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1 BOARD OF DIRECTORS AND OFFICERS Board of Directors and Officers GENERAL MEETING Chairman Prof. Doutor Luís Manuel Moreira de Campos e Cunha Secretaries Dr. Miguel José Luis de Sousa BOARD OF DIRECTORS Chairman Comendador Horácio da Silva Roque Vice Chairmen Dr. Joaquim Filipe Marques dos Santos Dr. Carlos David Duarte de Almeida Full Members Dr. António Manuel Rocha Moreira Dr. Manuel Isidoro Martins Vaz Dr. José Marques de Almeida Dr. João Manuel da Silva Machado dos Santos Dr. José António Machado de Andrade Engº Diogo António Rodrigues da Silveira BOARD OF DIRECTORS Dr. Machado dos Santos, Dr. Marques de Almeida, Dr. Rocha Moreira, Dr. Marques dos Santos, Comendador Horácio Roque, Dr. Duarte de Almeida, Dr. Manuel Vaz, Dr. Machado Andrade, Engº Diogo da Silveira 04

2 SUPERVISION BOARD Chairman Prof. Doutor Fernando Mário Teixeira de Almeida Efective Full Members Dr. António Ernesto Neto da Silva Dr. José Lino Tranquada Gomes Alternate Full Members Dr. José Pedro Lopes Trindade EXECUTIVE BOARD Chairman Dr. Joaquim Filipe Marques dos Santos Dr. Carlos David Duarte de Almeida Dr. António Manuel Rocha Moreira Dr. Manuel Isidoro Martins Vaz Dr. João Manuel da Silva Machado dos Santos Dr. José António Machado de Andrade Engº Diogo António Rodrigues da Silveira Official Audit Ernst & Young Audit & Associados S.R.O.C., SA, representada por: represented by: Dr. João Carlos Miguel Alves (ROC nº 896) Secretary General Dr. Carlos Oliveira Alternate Secretary Dra. Vanda Melo 05

3 NOTE Note _ This publication contains an abridged version of the Report and Accounts for 2007 of the company Banif SA, including the information considered to be of greatest interest to the general public. The full version of the said documents is published, in accordance with the law, and is also contained in the promotional CD ROM published by Banif SA, as well as being available online at and at the internet site of the Portuguese Securities Market Commission. The CD ROM also contains an abridged English language version of the Report and Accounts for 2007 of Banif SA. 06

4 Message from the Chairman of the Board of Directors and the Chairman of the Executive Board _ During the financial year of 2007, Banif continued to record the firm and sustained growth it has enjoyed in recent years, and which has characterized its performance since its founding. In a particularly difficult economic climate, characterized by instability in the markets and in financial institutions, the Bank recorded buoyant business, with cash flow of 95.6 million euros and profits for the period, on an IAS/IFRS basis, of 47.6 million euros, representing growth of 29.3% over the previous year. On an AAS basis (Adjusted Accounting Standards), the net profits stood at 26.1 million euros, which represents a decline of 24.8% from The main reason for the divergence between the profits for the period on an IAS/IFRS basis and those determined under the AAS lies in the large volume of provisions for general and specific credit risks made under the terms of Bank of Portugal Notice 3/95, totalling 48.6 million euros in 2007 (26.2 million euros in 2006), whilst provisions for credit impairment under IAS/IFRS rules stood at only 20.7 million euros (23.7 million euros in 2006). In keeping with its central strategic objectives for the period , the Bank recorded growth in size, combined with increased productivity and profitability, whilst at all times preserving appropriate levels of solvency, basing its growth on a substantial increase in service quality and personalized client service which together with improved operating effectiveness, allowed it to increase its market share. The Bank pursued organic growth by opening 35 new branches (5 more than originally envisaged), meaning that it now has a total of 228 bank branches in Portugal. The Bank s growth can also be seen in the extension of its base of active clients, achieved through a significant increase in the number of accounts opened and improved customer loyalty, helped in part by the 330 x 2 Programme developed and implemented during In the corporate banking sector, Banif has followed up the creation of its Business Centres and Customer Service Teams, which were revolutionary in their time, with the Companies x 2 Programme, amounting to a reinvention of its commercial strategy, with new and ambitious aims. Growth in business in no way detracted from the high standard of personalized service which has been Banif s hallmark. The Bank is structurally geared to relationship banking, and this has positioned Banif amongst the top four banks in Portugal in terms of service quality, well above the market average for banking services. In 2007, Banif once again led the industry ranking for Service quality at branches. Also in connection with the quality and personalized nature of customer service, a number of quality certification projects were completed within the Bank, including Quality Certification of the Call Centre, Quality Certification of the Customer Complaints Office, Quality Certification of Mortgage Lending and Quality Certification of EBanking. In 2008, the Bank plans to extend certification to other products marketed through the branches. The Bank s sustained and structured growth over 2007 was recognized by the market, as reflected in the higher ratings assigned by Moodys, up to A (long term) and P1 (short term). The Banif Financial Group has continued to expand internationally, and today enjoys a significant presence in countries such as Spain, England, Malta, South Africa, Cape Verde, Brazil, Venezuela, Mexico, the United States, Canada, and elsewhere. As in the past, Banif will continue to capitalize on this growth in its commercial 07

5 MESSAGE FROM THE CHAIRMAN OF THE BOARD OF DIRECTORS AND THE CHAIRMAN OF THE EXECUTIVE BOARD _ business, fostering its ties with Portuguese communities abroad, and turning its attention also to mortgage lending for nonresidents and the creation of services geared especially to new residents in Portugal. At the same time, Banif remains mindful of the social responsibilities associated by institutional growth, and continues committed to the main trends in sustainable development worldwide. Since 2005 it has been a member of BCSD Portugal the Business Council for Sustainable Development. Aware that projects are people, Banif has sought to build up the size and skills of its workforce in an organized and systematic manner. From 2000 to 2007, the Bank s workforce increased from 1331 to 1991, representing an increase of approximately 50%. This growth in the total number of employees has been underpinned by a relative increase in the level of academic qualifications and in the number of training hours provided by the Bank itself. At the start of 2008, Banif celebrates its 20th anniversary, at a moment when it is asserting to its customers, suppliers and other stakeholders its standing as a sound and prestigious institution, which has won, on its own merits, a leading position in the Portuguese and international financial markets. At the start of this new phase in its history, the Bank has adopted a new corporate image, comprising a new logo, a new colour and a new signature, shared by the entire Banif Financial Group. As well as underlining the Group s new identity in its relations with the outside world, these new elements will also serve to strengthen the ties between the different companies in the Group, highlighting the importance of mutual collaboration and pooled resources. The choice of the mythical figure of the Centaur, reflecting the perfect balance between physical strength and mental dexterity, demonstrates that the new identity in no way alters the Bank s core culture and values. It is the ambition, quality and determination of people, our people, that constitutes Banif s most valuable asset, and which allows us to face the challenges of the future with confidence. JOAQUIM FILIPE MARQUES DOS SANTOS Chairman of the Executive Board HORÁCIO DA SILVA ROQUE Chairman of the Board of Directors Dr. Marques dos Santos and Comendador Horácio da Silva Roque 08

6 DIAGRAM OF BANIF FINANCIAL GROUP HOLDINGS AS AT Diagram of Banif Financial Group Holdings as at Banif SGPS, SA Share C: 250,000,000 Banif Imobiliária Share C: 750, % 100% BanifServ a) Soc. Imobiliária Piedade Share C: 50,000 84,80% Banif Comercial SGPS, SA Share C: % Banif Investimentos SGPS, SA Share C: 8,750,000 15,20% 100% Banif Banco Internacional do Funchal, SA Share C: 240,000, % 100% 100% Banif (Açores) SGPS, SA Share C: 20,084,915 Banif Finance, Ltd Share C: c) Metalsines Share C: 1,999, % 100% Banco Caboverdiano de Negócios Share C: 700,000,000$00 Banif Bank (Malta) 14,07% 33,62% Companhia de Seguros Açoreana, SA Share C: 36,250, % Banif Banco de Investimento Share C: 30,000, % Banif (Cayman), Ltd d) Share C: USD 42,000, % 100% Banif Financial Services Inc Share C: USD 371,000 Banif Mortgage Company Share C: USD 5,750, % Banco Banif e Comercial dos Açores, SA Share C: 51,892, % 100% 59,195% Banif & Comercial Açores, Inc San José b) Share C: USD 1,000,000 Banif & Comercial Açores, Inc Fall River Share C: USD 100,000 Investaçor, SGPS Share C: 10,000,000 Eur 33,32% 27,5% 33,33% Banca Pueyo, SA (Espanha) Share C: 4,800,000 Bankpime (Espanha) Share C: 91,523,768 Inmobiliaria Vegas Altas (Espanha) Share C: 60, % 29,19% 48,38% 10,81% 75% Banif Gestão de Activos Share C: 2,000,000 Banif Açor Pensões Share C: 1,850,000 Banif Capital Soc. de Capital de Risco Share C: 750,000 85% 60% Banif International Holdings, Ltd Share C: USD 8,513,105 FINAB Share C: USD 35, % 100% 100% Banif Forfaiting (USA) Inc Share C: USD 250,000 Banif Forfaiting Company f) Share C: USD 250,000 Banif Trading Inc Share C: USD 350,000 99,9% Banif Holding (Malta), Ltd 0,1% Share C: 2,000 51% Centro Venture f) Soc Capital de Risco, SA Share C: 750, % Banif Securities Holdings, Ltd Share C: USD 2,108, % Banif Securities Inc Share C: USD 5,620, % Banif Go, SA Share C: 20,000, % Gamma Soc. Titularização de Créditos Share C: 250,000 20% 80% Banif (Brasil), Ltd Share C: R $ 150, % Econofinance, SA Share C: BRL: 2,817, % Banif Rent, SA Share C: 300, % Numberone SGPS, Lda. Share C: 5,000 0,1% 99,9% Banif International Bank, Ltd Share C: 25,000,000 99% Banif Investimento México Share C: 50,000 Pesos 90% Banif Banco Internacional do Funchal (Brasil), SA Share C: R $ 63,034, % 100% Banif International Asset Management Share C: USD 50, % 75% Banif Banco de Investimento (Brasil), SA Share C: R $ 37,500,000 Banif Multi Fund e) Share C: USD 50, % Banif Corretora de Valores e Câmbio Share C: R $ 21,125,048 51% Banif Nitor Asset Management Share C: R $ 2,725, a) b) c) d) e) f) g) Due to being an ACE ("Complementary Company Grouping"), its position in the diagram may have to be reviewed in the light of the relevant legislation. Paid up share capital USD % control of voting stock, the share capital comprising: 1,000 ordinary shares with a nominal value of USD 1 and 100,000 nonvoting preference shares with a nominal value of EUR 0, % control of voting stock, the share capital comprising: 26,000,000 ordinary shares with a nominal value of USD 1 and 16,000,000 nonvoting preference shares with a nominal value of USD 1. Paid up share capital USD 100. Yet to start trading. Banif Banco de Investimento (Brasil), S.A. directly holds a quota share with a nominal value of R$ 1, corresponding to (3)% of the share capital, and Banif Nitor Asset Management is holder of the quota part corresponding to %. Nitor Administração 100% Recursos g) Share C: R $ 300,000 11

7 ECONOMIC BACKGROUND Economic Background _ 1. THE INTERNATIONAL ECONOMY The financial year of 2007 was characterized by continued robust economic growth worldwide, albeit once again with increasing divergence between different economic blocks. According to estimates from the International Monetary Fund, the world economy is thought to have grown at a pace of 5.2%, as compared to 5.4% in 2006, with the US economy slowing significantly to levels below its potential pace, whilst Europe and Asia achieved stronger economic growth than initially expected. Another key development in 2007 was the end of the aggressive stand taken by the European Central Bank (ECB), with a view to neutralizing its monetary policy, and the start of a new cycle in US monetary policy, following the decision by the Federal Reserve (FED) to cut its intervention rate by 100 base points (bp) to 4.25%. In Japan, the economy also showed signs of renewed vigour, causing the intervention rate to rise to 0.5%. On the financial markets, the Euro rose against the Dollar (closing the year at 1.46 Dollars/Euro), and financial markets worldwide again recorded a significant increase in volatility, reaching the highest levels since 2003, as markets reassessed risk premiums. Oil prices again rose substantially, up over the year by approximately 57.2%, to levels close to 96 dollars/barrel (WTI); gold prices also rose by approximately 30.9% to 834 dollars/ounce, benefiting from its status as a safehaven asset, in an economy marked by strong demand for most raw materials. Growth in the US economy is estimated at 2.2% in 2007, significantly down from the rate of 2.9% recorded in After a first quarter marked by economic growth clearly below potential levels (0.6% in annualized terms, the lowest rate of growth in the last four years), due, essentially, to specific factors (a worsening trade balance, dwindling stocks and a sharp drop in investment in residential property), the second half saw signs of increasing economic vigour (growth of 3.8%). The rate of growth then accelerated at the start of the second half, with GDP growing by 4.9% in annualized terms in the third quarter of Contributions to this economic performance were again made by exports, clearly benefiting from a favourable exchange rate (the Dollar remained on a downward course against other major currencies), accumulating stocks and livelier consumer spending. However, in August, the problems in the subprime mortgage market in the US began to rub off on the rest of the financial sector, with a movement away from risk comparable only to that experienced in the aftermath of 9/11. As a result, the risk premium was downsized in the light of an environment of higher interest rates in the main economic blocs, with the yield on 10year US treasuries rising to 5.02%. In the second half of the year, significant deterioration in the credit risk associated with subprime finance operations led to direct intervention by several central banks. In an unprecedented operation, the ECB was the first to take action, injecting an extraordinary amount of liquidity, whilst the FED opted to cut its discount rate by 50 bp to 4.75%, the first cut since June 2003, defending the need to assure the stability and liquidity of the US money markets. In October and December, the FED again took action, although less drastically (25 bp at each meeting), leaving the leading rate at 4.25%, 100 bp lower than at the start of the year. Although the impact of the financial crisis on the pace of US growth is still difficult to assess, economic conditions deteriorated rapidly in the final quarter of 2007, with fears that a significant economic 14

8 _ slowdown might be due to flagging consumer spending. The unemployment rate, whilst still at a historically low level, rose to its highest in the last five years (5.0%), with American consumers feeling the pressure of more restrictive credit terms, due to the rising oil price, increasing inflationary pressures due to foodstuffs (known as agriflation ) and declining disposable incomes due to the situation in the capital and real estate markets. In terms of prices, the current inflation rate is thought to have fallen to 2.7% in 2007 from 3.2% in 2006, due to a downturn in economic activity and a more restrictive monetary policy. The core rate, excluding the effect of food and energy goods, actually dipped below the level regarded as comfortable by the FED (2.0%), for the first time since Importantly, this improved performance in inflation was achieved in a context of sharply rising prices for commodities, especially oil (the WTI was up by 57%, ending the year at close to 97 dollars/barrel). In Europe, after a year of strong economic growth in 2006, with economies growing at the fastest pace for the last six years (2.8%), a slight slowdown was perceptible at the start of 2007, due principally to the increase in VAT in Germany (from 16% to 19%), in January. However, 2007 started on a clearly optimistic note, with the German and Spanish economies doing better than expected, whilst in France and Italy economic performance was more moderate. Faced with a healthy set of monetary indicators and the expansion of consumer lending, the ECB continued to restrict its monetary policy to a level regarded as neutral, increasing the leading rate by 50 bp to 4.0%. After the first half of the year, the optimism around Europe began to ebb away, as fears grew that the financial crisis would hit European economies and the Euro again hit historically high levels against the Dollar (at around the 1.50 Dollar/Euro level). Economic growth is estimated to have dropped to 2.4% in 2007, with Germany taking back the role of the driving force for growth in the European bloc. Faced with the dilemma of balancing persistent inflationary pressures against signs of an economic slowdown, the ECB opted to hold its intervention rate steady at 4.0% through to the end of ,5 3,0 2,5 2,0 1,5 % Growth in GDP (Real Variation Rate) EU USA Japan 1,0 0,5 0, E 15

9 ECONOMIC BACKGROUND _ Estimates point to economic growth in Japan of 2.0% in 2007, slightly down from the figure of 2.2% recorded in 2006, based on dynamic corporate investment and foreign demand, especially from China. The Japanese economy continues to show signs of stronger economic growth, although the marks of a decade of deflation remain clear to see. Retail prices are thought to have recorded zero growth in 2007, after a rise of 0.3% in the previous year. Faced with this situation, the Bank of Japan opted to keep its reference rate unchanged at 0.5% from February through to the end of the year. A further significant development was the sharp slide of the Yen against the main international currencies, falling to a historical low against the Euro (168.6 Yen/Euro), giving rise to a significant increase in carry trade operations. The main Asian economies are expected to have recorded growth of 9.8% in 2007, identical to the 2006 figure, supported by the buoyancy of the Chinese and Indian economies (growth of 11.5% and 8.9%), where internal demand pushed up the volume of trading overall. The fundamentals of the Asian economies (high savings rates, strong economic growth and lively consumer spending) are one of the main factors underpinning the world economy in 2007, more than offsetting the slowdown in the US and Europe. Growth of 4.9% is estimated in Latin America for 2007, comparing with 5.4% in 2006, with the inflation rate unchanged at 5.2%. Internal demand continued to be the main driving force for growth in the Latin American bloc, benefiting from low interest rates and growing consumer credit, whilst the growth in the US economy and the stimulus of external demand from China, together with favourable performance in commodity prices, all worked to the benefit of the export sector. In Brazil, the economy grew by an annualized rate of 4.4% in 2007, outperforming the figure of 3.7% recorded in the previous year. The Brazilian economy has benefited from significantly expanding internal demand, supported by an accommodating monetary policy, growing public spending and an improving employment market. Strongperforming investment components, due to the low level of interest rates, and healthy growth in exports also explain the sound performance of the Brazilian economy. As regard retail prices, inflation is thought to have stood at 3.6%, down from the figure of 4.2% recorded in Faced with a scenario of economic growth at above potential levels, the Brazilian Central Bank decided to bring an end to the cycle of interest rate cuts, with the SELIC rate ending the year at 11.25%, 175 bp lower than at the start of the year. The improvement in public accounts and the balance of payments, combined with increasing political stability, continued to help the Real climb against the Dollar (up by approximately 16.7% over the year to 1.78 Reais/Dollar). The growing financial instability in the second half caused the spread to widen on the main Brazilian risk referential (the EMBI+ index) to a level identical to that recorded in late 2005: 240 bp, as opposed to 170 bp at the start pf

10 _ 2. THE PORTUGUESE ECONOMY This was the second year of recovery in the Portuguese economy. According to Bank of Portugal estimates, economic growth is thought to have gathered pace, with GDP up by 1.9%, as opposed to 1.2% in the previous year, supported essentially by healthy exports, driven by strong growth in foreign markets % Growth in GDP (Real Variation Rate) Portugal EU E A more detailed analysis of the components of GDP reveals that consumer spending grew at an annual rate of 1.2% in 2007, similar to that recorded in the previous year, and that it continues to be affected by the gradual rise in interest rates, in a context of heavy household indebtedness and an increasing tax burden. Figures for investment were encouraging, up on the year by 2.6% (as compared to 1.8% in 2006), after several years of decline. However, growth in investment was not uniform, and the improvements were particularly visible in corporate investment. Internal demand is therefore thought to have contributed 1.3 p.p. in 2007, as compared with 0.2 p.p. in Exports of goods and services, responsible for the good performance of the Portuguese economy in recent years, are thought to have grown by 7.0% in 2007, slightly slower than in 2006 when exports were up by 9.1%. However, this performance was due to less dynamic exports of merchandise (growth slowing to 5.0%), as compared to the very significant growth in services (12.4%)." Growth in imports of goods and services is thought to have slowed to 4.1% in 2007, whilst growth in the import of merchandise is expected to have held relatively steady. Net exports are through to have made a contribution of only 0.6 p.p. in 2007, as against 1.0 p.p. in the previous year. Mention should also be made of the efforts made by the Portuguese government to consolidate the budget. The public sector deficit is expected to have fallen to 3.0% of GDP by the end of 2007, as against 3.9% in 2006, achieving the target established in the Stability and Growth Programme one year earlier than expected. 17

11 ECONOMIC BACKGROUND Consumer Confidence (Index) Portugal UE E _ Inflation, measured by the retail price index (IHPC), is through to have stood at 2.4% in 2007, as compared to 3.0% in the previous year. This lower inflation rate is largely due to sharp slowdown in energy prices, and also to more moderate growth in unit labour costs and the prices of non energy goods. Portugal UE 4,5 4,0 3,5 3,0 2,5 2,0 1,5 1,0 0,5 0,0 % Inflation (Retail Price Index) E The borrowing requirement, measured by the joint balance of the current account balance and the capital account balance, is estimated to stand at 7.3% of GDP, down from 8.2% in

12 _ 3. THE FINANCIAL SYSTEM This was a year of financial instability around the world, forcing the world s main central banks to take concerted action, by injecting huge amounts of liquidity into the global financial system. At the same time, financial institutions put up their deposit rates, in an attempt to attenuate the effect of the liquidity crisis triggered by the crisis in the real estate market. Another major development was the behaviour of the ECB which sought to push on with the process of monetary normalization by increasing its leading rate by 50 bp to 4.00%. The financial year of 2007 also witnessed the rejection of a takeover bid by BCP for BPI, followed later in the year by a proposal for merger of the two banks, by means of a stock switch, which also came to nothing. The ECB s hike in interest rates was reflected in the lending rates offered by Portuguese banks on new lending to nonfinance companies, which went up by 90 bp to 7.42%, whilst in retail banking the average increase was around 82 bp to 5.22% for home loans and 84 bp to 8.13% for new consumer credit lending. Deposit rates offered by banks had a negative effect on the brokerage margin, given that average rates on deposits for up to 1 year increased by 44 bp to 4.28% in the business sector and by 84 bp to 4.11% for private customers. Bank of Portugal figures for consolidated lending through to November show growth at a yearonyear rate of 12.2%. Lending to private customers was up by 9.1%, with mortgage lending recording growth of 8.8%, down from 10.1% in the same period in the previous year, whilst consumer credit rose by 10.6%, as compared to growth of 9.6% in On the foreign exchanges, 2007 witnessed significant appreciation by the Euro against the main international currencies. In a context of higherthanexpected economic growth in Europe and increasing demand from foreign central banks for Eurodenominated assets, the Euro rose 10.5% against the Dollar and 3.74% against the Yen, ending the year at 1.46 Dollar/Euro and Yen/Euro. The behaviour of the three central banks also contributed to these movements on the foreign exchanges: whilst the FED was forced to cut its reference rate by 100 bp to 4.25%, in order to contain the effects of the subprime crisis, and the Japanese Central Bank held its rate steady, in the face of persistent signs of deflation, the ECB, in a context clearly favourable to its restrictive policy, increased its reference rate by 50 bp to 4.0%. (see graph on next page) 19

13 ECONOMIC BACKGROUND Exchange Rates Dólar / Iene (EE) Dólar / Euro (ED) Jan 26Mar 18Jun 10Set 3Dez 1,50 1,45 1,40 1,35 1,30 1,25 _ With regard to Euribor rates, the economic buoyancy experienced at the start of year fuelled expectations that the ECB would increase its rates. In the second half, fears that the crisis in subprime mortgage lending could undermine the stability and liquidity of the interbank money market were responsible for the significant increase in rates offered by financial institutions. Interest rates rose overall for all maturities, with 3 month yields ending the year at 4.68% (+96 bp), 6 month yields at 4.71% (+85 bp) and 12 month yields at 4.75% (+72 bp). Euribor Rates (Yield Curves) 4,9 % 4,7 4,5 4, ,1 3,9 3,7 3,5 3M 6M 9M 12M 20

14 _ 3.1 Bond Market Trends on the US bond market in 2007 were once again not uniform over the year. Whilst the first half saw yield curves heading upwards, in response to persistent inflationary pressures combined with a slowdown in economic activity, the last six months of the year witnessed the start of a downward movement in the FED s interest rates, as investors backed off from risk and sought out quality assets. Faced with signs of cooling in the property and labour markets, fears that consumer spending (70% of GDP) would be hard hit and cause a recession set off a downturn in the US yield curve. Yields on 10 year bonds ranged between a low of 3.84% (November) and a high of 5.29% (June), ending the year at 4.02% ,7 4,6 4,5 4,4 4,3 4,2 4,1 4,0 3,9 3,8 % German Treasury Bonds (Yield Curves) 2 years 5 years 10 years In Europe, signs of greaterthanexpected economic growth in the first half of the year led the market to discount continued hikes in interest rates from the ECB. However, the second half was characterized by a less dynamic European economy, accompanied by successive downward revisions of growth rates and the resurgence of inflationary tensions. In this context, the yield curve steepened, with the differential between interest rates on maturities of 2 and 10 years increasing from 4.6 bp to 36.7 bp. As a result, the differential between yields on US and German 10year bonds went from 75.4 bp to 30.8 bp. The Portuguese yield curve was in line with movements in the Euro bloc, with 10year treasury bond (TB) yields ranging from a low of 4.04% (March and a high of 4.86% (July). The differential between TB and the Bund (the key German bond) with maturities of 10 years widened from 16 bp to 24 bp during

15 ECONOMIC BACKGROUND _ 3.2 Equity Market In 2007, the main world equity markets recorded growth in value, albeit less than in the previous year, with levels of volatility unseen since 2003, with the VIX index reaching points. Eurostoxx 50, the leading European index, closed the year with a gain of 6.79%, outperforming the Standard & Poor s 500 (+3.53%) and the Dow Jones (+6.43%). Even so, some of the European markets recorded even higher growth, including the Portuguese market, which was up by 16.27%. This was also the year of two failed takeover bids: of Portugal Telecom by Sonaecom and of BPI by BCP. The scale and implications of these two transactions, both of them hostile, held the attention of most investors, and especially foreign investors. In addition, the market witnessed the proposed merger of BPI and BCP by means of a stock switch, which also came to nothing, and the flotation of Martifer (June) and REN (July). Another major development was the split of Portugal Telecom Multimédia away from Portugal Telecom (November). Also on the European markets, the main German index (DAX) also recorded significant growth, up by 22.29%, driven by the country s sound economic performance and the sharp upturn in certain specific sectors, such as the automobile industry. In Asia, most share markets closed up on the year, although the Nikkei recorded a negative yield of 11.30%. The Hang Seng index experienced particularly lively growth, ending the year up 39.31% overall. In terms of variations during the year, there was a significant adjustment in the equity markets at the start of August, after hitting the highs of 2001, as a result of the crisis in the subprime segment spreading to the rest of the financial sector, culminating in the intervention of several central banks, injecting funds into the money markets. Several international investment banks reported sizeable losses on trading activities, including in the field of fixed yield and structured products, as well as in securitization. After the FED s actions in September (cutting its leading rate by 50 bp to 4.75%), the markets gradually found reassurance in expectations that the FED s aggressive moves would be sufficient to reduce volatility and the uncertainty as to the course of the world s largest economy. Equity Markets S&P Eurostoxx50 PSI Jan 07 1Mar 07 1Mai 07 1Jul 07 1Set 07 1Nov07 22

16 _ In a context favourable to appreciation of floating rate assets, benefiting from movements generated by prospective mergers and acquisitions and the flotation of Martifer and REN, average trading on the Portuguese market (PSI20) was up by 59.3%, from million to million. 23

17 BUSINESS OPERATIONS OF BANIF BANCO INTERNACIONAL DO FUNCHAL, SA IN 2007 Business Operations of Banif Banco Internacional do Funchal, SA in 2007 _ 1. BUSINESS IN MADEIRA Once again, the business activities of the Madeira Commercial Department (MCD) in 2007 focussed on pursuing the strategic aim of maintaining business growth and consolidating our leadership in the regional market. Despite a difficult economic situation and a highly competitive environment in the region, the MCD recorded buoyant business reflected in the main balance sheet items in comparison with the same period in the previous year. The sustained growth in profits has been achieved thanks to broadening of the customer base (9,451 new customers) and the concerted actions of the different business units (retail, private banking and corporate), in providing a quality and distinctive service. This has helped to boost the value of the customer portfolio and to increase commissions substantially, whilst permitting selective and sustained growth in lending. Customer lending was up by 15% on This was essentially due to an increase in consumer credit (up by 16%), home loans (up by 16%) and card lending (+20%). Constrained by unfavourable trends on the foreign exchanges (with the euro rising strongly against other currencies), customer deposits grew 10% on the previous year. Yearonyear growth in the financial contribution stood at 6%, thanks largely to appreciable growth in commissions collected (up by 12%) and the financial contribution from deposits (up by 19%), contrasting with a decline in the financial contribution from lending (down by 2%), due to much narrower margins. Alongside sustained growth in banking business, the focus on service quality has also helped to consolidate our leadership position in the regional market. With the twin aims of increasing the efficiency of our operations and responding to growing customer needs, steps were taken to extend the already large Branch network in Madeira, with the opening of the Canhas Branch and a new Branch in Ponta do Sol. The Camacha, Estreito da Calheta and Machico Branches were revamped, and the Porto Santo and São Martinho Branches were moved. At the same time, the old Ponta de Sol Branch changed its name to the Livramento Branch. The opening of two more Branches, expansion of the network of freestanding ATMs (+16 in the region) and the creation of a new Customer Service Team at the Madeira Business Centre (Team 7) all contributed to expansion of distribution channels in the Madeira region in With a view to growth in the business of the Banif Financial Group in Madeira, and in order to attract new customers and business, the MCD added to the vast range of products available the Cash Management Account CGT, aimed at small and medium sized business and individual business people. 28

18 _ In keeping with the important role it has played in the development of the region over the last 20 years, the Bank reaffirmed its support for a range of initiatives under the Bank s social responsibility project and developed sponsorship contracts with organizations in various areas of society. In order to encourage regional development and reward the achievements of organizations and individuals in various sectors of society and the economy, the Bank again teamed up with regional institutions to award the Zarco Prize. In the arts, Banif again put its weight behind the Madeira Children s Song Festival, and sponsored the concert by the Orquestra Clássica da Madeira on the World Day of the Child. The Bank also signed a cooperation agreement with the Arts Education Office of the Regional Education Department. As part of efforts to raise the awareness of the student community of the importance of saving and to explain the role of banking operations in the economy, Banif organized another round of the Geração Mais competition and launched campaigns aimed at the same target, including Banif Filhos, Banif Verão Jovem and Banif Jovem 80 20, in order to continue encouraging saving in this segment and to help the young people of Madeira identify themselves with the Banif name. The Investor Forum organized by the Banif Privado Centre, in partnership with BIB, and participation in the events commemorating the Madeira Enterprise Day both assigned special importance to private banking and corporate clients. With the same aim, Banif sponsored the 1st Annual Tourism Conference organized by the Regional Branch of the Association of Economists, and signed a commercial agreement with this body, offering preferential terms for all its members. In the world of sport, the Bank consolidated its contracts with the Clube Naval do Funchal, Clube Sport Marítimo, Clube Desportivo Nacional, Clube de Golfe do Santo da Serra and Clube de Golfe do Porto Santo. The holding of 2 Banif Golf Tournaments, one in Porto Santo and another at Santo da Serra, combined with participation in the 6th Meeting of Generations in Venezuela, have enabled the Bank to deepen its ties with different client segments, raising the international profile of the Banif Financial Group. ACCOUNT VARIATION 07/06 Deposits Lending Total Financial Contribution Customer Base +10% +15% +6% +3,2% 29

19 BUSINESS OPERATIONS OF BANIF BANCO INTERNACIONAL DO FUNCHAL, SA IN 2007 _ 2. BUSINESS IN MAINLAND PORTUGAL 2.1 Business in the Corporate and Medium/High Income Segment The Corporate and Private Banking Division (CPBD) is responsible for coordinating and developing business with medium and large companies, institutional clients and middlehigh income private customers in Mainland Portugal. The operations of the CPBD in 2007 were geared to achieving the aim of growth in business and strengthening the position of the Banif Financial Group in this business area and in the market. Sustained growth in income in this area of the Bank has been attained thanks to a strategy focussed on four main factor: efficient lending, commitment to the Client Programme 330 x 2, reorganization of the Business Centres under the Companies x 2 project, and improving the technical and behavioural skills of the dedicated Customer Managers Business in the Corporate Segment Banif s operations in the small and medium sized business segment was conducted in 2007 by a network of 25 Business Centres and 59 Managers specialized in responding to the financial needs of this segment, resulting in sustained growth in business. Positive performance in business banking was reflected in customer lending, up by 23% on the previous year. In addition to rigorous and selective management of the loans portfolio, speedy decision making and pricing differentiation on the basis of a riskreturn analysis for each client and his relationship with the Bank were crucial factors in achieving these results. Despite the trends on the money markets and the consequent reduction in financial brokerage margins, the financial contribution from the lending business of the Business Centres grew by 7% over the course of The financial contribution from client deposits presented growth of 46% in 2007, driven by growth in offbalance sheet deposits (up by 25%). In contrast, onbalance sheet deposits declined by 4% in relation to The growth of 11% in the total financial contribution from this business area was also supported by a 13% increase in commissions over the period. As part of the 330x2 Programme, campaigns to attract new clients made it possible to expand the corporate client portfolio by 10% in comparison with 2006 and to consolidate the importance of this channel in gaining private clients (+30%) by means of crosssegment initiatives aimed at the staff and owners of corporate clients. Implementation in the second half of the Companies x 2 Project made it possible to add weight to the commercial approach to companies with an annual turnover in excess of 2 million euros. Efforts to strengthen the ties between clients and the Bank, supported principally by taking a more proactive commercial stance, which took the form of drawing up a detailed plan of contacts with a view to growth in the share of wallet for good risk clients and to increasing cross and upselling. 30

20 _ Functional reorganization of the Business Centres, implementation of the Business2Top training plan and the introduction of the GOP Empresas sales support tool made it possible to provide Client Managers with the technical and behavioural skills needed to get to know their clients better and to boost levels of overall satisfaction. The strategic priorities defined for the corporate area in the present threeyear period point to a substantial increase in market share and in operating profits from this business area, whilst maintaining service standards, client satisfaction and value creation for the Bank. ACCOUNT VARIATION 07/06 Deposits Credit Total Financial Contribution Client Base 4% +23% +11% +10% Factoring Business In 2007, the Bank recorded appreciable growth in factoring and confirming business. Yearonyear growth in credit transfers and the average advance payments balance stood at 14% and 12% respectively. In line with the growth of business in this area, financial revenues were up by 30% on the previous year. This was achieved thanks to an increase of 9% in the volume of commissions collected and growth of 38% in financial income, in relation to There was no significant change in the structure of the client lending portfolio during the year, and the construction industry was once again the main sector in this area Business in the MediumHigh Income Segment Private banking services are provided in mainland Portugal through a network of 12 managers specialised in advisory services and wealth management for institutional clients and highincome personal clients. Despite the direction taken by the economy, the strategy adopted in this business area permitted us to achieve significant results in the target market in Growth of 23% in onbalance sheet deposits combined with trends in the money markets permitted Banif Privado to record growth of 162% in the financial contribution from deposits, when compared with the previous year. At the same time, offbalance sheet deposits brought in by this network declined in relation to