o es a cco us e	2 4 57		10 981		13 438	102 42 3	8 8 92	111 31 5		124 75 3
tho d ity and issi inc equ 6.F me ee co mm on om e	305 00 4	9 3 01		( 1 8 27)	312 47 8		976	976		313 45 4
7.F and issi ee co mm on exp ens es	( ) 48 012	( 02) 3 3	( 2)	1 8 27	( ) 49 489					( ) 49 489
et f and e [ ] 8.N issi inc 6+7 ee co mm on om	256 99 2	5 9 99	( 2)		262 98 9		976	976		263 96 5
s/ ( loss es) fin ial 9.G ain ion rat on anc ope s	10 106	2 7 22	1 6 23		14 451		( 3)	( 3)		14 448
nd 10. Op ting inc era om e a exp ens es	( ) 23 335	( ) 149	( 30)		( ) 23 514		( ) 759	( ) 759		( ) 24 273
ss i [ ] 11. Gro 3+4 +5+ 8+9 +10 nco me	638 60 0	8 1 96	15 349		662 14 5	102 42 3	8 9 09	111 33 2		773 47 7
12. Sta ff e xpe nse s	( 7) 359 96	( 93) 8 4	( ) 210		( 0) 368 67		( 40) 1 0	( 40) 1 0		( 0) 369 71
lier nd al s 13. Sup ices ext p s a ern erv	( 4) 147 36	( 73) 3 1	( 26)		( 3) 150 56		( ) 361	( ) 361		( 4) 150 92
d a nd dep 14. Fixe rtis atio iati ts a sse mo n a rec on	( ) 21 685	( ) 149			( ) 21 834		( 43)	( 43)		( ) 21 877
tin s [ 14] 15. Op 12+ 13+ era g e xpe nse	( 529 01 6)	( 815 ) 11	( 236 )		( 06 7) 541		( 44) 1 4	( 44) 1 4		( 542 1) 51
16. tin inc e [ 15] Net 11+ op era g om	109 58 4	( 3 6 19)	113 15		121 07 8	102 42 3	65 7 4	109 88 8		230 96 6
17. Imp airm los fin ial ent ets ses on anc ass	4 7 64	( ) 220			4 5 44					4 5 44
18. Oth er i airm nd visi ent mp s a pro ons	( 3 6 18)		( 409 )		( 4 0 27)		( 667 )	( 667 )		( 4 6 94)
ins/ ( loss es) oth 19. Ga in ts er a sse	12 210				12 210					12 210
fit/ ( los s) bef [ 19] 20. Pro 16+ 17+ 18+ tax ore	122 94 0	( 39) 3 8	14 704		133 80 5	102 42 3	6 7 98	109 22 1		243 02 6
21. Inc e ta om x	( 40 792 )	919	( 825 )		( 40 698 )	( 10 275 )	( 802 )	( 077 ) 11		( ) 51 775
fit/ 22. ( los s) fro inu ing tio [ 20+ 21] Pro ont m c op era ns	82 148	( 20) 2 9	13 879		93 107	92 148	5 9 96	98 144		191 25 1
/ ( ) 23. Net ofit loss fro m d isco ntin ued tio pr op era ns	7 8 90		22 700		30 590	( 1) 211 62		( 1) 211 62		( 1) 181 03
fit/ ( loss ) at trib ble 24. Pro min orit inte uta to ts y res	( 11)				( 11)					( 11)
/ ofit ( los s) [ 24] 25. Net 22+ 23+ pr	90 027	( 20) 2 9	22 700 13 879		123 68 6	( 3) 119 47	5 9 96	( 7) 113 47		10 209

¹ Income statement structure presented in accordance with Banco BPI management information.

² Includes activity in Mozambique and South Africa.

8. DISCLOSURE OF THE REMUNERATION OF THE CORPORATE BODIES

The General Meeting of 20 April 2018 approved the "Remuneration Policy of Banco BPI applicable to the members of the Board of Directors and of the Supervisory Board" (hereinafter the "Remuneration Policy) for the 2017-2019 period.

In accordance with Banco BPI's Articles of Association, the members of the corporate bodies shall have a fixed remuneration and the members of the Executive Committee may receive, in addition to a fixed remuneration, a variable remuneration determined in accordance with the criteria defined in the remuneration policy for the members of the supervision and management bodies.

The remuneration of the elected members of the corporate bodies shall be fixed, after consultation with the Nominations, Evaluation and Remuneration Committee with respect to the remuneration of the members of the Executive Committee, by a Remuneration Committee.

The Remuneration Policy defines the limits for the total annual remuneration attributable to the members of the management and supervision bodies. The Remuneration Policy approved by the General Meeting of 20 April 2018 establishes the following limits:

a) Non-executive Directors (not including, for this purpose, attendance fees): 1 600 000 euros;
b) Executive Directors:
- fixed component: 5 500 000 euros
- variable component: (variable remuneration in the form of a bonus): 1 400 000 euros
c) Members of the Supervisory Board: Chairman 80 000 euros; members (each) 70 000 euros.

The remuneration of the Executive Directors is made up of a fixed component and a variable component, the latter in the form of a bonus. The variable component in the form of a bonus is in turn composed of a part in cash and another part in financial instruments, preferably CaixaBank shares, attributed in the framework and under the terms of the Remuneration Policy.

One part of the variable remuneration is paid immediately after its award, i.e., the cash and instruments that compose this nondeferred portion of the variable remuneration are transferred to the Executive Director.

The other part of the variable remuneration (the deferred part) is subject to a deferral period, phased in under the following terms:

a) On the date of payment of the variable remuneration, its non-deferred portion must be paid (hereinafter "Initial Payment Date"), i.e., the cash and instruments included in that non-deferred portion of the variable remuneration must be transferred to the Executive Director. Half of this non-deferred portion of the variable remuneration is paid in cash and the remaining half is paid in instruments.
b) Provided that the reduction assumptions set forth in Section 5.2. of the Remuneration Policy do not materialise, the deferred portion of the risk-adjusted variable remuneration shall be paid in five tranches, the amounts and dates of which are as follows:
- 1/5 12 months after the Initial Payment Date
- 1/5 24 months after the Initial Payment Date
- 1/5 36 months after the Initial Payment Date
- 1/5 48 months after the Initial Payment Date
- 1/5 60 months after the Initial Payment Date

The cash and instruments whose award is subject to the deferral period shall only be transmitted to the Executive Director after the end of the respective phase of the deferral period.

The percentage of deferral that applies to the variable remuneration of the Executive Directors is 60 percent. This percentage of deferral may be changed if the competent authorities set absolute or relative limits for the calculation of "particularly high variable remuneration amounts", pursuant to the provisions of the EBA Guidelines.

Fixed remuneration earned in 2018

In 2018 the overall fixed remuneration of the members of the Board of Directors totalled 5 885 722 euros.

Over and above this amount there were attendance fees of 273 400 euros for their participation in the meetings of the advisory and support committees of the Board of Directors foreseen in the Articles of Association.

Board of Directors	Fixed remuneration	Attendance fees
Fernando Ulrich	750 000
Pablo Forero	943 996
António José Cabral 1	28 667	11 100
António Lobo Xavier	95 222	58 800
Alexandre Lucena e Vale	368 212
António Farinha Morais	531 600
Carla Sofia Bambulo 2	34 889	18 500
Cristina Rios Amorim	64 889	37 000
Fátima Barros 3	51 333	33 300
Francisco Manuel Barbeira	354 547
Gonzalo Gortázar Rotaeche	64 889
Ignacio Alvarez-Rendueles	810 746
Javier Pano Riera	64 889	37 000
João Pedro Oliveira Costa	489 260
José Pena do Amaral	531 600
Juan Alcaraz 4	34 889
Lluís Vendrell	64 889	51 800
Natividad Capella Pifarre 5	12 167
Pedro Barreto	489 260
Tomaz Jervell	64 889	11 100
Vicente Tardio Barutel 6	34 889	14 800
1 Started functions on 9 July 2018.

2 Ceased functions on 1 July 2018.

3 Started functions on 23 February 2018.

4 Ceased functions on 29 June 2018.

5 Started functions on 19 October 2018.

6 Ceased functions on 1 July 2018.

Variable remuneration

General Features

As referred, the members of the Board of Directors who are members of the Executive Committee may be entitled to receive a variable remuneration.

This variable remuneration is dependent upon the performance of the members of the Executive Committee during a given year, and its attribution is usually decided and made during the first half of the following year.

Under the terms of the applicable Remuneration Policy, this variable remuneration is subject to deferral, i.e., one part thereof is paid in the year in which it is attributed and another over subsequent years.

Variable remuneration relative to the performance of the members of the Executive Committee in 2018

The existence and amount of this variable remuneration shall be subject to a decision to be taken in the first half of 2019, under the terms referred to hereinabove. However, and in accordance with the applicable accounting rules, it was considered in Banco BPI's 2018 financial statements that the variable remuneration to be attributed to the members of the Executive Committee in the first half of 2019, with reference to financial year 2018, would match the limit approved in the Remuneration Policy (total amount of 1.4 million euros). Applying the deferral rules, the Bank recognised in the 2018 accounts a cost of 875 t.euros relative to this variable remuneration.

Variable remuneration relative to the performance of the members of the Executive Committee in financial years before 2018

This remuneration does not therefore concern the year 2018 in so far as it rewards performance of previous years, but it was paid in 2018 due to the rules on deferral set forth in the Remuneration Policy.

Hence, with regard to performance in 2012 and the variable remuneration relative to that year, the members of the Executive Committee then in office received the following amounts in 2018:

Variable remuneration relative to 2012:

(Amounts in euros)	Amount
Fernando Ulrich	236 691
António Farinha Morais	167 118
José Pena do Amaral	167 118
Pedro Barreto	167 118

With regard to performance in 2013 and the variable remuneration relative to that year, the members of the Executive Committee then in office received the following amounts in 2018:

Variable remuneration relative to 2013:

(Amounts in euros)	Amount
Fernando Ulrich	87 168
António Farinha Morais	77 153
José Pena do Amaral	69 350
Pedro Barreto	77 153

Finally, and with regard to performance in 2017, the General Meeting of Shareholders of 20 April 2018, upon a proposal of the Remuneration Committee and under the transitory provision set out in Article 28 (5) of the Articles of Association, approved the attribution of the following variable remuneration:

Variable remuneration relative to 2017:

(Amounts in euros)	Amount attributed	Amount paid in 2018	Deferred amount with payment phased in from 2019 to 2023 (one fifth in each year)
Pablo Forero	200 000	80 000	120 000
Alexandre Lucena e Vale	110 460	44 184	66 276
António Farinha Morais	133 000	53 200	79 800
Francisco Manuel Barbeira	106 380	42 552	63 828
Ignacio Alvarez-Rendueles	177 690	71 076	106 614
João Oliveira e Costa	205 488	82 195	123 293
José Pena do Amaral	113 000	45 200	67 800
Pedro Bissaia Barreto	205 488	82 195	123 293

The amounts referred in the above table, i.e., both those paid in 2018 and those whose payment was deferred and are scheduled for phased payment over each of the five years of the 2019-2023 period, shall be paid half in cash and half in kind (the latter, in CaixaBank shares, valued at 3.9896 euros per share). The amounts paid in kind shall be subject to an unavailability period of one year starting on the date when the respective payment takes place.

Remuneration of the members of the Supervisory Board in 2018

The overall remuneration of the members of the Supervisory Board in 2018 totalled 231 876 euros. The individual amounts were as follows:

(Amounts in euros)	Fixed remuneration
Abel Pinto dos Reis	38 499
Rui Campos Guimarães	64 008
Jorge Figueiredo Dias	33 622
Manuel Ramos Sebastião	34 973
Ricardo Filipe Pinheiro	30 387
Elsa Roncon Santos	30 387

Remuneration of the Chairman of the Presiding Board of the General Meeting in 2018:

In 2018, the overall amount of the remuneration awarded to the Chairman of the Presiding Board of the General Meeting was 14 000 euros, paid in 14 instalments.

The members of the Presiding Board of the General Meeting do not benefit, under this circumstance, from any retirement rights.

Supplementary pensions or early retirement schemes

The members of the management body who are or have been Executive Directors (or, under the previous governance model, members of the Management body) benefit from the pension plan applicable to Banco BPI's Employees in general under the same circumstances, to the extent that they were Banco BPI Employees before holding those positions and their employment suspended was suspended, under the terms of the law.

The members of the management body who were Executive Directors in the 2014/2016 term of office or who were members of this body (or, under the previous governance model, members of the Management body) in earlier terms of office, also enjoy as a defined benefit, a supplementary retirement benefit, as approved at the Bank's General Council meeting of 25 July 1995, which provides them with a retirement supplement the monthly amount of which depends on their monthly income as Executive Directors and on the number of years served in said positions.

The rules which govern the aforesaid benefit are set out in the Retirement Entitlement Regulations for the Members of the Management Board, approved at the above-mentioned General Council meeting.

There is a provision that the pensions paid under the Social Security which fall within any one of the following three categories shall be deducted from the pensions paid under the Executive Directors' plan:

those relating to functions performed at BPI;
those relating to functions performed at third party entities at BPI's indication and which BPI has recognised for that purpose;
the pensions paid under other BPI pension plans.

By resolution of the Remuneration Committee, under the terms of the current Remuneration Policy, six of the eight Executive Directors are also entitled to a defined contribution supplementary pension benefit.

The members of the management and supervision bodies who are not nor have ever been Executive Directors (or, under the previous governance model, members of the Management body) are not entitled to any retirement benefit attributed by the Bank.

A sum of 10 252 t.euros, corresponding to the present value of past service liabilities, was allocated to the Executive members of the Board of Directors who at 31 December 2018 are beneficiaries of a defined contribution pension plan:

(Amounts in thousand euros)	Amount
José Pena do Amaral	3 627
Pedro Barreto	1 444
João Oliveira e Costa	1 462
António Farinha Morais	3 719

For Executive Directors Alexandre Lucena e Vale and Francisco Manuel Barbeira, who benefit from a pension scheme under the Collective Wage Agreement and/or the Social Security, the sum allocated, corresponding to the present value of past service liabilities, was 850 t.euros:

(Amounts in thousand euros)	Amount
Alexandre Lucena e Vale	581
Francisco Manuel Barbeira	269

In 2018, the annual cost of retirement and survivor's pensions calculated based on the actuarial evaluation of 31 December 2017 was 467 t.euros, broken down as follows:

(Amounts in thousand euros)	Normal cost
José Pena do Amaral	222
Pedro Barreto	79
João Oliveira e Costa	137
António Farinha Morais	23
Alexandre Lucena e Vale	6
Francisco Manuel Barbeira	1

9. CASH AND CASH BALANCES AT CENTRAL BANKS AND OTHER DEMAND DEPOSITS

The detail of this heading is as follows:
	31-12-2018	31-12-2017 Restated
Cash	278 878	221 173
Demand deposits at Bank of Portugal	1 950 209	686 863
Demand deposits at foreign Central Banks		1 816
Other demand deposits	223 992	184 298
Interest on demand deposits at Bank of Portugal	( 163)
	2 452 916	1 094 150

The caption 'demand deposits at Bank of Portugal' includes deposits made to comply with the minimum cash reserve requirements of the Eurosystem. The component of these deposits made to comply with the minimum cash reserve requirements is currently remunerated at 0% and the surplus funds have an interest rate of -0.40%. The minimum cash reserve corresponds to 1% of the amount of deposits and debt securities issued maturing in up to 2 years, excluding liabilities to other institutions subject to and not exempt from the same minimum cash reserve system and the liabilities to the European Central Bank and national central banks that participate in the euro.

10. FINANCIAL ASSETS AND LIABILITIES HELD FOR TRADING

Financial assets held for trading

The detail of this heading is as follows:

	31-12-2018	31-12-2017 Restated
Trading derivatives	131 708	136 777
Equity instruments	81 171	134 336
Debt securities	13 893	23 368
	226 772	294 481

Financial liabilities held for trading

The detail of this heading is as follows:

	31-12-2018	31-12-2017
		Restated
Trading derivatives	141 335	170 048
	141 335	170 048

10.1. Trading derivatives (assets and liabilities)

The detail of this heading is as follows:

	31-12-2018		31-12-2017 Restated
			Book value Notional value			Book value
	Notional value	Assets	Liabilities		Assets	Liabilities
Foreign currency purchase / sale
Foreign currency purchases against euros	1 033 212	2 503	7	980 761	1 586	3
Foreign currency purchases against foreign currencies	558			37 104	24	12
Sale of foreign currencies against euros	77 625	11	427	103 782	26	278
Financial futures on shares and interest rates
Bought	9 045		83	29 131	59	11
Share options
Bought	18 375	712		13 425	253
Issued	1 200 448	4 989		1 353 653	2 936
Interest rate options
Bought	297 526	1 991		305 601	4 534	78
Issued	296 416	231	2 089	306 548	15	2 646
Currency options
Bought	183 864	1 276
Issued	185 611		1 271
Other share and interest rate transactions
Share swaps	606 766	13 733	10 843	732 008	5 066	19 481
Interest rate swaps	3 765 145	106 262	126 615	4 124 064	122 278	147 539
	7 674 591	131 708	141 335	7 986 077	136 777	170 048
Of which: contracted in organised markets	27 420	712	83	42 556	312	11
Of which: contracted in non-organised markets	7 647 171	130 996	141 252	7 943 521	136 465	170 037

The trading derivatives balance sheet captions include 15 641 t.euros of Credit Valuation Adjustments (CVAs) and 133 t.euros of Debit Valuation Adjustments (DVAs) at 31 December 2018 and 22 825 t.euros of CVAs and 1 t.euros of DVAs at 31 December 2017 restated.

As a rule, the Bank hedges the market risk in derivatives contracted with customers by contracting symmetric derivatives on the market, recognising both in the trading portfolio. In this way, the market risk arising from these operations is not significant.

10.2. Equity instruments

The detail of this heading is as follows:

	31-12-2018	31-12-2017 Restated
Equity instruments
Shares in Portuguese companies	81 171	117 563
Shares in foreign companies		2
Participation units of Portuguese issuers		66
Participation units of foreign issuers		16 705
	81 171	134 336

At 31 December 2018 and 2017, this heading includes 81 171 t.euros and 117 562 t.euros, respectively, in shares of Portuguese companies hedging equity swaps contracted with Clients (Note 32).

10.3. Debt securities

The detail of this heading is as follows:

	31-12-2018	31-12-2017 Restated
Debt securities1
Bonds issued by Portuguese government entities2	4 532	5 466
Bonds issued by foreign government entities2		5 719
Bonds issued by other foreign entities	9 361	12 183
	13 893	23 368

1 Ratings classification in Note 3.3.3, section 'Concentration according to credit quality'.

2 Classification by residual time to maturity in Note 3.3.3, section 'Concentration according to sovereign risk'.

11. FINANCIAL ASSETS NOT DESIGNATED FOR TRADING COMPULSORILY MEASURED AT FAIR VALUE THROUGH PROFIT OR LOSS

The detail of this heading is as follows:
	31-12-2018
Equity instruments
Shares in Portuguese companies	7 859
Participation units of Portuguese issuers	136 248
Participation units of foreign issuers	24 487
	168 594
Debt securities
Bonds issued by other Portuguese entities	44
Bonds issued by other foreign entities	59 944
	59 988
	228 582

The balance in this caption at 31 December 2018 corresponds to amounts reclassified from the portfolios of 'Available-for-sale financial assets' and Financial assets at fair value through profit or loss' within the scope of IFRS 9 (Note 2.A), namely

235 939 t.euros in participation units in mutual funds (considered as "puttable instruments" under IAS 32, and the 14% equity holding in Viacer (considering the expectation of its sale in the short-term);
55 398 t.euros in debt securities classified at 31 December 2017 under financial assets held for sale, that did not pass the SPPI tests;
6 055 t.euros in participation units of foreign issuers classified at 31 December 2017 under financial assets at fair value through profit or loss.

In June 2018 Banco BPI and the Banco BPI Pension Fund sold their stake in Viacer – Sociedade Gestora de Participações Sociais, Lda, which in turn holds 56% of Super Bock Group, SGPS, SA. Banco BPI and the Banco BPI Pension Fund held 14% and 11%, in Viacer, having sold their equity holdings for 130 and 103 million euros, respectively. This transaction generated a 60 million euros capital gain in the income statement caption 'profit/(loss) in financial assets not designated for trading compulsorily measured at fair value through profit or loss' (Note 32).

12. FINANCIAL ASSETS DESIGNATED AT FAIR VALUE THROUGH PROFIT OR LOSS

The detail of this heading is as follows:

	31-12-2018	31-12-2017 Restated
Equity instruments
Participation units of foreign issuers		6 055
		6 055

The balance in this caption at 31 December 2017 was reclassified to the portfolio of 'Non-trading financial assets compulsorily measured at fair value through profit or loss' within the scope of IFRS 9 (Note 2.A).

13. FINANCIAL ASSETS AT FAIR VALUE THROUGH OTHER COMPREHENSIVE INCOME

This caption is made up as follows:

	31-12-2018
Equity instruments
Shares in Portuguese companies	66 232
Shares in foreign companies	531 508
	597 740
Debt securities
Bonds issued by Portuguese government entities
Treasury Bills	475 875
Treasury Bonds	314 786
Bonds issued by foreign government entities	486 759
	1 277 420
	1 875 160

On transition to IFRS 9, on 1 January 2018, 3 498 654 t.euros in debt securities and 85 170 t.euros in equity instruments were reclassified from the available-for-sale financial assets portfolio to this caption.

In 2018 the movement in the caption 'equity instruments at fair value through other comprehensive income' was as follows:

	Total
Balance at 31-12-2017 Restated
Impact of transition to IFRS9	85 170
Balance at 01-01-2018 (Note 2.A)	85 170
Purchases	2 014
Sales	( 6 672)
Reclassification of BFA	522 000
Gains/(losses) recognised under other comprehensive income	( 4 778)
Exchange difference	6
Balance at 31-12-2018	597 740

In December 2018, following Banco BPI's loss of significant influence in BFA, this equity holding was reclassified from 'Investments in joint ventures and associates' 'to Financial assets at fair value through other comprehensive income - equity instruments' (Notes 2.1 and 17).

The financial information on the most relevant equity holdings classified as 'Financial assets at fair value through other comprehensive income - equity instruments' is as follows:

			Voting	Book value	Investee financial data (100%)
		Registered office BPI Ownership (%)		at 31-12-2018	Equity	Net profit /(loss)
Banco de Fomento Angola, S.A.	Angola	48.1%	48.1%	522 000	1 025 193	493 630
SIBS1	Portugal	15.0%	15.9%	50 000	119 851	24 574

¹Equity and net profit/(loss) values for 31-12-2017.

The detail in the caption 'Financial assets at fair value through other comprehensive income - Debt securities' is as follows:

	Quantity			Book	Net Hedge accounting
	(unit value)	Acquisition value	value	gain/(loss)	effect
Debt securities
Bonds issued by Portuguese government entities
Treasury Bills	475 050 000	476 127	475 875	183
Treasury Bonds	300 000 000	318 513	314 786	5 979	( 5 185)
Bonds issued by foreign government entities	475 000 000	491 737	486 759	2 910	( 1 233)
		1 286 377	1 277 420	9 072	( 6 418)

In 2018 the movement in the caption 'Debt securities at fair value through other comprehensive income' was as follows:

	Total1
Balance at 31-12-2017 Restated
Impact of transition to IFRS9	3 498 654
Balance at 01-01-2018 (Note 2.A)	3 498 654
Purchases	782 409
Gains/(losses) recognised under other comprehensive income	1 562
Gains/(losses) from hedge accounting	( 19 010)
Sales and redemptions	(2 985 214)
Gains/(loses) recognised as profit/(loss)	81
Accrued interest	( 1 062)
Balance at 31-12-2018	1 277 420
1 The totality of the assets that make up this heading are in Stage 1.

14. AVAILABLE-FOR-SALE FINANCIAL ASSETS

This caption is made up as follows:

	31-12-2017
	Restated
Equity instruments
Shares in Portuguese companies	79 737
Quotas	70 899
Shares in foreign companies	13 142
Participation units of Portuguese issuers	140 562
Participation units of foreign issuers	16 769
	321 109
Debt securities
Bonds issued by Portuguese government entities
Treasury Bills	2 982 602
Treasury Bonds	328 781
Bonds issued by foreign government entities	187 272
Bonds issued by other foreign entities	55 398
	3 554 053
Loans and other receivables	208

On transition to IFRS 9 on 1 January 2018, the balances recognised under available-for-sale financial assets were reclassified as follows:

Debt securities classified at 31 December 2017 under financial assets held for sale that did not pass the SPPI tests (55 398 t.euros) were reclassified to financial assets not designated for trading compulsorily measured at fair value through profit or loss.
Equity instruments considered as "puttable instruments" under IAS 32 (essentially investment funds) that could not be included in this portfolio, and the equity holding in Viacer (considering the expectation of its sale in the short-term) (235 939 t.euros), were reclassified to the portfolio of financial assets not designated for trading compulsorily measured at fair value through profit or loss.
Loans and other receivables (208 t.euros) were reclassified to assets at amortised cost loans and advances to Customers.
The remaining debt and equity instruments in the available for sale portfolio (3 583 824 t.euros) were classified as financial assets at fair value through other comprehensive income.

3 875 370

In 2017 the movement in the caption Available-for-sale equity instruments was as follows:

	Available-for-sale financial assets - equity
	instruments
Balance at 31-12-2016	293 083
Purchases	1 821
Sales	( 33 292)
Fair value change	60 135
Transfers and other	( 1 979)
Impairment losses	1 341
Balance at 31-12-2017 Restated	321 109

At 31 December 2017, Banco BPI's equity holding in SIBS – SGPS, S.A ceased to be measured at cost and was revalued at fair value, because a reliable measure of its fair value became available in light of IAS 39 requirements. The Bank's holding in this company was revalued through an independent valuation essentially based on multiples and on the income method. The unrealized gain, in the amount or 46 884 t.euros, was recognised in Other comprehensive income.

In 2017 the movement in the caption Available-for-sale debt securities was as follows:

	Available-for-sale financial assets - debt
	securities
Balance at 31-12-2016	3 582 941
Purchases	2 985 214
Gains/(losses) recognised under other comprehensive income	12 348
Gains/(losses) from hedge accounting	( 18 301)
Sales and redemptions	(3 003 852)
Accrued interest	( 4 297)
Balance at 31-12-2017	3 554 053

15. FINANCIAL ASSETS AT AMORTISED COST

The detail of financial assets at amortised cost at 31 December 2018 and 2017 is as follows:

	Nominal value	Accrued interest	Discount premium	Impairment	Book value
Debt securities	3 519 123	21 415	( 19 196)	( 4 528)	3 516 814
Loans and advances
Central Banks and credit institutions	790 712	216		( 269)	790 659
Customers	21 865 562	32 031		( 533 123)	21 364 470
	26 175 397	53 662	( 19 196)	( 537 920)	25 671 943

31-12-2017 Restated

	Nominal value	Accrued interest	Impairment	Book value
Debt securities	1 312 698	3 154	( 9 722)	1 306 130
Loans and advances
Central Banks and credit institutions	816 194	589		816 783
Customers	20 918 295	40 738	( 575 276)	20 383 757
	23 047 187	44 481	( 584 998)	22 506 670

The impact of first-time adoption of IFRS 9 on assets at amortised cost and guarantees and commitments assumed is as follows (Note 2.A):

	Financial assets at amortised cost			Impairment for guarantees and commitments
	Gross value	Impairments	Total	assumed
Balance at 31-12-2017 Restated	23 091 668	( 584 998)	22 506 670	18 441
Reclassifications:
To "Financial assets not designated for trading compulsorily measured at fair value through profit or loss"	( 5 053)		( 5 053)
From "Available-for-sale financial assets"	208		208
Interest not recognised under IAS 39	3 577		3 577
Remeasurement in accordance with the expected loss model IFRS9		( 38 188)	( 38 188)	785
Balance at 01-01-2018	23 090 400	( 623 186)	22 467 214	19 226

15.1. Debt securities

The detail of this heading is as follows:

	31-12-2018	31-12-2017 Restated
Sovereign debt
Portuguese sovereign debt	555 844
Foreign sovereign debt	1 216 597
	1 772 441
Customer debt
Other Portuguese public issuers	252 570	140 655
Other Portuguese issuers	1 455 969	1 170 595
Other foreign issuers	40 362	4 602
	1 748 901	1 315 852
Impairment	( 4 528)	( 9 722)
	3 516 814	1 306 130

The detail of debt securities at amortised cost at 31 December 2018 is as follows:

		Acquisition	Book value
	Quantity	value
Sovereign debt
Portuguese sovereign debt	500 000 000	558 433	555 844
Foreign sovereign debt	1 200 000 000	1 218 863	1 216 597
	1 700 000 000	1 777 296	1 772 441
Customer debt
Other Portuguese public issuers	250 905 000	250 905	252 570
Other Portuguese issuers	1 452 497 861	1 450 705	1 455 969
Other foreign issuers	40 217 780	40 218	40 362
	1 743 620 641	1 741 828	1 748 901
			3 521 342
Impairment			( 4 528)
	3 443 620 641	3 519 124	3 516 814

In 2018 Banco BPI bought a portfolio of medium-long term public debt in the amount of 1 800 million euros with an average residual maturity of 3 years. The foreign sovereign debt portfolio mainly comprises Spanish and Italian treasury bills.

The portfolio of debt securities at amortised cost includes securities designated as interest rate hedged assets, the fair value change of which at 31 December 2018 and 31 December 2017 amounted to 2 621 t.euros and 24 t.euros, respectively.

Customer debt securities essentially include issues of commercial paper and bonds of Corporate Banking, Project Finance and Institutional Banking customers associated to Banco BPI's commercial loans portfolio.

At 31 December 2018 and 31 December 2017, debt securities included operations allocated to the Cover Pool given as collateral for Covered Bonds issued by Banco BPI (Note 22), namely 49 879 t.euros and 51 960 t.euros, respectively, allocated as collateral for public sector bonds.

In 2018 the movement in the caption Debt securities at amortised cost was as follows:

		Of which:
	Debt securities	Stage 1:	Stage 2:	Stage 3:
Balance at 31-12-2017 Restated	1 315 852
IFRS 9 Adoption (Note 2.A)	( 5 053)
Balance at 01-01-2018	1 310 799	1 288 808	8 913	13 078
Exposure increases / reductions	2 210 542	2 204 559	6 496	( 513)
Transfers:
From stage 1		( 1 010)	1 010
From stage 2		86	( 86)
Balance at 31-12-2018	3 521 341	3 492 443	16 333	12 565

In 2018 the movement in impairments due to expected loss on securities at amortised cost was as follows:

	Of whic

		Of which:
	Debt securities		Stage 1:	Stage 2:	Stage 3:
Balance at 31-12-2017 Restated	( 9 722)
IFRS 9 Adoption (Note 2.A)	5 332
Balance at 01-01-2018	( 4 390)	( 477)	( 226)	( 3 687)
Increase / (reversal) of impairments	( 138)	25	( 80)	( 83)
Balance at 31-12-2018	( 4 528)	( 452)	( 306)	( 3 770)

In 2017 the movement in impairments due to expected loss on securities at amortised cost was as follows:

	Balance at 31-12-2016	Increases	Decreases / Reversals	Transfers1	Balance at 31-12-2017
Debt securities	( 17 888)	( 3 955)	321	11 800	( 9 722)

1 The balance in the caption Transfers of impairments in Loans to Customers refers to impairment in securitised loans of BPI Vida e Pensões, which was sold in December 2018

15.2. Loans and advances

Loans and advances - Central Banks and other Credit Institutions

The detail of this heading is as follows:

	31-12-2018	31-12-2017 Restated
Loans and advances to the Bank of Portugal	5 000	5 000
Loans and advances to Credit Institutions in Portugal
Very short term applications	9 502	6 243
Cheques for collection	49 906	89 441
Loans	204 639	167 694
Reverse repurchase agreements	6 661	50 383
Other	490	130
Other loans and advances		4 724
Interest receivable and commissions relating to amortised cost	153	271
	271 351	318 886
Loans and advances to other Credit Institutions abroad
Very short term applications	261 764	206 121
Deposits	72 367	34 329
Cheques for collection	1 032	2 484
Loans		44
Other loans and advances	167 380	249 601
Interest receivable and commissions relating to amortised cost	63	318
Debtors for futures operations	11 971
	514 577	492 897
Impairment	( 269)
	790 659	816 783

Loans and advances - Customers

This caption is made up as follows:

	31-12-2018	31-12-2017 Restated
Loans to Customers
Companies
Loans	6 307 114	6 121 977
Loans on current account	781 578	579 089
Demand deposits - overdrafts	204 444	216 039
Invoices received – factoring	868 612	587 927
Finance leases	356 639	309 744
Real estate leasing	414 978	396 006
Car finance	227 296	187 985
Other loans	35 093	80 340
Individuals	12 545 982	12 440 531
Other loans and advances	155 857	39 395
Impairment	( 533 123)	( 575 276)
	21 364 470	20 383 757

The caption Other loans and advances essentially refers to margin accounts.

The portfolio of Loans to Customers includes Loans designated as interest rate hedged assets, the fair value change of which at 31 December 2018 and 31 December 2017 amounted to 24 097 t.euros and 20 550 t.euros, respectively.

The breakdown of loans and advances to Customers by activity at 31 December 2018 is as follows:

	31-12-2018
	Gross amount	Impairments
Public sector	1 227 118	( 208)
Other financial corporations and individual entrepreneurs (financial business)	380 428	( 406)
Non-financial corporations and individual
entrepreneurs (non-financial business)	7 744 064	( 318 168)
Real estate construction and development	430 388	( 54 299)
Civil construction	119 214	( 7 755)
Other	7 194 462	( 256 114)
Large companies	3 467 960	( 133 485)
Small and medium-sized companies	3 726 502	( 122 629)
Individuals	12 545 983	( 214 341)
Homes	11 176 948	( 175 121)
Consumer spending	990 214	( 31 317)
Other	378 821	( 7 903)
	21 897 593	( 533 123)

The breakdown of loans and advances to Customers by activity at 31 December 2017 is as follows:

	31-12-2017
	Gross amount	Impairments
Public sector	1 110 883	( 8)
Other financial corporations and individual entrepreneurs (financial business)	173 204	( 789)
Non-financial corporations and individual entrepreneurs (non-financial business)	7 234 415	( 336 450)
Real estate construction and development	296 719	( 58 095)
Civil construction	123 673	( 8 237)
Other	6 814 023	( 270 118)
Large companies	3 336 967	( 124 108)
Small and medium-sized companies	3 477 056	( 146 010)
Individuals	12 440 531	( 238 029)
Homes	11 114 519	( 190 964)
Consumer spending	820 312	( 34 521)
Other	505 700	( 12 544)
	20 959 033	( 575 276)

Loans and advances to Customers include the following non-derecognised securitised assets:

	31-12-2018	31-12-2017 Restated
Non-derecognised securitised assets1
Loans
Home loans	1 150 034	1 292 423
Loans to SMEs	3 214 901	3 226 084
Interest receivable	10 003	10 698
	4 374 938	4 529 205

1 Excludes overdue loans and interest.

The loans subject to securitisation operations carried out by Banco BPI were not derecognised from the Bank's balance sheet and are recorded under the caption 'Loans not represented by securities'. The amounts received by Banco BPI from these operations are recorded under the caption Financial liabilities at amortised cost - debt securities issued (Note 22).

At 31 December 2018 and 2017 the caption 'Loans and advances to Customers' included operations allocated to the Cover Pool given as collateral for Covered Bonds issued by Banco BPI (Note 22), namely:

7 576 415 t.euros and 7 461 814 t.euros, respectively, allocated as collateral to mortgage bonds;
694 340 t.euros and 698 338 t.euros, respectively, allocated as collateral to public sector bonds.

The movement in the caption Loans and advances to customers in 2018 was as follows:

		Of which:
	Loans and advances	Stage 1	Stage 2	Stage 3
Balance at 31-12-2017	20 959 033
IFRS 9 Adoption (Note 2.A)	3 785
Balance at 01-01-2018	20 962 818	18 192 775	1 474 777	1 295 266
Exposure increases / reductions	992 379	1 381 705	( 228 369)	( 160 957)
Transfers
From stage 1:		( 572 204)	529 035	43 169
From stage 2:		370 672	( 446 069)	75 397
From stage 3:		31 110	143 863	( 174 973)
Write-offs	( 57 604)			( 57 604)
Balance at 31-12-2018	21 897 593	19 404 057	1 473 238	1 020 298

In 2018 the movement in impairments due to expected loss on Loans and advances to Customers was as follows:

	Impairments for loans and advances	Of which:
		Stage 1:	Stage 2:	Stage 3:
Balance at 31-12-2017	( 575 276)
IFRS 9 Adoption (Note 2.A)	( 43 518)
Balance at 01-01-2018	( 618 605)	( 23 811)	( 64 226)	( 530 568)
Impairment / reversal of impairment due to changes in credit risk	2 725	7 832	4 578	( 9 685)
Impairment allowance for new financial assets	( 25 347)	( 16 360)	( 2 674)	( 6 313)
Reversal of impairments due to reimbursements and recoveries	70 186	7 317	9 888	52 981
Write-offs	57 604			57 604
Transfers and other	( 19 685)	( 164)	( 443)	( 19 077)
Balance at 31-12-2018	( 533 122)	( 25 186)	( 52 878)	( 455 059)

In 2017 the movement in impairments due to expected loss on Loans and advances to Customers was as follows:

Balance at 31-12-2016		Increases	Decreases / Reversals	Amounts used	Transfers	Balance at 31-12-2017
Loans and advances	( 677 315)	( 43 511)	17 891	127 724	( 65)	( 575 276)

15.3. Written-off loans

The movement in loans written off from assets in 2018 is as follows:

		31-12-2017
	31-12-2018	Restated
Balance at beginning of period	1 262 523	1 285 006
Increases:
Value correction due to depreciation of assets	57 604	98 132
Other		22
Decreases:
Recovery of written-off principal and interest	( 14 802)	( 13 039)
Amount recovered on sale of written-off loans	( 22 090)	( 16 729)
Remission of written-off credits due to disposals	( 162 855)	( 78 353)
Other	( 5 921)	( 12 516)
Balance at end of period	1 114 459	1 262 523

Loans written off from assets because recovery was deemed to be remote are recognised under the off-balance sheet caption "Loans written off from assets".

In the 4th quarter of 2018 Banco BPI sold a portfolio of non-performing loans for a global amount of 186 million euros, of which 171 million euros in loans written-off from assets (recognised in off-balance sheet items) and 3 million euros in loans net of impairments (recognised in the balance sheet). The recovery of loans written off from assets generated a gain of 15 062 t.euros, recognised as a credit recovery in the income statement caption "Impairments of financial assets not measured at fair value through profit or loss" (Note 36).

16. DERIVATIVES - HEDGE ACCOUNTING

The detail of hedging derivatives is as follows:

		31-12-2018		31-12-2017 Restated
	Notional Amount	Assets	Liabilities	Notional Amount	Assets	Liabilities
Interest rates	7 703 360	14 320	56 010	6 914 825	12 740	69 880
By type of counterparty:
Of which: OTC - credit institutions	2 374 616	7 707	43 501	3 113 422	9 510	67 862
Of which: OTC - other financial companies	5 328 744	6 613	12 509	3 791 884	3 219	2 018

The residual time to maturity and average interest rate of hedging items at 31 December 2018 was as follows:

	Notional amount
	< 1 month	1-3 months	3-12 months	1-5 years	> 5 years	Total
Fair value hedges	304 668	1 366 070	2 570 873	2 867 168	594 581	7 703 360
Credit	11 000	10 000	57 500	887 108	585 581	1 551 189
Fixed rate securities in portfolio		175 000	285 000			460 000
Term Deposits	293 668	1 171 070	2 228 373	1 972 060	9 000	5 674 171
Debt issues		10 000		8 000		18 000

The residual time to maturity of hedging items at 31 December 2017 was as follows:

		Notional amount
	< 1 month	1-3 months	3-12 months	1-5 years	> 5 years	Total
Fair value hedges	233 860	511 211	1 652 732	4 293 210	223 812	6 914 825
Credit	8 000		50 900	552 005	214 812	825 717
Fixed rate securities in portfolio		9 518		485 500		495 018
Term Deposits	225 860	491 693	1 596 832	3 240 705	9 000	5 564 090
Debt issues		10 000	5 000	15 000		30 000

Hedging items - Fair value hedges

					31- 12- 201 8		201 8	31- 12- 201 d 7 R est ate
				Hed ing ins alu tru nt v g me e					Hed ing ins alu tru nt v g me e
	Hed d it ge em	Hed d r isk Hed ge	ing ins sed tru nt u g me	min al No	Ass ets	Lia bili tie s	Fai lue ch e in r va ang hed ing ins in tru nts g me the riod pe	/ Ga ins ( los ) ses fro m h edg e tin et acc oun g, n	min al No	Ass ets	Lia bili tie s
tfo lio Por	( ies) Cre dit loa nd urit ns a sec	nsf atio n fr fix ed Tra to Inte orm om		1 5 51 189	1 4 48	39 953	( 31) 5 4	714	825 71 7	3 1 09	34 356
	rtfo Fixe d ra ritie s in lio te s ecu po		( t ra te s IRS res wa ps	460 00 0		14 824	18 641	3	495 01 8	76	33 534
hed ge	m d Ter sits epo	floa ting	and S) CC	5 6 74 171	12 827	1 2 33	3 1 83	693	5 5 64 090	9 4 69	1 9 90
	Deb t is sue s			18 000	45		( 37)	( 13)	30 000	86
				7 7 03 360	14 320	56 010	16 356	1 3 97	6 9 14 825	12 740	69 880

Hedged items - Fair value hedges

				31- 12- 201 8			201 8	31- 12- 201 7 ed Res tat
				Acc ula ted fai lue ad jus tm ent um r va s Hed d in stru nt ge me he hed d it in t ge em		Hed d in ge		stru nt me
Hed d it ge em		Hed d r isk ge	Hed ing ins sed tru nt u g me	Ass ets	Lia bili tie s	Ass ets	Lia bili tie s	Fai lue ch e in r va ang hed d it s in th erio d ge em e p	Ass ets	Lia bili tie s
hed Ma cro ges	( ies) Cre dit loa nd urit ns a sec			1 4 21 569		26 719		6 1 45	825 42 1
	d ra rtfo lio Fixe ritie s in te s ecu po	Tra nsf atio n fr fix ed orm om	( Inte IRS d to t ra te s res wa ps an	493 60 6		6 4 18		( ) 18 637	516 05 3
	Ter m D sits epo	floa ting	) CCS		5 0 84 484		3 5 60	( 2 4 90)		4 8 91 742
	Deb t is sue s				18 325		34	24		35 329
				1 9 15 175	5 1 02 809	33 137	3 5 94	( ) 14 958	1 3 41 474	4 9 27 071

17. INVESTMENTS IN JOINT VENTURES AND ASSOCIATES

The detail of investments in joint ventures and associates is as follows:

	Effective holding (%)		Book value
	31-12-2018	31-12-2017 Restated	31-12-2018	31-12-2017 Restated
Banco de Fomento Angola, S.A.		48.1%		576 358
Banco Comercial e de Investimentos, S.A.	35.7%	35.7%	90 156	81 237
Companhia de Seguros Allianz Portugal, S.A.	35.0%	35.0%	54 598	66 234
Cosec – Companhia de Seguros de Crédito, S.A.	50.0%	50.0%	34 883	35 405
Inter-Risco - Sociedade de Capital de Risco, S.A.	49.0%	49.0%	462	487
Unicre - Instituição Financeira de Crédito, S.A.	21.0%	21.0%	29 045	34 762
			209 144	794 483

The changes in investments in joint ventures and associates in 2018 were as follows:

	Book value	Goodwill	Impairment	Total

Balance at 31-12-2017 Restated	776 016	18 467		794 483
Transition to IFRS9	( 15 134)
Net profit / (loss) for the year	271 556
Dividends distributed	( 61 086)
Exchange difference	( 245 796)
Impairment allowance for equity holding in Unicre			( 6 689)
Reclassification of equity holding in BFA	( 518 054)
Changes in associates' other comprehensive income	( 10 136)
Balance at 31-12-2018	197 366	18 467	( 6 689)	209 144

The value of goodwill at 31 December 2018 and 31 December 2017 resulted from the acquisition of equity holdings in Unicre (13 194 t.euros) and BCI Moçambique (5 273 t.euros).

None of BPI's associated companies is listed on the stock exchange.

The breakdown of profit/(loss) of investments in joint ventures and associates accounted for using the equity method is as follows:

	31-12-2018	31-12-2017 Restated
Banco de Fomento Angola, S.A.	241 645	102 423
Banco Comercial e de Investimentos, S.A.R.L.	22 455	8 892
Companhia de Seguros Allianz Portugal, S.A.	( 832)	2 457
Cosec – Companhia de Seguros de Crédito, S.A.	4 128	5 565
InterRisco - Sociedade de Capital de Risco, S.A.	( 26)	( 71)
Unicre - Instituição Financeira de Crédito, S.A.	4 186	5 487
	271 556	124 753

Banco de Fomento Angola (BFA)

In January 2017 Banco BPI sold 2% of the share capital of Banco de Fomento Angola to Unitel, reducing its holding in BFA to 48.1%, and entering into an agreement with BFA's shareholders under which BPI was entitled to appoint two, from a maximum of fifteen, members of the Board of Directors of BFA, as well as one member of its Supervisory Board, and one member of the Risk Committee and the Remuneration Committee. BPI's stake in BFA's share capital and participation in BFA's governing bodies, although minoritary and not proportional to the share capital held, permitted to presume the existence of significant influence over BFA, in accordance with the IAS 28 provisions. Therefore, following the sale of 2% of BFA, Banco BPI classified its holding in BFA as an associate.

In December 2018, an assessment of the conditions on which the assumption of significant influence of Banco BPI over BFA in accordance with IAS 28 was based permitted to conclude that no real significant influence existed. This implied reclassifying the equity holding in BFA to the portfolio of Financial assets at fair value through other comprehensive income - equity instruments. The analysis and justification for the non-existence of significant influence are provided in Note 2.B).

• (157 975) t.euros resulting from the transfer to profit/(loss) of foreign exchange differences accumulated in other comprehensive income in 2017 and 2018 (Note 38),

3 946 t.euros resulting from the revaluation of the equity holding in BFA at fair value, from 518 054 t.euros, to 522 000 t.euros (Note 38),
(15 403) t.euros of deferred tax liabilities associated to the above amounts.

In 2018 the total contribution of BFA to net consolidated income was as follows:
Income generated by BFA recognised in share of profit/(loss) in associates recognised by the equity method in 2018	241 645
Other Gains/(losses) on financial operations	( 7 764)
Deferred taxes on net income/(loss) associated with BFA	( 22 037)
Reclassification of equity holding in BFA at 31 December 2018	( 138 626)
Gains/(losses) on derecognition of non-financial assets, (Note 38)	( 154 029)
Deferred taxes	15 403
Impact of BFA reclassification on 2018 net income	73 218

As from 2019, fair value changes in the equity holding in BFA are recognised under other comprehensive income.

In January 2018 the National Bank of Angola (BNA) changed the foreign exchange regime, from a central bank administratively fixed exchange rate regime to a floating rate system, dependent on supply and demand. This led to an orderly and gradual process of devaluation of the kwanza against the US dollar. In 2018 the Angolan kwanza depreciated by 47%. The impact of this depreciation on the value of the equity holding in Banco de Fomento Angola in 2018 was (246 560) t.euros.

The exchange rates used for the translation to euros of the accounts of Banco de Fomento Angola were as follows:

	31-12-2018	31-12-2017
Kwanza - Angola	353.015	185.400

In order to determine the value of its participation (48.1%) in the net assets and results of BFA at 31 December 2018 and 31 December 2017, Banco BPI considered an estimate of the impact of application of IAS 29 – Financial reporting on hyperinflationary economies, on the financial statements of BFA.

The results of BFA, accounted for by the equity method, at 31 December 2018, include an adjustment of (56 253) t.euros resulting from application of IAS 29, assuming an inflation rate of 18.1 % in 2018.

At 31 December 2018 the financial information relating to BPI's associated companies is broken down as follows:
-----------------------------------------------------------------------------------------------------------------	--	--

	Current assets	Non-current assets	Current liabilities	Non-current liabilities
Banco Comercial e de Investimentos, S.A.	1 049 856	1 137 211	1 880 815	70 232
Companhia de Seguros Allianz Portugal, S.A.	252 268	1 030 792	118 895	1 016 229
Cosec – Companhia de Seguros de Crédito, S.A.	104 911	10 336	68 424	315
Inter-Risco - Sociedade de Capital de Risco, S.A.	968	226	260
Unicre - Instituição Financeira de Crédito, S.A.	97 384	252 365	142 855	104 503
	Net income from continuing operations	Net profit/(loss) from continuing operations	Other comprehensive income	Total comprehensive income1
Banco Comercial e de Investimentos, S.A.	175 985	57 310	( 376)	56 934
Companhia de Seguros Allianz Portugal, S.A.	n.a.	( 2 669)	( 11 352)	( 14 021)
Cosec – Companhia de Seguros de Crédito, S.A.	n.a.	5 504	991	6 495
Inter-Risco - Sociedade de Capital de Risco, S.A.	1 052	( 61)		( 61)

Unicre - Instituição Financeira de Crédito, S.A. 71 122 15 343 551 15 894

1 Corresponds to the sum of net profit/(loss) from continuing operations and other comprehensive income.

At 31 December 2017 the financial information relating to BPI's associated companies is broken down as follows:

	Current assets	Non-current assets	Current liabilities	Non-current liabilities
Banco de Fomento Angola, S.A.	5 393 465	2 390 054	6 468 582	142 220
Banco Comercial e de Investimentos, S.A.	967 446	1 225 402	259 525	1 713 670
Companhia de Seguros Allianz Portugal, S.A.	200 716	1 102 299	106 995	1 017 059
Cosec – Companhia de Seguros de Crédito, S.A.	96 256	18 010	63 391	572
Inter-Risco - Sociedade de Capital de Risco, S.A.	1 017	247	255	15
Unicre - Instituição Financeira de Crédito, S.A.	112 961	237 662	109 848	138 117
	Net income from continuing operations	Net profit/(loss) from continuing operations	Other comprehensive income	Total comprehensive income1
Banco de Fomento Angola, S.A.	745 929	372 627		372 627
Banco Comercial e de Investimentos, S.A.	170 571	34 997	24 803	59 800
Companhia de Seguros Allianz Portugal, S.A.	n.a.	6 375	5 319	11 694
Cosec – Companhia de Seguros de Crédito, S.A.	n.a.	7 948	2 225	10 173
Inter-Risco - Sociedade de Capital de Risco, S.A.	1 131	( 144)		( 144)
Unicre - Instituição Financeira de Crédito, S.A.	77 662	24 309	14 331	38 640

1 Corresponds to the sum of net profit/(loss) from continuing operations and other comprehensive income.

Fair value of associates

To assess the recoverable amount of its portfolio of associated companies, under IAS 36, BPI regularly monitors the impairment indicators related to its investees. Particularly, the following items are considered, among others: i) business performance; and ii) peer performance, since the associates in question are not listed companies.

To conduct impairment tests to its equity holdings, BPI uses generally accepted valuation methods, such as the dividend discount model (DDM), analyses of market and transactions multiples, and linear regression curves. In no case were potential control premiums or discounts considered.

When the assessment method used is the dividend discount model (DDM), the balance sheet and income statement projections are made for a time horizon of 5 years, using assumptions that are based on the macroeconomic data for the countries and industry sectors in which the investees operate, as well as these entities' financial information. The results obtained are compared with those that would be obtained through the application of market and transactions multiples.

When the assessment method used is the analysis of market and transactions multiples, the benchmark values are the Price Book Value (PBV) and Price Earnings Ratio (PER) multiples implicit in the market value obtained through sampling of comparable listed companies, using several statistical methods for sample analysis, namely linear regression.

In accordance with the recoverable value calculated for the equity holding in Unicre, an impairment allowance of 6 689 t.euros was recognised for this equity holding in the consolidated accounts for 31 December 2018.

18. TANGIBLE ASSETS

The movement in tangible assets in 2018 was as follows:

	31-12-2018				31-12-2017 Restated
	Buildings	Equipment and other	Tangible assets in progress	Total	Buildings	Equipment and other	Tangible assets in progress	Total
Gross amount
Balance at beginning of period	75 740	338 528	6 313	420 581	82 057	340 658	9 275	431 990
Acquisitions	5	3 686	33 772	37 463	46	3 057	6 506	9 609
Disposals and write-offs	( 2 115)	( 30 887)		( 33 002)	( 3 977)	( 10 337)		( 14 314)
Transfers and other		4 797	( 7 093)	( 2 296)	( 1 887)	6 343	( 9 468)	( 5 012)
Reclassification BPI GA and BPI GIF					( 503)	( 975)		( 1 478)
Foreign exchange differences		92		92	4	( 218)		( 214)
Balance at end of period	73 630	316 216	32 992	422 838	75 740	338 528	6 313	420 581
Depreciation
Balance at beginning of period	64 145	311 127		375 272	68 872	312 164		381 036
Depreciation in the period	403	10 162		10 565	503	11 433		11 936
Disposals and write-offs	( 2 041)	( 28 934)		( 30 975)	( 3 894)	( 10 081)		( 13 975)
Transfers and other		( 4)		( 4)	( 834)	( 1 237)		( 2 071)
Reclassification BPI GA and BPI GIF					( 503)	( 975)		( 1 478)
Foreign exchange differences		82		82	1	( 177)		( 176)
Balance at end of period	62 507	292 433		354 940	64 145	311 127		375 272
Impairments
Balance at beginning of period
Allowances		646		646
Net value at end of period	11 123	23 137	32 992	67 252	11 595	27 401	6 313	45 309

19. INTANGIBLE ASSETS

The movement in intangible assets in 2018 was as follows:

	31-12-2018				31-12-2017 Restated
	Automatic data	Intangible assets in	Other intangible	Total	Automatic data processing software	Intangible assets in progress	Other intangible assets
	processing							Total
	software	progress	assets
Gross amount
Balance at beginning of period	104 561	22 033	16 796	143 390	93 927	6 832	17 940	118 699
Acquisitions	1 810	25 847		27 657	535	26 781		27 316
Disposals and write-offs	( 2 541)		( 150)	( 2 691)	( 216)		( 1 142)	( 1 358)
Transfers and other	31 455	( 31 836)		( 381)	10 734	( 11 580)		( 846)
Reclassification BPI GA and BPI GIF					( 417)		( 2)	( 419)
Foreign exchange differences					( 2)			( 2)
Balance at end of period	135 285	16 044	16 646	167 975	104 561	22 033	16 796	143 390
Depreciation
Balance at beginning of period	86 230		14 845	101 075	77 437		15 633	93 070
Depreciation in the period	13 251		12	13 263	9 933		11	9 944
Disposals and write-offs	( 2 515)			( 2 515)	( 203)		( 797)	( 1 000)
Transfers and other					( 519)			( 519)
Reclassification BPI GA and BPI GIF					( 417)		( 2)	( 419)
Foreign exchange differences					( 1)			( 1)
Balance at end of period	96 966		14 857	111 823	86 230		14 845	101 075
Impairments
Balance at beginning of period
Allowances			1 026	1 026
Net value at end of period	38 319	16 044	763	55 126	18 331	22 033	1 951	42 315

20. OTHER ASSETS

The detail of this heading is as follows:

	31-12-2018	31-12-2017 Restated
Assets received in settlement of defaulting loans and other tangible assets
Buildings		81 729
Equipment		568
Other		61
Impairments		( 16 358)
		66 000
Accrued income
Dividends receivable from Banco de Fomento Angola		57 631
Fees for Allianz's profit sharing	24 436	22 732
Other accrued income	29 211	26 863
	53 647	107 226
Deferred expenses
Rents	1 496	1 601
Other deferred expenses	7 755	6 983
	9 251	8 584
Other assets	3 042	2 961
Foreign exchange transactions pending settlement	3 624
Securities transactions pending settlement
– stock exchange transactions	303
Credit operations pending settlement	283 555	302 844
	290 524	305 805
	353 422	487 615

At 31 December 2018, Assets received in settlement of defaulting loans and other tangible assets were classified in the balance sheet caption 'Non-current assets and disposal groups classified as held for sale' (Note 21).

At 31 December 2018 and 31 December 2017, the caption 'Credit operations pending settlement' included:

224 613 t.euros and 256 807 t.euros, respectively, relating to securitisation operations carried out by Banco BPI (Notes 15 and 22.3), resulting from temporary differences between settlement of the securitised loans and settlement of the liability for assets not derecognised;
26 627 t.euros in 2018 and the same amount in 2017 relating to taxes paid but which were challenged by Banco BPI. At the date of the financial statements there was no expected date for a decision in this regard. The main ongoing tax processes are VAT processes arising from tax inspections carried out from 2004 to 2009, of which a total of 19 916 t.euros was paid under Decree-Law 151-A/13 of 31 October. The remainder 6 711 t.euros concerns amounts paid under Decree-Law 248-A/02 of 14 November, as well as other processes prior to the merger carried out in 2002, relating to tax processes of various types.
2 683 t.euros and 2 175 t.euros, respectively, relating to home loans pending settlement.

21. NON-CURRENT ASSETS AND LIABILITIES AND DISPOSAL GROUPS CLASSIFIED AS AVAILABLE FOR SALE

This caption is made up as follows:

		31-12-2017
	31-12-2018	Restated
Assets received in settlement of defaulting loans and other tangible assets
Buildings	52 879
Equipment	225
Other	61
Impairment	( 19 269)
	33 896
Assets of subsidiaries classified as held for sale
BPI Gestão de Activos		4 072
BPI Global Investment Fund Management		3 192
		7 264
	33 896	7 264
Liabilities of subsidiaries classified as held for sale
BPI Gestão de Activos		4 027
BPI Global Investment Fund Management		444
		4 471

At 31 December 2017 assets received in settlement of defaulting loans and other tangible assets were classified in the balance sheet caption 'Other assets' (Note 20), in view of the Bank's intention to sell them and in line with CaixaBank Group's accounting policies.

The amounts recognised in this caption are valued in accordance with the accounting policy described in Notes 2.15 and 41.2.

The changes in assets received in settlement of defaulting loans and other tangible assets in 2018 were as follows:

	Bal t 3 2-2 017 ted 1-1 Re sta anc e a		Sal and ite- off es wr s and Acq uis itio ns		se / als Inc rea rev ers	1/1 2/ Bal t 3 201 8 anc e a
	Gro unt ss a mo	Imp airm ent	lue Net va	nsf tra ers	Gro unt ss a mo	Imp airm ent	of i airm ent mp	Gro unt ss a mo	Imp airm ent	lue Net va
eiv ed in s lem of Ass ets ett ent rec def aul tin loa g ns
Bui ldin gs	80 31 0	( ) 15 773	64 537	10 590	( ) 39 295	5 2 36	( 42) 8 3	51 605	( ) 18 879	32 726
ipm Equ ent	56 8	( ) 301	267	99	( ) 442	163	( 13)	225	( ) 151	74
Oth er	61	( 51)	10				( 10)	61	( 61)
Oth ible er t set ang as s
ldin Bui gs	19 1 4	( 233 )	86 1 1		( ) 145	2	53	1 2 74	( 178 )	1 0 96
	82 35 8	( ) 16 358	66 000	10 689	( ) 39 882	5 4 01	( 12) 8 3	53 165	( ) 19 269	33 896

The changes in assets received in settlement of defaulting loans and other tangible assets in 2017 were as follows:

	Bal 1/1 2/ t 3 201 6 anc e a		uis itio and Acq ns	Sal and off ite- es wr s		se / al Inc rea rev ers	Bal ted t 3 1-1 2-2 017 Re sta anc e a
	Gro unt ss a mo	airm Imp ent	lue Net va	nsf tra ers	Gro unt ss a mo	airm Imp ent	of i airm ent mp	Gro unt ss a mo	airm Imp ent	lue Net va
ed lem of Ass eiv in s ets ett ent rec
def aul tin loa g ns
ldin Bui gs	13 1 7 14	( ) 30 987	100 72 7	17 660	( ) 69 064	10 496	4 7 18	80 310	( ) 15 773	64 537
Equ ipm ent	53 1	( ) 578	( 47)	526	( ) 489	149	12 8	568	( ) 301	267
Oth er	61	( 62)	( 1)				11	61	( 51)	10
Oth ible er t set ang as s
Bui ldin gs	4 7 75	( 35) 2 1	2 6 40	1 0 07	( 63) 4 3	2 0 00	( 98)	1 4 19	( ) 233	1 1 86
	13 7 0 82	( ) 33 762	10 3 3 20	19 193	( ) 73 916	12 645	4 7 59	82 358	( ) 16 358	66 000

At 31 December 2018 and 2017, the profit/(loss) associated to these assets amounted to (5 131) t.euros and 11 679 t.euros, respectively, of which:

•3 181 t.euros and 6 920 t.euros, respectively, relative to gains on the sale of assets received in settlement of defaulting loans and other tangible assets.
•(8 312) t.euros and 4 759 t.euros, respectively, relative to net impairment allowances in the period.

At 31 December 2018, the detail of real estate received in settlement of defaulting loans is as follows:

		Buildings1			Land
		Housing	Commercial	Other 1	Urban	Rural	Total
No. of properties		331	164	75	25	19	614
Fair value		29 069	9 630	10 086	3 212	344	52 341
Book value		19 678	5 837	5 863	1 204	144	32 726
	< 1 year	5 527	559	366			6 452
No. of years in	>= 1 year and < 2.5 years	5 009	443	456	13	5	5 926
portfolio	>= 2.5 year and < 5 years	6 882	1 599	706	1 175	8	10 370
	>= 5 years	2 260	3 236	4 335	16	131	9 978

1 1) This category includes all buildings that are not exclusively commercial or housing buildings.

At 31 December 2017, the detail of real estate received in settlement of defaulting loans is as follows:

		Buildings1			Land
		Housing	Commercial	Other 1	Urban	Rural	Total
No. of properties		501	194	93	28	19	835
Fair value		44 086	14 002	18 742	3 186	403	80 419
Book value		34 377	11 763	15 972	2 114	311	64 537
	< 1 year	12 123	350	439	13		12 925
No. of years in	>= 1 year and < 2.5 years	9 646	1 276	896	243	5	12 066
portfolio	>= 2.5 year and < 5 years	7 034	3 465	5 167	1 073	122	16 861
	>= 5 years	5 574	6 672	9 470	785	184	22 685

1 1) This category includes all buildings that are not exclusively commercial or housing buildings.

Subsidiaries classified as held for sale: BPI Vida e Pensões, BPI Gestão de Activos and BPI Global Investment Fund Management

On 23 November 2017, Banco BPI publicly announced that, following the acquisition proposals presented to it by its shareholder CaixaBank S.A., it had signed the agreements on the following transactions:

Sale of shares representing the entire share capital of BPI Vida e Pensões, Companhia de Seguros, S.A., to the CaixaBank Group company VidaCaixa S.A.U. de Seguros y Reaseguros, for the price of 135 million euros;
Sale of shares representing the entire share capital of BPI Gestão de Activos, Sociedade Gestora de Fundos de Investimento, S.A. and BPI Global Investment Fund Management Company S.A. (BPI GIF) to the CaixaBank Group company CaixaBank Asset Management SGIIC, S.A.U, for the price of 75 million euros and 8 million euros, respectively.

In the context of the transactions described above, Banco BPI entered several service provision contracts under which it will provide to the companies sold or to the purchasing companies a set of instrumental services to the operations sold.

Banco BPI's Board of Directors approved the transactions described above with the aim of improving over the medium and long term the commercial offer to its Customers, creating synergies with the CaixaBank Group and enabling Banco BPI to concentrate on the banking business. Banco BPI maintains the relationship with the Customers of the activities concerned, acting as agent for the companies sold or for the acquiring companies.

The sale of BPI Vida e Pensões was concluded at the end of December 2017, generating a capital gain before taxes in the amount of 7 677 t.euros.

The sales of BPI Gestão de Activos and BPI GIF were completed in April 2018, generating capital gains before taxes of 57 049 t.euros and 4 706 t.euros, respectively.

In accordance with IFRS 5 - Non-current assets held for sale and discontinued operations, BPI Gestão de Activos and BPI GIF were classified as discontinued operations on 31 December 2017, in so far as they represented a major line of business, separate from BPI Group's other operating units.

Consequently:

As of 31 December 2017, the total assets and liabilities of BPI Gestão de Activos and BPI GIF were presented in Banco BPI's consolidated balance sheet under the captions 'Non-current assets and disposal groups classified as held for sale' and 'Liabilities included in disposal groups classified as held for sale'.
The contribution up to 31 March 2018 of the operations of BPI Gestão de Activos and BPI GIF to Banco BPI's consolidated income and comprehensive income is presented in the captions 'Profit/(loss) after tax from discontinued operations' and 'Profit/(loss) related to discontinued operations not included in the consolidated income statement', respectively.
The contribution of the operations of BPI Gestão de Activos, BPI GIF and BPI Vida e Pensões (the latter sold at the end of December 2017) to the consolidated income and comprehensive income at 31 December 2017 is shown in the captions 'Profit/(loss) after tax from discontinued operations' and 'Profit/(loss) related to discontinued operations not included in the consolidated income statement', respectively.
The capital gains on the sale of these equity holdings were also recognised in the caption 'Profit/(loss) after tax from discontinued operations'.

BPI 's consolidated balance sheet for 31 December 2017 included the following sums relative to BPI Gestão de Activos and BPI GIF, adjusted for intragroup balances, in the captions 'Non-current assets held for sale and discontinued operations' and 'Non-current liabilities held for sale and discontinued operations', respectively:

	31-12-2017
	Restated
ASSETS
Cash and cash balances at central banks and other demand deposits 1	363
Financial assets held for trading
Available-for-sale financial assets	80
Tangible assets	1
Tax assets	281
Other assets 2	6 539
	7 264
LIABILITIES
Tax liabilities	1 637
Other liabilities 3	2 834
	4 471
1

Does not include 32 734 t.euros in deposits of BPI Gestão de Activos and BPI GIF in BPI. 2 Does not include 5 004 t.euros in income receivable by BPI Gestão de Activos from BPI.

3 Does not include 21 772 t.euros in expenses payable by BPI Gestão de Activos and BPI GIF to BPI.

The detail of the profit/(loss) of discontinued operations is presented in Note 39.

At 31 December 2017, the balance sheet caption 'Other accumulated comprehensive income from discontinued operations" included (187) t.euros of actuarial deviations in liabilities for retirement and survivor pensions and end-of-career premiums, net of taxes, of BPI Gestão de Activos.

22. FINANCIAL LIABILITIES AT AMORTISED COST

The detail of financial liabilities at amortised cost at 31 December 2018 and 2017 is as follows:

	Nominal value	Accrued interest	Premium Discount	Book Value
Deposits
Central Banks	1 363 830	( 10 987)		1 352 843
Credit Institutions	1 852 637	864		1 853 501
Customers	22 943 768	16 484		22 960 252
Debt securities issued	1 113 924	4 924	( 653)	1 118 195
Other financial liabilities	230 885	69		230 954
	27 505 044	11 354	( 653)	27 515 745

31-12-2017 Restated

	Nominal	Accrued	Premium
	value	interest	Discount	Book Value
Deposits
Central Banks	2 000 830	( 5 456)		1 995 374
Credit Institutions	1 981 618	1 030		1 982 648
Customers	20 699 785	13 848		20 713 633
Debt securities issued	1 014 138	6 534	( 695)	1 019 977
Other financial liabilities	249 618	165		249 783
	25 945 989	16 121	( 695)	25 961 415

22.1. Deposits - Central Banks and Credit Institutions

The detail of this heading is as follows:

	31-12-2018	31-12-2017 Restated
Deposits - Central Banks
Deposits	1 363 830	2 000 830
Interest payable	( 10 987)	( 5 456)
	1 352 843	1 995 374
Deposits - Credit Institutions
Funds of credit institutions in Portugal
Very short-term funds	26 201	6 671
Deposits	95 785	142 870
Other funds	820	1 520
Interest payable	112	73
	122 918	151 134
Funds of credit institutions abroad
International financial organisations	471 052	1 086 204
Very short-term funds		3 445
Deposits	564 864	681 658
Debt securities sold with repurchase agreement	663 117	51 200
Other funds	30 798	8 050
Interest payable	677	943
Commissions relating to amortised cost	75	14
	1 730 583	1 831 514
	1 853 501	1 982 648
	3 206 344	3 978 022

22.2. Deposits - Customers

The detail of this heading is as follows:

	31-12-2018	31-12-2017 Restated
By type
Demand deposits	13 233 854	12 038 739
Term deposits	8 633 430	8 532 552
Saving accounts	50 199	52 060
Compulsory deposits	100 143	14 347
Debt securities sold with repurchase agreement	926 142	40 687
Other Customer resources		21 400
Interest payable	16 424	13 844
Commissions relating to amortised cost, net	60	4
	22 960 252	20 713 633
By sector
Public sector	359 113	353 488
Private sector	22 601 139	20 360 145
	22 960 252	20 713 633

The portfolio of Customer deposits at amortised cost includes deposits designated as interest rate hedged liabilities, the fair value change of which at 31 December 2018 and 31 December 2017 amounted to (3 560) t.euros and (155) t.euros, respectively.

22.3. Debt securities issued

The detail of this heading is as follows:

	31-12-2018			31-12-2017 Restated
	Issues	Repurchased	Balance	Average interest rate	Issues	Repurchased	Balance	Average interest rate
Covered bonds	7 100 000	(6 550 000)	550 000	0.3%	6 750 000	(6 550 000)	200 000	0.4%
Fixed-rate bonds	21 578	( 3 285)	18 293	0.3%	39 609	( 4 341)	35 268	0.3%
Interest payable			57				1 648
Commissions relating to amortised cost, net							( 1)
			568 350				236 915
Other subordinated bonds	300 000		300 000	5.5%	300 000		300 000	5.5%
Participation securities					28 081	( 27 470)	611
Interest payable			4 514				4 466
			304 514				305 077
Liabilities relating to assets not derecognised
in securitisation operations (Note 15)	4 540 366	(4 294 735)	245 631		4 736 640	(4 258 381)	478 259
Interest payable			353				420
Commissions relating to amortised cost,
net			( 653)				( 694)
			245 331				477 985
			1 118 195				1 019 977

The portfolio of debt issued at amortised cost includes securities designated as interest rate hedged liabilities, the fair value change of which at 31 December 2018 and 31 December 2017 amounted to (34) t.euros and (63) t.euros, respectively.

The movement in debt securities issued by BPI in 2018 was as follows:

		Fixed rate	Other subordinated	Participation
	Covered bonds	bonds	bonds	securities	Total
Balance at 31 December 2017	200 000	35 268	300 000	611	535 879
Debt issues in the period	850 000	452			850 452
Issues retained	( 300 000)				( 300 000)
Issues redeemed	( 200 000)	( 16 345)		( 611)	( 216 956)
Repurchases (net of resales)		( 1 082)			( 1 082)
Balance at 31-12-2018	550 000	18 293	300 000		868 293

In 2018 the result of bond repurchases was 8 t.euros.

The movement in debt securities issued by BPI in 2017 was as follows:

					Other
		Fixed-rate	Variable-rate	Perpetual	subordinated	Participation
	Covered bonds	bonds	bonds	Bonds	bonds	securities	Total
Balance at 31 December 2016	400 000	89 619	16 248	60 000	8 707	731	575 305
Debt issues in the period	2 800 000	10 688			300 000		3 110 688
Issues retained	(2 800 000)						(2 800 000)
Issues redeemed	( 200 000)	( 62 617)	( 16 248)		( 8 707)		( 287 572)
Repurchases (net of resales)		( 2 422)				( 120)	( 2 542)
Deconsolidation of BPI Vida e Pensões				( 60 000)			( 60 000)
Balance at 31 December 2017	200 000	35 268			300 000	611	535 879

The detail of subordinated debt issuance is as follows:

Issue date				Amount pending redemption
	Maturity date	Nominal value	Interest rate	31-12-2018	31-12-2017 Restated
24/03/2017	24/03/2027	300 000 1	6-month Euribor + 5.74%	300 000	300 000

¹This issue was fully subscribed by CaixaBank.

Covered Bonds

BPI has two covered bond programmes under the terms of Decree-Law 59 / 2006. Under these programmes, BPI has issued mortgage bonds and public sector bonds, as described below.

In accordance with this law, the holders of covered bonds benefit from a special creditor privilege over the cover pool of, which acts as security for the debt to which the bondholders will have access in the event of the issuer's insolvency.

Mortgage bonds

The mortgage bonds programme was set up for up to a maximum of 7 000 000 t.euros.

The mortgage bonds are secured by a portfolio of mortgage loans and other assets that together constitute a cover pool.

Assets allocated to the cover pool may include mortgage loans for housing or commercial purposes located in a European Union Member State and other eligible assets, such as deposits at the Bank of Portugal, deposits at financial institutions with ratings equal to or greater than "A-" and other low risk and highly liquid assets. The total value of the other assets cannot exceed 20% of the cover pool. The amount of the allocated mortgage loans cannot exceed 80% of the value of the mortgaged property in the case of residential property, or 60% of the value of the mortgaged property, in the case of commercial property.

The legislation applicable to mortgage bonds imposes prudential limits, which must be met during the period of the bonds:

The total nominal amount of the outstanding mortgage bonds cannot exceed 95% of the total amount of mortgage loans and other assets allocated to the bonds;
The average maturity of the outstanding mortgage bonds cannot exceed, at any time, the average maturity of the mortgage loans and other assets allocated to the bonds;
The total amount of interest payable on the mortgage bonds cannot exceed, at any time, the amount of interest receivable on the mortgage loans and other assets allocated to the mortgage bonds;
The present value of the liabilities arising from the outstanding mortgage bonds cannot exceed, at any time, the net present value of the cover pool given as collateral of these bonds, after consideration of any financial derivative instruments. This ratio must be maintained when considering a 200 basis points parallel up or down shift of the yield curve.
The credit institutions' risk exposure, except for positions with residual maturity of less than or equal to 100 days, cannot exceed 15% of the total nominal amount of the outstanding mortgage bonds.

Issue	Issue date	Maturity date	Nominal amount		Coupon Interest payment frequency	Reimbursement	Rating	Repurchases
OH-Serie 9	21-05-2010	21-05-2025	350 000	3M Euribor + 0.65%	Quarterly	At maturity	Aaa/-/-/-	350 000
OH-Serie 10	05-08-2010	05-08-2020	500 000	3M Euribor + 0.65%	Quarterly	At maturity	-/-/AAA/-	500 000
OH-Serie 12	25-08-2011	25-08-2021	600 000	3M Euribor + 0.65%	Quarterly	At maturity	A3/A+/A-/-	600 000
OH-Serie 14	30-03-2015	27-03-2025	1 250 000	3M Euribor + 0.50%	Quarterly	At maturity	Baa2/-/-/-	1 250 000
OH-Serie 16	30-05-2016	30-05-2023	500 000	3M Euribor + 0.80%	Quarterly	At maturity	A3/-/-/A(High)	500 000
OH-Serie 17	22-02-2017	22-02-2024	700 000	3M Euribor + 1.00%	Quarterly	At maturity	A2/-/-/A(High)	700 000
OH-Serie 18	25-07-2017	25-07-2022	1 750 000	3M Euribor + 0.60%	Quarterly	At maturity	A2/-/-/A(High)	1 750 000
OH-Serie 19	02-03-2018	02-03-2023	300 000	3M Euribor + 0.40%	Quarterly	At maturity	A1/-/-/A(High)	300 000
OH-Serie 20	26-09-2018	26-09-2025	250 000	6M Euribor + 0.30%	Quarterly	At maturity	A1/-/-/AA(Low)
OH-Serie 21	13-12-2018	13-12-2022	300 000	6M Euribor + 0.30%	Quarterly		At maturity Aa3/-/-/AA(Low)

At 31 December 2018 the amount of mortgage bonds issued by BPI was 6 500 000 t.euros, split into 10 issues, as follows:

At 31 December 2018 and 2017, the cover pool allocated to the mortgage bonds amounted to 7 598 026 t.euros and 7 474 957 t.euros, respectively, of which 7 576 415 t.euros and 7 461 814 t.euros corresponded to credit and accrued interest (Note 15.2).

Public sector bonds

The public sector bonds programme was set up for up to a maximum of 2 000 000 t.euros.

The public sector bonds are secured by a portfolio of loans to public sector entities and other assets that together constitute a cover pool.

Loans granted to central public administrations, regional or local authorities of any EU Member State as well as loans with a specific guarantee from these entities may be allocated to the cover pool.

The prudential limits applicable to the public sector bonds are similar to those applicable to the mortgage bonds, except for the limit on the maximum nominal amount of outstanding bonds in relation to the loans and other assets allocated to the cover pool, which in the case of public sector bonds is 100%.

At 31 December 2018 the amount of public sector bonds issued by BPI was 600 000 t.euros, split into 3 issues, as follows:

Issue	Issue date	Maturity date	Nominal amount	Coupon	Interest payment frequency	Reimbursement	Rating	Repurchases
OSP-Serie 3	07-10-2015	07-10-2022	100 000	3M Euribor + 0.65%	Quarterly	At maturity	Baa1/-/-	100 000
OSP-Serie 4	15-06-2016	15-06-2023	150 000	3M Euribor + 0.80%	Quarterly	At maturity	Baa1/-/-	150 000
OSP-Serie 5	20-10-2017	20-10-2022	350 000	3M Euribor + 0.50%	Quarterly	At maturity	A3/-/-	350 000

At 31 December 2018 and 2017, the cover pool allocated to the public sector bonds amounted to 773 910 t.euros and 763 711 t.euros, respectively, of which 744 219 t.euros and 750 298 t.euros corresponded to credit and accrued interest (Note 15.2).

The coverage level of the mortgage bonds and public sector bonds is detailed as follows:

	31-12-2018	31-12-2017 Restated
Covered bonds issued (A)	550 000	200 000
Portfolio of loans and mortgage loans pending reimbursement	8 320 644	8 212 112
Covered bonds repurchased	(6 550 000)	(6 550 000)
Portfolio of loans and mortgage loans used as collateral for bond issuance (B)	1 770 644	1 662 112
Collateralisation (B)/(A)	322%	831%
Overcollateralisation [(B)/(A)-1]	222%	731%

Liabilities relating to assets not derecognised in securitisation operations

Banco BPI has launched several securitisation operations, the main features of which are summarised in the tables below. These were issued through Sagres – Sociedade de Titularização de Créditos S.A.

The bonds issued by securitisation vehicles and held by BPI entities are eliminated in the consolidation process.

On 11 February 2011 Banco BPI launched its second securitisation of loans to small and medium-sized companies - Douro SME Series 2-, in the amount of 3 552 511 t.euros and with quarterly payments. The operation was issued through Sagres – Sociedade de Titularização de Créditos S.A., in 4 tranches, with the main characteristics that are detailed below:

Description	31-12-2018 Estimated average residual life	(years)	Rating (Fitch / DBRS)	Spread
■ Class A Notes	1 819 400	2.2	AA/AA	0.15%
■ Class B Notes	1 317 500	2.2	n/r	n/a
■ Class C Notes		n/a	n/r	n/a
■ Residual Note	211 400	2.2	n/r	Residual interest
Total	3 348 300
Liabilities held by Banco BPI	(3 348 300)
	0

The purpose of the issue was to be eligible as collateral for possible funding from the European Central Bank.

On 24 November 2005 Banco BPI launched its first securitisation of residential mortgage loans - DOURO Mortgages Nº 1. -, in the amount of 1 509 000 t.euros and with quarterly payments. The securitisation was issued in 5 tranches, with the main characteristics that are detailed below:

Description	31-12-2018 Estimated average residual life	(years)	Rating (Moody's/ S&P/Fitch)	Spread
■ Class A Notes	237 534	3.5	A2/A/A+	0.28%
■ Class B Notes	5 026	3.5	Baa3/BB+/A	0.34%
■ Class C Notes	4 569	3.5	Ba3/B+/BBB	0.54%
■ Class D Notes	3 808	3.5	B2/B-/BB+	0.94%
■ Class E Notes	6 000	3.5	nr/nr/nr	Residual interest
Total	256 937
Other funds	( 1)
Liabilities held by Banco BPI	( 148 202)
	108 734

On 28 September 2006 Banco BPI launched its second securitisation of residential mortgage loans - DOURO Mortgages Nº 2. -, in the amount of 1 509 000 t.euros and with quarterly payments. The securitisation was issued in 6 tranches, with the main characteristics that are detailed below:

Description	31-12-2018 Estimated average residual life	(years)	Rating (Moody's/ S&P/Fitch)	Spread
■ Class A1 Notes	3 376	5.1	A1/BBB+/A	0.10%
■ Class A2 Notes	341 248	5.1	A2/BBB+/A	0.28%
■ Class B Notes	8 417	5.1	Ba1/B+/BBB	0.34%
■ Class C Notes	5 460	5.1	Ba3/B-/BB+	0.46%
■ Class D Notes	4 322	5.1	B3/B-/BB+	0.96%
■ Class E Notes	4 500	5.1	nr/nr/nr	Residual interest
Total	367 323
Liabilities held by Banco BPI	( 282 668)
	84 655

On 31 July 2007 Banco BPI launched its third securitisation of residential mortgage loans - DOURO Mortgages Nº 3. -, in the amount of 1 514 751 t.euros and with quarterly payments. The securitisation was issued in 6 tranches, with the main characteristics that are detailed below:

Description	31-12-2018 Estimated average residual life	(years)	Rating (Moody's/ S&P/Fitch)	Spread
■ Class A Notes	537 503	6.7	A2/A/BBB+	0.24%
■ Class B Notes	13 781	6.7	nr/BB/BB+	0.26%
■ Class C Notes	8 194	6.7	nr/B/BB	0.35%
■ Class D Notes	7 077	6.7	nr/B-/B	0.72%
■ Class E Notes		n/a	n/a	n/a
■ Class F Notes	1 251	6.7	nr/nr/nr	Residual interest
Total	567 806
Liabilities held by Banco BPI	( 515 566)
	52 240

22.4. Other financial liabilities

This caption is made up as follows:

	31-12-2018	31-12-2017 Restated
Other Customer funds
Cheques and orders payable	43 473	58 140
Guaranteed rate deposits	4 890	11 905
Creditors and other resources
Creditors for futures operations	13 026	12 732
Consigned resources	35 555	22 337
Captive account resources	4 747	6 808
Guarantee account resources	11 540	16 717
Public sector
VAT payable	272	129
Tax withheld at source	14 320	14 593
Contributions to the Social Security	3 786	4 338
Other	2 740	2 741
Contributions to other healthcare systems	1 337	1 337
Creditors for factoring agreements	43 854	37 418
Creditors for the supply of goods	7 988	13 713
Subscribed but not paid-up capital in venture capital funds
Fundo de Recuperação, FCR	8 639	9 056
Fundo InterRisco II CI	5 428	8 015
Fundo InterRisco II - Fundo de Capital de Risco	1 601	2 759
Fundo de Reestruturação Empresarial, FCR	661	714
Fundo Pathena SCA Sicar	3 429	4 909
Other funds	7	17
Sundry creditors	23 662	21 415
Deferred expenses		( 11)
	230 955	249 782

23. PROVISIONS AND CONTINGENT LIABILITIES

The detail of this heading is as follows:

	31-12-2018	31-12-2017 Restated
Pending legal issues and tax litigation
VAT Recovery processes (2003 to 2016)	29 711	29 711
Tax contingencies and other	12 534	12 656
Impairment and provisions for guarantees and commitments	23 212	18 441
Other provisions		3 430
	65 457	64 238

The movement in provisions in 2018 was as follows:

	Balance at 31-12-2017 Restated	IFRS9 Impact	Increases	Restitutions/	Reversals Amounts used	Exchange differences and others	Balance at 31-12-2018
Pending legal issues and tax litigation	42 367		592	( 267)	( 447)		42 245
Commitments and guarantees given	18 441	785	5 228	( 1 067)	( 175)		23 212
Other provisions	3 430			( 3 414)	( 19)	3
	64 238	785	5 820	( 4 748)	( 641)	3	65 457

The movement in provisions in 2017 was as follows:

	Balance at 31-12-2016	Increases	Restitutions/ Reversals	Amounts used	Exchange differences and others	Balance at 31-12-2017 Restated
Pending legal issues and tax litigation	44 558	1 839	( 584)	( 3 446)		42 367
Commitments and guarantees given	22 473	51	( 4 083)			18 441
Other provisions	3 204	698	( 32)	( 426)	( 14)	3 430
	70 235	2 588	( 4 699)	( 3 872)	( 14)	64 238

23.1. Provisions for pending legal issues and tax litigation

Banco BPI is party to certain legal proceedings arising from the normal course of its business, including claims in connection with lending activities, relationships with employees and other commercial or tax matters.

Based on available information, Banco BPI considers that it had reliably estimated the obligations arising from each proceeding and that it has recognised, where appropriate, sufficient provisions to reasonably cover the liabilities that may arise as a result of these tax and legal situations. It also considers that any responsibility arising from these proceedings will not, as a whole, have a material adverse effect on the Bank's businesses, financial position or results of operations.

23.2. Provisions for commitments and guarantees given

This heading includes the provisions for credit risk of the guarantees and contingent commitments given (Note 28).

23.3. Contingent liabilities

Competition Authority

In 2012, the Portuguese Competition Authority, under the powers legally attributed to it, opened administrative infraction proceedings against 15 banks operating in the Portuguese market, including BPI, due to alleged competition restrictive practices. On 1 June 2015 Banco BPI was served the corresponding notice of illicit act. On 27 September 2017 the Bank presented its defence. During the process, and whenever appropriate, Banco BPI appealed against several interlocutory rulings issued by the Competition Authority, which the Bank considered as susceptible of violating its rights.

The Bank is currently awaiting for the Competition Authority to take a final decision on this process and to notify it of this decision, so that it can appeal against it in court.

It should be stressed that the Bank considers it has not committed the infractions attributed to it by the Competition Authority and that there should be no grounds for a conviction, and for this reason it has not recognised any provision therefor on the balance sheet at 31 December 2018.

National Resolution Fund

Resolution measure of Banco Espírito Santo, S.A.

On 3 August 2014, Banco de Portugal applied a resolution measure to Banco Espírito Santo, S.A. (BES) pursuant to paragraph b) of number 1 of article 145 C of the General Regulation of Credit Institutions and Financial Companies (RGICSF), in the form of a partial transfer of assets, liabilities, off-balance sheet items and assets under management into a transition bank, Novo Banco, S.A. (Novo Banco), incorporated by a decision of Banco de Portugal on the same date. As part of this process, the Resolution Fund made a capital contribution to Novo Banco in the amount of 4 900 000 t.euros, becoming the sole shareholder.

In this context, the Resolution Fund contracted loans amounting to 4 600 000 t.euros, of which 3 900 000 t.euros granted by the Portuguese State and 700 000 t.euros, to which BPI contributed with 116 200 t.euros, by a banking syndicate.

On 29 December 2015, Banco de Portugal issued a public announcement informing that it had " (…) made a final adjustment to the perimeter of the assets, liabilities, off-balance-sheet items and assets under management transferred to Novo Banco, namely including:

a. Clarification that no liabilities have been transferred to Novo Banco that were contingent or unknown on the date the resolution measure was applied to Banco Espírito Santo, S.A.;

b. Retransfer to Banco Espírito Santo, S.A. of the shareholding in BES Finance, which is necessary to ensure full compliance with and application of the resolution measure as regards the non-transfer to Novo Banco of subordinated debt instruments issued by Banco Espírito Santo, S.A.;

c. Clarification that it is the Resolution Fund's responsibility to make neutral for Novo Banco – through compensatory measure – potential negative effects of future decisions, resulting from the resolution process and giving rise to liabilities or contingencies."

On 7 July 2016, the Resolution Fund stated that it would analyse and evaluate the necessary steps to be taken following the disclosure of the results of the independent valuation exercise, performed to estimate the level of credit recovery by each creditor class in the hypothetical scenario of a normal insolvency proceeding of BES.

Pursuant to applicable law, if at the completion of BES's winding-up, it is concluded that creditors, whose credits have not been transferred to Novo Banco, suffered a loss higher than the loss they would have hypothetically suffered if BES had initiated its windingup process immediately before the resolution measure was adopted, such creditors will have the right to receive the difference from the Resolution Fund.

Finally, it has surfaced in the media that judicial proceedings against the Resolution Fund have been initiated.

Resolution measure of Banif – Banco Internacional do Funchal, S.A.

On 19 December 2015, the Board of Directors of Banco de Portugal declared that Banif was failing or likely to fail and decided to start the institution's urgent resolution process through the total or partial sale of its business, which led to Banif's business being sold to Banco Santander Totta, S.A. (BST), on 20 December 2015, for 150 000 t.euros.

Most of the assets that were not sold were transferred to an asset management vehicle, called Oitante, S.A. (Oitante), created specifically for this purpose, the sole shareholder of which is the Resolution Fund. As a way of offsetting this transfer, Oitante issued debt securities for an initial amount of 746 000 t.euros, to which the Resolution Fund Provided a guarantee and the Portuguese State a counter-guarantee.

The operation involved additional support of around 2 255 000 t.euros to cover future contingencies, of which 489 000 t.euros provided by the Resolution Fund and 1 766 000 t.euros directly by the Portuguese State. The referred state support is net of the amount due by BST for the acquisition of the set of assets, liabilities and business of the former Banif. The 489 000 t.euros provided by the Resolution Fund was funded under a loan agreement with the Portuguese State.

General matters

In order to reimburse the loans obtained by the Resolution Fund and any other responsibilities that the Resolution Fund may have to take on with respect to the above-mentioned resolution measures, the Resolution Fund is entitled essentially to the contributions of the participating credit institutions (including the Bank) and to the special tax on banks ("contribuição sobre o setor bancário").

By a public statement on 28 September 2016, the Resolution Fund announced that it had agreed with the Portuguese Ministry of Finance to revise the terms of the 3 900 000 t.euros loan originally granted by the Portuguese State to the Resolution Fund in 2014 to finance the resolution measure applied to BES. According to the Resolution Fund, the extension of the maturity of the loan was intended to ensure the capacity of the Resolution Fund to meet its obligations through its regular revenues, regardless of the contingencies to which the Resolution Fund is exposed. On the same day, the Office of the Portuguese Minister of Finance also announced that increases in liabilities arising from the materialisation of future contingencies would determine maturity adjustment to the Portuguese State and bank loans to the Resolution Fund in order to maintain the current levels of the required effort regarding the contributions from the banking sector.

In addition, according to the communication of the Resolution Fund on 21 March 2017:

"The terms of the loans obtained by the Fund to finance the resolution measures applied to Banco Espírito Santo, S.A. and Banif – Banco Internacional do Funchal, S.A. were changed." These loans amount to 4 953 million euros, of which 4 253 million euros granted by the Portuguese State and 700 million euros granted by a banking syndicate, of these, 116 million euros were granted by the Bank.
"Those loans now mature in December 2046, without prejudice to the possibility of early redemption based on the use of proceeds from the Resolution Fund. The maturity will be adjusted in such terms as guarantee the capacity of the Resolution Fund to fully meet its obligations based on regular revenues and without the need for special contributions or any other extraordinary contributions." The liabilities arising from contracts entered into by the Resolution Fund with the Portuguese State and a syndicate of banks in accordance with the resolution measures of BES and Banif rank pari passu with each other.
"The revision of the terms of the loans aimed to ensure the sustainability and financial balance of the Resolution Fund, on the basis of a stable, predictable and sustainable burden for the banking sector".
"The new conditions allow for the full payment of the Resolution Fund's liabilities and respective remuneration, without the need for special contributions or any other extraordinary contributions from the banking sector."

On 31 March 2017, the Bank of Portugal made a communication in which it referred, among others, the following:

• "The Bank of Portugal has today selected LONE STAR to complete the sale of Novo Banco and the Resolution Fund has signed the operation's contract documents.

Through the capital injection to be realised, LONE STAR will hold 75% of the share capital of Novo Banco and the Resolution Fund will maintain 25% of the share capital.
The terms agreed also include a contingent capital mechanism, under which the Resolution Fund, as a shareholder, undertakes to make capital injections in case certain cumulative conditions are met related to: i) the performance of a specific portfolio of assets of Novo Banco and ii) the capitalisation levels of the bank going forward."
The agreed conditions also provide for mechanisms to safeguard the interests of the Resolution Fund and to align incentives, as well as supervision mechanisms, notwithstanding the limitations arising from the application of State aid rules."
The completion of the sale is conditional on the customary regulatory approvals (including by the European Central Bank and the European Commission), and on a liability management exercise, subject to acceptance of the bondholders, which will cover the non-subordinated bonds of Novo Banco, and, through the issuance of new bonds, generate at least 500 million euros of eligible own funds for the calculation of the CET1 ratio.

On 2 October 2017, the Council of Ministers approved a resolution by which it authorised the conclusion by the Portuguese State, in its role of ultimate guarantor of financial stability, of a framework agreement with the Resolution Fund, for the provision of financial resources to the Resolution Fund, if and when considered necessary for the fulfilment of its contractual obligations under the sale of the 75% stake in Novo Banco, S.A.

The abovementioned framework agreement was signed on the same date and determines that additional funds are to be made available when necessary to ensure compliance with the responsibilities assumed within the scope of the sale process of Novo Banco, while also establishing that the refund of any such funds will be scheduled taking into consideration that one of the objectives of this framework agreement is to ensure the stability of the contributive burden that falls on the banking sector, i.e., to ensure that no special contributions or any other extraordinary contributions are required from the participants of the Resolution Fund.

On 18 October 2017 Banco de Portugal and the Resolution Fund announced the conclusion of the sale of Novo Banco to Lone Star.

On 1 March 2019, after Novo Banco's capital call relative to 2018 had been made public, the Minister for Finance issued a communication where it confirmed "(...) its commitment to the targets assumed and to promoting the stability of the banking sector to allow reaching these targets."

Currently it is not possible to predict the possible effects for the Resolution Fund arising from: (i) the sale of the holding in Novo Banco; (ii) the application of the principle that no creditor of the credit institution under resolution may incur in a loss greater than that it would incur if the institution had entered into liquidation; (iii) the guarantee provided to the bonds issued by Oitante; and (iv) other liabilities which the Resolution Fund may have to assume.

Notwithstanding the possibility of collection of special contributions provided for in the applicable legislation, considering the renegotiation of the terms of the loans granted to the Resolution Fund by the Portuguese State and by a syndicate of banks, where the Bank is included, and the public announcements made by the Resolution Fund and the Office of the Portuguese Minister of Finance, which indicate that this possibility will not be used, the financial statements as of 31 December 2018 reflect the Board of Directors' expectation that the Bank will not be required to make any special or extraordinary contribution to finance the resolution measures applied to BES and Banif or any other liability or contingent liability assumed by the Resolution Fund.

Possible changes regarding these issues may have relevant implications on the Bank's financial statements.

24. OTHER LIABILITIES

This caption is made up as follows:

	31-12-2018	31-12-2017 Restated
Liabilities for pensions and other benefits (Note 4.26)
Pension fund assets (Note 25)	(1 662 358)	(1 616 132)
Past service liabilities (Note 25)	1 695 496	1 657 330
	33 138	41 198
Expenses payable
Staff Expenses	82 728	84 329
Other administrative expenses	63 249	38 944
Special tax on banks	15 187	14 323
Other	2 418	2 183
	163 582	139 779
Deferred income
From guarantees given and other contingent liabilities	1 940	3 654
Other	119	8 772
	2 059	12 426
Other adjustment accounts
Foreign exchange transactions pending settlement		31 565
Securities transactions pending settlement
– stock exchange transactions		6
Liabilities pending settlement	110 316	86 270
Other transactions pending settlement	197 025	164 487
	307 341	282 328
	506 120	475 731

At 31 December 2018 and 2017, the caption Expenses payable - staff expenses includes 6 870 t.euros and 6 402 t.euros, respectively, relating to end-of-career bonuses.

The movement in end-of-career bonuses in 2018 and 2017 was as follows:

	31-12-2018	31-12-2017
		Restated
End-of-career bonuses at beginning of the year	( 6 402)	( 6 685)
Staff expenses 1
Current service cost	( 336)	( 372)
Interest expenses	( 136)	( 140)
Voluntary terminations programme		540
End-of-career bonuses payment	280	377
Actuarial gains/(losses)
Change in mortality table		( 51)
Change in discount rate	( 57)
Other deviations	( 219)	( 116)
Change of consolidation perimeter of BPI Gestão de Activos at 31 December 2017		45
End-of-career bonuses at year-end	( 6 870)	( 6 402)

1 At 31 December 2017 included 4 t.euros relative to staff expenses of BPI Gestão de Activos, reclassified to the income statement caption Profit/(loss) of discontinued operations.

The main actuarial assumptions used to calculate liabilities for end-of-career bonuses are the same as those used to calculate employee pension liabilities (Note 25).

The caption 'Stock exchange transactions pending settlement' relates to the acquisition of securities for which settlement only occurred in the following month.

At 31 December 2018 and 31 December 2017, the caption 'Liabilities pending settlement' included:

66 641 t.euros and 44 997 t.euros, respectively, relating to transactions with loan securitisation funds;
24 501 t.euros and 18 900 t.euros, respectively, relating to ATM transactions pending settlement;
7 184 t.euros and 8 982 t.euros, respectively, relating to transactions with SIBS pending settlement;

At 31 December 2018 and 31 December 2017, the caption 'Other transactions pending settlement' included 189 072 t.euros and 143 284 t.euros, respectively, relating to transfers under SEPA (Single Euro Payment Area).

25. LIABILITIES FOR PENSIONS AND OTHER BENEFITS

Past service liabilities for Pensioners, Employees and Directors that are, or have been, at the service of BPI companies⁴ , are calculated in accordance with IAS 19.

Benefits established by BPI are defined benefits based on the last salary earned and length of service, providing for the payment of benefits in the event of retirement due to old age or disability, death and end-of-career bonuses. The rules used to calculate these benefits are mainly drawn from the provisions of the Collective Labour Agreement for the Portuguese Banking Sector. There is also a restricted group of management staff that is covered by a supplementary defined benefit pension plan, based on the last salary earned and length of service.

With the publication of Decree-Law no. 1-A / 2011 of 3 January, from 1 January 2011 all banking sector employees who were beneficiaries of "CAFEB – Caixa de Abono de Família dos Empregados Bancários" were integrated into the General Social Security Scheme, being henceforth covered by this scheme for old-age pensions as well as for maternity, paternity and adoption allowances, which the Bank ceased to support. Given the complementary nature of the scheme under the rules of the Collective Labour Agreement for the Portuguese Banking Sector ("ACT"), the Bank continues to cover the difference relative to the amount of the benefits paid under the General Social Security Regime for the eventualities covered and the benefits established in the ACT.

Following the instructions of the National Council of Financial Supervisors (Conselho Nacional dos Supervisores Financeiros), the amount of past service liabilities remained unchanged at 31 December 2010. Current service cost decreased as from 2011 and the Bank became subject to the Single Social Tax (Taxa Social Única - TSU) at the rate of 23.6%.

Disability and survivor pensions and sick leave for these Employees continue to be the Bank's responsibility.

Decree-Law 127 2011 of 31 December established the transfer to the Social Security of liabilities for retirement and survivor pensions of retired personnel and pensioners that were in that situation at 31 December 2011 and were covered by the substitute social security regime included in the collective labour regulations instrument in force for the banking sector (Pillar 1), as well as the transfer to the Portuguese State of the corresponding pension fund assets covering these liabilities. Since the transfer to the Social Security corresponded to a settlement, extinguishing the corresponding liability of Banco BPI, the negative difference (99 507 t.euros) between the amount of the pension fund assets transferred to the Portuguese State and the amount of the liability transferred based on actuarial assumptions used by Banco BPI was fully recognised as a cost in 2011/12. For tax purposes, this cost is recognised over a period of 18 years.

Through its pension fund, Banco BPI retains the liability for payment of (i) the amount of updates to the pensions mentioned above, according to the criteria set out in the ACT; (ii) the complementary benefits to the retirement and survivor pensions assumed by the ACT; (iii) the fixed contribution to the Social and Medical Support Services (SAMS); (iv) death allowance; (v) survivor pensions to children and surviving spouse related to the same Employee and (vi) survivor pension due to the family of a retired Employee, in which the conditions for being granted occurred as from 1 January 2012.

BPI Vida e Pensões is the entity responsible for the actuarial calculations used to determine the amounts of the retirement and survivor pension liabilities, as well as for managing the respective Pension Funds.

The "Projected Unit Credit" method was used to calculate the normal cost and past service liabilities due to old age, and the "Single Successive Premiums" method was used to calculate the cost of the disability and survivor benefits.

The commitments assumed in the regulations of Banco BPI Pension Plans are funded by Pension Funds and therefore Banco BPI is exposed to risks resulting from the valuation of the liabilities and the value of the related pension funds. The Pension Funds of Banco BPI are disclosed in Note 42.

The funding requirements of the Pension Fund are defined in Bank of Portugal Notice no. 4/2005, which establishes the requirement to fully fund (100%) pensions under payment and a minimum of 95% of the past service liability for current personnel.

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The main actuarial assumptions used to calculate the pension liabilities of the employees are as follows:

		31-12-2017 Restated
	31-12-2018
Demographic assumptions:
Mortality Table	TV 88/90-M	TV 88/90-M
	TV 88/90-W - 3 years1	TV 88/90-W - 3 years1
Disability table	EKV 80	EKV 80
Staff turnover	0%	0%
Decreases	by mortality	by mortality
Financial assumptions
Discount rate
Start of the year	2.0%	2.0%
Year-end	2.0%	2.0%
Pensionable salaries growth rate 2	1.0%	1.0%
Pensions growth rate	0.5%	0.5%

¹Life expectancy considered for women was 3 years longer than considered in the mortality table used.

2 The mandatory promotions under the current ACT and the projected seniority payments are considered separately, i.e., directly in the estimate of salaries evolution, corresponding to an increase of approximately 0.5%.

The actual results obtained in relation to the main financial assumptions were:

	31-12-2018	31-12-2017 Restated
Pensionable salaries growth rate 1	2.40%	1.80%
Pensions growth rate 2	1.00%	0.75%
Pension fund assets' return rate
Banco BPI	5.50%	13.07%
Other companies	-5.50%	4.80%
1

Calculated based on average pensionable salary changes for current Employees present at the beginning and at the end of the year (includes changes in remuneration levels, the effect of mandatory promotions due to time of service and seniority payments and does not consider new admissions and leavers).

²Corresponds to the ACT table update rate.

At 31 December 2018 and 2017 the number of pensioners and Employees covered by the pension plans funded by the pension funds was as follows:

	31-12-2018	31-12-2017 Restated
Retired pensioners
Retired pensioners	7 399	7 490
Survivor pensioners	1 553	1 434
Current Employees	4 958	4 910
Former Employees (clause 98 of the ACT)	3 357	3 360
	17 267	17 194

The past service liabilities for Pensioners and Employees of BPI and respective coverage by the Pension Fund show the following evolution over the last five years:

	31-12-2018	31-12-2017	31/12/2016	31/12/2015	31/12/2014
Total past service liabilities	(1 639 393)	(1 601 350)	(1 463 137)	(1 279 923)	(1 278 394)
Net assets of the Pension Fund	1 612 353	1 564 913	1 355 356	1 391 069	1 201 648
Contributions to be transferred to the Pension Fund	5 547	9 010	75 455	1 279	47 008
Coverage surplus/(shortfall)	( 21 493)	( 27 427)	( 32 326)	112 425	( 29 738)
Coverage ratio of liabilities	99%	98%	98%	109%	98%

In accordance with Decree-Law 12/2006 of 20 January, only in very special conditions is it possible to return excess funding, so it is assumed that any excess will be used to reduce future contributions.

The return of the pension fund in 2018 was 5.5%. The return of the pension fund in the period benefited from the gains on the sale of the equity holding in Viacer - Sociedade Gestora de Participações Sociais, Lda and on the sale of property.

In 2018, the movement in the present value of past service liabilities and in the Employee's pension fund was as follows:

	Total past service liabilities	Net assets of the pension fund	Net (Assets)/Liabilities for pensions and other benefits
Amount at 31 December 2017	(1 601 350)	1 564 913	( 36 437)
Recognised as profit/(loss) (Note 34)	( 32 501)	32 798	297
Current service cost	5 929		5 929
Liabilities' interest cost	( 31 876)		( 31 876)
Income on plan assets computed based on the discount rate (Note 34)		32 798	32 798
Early retirements	( 7 936)		( 7 936)
Voluntary terminations	1 382		1 382
Recognised in shareholders' equity (Note 26)	( 52 420)	51 110	( 1 310)
Deviation in pension funds return		52 581	52 581
Update increase in ACTV table above expected increase	( 17 112)		( 17 112)
Change in financial and demographic assumptions
Change in discount rate	( 8 174)		( 8 174)
Impact on ACT table from the national minimum wage increase	( 5 609)		( 5 609)
Deviation in pensions paid		( 1 471)	( 1 471)
Other deviations 1	( 21 525)		( 21 525)
Other	46 878	( 36 468)	10 410
Employee contributions	( 3 519)	3 519
BPI contributions		10 410	10 410
Pensions payable (estimate)	49 874	( 49 874)
Transfer of Banco BPI Employees to BPI Gestão de Activos	523	( 523)
Amount at 31 December 2018	(1 639 393)	1 612 353	( 27 040)

1 Includes (8 431) t.euros relative to mortality deviations and (7 200) t.euros relative to deviations in the amount of early pensions.

The movement in the present value of past service liabilities and in the Employee's pension fund in 2017 was as follows:

	Total past service Net assets of the pension	Net (Assets)/Liabilities for
	liabilities	fund	pensions and other benefits
Amount at 31 December 2016	(1 463 137)	1 355 356	( 107 781)
Recognised as profit/(loss) (Note 34)	( 66 362)	29 801	( 36 561)
Current service cost 1	7 092		7 092
Interest cost relating to the liabilities 2	( 30 337)		( 30 337)
Income on plan assets computed based on the discount rate 3		29 801	29 801
Early retirements	( 52 610)		( 52 610)
Voluntary terminations	11 829		11 829
Change in plan conditions	( 2 336)		( 2 336)
Recognised in shareholders' equity (Note 26)	( 110 949)	143 597	32 648
Deviation in pension funds return		147 320	147 320
Change in financial and demographic assumptions
Change in mortality table	( 63 384)		( 63 384)
Impact on ACT table from the national minimum wage increase	( 4 436)		( 4 436)
Disability pensions	( 7 489)		( 7 489)
Population adjustments	( 19 694)		( 19 694)
Other deviations	( 15 946)		( 15 946)
Deviation in pensions paid		( 3 723)	( 3 723)
Other	39 098	36 159	75 257
Employee contributions	( 3 698)	3 698
BPI contributions		75 455	75 455
Pensions payable (estimate)	40 289	( 40 289)
Change in consolidation perimeter - Pension liabilities and Pension Fund of BPI Gestão de Activos at 31 December 2017	2 507	( 2 705)	( 198)
Amount at 31 December 2017	(1 601 350)	1 564 913	( 36 437)

1 Does not include (9) t.euros relative to staff expenses of BPI Gestão de Activos, reclassified to the income statement caption Profit/(loss) of discontinued operations.

2 Does not include 56 t.euros relative to staff expenses of BPI Gestão de Activos, reclassified to the income statement caption Profit/(loss) of discontinued operations.

³Does not include (54) t.euros relative to staff expenses of BPI Gestão de Activos, reclassified to the income statement caption Profit/(loss) of discontinued operations.

The movement in deviations in 2018 was as follows:
Amount at 31 December 2017	( 211 218)
Deviation in pension funds return	52 581
Update increase in ACTV table above expected increase	( 17 112)
Change in discount rate	( 8 174)
Impact on ACT table from the national minimum wage increase	( 5 609)
Deviation in pensions paid	( 1 471)
Other deviations	( 21 525)
Amount at 31 December 2018	( 212 528)

At 31 December 2018 and 2017 Banco BPI's Employees' Pension Funds comprised the following assets:

		31-12-2018		31-12-2017 Restated
	Value	%	Value	%
Liquidity	59 228	3.7%	277 845	17.8%
Fixed-rate bonds
Listed	902 542	56.0%	185 225	11.8%
Variable-rate bonds
Listed	83 231	5.2%	143 512	9.2%
Non listed	1	0.0%		0.0%
Shares
Listed	174 328	10.8%	449 556	28.7%
Non listed		0.0%	55 720	3.6%
Real Estate	318 285	19.7%	347 684	22.2%
Other
Listed	74 738	4.6%	105 371	6.7%
	1 612 353	100.0%	1 564 913	100.0%

The sensitivity analysis to a change in the main financial assumptions for the entire period covered by the actuarial valuation (and not just a change in a given year) would result in the following impact on the present value of past service liabilities ¹ :

		(decrease)/increase
	%	Amount
Change in discount rate
0.25% increase	-4.2%	( 69 060)
0.25% decrease	4.5%	73 743
Change in salaries growth rate 2
0.25% increase	1.2%	19 323
Change in pensions growth rate 3
0.25% increase	4.9%	80 292
Mortality Table
+1 year	3.4%	55 818

¹The calculation method and assumptions were the same as used for the calculation of the liabilities, except for the assumption under analysis.

²The change in the increase in salaries applies only to the pensionable salaries component of the pension plan foreseen in ACT, there being no change in the growth rate of the pensionable salaries for Social Security pension purposes, since what is considered is the maximum risk in the wage evolution component.

³The change in the pension increase applies to pensions and supplements provided by the Bank, as well as to pensions transferred to the Social Security, for whose future revisions the Bank remains responsible.

The average duration of the pension liability for Banco BPI Employees is 18 years, including both current and retired Employees.

The estimated Employee contributions to the pension plan in 2019 amount to 3 826 t.euros.

The Members of the Executive Committee of the Board of Directors of Banco BPI, S.A. and the former Board Members of Banco Português de Investimento benefit from a supplementary retirement and survivor pension plan, the funding coverage of which is ensured through a pension fund.

The main actuarial assumptions used to calculate the pension liabilities of Board members are as follows:

		31-12-2017 Restated
	31-12-2018
Demographic assumptions:
Mortality Table	TV 88/90-M	TV 88/90-M
	TV 88/90-W - 3 years1	TV 88/90-W - 3 years1
Disability table	EKV 80	EKV 80
Staff turnover	0%	0%
Decreases	by mortality	by mortality
Financial assumptions:
Discount rate
Start of the year	2.0%	2.0%
Year-end	2.0%	2.0%
Pensionable salaries growth rate	0.5%	0.5%
Pensions growth rate 2	0.5%	0.5%
1 Life expectancy considered for women was 3 years longer than considered in the mortality table used.

²Rate of increase corresponds to Consumer Price Index rate of change, as per the pension plan rules.

The liabilities for past services of Board members and respective coverage by the Pension Fund show the following evolution in the last five years:

	31-12-2018	31-12-2017 Restated	31/12/2016	31/12/2015	31/12/2014
Present value of past service liabilities	( 56 103)	( 55 980)	( 52 266)	( 43 979)	( 43 744)
Net assets of the Pension Fund	50 005	51 219	41 790	42 311	39 098
Contributions to be transferred to the Pension Fund	5 413	4 132	8 900	364	3 393
Coverage surplus/(shortfall)	( 685)	( 629)	( 1 576)	( 1 304)	( 1 253)
Coverage ratio of liabilities	99%	99%	97%	97%	97%

The return of the pension fund in 2018 was - 5.6%.

In 2018, the movement in the present value of past service liabilities for Directors and in the pension fund was as follows:

	Net (Assets)/Liabilities for Total past service Net assets of the pension
	liabilities	fund	pensions and other benefits
Amount at 31 December 2017	( 55 980)	51 219	( 4 761)
Recognised as profit/(loss) (Note 34)	( 1 776)	1 090	( 686)
Current service cost	( 660)		( 660)
Liabilities' interest cost	( 1 116)		( 1 116)
Income on plan assets computed based on the discount rate		1 090	1 090
Recognised in shareholders' equity (Note 26)	( 1 176)	( 3 607)	( 4 783)
Deviation in pension funds return		( 3 948)	( 3 948)
Change in financial and demographic assumptions
Change in discount rate	( 183)		( 183)
Deviation in pensions paid		341	341
Other deviations	( 993)		( 993)
Other	2 829	1 303	4 132
BPI contributions		4 132	4 132
Pensions payable (estimate)	2 829	( 2 829)
Amount at 31 December 2018	( 56 103)	50 005	( 6 098)

In 2017, the movement in the present value of past service liabilities for Directors and in the pension fund was as follows:

	Total past service liabilities	Net assets of the pension fund	Net (Assets)/Liabilities for pensions and other benefits
Amount at 31 December 2016	( 52 266)	41 790	( 10 476)
Recognised as profit/(loss) (Note 34)	( 3 167)	1 057	( 2 110)
Current service cost	( 1 333)		( 1 333)
Liabilities' interest cost	( 1 129)		( 1 129)
Income on plan assets computed based on the discount rate		1 057	1 057
Early retirements	( 705)		( 705)
Recognised in shareholders' equity (Note 26)	( 2 074)	999	( 1 075)
Deviation in pension funds return		1 344	1 344
Change in financial and demographic assumptions
Change in mortality table	( 3 414)		( 3 414)
Other deviations	1 340		1 340
Deviation in pensions paid		( 345)	( 345)
Other	1 527	7 373	8 900
BPI contributions		8 900	8 900
Pensions payable (estimate)	1 527	( 1 527)
Amount at 31 December 2017	( 55 980)	51 219	( 4 761)
The movement in deviations in 2018 was as follows:

Amount at 31 December 2017	( 12 464)
Deviation in pension funds return	( 3 948)
Change in financial and demographic assumptions
Change in discount rate	( 183)
Deviation in pensions paid	341
Other deviations	( 993)
Amount at 31 December 2018	( 17 247)

At 31 December 2018 and 2017 the Pension Funds of BPI's Directors comprised the following assets:

		31-12-2018		31-12-2017 Restated
	Value	%	Value	%
Liquidity	1 448	2.9%	1 314	2.6%
Fixed-rate bonds
Listed	29 494	59.0%	26 469	51.7%
Variable-rate bonds
Listed	2 796	5.6%	5 225	10.2%
Non listed	2	0.0%		0.0%
Shares
Listed	12 412	24.8%	14 043	27.3%
Real Estate	568	1.1%	757	1.5%
Other
Listed	3 285	6.6%	3 411	6.7%
	50 005	100.0%	51 219	100.0%

		(decrease)/increase
	%	Amount
Change in discount rate
0.25% increase	-2.9%	( 1 606)
0.25% decrease	3.0%	1 684
Change in salaries growth rate 2
0.25% increase	0.1%	44
Change in pensions growth rate 3
0.25% increase	2.5%	1 397
Mortality Table
+1 year	3.4%	1 929

¹The calculation method and assumptions were the same as used for the calculation of the liabilities, except for the assumption under analysis.

The average duration of the pension liability for Banco BPI Directors is 12 years, including both current and retired Directors.

26. SHAREHOLDERS' EQUITY

Capital

At 31 December 2018 and 31 December 2017 Banco BPI's share capital was 1 293 063 t.euros, represented by 1 456 924 237 ordinary dematerialised registered shares with no nominal value.

Other equity instruments and treasury shares

This caption has the following composition:
	31-12-2018	31-12-2017 Restated
Other equity
Cost of shares to be made available to Group Employees	371	1 211
Costs of options not exercised (premiums)		1 065
	371	2 276
Own shares hedging RVA options		377
	0	377

The caption 'Other equity' includes the accrued costs of the share-based variable remuneration programme (RVA) relating to shares to be made available.

From 2018 onwards, and with reference to the 2017 variable remuneration programme, in accordance with the Remuneration Policies approved for the members of the Board of Directors and members of the Identified Collective, any payments in equity instruments will be made, preferably, in CaixaBank shares.

In 2017 and 2018, considering the process of acquisition of the entire share capital of Banco BPI by CaixaBank and the impossibility of delivering BPI shares, all previous years' programmes involving Banco BPI shares and options were concluded.

Accumulated other comprehensive income

The main movements in Accumulated other comprehensive income are shown in detail in the tables of the consolidated statements of profit and loss and other comprehensive income.

In 2018 and 2017 the amount of other comprehensive income not included in the income for the year was (66 918) t.euros and 365 212 t.euros, respectively. The most significant change in this caption resulted from the impact of foreign exchange differences in the holding in Banco de Fomento Angola (Note 17).

Retained earnings and other reserves

This caption is made up as follows:

	31-12-2018	31-12-2017
		Restated
Retained earnings
Legal reserve	153 358	130 081
Other reserves and retained earnings	1 001 557	815 821
Reserves of fully consolidated companies	396 380	( 608)
Profit/(loss) generated on change of accounting policies	( 2 837)	( 1 069)
	1 548 458	944 225
Other reserves
Merger reserve	2 530	2 530
Reserves of equity consolidated companies	124 294	735 404
	126 824	737 934

In accordance with Article 97 of the General Law on Credit Institutions and Financial Companies, approved by Decree-Law no. 298/92 of 31 December and amended by Decree-Law no. 201/2002 of 26 September, Banco BPI must appropriate at least 10% of its net income each year to a legal reserve until the amount of the reserve equals the greater of the amount of share capital or the sum of the free reserves plus retained earnings.

Changes in accumulated other comprehensive income - 2018

	31- 12- 201 7 ed Res tat	1st tim e ado ion pt IFR S 9	01- 01- 201 8	s / ( lua tio ain Va n g los ) ses	Am ts oun nsf ed tra to err / ins ( los ) in Ga ses inc om e ity ins tru nts equ me sta tem ent ( bef es) tax ore	Tax es	31- 12- 201 8
th ill n be lass ifie d to ofit los Ite at w ot ms rec pr or s	( 313 7) 41	60 673	( 252 4) 74	( 302 ) 14	2 8 42	31 416	( 232 78 8)
s/ ial g ( loss es) de fine d b fit lan Act ain sio uar on ene pen n p s	( 0) 312 31		( 312 31 0)	( 66) 6 3		30 428	( 288 24 8)
lue ch f eq red fair lue th h o the reh Fai uity ins ive tru nts at r va ang es o me me asu va rou g r co mp ens inc om e		60 673	60 673	( 20) 7 6	2 8 42	720	56 615
Sha f ot her f in bsi nise d in nd s in dia ries jo int tm ent tur re o re cog com e a exp ens e o ves su ven es , and iate as soc s	( 10) 1 8		( 10) 1 8	( ) 316		268	( 58) 1 8
ible Tan set as s g	703		703				703
th be lass ifie d to ofit los Ite at m ms ay rec pr or s	149 85 8	( ) 83 413	66 445	( 0) 255 36	157 65 7	10 644	( ) 20 614
eig lati For y tr n c urr enc ans on	43 104		43 104	( 0) 245 34	157 57 6	8 8 58	( ) 35 802
Ava ilab le-f sale fin ial ets or- anc ass	84 150	( ) 84 150	( 0)				( 0)
Deb s cl ifie d a s fa alu e fi l as s th h o the reh itie ir v cia ive inc t se set cur ass nan rou g r co mp ens om e		737	737	1 5 58	81	( ) 449	1 9 27
Sha f ot her nise d in nd of inv in sub sid iari jo int est nts tur re o re cog com e a exp ens e me es, ven es and iate as soc s	22 604		22 604	( ) 11 578		2 2 35	13 261
	( 9) 163 55	( ) 22 740	( 9) 186 29	( 2) 269 66	157 65 7 2 8 42	42 060	( 2) 253 40

Changes in accumulated other comprehensive income - 2017

	31/ 12/ 201 6	s / ( ) Va lua tio ain los n g ses	sfe d to Am ts t oun ran rre nt ( bef inc e st ate om me ore es) tax	Tax es	31- 12- 201 7 ed Res tat
th ill n be lass ifie d to ofit los Ite at w ot ms rec pr or s	( 3) 336 52	32 012		( 06) 8 9	( 7) 313 41
s/ ( es) Act ial g ain loss de fine d b fit sio lan uar on ene pen n p s	( 9) 334 94	31 545		( 06) 8 9	( 0) 312 31
Sha of oth ised inc nd f in s in bsi dia ries jo int and tm ent tur re er rec ogn om e a exp ens e o ves su ven es , oci ate ass s	( 77) 2 2	467			( 10) 1 8
Tan ible set g as s	703				703
th be lass ifie d to ofit los Ite at m ms ay rec pr or s	( 192 68 2)	175 45 5	181 97 4	( 889 ) 14	149 85 8
lati For eig y tr n c urr enc ans on	( 2) 220 90	90 743	182 12 1	( 58) 8 8	43 104
ilab le-f sale fin ial Ava ets or- anc ass	16 563	72 630	( ) 147	( 96) 4 8	84 150
Sha of oth ised nd f in bsi dia and inc s in ries jo int tm ent tur re er rec ogn om e a exp ens e o ves su ven es , oci ate ass s	11 657	12 082		( 35) 1 1	22 604
	( 7) 721 88	382 92 2	363 94 8	( ) 38 684	( 9) 163 55

27. TAX POSITION

27.1. Tax assets and liabilities

The breakdown of tax assets and liabilities is as follows:

Tax assets

	31-12-2018	31-12-2017 Restated
Current tax assets	3 701	30 232
Recoverable VAT	20 049	17 768
Deferred tax assets	329 013	405 183
	352 763	453 183

Tax liabilities
	31-12-2018	31-12-2017 Restated
Current tax liabilities	2 750	3 830
Deferred tax liabilities	71 052	66 792
	73 802	70 622

27.2. Income taxes

At 31 December 2018 and 2017 restated, the cost of income tax recognised in the income statement, as well as the tax burden, measured as the ratio of the tax charge to the profit/(loss) of continuing operations, were as follows:

Continuing operations

		31-12-2017 Restated
	31-12-2018
Profit / (loss) for the year before tax (A)	557 863	243 026
Profit / (loss) of equity accounted companies (B)	( 271 556)	( 124 753)
Effect of BFA deconsolidation (C) (Note 17)	154 030
Profit / (loss) for the year subject to tax (A)+(B)+(C)=(D)	440 337	118 273
Total tax recognised in the income statement (E)	( 131 439)	( 51 775)
Current taxes	( 7 512)	( 9 307)
Deferred taxes	( 108 577)	( 27 966)
Recognition and reversal of temporary differences	( 108 390)	( 17 944)
Tax loss carry forwards	( 187)	( 10 022)
Corrections of previous years	( 125)	( 243)
Special tax on banks (F)	( 15 225)	( 14 259)
Average tax rate [(E) - (F)]/(D)	26.4%	31.7%
Profit / (loss) for the year after tax (A)+(E)	426 424	191 251

In 2018 and 2017 restated the Bank recorded directly in other comprehensive income, income tax of (30 699) t.euros and 8 906 t.euros, respectively, resulting from actuarial deviations in pensions and end-of-career bonus and from fair value changes in equity instruments and debt securities.

Reconciliation between the nominal income tax rate and the average tax rate, in accordance with IAS 12, at 31 December 2018 and 31 December 2017 restated, as well as reconciliation between the tax cost/gain and the product of multiplying the accounting profit by the average tax rate, are as follows:

Continuing operations

	2018		2017 restated
	Tax		Tax
	rate	Amount	rate	Amount
Net income before income tax		440 337		118 273
Income tax computed based on the nominal tax rate	28.4%	125 054	27.4%	32 458
Capital gains and impairments in equity holdings, net	-4.0%	( 17 678)	-0.3%	( 363)
Capital losses in tangible assets, net	-0.3%	( 1 324)	-1.6%	( 1 879)
Non taxable dividends	-0.4%	( 1 878)	-1.2%	( 1 426)
Taxable temporary differences (BFA and BCI)	5.9%	26 086	9.3%	11 024
Effect of BFA deconsolidation (Note 17)		( 15 403)
Tax benefits	-0.1%	( 302)	-0.4%	( 522)
Change in tax regime for provisions 1			14.7%	17 401
Impairment and provisions for loans 1	0.0%	( 7)	-11.0%	( 13 034)
Non-deductible pension costs	0.0%	120	-1.1%	( 1 308)
Correction of previous years	0.1%	364	0.2%	243
Correction of previous years tax losses			-6.4%	( 7 617)
Autonomous taxation	0.3%	1 119	1.0%	1 234
Other non taxable income and expenses	0.0%	63	1.1%	1 305
	26.4%	116 214	31.7%	37 516

¹Corresponds to changes made in tax carryforwards of 2016, resulting from application of Article 3 of Regulatory Decree no. 5/2018 of 18 November.

27.3. Deferred tax assets and liabilities

Deferred tax assets and liabilities correspond to the amount of tax recoverable and payable in future periods resulting from temporary differences between the amount of assets and liabilities on the balance sheet and their tax base. Deferred tax losses carried forward and tax credits are also recognised as deferred tax assets.

In accordance with IAS 12, deferred tax assets and liabilities are recognised to the extent that it is probable that taxable profits will be available in the future against which they can be utilised. Accordingly, Banco BPI prepared future taxable income projections to support the deferred tax assets accounted for.

Deferred tax assets and liabilities were measured at the tax rates that are expected to apply to the period when the asset is expected to be realised or the liability settled.

The movement in deferred tax assets in 2018 was as follows:

	31-12-2017 Restated	Movement in the year
		Increases	Decreases	31-12-2018
Tax losses	20 559	6	( 193)	20 372
Application of Art. 4 of the regime set forth in Law 61/2014	65 549	8 864	( 69 243)	5 170
Taxed provisions and impairments	158 542	24 238	( 3 037)	179 743
Tax deferral of the impact of the partial transfer of pension liabilities to the Social Security	18 198		( 1 516)	16 682
Pension liabilities	37 954		( 4 895)	33 059
Actuarial deviations	75 611	295	( 9 069)	66 837
Voluntary terminations programme	7 014	179	( 2 589)	4 604
End-of-career bonus	1 717	55		1 772
Taxable temporary differences in subsidiaries and associated companies (BFA
and BCI)	17 544		( 17 544)	0
Financial instruments at fair value	1 570	9 519	( 10 633)	456
Other	925	2 147	( 2 754)	318
	405 183	45 303	( 121 473)	329 013

At 31 December 2018, BPI's consolidated balance sheet included deferred tax assets in the amount of 329 013 t.euros, of which:

(i) 122 833 t.euros are eligible to benefit from the Special Regime applicable to Deferred Tax Assets approved by Law no. 61/2014, of 26 August;
(ii) 206 180 t.euros depend on the existence of future taxable profits (not eligible for the Special Regime), including:
- 105 552 t.euros related to impairments for loans and guarantees;
- 25 751 t.euros relating to other taxed impairments and provisions;
53 729 t.euros related to Employee benefits (actuarial deviations, transfer to Social Security, early retirements, end-of-career premium and compensations and other benefits payable under the voluntary termination programme);
20 372 t.euros corresponding to tax losses carried forward (19 609 t.euros relative to Banco BPI's individual activity). According to Law no. 2/2014, of 16 January, the use of tax losses carried forward in future taxation periods cannot exceed 70% of taxable income in each of those periods, and tax losses carried forward are subject to a preestablished period during which they can be used.

The movement in deferred tax liabilities in 2018 was as follows:

	31-12-2017 Restated	Movement in the year
		Increases	Decreases	31-12-2018
Taxable temporary differences in subsidiaries and associated companies (BFA
and BCI)	62 292		( 54 247)	8 045
Financial instruments at fair value	3 255	60 802	( 1 310)	62 747
Other	1 245		( 985)	260
	66 792	60 802	( 56 542)	71 052

At 31 December 2018 the caption Financial instruments at fair value included 50 741 t.euros in deferred taxes associated with the unrealised capital gain in BFA.

Profits distributed to Banco BPI by subsidiaries and associated companies are not taxed in Banco BPI as a result of application of the regime established in article 51 of the Corporation Income Tax Code, which provides for the elimination of double taxation of profits distributed.

In this context, Banco BPI does not recognise deferred tax assets or liabilities for deductible or taxable temporary differences relating to investments in associated companies, since the stake held by BPI has exceeded 10% and been held for more than one year, which enables it to be considered in the Participation Exemption regime, except for Banco Comercial e de Investimentos and Banco de Fomento Angola (in the latter up to 31 December 2018), in which the deferred tax liabilities relating to taxation in Mozambique and Angola, respectively, of all the distributable profits, are recognised.

28. OFF BALANCE SHEET ITEMS

This caption is made up as follows:

	31-12-2018	31-12-2017 Restated
Loan commitments given
Irrevocable credit lines	161	737
Securities subscribed	475 233	407 926
Revocable commitments	2 125 401	2 821 199
	2 600 795	3 229 862
Financial guarantees given
Guarantees and sureties	215 881	236 170
Standby letters of credit	32 756	47 448
Sureties and indemnities		66
	248 637	283 684
Other commitments given
Non-financial guarantees and sureties	1 194 592	1 158 228
Documentary credits	192 339	130 946
Term liabilities for annual contributions to the Deposit Guarantee Fund	38 714	38 714
Term liabilities for annual contributions to the Resolution Fund	6 715	4 640
Potential liability to the Investor Compensation Scheme	11 639	10 825
Other irrevocable commitments	732	1 464
	1 444 731	1 344 817
	4 294 163	4 858 363
Assets pledged as collateral
European System of Central Banks	7 939 263	7 530 249
Deposit Guarantee Fund	43 341	43 819
Investors Compensation Scheme	5 926	5 725
European Investment Bank	619 956	1 362 939
Repos	1 604 613	93 414
Other collateral	53	56
	10 213 152	9 036 202

The breakdown by stage of the exposure to and impairment in guarantees and commitments at 31 December 2018 is as follows:

		Exposure			Impairments
	Stage 1	Stage 2	Stage 3	Total	Stage 1	Stage 2	Stage 3	Total
Loan commitments given	2 561 991	34 174	4 630	2 600 795	57	1	7	65
Financial guarantees given	246 038	2 044	555	248 637	342	27	538	907
Other commitments given	1 294 436	54 349	95 946	1 444 731	355	466	21 419	22 240
	4 102 465	90 567	101 131	4 294 163	754	494	21 964	23 212

The breakdown by stage of the exposure to and impairment in off balance sheet items at 1 January 2018 is as follows:

		Exposure			Impairments
	Stage 1	Stage 2	Stage 3	Total	Stage 1	Stage 2	Stage 3	Total
Loan commitments given	3 224 107	4 131	1 624	3 229 862	325	40	135	500
Financial guarantees given	263 138	15 660	4 886	283 684	273	610	959	1 842
Other commitments given	1 189 086	46 270	109 461	1 344 817	303	886	15 695	16 884
	4 676 331	66 061	115 971	4 858 363	901	1 536	16 789	19 226

BPI is only obliged to pay the sum of guarantees and contingent liabilities if the counterparty guaranteed fails to comply with its obligations, at the moment of default. The Bank believes that most of these commitments will reach maturity without materialising.

With respect to contingent commitments given for loans, BPI has undertaken to facilitate funds to Customers through drawdowns on credit lines and other commitments, whenever it is requested to do so and subject to compliance with certain conditions. The Bank believes that a large portion of them will expire prior to drawdown, either because they will not be requested by Customers or because the necessary conditions will not be met by the Customers.

The detail of "Loan commitments given" is as follows:

	31-12-2018		31-12-2017 Restated
	Available	Limits	Available	Limits
Drawable by third parties
Credit institutions	62 922	87 825	17 436	52 294
Public sector	67 319	106 787	175 719	269 722
Other sectors	2 470 554	6 117 838	3 036 707	4 721 074
	2 600 795	6 312 449	3 229 862	5 043 089

The table below details the contractual maturities of the loan commitments given at 31 December 2018:

	< 1 month	1-3	3-12	1-5
		months	months	years	> 5 years
Drawable by third parties	1 114 594	358 766	507 448	368 694	251 293

The table below details the contractual maturities of the loan commitments given at 31 December 2017:

	< 1 month	1-3	3-12	1-5	> 5 years
		months	months	years
Drawable by third parties	2 125 754	128 971	220 266	520 336	234 535

29. NET INTEREST INCOME

This caption is made up as follows:

	31-12-2018	31-12-2017 Restated
Interest income
Financial assets held for trading	45 923	43 103
Financial assets not designated for trading compulsorily measured at fair value through profit or loss	4 864
Financial assets at fair value through other comprehensive income	14 401
Available-for-sale financial assets		17 023
Financial assets at amortised cost
Debt securities	25 221	20 547
Loans and advances - central banks and other credit institutions	9 152	8 212
Loans and advances - Customers	380 033	364 574
Derivatives - Hedge accounting, interest rate risk	3 637	996
Other assets	3 721	3 659
Interest income on liabilities	2 301	2 964
Commissions received relating to amortised cost	21 011	20 999
	510 264	482 077
Interest expense
Financial liabilities held for trading	( 21 519)	( 28 142)
Financial liabilities at amortised cost
Deposits - Credit Institutions	( 4 560)	( 6 577)
Deposits - Customers	( 21 049)	( 20 430)
Debt securities issued	( 22 820)	( 22 746)
Derivatives - Hedge accounting, interest rate risk	( 14 952)	( 14 893)
Other liabilities	( 2 460)	( 1 041)
Interest expense on assets	( 21)	( 20)
Commissions paid relating to amortised cost	( 307)	( 169)
	( 87 688)	( 94 018)
Net interest income	422 576	388 059

The detail of the average return on assets and liabilities is as follows:

	31-12-2018	31-12-2017 Restated
Average return on assets
Financial assets at fair value through other comprehensive income - debt securities1	0.71%	0.48%
Financial assets at amortised cost	1.69%	1.75%
Loans and advances - Central Banks	-0.41%
Loans and advances - Credit Institutions	1.18%	0.77%
Loans and advances - Customers2	1.70%	1.80%
Average return on liabilities
Financial liabilities at amortised cost	0.17%	0.18%
Deposits - Central Banks	-0.13%	-0.14%
Deposits - Credit Institutions	0.19%	0.38%
Deposits - Customers	0.10%	0.10%
Debt securities issued3	1.44%	0.95%
Subordinated liabilities	5.54%	5.31%

¹At 31 December 2017 includes interest from available-for-sale financial assets

2 Includes debt securities.

³Does not include subordinated liabilities.

30. DIVIDEND INCOME

The detail of this heading is as follows:

	31-12-2018	31-12-2017 Restated
Conduril	276	92
SIBS	1 116	2 788
Viacer		2 366
Via Litoral		936
Digitmarket	234	32
Other	97	311
	1 723	6 525

31. FEE AND COMMISSION INCOME AND EXPENSES

The detail of this heading is as follows:

	31-12-2018	31-12-2017 Restated

Fee and commission income
On guarantees provided	14 130	12 852
On commitments to third parties	3 131	2 413
On insurance brokerage services	66 672	64 890
On other banking services provided	174 139	180 731
On operations performed on behalf of third parties	14 634	14 711
Other	7 341	547
Refund of expenses	30 087	29 959
Income from provision of sundry services	8 875	7 351
	319 009	313 454
Fee and commission expenses
For guarantees received	( 33)	( 47)
On financial instruments' transactions	( 265)	( 190)
On banking services provided by third parties	( 31 215)	( 37 161)
On operations performed by third parties	( 2 676)	( 3 983)
Commission-equivalent expenses	( 6 664)	( 7 859)
Other	( 386)	( 249)
	( 41 239)	( 49 489)

At 31 December 2018 and 2017, income from insurance or reinsurance brokerage services provided is broken down as follows:

31-12-2018	31-12-2017
	Restated

14 696	18 326
21 544	21 243
2 669	2 154
9 202	7 330
48 111	49 053

6 029	5 639
3 464	1 324
9 068	8 874
18 561	15 837
66 672	64 890

At 31 December 2018 and 2017, remunerations for insurance brokerage services were fully received in cash, and more than 99% of the fee and commission income relates to insurance brokerage services for Allianz and BPI Vida e Pensões.

32. GAINS / (LOSSES) ON FINANCIAL ASSETS AND LIABILITIES

This caption is made up as follows:

	31-12-2018	31-12-2017 Restated
Gains/(losses) on derecognition of financial assets and liabilities not measured at fair value through	1 457	4 342
profit or loss, net
Financial assets at fair value through other comprehensive income
Debt securities	589
Available-for-sale financial assets
Debt securities		1 000
Equity instruments		1 620
Other securities		102
Financial assets at amortised cost
Debt securities	( 2 766)	348
Financial liabilities at amortised cost	3 632	1 269
Other	2	3
Gains/(losses) on financial assets and liabilities held for trading, net	39 027	( 1 469)
Trading derivatives	66 820	( 51 821)
Debt securities	187	( 3 368)
Equity instruments	( 27 970)	54 055
Financial liabilities held for trading	( 10)	( 335)
Gains/(losses) on financial assets not designated for trading compulsorily measured at fair value through profit or loss, net	60 321
Debt securities	( 2 969)
Equity instruments	63 290
Gains/(losses) on financial assets and liabilities measured at fair value through profit or loss, net		129
Gains/(losses) from hedge accounting, net	1 398	1 438
Hedging derivatives (Note 16)	16 356	25 423
Hedged items (Note 16)	( 14 958)	( 23 985)
	102 203	4 440

At 31 December 2018 and 2017 the caption "Gains / (losses) on financial assets and liabilities held for trading - Hedging derivatives included 27 533 t.euros and (31 012) t.euros, respectively, concerning equity swaps contracted with Clients, which are hedged through a portfolio of equities, in the caption "Gains / (losses) on financial assets and liabilities held for trading - Equity instruments".

At 31 December 2018 gains/(losses) on equity instruments not designated for trading compulsorily measured at fair value through profit or loss, included 59 581 t.euros relating to the sale of the equity holding in Viacer - Sociedade Gestora de Participações Sociais, Lda. (Note 11).

33. OTHER OPERATING INCOME AND EXPENSES

This caption is made up as follows:

	31-12-2018	31-12-2017 Restated
Other operating income
Service provision agreements with CaixaBank Group companies	6 286
Other operating income	5 201	4 426
	11 487	4 426
Other operating expenses
Subscriptions and donations	( 2 824)	( 5 652)
Contributions to the Deposit Guarantee Fund	( 34)	( 18)
Contribution to the Resolution Fund	( 5 452)	( 3 876)
Contributions to the Single Resolution Fund	( 11 761)	( 11 355)
Contribution to the Investor Compensation Scheme	( 7)	( 7)
Other operating expenses	( 1 701)	( 3 253)
Indirect taxes	( 2 265)	( 2 457)
Direct taxes	( 383)	( 2 081)
	( 24 427)	( 28 699)

34. STAFF EXPENSES

This caption is made up as follows:

	31-12-2018	31-12-2017 Restated
Staff expenses
Remuneration	( 191 145)	( 206 598)
End-of-career bonus	( 472)	( 508)
Other mandatory social costs	( 51 484)	( 53 890)
Pension costs (Note 4.xx)
Current service cost	5 269	5 750
Interest cost relating to the liabilities	( 32 992)	( 31 410)
Income on plan assets computed based on the discount rate	33 888	30 804
Other	( 635)	( 2 919)
Other staff costs	( 3 550)	( 5 135)
	( 241 121)	( 263 906)
Costs with early retirements and terminations
Early retirements (Note 4.xx)	( 16 112)	( 67 156)
Voluntary terminations	( 4 981)	( 38 648)
	( 21 093)	( 105 804)
	( 262 214)	( 369 710)

In 2017, Banco BPI implemented an early retirement and voluntary terminations programme that resulted in the progressive termination of 515 Employees' contracts, of which 289 due to early retirement, and 226 due to voluntary termination, with a total cost of 90 million euros. An additional 98 workers had already agreed to a voluntary agreement for contract termination, to whom the same conditions of the programme were applied. Hence the total terminations agreed in 2017 involved 613 Employees and a total cost of 106.9 million euros.

In 2018 and 2017 the average headcount was broken down as follows:

		2018			2017
			Of which: with			Of which: with disability
			disability
	Men	Women	above 33%	Men	Women	above 33%
Directors1	8			7	1
Senior management	290	147	8	371	200	9
Other management staff	1743	2325	77	2101	2620	76
Other employees	175	264	19	730	831	17
	2216	2736	104	3209	3652	102

1 Executive Director of Banco BPI.

In 2018 and 2017 the headcount was broken down as follows:

		2018			2017
			Of which: with disability			Of which: with disability
	Men	Women	above 33%	Men	Women	above 33%
Directors1	8			8
Senior management	281	143	8	298	150	6
Other management staff	1797	2439	80	1723	2268	69
Other employees	99	151	13	230	368	17
	2185	2733	101	2259	2786	92

1 Executive Director of Banco BPI.

35. OTHER ADMINISTRATIVE EXPENSES

This caption is made up as follows:

	31-12-2018	31-12-2017 Restated
General administrative expenses
Supplies
Water, energy and fuel	( 7 324)	( 6 992)
Consumables	( 1 837)	( 1 954)
Other	( 324)	( 403)
Services
Rents and leases	( 39 371)	( 40 197)
Communications and IT	( 39 419)	( 30 507)
Travel, lodging and representation	( 4 835)	( 4 753)
Advertising and publishing	( 13 668)	( 8 408)
Maintenance and repairs	( 11 255)	( 10 877)
Insurance	( 1 740)	( 2 639)
Fees	( 3 624)	( 4 675)
Legal expenses	( 3 457)	( 3 591)
Security and cleaning	( 3 808)	( 3 549)
Information services	( 3 867)	( 4 344)
Temporary labour	( 1 739)	( 2 376)
Studies, consultancy and auditing	( 10 859)	( 7 661)
SIBS	( 3 233)	( 3 171)
Other	( 22 518)	( 14 827)
	( 172 878)	( 150 924)

The value of future minimum lease payments to be incurred by the Bank during the mandatory period of the lease, excluding future rental increases, are as follows:

	20181	20192	2020 and following3
Effective and estimated cost of leases	26 015	24 254	24 058

¹Effective costs with leases

²Current situation, with Rua do Comércio building leased in January 2019 only and amount of rents updated in January.

³Current situation, without Rua do Comércio building and no updates.

The detail of remunerations paid to auditors and respective network ¹ according to the nature of the services provided and the company providing them, in 2018, is as follows:

31-12-2018	Banco BPI	Other companies2	Total
PwC - SROC fees
Audit	411	48	459
Other services
Other non-audit services required by law	192	21	213
Other non-audit services:	265		265
	868	69	937
Fees of other companies of the PwC network
Audit	28	19	47
Other services
Other non-audit services required by law		11	11
Other non-audit services:	3	118	121
	31	147	178
CMVM fees and reimbursement of PwC expenses	38	32	70
	937	248	1 185

1 In accordance with the definition of network given by the European Commission in its Recommendation no. C(2002) 1873, of 16 May 2002. 2 By decreasing order of importance of the amount paid: Banco Português de Investimento, BPI Suisse, Banco BPI Cayman, BPI Private Equity and BPI Madeira.

The breakdown of payments to suppliers in 2018 and 2017 is as follows:

		31-12-2017
	31-12-2018	Restated
Amounts outstanding	712	795
Amount of payments made	376 188	248 929
	376 900	249 724
Average supplier payment period in days	30	30

36. IMPAIRMENT OF FINANCIAL ASSETS NOT MEASURED AT FAIR VALUE THROUGH PROFIT OR LOSS

The movement in impairment of financial assets not measured at fair value through profit or loss in 2018 and 2017 is as follows:

	31-12-2018	31-12-2017 Restated
Available-for-sale financial assets
Equity instruments		( 2 585)
Loans and advances		( 187)
Balance at end of period		( 2 772)
Financial assets at amortised cost
Loans and advances
Net allowances
Credit Institutions	( 269)
Customers	12 482	( 25 621)
Recovery of loans written off from assets	36 892	29 768
Debt securities
Net allowances	( 138)	( 3 634)
Balance at end of period	48 967	513

37. IMPAIRMENT/(REVERSAL) OF IMPAIRMENT ON NON-FINANCIAL ASSETS

The movement in this caption in 2018 and 2017 was as follows:

	31-12-2018	31-12-2017 Restated
Non-current assets held for sale1
Net allowances		4 759
Balance at end of period	0	4 759
Tangible and intangible assets
Tangible assets - Equipment and other
Net allowances	(646)
Intangible assets - other
Net allowances	(1 026)
Balance at end of period	(1 672)	0
1

At 31 December 2108 these impairments are included in the caption Profit/(loss) in non-current assets and disposal groups classified as held for sale, non eligible as discontinued operations (Note 21).

38. GAINS/(LOSSES) ON DERECOGNITION OF NON-FINANCIAL ASSETS

The detail of these captions is as follows:

	31-12-2018	31-12-2017 Restated
Gains in non-financial assets
Gains in investments in joint ventures and associates	400
Gains on the sale of businesses	98 842
Gains in non-current assets held for sale1		8 251
Gains/(losses) on the relocation of assets	518	615
Gains in other tangible assets	43	609
	99 803	9 475
Losses in non-financial assets
Losses in investments in joint ventures and associates	( 154 030)
Losses in non-current assets held for sale1		( 1 331)
Losses in other tangible assets	( 954)	( 693)
	( 154 984)	( 2 024)
	( 55 181)	7 451

1 At 31 December 2108 gains and losses in assets held for sale are included in the caption Profit/(loss) in non-current assets and disposal groups classified as held for sale, non eligible as discontinued operations (Note 21).

The gains on the sale of businesses refer to the gains on the sale of the legal positions in the merchant acquiring business to Comercia Global Payments, Entidad de Pago, S.L., in August 2018 (57 788 t.euros) and on the sale of the cards business to Caixabank Payments E.F.C. E.P., S.A., in November 2018 (41 054 t.euros).

The losses in joint ventures and associates refer to the recognition of adjustments to the valuation of BFA, essentially deriving from the devaluation of the kwanza, recognised under other comprehensive income in 2017 and 2018 (before tax) following the loss of significant influence, which led to the reclassification in Banco BPI's balance sheet of the equity holding in BFA from Associate to Financial assets at fair value through other comprehensive income - equity instruments, and its revaluation at fair value (Note 17).

39. PROFIT/(LOSS) OF DISCONTINUED OPERATIONS

In 2018 and 2017 the contribution of BPI Gestão de Activos and BPI GIF and the respective capital gains on sale, were included in the income statement caption 'Profit/(loss) after tax from discontinued operations', broken down as follows:

	31-12-2018 BPI Gestão de Activos and BPI GIF	31-12-2017 Restated
		BPI Vida e Pensions	BPI Gestão de Activos and BPI GIF
Net interest income	( 1)	14 192	( 1)
Technical result of insurance contracts		18 592
Fee and commission income and expenses	5 747	( 12 715)	20 033
Gains/(losses) on financial operations	3	653	5
Other operating income and expenses	( 118)	( 419)	( 601)
Gross income	5 631	20 303	19 436
Administrative expenses	( 2 431)	( 2 076)	( 7 083)
Depreciation and amortisation			( 2)
Net income before income tax	3 200	18 227	12 351
Taxes	( 741)	( 3 924)	( 3 064)
Net Profit/(Loss)	2 459	14 303	9 287
Gain/(loss) on sale	61 755	7 677
Profit/(loss) after tax from discontinued operations	64 214	21 980	9 287

Banco de Fomento Angola

At 31 December 2017 the caption 'Profit/(loss) from discontinued operations included (212 298) t.euros relative to the sale of a 2% stake in and deconsolidation of Banco de Fomento Angola:

	31-12-2017
	Restated
Capital gain on the sale of 2% of the share capital of BFA, net of taxes	6 593
Reclassification of foreign exchange reserves to profit or loss	( 182 121)
Profit/(loss) before tax from discontinued operations	( 175 528)
Deferred tax liabilities	( 36 770)
Profit/(loss) after tax from discontinued operations	( 212 298)

40. PROFIT

In 2018 and 2017 the contribution of Banco BPI and its subsidiaries and associates to the consolidated net income was as follows:

	31-12-2018	31-12-2017 Restated
Banks
Banco BPI S.A.	384 269	77 115
Banco Português de Investimento, S.A.	2 083	( 2 973)
Banco de Fomento Angola, S.A.	73 217	( 119 473)
Banco Comercial e de Investimentos, S.A.R.L.	20 546	8 136
Banco BPI Cayman, Ltd	( 13)	8 497
Asset management
BPI Gestão de Activos - Sociedade Gestora de Fundos de Investimento Mobiliários, S.A.	1 725	7 329
BPI - Global Investment Fund Management Company, S.A.	735	1 958
BPI (Suisse), S.A.	2 899	4 085
BPI Alternative Fund: Iberian Equities Long/Short Fund Luxemburgo		794
Venture / development capital
BPI Private Equity - Sociedade de Capital de Risco, S.A.	1 100	31
Inter-Risco - Sociedade de Capital de Risco, S.A.	( 26)	( 71)
Insurance
BPI Vida e Pensões - Companhia de Seguros, S.A.		13 413
Cosec - Companhia de Seguros de Crédito, S.A.	4 128	5 565
Companhia de Seguros Allianz Portugal, S.A.	( 832)	2 457
Other
BPI, Inc	( 5)	( 6)
BPI Madeira, SGPS, Unipessoal, S.A.	( 476)	( 8)
BPI Moçambique - Sociedade de Investimento, S.A.		( 747)
BPI Capital Finance Ltd.		13
BPI Capital Africa	588	( 1 393)
Unicre - Instituição Financeira de Crédito, S.A.	700	5 487
	490 638	10 209

41. INFORMATION ON FAIR VALUE

The fair value of financial instruments is estimated, whenever possible, on the basis of prices in an active market. A market is considered active, and therefore liquid, when it is accessed by equally knowledgeable counterparties and where transactions are carried out on a regular basis. For financial instruments for which there is no active market, due to lack of liquidity or regular transactions, valuation methods and techniques are used to estimate fair value.

41.1. Fair value of financial instruments

Financial instruments on the balance sheet at fair value are classified into levels using the hierarchy defined in IFRS 13.

Debt securities and equity instruments

• Level 1: This category includes, in addition to financial instruments listed on regulated markets, bonds and participating units in harmonised funds, valued based on prices / quotations in active markets, published in trading platforms, taking into account also the liquidity and quality of the prices.

The classification of fair value in level 1 is made automatically by SIVA ("Asset Valuation Integrated System") whenever the financial instruments are traded in an active market, considering, for this purpose, that this is the case when:

(i) financial instruments are priced daily by at least 6 contributors, at least three of them with firm offers, or there is a multi-contributed price (price formed by several firm offers from contributors available in the market) (active market), or;
(ii) such financial instruments have been classified as level 1, in accordance with the rule referred to in the preceding paragraph, in at least 50% of the last 30 calendar days.

For financial instruments that do not have a history in the 30 days calendar available in the system, allocation of fair value level will be carried out taking into account the history available in SIVA.

• Level 2: Financial instruments that have not been traded on an active market or that are valued by reference to valuation techniques based on market data for financial instruments having the same or similar characteristics in accordance with the rules referred to below are considered as level 2. Level 2 fair value classification is determined automatically by SIVA in accordance with the following rules:

a) Financial instruments are classified daily in Level 2 if they are:

(i) Quoted by less than 6 contributors, regardless of the type of price, or;
(ii) valued based on models using inputs which are mainly observable in the market (such as interest rate curves or exchange rates), or;
(iii) valued based on third party indicative purchase prices, based on observable market data, and
(iv) have been classified as level 1 and level 2, in accordance with the rules mentioned above, in at least 50% of the last 30 calendar days.

b) For financial instruments that do not have a history in the 30 days calendar available in the system, allocation of fair value level will be carried out taking into account the history available in SIVA.

• Level 3: Financial instruments are classified as Level 3 when they do not meet the criteria to be classified as Level 1 or Level 2, or if their value is the result of inputs not based on observable market data, namely:

a) financial instruments not admitted to trading on a regulated market, which are valued based on valuation models for which there is no generally accepted market consensus as to the inputs to be used, namely:

(i) valuation based on Net Asset Value of non-harmonized funds, updated and disclosed by their managing companies;
(ii) valuation based on indicative prices disclosed by the entities involved in the issue of certain financial instruments, without an active market; or
(iii) valuation based on impairment tests, using indicators of the performance of the underlying operations (degree of protection by subordination of notes held, delinquency rates of the underlying assets, evolution of ratings, among others).
b) financial instruments valued at indicative purchase prices based on theoretical models, disclosed by specialized third parties.

Automatic classification proposed by SIVA relating to the level of fair value is made on the day of measurement, being supervised by a specialized team, in order to ensure that the classification of the fair value level is considered the most appropriate, according to the principles set forth herein.

Derivative financial instruments

Financial derivative transactions in the form of foreign exchange contracts, interest rate contracts, contracts on shares or share indices, inflation contracts or a combination of these, are carried out in over-the-counter (OTC) markets and in organized markets (mainly stock exchanges). For the over-the-counter derivatives (swaps and options) the valuation is based on generally accepted methods, always giving priority to values from the market.

Level 1: This category includes futures and options and other derivative financial instruments traded on regulated markets.
Level 2: Level 2 includes derivatives, traded on over-the-counter markets, without an optional component.

Valuation of these derivatives is made by discounting the cash flows of the operations, using interest rate market curves deemed appropriate for the currency concerned, prevailing at the time of calculation. The interest rates are obtained from reliable sources of information (e.g. Bloomberg or Reuters). The same interest rate curves are used in the projection of non-deterministic cash flows such as interest calculated from indices. The rates for required specific periods are determined by appropriate interpolation methods.

• Level 3: Level 3 includes options and derivatives traded in the over-the-counter market, with embedded optional elements.

The valuation of options is carried out using statistical models that consider the market value of the underlying assets and their volatilities (considering that the latter are not directly observable in the market). The theoretical models used to value derivatives classified in Level 3 are of two types:

(i) For simpler options the Black-Scholes model and their derivatives is used (commonly used models by the market in the valuation of this type of operation). The unobservable market inputs (implied volatility of the underlying assets) are collected from Bloomberg.
(ii) For exotic options or complex derivatives incorporating optional elements for which there are no valuation models available, the Bank contracts specialized entities that perform the valuation of these operations based on specific models that they develop using criteria and methodologies generally accepted by the sector for these types of instruments. On 31 December 2018, there were no outstanding operations of this type, therefore the Bank did not use valuations prepared by these entities.

In accordance with the policy defined by the Banco BPI as regards the management of exposures in options, significant open positions are not maintained, the risk being managed mainly through "back-to-back" hedges and portfolio hedges. Thus, the impact of possible changes in the inputs used in the valuation of the options, in terms of the Bank's income statement, tends to be negligible.

Valuations thus obtained are, in the case of interbank transactions, valued against those used by the counterparties and whenever there are significant differences, the models or assumptions are reviewed.

The valuation of the non-optional components, not adjusted for credit risk (cash flows from operations), is made based on discounted cash flows, using a methodology similar to that used for derivatives without an optional component. Nevertheless, the derivative instrument is classified (as a whole) in level 3.

Financial instruments recorded in the balance sheet at amortized cost

The fair value of financial instruments recorded in the balance sheet at amortized cost is determined by Banco BPI through valuation techniques.

The valuation techniques used are based on market conditions applicable to similar operations as of the date of the financial statements, such as the value of their discounted cash flows based on interest rates considered as most appropriate, namely:

the cash flows relating to Financial assets at amortised cost Loans and advances to Central Banks and Credit Institutions, and Financial liabilities at amortised cost - deposits from Central Banks and Credit institutions, were discounted based on interest rate curves for interbank operations on the date of the financial statements, except for medium and long term resources, the cashflows of which were discounted based on the interest rate curve used by the Bank for senior issuances;
in operations with Customers (Financial assets at amortised cost loans and advances to Customers and Financial liabilities at amortised cost - Customer deposits), the weighted average of the reference rates used by the Bank in the previous month to contract similar operations is considered;

• for bonds issued (Financial liabilities at amortised cost - debt securities issued), the Bank considered the reference interest rates and spreads available in the market, considering the residual maturity and degree of subordination of the issuances. For subordinated debt, the Bank used issuance proposals submitted to the Bank by other credit institutions, as the basis for the construction of subordination spread curves, also considering the senior debt curve, the Portuguese public debt curve and the evolution of the spread between the Portuguese and German public debts.

For on demand operations (namely Cash and cash balances at central banks and other demand deposits, and deposits included in Financial liabilities at amortised), fair value corresponds to the respective balance-sheet value.

Note that the fair value presented for these financial instruments may not correspond to their realizable value in a sale or liquidation scenario, as it was not determined for that purpose.

The fair value of the financial assets on the balance sheet, broken down by levels, is as follows:

			31- 12- 201 8				31-	12- 201 7 R d est ate
	Fai lue r va			Fai lue r va
	k v alu Boo e	al Tot	el 1 Lev	el 2 Lev	el 3 Lev	k v alu Boo e	al Tot	el 1 Lev	el 2 Lev	el 3 Lev
Fin ial he ld f rad ing ets or t anc ass	226 77 2	226 77 2	83 415	122 16 2	21 195	294 48 1	294 48 1	145 82 6	128 77 0	19 886
ivat ive Der s	131 70 8	131 70 8	712	119 16 2	11 834	136 77 7	136 77 7	305	128 0 77	02 7 7
Equ ity inst ent rum s	81 171	81 171	81 171			134 33 6	134 33 6	134 33 6
Deb itie t se cur s	13 893	13 893	1 5 32	3 0 00	9 3 61	23 368	23 368	11 185		12 184
Fin ial t d esi ted fo adi lso rily ets r tr anc ass no gna ng com pu
red fair lue th h p rof r lo it o at me asu va rou g ss	228 58 2	228 58 2			228 58 2	6 0 55	6 0 55			6 0 55
Equ ity inst ent rum s	168 59 4	168 59 4			168 59 4	6 0 55	6 0 55			6 0 55
Deb itie t se cur s	59 988	59 988			59 988
Fin ial fair lue th h o the reh ive ets at anc ass va rou g r co mp ens
inc om e	1 8 75 160	1 8 75 160	1 2 78 796	6 8 88	589 47 6
Equ ity inst ent rum s	597 74 0	597 74 0	1 3 76	6 8 88	589 47 6
Deb itie t se cur s	1 2 420 77	1 2 420 77	1 2 420 77
le-f e fi Ava ilab sal cia l as set or- nan s						3 8 75 370	3 8 75 370	3 5 02 427	5 7 52	367 19 1
Equ ity inst ent rum s						321 10 9	321 10 9	3 7 72	5 7 52	311 58 5
Deb itie t se cur s						3 5 54 053	3 5 54 053	3 4 98 655		55 398
nd adv Loa ns a anc es						208	208			208
Fin ial ised ets at ort st anc ass am co	25 671 94 3	27 899 91 4		720 51 0	27 179 40 4	22 506 67 0	21 378 38 6		725 67 8	20 652 70 8
Deb itie t se cur s	3 5 16 814	3 5 16 513			3 5 16 513	1 3 06 130	1 2 93 904			1 2 93 904
Loa nd adv ns a anc es	22 155 12 9	24 383 40 1		720 51 0	23 662 89 1	21 200 54 0	20 084 48 2		725 67 8	19 358 80 4
l ba nks d c red Cen it in stit utio tra an ns	790 65 9	783 90 8		720 51 0	63 398	816 78 3	817 75 1		725 67 8	92 073
Cus tom ers	21 364 47 0	23 599 49 3			23 599 49 3	20 383 75 7	19 266 73 1			19 266 73 1
De riva tive Hed tin s - ge acc oun g	14 320	14 320		14 320		12 740	12 740	11	12 729
al Tot	28 016 77 7	30 244 74 8	1 3 62 211	863 88 0	28 018 65 7	26 695 31 6	25 567 03 3	3 6 48 264	872 92 9	21 045 84 0

The fair value of the financial liabilities on the balance sheet, broken down by levels, is as follows:

			31- 12- 201 8				31- 12-	d 201 7 R est ate
		lue Fai r va				lue Fai r va
	k v alu Boo e	al Tot	el 1 Lev	el 2 Lev	el 3 Lev	k v alu Boo e	al Tot	el 1 Lev	el 2 Lev	el 3 Lev
Fin ial liab iliti hel d fo adi r tr anc es ng	141 33 5	141 33 5	83	136 53 1	4 7 21	170 04 8	170 04 8	4	167 07 6	2 9 68
Der ivat ive s	141 33 5	141 33 5	83	136 53 1	4 7 21	170 04 8	170 04 8	4	167 07 6	2 9 68
ial liab iliti ed Fin rtis at a t anc es mo cos	27 515 74 5	27 532 37 8		1 3 52 964	26 179 41 4	25 961 41 5	25 877 75 6		3 9 34 238	21 943 51 8
Dep osi ts	26 166 59 6	26 158 93 6		1 3 52 964	24 805 97 2	24 691 65 5	24 643 73 3		3 9 34 238	20 709 49 5
Cen l Ba nks tra	1 3 52 843	1 3 52 964		1 3 52 964		1 9 95 374	1 9 95 046		1 9 95 046
Cre dit Inst itut ion s	1 8 53 501	1 8 41 891			1 8 41 891	1 9 82 648	1 9 39 192		1 9 39 192
Cus tom ers	22 960 25 2	22 964 08 1			22 964 08 1	20 713 63 3	20 709 49 5			20 709 49 5
Deb d itie s is t se cur sue	1 1 18 195	1 1 42 488			1 1 42 488	1 0 19 977	984 23 9			984 23 9
Oth er f al l iab iliti ina nci es	230 95 4	230 95 4			230 95 4	249 78 3	249 78 3			249 78 3
riva tive Hed tin De s - ge acc oun g	56 010	56 010		56 010		69 880	69 880		69 880
al Tot	27 713 09 0	27 729 72 3	83	1 5 45 506	26 184 13 4	26 201 34 3	26 117 68 4	4	4 1 71 194	21 946 48 6

The main valuation techniques, assumptions and inputs used in fair value estimation for levels 2 and 3 by type of financial instruments are as follows:

Valuation methodologies and inputs

		Instrument type	Valuation method	Main assumptions
		Swaps	Discounted cash flow method2	Interest rate curves
	Derivatives1	Exchange rate options	Black-Scholes model	Implicit volatilities
Financial assets and liabilities held for		Interest rate options	Normal method	Probability of default for calculation of CVA and DVA
trading				Interest rate curves
			Discounted cash flow	Risk premiums
	Debt securities		method2	Comparable assets3
				Prices observed on the market
Financial assets not	Equity instruments			Interest rate curves
designated for trading			Discounted cash flow	Risk premiums
compulsorily measured at fair value			method2	Comparable assets3
through profit or loss	Debt securities			Prices observed on the market
				Interest rate curves
Financial assets at fair	Equity instruments			Risk premiums
value through other comprehensive			Discounted cash flow method2	Comparable assets3
income	Debt securities			Net asset value (NAV)
				Nominal Amount
Financial assets at	Debt securities		Discounted cash flow	Interest rate curves
amortised cost	Loans and receivables		method2	Spreads
				Interest rate curves
Derivatives - Hedge accounting	Swaps1		Discounted cash flow	Implicit volatilities
			method2	Probability of default for
				calculation of CVA and DVA
Financial liabilities at	Term deposits		Discounted cash flow	Interest rate curves
amortised cost	Debt securities issued		method2	Spreads

1 The valuation of derivatives is adjusted to consider the counterparty credit risk when the exposure lies with the Bank, and the Bank's credit risk when the exposure lies with the counterparty (CVA - Credit Valuation Adjustment and DVA - Debit Valuation Adjustment).

²Discounted cash flow method (net present value): this model uses the cash flows of each instrument, which are established in the different contracts, and discounts them to calculate the present value.

3 Comparable assets (similar asset prices): comparable financial instrument prices, or market benchmark indices are employed to calculate return from purchase price to current valuation, making subsequent adjustments to take into account the differences between the measured asset and the one taken as reference. It can also be assumed that the price of an instrument is equivalent to the price of another instrument,

Credit Risk Valuation Adjustments

Credit Valuation Adjustments (CVA) and Debit Valuation Adjustment (DVA) are incorporated in the valuation of Over The Counter (OTC) derivatives due to the risk associated to the counterparty's and own credit risk exposure, respectively.

The CVA is calculated bearing in mind the expected exposure with each counterparty in each future maturity. The CVA for an individual counterparty is equal to the sum of the CVA for all maturities. Adjustments are calculated by estimating the counterparty's exposure at default (EAD), probability of default (PD) and loss given default (LGD) for all derivatives traded under the same contract with Banco BPI with close-out netting (under the same netting set). Similarly, DVA is calculated by multiplying the expected negative exposure by the probability of default and by the LGD of Banco BPI.

To calculate PD and LGD, counterparty credit market data are used (Credit Default Swaps), when such information is available. Where such information is not available, PD and LGD are calibrated through market data, using for the purpose the counterparty's rating and sector, or historical PD data.

Changes in the value of the CVA/FVA and DVA/FVA adjustments are recognised in "Gains/(losses) on financial assets and liabilities held for trading" in the income statement. The table below shows the changes to these adjustments:

CVA/FVA and DVA/FVA changes

	2018		2017
	CVA/FVA	DVA/FVA	CVA/FVA	DVA/FVA
Opening balance	22 825	1	14 032	214
Additions/changes in derivatives	( 5 576)	133	10 633	1
Cancellation or maturity of derivatives	( 1 609)	( 1)	( 1 840)	( 214)
Closing balance	15 640	133	22 825	1

The values of CVA and DVA are reflected on the balance sheet (Note 10).

The movement in level 3 financial assets at fair value in 2018 was as follows:

	31-12-2018				31-12-2017 Restated
	Financial assets held for trading	Financial assets at fair value through profit or loss		Financial assets at fair value through other comprehensive income	Financial assets held for trading at fair value through profit or loss	Available-for-sale financial assets
	Debt instruments	Equity instruments	Debt instruments	Equity instruments	Debt and equity instruments	Equity instruments	Debt instruments
Balance at beginning of period	12 184				61 683	284 878	85 944
Impact of transition to IFRS9		243 048	54 983	74 763
Balance at 01-01-2018	12 184	243 048	54 983	74 673
Total profit or loss	( 137)	606	( 1 814)	( 18 235)	777	60 615	8 947
Losses or gains	( 3)	606	( 867)	( 13 683)	777	2 486	719
Adjustments to equity	( 134)		( 947)	( 4 552)		58 129	8 228
Purchases	2 870		6 982	16 841	12 025	2 648	1 469
Reclassifications to/from Level 3					( 212)
Liquidations and other	( 5 556)	( 82)	( 163)	516 197	( 56 035)	( 36 556)	( 40 754)
Balance at end of period	9 361	243 572	59 988	589 476	18 238	311 585	55 606

41.2. Fair value of assets received in settlement of defaulting loans

The fair value and the impairment allowances created for foreclosed real estate assets are determined in accordance with the appraisal value and the book value of the properties. The appraisal value is the lower of the following:

On-site appraisal value
Statistical revaluation value (RIMO)
Sale value (if purchase/sale agreement concluded)

On-site appraisal by independent external entities takes place:

On the date the asset is booked in the Bank's balance sheet;
Regularly:
- Every 3 years in the case of residential property (with quarterly re-appraisal based on an internal statistical model (RIMO);
- Annually for all other properties;
- Whenever available information points to a possible substantial decrease in value.

Impairment may also be increased due to the time the property has remained in the Bank's portfolio,

The detail of this heading is as follows:

	31-12-2018	31-12-2017
		Restated
Gross value	51 605	80 310
Impairments	18 879	15 773
Book value	32 726	64 537
Fair value	52 341	80 419

External appraisers of real estate assets

The selection of appraisers is based on the pool of entities registered as "expert appraisers" with the CMVM, and seeks to ensure adequate diversification and rotation of appraisals.

The independent external appraisals follow the principles defined in:

IVSC International Valuation Standards Council, in the International Valuation Standards publication (7th edition, of 2005);
Bank of Portugal Notice 5/2006 (Valuation of Mortgaged Properties pledged as collateral for Mortgage Bond Loans);
Regulation no. 575/2013/EU of the European Parliament and of the Council (prudential requirements), Using 3 appraisal methods described in the contracts entered into with the companies: market method, income method and Cost method.

Market Method

This method determines an estimate of the amount by which it is understood that a particular property may be traded, after an appropriate period of marketing, between an interested seller and an interested buyer, in which both parties act in an informed, prudent and non-conditioned manner and subject to no coercion.

The value of the property is determined after analysing transaction and offered prices for comparable properties, obtained through knowledge of the local market and exhaustive collection of real estate market data which permit to determine the supply/demand situation for similar properties and act as a decisive factor in determining the Market Value of the property under evaluation.

Income method

In this method, the market value of a property corresponds to the present value of all future rights and benefits deriving from its ownership.

This method relies on the principle that the management and operation of the property is based on principles of legality, rationality and competence. The purpose of the analysis is to determine the property's capacity to generate revenue flows and respective frequency, also inferring all inherent expenses.

Cost method

In this method, the estimate of the value of a property corresponds to the construction cost of another property serving the same purposes and having the same characteristics of the first, in terms of materials and technology, at current market prices. The value determined includes the value of the land, the construction costs and the developer profit margin, minus depreciation, i.e., the property's loss of value due to physical, functional, economic or environmental obsolescence, or a combination of these factors.

For all appraisals not using the 3 appraisal methods, the expert appraiser must take into account the characteristics of the local market and the specific characteristics of the property being appraised. The appraisal value that will be adopted shall be the lower of those determined, as it is the more prudent in terms of guarantee.

In any case, the appraisal reports must contain an explanation of the methodological options, thus complying with Banco de Portugal's instructions.

Company	% of total assets allocated that were appraised
CPU - Consultores, Valores Hipotecários, LDA	0.1%
ESTILOVALOR - Engenharia e Avaliação Imobiliária, LDA	14.8%
EUROVALOR - Sociedade Geral Imobiliária LDA	0.5%
EUROVALOR MADEIRA - Engenharia e Consultoria Imobiliária, LDA	0.2%
J.CURVELO, LDA	1.7%
KRATA - Sociedade de Avaliação de Bens, Lda	1.2%
MENCOVAZ - Consultoria Imobiliária e Avaliação, LDA	18.2%
PVW – Price Value and Worth, Lda.	13.3%
QUANTIMO - Projetos de Engenharia e Avaliações de Imóveis LDA	16.3%
TERRAVAL - Avaliação e Consultadoria Imobiliária, LDA	13.1%
TINSA PORTUGAL - Avaliações e Consultoria, S.A	20.1%
VALTECSA - Sociedade de Avaliação de Bens, Lda	0.5%
	100.0%

42. RELATED PARTIES

In accordance with IAS 24, the entities considered to be related to Banco BPI are:

those in which the Bank has direct or indirect significant influence over their management and financial policies Associated companies and jointly controlled entities and pension funds;
those that have direct or indirect significant influence over the management and financial policies of the Bank Shareholders, this is presumed to happen when the equity holding is greater than 20%;
the members of the key management personnel of Banco BPI, such being considered for this purpose the executive and nonexecutive members of the Board of Directors and individual persons and companies related with them.

In accordance with these criteria, BPI's related parties at 31 December 2018 were the following:

		Effective	Direct
Name of related entity	Registered office	holding	holding
Shareholders of Banco BPI
CaixaBank Group	Spain	100.0%
Associated and jointly controlled entities of Banco BPI
Banco Comercial e de Investimentos, S.A.	Mozambique	35.7%	35.7%
Companhia de Seguros Allianz Portugal, SA	Portugal	35.0%	35.0%
Cosec - Companhia de Seguros de Crédito, SA	Portugal	50.0%	50.0%
Inter-Risco – Sociedade de Capital de Risco, S.A.	Portugal	49.0%
Unicre - Instituição Financeira de Crédito, SA	Portugal	21.0%	21.0%
Pension Funds of BPI Employees
Fundo de Pensões Banco BPI	Portugal	100.0%
Fundo de Pensões Aberto BPI Acções	Portugal	7.8%
Fundo de Pensões Aberto BPI Valorização	Portugal	38.1%
Fundo de Pensões Aberto BPI Segurança	Portugal	20.1%
Fundo de Pensões Aberto BPI Garantia	Portugal	8.2%
Members of the Board of Directors of Banco BPI
Fernando Ulrich
Pablo Forero
António Lobo Xavier
Alexandre Lucena e Vale
António Farinha Morais
António José Cabral
Cristina Rios Amorim
Fátima Barros
Francisco Barbeira
Gonzalo Gortázar Rotaeche
Ignacio Alvarez-Rendueles
Javier Pano Riera
João Pedro Oliveira e Costa
José Pena do Amaral
Lluís Vendrell
Natividad Capella
Pedro Barreto
Tomás Jervell

In accordance with these criteria, BPI 's related parties at 31 December 2017 were the following:

		Effective	Direct
Name of related entity	Registered office	holding	holding
Shareholders of Banco BPI
CaixaBank Group	Spain	84.5%
Associated and jointly controlled entities of Banco BPI
Banco de Fomento Angola, S.A.	Angola	48.1%	48.1%
Banco Comercial e de Investimentos, S.A.	Mozambique	35.7%	35.7%
Companhia de Seguros Allianz Portugal, SA	Portugal	35.0%	35.0%
Cosec - Companhia de Seguros de Crédito, SA	Portugal	50.0%	50.0%
Inter-Risco – Sociedade de Capital de Risco, S.A.	Portugal	49.0%
Unicre - Instituição Financeira de Crédito, SA	Portugal	21.0%	21.0%
Pension Funds of BPI Employees
Fundo de Pensões Banco BPI	Portugal	100.0%
Fundo de Pensões Aberto BPI Acções	Portugal	8.5%
Fundo de Pensões Aberto BPI Valorização	Portugal	40.8%
Fundo de Pensões Aberto BPI Segurança	Portugal	21.9%
Fundo de Pensões Aberto BPI Garantia	Portugal	8.5%
Members of the Board of Directors of Banco BPI
Fernando Ulrich
Pablo Forero
António Lobo Xavier
Alexandre Lucena e Vale
Allianz Europe Ltd. - which appointed Carla Bambulo to fill the position in her own name
António Farinha Morais
Cristina Rios Amorim
Francisco Barbeira
Gonzalo Gortázar Rotaeche
Ignacio Alvarez-Rendueles
Javier Pano Riera
João Pedro Oliveira e Costa
José Pena do Amaral
Juan Alcaraz
Lluís Vendrell
Pedro Barreto
Tomás Jervell
Vicente Tardio Barutel

At 31 December 2018 the total amount of assets, liabilities, results, capital and off-balance sheet commitments relating to transactions with associated and jointly controlled companies, pension funds of BPI Employees, Shareholders of Banco BPI, members of the Board of Directors and companies in which these hold significant influence were broken down as follows:

	Shareholders of Banco BPI CaixaBank Group 1	Associated and jointly controlled entities	Pension Funds of BPI Employees	Members of the Board of Directors of Banco BPI	Companies in which the Members of the Board of Directors of Banco BPI have significant influence 2
Assets
Cash and cash balances at central banks and other demand deposits Financial assets held for trading	7 941 3 547
Financial assets at fair value through other comprehensive income -
equity instruments	618				50 000
Financial assets at amortised cost
Debt securities Loans and advances - central banks and other credit					55 000
institutions	94	24 714
Loans and advances - Customers	200 661			7 319	50 756
Derivatives - Hedge accounting	3 312
Tangible assets	167
Intangible assets	12 728
Other assets	18 699	24 436
	247 767	49 150		7 319	155 756
Liabilities
Financial liabilities held for trading	1 421
Financial liabilities at amortised cost
Deposits - Customers	623 990	19 855	90 690	6 604	22 606
Deposits - Credit Institutions	14 485	1 272
Debt securities issued Other financial liabilities	304 514 3	97		24
Fair value changes of the hedged items in portfolio hedge of interest
rate risk	86
Provisions - Commitments and guarantees given					1
	944 499	21 224	90 690	6 628	22 607
Capital
Fair value changes of equity instruments measured at fair value
through other comprehensive income	( 188)
	( 188)
Results 3
Net interest income	( 6 163)	( 4 809)	( 510)	( 4)	490
Dividend income	13				1 116
Fee and commission income	41 552	51 914	334	3	2
Gains/(losses) from hedge accounting, net	179
Other operating income Administrative expenses - other administrative expenses	6 543 ( 1 600)	( 882)	( 15 098)
Depreciation and amortisation	( 2 058)
Provisions or reversal of provisions - Commitments
and guarantees given		21			83
Impairment/(reversal) of impairment losses on financial assets not
measured at fair value through profit or loss	2			17	290
Gains/(losses) on derecognition of non-financial assets, net	98 842
Profit/(loss) from non-current assets and disposal groups classified as
held for sale not qualifying as discontinued operations	460
Profit/(loss) before tax from discontinued operations	61 755
	199 525	46 244	( 15 274)	16	1 981
Off-balance sheet items
Guarantees given and other contingent liabilities
Guarantees and sureties	341	11 870	60	3	3 509
Guarantees received				2 298	1 783
Commitments to third parties
Revocable commitments Irrevocable commitments	225	5 000		53	27 558 10 000
Liabilities for services provided
Deposit and safekeeping of valuables	5 817 006	1 114 160	1 598 194	6 754	38 584
Other					2 500
Foreign exchange transactions and derivative instruments
Purchase	997 170
Sale	( 751 779)
Written-off loans					200
	6 062 963	1 131 030	1 598 254	9 108	84 134

¹Includes the CaixaBank Group and the companies which it controls.

²Includes the companies in which the Members of the Board of Directors have significant influence, not included in other categories.

³Includes the results of operations with BFA since the reclassification of this equity holding from associate to financial assets at fair value through other comprehensive income - equity instruments only occurred at the end of 2018 (Note 2.1).

Operations with CaixaBank Group companies are part of the Bank's regular business activity and are carried out on arm's length terms. The most significant operations carried out in 2018 (included in this note) were the following:

• The sale operations of businesses and equity holdings to Caixabank agreed in the last quarter of 2017 were concluded in 2018. Given that these transactions constitute related party transactions, the corresponding resolutions taken by the Board of Directors required a previous analysis and opinion issued by a Board of Directors committee composed of non-executive members of the Board of Directors and by the Supervisory Board.

The sale of the legal positions in the merchant acquiring business to Comercia Global Payments, Entidad de Pago, S.L., in August 2018, generated a gain of 57 788 t.euros, and the sale of the cards business to Caixabank Payments E.F.C. E.P., S.A., in November 2018 generated a gain of 41 054 t.euros. These gains were included in the caption Gains/(losses) with derecognition of nonfinancial assets, net (Note 38).

The gains on the sale of BPI Gestão de Activos and BPI GIF to CaixaBank Group totalled 61 755 t.euros and were included in the caption profit/(loss) before tax from discontinued operations (Note 39).

In 2018 Banco BPI approved a loan on current account to Caixabank Payments E.F.C. E.P., S.A. up to the amount of 200 000 t.euros at an interest rate equivalent to the 12-month EURIBOR + 0.99%. At 31 December 2018 the amount of this operation is 200 341 t.euros, and is recognised under loans and advances - Customers.
In March 2017 Banco BPI made a 300 000 t.euros issue of subordinated bonds, at a rate equivalent to the 6-months EURIBOR + 5.74%, that was fully subscribed by CaixaBank. This operation is recognised in the caption Financial liabilities measured at amortised cost - other financial liabilities, amounting to 304 514 t.euros at 31 December 2018 (Note 22).

At 31 December 2017, the total amount of assets, liabilities, results and off-balance sheet commitments relating to transactions with associated and jointly controlled companies, pension funds of Employees of the BPI Group, Shareholders of Banco BPI, members of the Board of Directors and companies in which these hold significant influence were broken down as follows:

	Shareholders of Banco BPI CaixaBank Group 1	Associated and jointly controlled entities	Pension Funds of BPI Employees	Members of the Board of Directors of Banco BPI 2	Companies in which the Members of the Board of Directors of Banco BPI have significant influence3
Assets
Cash and cash balances at central banks and other demand deposits	2 569
Financial assets held for trading	1 871	1 843
Available-for-sale financial assets	88				122 211
Financial assets at amortised cost
Loans and advances - central banks and other credit institutions	800	21 498
Loans and advances - Customers	1 371	12		7 837	87 522
Derivatives - Hedge accounting	108
Tangible assets	243
Intangible assets	13 209
Other assets	17 699	80 363		1
Non-current assets and disposal groups classified as held for sale	165
	38 123	103 716		7 838	209 733
Liabilities
Financial liabilities held for trading	1 354
Financial liabilities at amortised cost
Deposits - Customers	546 456	55 437	293 069	8 101	26 852
Deposits - Credit Institutions	3 087	602 584			630
Debt securities issued	304 466
Other financial liabilities				24	19
Provisions - Commitments and guarantees given	2	21			116
Other liabilities		83
	855 365	658 125	293 069	8 125	27 617
Results
Net interest income	( 9 678)	( 3 081)	( 886)	( 2)	446
Dividend income					5 187
Fee and commission income	541	46 508	50	12	66
Administrative expenses - other administrative expenses	( 533)	( 953)	( 15 352)
Impairment/(reversal) of impairment losses on financial assets not
measured at fair value through profit or loss		3		3	( 60)
Profit/(loss) before tax from discontinued operations	( 2)		2 150	164	3 321
	( 9 672)	42 477	( 14 038)	177	8 960
Off-balance sheet items
Guarantees given and other contingent liabilities
Guarantees and sureties	1 613	11 313	60	14	24 895
Documentary credits		33 108
Guarantees received	66	84 005		2 876	2 231
Commitments to third parties
Revocable commitments	237	467		849	37 361
Irrevocable commitments		971			32 401
Liabilities for services provided
Deposit and safekeeping of valuables	5 510 394	1 122 790	1 210 366	195 272	45 087
Other	6 661 665				438
Foreign exchange transactions and derivative instruments
Purchase	254 103	62 625
Sale	( 222 972)	( 62 629)
Written-off loans					200
	12 205 106	1 252 650	1 210 426	199 011	142 613

¹Includes the CaixaBank Group and the companies which it controls.

2 Includes the Members of the Board of Directors, also including Allianz Europe Ltd., the companies that control it, including Allianz SE, and the companies controlled by it, except Allianz Portugal, which was considered under associated companies.

3 Includes the companies in which the Members of the Board of Directors have significant influence, not included in other categories. For compliance with article 477 of the Portuguese Commercial Code (Código das Sociedades Comerciais), the share and option holdings of the members of the Board of Directors at 31 December 2018 was as follows:

	Held at 31-12-2017	Disposals	Loans1
Fernando Ulrich	2 033 456	(2 033 456)	1 632 5
Pablo Forero
António Lobo Xavier
António Farinha Morais
António José Cabral2
Alexandre Lucena e Vale	59 284	( 59 284)	127 6
Cristina Rios Amorim
Fátima Barros3
Francisco Barbeira
Gonzalo Gortázar
Ignacio Alvarez-Rendueles
Javier Pano
João Pedro Oliveira e Costa
José Pena do Amaral			169
Lluís Vendrell
Natividad Capella4
Pedro Barreto	500 000	( 500 000)
Tomás Jervell
1Amount outstanding at 31 December 2018 on the loans obtained to purchase BPI shares through the exercise of the right to purchase BPI shares in a capital increase and the exercise of the options

under the Variable Remuneration programme (RVA).

2 Started functions on 9 July 2018.

3 Started functions on 23 February 2018.

4 Started functions on 19 October 2018.

Secured by promissory note. 6

Secured by pledged deposit in the amount of 87 t.euros.

FERNANDO ULRICH

Sold 2 033 456 shares on 27 December, at the price of € 1.47 per share, in the scope of the compulsory takeover launched by CaixaBank, S.A.