BANCO BPI, SA C R · increases. To the La Caixa group, BPI is an extremely important partner, as it allows the group to provide “Iberian Business Solutions”2 and considers the

THIS REPORT WAS PREPARED BY FRANCISCO LOPES, A MASTERS IN FINANCE STUDENT OF THE NOVA SCHOOL OF BUSINESS AND

ECONOMICS, EXCLUSIVELY FOR ACADEMIC PURPOSES. THIS REPORT WAS SUPERVISED BY ROSÁRIO ANDRÉ WHO REVIEWED THE

VALUATION METHODOLOGY AND THE FINANCIAL MODEL. (SEE DISCLOSURES AND DISCLAIMERS AT END OF DOCUMENT)

See more information at WWW.NOVASBE.PT Page 1/37

MASTERS IN FINANCE

EQUITY RESEARCH

BANCO BPI, SA COMPANY REPORT

BANKING SECTOR 03 JUNE 2013

FRANCISCO DA SILVA CARRILHO DUARTE LOPES [email protected]

Banco BPI, a good investment?

Opportunity in the heart of the Euro-zone crisis

Recommendation: BUY

Potential + 28.55%

Price Target FY13: 1.33 €

Price (as of 3-Jun-13)Sa 1.03 €

Reuters: BBPI.LS, Bloomberg: BPI PL

52-week range (€) 0.38-1.38

Market Cap (€Mn) 1,433

Outstanding Shares 1,390,000,000

Source: Bloomberg

Source: Bloomberg

(Values in € millions) 2012 2013E 2014F

NII 549 581 710

NIM 1.56% 1.61% 1.90%

Banking Income 1330 1254 1442

Provisions and Impairments 269 389 356

Operational Costs 930 1152 1118

Net Income 249 5 169

Cost-to-Income 48.1% 61% 52.9%

Loans/Deposits ratio 106% 108% 110%

Core Tier 1 15% 15.1% 15.2%

ROE 14.6% 0.23% 7.05%

EPS (€) 0.21 0.004 0.12

Source: Company Data, Nova ER Team

Our recent forecast points towards a final year 2013

price target of 1.33 € per share, representing a potential

increase in value of 28.55%.

Besides the € 249 million profit in 2012, € 400 million

were extraordinary, resulting from appreciation in Sovereign

Debt Securities. Thus, these were a non-recurrent income.

In 2013 we forecast € 5 million consolidated profit,

as Net Interest Income continues to be penalized by higher

financing costs and low spreads on mortgage loans contracted

the years before.

The domestic activity is expected to be under

pressure until economic growth resumes. In 2013 we

forecast € 74 million negative results for the Portuguese

activity, mainly due to reduced Net Interest Income and still

high credit impairments.

BPI’s foreign activity will continue to perform well,

as Angola and Mozambique economic performance remains

strong, both countries growing above 6%, foreign results will

be the engine of the bank at least until 2015.

Political stability in Portugal is not as strong as it

was 6 months ago, with political speech becoming radicalized,

however until no majority is revealed on polls no elections are

anticipated.

speralta

Rectangle


PAGE 2/37

Table of Contents

Banco BPI, SA 3

Description 3

Shareholder Structure 5

Valuation Methodology 6

The Cost of Equity 6

Portugal 8

Portuguese Economy 8

Portuguese Banking System 11

Scenarios for Banco BPI in Portugal 14

Repayment of CoCos 19

Angola 22

Scenarios for BFA in Angola 23

Mozambique 25

Scenarios for BCI in Mozambique 26

Valuation Summary 30

Appendix 34


PAGE 3/37

Banco BPI, S.A.

Description

Banco BPI (Banco Português de Investimento), SA was founded in the city of

Oporto in 1981 originally as an Investment Company; the bank entered the

commercial banking activity by acquiring several existing banks during the early

nineties, and then grew organically during the mid-nineties and the new century

following the growth of the Portuguese economy. The Bank is currently one of the

major Portuguese banks and is listed on the main Portuguese Stock Index, PSI

20 and its market capitalization is € 1,441 Million and its total assets are worth €

44,500 Million.

The activity of Banco BPI can be divided into four main segments: commercial

banking, investment banking, asset management and insurance. The asset

management division operates through the management of several investment

and retirement funds and benefits from high-patrimony individuals captured by

the commercial banking segment. The insurance segment operates through

Allianz and Euler Hermes, which BPI owns 65% and 50% respectively. The

investment banking division comprises four different sub-segments: stocks,

corporate finance, private equity and private banking; with corporate finance

operating in Portugal, Spain, France, Switzerland and South Africa. The

commercial banking activity is the most important segment of the Bank, operating

in Portugal through Banco BPI, in Angola through Banco de Fomento Angola

(where BPI owns 50.1% stake) and in Mozambique through a partnership with

CGD (the State owned Portuguese Bank) in Banco Comercial e de Investimentos

(where BPI has a 30% stake).

The domestic activity (commercial banking, investment banking and others) is

still the most important one, as it represents 77%1 of the banking income of BPI,

moreover, 96% of the credit is allocated in the domestic market and 89% of total

assets are allocated in Portugal. Within the domestic commercial activity the

bank has always been more focused on providing credit to mortgage loans,

which represent 81% of total credit and represent a market share of 10.3% in the

Portuguese mortgage loans market. Consumer credit can be divided into three

main categories: personal credit (5% of total loans), car loans (1.3% of total

loans) and credit card loans (1% of total loans). Corporate clients, small and

medium enterprises or large multi business corporations, represent only 11% of

total loans. This credit structure is not particularly good for BPI, as most of the

credit is mortgage loans, which has small, non-negotiable spreads, mostly

1 Source: BPI, annual report 2012

Political consensus in the application of the MoU


PAGE 4/37

contracted in the first half of the decade, during the construction boom in

Portugal; moreover these loans, due to their nature, have long-term maturities,

locking the revenue of the bank for long periods in time. Regarding resources

from customers, time deposits are the most important segment, representing

54% of total customer’s resources. Moreover, sight deposits represent 18%,

structured products 8.2% and investment funds represent 5.5% of total

customer’s resources. In 2012 the domestic activity had higher profits than the

international segment for the first time since 2008 (Exhibit 1), mostly due to the

appreciation of Portuguese Government Bonds, which pushed results of the

domestic activity towards € 160 million, comparing with € 87 million of

international results. Since the international crisis origin in 2008 that the

Portuguese economy is facing huge difficulties, later worsened by the euro-zone

sovereign debt crisis, resulting in the bankruptcy of thousands of companies and

cancelation or postponement of numerous investments, making credit

impairments to exponentially rise since 2008, being a crucial factor in the

negative performance of the domestic activity, comparing to the international

counterpart (Exhibit 2).

The international activity of the bank is either developed by its retail business

abroad or investment banking services. As expected, the international exposure

is primarily concentrated in countries with special ties to Portugal and Portuguese

companies, namely ex-colonies or important trade partners. As such, the bank

expanded its commercial banking activities to Angola and Mozambique and has

branches in France and Spain specially targeting Portuguese communities. In the

last few years the International activity has been increasing its importance in

BPI’s net income and banking income (Exhibits 1 and 3).

Comparing to the other Portuguese main private banks, BPI is the smallest but

the most capitalized bank and the one with the process of internal restructuring

more advanced. In terms of size BPI has € 44,565 million worth of assets, while

BES8 has € 83,691 million and BCP

9 has € 89,744 million. Regarding total credit

BPI has € 30,519 million, comparing to € 50,399 million from BES and € 61,618

million from BCP. In customer deposits BPI has € 24,600 million, while BES has

€ 34,540 million and BCP has € 49,390 million. In terms of capitalization BPI is

the bank with the highest Core Tier I ratio, 15%, while BES has 10.5% and BCP

12.4%. The transformation ratio, loans-to-deposits ratio, an important measure of

bank’s leverage, BPI has 106%, while BES has 137% and BCP 128%, with

banks obliged to achieve a ratio of below 120% by final year 2014. When looking

at the credit at risk of impairment, BPI has 4.2% compared to 9.4% of BES and

13.1% of BCP. In 2012, Return on Equity in BPI was 12.9%, while BES had 1.2%

and BCP had an impressive -35.4%. In terms of long-term credit rating, BPI and

Source: BPI official accounts



Exhibit 1: Domestic and International

Results of BPI 2008-2012

Exhibit 2: Credit Impairments in the Domestic and International activities

2008-2012

Exhibit 3: Domestic and International banking Income 2008-2012


PAGE 5/37

BES are considered BB- and BCP is considered B+, all measured by Standard

and Poor’s.

Shareholder Structure

Banco BPI has a solid shareholder structure (Graph 1), where institutional

investors own approximately 80% of the bank, giving BPI’s administration an

important support when taking strategic decisions. The La Caixa group owns

46.2% of Banco BPI being the largest shareholder, followed by Santoro Financial

Holdings with 19.5% (an Angolan Private Company whose CEO is Isabel dos

Santos, daughter of José Eduardo dos Santos, the President of the Angolan

Republic), the third largest shareholder is the strategic partner Allianz with 8.8%

of the shares. Other institutional investors include HVF, Arsopi and AutoSueco.

The remaining 20% are free-float traded in the Lisbon Stock Exchange.

Before entering in detail in the valuation of BPI, we want to discuss the

availability of the current strategic shareholders to participate in future capital

increases. To the La Caixa group, BPI is an extremely important partner, as it

allows the group to provide “Iberian Business Solutions”2 and considers the

Angolan subsidiary of BPI (BFA) a “leading position, in an emerging economy

experiencing major growth in recent years”. Moreover the group aims to “support

its customers in their foreign trade endeavours and investment projects,

anywhere in the world”. In this case, and due to the importance of the Iberian

market to the group, we believe that La Caixa will support and subscribe any

possible capital increases in the future. Regarding Santoro Financial Holdings

(second largest shareholder, 19.5% stake), BPI is an important financial

institution in a country with a tight connection to Angola, which can support

activities promoted by the company through subsidiaries or partners; moreover

Santoro Financial Holding has consecutively increased its participation in the

bank in the last few years, and by that we consider the company willing to

participate in future capital increases.

2 Source: La Caixa 2012 Annual Report.


PAGE 6/37

Valuation of Banco BPI, S.A.

Valuation Methodology

In this report we are going to value Banco BPI, S.A by the sum of the parts

method, i.e. we will value separately the Portuguese activity, the Angolan activity

and the Mozambique’s activity. By using the sum of the parts method we will get

a better understanding on which geography most contributes to the value of the

bank. Moreover we will use the Free Cash Flow to Equity method, more

appropriate to financial institutions, to value the separate operations.

Cost of Equity

The cost of equity is an important measure to discount the expected Free Cash

Flow to Equity. In our valuation we will use the Capital Asset Pricing Model

(CAPM3) to find the appropriate Cost of Equity. However, we will make a slight

modification in the formula in order to capture the systematic risk of the different

geographies. Instead of just using the beta of the company as it is usually done,

we developed a beta which captures the correlation of BPI with MSCI World (the

Index used as the Market Portfolio) and the correlation of the different

geographies with the same Index, the Market Portfolio; it is simply done by

multiplying both betas. When both betas are multiplied we get a new beta which

captures the systematic risk of the stock towards the market portfolio and the

systematic risk of the country towards the market portfolio. In this way, we

discounted the Portuguese operations with a different Cost of Equity than the

Angolan’s or the Mozambique’s operations, i.e. we used a different cost of equity

for each of the geographies. Below, we carefully describe how we computed the

different Cost of Equities and we present its values.

First, we need a Risk-Free Rate, an interest rate at which we can invest our

capital and be 100% confident that we will recover our money back. One can

possibly argue that, at this moment, in the world, there is simply not any

investment that guarantees our money back with 100% certainty, but the market

is pricing some Euro-Zone Government Bonds of AAA countries as such

investments. As interest rates are historically low, and we are discounting cash-

flows that will only occur in the long-term, e.g. the terminal value, we conducted a

small study to find a more suitable risk-free rate for both times of crisis and

economic expansion. The idea is to find a risk-free rate from a basket of Euro-

Zone countries but considering periods of economic expansion, say from 2008

until nowadays. We first selected the four Euro-Zone countries that are classified

3 CAPM : Cost of Equity = Risk-Free Rate + (Company Beta * Country Systematic Risk) * Market Risk Premium


PAGE 7/37

as AAA by the three main Credit Agencies (S&P, Fitch and Moody’s) and we got

Germany, the Netherlands, Denmark and Finland4. We then computed the

average of the last five years yield to maturity on their respective 10 year

Government Bonds, we got 2.69% for Germany, 3.02% for the Netherlands,

3.01% for Finland and 2.86% for Denmark. Our Risk-Free Rate will be the

average of these: 2.90%.

Secondly, we computed the usual beta for BPI, using three year, weekly

observations and the MSCI World as the Market Portfolio; we got a beta of 1.55,

which indicates that BPI’s stock is 55% more volatile than the Market Portfolio.

Thirdly, we computed the three different betas for each of the geographies, in

order to capture the systematic risk of each country:

The “Portuguese beta” was computed by regressing the PSI20 Index, the most

liquid and best representative Index of the Portuguese economy, with the MSCI

World. For that we got a beta of 1.16, indicating that the Portuguese market is

16% more volatile than the World’s market, i.e. the Portuguese market responds

with 16% more volatility to external shocks than the World’s Market portfolio.

In Angola we don’t have a liquid and representative Index of the Angolan

economy; as so, we must choose a proxy in order to capture the country’s

systematic risk. In Angola, the oil sector represents 50% of the GDP, and the

country exports are completely dominated by oil products; as so, we will use the

oil price as the proxy for the Angolan economy. Once again, regressing the Oil

price with the MSCI World we got a beta of 0.72.

In Mozambique we have even a further more difficult problem: Mozambique does

not have a liquid and representative Index of its economy as with Angola,

however Mozambique is currently a country where the agricultural activity

accounts for 31% of the GDP, but that is going to change in the near future, as

the Natural Gas production is starting to develop, transforming the country’s GDP

into something similar to Angola but instead of the oil being the engine of the

economy it will be the natural gas. As so, it does not make sense to find the

current beta for Mozambique, as it will certainly change in the future. We must

look for a country which has the GDP dominated by gas production and by

finding its beta we get a good proxy for Mozambique’s future beta; that country

would be Algeria, it fits perfectly our criteria (GDP dominated by Gas production,

Gas exports dominate total exports, being an African country, proximity to

European Countries, amongst others) however there is no stock index in the

country. To overcome the difficulty of finding a proxy for Mozambique we must

reduce the desired similarity of the countries and broaden our search; two

4 We did not include Luxembourg in our study as it does not currently have a 10 year Government Bond outstanding


PAGE 8/37

countries have both a relevant weight of natural resources in their GDP, in their

exports, are developing countries, have liquid stock indexes and have tight

relations to Developed countries: Saudi Arabia and Indonesia. And due to the

weight of oil in Saudi Arabia (although Saudi Arabia is the world 8th Natural Gas

producer) we chose Indonesia. Indonesia is a much more advanced country, with

its GDP growing at 6% quickly towards the 1 trillion Euros barrier. Agriculture still

accounts 15% of its GDP, with the Gas industry accounting for 12% and the

Industry with 24%. The Jakarta stock exchange Index regressed with the MSCI

World both in Euros delivers a beta of 0.98.

The table 1, below, summarises the used cost-of-equities:

CAPM per geography

CAPM Portugal Angola Mozambique

Risk-Free Rate 2,90% 2,90% 2,90%

Market Premium 5% 5% 5%

BPI Beta 1,55 1,55 1,55

Country Beta 1,16 0,72 0,98

Cost of Equity 11,88% 8,51% 10,47%

Table 1 : Cost of Equity Source: NOVA ER Team

Portugal

Portuguese Macroeconomic Environment

In the last two years the Portuguese economic and political discussion have been

marked by the application of the Memorandum of Understanding (MoU) signed

by the Portuguese government and the Troika (European Commission, ECB and

IMF) in May 2011. The MoU was signed by the three main Portuguese parties,

the Socialist party, the Social-Democrat party and the Popular party, which

represent altogether 90% of the seats in the Portuguese national parliament,

assuring a huge majority in the application of the measures agreed. Moreover,

the Portuguese political stability is seen as a key strength of Portugal in assuring

the application of the MoU. The commitment shown by the Portuguese

government in the application of the MoU has been much appreciated by

investors, originating a steady decrease in the yields of the Portuguese

Government Bonds since the beginning of 2012, and the tightening of the spread

Source: Bloomberg

Source: Bloomberg

Exhibit 4: Yields on Portuguese 10 year Government Bonds

Exhibit 5: Spread between Portuguese and German 10 year Government Bonds Yields


PAGE 9/37

between the yields on Portuguese and German Government Bonds (Exhibits 4

and 5 respectively)5. Besides Portugal’s credit rating by S&P, Moody’s and Fitch

of BB, Ba3 and BB+ respectively, there have been significant improvements in

the access of foreign capital markets by Portuguese companies. In the last

semester of 2012 and first semester of 2013 several companies such as Banco

Espírito Santo, Brisa, EDP, Mota Engil, PT, REN and Semapa accessed markets

by issuing long-term debt, reflecting a reopening of financial markets to stronger

and reliable Portuguese companies.

It is important to keep track of the political scene in Portugal. In the event of new

elections it is almost certain that Portugal would need a new financial rescue

package with important implications in the economic environment, as more

austerity would worsen economic conditions which would affect the corporate

sector and certainly the banking sector. Besides the MoU was signed by the

three main parties, increased instability has risen in the political discussion in the

first half of 2013. Repetitive new austerity measures to face unexpected lower tax

revenues due to worsened economic conditions has been creating instability in

the political scene, as the major opposition party (Socialist party) has demarked

itself from the austerity policy and introduced in its political speech the variable

economic growth, which in their view (correctly) is essential for Portugal to exit

the current recession spiral, however Portuguese citizens must not confuse

economic growth with the need for austerity, as public deficit is still over the

target of 4.5% by final year 2013. The Socialist party has repeatedly asked for

new elections, as the coalition currently in power (Social Democrat party and

Popular party) seem to be continuously chasing the deficit target instead of

having things under control, and demand higher sacrifices to the Portuguese

citizens; moreover there have been signs of internal instability in the coalition, as

the Popular party publicly said that it will not tolerate more sacrifices imposed to

the retirees, as they have already been asked to contribute with a large share.

The President, Mr. Cavaco Silva, has been under pressure, as he is the one with

the power to dissolve the national assembly and impose new elections, however

that hypothesis is still far away, mainly because although the Socialist party is

ahead on recent public polls it does not have a majority of the votes, which would

be an even greater cause of political instability in the country. Thus, the political

speech in Portugal has become more radicalized and less prone to national

consensus, it is true that the probability of new elections is higher than a few

months ago, however it is yet a rather remote possibility.

The Portuguese economy, in the process of correction of the structural

imbalances, will face the third consecutive year of recession in 2013, with a

5 Source: Bloomberg

Political speech is more radicalized, the coalition is facing internal instability and the Socialist party asks for new elections.


PAGE 10/37

projected GDP contraction of 2.3% (Table 2). The internal demand is going to

decrease by 4.2% in 2013, making a cumulative reduction of 17% in the 2011-

2013 period, as the private and public entities are still in the process of

deleveraging and the economic activity worsens. The private consumption,

projected to decrease 3.8% in 2013, is being strongly conditioned by the

increased taxation, both direct and indirect, and also the worsening of the labour

market conditions, with unemployment rising and breaking records in the

country’s history, 15.7% unemployment in 2012 and 18.3% in 20136, reducing

families disposable income. The public consumption is expected to decrease

2.4% in 2013 as the Government is aiming towards a 4.5% public budget deficit

in 2013, to meet the goal established in the MoU with the Troika, however this

target might be relaxed towards a larger number as the economic conditions get

worse than expected. The gross fixed capital formation has been the most hit

economic variable, it is expected to decrease 7.1% in 2013. The depressed

economic activity lowers the will and need to invest in new projects or in

increasing the capacity of existing projects, negatively affecting this variable.

The good news is the adjustment occurring in the external accounts, namely the

current account, which was traditionally negative in Portugal and in 2012 turned

positive to 0.8% of GDP and is projected to be 3.6% positive in 2013. To this

situation is positively contributing the balance of transfers which now represents

5% of GDP and the trade balance which in 2012 was virtually zero and in 2013

became positive by 2.8% and is expected to rise to 3.8% in 2014, as exports

keep rising and imports decrease, mainly affected by the reduction in internal

demand. Exports have been rising significantly mainly due to the extraordinary

behaviour and commitment of Portuguese export companies, which were forced

to search new markets for their products as the domestic market declined

significantly and upgraded themselves into a more efficient and competitive

production of their products; because although exports are rising, that cannot be

explained either by the government’s act or impressive external growth, on the

contrary, government is still very late in the implementation of structural reforms

that would help companies, such as reducing bureaucracy, faster justice system,

lower energy costs due to revision of the so called rent contracts, amongst

others; while the euro-area, the Portuguese main client, had a recession of 0.6%

in 2012 and is expected to have another recession of 0.3% in 2013, which does

not favour Portuguese exports. Apart from that, Exports are expected to rise

2.2% in 2013 and 4.3% in 2014, while imports are expected to decrease 2.9% in

2013 and increase 2.7% in 2014. Negatively contributing to the current account is

the income balance, which in 2012 was of -3.9% of GDP and is expected to stay

6 Source: International Monetary Fund, World Economic Outlook, April 2013

The Portuguese economy will fall 2.3% in 2013, the third consecutive recession. Investment and private consumption are the most hit variables, decreasing 7.1% and 3.8% respectively.

The external adjustment is the only good news during this period of correction of structural imbalances. The current account is expected to be positive by 3.6% of GDP in 2013.


PAGE 11/37

at that level until 2014. Besides the significant improvement in external accounts,

this subject has been away from the main public and political debate, which is

much more focused in the macroeconomic effects of the austerity policy, namely

the unemployment and the economic recession.

Portuguese Economic Projections (2013-2014) All values in Per cent change

2012 2013E 2014F

GDP -3.2 -2.3 1.1

Private Consumption -5.6 -3.8 -0.4

Public Consumption -4.4 -2.4 1.5

GFCF -14.5 -7.1 1.9

Internal Demand -6.8 -4.2 0.4

Exports 3.3 2.2 4.3

Imports -6.9 -2.9 2.7

Inflation 2.8 0.7 1.0

Table 2 : Portuguese Economy Data Source: Bank of Portugal

The economy of the euro-zone decreased 0.6% in 2012 and is expected to

decrease 0.3% in 2013 with a modest growth of 1% in 20147. The fact that the

euro-zone is economically weak does not favour the Portuguese exports, as the

main buyers of Portuguese products are Spain (25%), Germany (13.5%), France

(12.1%) and the United Kingdom (5.1%).

Portuguese Banking System

The main banks in the Portuguese Banking system are Banco Espírito Santo

(BES)8, Banco Comercial Português (BCP)

9, Banco Português de Investimento

(BPI) and the state-owned Caixa Geral de Depósitos (CGD). Contrary to large

European banks who have operations worldwide and to whom domestic revenue

is a small proportion of the entire revenue, Portuguese banks are still much

dependent on domestic results as it still is their primary market; as so, the entire

banking system suffers when the domestic economy enters in recession, as

results from branches and subsidiaries located abroad do not yet have a large

weight on the banks activity. Regarding the stock performance of the main

Portuguese banks (Exhibit 6) we observe that, since the beginning of 2013, BCP

is the bank with the highest appreciation, 40% year to date, BPI is appreciating

4% and BES is losing 20%. Moreover, BPI’s appreciation is in line with PSI 20

7 Source: International Monetary Fund, World Economic Outlook, April 2013

8 Bloomberg ticker: BES PL

9 Bloomberg ticker: BCP PL


PAGE 12/37

index and SX7P index (major banks in Europe), while both BCP and BES have

been deviating in different trajectories from the main Portuguese Index. The fact

that BPI is in line with PSI 20 and SX7P indexes for at least 2 months is in itself a

very interesting fact, which might indicate that the share is now reacting only to

Portuguese and European economic and political news, while internal factors

matter less at this point. In the opposite way, both BCP and BES shares’

behaviour indicate that internal factors still matter in the shares’ valuation. BCP’s

appreciation in 2013 is quite impressive when compared to its peers and

because investors should worry on the capacity of the bank to pay back its loan

to the Portuguese government (subordinated convertible debt); or else, the state

will become a shareholder with a large share of the bank, diluting all other

shareholders10

.

Exhibit 6 - Stock market performance of major Portuguese banks, PSI 20 and

SX7P Indexes.

Regarding the past year, banks had a challenging year, as they had to meet a

Core Tier 1 ratio of 10% by the end of 201211

. To achieve this target BPI and

BCP had to resort to the credit line made available by the government, € 1,500

million and € 3,000 million respectively, along with issuance of new capital while

the state-owned CGD increased its capital by 1,650 million Euros. BES was the

only bank that did not required funds from the state in order to comply with the

regulatory obligations; instead it issued new capital, by the amount of 1,000

million Euros12

. It is important to notice that both BPI and BCP have a strict

schedule do repay the money accessed through the credit line, otherwise the

10

Notice that BCP accessed the state’s credit line by the amount of 3,000 million euro, repayable in 5 years; otherwise it

will convert into ordinary shares. 11

Condition imposed in the MoU 12

Source: BES, 2012 annual report

Source: Bank of Portugal

Exhibit 7: loan Impairments in the Portuguese Banking System


PAGE 13/37

state will become shareholder of the banks, and will have an important stake,

diluting all other investors.

In 2013 banks are facing two great challenges that will have a significant impact

in their balance sheets and will weight negatively on results: loan impairments

and the deleverage program aiming towards a transformation ratio (loan to

deposit ratio) of 120% by year end 201413

. Due to the worsening of the

macroeconomic environment in the last five years, the default on credit payments

have been increasing (Exhibit 7) and it is expected to keep rising as new

austerity measures impact the economy throughout the year of 2013. The

evolution of non-performing loans is expected to follow close the economic

conditions, as so, it is expected that the last quarter of 2013 will be the turning

point in non-performing loans, hopefully initiating a steady decrease of credit loan

defaults. Regarding the achievement of the required Loan to Deposit ratio of

120% by year end 2014, banks have been making a strong effort in deleveraging

their operations since the second semester of 2010 (Exhibits 8 and 9); in June of

2010 the transformation ratio of the whole system was 151% and in June 2012 it

was already 124%, a 27pp reduction in two years. If we look at the total credit

given by banks we can see a clear reduction since June 2010 and June 2012, as

total credit decreased from 345,000 million Euros to 325,000 million Euros,

respectively. Moreover, these are another evidence of the harsh adjustments

being made by the Portuguese economy in the process of deleveraging and

structural reforms.

Since capital markets closed to Portuguese banks, these have relied mainly on

ECB funding, exponentially increasing their exposition to the ECB (Exhibit 10);

however, since the second half of 2012, banks have seen the risk of their debt

consecutively decreasing, in line with what had been happening with the

Portuguese public debt and have started to decrease their exposition to ECB

funding, as other financing alternatives appear. An example of that was that BES

issued a 3 year, 750 million Euros Bond, in October 2012, re-opening debt

markets for Portuguese banks. Moreover, we might witness, during 2013, more

Portuguese bank’s debt issues.

13

Conditions imposed to European banks

Exhibit 9: Total credit in the Portuguese Banking System



Exhibit 8: Loan-to-Deposits ratio in the

Portuguese Banking System


Exhibit 10: ECB funding of Portuguese

Banks


PAGE 14/37

Valuation of Banco BPI in Portugal

To value Banco BPI in the domestic market we developed two scenarios: the

scenario under which the expected macroeconomic variables materialize, which

we call “Base Scenario” and the scenario under which Portugal leaves the Euro-

Zone and returns to the old currency the Portuguese Escudo, which we call

“Exiting the Euro Scenario”. In our valuation we attribute a 5% probability of

Portugal leaving the Euro. When analyzing the possibility of Portugal leaving the

Euro we took into account two things: the yields on Portuguese government

bonds and a few studies/opinions related to the subject. The consistent decrease

in yields of Portuguese government bonds leads to think that the market is each

and each day attributing a lower probability of things going wrong in Portugal,

and consequently of leaving the Euro. In addition, several economists attributed

between 1% to 25% probability of Portugal leaving the Euro during the past 12

months, with Paul Krugman and Roubini amongst them. Moreover, along our

valuation report on BPI, we embraced a cautiously pessimistic view of the bank,

as the bank is struggling in a depressed economy full of problems. Thus, we

believe that 5% probability of Portugal leaving the Euro is adequate, when

looking at the current economic, political and social environments.

Base Scenario

The key assumption of the base scenario is that macroeconomic conditions will

follow the current expectations of the behavior of the economy in the years to

come. According to IMF’s latest economic report14

, the Portuguese economy will

only start growing in 2014, a very slow growth of 0.64%, followed by another

modest growth in 2015 and 2016 of 1.5% and 1.8% respectively. Regarding total

investment, it is forecasted to grow 3% in 2014, 9% in 2015 and 8% in 2016,

following a huge contraction in the period 2008-2013 of 42%; on the other hand,

gross national savings have increased 48% in the same period.

Regarding the bank’s activity we forecast a decrease in loans granted in 2013 of

4.7%, with corporate loans decreasing 5.6% and consumer loans decreasing

4.5%15

as both the investment and GDP reach the bottom of their values during

the 2008-2013 period, -42% for investment and -8% for cumulative GDP growth.

Only from 2014 onwards we forecast an increase in corporate and consumer

loans: corporate loans will increase 8% in 2014, 9.3% in 2015 and 11.3% in

2016, following the rise in investment, better economic prospects, the effect of

the structural reforms and as the government’s pro-economic and pro-investment

growth measures take action. Regarding consumer loans we also forecast

14

Source: International Monetary Fund, World Economic Outlook, April 2013. 15

We also forecast foreign loans to decrease 2.5% in 2013.

The Valuation of the Domestic Activity attributes a 5% probability of Portugal leaving the Euro. The consequences of such a scenario would be extremely severe to the shareholders of the bank.


PAGE 15/37

growth for the same period, with consumer loans increasing 8%, 8.4% and 9.3%

in 2014, 2015 and 2016 respectively.

Non-performing loans are still one of the most serious problems of the bank,

which is far from being solved. In 2012 loan impairments rose from € 135 million

in 2011 to € 254 million, this represents 0.91% of total loans. In 2013 we forecast

loan impairments to decrease to € 174 million, and further more in 2014 to € 156

million, € 153 million in 2015 and € 150 million in 2016. We believe that loan

impairments have reached their peak in 2012 as it was the hardest recession

during this three year period of recessions. In 2013 and 2014 we expect that loan

impairments decrease steadily as the economic conditions and corporate

financing conditions improve, letting companies finance their daily activities,

which have been almost impossible for a large number of companies in 2011 and

in 2012, leading to mass bankruptcy in the corporate sector.

In respect to deposits, we expect 2013 to be a year of slight growth of deposits,

only 3.5%. Deposits are subject to opposite forces, in one hand, the decline of

GDP and consequent decline in families’ income are putting pressure on

deposits, on the other hand, gross savings are increasing and the banking

system is looking to deposits as a way of financing, since financial markets are

still almost close for Portuguese banks. So, it is in these set of forces that

deposits are depending on, moreover, it is our prediction that the strong growth of

gross savings and the willingness to capture deposits will overcome the

downward pressure on deposits. In the years to come we forecast a steady

growth of deposits, 2.4%, 8% and 10% for 2014, 2015 and 2016 respectively.

It is extremely important to have an idea on what will be the interest rates

charged by the bank on loans and what will be the interest rates paid for deposits

when predicting a crucial source of revenue for the bank, the net interest income.

We begin by describing our forecast of future Euribor rates (Exhibit 11), which in

turn will be responsible for the determination of both interest rates on loans and

deposits. Our analysis was based on inflation expectations and expected GDP

growth in the euro-zone, which will be very modest, with inflation under 1.75%

from 2013 until 2016 and GDP slowly growing at an annual average of 1% until

2016, in this way, our forecasts for Euribor rates reflect the slow economic

recovery. Our analysis assume an Euribor 3 month of 0.3% in 2013, 0.75% in

2014, 1% in 2015 and 1.5% in 2016; an Euribor 6 month of 0.5% in 2013, 1% in

2014, 1.5% in 2014 and 2% in 2016 and an Euribor 12 month of 0.75% in 2013,

1.25% in 2014, 1.75% in 2015 and 2.25% in 2016.

As discussed before as one of the problems of the Portuguese banking system,

banks are facing huge difficulties as financing costs rose in the last three years

but many of the consumer long-term loans are contracted with extremely low and

Exhibit 11: Euribor Rates Forecasts

Source: NOVA ER Team

Non-performing loans will only decrease in the last quarter of this year or first quarter of the next year, when the economic activity is expected to start growing.


PAGE 16/37

even zero % spreads, crushing net interest margins, which in 2013 is expected to

be 0.83% in the domestic activity, slowly increasing in the years to come (Exhibit

12). On the contrary, in the case of the corporate loans, many of the debt is in

form of current accounts and short maturity loans, whose new contracts can be

changed must easier than those of consumer loans. As a consequence, banks

are demanding higher spreads to corporate loans, as it is the only alternative to

face the new financing costs, as most of the consumer loans are long-term and

impossible to change the contracted terms (e.g. Mortgage loans). In our valuation

we take this situation into account, where interest rates on consumer loans

increased slower than on corporate loans.

We forecast that in 2013 the domestic activity will have negative results of € 74

million, mostly penalized by reduced margins due to the rising costs of financing

and locked contracts on mortgage loans, with net interest income totalizing € 317

million. Fees and commissions will stay in line with previous years amounting to €

244 million. The main contributor to 2011’s negative results and 2012’s profit is

the activity developed by the capital markets division. In 2013 we also forecast

good results in this division as Portuguese government bonds held by the bank

keep appreciating and yields declining, we estimate a result of € 214 million. On

the bank’s expenses both administrative and staff costs and depreciations will

remain in line with previous years, representing altogether € 544 million. Total

impairments will decrease to € 347 million. The banking income will be € 775

million and total costs will sum € 891 million, leading to negative earnings before

taxes and minorities of € 116 million. The table 3, below, represents our

estimates for the domestic activity until 2016:

Banco BPI (Mn Euro) - Domestic Activity

Income Statement 2013F 2014F 2015F 2016F

Net Interest Income 317 426 473 560

Fees and Commissions 244 265 288 318

Capital Markets Results 214 224 242 267

Banking Income 775 914 1002 1145

Staff and Administrative costs 522 494 494 515

Depreciations 22 23 24 25

Provisions and Impairments 347 307 333 289

Operating costs 891 824 851 829

EBT -116 90 151 316

Taxes and Minorities -42 13 30 78

Net Income -74 77 121 238

Table 3 : Forecast of Domestic Activity Source: NOVA ER Team

Exhibit 12: Net Interest Margin in the

Domestic Activity



PAGE 17/37

Exiting the Euro Scenario

Some economists argue that the main problem of Portugal is the Euro for several

different reasons: First, the Euro is a strong and appreciated currency which

makes many of the Portuguese industry uncompetitive under the global

competition, partially because our industry adds low added value to its products,

making the cost of production an important variable to compete in foreign

markets. Secondly, with its own currency, Portugal would be able to expand

public consumption, which is in their view is essential to start the recovery of the

economy and stop the rising of unemployment. Other reasons are many times

presented in favor of leaving the Euro. Moreover, there is also the possibility of

Portugal being forced to leave the Euro, if the European Union decides not to

finance Portugal furthermore and if financial markets are closed to the country.

Although remote, there is the real possibility of this scenario to happen, which

would have a major impact in BPI, changing all our forecasts of the domestic

activity.

We assume that Portugal would leave the Euro in the near future, namely in

January 1st 2014 to facilitate. In that moment it is almost certain that deposits

would be converted to the returned Portuguese Escudo and frozen for at least a

few days to avoid bank runs, moreover, all domestic or foreign loans would be

converted to Escudos as well. The main problem for the bank would be the debt

issued in Euros in financial markets, which would probably stay denominated in

Euros, implying an increase identical to the devaluation of the Escudo.

When thinking of the macroeconomic conditions resulting from the exiting of the

euro, we looked carefully at the Argentinian example and its crisis of 1999-2002

and inferred the consequences on the Portuguese economy. We predict that

GDP will fall 10% in 2014, and then growth resumes at 4% in 2015 and 2016.

Total investment will fall by 25% in 2014 as response to the abrupt fall in GDP; it

will remain unchanged in 2015 and will grow 25% in 2016. As with what

happened in Argentina, inflation will soar to 15% in 2014, but then slowing to 8%

in 2015 and 5% in 2016. Unemployment rate will reach 25% according to our

forecasts, but then starts decreasing at 1.5 percentage points per year. In relation

to the exchange rate of the Euro/Escudo we believe that at the moment of the

conversion, by political decision the Escudo would return to its pre-Euro value,

which is 200.482 Escudos per Euro. However, we believe the Escudo would

devalue significantly in the next few days, with several studies pointing to

devaluations between 25%-50%; moreover, the Argentinian currency devalued

66% during the currency crisis. In our valuation we will assume a devaluation of

The internal discussion on whether Portugal should leave the Euro or not is not finished, as both sides recognize pros

and cons on either option.

Leaving the Euro would cost the reborn Portuguese Escudo a devaluation of cerca 40%.


PAGE 18/37

40%, implying an exchange rate moving from 200.482 Escudos per Euro to

283.65 Escudos per Euro.

Regarding the bank’s activity we forecast a decrease in loans granted of 9% to

the corporate sector and a reduction of 11% in the consumer loans, both in 2014,

with investment reduction and GDP negative growth clearly crushing any new

investment prospect. In 2015 and 2016 the situation improves clearly, as

investment and GDP start growing, with corporate loans increasing 4% in 2015

and 12.5% in 2016, consumer loans will increase 3% and 10% in 2015 and 2016

respectively. In respect to non-performing loans, we expect an exponential rise in

2014 to 15%, as what happened in Argentina in 2000 and 2001, due to the GDP

and investment shrunk, combined with unemployment rise, which directly affects

non-performing loans, but also the instability caused by the change of currency

and devaluation process. In the following years we expect this number to come

down to 5% in 2015 and 3% in 2016, as a better macroeconomic environment

and the regain competitiveness of the economy starts generating employment

and investment growth.

Like in Argentina during the crisis and even more recently in Cyprus, bank

deposits will be frozen for at least a few days in order to avoid bank runs.

Moreover, all deposits will be converted to Escudos and depositors will suffer the

devaluation in their savings. Although being frozen, we forecast a decline of 4%

in deposits in 2014, as a result of the instability created by the change of

currency and the fact that some agents moved part of their savings to other

products, namely gold or foreign investments. In 2015 and 2016 we forecast

growth of deposits of 5% and 11% respectively, as the economic conditions

improve and the money returns to the traditional deposits.

In 2014 and 2015 the bank will have heavy negative results, resulting mainly from

impairments, which will amount to € 2500 million in 2014, six times the 2013

impairments value and € 600 million in 2015. Net income will be negative by the

amount of € 1,900 million in 2014 and € 250 million in 2015, however 2016 will be

the recovery year, with net income rebounding to € 106 million. The bank will

need a capital increase in 2014 to face the large loss of that same year, as past

reserves are crushed by the exponential rise of impairments, leaving total equity

negative. We forecast a capital increase of no less than € 2,000 million, to face

the 2014 loss and provide the bank the liquidity it needs to face the year of 2015

with some capital buffer. If the capital increase succeeds, total equity will soon be

at pre-crisis levels, € 1,000 million in 2015 and € 1,400 million in 2016. The

forecasts for the Domestic activity under the scenario of “Exiting the Euro” are

presented in the table 4 and 5 below:


PAGE 19/37

Banco BPI (Mn Euro and Mn Portuguese Escudo) – Domestic Activity


Net Interest Income 329 -7.754 88.023 111.447

Fees and Commissions 271 64.504 74.125 83.576

Capital Markets Results 223 49.161 60.048 85.267

Banking Income 823 105.911 222.196 280.290

Staff and Administrative costs 543 123.958 123.400 129.768

Depreciations 22 5.090 5.141 5.887

Provisions and Impairments 380 706.138 193.913 104.123

Operating costs 946 835.187 322.454 239.779

EBT -122 -729.276 -100.258 40.511

Taxes and Minorities -44 -185.474 -28.283 8.401

Net Income -74 -543.801 -71.975 32.110


Banco BPI (Mn Euro) – Domestic Activity


Net Interest Income 329 -27 314 368 Fees and Commissions 271 227 265 276 Capital Markets Results 223 173 214 282 Banking Income 823 373 793 927 Staff and Administrative costs 543 437 441 429 Depreciations 22 18 18 19 Provisions and Impairments 380 2.489 692 344 Operating costs 946 2.944 1.151 793 EBT -122 -2.571 -358 134 Taxes and Minorities -44 -654 -101 28 Net Income -74 -1.917 -257 106


The repayment of the CoCos

Before entering in detail on the schedule of repayment of the CoCos by BPI, we

will briefly describe the origin of these convertible bonds. All Portuguese banks

had to comply with a Core Tier I ratio of 10% by final year 2012; however, BPI

was below it (9.2% in final year 2011) and in June of 2012 BPI issued “contingent

convertible subordinated bonds” (CoCos) totally subscribed by the Portuguese

Republic which are eligible for Core Tier I purposes and allowed BPI to reach a


PAGE 20/37

Core Tier I ratio of 15%. These CoCos amounted to € 1,500 million at the issue

date, but BPI repaid immediately € 200 million16

and more recently three other

repayments of € 100 million, € 200 million and € 100 million respectively, leaving

nowadays € 900 million outstanding of the convertible bonds. During the period

of the convertible bonds (5 years) BPI has to pay increasing interests to the

State, 8.5%, 8.75%, 9%, 9.5% and 10% per year respectively. If the loan is not

fully repaid at the due date, the amount outstanding will convert to capital, diluting

every other shareholder. The board of directors of BPI wants to repay the CoCos

as soon as possible, to avoid partial nationalization; however it is not an easy

task under the current economic environment.

Hereinafter we will describe the possible repayment schedule of the CoCos by

BPI according to our estimates. We assume that BPI in Portugal will repay the

CoCos on its own, without touching Angola’s or Mozambique’s subsidiary’s

results. In this way we get a better perception on how difficult it is for the

domestic activity of the bank to face the current macroeconomic conditions and

what is the true value of the domestic activity on its own; without misleading the

final price target calculation, as the foreign activity is compensating for lower

domestic returns.

In the base scenario, we assume that the amount outstanding of CoCos in final

year 2013 is € 900 million, as we forecast a negative net income for that year, not

allowing for further repayments. In 2014 we forecast a net income of € 77 million

which by law decree must be fully allocated to the repayment of CoCos, as the

decree states that during the period of the loan, while there is still an amount to

be repaid to the State, the banks are not allowed to distribute dividends. In this

way in final year 2014 the CoCos outstanding are still worth € 823 million. In

2015 the net income is expected to be € 121 million, reducing the CoCos to €

702 million. In 2016, the domestic activity will have positive results of € 238

million, implying a reduction in CoCos to € 464 million by final year 2016. As the

CoCos must be fully repaid after five years of the issue date, June 2017, we

believe the bank will have to raise capital somewhere in the second semester of

2016 to make sure it fully repays the State’s loan by the due date. We estimate

that capital increase operation to aim towards a € 450 - € 500 million new capital

target, assuring the full repayment of the CoCos, and avoiding partial

nationalization. The detailed repayment schedule can be seen in the exhibit 13

below:

16

The € 200 million were raised through a capital increase in August 2012.


PAGE 21/37

Under the leaving the Euro scenario, the repayment is much more difficult for

BPI, as the bank suffers huge losses in 2013, 2014 and 2015, but particularly in

2014. Until 2015 the remaining € 900 million worth in CoCos will remain

unchanged, as the bank is struggling to finance its equity, setting aside the

CoCOs matter for a while. However in 2016 the bank will already be able to

repay part of the loan, € 106 million, leaving € 794 million to be repaid. As we

analyzed before, under this scenario, we already forecast a capital increase of €

2,000 million in 2014, but in 2016 we see no other alternative but to raise capital

again to repay the remaining CoCos in the amount of € 738 million17

. The

detailed repayment schedule can be seen in exhibit 14 below:

17

It is € 738 million instead of € 794 million due to the new exchange rate of 302.48 Escudos per Euro.


PAGE 22/37

Angola

Angola has become a fast-growing economy since the end of its civil-war in

2002. Prior to that, 26 years of civil-war following the Independence from

Portugal led to a significant destruction of the public infrastructure, as well as

economic enterprises. Since 2002 the Angolan economy grew at an average

annual rate of more than 11%, turning Angola into one of the fastest growing

countries in the world. Moreover, the economic growth is expected to keep its

strong momentum, with real GDP expected to rise at an average annual rate of

6% from 2013 until 2018, investment rising at an average annual rate of 6% and

inflation at 8% per annum for the same period18

. Although Angola is growing

impressively, it is still a poor country, with a huge required transformation still

ahead. It has been only a decade since the country started to rebuild roads,

schools, hospitals, public sanitation, etc. The Angolan GDP is much dependent of

the oil sector, which represents 47% of the product, followed by 30% of non-

transacted services, 10% agriculture and only 6% of non-oil industry. According

to independent oil-experts Angola, with its recent oil discoveries, might have

significant production for the next 50 years, reaching the production of 2 million

barrels per day in 2014. Agriculture will also be an important sector in the near

future, completely abandoned, of all agricultural area only 6% is now explored,

when explored can make Angola one of the main agricultural powers in Africa.

Communications and construction also play an important role in the Angolan

economy, and will remain important as the country keeps rebuilding itself after

the long and devastating civil-war.

The competition in the banking sector has allowed a growing access of the

population to the Angolan banking system in the country, as the major banks

seek to be present in the 18 domestic provinces. Moreover, we developed a

study in which we forecast the Angolan population access to the banking system

until 2017. According to our study population access to banks in Angola will

increase from 34% in 2013 to 70% in 2017, which will represent 16 million

persons with access to banking services (Exhibit 15). The increase in access of

banks, by the Angolan population will increase at an annual average rate of 31%

per year (Exhibit 16). This study gives us an indication of the potential of the

Angolan market for banks, as it is a country in fast development.

Banco de Fomento Angola (BFA) is the Angolan subsidiary of BPI. Angola is a

country with significant ties to Portugal by historical reasons; both countries share

the same language, a huge presence of Portuguese companies are currently

working in Angola, trade and residence authorization agreements make possible

18

Source: International Monetary Fund, World Economic Outlook, April 2013.

Exhibit 15: Population access to

banks in Angola


Exhibit 15: Population access to banks in Angola



PAGE 23/37

the significant trade made between the two countries and the large community of

Portuguese citizens living in Angola and vice-versa, so it was an obvious

geography for BPI to expand its foreign operations. BFA is currently the fourth

bank in Angola by assets, having a market share in deposits of 16.4% and

leadership positions in the ATM’s and APT’s segment. The bank has 158

branches and more than 2000 employees.

Scenarios for BFA in Angola

Angola is a promising country, which lately has been focused in rebuilding its

infrastructure and developing the living conditions of its population, mainly with

the income generated by the oil industry. Angola has become an important oil

exporter, selling more than 2 million barrels a day, but also extremely dependent

on oil prices. One of the important issues that will influence the Angolan economy

prospects in the future is the possible discovery of new wells and the oil price.

Another important question is the succession of the current President, José

Eduardo dos Santos, who rules Angola since 1979. Nowadays his authority is

recognized and respected by everyone, i.e. military officials and other members

of the Angolan elite; however, if the Angolan succession is not prepared while

José Eduardo dos Santos is still alive, to assure a quiet and peaceful succession,

and for some reason José Eduardo dos Santos dies in the meanwhile, there

might be a huge problem in the succession of the country, as the military elite

fight amongst themselves to succeed the current president, possibly leading the

country to another civil-war.

In the case of the valuation of the Angolan subsidiary, as for the Mozambique’s

subsidiary, we built four different scenarios: a bad, a disappointing, a normal

and a good scenarios. The valuation of the different scenarios can be seen in the

Valuation Summary section, on page 29.

The bad scenario (1) reflects precisely the possibility of a succession problem in

Angola, with the country facing huge instability and possibly a civil-war of two to

three years, resulting both in a new leadership and new elite in the country. This

scenario is obviously the worst scenario for BFA, as the macroeconomic

conditions resulting from a civil-war are devastating and issues relating to credit

defaults and the recognition of impairments. Under such a scenario we forecast

at the macroeconomic level a decrease in GDP of 10% in 2014 and a reduction

of 5% in 2015; as for investment we forecast a reduction of 25% in 2014 and in

2015. Regarding the exchange rate, we forecast a devaluation of 50% in the

Kwanza, which in 2013 traded at 136 Kwanzas per Euro, passing to 217

Kwanzas per Euro in 2014. As for the bank’s activity, we forecast credit

impairments to rise significantly, as non-performing loans rise to 20% in 2014,


PAGE 24/37

and 15% for 2015 and 2016. Government bonds will suffer a haircut of 60% in

2014 and 20% in 2015, resulting in more impairments, which will deeply penalize

the bank’s results. Total loans decrease 15% in 2014 and in 2015, suffering from

the decrease in investment and the closure of some business. As of customers’

deposits we forecast a 25% reduction in 2014, followed by 2% rise in the

following years, resulting from money withdraws as a protective measure taken

by individuals and companies who have money in the bank. Moreover, this

situation is dependent on possible restrictive measures taken by the National

Bank of Angola, not allowing money withdraws, however in the case of a situation

like this it is highly probable that the elites will take their money out of the country

in the days before the decision by the National Bank is made.

The bank’s results will be extremely negative in 2014 and in 2015: -

123,000,000,000 Kwanzas in 2014 and –20,000,000,000 Kwanzas in 2015, with

2016 being slightly positive. Defaults on loans and government bonds are the

main cause of these results, with impairments in 2014 being over

200,000,000,000 Kwanzas, compared to 4,638,000,000 Kwanzas in 2013. The

main source of revenue of the bank, net interest income, will decrease 48% to

14,023,000,000 Kwanzas in 2014 and further 34% in 2015. BFA’s equity is

completely evaporated in 2014, imposing an emergency capital increase of, at

least, 200,000,000,000 Kwanzas or over 900,000,000 Euros at the new

exchange rate of 218 Kwanzas per Euro.

The disappointing scenario (2) is a scenario which represents the activity of the

bank in the case of a deterioration in the macroeconomic conditions, namely a

decrease in the GDP growth prospects and lower investment than the predicted,

i.e. a general macroeconomic slowdown. This situation can result from a

permanent decrease in the price of oil in the global markets which deeply affects

the Angolan economy, highly dependent on oil production and exports. A

permanent decrease in oil prices is not completely irrational, as alternative

energy sources appear, namely the Shale Gas in the United States, possibly

leading to a new wave of cheap energy as happen with oil from the end of the

second world war until the oil shocks of the seventies.

Under this scenario, we predict the macroeconomic variables to perform

relatively bad when compared to the actual expectations: the GDP will grow only

at 2% per year from 2014 to 2016, and investment will decline 10% in 2014, 5%

in 2015 and will be unchanged in 2016. The bank will be directly affected by an

increase in underperforming loans to 8% during these years, with credit

increasing only 3%, 5% and 7% in 2014, 2015 and 2016 respectively. Customer

Deposits will increase at 5% per year. Under this scenario the return on equity is


PAGE 25/37

still quite impressive, 25% per year since 2014 until 2016, however far below the

36% return on equity from 2008 until 2013.

The normal scenario (3) is the scenario under which all IMF expectations over

the Angolan economy materialize: GDP will grow at 7% from 2014 until 2016,

investment will decline 3% in 2014 and then will grow 3% in 2015 and in 2016.

The bank is expected to have good results under this scenario, the most likely

one, as the return on equity will be 31% per year from 2014 until 2016, however

the bank is strongly capitalized, with 20% of its net income going to reserves. In

the normal scenario loan impairments will be 5.78% per year throughout the

period of analysis, maintaining the average of the past periods which had similar

macroeconomic conditions. Credit loans will grow at an annual average rate of

21% from 2014 until 2016, with customer deposits rising 8% per year in the same

period; significantly lower than the growth rate of loans, as the bank is trying to

increase its loan-to-deposit ratio, which is 25% in 2013, which in turn will improve

the net interest margin.

The good scenario (4) is dependent on the same variable as the disappointing

scenario, oil. In this case, the good scenario happens in the case of a permanent

rise in the price of oil or in the case of significant new oil wells discoveries in

Angola, increasing the production of oil permanently. The macroeconomic

environment will generally improve as GDP grows faster and investment rising.

We forecast GDP to rise 9% per year from 2014 until 2016 and investment rising

3% in 2014 and 8% in 2015 and 2016. Under this scenario non-performing loans

will rise to 5.78% with loans rising 28% in 2014 and in 2015. Customer deposits

will grow 9% per year from 2013 until 2016. Return on equity will be 31% per

year, below the average of 36% from 2008 until 2013; however the bank is

strongly capitalized, as in the case of the normal scenario.


PAGE 26/37

Mozambique

Mozambique has lately turned into a fast-growing economy, with real GDP

expected to rise at an average annual rate of 8% from 2013 until 2018,

investment growing at an average annual rate of 12% and inflation below 6% for

the same period19

. Besides the impressive Macroeconomic projections,

Mozambique is still a very poor country, listed 165 in the World Bank´s Human

Development Index, with 31% of GDP coming from agriculture and fishery,

employing 77% of the labor force, with only 8% employed in Industry and 15% in

services. The Mozambique’s economy is expected to suffer huge transformations

in the next few years, as the Natural Gas and Coal explorations develop, turning

the country into an important exporter of such raw materials. The development of

further important industries such as cement, furniture, food and beverages will

also be important in the diversification of the country’s exports. The development

of the industry sector will require better communication routes, namely through

the construction of roads, railways, ports and airports; moreover the investment

on renewable energy will force the construction of new dams providing larger

energy independence of the country. The development of tourism is also a

strategic objective that the government is willing to focus on.

Banco Comercial e de Investimentos (BCI) is the Mozambique’s subsidiary of

BPI. Mozambique is a natural geography for BPI to develop its foreign activity as

the country has tight relations with Portugal, namely sharing the same language,

having bilateral trade agreements, innumerous Portuguese companies are

operating in Mozambique and a large share of Portuguese citizens are living in

Mozambique and vice-versa. BCI is the second largest bank operating in

Mozambique by banking revenue, with a market share of 30.22% in loans and

29.18% in deposits, serving over 550.000 clients and 128 branches across the

country20

.

Scenarios for BCI in Mozambique

Although Mozambique is in the pace of modernization and stabilization of its

economy, it is still a developing country, subject to a large number of factors that

might change the macroeconomic environment and affect the activity of BCI,

such as: Political and social unrest due to poor living conditions, leading to a

decrease in GDP, investment and rise of inflation; or the Discovery of new natural

Gas wells and consequent rise in GDP growth and investment. The last two

scenarios are extreme and opposite, but possible for Mozambique in the near

19

Source: International Monetary Fund, World Economic Outlook, April 2013 20

Source: BCI’s annual report, 2012


PAGE 27/37

future, and as so, we must account for it in our BCI’s projections. In this way, we

analyzed and took into account in the valuation of BCI four different scenarios,

with different probabilities, depending on the characteristics of each of the

scenarios. We built projections for the bank’s activity under each of the scenarios

and then computed the expected FCFE weighting the different scenarios. We

constructed a bad, a disappointing, a normal and a good scenarios. The

valuation of the different scenarios can be seen in the Valuation Summary

section, on page 29.

The bad scenario (1) reflects the remote but existing possibility of a political or

social unrest, leading to a change of government and possibly of regime,

implying huge instability in the country. In this scenario, we foresee a tremendous

impact at the macroeconomic level, with a reduction in GDP of 10% for 2014, 5%

in 2015 and 0% GDP growth in 2016; for investment we forecast a reduction of

25% in 2014 and 2015 and 0% in 2016, and finally a very important variable the

exchange rate; which we assume to devalue 50%, from 42 Metical per Euro in

2013 to 66 Metical per Euro in 2014, something common in events such as

revolutions and very unstable periods. At the bank’s level, the situation can be

more or less severe depending on the measures taken by the new government,

regarding the freezing of deposits and the payment of Government Bonds.

Moreover we forecast an 80% haircut in Government Bonds in 2014, and another

20% in 2015, implying huge impairments to be recognized by the bank.

Regarding the Loans portfolio, we forecast a great rise in general credit defaults,

10% in 2014 and 5% in 2015; and also a decrease in loans granted of 15% in

2014 and 2015; as the instability in the country freezes any new investments, and

the severe recession will imply several defaults. As for deposits, the policy

adopted by the Central Bank will be crucial in terms of freezing deposits for some

days, in order to avoid bank runs; however we introduced a partial deposit’s run

of 20% in 2014, as a response to the instability, followed by 0% and 4% growth in

2015 and 2016 respectively, as confidence returns.

The consequence of these predictions in the bank’s balance sheet and income

statement is that the bank will have extremely negative results in 2014 and 2015,

with only 2016 being the recovery year. In 2014 we predict more than

9,000,000,000 AOA of impairments, resulting from defaults on both credit loans

and Government Bonds, comparing to 350,000,000 AOA in 2013. Net Interest

Income will suffer a large reduction, which, combined with impairments, cause a

negative Net Income of more than 7,000,000,000 AOA in 2014 and

1,600,000,000 in 2015. In 2014, as a result of the huge amount of impairments,

we believe that BCI will need a capital inflow of 10,000,000,000 AOA in form of

share capital, in order to prevent Equity of being negative.


PAGE 28/37

The disappointing scenario (2) reflects the possibility of a decrease in the

expected GDP growth and investment growth resulting from a deceleration of the

global and regional economies, with less demand for Mozambique’s exports and

also internal factors that might decrease the economic prospects. In this scenario

we foresee at the macroeconomic level a GDP growth of 2% throughout 2014,

205 and 2016; for investment we forecast a 20% growth in 2014 followed by 0%

growth in 2015 and -5% in 2016. At the bank’s level, we forecast a rise in credit

defaults to 4% in 2014 and 3% in 2015 and in 2016. The credit loans evolution

will be less optimistic than what the “normal scenario” expects, with loans

increasing 30% in 2014 and 10% in 2015 and 2016. As for deposits, we forecast

an increase of 12% per year. In this scenario no share capital increase is

necessary, however the return on equity is lower than in previous years, 16% in

2014 and in 2015 and 24% in 2016, comparing to an average of 25% from 2008

until 2013.

The normal scenario (3) reflects the possibility of maintenance of the expected

GDP and investment growth rates as forecasted by the IMF in its world economic

outlook: GDP growth of 8% from 2014 until 2016 with investment growing 54% in

2014, 5% in 2015 and -1% in 2016. In this case, at the bank’s level, we forecast

loan impairments to follow the past years behavior, around 2.72% per year.

Regarding credit loans we forecast growth rates of 50% in 2013, 20% in 2015

and 14% in 2016, reflecting the high investment expected to occur in the country

and great GDP growth prospects. Customer deposits will grow around 20% along

the years of 2014, 2015 and 2016, giving the bank a loan-to-deposit ratio of 95%

in those same years. In this scenario the bank will be capable of delivering high

returns to its investors, 26% return on equity from 2013 until 2016.

The good scenario (4) reflects the possibility of an increase in the expected

GDP and investment growth rates, as a result of more Natural Gas wells

discovered and further momentum on the Mozambique’s economy as well as

better economic conditions in the region. With the discovery of more Natural Gas

it is expected to have a positive contagious effect on the overall economy,

boosting investment and the growth of GDP. As so, in this scenario, we forecast

at the macroeconomic level a GDP growth of 10% for 2014, 2015 and 2016; as

for investment we forecast a rise of 60% in 2014, 20% in 2015 and 10% in 2016.

At the bank’s level, we forecast a decrease in credit defaults to 2% in 2014 and

2015 and 2016; an increase in loans granted of 50% in 2014, 20% in 2015 and

14% in 2016. Regarding the customer deposits we forecast a growth rate of 20%

for the years of 2014, 2015 and 2016, increasing the loan-to-deposit ratio of the

bank to 101%. Under this scenario the bank will be able to provide a return on

equity of more than 28%, achieving 31% in 2015 and 2016.


PAGE 29/37


PAGE 30/37

Valuation Summary

Portugal – Banco BPI

FCFE description by Scenario and Aggregated FCFE

Base Scenario 2013F 2014F 2015F 2016F Terminal

Net Income -74 77 121 238 2426

Retained Earnings 0 77 121 702 485

FCFE -74 0 0 -464 1941

Exit of the Euro Scenario (Euros) 2013F 2014F 2015F 2016F Terminal

Net Income -74 -1917 -257 106 1083

Retained Earnings 0 2000 0 106 1063

FCFE -3917 -257 0 21

FCFE 2013F 2014F 2015F 2016F Terminal

Base Scenario -74 0 0 -464 1941

Exit of the Euro Scenario (Euros) -74 -3917 -257 0 21

Euros 2013F 2014F 2015F 2016F Terminal

Aggregated FCFE -74 -196 -13 -441 1845 Discounted FCFE -66 -156 -9 -281 1177

Table 6 : Domestic Valuation Source: NOVA ER Team

Present Value of BPI’s domestic activity

PV 664.369.228 € Nº Shares 1.390.000.000 Price per share 0,48

Table 7 : Price Target Source: NOVA ER Team


PAGE 31/37

Angola – Banco de Fomento Angola

Banco de Fomento Angola – FCFE description by Scenario and Aggregated FCFE

FCFE in Kwanzas 2013F 2014F 2015F 2016F Terminal Probability of Scenario

Scenario 1 FCFE 19.137 -322.799 -19.573 4.510 58.990 20%

Scenario 2 FCFE 18.803 16.822 15.912 16.814 276.505 25%

Scenario 3 FCFE 19.572 21.047 22.674 26.270 437.342 40%

Scenario 4 FCFE 19.765 21.736 23.795 28.106 472.685 15%

Exchange Rates EUR/AOA 2013F 2014F 2015F 2016F

Scenario 1 136,69 217,77 226,29 235,46

Scenario 2 136,69 139,88 142,60 145,58

Scenario 3 136,69 145,18 150,86 156,97

Scenario 4 136,69 150,59 159,43 169,02

FCFE in Euros 2013F 2014F 2015F 2016F Terminal

Scenario 1 140 -1482 -86 19 251

Scenario 2 138 120 112 115 1899

Scenario 3 143 145 150 167 2786

Scenario 4 145 144 149 166 2797


Aggregated FCFE 141 -187 93 125 2059

Discounted FCFE 130 -159 73 90 1485

Table 8 : Angolan Subsidiary Valuation Source: NOVA ER Team

Present Value of Banco de Fomento Angola

PV 1.619.355.236 €

Nº Shares 1.305.561.000

Price per share 1,24 €

Price per share (BPI = 50,08%) 0,62 €



PAGE 32/37

Mozambique – Banco Comercial e de Investimentos

Banco Comercial e de Investimentos – FCFE description by Scenario and Aggregated FCFE

FCFE in Meticais 2013F 2014F 2015F 2016F Terminal Probability of Scenario

Scenario 1 FCFE 894 -17256 -1670 0 701 20%

Scenario 2 FCFE 690 556 600 1151 13756 25%

Scenario 3 FCFE 690 1297 1465 1532 18584 40%

Scenario 4 FCFE 666 1352 1698 2007 24644 15%

Exchange Rates EUR/MZN 2013F 2014F 2015F 2016F

Scenario 1 42,18 66,13 68,52 71,03

Scenario 2 42,18 42,43 43,13 43,87

Scenario 3 42,18 44,09 45,68 47,36

Scenario 4 42,18 45,77 48,32 51,05

FCFE in Euros 2013F 2014F 2015F 2016F Terminal

Scenario 1 21 -261 -24 0 10

Scenario 2 16 13 14 26 314

Scenario 3 16 29 32 32 392

Scenario 4 16 30 35 39 483


Aggregated FCFE 17 -33 17 25 310

Discounted FCFE 16 -27 12 17 208

Table 10 : Mozambique’s Subsidiary Valuation Source: NOVA ER Team

Present Value of Banco Comercial e de Investimentos

PV 226.213.322 € Nº Shares 300.000.000 Price per share 0,75 € Price per share (BPI = 30%) 0,23 €



PAGE 33/37

Price Target Final year 2013 – Sum of the Parts

Banco BPI, SA Consolidated - Sum of the Parts

Price per Share in Euros

Banco BPI - Portugal 0,48 €

BFA - Angola 0,62 €

BCI - Mozambique 0,23 €

Price target

Banco BPI, SA 1,33 €



PAGE 34/37

Appendix

Consolidated Banco BPI (Mn Euro)

Income Statement Forecast 2013F 2014F 2015F 2016F

Net Interest Income 581 710 768 886

Fees and Commissions 293 323 356 397

Capital Markets Results 379 409 452 504

Banking Income 1.254 1.442 1.576 1.788

Staff and Administrative costs 720 715 741 784



Operating costs 1.152 1.118 1.183 1.198

EBT 101 324 393 590

Taxes and Minorities 96 156 175 241

Net Income 5 169 218 349

Consolidated Banco BPI (Mn Euro)

Balance Sheet Forecast 2013F 2014F 2015F 2016F

Assets

Cash and Deposits 1.839 1.951 2.189 2.537

Interbank Deposits and Investments 7.429 6.158 2.707 2.456

Bonds and Other Securities 10.873 11.527 10.333 11.293

Loans 26.800 29.168 32.123 35.557

Fixed Assets 333 373 428 492

Other Assets 1.284 1.369 1.478 1.623

Total Assets 48.558 50.546 49.257 53.496

Liabilities

Owed to Credit Institutions 3.152 3.157 3.163 3.169

Customer Deposits 24.815 26.517 29.471 32.034

Provisions 2.361 2.292 2.511 2.796

Other Liabilities 10.428 10.729 11.317 12.365

Total Liabilities 40.756 42.694 46.461 50.363

Equity

Share Capital 1.190 1.190 1.190 1.654

Reserves and Retained Earnings 565 707 862 1.049

Net Income 5 169 218 349

Minority Interests 536 526 525 545

Total Equity 2.296 2.592 2.796 3.133

Total Equity + Liabilities 43.052 45.286 49.257 53.496


PAGE 35/37

Banco Fomento Angola (Mn AOA (Kwanza))


Net Interest Income 26.961 28.554 30.007 35.872

Fees and Commissions 3.625 4.167 5.106 6.305

Capital Markets Results 18.051 21.074 24.592 28.787

Banking Income 48.638 53.796 59.704 70.963

Staff and Administrative costs 16.698 19.494 22.747 26.628

Depreciations 1.713 1.978 2.287 2.646

Provisions and Impairments 4.638 5.365 6.520 7.970

Operating costs 23.048 26.837 31.555 37.244

EBT 25.590 26.959 28.149 33.719

Taxes and Minorities 1.697 1.731 1.635 2.760

Net Income 23.892 25.227 26.514 30.959

Banco Fomento Angola (Mn AOA (Kwanza))

Balance Sheet 2013F 2014F 2015F 2016F

Assets




Loans 185.503 214.598 260.817 318.815

Fixed Assets 19.037 21.980 25.416 29.401

Other Assets 7.960 7.732 7.944 8.204

Total Assets 902.569 1.053.721 1.229.577 1.439.331

Liabilities


Customer Deposits 780.902 923.001 1.088.709 1.280.529

Provisions 14.785 20.150 26.670 34.641


Total Liabilities 809.696 958.177 1.131.460 1.332.324

Equity

Share Capital 3.522 3.522 3.522 3.522

Reserves and Retained Earnings 65.460 66.794 68.081 72.526

Net Income 23.892 25.227 26.514 30.959

Total Equity 92.874 95.544 98.117 107.007

Total Equity + Liabilities 902.569 1.053.721 1.229.577 1.439.331


PAGE 36/37

Banco Comercial e de Investimentos (Mn MZN (Metical))


Net Interest Income 2.803 3.858 4.422 4.613

Fees and Commissions 960 1.323 1.592 1.840

Capital Markets Results 1.406 1.760 2.138 2.574

Banking Income 5.169 6.942 8.152 9.027

Staff and Administrative costs 3.194 3.803 4.382 4.705



Operating costs 3.917 4.795 5.619 6.210

EBT 1.252 2.146 2.533 2.817

Taxes and Minorities 200 343 405 451

Net Income 1.052 1.803 2.128 2.366

Banco Comercial e de Investimentos (Mn MZN (Metical))

Balance Sheet 2013F 2014F 2015F 2016F

Assets




Loans 50.885 73.628 88.044 99.729

Fixed Assets 4.408 5.730 7.449 9.683

Other Assets 584 638 684 730

Total Assets 77.894 97.513 118.441 142.569

Liabilities


Customer Deposits 62.553 77.253 94.901 115.885

Provisions 272 393 470 533


Total Liabilities 71.886 88.951 107.427 128.949

Equity

Share Capital 3.000 3.000 3.000 3.000

Reserves and Retained Earnings 1.956 3.759 5.887 8.253

Net Income 1.052 1.803 2.128 2.366

Total Equity 6.008 8.562 11.014 13.620

Total Equity + Liabilities 77.894 97.513 118.441 142.569


PAGE 37/37

Disclosures and Disclaimer

Research Recommendations

Buy Expected total return (including dividends) of more than 15% over a 12-month period.

Hold Expected total return (including dividends) between 0% and 15% over a 12-month period.

Sell Expected negative total return (including dividends) over a 12-month period.

This report was prepared by Francisco da Silva Carrilho Duarte Lopes, a student of the NOVA School of Business and Economics, following the Masters in Finance Equity Research – Field Lab Work Project, exclusively for academic purposes. Thus, the author, which is a Masters in Finance student, is the sole responsible for the information and estimates contained herein and for the opinions expressed, which reflect exclusively his/her own personal judgement. This report was supervised by professor Rosário André (registered with Comissão do Mercado de Valores Mobiliários as financial analyst) who revised the valuation methodology and the financial model. All opinions and estimates are subject to change without notice. NOVA SBE or its faculty accepts no responsibility whatsoever for the content of this report nor for any consequences of its use. The information contained herein has been compiled by students from public sources believed to be reliable, but NOVA SBE or the students make no representation that it is accurate or complete, and accept no liability whatsoever for any direct or indirect loss resulting from the use of this report or its content. The author hereby certifies that the views expressed in this report accurately reflect his/her personal opinion about the subject company and its securities. He/she has not received or been promised any direct or indirect compensation for expressing the opinions or recommendation included in this report. The author of this report may have a position, or otherwise be interested, in transactions in securities which are directly or indirectly the subject of this report. NOVA SBE may have received compensation from the subject company during the last 12 months related to its fund raising program. Nevertheless, no compensation eventually received by NOVA SBE is in any way related to or dependent on the opinions expressed in this report. The Nova School of Business and Economics, though registered with Comissão do Mercado de Valores Mobiliários, does not deal for or otherwise offers any investment or intermediation services to market counterparties, private or intermediate customers. This report may not be reproduced, distributed or published without the explicit previous consent of its author, unless when used by NOVA SBE for academic purposes only. At any time, NOVA SBE may decide to suspend this report reproduction or distribution without further notice.

BANCO BPI, SA C R · increases. To the La Caixa group, BPI is an extremely important partner, as it allows the group to provide “Iberian Business Solutions”2 and considers the

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