2019 ANNUAL REPORT 2019 ANNUAL REPORT Contents PART I. MANAGEMENT REPORT ...................................................................................................... 4 1 WHO WE ARE ............................................................................................................................. 4 Message from the Chairman of the General and Supervisory Board .............................................. 4 Message from the Chief Executive Officer ....................................................................................... 6 2019 Main indicators ........................................................................................................................ 7 Main events in 2019 ....................................................................................................................... 10 Who we are. NOVO BANCO in 2019 ............................................................................................. 11 DG COMP commitments: first intermediate target achieved ......................................................... 11 Governance model ......................................................................................................................... 12 Business model .............................................................................................................................. 15 Awards and Recognitions .............................................................................................................. 16 2 3 STRATEGY ................................................................................................................................ 17 RESULTS AND ACTIVITY ......................................................................................................... 20 3.1 3.2 3.3 3.4 3.5 3.6 3.7 3.8 3.9 Economic environment ...................................................................................................... 20 Relevant facts from the activity .......................................................................................... 22 Highlights ........................................................................................................................... 23 Recurrent and Legacy ....................................................................................................... 24 NOVO BANCO Group (consolidated) ................................................................................ 29 NOVO BANCO (Separate) ................................................................................................ 34 Business segments ............................................................................................................ 37 Digital banking ................................................................................................................... 45 Liquidity and funding .......................................................................................................... 49 3.10 Risk management .............................................................................................................. 55 4 CORPORATE GOVERNANCE .................................................................................................. 67 4.1 4.2 4.3 4.4 Shareholder structure ........................................................................................................ 67 Management and supervisory corporate bodies ................................................................ 67 Internal control and risk management systems ................................................................. 74 NOVO BANCO Main Policies ............................................................................................ 83 NOVO BANCO | 2019 ANNUAL REPORT | 1 4.5 4.6 4.7 4.8 Credit to members of the Corporate Bodies ...................................................................... 94 Remuneration of the members of the Corporate Bodies and Identified Employees .......... 95 Securities held by members of the Corporate Bodies ........................................................ 97 Minor indirect investment in NOVO BANCO ...................................................................... 97 5 CONSOLIDATED FINANCIAL STATEMENTS AND FINAL NOTES ........................................ 98 5.1 5.2 5.3 Consolidated Financial Statements ................................................................................... 98 Separate Financial Statements ........................................................................................ 100 Final notes ....................................................................................................................... 102 6 ANNEX – ALTERNATIVE PERFORMANCE MEASURES ...................................................... 104 6.1 6.2 Reconciliation of the Income Statement .......................................................................... 104 Alternative performance measures .................................................................................. 105 PART II . NOTES TO THE FINANCIAL STATEMENTS .................................................................. 107 7.1 7.2 Consolidated Financial Statements and Notes to the Consolidated Financial Statements108 Annex – Adoption of the Financial Stability Forum (FSF) and Committee of European Banking Supervisors (CEBS) Recommendations on the Transparency of Information and the Valuation of Assets ......................................................................................................................................... 263 7.3 7.4 7.5 7.6 Separate Financial Statements of NOVO BANCO as at 31 December 2019 .................. 267 Auditor’s Report on the Consolidated Financial Statements............................................ 395 Auditor’s Report on the Separate Financial Statements .................................................. 404 Report of the General and Supervisory Board and the Opinion of the Financial Affairs (Audit) Committee on the Management Report and on the Separate and Consolidated Financial Statements of Novo Banco, S.A. for the year ended on 31 December 2019 .................................................. 412 NOVO BANCO | 2019 ANNUAL REPORT | 2 ABBREVIATIONS AND ACRONYMS NB NOVO BANCO NBG NOVO BANCO Group ECB European Central Bank DG Comp Directorate-General | Competition CCA Contingent Capitalization Agreement YTD Year-to-date - change since the start of the year YoY Year-on-Year - change on a year earlier NII Net Interest Income LCR Liquidity Coverage Ratio €, EUR euro €m million euro €bn billion euro bps basis points pp percentage points Additional notes to this Report NOVO BANCO discloses its results, since 2018, presenting separately the financial results of “NOVO BANCO Recurrent”, and those of “NOVO BANCO Legacy”. Therefore, all the references in this report must take in consideration this segmentation. For more information please refer to chapter 3.4. of this report. This Annual Report is a free translation into English of the original Portuguese version. In case of doubt or misinterpretation the Portuguese version will prevail. NOVO BANCO, S.A. Head Office: Av. da Liberdade, n. 195, 1250-142 Lisbon Commercial and Tax identification number: 513 204 016 Share Capital: €5 900 000 000.00 NOVO BANCO | 2019 ANNUAL REPORT | 3 PART I. MANAGEMENT REPORT 1 WHO WE ARE NOVO BANCO in 2019 Message from the Chairman of the General and Supervisory Board Dear Stakeholders, The General and Supervisory Board (“GSB”) and the respective GSB committees met throughout year 2019 supervising and supporting the Executive Board of Directors (“EBD”) in the monitoring of the execution of the Bank’s strategic goals and targets as set out and agreed in the medium-term plan (“the Plan”). During 2019, the Bank continued at an accelerated pace to execute this Plan in particular focusing in investing, developing and supporting its core commercial franchises as well as the de-risking of the balance sheet through the cleaning up of the past Legacy issues, including the disposal of non-core assets. The financial results of the year for the Recurrent Bank reflects the good progress being made with a net customer loan growth of 5.7% and a Net Income of €177.6m, compared to the loss making results for year 2018. The Legacy Bank successfully disposed of non-core assets and non-performing loans and real estate during the year, resulting in a net balance sheet reduction of €6.2bn, 57.9%. The NPL ratio for NOVO BANCO for 2019 is 11.8% compared to 22.4% for year 2018. This ratio however is still at an elevated level and remains an outlier both in the Portuguese and other European markets (average European Bank NPL ratio <4%) and will therefore continue to be an area of focus for further reduction during the course of 2020. For the year of 2019, the Bank successfully met all the interim European Commission, State Aid Director General for Competition (“DG Comp”) targets with respect to pre provision income, cost / income ratio, number of employees, number of branches and the disposal of significant non-core businesses. NOVO BANCO further improved its internal governance, control, operations and risk management capabilities during 2019. Recognition of the progress being made was reflected in a 25bps SREP Pillar 2 requirement reduction to 3.00% by the Single Supervision Mechanism (“SSM”) for 2020. However, this SREP Pillar 2 requirement for year 2020 remains at a significant high level compared to our Portuguese and European Banking peer group and should therefore be addressed in the near term. The Bank has maintained strong capital and liquidity during the year. The Contingent Capitalization Agreement (“CCA”) continues to provide capital support in the cleanup of past Legacy issues. A loan to NOVO BANCO | 2019 ANNUAL REPORT | 4 deposit ratio of 92% and a liquidity coverage ratio of 143% reflects the healthy liquidity position of Bank at year end 2019. Overall, the Bank has made good progress during the year in realizing its goals and targets, despite the very challenging market conditions, notably the low interest environment. For the year of 2020, realistic strategic goals and targets for NOVO BANCO have been set and agreed, in line with the current market and economic operating conditions. The Bank will continue to transform the business and operating model in support of our customers, employees and our other stakeholders through the continued investment and development of our commercial businesses in the Recurrent Bank. The de-risking and cleanup of the Legacy Bank continues and is targeted to be largely complete by year end 2020, dependent on prevailing market conditions. On behalf of the GSB, I would like to thank our customers and our other stakeholders for their trust and loyalty to NOVO BANCO and to the EBD members as well as all the employees of the Bank for their continued dedication, hard work and sustained commitment during 2019, in helping transform the Bank and realizing our goals and targets. Byron Haynes Chairman of the General and Supervisory Board NOVO BANCO | 2019 ANNUAL REPORT | 5 Message from the Chief Executive Officer Dear Stakeholders, The 2019 financial year was decisive for NOVO BANCO. And it was a decisive financial year because it marks a special milestone in its restructuring and viability path as agreed in the commitments between the Portuguese State and the European Union. The fact that NOVO BANCO attained the goals established about two and half years ago, demonstrates not only the rightfulness of the defined strategy and the demanding governance that was implemented but also the undeniable quality of its people and the loyalty of its clients. The Bank's capacity to quadruple its commercial banking product, to have reduced its cost to income by more than a third and to have kept its relative importance in the market untouched despite the reduction of more than 200 branches and 10% of employees. All this was ensured through the “repairment” of its Balance Sheet, expressed in the reduction of 70% of the Legacy in just two years, in 2019 alone this reduction was over 3 308 billion euro. Equally important was the growth of our credit activity by more than 5%, demonstrating our importance as a funding partner of the Portuguese economy, which moreover allowed us to achieve a Recurrent Bank net income of 177 million euro. The results obtained, both in the “repair of the Balance Sheet” and in the Recurrent Bank activity, were only possible thanks to the demanding and determined support that the Executive Board of Directors has always had from the General and Supervisory Board, as well as from the respective special Committees. A special word for all the Bank's employees who have been tireless in these years of complex restructuring and whose resistance is unquestionable. And a special mention to the shareholders for the precious support that they have given us, not forgetting the Monitoring Committee for its permanent presence in the decisions under its responsibility. A word to our customers as well, who have always been the Bank's raison d'être and who will never cease to be its reason to exist. We always try to respond sustainably adapting our offer of products and services to the demands and needs of our customers. One last word to the community in which the Bank is inserted and that has given us so much support. When I write these brief words, we are facing one of the most decisive challenges that, as a society, we will have to overcome. I am sure that NOVO BANCO with its experience and resilience will be able to positively contribute to the future of our country. António Ramalho Chief Executive Officer NOVO BANCO | 2019 ANNUAL REPORT | 6 2019 Main indicators FINANCIAL RESOURCES + €177.6 million Recurrent Bank Net Income 57.9% Reduction of Legacy Assets €935.4 million NBG Impairments and Provisions PEOPLE 4869 NBG employees €750 thousand investment in training and development 46.4 training hours per employee TECHNOLOGY & EXPERIENCE 200 employees and external contractors in digital transformation area 14 multidisciplinary and agile teams in digital transformation area 566 thousand active clients in digital channels NETWORKS & PARTNERSHIPS 1.3 million clients 387 branches 4292 registered suppliers 6 areas of partnerships with the community: culture, science and academia, institutions of solidarity and social responsibility, financial, communication and media, and technology NOVO BANCO | 2019 ANNUAL REPORT | 7 NOVO BANCO | 2019 ANNUAL REPORT | 8 MAIN INDICATORS - Recurrent31-dez-1831-dez-19ACTIVITY (mn euros)Net assets 37 616 40 814Customer loans (gross) 23 077 24 380Customer Deposits 28 350 27 835ASSET QUALITYNon-Performing Loans (NPL)/ (Customer loans + Cash and deposits with banks and loans and advances to banks)5.4%3.6%Credit provisions / Non-Performing Loans46.8%68.3%Credit provisions / Customer loans (gross)2.7%2.6%Cost of Risk0.17%0.91%PROFITABILITYIncome before taxes (mn euros) -77.2177.6Income before taxes and Non Controlling Interests / Average Net Assets (1) 0.0%0.4%Banking income / Average Net Assets (1)1.9%2.1%Income before taxes and Non Controlling Interest / Average Equity (1) 0.1%5.3%EFFICIENCYOperating costs / Banking income (1) 64.5%54.9%EMPLOYEES (No.)Total5 0964 869- Domestic4 8044 648- International 292 221BRANCH NETWORK (No)Total402387- Domestic381375- International2112(1)According to Banco de Portugal Instruction No. 16/2004, in its version in forceMAIN INDICATORS - Legacy31-dez-1831-dez-19ACTIVITY (mn euros)Net assets 10 658 4 482Customer loans (gross) 5 635 2 675ASSET QUALITYNon-Performing Loans (NPL)/ (Customer loans + Cash and deposits with banks and loans and advances to banks)90.3%81.3%Credit provisions / Non-Performing Loans63.0%51.7%Credit provisions / Customer loans (gross)59.4%45.2%Cost of Risk3.97%15.15%PROFITABILITYIncome before taxes (mn euros) -1335.5-1236.4Income before taxes and Non Controlling Interests / Average Net Assets (1) -6.2%-14.3%Banking income / Average Net Assets (1)-2.0%-5.1%Income before taxes and Non Controlling Interest / Average Equity (1) -62.1%-142.6%(1)According to Banco de Portugal Instruction No. 16/2004, in its version in force NOVO BANCO | 2019 ANNUAL REPORT | 9 MAIN HIGHLIGHTS31-Dec-1831-Dec-19ACTIVITY (mn€)Net Assets 48 274 45 296Customer Loans (gross) 28 712 27 055Customer Deposits 28 350 27 835Equity 3 922 4 003SOLVENCYCommon EquityTier I / Risk Weighted Assets12.8%13.5%Tier I / Risk Weighted Assets 12.8%13.5%Total Capital / Risk Weighted Assets14.5%15.1%LIQUIDITY (mn€)European Central Bank Funding (2) 5 864 4 714Eligible Assets for Repo Operations (ECB and others), net of haircut 14 624 15 253(Total Credit - Credit Provision) / Customer Deposits (1)89%92%Liquidity Coverage Ratio (LCR)125%143%Net Stable Funding Ratio (NSFR)106%101%ASSET QUALITYOverdue Loans > 90 days / Customer Loans (gross)12.1%4.0%Non-Performing Loans (NPL) / (Customer Loans + Deposits with banks and Loans and advances to banks)22.4%11.8%Credit Provision / Overdue Loans > 90 days114.3%171.0%Credit Provision / Customer Loans (gross)13.8%6.8%Cost of Risk0.92%2.32%PROFITABILITYNet Income for the Period (mn€)-1412.6-1058.8Income before Taxes and Non-controlling interests / Average Net Assets (1)-1.5%-2.1%Banking Income / Average Net Assets (1)1.0%0.9%Income before Taxes and Non-controlling interests / Average Equity (1)-14.3%-22.3%EFFICIENCYOperating Costs / Banking Income (1)100.6%113.8%Staff Costs / Banking Income (1)55.0%63.1%EMPLOYEES (No.)Total5 0964 869- Domestic4 8044 648- International 292 221BRANCH NETWORK (No.)Total402387 - Domestic381375 - International2112(1) According to Banco de Portugal Instruction n. 16/2004, in its version in force(2) Includes funds from and placements with the ESCB; positive = net borrowing; negative = net lending Main events in 2019 JAN FEB MAR APR 29 | NOVO BANCO CULTURA | Cultural assets sharing programme celebrates its 1st year. 15 protocols were signed in 2019 to grant 32 works of art to museums in 10 regions of the country. 20 | NOVO BANCO ALGARVE SUMMIT | Under a partnership with SIC Notícias TV channel and the Expresso newspaper, this is an innovative and unique project that highlights entrepreneurs, businesses and other relevant entities, in Regional Summits. Three Summits were held in 2019: Algarve, Beira Interior and Aveiro. 23 | ANNUAL MEETING | 5th edition of the internal meeting with the presentation of the Strategic Plan and annual objectives for the year. 25 | DIGITAL MOBILE KEY | Offers individual clients a new online account opening functionality. 11 | NOVO BANCO HACKATHON FEST | A 24h marathon to create, develop, plan and design innovative solutions in response to technological challenges, in partnership with Nova SBE University, in Carcavelos. 15 | INSTITUTIONAL CAMPAIGN | Launch of first TV institutional campaign - “O MEU NOVO BANCO” (my new bank) - featuring direct testimonies of actual clients and partners. MAY JUN JUL AUG 8 | NOVO BANCO Revelação | Opening of applications for the Prize awarded in partnership with the Serralves Foundation, an initiative that distinguishes young creators in the field of contemporary photography. 31 | PME LÍDER | Published annually, in partnership with Exame magazine, with its 11th edition, addressing topics that interest business clients. 5 | NB ECO ECONOMIA CIRCULAR | NB Eco Circular Economy, a new structured deposit indexed to the performance of the shares of 3 companies that stand out for their ability to apply the concept of Circular Economy. 28 | INTEGRATED PAYMENT PLATFORM | Selection of Fiserv technology to improve the customer experience, through this innovative platform. 8 | SUSTAINABILITY| Signature of the “Letter of Commitment for Sustainable Finance in Portugal” 24 | RESIDENTIAL MORTGAGE LOANS | Offer of new solutions, designed to fulfil the needs of young people up to 35 years old and people over 50 years old, in the current real estate market context. 8 | NON-STRATEGIC ASSETS | Within the scope of the divestment program, the sale of two asset portfolios was concluded – Sertorius Project and Albatros Project. In 2019, other relevant assets were disinvested, contributing to the Legacy reduction. SEP OCT NOV DEC 20 | BUSINESS| Campaign aimed at giving a voice to 10 customers who speak about their business in different regions and industry sectors. 2 | TALENT ATTRACTS TALENT | Internship program of 47 newly graduated students, start working for a year in different Departments of the Bank. The program, which spans across the country, contemplates the commercial structure for the first time. 2 | NEW DISTRIBUTION MODEL | Project development of business model redefinition and branch optimization project. 4-5 | STRATEGIC REFLEXION | Under the motto “For NOVO BANCO by NOVO BANCO”, the meeting brought together all the top management to reflect on the strategic challenges for the coming years. 28 | EXPORT & INTERNATIONALIZATION AWARDS | NOVO BANCO and Jornal de Negócios annual initiative, in partnership with IBERINFORM Portugal with the purpose of recognizing SMEs and Large Companies in two different areas: internationalization and export performance. 6 | SUSTAINABILITY| Signature of letter of commitment: United Nations Global Compact Business Ambition for 1.5ºC. 27 | PORTUGAL EXPORTADOR | 14th edition of the largest event dedicated to national exports, with the purpose of helping Portuguese companies to face and overcome the challenges of the export markets. During 2019, the Bank participated in 7 business fairs and events in the areas of Tourism, Wine, Exports, Textiles and the Food & agriculture Industry. NOVO BANCO | 2019 ANNUAL REPORT | 10 Who we are. NOVO BANCO in 2019 NOVO BANCO, S.A. (“NOVO BANCO” or the “Bank”), together with its subsidiaries and its equity holdings which make up the NOVO BANCO Group (the “Group” or “GNB”), operates mainly in the banking sector, but also in asset management, and holds equity stakes in companies operating in venture capital, insurance, renting and corporate services. Through its 387 branches and its digital platforms, the Bank serves around 1.3 million clients, having taken significant steps in 2019 to i) optimize its core activity, by striving for improved and increasingly efficient processes, and for the accelerated divestment of its Legacy assets; ii) consolidate its digital transformation by incorporating the most advanced technological developments; and iii) continue to build up factors of differentiation vis-à-vis the competition, based on the propositions of NOVO BANCO dos Açores, Banco Best and GNB Gestão de Ativos (Asset Management), alongside NOVO BANCO business units Real Estate Financing and Principal Finance. NOVO BANCO was set up in 2014 upon the resolution of Banco Espírito Santo, S.A.. During its first five years, NOVO BANCO has shown its resilience, overcoming the huge challenges resulting from its status as a transitional bank, and by the new commitments imposed by the European Commission for the sale, in October 2017, of 75% of the Resolution Fund's holdings to Lone Star. DG COMP commitments: first intermediate target achieved The letter of commitment signed by the Portuguese State and the European Commission in connection to the process of authorization of state aid to NOVO BANCO, in the scope of the sale to Lone Star, established 33 commitments to be fulfilled by the Bank until the end of the restructuring period (currently set to 31 December 2021). These commitments are divided into three categories, and compliance therewith is monitored and checked every six months by an international audit company chosen by the European Commission. - Structural commitments, namely commitments to divest in several geographies and businesses and to reduce the Bank's non-core assets (the Legacy assets). - Behavioural commitments, notably the establishment of a cap on the remunerations paid by the Bank, linked to the average remuneration paid by the institution, restrictions on the current and future shareholders, establishment of pricing tools based on Return on Equity (ROE), with preset minimum limits, restrictions on acquisitions, a ban on dividend distributions, a ban on the voting rights of the minority shareholder (the Resolution Fund), and the appointment of a Monitoring Committee to monitor the assets included in the Contingent Capitalization Agreement. - Viability commitments, interim targets and 2021 targets, notably Full-time equivalent (FTE) reduction targets, branch reduction targets, Pre-Provision Income and Cost-to-Income targets (interim and 2021), and adoption of risk management policies. NOVO BANCO | 2019 ANNUAL REPORT | 11 2019 was the first year in which there were targets to meet under most of the commitments set forth in the letter of commitment, in particular those concerning divestment and viability. The success of the strategy followed by the Bank is patent in the results obtained. The targets set under all the commitments were met, with no exception, some of them were even exceeded. The fulfilment of the DG COMP objectives, in particular those concerning divestment and viability, combined with strong investment in IT and digital, will allow NOVO BANCO to grow from a restructuring Bank into a digitally enabled bank, and to remain a reference in the national market, with a strong franchise in the corporate and retail segments, and stand out by the quality of the service provided. In 2019, the Bank’s activity was shaped by the objectives established by the Strategic Plan, which resulted in the growth of the recurrent credit portfolio, with a reduction in the cost of risk, in significant improvements in commercial banking income, and in the continuous reduction of operating costs, despite the strong increase in investment. In 2019, the NOVO BANCO Recurrent began to show signs of normalization and the positive effects of the strategy designed to transform it into the bank of the future. Governance model NOVO BANCO's management relies on a governance model that is unique within the Portuguese financial sector. In line with international best practices in management, and under the new shareholder structure, since 18 October 2017 the Bank has a General and Supervisory Board (GSB) and an Executive Board of Directors (EBD). The General and Supervisory Board is responsible for regularly monitoring, advising and supervising the management of the Bank and the Group subsidiaries, as well as for supervising the EBD in what regards the compliance with the relevant regulatory requirements of the banking activity. The GSB meets on a monthly basis, and its Chairman maintains regular communication and dialogue with the Chief Executive Officer (CEO). In its activity, the GSB is supported by committees to which it delegates some of its powers: the Financial Affairs (Audit) Committee, the Risk Committee, the Compliance Committee, the Nomination Committee and the Remuneration Committee. These committees are composed of and chaired by independent members of the GSB and their meetings may be attended by the members of the EBD responsible for the matters that are dealt with by said committees. The General and Supervisory Board has the responsibilities and powers that are granted to it by law and by the Articles of Association and in its internal regulations, including the supervision of all matters related to risk management, compliance and internal audit, and prior approval on relevant matters detailed in the Articles of Association. The Executive Board of Directors is responsible for the management of the Bank, for the definition of the general policies and strategic objectives, as well as ensuring the running of the business in accordance with the rules and good banking practices. NOVO BANCO | 2019 ANNUAL REPORT | 12 Composition of the corporate and statutory bodies of NOVO BANCO for the 2017-2020 term of office, at the date of this Report: Board of the General Meeting Chairman: Vice-Chairman: Secretary1 Rui Manuel Pinto Duarte Miguel João Valente da Costa Madeira General and Supervisory Board Chairman: Vice-Chairman: Member: Member: Member: Member: Member: Member: Member: Byron James Macbean Haynes Karl-Gerhard Eick Donald John Quintin Kambiz Nourbakhsh Mark Andrew Coker Benjamin Friedrich Dickgiesser John Ryan Herbert Robert Alan Sherman Carla Antunes da Silva Executive Board of Directors Chairman: Member: Member: Member: Member: Officer Member: Member: Member: António Manuel Palma Ramalho - Chief Executive Officer Jorge Telmo Maria Freire Cardoso - Chief Recovery and Investment Officer José Eduardo Fragoso Tavares de Bettencourt - Chief Operating Officer Luís Miguel Alves Ribeiro - Chief Commercial Officer (Retail) Luísa Marta Santos Soares da Silva Amaro de Matos - Chief Legal and Compliance Mark George Bourke - Chief Financial Officer2 Rui Miguel Dias Ribeiro Fontes - Chief Risk Officer Vítor Manuel Lopes Fernandes - Chief Commercial Officer (Corporate) Monitoring Committee3 Chairman: Member: José Rodrigues de Jesus José Bracinha Vieira Statutory Auditor Ernst & Young, Audit & Associados – SROC, S.A., registered in the CMVM4 under number 20161480 and in the OROC4 under number 178, represented by António Filipe Dias da Fonseca Brás, registered in the CMVM under number 20161271 and in the OROC under number 1661, and by João Carlos Miguel Alves, as alternate statutory auditor, registered in the CMVM under number 20160515 and in the OROC under number 896. 1 Pedro Queiroz de Barros held office during the financial year of 2019. The position is held on an interim base by the Company Secretary since the resignation of Pedro Queiroz de Barros on December 31, 2019. 2 Mark Bourke took office on 4 March 2019. 3 During the exercise of 2018, Miguel Athayde Marques held the position of Member of the Monitoring Committee, having resigned from office with immediate effect on 28 February 2019. 4 CMVM: Portuguese Securities Market Commission. OROC: Portuguese Institute of Statutory Auditors NOVO BANCO | 2019 ANNUAL REPORT | 13 Company Secretary Mário Nuno de Almeida Martins Adegas Ana Rita Amaral Tabuada Fidalgo Brás (Alternate Secretary) NOVO BANCO | 2019 ANNUAL REPORT | 14 Business model In a context of disruption of the banking sector caused by the macroeconomic environment, new players, such as fintech, and consumers pressure for greater speed, agility and simplicity, NOVO BANCO has been implementing profound changes in its positioning and working rationale. NOVO BANCO focuses its business model on three main segments – individuals and companies, asset management and markets. The Bank seeks to meet the expectations of its clients and to improve continuously so as to deliver transparent, straightforward, and secure banking services based on the highest standards of integrity and trust, and on quality and customer satisfaction assessment tools. The NOVO BANCO Group counts with 4869 employees distributed in a commercial network and a support services structure, encompassing the following areas: Audit, Internal Control, Human Resources, Strategy, Digital Transformation, Capital Management and Financial Planning, Legal and Compliance, Marketing, Information Systems, Risk Management and Operational Resources. GNB EMPLOYES BY COUNTRY/REGION Countries NOVO BANCO Group Portugal Spain Ireland Switzerland Luxembourg Brazil Total 4647 198 1 7 11 5 4869 NOVO BANCO | 2019 ANNUAL REPORT | 15 Awards and Recognitions NB Obrigações Europa FIMAO Fund Distinguished in Morningstar Portugal Fund Awards 2019, in the Best Euro Bonds National Fund category. NB Obrigações Europa The fund was distinguished in the Rankia 2019 Awards for the quality and consistency of management and the flexibility of its investment process. Best Bank in several categories Distinguished by Global Finance magazine in the Best Trade Finance Provider, Best Sub-Custodian Bank and Best Integrated Corporate Banking Site categories. Digital Account Opening Distinguished by the 2019 Portugal Digital Awards (4th edition), in the Best Digital Product & Customer Experience category. Distinguished by Exame Informática magazine in The best in Technological Portugal category. Short-term Finance Distinguished by the 2019 Portugal Digital Awards (4th edition), in the Best Digital Process category. nbcultura.pt digital platform Silver award winner of the 2019 Communicator Awards (25th edition) , category Websites of Art Distinguished in the Art for Websites category of the W3 2019 Awards. Gold award in the Davey Awards 2019’s Websites of Arts category. Human Resources Management Winner of the “Wealth and Well-being by MÉDIS” and “Best Trainees Academy” prizes in the HR 2019 Awards (14th Edition) promoted by the Human Resources Information Institute. NOVO BANCO Culture “Institution” award in the APOM 2019 Awards for the project of sharing with society its cultural and arts heritage. Economic Research Team Distinguished with the following prizes in the Analyst Forecast Awards 2019: #1 Best Overall Forecaster for Eurozone; #2 Best Overall Forecaster for Portugal; #1 GDP Forecaster for Portugal; #1 Interest Rate Forecaster for Portugal; #1 Fiscal Balance Forecaster for Portugal. NOVO BANCO | 2019 ANNUAL REPORT | 16 2 STRATEGY Transforming NOVO BANCO for the future NOVO BANCO is now transitioning towards a growth strategy, as it approaches the resolution of the Legacy issues. The 2019-2021 strategic plan has its base on four strategic pillars: adjusting risk processes, fostering talent and merit, optimizing IT, Data and Processes, and revolutionizing the distribution model. These four strategic pillars are implemented within a framework of operating circles: optimization, digitalization and differentiation. The 2019-2021 strategic framework remains fit-for-purpose as the bank transitions from turnaround to growth. In 2020, the strategic framework and plan evolved in two main aspects: strengthen the focus on rebuilding its Purpose and Identity and finishing the tail-end of the Legacy resolution plan. In 2020-2022 cycle, NOVO BANCO must strengthen its core competencies to compete at par with peers, and conquer a sustainable position in the national banking sector. NOVO BANCO is adamant in becoming a positive contributor in the ecosystem it sits in, continually monitoring how its behaviors impact others and continuing to display authenticity, transparency, integrity and consistency. The circles and pillars of NOVO BANCO’s strategy provide the basis for the 9 priorities underpinning the strategic plan to support its growth. NOVO BANCO | 2019 ANNUAL REPORT | 17 1. Purpose and Identity NOVO BANCO is rebuilding its purpose and identity maintaining an underlying sustainability emphasis. NOVO BANCO steers its activity based on sustainability principles and with the firm purpose to give back to the community the support it has received from it. With the aim of managing its business fairly and responsibly, the Bank has been implementing a culture of permanent monitoring of its impact on the surrounding ecosystem, training and raising awareness of its employees, business partners and clients and promoting the values of authenticity, transparency, integrity and consistency. More information on the sustainability strategy is provided in the 2019 Sustainability Report. 2. Optimization NOVO BANCO is further optimizing the bank’s cost structure and efficiency models to gain competitive advantage, refocusing the Bank on its core activity, accelerating essential changes that reduce costs and expedite processes and restructuring the bank to achieve a high level of operating profitability. 3. Digitalization Aiming to transform the organization, NOVO BANCO is evolving digital transformation to increase efficiency and meet customer expectations, ensuring compatibility between an incumbent and a digital platform and responding to digital demand, supply digitalization and digital ecosystem. This implies focusing on lower production costs and greater commercial productivity, by simplifying processes, facilitating the transition to a more efficient business model and boosting service intelligence, in parallel with customer experience, service differentiation and innovation. 4. Differentiation NOVO BANCO is developing differentiated core banking value propositions and implementing additional revenue drivers that diversify income sources and distinguish the Bank from its competitors and build up the Group's differentiation, namely through new business initiatives like the Real Estate Financing and Principal Finance areas. 5. Legacy NOVO BANCO is now executing the tail-end of the Legacy resolution strategy to refocus on its core activity. NOVO BANCO | 2019 ANNUAL REPORT | 18 6. Risk Adjustment The strategy outlined for the Bank finds its pillar in specialized, holistic, resilient and efficient risk management and control to support decision-taking processes at both top-management level and across all levels of the organization, and in particular in the first lines of defense. The programs in progress in the risk area thus aim to ensure the alignment of risk management and control, taking into account the new banking challenges, new technological competitors and customer requirements, in compliance with the risk appetite rules defined by the Executive Board of Directors. 7. Talent and Merit NOVO BANCO is implementing a comprehensive talent & merit strategy, establishing and communicating sound governance policies, to attract and retain talent, enable staff to fulfill potential and enhance the Bank’s employee experience from recruitment to retirement. 8. IT, Data & Processes NOVO BANCO is streamlining processes and systems and implementing new ways of working to simplify the bank and its processes in order to improve customer experience, maximize operational efficiency and reduce cost-to-serve. In 2019, particular emphasis was given to programs aimed at technological transformation and at evolving the current platforms for integration into an agile IT infrastructure. This involved setting up a Data Science area, where machine-learning and artificial intelligence are used in predictive models and applying robotics to a greater number of processes, promoting efficient and fast ways of working. 9. Distribution Model In order to meet our clients' needs, their expectations and requirements in terms of speed and simplicity, the Bank is adjusting its distribution model by replacing the current structures and architectures by more efficient, intelligent and technology-based ones, that deliver to the client a differentiating, unique and integrated new omnichannel relationship experience. This change involves deep changes to the branch model and customer journeys, implementing an omnichannel distribution model to meet digital clients’ needs through phygital formats (complementing physical with digital and self-service). NOVO BANCO | 2019 ANNUAL REPORT | 19 3 RESULTS AND ACTIVITY A landmark year for NOVO BANCO 3.1 Economic environment 2019 saw the extension of the cycle of expansion of global economic activity, with a deceleration of the main economic areas that brought down global GDP growth to 3%, the lowest in the last decade. This trend was mainly underpinned by a contraction of industrial activity as a result of the constraints associated with the advanced phase of the cycle, by structural problems in the car industry, and by the impact of trade tensions between the US and China. Economic agents’ confidence was undermined by other factors of political uncertainty, notably the Brexit and social protest movements (e.g. Hong Kong, France, Catalonia, Latin America). This reflected onto the postponement of investment decisions in the main economic areas and a negative trend in international trade flows. Nevertheless, in the US and in Europe, growth was supported by the continued expansion of the services sector and the favorable performance of private consumption (upheld by falling unemployment and rising wages). The US GDP increased by 2.3% in 2019 (2.9% in 2018), while in the Eurozone the economy grew by 1.2% (1.9% in 2018). China's GDP grew by 6.1% (6.6% in 2018), the lowest growth rate since 1990, but with signs of stabilization towards the end of the year, reflecting the new policy stimuli. In the emerging economies, GDP growth fell from 4.5% to 3.7% while in the advanced economies it decelerated from 2.2% to 1.7%. Inflation remained contained in both the US and the Eurozone, notwithstanding lower unemployment and rising wages, suggesting that companies have partially absorbed the increase in production costs (and in the US, the effect of the introduction of tariffs) through a reduction in margins. In the US, year-on-year core inflation closed the year at 2.3%, vs. 2.2% in January. In the Eurozone, core inflation increased from 1.1% to 1.3% in the same period, still below target. In China, inflation rose from 1.7% to 4.5%, reflecting the impact of the African swine fever on the price of food. The US-China commercial war and the expectations of a normalization of the monetary policy that marked the first half of the year contributed to a short-lived inversion of the US yield curve, feeding some fears of a recession. In August, the amount of global debt with negative yields reached a historical high of close to USD 17 trillion (which by the end of the year had retreated to approximately USD 11 trillion). Increasing risks to the outlook and the persistence of subdued inflation thus led the main central banks to reinforce the expansionary nature of the monetary policy. In the US, the Fed made three 25 bps cuts of the target fed funds rate, between July and October, lowering it to 1.5%-1.75%. In the Eurozone, the ECB announced in September the return of its asset purchase program (with monthly purchases of €20 billion per month as from November) and cut the deposit facility rate by 10 bps, to -0.50% (under a two- tier system, to mitigate the negative impact on the financial system). In this context, from January to September the 3-month Euribor fell from -0.309% to 0.383%, albeit picking up at the end of the year, while the 10-year Bund yield retreated from 0.242% to -0.185% (hitting a low of 0.714% at the end of August). The 10-year Treasury yield retreated from 2.685% to 1.919% (with a low of 1.457% at the beginning of September). Corporate debt spreads remained very contained in both the investment grade NOVO BANCO | 2019 ANNUAL REPORT | 20 and the high-yield segments. The euro lost close to 1.95% to the US dollar in 2019. In average annual terms, the price of oil (Brent) retreated from USD 71.2 to USD 64/barrel, reflecting the moderation of global growth and the perception of some surplus in supply. Despite fears over trade tensions, the main equity indices reported significant gains in 2019, bolstered by a combination of expanding economic activity with an increasingly consistent environment of low interest rates. The high amount of share repurchases, in particular in the US (which registered the second ever highest value) are also worth noting. In the US, the Dow Jones, S&P 500 and Nasdaq indices gained 22.3%, 28.9% and 35.2%, respectively. In Europe, the DAX, CAC40 and IBEX rose by 25.5%, 26.4% and 11.8%. These gains became sharper towards the end of the year due an apparent abatement of political risks, resulting, in particular, from the announcement of a partial trade agreement between the US and China, and the lower likelihood of a hard Brexit scenario following the December elections in the United Kingdom. In Portugal, economic activity proved resilient, mainly supported by domestic demand. GDP grew by 1.9% in the year, above the Eurozone average. Private consumption maintained relatively stable real growth compared to 2018 (2.3%), while investment slightly accelerated (to an annual increase of 7.2%). Household spending continued to be supported in 2019 by falling unemployment (6.6% of the labor force, vs. 7% in 2018), low inflation (0.3% in average annual terms, boosting purchasing power) and favorable monetary and financial conditions (supporting the growth of home and consumer loans). On the other hand, net external demand gave a moderately negative contribution to GDP growth, with exports slowing down faster than imports. While exports of goods and services grew by 3% in real terms, imports registered an annual increase of 5.3%. In this context, the combined current and capital account surplus retreated from 1.2% to 0.5% of GDP, denoting a lower net capacity to finance the economy. This resulted from the deterioration of the goods account deficit (reflecting the vigor of domestic demand) and a moderation of the services account surplus, notwithstanding the dynamic performance of the tourism activity. After a slight slowdown in 2018, house prices resumed a moderate acceleration trend in 2019, growing year-on-year by 10.3% in the 3rd quarter, which brought the average annual increase to close to 10%. The combination of growth with improved public accounts - a fiscal balance of close to zero is expected, with the public debt ratio retreating from ca. 12% to 119% of GDP - benefited investors’ perception of the Portuguese economy. This perception translated into an improvement of the Republic's rating (BBB- to BBB by S&P and revision of the outlook to positive, by S&P, Moody’s and Fitch). The 10-year PGB yield fell from 1.72% to 0.44% (with a low of 0,071% in mid-August), narrowing the spread to the German Bund from 148 bps to 63 bps. The PSI-20 equity index advanced by 10.2%. NOVO BANCO | 2019 ANNUAL REPORT | 21 3.2 Relevant facts from the activity - On 4 March, and following the announcement on 24 September 2018, NOVO BANCO S.A. informed that Mark Bourke had started on that day as member of the Executive Board of Directors of NOVO BANCO as Chief Financial Officer for the current term of office. - On 17 April the rating agency DBRS Rating GmbH (“DBRS”) took several rating actions on NOVO BANCO. DBRS upgraded the Long-Term Issuer rating to B (high) from B, the Long-Term Senior Debt rating to B (high) from B, the Long-Term Deposits rating to BB (low) from B (high), the Intrinsic Assessment (IA) to B (high) de B, the Long-Term Critical Obligations Ratings (COR) to BB (high) from BB, and the Short-Term COR to R-3 from R-4. The Subordinated Debt rating was also upgraded to B (low) from (CCC (high). The upgrade of the Long-Term Issuer rating to B (high) takes into consideration the improvement in the NOVO BANCO’s risk profile, particularly in terms of the reduction in Non-Performing Loans (NPLs), the divestment of non-core assets and the further rationalization of the organizational structure. DBRS also made reference to notable achievements in 2018, which included large sales of NPLs and real estate assets. The trend remains Positive for the Long-Term ratings and for the Subordinated Debt. Other Short- Term ratings of NOVO BANCO remained unchanged at R-4 and the trend remains Stable. The Support Assessment remains at SA3. - On 24 July, the rating agency Moody’s Investors Service (“Moody’s”) took several rating actions on NOVO BANCO. Moody’s upgraded the long-term deposit ratings two-notches to B2 from Caa1 and affirmed the long-term senior unsecured debt ratings at Caa2. Moody’s also upgraded the baseline credit assessment (BCA) and adjusted BCA of NOVO BANCO to caa1 from caa2. The outlook on the long-term deposit ratings remained positive while the outlook on the senior unsecured debt ratings improved to positive from negative. Moody’s also upgraded the long- term Counterparty Risk Ratings to B1 from B2, the long-term Counterparty Risk Assessment to B1(cr) from B2(cr) and the Subordinate Regular Bond rating to Caa2 from Caa3. The rating actions were taken following Moody’s change of the Macro Profile of Portugal (Baa3 stable) to “Moderate+” from “Moderate” in combination with the continued improvement in the banks’ credit fundamentals, notably asset risk. - On 5 August, NOVO BANCO informed that its branch in Spain and Novo Banco Servicios Corporativos, S.L. signed a Sale and Purchase Agreement with Waterfall Asset Management L.L.C., a New York-based asset management firm, for the sale of a portfolio of real estate properties and nonperforming loans known as “Project Albatros”. The portfolio had a gross book value of 308 million euro at NOVO BANCO consolidated level and the sale value amounted to 98.7 million euro. - On 5 August, NOVO BANCO informed that it has signed a Promissory Sale and Purchase Agreement with entities indirectly owned by funds managed by Cerberus Capital Management, L.P., a New York-based firm, for the sale of a portfolio of real estate assets, known as “Project Sertorius”. The portfolio with a gross book value of 487.8 million euro comprises 195 properties, corresponding to 1,228 individual units, with industrial, commercial, land plots and residential uses, including parking spaces. The sale value amounted to 159 million euro. NOVO BANCO | 2019 ANNUAL REPORT | 22 - On 5 September, NOVO BANCO and ARRÁBIDA - FUNDO ESPECIAL DE INVESTIMENTO IMOBILIÁRIO FECHADO informed that they have signed a Sale and Purchase Agreement with BURLINGTON LOAN MANAGEMENT DAC, a company affiliated with and advised by DAVIDSON KEMPNER EUROPEAN PARTNERS, LLP, for the sale of a portfolio of non- performing loans and related exposures (Project Nata II). The final Gross and Net Asset disposals approved by the Resolution Fund were €1,365 million and €248 million respectively and the sale value was €157 million. - On 14 October, NOVO BANCO informed that it has completed the sale of the entire share capital of GNB – Companhia de Seguros de Vida, S.A. (“GNB Vida”) to GBIG Portugal, S.A., an entity wholly owned by funds to which the investment adviser is APAX PARTNERS, LLP. The total consideration for the sale amounts to an upfront fixed price of 123 million euro and an earn-out component of up to 125 million euro indexed to distribution targets associated to the 20-year agreement between NOVO BANCO and GNB Vida to distribute life insurance products in Portugal. 3.3 Highlights - Growth of recurrent loan volumes (+5.6%; +€1 303 million), building on the positive trend achieved in 1st half 2019 (+3.1%; +€713 million), with increases across both retail and corporate portfolios. Loans to Corporate +3.8%; Residential mortgage +8.3%; Consumer and other +4.2%. - Stable deposits and increase in total customer funds (+0.8%; +€262 million), namely in off- balance sheet funds, the Bank continues to maintain a strong liquidity position through growing the recurrent bank funds. - Progress to sustainable profitability. Recurrent net income +€177.6 million (Dec.18: -€77.2 million). Income before taxes increased from +€2.2 million in 2018 to +€175.3 million in 2019. Recurrent commercial banking income grew to +€811.9 million (+16,6%) in the year, with a growth in all quarters, with the recurrent net interest margin and fees and commissions showing a growth of +26.9% and +3.7%, respectively, reflecting the continued strengthening of its franchise. - Continued focus on costs control while investing in the core business and in Digital transformation. Recurrent operating costs decreasing -0.8% to €460.8 million (Dec.18: €464.3 million). - Marked reduction in non-performing loans, in line with the defined strategy. Reduction of non-performing loans -€3 308 million from €6 739 million to €3 430 million (reduction of -€6 700 million comparing to December 2017), reflecting a NPL ratio decrease of NOVO BANCO | 2019 ANNUAL REPORT | 23 circa 58% from 28.1% in Dec.17 to 11.8% in Dec.19. The NPL ratio of the recurrent activity decreased to 3.6% (Dec/18: 5.4%). - Reduction of Legacy assets. Reduction of Legacy assets by 57.9% (-€6 176 million), across all asset categories. The sale of GNB Vida's share capital contributed -€4 076 million to this reduction. - Contingent Capitalization Agreement As a result of the losses recorded in the Legacy activity amounting to -€1 236.4 million, that reflects the continued deleverage of Legacy loans and real estate assets, which were in the balance sheet in 2016, NOVO BANCO will request the payment of €1 037 million under the Contingent Capitalization Agreement (CCA), as stipulated in the contract. The amount of the payments requested in 2017 and 2018 and to be requested in relation to 2019 totals €2.98 billion. The maximum amount established in the CCA contract is €3.89 billion. NOVO BANCO continues to deliver on its strategic plan, targets and the commitments assumed by the Portuguese Government with DG Comp. Throughout the year, the Bank continued to make progress on its strategic priorities, achieving positive financial results in recurrent activity. In the Legacy activity the Bank pursued its strategy of reducing non-performing assets. 3.4 Recurrent and Legacy As in 2018, NOVO BANCO discloses its full year 2019 results presenting separately the financial results of NOVO BANCO Recurrent, which include all the core banking activity, and those of NOVO BANCO Legacy, which includes loans to clients, integrating not only loans included in the Contingent Capitalization Agreement, as well as other credits, bonds, real estate and discontinued operations, mostly considered as non-strategic in the commitments imposed by DGCOMP after the resolution, therefore, all the references in this report must take in consideration this segmentation. NOVO BANCO considers that differentiating between NOVO BANCO Recurrent and NOVO BANCO Legacy will allow customers and other stakeholders to better understand the progress of the Bank’s ongoing restructuring. 3.4.1 NOVO BANCO Recurrent Results As at 31 December 2019, NOVO BANCO Recurrent reported a positive net income of +€177.6 million, which represents a year-on-year increase of +€254.8 million. This positive performance was underpinned by the growth of net interest income (+€104.0 million; +26.9%), of fees and commissions (+€11.5 million; +3.7%), and of capital markets results (+41.8 million), and the reduction in impairments and provisions (-€51.0 million; -20.1%), being in part offset by the decrease in other operating results (-€38.9 million). These results reflect the continuing focus on the core domestic business. NOVO BANCO | 2019 ANNUAL REPORT | 24 Net interest income increased by €104.0 million, to €491.2million (+26,9%), benefiting from the positive contribution of the optimization measures implemented in 2018 and the expansion of the loan volume and continued focus on pricing policy. During 2019 there was an increase in the loan volumes (corporate, mortgage and consumer) and revenue levels were maintained. Growth in volumes was achieved while maintaining a focus on pricing discipline. However, the highly competitive corporate market contributed to a slight decrease in interest rates to 2.24% (Dec/18: 2.36%). NOVO BANCO | 2019 ANNUAL REPORT | 25 The liability management measures performed led to the reduction of the cost of funding from 0.69% to 0.48%, while the interest rate on assets increased from 1. 83% to 1.86%. The resulting net interest margin was 1.37% (+25 bps compared to 31 December 2018). Fees and commissions on banking services contributed +€320.7 million (+3.7%) to the results, which compares with +€309.2 million on 31 December 2018. Fees and commissions related to payments management, and loans and guarantees, were relatively stable despite the competitive environment that has characterized banking activity. Bancassurance and asset management continued to deliver good results. Recurrent commercial banking income grew to +€811.9 million (+16.6%) in the year with a growth in all quarters (1Q19: +€188 million; 2Q19: +€199 million; 3Q19: +€202 million; 4Q19: +€223 million). The Capital markets results totaled +€72.2 million, reflecting the gains on the sale and revaluation of securities, in particular sovereign debt securities. In addition, the losses recorded under this heading related to the hedging of sovereign debt securities (-€111.1 million) were more than offset by the increase of the respective fair value reserves (+€245.7 million), included in the Group's equity. Operating costs totaled €460.8 million, a year-on-year absolute decrease of -0.8%, that reflects the investment in the core business and in the digital transformation, as well as continued cost control. Operating income was up by €122.0 million year-on-year, reaching €377.8 million (+47.7%). The cost of risk considering the credit impairment was 91bps. Excluding the one offs and exceptional provisions in 2019 the underlying cost of risk would be in the range of 55-65 bps. Activity Assets increased by €3 198 million (+8.5%) with net customer loans growing by 5.7% (+€1 270 million), building on the positive trend already achieved up to the 3rd quarter of 2019 (+4.0%; +€895 million), with increases in individuals and corporate loan portfolios. The growth in corporate loans reflects the continued support to domestic companies, across all economic sectors (including industry, retail, real estate activities and tourism and services), with a special focus on SMEs. NOVO BANCO | 2019 ANNUAL REPORT | 26 mn€absolute%Customer loans (net)22 46523 7351 2705.7%Real estate 374 307- 67-18.0%Other assets14 77716 7721 99513.5%Total Net Assets37 61640 8143 1988.5%Total Liabilities and Equity37 61640 8143 1988.5%31-Dec-1831-Dec-19Change The recurrent assets’ quality indicators improved, as shown by the NPL ratio's reduction to 3.6% and coverage ratios’ improvement by 2150 basis points. 3.4.2 NOVO BANCO Legacy In line with the medium-term strategy of deleverage of Legacy assets, NOVO BANCO Legacy reported a loss of -€1 236.4 million, which includes losses related to the sale and devaluation of assets (project Sertorius (sale of real estate); project Albatros (sale of real estate and non-performing loans in Spain); project NATA II (sale of non-performing loans and related assets) and GNB Vida). NOVO BANCO | 2019 ANNUAL REPORT | 27 mn€%Customer Loans (gross)23 07724 3801 3035.6%Corporate12 44712 925 4783.8%Residential Mortgage9 32910 100 7708.3%Consumer finance and other1 3011 355 554.2%Non-Performing Loans (NPL)*1 309 946- 363-27.8%Impairment 612 645 335.3%NPL Ratio*5.4%3.6%-1.8p.p.…NPL coverage*46.8%68.3%21.5p.p.…Cost of Risk (bps) 17 91 74…* Includes Deposits and Loans and advances to Banks and Customer LoansCUSTOMER LOANS31-Dec-1831-Dec-19Changeabsolutemn€LegacyChangeabsolute%Net Interest Income 67.2 49.4- 17.8-26.4%+Fees and Commissions 4.6 2.7- 1.9-40.8%=Commercial Banking Income 71.8 52.2- 19.6-27.4%+Capital Markets Results- 70.7- 269.0- 198.3...+Other Operating Results- 237.0- 201.5 35.615.0%=Banking Income-235.9-418.3-182.4-77.3%-Operating Costs 22.917.7-5.3-22.9%=Net Operating Income-258.8-436.0-177.2-68.5%-Net Impairments and Provisions456.4732.9276.560.6%Credit 223.9 405.1 181.180.9%Securities 0.9- 3.7- 4.6...Other Assets and Contingencies 231.5 331.5 100.043.2%=Income before Taxes- 715.2-1 168.9- 453.7-63.4%Corporate Income Tax and Special Tax on Banks 620.2 83.4- 536.8-86.5%=Income after Taxes-1 335.4-1 252.3 83.16.2%-Non-Controlling Interests0.1- 15.9- 16.0...=Net Income for the year-1 335.5-1 236.4 99.17.4%Income Statement31-Dec-1831-Dec-19 NOVO BANCO Legacy assets decreased by 57.9% compared to December 2018. This was underpinned by reductions of circa -€822 million (-35.9%) in the net loan book, of -€832 million (50.1%) in real estate, and of -€4 522 million (67.4%) in other assets, of which -€4 076 due to the sale of GNB Vida. There are no liabilities directly allocated to the Legacy activity, therefore the funding costs for Legacy loans and real estate are calculated based on the average balance sheet funding rate (0.48%). NOVO BANCO | 2019 ANNUAL REPORT | 28 mn€absolute%Customer loans (net)2 2891 467- 822-35.9%Real estate1 661 829- 832-50.1%Other assets6 7082 186-4 522-67.4%Total Net Assets10 6584 482-6 176-57.9%Total Liabilities and Equity10 6584 482-6 176-57.9%31-Dec-1831-Dec-19Changemn€%Customer Loans (gross)5 6352 675-2 960-52.5%Corporate5 1482 307-2 841-55.2%Residential Mortgage 220 165- 56-25.4%Consumer finance and other 267 203- 64-23.9%Non-Performing Loans (NPL)*5 4292 485-2 944-54.2%Impairment3 3461 208-2 138-63.9%NPL Ratio*90.3%81.3%-9.0p.p.…NPL coverage*63.0%51.7%-11.3p.p.…Cost of Risk (bps) 3971 5151117…* Includes Deposits and Loans and advances to Banks and Customer LoansCUSTOMER LOANS31-Dec-1831-Dec-19Changeabsolute 3.5 NOVO BANCO Group (consolidated) 3.5.1 Results NOVO BANCO Group reported a net loss of -€1 058.8 million in 2019, reflecting the combined effect of a -€1 236.4 million loss in the Legacy activity and a +€177.6 million profit in recurrent activity. NOVO BANCO Group recorded losses related to the restructuring process and the deleverage of non- performing assets, namely projects Sertorius, Albatros, and NATA II, and the sale process of GNB Vida. The combined activity in 2019 includes the following: - Commercial banking income reached €864.1 million (+12.5% YoY), supported by increases in net interest income (+19.0%) and in fees and commissions (+3.1%); - Capital markets results were negative, at -€196.8 million, reflecting the losses resulting from the Legacy activity (-€269.0 million). In contrast, fair value reserves on the securities portfolio reported an expressive increase; - Operating costs decreased by -1.8% year-on-year, to €478.5 million, underpinned by the improvements made in simplifying processes and streamlining the organization, with the consequent reduction in the number of branches and employees. The costs related to the Legacy activity were significantly reduced. - The provision charge in the period, totaling €935.4 million, is broken down into credit impairments amounting to €627.5 million, -€0.2 million for securities and €308.1 million for other assets and contingencies, of which €47.3 million are provisions for restructuring and €177,8 million are related with the sale processes of non-performing assets (NATA II, Sertorius and Albatros) and GNB Vida. NOVO BANCO | 2019 ANNUAL REPORT | 29 mn€absolute%Net Interest Income 454.3 540.6 86.319.0%+Fees and Commissions 313.9 323.5 9.63.1%=Commercial Banking Income 768.2 864.1 95.912.5%+Capital Markets Results- 40.3- 196.8- 156.5...+Other Operating Results- 243.7- 247.0- 3.3-1.3%=Banking Income 484.2 420.3- 63.9-13.2%-Operating Costs 487.3 478.5- 8.8-1.8%=Net Operating Income- 3.0- 58.2- 55.1...-Net Impairments and Provisions 710.0 935.4 225.531.8%Credit 263.5 627.5 364.0...Securities 13.3- 0.2- 13.5...Other Assets and Contingencies 433.1 308.1- 125.0-28.9%=- 713.0- 993.6- 280.6-39.4%-Corporate Income Tax 667.7 45.8- 621.9-93.1%-Special Tax on Banks 27.3 27.1- 0.2-0.7%=Income after Taxes-1 408.0-1 066.5 341.524.3%-Non-Controlling Interests4.7- 7.7- 12.3...=Net Income for the year-1 412.6-1 058.8 353.825.0%Income before TaxesINCOME STATEMENT31-Dec-1931-Dec-18Change Net Interest Income The reduction in the interest rate on liabilities (-18bps) contributed to the increase in the net interest margin by 26bps year-on-year (from 1.06% to 1.32%), with the interest rate on assets increasing by 7bps (from 1.75% to 1.82%). The net interest margin shown also includes the net interest income of Legacy activity. The average rate on customer loans, the main component of financial assets (70.8%), was 2.08%. As to liabilities, the average balance of deposits was €27.9 billion, with an average interest rate of 0.34%. The Bank therefore continued to build the spread between the rate on interest earning assets (1.82%; Dec/18: 1.75%) and the cost of liabilities (0.48%; Dec/18: 0.66%). Fees and Commissions Fees and commissions on banking services contributed +€323.5 million (+3.1%), which compares with +€313.9 million on 31 December 2018. NOVO BANCO | 2019 ANNUAL REPORT | 30 mn€INTEREST EARNING ASSETS42 2851.75% 75240 3441.82% 745Customer Loans30 7222.06% 64328 5582.08% 601Money Market Placements2 6100.83% 221 4421.32% 19Securities and Other Assets8 9520.95% 8710 3441.19% 125INTEREST EARNING ASSETS AND OTHER42 2851.75% 75240 3441.82% 745INTEREST BEARING LIABILITIES38 4040.73% 28437 9600.51% 196Customer Deposits28 8360.66% 19427 9490.34% 97Money Market Funding8 4700.30% 268 9310.37% 25Other Liabilities1 0985.73% 641 0808.93% 73OTHER NON-INTEREST BEARING LIABILITIES3 881--2 383--INTEREST BEARING LIABILITIES AND OTHER42 2850.66% 28440 3440.48% 1961.09% 4681.34% 549Stage 3 impairment- 14- 9NIM / NII1.06% 4541.32% 541NIM / NII(without stage 3 impairment adjustment)NET INTEREST INCOME (NII) AND NET INTEREST MARGIN (NIM)Average BalanceAvg. RateIncome / Costs31-Dec-19Average BalanceAvg. RateIncome / Costs31-Dec-18mn€absolute%Payments Management118.8117.2-1.5-1.3%Commissions on Loans, Guarantees and Similar111.6107.8-3.8-3.4%Asset Management and Bancassurance66.771.54.87.2%Advising, Servicing and Other16.826.910.160.4%TOTAL313.9323.59.63.1%FEES AND COMMISSIONS31-Dec-1931-Dec-18Change In 2019 there was a decrease in fees and commissions on payment services and on loans and guarantees, due to the current context of banking activity in Portugal, which was offset by the increase in asset management, Advisory, Servicing and sundry fees and commissions. Capital Markets and Other Operating Results Capital markets results, at -€156.5 million, reflect the gains on the sale and revaluation of sovereign debt securities, the losses on the revaluation of derivative instruments, and the losses resulting from the Legacy activity (-€269.0 million). Other operating results include, apart from the losses related with the projects for the sale on non- performing assets (-€46.2 million), the costs with the contributions to the Single Resolution Fund (€22.5 million) and to the Portuguese Resolution Fund (€12.2 million). Operating Costs Operating costs show a year-on-year reduction of -1.8%, reflecting the restructuring measures associated with the downsizing of the distribution network and simplification of the organizational structure and processes, with the consequent reduction of the headcount. Staff costs amounted to €265.4 million (-0.3% YoY), with an associated headcount reduction of 227 employees since 31 December 2018. As at 31 December 2019, NOVO BANCO Group had 4 869 employees. General and administrative costs dropped by -9.8% year-on-year, to €179.5 million. This reduction reflects the continued rationalization and streamlining of the Bank’s internal business processes. At 31 December 2019 the branch network comprised 387 units (402 at 31 December 2018). Impairments and Provisions NOVO BANCO Group increased provisions by €935.4 million (€225.5 million more than at 31 December 2018), of which €627.5 million for credit (€364.0 million increase) and €308.1 million for other assets and contingencies, including €47.3 million for restructuring and €177.8 million related to the sale of non- performing assets. NOVO BANCO | 2019 ANNUAL REPORT | 31 mn€absolute%Staff Costs397.6303.5275.7 266.1 265.4- 0.8-0.3%General and Administrative Costs *285.4231.4215.4 199.0 179.5- 19.5-9.8%Depreciation *71.756.158.1 22.1 33.7 11.552.0%TOTAL 754.6 590.9 549.2 487.3 478.5- 8.8-1.8%* The adoption in 2019 of IFRS 16 led to an increase of c. €17 million in Depreciation and to a decrease of the same amount in General and Administrative Costs.OPERATING COSTS31-Dec-1931-Dec-1831-Dec-1531-Dec-1631-Dec-17Change31-Dec-19 vs 31-Dec-18 Net impairments and provisions include €732.9 million related to the Legacy activity, which represents 78% of the total for NOVO BANCO Group. 3.5.2 Balance sheet and Activity Customers Loans NOVO BANCO's strategy is one of supporting the domestic business community combined with a robust lending policy. This support has been provided across all industry sectors and all companies, placing a particular focus on the exporting small and medium-sized companies in the industry, retail, real estate, tourism, and services sectors, and those that incorporate innovation in their products, services or production systems. Gross customer loans decreased by €-1 658 million relative to December 2018. The reduction in corporate loans in 2019 was mainly focused on Legacy non-performing loans, which decreased by -€2 841 million. In the recurrent activity, loan volumes increased by +5.6%, with improvements in both individuals and corporate portfolios. It should be noted that residential mortgage loan portfolios totaling €0.6 billion, which had been subject to securitization operations by the Group, were purchased in 2019. The main credit risk indicators also showed an improvement compared to December 2017 and 2018. NOVO BANCO | 2019 ANNUAL REPORT | 32 absolute%Customer Loans263.5627.5364.0...Securities13.3-0.2-13.5...Other Assets and Contingencies 433.1 308.1- 125.0-28.9%TOTAL 710.0 935.4 225.531.8%mn€31-Dec-18NET IMPAIRMENTS AND PROVISIONS31-Dec-19Changemn€absolute%Loans to corporate customers17 59515 232-2 363-13.4%Loans to Individuals11 11711 823 7056.3%Residential Mortgage9 55010 264 7147.5%Other Loans1 5681 558- 9-0.6%Customer Loans (gross)28 71227 055-1 658-5.8%Provisions3 9581 852-2 105-53.2%Customer Loans (net)24 75425 202 4481.8%CUSTOMER LOANSChange31-Dec-1931-Dec-18 The reduction in loans overdue by more than 90 days and in non-performing loans (including deposits with banks and loans and advances to banks) improved the respective asset quality ratios to 4.0% and 11.8%, respectively, at 31 December 2019 (12.1% and 22.4% at 31 December 2018). The coverage of non-performing loans by impairments (including deposits with banks and loans and advances to banks) reached 56.2%. Provisions for credit amounted to €1.9 billion, representing 6.8% of the total loan book. Securities portfolio The securities portfolio, the main source of eligible assets for funding operations with the ECB, totaled approximately €12.0 billion on 31 December 2019 and represented 26.6% of assets. NOVO BANCO | 2019 ANNUAL REPORT | 33 mn€absolute%Overdue Loans > 90 days5 1273 4641 083-2 380-68.7%Non-Performing Loans (NPL)*10 1306 7393 430-3 308-49.1%Overdue Loans > 90 days / Customer Loans (gross)16.3%12.1%4.0%-8.1p.p.Non-Performing Loans (NPL) * / Customer Loans (gross) + Deposits with banks and advances to banks (gross)28.1%22.4%11.8%-10.7p.p.Credit Provisions / Customer Loans17.9%13.8%6.8%-6.9p.p.Coverage of Overdue Loans > 90 days109.8%114.3%171.0%56.7p.p.Coverage of Non-Performing Loans *56.3%59.9%56.2%-3.6p.p.ChangeDec-19 vs Dec-18* Includes Deposits and Loans and advances to Banks and Customer LoansASSET QUALITY AND COVERAGE RATIOS31-dez-1731-Dec-1831-Dec-19net of impairmentmn€absoluterelativePortuguese sovereign debt4 4344 071- 363-8.2%Other sovereign debt2 9463 750 80427.3%Bonds1 8392 8831 04456.8%Other1 6561 337- 318-19.2%Total10 87512 0421 16710.7%ChangeSecurities portfolio31-Dec-1931-Dec-18 Funding As at 31 December 2019 total customer funds amounted to €34.4 billion, with off-balance sheet funds having increased by 12.3% year-on-year. 3.6 NOVO BANCO (Separate) 3.6.1 Results NOVO BANCO reported a net loss of €1 087.6 million in 2019, which compares with a net loss of €1 432.9 million in 2018. Commercial banking income reached €841.1 million (+14.7% YoY), driven by the increase in net interest income (+22.4%); fees and commissions were up by +2.7%. Capital markets results were negative, at €313.9 million, to which the main adverse contribution was the recognition of devaluations in the restructuring funds. Operating costs decreased by -2.4% year-on-year, to €450.7 million, reflecting staff cuts and the improvements achieved in terms of simplifying processes and streamlining the structures. Net operating income (before impairments and taxes) was positive, at €45.1 million. The year's total provision charge of €1 067.4 million includes €630.9 million for credit, €0.2 million for securities and €436.3 million for other assets and contingencies. NOVO BANCO | 2019 ANNUAL REPORT | 34 mn€absolute%Deposits28 35027 835- 515-1.8%Other Customer Funds (1) 346 566 22063.6%Debt Securities (2) 689 708 182.7%Subordinated Debt 415 415 00.0%Sub -Total29 79929 523- 277-0.9%Off-Balance Sheet Funds (3)4 3874 925 53812.3%...Total Funds34 18634 448 2620.8%(1)Includes checks and pending payment instructions, Repos and other funds.(2)Includes funds associated to consolidated securitisation operations.(3)For comparison, in 2018 the Off-balance Sheet Funds placed by GNB Vida were not taken into consideraration.ChangeTOTAL FUNDS31-Dec-1931-Dec-18 3.6.2 Activity NOVO BANCO’s activity in 2019 was developed under the same guidelines already referred to for NOVO BANCO Group. NOVO BANCO | 2019 ANNUAL REPORT | 35 mn€Net Interest Income446.2546.222.4%+Fees and Commissions287.2295.02.7%=Commercial Banking Income733.4841.114.7%+Capital Markets Results10.0-313.9...+Other Operating Results-204.5-31.484.6%=Banking Income538.9495.8-8.0%-Operating Costs461.6450.7-2.4%=Net Operating Income77.445.1-41.6%-Net Impairments and Provisions822.81067.429.7%Credit295.1630.9...Securities10.60.2-98.1%Other Assets and Contingencies517.1436.3-15.6%=Income before Taxes-745.5-1022.2-37.1%-Taxes660.638.7-94.1%-Special Tax on Banks26.826.6-0.6%=Net Income for the year-1432.9-1087.624.1%INCOME STATEMENT31-dec-1831-dec-19% Changemn€absolute%Assets43 83145 0261 1962.7%Customer Loans (gross)26 89325 046-1 848-6.9%Loans to Individuals9 0859 939 8549.4%Residential Mortgage7 6538 524 87111.4%Other Loans1 4321 415- 17-1.2%Loans to corporate customers17 80815 106-2 702-15.2%On Balance Sheet Funds29 33228 891- 441-1.5%Deposits28 10127 419- 683-2.4%Other Customer Funds (1) 338 561 22366.1%Debt Securities 478 496 183.8%Subordinated Debt 415 415 00.0%(1) Includes checks and pending payment instructions, Repos and other funds.ChangeACTIVITY EVOLUTION31-dec-1831-dec-19 On 31 December 2019, customer deposits totaled €27.4 billion, which is €683 million less than in December 2018 (€28.1 billion). Gross customer loans decreased by €1 848 million relative to December 2018, with loans to individuals posting an increase of €854 million that partly offset the reduction in corporate loans (-€2 702 million). This reduction was particularly sharp in non-performing loans. The Overdue loans >90 days / Gross loans ratio improved to 4.3% (from 12.9% on 31 December 2018), with the corresponding coverage ratio rising to 171.6% (117,5% on 31 December 2018). NOVO BANCO | 2019 ANNUAL REPORT | 36 absolute%DATA BASIS (Euro millions)Customer Loans (gross) 26 893 25 046- 1 848-6.9%Overdue Loans 3 529 1 097- 2 432-68.9%Overdue Loans > 90 days 3 466 1 073- 2 393-69.0%Forborne Loans 4 793 2 694- 2 099-43.8%Non-Performing Loans (NPL)* 6 665 3 372- 3 293-49.5%Customer Loans Impairment 4 072 1 841- 2 230-54.8%ASSET QUALITY AND COVERAGE RATIOS (%)Overdue Loans / Gross Loans to Customers13.1%4.4%-8.7p.p.Overdue Loans > 90 days / Gross Loans to Customers12.9%4.3%-8.6p.p.Forborne Loans / Gross Loans to Customers17.8%10.8%-7.1p.p.Non-Performing Loans (NPL)* / Gross Loans to Customers + Gross Loans to Credit Institutions23.7%12.4%-11.2p.p.Impairment / Total Loans to Customers15.1%7.4%-7.8p.p.Impairment / Overdue Loans115.4%167.8%52.4p.p.Impairment / Overdue Loans > 90 days117.45%171.6%54.1p.p.Impairment / Non-Performing Loans*61.1%54.6%-6.5p.p.* includes Credit InstitutionsCREDIT QUALITY31-dec-19Change31-dec-18 3.7 Business segments 3.7.1 Retail Banking In 2019 the Retail banking area once again stressed its relevance in the daily life of thousands of clients, individual customers and small business, that entrust their main banking relationship to NOVO BANCO. In a context of fast-changing customer preferences and service requirements, and a very challenging competition environment, with new Fintech players entering the banking sector, NOVO BANCO maintained a prominent position in the main product lines, the result of differentiation through service quality and permanent enhancement of the functionalities and services provided through the various customer relationship channels. In its drive for customer service optimization, in 2019, NOVO BANCO launched the ‘NB360º Singular’ service, designed to improve the value proposition for the Affluent and Upper Affluent clients. This service, under its own brand and identify, and having specifically allocated areas within the branches, fosters greater proximity between clients and their account managers, and gives access to investment experts. In recognition of the focus placed by NOVO BANCO on the well-being of its clients, there has been a widespread increase in several treasury and day-to-day management products for the Portuguese companies and families, including salary credit, credit cards and service accounts. The number of active clients using the digital channels grew by more than 10% YoY, while the number of Clients subscribing to the ‘Solução NB Ordenado’ (NB Salary Solution) registered an increase of over 15%. The competitiveness and breadth of the Insurance and Protection offer, in both the Life and Non-Life insurance products, also contributed to boost the commercial activity in Retail and to increase the level of client cross-selling, with production of new insurance policies growing by more than 20% year-on-year. NOVO BANCO's saving and investment solutions were reinforced throughout the year with the launch of innovative products, such as the Profiled Investment Funds, which are customized to the risk appetite of each client, and the ‘NB ECO Structured Deposits’, whose yield is linked to the performance of companies that are leading the change in their industry sectors’ economic models, and are at the forefront of best environmental, social and governance practices. The high level of customer recognition and satisfaction with the Bank's offering permitted to double the pace of diversification compared to 2018. NOVO BANCO's position as an expert in credit solutions, ensuring high speed of response, contributed to drive consumer lending, which grew by 10% year-on-year. In terms of the non-financial offering, some exclusive thematic offers were launched in 2019, with products of several categories (technology, jewelry, collectibles, football, and others). This has permitted to maintain the rising trend of NOVO BANCO's market share in loan granting by the Portuguese banking sector. In Residential Mortgage Loans, the introduction of specific solutions targeting different segments - such as people under 35 or over 50 years old -, according to their specific needs at the time of purchasing a home, and a new proximity service to credit intermediaries, have allowed NOVO BANCO to maintain its competitive position, amidst an environment of increasing competition. NOVO BANCO | 2019 ANNUAL REPORT | 37 In the Small Business segment, NOVO BANCO has been finetuning and reinforcing its product and service offer with specific solutions tailored to the different stages of companies’ life-cycles, including the “NB Novo Negócio” (NB New Business) Solution, which is free of maintenance fees for the first three years in business, and to which a POS can be associated, also free of monthly charges. In addition, leveraging on its deep knowledge of the characteristics of businesses and regions obtained through its proximity to the clients, NOVO BANCO enters regional protocols with several entities, which allow it to put this knowledge into practice. 2019 thus ends with a campaign that enhances the concept of proximity, joining the voice of the Clients to the voice of NOVO BANCO. This dynamic approach has yielded expressive growth rates, namely in client acquisition (+25% YoY) and in medium- and long-term credit production, construction loans and leasing (+10.7% YoY). Equally worth mentioning as a sign of the segment's buoyancy, the volume of loans contracted under the current edition of the mutual guarantee line dedicated to small and medium-sized enterprises (“Capitalizar MPE 2018”) surpassed by 55% the volume contracted in the previous edition. Specialized offer within the scope of the sustainability policy NOVO BANCO Group is committed to looking out for the environmental impacts of its financial products and services and to any resulting business opportunities, shaping its offer in accordance with the expectations of its stakeholders. Recognizing the important role played by the financial sector in promoting sustainable development, the Group has a specific offer of innovative financial products and services designed to encourage environmental accountability amongst its clients. 2019 saw the launch of several such products and services. 2 April | NB ECO Less Plastic Structured Deposit. A sustainable investment, based on environmental, social and governance (ESG) criteria, in one of the fastest growing investment areas in financial markets worldwide. 3 June | NB ECO Circular Economy Structured Deposit. Linked to the share performance of three companies – Caterpilar Inc., Renault SA and Danone SA – included in the MSCI World ESG Leaders index, which stand out for their ability to apply the Circular Economy concept. July| NB ESG DIGITAL SECURITY. Included within the saving and investment products offer, this structured deposit's underlying assets are shares of three multinational companies - Cisco Systems Inc, Symantec Corp., and SAP SE – included in the STOXX Global ESG Impact index, and as such recognized as companies that best meet environmental, social and governance (ESG) criteria. October | NB ECO Better Environment. Included within the saving and investment products offer, this structured deposit's underlying assets are shares of three multinational companies - Iberdrola, Royal Dutch Shell and Schneider Electric – which not only are included in the STOXX Global ESG Impact index, and therefore comply in their activity with Environmental, Social and Governance (ESG) criteria, but have also undertaken the commitment to implement strategies (on the governance model, the management of greenhouse gases and financial statements disclosures) for fighting climate change. Detailed information on environmentally responsible services is provided in the 2019 Sustainability Report. NOVO BANCO | 2019 ANNUAL REPORT | 38 Subsidiaries Still in the Retail segment the services rendered by NOVO BANCO subsidiaries NOVO BANCO dos Açores and Banco Best should be highlighted. NOVO BANCO dos Açores In 2019, NOVO BANCO dos Açores continued to develop its activity in close proximity to its clients, mainly in the primary and industrial sectors, with a particular focus on the manufacturing industry and tourism. Its net profit increased by 6.4% year-on-year, reaching €4 005 thousand, which compares with €3 764 thousand in December 2018. During the year, NOVO BANCO dos Açores contributed with a €929 thousand donation to the Santas Casas das Misericórdias dos Açores, a charity shareholder of the Bank, which contributed towards the fulfilment of its Commitments and social objectives. NOVO BANCO dos Açores continues to register a steady improvement of its activity, as shown by a 2.3% year-on-year increase in Deposits. Loans decreased by -3.7% in the period, essentially through the reduction in Overdue Loans. Net Interest Income increased by 6.2% compared to 2018, with Commercial Banking Income and Total Banking Income rising by 3.1% and 5.1%, respectively. NOVO BANCO dos Açores closed the year with net assets of €559 million. NOVO BANCO dos Açores continues to be the only Bank with its registered office in the Autonomous Region of the Azores. For detailed information about Banco Best's activity in 2019, see its annual report at www.novobancodosacores.pt Banco Best Banco Best offers the full range of products and services of a universal bank, assisting its customers in identifying saving solutions and investment opportunities at any time available, and helping them make the most of all the advantages of the new information technologies through the internet, namely greater speed and efficiency in the treatment of processes and transactions and access to innovative services that facilitate and streamline the clients’ relationship with the Bank. Banco Best is headquartered in Lisbon and has no branches, in the traditional sense of the term, therefore it provides its banking and financial products and services through other channels: (i) the Internet; (ii) Investment Centers located across the country; and (iii) Contact Centre. Banco Best posted a net profit of €2.7 million in 2019, while maintaining solid prudential and financial strength ratios, namely a loan to deposit ratio of 27%. NOVO BANCO | 2019 ANNUAL REPORT | 39 In 2019 Banco Best maintained its focus on digital banking leadership and innovation in the offer of financial products and services, developing a set of projects that emphasize its strong commitment to innovation and the independent nature of the offer, and permitted to put at the disposal of the Clients the best third-party products at world level. For detailed information about Banco Best's activity in 2019, see its annual report at www.bancobest.pt 3.7.2 Corporate Banking NOVO BANCO has strong roots in the Portuguese business community, as shown by its market shares, namely in loans to Non-financial Companies, where its share reaches 16.3%, and in deposits, where it stands at 14.6% 5. Production of medium- and long-term loans to the SME and Corporate segment totaled approximately €2 billion in 2019, the same as in 2018. NOVO BANCO thus maintained its reference role in supporting companies and economic activity in Portugal, especially through protocol lines, and in particular through credit with mutual guarantees, which grew by 35% year-on-year. In Trade Finance, NOVO BANCO provides a wide range of products and specialized advice designed to support international trade. The Bank's know-how in this segment is much valued by companies, which reward it with a market share of 20%6. In January 2020 NOVO BANCO was considered the ‘Best trade finance bank’ in Portugal by the Global Finance international magazine, based on its activity in 2019. This award highlights the international recognition for the Bank's capabilities in this important business area. Also worth noting, in 2019 NOVO BANCO was considered by the Global Finance magazine as the “Best Integrated Corporate Banking Site” in Western Europe, an award that highlights the recognized quality 5 Non-Financial Companies based in the Economic and Monetary Union, with contracts in Euro - November 2019. 6 December 2019, as measured by the number of Swift messages. NOVO BANCO | 2019 ANNUAL REPORT | 40 of the digital solutions made available by the Bank to the corporate sector. In this context, another relevant fact concerns the ever-increasing levels of use of the corporate online banking and mobile banking solutions made available by the Bank to its business clients - NBnetwork and NB smart app, which in 2019 grew by 4% and 12%, respectively. The increase in customer satisfaction with these digital solutions should also be stressed, with 81% of the clients responding they are very satisfied with NBnetwork. 2019 also saw the introduction of important novelties in the Bank's digital offering, notably the possibility of requesting Bank Guarantees online, through a fully dematerialized, agile and very effective process that was rapidly adopted by the clients. As to the assessment made by the corporate clients of NOVO BANCO and its team of bankers, the level of "Customer Service Satisfaction" reached 93% (percentage of responses of 8 to 10 in a scale of 1 to 10) in November 2019, which represents an increase of 4pp relative to 2017. Moreover, the results of other surveys conducted, namely relating to "Global Satisfaction with the Bank", "Trust", "Repurchase intention" and "Recommendation", have also improved steadily since 2015. During the year NOVO BANCO also promoted and participated in several initiatives addressed to the business and corporate clients and enhancing the visibility of economic sectors, regions and outstanding companies, namely the following: - Regional Events. The NOVO BANCO “Algarve Summit” (February, in Albufeira), “Beira Interior Summit” (July, in Covilhã) and “Aveiro Summit” (November, in Aveiro) promoted these regions and their distinctive assets and reached out to their companies and entrepreneurs (under a partnership with the Expresso newspaper and SIC TV channel). - Industry-specific Events. Promotion of the more dynamic, representative and innovative sectors in the Portuguese economy, namely (i) the Agroindustry sector, where the Bank participated in SISAB, the International Trade Fair for Portuguese Food and Beverages (March, in Lisbon); (ii) the Agricultural sector, where the Bank participated in Ovibeja (April) and in the National Agricultural Fair (June, in Santarém); and (iii) the Wine sector, where the Bank participated in the Wine Harvest Fair, which celebrates the wine culture and economy of the Dão region and was held from the 19th to the 22nd of September. The highlight of the program was, at corporate level, the Conference "Wine Tourism in the Dão region - A way for Wine and Tourism"; (iv) the Textiles and Clothing industry - NOVO BANCO entered a partnership Protocol with ATP - Associação Têxtil e Vestuário de Portugal, under which it was exclusive banking sponsor of the annual conference of the International Textile Manufacturers Federation (ITMF), held in Porto from the 20th to the 22nd of October, as well as of the Textiles Industry Forum, held in December, in Famalicão; and (v) the Tourism sector - NOVO BANCO was exclusive sponsor of the “Publituris Trade Awards” (March, in Lisbon) and “Publituris Travel Awards” (September, in Cascais), which are flagships of the business dynamism and recognition enjoyed by Tourism at national level. - Events to promote Exports. (i) The Export & Internationalization Awards, an initiative of NOVO BANCO and the Jornal de Negócios newspaper (in partnership with IBERINFORM), that aim to distinguish SMEs and Large Companies in different areas, namely successful internationalization and best exporting performance (October, in Ílhavo); (ii) 'Portugal Exporter', NOVO BANCO | 2019 ANNUAL REPORT | 41 the largest national event dedicated to business internationalization, under a partnership with AIP (Portuguese Industrial Association) and AICEP (Portugal Global Trade & Investment Agency); the purpose of this event is to promote capacity building and assert the exporting capabilities of Portuguese companies in international markets. This event, held in Lisbon on 27 November, had more than 1,200 participants and over 130 Portuguese and international speakers. NOVO BANCO's objective is to maintain a competitive positioning in the corporate segment, and in particular to support the exporting companies and the most dynamic and innovative industries. To this end, it will continue to invest in developing digital platforms and in streamlining processes that enhance customers' service experience, designing its products and services according to innovative solutions that meet companies’ needs, thus reinforcing its role as a partner of the Portuguese business community. 3.7.3 International Commercial Banking In line with its strategy of divesting from non-strategic assets, in January 2019 NOVO BANCO closed down its London branch (United Kingdom). 2018 was primarily marked by the drawing up, approval and start-up of implementation of a Strategic Plan for NOVO BANCO’s Branch in Spain, to be deployed over 2018-2022. The Plan lays down a set of activity guidelines that, considering the scope and dynamics of the Spanish economy, and several specific characteristics of this country (such as, among others, the consolidation of the banking sector, or the fact that BANCO is the only Portuguese bank with activity in Spain), will permit to harness the existing opportunity by pursuing an ambitious goal of expanding the commercial activity. 2019 was a year of deep transformation for the Spain branch. Several strategic scenarios were analyzed at the start of the year, with a view to adapting the business model and cost structure to a context of general decline in interest rates. Each segment, in the branch network and central structure, was subject to thorough analysis, and a sweeping restructuring program (involving more than 300 measures) was designed, which will contribute significantly to the growth, profitability and sustainable development of the branch. This work involved changing the segmentation criteria and defining target clients, as well as designing a more customized customer service model, focused on the higher added value clients (namely Medium-sized and Large Companies, including those operating at Iberian level, and the Private and Affluent Banking segments). Eight branches were closed, and the branch now operates from nine distribution points plus specialized teams based in the head office and a central structure that manages the remote channels. This global repositioning involved multiple client migrations between agencies and segments, under very controlled business erosion levels. Moreover, a large number of processes were re-engineered or outsourced, and cost-cutting measures were implemented, so as to increase the branch's efficiency. As a corollary of all these initiatives, a staff downsizing program was also carried out, covering about 20% of the branch's workforce. This initiative was completed in December 2019 with no problems and in a climate of social peace. NOVO BANCO | 2019 ANNUAL REPORT | 42 Another key priority for the branch was to improve the quality of its balance sheet. This was achieved through two sale operations of non-performing assets - Albatros and Cannas -, which, in addition to having a very positive impact in terms of reducing REOs, also allowed the branch to lower its NPL ratio from 24% to 6.5% in 2019, decisively contributing to improve the Asset Quality Indicators of the Group itself. Moreover, several other initiatives were launched in the course of 2019 to set in place objective conditions for the sustainable growth of the activity in Spain, namely: the adoption of new risk management policies and procedures, the implementation of new rating models adjusted to the market specificities and the reality of the strategic segments, the definition of new Standard conditions and offerings customized to each Segment, and the migration of the IT infrastructure to an external supplier, among others. The Luxembourg Branch posted a 49% year-on-year increase in total assets, which reached €2.5 billion at the end of 2019. These results are in line with the strategic reorientation carried out in this Branch, which resulted in a reinforcement of the booking activity, through the operationalization of new financing transactions originating from NB’s commercial structures and the hosting of transactions transferred from discontinued international units. Also deriving from this strategy, the winding down of the local client acquisition business, initiated at the end of 2017, was completed, as imposed by the European competition authority. 3.7.4 Asset Management The asset management activity is developed by GNB Gestão de Ativos, mainly in Portugal and Spain. The offer covers all types of funds - securities, real estate and pension funds - in addition to the provision of discretionary and portfolio management services. At the end of 2019 GNB Gestão de Ativos had total assets under management of €11.3 billion, which represents an increase of 5.6% compared to the end of the previous year (€10.7 billion in December 2018). Such volumes consolidate the asset management activity in Portugal, Luxembourg and Spain. In Portugal, asset volume under management was up by 6.0% (to €10.2 billion, versus €9.6 billion in December 2018). This increase was supported by all business areas except for Real Estate Investment Funds, which contracted by 26.7% (to €1 096.5 million, from €1 495.9 million in 2018), as a result of this business unit’s divestment strategy in 2019. Mutual funds registered an increase of 60.2% (to €573.3 million, from €357.9 million in 2018), mainly underpinned by net subscriptions totaling €177.8 million in 2019. The volume under management of Pension Funds increased by 8.4% year-on-year (to €2 340.2 million, from €2 158.4 million in 2018), reflecting net subscriptions of €33.2 million and a €148.6 million value increase of the fund's assets. In Wealth Management, volume under management reached €6 194.5 million (€5 611.1 million in December 2018), underpinned by a €358.0 million asset value increase and net subscriptions of €225.3 million, mainly focused on the Life Products portfolios (which increased by €171.8 million). The Luxembourg unit reported an increase of 26.5% in volumes under management relative to the end of the previous year (€310.3 million at the end of 2019 vs. €245.3 million at the end of 2018), essentially through the growth of the NB Eurobond fund (+35.1% YtD). NOVO BANCO | 2019 ANNUAL REPORT | 43 The promissory sale and purchase agreement on the Spain asset management unit (Novo Activos Financieros, S.A.) was signed at the end of 2019. The transaction is expected to be closed in the second half of 2020. The net profit for the year was €8.7 million, representing a year-on-year reduction of 9.9%. To these results the domestic units contributed with €6.3 million and the international units with €2.4 million, of which €2.8 million were contributed by the Luxembourg unit. The good performance of the funds in 2019 allowed the company to receive performance fees totaling €3.5 million (€1.7 million in the domestic units and €1.8 million from Luxembourg funds). Equity increased by 12.3% relative to the end of 2018, reaching €70.4 million at the end of the year. 3.7.5 Markets This segment includes the global financial management activity of the Group, namely raising and placement of funds in the financial markets, as well as investment in and risk management of credit, interest rate, FX and equity instruments, whether of a strategic nature or as part of current trading activity. It also includes any activities arising from strategic decisions impacting the entire Group. NOVO BANCO | 2019 ANNUAL REPORT | 44 3.8 Digital banking The implementation of NOVO BANCO Digital was completed in 2019. This is a group-wide area created in 2018, which acts as an accelerator and facilitator of transformation to allow meeting the new and demanding expectations of the Bank’s clients: banking anywhere, available 24 hours a day, 7 days a week, faster, more intuitive, more personalized, smarter and with more options to choose from. Digital transformation equals organizational transformation The ambition in this field is strong: the aim is to attain the highest level of service delivery and quality in commercial digital banking, providing our clients with solutions aligned to the best global standards of usability, service level and satisfaction. An agile organization was built with close to 200 people from various areas of the bank and from partners, structured into multidisciplinary autonomous teams empowered to develop solutions for the clients. Customer-centric designed methodologies were introduced to delve deeply into the customers’ needs and on this basis design market leading solutions A specific governance model was established to steer digital transformation; this model is led by the CEO and ensures the ongoing involvement of the Executive Board of Directors. A relevant technological transformation has been driven, including the introduction of a new digital technology stack that allows teams to develop solutions with speed and agility. A workspace has been set up to meet the needs of the transformation teams and allow them to be agile, fast and efficient. The clients fuel the digital transformation Digital evolution in NOVO BANCO has been remarkable, especially in the development of the digital channels for individual customers. The app mobile NBsmart app is leader in Portuguese banking, both in Google Play and in Apple Store, and has scored average assessments of 4.5 out of 5. In 2019, the NBsmart app and the website NBnet maintained high levels of satisfaction, boasting more than 87% of very satisfied clients. The clients continued to trust and promote the NBsmart app and NBnet, which scored 85.2% and 83.2%, respectively, in the Net Promoter Score (NPS). The Bank will continue to develop the digital channels and expand their functionalities, so as to meet its clients’ expectations. At the end of 2019 there were more than 566 thousand active clients in the digital channels (+6.6% YoY) and more than 374 thousand in mobile banking (+20.1% YoY). The clients’ digital activity continued to grow at a strong pace, with the digital clients’ penetration rate in December reaching 45.3% in individual NOVO BANCO | 2019 ANNUAL REPORT | 45 clients, 79% in corporate clients, and 67.2% in small business clients. This growth is strongly underpinned by mobile banking, with this channel's penetration rate reaching 32% in the individual client’s segment and 24.8% in the small business segment, corresponding to year-on-year increases of 6pp and 3pp, respectively. It is also worth noting that, for the first time, customer interactions on the mobile channel surpassed ATM's and branches. The NBsmart app has been growing to be the channel of excellence and preference in the relationship with private customers. Digital Transformation Programme The following initiatives contributed to improve and fine-tune the experience delivered to the clients: Digital mobile key. First bank in Portugal to launch a digital mobile key for online account opening, with no need for face-to-face contact or video calls, in a more convenient, simple, fast, safe and paperless process. This new service earned NOVO BANCO an honorable mention in the Internet category ‘The best of Technological Portugal’ awarded every year by Exame Informática to people and organizations NOVO BANCO | 2019 ANNUAL REPORT | 46 that distinguish themselves in the field of Science and Technology. This initiative also deserved an honorable mention in the ‘Best Digital Product & Customer Experience’ category of the 4th edition of the Portugal Digital Awards, organized under a partnership between Jornal de Negócios newspaper, IDC and Axians. New Home Buying experience – residential mortgage loans. A new digital mortgage loan tool has been made available, which allows a private customer to simulate, consult eligibility, obtain an immediate response by validating the information provided and submitting the process mortgage loans in a convenient and remote way. This tool improves the experience of those who want to take out a mortgage loan, simplifying the process, without papers and travel to the bank until commercial approval, providing: - “Smart Simulator” - much more than a simple and traditional simulator, it allows to inform in a simple and immediate way, if the simulation is eligible to proceed to the credit application. If not, the simulator itself indicates the way to fine-tune parameters for a favorable result, with the possibility of requesting a contact by the Bank to find a solution. - Loan pre-analysis document - from the outset, allows the client to print a document with the pre- analysis of the credit application, valid for 30 days, to support the home search process, subject to commercial approval and consequent confirmation of declarative information presented by the customer. - Loading of documents to support the mortgage loan process, providing greater convenience and speed in the decision. - Monitoring the entire process in a completely digital way, with a dynamic list of documents to be presented according to the purpose and type of credit sought NB smart app. The mobile application has evolved to enable access to new functionalities that make life easier for our clients, at no additional cost. - Transfers to phone contacts with no need of BIN or IBAN. - Mobile phone cash withdrawal. - App payments using QR or NFC codes. - Use of Multibanco (ATM) with no need to insert a bank card. - Matrix Card replaced by biometric data. NBnet. The internet banking started offering online personal loan application, with simulation and approval, for amounts of up to €15,000 and 72-month maturity. NBnetwork. Launch of CRM (Customer relationship management) on this digital channel for corporate clients, taking full advantage of the Digital Channels for commercial purposes, always and increasingly based on the rationale of improving our clients’ experience, and developing more targeted and personalized offers. Bank guarantee request now available online, promoting customer autonomy for frequent transactions, increasing response speed and quality, and simplifying the whole process in an end-to-end process. Short Term Finance. A new approach to treasury support for corporate clients is now on pilot phase, which will transform their experience and provide an immediate response to their treasury needs. This solution, which simplifies the integrated credit process, is accessed through our corporate bankers, who define a pre-established credit limit based on the clients’ profile, which can be used within one year NOVO BANCO | 2019 ANNUAL REPORT | 47 through the credit products which the client finds more convenient. This initiative deserved an honorable mention in the ‘Best Digital Operational Process’ category of the 4th edition of the Portugal Digital Awards, organised under a partnership between Jornal de Negócios, IDC and Axians. Phygital. A pilot set of initiatives to change processes and introduce simpler and more efficient ones was made available at some of the Bank's branches to promote a “paperless” culture. Different forms of digital signature are being introduced, in a phased and incremental manner, that allow the formalization of operations at branches to be dematerialized, using, for example, handwritten electronic signatures and signatures validated and obtained through ‘one-time password’ validation codes sent to customers' mobile phones. Finally, the conditions have been set in place to start a shared mobility pilot within and outside the branches, improving customer-centered service and increasing contracting and execution speed, while also contributing to greater cost efficiency (printing, paper and filing). Data Science. A Data Science area has been created, which, through machine-learning and artificial intelligence predictive models, permits to offer the clients a deeply personalized relationship with the bank. Its main mission is to generate value from data, whether structured or not, in a fair and ethical manner for both the clients and the bank. The area's activity is based on open-source technologies within the Phyton and Spark ecosystem, working in big data environments from a newly-created data lake. It provides cross-cutting support to all areas of the organization, working in cases of use of marketing, strategy, digital channels, compliance, among others. Among the initiatives already launched, two stand out, which are currently in production and generating value for clients and the Bank: - Next Best Offer – new models for detecting the needs of individual customers and the products that best satisfy them were designed, predicting the relevance of each offer, at each moment, and according to the profile of each customer. These models make it possible to improve and personalize the relationship with the clients, anticipating their needs and increasingly enriching their relationship with the bank. Their use of explainable and interpretable methods (explainable AI) should be stressed, as they permit to assess the ethical impact of the model's recommendations. - Corporates like You – a set of models has been developed to design and map companies' commercial relations network (clients and non-clients), based on transactional and external data, thus permitting to find clusters of clients with similar needs and profiles. These models allow account managers to take a 360º approach to their clients, understanding and forecasting their financial and commercial needs, while also facilitating the acquisition and reactivation of clients which have relations with NOVO BANCO clients and permitting to analyze the value chain in which they operate (from production to distribution). PSD2. Launch of dedicated interface solutions developed in the context of the new payments directive (“PSD2”), that allow Clients to access accounts with NOVO BANCO, for consultations and payments, through other entities’ websites and applications. The development of a dedicated solution to foster customer loyalty has also been initiated, providing added value and innovative services. Technological evolution. The bases have been laid for an approach to application development, with autonomous teams oriented to the customer journeys, facilitating an omnichannel approach and supported by agile methodology. The development of the first two customer journeys relied on a NOVO BANCO | 2019 ANNUAL REPORT | 48 completely renewed technology stack, based on open-source tools and a container-supported microservices approach, with a strong DevOps component, enhancing speed, reuse, and scalability, as well as ensuring greater flexibility. In order to maximize agility, efficiency and flexibility, as well as to minimize risks, the first steps have been taken to use the cloud as a valuable tool. NOVO BANCO HACKATHON FEST A marathon of ideas and new solutions in the financial area, lasting 24 intensive hours, promoted under a partnership with NOVA SBE – School of Business & Economics. With the "Hello Future” signature, its aim was to involve undergraduate and master students in the development of innovative technological solutions for banking problems and challenges. The first edition had the participation of 37 students from 3 Universities: Nova SBE, IADE, and FCT, and 12 employees of NOVO BANCO. The participants, organized into 10 teams, were given the challenge of proposing the creation of a Fintech B2B startup which, in partnership with NOVO BANCO, will help support Portuguese companies to overcome their growth challenges, along three key drivers: (i) development of new products and a new approach to the market based on support data existing in the banking universe; (ii) internationalization; and (iii) digitization. The interaction between participants and mentors generated a positive and creative energy, resulting in 10 ideas that were assessed by a panel of judges, two of which were awarded prizes. 3.9 Liquidity and funding NOVO BANCO manages liquidity risk in accordance with all the regulatory rules and its own management principles, guaranteeing that all its responsibilities are met, whether in normal market conditions or under stress conditions. NOVO BANCO’s liquidity risk is managed under the perspective of (i) short-term liquidity, (ii) structural liquidity, and (iii) contingency liquidity. Short-term liquidity Short-term liquidity levels are monitored through daily mismatch reports, prepared in accordance with pre-established guidelines and internally defined metrics, which permit to detect any signals of crisis with potential impacts on the Bank, namely through idiosyncratic risk, contagion risk (due to market tensions) or the risk of repercussions of an economic crisis on the Bank. This process ensures an ongoing and active role in liquidity risk management and risk assessment from the EBD. In addition, the liquidity position is also regularly reported to the Banco de Portugal and the ECB. The EBD monitors the evolution of the liquidity position, namely eligible assets and liquidity buffers, main cash inflows and outflows, deposits’ evolution, medium- and long-term funding, central banks funding, NOVO BANCO | 2019 ANNUAL REPORT | 49 the evolution of the treasury gap (net interbank deposits), as well as certain warning signals pre- established for the purpose. Structural liquidity In terms of the structural liquidity, NOVO BANCO prepares a monthly liquidity report (for more details see ‘Liquidity Risk’ in chapter 3.8. Risk Management), taking into account not only the effective maturity but also behavioral maturity of the various products, which allows to determine the structural mismatches for each time bucket. Based on this information, the activity funding annual plan is prepared taking into account the established budget targets. This plan, which is regularly reviewed, favors, as far as possible, stable funding instruments. The Capital and Asset Liability Committee (CALCO), in its monthly meetings, analyses and discusses the Bank's liquidity position. CALCO performs a comprehensive analysis of the liquidity risk and its evolution, with special focus on current liquidity buffers and generation / maintenance of eligible assets for rediscount with the ECB and respective impacts on the liquidity ratios. Contingency liquidity The Bank also has in place a liquidity contingency plan, which comprises a set of measures that, when triggered, allow to manage and/or minimize the effects of a liquidity crisis. These measures aim to address additional liquidity needs and boost the resilience of NOVO BANCO in a potential situation of stress. NOVO BANCO Group’s funding policy is one of the major components of the Bank’s liquidity risk management, which stresses the diversification of funding sources. NOVO BANCO's strategy has from its incorporation largely relied on boosting customer deposits as its major source of funding, in so far as since the resolution measure was implemented access to the financial markets has not yet been normalized. At the end of 2019 NOVO BANCO showed a liquidity surplus, with deposits with the ECB having increased by €0.9 billion, to €1.4 billion. During the year, liquidity management continued to involve the rationalization of funding sources, and the improvement of profitability, namely through an effort to reduce the pricing of deposits and to diversify the product offering, focusing in particular on off-balance sheet products. Funding Hence at the end of 2019 customer deposits with NOVO BANCO totaled €27.8 billion, a year-on-year reduction of €0.5 billion that mainly resulted from the referred effort to adjust the price of liabilities, and from the off-balance sheet products offering. NOVO BANCO | 2019 ANNUAL REPORT | 50 The reduction in customer deposits was therefore offset by the increase in off-balance sheet customer funds, leading to a €262 million increase in total customer funds. Despite said reduction in customer deposits, at the end of 2019 these remained the Bank's main funding source, accounting for roughly 61% of its funding structure (59% at the end of 2018), and of this, 68% were deposits from the retail segment. NOVO BANCO | 2019 ANNUAL REPORT | 51 On the other hand, NOVO BANCO pursued its strategy of reducing non-strategic and non-productive assets, focusing in particular on the loan book, which in gross terms was reduced by €1.6 billion in 2019. This reduction did not have a significant impact on liquidity as it essentially resulted from the write-off of loans and the sale of non-performing loan portfolios and related assets, whose financial settlement will only take place in 2020. Despite their low impact on liquidity, NOVO BANCO concluded the following material transactions in 2019 within the scope of its deleverage policy: i) sale of a portfolio of real estate assets and non-performing loans – “Project Albatros”, ii) sale of a portfolio of real estate assets – “Project Sertorius”, iii) sale of a portfolio of non-performing loans and related assets – ‘Project Nata II’, and iv) sale of the entire share capital of GNB – Companhia de Seguros de Vida, SA. NOVO BANCO has a low senior debt reimbursement schedule in the next few years. Therefore, with reduced funding needs, no liquidity strains are to be expected in the near future. In this context, and in view of the increase in the amount of cash placed with the ECB, to €1.4 billion, net funding from the ECB decreased to €4.7 billion at the end of 2019. In addition, gross funding registered a small decrease, to €6.1 billion. On the other hand, the securities portfolio increased by around €1.2 billion, largely through the strategy of investing in high-quality liquid assets (HQLAs), which led to an increase of €1.3 billion in this type of bonds in portfolio. This increase contributed to expand the diversification of the securities portfolio, with the Portuguese sovereign debt contracting by €0.3 billion, and the sovereign debt of other States, as well as debt from supranational and corporate issuers increasing. NOVO BANCO | 2019 ANNUAL REPORT | 52 NOVO BANCO extended the maturity of its PTNOBBOE0011 covered bond issue, with nominal value of €1 billion, for a period of five years, to 7 October 2024. Moreover, in December 2019 the Bank made two new issues of covered bonds, one in the nominal amount of €550 million and maturity in December 2024 and the other in the nominal amount of €750 million and maturity in June 2023. As a result of its strategy of investment in the securities portfolio, and issuance of covered bonds, NOVO BANCO maintained a high liquidity buffer. At the end 2019, the portfolio of eligible securities for rediscount with the ECB totaled €15.3 billion (net of haircuts), which compares with €14.6 billion at the end of 2018. NOVO BANCO thus maintained a comfortable liquidity position, with the regulatory Liquidity Coverage Ratio (LCR) improving to 143% at the end of 2019, from 125% at the end of 2018. Finally, the Net Stable Funding Ratio (NSFR) in 2019 was 101%. The minimum requirement for own funds and eligible liabilities (MREL), set by the Single Resolution Board, using the financial and supervisory information as of 31 December 2018, has been set at 17.61% of Total Liabilities and Own Funds of NOVO BANCO. MREL requirement represents 26.01% of the Total NOVO BANCO | 2019 ANNUAL REPORT | 53 Risk Exposure Amount and should be reached by 31 December 2023. The requirement is in line with Bank expectations, and consistent with the funding plans. It should be noted that the MREL requirement will be subject to ongoing regulatory reviews, reflecting ongoing assessment of the business evolution and this may lead to changes in the profile of NOVO BANCO assets and liabilities, and its underlying risks. In terms of capital, and with a positive impact on the liquidity position, we would stress, in May, the payment of €1,149 million made by the Resolution Fund to NOVO Banco under the Contingent Capitalization Agreement. NOVO BANCO | 2019 ANNUAL REPORT | 54 3.10 Risk management 3.10.1 Risk management model framework The definition of a risk management model allows the define of a strategic direction for risk management by defining standards, patterns, objectives and responsibilities for all areas of NBG. This model supports top management in effective risk management and in the development of a strong risk culture. This model defines: (i) the main risks faced by NBG; (ii) the risk appetite requirements; (iii) the functions with responsibility in risk management; and (iv) the governance structures and corporate bodies, and risk management committee. 3.10.2 The risk culture at NOVO BANCO Group NOVO BANCO Group is naturally exposed to the various types of risk inherent to the banking system, arising from external and internal factors, namely from the nature of the markets in which it operates. NBG considers that Risk Management is a key pillar of its action to create sustained value over time. NBG’s Risk Management is thus based on the three lines of defense model, viewing the adequate NOVO BANCO | 2019 ANNUAL REPORT | 55 detection, measurement, monitoring and control of all material risks to which NBG is exposed. This model implies that all employees, in their sphere of activity, are responsible for the management and control of risks. The First Line of Defense comprises all employees involved in revenue generation and customer service areas, commercial areas, and all associated support functions, including Finance and Accounting, Treasury, Human Resources and functions of an Operational nature. First-Line employees are responsible for: (i) identifying the risks arising in the performance of their activities and developing appropriate policies, standards and controls; and (ii) escalating risk events to the Second-Line management teams. The Second Line of Defense comprises the Risk and Compliance employees. The role of the Second Line is to establish the limits, rules and restrictions under which the First Line activities must be carried out, in accordance with Novo Banco’s risk appetite, and to monitor the performance of the First Line with regard to these limits and restrictions. The Third Line of Defense comprises employees from Internal Audit. These provide independent assurance to the EBD and GSB regarding the effectiveness of governance and the risk management process. The risk function is also based on other principles: independence vis-à-vis the business units, universality, through application across the whole NBG, integration of the risk culture, through a holistic and pre-emptive approach to risk, and specialization. 3.10.3 Risk management function The risk management function is organized in such a way as to allow effective management of the risks considered relevant and material by NOVO BANCO (those to which top management pays special attention and which may have an impact on the achievement of the objectives defined by the Bank) as well as those considered as emerging (those where little is known about their components, and whose impact may occur over a longer time horizon). The relevant and material risks identified are quantified within the scope of the Internal Capital Adequacy Self-Assessment (ICAAP) exercise, the most relevant being: (i) credit risk, which includes default, counterparty and concentration risk, (ii) market risk in the banking book, which includes interest rate risk NOVO BANCO | 2019 ANNUAL REPORT | 56 in the banking book (IRRBB), equities risk, credit spread risk, real estate risk and pension fund risk, (iii) market risk in the trading book, (iv) operational risk, which includes operations risk, information systems risk, compliance risk, and reputational risk, and (v) business risk. Emerging risks, which are closely monitored by the risk structures, include cyber risk, climate change, and regulatory changes, among others. Risk management is considered vital for NOVO BANCO Group Risk Management, as a vital function for the development of NBG’s activity, is centralized in the Global Risk Department (GRD), Rating Department (RTD), and Model Validation Office (MVO), which are responsible for operationalizing and implementing the policies defined by the Executive Board of Directors (EBD). All materially relevant risks are reported to the management and supervision bodies (as applicable, to the Executive Board of Directors, General and Supervisory Board and respective Risk Committee, and to the other specialized committees, as applicable.). NB Group takes an integrated and holistic approach to Risk Management At operational level, the Global Risk Department (GRD) centralizes NBG's Risk Management Function, namely in terms of the responsibilities inherent to the function, supervising the various institutions of the Group and ensuring independence vis-à-vis the business areas. The Head of NBG’s Risk Management Function is the Head of the GRD. To ensure maximum efficiency in the articulation with the GRD, a local Risk Management Officer function was appointed in each relevant entity of NBG. The GRD acts either directly or as coordinator, in articulation with the units of the local Risk Management function. NOVO BANCO | 2019 ANNUAL REPORT | 57 Credit Risk Credit risk represents the potential financial loss arising from the failure of a borrower or counterparty to honor the contractual obligations established with NOVO BANCO within the scope of its lending activity. Management and control of risks of this nature are based on an internal risk identification, assessment and quantification system. 2019 main initiatives and highlights - Reduction of the non-performing loan (NPL) portfolio, which contracted by more than €3.3 billion in 2019 at NOVO BANCO, causing the NPL ratio to decline from 22.4% (Dec/18) to 11.8% (Dec/19). It should be noted that in the Recurrent Bank the NPL ratio dropped from 5.4% (Dec/18) to 3.6% (Dec/19) and is now practically in line with the European average, and, most importantly, at a comfortable level for a sustainable bank. - For 2020, the objective of convergence of the NPL ratio with the levels of the Sector (national and European) is maintained, making use of the strategies that best fit to achieve that same objective. - Specific impairment coverage at conservative levels and above the European average (55% Individual NOVO BANCO vs. 45%) - The lending activity at the Recurrent Bank maintained its growth tendency (+5.7%; +€1.3 billion relative to 2018). This growth occurred across all portfolios - individual and corporate. - Improvement of NOVO BANCO’s loan portfolio profile, with an increase in Stage 1 credit (loans with no indications of an increase in credit risk) against reductions in Stage 2 and Stage 3 credit (loans with indications of an increase in credit risk and loans in default, respectively). - Compliance with the internally defined risk profiles when admitting credit into the different individual and corporate portfolios, by following up and monthly reporting the selected risk appetite metrics. In addition, and within the framework of the Banco de Portugal Recommendation with regard to new credit agreements entered into with consumers, and as expressed in its annual self-assessment report, the Bank incorporated and fully complies with all the criteria of this Recommendation in its decision-making procedures for credit operations (regarding solvency assessment, maximum terms assumed, limits on DSTI ratios, regular repayment schedule and maximum LTV values by type of Mortgage purpose). - The focus was maintained on reducing concentration levels in the loan portfolio, permitting to maintain the downward trend in single-name concentration, in terms of both the largest 5 names (from 11% to 9% of total exposure), the largest 10 names (from 16% to 13% of the total exposure), and the largest 100 names (from 52% to 48% of the total exposure). NOVO BANCO | 2019 ANNUAL REPORT | 58 - Development of the new definition of default in accordance with the latest regulatory requirements and best market practices. Although its implementation is only scheduled for 2020, the new definition of default represented in 2019 an enormous effort to recover historical data, involving the retroactive processing of information dating back 10 years as well as the development and implementation of a daily engine, whose results have been running in parallel since the last quarter of 2019. The implementation of the new definition will still represent a significant effort in 2020. - Definition of a new operating model to be adopted in the credit-decision process for individual clients and small businesses, with a view to increasing their degree of automation. This model will be implemented gradually during 2020, starting with the creation of a consumer credit pilot in some branches, which will be subsequently expanded to the rest of the commercial network on a test / learning basis, depending on the results achieved. Market Risk Market risk represents the potential loss resulting from an adverse change in the value of a financial instrument due to fluctuations in interest rates, foreign exchange rates, equity prices, commodity prices, real estate prices, volatility and credit spreads. NOVO BANCO | 2019 ANNUAL REPORT | 59 2019 main initiatives and highlights - The risk appetite for the Bank's trading activity was kept conservative, and the policy for the investment portfolio continued to be focused on liquidity management (around 80% of the portfolio is public debt) and margin generation, taking into account the commitments assumed with the DGCOMP, measured through value at risk (VaR). - Compliance with the risk appetite defined for the remaining risks of the banking book, namely interest rate risk on the Balance Sheet, equity risk, real estate risk, exchange rate risk on structural positions and pension fund risk, also taking into account the deleverage commitments assumed with the DG COMP, when applicable. - Evolution of NBG’s VaR - 99% at 10 days (Dec/18-Dec/19): Trading and Investment Portfolio Liquidity Risk Liquidity risk derives from an institution’s present or future inability to settle its liabilities as they mature, without incurring in excessive losses. The liquidity management process aims, on the one hand, to measure net liquidity outflows arising from contractual and contingent positions, under normal conditions or under stress scenarios previously defined by the Bank, these being used to determine the size of the available liquidity pool at any time, and on the other, to plan for stable funding sources in the medium and long-term. 2019 main initiatives and highlights - Performance of the liquidity stress test (LiST) exercise promoted by the European Central Bank, where NOVO BANCO's performance was considered adequate. NOVO BANCO | 2019 ANNUAL REPORT | 60 - Discipline in liquidity management and control processes, permitting to report an LCR throughout 2019 above the defined risk appetite (regulatory minimum of 100%); the average LCR in the 12 months of 2019 was 129%. - At 31 December 2019, NOVO BANCO had a liquidity pool with the ECB (after haircuts) in the amount of €8,2 billion, in addition to an investment portfolio concentrated on public debt, which allows it to survive a severe idiosyncratic and market stress period of 12 months. - Funding structure based on deposits of Retail, Corporate and Institutional clients and diversification of the Bank's remaining funding sources, alongside a responsible use of public funds, with ECB funding decreasing by around €300 million. Operational Risk Operational risk may be defined as the probability of occurrence of events with negative impacts on results or equity, resulting from inadequacies or weaknesses in procedures or information systems, staff behavior, or external events, including legal risk. Operational risk is, therefore, understood to be the sum of the following risks: Operations, Information Systems, Compliance and Reputational. The operational risk appetite defined for NBG covers the various categories under this risk, reflecting the infeasibility of eliminating it, from a cost-benefit perspective, along with NBG’s ethical and conduct values. Main indicators NBG maintained its operational risk profile, which is characterized by a significant frequency of incidents with low financial impact (below €5 thousand), and very few incidents with a material impact (above €100 thousand). In 2019, 97% of the events involved losses of less than €5 thousand each, representing 29% of the total reported losses related to Operational Risk. Incidents with material severity were few and represented 25% of the total impact (which compares with 70% in 2018), and measures were defined to solve the problems identified. NOVO BANCO | 2019 ANNUAL REPORT | 61 The operational risk incidents identified are classified in accordance with the operational risk taxonomy approved for the Group and with Basel's Business Lines and Risk Types. Loss distribution remained broadly unchanged. The 'External Fraud' incidents (mostly involving credit cards) registered the highest score in terms of frequency, with 70% of the incidents representing 33% of the lost amount, which is broadly in line with the average in the financial system. The “Execution, delivery & process management” events registered the highest score in terms of severity (55%), corresponding to 18% of the reported incidents. 2019 main initiatives and highlights - Strengthening of operational risk culture, not only through training actions in several areas, namely information security and Compliance Risk, but also through a deeper involvement of the commercial areas - 1st line of defence - in the identification of sources of risk, in a pre-emptive move that permits to develop specific operational risk prevention and mitigation actions. In this regard, we note the regular meetings held by NBG’s Operational Risk Committee, which brings together the various local risk functions, Group control functions, risk experts and elements from the 1st line of defence, allowing a broad-based and deep analysis of various themes. - Revision, implementation and monthly reporting of NBG's Operational Risk Appetite, covering all its categories - Operations, Information Systems, Compliance and Reputational - as well as the risk mitigation and control measures for any identified situations. In this context, there was a continuous effort to deepen the key risk metrics and indicators, allowing to generate warning signals designed to control operational risk at Group level. - Annual revision of the Operational Risk Policies framework, and publication of NBG's Reputational Risk Policy. - The Bank's high standards of employee performance are governed by and depend on compliance with the Code of Conduct and the Conflicts of Interest Policy. No material events of non-compliance with these standards of conduct have been registered. - Implementation of initiatives intended to reinforce operational risk governance and control, in particular regarding cyber, outsourcing and conduct risks; - Performance of operational risk assessments in connection to the management of change processes implemented in the Bank, namely concerning new products, services, processes and NOVO BANCO | 2019 ANNUAL REPORT | 62 outsourcing. In addition, a specific self-assessment process was carried out to gauge the effectiveness of the implementation of NBG's Outsourcing Risk Policy. - In 2019, NBG incurred operational losses in the amount of €2.2 million, which compares with €5.2 million in 2019 and thus represents a relevant improvement in the Bank's control environment. These losses mainly resulted from operational risk events and external fraud, which characteristically are very granular and without excessive concentration, thus not materially affecting the Bank's risk profile. - The number of incidents of an operational nature also decreased, from 5 750 in 2018 to 5 193 in 2019. In this context, it is worth noting that there were no relevant events related to the availability of computer applications, with impacts on the clients, or disruptions in the Bank's operational activity. 3.10.4 Capital management The main objective of NOVO BANCO Group’s capital management is to ensure compliance with the Group’s strategic targets in terms of capital adequacy, respecting and enforcing the rules regarding the calculation of risk weighted assets, the measure of exposure (leverage), and own funds, and ensuring compliance with the solvency and leverage levels set by the supervision authorities and with the risk appetite internally established for capital metrics. The Group’s capital ratios are calculated by the Risk Weighted Assets Calculation and Control area of the Global Risk Department, which has the following main responsibilities: (i) to ensure the calculation of prudential capital ratios in accordance with the relevant regulations, with a view to complying with the minimum regulatory requirements and with the level of risk appetite defined by the Executive Board of Directors; and (ii) to project the evolution of capital needs, participating in capital ratios projection exercises for budgetary purposes, medium-term plans, and any required internal or regulatory exercise that involves the determination of capital requirements, namely the ICAAP and Stress Tests. NOVO BANCO’s Common Equity Tier 1 (CET1) and Tier 1 ratios are protected at pre-established levels, up to the amounts of losses already recorded on the assets protected by the Contingent Capitalization Agreement. The compensation amount to be requested from the Fundo de Resolução with reference to 2019, taking into account the losses incurred on the assets protected by the Contingent Capitalization Agreement, as well as the regulatory requirements for capital ratios defined for 2019, will be €1 037 million. At 31 December 2019 the CET1 ratio was 13.5% and the total phased-in capital ratio was 15.1%, which represents an increase when compared with 2018 figures, due to the increase on the prudential requirements applicable to NOVO BANCO. This increase implied higher CET1 needs at the end of 2019 - +€188 million compared to the end of 2018 -, despite the €295 million decrease in risk weighted assets during the year. NOVO BANCO | 2019 ANNUAL REPORT | 63 As at 31 December 2019, NOVO BANCO complied with all capital ratios required by the ECB under the Supervisory Review and Evaluation Process (SREP), maintaining a relevant buffer in view of the minimum requirements to which it was subject. It should be noted that in the context of the ECB's SREP, the Pillar 2 requirement applying from 1 January 2020 is 3.00%, which compares with the 3.25% requirement in 2019. The minimum own funds requirements to be complied with on a consolidated basis as from 1 January 2020, relative to total risk weighted assets (RWA), are as follows: A more detailed information about the capital ratios development of the NBG and all its components may be consulted on chapter 3. “Adequação de capitais” from de document “Disciplina de Mercado”. NOVO BANCO | 2019 ANNUAL REPORT | 64 mn€31-Dec-1831-Dec-19 31-Dec-19 (Phased-in)(Phased-in)(fully loaded)Risk Weighted Assets(A)29 87429 57929 436Own Funds Common Equity Tier 1(B)3 8083 9963 768 Tier 1(C)3 8093 9983 769 Total Own Funds(D)4 3284 4754 228Common Equity Tier 1 Ratio(B/A)12.8%13.5%12.8%Tier 1 Ratio (C/A)12.8%13.5%12.8%Solvency Ratio(D/A)14.5%15.1%14.4%Leverage Ratio8.2%8.4%7.9%CAPITAL RATIOS (CRD IV/CRR)Pillar 1Pillar 2Buffers (1)CET113.5%12.8%10.01%4.50%3.00%2.51%T113.5%12.8%11.51%6.00%3.00%2.51%Rácio total15.1%14.4%13.51%8.00%3.00%2.51%(1) Includes: - Capital Conservation Buffer of 2.5%. - Counter Cyclical Buffer that is 0% in Portugal but is 0.01% for NOVO BANCO Group. The Other Sistemically Important Institutions Buffer of 0.375% for 2020 increasing to 0.50% in 2021 needs to be fufilled only at the consolidated level (LSF Nani Investments S.à.r.l.).Capital requirements for 2020 (SREP)RatiosRatiosphased-in31-Dec-2019TotalOf which:Ratiosfully loaded31-Dec-2019 3.10.5 Main risks and uncertainties The year 2020 is being marked by the pandemic COVID-19 due to the spread of the 2019-nCoV virus infection that is believed to have appeared in a living market in the city of Wuhan (Hubei province), in China. The World Health Organization agreed that the date of origin of the epidemic would be 12 December 2019, having subsequently declared COVID-19 as Pandemic (11 March 2020) alleging alarming levels of spread and inaction. Still in its epidemic phase, China, attempting to contain the virus, decreed quarantine in the region, which led to the closure of factories, schools and services, which had a negative impact on global production chains and global demand. In January 2020, a high number of cases arose in northern Italy, in the Lombardy region, which quickly spread throughout Europe, with the most affected countries being Spain, Germany, France, Switzerland and the United Kingdom. In an attempt to try to contain the epidemic, these countries decreed quarantine, as other Asian countries (South Korea, Singapore and Hong Kong). In the USA the situation worsened in the beginning of March, with New York and California being the most affected States. In Portugal, the 11th most affected country on the European Continent, was declared a preventive National Emergency State in an attempt to contain the epidemic. With this forced shutdown of the main economies of the world, high and widespread losses were observed in the financial markets, anticipating a scenario of severe deterioration, resulting from this public health problem, in the worldwide macroenomic environment. Central banks worldwide were the first to react, announcing monetary stimulus packages in an attempt to contain liquidity levels: - ECB launched a new € 750 billion debt purchase emergency program; - FED launched a USD 300 billion (more than € 278 billion) aid program to support the flow of credit to employers, consumers and businesses, in addition to lowering interest rates to levels from 0% to 0.25%; - Bank of England announced interest rate decline from 0.25% to 0.1%, a historic low and an increase in the UKP 645 billion stimulus program (€ 700 billion); - Bank of Japan reinforced its asset purchase policy, which was already € 13.4 billion to provide interest-free loans to small and medium-sized companies. Governments have also started to take fiscal policy measures: - The EU has made the equivalent of 2% of the region's GDP available in budgetary measures: (i) € 37 billion under the Coronavirus Response Investment Initiative; (ii) € 29 billion from the structural funds of; (iii) € 8 billion of investment liquidity; (iv) up to € 40 billion to meet the short- term financing needs of SMEs, through the EIB. In addition, the EU allows flexibility in the application of EU rules on i) state aid measures designed to support companies and workers; as well as ii) public finances and fiscal policies, for example, in order to take into account exceptional expenses - The US Senate unanimously approved a stimulus package of USD 2 trillion (about 9% of GDP), including very significant amounts of public investment, direct transfers to families (USD 1200 NOVO BANCO | 2019 ANNUAL REPORT | 65 per adult and USD 500 per child), the payment of unemployment benefit for an additional 4 months, a USD 500 billion rescue fund for companies in the hardest hit sectors (eg aviation) and USD 350 billion in loans to SMEs. The Portuguese Government announced a package that includes several lines of financing, totaling € 3 billion with state guarantee, particularly aimed at the sectors of tourism, restaurants, textiles, clothing, footwear and the wood sector, as well as the establishment of a 6 months moratorium for companies affected in their activity by the impacts of Covid-19 and for national residents customers with acquisition of their own and permanent housing mortgage loans. Uncertainty, however, remains in conjunction with high volatility because of a non-existing effective vaccine / treatment, making it very difficult to predict the final consequences of this public health crisis. All these unexpected challenges imply an increasing resilience, capacity to adapt and mobilize support to companies and families by NOVO BANCO, which has a main mission to remain as the second line of defense of Economics in the face of this context of high uncertainty, NOVO BANCO | 2019 ANNUAL REPORT | 66 4 CORPORATE GOVERNANCE Doing it well done at NOVO BANCO 4.1 Shareholder structure Qualified holdings in NOVO BANCO’s share capital NOVO BANCO has share capital of € 5 900 000 000.000 (five billion nine hundred million euro), divided into 9,799,999,997 (nine billion, seven hundred ninety-nine million, nine hundred ninety-nine thousand and nine hundred ninety-seven) nominative and dematerialized shares with no nominal value, fully subscribed and paid up. Qualified holdings in NOVO BANCO’s share capital as at 31 December 2019: Shareholder Number of shares % of share capital Nani Holdings S.G.P.S., S.A. 7,349,999,998 Fundo de Resolução (Resolution Fund) 2,449,999,999 75% 25% Equity holders with special rights There are no shareholders with special rights. Restrictions on voting rights In view of the commitments assumed by the Portuguese State before the European Commission in the context of the approval of the sale of a participation in the share capital of NOVO BANCO under EU rules on State aid, the shareholder Resolution Fund should refrain from exercising its non-equity rights, namely its voting rights. 4.2 Management and supervisory corporate bodies Composition and functioning of the management and supervisory corporate bodies and changes in the Company’s Articles of Association Under the terms of the Company's Articles of Association, the corporate and statutory bodies of NOVO BANCO are the General Meeting, the General and Supervisory Board, the Executive Board of Directors, the Monitoring Committee, the Statutory Auditor and the Company Secretary. The members of the corporate bodies are elected for four-year terms of office and they may be re-elected once or more than once. NOVO BANCO | 2019 ANNUAL REPORT | 67 Also, in terms of the accordance with the Articles of Association, the members of the General Meeting, the General and Supervisory Board, and the Monitoring Committee are elected by the General Meeting. The General Meeting also has the powers to appoint and replace the Bank's Statutory Auditor, upon a proposal of the General and Supervisory Board. The members of the Executive Board of Directors are appointed by the General and Supervisory Board. The Company Secretary and Alternate Secretary are appointed by the Executive Board of Directors, after consulting with the General and Supervisory Board. Amendments to the Articles of Association Changes to NOVO BANCO’s Articles of Association are the responsibility of the General Meeting. In 2019 there were no changes in NOVO BANCO's articles of association. General and Supervisory Board The General and Supervisory Board is the supervisory body of NOVO BANCO and its members are elected by the General Meeting. In 2019 there were no changes in the composition of the General and Supervisory Board, whose members at the date of this report are identified in point 1. Who we are. NOVO BANCO in 2019, The governance model. At the date of this Annual Report, five of the nine members of the General and Supervisory Board, including its Chairman, are independent. The General and Supervisory Board has the powers vested upon it by law and by the Articles of Association, having as main functions to regularly monitor, advise and supervise the management of NOVO BANCO and of the Group companies, as well as to supervise the Executive Board of Directors with regard to compliance with the relevant regulatory requirements of banking activity. Additionally, the GSB has specific powers to elect the members of the Executive Board of Directors and responsibilities in granting previous consents for approval by the Executive Board of Directors of certain matters established in the Articles of Association, namely in what concerns the approval of (i) credit, risk and accounting policies, (ii) business plan, budget and activity plan, (iii) change of headquarters, closing or changing of representation structure abroad; (iv) capital expenditure, debt or refinancing, sales or acquisitions, creation of liens or granting of loans above certain limits and within certain conditions, (v) practice or omission of any material act related with the Contingent Capitalization Agreement; and (vi) hiring of employees with annual remunerations above certain limits. The General and Supervisory Board holds meetings on a monthly basis. The Chairman of the General and Supervisory Board and the Chief Executive Officer maintain regular, and at least weekly, dialogue and communication between them. In its activity, the General and Supervisory Board is directly supported by 5 (five) Committees, namely the Financial Affairs (Audit) Committee, the Risk Committee, the Compliance Committee, the Nomination Committee and the Remuneration Committee, the latter holding some powers delegated by the General and Supervisory Board. NOVO BANCO | 2019 ANNUAL REPORT | 68 These Committees are composed of and chaired by members of the General and Supervisory Board. Their meetings may also be attended by members of the Executive Board of Directors responsible for the matters that are dealt with by said committees. Financial Affairs (Audit) Committee The Financial Affairs (Audit) Committee has monitoring and supervision responsibilities concerning the financial performance of the Bank and other financial entities included in the prudential consolidation perimeter, the accounting policies and procedures and the follow-up of the external auditor, in particular with powers under the Commercial Companies Code. This Committee also has delegated powers of the General and Supervisory Board with regard to, among other, material changes to accounting policies, the approval of the annual budget, and prior consent for the issue of certain instruments of debt. In addition, this Committee supports the General and Supervisory Board in overseeing the effectiveness of the internal control system, risk management system and internal audit system of the Bank and the financial companies within its scope of prudential consolidation. At the signature date of this Report the members of the Financial Affairs (Audit) Committee are the following: Chairman: Karl-Gerhard Eick Byron Haynes Kambiz Nourbakhsh Risk Committee The Risk Committee advises and supports the General and Supervisory Board in monitoring the Bank's actual and future global risk appetite and risk strategy as well as the effectiveness of the internal control system and risk management system of the Bank and the financial companies included in its prudential consolidation perimeter. This Committee also has the powers provided for by law and the delegated powers of the General and Supervisory Board with regard to certain credit transactions and changes in risk policies. At the signature date of this Report the members of the Risk Committee are the following: Chairman: Byron Haynes Karl-Gerhard Eick Kambiz Nourbakhsh Benjamin Dickgiesser Compliance Committee The Compliance Committee advises and supports the General and Supervisory Board, among others, in monitoring compliance issues pertaining to the Bank, the members of corporate bodies and employees, internal policies and processes related to compliance, policies on business conduct and ethics, and compliance and reputational risk. NOVO BANCO | 2019 ANNUAL REPORT | 69 In addition, it also has delegated powers in matters concerning related parties (with the exception of the Bank's transactions with shareholders, and its related parties, the matter of which is not delegable and is a matter of the GSB). The above functions also extend to the following financial subsidiaries: BEST, NOVO BANCO Açores and companies of GNB Gestão de Ativos (Asset Management). At the signature date of this Report the members of the Compliance Committee are the following: Chairman: Robert Sherman John Herbert Mark Coker Nomination Committee The Nomination Committee supports the General and Supervisory Board in overseeing the Executive Board of Directors’ action in the establishment of, and in ensuring compliance with, consistent and well- integrated nomination policies at the Bank and the following financial subsidiaries: BEST, NOVO BANCO Açores and companies of GNB Gestão de Ativos (Asset Management. At the signature date of this Report the members of the Nomination Committee are the following: Chairman: John Herbert Robert Sherman Donald Quintin Mark Coker Remuneration Committee The Remuneration Committee advises and supports the General and Supervisory Board in the establishment of, and in ensuring adherence to, consistent and well-integrated remuneration policies in the Bank and the following financial subsidiaries: BEST, NOVO BANCO Açores and companies of GNB Gestão de Ativos (Asset Management). This Committee also has delegated powers with regard to the hiring of employees with annual remuneration above €200 000. At the signature date of this Report the members of the Remuneration Committee are the following: Chairman: Byron Haynes Karl-Gerhard Eick Benjamin Dickgiesser The rules of procedure of all the Committees of the General and Supervisory Board can be accessed in the Bank's website, at: www.novobanco.pt/homepage institutional/Governance/ Company Documents/ here NOVO BANCO | 2019 ANNUAL REPORT | 70 Executive Board of Directors The members of the EBD are appointed by the General and Supervisory Board, which also appoints the Chief Executive Officer (CEO). The members of the EBD in office at the date of this report are identified in point 1. WHO WE ARE, Governance model. There were no changes in the composition of the Executive Board of Directors in 2019 other than the member Mark George Bourke as Director, who took office as Chief Financial Officer on 4 March 2019. Committees of the Executive Board of Directors In accordance with its rules of procedure, the Executive Board of Directors may establish committees to complement its own management activity, ensuring the monitoring of the Bank's activity in areas that are considered relevant. RISK COMMITTEE. Responsible for issuing an opinion on, approving, under the powers delegated by the Executive Board of Directors, and monitoring NOVO BANCO Group’s policies and risk levels. In this context, the Risk Committee is responsible for monitoring the evolution of NBG’s integrated risk profile, and for analyzing and proposing methodologies, policies, procedures and instruments to deal with all types of risk, namely credit, market, liquidity and operational. Rui Fontes (Chairman) FINANCIAL AND CREDIT COMMITTEE. Responsible for deciding the main credit operations in which the NOVO BANCO Group participates, in line with the risk policies defined for NOVO BANCO Group. José Eduardo Bettencourt (Chairman) CAPITAL, ASSETS AND LIABILITIES COMMITTEE (CALCO). Responsible for the definition of the Balance Sheet management policies (capital, pricing and interest rate, liquidity and foreign exchange risk) and for monitoring their impact at NOVO BANCO Group level. Mark Bourke (Chairman) PRODUCT COMMITTEE. The Product Committee is the global forum where, from a compliance standpoint, products and services to be developed and/or distributed by NOVO BANCO are approved. The Committee must issue an opinion on all products and services within the scope of the signoff process of current products. In this context, and among others, it is up to the Committee to make sure that the products and services in question comply with the applicable legislation and regulations and were duly analyzed and validated by the competent structures of the Bank. Luísa Soares da Silva (Chairwoman) NON-PERFORMING ASSETS (NPA) COMMITTEE. Responsible for ensuring the monitoring of the Strategic Plan (SP), the development and enhancement of the Operational Plan, and for defining and monitoring NBG's divestment strategies. Jorge Freire Cardoso (Chairman) NOVO BANCO | 2019 ANNUAL REPORT | 71 INTERNAL CONTROL SYSTEM COMMITTEE. The Committee monitors all issues related to NOVO BANCO Group’s Internal Control System, without prejudice to the responsibilities attributed in this regard to the Executive Board of Directors and other Committees in place at NOVO BANCO Group, namely the Risk Committee, the Operational Risk Committee and the Compliance Committee. Rui Fontes (Chairman) COMPLIANCE COMMITTEE. Responsible for the monitoring of all relevant Compliance matters, with particular emphasis on the analysis of new legislation and regulations and of any ensuing actions required for the necessary adaptations, matters of conflicts of interest / conduct, products and financial intermediation, and money laundering. Luísa Soares da Silva (Chairwoman) MANAGEMENT INFORMATION COMMITTEE. Committee of a transitional nature implemented to guarantee the development and implementation of the Management Information Project, responsible for monitoring, presenting and communicating measures related to: Governance model, centralization of Management Information, Data Certification Process, Signoff of concepts, and other topics related to Management Information. Mark Bourke (Chairman) DIGITAL TRANSFORMATION COMMITTEE. Responsible for defining and driving digital transformation at NOVO BANCO. António Ramalho (Chairman) INVESTMENT COMMITTEE. Responsible for agreeing the macroeconomic vision and NOVO BANCO's asset allocation positioning, as well as for issuing guidelines and core beliefs to product and commercial units. Luís Ribeiro (Chairman) HUMAN CAPITAL COMMITTEE. Responsible for promoting NOVO BANCO’s Talent and Merit Plant and for fostering the engagement of the Bank's employees. António Ramalho (Chairman) COSTS AND INVESTMENTS COMMITTEE. Responsible for approving the execution of expenses, within the limits of the powers conferred upon it. Its objectives include the definition of an annual expenditure plan and the revision of the acquisitions strategy. José Eduardo Bettencourt (Chairman) EXTENDED IMPAIRMENT COMMITTEE. Responsible for defining the amount of impairment to be allocated to each client, when NOVO BANCO has an exposure above €100 million to that client or group of clients. Rui Fontes (Chairman) EXTENDED MODELS RISK COMMITTEE. Responsible for managing the models implemented at NOVO BANCO, including the approval and/or modification of existing models, and for monitoring the NOVO BANCO | 2019 ANNUAL REPORT | 72 Model Risk, namely by regularly reporting on the global vision, adequacy assessment, robustness, predictive capability and legal compliance of the models in use at the Bank. Rui Fontes (Chairman) OPERATIONAL RISK COMMITTEE. Responsible for developing and monitoring the operational risk policies and monitoring the operational risk levels of NOVO BANCO Group (excluding the insurance activity). This committee operates under delegation of EBD’s Risk Committee, and reports to this Committee. Rui Fontes (Chairman) Monitoring Committee The Monitoring Committee is a statutory advisory body ruled by the Articles of Association and deriving from the Contingent Capitalization Agreement composed of three members elected by the General Meeting, one of whom to act as Chairman. The composition of the Monitoring Committee shall respect the following criteria: one of its members shall be independent from the parties to the Contingent Capitalization Agreement, and another shall be a registered charter accountant, as the Resolution Fund is responsible for appointing two of its members. The Committee has as main responsibilities to discuss and issue (non-binding) opinions on Relevant Issues concerning the Contingent Capitalization Agreement upon which it is requested to issue an opinion. The members of the Monitoring Committee are entitled to attend as observers and speak (but note vote) at all meetings of the General and Supervisory Board. Supervision Supervision is in part the responsibility of the General and Supervisory Board and the Statutory Auditor. The Statutory Auditor and Alternate Statutory Auditor are elected and removed by the General Meeting, under a proposal of the General and Supervisory Board, and they have the powers and responsibilities provided for in the law. Powers of the management body Powers of the management body, namely regarding resolutions on share capital increases The Executive Board of Directors is the corporate body in charge of the management of the Bank. Under the law and the Articles of Association, and respecting the powers of the other corporate bodies, it is responsible for defining the general policies and strategic objectives of the Bank and of the Group and for ensuring the activity not comprised within the functions of other bodies of the Bank, in compliance with the rules and standards of good banking practice. NOVO BANCO | 2019 ANNUAL REPORT | 73 The EBD has no powers to resolve on capital increases, or on the issuance of securities convertible into shares or securities granting subscription rights, such decisions being the exclusive responsibility of the General Meeting. In the case of traded securities emission, the GSB issues a previous opinion. 4.3 Internal control and risk management systems Main details of the internal control and risk management systems implemented at the company regarding the financial reporting process. Risk management system In addition to that described in chapter 3.10 Risk Management, which describes the implemented Risk Management and Control Model, it should be noted that the Global Risk Department (DRG) assumes responsibility for ensuring the effectiveness of the Risk Management and Control Function of the GNB. The organizational model for the Bank's risk management function and the various Committees is presented as follows: Note: A detailed description of the Committees is available in section 4.2.4 The Executive Board of Directors of this Report. The DRG is organized in specialized teams that ensure the identification, measurement, monitoring, control and reporting of the Risks to which the Group is exposed. DRG's specialized teams ensure: (i) the comparison of the risk profile with the risk appetite approved by the GSB; (ii) the promotion of an effective risk culture in which the defined risk appetite is incorporated into management and decision making; (iii) the proposal for corrective measures in case the defined thresholds are reached; and (iv) reviewing the risk appetite and identifying new risks to which the NB Group may be exposed. I. Strategic Risk Management area. At a functional level, this area is subdivided into two units: - Research and Development (R&D) whose functions are: (i) to develop and monitor methodologies and models for the identification and quantification of the various types of risk, including, in this case, in the case of credit risk, several models of default probabilities (PD), loss NOVO BANCO | 2019 ANNUAL REPORT | 74 given default (LGD), and credit conversion factors (CCF) used in Grupo NB; (ii) maintenance of the risk / value-based decision support tools used in the NB Group; (iii) supporting the business areas in the appropriation of risk-adjusted profitability concepts; (iv) participate in the ICAAP, planning and stress test exercises, (v) support the securitization processes in the management of the rating assignment process and in the selection of portfolios in a risk transfer logic, vi) manage changes and extensions to the IRB method under your responsibility, in accordance with the specific regulations on this matter and the approach defined by the NB Group for the topic .; and - Risk / Process Policies, which is responsible for: (i) proposing risk policies; (ii) participate in the evaluation of the efficiency and effectiveness of decision-making processes and in their redesign proposals, quantifying the risk parameters necessary for a cost-benefit analysis and (iii) analysing and proposing limits for the approval powers of various types of risk, at the operation, customer and portfolio level. II. Market Risk Area, whose main duties are: - Monitor, control and report market risks (banking book and trading book), including Balance Sheet interest rate risk, liquidity, counterparty and issuing risk of the positions managed by the room; - Monitor and control the risk policies and limits established by the Executive Board of Directors, Risk Committee and CFC for the risks mentioned above, as well as for money market operations; - Develop, together with the Treasury and Finance Department (DTF), the internal liquidity adequacy assessment process (ILAAP); - Contribute to the calculation of economic capital for market risks to the DRG internal capital adequacy assessment (ICAAP) process; - Validate the valuation of level 1, 2 and 3 financial instruments, subject to market risk limits - Identify new methodologies, procedures and analysis tools for market risks; - Perform and participate in various stress test exercises. III. Operational Risk, whose functional responsibilities are related to: - Design, monitor and maintain the Operational Risk Management System, ensuring the uniformity, systematization and recurrence of the activities of identification, monitoring, control and mitigation of the main sources of operational risk; - Propose and review the appetite for operational risk for its various categories and carry out their monitoring, through key risk indicators (KRIs); - Perform periodic self assessment exercises; - Analyze and classify the totality of incidents and sources of risk detected and reported, by the various units, in the Application of Operational Risk (AGIRO); - Identify and monitor the implementation of the improvement actions identified through the operational risk management tools; - Propose the definition of Specific Operational Risk Policies and promote their periodic review; - Participate in the various sign-off processes in force at NB (processes, products and services, outsourcing). The area coordinates the intervention of the DRG in the sign-off processes of products and services, and outsourcing NOVO BANCO | 2019 ANNUAL REPORT | 75 - Manage and maintain the Group's Inventory of Models. IV. Portfolio Credit Risk Planning and Monitoring Area, whose main functions are: - Monitor and report, internally and externally, the credit risk profile; - Ensure budget planning and control / projections of credit risk / loss ratio and impairment indicators; - Report / validate regulatory reports on credit risk / loss ratio and impairment indicators; - Develop and manage the credit risk impairment calculation model. V. The Risk-weighted Asset Calculation and Control area has the following main responsibilities: - Ensure the determination of the NOVO BANCO Group's solvency, in accordance with the corresponding regulations, with a view to meeting the minimum solvency levels regulated by the regulations and the level of risk appetite defined by CAE; - Contribute to an efficient, profitable and sustained capital management, as far as risk-weighted assets (RWAs) are concerned, in NOVO BANCO Group; - Calculate and report internally the assets weighted by your risk and the capital ratios, as well as their evolution (solvency and leverage) at the GNB level, in accordance with the rules in force; - Project the evolution of risk-weighted assets, participating in projections of future capital ratios for the purposes of fiscal years, medium-term plans or others, as well as internal or regulated fiscal years involving capital requirements, namely ICAAP and "Stress Tests"; - Coordinate the reporting of prudential information, related to capital ratios, to the supervisory entity in the COREP format. Internal control system Definition and Objectives Internal Control is integral to the running of the organization, combining guidelines, functions, structures and processes established and communicated by the Board to ensure efficient management in the pursuit of the objectives established, in line with the defined risk appetite. An efficient and effective internal control system is key for the organization to achieve: - Strategic and Operational Performance Objectives - the Bank's viability and sustainability in the long term; - Information and Reporting Objectives - the existence of financial and management information that is complete, pertinent, reliable and timely to support decision-making and control processes at both internal and external level; - Compliance Objectives - compliance with the applicable legal and regulatory provisions, internal rules and the code of conduct. The Executive Board of Directors is the body with ultimate and global responsibility for the institution and that which defines, supervises and is responsible for the implementation of an adequate Internal Control System, with a clear organizational structure and independent and efficient functions in terms of risk management, compliance and audit. NOVO BANCO | 2019 ANNUAL REPORT | 76 In turn, it is incumbent upon the General and Supervisory Board, among other duties detailed in the Bank’s Articles of Association, to ensure that the Executive Board of Directors establishes and maintains adequate, independent and effective internal control, in compliance with the law, regulations and internal policies. Internal Control concerns all the Institution's bodies and employees, who perform their duties in accordance with internal policies and standards of ethics, integrity and professionalism. Each employee has a role to play as well as duties and responsibilities, which contribute to ensure the efficiency and effectiveness of Internal Control. NOVO BANCO Group's Internal Control System is consistently implemented across all the financial entities of the Group where management control exists, without prejudice to additional requirements of host territories and of the specificities of the functions involved in the System. General Principles In order to effectively achieve the defined objectives, NOVO BANCO Group's Internal Control System is based on the following principles: - Adequate control environment reflecting the importance of internal control and establishing the discipline and structure of the remaining elements of the internal control system; - Solid risk management system, designed to identify, assess, monitor and control all risks that may influence the strategy and objectives of NOVO BANCO Group, ensuring that the strategy and objectives are pursued and that the necessary steps are taken to respond adequately to undesired deviations; - Efficient information and communication system that guarantees the collection, treatment and exchange of relevant, comprehensive and consistent information, in a timely manner and in a way that allows effective and timely management and control of the activity and the inherent risks; - Effective monitoring process, implemented to ensure the adequacy and effectiveness of the Internal Control System over time, ensuring in particular the timely identification of potential or actual deficiencies and ensuring that corrective actions are triggered, and of opportunities for improvement allowing to strengthen the Internal Control System. Under NOVO BANCO Group’s Internal Control System, policies, processes, procedures, systems and controls are formalized in internal standards, process catalogues, internal control manuals, presentations supporting the main committees involved in the management of risk, information and communication, control function reports, and in the internal control report itself. In addition, for the design and assessment of its Internal Control System, NOVO BANCO Group adopted COSO's Internal Control – Integrated Framework international methodologies and COBIT's Framework for IT Governance and Control. NOVO BANCO | 2019 ANNUAL REPORT | 77 3 Lines of Defense Model The Executive Board of Directors is responsible for maintaining an adequate and effective Internal Control System, which is based on the Three Defense Lines model. To this extent, the allocation of portfolios is aligned to this model. The 3 lines of defense model defines different intervention and responsibility levels in the management of risks and execution of controls, viewing the adequacy and overall effectiveness of the organization's Internal Control System. 1st LINE OF DEFENSE The 1st line of defense is held by the organizational units that daily assume and manage the risk of their activities, of the IT processes and systems they sponsor, and of the outsourced activities under their responsibility, within pre-established limits set by the Executive Board of Directors. These units are responsible for the continuous identification, assessment and control of risks in the activities under their responsibility. It is up to them to defend the institution from taking risks that are not duly mitigated. Maintaining effective internal controls and conducting established control procedures is also their responsibility. 2nd LINE OF DEFENSE The 2nd line of defense defines risk management and control policies, methodologies and tools, exercising functional supervision and monitoring of the effectiveness of the 1st Line, controls legal and regulatory compliance, and reports to the Bank's management and supervisory bodies as well as to the competent external authorities, when applicable. The mission of the 2nd line of defense is to maintain the Bank within its risk limits by controlling, measuring and monitoring risks and reporting any deviations relative to the risk policies in force. This line of defense comprises the "Risk Management" and "Compliance" Control Functions, for which the Global Risk and the Rating Departments, and the Compliance Department are respectively responsible, being NOVO BANCO | 2019 ANNUAL REPORT | 78 complemented by activities carried out by other departments of the Bank (e.g. Accounting, Consolidation and Taxation Department, Internal Control and Data Protection Department). 3rd LINE OF DEFENSE The 3rd line of defense is held by the Internal Audit Department, whose mission is to ensure the adequacy and effectiveness of the Internal Control System through its independent, objective and risk-based assessment of the governance system, risk management system, and the system for monitoring compliance with legal obligations and other duties, regularly reporting to the management and supervisory bodies any situations liable of indicating a deterioration trend in the internal control system, and following up on the recommendations issued for their correction. To ensure its necessary independence, the internal audit function: - Reports functionally to the Financial Affairs (Audit) Committee of the General and Supervisory Board, and administratively (i.e., daily operations) to the Chief Executive Officer. - Performs its activity in accordance with a pre-established plan and a risk-based approach. This plan is approved by the General and Supervisory Board; - May not have any kind of responsibility or authority over the design, implementation and execution of the control procedures which it audits. The Executive Board of Directors may request information and opinions from the internal audit function, namely in matters of risk, internal control and compliance. Main intervenient in the Internal Control System CONTROL FUNCTIONS Compliance Function The Compliance function is an independent function whose mission is to promote compliance with the legal, regulatory, operational, ethical and conduct obligations and duties applicable at any time to financial institutions as well as to their corporate bodies, managers and employees within the framework of institutional control and supervision defined by the competent regulatory bodies and the legislation to which they are subject. This function is exercised by the Compliance Department, an autonomous unit that currently reports directly to the Executive Board of Directors, through the Board member responsible for this area. In addition, it maintains a permanent communication line with the General and Supervisory Board, namely through articulation with the Compliance Committee of this body, viewing the adequate disclosure of information and the discussion of relevant issues in the activity of the Compliance Function. As the body in charge of one of the control functions, the Compliance Department cooperates with the other control functions (Risk Management, Internal Audit) and with the Internal Control and Data Protection Department in the implementation of an effective risk management system, for which, among NOVO BANCO | 2019 ANNUAL REPORT | 79 others, it holds monthly meetings, takes part in Committee meetings, and submits its annual activity plans to the Internal Audit Function, viewing the overall alignment of the interests of these functions. Risk Function As described in chapter 3.10.3 of this Report (Risk Management Function), the Risk Management function is independent of the Bank's business areas, with its main mission: (i) management of risks considered relevant and material, and that can have an impact on the achievement of the defined objectives; as well as (ii) correct assessment of risks considered emerging, whose impact may be verified in a broader time horizon. The Risk Management Function is operationally centralized in the DRG, being responsible for the Risk Management Function, responsible for the DRG. Additional and detailed information on the risk function can be found in point 3.10. (Risk Management), as well as point 4.3.1. (Risk management system) of this report. Internal Audit Function It falls on the Internal Audit Function to assess the adequacy and effectiveness of the various components of the Internal Control System, and of the Internal Control System as a whole, in the companies of the NOVO BANCO Group included in its scope of action. In particular the Internal Audit Function is responsible for the assessment of the adequacy and effectiveness of the governance systems, the risk management systems and the systems that monitor compliance with legal obligations and other duties, regularly reporting to the Executive Board of Directors and the General and Supervisory Board and respective committees any situations liable of indicating a deterioration trend in the Internal Control System, and following up on the recommendations issued for their correction. The Internal Audit Function at the Bank is performed by the Internal Audit Department, which assists operational management in the exercise of control, and acts upon the following general principles: - Internal audit acts as an auxiliary body to the Executive Board of Directors and General and Supervisory Board concerning the independent verification of the adequacy of and compliance with the internally defined policies and procedures; - The activity of the Internal Audit Department encompasses all the organizational units, structures, processes, IT or functional routines, operations and procedures within the group of companies under its scope of responsibility; - The internal auditors, in the performance of their functions, have unlimited access to all documentation and information, in whatever support, used or produced by the audited structures or processes, and when they so request, should receive collaboration viewing the optimized execution of the audit works. The annual planning of the Internal Audit Department’s activity principally aims to ensure adequate coverage of the activities developed by the various structures under its scope of action, in accordance NOVO BANCO | 2019 ANNUAL REPORT | 80 with their relevance with regard to risks of a financial nature (credit risk, market risk, liquidity risk, etc.) and risks of a non-financial nature (operational risks: operations risk, information systems risk, compliance/legal risk and reputational risk), in accordance with the governance principles adopted by the Bank as the 3rd line of defense. The final decision on the activities to be audited must strike a balance between, on the one hand the prioritization of the risks assessed in accordance with criteria aimed at ensuring adequate and reasonable annual coverage of the audit universe, and on the other, the application of criteria to ensure the efficient use of the available resources. The planning of the Internal Audit Function's activities is thus based on a risk assessment process that is performed/revised at least annually, permitting the continuous and timely assessment of the more relevant risks inherent to the organization's activities. This assessment of risk encompasses a variety of issues, namely regulatory recommendations and requirements, financial information, risk management information, operational risk losses, criticality for business continuity, date of last audit and respective assessment, among others. Finally, the annual planning process requires the involvement of the members of the management and supervisory bodies (the main stakeholders) in the identification of the audit priorities. A Strategic Audit Plan (Multi-annual Plan) has been defined that establishes target audit cycles for each component (object) of the audit universe, according to risk criteria. The Plan foresees the coverage of the audit universe within a 4-year cycle for the higher risk and priority objects, this being the target period for full coverage of the various components of the Internal Control System and of the Internal Control System as a whole, of the entities of NOVO BANCO Group included in the scope of action of the Internal Audit Department. The Strategic Plan is revised on an annual basis to incorporate the evolution of the Group's activity and risks. CONTROL FUNCTIONS INDEPENDENCE The independence of the control functions is ensured through implementation of the following: - Internal authority: the functions are established at an appropriate hierarchical level and report hierarchically to the Executive Board of Directors and functionally to the General and Supervisory Board and respective committees, regularly participating in the respective meetings; - Head of function: the person responsible for the control function does not carry out activities in business or support areas that are subject to control; - Human Resources: the employees allocated to these functions only perform control functions and are independent of the negotiation and support units that they supervise and control. However, they are not isolated from them, and are familiar with their activity. The control functions have an adequate number of qualified employees (at the level of both the Bank and its branches and subsidiaries); NOVO BANCO | 2019 ANNUAL REPORT | 81 - Remuneration: the remuneration of control function employees is not associated with the results of the activities which they supervise and control, nor does it compromise, in any other way, their objectivity; - Technical resources and organization: the functions have adequate technical resources at their disposal and are organizationally independent from each other; - Scope: the Bank's control functions carry out supervision activities over the control functions of its branches and subsidiaries. Internal Control and Data Protection Department The mission of the Internal Control and Data Protection Department (ICDPD) is to assist the Executive Board of Directors in the maintenance of an adequate and effective Internal Control System, and to drive the implementation of the General Data Protection Regulation (GDPR) requirements in the operational model of the various entities of NOVO BANCO Group and monitor compliance therewith at all times. Taking into account the size of NOVO BANCO Group and the specific characteristics of the activity of each department, the dynamics of the Internal Control and Data Protection Department increases the robustness and specialization of assessment of internal control matters, improves coordination among the Internal Control System's various lines of defense, promotes a culture of control, and permits the assessment of the control environment and control coverage of the critical processes. On the other hand, it also affords the Executive Board of Directors a more integrated and consistent view of the Internal Control System, as well as more effective support in the preparation of the Internal Control Reports required under Banco de Portugal's Notice no. 5/2008 and Regulation no. 2/2007 of the Portuguese Securities Market Commission (CMVM), while ensuring coordination with the statutory auditors with regard to the adequacy and effectiveness of the Internal Control System. External intervenients in the defense of the Internal Control System (4th line of defense) The Statutory Auditor, which acts as an additional line of defense, bearing in mind its functions, essentially of an accounts supervision nature, including within the scope of the internal control report; and the Supervision Authorities (European Central Bank and Banco de Portugal), which act as the last line of defense, monitoring and promoting compliance with prudential rules at financial level and at the level of people, incentives schemes, governance structures, systems and processes. The intervention of the supervision authorities does not exempt the institution from its responsibility of ensuring sound and prudent management and compliance with the prudential rules. This line of defense external to the Bank promotes a strong risk culture as well as a more efficient risk management within the parameters institutionally defined for the purpose. In this context, these entities contribute in the following manner: (I) They provide guidelines/recommendations and supervise the governance of the Bank, namely through detailed assessments and regular interaction with the Executive Board of Directors and top management; (ii) They request improvements and remediation measures, when and if necessary. NOVO BANCO | 2019 ANNUAL REPORT | 82 4.4 NOVO BANCO Main Policies For NOVO BANCO Group the framework of values, principles and rules that guide its actions, and the standards that govern the manner in which it conducts its business and runs its activity, are fundamental. This framework relies upon NOVO BANCO Group's Code of Conduct, Conflicts of Interest Policy, Related-Party Transactions Policy, Whistleblowing Policy, Anti-Bribery and Anti-Corruption Policy, Policies on the Prevention of Money Laundering and Terrorist Financing, Investor Protection and Market Transparency Policies and Remuneration Policies for the Management and Supervisory Bodies, and for the Employees. The commitment assumed by NOVO BANCO Group focuses on the prevention, detection, reporting and management of situations involving risks of conduct or irregular conducts, based on principles of integrity, honesty, diligence, competence, transparency and fairness. Code of Conduct NOVO BANCO Group’s Code of Conduct, which entered into force in 2015, applies to the members of the General and Supervisory Board and Executive Board of Directors, to the employees of NOVO BANCO and NOVO BANCO Group companies, and also to all third parties which subscribed to this policy at the request of NOVO BANCO. The Code of Conduct promotes a set of rules and good practices to be followed by the employees in their relationship with the clients and with the Bank itself and aims to ensure that everyone knows the ethical and professional principles and standards that should guide their performance and is aware of the need and importance to follow them so as to ensure that the interests of shareholders, employees and clients are at all times respected. NOVO BANCO Group’s Code of Conduct aims to: - Disclose the principles by which the NOVO BANCO Group companies should steer their activities; - Promote an ethical conduct amongst all employees, aligned with NOVO BANCO Group's values; - Promote respect for and compliance with all applicable laws and regulations; - Create a transparent system of relations between employees and outsiders. The Code of Conduct is available at NOVO BANCO's website, in Portuguese and English, at NOVO BANCO > Governance > Compliance > here Monitoring the Code of Conduct and clarifying employees’ doubts about its content and application is the responsibility of the Compliance Department. Policy on Conflicts of Interest The Conflicts of Interest Policy establishes rules for the identification, management and monitoring of potential conflicts of interest in the various activities of NOVO BANCO and NOVO BANCO Group, in compliance with applicable legal and regulatory provisions, as well as the recommendations of Banco de NOVO BANCO | 2019 ANNUAL REPORT | 83 Portugal and the European Central Bank. The Code applies to all Group employees, including the members of the General and Supervisory Board and Executive Board of Directors. The policy aims to strengthen the governance model of the NOVO BANCO Group by pursuing the following objectives: - Define the set of rules and mechanisms to prevent, identify and manage potential or actual situations of conflict of interests; - Ensure compliance with the legal and regulatory rules on the prevention and management of conflicts of interest that apply to NOVO BANCO and its employees; - Reinforce the employees’ knowledge of and awareness to conflicts of interest issues. The Conflicts of Interest Policy is available at NOVO BANCO's website, in Portuguese and English, at NOVO BANCO > Governance > Compliance > here In the course of 2019, NOVO BANCO pursued its regular activity or revision and updating of internal regulations on various matters of conflicts of interest, such as the existence of family members in the hierarchical chain, employees’ purchase of real estate from NOVO BANCO, or activities outside NOVO BANCO. During the year the Compliance Department issued a total of 339 opinions on a variety of issues, as shown in the chart below: In 2019, due to non-compliance of internal regulations and negligence in the performance of their duties, sanctions were applied to 27 employees, namely: 2 dismissals without any indemnity or compensation; 9 days of suspension sanctions without pay and with loss of seniority; 7 holiday days lost and 9 registered reprimands. Policy on Related Party Transactions NOVO BANCO’s Policy on Related Party Transactions sets down rules aimed at identifying transactions concluded between NOVO BANCO and Related Parties and at ensuring that the Bank complies with several provisions and regulations, namely the European Banking Authority (EBA) Guidelines on Internal NOVO BANCO | 2019 ANNUAL REPORT | 84 Governance (EBA/GL/2017/11), Articles 85 and 109 of the General Law on Credit Institutions and Financial Companies and the International Accounting Standards (IAS 24). In addition, the Bank has implemented internal standards that operationalize its Policy on Related Party Transactions, including through information system alarms triggered when related parties are identified, and rules on the formalization of transactions and respective approval circuits. All proposed transactions with related parties must be submitted to the Compliance Department, which checks their conformity with the applicable internal rules and legal and regulatory provisions, for subsequent approval by the General and Supervisory Board, and resolution by the Executive Board of Directors. As is the case with the Code of Conduct and Conflicts of Interest Policy, the Policy on Related Party Transactions is also available at NOVO BANCO's website, in Portuguese and English, at NOVO BANCO > Governance > Compliance > here During 2019, transactions carried out with related parties (credit transactions, service provision, and other contracts) included credit transactions, including extensions and renewal of limits, in the amount of €1,739 million, broken down as follows: Article 85 of the General Law on Credit Institutions and Financial Companies sets forth that credit institutions shall not grant credit, in any form or type, including the provision of guarantees, to members of their management or supervisory bodies, nor to companies or other collective bodies directly or indirectly controlled by them. However, the granting of credit to companies and other collective bodies not included in paragraph 1, of which they are managers or in which they have a qualifying holding is allowed under paragraph 8 of the same article 85. In this Context, the Compliance Department issued eight favorable opinions on credit transactions allowed under said paragraph 8 of Article 85, which were subsequently approved by the Compliance Committee of the General and Supervisory Board and approved by the Executive Board of Directors. In addition, under Article 109 of the General Law on Credit Institutions and Financial Companies, credit granting to qualifying shareholders, or entities directly or indirectly controlled or in a group relationship with them is allowed, subject to certain limits. During 2019 NOVO BANCO did not conclude any credit transactions with qualifying shareholders, under said legal rule. NOVO BANCO | 2019 ANNUAL REPORT | 85 Whistleblowing Policy NOVO BANCO remains strongly committed to the growing internalization of a culture of compliance, namely regarding the reporting of undue or irregular behaviors or behaviors that go against the law, the regulations and the Bank's internal policies. The Whistleblowing Policy regulates the reporting of irregularities by the Bank's employees, as well as by service providers or any third parties, and its objectives are to preserve the Bank's reputation, effectively protect its assets and those of its clients, and prevent or detect in advance any irregularities that may be committed. The following are considered as irregularities: violations within NOVO BANCO in the fields of accounting, internal accounting controls, auditing, the fight against corruption and banking and financial crime in accordance with Resolution No. 765/2009 of the National Data Protection Commission, and those relating to possible breaches of Law No. 83/2017, the regulations which implement it and the internally defined policies, procedures and controls on the prevention of money laundering and terrorist financing. Irregularities are reported in writing and presented through the following channels, at the choice of the person who is reporting: - Addressed to the Compliance Committee of the General and Supervisory Board (Avenida da Liberdade, 195, 14 floor, 1250-142 Lisbon); - Through the Form available on the Bank’s intranet NBWeb; or - By e-mail to the address: irregularidades@novobanco.pt. All communications must be made in good faith, indicating the respective grounds. The deliberate and unfounded use of the channels made available under the Whistleblowing Policy may constitute a disciplinary, civil, criminal or other infraction. Under the terms of the Whistleblowing Policy, anonymous communications are admitted. The General and Supervisory Board is responsible for managing the irregularities communication system, ensuring the confidentiality of communications. NOVO BANCO guarantees the protection of the personal data of the person who makes the communication and of the suspect of violation, collected through the communication means made available. The text of the Whistleblowing Policy is available at NOVO BANCO's website, in Portuguese and English, at NOVO BANCO > Governance > Compliance > here Anti-Bribery and Anti-Corruption Policy Corruption and bribery represent one of the key challenges in modern society and fighting them requires a joint effort by all sectors of society, including banking, which plays an important role in promoting a culture of public integrity. The fight against practices of corruption and bribery becomes everyone’s responsibility, requiring the development of a new set of preventive duties and methodologies across organizations and public and private entities. In this context, in 2019 the Compliance Committee of the General and Supervisory Board and the Executive Board of Directors approved an Anti-Bribery and Anti- NOVO BANCO | 2019 ANNUAL REPORT | 86 Corruption Policy intended to prevent and mitigate the risk of corruption and bribery and of practices related thereto, reaffirming the Bank's commitment in building a more upright society. The text of the Anti-Bribery and Anti-Corruption Policy is available at NOVO BANCO's website, in Portuguese and English, at NOVO BANCO > Governance > Compliance > here Policy on the Prevention of Money Laundering and Terrorist Financing A bank's ability to detect and prevent activities capable of constituting money laundering is directly linked to its knowledge of certain key elements relating to their counterparties and respective transactions. The NOVO BANCO Group, through its Compliance Department, sets up the conditions that enable the Bank to detect and prevent, through adequate policies and procedures, the possibility of the Bank being used as a vehicle for money laundering or terrorist financing activities, which is a risk inherent to its presence and activity in the national and international financial markets. The Novo Banco Group takes increasingly great care in the identification of weaknesses and areas of greater exposure to ensure it has in place adequate methods to control and mitigate the risks of money laundering and terrorist financing inherent to its activity. The ability to detect and, if possible, prevent activities capable of constituting such crimes is directly linked to the Bank's knowledge about its clients, their counterparties and the transactions they engage in, particularly at the following moments: - Opening of contract or change of a party to an existing contract, through what is known as KYC (Know Your Customer) - i.e., the identity of contract parties, representatives and beneficiaries must be effectively established; - Monitoring contracts' transactions - KYT (Know Your Transactions), spotting unusual situations, either beforehand or by contacting the client after the situation was detected. To that end, NOVO BANCO Group, using software tools with internationally recognized results to complement the experience of its human capital, has created and developed assessment models that will ensure that greater scrutiny is applied where this proves more necessary. NOVO BANCO Group, complying with its regulatory obligations, develops training exercises in preventing money laundering and terrorist financing for all its employees (commercial and central structures, including senior management). Training can be remote or face-to-face, the latter mainly directed to new employees, and the objective is to equip them with skills that enable them to collaborate with the control functions in mitigating the risks inherent to the execution of their functions. In 2018, Novo Banco reinforced training on money laundering and terrorism financing prevention, having provided 8 891 hours of online training (including 1 259 hours for senior management) and 807 hours of face-to- face training (of which 314 hours for senior management), making a total of 9 698 hours. Training is seen as a key tool for a correct flagging by the employees of potential situations of money laundering and terrorist financing. On the other hand, it is also useful for compliance with the legal and regulatory duties to which the Bank is subject. In 2019 the NOVO BANCO Group examined 4 189 new contracts, of which 52 were rejected. In addition,1 411 other contracts were analyzed, upon which their ownership was changed. It also analyzed 13 482 NOVO BANCO | 2019 ANNUAL REPORT | 87 transactions under existing contracts, of which 1 078 were reported to the competent authorities. The prevention of money laundering and terrorist financing is one of the foundations of confidence in the financial system and as such will continue to deserve permanent attention by the NOVO BANCO Group. The Policies on the Management of Money Laundering and Terrorist Financing Risks are available for consultation in NOVO BANCO's website, in Portuguese and English, at NOVO BANCO > Governance > Compliance > here Policies on Investor Protection and Market Transparency The Directive on Markets in Financial Instruments, no. 2014/65/EU, of 15 May 2014 (“MiFID II), and related regulations, which entered into force in January 2018, aim to reinforce investor protection and increase the transparency and quality of the financial market operation and services provided, and cover all persons and entities operating in the markets in financial instruments. This regulation determines the reinforcement of the duties of financial intermediaries, as well as changes in the marketing regulations of financial instruments. In accordance with the revised legal framework, NOVO BANCO has revised and approved its new standards and Policies, which it discloses in a dedicated area of its website www.novobanco.pt > Produtos > Poupança e Investimento > Informação ao Investidor (here). The most salient aspects of these standards and policies are summarised below: Recording and register of communications. NOVO BANCO is obliged to keep recordings and registers of all communications with Customers and potential Customers, with regard to all services, activities and operations carried out. Customer classification. NOVO BANCO classifies its customers for the purpose of transactions in financial instruments into one of three categories: non-professional, professional and eligible counterparty. These classifications have implications on the level of protection allocated to the investor. The lower the knowledge and experience of the customer about markets and financial instruments the greater the level of protection. Assessment of adequacy. In order to ensure that the financial instruments or investment services it provides suit its Customers’ investment profile, NOVO BANCO will request Customers and potential Customers to complete individual profile questionnaires, in order to get to know in a more complete and NOVO BANCO | 2019 ANNUAL REPORT | 88 detailed manner, inter alia, their experience and knowledge of investment, their financial situation, their investment objectives (including capacity to withstand losses) and their risk tolerance, and thus assess whether a particular investment product or service is appropriate. Order Execution Policy. The Order Execution Policy of NOVO BANCO, S.A. describes the rules and procedures, strategies and other practices to be applied to the execution of customer orders and/or their transmission to other entities authorized to execute orders, viewing compliance with the applicable laws and regulations, as arising from the Markets in Financial Instruments Directive II (MiFID II) and other legal or regulatory rules and legislation that complement it. Internal Regulation and Conflict of Interest Prevention and Management Policy for Financial Intermediation Activities. The Internal Regulation for Financial Intermediation activities organizes in a single document the rules related to financial intermediation activities carried out by the Bank. In particular, it defines measures aimed at identifying, mitigating, managing and registering conflicts of interest in relation to all relevant Financial Intermediation Activities (Policy for Prevention and Management of Conflicts of Interest within the scope of Financial Intermediation Activities) and at ensuring that the interests of the Clients take precedence over the Bank's own interests or related interests, and that Clients are guaranteed transparent and equitable treatment, in compliance with the Regulation (EU) on Market Abuse. Safeguard of Customer Assets. The Securities Code sets forth that in all acts performed, as well as in accounting and operations records, the financial intermediary should adopt procedures and implement measures permitting to maintain a clear distinction between its assets and the assets of each of its clients to ensure that the opening of proceedings for the insolvency, recovery of the company or reorganization of the financial intermediary does not have effects on actions carried out by the financial intermediary on behalf of its clients. The financial intermediary may not utilize, for its own or a third party’s benefit, the clients’ financial instruments or exercise the rights inherent thereto, unless the holders have agreed thereto. NOVO BANCO has procedures that safeguard these rules. Offer screening process / Product Committee. NOVO BANCO has established procedures that govern the design, approval, distribution and monitoring of the products and services offered. These procedures provide for the screening of new offers, and the monitoring of the existing offer. This ensures that any innovation in own and third-party products and services, the distribution channels or target markets, including any significant changes therein, is subject to the approval of the Executive Board of Directors, in the Product Committee, which shall support its decision on a previous transversal validation by the relevant departments that considers, among others, legal, operational, IT, information security, financial, accounting, data protection and tax aspects, as well as on an assessment by the Risk and Compliance functions. Remuneration Policies for the Management and Supervisory Bodies and Identified Employees and Declaration on the Remuneration Policies Under the terms and for the purposes of Law no. 28/2009 of 19 of June, and Banco de Portugal Notice no. 10/2011, and for compliance with the disclosure duties related to the remuneration policies provided NOVO BANCO | 2019 ANNUAL REPORT | 89 for therein, the Remuneration Committee submits for approval at the General Meeting of Shareholders of NOVO BANCO the following declaration on the remuneration policy of the members of the Bank's management and supervisory bodies. In 2019, NOVO BANCO made slight changes to the Remuneration Policies of the Management and Supervisory Bodies and of the Employees resulting essentially of: (i) updating the current regulatory context; (ii) forecasting the existence of Sign-on bonuses or Signature Awards; (iii) clarification of the application of the remuneration limits established by DG COMP; (iv) clarification of the rules for selecting the identified employees; (v) rules in case of the employment contract termination. These Policies have been prepared in accordance with the legislation in force on this date, in particular with the RGICSF and the EBA Guideline no. 2015/22 on sound remuneration policies and related legislation and reflect the Bank's objectives, strategy, structure and culture, steered by principles of meritocracy and transparency. Their implementation aims to foster adequate professional practices and conducts, namely in the sale of products and services, as well as in the prevention of conflicts of interest with clients. The Remuneration Committee believes that the Remuneration Policies and recent changes thereto, namely regarding the allocation of the variable component and respective conditions, are appropriate to the current situation of NOVO BANCO, are in line with the objectives of the Restructuring Plan and respect the associated limitations. Accordingly, the incentives defined for the members of the board of directors and for the different categories of employees, as well as the structure of these incentives, are in line with the long-term objectives of the institution and of the various stakeholders. The Governance of the Remuneration Policy provides for the involvement of several internal entities, namely the Remuneration Committee, formed by three members of the General and Supervisory Board, and also several Departments of the Bank, including the Risk, Compliance, Audit, Legal and Human Capital Departments, ensuring full alignment of the established practices with the applicable regulatory requirements and the higher interests of the institution. I. Limits to remuneration in NOVO BANCO Following the sale process of NOVO BANCO, and in the context of “State Aid” having been granted, the Portuguese State assumed certain commitments before the European Commission (State Aid no.SA.49275 (2017 / N)) up to the end of the Restructuring Period – currently 31 December 2021 (hereinafter “Restructuring Period”). This situation entails the following limitations to the Remuneration of the Management and Supervisory Bodies and the Employees of NOVO BANCO: - Up to 30 June 2020 the Bank shall not pay any employee or Member of a Management or Supervisory Body a total annual salary (includes salary, pension contribution, premium/bonus) above 10 times the average annual salary of the employees of NOVO BANCO. In the period comprised between 30 June 2020 and the end of the Restructuring Period, this limit may be exceeded providing all the established viability commitments have been met. In any case, the Bank may attribute Deferred Bonuses for performances occurred during the Restructuring Period, making the respective payment only at the end of said period. NOVO BANCO | 2019 ANNUAL REPORT | 90 - Up to the end of the Restructuring Period, the total remuneration and respective conditions of payment/attribution may be affected by non-compliance with the commitments referred to above. The aforementioned Remuneration Policies are thus subject to any changes that may result from said commitments. - The attribution of a variable remuneration to the members of the Management and Supervisory Bodies and to the Employees shall in no case jeopardise the maintenance of a solid capital basis and the timely termination of the extraordinary State financial aid. II. Description of the Remuneration Policy of the Management and Supervisory Bodies Policy Approval Powers. The approval of the Remuneration Policy of the Management and Supervisory Bodies is the responsibility of the General Meeting, upon proposal of the Remuneration Committee of the General and Supervisory Board, and this Committee is also responsible for, among others: - Decide on the remuneration to be attributed to the members of the Executive Board of Directors, as well as their KPIs, and establish and approve the budget for the total variable remuneration of employees, jointly with the Executive Board of Directors, based on the operating income of the period; - Verify if the existing remuneration policies are updated and if necessary, propose the appropriate changes; - Review the mechanisms and systems used to ensure that remuneration systems are consistent with sound and effective risk management and assess the criteria used to define remuneration and ex ante risk adjustment based on actual risk outcomes (Clawback or Malus). General and Supervisory Board. Only the independent members of the General and Supervisory Board shall receive remuneration from NOVO BANCO, such remuneration being fixed only and paid 12 times per year. If applicable, the members of the General and Supervisory Board shall also be subject to the limitations referred to in the point above I. Limits to remuneration in NOVO BANCO. Executive Board of Directors. The remuneration of the Executive Board of Directors consists of a fixed component and a variable component. The fixed remuneration is established according to the complexity, level of responsibility and skills required for the function, and is paid 14 times per year. The variable component of remuneration is set based on an individual and collective assessment of performance, using quantitative and qualitative criteria. These criteria are set by the Remuneration Committee and informed in due time to the members of the Executive Board of Directors. The following criteria are also considered in the process of attribution of variable remuneration: - It shall only be attributed if it does not jeopardize the Bank's capacity to maintain a solid capital basis, the Bank has had a positive operating performance and provided that the allocation is - - consistent with sound and effective risk management practices It is subject to a maximum cap of 100% of the annual fixed remuneration; It is attributed over a multi-year framework, being fully deferred proportionally, for a minimum period of 3 years. However, during the Restructuring Period, the amounts attributed for the year 2019 are 100% deferred and will only constitute an acquired right and, consequently, be paid, NOVO BANCO | 2019 ANNUAL REPORT | 91 at the end of the said period, under the terms defined in the respective Policy. For the remaining years of the restructuring It is attributed over a multi-year framework period, deferral is made proportionately, and it is necessary to ensure that no instalments are paid or considered an acquired right before the end of the period; - 50% of the amounts attributed shall take the form of “Remuneration Units”, the value of which is determined by financial indicators of the Bank. - No guaranteed variable remuneration shall be established, save in the first year after hiring, under the form of a Sign-on bonus. All amounts paid or subject to deferral, regardless of whether or not they have vested, shall be subject to the application of adjustments based on risk, Clawback and/or Malus, including those that were deferred through application of the limits established in 1 above. In what concerns other benefits, such as Health Insurance or Mobile Phone, their attribution is aligned to the internal policies for the remaining employees of the Bank. It is worth mentioning that for cases where the member of the EBD was an employee of the Bank before taking up such role, the Policy provides for the possibility of maintaining some benefits contractually established, such as for instance SAMS, special loan conditions and pension plan. In what concerns company cars, the models are defined taking into account the policy in force. III. Identified Employees Policy Approval Powers. The approval of the Remuneration Policy for Employees is the responsibility of the Executive Board of Directors, upon a proposal of the Remuneration Committee. Selection of employees. The Remuneration Policy for Employees includes specific chapters applicable to the employees who materially influence or may influence the risk profile of NOVO BANCO, these being classified as Identified Employees. Under this policy, the following are Identified Employees: - Senior Managers: all employees who have a material impact on the risk profile of the Bank and general directors, CAE advisors, coordinating directors or other directors who are responsible for any Department or area of the Bank, including the Control Functions, the commercial departments and other relevant functions; - Other employees: (i) earning total remuneration above €500 thousand/year; (ii) earning total remuneration above the minimum remuneration of the group of employees selected according to the qualitative criteria referred to above, or (iii) whose total remuneration falls within that of the group of the 0.3% of employees with the highest remunerations. In any of the above cases, providing they have a material impact on the risk profile of NOVO BANCO. Components of Remuneration. The attribution of a Fixed Remuneration shall reflect the skills, experience and responsibility inherent to the function performed, and shall not depend on performance. The attribution of a Variable Remuneration to the Identified Employees is the result of individual and collective performance evaluation and shall take into account the following principles: NOVO BANCO | 2019 ANNUAL REPORT | 92 - Performance must be assessed through quantitative and qualitative criteria and financial and non-financial variables; - The period of assessment of performance and attribution of variable remuneration must be multi- annual, which implies that a substantial part of the amount attributed be deferred so as to take into account economic cycles and the management of risk, and promote the retention of Identified Employees; - The existence of adjustment mechanisms based on risk (Malus and Clawback), as described in the Remuneration Policies; - The amount attributed is limited to 100% of the annual Fixed Remuneration; - 50% of the amounts attributed will take the form of “Remuneration Units”, whose final value is determined by the Bank's financial indicators; - Guaranteed variable remuneration cannot be defined, except in the first year after hiring and on the form of subscription premium. IV. Disclosure of Remuneration The amount of remuneration of the Management and Supervisory Bodies is presented in point 4.6.1 Remuneration of the members of the Management and Supervisory Bodies. The amount of remuneration of the identified employees with material impact on the Bank's risk profile is presented in point 4.6.2. Employee Remuneration. Policy for Selection and Evaluation of the Management and Supervisory Bodies and Key Function Holders NOVO BANCO approved in March 2018 a Policy for Selection and Evaluation of the Management and Supervisory Bodies and Key Function Holders (the “Policy”), thus ensuring compliance with the regulations in force and the implementation of the required governance standards for Significant Financial Institutions. The Policy was approved by the Nomination Committee, the Executive Board of Directors and the General and Supervisory Board, and by the General Meeting. The Policy intends to ensure that the members of the Management and Supervisory Bodies and Key Function Holders (essentially the holders of the Risk, Audit, and Compliance Functions and the General Managers of Foreign Branches) meet all the fit and proper criteria to perform their functions, both at the time of appointment and throughout their mandates. This suitability to the function basically refers to the capacity to permanently ensure a sound and prudent management of the institution, which is assessed in accordance with the following requirements: i) Experience; ii) Repute; Independence; iv) Availability; and v) Collective Suitability. The Policy establishes the procedures to select and assess the employees for the identified functions, setting out the responsibilities of the Nomination Committee and of the Fit&Proper Officer in the management of processes. NOVO BANCO | 2019 ANNUAL REPORT | 93 4.5 Credit to members of the Corporate Bodies At 31 December 2019 the outstanding amount of loans to persons and entities falling under the provisions of art. 85 of the RGICSF* is presented below: The amounts shown in the table below concern residential mortgage loans, save for those listed for Locarent - Companhia Portuguesa de Aluguer de Viaturas SA and the person related to the member of the General and Supervisory Board, where they concern corporate loans. * RGICSF: Regime Geral das Instituições de Crédito e Sociedades Financeiras (General Law on Credit Institutions and Financial Companies). For the purposes of Art. 109 (7) of the RGICSF, at 31 December 2019 there were no loans granted to holders, directly or indirectly, of qualified holdings nor to persons related with them. NOVO BANCO | 2019 ANNUAL REPORT | 94 Function Value(in EUR) Executive Board of DirectorsJosé Eduardo Fragoso Tavares de BettencourtMember of the Executive Board of Directors - € Closely related people 60 774,05 € Luís Miguel Alves RibeiroMember of the Executive Board of Directors 241 711,86 € Closely related people 144 738,83 € General and Supervisory BoardCarla Alexandra Severino Antunes da SilvaMember of the General and Supervisory Board - € Closely related people 116 666,67 € Statutory AuditorAntónio Filipe Dias da Fonseca BrásStatutory Auditor, representing Ernst & Young Audit &Associados - SROC, S.A. 136 018,00 € Entity in which a member of the Executive Board of Directors has management functionsLocarent - Companhia Portuguesa Aluguer Viaturas S.A. 43 877 963,68 € Name / Denomination 4.6 Remuneration of the members of the Corporate Bodies and Identified Employees 4.6.1 Remuneration of the Members of the Management and Supervisory Bodies The annual amount of remuneration received, on an individual and aggregate basis, by the Members of the Corporate Bodies of NOVO BANCO in 2019 was the following: (i) Took office in 2019 Note: In 2019 there were no amounts paid to the members of the corporate bodies of NOVO BANCO by other group companies. Additionally, and resulting from the commitment to take up Mark Bourke as new Executive Director, Euro 320 thousand were paid in 2019 to this board member, before taking up his duties, as a sign-on bonus. In relation to 2019, there was a conditional attribution, subject to the verification of several conditions, of a total Variable Remuneration of 1 997 thousand euro to the members of the Executive Board of Directors, due to the individual and collective evaluation of their performance and in accordance with the Remuneration Policy for Members of the Management Bodies. This attribution did not create vested rights and no payment to the members was made. The totality of the Variable Remuneration attributed is subject to the maximum limit of 100% of the annual Fixed Remuneration of each member, 50% of which is attributed in the form of cash and 50% in the form of Remuneration Units. The value of the Remuneration Units at the date of the attribution is 1 (one) Euro NOVO BANCO | 2019 ANNUAL REPORT | 95 and their value is then reassessed, by the Remuneration Committee, at the time of payment. According to the “Regulation of Remuneration Units”, at the time of payment, the value of the Remuneration Units can only be adjusted downwards when compared to that defined at the time of attribution. On the other hand, the Variable Remuneration attributed to the members of the Executive Board of Directors for 2019 is fully deferred and there will be no payments until after the end of the Restructuring Period, on the date currently defined as December 31, 2021. This Variable Remuneration does not constitute an acquired right until after the end of the Restructuring Period and will be subject to the risk adjustment mechanisms provided for in the Remuneration Policy, namely, Malus and/or Clawback. The 2019 Variable Remuneration attributed to the members of the Executive Board of Directors is subject to future adjustments. In particular, there is no vested right or certainty as to what the final Variable Remuneration amount will be attributed or when payments will be made. In particular: (i) the right to receive will only be effective after the end of the Restructuring Period (currently, December 31, 2021), so there will be no payments until that date; and (ii) the value of the Variable Remuneration component paid in Remuneration Units may be less than the assigned amount or even zero, depending on the Bank's financial indicators at the time of payment, after the end of the Restructuring Period. Other benefits and compensation and non-cash benefits Nothing to report. Compensation paid or due to former members of the Executive Board of Directors in relation to early contract termination in the reporting year Nothing to report. Plans for the attribution of shares or stock options Nothing to report. 4.6.2 Employee Remuneration Regarding employees with impact on the risk profile of the Bank (Identified Employees) their remuneration in 2019 is presented in the table below. Total remuneration includes the fixed remuneration for the year and variable remuneration attributed to year 2019. Variable remuneration attributed for year 2019 was fully deferred, in view of the current market conditions. NOVO BANCO | 2019 ANNUAL REPORT | 96 Variable remunerationAttributed 2019DeferredTotal465 405 4642 262 626 (*)Commercial8874 050376 677Control4551 022196 407Suport343 980 3921 689 542(*) amounts subject to minor adjustmentsEmployees with Material impact on the Risk Profile# EmployeesFixed Remuneration2019 4.7 Securities held by members of the Corporate Bodies As at 31 of December of 2019, and regarding 2019, the members of the Corporate Bodies of NOVO BANCO did not hold any securities issued by NOVO BANCO or by entities that in a control or group relationship with NOVO BANCO. Additionally, no acquisitions, disposals or transmissions of securities issued by NOVO BANCO or by entities in a control or group relationship with NOVO BANCO were carried out in this period by members of the Corporate Bodies of NOVO BANCO. 4.8 Minor indirect investment in NOVO BANCO All members of the Executive Board of Directors and certain members of the General and Supervisory Board have acquired in 2018 (as disclosed in the 2018 annual report) using their own resources, holdings in an indirect investment structure in Novo Banco, which has been structured (and is controlled) by LSF Nani GP, LLP, which owns indirectly a 75% interest in Novo Banco. This indirect investment represents an indirect shareholding of substantially less than 1% in Novo Banco and has no financial impact on the Bank or in the exercise of the functions, suitability and independence of the aforesaid members, due to the low percentage representation of the investment in the share capital, as well as for each of the members that made the investment. This fact has been disclosed to the relevant supervisory authorities and internal control bodies. There was no change in 2019, except in what respects to the member of the Executive Board of Directors elected in 2019, Mark Bourke, who has likewise acquired in 2019 an holding in the same indirect investment structure in Novo Banco, to which the information hereby mentioned is applicable. NOVO BANCO | 2019 ANNUAL REPORT | 97 5 CONSOLIDATED FINANCIAL STATEMENTS AND FINAL NOTES 5.1 Consolidated Financial Statements NOVO BANCO | 2019 ANNUAL REPORT | 98 thousands of Euros31.12.201931.12.2018Interest Income 753 087 758 691 Interest Expenses( 212 474)( 304 349)Net Interest Income 540 613 454 342 Dividend income 9 909 8 974 Fee and comission income 367 400 366 068 Fee and comission expenses( 53 456)( 59 734)Gains or losses on derecognition of financial assets and liabilities not measured at fair value through profit or loss 61 554 ( 173 860)Gains or losses on financial assets and liabilities held for trading( 59 223)( 20 405)Gains or losses on financial assets mandatorily at fair value through profit or loss( 253 720)( 32 877)Gains or losses on financial assets and liabilities designated at fair value through profit and loss 4 ( 1 123)Gains or losses from hedge accounting( 1 740)( 47 147)Exchange differences 38 829 42 503 Gains or losses on derecognition of non-financial assets 3 954 32 270 Other operating income 139 802 177 776 Other operating expenses( 403 299)( 255 643)Operating Income 390 627 491 144 Administrative expenses( 444 840)( 465 127)Staff expenses( 265 350)( 266 138)Other administrative expenses( 179 490)( 198 989)Depreciation( 33 664)( 22 149)Provisions or reversal of provisions( 21 297)( 238 870)Commitments and guarantees given 60 776 ( 26 189)Other provisions( 82 073)( 212 681)Impairment or reversal of impairment on financial assets not measured at fair value through profit or loss( 627 294)( 269 979)Impairment or reversal of impairment of investment in subsidiaries, joint ventures and associates 333 ( 28 398)Impairment or reversal of impairment on non-financial assets( 287 159)( 172 708)Share of the profit or loss of investments in subsidiaries, joint ventures and associates accounted for using the equity method 1 470 5 626 Profit or loss before tax from continuing operations( 1 021 824)( 700 461)Tax expense or income related to profit or loss from continuing operations( 45 769)( 667 707)Current tax( 8 804)( 8 790)Deferred tax( 36 965)( 658 917)Profit or loss after tax from continuing operations( 1 067 593)( 1 368 168)Profit or loss from discontinued operations 1 128 ( 39 819)Profit or loss for the period( 1 066 465)( 1 407 987)Attributable to Shareholders of the parent( 1 058 812)( 1 412 642)Attributable to non-controlling interests( 7 653) 4 655 ( 1 066 465)( 1 407 987)NOVO BANCO, S.A.CONSOLIDATED INCOME STATEMENT AS AT 31 DECEMBER 2019 AND 2018 NOVO BANCO | 2019 ANNUAL REPORT | 99 thousands of Euros31.12.201931.12.2018ASSETSCash, cash balances at central banks and other demand deposits1 854 081 977 672Financial assets held for trading 748 732 843 783Financial assets mandatorily at fair value through profit or loss1 314 7421 566 225Financial assets designated at fair value through profit or loss- 480Financial assets at fair value through other comprehensive income8 849 8967 661 207Financial assets at amortised cost27 141 46026 533 068Securities1 622 5451 389 400Loans and advances to banks 369 228 423 058Loans and advances to customers25 149 68724 720 610Derivatives – Hedge accounting 7 452 1 227Fair value changes of the hedged items in portfolio hedge of interest rate risk 52 540 33 835Investments in subsidiaries, joint ventures and associates 92 628 118 698Tangible assets 889 1521 240 565Tangible fixed assets 188 408 142 494Investment properties 700 7441 098 071Intangible assets 26 378 5 425Tax assets 900 0951 203 214Current Tax Assets 1 628 6 689Deferred Tax Assets 898 4671 196 525Other assets3 378 4923 996 257Non-current assets and disposal groups classified as held for sale 40 2554 092 246TOTAL ASSETS45 295 90348 273 902LIABILITIESFinancial liabilities held for trading 544 825 492 953Financial liabilities designated at fair value through profit or loss 102 012 96 762Financial liabilities measured at amortised cost39 673 64938 336 497Deposits from central banks and other banks9 849 6238 355 560Due to customers28 400 12728 695 268Debt securities issued, Subordinated debt and liabilities associated to transferred assets1 065 2111 051 843Other financial liabilities 358 688 233 826Derivatives – Hedge accounting 58 855 36 150Provisions 307 817 425 935Tax liabilities 17 980 18 453Current Tax liabilities 11 873 12 050Deferred Tax liabilities 6 107 6 403Other liabilities 586 066 506 790Liabilities included in disposal groups classified as held for sale 1 9424 438 001TOTAL DO PASSIVOTOTAL LIABILITIES41 293 14644 351 541EQUITYCapital5 900 0005 900 000Accumulated other comprehensive income( 702 311)( 790 884)Retained earnings(6 115 245)(4 682 300)Other reserves5 942 5014 872 841Profit or loss attributable to Shareholders of the parent(1 058 812)(1 412 642)Minority interests (Non-controlling interests) 36 624 35 346TOTAL EQUITY4 002 7573 922 361TOTAL LIABILITIES AND EQUITY45 295 90348 273 902NOVO BANCO, S.A.CONSOLIDATED BALANCE SHEETAS AT 31 DECEMBER 2019 AND 2018 5.2 Separate Financial Statements NOVO BANCO | 2019 ANNUAL REPORT | 100 milhares de euros31.12.201931.12.2018Receitas de juros 765 259 762 633 Despesas com juros( 219 109)( 316 392)Margem financeira 546 150 446 241 Receitas de dividendos 17 313 17 864 Receitas de taxas e comissões 333 362 329 201 Despesas de taxas e comissões( 48 049)( 49 395)Ganhos ou perdas com o desreconhecimento de ativos e passivos financeiros não mensurados pelo justo valor através dos resultados 59 377 ( 175 182)Ganhos ou perdas com ativos e passivos financeiros detidos para negociação( 60 446)( 22 625)Ganhos ou perdas com ativos financeiros obrigatoriamente contabilizados pelo justo valor através dos resultados( 372 645)( 10 094)Ganhos ou perdas com ativos e passivos financeiros contabilizados pelo justo valor através dos resultados( 102)- Ganhos ou perdas da contabilidade de cobertura( 2 261)( 46 910)Diferenças cambiais 38 599 42 759 Ganhos ou perdas com o desreconhecimento de ativos não financeiros 7 996 19 943 Outras receitas operacionais 62 522 124 327 Outras despesas operacionais( 112 664)( 164 006)Receitas operacionais totais 469 152 512 123 Despesas administrativas( 413 977)( 440 258)Despesas de pessoal( 242 098)( 244 104)Outras despesas administrativas( 171 879)( 196 154)Depreciação( 36 681)( 21 314)Provisões ou reversão de provisões( 101 844)( 239 973)Compromissos e garantias concedidos 60 467 ( 26 161)Outras provisões( 162 311)( 213 812)Imparidades ou reversão de imparidades de ativos financeiros não mensurados pelo justo valor através dos resultados( 631 044)( 298 792)Imparidades ou reversão de imparidades de investimentos em subsidiárias, empreendimentos conjuntos e associadas( 36 040)( 47 605)Imparidades ou reversão de imparidades de ativos não financeiros( 298 424)( 236 460)Lucros ou prejuízos de unidades operacionais em continuação antes de impostos( 1 048 858)( 772 279)Despesas ou receitas com impostos relacionadas com os resultados de unidades operacionais em continuação( 38 726)( 660 596)Impostos correntes( 2 541)( 2 714)Impostos diferidos( 36 185)( 657 882)Lucros ou prejuízos de unidades operacionais em continuação após dedução de impostos( 1 087 584)( 1 432 875)Lucros ou prejuízos de unidades operacionais descontinuadas- - Lucros ou prejuízos do exercício( 1 087 584)( 1 432 875)O Contabilista CertificadoO Conselho de Administração ExecutivoNOVO BANCO, S.A.DEMONSTRAÇÃO DOS RESULTADOS INDIVIDUAIS EM 31 DE DEZEMBRO DE 2019 E 2018 NOVO BANCO | 2019 ANNUAL REPORT | 101 milhares de euros31.12.201931.12.2018ATIVOCaixa, saldos de caixa em bancos centrais e outros depósitos à ordem 1 674 826 802 330 Ativos financeiros detidos para negociação 748 836 925 544 Ativos financeiros obrigatoriamente contabilizados pelo justo valor através dos resultados 3 044 724 2 949 597 Ativos financeiros pelo justo valor através de outro rendimento integral 8 758 131 7 567 290 Ativos financeiros pelo custo amortizado 26 042 243 25 651 402 Títulos 2 392 843 2 302 765 Aplicações em instituições de crédito 495 252 558 652 Crédito a clientes 23 154 148 22 789 985 Derivados - Contabilidade de cobertura 7 992 1 721 Variação do justo valor dos elementos abrangidos pela cobertura de carteira para o risco de taxa de juro 49 884 31 571 Investimentos em subsidiárias, empreendimentos conjuntos e associadas 231 425 645 871 Ativos tangíveis 194 753 135 731 Ativos fixos tangíveis 194 753 135 731 Ativos intangíveis 26 043 4 781 Ativos por impostos 892 713 1 182 481 Ativos por impostos correntes 680 3 209 Ativos por impostos diferidos 892 033 1 179 272 Outros ativos 3 333 586 3 745 772 Ativos não correntes e grupos para alienação classificados como detidos para venda 21 273 186 508 TOTAL DO ATIVO45 026 42943 830 599PASSIVO Passivos financeiros detidos para negociação 544 400 493 403 Passivos financeiros mensurados pelo custo amortizado 39 924 564 38 925 605 Recursos de Bancos Centrais e de outras instituições de crédito 10 542 549 9 119 139 Recursos de clientes 27 980 577 28 439 075 Responsabilidades representadas por títulos, Passivos Subordinados e Passivos associados a ativos transferidos 1 044 445 1 135 128 Outros passivos financeiros 356 993 232 263 Derivados - Contabilidade de cobertura 58 854 36 150 Provisões 371 744 423 883 Passivos por impostos 9 239 9 112 Passivos por impostos correntes 9 239 9 112 Outros passivos 471 626 343 167 TOTAL DO PASSIVOTOTAL DO PASSIVO41 380 42740 231 320CAPITAL PRÓPRIOCapital 5 900 000 5 900 000 Outro rendimento integral acumulado( 632 033)( 751 016)Resultados retidos( 6 115 245)( 4 682 368)Outras reservas 5 580 864 4 565 538 Resultados atribuíveis aos acionistas da empresa-mãe( 1 087 584)( 1 432 875)TOTAL DO CAPITAL PRÓPRIO3 646 0023 599 279TOTAL DO PASSIVO E CAPITAL PRÓPRIO45 026 42943 830 599O Contabilista CertificadoO Conselho de Administração ExecutivoNOVO BANCO, S.A.BALANÇO INDIVIDUAL EM 31 DE DEZEMBRO DE 2019 E 2018 5.3 Final notes 5.3.1 Declaration of Conformity with the Financial Information Reported In accordance with Article 246-1-c) of the Portuguese Securities Code (“Código dos Valores Mobiliários”), the members of the Executive Board of Directors of NOVO BANCO, S.A., named below, state that: (i) the separate and consolidated financial statements of NOVO BANCO, S.A., for the year ended on 31 December 2019 were prepared in accordance with the International Financial Reporting Standards (IFRS) as adopted in the European Union; (ii) to the best of their knowledge the financial statements referred to in (i) provide a true and fair view of the assets and liabilities, equity and earnings of NOVO BANCO and of NOVO BANCO Group, in accordance with the referred standards; (iii) the management report describes accurately the evolution of the businesses, the performance and the financial position of NOVO BANCO and of NOVO BANCO Group in 2019, and includes a description of the main risks and uncertainties faced. The management report and the individual and consolidated financial statements have been approved at the meeting of the Executive Board of Directors held on 25th of March 2020. 5.3.2 Proposal for the distribution of NOVO BANCO results Under the terms of Article 66 (5-f) and for the purposes of Article 376 (1-b) of the Portuguese Commercial Companies Code, and pursuant to Article 29 of the Bank’s Articles of Association, the Executive Board of Directors of NOVO BANCO proposes, for approval by the General Meeting, that the net loss reported in the separate accounts for financial year 2019, in the amount of € 1 087 582 723,94 be allocated to the "Other Reserves and Retained Earnings" caption on the Balance Sheet. 5.3.3 Note of recognition 2019 was a striking year. NOVO BANCO closed the year with a very positive Recurrent result and business growth above 5%, having at the same time reduced by more than 50% its Legacy Balance Sheet. This was also the year in which all the objectives of the commitments assumed with the European Commission when 75% of the share capital of NOVO BANCO was sold to Lone Star, were achieved. The General and Supervisory Board and the Executive Board of Directors hereby express their recognition for the loyalty, trust and involvement with the Bank of its Clients and Employees, as well as for the collaboration of the Governmental, Supervision and Resolution Authorities and the European Commission. Lisbon, 25th of March 2020 NOVO BANCO | 2019 ANNUAL REPORT | 102 Executive Board of Directors António Manuel Palma Ramalho Jorge Telmo Maria Freire Cardoso José Eduardo Fragoso Tavares de Bettencourt Luís Miguel Alves Ribeiro Luísa M. S. Soares da Silva Amaro de Matos Mark George Bourke Rui Miguel Dias Ribeiro Fontes Vítor Manuel Lopes Fernandes NOVO BANCO | 2019 ANNUAL REPORT | 103 6 ANNEX – ALTERNATIVE PERFORMANCE MEASURES The European Securities and Markets Authority (ESMA) issued on 5 October 2015 a set of guidelines on the disclosure of Alternative Performance Measures (APM) by issuers of securities (ESMA/2015/1415), of compulsory application from 03 July 2016. The NOVO BANCO Group uses a set of indicators in the analysis of its financial performance that can be classified as Alternative Performance Measures, in accordance with the referred ESMA guidelines. In compliance with the ESMA guidelines, we present hereunder (i) the reconciliation of the Consolidated Income Statement and (ii) the Alternative Performance Measures: 6.1 Reconciliation of the Income Statement Reconciliation between the Official Consolidated Income Statement and the Management Consolidated Income Statement used by NOVO BANCO's management as a work tool in the analysis of the Group's performance: NOVO BANCO | 2019 ANNUAL REPORT | 104 thousand €Net Interest IncomeFees and CommissionsCapital Markets ResultsOther Operating ResultsStaff CostsGeneral and Administrative CostsDepreciationProvisions for CreditProvisions for SecuritiesProvisions for Other Assets and ContingenciesCorporate Income TaxesSpecial Tax on Banks 540 613 323 460( 196 773)( 246 984)( 265 350)( 179 490)( 33 664)( 627 517) 188( 308 088)( 45 769)( 27 091)Interest and similar income 753 087 753 087Interest expense and similar charges( 212 474)( 212 474)Net Interest Income 540 613Dividend income 9 909 9 909Fee and Commission income 367 400 367 400Fee and Commission expense( 53 456)( 53 456)Net gains / (losses) from financial assets and liabilities at fair value through profit or loss 61 554 69 889( 8 335)Gains or losses on financial assets and liabilities held for trading( 59 223)( 59 223)Net gains / (losses) from assets at fair value through profit or loss mandatory( 253 720)( 253 720)Net gains / (losses) from financial assets at fair value through other comprehensive income 4 4Hedge accounting gains or losses( 1 740)( 1 740)Exchange differences 38 829 38 829Net gains/ (losses) from the sale of other assets 3 954 3 954Other operating income 139 802 9 516 3 973 126 313Other operating expenses( 403 299)( 4 694)( 371 514)( 27 091)Operating Income 390 627General and administrative expensesStaff costs( 265 350)( 265 350)Other administrative expenses( 179 490)( 179 490)Depreciation and amortisation( 33 664)( 33 664)Provisions, net of reversalsCommitments and granted guarantees 60 776 60 776Other provisions( 82 073)( 82 073)Impairment or reversal of impairment of financial assets not measured at fair value through profit or loss( 627 294)( 627 517) 188 35Impairment or reversal of impairment of investments in subsidiaries, joint ventures and associates 333 333Impairment or reversal of impairment of non-financial assets( 287 159)( 287 159)Proportion of profits or losses from investments in subsidiaries, joint ventures and associates accounted for using the equity method 1 470 1 470Profit or loss from continuing operations before taxes(1 021 824)Tax expenses or income related to the results of continuing operationsCurrent taxes( 8 804)( 8 804)Deferred taxes( 36 965)( 36 965)Profits or losses from continuing operations after tax deduction(1 067 593)Profits or losses from discontinued operations 1 128 1 128Profits or losses for the exercise(1 066 465)Attributable to shareholders of the Bank( 1 058 812)Attributable to Non-controlling interests( 7 653)(1 066 465)Official Consolidated Income StatementManagement Consolidated Income Statement 6.2 Alternative performance measures Information on the Alternative Performance Measures (definition, calculation method and scope). NOVO BANCO | 2019 ANNUAL REPORT | 105 DESIGNATIONDEFINITION / UTILITYCALCULATION BASISCONCILIATION WITH THE FINANCIAL STATEMENTS(DR): Income Statement Item (BAL): Balance Sheet ItemINCOME STATEMENTFees and CommissionsIndicator of results of financial activity directly related to services provided to clientsHistorical financial performance indicatorFee and commission income less fee and commission expenses(DR): Fee and commission income and Fee and commission expensesCommercial banking incomeIndicator of the results of commercial activity most directly related to customersHistorical financial performance indicatorFinancial margin + Customer servicesCapital markets resultsIndicator of results of activity in the financial marketsHistorical financial performance indicatorResults from trading and hedging operations, assets at fair value through other comprehensive income and at amortized cost(DR): Dividend income, gains or losses on the derecognition of financial assets and liabilities not measured at fair value through profit or loss, gains or losses on financial assets and liabilities held for trading, gains or losses on financial assets that must be accounted for at fair value through profit or loss, gains or losses on financial assets and liabilities accounted for at fair value through profit or loss, gains or losses from hedge accounting and exchange differencesOther operating resultsIndicator of other diverse results, not directly related to activity with customers and marketsHistorical financial performance indicatorGains or losses on the derecognition of non-financial assets + Other operating income + Other operating expenses + Proportion of profits or losses from investments in subsidiaries and joint ventures and associates accounted for using the equity method(DR): Gains or losses on the derecognition of non-financial assets, other operating income, other operating expenses, proportion of profits or losses from investments in subsidiaries and joint ventures and associates accounted for using the equivalence methodBanking IncomeFinancial activity results indicatorHistorical financial performance indicatorNet interest income + Fees and commissions + Capital markets results + Other operating resultsOperating costsIndicator of structural costs that support commercial activity and whose analysis allows to assess the trajectory of progression of costs Indicator of historical financial performancePersonnel expenses + Other administrative expenses + Depreciation(DR): Personnel expenses, Other administrative expenses and DepreciationOperational resultIndicator of results of financial activity less costs and before impairment. Measures the extent to which the income generated covers / exceeds operating costs Historical financial performance indicatorBanking income - Operating costsProvisions, net of replacement / ImpairmentsIndicator of net reinforcements of impairments made in the yearHistorical financial performance indicatorProvisions or reversal of provisions + Impairment or reversal of financial assets not measured at fair value through profit or loss + Impairment or reversal of impairment of investments in subsidiaries, joint ventures and associates + Impairment or reversal of impairment of non-financial assets(DR): Provisions or reversal of provisions, Impairment or reversal of impairment of financial assets not measured at fair value through profit or loss, Impairment or reversal of impairment of investments in subsidiaries, joint ventures and associates and Impairment or reversal of impairment of non-assets financialALTERNATIVE PERFORMANCE INDICATORSBALANCE SHEET / LIQUIDITYAssets eligible for rediscount transactions with the ECBTrading financial securities or other types of assets, such as non-marketable assets or cash, accepted as collateral by the ECB in financing operations Indicator of historical financial performancenanaSecurities portfolioIndicator of the size of funds invested in trading assets, at fair value through profit or loss, at fair value through profit or loss mandatory, at fair value through other comprehensive income and at amortized costHistorical financial performance indicatorSecurities (bonds, shares and other variable income securities) recorded in trading portfolios, at fair value through profit or loss, at fair value through mandatory income, at fair value through equity and amortized cost.(BAL): Securities held for trading and Securities portfolioCustomer deposits Instruction No 16/2004 of Banco de PortugalIndicator of the asset's financing capacityHistorical financial performance indicatorSet of amounts entered in the following general ledges accounting items: [# 400 - # 34120 + # 52020 + # 53100](BAL): Customer resourcesNet financing from the ECBIndicator that reflects the net amount that was obtained from the ECB to finance the activityHistorical financial performance indicatorDifference between the amount of financing obtained from the ECB and investments in the ECB(BAL): Applications at the ECB and Resources from the ECBCustomer fundsIndicator of the asset's financing capacityHistorical financial performance indicator'Deposits + Other customer funds + Debt securities placed on customers(BAL): Customer funds, Debt securities issued, subordinated liabilities and Liabilities associated with transferred assetsOff-balance fundsIndicator of off-balance sheet customer fundsHistorical financial performance indicatorOff-balance sheet resources managed by Group companies, which include real estate and investment funds, pension funds, banking insurance, portfolio management and discretionary managementTotal customer fundsIndicator of customer resources registered on the balance sheet and off balance sheetHistorical financial performance indicatorDeposits + Other customer resources + Issued bonds + Subordinated liabilities + Disintermediation resources(BAL): Customer resources, Liabilities represented by securities, subordinated liabilities and Liabilities associated with transferred assetsCommercial gapIndicator that measures the need / excess of financing in absolute value of the commercial areaHistorical financial performance indicatorDifference between customer deposits and net credit(BAL): Net customer loans and customer depositsLiquidity gapIndicator that allows assessing the need / excess liquidity accumulated up to 1 year, in each cumulative scale of residual maturity.Historical financial performance indicatorDifference between [(Net assets - volatile liabilities)]Loans to Deposit Ratio Instruction No 16/2004 of Banco de PortugalIndicator of the relationship between the financing of the activity and the funds raised from customersHistorical financial performance indicatorRatio between [(total credit - accumulated impairment for credit) and customer deposits](BAL): Net customer loans and customer deposits NOVO BANCO | 2019 ANNUAL REPORT | 106 Overdue loans ratioLoans quality indicator, showing the proportion of the gross loan portfolio that is in defaultHistorical financial performance indicatorRatio between overdue loans and total loans(BAL): Overdue loans, that is, loans with installments of capital and interest in default and loans to customers, grossRatio of loans overdue for more than 90 daysLoans quality indicator, reflects the proportion of the gross loan portfolio that has been in default for more than 90 days Historical financial performance indicatorRatio between loans overdue for more than 90 days and total loans(BAL): Loans overdue for more than 90 days, that is, loans with installments of capital and interest in default for more than 90 days and loans to customers, grossNon-performing loans ratioLoans portfolio quality indicator, reflects the proportion of the gross loans portfolio including cash and deposits with loans institutions that are in a non-performing situationHistorical financial performance indicatorRatio between the total balance of loans agreements with customers and cash equivalents and investments in loans institutions identified as: (i) being in default (internal definition in line with Article 178 of the Capital Requirements Regulation, that is, contracts with higher material defaults) 90 days and contracts identified as unlikely to pay, according to qualitative criteria; and (ii) having specific impairment and total loans(BAL). Loans identified as non-productive loans and Gross customer loansForborne ratio Instruction No 32/2013 of Banco de PortugalLoans quality indicator, reflects the proportion of the gross loan portfolio that was restructuredHistorical financial performance indicatorRatio between forborne and total loans(BAL). Loans identified as restructured due to financial difficulties of the customer and loans to customers grossOverdue loans coverageIndicator of the ability to absorb potential losses related to loans defaultHistorical financial performance indicator Ratio between balance sheet impairments for loans to customers and the amount of overdue loans(BAL): Provisions for loans and overdue loans to customersCoverage of loans overdue for more than 90 daysIndicator of the ability to absorb potential losses related to loans default for more than 90 daysHistorical financial performance indicatorRatio between balance sheet impairments for loans to customers and loans overdue for more than 90 days(BAL): Provisions for loans and loans to customers overdue by more than 90 daysNon-performing loans coverageIndicator of the capacity to absorb potential losses related to non-performing loans defaultHistorical financial performance indicator Ratio between balance sheet impairments for loans to customers and non-performing loans(BAL): Provisions for loans and non-performing loansCoverage of loans to customersIndicator of the ability to absorb potential losses related to the customer loan portfolioHistorical financial performance indicatorRatio between balance sheet loan impairments and gross loans to customers(BAL): Provisions for loans and gross loans to customersCost of Risk Measure of the cost recognised in the year to cover the risk defaultin the customer loans book -historical financial performance measureRatio between impairment charges recorded in the period for loans risk and the balance of loans to customers gross(DR): Reinforcement of provisions for loans, in the year (BAL): Gross customer loansASSET QUALITY AND COVERAGE RATIOSEFFICIENCY AND PROFITABILITY RATIOEFFICIENCY I Instruction No 16/2004 of Banco de PortugalIt expresses the proportion of income necessary to cover the staff costs incurred. The lower the value of the indicator, the higher the level of efficiency of the organization's human resourcesHistorical financial performance indicatorRatio between staff expenses and banking income(DR): Staff expenses EFFICIENCY II Instruction No 16/2004 of Banco de PortugalExpresses the proportion of income necessary to cover operating costs incurred. The lower the value of the indicator, the greater the level of efficiency of the organization Historical financial performance indicatorRatio between [administrative expenses and depreciation] and banking income(DR): Operating costs include Staff expenses, Other administrative expenses and DepreciationCost to IncomeIt expresses the proportion of income necessary to face the operating costs incurred and allows to measure the progression of efficiency levels. The lower the value of the indicator, the greater the level of efficiency of the organizationHistorical financial performance indicatorRatio between operating costs and banking incomePROFITABILITY Instrução nº16/2004 do Banco de PortugalExpresses the banking income (in%) generated by the asset, in the period and provides an analysis of the capacity to generate income per unit of assets used Indicator of historical financial performanceRatio between banking income and average net assets(BAL): Active; the calculation of the average net asset includes, in addition to the values at the ends of the period under analysis, the values recorded in each of the months in the interval consideredReturn on average net assets Instruction No 16/2004 of Banco de PortugalExpresses the income (in%) generated by the asset, in the period and provides an analysis of the capacity to generate results per unit of assets used Indicator of historical financial performanceRatio between profits or losses of continuing operations before taxes and average net assets. (DR): Profit or loss from continuing operations before taxes (BAL): Assets; the calculation of the average net asset includes, in addition to the values at the ends of the period under analysis, the values recorded in each of the months in the interval consideredReturn on average equity Instruction No 16/2004 of Banco de PortugalExpresses the income (in%) generated by equity in the period and provides information on the efficiency with which capital is used to generate results Indicator of historical financial performanceRatio between profits or losses of continuing operations before taxes and average equity(DR): Profit or loss from continuing operations before taxes (BAL): Equity; the calculation of average equity includes, in addition to the values at the ends of the period under analysis, the values recorded in each of the months in the interval considered PART II . NOTES TO THE FINANCIAL STATEMENTS NOVO BANCO | 2019 ANNUAL REPORT | 107 7.1 Consolidated Financial Statements and Notes to the Consolidated Financial Statements NOVO BANCO | 2019 ANNUAL REPORT | 108 (in thousands of Euros)31.12.201931.12.2018Interest Income5 753 087 758 691Interest Expenses5( 212 474)( 304 349)Net Interest Income 540 613 454 342Dividend income6 9 909 8 974Fee and comission income7 367 400 366 068Fee and comission expenses7( 53 456)( 59 734)Gains or losses on derecognition of financial assets and liabilities not measured at fair value through profit or loss8 61 554( 173 860)Gains or losses on financial assets and liabilities held for trading9( 59 223)( 20 405)Gains or losses on financial assets mandatorily at fair value through profit or loss10( 253 720)( 32 877)Gains or losses on financial assets and liabilities designated at fair value through profit and loss10 4( 1 123)Gains or losses from hedge accounting11( 1 740)( 47 147)Exchange differences12 38 829 42 503Gains or losses on derecognition of non-financial assets13 3 954 32 270Other operating income14 139 862 177 776Other operating expenses14( 403 299)( 255 643)Operating Income 390 687 491 144Administrative expenses( 444 840)( 465 127)Staff expenses15( 265 350)( 266 138)Other administrative expenses17( 179 490)( 198 989)Depreciation24, 26( 33 664)( 22 149)Provisions or reversal of provisions31( 21 297)( 238 870)Commitments and guarantees given 60 776( 26 189)Other provisions( 82 073)( 212 681)Impairment or reversal of impairment on financial assets not measured at fair value through profit or loss21( 627 294)( 269 979)Impairment or reversal of impairment of investment in subsidiaries, joint ventures and associates23 333( 28 398)Impairment or reversal of impairment on non-financial assets26, 28 and 29( 287 159)( 172 708)Share of the profit or loss of investments in subsidiaries, joint ventures and associates accounted for using the equity method23 1 470 5 626Profit or loss before tax from continuing operations(1 021 764)( 700 461)Tax expense or income related to profit or loss from continuing operations( 45 769)( 667 707)Current tax( 8 804)( 8 790)Deferred tax( 36 965)( 658 917)Profit or loss after tax from continuing operations(1 067 533)(1 368 168)Profit or loss before tax from discontinued operations29 1 068( 39 819)Profit or loss for the period(1 066 465)(1 407 987)Attributable to Shareholders of the parent(1 058 812)(1 412 642)Attributable to non-controlling interests34( 7 653) 4 655(1 066 465)(1 407 987)Basic earnings per share (in Euros)18(0.11)(0.14)Diluted earnings per share (in Euros)18(0.11)(0.14)Basic earnings per share of continuing activities (in Euros)18(0.11)(0.14)Diluted earnings per share of continuing activities (in Euros)18(0.11)(0.14)CONSOLIDATED INCOME STATEMENTNOVO BANCO GROUP FOR THE YEARS ENDED 31 DECEMBER 2019 AND 2018The accompanying explanatory notes are an integral part of these consolidated financial statementsNotes NOVO BANCO | 2019 ANNUAL REPORT | 109 (in thousands of Euros)31.12.201931.12.2018Net profit / (loss) for the period( 1 066 465)( 1 407 987)Other comprehensive income/(loss) Items that will not be reclassified to results( 107 623)( 71 535)Actuarial gains / (losses) on defined benefit plansa)( 107 341)( 70 805)Other comprehensive income from associates accounted for using the equity methoda) 897 779Fair value changes of equity instruments measured at fair value through other comprehensive incomea) 1 692( 2 711)Fair value changes of financial liabilities at fair value through profit or loss that isattributable to changes in their credit riska)( 2 871) 1 202Items that may be reclassified to results 209 412( 76 222)Foreign exchange differencesa) 31( 8 665)Financial assets at fair value through other comprehensive incomea) 209 381( 67 557)Total other comprehensive income/(loss) for the period( 964 676)(1 555 744)Attributable to non-controlling interest( 7 653) 4 655Attributable to Shareholders of the Bank( 957 023)(1 560 399)a) See Statement of Changes in the Consolidated EquityNOVO BANCO GROUPNotesThe accompanying explanatory notes are an integral part of these consolidated financial statementsCONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME FOR THE YEARS ENDED 31 DECEMBER 2019 AND 2018 NOVO BANCO | 2019 ANNUAL REPORT | 110 (in thousands of Euros)Notes31.12.201931.12.2018ASSETSCash, cash balances at central banks and other demand deposits 191 854 081 977 672Financial assets held for trading 20 748 732 843 783Financial assets mandatorily at fair value through profit or loss 211 314 7421 566 225Financial assets designated at fair value through profit or loss 21- 480Financial assets at fair value through other comprehensive income 218 849 8967 661 207Financial assets at amortised cost 2127 141 46026 533 068Securities1 622 5451 389 400Loans and advances to banks 369 228 423 058 (of which, Reverse Repurchase Agreement)- 9 774Loans and advances to customers25 149 68724 720 610Derivatives – Hedge accounting 22 7 452 1 227Fair value changes of the hedged items in portfolio hedge of interest rate risk 22 52 540 33 835Investments in subsidiaries, joint ventures and associates 23 92 628 118 698Tangible assets 889 1521 240 565Tangible fixed assets 24 188 408 142 494Investment properties 25 700 7441 098 071Intangible assets 26 26 378 5 425Tax assets 27 900 0951 203 214Current Tax Assets 1 628 6 689Deferred Tax Assets 898 4671 196 525Other assets 283 378 4923 996 257Non-current assets and disposal groups classified as held for sale 29 40 2554 092 246TOTAL ASSETS45 295 90348 273 902-LIABILITIES Financial liabilities held for trading 20 544 825 492 953 Financial liabilities designated at fair value through profit or loss 30 102 012 96 762 Financial liabilities measured at amortised cost 3039 673 64938 336 497Deposits from banks9 849 6238 355 560 (of which, Repurchase Agreement)2 168 488 237 178Due to customers28 400 12728 695 268Debt securities issued, Subordinated debt and liabilities associated to transferred assets1 065 2111 051 843Other financial liabilities 358 688 233 826 Derivatives – Hedge accounting 22 58 855 36 150 Provisions 31 307 817 425 935 Tax liabilities 27 17 980 18 453Current Tax liabilities 11 873 12 050Deferred Tax Liabilities 6 107 6 403 Other liabilities 32 586 066 506 790 Liabilities included in disposal groups classified as held for sale 29 1 9424 438 001TOTAL LIABILITIES41 293 14644 351 541EQUITY Capital 335 900 0005 900 000 Accumulated other comprehensive income 34( 702 311)( 790 884) Retained earnings 34(6 115 245)(4 682 300) Other reserves 345 942 5014 872 841 Profit or loss attributable to Shareholders of the parent(1 058 812)(1 412 642) Minority interests (Non-controlling interests) 34 36 624 35 346TOTAL EQUITY4 002 7573 922 361TOTAL LIABILITIES AND EQUITY45 295 90348 273 902NOVO BANCO GROUPCONSOLIDATED BALANCE SHEETAS AT 31 DECEMBER 2019 AND 2018The accompanying explanatory notes are an integral part of these consolidated financial statements NOVO BANCO | 2019 ANNUAL REPORT | 111 (in thousands of Euros)Other Comprehensive IncomeOtherBalance as at 31 December 2017 * 5 900 000 ( 175 862)( 2 415 578) 3 631 545 ( 2 298 049)( 29 913) 109 125 4 721 268 Impact of transition to IFRS 9- ( 490 374) 41 379 90 175 - - ( 1 086)( 359 906)Balance as at 1 January 2018 5 900 000 ( 666 236)( 2 374 199) 3 721 720 ( 2 298 049)( 29 913) 108 039 4 361 362 Corrections to the impact of transition to IFRS 9- 14 635 ( 1 854)- - - ( 15) 12 766 Changes in perimeter- - - - - - ( 13 886)( 13 886) Other Increase / (Decrease) in Equity- 8 474 ( 2 306 247) 1 151 121 2 298 049 - ( 33 534) 1 117 863 Appropriation to retained earnings of net profit / (loss) of the previous period *- - ( 2 298 049)- 2 298 049 - - - Reserve of Contingent Capital Agreement- - - 1 149 295 - - - 1 149 295 Transactions with non-controlling interests- - - - - - ( 28 882)( 28 882)Other movements- 8 474 ( 8 198) 1 826 - - - 2 102 Other changes in non-controlling Interests- - - - - - ( 4 652)( 4 652)Total comprehensive income for the period- ( 147 757)- - ( 1 412 642) 4 655 - ( 1 555 744)Changes in fair value, net of tax- ( 67 557)- - - - - ( 67 557)Foreign exchange differences, net of tax- ( 8 665)- - - - - ( 8 665)Remeasurement of defined benefit plans, net of tax- ( 70 805)- - - - - ( 70 805)Other comprehensive income appropriated from associated companies- 779 - - - - - 779 Variation in the credit risk of financial liabilities at fair value, net of taxes- 1 202 - - - - - 1 202 Reserves of impairment of securities at fair value through OCI- 604 - - - - - 604 Reserves of sales of securities at fair value through OCI- ( 3 315)- - - - - ( 3 315)Net profit / (loss) for the period- - - - ( 1 412 642) 4 655 - ( 1 407 987)Balance as at 31 December 2018 5 900 000 ( 790 884)( 4 682 300) 4 872 841 ( 1 412 642)( 25 258) 60 604 3 922 361 Other Increase / (Decrease) in Equity- ( 13 216)( 1 432 945) 1 069 660 1 412 642 ( 1) 8 932 1 045 072 Appropriation to retained earnings of net profit / (loss) of the previous period- - ( 1 412 642)- 1 412 642 - - - Reserve of Contingent Capital Agreement 34 - - - 1 037 013 - - - 1 037 013 Transactions with non-controlling interests- - - - - - ( 1 746)( 1 746)Other movements- ( 13 216)( 20 303) 32 647 - - - ( 872)Other changes in non controlling Interests- - - - - ( 1) 10 678 10 677 Total comprehensive income for the period- 101 789 - - ( 1 058 812)( 7 653)- ( 964 676)Changes in fair value, net of tax 34 - 211 207 - - - - - 211 207 Foreign exchange differences, net of tax- 31 - - - - - 31 Remeasurement of defined benefit plans, net of tax 16 - ( 107 341)- - - - - ( 107 341)Other comprehensive income appropriated from affiliates- 897 - - - - - 897 Credit risk changes of financial liabilites at fair value, net of tax 34 - ( 2 871)- - - - - ( 2 871)Reserves of impairment of securities at fair value through OCI 34 - 4 336 - - - - - 4 336 Reserves of sales of securities at fair value through OCI 34 - ( 4 470)- - - - - ( 4 470)Net income of the period- - - - ( 1 058 812)( 7 653)- ( 1 066 465)Balance as at 31 December 2019 5 900 000 ( 702 311)( 6 115 245) 5 942 501 ( 1 058 812)( 32 912) 69 536 4 002 757 Non-controlling interests* - restated by the amount of the activation of the Contingent Capital Agreement recognized in Other reservesGRUPO NOVO BANCOCONSOLIDATED STATEMENT OF CHANGES IN EQUITYFOR THE YEARS ENDED 31 DECEMBER 2019 AND 2018The accompanying explanatory notes are an integral part of these consolidated financial statementsShare CapitalOther Comprehensive IncomeNet profit/(loss) for the period attributable to shareholders of the BankTotalNotesRetained earningsOther reserves NOVO BANCO | 2019 ANNUAL REPORT | 112 (in thousands of Euros)Notes31.12.201931.12.2018Cash flows from operating activitiesInterest received 723 210 795 484 Interest paid( 217 305)( 327 982)Fees and commissions received 367 940 366 634 Fees and commissions paid( 53 456)( 61 180)Recoveries on loans previously written off 31 372 42 424 Contributions to the pension fund( 1 535)( 93 686)Cash payments to employees and suppliers( 449 187)( 406 041) 401 039 315 653 Changes in operating assets and liabilities:Deposits with / from Central Banks( 297 651) 4 742 Financial assets mandatorily at fair value through profit or loss( 248 408) 129 779 Financial assets designated at fair value through profit or loss 85 964 ( 331 573)Financial assets at fair value through other comprehensive income( 869 032)(2 045 648)Financial assets at amortised cost(1 194 539) 594 650 Debt securities( 185 695)( 103 213)Loans and advances to banks 54 090 162 485 Loans and advances to customers(1 062 934) 535 378 Financial liabilities at amortised cost1 491 918 (1 676 569)Deposits from banks1 781 604 ( 69 995)Due to customers( 289 686)(1 606 574)Derivatives - Hedge accounting( 2 225) 103 973 Other operating assets and liabilities 88 249 ( 833 679)Net cash from operating activities before corporate income tax( 544 685)(3 738 672)Corporate income taxes paid( 34 868)( 32 965)Net cash from operating activities( 579 553)(3 771 637)Cash flows from investing activitiesAcquisition of investments in subsidiaries and associated companies( 36 700)( 1 003)Sale of investments in subsidiaries and associated companies 163 828 1 025 Dividends received 9 909 8 974 Acquisition of investment properties- ( 13 720)Sale of investment properties 197 058 69 703 Acquisition of tangible fixed assets ( 19 959)( 16 276)Sale of tangible fixed assets 16 477 332 Acquisition of intangible assets( 26 439)( 5 252)Sale of intangible assets- 3 Net cash from investing activities 304 174 43 786 Cash flows from financing activitiesContingent Capital Agreement1 149 295 791 695 Issue of bonds and other debt securities1 300 000 - Reimbursement of bonds and other debt securities(1 307 855)( 391 596)Issue of subordinated liabilities- 141 200 Net cash from financing activities1 141 440 541 299 Net changes in cash and cash equivalents 866 061 (3 186 552)Cash and cash equivalents at the beginning of the period 719 541 3 906 093 Net changes in cash and cash equivalents 866 061 (3 186 552)Cash and cash equivalents at the end of the period1 585 602 719 541 Cash and cash equivalents include:Cash19 179 220 155 860 Deposits with Central Banks191 408 908 546 023 (of which, Restricted balances)( 268 479)( 258 131)Deposits with banks19 265 953 275 789 Total1 585 602 719 541 CONSOLIDATED CASH FLOW STATEMENTFOR THE YEARS ENDED 31 DECEMBER 2019 AND 2018The accompanying explanatory notes are an integral part of these consolidated financial statementsNOVO BANCO GROUP NOVO BANCO Group Notes to the Consolidated Financial Statements as at 31 December 2019 (Amounts expressed in thousands of Euro, except when otherwise indicated) NOTE 1 – ACTIVITY AND GROUP STRUCTURE NOVO BANCO, S.A. is the main entity of the financial Group NOVO BANCO focused on the banking activity, having been incorporated on the 3rd of August 2014 per deliberation of the Board of Directors of Bank of Portugal (the Central Bank of Portugal) dated 3rd of August 2014 (8 p.m.), under No. 5 of article 145-G of the General Law on Credit Institutions and Financial Companies (“Regime Geral das Instituições de Crédito e Sociedades Financeiras” (RGICSF)) , approved by Decree-Law No. 298/92, of 31 December, following the resolution measure applied by Bank of Portugal to Banco Espírito Santo, S.A. (BES), under the terms of paragraphs 1 and 3-c) of article 145-C of the RGICSF, from which resulted the transfer of certain assets, liabilities and off-balance sheet elements as well as assets under management of BES from BES to NOVO BANCO (NOVO BANCO or the Bank). As a result of the resolution measure applied, Fundo de Resolução (“Resolution Fund”) became the sole owner of the share capital of NOVO BANCO, in the amount of Euro 4 900 million, with the status of a transition bank, with a limited duration, due to the commitment assumed by the Portuguese State with the European Commission to sell its shares within two years from the date of its incorporation, extendable for one year. On 31 March 2017, the Resolution Fund signed the sale agreement of NOVO BANCO. On 18 October 2017 the sale process was concluded, following the acquisition of the majority (75%) of its share capital by Nani Holdings, SGPS, SA, a company belonging by the North-American Group Lone Star, through two share capital increases in the amount of Euro 750 million and Euro 250 million, in October and December, respectively. Thus, as at 31 December 2019, the share capital of NOVO BANCO amounted to Euro 5 900 million, represented by 9 799 999 997 nominative shares, with no nominal value. Within the sale process, a Contingent Capitalization Agreement was created, which in case its capital ratios decrease below the regulatory requirements defined for NOVO BANCO, and cumulatively, losses are recorded in a delimited portfolio of assets, the Resolution Fund makes a payment corresponding to the lower of the losses recorded and the amount needed to restore the capital ratios at the relevant level, up to a maximum of Euro 3 890 million. With the conclusion of the sale process, NOVO BANCO ceased to be considered a transition bank and began to operate normally, although still being subject to certain measures restricting its activity, imposed by the European Competition Authority. Since 18 October 2017 the financial statements of NOVO BANCO Group are consolidated by Nani Holdings SGPS, S.A., with registered office at Avenida D. João II, No. 46, 4A, Lisbon. LSF Nani Investments S.a.r.l., headquartered in Luxembourg, is the parent company of the Group. NOVO BANCO, S.A. has its registered office in Lisbon, at Avenida da Liberdade, No. 195. As at 31 December 2019, NOVO BANCO Group (hereinafter also designated as Group or NB Group) has a retail network comprising 387 branches in Portugal and abroad (31 December 2018: 402 branches), including NOVO BANCO | 2019 ANNUAL REPORT | 113 branches in Spain and Luxembourg, and 4 representative offices in Switzerland (31 December 2018: 5 representative offices). Group companies in which the Bank has a direct or indirect holding higher or equal to 20%, over which the Bank exercises control or significant influence, and that were included in the consolidation perimeter, are presented below. NOVO BANCO | 2019 ANNUAL REPORT | 114 The entities directly consolidated into NOVO BANCO are the following: NOVO BANCO | 2019 ANNUAL REPORT | 115 NOVO BANCO, SA2014-PortugalBank Novo Banco Servicios Corporativos, SL19961997SpainInsurance distrib. & real estate management100.00%Full consolidation Novo Vanguarda, SL20112011SpainServices provider100.00%Full consolidation Novo Banco dos Açores, SA (NB Açores)20022002PortugalBank57.53%Full consolidation BEST - Banco Electrónico de Serviço Total, SA (BEST)20012001PortugalElectronic banking100.00%Full consolidation NB África, SGPS, SA20092009Portugal Holding100.00%Full consolidation GNB - Gestão de Ativos, SGPS, SA (GNB GA)19921992Portugal Holding100.00%Full consolidation ES Tech Ventures, S.G.P.S., SA (ESTV)20002000Portugal Holding100.00%Full consolidation NB Finance, Ltd. (NBFINANCE)20152015 Cayman IslandsIssue and distribution of securities100.00%Full consolidation GNB - Recuperação de Credito, ACE (GNBREC)19981998PortugalDebt collection99.15%Full consolidation GNB Concessões, SGPS, SA (GNB CONCESSÕES)20022003Portugal Holding100.00%Full consolidation GNB - Serviços de Suporte Operacional, ACE (GNB ACE)20062006PortugalServices provider86.86%Full consolidation Espírito Santo Representações, Ltda. (ESREP)19961996BrazilRepresentation services99,99%Full consolidation Fundo de Capital de Risco NOVO BANCO PME Capital Growth20092009PortugalVenture capital fund100.00%Full consolidation Fundo FCR PME / NOVO BANCO19971997PortugalVenture capital fund56.78%Full consolidationFundo de Gestão de Património Imobiliário - FUNGEPI - Novo Banco19972012Portugal Real estate fund management100.00%Full consolidation Fundo de Gestão de Património Imobiliário - FUNGEPI - Novo Banco II20112012Portugal Real estate fund management100.00%Full consolidationFUNGERE - Fundo de Gestão de Património Imobiliário19972012Portugal Real estate fund management95.28%Full consolidationImoInvestimento – Fundo Especial de Investimento Imobiliário Fechado20122012Portugal Real estate fund management100.00%Full consolidationPrediloc Capital – Fundo Especial de Investimento Imobiliário Fechado20062012Portugal Real estate fund management100.00%Full consolidationImogestão – Fundo de Investimento Imobiliário Fechado20062013Portugal Real estate fund management100.00%Full consolidationArrábida - Fundo Especial de Investimento Imobiliário Fechado20062013Portugal Real estate fund management100.00%Full consolidationInvesfundo VII – Fundo de Investimento Imobiliário Fechado20082013Portugal Real estate fund management100.00%Full consolidationNB Logística - Fundo Especial de Investimento Imobiliário Aberto20072012Portugal Real estate fund management85.76%Full consolidationNB Património - Fundo de Investimento Imobiliário Aberto19922014Portugal Real estate fund management55.73%Full consolidationFundes - Fundo Especial Investimento Imobiliário Fechado20082015Portugal Real estate fund management100.00%Full consolidationNB Arrendamento - Fundo de Investimento Imobiliário Fechado para Arrendamento Habitacional20092012Portugal Real estate fund management100.00%Full consolidationOrey Reabilitação Urbana - Fundo de Investimento Imobiliário Fechado20062012Portugal Real estate fund management100.00%Full consolidationFimes Oriente - Fundo de Investimento Imobiliário Fechado20042012Portugal Real estate fund management100.00%Full consolidationFundo de Investimento Imobiliário Fechado Amoreiras20062015Portugal Real estate fund management95.24%Full consolidationFundo de Investimento Imobiliário Fechado Solid20042015Portugal Real estate fund management100.00%Full consolidationASAS Invest - Fundo Especial de Investimento Imobiliário Fechado20102013Portugal Real estate fund management100.00%Full consolidationNovimove - Fundo de Investimento Imobiliario Fechado20042019Portugal Real estate fund management100.00%Full consolidationFebagri-Actividades Agropecuárias e Imobiliárias SA20062012PortugalReal estate development100.00%Full consolidationAutodril - Sociedade Imobiliária, SA19982012PortugalReal estate development100.00%Full consolidationJCN - IP - Investimentos Imobiliários e Participações, SA19952012PortugalReal estate development95.28%Full consolidationPortucale - Sociedade De Desenvolvimento Agro - Turistico, SA19902012PortugalAgricultural holdings94.80%Full consolidationGreenwoods Ecoresorts empreendimentos imobiliários, SA20122012PortugalReal estate development100.00%Full consolidationSociedade Imobiliária Quinta D. Manuel I, SA20122012PortugalReal estate development100.00%Full consolidationQuinta da Areia - Sociedade Imobiliária, SA20122012PortugalReal estate development100.00%Full consolidationSociedade Agrícola Turística e Imobiliária da Várzea da Lagoa, SA20122012PortugalReal estate development100.00%Full consolidationImalgarve - Sociedade de Investimentos Imobiliários, SA19862014PortugalReal estate development100.00%Full consolidationPromotur - Empreendimentos Turístico, SA19832014PortugalReal estate development99.875%Full consolidationHerdade da Boina - Sociedade Imobiliária19992012PortugalReal estate development100.00%Full consolidationRibagolfe - Empreendimentos de Golfe, SA19952012PortugalGolf course operations100.00%Full consolidationBenagil - Promoção Imobiliária, SA19702012PortugalReal estate development100.00%Full consolidationImoascay - Promoção Imobiliária, SA20112012PortugalReal estate development100.00%Full consolidationHerdade do Pinheirinho Resort, SA 20072017PortugalReal estate development100.00%Full consolidationHerdade do Pinheirinho II - Investimento Imobiliário, SA20082017PortugalReal estate development100.00%Full consolidationFundo de Investimento Imobiliário Fechado Quinta da Ribeira20062017PortugalReal estate fund management100.00%Full consolidationR Invest - Fundo Especial de Investimento Imobiliário Fechado20092017PortugalReal estate fund management100.00%Full consolidationPromofundo - Fundo Especial de Investimento Imobiliário Fechado20082018PortugalReal estate fund management100.00%Full consolidation Locarent - Companhia Portuguesa de Aluguer de Viaturas, SA (LOCARENT)19912003PortugalRenting50.00%Equity methodUNICRE - Instituição Financeira de Crédito, SA19742010PortugalNon banking financing17.50%Equity method Ijar Leasing Algérie20112011AlgeriaLeasing35.00%Equity method Edenred Portugal, SA19842013PortugalServices provider50.00%Equity method PNCB - Plataforma de Negociação Integrada de Créditos Bancários, A.C.E. 20182018PortugalServices provider33.33%Equity methodb) Entities consolidated under the equity method as the voting rights grant control to the other shareholders.Activity% Economic InterestConsolidation methodYear incorporatedYear acquiredRegistered officea) The percentage presented above reflects the Group's economic interest. These entities were included in the consolidated balance sheet via the equity method as the Group exercises significant influence over their activities a)b) Subgroups: Additionally, and considering the requirements of IFRS 10, the Group’s consolidation perimeter includes the following structured entities: During the financial year of 2019, the main changes in NOVO BANCO Group’s structure were as follows: - Subsidiaries and branches - - - - In January 2019, the London branch was closed; In March 2019, the early redemption of Lusitano Project Finance No. 1, FTC; In September 2019, BES GMBH merged into Novo Banco; In December 2019, a capital increase was made in the Fundo Amoreiras in the amount of Euro 36 200 thousand, entirely carried out by the NB, with the holding percentage going from 94.16% to 95.24%; - In December 2019, Fundo Fimes Oriente capital was reduced in the amount of Euro 163 815 thousand; - - - In December 2019, the Cayman Islands branch was closed: In December 2019, BESIL was merged into Novo Banco; In December 2019, ES Plc was merged into Novo Banco. NOVO BANCO | 2019 ANNUAL REPORT | 116 GNB - Gestão de Ativos, SGPS, SA (GNB GA)19921992PortugalHolding100.00%Full consolidation GNB - Sociedade Gestora de Fundos de Investimento Mobiliário, SA19871987PortugalInvestment fund management100.00%Full consolidation GNB - International Management, SA19951995LuxembourgInvestment fund management100.00%Full consolidation GNB - Sociedade Gestora de Fundos de Investimento Imobiliário, SA19921992PortugalInvestment fund management100.00%Full consolidation GNB - Sociedade Gestora de Fundos de Pensões, SA19891989PortugalInvestment fund management100.00%Full consolidation Espírito Santo International Asset Management, Ltd.19981998British Virgin IslandsInvestment fund management50.00%Equity method GNB - Sociedade Gestora de Patrimónios, SA19871987PortugalWealth management100.00%Full consolidation ES Tech Ventures, S.G.P.S., SA (ESTV)20002000PortugalHolding100.00%Full consolidation Yunit Serviços, SA20002000PortugalInternet portal management33.33%Equity method Fundo de Capital de Risco NOVO BANCO PME Capital Growth20092009PortugalVenture capital fund100.00%Full consolidation Righthour, SA20132013PortugalServices provider100.00%Full consolidationImbassaí Participações, SA20092013BrazilHolding100.00%Full consolidationLírios Investimentos Imobiliários, Ltda20072013BrazilReal estate management100.00%Full consolidationUCH Investimentos Imobiliários, Ltda20072013BrazilReal estate management100.00%Full consolidationUCS Participações e Investimentos, Ltda20042013BrazilReal estate management100.00%Full consolidationUR3 Investimentos Imobiliários, Ltda20072013BrazilReal estate management100.00%Full consolidation Fundo FCR PME / NOVO BANCO19971997PortugalVenture capital fund56.78%Full consolidation Enkrott SA20062006PortugalWater treatment and management16.07%Equity method Logic C - Logística Integrada, SA20052016PortugalLogistics20.74%Equity method Epedal - Indústria de Componentes Metálicos, S.A.19812015PortugalHolding12.22%Equity methodNexxpro - Fábrica de Capacetes, S.A. 20012015PortugalHelmet manufacturing38.99%Equity methodCristalmax – Indústria de Vidros, S.A.19942017PortugalGlass manufacturing18.96%Equity methodAch Brito & Ca, SA19182015PortugalSoap manufacturing8.77%Equity methodM. N. Ramos Ferreira, Engenharia, SA19832013PortugalEngeneering8.11%Equity method GNB Concessões, SGPS, SA (GNB CONCESSÕES)20022003PortugalHolding100.00%Full consolidation Lineas – Concessões de Transportes, SGPS, SA20102010PortugalHolding40.00%Equity method Portucale - Sociedade De Desenvolvimento Agro - Turístico, SA19902012PortugalAgricultural holdings94.80%Full consolidation Herdade da Vargem Fresca VI - Comércio e Restauração SA19972012PortugalCatering94.80%Full consolidationa) The percentage presented above reflects the Group's economic interest. These entities were included in the consolidated balance sheet via the equity method as the Group exercises significant influence over their activities.b) Entities consolidated under the equity method as the voting rights grant control to the other shareholders.Activity% Economic InterestConsolidation methodYear incorporatedYear acquiredRegistered officea)a)b)a)a)a)Lusitano Mortgages No.6 plc (*)20072007Ireland100%Full consolidationLusitano Mortgages No.7 plc (*)20082008Ireland100%Full consolidationLusitano SME No. 3 (*)20162016Portugal100%Full consolidation(*) - Structured entities set up in the scope os securitization operations, recorded in the consolidated financial statements in accordance with the continued involvement of theGroup in these operations, determined based on the percentage of the equity pieces held of the respective vehicles (see Note 38)Consolidation methodYear incorporatedYear acquiredRegistered office% Economic Interest - Associated companies - In March 2019, the Nexxpro, an associated company held by the FCR PME NB Fund, made a capital increase of Euro 440 thousand, which was fully subscribed by the Fund. As such, the Fund's participation percentage in this Company went from 59.58% to 68.68%; - In August 2019, Epedal, SGPS, S.A. was merged into Epedal - Indústria de Componentes Metálicos, S.A. During the financial year of 2018, the main changes in NOVO BANCO Group’s structure were as follows: - Subsidiaries and branches - - - In January 2018, ESTV acquired Opway 1.032% of the share capital of GNB Concessões for 1 euro; In March 2018, Palexpo Imobiliária. S.A., was liquidated; In May 2018, Fundo Solid increased its share capital by Euro 250 thousand; this capital increase was fully subscribed and paid by NOVO BANCO; - In June 2018, the companies Quinta dos Cónegos – Sociedade Imobiliária, S.A. and GNB SI ACE were liquidated; - In June 2018, NOVO BANCO acquired participation units of Fundo Invesfundo VII for Euro 1 003 thousand, representing 4.14% of its share capital, and now owns 100% of the capital of the Fund; - In June 2018, Promofundo fund became part of the consolidation perimeter of NOVO BANCO Group as a result of a process of transfer in lieu of payment of the participation units representing the entire share capital of this fund; In August 2018, Promofundo fund increased its share capital by Euro 22 850 thousand; In October 2018, Sociedade da Vargem Fresca III – Comércio e Serviços, S.A., owned by Portucale, was liquidated; In October 2018, the securitization operation Lusitano Finance N. º 3 was liquidated; In October 2018, NOVO BANCO received as a payment in kind 260 000 shares from GNB Concessões equity capital, making NB Group the owner of 100% of the entity; In November 2018, Madeira’s branch was terminated; In December 2018, the companies Herdade da Vargem Fresca V e Herdade da Vargem Fresca VII, - - - - - - owned by Portucale, were liquidated. - Associated companies - In February 2018, NOVO BANCO and GNB Concessões sold their stake in Ascendi Pinhal Interior, recording a consolidated capital gain of Euro 1 026 thousand; - In April 2018, the FCR SME NB fund sold the 33.33% stake held in Attentionfocus, Lda for Euro 1, generating no impact on results. Simultaneously, the accessory capital and shareholder loans granted to this Company were fully reimbursed; - In October 2018, FCR PME NB Fund started to consolidate the entities Ach Brito & Ca, S.A. and M. N. Ramos Ferreira, Engenharia, S.A. using the equity method. NOVO BANCO | 2019 ANNUAL REPORT | 117 During 2019 and 2018, the movements relating to acquisitions, disposals and other investments and reimbursements in subsidiaries and associated companies are detailed as follows: In addition, in February 2018 the sale of assets and liabilities of the NOVO BANCO Branch in Venezuela to BANCAMIGA, Banco Universal, C.A., from Venezuela, was completed for the value of 11 707 500 thousand Venezuelan bolivars (approximately Euro 272 thousand at DICOM-BCV exchange rate of February 28, 2018). The sale had no impact on results in that period because the operation in Venezuela was fully impaired in 2017. Upon completion of the transaction and cancellation of the bank license, NOVO BANCO no longer has any banking activity in Venezuela. The subsidiaries classified under IFRS 5 as non-current assets held for sale and discontinued operations, are detailed in Note 29. NOTE 2 – MAIN ACCOUNTING POLICIES 2.1. Basis of presentation In accordance with Regulation (EC) No. 1606/2002 of 19 July 2002 of the European Council and the Parliament and Notices 5/2015 of Bank of Portugal, the consolidated financial statements from NOVO BANCO, S.A. were prepared in accordance with the International Financial Reporting Standards (IFRS) as adopted by the European Union effective as of 1 January 2019. The IFRS comprise accounting standards issued by International Accounting Standards Board (IASB) as well as interpretations issued by the International Reporting Interpretations Committee (IFRIC), and by their predecessor bodies Standing Interpretations Committee (“SIC”). NOVO BANCO | 2019 ANNUAL REPORT | 118 (in thousands of Euros)Acquision costOther investments(a)TotalDisposal amountOther reimbursements (a)TotalProfit / (loss) on disposals / liquidationsSubsidiariesAutodril- 60 60 - - - - Amoreiras- 36 200 36 200 - - - - Fimes Oriente- - - ( 163 815)( 163 815)- - 36 260 36 260 - ( 163 815)( 163 815)- Associated companies- - Nexxpro- 440 440 - - - - - 440 440 - - - - - 36 700 36 700 - ( 163 815)( 163 815)- (a) Share capital increases / decreases, supplementary capital contributions, shareholder loans, financial instrument exchange operations and incorporation of companiesAcquisitionsDisposals31.12.2019(in thousands of Euros)Acquision costOther investments(a)TotalDisposal amountOther reimbursements (a)TotalProfit / (loss) on disposals / liquidationsSubsidiariesSolid- 250 250 - - - - Invesfundo VII 1 003 - 1 003 - - - - Promofundo- 22 850 22 850 - - - - 1 003 23 100 24 103 - - - - Associated companies- - Ascendi Pinhal Interior- - - 10 - 10 1 026 - - - 10 - 10 1 026 1 003 23 100 24 103 10 - 10 1 026 (a) Share capital increases / decreases, supplementary capital contributions, shareholder loans, financial instrument exchange operations and incorporation of companies31.12.2018AcquisitionsDisposals The consolidated financial statements of NOVO BANCO are presented as at 31 December 2019. The accounting policies used by the Group in their preparation are consistent with those used in the preparation of the financial statements as at 31 December 2018, except in what concerns with the new standards issued. These changes are presented below. Accounting Policies, Changes in Accounting Estimates and Errors Changes in accounting policies New and amended standards As described in Note 45, in the preparation of its consolidated financial statements as at 31 December 2019 the Group adopted the accounting standards issued by the IASB and the IFRIC interpretations with mandatory effect as from 1 January 2019. The accounting policies used by the Group in preparing the consolidated financial statements, described in this note, were adopted accordingly. In these financial statements, the Group first applied IFRS 16, which is mandatory for periods beginning on or after 1 January 2019. The Group did not early adopt any other regulation or interpretation. IFRS 16 Leases The Group first adopted IFRS 16 Leases as at 1 January 2019, and the comparative information presented for 2018 has not been restated, so it is presented, as previous reported, in accordance with IAS 17 and related interpretations. According to IFRS 16: - as a lessee, the standard introduces a single accounting model with the recognition of rights-of-use assets representative of their rights of use of the underlying assets and lease liabilities representative of their obligations to make lease payments; - as a lessor, accounting remains the same as existing accounting policies and leases may be classified as financial or operating. In the transition to IFRS 16, the Group recognized assets under right of use and lease liabilities, with the following impact in the consolidated financial statements: A. Lease Definition The Group first adopted IFRS 16 through the modified retrospective approach, so no impact was recognized in equity, since there were no differences between the right-of-use asset and the lease liability in the initial recognition on 1 January 2019. In the transition to IFRS 16, the Group opted to apply the “practical expedient” allowed by the standard to support the assessment of which transactions are leases. The Group has only applied IFRS 16 in contracts that were previously identified as leases. Contracts that were not identified as leases under IAS 17 and IFRIC 4 were not revalued to determine whether they were leases. Therefore, the definition of lease in accordance NOVO BANCO | 2019 ANNUAL REPORT | 119 (in thousands of Euros)Assets under right-of-use presented in Other tangible assets 71 105 Lease liabilities 71 105 with IFRS 16 has been applied only to contracts that entered into force or have changed as of or after 1 January 2019 (including). Previously, the Group classified real estate leases as operational leases in accordance with IAS 17. Leases typically take place over periods of up to 5 years. Some of them include an option to renew the lease for additional periods that vary between 1 month and 20 years after the end of the non-cancellable period. Some leases also provide for additional rent payments due to changes in local index prices. In the transition, for leases classified as operating leases in accordance with IAS 17, the lease liabilities were measured at the present value of the remaining lease payments, discounted at the Group's incremental financing rate on 1 January 2019. The right-of-use assets are measured at the amount equivalent to the lease liability, adjusted by the amount of any advance or accumulated lease payments. Practical expedients The Group has adopted some practical expedients provided for in the standard in applying IFRS 16 to leases previously classified as operating leases in accordance with IAS 17. - Apply the exception of non-recognition of assets under right of use and liabilities for short-term leases (i.e. with a lease term of 12 months or less); - Apply the exception of non-recognition of assets under use and liabilities for low value leases (i.e. new value less than Euro 5 thousand); - Do not separate lease components from non-lease components. For leases that were classified as finance leases in accordance with IAS 17, the accounting amount of assets under lease use and the liability of the lease as at 1 January 2019 was determined at the accounting amount of the lease asset and the lease liability, according to IAS 17 immediately prior to that date. The accounting standards and interpretations recently issued, but not yet effective and which the Group has not yet applied in the preparation of its financial statements, can be analysed in Note 45. The consolidated financial statements are expressed in thousands of Euro, rounded to the nearest thousand. They have been prepared under the assumption of continuity of operations from the accounting records and following the historical cost convention, except for the assets and liabilities accounted for at fair value, namely derivative financial instruments, financial assets and liabilities at fair value through profit or loss, financial assets at fair value through other comprehensive income, investment properties and hedged assets and liabilities, in respect of their hedged component. Changes in accounting estimates The preparation of financial statements in accordance with IFRS requires the Group to make judgements and estimates and use assumptions that affect the application of the accounting policies and the reported amounts of income, expenses, assets and liabilities. Changes in such assumptions or differences when compared to the reality may impact the current estimates and judgements. The areas involving a higher level of judgement or complexity, or areas where assumptions and estimates are significant to the consolidated financial statements are analysed in Note 3. The consolidated financial statements and the Management Report of 31 December 2019 were approved at the Executive Board of Directors’ meeting held on 25 March 2020 and will be submitted to the General Assembly of Shareholders, which has the power to justifiably decide to change them. However, it is Executive Board of Directors conviction that these consolidated financial statements will be approved without changes. NOVO BANCO | 2019 ANNUAL REPORT | 120 2.2. Consolidation principles These consolidated financial statements comprise the assets, liabilities, income, expenses, other comprehensive income and cash flows of NOVO BANCO and of its subsidiaries (Group or NOVO BANCO Group) and the results attributable to the Group relating to shareholdings in associated companies. These accounting policies have been consistently applied to all the Group subsidiaries and associated companies during the financial years covered by these consolidated financial statements, with the exception of GNB – Companhia de Seguros Vida, S.A. (GNB Vida) which did not adopt IFRS 9 as of 1 January 2018 due to the company benefiting from the deferment period of the adoption of this standard granted to Insurance Companies, which extends until 1 January 2021, which is why, as at 31 December 2018, its assets and liabilities recognized in discontinued operations still follow the valuation recommended in IAS 39 - Financial Instruments. Subsidiaries Subsidiaries are entities (including investment funds and securitization vehicles) over which the Group exercises control. The Group controls an entity when it is exposed, or has rights, to the variability of the return deriving from its involvement with that entity and may take possession of same by way of the power it has over the entity (de facto control) and has the ability to affect these variable returns through the power it held over the relevant activities of the entity. As provided in IFRS 10, the Group analyses the objective and the structuring of how an entity’s operations are developed when assessing its control over such entity. Subsidiaries are fully consolidated from the date on which control over their activities is transferred to the Group and until the date that control ceases. Holdings of third parties in these entities are presented in the caption Non-controlling interests, except for open investment funds in which these values are presented in the caption Other liabilities, due to the high probability of their redemption. The accumulated losses of a subsidiary are attributed proportionally to non-controlling interests even if this results in the recognition of non-controlling interests of a negative value. When control is obtained in a business combination achieved in stages (step acquisition) the Group remeasures its previously held non-controlling interest in the entity at its fair value and recognizes the resulting gain or loss in the income statement upon determining the respective goodwill. At the moment of a partial sale, resulting in the loss of control of a subsidiary, any remaining non-controlling interest retained is remeasured to its fair value at the date the control is lost, and the resulting gain or loss is recognised in the income statement. The entity identified as acquirer or incorporator integrates the results of the entity/ business acquired as from the date of its acquisition, that is, from the date of the takeover of control. The accounting treatment of mergers by incorporation, between entities under common control, follows the same principles - the integration of the assets and liabilities of the entity to be incorporated is carried out at the amounts presented in the consolidated financial statements of the entity that has control over the two entities, at the highest level of the Group's financial holdings chain (the "predecessor"). The difference between the carrying book value of the incorporated assets and liabilities and the amount of the financial investment is recognised as a merger reserve. Associated companies Associated companies are those entities over which the Group has significant influence over the company’s financial and operating policies, but not its control. Generally, when the Group owns more than 20% of the voting rights but less than 50%, it is presumed to have a significant influence. Even if the Group owns less than NOVO BANCO | 2019 ANNUAL REPORT | 121 20% of the voting rights, it can still have a significant influence through its participation in the management of the associated company or its representation in its executive Management bodies. Investments in associated companies are recorded in the consolidated financial statements of the Bank using the equity method of accounting from the date on which significant influence is attained by the Group and until the date that significant influence ceases. The carrying value of the investments in associated companies includes the value of the respective goodwill determined at the acquisition date and is presented net of impairment losses. NOVO BANCO carries out impairment tests on its investments in associated companies, whenever there are any indications of impairment. Impairment losses recognised in prior years may be reversed, up to the limit of the accumulated losses. In a step acquisition that results in the Group obtaining significant influence over an entity, any previously held stake in that entity is remeasured to its fair value through the income statement when the equity method is first applied. When the Group’s share of losses of an associated company equals or exceeds its interest in the associated company, including any medium and long-term interest, the Group discontinues the application of the equity method, except when it has a legal or constructive obligation to cover those losses or has made payments on behalf of the associated company. Gains or losses on disposals of shares in associated companies are recognised in the income statement even if those disposals do not result in the loss of significant influence. Dividends attributed by associated companies reduce the Balance Sheet value recognised by the Group. Structured Entities (SE) The Group consolidates, using the full consolidation method, certain special purpose entities, created specifically to accomplish a narrow and well-defined objective, when the substance of the relationship with those entities indicates that they are controlled by the Group, irrespective of the percentage of the equity held. The evaluation of the existence of control is made based on the established by IFRS 10 – Consolidated Financial Statements, according to which a SE is controlled if (i) the Group is exposed or has rights to its results; and (ii) the Group has the power to affect the SE’s results through the control it exercises over them. Investment funds managed by the Group As part of its asset management activity, the Group manages investment funds on behalf of the holders of the participation units. The financial statements of these funds are not consolidated by the Group except in the cases where control is exercised over their activity, according to the criteria established by IFRS 10. Goodwill Goodwill represents the difference between the acquisition cost and the fair value of the Group’s share of identifiable net assets, liabilities and contingent liabilities acquired. Business combinations occurring after 31 December 2009 were accounted for using the purchase method. The acquisition cost includes the fair values: i) of the assets transferred, ii) of the liabilities assumed by the acquirer before the previous shareholders of the acquired, and iii) of the equity instruments issued. In accordance with IFRS 3 – Business Combinations, the Group measures goodwill as the difference between the fair value of the consideration transferred including the fair value of any non-controlling interest previously held, and the fair value attributable to the assets acquired and the liabilities assumed and any equity NOVO BANCO | 2019 ANNUAL REPORT | 122 instruments issued. The fair values are determined at the acquisition date. The costs directly attributable to the acquisition are expensed at the moment of the acquisition. As at the acquisition date, the non-controlling interests are measured at their proportional interest in the fair value of the net identifiable assets acquired and liabilities assumed, without their respective portion of goodwill. As a result, the goodwill recognised in these consolidated financial statements corresponds solely to the portion attributable to the shareholders of the Bank. In accordance with IFRS 3 – Business Combinations, positive goodwill is recognised as an asset at its cost and is not amortised. Goodwill relating to the acquisition of associated companies is included in the carrying book value of the investments in those associated companies, determined using the equity method. Negative goodwill is recognised directly in the income statement in the period the business combination occurs. Impairment losses of goodwill may not be reversed in the future. The recoverable amount of the goodwill recognised as an asset is reviewed annually, regardless of whether there is, or not, any indication of impairment. Impairment losses are expensed directly in the income statement. The recoverable amount corresponds to the lower of market value less costs to sell and the respective value in use. In determining value in use, estimated future cash flows are discounted using a rate that reflects market conditions, the time value of money and business risks. Transactions with non-controlling interests Acquisitions of non-controlling interests that do not result in a change in control over a subsidiary are accounted for as transactions with shareholders and, therefore, no additional goodwill is recognised as a result of such transactions. Any difference between the acquisition cost and the carrying book value of the non-controlling interest acquired is recognised directly in reserves. Similarly, gains or losses arising from sale of non-controlling interests that do not result in a loss of control over a subsidiary, are always recorded against reserves. Gains or losses arising on the dilution or on the sale of portion of an interest in a subsidiary, resulting in a loss of control, are recognised, by the Group, in the income statement. Non-controlling interests in Open Real Estate Funds are recorded under Other Liabilities. Transcription of financial statements in foreign currency The financial statements of each of the Group’s subsidiaries and associated companies are prepared using their functional currency, which is defined as the currency of the primary economic environment in which that entity operates. The Group’s consolidated financial statements are prepared in Euro, which is NOVO BANCO’s functional currency. The financial statements of each of the Group entities that have a functional currency different from the Euro are translated into Euro in accordance with the following criteria: - Assets and liabilities are translated using the exchange rate prevailing at the reporting date; - Income and expenses are translated at exchange rates approximating the real rates ruling at the dates of the transactions; - The exchange differences arising between the translation amount of the equity at the beginning of the period and the amount determined at the Balance Sheet date of the consolidated accounts, using the exchange rates applicable at that date, are recorded against reserves (other comprehensive income). Similarly, regarding the subsidiaries and associated companies’ results, the exchange differences arising from the translation of income and expenses at the rates ruling at the dates of the transactions NOVO BANCO | 2019 ANNUAL REPORT | 123 and that determined at the Balance Sheet date are recorded in reserves. When the entity is sold, such exchange differences are recognised in results as an integral part of the gain or loss on the disposal. Balances and transactions eliminated with consolidation Intercompany balances and transactions, including any unrealised gains and losses on transactions between Group companies, are eliminated in preparing the consolidated financial statements, unless the unrealised losses provide evidence of an impairment loss that should be recognised in the consolidated financial statements. Unrealised gains on transactions between the Group and its associated companies are eliminated to the extent of the Group’s interest in the associated companies. Unrealised losses are also eliminated unless the transactions reveal evidence of impairment. The accounting policies of subsidiaries and associated companies are changed, whenever necessary, to ensure that same are applied consistently throughout the Group. 2.3. Foreign currency transactions Foreign currency transactions are translated into the functional currency using the exchange rate prevailing at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies are translated into Euro at the foreign exchange rates ruling at the Balance Sheet date. Foreign exchange differences arising on this translation are recognised in the income statement. Non-monetary assets and liabilities recorded at historical cost, denominated in foreign currency, are translated using the exchange rate prevailing at the transaction date. Non-monetary assets and liabilities, denominated in foreign currency, that are stated at fair value are translated into Euro at the foreign exchange rates ruling at the dates the fair value was determined. The resulting exchange differences are accounted for in the income statement, except if related to equity instruments classified as financial assets at fair value through other comprehensive income, which are recorded in equity reserves. Foreign exchange differences relating to cash flow hedges and the hedging of the net investment in foreign operational units, when they exist, are recognised in other comprehensive income. 2.4. Derivative financial instruments and hedge accounting Classification The Group classifies its derivative portfolio into (i) fair value hedge and (ii) trading derivatives, which include, in addition to the trading book, other derivatives contracted for the purpose of hedging certain assets and liabilities designated at fair value through profit or loss but not classified as hedging (fair value option). NOVO BANCO | 2019 ANNUAL REPORT | 124 Recognition and measurement Derivative financial instruments are initially recognised at their fair value on the date the derivative contract is entered into (trade date). Subsequent to initial recognition, the fair value of derivative financial instruments is remeasured on a regular basis and the resulting gains or losses on remeasurement are recognised directly in the income statement, except for derivatives designated as hedging instruments. The recognition of the resulting gains or losses arising on the derivatives designated as hedging instruments depends on the nature of the risk being hedged and the hedge model used. Derivatives traded on organised markets, namely futures and some options contracts, are recorded as trading derivatives and their fair value changes are recorded against the income statement. The margin accounts are included under other assets and other liabilities (see Notes 28 and 32) and comprise the minimum collateral mandatory for open positions. The fair value of the remaining derivative financial instruments corresponds to their market value, if available, or is determined using valuation techniques, including discounted cash flow models and options pricing models, as appropriate. Hedge accounting • Classification criteria Derivative financial instruments used for hedging purposes may be classified in the accounts as hedging instruments provided the following criteria are cumulatively met: (i) Hedging instruments and hedged items are eligible for the hedge relationship; (ii) At the inception of the hedge, the hedge relationship is identified and documented, including identification of the hedged item and hedging instrument and evaluation of the effectiveness of the hedge; (iii) There is an economic relationship between the hedged item and the hedging instrument; (iv) The effect of credit risk does not dominate the changes in value that result from this economic relationship; (v) The effectiveness of the hedge can be reliably measured, both at the inception of the hedge and on an ongoing basis. The use of derivatives is framed in the Group's risk management strategy and objectives. • Fair value hedge In a fair value hedging operation, the carrying value of the hedged asset or liability, determined in accordance with the respective accounting policy, is adjusted to reflect the changes in its fair value attributable to the risk being hedged. Changes in the fair value of the derivatives that are designated as hedging instruments are recorded in the income statement, together with any changes in the fair value of the hedged asset or liability that are attributable to the risk hedged. In cases where the hedging instrument covers an equity instrument designated at fair value through other comprehensive income, changes in fair value are also recognised in other comprehensive income. If the hedge no longer meets the effectiveness requirement, but the objective of risk management stays the same, the Group may adjust the hedging operation in order to meet the eligibility criteria (rebalancing). If the hedge no longer meets the criteria for hedge accounting (if the hedging instrument expires, is sold, terminated or exercised, without having been replaced in accordance with the entity's documented risk management objective), the derivative financial instrument is transferred to the trading portfolio and hedge accounting is discontinued prospectively. The cumulative adjustment to the carrying book value of a hedged NOVO BANCO | 2019 ANNUAL REPORT | 125 asset or liability corresponding to a fixed income instrument, is amortised via the income statement over the period to its maturity, using the effective interest rate method. • Cash flow hedge When a derivative financial instrument is designated as a hedge against the variability of highly probable future cash flows, the effective portion of the changes in the fair value of the hedging derivative is recognised in reserves, being recycled to the income statement in the periods in which the hedged item affects the income statement. The ineffective portion is recognised in the income statement. When a hedging instrument expires or is sold, or when a hedge no longer meets the criteria for hedge accounting, any cumulative gain or loss recognised in reserves at that time is recognised in the income statement when the hedged transaction also affects the income statement. When a hedged transaction is no longer expected to occur, the cumulative gain or loss reported in equity is recognised immediately in the income statement and the hedging instrument is reclassified to the trading portfolio. Embedded derivatives If a hybrid contract includes a host contract that is a financial asset under IFRS 9, the Group classifies the entire contract in accordance with the policy outlined in note Note 2.5. If a hybrid contract includes a host contract that is not an asset under IFRS 9, an embedded derivative shall be separated from the host contract and accounted for as a derivative under this Standard if, and only if: a. The economic characteristics and risks of the embedded derivative are not closely related to the economic characteristics and risks of the host contract; b. a separate financial instrument with the same terms as the embedded derivative satisfies the definition of a derivative; and c. The hybrid contract is not measured at fair value and changes in fair value are recognised in profit or loss (a derivative that is embedded in a financial liability at fair value through profit or loss is not separated). These embedded derivatives are measured at fair value with the changes in fair value being recognised in the income statement. 2.5. Other financial assets: placements with credit institutions, customer loans and securities From 1 January 2018, the Group initially classifies all of its financial assets based on the business model for managing the assets and the asset’s contractual terms. This classification determines how the asset is measured after its initial recognition: - Amortised cost: if it is held within a business model with the objective to hold financial assets in order to collect contractual cash flows that are solely payments of principal and interest (SPPI - solely payments of principal and interest); - Fair value through other comprehensive income: if it is held within a business model, the objective of which is achieved by both collecting contractual cash flows and selling financial assets and the contractual cash flows fall under the scope of SPPI. In addition, upon initial recognition, the Bank may choose to classify irrevocably equity instruments in the fair value through other comprehensive income portfolio being the changes in the fair value recognised in equity; - Mandatorily measured at fair value through profit or loss: all cases not within the scope of SPPI; NOVO BANCO | 2019 ANNUAL REPORT | 126 - Measured at fair value through profit or loss: other financial instruments not included in the business models described above. If these assets are acquired for the purpose of trading in the short term, they are classified as held for trading. In accordance with its documented strategy for risk management, the Group contracts derivative financial instruments to hedge certain risks pertaining to a specific part of the loan portfolio, without, however, resorting to hedge accounting as described in Note 2.4. In these situations, the initial recognition of the loan is made measurement fair value through profit or loss. In this manner, measurement consistency is achieved between the loans and the derivatives for risk management purposes (accounting mismatch). Initial recognition and measurement and derecognition These financial assets are initially recognised at fair value plus transaction costs, except for financial assets at fair value through profit or loss, where transaction costs are directly recognised in the income statement. Financial assets are derecognised when (i) the Group's contractual rights to its cash flows have expired, (ii) the Group has transferred substantially all the risks and rewards associated with its holding, or (iii) retained part, but not substantially all the risks and rewards associated with their detention, control over the assets has been transferred. When a financial asset measured at fair value through OCI is derecognised, the accumulated gain or loss previously recognised in other comprehensive income is reclassified to profit or loss. In the specific case of equity instruments, the cumulative gain or loss previously recognised in other comprehensive income is not reclassified to profit or loss and is transferred between equity captions. Deposits and loans and advances to banks and loans and advances to customers are recorded on the date the amount of the transaction is advanced to the counterparty. Acquisitions and disposals of securities are recognised on the trade date, that is, on the date on which the Group undertakes to acquire or dispose of the asset. Financial assets at amortised cost or accounted at fair value through other comprehensive income In accordance with IFRS 9 - Financial Instruments, for a financial asset to be classified and measured at amortised cost or at fair value through other comprehensive income, it is necessary that: (i) The contractual terms of the financial asset give rise to cash flows that are solely payments of principal and interest (SPPI - solely payments of principal and interest) on the principal amount outstanding. Principal, for the purposes of this test is defined as the fair value of the financial asset at initial recognition. The contractual terms that are SPPI are consistent with a basic lending arrangement. Contractual terms that introduce exposure to risks or volatility in the contractual cash flows that are unrelated to a basic lending arrangement, such as exposure to changes in stocks or commodity prices, do not give rise to contractual cash flows that are solely payments of principal and interest on the amount outstanding. In such cases, the financial asset is required to be measured at fair value through profit or loss; (ii) The financial asset is held within a business model with the objective to hold financial assets to maturity to collect contractual cash flows (financial assets at amortised cost) or to collect the contractual cash flows until maturity and selling the financial asset (financial assets at fair value through other comprehensive income). The assessment of the business models of the financial asset is fundamental for its classification. The Group determines the business models by financial asset groups according to how they are managed to achieve a particular business objective. The Group's business models determine whether cash flows will be generated by obtaining only contractual cash flows, from selling the financial assets or both. At initial recognition of a financial asset, the Group NOVO BANCO | 2019 ANNUAL REPORT | 127 determines whether it is part of an existing business model or if it reflects a new business model. The Group reassesses its business models in each reporting period in order to determine whether there have been changes in business models since the last reporting period. The above requirements do not apply to lease receivables, which meet the criteria defined in IFRS 16 – Leases. Financial assets that are subsequently measured at amortised cost or at fair value through other comprehensive income are subject to impairment. Financial assets at fair value through other comprehensive income are initially recorded at fair value and subsequently measured at fair value with changes in the fair value recognised in reserves (other comprehensive income) until derecognition, when cumulative potential gains and losses recognised in reserves are reclassified to the caption Gains and losses on financial assets and liabilities designated at fair value through profit or loss. In the specific case of equity instruments, the cumulative gains/ (losses) previously recognised in equity is not reclassified to profit or losses being reclassified between equity accounts. However, dividends received from these equity instruments are recognised in profit or loss. At initial recognition, financial assets at amortised cost are recorded at acquisition cost, and subsequently measured at amortised cost based on the effective interest rate. Interest, calculated at the effective interest rate, and dividends are recognised in profit or loss. Financial assets at fair value through profit or loss Financial assets measured at fair value through profit or loss present the following characteristics: - - contractual cash flows are not SPPI (mandatorily measured at fair value through profit or loss); and/or it is held within a business model which objective is neither to obtain only contractual cash flows or to obtain contractual cash flows and sale; or - it is designated at fair value through profit or loss as a result of applying the fair value option. These assets are measured at fair value and the respective revaluation gains or losses are recognised in the income statement. The fair value of listed financial assets is based on bid-prices, the bid price of the last transaction or on the bid known. In the absence of a price an active market, the Group estimates fair value using (i) valuation techniques, including the use of recent similar arm’s length transactions, discounted cash flow techniques and option pricing models customized to reflect the specificities and circumstances of the instrument and (ii) valuation assumptions based on market information. For assets included in the level 3 of fair value hierarchy, whose quotation is provided by a third party using parameters that are not observable in the market, the Group carries out, when applicable, a detailed analysis of the historical and liquidity performance of these assets, which may imply a additional adjustment to its fair value. Reclassifications If the Group changes a business model, the financial assets included in that model are reclassified and the classification and measurement requirements for the new category are applied prospectively as from that date. Impairment The Group record impairment allowance for expected credit losses ("ECLs") for the following debt instruments: - Loans and advances to customers; NOVO BANCO | 2019 ANNUAL REPORT | 128 - Financial and performance guarantees; - Import documentary credits; - Confirmed export documentary credits; - Undrawn loan commitments; - Money market exposures; - Securities portfolio. Debt instruments at amortised cost or at fair value through other comprehensive income are in the scope of the impairment calculation. Impairment losses identified are recognised in the income statement and are subsequently reversed through the income statement if, in a subsequent period, the amount of impairment losses decreases. The impairment calculation approach distinguishes between the 12 months’ expected credit losses - Stage 1 - and the lifetime expected credit losses. To determine expected lifetime losses, the approach considers the projection of contractual cash flows - Stage 2 - or the present value of the expected recoveries - Stage 3. Thus, the model of impairment calculation by Stage is summarized as follows: - expected credit loss resulting from a potential loss event occurring within the next 12 months after the calculation date (Stage 1); or - expected credit loss, resulting from all potential loss events expected over the lifetime, applied to the projection of contractual cash flows (Stage 2); or - expected credit loss resulting from the difference between the amount outstanding and the present value of the cash flows estimated to be recovered from the exposure7 (Stage 3). Therefore, for the determination of impairment, the classification by Stage for all exposures according to their level of credit risk, as summarized in the figure below, is made beforehand: Stage 3 The process of assigning Stage to an exposure starts by checking if the Stage 3 criteria applies. If the exposure is classified as Default - according to the current internal definition8 - this exposure is classified as Stage 3. Thus, the classification of exposures in Stage 3 is based on the occurrence of a default event, with objective evidence of loss occurring at the time from which a significant change occurs in the creditor-debtor relationship, being the creditor exposed to a monetary loss. 7 Parameters used to determine recoveries vary, mainly depending on the risk profile / nature of the exposure. 8 The internal definition of Default is aligned with article 178 of CRD IV, providing criteria of material past due for more than 90 days and for unlikely to pay. NOVO BANCO | 2019 ANNUAL REPORT | 129 Stage 2 Exposures are classified as Stage 2 whenever there is a significant increase in credit risk, since initial recognition. If there is no objective evidence of loss associated with the exposure, criteria are analysed to determine whether exposure has significantly increased its credit risk. The significant increase in credit risk is assessed through qualitative and quantitative evidence. Once it is verified that - at least - one of these triggers is active, the exposure is classified in Stage 2. The table below describes the criteria and respective thresholds applicable: As explained in IFRS 9, the assessment of the significant increase in credit risk also involves comparing the current risk level of an exposure against the level of risk at origination. The Group assigns an internal credit risk grade to the exposure / borrower, depending on its quality and associated with the probability of default. In assessing whether the exposure credit risk has increased significantly since initial recognition, the Group compares, at the reporting date, the lifetime probability of default with the probability of default at origination of the exposure. Depending on whether the observed variation falls above a defined threshold - relative and / or absolute - the exposure is classified in Stage 2. In addition to this event, the Group considers other events, that if verified imply the classification in Stage 2 (e.g.: material default for more than 30 days, risk events in the financial system, internal credit risk grade above a certain threshold, among others). Stage 1 The classification of exposures in Stage 1 depends on: - absence of active events that qualify for Stage 3 and Stage 2, which were mentioned and described above; or - the framing of these exposures under the low-credit risk exemption. These exposures, if not in Stage 3, are automatically classified in Stage 1. NOVO BANCO | 2019 ANNUAL REPORT | 130 The Group assesses collective and individual impairment. In the collective assessment model, the impairment calculation is based on an initial classification of the credit risk level – Stage 1, 2 or 3; in the individual analysis the calculation is based on a going concern or gone concern approach. If for a particular loan there is no objective evidence of impairment in an individual level, the loan is grouped together with other loans that have similar credit risk characteristics (loan portfolio) and assessed collectively through the application of estimated risk factors for exposure segment - collective assessment of impairment. If an impairment loss is identified on an individual basis, the amount of the impairment loss determined prevails over the collective impairment. Individual assessment is carried out for the following exposures: - All borrowers classified as defaulted (stage 3), or classified in stage 2 and with no internal grade assigned, with exposure above Euro 1 million; - All borrowers classified in stage 2, with exposure above Euro 5 million; - All borrowers classified in stage 1 and with no internal grade assigned, with credit exposure above Euro 5 million; - All real estate entities and financial holdings with credit exposure above Euro 5 million; - All other low-risk borrowers (stage 1) with exposure above Euro 25 million; and - Additionally, the following borrowers are selected for individual analysis: - identified by the Committee based on other justified criteria (e.g.: sector of activity); - exposures that in the past were subject to an individual impairment recognition; - exposures that based on new events which may impact the impairment calculation, might be elected for analysis by one of the Impairment Committee members or by another body/committee. For purposes of the collective assessment of impairment, loans are grouped on a basis of similar credit risk characteristics, taking in consideration the Group’s credit risk management process. For each of these homogeneous risk groups, risk factors are estimated and then applied for impairment assessment purposes. For purposes of the collective assessment of impairment, loans are allocated to risk sub-segments in accordance with the following definitions in the table bellow: 1st Segmentation 2nd Segmentation 3rd Segmentation 4th Segmentation Client type Corporate Risk segment Large companies Real Estate Medium companies Small companies Start-Ups Financial Institutions Sovereign Rating notation Individuals Product type Mortgage Consumer loans Credit cards Other individuals Scoring notation Collaterals – LTV Typically, Corporate segments consider the value of collateral for segmentation purposes The mortgage segment considers the value of the financed asset for the purposes of segmentation NOVO BANCO | 2019 ANNUAL REPORT | 131 Scenarios As required by IFRS 9, the impairment assessment should reflect different expectations of macroeconomic developments, i.e., it should incorporate multiple scenarios. In order to incorporate the effects of future macroeconomic behaviour on loss estimates, forward looking macroeconomic estimates are included in some of the risk parameters used to calculate impairment. In fact, different possible scenarios giving rise to the same number of impairment results are considered. In this context, the process of defining macroeconomic scenarios must consider the following principles: - Representative scenarios that capture the existing non-linearities (e.g. a base scenario, an optimistic and a pessimistic scenario); - The base scenario should be consistent with the inputs used in other exercises in the Group (e.g., Planning). This is ensured since the option used for the purpose of calculating impairment was precisely the same methodology that the Group uses in internal and / or regulatory planning exercises; - Alternative scenarios to the base scenario should not originate extreme scenarios; - The correlation between the projected variables should be realistic with the economic reality (e.g. if GDP is increasing it is expected that unemployment is decreasing). The macroeconomic scenarios and projections available also have a probability of occurrence. In the case of the base scenario, since it is the most representative, it has a 60% probability of occurrence. The other two alternative scenarios, considered to be variations of the central scenario, have probabilities of occurrence of 25% for the less favorable alternative scenario compared to the base scenario and 15% for the more favorable alternative scenario compared to the base scenario. The exercise of build the base and alternative macroeconomic scenarios for the Portuguese economy is based on a combination of econometric forecasts, information on forecasts from other external institutions and application of subjective expert judgment. In the first component, GDP growth is estimated through estimates for the growth of expenditure components, obtaining GDP through the formula GDP = Consumption + Investment + Exports - Imports. The econometric specifications chosen are those that, after testing different alternatives, generate the best result. The econometric estimates thus obtained are then weighted with forecasts from external institutions, according to the principle that the combination of different projections tends to be more accurate than just a forecast (the risk of errors and bias associated with specific methods and variables is minimized). The forecasts for prices (consume and real estate) and unemployment follow a similar methodology: own forecasts based on an estimated model, weighted with forecasts from external institutions, if available. In a base scenario, the projections for interest rates start from market expectations (provided by Bloomberg), with possible adjustments in accordance with the principles defined above, if considered appropriate (weighting by expert judgment and forecasts from external institutions). The alternative scenarios are based on the historical observation of deviations from the trend in GDP behavior (cost and contraction cycles), the reference of EBA recommendations for extreme adverse scenarios, the stylized facts of economic cycles, with respect to the components of expenditure, prices, unemployment, etc. and estimates. So when reviewing / updating the scenarios – at least once a year – the respective probabilities of execution are also reviewed. Once updated the scenarios, the values of the risk parameters are also updated for subsequent consideration on impairment calculation. The final impairment assessment will result from the addition of the impairment in each scenario weighted by the respective probability of execution. NOVO BANCO | 2019 ANNUAL REPORT | 132 It is still relevant to mention the existence of specific portfolios where the internal credit risk grades incorporate, by its attribution process, forward-looking information. We refer to the commonly referred known Low Default Portfolios for which the attribution of an internal credit risk grade is based on a medium and long-term perspective and incorporating all the forward-looking information available. Therefore, for this universe of portfolios the incorporation of the forward-looking information is guaranteed. Write-offs Write-off is defined as the derecognition of a financial asset from the Group’s balance sheet, which should only occur when cumulatively: (i) The total amount of the credit has been demanded, that is, the credit must be fully recognized as overdue credit. Exemptions from this requirement are extra-judicial agreements, PER and Insolvency, where part of the credit may remain due and the remaining debt is written off by judicial/ extra-judicial decision; (ii) All the recovery efforts, considered appropriate, have been developed (and the relevant evidence gathered) and additional efforts to recover the asset will not be considered economically viable; (iii) The credit recovery expectations are very low, leading to an extreme scenario of total impairment– 100% impairment. This rule is only applicable for contracts without real estate collateral and if the whole contract is classified as overdue. In all other cases, it is necessary to ensure that the amount to be written off is fully impaired (at least in the month prior to the month of the write-off); and (iv) A final agreement has been obtained as part of a restructuring process and the remaining debt can no longer be recovered. Or additionally, if it is considered more beneficial to sell the credit to a third party. At the time of sale, the difference between the sale amount and the balance sheet amount must be fully impaired, and at the time of sale the credit will be derecognized in exchange of the funds/assets received. Subsequent payments received after the write-off must be recognized in the income statement as subsequent write-off recoveries. 2.6. Assets sold with repurchase agreements, securities loaned and short sales Securities sold subject to repurchase agreements (repos) at a fixed price or at a price that corresponds to the sales price plus a lender’s return are not derecognised from the balance sheet. The corresponding liability is included under amounts due to banks or to customers, as appropriate. The difference between the sale and repurchase price is treated as interest and deferred over the life of the agreement, using the effective interest rate method. Securities purchased under agreements to resell (reverse repos) at a fixed price or at a price that corresponds to the purchase price plus a lender’s return are not recognised in the balance sheet, the purchase price paid being recorded as loans and advances to banks or customers, as appropriate. The difference between the purchase and resale price is treated as interest and deferred over the life of the agreement, using the effective interest rate method. Securities ceded under loan agreements are not derecognised in the balance sheet, being classified and measured in accordance with the accounting policy described in Note 2.5. Securities received under borrowing agreements are not recognised in the balance sheet. NOVO BANCO | 2019 ANNUAL REPORT | 133 Short sales correspond to securities sold that are not included in the Group’s assets. They are recorded as financial liabilities held for trade, at the fair value of the assets to be returned in the scope of the repurchase agreement. Gains and losses resulting from the change in their respective fair value are recognised directly in the income statement. 2.7. Financial liabilities An instrument is classified as a financial liability when it contains a contractual obligation to transfer cash or another financial asset, regardless of its legal form. Financial liabilities are derecognised when the underlying obligation is liquidated, expires or is cancelled. Non-derivatives financial liabilities include deposits from banks and customers, loans, debt securities, subordinated debt and short sales. Preference shares issued are considered to be financial liabilities when the Group assumes the obligation of reimbursement and/or the payment of dividends. These financial liabilities are recognised (i) initially, at fair value less transaction costs and (ii) subsequently, at amortised cost, using the effective interest rate method, except for short sales and financial liabilities designated at fair value through profit or loss, which are measured at fair value. The Group designates, at inception, certain financial liabilities at fair value through profit or loss when: - It eliminates or significantly reduces, a measurement or recognition inconsistency (accounting mismatch) that would otherwise occur; - The financial liability it’s part of a portfolio of financial assets or financial liabilities or both, managed and evaluated on a fair value basis, according with the Group’s risk management or investment strategy; or - These financial liabilities contain embedded derivatives and IFRS 9 allows designate the entire hybrid contract at fair value through profit and loss. Reclassifications between categories of liabilities are not allowed. The structured products issued by the Group – except for the structured products for which the embedded derivatives were separated, recorded separately and revalued at fair value - are classified under the fair value through profit or loss category because they always meet one of the abovementioned conditions. The fair value of listed financial liabilities is their current market bid prices. In the absence of a quoted price, the Group establishes the fair value by using valuation techniques based on market information, including the Group issuer’s own credit risk. Profits or losses arising from the revaluation of liabilities at fair value are recorded in the income statement. However, the change in fair value attributable to changes in credit risk is recognised in other comprehensive income. At the time of derecognition of the liability, the amount recorded in other comprehensive income attributable to changes in credit risk is not transferred to the income statement. The Group accounts material changes in the terms of an existing liability or part of it as an extinction of the original financial liability and recognises of a new liability. The terms are assumed to be substantially different if the present value of the cash flows under the new terms, including any fees paid net of commissions received, and discounted using the original effective interest rate is at least 10% different from the discounted present value of the remaining cash flows from the original financial liability. The difference between the carrying amount of the original liability and the value of the new liability is recognised in the income statement. NOVO BANCO | 2019 ANNUAL REPORT | 134 If the Group repurchases debt securities issued, these are derecognised from the balance sheet and the difference between the carrying book value of the liability and its acquisition cost is recognised in the income statement. 2.8. Financial and performance guarantees Financial guarantees Financial guarantee contracts are contracts that require the issuer to make specified payments to reimburse the holder for a loss due to non-compliance with the contractual terms of a debt instrument, namely the payment of principal and/or interest. Financial guarantees are initially recognised in the financial statements at fair value. Financial guarantees are subsequently measured at the higher of (i) the fair value recognised on initial recognition and (ii) the amount of any financial obligation arising as result of the guarantee contracts, measured at the balance sheet date. Any change in the amount of the liability relating to guarantees is taken to the income statement. Financial guarantee contracts issued by the Group normally have a stated maturity date and a periodic fee, usually paid in advance, which varies in function of the counterpart risk, the amount and the time period of the contract. Consequently, the fair value of the financial guarantee contracts issued by the Group, at the inception date, is approximately equal to the initial fee received, considering that the conditions agreed to are market conditions. Hence, the amount recognised at the contract date is equal to the amount of the commission initially received, which is recognised in the income statement over the period to which it relates. Subsequent periodic fees are recognised in the income statement in the period to which they relate. Performance guarantees Performance guarantees are contracts that result in the compensation of a party if the other does not comply with its contractual obligation. Performance guarantees are initially recognised at their fair value, which is normally evidenced by the amount of the commissions received during the contract period. When there is a breach of contract, the Group has the right to reverse the guarantee, recognizing the amounts in Loans and advances to customers after transferring the compensation for the losses to the collateral taker. 2.9. Equity instruments An instrument is classified as an equity instrument when it does not contain a contractual obligation to deliver cash or another financial asset, regardless of its legal form, but evidences a residual interest in the assets of an entity after deducting all of its liabilities. Transaction costs directly attributable to the issuance of equity instruments are recorded against equity as a deduction from the amount issued. Amounts paid or received relating to acquisitions or sales of equity instruments are recognised in equity, net of transaction costs. Distributions to holders of an equity instrument are deducted directly from equity as dividends, when declared. Preference shares issued are considered equity instruments if the Group has no contractual obligation to redeem these and if dividends, non-cumulative, are paid only if, and when, declared by the Group. NOVO BANCO | 2019 ANNUAL REPORT | 135 2.10. Offsetting financial instruments Financial assets and liabilities are offset and the net amount reported in the balance sheet when there is a legally enforceable right to offset the recognised amounts and there is an intention to settle on a net basis, or to realize the asset and settle the liability simultaneously. The legally enforceable right may not be contingent on future events and must be enforceable in the course of the normal activity of the NOVO BANCO Group, as well as in the event of default, bankruptcy or insolvency of the Group or the counterpart. 2.11. Foreclosed properties and non-current assets held for sale Non-current assets or disposal groups (groups of assets to be disposed of together and the related liabilities that include at least one non-current asset) are classified as held for sale when it is expectable that their carrying values will be recovered mainly through a sale transaction (including those acquired exclusively with a view to their subsequent disposal), the assets or disposal groups are available for immediate sale and the sale is highly probable (within the period of one year). Immediately before the initial classification as held for sale, the measurement of the non-current assets (or of all the assets and liabilities in a disposal group) is brought up to date in accordance with the applicable IFRS. Subsequently, these assets or disposal groups are remeasured at the lower of their carrying value and fair value less costs to sell. When the carrying book value of non-current assets corresponds to fair value less costs to sell, the fair value level of the IFRS 13 hierarchy corresponds mostly to level 3. In the scope of its loan granting activity, the Group incurs in the risk of the borrower failing to repay all the amounts due. For mortgage loans, the Group executes the collateral and receives the real estate properties. The Group also receives real estate properties through foreclosing. Due to the provisions of the General Law on Credit Institutions and Financial Companies (“Regime Geral das Instituições de Crédito e Sociedades Financeiras” (RGICSF)), banks are prevented, unless authorised by Bank of Portugal, from acquiring real estate property that is not essential to their installation and daily operations and the pursuit of their object (No. 1 of article 112 of RGICSF), being able to acquire, however, real estate property in exchange for loans granted by same. This real estate property must be sold within 2 years, period which may, based on reasonable grounds, be extended by Bank of Portugal, on the conditions to be determined by this Authority (article 114 of RGICSF). Although the Group’s objective is to immediately dispose of all real estate property acquired as payment in kind for loans or through collaterals execution, during financial year 2016 the Group changed the classification of this real estate properties from Non-current assets held for sale to Other assets (and to Investment properties, in the case of assets owned by investment funds or real estate properties leased out), due to the permanence of same in the portfolio exceeding 12 months. However, the accounting method has not changed, these being initially recognised at the lower of their fair value less costs to sell and the carrying amount of the subjacent loans. Subsequently, these real estate properties are measured at the lower of its initial carrying amount and the corresponding fair value less costs to sell and it is not depreciated. For real estate properties recorded in the balance sheet of NOVO BANCO and of the remaining credit institutions integrating the consolidation perimeter of the Group, the amount recoverable from their immediate sale is considered to be their respective fair value. For real estate properties held by investment funds, and in accordance with Law No. 16/2015, of February 24, fair value is determined as the average between two valuations, obtained from independent entities, determined at the best price that could be obtained if it were put up for sale under normal market conditions at the time of valuation, which is reviewed at least annually or, in the case of open investment NOVO BANCO | 2019 ANNUAL REPORT | 136 funds, with the frequency of redemption, and whenever acquisitions or disposals occur or when significant changes in the value of the real estate property occur. The market value of properties for which a promissory purchase and sale agreement was entered into corresponds to the value of that agreement. The valuation of these real estate properties is performed in accordance with one of the following methodologies, applied in accordance with the specific situation of the asset: (i) Market Method The Market Comparison Criteria takes as a reference transaction values of similar and comparable real estate properties to the real estate property under valuation, obtained through market prospection carried out in the zone. (ii) Income Method Under this method, the real estate property is valued based on the capitalization of its net income, discounted to the present using the discounted cash-flow method. (iii) Cost Method This method aims to reflect the current amount that would be required to substitute the asset in its present condition, separating the value of the real estate property into its fundamental components: Urban Ground Value and Urbanity Value; Construction Value; and Indirect Costs Value. Valuations carried out are performed by independent entities. The valuation reports are analysed internally to assess the adequacy of the assumptions, comparing the historical sale values with the revalued amounts of the assets so as to assess the parameters and process adequacy with the market evolution. Additionally, since these are assets whose level in fair value hierarchy of IFRS 13 mostly corresponds to level 3, given the subjectivity of some assumptions used in the valuations and the fact that there are external indications with alternative values, the Group proceeds to analyzes on the assumptions used, which may imply additional adjustments to their fair value. Assets / liabilities of subsidiaries acquired for resale purposes reflect, essentially, assets and liabilities of subsidiaries acquired by the Group in the scope of loan restructuring operations, for which the Group’s objective is their subsequent disposal within one year. Since these acquisitions arise from loan restructuring operations, they are recognised at their fair value, and any differences between their fair values and those of the extinguished loans following the acquisitions, are recognised as impairment losses on loans and advances. On the acquisition of an entity meeting the subsidiary criteria and for which the Group’s objective is its resale, it is consolidated in accordance with the applicable procedures adopted by the Group and its assets and liabilities are measured at fair value at the acquisition date. However, in these specific cases, the assets are classified as non-current assets held for sale and the liabilities are classified as non-current liabilities held for sale. Consequently, and at the first consolidation date, the net value of the assets and liabilities of the subsidiary reflects their fair value determined at the acquisition date (which results from the loan restructuring operation). These subsidiaries are consolidated until their effective sale. At each balance sheet date, the net carrying book value of their assets and liabilities is compared with their fair value, less costs to sell, and impairment losses are recognised when necessary. Assets and liabilities relating to discontinued operations are recorded in accordance with the valuation policies applicable to each category of assets and liabilities, as set down in IFRS 5, according to the IAS/IFRS applicable to the respective assets and liabilities. For purposes of determining the fair value of subsidiaries held for resale, the Group adopts the following methodologies: NOVO BANCO | 2019 ANNUAL REPORT | 137 - for subsidiaries which assets comprise fundamentally real estate, their fair value is determined with reference to the value of those assets, which is based on valuations performed by independent specialised entities; - for the remaining entities, their fair value is determined based on the discounted cash flow methodology, using assumptions consistent with the business risks of each of the subsidiaries under valuation. If these subsidiaries cease to comply with the conditions necessary to be recorded as non- current assets held for sale in accordance with IFRS 5, their assets and liabilities are fully consolidated in the respective asset and liability captions, in accordance with that provided for in Note 29. 2.12. Tangible fixed assets The Group’s tangible fixed assets are measured at cost less accumulated depreciation and impairment losses. The cost includes expenditure that is directly attributable to the acquisition of the assets. Subsequent costs with tangible fixed assets are only recognised when it is probable that future economic benefits associated with them will flow to the Group. All repair and maintenance costs are charged to the income statement during the period in which they are incurred, on the accrual basis. Land is not depreciated. The depreciation of tangible fixed assets is calculated using the straight-line method, at the following depreciation rates that reflect their estimated useful lives: The useful lives and residual values of the tangible fixed assets are reviewed at each reporting date. When there is an indication that an asset may be impaired, IAS 36 requires its recoverable amount to be estimated and an impairment loss recognised when the book value of the asset exceeds its recoverable amount. Impairment losses are recognised in the income statement, being reversed in subsequent periods, when the reasons that led to their initial recognition cease to exist. For this purpose, the new depreciated amount shall not exceed that which would be recorded had the impairment losses not been imputed to the asset, but considering the normal depreciation the asset would have been subject to. The recoverable amount is determined as the lower of its net selling price and its value in use, which is based on the net present value of the estimated future cash flows arising from the continued use and ultimate disposal of the asset at the end of its useful life. On the date of the derecognition of a tangible fixed asset, the gain or loss determined as the difference between the net selling price and the net carrying book value is recognised under the caption Other operating income and expenses. NOVO BANCO | 2019 ANNUAL REPORT | 138 2.13. Intangible assets The costs incurred with the acquisition, production and development of software are capitalised, as are additional costs incurred by the Group to implement said software. These costs are amortised on a straight- line basis over their expected useful lives, which usually range between 3 and 6 years. Costs that are directly associated with the development of specific software applications, that will probably generate economic benefits beyond one financial year, are recognised and recorded as intangible assets. All remaining costs associated with information technology services are recognised as an expense as incurred. 2.14. Leases IFRS 16 – Leases According to IFRS 16: - as a lessee, the standard defines a single accounting model with the recognition of rights-of-use assets representative of their rights of use of the underlying assets and lease liabilities representative of their obligations to make lease payments; - as a lessor, accounting depends on the classification as financial or operating. The Group adopted IFRS 16 using the Modified Retrospective approach, so there was no impact on its net worth as there are no differences between the right to use the asset and the lease liability at the time of initial recognition on 1 January 2019. A. Lease Definition - Determining whether an Agreement Contains a Lease The Group assesses whether a contract is or contains a lease based on the lease definition. In accordance with IFRS 16, a contract is or contains a lease if it has the right to control the use of an identified asset for a certain period of time, in exchange for retribution. For leases in which the Bank is a lessee, it was decided not to separate the non-lease components and to account the lease and non-lease components as a single lease component. B. As lessee Finance lease contracts are recorded at the inception date, both under assets and liabilities, at the cost of the asset leased, which is equal to the present value of the outstanding lease instalments. Instalments comprise (i) an interest charge, which is recognised in the income statement and (ii) the repayment of principal, which is deducted from liabilities. Financial charges are recognised as costs over the lease period, in order to produce a constant periodic rate of interest on the remaining balance of the liability for each period. The Group leases various assets, including real estate, vehicles and IT equipment. As lessee, the Group initially classified leases as operating leases or finance leases based on the overall assessment of whether the lease substantially transfers all risks and rewards associated with ownership of the NOVO BANCO | 2019 ANNUAL REPORT | 139 underlying assets. In accordance with IFRS 16, the Group recognizes leased assets and lease liabilities for some asset classes, i.e., these leases are on the entity's balance sheet. However, the Group has opted not to recognize assets under right of use and liabilities for short-term leases, with a lease term of 12 months or less, and low value asset leases (e.g. IT equipment). The Group recognizes the lease payments associated with these leases as expenses on a straight-line basis over the lease term. The Group presents assets under right of use that do not fit the definition of investment property as "tangible fixed assets", in the same line as the underlying assets of the same nature that they own. Right-of-use assets that fall under the definition of investment property are presented as investment property. The Group presents the lease liabilities under "other liabilities" in the statement of financial position. Significant judgment in determining contract lease term The Group has applied judgment to determine the lease term of certain agreements, in which it acts as lessee, and which include renewal and termination options. The Group determines the lease term as the non- cancellable lease term, together with any periods covered by an option to extend the lease if it is reasonably certain to be exercised, or any periods covered by an option to terminate the lease, if reasonably certain not to be exercised. This assessment will have an impact on the lease term, which will significantly affect the amount of the lease liabilities and recognized right-of-use assets. The Group has the option, namely in real estate lease agreements, to lease assets for additional periods from 1 month to 20 years. The Group applies judgment in assessing whether it is reasonably right to exercise the renewal option. That is, it considers all the relevant factors that create an economic incentive for renewal. For leases that were classified as finance leases in accordance with IAS 17, the accounting amount of assets under lease use and the liability of the lease as at 1 January 2019 was determined at the accounting amount of the lease asset and the lease liability, according to IAS 17 immediately prior to that date. Practical expedients The Group has adopted some practical expedients provided for in the standard in applying IFRS 16 to leases previously classified as operating leases in accordance with IAS 17. - Apply the exception of non-recognition of assets under right of use and liabilities for short-term leases (i.e. with a lease term of 12 months or less); - Apply the exception of non-recognition of assets under use and liabilities for low value leases (i.e. new value less than Euro 5 thousand); - Do not separate lease components from non-lease components. NOVO BANCO | 2019 ANNUAL REPORT | 140 C. As lessor Financial leases Assets leased out are recorded in the balance sheet as loans granted, at an amount equal to the net investment made in the leased assets, together with any estimated unguaranteed residual value. Interest included in instalments charged to customers is recorded as interest income, whilst repayments of principal, also included in the instalments, are deducted from the amount of the loans granted. The recognition of the interest reflects a constant periodic rate of return on the lessor's net outstanding investment. Operating leases Payments made by the Group under operating leases are charged to the income statement in the period to which they relate. Until 31 December 2018, the Group classified leasing operations as finance leases or operating leases, according to their substance and not their legal form, meeting the criteria set out in IAS 17 - Leases. Transactions in which the risks and rewards incidental to ownership of an asset are substantially transferred to the lessee are classified as finance leases. All other lease transactions are classified as operating leases. The accounting policies applicable to the Group as lessor in the comparative period are not different from those policies applicable under IAS 17. 2.15. Employee benefits Pensions Pursuant to the signature of the Collective Labour Agreement (“Acordo Colectivo de Trabalho” (ACT)) for the banking sector and its subsequent amendments resulting from the 3 tripartite agreements described in Note 16, pension funds and other mechanisms were set up to cover liabilities assumed with pensions on retirement, disability, survival and health-care benefits. The liabilities’ coverage is assured, for most of the Group companies, by pension funds managed by GNB - Sociedade Gestora de Fundos de Pensões, SA, subsidiary of the Group. The pension plans of the Group are defined benefit plans, as they establish the criteria to determine the pension benefit to be received by employees during retirement, usually dependent on one or more factors such as age, years of service and salary level. The retirement pension liabilities are calculated semi-annually, in 31 December and 30 June of each year, for each plan individually, using the Projected Unit Credit Method, being annually reviewed by qualified independent actuaries. The discount rate used in this calculation is determined with reference to market rates associated with high-quality corporate bonds, denominated in the currency in which the benefits will be paid out and with a maturity similar to the expiry date of the plan’s liabilities. The Group determines the net interest income / expense for the period incurred with the pension plan by multiplying the plan’s net assets / liabilities (liabilities net of the fair value of the fund’s assets) by the discount rate used to measure the retirement pension liabilities referred to above. On that basis, the net interest income / expense was determined based on the interest cost on the retirement pension liabilities net of the expected NOVO BANCO | 2019 ANNUAL REPORT | 141 return on the funds’ assets, both calculated using the discount rate applied in the determination of the retirement pension liabilities. Re-measurement gains and losses, namely (i) actuarial gains and losses arising due to differences between actuarial assumptions used and real values verified (experience adjustments) and changes in actuarial assumptions and (ii) gains and losses arising due to the difference between the expected return on the fund’s assets and the actual investment returns, are recognised in equity under the caption other comprehensive income. The Group recognizes as a cost in the income statement a net total amount that includes (i) current service costs, (ii) net interest income / expense with the pension fund, (iii) the effect of early retirement, (iv) past service costs, and (v) the effect of settlements or curtailments occurring during the period. The net interest income / expense with the pension plan is recognised as interest income or interest expense, depending on its nature. Early retirement costs correspond to increases in liabilities due to employees retiring before turning 65 (normal retirement age foreseen in the ACTV) and which forms the basis of the actuarial calculation of pension fund liabilities. Whenever the possibility of the early retirement provided for in the pension fund regulation is invoked, the responsibilities of same must be incremented by the value of the actuarial calculation of the liabilities corresponding to the period between the early retirement and the employee turning 65. The Group makes payments to the fund to assure its solvency, the minimum levels set by Bank of Portugal being: (i) the liability with pensioners must be totally funded at the end of each period, and (ii) the liability relating to past service costs for active employees must be funded at a minimum level of 95%. The Group assesses the recoverability of any excess in a fund regarding he retirement pension liabilities, based on the expectation of reductions in future contributions. Health-care benefits The Group provides to its banking employees health-care benefits through a specific Social-Medical Assistance Service. This Social-Medical Assistance Service (SAMS) is an autonomous entity which is managed by the respective Union. SAMS provides its beneficiaries services and/or contributions with medical assistance expenses, diagnostics, medication, hospitalization and surgeries, in accordance with its funding availability and internal regulations. Until 1 February 2017, the Group’s annual mandatory contribution to SAMS amounted to 6.50% of the total annual remuneration of active employees, including, amongst others, the holiday subsidy and Christmas subsidy. Arising from the signature of the new Collective Labour Agreement (ACT) on 5 July 2016, published in Labour Bulletin (Boletim do Trabalho) No. 29, of 8 August 2016, the Group’s contributions to SAMS as from 1 February 2017, correspond to a fixed amount (as per Annex VI of the new ACT) for each employee, 14 times a year. The calculation and recognition of the Group’s liability with post-retirement health-care benefits is similar to the calculation and recognition of the pension liability described above. These benefits are covered by the Pension Fund, which presently covers all liabilities with pensions and health-care benefits. Long-term service bonus and Career bonus In accordance with the previous Collective Labour Agreement (ACT) for the Banking Sector, in force until July 2016, the Group had the commitment to pay active employees who completed 15, 25 and 30 years of service NOVO BANCO | 2019 ANNUAL REPORT | 142 in the Group, long-term service bonuses corresponding to one, two and three times, respectively, their monthly salary paid at the date the bonuses were paid. At the date of early retirement due to disability or presumed disability, employees had the right to a long-term service bonus proportional to that which they would receive if they were to remain in service until meeting the next bonus level. These long-term service bonuses were accounted for by the Group in accordance with IAS 19, as other long- term employee benefits. The Group’s liability with these long-term service bonuses were periodically estimated by the Group using the Projected Unit Credit Method. The actuarial assumptions used were based on expectations as to future salary increases and mortality tables. The discount rate used in this calculation was determined using the methodology described for retirement pensions. In each period, the increase in the liability for long-term service bonuses, including actuarial gains and losses and past service costs, was charged to the income statement. Upon the signature of the new ACT on 5 July 2016, the long-term service bonus was extinguished and the Group paid its employees the proportional share of the bonuses due on entry into force of the new ACT. Under the new ACT, the long-term service bonus was replaced by a career bonus, payable immediately prior to the employee´s retirement date, if the employee retires at the service of the Group, corresponding to 1.5 of his/her salary at the time of its payment. The career bonus is accounted for by the Group in accordance with IAS 19, as a long-term employee benefit. The remeasurement effects and past service costs of this benefit are recognised in the income statement for the year, as occurred with the accounting model for long-term service bonuses. The amount of the Group's liabilities with this career bonus is likewise periodically estimated based on the Projected Unit Credit Method. The actuarial assumptions used are based on expectations of future salary increases and mortality tables. The discount rate used in this calculation is determined applying the same methodology described above for retirement pensions. Employees’ variable remuneration The Group recognises under costs the short-term benefits paid to employees who were at its services in the respective accounting period. - Profit-sharing and bonus plans The Group recognizes the cost expected with profit-sharing pay-outs and bonuses when it has a present, legal or contractual, obligation to make such payments as a result of past events and can make a reliable estimate of the obligation. - Obligations with holidays, holiday subsidy and Christmas subsidy In accordance with the legislation in force in Portugal, employees are annually entitled to one month of holidays and one month of holiday subsidy, this being a right acquired in the year prior to their payment. In addition, employees are annually entitled to one month of Christmas subsidy, which right is acquired throughout the year and settled during the month of December of each calendar year. Hence, these liabilities are recorded in the period in which the employees acquire the right to same, regardless of the date of their respective payment. NOVO BANCO | 2019 ANNUAL REPORT | 143 2.16. Corporate Income tax NOVO BANCO and its subsidiaries are subject to the tax regime consigned in the Código do Imposto sobre o Rendimento das Pessoas Coletivas (IRC code). Corporate income tax comprises current tax and deferred tax. Corporate income tax is recognised in the income statement except to the extent that it relates to items recognised directly in equity, in which case it is recognised under deferred tax reserves (other comprehensive income). Corporate income tax recognised directly in equity relating to fair value remeasurement of financial assets at fair value through other comprehensive income and cash flow hedges is subsequently recognised in the income statement when the gains or losses giving rise to said income tax are also recognised in the income statement. Current tax Current tax is the tax expected to be paid on the taxable profit for the year, calculated using tax rules and tax rates enacted or substantively enacted in each jurisdiction. The tax is recognised in each financial reporting period based on management estimates as regards the average effective tax rate foreseen for the entire fiscal year. Current tax is calculated based on taxable income for the period, which differs from the accounting result due to adjustments resulting from expenses or income not relevant for tax purposes or which will only be considered in subsequent years. Deferred tax Deferred tax is calculated on timing differences arising between the carrying book values of assets and liabilities for financial reporting purposes and their respective tax base and is calculated using the tax rates enacted or substantively enacted at the balance sheet date in each jurisdiction and that are expected to apply when the timing differences are reversed. Deferred tax liabilities are recognised for all taxable timing differences except for: i) goodwill non-deductible for tax purposes; ii) differences arising on the initial recognition of assets and liabilities that neither affect the accounting nor taxable profit; iii) that do not result from a business combination, and iv) differences relating to investments in subsidiaries to the extent that they will probably not reverse in the foreseeable future and the Group does not control the timing of the reversal of the timing differences. Deferred tax assets are recognised to the extent that it is probable that future taxable profits will be available against which the deductible timing differences can be offset. Deferred tax liabilities are always accounted for, regardless of the performance of NOVO BANCO and its subsidiaries. The Group, as established in IAS 12, paragraph 74, offsets deferred tax assets and liabilities whenever (i) it has the legally enforceable right to offset current tax assets and current tax liabilities; and (ii) they relate to corporate income taxes levied by the same Taxation Authority, on the same tax entity or different taxable entities that intent to settle current tax liabilities and assets on a net basis, or to realize the assets and settle the liabilities simultaneously, in each future period in which the deferred tax liabilities or assets are expected to be settled or recovered. NOVO BANCO | 2019 ANNUAL REPORT | 144 2.17. Provisions and Contingent liabilities Provisions are recognised when: (i) the Group has a current legal or contractual obligation, (ii) it is probable that its settlement will be required in the future and (iii) a reliable estimate of the obligation can be made. Provisions related to legal cases opposing the Group to third parties, are constituted according to internal risk assessments made by Management, with the support and advice of its internal and external legal advisors. When the effect of the passage of time (discounting) is material, the provision corresponds to the net present value of the expected future payments, discounted at an appropriate rate considering the risk associated with the obligation. In these cases, the increase in the provision due to the passage of time is recognised in financial expenses. Restructuring provisions are recognised when the Group has approved a formal, detailed restructuring plan and such restructuring has either commenced or has been publicly announced. A provision for onerous contracts is recognised when the benefits expected to be derived by the Group from a contract are lower than the unavoidable costs of meeting its obligation under the contract. This provision is measured at the present value of the lower of the estimated cost of cease the contract and the estimated net costs of continuing the contract. If a future outflow of funds is not probable, this situation reflects a contingent liability. Contingent liabilities are always disclosed, except when the likelihood of their occurrence is remote. 2.18. Recognition of interest income and expense Interest income and expense is recognised in the income statement under interest and similar income and interest expense and similar charges for all financial instruments measured at amortised cost and for all financial assets at fair value through other comprehensive income, using the effective interest rate method. Interest arising on financial assets and liabilities at fair value through profit or loss is also included under interest and similar income or interest expense and similar charges, as appropriate. The effective interest rate is the rate that discounts the estimated future cash payments or receipts throughout the expected life of the financial instrument or, when appropriate, a shorter period to the net book value of the financial asset or liability. The effective interest rate is calculated at inception and is not subsequently revised, except in respect of financial assets and liabilities with a variable interest rate. In this case, the effective interest rate is periodically revised, taking into consideration the impact of the change in the interest rate of reference on the estimated future cash flows. When calculating the effective interest rate, the Group estimates the cash flows considering all the contractual terms of the financial instrument (for example, prepayment options) but does not consider future credit losses. The calculation includes all the commissions that are an integral part of the effective interest rate, transaction costs and all other related premiums or discounts. Interest and similar income includes interest from financial assets for which were recognised impairment. The interest from financial assets classified as Stage 3 are determined based on the effective interest rate method applied to the net book value. When the asset is no longer classified as Stage 3, the interest is calculated based on the gross book value. NOVO BANCO | 2019 ANNUAL REPORT | 145 For derivative financial instruments, the interest component in the change in fair value of derivative financial instruments classified as fair value hedge and fair value option is recognized under interest income or interest expense. For other derivatives, the interest component inherent in the fair value change will not be separated and will be classified under the income statement of assets and liabilities at fair value through profit or loss (see Note 2.4). 2.19. Recognition of fee and commission income Fees and commissions income are recognised as revenue from customer contracts to the extent that performance obligations are met: - Fees and commissions that are earned on the execution of a significant act, such as loan syndication fees, are recognised as income when the significant act has been completed; - Fees and commissions earned over the period during which the services are provided are recognised as income in the financial year in which the services are provided; - Fees and commissions that are an integral part of the effective interest rate of a financial instrument are recognised as income using the effective interest rate method. 2.20. Recognition of dividend income Dividend income is recognised when the right to receive the dividend payment is established. 2.21. Earnings per share Basic earnings per share are calculated by dividing the net income attributable to the shareholders of the parent company by the weighted average number of ordinary shares outstanding during the period. For the calculation of diluted earnings per share, the weighted average number of ordinary shares outstanding is adjusted to reflect the impact of all potential dilutive ordinary shares, such as those resulting from convertible debt and share options granted to employees. The dilution effect translates into a decrease in earnings per share, based on the assumption that the convertible instruments will be converted or the options granted exercised. 2.22. Cash and cash equivalents For the purposes of the cash flow statement, cash and cash equivalents comprise balances with a maturity of less than three month from the date of acquisition / contracting and whose risk of change in value is immaterial, including cash, deposits with Central Banks and deposits with other credit institutions. Cash and cash equivalents exclude restricted balances with Central Banks. 2.23. Investment properties The Group classifies as investment properties the real estate assets held to earn rentals or for capital appreciation or both. Investment properties are initially recognised at acquisition cost, including directly attributable transaction costs, and subsequently at their fair value. Changes in fair value determined at each NOVO BANCO | 2019 ANNUAL REPORT | 146 balance sheet date are recognised in the income statement, under the caption Other operating income and expenses, based on periodic valuations performed by independent entities specialised in this type of service. Investment properties are not depreciated. Additionally, since these are assets whose level in fair value hierarchy of IFRS 13 mostly corresponds to level 3, given the subjectivity of some assumptions used in the valuations and the fact that there are external indications with alternative values, the Group proceeds to analyzes on the assumptions used, which may imply additional adjustments to their fair value. Reclassifications to and from the caption Investment properties may occur whenever a change in respect of the use of a real estate property is verified. On the reclassification of investment properties to real estate properties held for own use, the estimated cost, for accounting purposes, is the fair value, at the date of the change in usage. If a real estate property held for own use is reclassified to investment properties, the Group records that asset in accordance with the policy applicable to real estate properties held for own use, up to the date of its reclassification to investment properties and at fair value subsequently, with the difference arising in its measurement at the date of the reclassification being recognised in revaluation reserves. If a real estate property is transferred from other assets to investment properties, any difference between the fair value of the asset at that date and the previous carrying book value is recognised in the income statement. Subsequent expenditure is capitalised only when it is probable that the Group will obtain future economic benefits in excess of those originally estimated based on the performance of the asset. Gains and losses on the disposal of investment properties resulting from the difference between the realised value and the carrying book value are recognised in the income statement for the year under the caption Other operating income and expenses. Gains and losses on the disposal of investment properties resulting from the difference between the realised value and the carrying book value are recognised in the income statement for the year under the caption Other operating income and expenses. Investment properties recorded relate solely to non-banking activities (Investment Funds and Real Estate Companies). NOTE 3 – MAIN ACCOUNTING ESTIMATES AND JUDGEMENTS USED IN PREPARING THE FINANCIAL STATEMENTS Considering that the current accounting framework requires applying judgements and calculating estimates involving some degree of subjectivity, the use of different parameters or judgements based on different evidence may result in different estimates. The main accounting estimates and judgments used in applying the accounting principles by the Group are discussed in this Note in order to improve the understanding of how their application affects the reported results of the Bank and its disclosure. The relevant judgments made by management in the application of the Group's accounting policies and the main sources of uncertainty in the estimates were the same as those described in the last reporting of the Financial Statements, except for the new judgments related to accounting as lessee of leases under IFRS. 16, which are described in Note 2.1. NOVO BANCO | 2019 ANNUAL REPORT | 147 3.1. Impairment of financial assets at amortised cost and at fair value through other comprehensive income The critical judgements with greater impact on the recognised impairment values for the financial assets at amortised cost and at fair value through other comprehensive income are the following: - Assessment of the business model: the measurement and classification of financial assets depends on the results of SPPI test and on the business model setting. The Group determines its business model based on how it manages the financial assets and its business objectives. The Group annually monitors if the business model classification is appropriate based on the analysis on the anticipated derecognition of the assets at amortised cost or at fair value through other comprehensive income, assessing if it is necessary to prospectively apply any changes; - Significant increase on the credit risk: as mentioned on the Note 2.5 – Other financial assets, the determination of the transfer of an asset from stage 1 to stage 2 with the purpose of determining the respective impairment is made based on the significant increase of its credit risk, though IFRS 9 does not objectively define what constitutes a significant increase on credit risk; - Classification of default: the internal definition of exposure in default in place within NOVO BANCO Group is broadly in line with the regulatory definition in Article 178 of CRR/CRD IV. This regulation defines qualitative criteria for assessing the default classification – unlikely to pay -, which are replicated in the internal definition implemented by NOVO BANCO and which result in performing judgements when assessing the high probability that the borrower does not fulfil its obligations within the conditions agreed with NOVO BANCO; - Definition of groups of financial assets with similar credit risk characteristics: when the expected credit losses are measured through collective model, the financial instruments are aggregated based on the same risk characteristics. The Group monitors the credit risk characteristics in order to assure the correct reclassification of the assets, in cases of changes on the credit risk characteristics; - Models and assumptions: the Group uses several models and assumptions on the measurement of the expected credit losses. The judgement is applied on the identification of the more appropriate model for each type of asset as well as in the determination of the assumptions used in these models, including the assumptions related with the main credit risk drivers. In addition, in compliance with the IFRS9 regulation that clarifies the need for the impairment result to consider multiple scenarios, a methodology for incorporating different scenarios into the risk parameters was implemented. Thus, the calculation of collective impairment considers several scenarios with a specific weighting, based on the internal methodology defined about scenarios - definition of multiple perspectives of macroeconomic, with probability of relevant occurrence. 3.2. Fair value of derivative financial instruments and other financial assets and liabilities at fair value Fair value is based on listed market prices when available; otherwise fair value is determined based on similar recent arm’s length transaction prices or using valuation methodologies, based on the net present value of estimated future cash flows taking into consideration market conditions, the time value, the yield curve and volatility factors, in accordance with IFRS 13 - Fair Value Measurement. The Group uses several models and assumption in measuring the fair value of financial assets. Judgement is applied on the identification of the NOVO BANCO | 2019 ANNUAL REPORT | 148 more appropriate model for each type of asset as well as in the determination of the assumptions used in these models, including the assumptions related with the main credit risk drivers. Consequently, the use of a different methodology or different assumptions or judgements in applying a particular model could have produced different financial results, summarised in Note 39. 3.3. Impairment of Goodwill The recoverable amount of the goodwill recognised as an asset of the Group is revised periodically regardless of the existence, or not, of impairment triggers. For this purpose, the book value of the cash generating units of the Group in respect of which goodwill has been recognised is compared with their respective recoverable amount. A goodwill impairment loss is recognised when the book value of a cash generating unit exceeds the respective recoverable amount. In the absence of an available market value, the recoverable amount is determined using cash flows techniques and applying a discount rate that includes a risk premium that is appropriate to the business unit being tested. The determination of the future cash flows to be discounted and the discount rate involve judgement. Changes in the expected cash flows and in the discount rate may lead to conclusions that differ from those used in the preparation of these financial statements and are evidenced in the amount of goodwill indicated in Note 26. 3.4. Corporate income taxes The Group is subject to corporate income tax in numerous jurisdictions. Certain interpretations and estimates are required in determining the overall corporate income tax amount. Different interpretations and estimates could result in a different level of income tax, current and deferred, being recognised in the period and evidenced in Note 27. This aspect assumes additional relevance for effects of the analysis of the recoverability of deferred taxes, while the Bank considers forecasts of futures taxable profits based on a group of assumptions, including the estimate of income before taxes, adjustments to the taxable income and its interpretation of fiscal legislation. This way, the recoverability of deferred taxes depends on the concretization of the strategy of the Executive Board of Directors, namely in the capacity to generate the estimated taxable results and its interpretation of fiscal legislation. The Tax Authorities are entitled to review the determination of the taxable income of the Bank and of its subsidiaries located in Portugal during a period of four years or twelve years, when there are tax loss carry forwards. Hence, it is possible that some additional taxes may be assessed, mainly as a result of differences in interpretation of tax law. However, it is the conviction of the Executive Board of Directors of the Bank and of its subsidiaries, that there will be no significant corrections to the corporate income taxes recorded in the financial statements. 3.5. Pensions and other employee benefits The determination of the retirement pension liabilities presented in Note 14 requires the use of assumptions and estimates, including the use of actuarial tables, assumptions regarding the growth of pensions, salaries NOVO BANCO | 2019 ANNUAL REPORT | 149 and discounts rates (which are determined based on the market rates associated with high quality corporate bond, denominated in the same currency in which the benefits will be paid and with a maturity similar to the expiry date of the plan's obligations). These assumptions are based on the expectations of the NOVO BANCO Group for the period during which the liabilities will be settled as well as other factors that may impact the costs and liabilities of the pension plan. Changes in these assumptions could materially affect the amounts determined. 3.6. Provisions The Group recognises provisions intended to cover costs arising from the implementation of offers, which by commercial reasons were presented and accepted by customer groups. The amount of the provisions reflects NOVO BANCO’s best estimate as each reporting date. The subjectivity inherent to the determination of the probability and amount of the internal resources required for the payment of the obligations may lead to significant adjustments (i) due to variations in the assumptions used (ii) for the future recognition of provisions previously disclosed as contingent liabilities; and/or (iii) for the future write-off of provisions, when they start to qualify as contingent liabilities only. The provisions are detailed in Note 31. 3.7. Investment properties, Assets received from credit recovery and Non-current assets held for sale Investment properties are initially recognised at cost, including directly related transaction costs and subsequently at fair value. Assets received from credit recovery and Non-current assets held for sale are measured at the lower of the net book value and the fair value less costs to sell. The fair value of these assets is determined based on valuations conducted by independent entities, using the market, income or cost methods, as defined in Notes 2.11 and 2.23. The valuation reports are analysed internally, namely comparing the sales values with the revalued values of the properties, to keep the valuation parameters and processes updated to the market evolution. The use of alternative methodologies and different assumptions may result in a different level of fair value with respective impact on the recognised balance sheet value. 3.8. Entities included in the consolidation perimeter For the determination of the entities to be included in the consolidation perimeter, the Group evaluates the extent to which (i) it is exposed, or has rights, to the variability of the return from its involvement with this entity, and (ii) it can seize that return through of its power. In this analysis, the Bank also considers shareholder agreements that may exist and that result in the power to take decisions that impact the management of the entity's activity. The decision that an entity should be consolidated by the Group requires the use of judgments to determine to what extent the Group is exposed to the variability of an entity's return and has the power to seize that return. In using this judgment, the Group analyses assumptions and estimates. Thus, other assumptions and estimates could lead to a different consolidation perimeter, with a direct impact on the balance sheet. NOVO BANCO | 2019 ANNUAL REPORT | 150 NOTE 4 – SEGMENT REPORTING NOVO BANCO Group activities are centred on the financial sector targeting corporate, institutional and private individual customers. Its decision centre is in Portugal, making the domestic territory its privileged market. The products and services rendered include deposit taking, granting of loans to corporate and private customers, investment fund management, broker and custodian services and the commercialization of life and non-life insurance products. Additionally, the Group makes short-, medium- and long-term investments in the financial and currency exchange markets with the objective of taking advantage of price changes or to get returns on its available financial resources. For this purpose, as at 31 December 2019, the Group has NOVO BANCO as its main operating unit - with 356 branches in Portugal (31 December 2018: 362 branches) and branches in Spain (11 branches), Luxembourg and 4 representation offices – with NBA Açores (13 branches), Banco BEST (6 branches), GNB GA, GNB Seguros (non-life insurance segment), amongst other companies. When evaluating performance by business area, the Group considers the following Operating Segments: (1) Domestic Commercial Banking, including Retail, Corporate and Private Banking; (2) International Commercial Banking; (3) Asset Management; (4) Life Insurance (only for 31 December 2018); (5) Markets; and (6) Corporate Centre. Each segment integrates the NOVO BANCO structures that directly relate to it, as well as the units of the Group whose businesses are mainly related to the segments. The individual and independent monitoring of each operating unit of the Group is complemented, at the Board of Directors of NOVO BANCO level, by the definition of specific strategies and commercial programs for each unit. In accordance with the commitments assumed with Directorate General for Competition - European Commission (“DGComp”), at the end of 2019 the Bank discontinued the Private Banking services. Additionally, in 2019 NOVO BANCO derecognized the investment on GNB Vida, after obtaining the necessary regulatory authorizations, discontinuing the information reported in the Life Insurance Activity segment. 4.1. Description of the operating segments Each of the operating segments includes the following activities, products, customers and Group structures, aggregated by criteria of risk, market / geography and nature of the products and services: Domestic Commercial Banking This Operating Segment includes all the banking activity developed on national territory involving corporate and private customers and using the branch network, corporate centres and other channels, and includes the following sub segments: a) Retail: corresponds to all the activity developed in Portugal with private customers and small businesses. The financial information of the segment relates, amongst other products and services, to mortgage loans, consumer credit, small business financing, deposits, retirement plans and other insurance products sold to private customers, account management and electronic payments and placement of investment funds, brokerage and custodian services; b) Corporate and Institutional: includes the activities developed in Portugal with medium- and large- sized companies, developed through a commercial structure dedicated to this segment, which includes 20 Corporate Centres. This segment also includes activities with institutional and municipal customers. The Group maintains an important presence in this segment, the result of the support it NOVO BANCO | 2019 ANNUAL REPORT | 151 has lent to the development of the national business community, focused on companies with good risk, an innovative nature and an exporter activity; c) Private Banking: in accordance with the DGComp commitments, the Bank has discontinued the Private Banking services, so this segment is no longer reportable. International Commercial Banking This Operating Segment integrates the units located abroad, which banking activities focus both on corporate and private customers, excluding the asset management business, which is integrated in the corresponding segment. Amongst the units comprising this segment are NOVO BANCO’s branches in Spain, London (closed at the beginning of 2019) and Luxembourg. The aggregation of this units in the same segment is related with the geographic criteria and with the nature of the clients, the products and the services provided. Asset Management This segment, which depends on the specific nature of the products and services provided, includes the asset management activities developed both in Portugal and abroad through specialised companies incorporated for the purpose. The product range includes all types of funds - investment funds, real estate funds and pension funds - as well as discretionary management and portfolio management. Life insurance Segment that depends on the specific nature of the products and services provided, including the activities of Companhia de Seguros GNB Vida that sells traditional and investment insurance contracts and retirement plans. As mentioned in Note 42, NOVO BANCO derecognised this investment in September 2019, after obtaining the necessary regulatory authorizations, discontinuing the information reported in this segment. Markets This segment includes the overall financial management of the Group, including the taking and ceding of funds on the financial markets, as well as the investment and risk management of credit, interest rate, currency and securities instruments, whether of a strategic nature or related to the current activity of the Markets’ area. It also covers the activity involving non-resident institutional investments and the effects of strategic decisions with a transversal impact on the Group. Corporate Centre This area does not correspond to an operating segment in its true sense, but rather to an aggregation of transversal corporate structures acting throughout the entire Group, executing its overall basic management functions, such as the areas relating to the Management and Supervisory bodies, Compliance, Planning, Accounting, Risk Management and Control, Investor Relations, Internal Audit, Organization and Quality, amongst others. Since NOVO BANCO is in a situation of tax loss for the years of 2019 and 2018, the recognized deferred taxes (that includes the annulment of deferred taxes generated by tax losses in the amount of Euro 251 million in the year 2018) were totally assigned to this segment. NOVO BANCO | 2019 ANNUAL REPORT | 152 4.2. Criteria for the allocation of activities and results to the operating segments The financial information presented for each segment was prepared in accordance with the criteria followed in the preparation of the internal information that is analysed by the Executive Board of Directors of the Group, as required by IFRS. The accounting policies applied in the preparation of the financial information related to the operating segments are consistent with those used in the preparation of these consolidated financial statements, which are described in Note 2, with the adoption of the following additional principles: Measurement of the profit or loss of the segments The Group uses net income / (loss) before taxes as the measure of the profit or loss for purposes of evaluating the performance of each operating segment. Autonomous operating units As mentioned above, each autonomous operating unit (foreign branches, subsidiaries and associated companies) is evaluated separately, as each of these units is considered an investment centre. Additionally, based on the characteristics of the primary business developed by these units, they are fully integrated into one of the Operating Segments, i.e. their assets, liabilities, income and expenses. NOVO BANCO structures dedicated to the Segment NOVO BANCO’s activity, given its characteristics, can be allocated to most of its operating segments and is, therefore, accordingly disaggregated. For purposes of allocating the financial information, the following principles are used: (i) the origin of the operation, i.e. the operation is allocated to the same segment that the commercial structure that originated it integrates, even if, in a subsequent phase, the Group, strategically, decides to securitize some of the assets; (ii) the allocation of a commercial margin to mass-products, defined at top management level when the products are launched; (iii) for non-mass products, the allocation of a margin directly negotiated by the commercial structures with customers; (iv) the allocation of the direct costs of commercial and central structures dedicated to the segment; (v) the allocation of indirect costs (central support and IT services) determined based on specific drivers; (vi) the allocation of credit risk determined in accordance with the impairment model; and (vii) the allocation of NOVO BANCO’s total equity to the Markets segment. The transactions between the legally autonomous units of the Group are made at market prices; the price for services rendered between the structures of each unit, namely the price established for internal funding between units, is determined using the margins process referred to above (which varies in accordance with the strategic relevance of the product and the equilibrium of the structures’ funding and lending functions); the remaining internal transactions are allocated to the segments, without any margin for the supplier; the strategic decisions and/or of an exceptional nature are analysed on a case-by-case basis, with the income and/or costs being generally allocated to the Markets segment. The interest rate risk, currency risk, liquidity risk and others, excluding credit risk, are included in the Financial Department, which mission it is to undertake the Bank’s financial management, and which activity and results are included in the Markets segment. Interest and similar income / expense Since the Group’s activities are exclusively carried out in the financial sector, the income reflects, fundamentally, the difference between interest received on assets and interest paid on liabilities. This situation NOVO BANCO | 2019 ANNUAL REPORT | 153 and the fact that the segment evaluation is based on margins previously negotiated or determined for each product, leads to the presentation of the results from the intermediation activity, as permitted by IFRS 8, paragraph 23, at the net value of interest, under the designation “Net interest income / expense”. Investments presented using the equity method Investments in associated companies presented under the equity method are included in the Markets segment, in the case of NOVO BANCO’s associated companies. For other associated companies of the Group, these entities are included in the segment to which they relate. Non-current assets Non-current assets, according to IFRS 8, include Tangible fixed assets, Intangible assets and Non-current assets held for sale. NOVO BANCO includes these assets in the Markets segment, with the non-current assets held by the remaining subsidiaries being allocated to the segment in which these subsidiaries primarily develop their business. Corporate income tax Corporate income tax is part of the Group’s net income that, for purposes of monitoring the performance of the Operating Segments, by the Executive Board of Directors, does not affect the evaluation of most of the Operating Segments. In the tables presented below the deferred tax recognised in net income for the year are included in the Corporate Centre. Deferred tax assets and liabilities are included in the Markets segment. Domestic and International Areas In the presentation of financial information by geographic areas, the operational units that integrate the International Area are NOVO BANCO’s branches in Spain, Luxembourg and London (closed in early 2019), and the subsidiaries Novo Banco Servicios, Ijar Leasing Algérie, as well as units located outside GNB GA, and the discontinued operations Novo AF and Banco Delle Tre Venezie. In 2018, Banco Internacional de Cabo Verde (having been sold in July 2018, 90% of this participation) and BES Vénétie (which was sold in full in December 2018) were also considered. The financial and economic elements related to the international area are those consistent with the financial statements of such units, with the respective consolidation adjustments and eliminations. Legacy and recurrent activity From 2018 the GROUP started to present separate financial information between "NOVO BANCO Recurrent", that includes all the core banking activity, and "NOVO BANCO Legacy” that include loans and advances to customers, integrating not only the credits included in Contingent Capitalization Agreement, as well as other receivables, securities, real estate and discontinued operations considered, on its majority, as no strategic in the commitments imposed by DGCOMP after the resolution measure, so the references in these explanatory notes should be read taking this segmentation into account. When determining the NOVO BANCO Legacy, the bank considered the following items: - Loans and advances to customers include all clients of the CCA and other non-strategic exposures; - Securities and associated companies were selected by contract and include restructuring funds, real estate funds, commercial paper and mandatory convertible securities (“VMOCs”); - The portfolio of real estate properties available for sale has been selected by contract and excludes yielding assets; NOVO BANCO | 2019 ANNUAL REPORT | 154 - Assets and liabilities of the discontinued operations were allocated to legacy, based on a case-by- case analysis insofar as they were considered by management to be legacy assets; - All profit and loss associated with legacy assets was considered as results of this activity; - The cost of funding corresponds to the percentage of legacy liabilities in the total liabilities of the Group (excluding discontinued operations); and - Operating costs include all CCA costs, and the operating costs of some departments, according to the weight of legacy assets in their activity. The Group considers that the split between the NOVO BANCO Recurrent and NOVO BANCO Legacy will allow customers and other stakeholders to have a better understanding of the Bank's ongoing restructuring process. The segment reporting is presented as follows: NOVO BANCO | 2019 ANNUAL REPORT | 155 (in thousands of Euros)RetailCorporate and InstitutionalPrivate bankingInternational Commercial BankingAsset ManagementLife InsuranceMarketsCorporate centreTotalNet interest income 153 602 170 274 2 538 57 849 2 - 156 348 - 540 613 Net fees and comissions 171 441 110 009 5 121 23 399 25 747 - ( 21 773)- 313 944 Other operating income 15 480 18 514 ( 5)( 17 523)( 1 056)- ( 479 280)- ( 463 870)Total operating income 340 523 298 797 7 654 63 725 24 693 - ( 344 705)- 390 687 Operational expenses 273 315 694 359 4 680 168 877 12 179 4 082 157 912 98 517 1 413 921 Of which: Provisions / Impairment losses 16 172 653 594 ( 1 452) 119 304 536 4 082 143 181 - 935 417 Depreciation and amortization 10 803 882 423 3 994 433 - 1 550 15 579 33 664 Net gains / (losses) from investments in subsidiaries, joint ventures and associated companies registered by the equity method- - - - - - 1 470 - 1 470 Profit / (loss) from continued operations before taxes and non-controlling interests 67 208 ( 395 562) 2 974 ( 105 152) 12 514 ( 4 082)( 501 147)( 98 517)(1 021 764)Taxes- - - ( 2 133) 3 418 - 3 391 41 093 45 769 Profit / (loss) of discontinued operations- - - - ( 392) 1 533 ( 73)- 1 068 Net Profit / (loss) for the period attributable to non-controlling interests 1 736 - - - - - ( 9 389)- ( 7 653)Net Profit / (loss) for the period attributable to Shareholders of the parent 65 472 ( 395 562) 2 974 ( 103 019) 8 704 ( 2 549)( 495 222)( 139 610)(1 058 812)Intersegment operating income (1) 4 970 6 005 - 91 716 9 274 - ( 100 272)- 11 693 Total Net Assets19 835 663 11 223 700 - 4 846 926 84 058 - 9 305 556 - 45 295 903 Total Liabilities19 541 454 11 605 333 - 4 964 199 13 649 - 5 168 511 - 41 293 146 Investments in associated companies- - - - - - 92 628 - 92 628 Investments in tangible fixed assets 1 633 - - 767 1 196 - 16 363 - 19 959 Investments in intangible assets 282 - - 703 18 - 25 436 - 26 439 Investments in other assets - real estate properties 1 134 - - 4 358 - - 81 319 - 86 811 (1) Intersegment operating income refers essentially to interest (net interest income)31.12.2019(in thousands of Euros)RetailCorporate and InstitutionalPrivate bankingInternational Commercial BankingAsset ManagementLife InsuranceMarketsCorporate centreTotalNet interest income 116 791 184 243 ( 10 044) 74 598 43 - 88 711 - 454 342 Net fees and comissions 168 002 111 186 6 951 24 287 25 465 - ( 29 557)- 306 334 Other operating income( 25 305)( 89 282)( 208)( 74 167) 161 ( 19 741)( 60 990)- ( 269 532)Total operating income 259 488 206 147 ( 3 301) 24 718 25 669 ( 19 741)( 1 836)- 491 144 Operational expenses 280 545 496 943 8 333 136 061 12 396 - 179 278 83 675 1 197 231 Of which: Provisions / Impairment losses 13 479 452 347 ( 1 067) 84 126 462 - 160 608 - 709 955 Depreciation and amortization 12 742 1 499 676 1 798 136 - 2 546 2 752 22 149 Net gains / (losses) from investments in subsidiaries, joint ventures and associated companies registered by the equity method- - - - - - 5 626 - 5 626 Profit / (loss) from continued operations before taxes and non-controlling interests( 21 057)( 290 796)( 11 634)( 111 343) 13 273 ( 19 741)( 175 488)( 83 675)( 700 461)Taxes- - - 1 129 3 139 - 3 961 659 478 667 707 Profit / (loss) of discontinued operations- - - ( 939)- ( 38 540)( 340)- ( 39 819)Net Profit / (loss) for the period attributable to non-controlling interests 1 518 - - 181 - - 2 956 - 4 655 Net Profit / (loss) for the period attributable to Shareholders of the parent( 22 575)( 290 796)( 11 634)( 113 592) 10 134 ( 58 281)( 182 745)( 743 153)(1 412 642)Intersegment operating income (1) 6 865 4 790 - 55 928 20 173 - ( 71 503)- 16 253 Total Net Assets17 363 284 12 931 833 1 673 216 4 431 112 72 282 4 843 999 6 958 176 - 48 273 902 Total Liabilities17 118 848 13 085 227 1 680 757 4 516 267 9 035 4 458 423 3 482 984 - 44 351 541 Investments in associated companies- - - - - - 118 698 - 118 698 Investments in tangible fixed assets 1 722 - - 346 11 - 14 197 - 16 276 Investments in intangible assets- - - 1 257 50 - 5 391 - 6 698 Investments in investment properties- - - - - - 13 720 - 13 720 Investments in other assets - real estate properties 2 352 - - 21 404 - - 154 935 - 178 691 (1) Intersegment operating income refers essentially to interest (net interest income)31.12.2018 The geographical distribution of the different Group business units is as follows: The information aggregated by legacy and recurrent activity is as follows: NOVO BANCO | 2019 ANNUAL REPORT | 156 (in thousands of Euros)PortugalSpainLuxembourgBrazilAngolaCape VerdeMacaoOtherTotalNet profit / (loss) for the period attributable to Shareholders of the parent( 930 114)( 103 761)( 20 909)( 303)- - - ( 3 725)(1 058 812)(of which: rel. to discontinued units) 1 460 ( 392)- - - - - - 1 068 Total income4 348 294 170 070 497 028 919 - - - - 5 016 311 Intersegment operating income ( 25 309)( 11 812) 48 814 - - - - - 11 693 Net assets40 772 690 2 011 246 2 498 979 3 303 3 060 - - 6 625 45 295 903 (of which: rel. to discontinued units) 25 349 4 240 - - 2 946 1 299 4 121 2 300 40 255 Investments in associated companies 92 628 - - - - - - - 92 628 Investments in tangible fixed assets 19 192 767 - - - - - - 19 959 Investments in intangible assets 25 736 703 - - - - - - 26 439 Investments in other assets - real estate properties 82 453 4 358 - - - - - - 86 811 Profits / (losses) of continuing operating units before taxes and non-controlling interests( 911 060)( 84 555)( 22 121)( 303)- - - ( 3 725)(1 021 764)Turnover (a) (b) 945 859 48 629 70 591 367 - - - - 1 065 446 Number of employees (a) 4 648 198 11 - - - - 7 4 869 (a) Financial information presented according to art. 2 of DL no. 157/2014 (b)Turnovercorrespondstothesumofthefollowingitemsintheconsolidatedoperatingaccount:interestincome,dividendincome,feeandcommissionincome,gainsorlossesonderecognitionoffinancialassetsandliabilitiesnotmeasuredatfairvaluethroughprofitorlossonfinancialassetsandliabilitiesheldfortrading,gainsorlossesonfinancialassetsmandatorilyatfairvaluethroughprofitorloss,gainsorlossesonfinancialassetsandliabilitiescarriedatfairvaluethroughprofitorlosshedgeaccountinglosses,exchangedifferences,gainsorlossesonderecognitionofnon-financialassets,otheroperatingoperatingincomeandproportionofprofitsorlossesoninvestmentsinsubsidiaries,jointventuresandassociatesaccountedforunder the equity method.31.12.2019(in thousands of Euros)PortugalSpainLuxembourgUnited KingdomBrazilAngolaCape VerdeMacaoOtherTotalNet profit / (loss) for the period attributable to Shareholders of the parent(1 369 651)( 84 058) 47 255 ( 3 745)( 542)- ( 1 901)- - (1 412 642)(of which: rel. to discontinued units)( 38 880) 1 088 1 268 - - - ( 2 207)- - ( 38 731)Total income3 846 914 111 784 568 727 9 585 461 - - - - 4 537 471 Intersegment operating income ( 58 887) 2 116 79 965 ( 6 941)- - - - - 16 253 Net assets44 247 528 2 247 277 1 755 453 8 447 3 688 3 060 - - 8 449 48 273 902 (of which: rel. to discontinued units)4 075 962 - - - - 3 060 1 299 4 013 6 024 4 090 358 Investments in associated companies 114 372 - - - - - - - 4 326 118 698 Investments in tangible fixed assets 15 930 346 - - - - - - - 16 276 Investments in intangible assets 947 1 234 23 - - - - - - 2 204 Investments in investment properties 13 720 - - - - - - - - 13 720 Investments in other assets - real estate properties 157 287 21 404 - - - - - - - 178 691 Profits / (losses) of continuing operating units before taxes and non-controlling interests( 656 195)( 77 431) 38 880 ( 3 272)( 542)- ( 1 901)- - ( 700 461)Turnover (a) (b) 866 021 68 464 171 957 9 231 48 - - - - 1 115 721 Number of employees (a) 4 804 262 13 3 5 - - - 9 5 096 (a) Financial information presented according to art. 2 of DL no. 157/2014 (b)Turnovercorrespondstothesumofthefollowingitemsintheconsolidatedoperatingaccount:interestincome,dividendincome,feeandcommissionincome,gainsorlossesonderecognitionoffinancialassetsandliabilitiesnotmeasuredatfairvaluethroughprofitorlossonfinancialassetsandliabilitiesheldfortrading,gainsorlossesonfinancialassetsmandatorilyatfairvaluethroughprofitorloss,gainsorlossesonfinancialassetsandliabilitiescarriedatfairvaluethroughprofitorlosshedgeaccountinglosses,exchangedifferences,gains or losses on derecognition of non-financial assets, other operating operating income and proportion of profits or losses on investments in subsidiaries, joint ventures and associates accounted for under the equity method.31.12.2018(in thousands of Euros)Recurrent LegacyTotalRecurrent LegacyTotalNet interest income 491 188 49 425 540 613 387 164 67 178 454 342 Net fees and commissions 311 195 2 749 313 944 301 691 4 643 306 334 Other operating income 4 203 ( 468 073)( 463 870)( 1 714)( 267 818)( 269 532)Total operating income 806 586 ( 415 899) 390 687 687 141 ( 195 997) 491 144 Operating expenses 668 728 745 193 1 413 921 717 926 479 305 1 197 231 Includes: Provisions / Impairment losses 207 907 727 510 935 417 253 587 456 368 709 955 Net gains / (losses) from investments in subsidiaries, joint ventures and associated companies registered by the equity method 4 462 ( 2 992) 1 470 5 698 ( 72) 5 626 Taxes( 37 674) 83 443 45 769 47 513 620 194 667 707 Profit / (loss) of discontinued operations 5 849 ( 4 781) 1 068 - ( 39 819)( 39 819)Net Profit / (loss) for the period attributable to non-controlling interests 8 217 ( 15 870)( 7 653) 4 655 - 4 655 Net Profit / (loss) for the period attributable to Shareholders of the parent 177 626 (1 236 438)(1 058 812)( 77 255)(1 335 387)(1 412 642)Total net Assets40 813 669 4 482 234 45 295 903 37 615 251 10 658 651 48 273 902 (of which: related to discontinued operations) 15 891 24 364 40 255 1 888 4 090 358 4 092 246 31.12.201931.12.2018 NOTE 5 – NET INTEREST INCOME As at 31 December 2019 and 2018, the breakdown of this caption is as follows: Interest on deposits with and loans and advances to banks, due to customers and deposits from banks include as at 31 December 2019, respectively, the amounts of Euro -2 thousand, Euro 16 375 thousand and Euro 2 453 thousand related to repurchase agreement operations (31 December 2018: Euro 756 thousand of interest on deposits with and loans and advances to Banks, Euro 576 thousand in interest on funds from customers and Euro 1 850 thousand in interest on deposits from Banks). Interest income and expense items related to derivative interest include, according to the accounting policy described in Notes 2.4 and 2.18, interest from hedging derivatives and from derivatives used to manage the economic risk of certain financial assets and liabilities designated at fair value through profit or loss, as per the accounting policies described in Notes 2.4 and 2.7. The measures adopted to reduce the cost of customer deposits justify the decrease in the interest expense related to these liabilities. NOTE 6 – DIVIDEND INCOME The breakdown of this caption is as follows: During 2019, dividend income amounts to Euro 9 909 thousand, which includes dividends received from Euronext in the amount of Euro 1 348 thousand, from Soluções Arrendamento Fund in the amount of Euro 1 767 thousand, from Sealion Ltd in the amount of Euro 1 161 thousand, from ESA Energia in the amount of Euro 1 080 thousand, from Fund Explorer III in the amount of Euro 738 thousand and from SIBS SGPS in the amount of Euro 922 thousand (31 December 2018: Euro 8 974 thousand, which includes dividends recorded from Fund Explorer III in the amount of Euro 3 027 thousand, from Euronext in the amount of Euro 1 514 thousand and from Haitong FCR in the amount of Euro 1 251 thousand). NOVO BANCO | 2019 ANNUAL REPORT | 157 (in thousands of Euros)OtherOtherFrom assets / liabilities at fair value through other comprehensive income and assets at amortised costIncome/expenses from negative interest ratesFrom assets / liabilities at fair value through profit or lossFrom assets / liabilities at fair value through other comprehensive income and assets at amortised costIncome/expenses from negative interest ratesFrom assets / liabilities at fair value through profit or lossInterest IncomeInterest from loans and advances 595 188 - - 595 188 631 842 - - 631 842 Interest from deposits with and loans and advances to banks 21 221 3 118 - 24 339 26 652 10 777 27 439 Interest from securities 117 934 - 7 063 124 997 85 162 - 1 383 86 545 Interest from derivatives held for risk management purposes - 496 6 664 7 160 - 401 10 188 10 589 Other interest and similar income 1 403 - - 1 403 2 276 - - 2 276 735 746 3 614 13 727 753 087 745 932 411 12 348 758 691 Interest ExpensesInterest on debt securities issued 38 956 - - 38 956 42 993 - 4 068 47 061 Interest on amounts due to customers 97 259 - - 97 259 194 327 - - 194 327 Interest on deposits from Central Banks and other banks 19 935 1 864 - 21 799 21 631 5 342 - 26 973 Interest on subordinated liabilities 34 166 - - 34 166 16 742 - - 16 742 Interest on derivatives held for risk management purposes - 4 114 9 237 13 351 - 2 903 11 852 14 755 Other interest and similar expenses 6 796 147 - 6 943 4 491 - - 4 491 197 112 6 125 9 237 212 474 280 184 8 245 15 920 304 349 538 634 ( 2 511) 4 490 540 613 465 748 ( 7 834)( 3 572) 454 342 31.12.201931.12.2018Calculated by the effective interest methodCalculated by the effective interest methodTotalTotal(in thousands of Euros)31.12.201931.12.2018Financial assets mandatorily at fair value through profit or lossShares 3 374 2 386 Participation units 4 080 4 453 Financial assets at fair value through other comprehensive incomeShares 2 300 2 135 Participation units 155 - 9 909 8 974 NOTE 7 – FEE AND COMMISSION INCOME AND FEE AND COMISSION EXPENSES The breakdown of this caption is as follows: NOTE 8 – GAINS OR LOSSES ON DERECOGNITION OF FINANCIAL ASSETS AND LIABILITIES NOT MEASURED AT FAIR VALUE THROUGH PROFIT OR LOSS The breakdown of this caption is as follows: NOTE 9 - GAINS OR LOSSES ON FINANCIAL ASSETS AND LIABILITIES HELD FOR TRADING The breakdown of this caption is as follows: NOVO BANCO | 2019 ANNUAL REPORT | 158 (in thousands of Euros)31.12.201931.12.2018Fee and commission incomeFrom banking services 260 672 254 193 From guarantees provided 46 460 52 778 From transaction of securities 7 146 7 015 From commitments to third parties 8 914 11 465 From transactions carried out on behalf of third parties - cross-selling 35 089 37 618 Other fee and commission income 9 119 2 999 367 400 366 068 Fee and commission expensesWith banking services rendered by third parties 35 906 41 581 With guarantees received 1 960 1 566 With transaction of securities 5 675 5 876 Other fee and commission income 9 915 10 711 53 456 59 734 313 944 306 334 (in thousands of Euros)GainsLossesTotalGainsLossesTotalFrom financial assets at fair value through other comprehensive incomeSecuritiesBonds and other fixed income securitiesIssued by government and public entities 67 860 2 021 65 839 52 957 18 411 34 546 Issued by other entities 2 443 443 2 000 644 712 ( 68)Other variable income securities- - - - 6 ( 6) 70 303 2 464 67 839 53 601 19 129 34 472 From financial assets and liabilities at amortised costSecuritiesBonds and other fixed income securitiesIssued by other entities 2 050 - 2 050 5 176 1 5 175 Loans 23 662 31 997 ( 8 335) 40 404 253 911 ( 213 507) 25 712 31 997 ( 6 285) 45 580 253 912 ( 208 332) 96 015 34 461 61 554 99 181 273 041 ( 173 860)31.12.201931.12.2018(in thousands of Euros)GainsLossesTotalGainsLossesTotalTítulosSecuritiesBonds and other fixed income securitiesIssued by government and public entities 26 480 10 963 15 517 6 032 1 100 4 932 Issued by other entities 260 - 260 2 119 ( 117)Financial DerivativesForeign exchange rate contracts 24 493 26 470 ( 1 977) 36 721 36 774 ( 53)Interest rate contracts 669 602 745 048 ( 75 446) 445 816 484 584 ( 38 768)Equity / Index contracts 93 255 92 499 756 65 744 63 356 2 388 Credit default contracts 78 141 78 522 ( 381) 47 055 52 180 ( 5 125)Other 4 900 2 852 2 048 17 957 1 619 16 338 897 131 956 354 ( 59 223) 619 327 639 732 ( 20 405)31.12.201931.12.2018 In accordance with the accounting policy described in Note 2.5, financial instruments are initially recorded at fair value. It is deemed that the best evidence of the fair value of the instrument at inception is the transaction price. However, in certain circumstances, the fair value of a financial instrument at inception, determined based on valuation techniques, may differ from the transaction price, namely due to the existence of an intermediation fee, originating a day one profit. The Group recognizes in its income statement the gains arising from the intermediation fee (day one profit), which is generated, primarily, through currency and derivative financial product intermediation, given that the fair value of these instruments, both at inception and subsequently, is determined based solely on observable market data and reflects the Group’s access to the wholesale market. As at 31 December 2019, the related gains recognised in the income statement, which are essentially related to foreign exchange transactions, amounted to approximately Euro 3 114 thousand (31 December 2018: Euro 6 914 thousand). NOTE 10 - GAINS OR LOSSES ON FINANCIAL ASSETS MANDATORILY AT FAIR VALUE THROUGH PROFITS OR LOSS AND GAINS OR LOSSES ON FINANCIAL ASSETS AND LIABILITIES DESIGNATED AT FAIR VALUE THROUGH PROFIT AND LOSS The breakdown of this caption is as follows: NOTE 11 – GAINS OR LOSSES FROM HEDGE ACCOUNTING The breakdown of this caption is as follows: NOVO BANCO | 2019 ANNUAL REPORT | 159 (in thousands of Euros)GainsLossesTotalGainsLossesTotalGains or losses on financial assets mandatorily at fair value through profit or lossSecuritiesBonds and other fixed income securitiesIssued by other entities 3 031 6 062 ( 3 031) 222 2 220 Shares 35 266 90 864 ( 55 598) 31 407 4 163 27 244 Other variable income securities 16 600 211 691 ( 195 091) 25 559 85 900 ( 60 341) 54 897 308 617 ( 253 720) 57 188 90 065 ( 32 877)Gains or losses on financial assets and liabilities designated at fair value through profit and lossSecuritiesBonds and other fixed income securitiesIssued by other entities- 102 ( 102)- - - Other variable income securities 106 - 106 - 140 ( 140) 106 102 4 - 1 123 ( 1 123) 55 003 308 719 ( 253 716) 57 188 91 188 ( 34 000)31.12.201931.12.2018(in thousands of Euros)GainsLossesTotalGainsLossesTotalFair value changes of hedging instrumentsFair value changes of hedging instrumentsForeign exchange rate contracts 51 211 67 864 ( 16 653) 124 967 131 494 ( 6 527)Instrumentos financeiros derivadosFair value changes of hedging item attributable to hedged risk 30 533 15 620 14 913 20 541 61 161 ( 40 620) 81 744 83 484 ( 1 740) 145 508 192 655 ( 47 147)Compensations for hedging operations interruptions (see Note 14) 461 - 461 46 714 - 46 714 Amount net of compensations 82 205 83 484 ( 1 279) 192 222 192 655 ( 433)31.12.201931.12.2018 NOTE 12 – EXCHANGE DIFFERENCES The breakdown of this caption is as follows: This caption includes the results arising from the foreign currency revaluation of monetary assets and liabilities denominated in foreign currency in accordance with the accounting policy described in Note 2.3. NOTE 13 – GAINS OR LOSSES ON DERECOGNITION OF NON-FINANCIAL ASSETS The breakdown of this caption is as follows: NOTE 14 – OTHER OPERATING INCOME AND OTHER OPERATING EXPENSES The breakdown of these captions is as follows: As at 31 December 2019, the amount received for compensation for interruption of hedging operations amounts to Euro 461 thousand (see Note 11). As at 31 December 2018, Other operating income includes the amount of Euro 46 714 thousand, received as part of the early repayment of a fixed rate financing agreement, corresponding to the amount of the early reimbursement of the credit risk contract interest rate, the loss of which was recorded under the caption Gains or losses in hedge accounting. NOVO BANCO | 2019 ANNUAL REPORT | 160 (in thousands of Euros)31.12.201931.12.2018GainsLossesTotalGainsLossesTotalForeign exchange revaluation 1 114 573 1 075 744 38 829 1 012 302 969 799 42 503 1 114 573 1 075 744 38 829 1 012 302 969 799 42 503 (in thousands of Euros)31.12.201931.12.2018Real Estate 2 689 28 189 Equipment( 490) 69 Other 1 755 4 011 3 954 32 270 (in thousands of Euros)31.12.201931.12.2018Other operating incomeGains / (losses) on recoveries of loans 31 372 42 424 Non-recurring advisory services 1 299 814 Income of Funds and real estate companies 37 858 28 937 Gains on investment properties revaluation (see Note 25) 44 347 29 370 Other income 24 986 76 231 139 862 177 776 Other operating expensesLosses on repurchase of Group debt securities (see Note 30)( 465)( 86 210)Direct and indirect taxes( 14 782)( 14 353)Contributions to the Deposit Guarantee Fund( 42)( 45)Contributions to the Resolution Fund( 12 196)( 10 995)Contributions to the Single Resolution Fund( 22 469)( 20 678)Contribution to the Banking Sector( 27 091)( 27 276)Membership subscriptions and donations( 2 603)( 1 358)Expenses of Funds and real estate companies( 14 317)( 16 151)Charges with Supervisory entities( 2 456)( 2 360)Contractual indemnities (SPE)( 297)( 4 844)Losses on investments properties revaluation (see Note 25)( 260 466)( 45 888)Other expenses( 46 115)( 25 485)( 403 299)( 255 643)Other operating income / (expenses) ( 263 437)( 77 867) NOTE 15 – STAFF EXPENSES The breakdown of staff expenses is as follows: The provisions and costs related to the restructuring process are presented in Note 31. As at 31 December 2019 and 2018, the number of employees of NOVO BANCO Group has the following breakdown: The breakdown by professional category of the number of employees of the NOVO BANCO Group is as follows: NOTE 16 – EMPLOYEE BENEFITS Pension and health-care benefits In compliance with the Collective Labour Agreement (ACT) for the banking sector established with the unions, the Bank undertook the commitment to grant its employees, or their families, pensions on retirement, disability and survival. These payments consist of a percentage that increases in accordance with the years of service, applied to each year’s negotiated salary table for the active workforce. Banking employees also receive health-care benefits through a specific Social-Medical Assistance Service (SAMS), managed by the respective Union, having the Group made (until February 2017) annual contributions to SAMS amounting to 6.50% of the total annual remuneration of the active employees, including, amongst others, the holiday subsidy and Christmas subsidy. The measurement and recognition of the Group’s liability with post-retirement health-care benefits is similar to the measurement and recognition of the pension liability. These benefits are covered by the Pension Fund, which currently covers all liabilities with pensions and health- care benefits. NOVO BANCO | 2019 ANNUAL REPORT | 161 (in thousands of Euros)31.12.201931.12.2018Wages and salaries 199 815 200 835 Remuneration 198 951 200 317 Long-term service / Career bonuses (see Note 16) 864 518 Mandatory social charges 59 891 60 807 Costs with post-employment benefits (see Note 16) 14 746 Other costs 5 630 3 750 265 350 266 138 31.12.201931.12.2018NOVO BANCO employees 4 428 4 578 Employees of the Group's subsidiaries 441 518 Total employees of the Group 4 869 5 096 31.12.201931.12.2018Senior management functions 481 546 Middle management positions 591 536 Specific positions 2 348 2 227 Administrative and other functions 1 449 1 787 4 869 5 096 Arising from the signature of the new Collective Labour Agreement (ACT) on 5 July 2016, published in Labour Bulletin (Boletim do Trabalho) No. 29, of 8 August 2016, the Group’s contributions to SAMS as from 1 February 2017, correspond to a fixed amount (as per Annex VI of the new ACT) for each employee, 14 times a year. For employees hired until 31 December 2008, the retirement pension and the disability, survival and death pensions consecrated under the ACT, as well as the liabilities for health-care benefits (SAMS), are covered by a closed pension fund, managed by GNB – Sociedade Gestora de Fundos de Pensões, S.A. Protection of employees in the event of maternity, paternity and adoption, as well as old age, is covered by the General Social Security Regime, given that with the publication of Decree-Law No. 1-A/2011, of 3 January, all banking employees who were beneficiaries of “CAFEB – Caixa de Abono de Família dos Empregados Bancários” were integrated in the General Social Security Regime as from 1 January 2011. Employees hired after 31 December 2008 are covered by the Portuguese General Social Security Regime. Retirement pensions of banking employees integrated in the General Social Security Regime within the scope of the 2nd tripartite agreement continue to be calculated in accordance with the provisions of the ACT and other conventions; however, banking employees are entitled to receive a pension under the General Regime that considers the number of years of contributions under that regime. The Banks are responsible for the difference between the pension determined in accordance with the provisions of the ACT and that which the banking employees are entitled to receive from the General Social Security Regime. The contribution rate is 26.6%, 23.6% paid by the employer and 3% paid by the employees on the behalf of Caixa de Abono de Família dos Empregados Bancários (CAFEB), abolished by said Decree-law. In consequence of this change, pension entitlements of active employees are to be covered on the terms defined under the General Social Security Regime, for the length of their employment between 1 January 2011 and their retirement date. The differential required to make up the pension guaranteed under the ACT is paid by the Banks. At the end of financial year 2011 and pursuant to the 3rd tripartite agreement, it was decided to transfer, definitively and irreversibly, to the General Social Security Regime all the banks’ liabilities with pensions in payment to retirees and pensioners that were in that condition as at 31 December 2011 at constant values (0% discount rate) for the component foreseen in the “Instrumento de Regulação Colectiva de Trabalho” (IRCT) applicable to banking employees, including the eventualities of death, disability and survival. The liabilities relating to the updating of pension amounts, pension benefits other than those to be borne by Social Security, health-care contributions to SAMS, death allowances and deferred survivor’s pensions will remain under the banks’ responsibility, with the corresponding funding being met through the respective pension funds. The agreement further established that the financial institutions’ pension fund assets relating to the part allocated to the satisfaction responsibilities for those pensions, be transferred to the State. According to the deliberation of the Board of Directors of Bank of Portugal of 3 August 2014 (8 p.m.), considering the resolution by the same Board of Directors of 11 August 2014 (5 p.m.), and the additional clarifications contained in the deliberation of the Board of Directors of Bank of Portugal, of 11 February 2015, it was clarified that the BES responsibilities not transferred to NOVO BANCO relate to the retirement and survival pensions and complementary retirement and survival pensions of the Directors of BES who had been members of its Executive Committee, as defined in BES’s Articles of Association and BES’s General Assembly Regulations to which the Articles of Association refer, not having, therefore, been transferred to NOVO BANCO, without prejudice to the transfer of the responsibilities relating exclusively to the employment contracts with BES. NOVO BANCO | 2019 ANNUAL REPORT | 162 Given the aforementioned, only the pension fund liabilities arising from the Executive Committee Complementary Plan were splited, with a part (described above) remaining in BES and the remaining responsibilities related to the Executive Committee Complementary Plan being transferred to NOVO BANCO, together with the liabilities of the Pension Fund regarding the Base Plan and the Complementary Plan. To quantify the amounts relating to the split of the Pension Fund assets allocated to the liabilities that remained in BES, following the decision of the Board of Directors of the Bank of Portugal of 11 February 2015, from those that were transferred to NOVO BANCO, the assets existing on 3 August 2014 were split in proportion to the liabilities calculated on the same date, allocated to each of the groups of former participants and beneficiaries allocated to each of the entities, after deducting the amounts already paid. The split performed on these terms resulted, on 3 August 2014, in a level of funding of the Complementary Plan of the Executive Commission, at that time, that was equal for each of the associates of the Fund (NOVO BANCO and BES). However, up to the present date, the formalization of the effective splitting of the liabilities / assets of BES and NB has not yet occurred, with both formally continuing to be members of the same Pension Fund, currently designated Fundo de Pensões NB. On 1 June 2016, an amendment was made to Fundo de Pensões NB´s constitutive contract, where the complementary plan became a defined contribution instead of a defined benefit plan. Considering this, and in accordance with IAS 19, this plan´s responsibilities and assets are net of the amounts presented for the defined benefit plans. The key actuarial assumptions used to calculate retirement pension and health-care liabilities are identical and are as follows: Disability decreases are not considered in the calculation of the liabilities. The determination of the discount rate as at 31 December 2019 and 2018 was based on: (i) the evolution of the main indices for high quality corporate bonds and (ii) the duration of the liabilities. The pension plan participants have the following breakdown: NOVO BANCO | 2019 ANNUAL REPORT | 163 AssumptionsActualAssumptionsActualActuarial Assumptions Projected rate of return on plan assets1.35%6.82%2.1%-1.57% Discount rate1.35%-2.1%- Pension increase rate0.5%0.49%0.5%0.06% Salary increase rate0.25%1.2%0.75%1.00% Mortality table men Mortality table womenTV 88/90-2 yearsTV 88/90-2 years31.12.201931.12.2018TV 88/90TV 88/9031.12.201931.12.2018Employees 4 520 4 628 Pensioners and survivors 6 818 6 765 TOTAL 11 338 11 393 The application of IAS 19 in terms of liabilities and coverage levels as at 31 December 2019 and 2018 is as follows: According to the policy defined in Note 2.15 - Employee Benefits, the Group calculates liabilities for pensions and actuarial gains and losses half-yearly and evaluates at each balance sheet date and for each plan separately, the recoverability of the excess of the respective pension liabilities. As at 31 December 2019, the net balance sheet value includes Euro 30.4 million (31 December 2018: Euro 26.7 million) related to NOVO BANCO’s share of the deficit of the complementary plan CE. With respect to the base and complementary net liabilities, the Bank has already made the contribution. As at 31 December 2019 and 2018, the sensitivity analysis to a 0.25% increase in the rate of the assumptions and to a one-year increase in the mortality table results in the following changes in the present value of the liabilities determined for past services: The evolution of liabilities for pensions and health-care benefits can be analysed as follows: NOVO BANCO | 2019 ANNUAL REPORT | 164 (in thousands of Euros)Assets / (liabilities) recognized in the balance sheetTotal liabilities(1 848 930)(1 675 608) Pensioners(1 287 349)(1 132 795) Employees( 561 581)( 542 813)Coverage Fair value of plan assets1 695 8571 648 168Net assets / (liabilities) in the balance sheet (See Note 32)( 153 073)( 27 440)Accumulated actuarial deviations recognized in other comprehensive income 599 454 492 17731.12.201931.12.2018(in thousands of Euros)Assumptionsof +0.25% in the rate usedof -0.25% in the rate usedof +0.25% in the rate usedof -0.25% in the rate usedDiscount rate( 68 854) 73 693 ( 61 543) 60 526 Salary increase rate 27 329 ( 18 882) 19 707 ( 24 102)Pension increase rate 54 664 ( 50 705) 46 995 ( 46 845)de +1 ano de -1 ano de +1 ano de -1 ano Mortality table( 64 631) 65 300 ( 55 362) 52 265 Change in the amount of liabilities due to the change:31.12.201931.12.2018(in thousands of Euros)Retirement pension liabilities at beginning of the exercise1 675 608 1 663 489 Current service cost 14 562 Interest cost 31 687 33 839 Plan participants' contribution 2 645 2 678 Contributions from other entities 285 203 Actuarial (gains) / losses in the exercise: - Changes in demographic assumptions- ( 68) - Changes in financial assumptions 125 523 ( 359) - Experience adjustments (gains) / losses 64 098 17 839 Pensions paid by the fund / transfers and once-off bonuses( 69 708)( 63 998)Early retirement 15 670 28 688 Foreign exchange differences and other 3 108 ( 7 265)Retirement pension liabilities at end of the exercise1 848 930 1 675 608 31.12.201931.12.2018 The evolution of the value of the pension funds during 2019 and 2018 can be analysed as follows: The assets of the pension funds can be analysed as follows: The assets of the pension funds used by the Group or representative of securities issued by the Group’s entities are detailed as follows: The evolution of the actuarial gains and losses in the balance sheet can be analysed as follows: The cost with retirement pensions and health-care benefits during 2019 and 2018, can be analysed as follows: During 2019, the value of early retirements amounted to Euro 15.7 million (2018: Euro 28.7 million), which are related to the Group’s restructuring process, and as such, were recognised against the restructuring provision (see Note 31). NOVO BANCO | 2019 ANNUAL REPORT | 165 (in thousands of Euros)31.12.201931.12.2018Fair value of fund assets at beginning of the exercise1 648 168 1 648 405 Net return from the fund 110 313 ( 22 093)- Share of the net interest on the assets 28 026 31 824 - Return on assets excluding net interest 82 287 ( 53 917)Group contributions 1 535 93 686 Plan participants’ contributions 2 645 2 678 Pensions paid by the fund / transfers and once-off bonuses( 69 708)( 63 998)Foreign exchange differences and other 2 904 ( 10 510)Fair value of fund assets at end of the exercise1 695 857 1 648 168 (in thousands of Euros)QuotedUnquotedTotalQuotedUnquotedTotalEquity instruments 163 866 59 309 223 175 133 062 56 732 189 794 Debt instruments1 013 356 74 1 013 430 870 930 4 870 934 Investment funds 216 168 57 984 274 152 229 914 52 410 282 324 Structured debt 6 683 7 818 14 501 9 950 9 649 19 599 Derivatives - 1 1 - - - Real estate properties - 107 166 107 166 - 103 942 103 942 Cash and cash equivalents - 63 432 63 432 - 181 575 181 575 Total1 400 073 295 784 1 695 857 1 243 856 404 312 1 648 168 31.12.201931.12.2018(in thousands of Euros)31.12.201931.12.2018Participation units 92 601 102 593 Real estate properties 75 851 58 083 Total 168 452 160 676 (in thousands of Euros)31.12.201931.12.2018Accumulated actuarial losses recognized in other comprehensive income at the beginning of the period 492 177 421 246 Actuarial (gains) / losses in the period: - Changes in assumptions - Demographic assumptions- ( 68) - Financial assumptions 125 523 ( 359) - Plan assets return (excluding net of interests)( 18 189) 71 756 Other( 57)( 398)Accumulated actuarial losses recognized in other comprehensive income at the end of the period 599 454 492 177 (in thousans of Euros)31.12.201931.12.2018Current service cost 14 562 Net interest 3 661 2 015 Other - 184 Cost with post-employment benefits 3 675 2 761 The evolution of net assets/ (liabilities) on balance sheet may be analysed, during 2019 and 2018 as follows: The summary of the liabilities and balance of the funds, as well as the experience gains and losses is analysed as follows: The weighted average maturity of the liabilities of the defined benefit plans is approximately 16 years (31 December 2018: approximately 16 years). The table below presents the temporal breakdown of the estimated benefits payable: Career bonuses As at 31 December 2019, the liabilities assumed by the Group amounted to Euro 7 106 thousand, corresponding to the liabilities for past services subjacent to the career bonuses, as described in Note 2.15 – Employee benefits (31 December 2018: Euro 6 486 thousand) (see Note 32). As at 31 December 2019, the costs recognised with career bonuses were Euro 864 thousand (31 December 2018: Euro 518 thousand) (see Note 15). NOVO BANCO | 2019 ANNUAL REPORT | 166 (in thousands of Euros)31.12.201931.12.2018At the beginning of the exercise( 27 440)( 15 084)Cost for the exercise( 3 675)( 2 761)Actuarial gains / (losses) recognized in other comprehensive income( 107 277)( 70 931)Contributions made in the exercise 1 535 93 686 Other( 16 216)( 32 350)At the end of the exercise( 153 073)( 27 440)(in thousands of Euros)31.12.201931.12.201831.12.201731.12.201631.12.2015Retirement pension liabilities(1 848 930)(1 675 608)(1 663 489)(1 577 750)(1 545 996)Funds balance1 695 857 1 648 168 1 648 405 1 557 979 1 514 326 (Under) / overfunding of liabilities( 153 073)( 27 440)( 15 084)( 19 771)( 31 670)(Gains) / losses on experience adjustments in retirement pension liabilities 64 098 17 839 15 263 12 318 ( 2 330)(Gains) / losses on experience adjustments in plan assets( 82 287) 53 917 ( 91 900) 43 716 17 545 (in thousands of Euros)Estimated amount of benefits payable 67 485 67 815 205 344 1 931 070 Up to 1 yearFrom 1 to 2 yearsFrom 2 to 5 yearsMore than 5 years NOTE 17 – OTHER ADMINISTRATIVE EXPENSES The breakdown of this caption is as follows: The caption Other costs includes, amongst others, specialised service costs incurred with security and surveillance, information services, training and sundry external supplies. The fees invoiced during financial years 2019 and 2018 by the Statutory Audit Firm, according to that laid down in article 508-F of the Portuguese Companies Code (Código das Sociedades Comerciais), have the following breakdown: NOTE 18 – EARNINGS PER SHARE Basic earnings per share The basic earnings per share are calculated dividing the net profit attributable to the shareholders of the Bank by the weighted average number of ordinary shares in circulation during the financial year /period. Diluted earnings per share The diluted earnings per share are calculated considering the net profit attributable to the shareholders of the Bank and the weighted average number of ordinary shares in circulation, adjusted for the effects of all potential dilutive ordinary shares. The diluted earnings per share do not differ from the basic earnings per share, since there are no dilutive effects. NOVO BANCO | 2019 ANNUAL REPORT | 167 (in thousands of Euros)31.12.201931.12.2018Rentals 3 622 25 325 Advertising 8 511 9 139 Communication 12 830 13 956 Maintenance and repairs expenses 9 821 8 510 Travelling and representation 3 513 3 475 Transportation of valuables 4 280 4 241 Insurance 2 777 3 656 IT services 50 378 47 972 Independent work 3 614 4 852 Temporary work 1 599 1 544 Electronic payment systems 10 482 10 052 Legal costs 9 289 15 111 Consultancy and audit fees 28 313 19 712 Water, energy and fuel 3 839 5 095 Consumables 1 644 2 208 Other costs 24 978 24 141 179 490 198 989 (in thousands of Euros)31.12.201931.12.2018Statutory audit of annual accounts 1 685 524 Other reliability assurance services 1 043 509 Total value of billable services 2 728 1 033 (In thousands of Euros)31.12.201931.12.2018Net consolidated profit / (loss) attributable to shareholder of the Bank(1 058 812)(1 412 642)Weighted average number of common shares outstanding (thousands)9 800 000 9 800 000 Basic earnings per share attributable to shareholders of NOVO BANCO (in Euros)(0.11)(0.14)Basic earnings per share from continuing activities attributable to shareholders of NOVO BANCO (in Euros)(0.11)(0.14) NOTE 19 – CASH, CASH BALANCES AT CENTRAL BANKS AND OTHER DEMAND DEPOSITS As at 31 December 2019 and 2018, this caption is analysed as follows: The caption Demand Deposits with Bank of Portugal includes mandatory deposits to comply with the minimum legal cash reserve requirements in an amount of Euro 246.8 million (31 December 2018: Euro 243.8 million). According to the European Central Bank Regulation (EU) No. 1358/2011, of 14 December 2011, minimum cash requirements of demand deposits with Bank of Portugal are interest-bearing and correspond to 1% of the deposits and debt certificates maturing in less than 2 years, after excluding from these the deposits of institutions subject to the European System of Central Banks minimum reserve requirements. As at 31 December 2019, the average interest rate on these deposits was null (31 December 2018: null). Compliance with minimum cash requirements, for a given observation period, is monitored taking into account the average amount of the deposits with Bank of Portugal over said period. The balance of the account with Bank of Portugal as at 31 December 2019 was included in the observation period running from 18 December 2019 to 28 January 2020. Checks to be collected on credit institutions at home and abroad were sent for collection within the first business days following the reference dates. NOTE 20 – FINANCIAL ASSETS AND LIABILITIES HELD FOR TRADING As at 31 December 2019 and 2018, this caption is analysed as follows: NOVO BANCO | 2019 ANNUAL REPORT | 168 (in thousands of Euros)31.12.201931.12.2018Cash 179 220 155 860 Demand deposits with Central BanksBank of Portugal 1 387 250 531 664 Other Central Banks 21 658 14 359 1 408 908 546 023 Deposits in other domestic credit institutionsRepayable on demand 12 303 7 541 Uncollected checks 51 437 59 603 63 740 67 144 Deposits with banks abroadRepayable on demand 175 761 188 470 Other deposits 26 452 20 175 202 213 208 645 1 854 081 977 672 (in thousands of Euros)31.12.201931.12.2018Financial assets held for tradingSecuritiesBonds and other fixed income securitiesIssued by government and public entities 254 848 257 269 Issued by other entities- 1 254 848 257 270 DerivativesDerivatives held for trading with positive fair value 419 791 516 336 Fair value option derivatives with positive fair value 74 093 70 177 493 884 586 513 748 732 843 783 Financial liabilities held for tradingDerivativesDerivatives held for trading with negative fair value 544 825 492 953 544 825 492 953 Securities held for trading In accordance with the accounting policy described in Note 2.5, securities held for trading are those acquired to be traded in the short-term regardless of their maturity. As at 31 December 2019 and 2018, the analysis of the securities held for trading, by maturity, is as follows: A breakdown of the securities held for trading, by fair value hierarchy, is presented in Note 39. Derivatives As at 31 December 2019 and 2018, the breakdown of this caption is as follows: NOVO BANCO | 2019 ANNUAL REPORT | 169 (in thousands of Euros)31.12.201931.12.2018Up to 3 months - 50 029 3 months to 1 year - 2 007 1 to 5 years 117 227 157 434 More than 5 years 137 621 47 800 254 848 257 270 (in thousands of Euros)AssetsLiabilitiesAssetsLiabilitiesTrading derivativesExchange rate contractsForward- buy 743 210 375 271 - sell 744 649 375 697 Currency Swaps- buy1 019 987 1 701 938 - sell1 025 562 1 706 018 Currency Interest Rate Swaps- buy 22 951 23 417 - sell 22 947 23 413 Currency Options- buy 219 866 256 052 - sell 192 493 156 257 34 540 33 953 32 731 32 748 Interest rate contractsInterest Rate Swaps- buy7 808 593 7 489 169 - sell7 809 654 7 532 826 Swaption - Interest Rate Options- buy 400 000 - - sell- - Interest Rate Caps & Floors- buy 93 846 54 352 - sell 91 073 57 105 Interest Rate Futures a)- buy- - - sell- 50 000 352 939 501 689 436 771 436 001 Equity / Index contractsEquity / Index Swaps- buy 152 294 116 752 - sell 152 294 116 752 Equity / Index Options- buy 711 682 1 020 012 - sell 743 755 1 130 702 Equity / Index Futures a)- buy- 1 330 - sell- - 32 311 9 141 46 825 24 087 Credit default contractsCredit Default Swaps- buy 2 883 7 814 - sell 2 883 7 814 1 42 9 117 419 791 544 825 516 336 492 953 Fair value option derivativesInterest rate contractsInterest Rate Swaps- compras 171 371 171 370 - vendas 171 371 171 370 74 093 - 70 177 - 1 42 9 117 a) Derivatives traded on organized markets, whose market value is settled daily through the margin account (see Note 28) 70 177 - 74 093 - - - - - 3 988 3 739 13 058 13 061 28 323 5 402 33 767 11 026 - - - - 349 152 499 619 436 188 435 401 966 893 583 600 2 821 1 177 - - 6 240 5 836 5 235 5 279 21 875 21 870 21 036 21 029 5 307 5 757 4 141 5 670 1 118 490 2 319 770 31.12.201931.12.2018NotionalFair valueNotionalFair value Fair value option derivatives include instruments designed to manage the risk associated with certain financial assets and liabilities designated at fair value through profit or loss, in accordance with the accounting policy described in Notes 2.4 and 2.7, and which the Group has not designated for hedge accounting. The Group calculates the Credit Valuation Adjustment (CVA) for derivative instruments in accordance with the following methodology: (i) Portfolio basis – the calculation of the CVA corresponds to the application, to the aggregate exposure of each counterpart, of an expected loss and a recovery rate, considering the average duration period estimated for each exposure; (ii) Individual basis – the calculation of the CVA on an individual basis is based on the determination of the exposure using stochastic methods (Expected Positive Exposure) which translates into the calculation of the expected fair value exposure that each derivative is likely to assume over its remaining life. Subsequently, are applied to the exposure determined, an expected loss and a recovery rate. In the financial year of 2019, the Group recognized a gain of Euro 1.8 million related to the CVA of derivative instruments (31 December 2018: gain of Euro 16.0 million). As at 31 December 2019 and 2018, the analysis of the derivatives held for trading by maturity period is as follows: Credit Support Annex (CSA) NOVO BANCO has several contracts negotiated with counterparties with which it trades derivatives on the Over-the-counter market. The CSAs take the form of collateral agreements established between two parties negotiating over-the-counter derivatives with each other, with the main objective of providing protection against credit risk, defining for that purpose rules regarding collateral. Derivative transactions are regulated by the International Swaps and Derivatives Association (ISDA) and have minimum risk margin that may change according to the ratings of the parties. NOVO BANCO | 2019 ANNUAL REPORT | 170 (in thousands of Euros)AssetsLiabilitiesAssetsLiabilitiesDerivatives held for negotiationUp to 3 months2 094 664 1 924 137 ( 892)2 467 814 2 419 978 ( 693)From 3 months to 1 year1 053 257 843 821 16 406 1 461 925 1 538 680 ( 4 336)From 1 to 5 years2 111 144 2 098 238 1 301 1 698 310 1 707 800 14 076 More than 5 years5 916 247 5 919 114 ( 141 849)5 418 058 5 490 126 14 336 11 175 312 10 785 310 ( 125 034)11 046 107 11 156 584 23 383 Fair value option derivativesMore than 5 years 171 371 171 371 74 093 171 370 171 370 70 177 171 371 171 371 74 093 171 370 171 370 70 177 31.12.201931.12.2018NotionalFair Value (net)NotionalFair Value (net) NOTE 21 – FINANCIAL ASSETS MANDATORILY AT FAIR VALUE THROUGH PROFIT OR LOSS, DESIGNATED AT FAIR VALUE THROUGH PROFIT OR LOSS, AT FAIR VALUE THROUGH OTHER COMPREHENSIVE INCOME AND AT AMORTISED COST As at 31 December 2019 and 2018, these captions are analysed as follows: Securities As at 31 December 2019 and 2018, the detail of securities portfolio is as follows: The securities mandatorily accounted at fair value through profit or loss include the participation units held by the Group in Restructuring Funds, which are accounted for in accordance with the accounting policy described in Note 2.5, based on the net book value disclosed by the Management Companies, which may be adjusted according to information or analyzes that are considered to have an impact on the fair value of the participation NOVO BANCO | 2019 ANNUAL REPORT | 171 (in thousands of Euros)Mandatorily at fair value through profit and lossFair value through profit and lossFair value through other comprehensive incomeAmortised costFair value changes * TotalSecurities 1 314 742 - 8 849 896 1 622 545 - 11 787 183 Loans and advances to banks- - - 369 228 - 369 228 Loans and advances to customers- - - 25 149 687 52 540 25 202 227 1 314 742 - 8 849 896 27 141 460 52 540 37 358 638 * Fair value changes of the elements covered by the interest rate hedge portfolio (see Note 22)31.12.2019(in thousands of Euros)Mandatorily at fair value through profit and lossFair value through profit and lossFair value through other comprehensive incomeAmortised costFair value changes * TotalSecurities 1 566 225 480 7 661 207 1 389 400 - 10 617 312 Loans and advances to banks- - - 423 058 - 423 058 Loans and advances to customers- - - 24 720 610 33 835 24 754 445 1 566 225 480 7 661 207 26 533 068 33 835 35 794 815 * Fair value changes of the elements covered by the interest rate hedge portfolio (see Note 22)31.12.2018(in thousands of Euros)31.12.201931.12.2018Securities mandatorily at fair value through profit or lossBonds and other fixed income securitiesFrom other issuers 57 590 47 Shares 603 851 674 823 Other securities with variable income 653 301 891 355 1 314 742 1 566 225 Securities at fair value through profit or lossBonds and other fixed income securitiesFrom other issuers - 480 - 480 Securities at fair value through other comprehensive incomeBonds and other fixed income securitiesFrom public issuers7 108 022 6 620 509 From other issuers1 661 538 951 085 Shares 80 334 89 610 Other variable income securities 2 3 8 849 896 7 661 207 Securities at amortised costBonds and other fixed income securitiesFrom public issuers 459 260 503 123 From other issuers1 322 059 1 081 063 Impairment( 158 774)( 194 786)1 622 545 1 389 400 11 787 183 10 617 312 units. In the second half of 2019, the Group undertook a detailed analysis of the historical performance of these funds, as well as an analysis of the liquidity of the participation units held by the Group, having concluded that, given their complexity and limitations inherent to their liquidity it should consider an adjustment to the net book value reported by the Management Companies based on historical market metrics. Additionally, the Group is conducting an analysis of the valuation of all assets held by these funds. As at 31 December 2019 and 2018, the detail of the fair value securities through other comprehensive income is as follows: The movements in the impairment reserves in fair value securities through other comprehensive income are presented as follows: NOVO BANCO | 2019 ANNUAL REPORT | 172 (in thousands of Euros)PositiveNegativeBonds and other fixed income securitiesFrom public issuers6 781 109 327 605 ( 692)7 108 022 ( 4 527)Residents3 201 240 162 006 ( 490)3 362 756 ( 2 158)Non residents3 579 869 165 599 ( 202)3 745 266 ( 2 369)From other issuers1 575 607 87 363 ( 1 432)1 661 538 ( 1 029)Residents 33 212 20 711 - 53 923 ( 8)Non residents1 542 395 66 652 ( 1 432)1 607 615 ( 1 021)Shares 480 591 25 771 ( 426 028) 80 334 - Residents 375 391 24 590 ( 335 217) 64 764 - Non residents 105 200 1 181 ( 90 811) 15 570 - Other securities with variable income 2 2 ( 2) 2 - Residents 2 - ( 2)- - Non residents- 2 - 2 - Balance as at 31 December 20198 837 309 440 741 ( 428 154)8 849 896 ( 5 556)(1) Aquisition cost referring to shares and other equity instruments and amortized cost for debt securities.Fair value reserveBalance sheet valueImpairment reservesCost (1)(in thousands of Euros)PositiveNegativeBonds and other fixed income securitiesFrom public issuers6 563 893 58 463 ( 1 847)6 620 509 ( 816)Residents3 646 985 28 037 ( 612)3 674 410 ( 390)Non residents2 916 908 30 426 ( 1 235)2 946 099 ( 426)From other issuers 934 722 24 490 ( 8 127) 951 085 ( 397)Residents 28 613 20 600 ( 54) 49 159 ( 22)Non residents 906 109 3 890 ( 8 073) 901 926 ( 375)Shares 487 063 19 154 ( 416 607) 89 610 - Residents 382 110 17 085 ( 328 800) 70 395 - Non residents 104 953 2 069 ( 87 807) 19 215 - Other securities with variable income 2 1 - 3 - Residents 2 - - 2 - Non residents- 1 - 1 - Balance as at 31 December 20187 985 680 102 108 ( 426 581)7 661 207 ( 1 213)(1) Aquisition cost referring to shares and other equity instruments and amortized cost for debt securities.Cost (1)Fair value reserveBalance sheet valueImpairment reserves(in thousands of Euros)Stage 1Stage 2Stage 3TotalBalance as at 31 December 2017* 1 179 050 Impact of transition to IFRS 9( 1 178 443)Balance as at 1 January 2018 607 - - 607 Increases due to changes in credit risk 9 032 23 12 9 067 Decreases due to changes in credit risk( 7 608)( 1)( 12)( 7 621)Utilization during the period( 852)- - ( 852)Other movements 12 - - 12 Balance as at 31 December 2018 1 191 22 - 1 213 Increases due to changes in credit risk 6 233 - - 6 233 Decreases due to changes in credit risk( 1 729)( 18)- ( 1 747)Utilization during the period( 137)- - ( 137)Other movements( 2)( 4)- ( 6)Balance as at 31 December 2019 5 556 - - 5 556 * The amount corresponds to accumulated impairment losses on available-for-sale securities at 31 December 2017, recorded in accordance with IAS 39.Impairment movement of securities at fair valuethrough other comprehensive income During the financial year of 2019, the Group sold Euro 3 761.0 million of financial instruments classified at fair value through other comprehensive income (31 December 2018: Euro 9 208.3 million), with a gain of Euro 67.8 million (31 December 2018: gain of Euro 34.5 million), and a loss of Euro 4.5 million that were transferred from revaluation reserves to sales reserves (31 December 2018: loss of Euro 3.3 million). Changes in impairment losses on amortised cost securities are as follows: In accordance with the accounting policy mentioned on Note 2.5, the Group regularly evaluates if there is any objective evidence of impairment in its securities portfolio at a fair value through other comprehensive income based on the judgement criteria mentioned on Note 3.1. As at 31 December 2019 and 2018, the securities portfolio, by residual maturity period, is as follows: The detail of the securities portfolio by fair value hierarchy is presented in Note 39. The portfolio securities pledged by the Group are analysed in Note 35. NOVO BANCO | 2019 ANNUAL REPORT | 173 (in thousands of Euros)Stage 1Stage 2Stage 3TotalBalance as at 31 December 2017- - - - Impact of transition to IFRS 9 213 808 Balance as at 1 January 2018 3 549 4 162 206 097 213 808 Increases due to changes in credit risk 5 226 245 353 4 385 254 964 Decreases due to changes in credit risk( 4 593)( 237 556)( 918)( 243 067)Utilization during the period( 1 953)( 2 945)( 74 665)( 79 563)Other movements 4 48 609 31 48 644 Balance as at 31 December 2018 2 233 57 623 134 930 194 786 Derecognized financial assets- - ( 3 424)( 3 424)Increases due to changes in credit risk 8 212 638 922 6 616 653 750 Decreases due to changes in credit risk( 8 208)( 642 526)( 7 690)( 658 424)Utilization during the period- ( 1)( 28 019)( 28 020)Other movements 59 38 9 106 Balance as at 31 December 2019 2 296 54 056 102 422 158 774 Impairment movement of securities at amortised cost(in thousands of Euros)31.12.201931.12.2018Securities at fair value through profit or loss - mandatoryUp to 3 months - 1 From 3 months to 1 year 7 - From 1 to 5 years 57 535 - More than 5 years 49 47 Unlimited duration1 257 151 1 566 177 1 314 742 1 566 225 Securities at fair value through profit or lossUp to 3 months - 480 - 480 Securities at fair value through other comprehensive incomeUp to 3 months 165 561 155 385 De 3 meses a um ano 179 917 618 944 De um a cinco anos4 345 876 4 219 916 More than 5 years4 078 206 2 577 349 Unlimited duration 80 336 89 613 8 849 896 7 661 207 Securities at amortised cost (*)Up to 3 months 929 394 754 681 De 3 meses a um ano 131 372 125 633 De um a cinco anos 48 500 37 576 More than 5 years 672 053 666 296 1 781 319 1 584 186 11 945 957 10 812 098 (*) Gross value before impairments Loans and advances to banks As at 31 December 2019 and 2018, the detail of Loans and advances to banks is as follows: Loans and advances to banks are all recorded in the amortised cost portfolio. The operations with repurchasing agreement, as at 31 December 2018, relate entirely to operations with a maturity of up to 1 year. As at 31 December 2019 and 2018, the analysis of loans and advances to banks, by residual maturity is as follows: Changes in impairment losses on loans and advances to banks are presented as follows: NOVO BANCO | 2019 ANNUAL REPORT | 174 (in thousands of Euros)Loans and advances to banks in PortugalVery short-term placements 8 902 64 517 Deposits 9 342 269 Loans 34 013 20 051 Other loans and advances 3 3 52 260 84 840 Loans and advances to banks abroadDeposits 10 850 28 078 Loans 1 645 1 700 Operations with reverse repurchase agreements- 9 774 Other loans and advances 381 561 374 332 394 056 413 884 Outstanding applications- 74 446 316 498 798 Impairment losses( 77 088)( 75 740) 369 228 423 058 31.12.201931.12.2018(in thousands of Euros)31.12.201931.12.2018Up to 3 months 24 302 97 461 From 3 months to 1 year 11 793 6 369 From 1 to 5 years 406 305 14 471 More than 5 years 3 916 380 423 Unlimited duration (Overdue Loans)- 74 446 316 498 798 (in thousands of Euros)Stage 1Stage 2Stage 3TotalBalance as at 31 December 2017 71 158 Impact of transition to IFRS 9 8 950 Balance as at 1 January 2018 1 227 78 563 318 80 108 Increases due to changes in credit risk 517 3 389 426 4 332 Decreases due to changes in credit risk( 894)( 10 183)( 119)( 11 196)Utilization during the period- - ( 13)( 13)Other movements( 680) 3 374 ( 185) 2 509 Balance as at 31 December 2018 170 75 143 427 75 740 Increases due to changes in credit risk 406 2 752 - 3 158 Decreases due to changes in credit risk( 234)( 2 959)- ( 3 193)Utilization during the period- ( 22)- ( 22)Other movements( 24) 1 427 2 1 405 Balance as at 31 December 2019 318 76 341 429 77 088 Loans and advances to banks Loans and advances to customers As at 31 December 2019 and 2018, the detail of loans and advances to customers is presented as follows: During the year of 2019, a sale of a portfolio of non-performing loans (called “NATA II”) was carried out, and the impact of this operation on the balance sheet resulted in a reduction in net loans and advances to customers of 141.9 million Euro (1,180.7 million Euro in gross value and 1,038.8 million Euro in impairment), and the impact on results was a loss of 79.7 million Euro (see Note 42). In 2018, a non-performing loan portfolio was sold, and the impact of this operation on the balance sheet resulted in a reduction of Euro 543.9 million in loans and advances to customers (Euro 1 529.9 million gross value and Euro 986.1 million of impairment), and the impact on profit or loss resulted in a loss of Euro 108.9 million (see Note 42). Loans to customers are all recorded in the amortized cost portfolio. As at 31 December 2019, the amount of loans and advances to customers (net of impairment) includes the amount of Euro 1 608.7 million (31 December 2018: Euro 1 877.2 million), related to securitization operations in which, according to the accounting policy referred to in Note 2.2, structured entities are consolidated by the Group (see Note 1 and 38). The liabilities associated with these securitization operations were recognized as Debt Securities (see Note 30). NOVO BANCO | 2019 ANNUAL REPORT | 175 (in thousands of Euros)Domestic loans and advancesCorporateCurrent account loans1 408 191 1 473 186 Loans8 436 268 8 499 596 Discounted bills 121 203 141 700 Factoring 710 493 866 677 Overdrafts 3 061 36 034 Financial leases1 523 091 1 547 898 Other loans and advances 29 617 30 577 IndividualsResidential Mortgage loans9 102 659 8 545 373 Consumer credit and other loans1 178 338 1 101 674 22 512 921 22 242 715 Foreign loans and advancesCorporateCurrent account loans 667 842 352 770 Loans1 068 336 1 031 223 Discounted bills 21 206 39 086 Factoring 138 292 101 980 Overdrafts 39 158 30 894 Financial leases 37 422 42 765 Other loans and advances 1 1 IndividualsResidential Mortgage loans1 085 701 956 838 Consumer credit and other loans 321 114 341 592 3 379 072 2 897 149 Overdue loans and advances and interestsUnder 90 days 26 695 74 885 Over 90 days1 083 494 3 463 783 1 110 189 3 538 668 27 002 182 28 678 532 Impairment losses(1 852 495)(3 957 922)25 149 687 24 720 610 Fair value adjustaments of interest rate hedges *CorporateLoans 14 390 32 072 IndividualsResidential Mortgage loans 38 150 1 763 52 540 33 835 25 202 227 24 754 445 * See Note 2231.12.201931.12.2018 As at 31 December 2019, the caption Loans and advances to customers include Euro 6 076.8 million of mortgage loans related to the issuance of covered bonds (31 December 2018: Euro 4 617.4 million) (see Note 30). As at 31 December 2019, the amount of interest income and commission fees recorded in the balance sheet relating to credit operations totals Euro 26 343 thousand (31 December 2018: Euro 28 912 thousand). As at 31 December 2019 and 2018, the analysis of loans and advances to customers, by residual maturity period, is as follows: Changes in credit impairment losses are presented as follows: Credit distribution by type of rate is as follows: NOVO BANCO | 2019 ANNUAL REPORT | 176 (in thousands of Euros)31.12.201931.12.2018Up to 3 months 1 773 496 2 244 430 From 3 months to 1 year 1 496 699 1 803 652 From 1 to 5 years 5 108 121 4 579 144 More than 5 years 17 566 217 16 546 473 Unlimited duration (Overdue Loans) 1 110 189 3 538 668 27 054 722 28 712 367 (in thousands of Euros)Stage 1Stage 2Stage 3TotalBalance as at 31 December 2017 5 631 498 Impact of transition to IFRS 9 216 139 Balance as at 1 January 2018 273 558 230 694 5 343 385 5 847 637 Financial assets originated or acquired 2 359 - - 2 359 Financial assets derecognised ( 572)( 1 573)( 999 880)( 1 002 025)Increases due to changes in credit risk 35 785 63 608 793 097 892 490 Decreases due to changes in credit risk( 54 298)( 68 382)( 506 310)( 628 990)Utilization during the period( 94 287)( 2 189)( 1 015 434)( 1 111 910)Other movements 102 808 ( 111 803)( 32 644)( 41 639)Balance as at 31 December 2018 265 353 110 355 3 582 214 3 957 922 Financial assets derecognised ( 1 050)( 13)( 1 055 717)( 1 056 780)Increases due to changes in credit risk 137 482 106 610 705 452 949 544 Decreases due to changes in credit risk( 156 076)( 31 981)( 133 970)( 322 027)Utilization during the period( 49)( 422)( 1 709 571)( 1 710 042)Other movements( 191 715)( 44 774) 270 367 33 878 Balance as at 31 December 2019 53 945 139 775 1 658 775 1 852 495 Impairment movements of loans and advances to customers (in thousands of Euros)31.12.201931.12.2018Fixed rate3 705 246 3 260 266 Variable rate23 349 476 25 452 101 27 054 722 28 712 367 An analysis of finance lease loans, by residual maturity period, is presented as follows: NOTE 22 – DERIVATIVES – HEDGE ACCOUNTING AND FAIR VALUE CHANGES OF THE HEDGED ITEMS As at 31 December 2019 and 2018, the fair value of the hedging derivatives is analysed as follows: As at 31 December 2019 and 2018, fair value hedging operations may be analysed as follows: Changes in the fair value of the hedged assets and liabilities mentioned above and of the respective hedging derivatives are recognised in the income statement in the caption Net gains / (losses) from financial assets and liabilities at fair value through profit or loss. NOVO BANCO | 2019 ANNUAL REPORT | 177 (in thousands of Euros)31.12.201931.12.2018Gross investment in finance leases receivableUp to 1 year 293 189 275 621 1 to 5 years 827 824 819 974 More than 5 years 663 672 720 998 1 784 685 1 816 593 Unrealized finance income in finance leasesUp to 1 year 35 558 37 344 1 to 5 years 91 219 97 615 More than 5 years 57 541 46 048 184 318 181 007 Present value of minimum lease payments receivableUp to 1 year 257 631 238 277 1 to 5 years 736 605 722 359 More than 5 years 605 996 674 870 1 600 232 1 635 506 Impairment ( 202 575)( 289 405)1 397 657 1 346 101 (in thousands of Euros)31.12.201931.12.2018Hedging derivativesAssets 7 452 1 227 Liabilities( 58 855)( 36 150)( 51 403)( 34 923)Fair value component of the assets and liabilities hedged for interest rate riskFinancial assetsLoans and advances to customers (ver Nota 21) 52 540 33 835 52 540 33 835 (in thousands of Euros)Interest Rate Swap/ CIRSLoans and advances to customersInterest and exchange rates 3 295 352 ( 51 403)( 16 142) 52 540 18 007 3 295 352 ( 51 403)( 16 142) 52 540 18 007 (1) Attributable to hedged risk(2) Includes accrued interest31.12.2019Derivative Hedged itemHedged riskNotionalFair value of derivatives (2)Change infair value ofderivative inperiodFair valuecomponent ofitem hedged(1)Change in fairvaluecomponent ofitem hedgedin period (1)(in thousands of Euros)Interest Rate Swap/ CIRSLoans and advances to customersInterest and exchange rates 2 597 116 ( 34 923) 42 611 33 835 ( 39 419) 2 597 116 ( 34 923) 42 611 33 835 ( 39 419)(1) Attributable to hedged risk(2) Includes accrued interest31.12.2018Derivative Hedged itemHedged riskNotionalFair value of derivatives (2)Change infair value ofderivative inperiodFair valuecomponent ofitem hedged(1)Change in fairvaluecomponent ofitem hedgedin period (1) As at 31 December 2019, the ineffective portion of the fair value hedging operations resulted in a gain of Euro 1.8 million that was recognised in the income statement (31 December 2018: cost of Euro 3.2 million). The Group periodically evaluates the effectiveness of the hedges. As at 31 December 2019 and 2018, the analysis of derivatives held for risk management and hedging purposes, by maturity, may be analysed as follows: NOTE 23 – INVESTMENTS IN SUBSIDIARIES, JOINT VENTURES AND ASSOCIATES Investments in subsidiaries, joint ventures and associates are presented as follows: The financial information of the most relevant associated companies is presented in the following table: The movements in impairment losses for investments in associates are presented as follows: NOVO BANCO | 2019 ANNUAL REPORT | 178 (in thousands of Euros)BuySellBuySell3 months to 1 year- - - 25 000 25 000 ( 436)1 to 5 years 772 860 772 860 ( 14 413) 638 850 638 850 ( 12 021)More than 5 years 874 816 874 816 ( 36 990) 634 708 634 708 ( 22 466)1 647 676 1 647 676 ( 51 403)1 298 558 1 298 558 ( 34 923)31.12.201931.12.2018NotionalFair value (net)NotionalFair value (net)(in thousands of Euros)31.12.201931.12.201831.12.201931.12.201831.12.201931.12.201831.12.201931.12.2018LOCARENT 2 967 2 967 50.00%50,00% 19 612 18 688 1 325 1 451 GNB SEGUROS a)- 3 749 - 25,00%- 7 989 - 1 199 ESEGUR a)- 9 634 - 44,00%- 14 446 - 411 LINEAS - CONCESSÕES DE TRANSPORTES 146 769 146 769 40.00%40,00% 61 786 63 571 ( 1 784)( 352)EDENRED 4 984 4 984 50.00%50,00% 1 992 1 641 513 295 UNICRE b) 11 497 11 497 17.50%17,50% 24 640 26 284 2 624 3 541 Others 28 381 28 041 20 915 22 729 ( 1 208)( 919) 194 598 207 641 128 945 155 348 1 470 5 626 Impairment( 36 317)( 36 650) 92 628 118 698 a) Throughout the first semester of 2019 it was reclassified as discontinued operations (see Note 29)b) Although the Group's shareholding is less than 20%, this entity was consolidated under the equity method as that the Group exercises significant influence over its activities.Cost of participationEconomic interestBook valueGroup profit / losses attributable to the Group(in thousands of Euros)AssetsLiabilitiesEquityIncome Profit / (loss) for the period31.12.201931.12.201831.12.201931.12.201831.12.201931.12.201831.12.201931.12.201831.12.201931.12.2018LOCARENT 285 608 260 816 247 005 224 061 38 603 36 755 66 882 74 061 2 649 2 901 GNB SEGUROS a)- 121 987 - 90 033 - 31 954 - 64 770 - 4 800 ESEGUR a)- 37 973 - 20 696 - 17 277 - 44 566 - 933 LINEAS - CONCESSÕES DE TRANSPORTES 314 608 263 684 227 063 170 688 87 545 92 996 2 272 12 294 ( 4 461)( 3 209)EDENRED 74 183 73 336 63 978 63 832 10 205 9 504 7 713 9 095 1 026 589 UNICRE b) 398 278 350 610 257 476 200 414 140 802 150 196 156 270 162 274 14 995 20 234 Note: Data adjusted for consolidation purposesb) ) Although the Group's shareholding is less than 20%, this entity was consolidated under the equity method as that the Group exercises significant influence over its activities.a) Throughout the first semester of 2019 it was reclassified as discontinued operations (ver Nota 41)(in thousands of Euros)31.12.201931.12.2018Balance at the beginning of the exercise 118 698 146 251 Disposals and other reimbursements (see Note 1)- ( 1)Share of profits / (losses) of associated companies 1 470 5 626 Impairment in associated companies 333 ( 28 401)Fair value reserves of investments in associated companies 709 779 Dividends received( 5 371)( 6 090)Foreign exchange differences and other (a)( 23 211) 534 Balance at the end of the exercise 92 628 118 698 (a)Asat31December2019thisincludes22904thousandeurosrelatedtothereclassificationofGNBSeguros,ESEGURandMultipessoaltodiscontinuedoperations(seeNote 29) The movements in impairment losses for investments in associates are presented as follows: NOTE 24 – TANGIBLE FIXED ASSETS This caption as at 31 December 2019 and 2018 is analysed as follows: NOVO BANCO | 2019 ANNUAL REPORT | 179 (in thousands of Euros)31.12.201931.12.2018Balance at the beginning of the period 36 650 8 251 Charges 1 30 006 Reversals( 334)( 1 608)Foreign exchange differences- 1 Balance at the end of the period 36 317 36 650 (in thousands of Euros)31.12.201931.12.2018Real estate propertiesFor own use 207 553 207 478 Improvements in leasehold properties 139 257 139 746 Assets under right-of-use 60 531 - 407 341 347 224 EquipmentComputer equipment 110 371 109 977 Fixtures 58 243 66 048 Furniture 71 061 73 311 Security equipment 24 829 27 124 Office equipment 8 230 8 341 Transport equipment 640 707 Assets under right-of-use 5 952 - Other 1 195 1 307 280 521 286 815 687 862 634 039 Work in progressImprovements in leasehold properties 22 846 Real estate properties 67 160 Equipment 6 936 95 1 942 687 957 635 981 Accumulated impairment( 10 609)( 10 609)Accumulated depreciation( 488 940)( 482 878) 188 408 142 494 The changes in this caption were as follows: NOTE 25 – INVESTMENT PROPERTIES The movement in the caption Investment properties is presented as follows: The book value of investment properties is the fair value of the properties, as determined by a registered and independent appraiser with a recognised professional qualification and experience in the geographical location and category of the property being valued. Fair value is determined according to the accounting policy indicated in Note 2.23. NOVO BANCO | 2019 ANNUAL REPORT | 180 (in thousands of Euros)Real estate propertiesEquipmentOtherWork in progressTotalAcquisition costBalance at 31 December 2017 375 700 294 904 2 560 671 166 Acquisitions 607 12 814 - 2 855 16 276 Disposals / write-offs( 12 672)( 19 088)- - ( 31 760)Transfers (a)( 16 403)( 1 669)- ( 1 474)( 19 546)Foreign exchange differences and other ( 8)( 146)( 2) 1 ( 155)Balance at 31 December 2018 347 224 286 815 - 1 942 635 981 Acquisitions 8 230 11 371 - 358 19 959 Disposals / write-offs( 20 244)( 22 634)- - ( 42 878)Transfers (b) 491 950 - ( 2 205)( 764)IFRS 16 transition impact 66 644 4 461 - - 71 105 Foreign exchange differences and other 4 996 ( 442)- - 4 554 Balance at 31 December 2019 407 341 280 521 - 95 687 957 DepreciationBalance at 31 December 2017 235 963 266 452 132 - 502 547 Depreciation 6 075 10 786 1 - 16 862 Disposals / write-offs( 12 672)( 18 809)- - ( 31 481)Transfers (a)( 4 077)( 1 690)- - ( 5 767)Foreign exchange differences and other 424 304 ( 11)- 717 Balance at 31 December 2018 225 713 257 043 122 - 482 878 Depreciation 20 542 11 867 1 - 32 410 Disposals / write-offs( 5 998)( 21 292)- - ( 27 290)Transfers (b)( 210)( 74)- - ( 284)Foreign exchange differences and other 1 085 141 - - 1 226 Balance at 31 December 2019 241 132 247 685 123 - 488 940 ImpairmentBalance at 31 December 2017 11 122 - - - 11 122 Transfers( 513)- - - ( 513)Balance at 31 December 2018 10 609 - - - 10 609 Balance at 31 December 2019 10 609 - - - 10 609 Net book value at 31 December 2019 155 600 32 836 ( 123) 95 188 408 Net book value at 31 December 2018 110 902 29 772 ( 122) 1 942 142 494 (a)IncludesEuro30501thousandoffixedassets(realestateandequipment)andEuro9805thousandofaccumulatedamortizationsrelatedtodiscontinuedbrancheswhichweretransferredbythenetamount to the appropriate balance sheet items.(b)IncludesEuro764thousandoffixedassets(realestateandequipment)andEuro284thousandofaccumulatedamortizationsrelatedtodiscontinuedbrancheswhichweretransferredbythenetamount to the appropriate balance sheet items.(in thousands of Euros)31.12.201931.12.2018Balance at the beginning of the exercise1 098 071 1 144 432 Changes in consolidation perimeter 9 455 23 401 Acquisitions - 13 720 Sales( 197 058)( 69 703)Improvements - 13 Changes in fair value( 216 119)( 16 518)Other 6 395 2 726 Balance at the end of the exercise 700 744 1 098 071 Investment properties comprise some assets held by Funds and Real Estate Societies, and include commercial properties leased for revenue and properties held for valuation. Most of the lease contracts have no specific tenor, enabling the lessee to cancel it at any time. However, for a small number of these commercial properties leased to third parties there is a non-cancelling clause for approximately 10 years. Subsequent leases are negotiated with the lessee. In the financial year of 2019, the decrease in the fair value of investment properties of Euro 216.1 million, (31 December 2018: reduction of Euro 16.5 million) (see Note 14), and the rental income from investment properties of Euro 15.0 million (31 December 2018: Euro 10.4 million) are recognised in Other operating income and expenses. The fair value changes and sales presented as at 31 December 2019 include Euro 35.0 million and Euro 17.4 million related to the sale of real estate assets (Project Sertorius) (see Note 42). For the purposes of determining the fair value of these assets, generally accepted criteria and methodologies are used, which integrate analyses by the income method and the market method, corresponding to level 3 of the fair value hierarchy (see Note 39). NOTE 26 – INTANGIBLE ASSETS This caption as at 31 December 2019 and 2018, is analysed as follows: NOVO BANCO | 2019 ANNUAL REPORT | 181 (in thousands of Euros)31.12.201931.12.2018Goodwill 13 908 251 004 Internally developedSoftware - Automatic data processing system 69 408 72 713 Other 1 1 Acquired from third partiesSoftware - Automatic data processing system 371 533 369 776 Other 4 4 440 946 442 494 Work in progress 17 464 2 618 472 318 696 116 Accumulated amortization( 432 032)( 440 130)Impairment losses( 13 908)( 250 561) 26 378 5 425 The changes in this caption were as follows: Goodwill, recognised in accordance with the accounting policy described in Note 2.2, is analysed as follows: NOVO BANCO | 2019 ANNUAL REPORT | 182 (in thousands of Euros)Goodwill e Value In ForceSoftwareWork in progressTotalAcquisition costBalance as at 31 December 2017 251 007 479 030 1 921 731 958 AcquisitionsInternally developed- - 1 446 1 446 Acquired from third parties- 1 507 3 745 5 252 Disposals / write-offs( 3)( 37 829)- ( 37 832)Transfers (a)- - ( 4 494)( 4 494)Foreign exchange differences and other- ( 214)- ( 214)Balance as at 31 December 2018 251 004 442 494 2 618 696 116 AcquisitionsAcquired from third parties- 3 421 23 018 26 439 Disposals / write-offs( 234 575)( 7 458)- ( 242 033)Transfers- 4 467 ( 8 172)( 3 705)Foreign exchange differences and other( 2 521)( 1 978)- ( 4 499)Balance as at 31 December 2019 13 908 440 946 17 464 472 318 AmortizationsBalance as at 31 December 2017- 472 715 - 472 715 Amortization for the period- 5 287 - 5 287 Disposals / write-offs- ( 37 829)- ( 37 829)Foreign exchange differences and other- ( 43)- ( 43)Balance as at 31 December 2018- 440 130 - 440 130 Amortization for the period- 1 254 - 1 254 Disposals / write-offs- ( 7 460)- ( 7 460)Foreign exchange differences and other- ( 1 892)- ( 1 892)Balance as at 31 December 2019- 432 032 - 432 032 ImpairmentBalance as at 31 December 2017 250 561 - - 250 561 Balance as at 31 December 2018 250 561 - - 250 561 Impairment losses 443 - - 443 Reversal of impairment losses( 234 575)- - ( 234 575)Foreign exchange changes and other( 2 521)- - ( 2 521)Balance as at 31 December 2019 13 908 - - 13 908 Net balance at 31 December 2019- 8 914 17 464 26 378 Net balance at 31 December 2018 443 2 364 2 618 5 425 (a) Includes 4 971 thousands of Euros of discontinued investment projects that were allocated to costs.(in thousands of Euros)31.12.201931.12.2018SubsidiariesGNB Vida- 234 575 Imbassaí13 526 13 526 ES Gestion - 2 460 Other 382 443 13 908 251 004 Impairment lossesGNB Vida- (234 575)Imbassaí(13 526)(13 526)ES Gestion - (2 460)Other( 382)- (13 908)(250 561)- 443 GNB Vida In 2017, the Group launched an organised sale process of up to 100% of GNB Vida’s share capital and as at 31 December 2017 all the assets and liabilities of the Company started to be presented as a discontinued operation, in a specific asset and liability line (see Note 29), being valued at the lowest between the accounting value or the fair value net of cost of sale. Thus, contrary to what happened in 31 December 2016, when the Bank used for the purposes of the Goodwill annual impairment test the above-mentioned independent valuation, in order to determine the fair value in 31 December 2017, the Bank used the indicative values of the non-binding proposals received at the end of 2017 for the purchase of this Company. On 12 September 2018 a purchase and sale agreement for the share capital of GNB Vida was signed with Bankers Insurance Holdings, SA, a company of the Global Bankers Insurance Group, LLC. The derecognition of this participation occurred in September 2019, after the necessary regulatory authorizations (see Note 29). NOTE 27 – INCOME TAXES NOVO BANCO and its subsidiaries and associated companies located in Portugal are subject, individually, to taxation in accordance with the Corporate Income Tax (IRC) Code. As a result, deferred taxes are recorded depending on the temporary differences between accounting and tax income relevant for IRC purposes, whenever such temporary differences are to be reverted in the future. The income taxes correspond to the value determined of taxable income (if applicable) of the period, using the overall Corporate Income Tax (IRC) at the general rate of 21% and autonomous taxations. Corporate income taxes (current or deferred) are recognised in the income statement except when the underlying transactions or items to which they are related have been reflected under equity captions (e.g. revaluation of financial assets at a fair value through other comprehensive income). In these situations, the corresponding tax is also charged to equity, not affecting the net profit / (loss) for the year. Deferred taxes are calculated based on the tax rates expected to be in force at the temporary differences’ reversal date, which correspond to the rates enacted or substantively enacted at the balance sheet date. Thus, at 31 December 2019 the deferred tax related to temporary differences was determined based on an aggregate rate of 31%, resulting from the sum of the general IRC rate (21%), the Municipal Surcharge of 1.5% and an average rate of State Surcharge of 8.5%. On 4th September 2019, Law No. 98/2019 was published, which amended the IRC Code on the tax treatment of credit institutions' impairments, creating rules applicable to impairment losses recorded in the tax periods beginning before 1 January 2019, not yet accepted for tax purposes. This Law established a transition period for the aforementioned tax regime, which allows taxpayers in the five tax periods beginning on or after 1 January 2019, to continue to apply the tax regime in force before publication of this law, except if they perform the exercise of opt in until the end of October of each tax period of the adaptation regime. The IRC payment declarations are subject to inspection and possible adjustment by the Tax Authorities for a period of four years or during the period in which it is possible to deduct tax losses or tax credits (up to a maximum of twelve years, depending on the year of determination). Thus, possible additional tax assessments may take place due essentially to different interpretations of tax legislation. However, Management believes that, in the context of the consolidated financial statements, there will be no additional charges of significant value. NOVO BANCO | 2019 ANNUAL REPORT | 183 In 2019 and 2018, NOVO BANCO Group recorded deferred tax assets associated with impairments not accepted for tax purposes for credit operations, which have already been written off, considering the expectation that these will contribute to a taxable profit in the periods taxation in which the conditions required for tax deductibility are met. Pursuant to Law No. 55-A/2010, of 31 December, a Bank Levy was established, which is levied on the average annual liabilities recorded on the balance sheet net of own funds and of deposits covered by the guarantee of the Deposit Guarantee Fund and on the notional amount of derivative financial instruments. The Bank Levy is not eligible as a tax cost, and the respective regime has been extended. As at 31 December 2019, NOVO BANCO Group recognised Banking Levy charges as a cost in the amount of Euro 27 091 thousand (31 December 2018: Euro 27 276 thousand). The cost recognised as at 31 December 2019 has been calculated and paid based on the maximum rate of 0.110% levied on the average annual liabilities recorded on the balance sheet, net of own funds and deposits covered by the guarantee of the Deposit Guarantee Fund, approved by Law No. 7-A/2016, of 30 March and by Ordinance No. 165-A/2016, of 14 June. The deferred tax assets and liabilities recognized in the balance sheet as at 31 December 2019 and 2018 may be analysed as follows: The deferred tax assets and liabilities recognized in the balance sheet in this period are as follows: The changes occurred in the deferred tax captions are as follows: NOVO BANCO | 2019 ANNUAL REPORT | 184 (in thousands of Euros)AssetsLiabilitiesAssetsLiabilitiesCurrent tax 1 628 11 873 6 689 12 050 Corporate tax recoverable 802 7 865 2 790 7 249 Other 826 4 008 3 899 4 801 Deferred tax 898 467 6 107 1 196 525 6 403 900 095 17 980 1 203 214 18 453 31.12.201931.12.2018(in thousands of Euros)AssetsLiabilitiesNet31.12.201931.12.201831.12.201931.12.201831.12.201931.12.2018Financial instruments 54 531 57 571 ( 137 302)( 32 502)( 82 771) 25 069 Impairment losses on loans and advances to customers 906 917 907 482 - - 906 917 907 482 Other tangible assets- - ( 8 377)( 8 552)( 8 377)( 8 552)Provisions 48 560 81 815 - - 48 560 81 815 Pensions 27 375 37 760 - - 27 375 37 760 Long-term service bonuses 23 23 - - 23 23 Debt securities issued- 8 357 - - - 8 357 Other 5 364 5 677 ( 5 493)( 6 403)( 129)( 726)Tax losses carried forward 762 138 894 - - 762 138 894 Deferred tax asset / (liability)1 043 532 1 237 579 ( 151 172)( 47 457) 892 360 1 190 122 Asset / liability set-off for deferred tax purposes ( 145 065)( 41 054) 145 065 41 054 - - Net Deferred tax asset / (liability) 898 467 1 196 525 ( 6 107)( 6 403) 892 360 1 190 122 (in thousands of Euros)31.12.201931.12.2018Balance at the beginning of the exercise1 190 122 1 957 824 Recognised in Results for the exercise( 36 965)( 658 917)Recognised in Fair value reserves( 105 943) 81 127 Recognised in Other reserves( 74)( 74)Impact of the transition to IFRS 9 (in other reserves) -( 47 993)Conversion of Deferred taxes into Tax credits( 145 899)( 152 478)Foreign exchange differences and other( 8 882) 10 633 Balance at the end of the exercise (Assets / (Liabilities)) 892 360 1 190 122 The current and deferred taxes recognised in the income statement and in reserves, in 2019 and 2018, had the following origins: The reconciliation of the corporate income tax rate, for the portion recognised in the income statement, may be analysed as follows: Deferred tax assets are recognised to the extent it is probable that taxable profits will be available allowing for the utilization of the deductible temporary differences. The Group has evaluated the recoverability of the deferred tax assets considering its expectations of future taxable profits until 2028. The recoverable deferred tax assets covered by the Special Regime applicable to Deferred Tax Assets is not dependent on the generation of future taxable income. The assessment of the recoverability of the deferred tax assets is made annually. With reference to 31 December 2019, exercise was made based on the business plan for the period 2019-2022. This evaluation led the Bank to the annulment of deferred tax assets generated by tax losses recognized in previous years in the amount during the last quarter of 2019 in the amount of Euro 138 030 thousand. The reduction in the Group´s capacity to recover the deferred tax assets generated from tax liabilities, which was the reason for the abovementioned write down at the end of 2019, when compared to the amount estimated by the Executive Board of Directors at the end of 2018, is due, with the commitments between the Portuguese State and Directorate-General for Competition of the European Commission (“DGCOMP”), reviewed upon the partial sale of NOVO BANCO concluded by the end of October 2017 and formally NOVO BANCO | 2019 ANNUAL REPORT | 185 (in thousands of Euros)Recognised in the income statementRecognised in reservesRecognised in the income statementRecognised in reservesFinancial instruments 1 897 105 943 50 554 ( 84 254)Impairment losses on loans and advances to customers( 135 968)- 382 488 - Other tangible assets( 175)- ( 183)- Investments in subsidiaries and associated companies- - ( 1 058)- Provisions 33 255 - ( 9 708)- Pensions 944 74 ( 17 694) 74 Long-term service bonuses- - ( 1)- Debt securities issued- - 392 - Other( 1 120)- 2 968 - Tax losses carried forward 138 132 - 251 159 - Deferred taxes 36 965 106 017 658 917 ( 84 180)Current taxes 8 804 ( 74) 8 790 254 Total tax recognised (income) / (expense) 45 769 105 943 667 707 ( 83 926)31.12.201931.12.2018(in thousands of Euros)Income before tax (a)(1 020 696)( 740 280)Tax rate of NOVO BANCO21.021.0Income tax calculated based on the tax rate of NOVO BANCO( 214 346)( 155 459)Tax-exempt dividends0.2( 1 759)0.3( 2 106)Impairment on investments in subsidiaries or associated companies subject to Participation Exemption(2.2) 22 788 (2.6) 19 463 Rate differential on the generation / reversal of timing differences(3.8) 38 344 (4.4) 32 363 Profits / losses in units with a more favorable tax regime(0.1) 592 1.1( 8 211)Taxes of Bank Branches and tax withheld abroad(0.3) 3 391 (0.8) 5 580 Impairments and provisions for loans22.1( 225 299)(34.4) 254 374 Impairments for stocks(0.1) 922 (3.3) 24 491 Provisions for other risks, costs and contingencies0.6( 6 264)0.7( 4 849)Annulment of tax losses carried forward(13.5) 138 030 (33.9) 251 000 Share of profits / (losses) of associated companies(0.0) 426 0.2( 1 604)Deffered tax assets not recognized under tax losses for the exercise(24.9) 254 300 (28.3) 209 708 Other(3.4) 34 644 (34.1) 42 957 Total tax recognized(4.5) 45 769 (90.2) 667 707 (a) Includes the profit / (loss) of discontinued units31.12.201831.12.2019% Amount% Amount announced to the Bank in December 2017, and due to a higher level of conservatism on the Portuguese macroeconomic projections for the medium and long term, bearing in mind the challenges and difficulties faced by NOVO BANCO, as well as the current expectations for the reference rates in the medium term, in particular after the measures announced by the ECB in the summer of 2019. The plan incorporates also a greater focus on reducing non-performing assets, reflecting the requirements and commitments the Bank faces in the regulatory framework of the European Union, something that also contribute to this less favourable evolution when compared with the previous plan. In the evaluation of the expectation of future taxable income generation in Portugal for the purposes of the above recovery exercise, the following assumptions were also considered: - Growth of pre-tax income at a rate of 2.62% from 2022; - Significantly unfavourable evolution of net interest income in relation to the projections presented in the previous Medium-term Plan (PMP), especially due to the effect of the reduction in interest rate benchmarks, according to the current macroeconomic estimates; - Reduction of operating costs, reflecting the favourable effect of the decreases in the number of employees and branches and, generally, of the simplification and increased process efficiency; and - Increase in credit impairment in line with the evolution of the Group's activity and based on the macroeconomic projections, especially bearing in mind the significant effort made in the last years in the provisioning of the loan portfolio. Special Regime applicable to Deferred Tax Assets During 2014, NOVO BANCO adhered to the Special Regime applicable to deferred tax assets, after a favourable decision of the Shareholders General Meeting. The Special Regime applicable to Deferred Tax Assets approved by Law No. 61/2014, of 26 August, covers deferred tax assets resulting from non-deduction of expenses and negative equity changes related to impairment losses on credit and with post-employment or long-term employee benefits. The changes to the mentioned above regime, introduced by Law No. 23/2016, of August 19, limited the temporal application of the above mentioned negative expenses and equity variations, accounted for in the tax periods beginning on or after 1January 2016, as well as the associated deferred taxes. Thus, the deferred taxes covered by this special regime correspond only to expenses and negative equity variations calculated up to 31 December 2015. Deferred tax assets covered by the above mentioned regime are convertible into tax credits when the taxpayer records a negative net result in the respective tax period, or in case of liquidation by voluntary dissolution or insolvency decreed by court decision. To convert to a tax credit (other than by liquidation or insolvency), a special reserve should be created for the amount of the respective tax credit increased by 10%. The exercise of conversion rights results in the capital increase of the taxable person by incorporation of the special reserve and issuance of new common shares. This special reserve may not be distributed. NOVO BANCO | 2019 ANNUAL REPORT | 186 Deferred tax assets recorded by NOVO BANCO and considered eligible the special regime at 31 December 2019 and 2018, are as follows: Following the determination of a negative net income for the years between 2015 and 2019, the deferred tax assets converted or estimated to be converted by reference to the deferred tax assets eligible at the balance sheet date are as follows: As a result of Law No. 61/2014, the amount of deferred tax assets to be converted into a tax credit and the constitution of the special reserve shall be subject to certification by a statutory auditor, as well as to confirmation by the Tax and Customs Authority, within the scope of the review procedures for the assessment of the taxable income for the relevant tax periods. NOTE 28 – OTHER ASSETS As at 31 December 2019 and 2018, the caption Other assets is analysed as follows: The caption Collateral deposits placed includes, amongst others, deposits made by the Group as collateral in order to celebrate certain derivative contracts on organised markets (margin accounts) and on over the counter markets (Credit Support Annex – CSA). NOVO BANCO | 2019 ANNUAL REPORT | 187 (in thousands of Euros)31.12.201931.12.2018Credit impairment 516 616 598 900 Employees' benefits 268 9 748 516 884 608 648 (in thousands of Euros)2018201720162015Tax credit 161 974 136 403 99 474 153 555 (in thousands of Euros)31.12.201931.12.2018Collateral deposits placed 807 810 680 685 Derivative products 631 994 468 442 Collateral CLEARNET and VISA 33 175 33 350 Collateral deposits relating to reinsurance operations 141 697 167 967 Other collateral deposits 944 10 926 Recoverable government subsidies on mortgage loans 4 663 1 915 Public sector 459 752 325 968 Contingent Capital Agreement1 037 013 1 149 295 Other debtors 611 802 849 835 Income receivable 36 319 11 211 Deferred costs 56 910 63 205 Precious metals, numismatics, medal collection and other liquid assets 9 555 9 384 Real estate properties a) 977 465 1 551 977 Equipment a) 3 130 22 157 Stock exchange transactions pending settlement - 2 010 Other assets 138 881 194 963 4 143 300 4 862 605 Impairment lossesReal estate properties a)( 542 589)( 615 157)Equipment a)( 2 404)( 19 479)Other debtors - Shareholder loans, supplementary capital contributions( 126 452)( 141 605)Other( 93 363)( 90 107)( 764 808)( 866 348)3 378 492 3 996 257 a) Real estate properties and equipment received in settlement of loans and discontinued The caption Other debtors includes, amongst others: - Euro 14.7 million in shareholder loans and supplementary capital contributions granted to entities within the scope of the Group’s venture capital business which are entirely provisioned (31 December 2018: Euro 21.4 million, entirely provisioned); - Euro 111.6 million of shareholder loans and supplementary capital contributions resulting from the assignment of loans and advances which are entirely provisioned (31 December 2018: Euro 112.8 million, entirely provisioned), and - Euro 246.7 million receivable in relation to the sale operation of non-performing loans (Project NATA I: Euro 135.9 million and NATA II: Euro 110.8 million) (31 December 2018: Euro 435.5 million in relation to NATA I) (see Note 42); - Euro 29.0 million receivable in relation to the sale operation of real estate assets in 2019 (denominated “Sertorius Project”); and - Euro 12.4 million receivable in relation to the sale operation of real estate assets and non-performing loans in the Spanish Branch in 2019 (denominated “Albatros Project”). As at 31 December 2019, the caption Deferred costs includes the amount of Euro 43 836 thousand (31 December 2018: Euro 47 299 thousand) related to the difference between the nominal amount of the loans and advances granted to Group employees under the Collective Labour Agreement (ACT) for the banking sector and their respective fair value at grant date, calculated in accordance with IFRS 9. This amount is charged to the income statement under staff costs over the lower of the remaining period to the maturity of the loan granted and the estimated remaining years of service life of the employee. The captions of Real estate properties and Equipment relate to foreclosed assets through the recovery of loans and advances and to discontinued facilities, for which the Group has the objective of immediate sale. The Group implemented a plan aimed at the immediate sale of all real estate property recorded in Other assets, continuing its efforts to meet the sales program established, of which we highlight the following (i) the existence of a web site specifically aimed at the sale of real estate properties; (ii) the development and participation in real estate events both in Portugal and abroad; (iii) the establishment of protocols with several real estate agents; and (iv) the regular sponsorship of auctions. Despite its intention to sell these assets, the Group regularly requests the Bank of Portugal’s authorization, under article 114 of RGICSF, to extend the period the Group has to hold foreclosed assets. Stock exchange transactions pending settlement refer to transactions of securities, recorded at the trade date and pending settlement, in accordance with the accounting policy described in Note 2.5. In the financial year of 2019, the Group recorded impacts related to the sale of a portfolio of real estate assets (Project Sertorius) and to a sale of a portfolio of non-performing loans and real estate assets (Project Albatros). During 2018, the Group entered into a promissory contract to buy and sell a portfolio of real estate assets, called Project Viriato. The details of these operations can be found in Note 42. NOVO BANCO | 2019 ANNUAL REPORT | 188 The changes occurred in impairment losses are presented as follows: The changes occurred in the real estate properties were as follows: The sales occured during 2019 include the operation Project Sertorius (in the year of 2018 include the operation Project Viriato) (See Note 42). As at 31 December 2019 and 2018, the detail of the real estate properties included in Other assets, by type, is as follows: NOVO BANCO | 2019 ANNUAL REPORT | 189 (in thousands of Euros)31.12.201931.12.2018Balance at the beginning of the exercise 866 348 862 327 Allocation for the exercise 309 572 270 009 Utilisation during the exercise( 370 341)( 261 036)Write-back for the exercise( 28 259)( 25 209)Foreign exchange differences and other( 12 512) 20 257 Balance at the end of the exercise 764 808 866 348 (in thousands of Euros)31.12.201931.12.2018Balance at the beginning of the exercise1 551 977 1 989 477 Additions 86 811 178 691 Sales( 657 235)( 610 135)Other movements( 4 088)( 6 056)Balance at the end of the exercise 977 465 1 551 977 (in thousands of Euros)Number of propertiesGross value ImpairmentNet book valueFair value of assets (b)LandUrban 594 146 600 71 049 75 551 151 269 Rural 246 216 860 140 986 75 874 79 484 840 363 460 212 035 151 425 230 753 Buildings under constructionCommercial 2 36 4 32 59 Residential 3 580 413 167 730 Other 2 1 668 830 838 838 7 2 284 1 247 1 037 1 627 Buildings constructedCommercial 493 259 668 169 999 89 669 101 275 Residential 2 177 185 915 52 122 133 793 156 752 Other 308 142 068 59 300 82 768 86 686 2 978 587 651 281 421 306 230 344 713 Other (a) 5 24 070 47 886 ( 23 816)( 23 815) 3 830 977 465 542 589 434 876 553 278 (a) The net book value of this caption is negative due to the imputation of costs incurred with the sale of real estate properties(b) Determined in accordance with accounting policy mentioned in Note 2.1131.12.2019(in thousands of Euros)Number of propertiesGross value ImpairmentNet book valueFair value of assets (b)LandUrban 1 163 314 298 114 032 200 266 210 864 Rural 396 307 500 140 028 167 472 172 319 1 559 621 798 254 060 367 738 383 183 Buildings under constructionCommercial 3 115 14 101 128 Residential 5 1 195 449 746 944 Other 2 1 668 487 1 181 1 181 10 2 978 950 2 028 2 253 Buildings constructedCommercial 829 321 748 177 109 144 639 163 375 Residential 2 965 309 224 61 583 247 641 271 307 Other 575 272 666 82 591 190 075 210 446 4 369 903 638 321 283 582 355 645 128 Other (a) 24 23 563 38 864 ( 15 301)( 14 195) 5 962 1 551 977 615 157 936 820 1 016 369 (a) The net book value of this caption is negative due to the imputation of costs incurred with the sale of real estate properties(b) Determined in accordance with accounting policy mentioned in Note 2.1131.12.2018 The detail of the real estate properties included in Other assets, by ageing, is as follows: As at 31 December 2019, the amount related to discontinued facilities included in the caption Real estate properties amounts to Euro 16 569 thousand (31 December 2018: Euro 22 488 thousand), having the Group recorded impairment losses for these assets in the total amount of Euro 8 079 thousand (31 December 2018: Euro 9 494 thousand). NOTE 29 – NON-CURRENT ASSETS AND DISPOSAL GROUPS FOR SALE CLASSIFIED AS HELD FOR SALE AND LIABILITIES INCLUDED IN DISPOSAL GROUPS CLASSIFIED AS HELD FOR SALE Under IFRS 5 - Non-current assets held for sale and discontinued operations, a group of directly associated assets and liabilities are reclassified for discontinued operations if their balance sheet value is recoverable through a sale transaction, which must be ready for immediate sale. This category includes the subsidiaries and associated companies in the Group's consolidation perimeter, but which the Bank intends to sell and are actively in the process of selling with the net value of assets and liabilities measured at the lower of book value or fair value net of costs to sell. NOVO BANCO | 2019 ANNUAL REPORT | 190 (in thousands of Euros)Up to 1 year1 to 2.5 years2.5 to 5 yearsMore than 5 yearsTotal net book valueLandUrban 2 359 3 397 43 946 25 849 75 551 Rural 7 698 13 493 7 474 47 209 75 874 10 057 16 890 51 420 73 058 151 425 Buildings under constructionCommercial- - 29 3 32 Residential 68 - - 99 167 Other- - 825 13 838 68 - 854 115 1 037 Buildings constructedCommercial( 2 481) 5 661 9 698 76 791 89 669 Residential 8 845 33 882 33 188 57 878 133 793 Other 8 887 10 398 11 180 52 303 82 768 15 251 49 941 54 066 186 972 306 230 Other (a)( 23 816)- - - ( 23 816) 1 560 66 831 106 340 260 145 434 876 (a) The net book value of this caption is negative due to the imputation of costs incurred with the sale of real estate properties31.12.2019(in thousands of Euros)Up to 1 year1 to 2.5 years2.5 to 5 yearsMore than 5 yearsTotal net book valueLandUrban 23 428 52 122 25 092 99 624 200 266 Rural 13 627 24 819 48 303 80 723 167 472 37 055 76 941 73 395 180 347 367 738 Buildings under constructionCommercial- - 98 3 101 Residential- 53 108 585 746 Other- - 1 168 13 1 181 - 53 1 374 601 2 028 Buildings constructedCommercial 9 021 20 914 20 322 94 382 144 639 Residential 44 179 78 330 55 871 69 261 247 641 Other 22 996 26 663 41 171 99 245 190 075 76 196 125 907 117 364 262 888 582 355 Other (a)( 15 236)- - ( 65)( 15 301) 98 015 202 901 192 133 443 771 936 820 (a) The net book value of this caption is negative due to the imputation of costs incurred with the sale of real estate properties31.12.2018 The breakdown of Non-current assets and liabilities held for sale and discontinued operations on 31 December 2019 and 2018, net of consolidation adjustments, is as follows: As at 31 December 2019 and 2018, the results from discontinued operations is as follows: The impairment movement for non-current Assets and Liabilities for disposal classified as held for sale is as follows: NOVO BANCO | 2019 ANNUAL REPORT | 191 (in thousands of Euros)31.12.201931.12.2018Assets of discontinued operationsBanco Internacional de Cabo Verde 1 299 1 299 Banco Well Link (former NB Ásia) 4 121 4 013 GNB Vida- 4 286 538 Banco Delle Tre Venezie 9 633 9 633 Económico FI 3 060 3 060 Greendraive 856 3 374 NOVO AF 2 770 - GNB Seguros 8 209 - ESEGUR 14 499 - Multipessoal 2 641 - Nueva Pescanova 1 470 1 888 48 558 4 309 805 Impairment lossesGNB Vida- ( 210 576)Banco Delle Tre Venezie( 7 333)( 3 608)Greendraive( 856)( 3 374)Económico FI( 114)- Other- ( 1)( 8 303)( 217 559) 40 255 4 092 246 Liabilities of discontinued operationsGNB Vida- 4 434 528 Greendraive 982 3 473 Novo AF 960 - 1 942 4 438 001 (in thousands of Euros)31.12.201931.12.2018Profit / (loss) generated by discontinued operationsGreendraive( 761)( 342)NOVO AF( 392)- GNB Seguros 1 533 - ESEGUR 487 - Multipessoal 201 - Banco Internacional de Cabo Verde- ( 2 207)Quinta dos Cónegos- 2 GNB Vida- ( 38 540)BES Vénétie- 1 268 1 068 ( 39 819)(in thousands of Euros)31.12.201931.12.2018Balance at the beginning of the exercise 217 559 396 146 Allocation / reversals for the exercise 5 403 ( 72 092)Utilizations( 214 658)( 106 496)Exchange differences and other( 1) 1 Balance at the end of the exercise 8 303 217 559 The impairment determined as at 31 December 2018 of GNB Vida is presented as follows: During 2019, the associates GNB Seguros, Esegur, Multipessoal and Novo AF were transferred to non-current assets held for sale because they are in active sale processes with the objective of their sale in the short term. GNB Vida As consequence of the commitments made between the Portuguese State and European Commission Competition Authority communicated to the Group by the end of 2017, after the completion of Bank’s sale process, the group launched in 2017 an organized sale process of 100% of the share capital of GNB Vida. Therefore, this entity was considered as a discontinued operation on 31 December 2017. On September 12, 2018, the Bank entered into a purchase and sale agreement of the entire share capital of GNB Vida, with Bankers Insurance Holdings, S.A., a company of the Global Bankers Insurance Group, LLC. The derecognition of this investment occurred in September 2019, after obtaining the necessary regulatory authorizations (see Note 42). BES Vénétie As a result of the commitments assumed between the Portuguese State and the European Commission Competition Authority, the shareholding held in BES Vénétie was considered as non-strategic. The Bank classified this shareholding as a discontinued operation in 2016, given the advanced state of the negotiation sale process in that financial year. The fair value presented of Euro 48 million, resulting from an impairment loss of Euro 103 million registered in 2017, was based on a proposal received for the acquisition of this entity. During May 2018, NOVO BANCO, S.A. Group celebrated with Promontoria MMB SAS, a company incorporated in France and subsidiary of Cerberus Capital Management, L.P. a sale and purchase agreement for the share capital of Banque Espírito Santo et de la Vénétie, S.A. and related assets. The conclusion of the transaction was dependent on the required approvals, a condition that occurred on 28 December 2018 (date of closing of the transaction). The financial statements as at 31 December 2019 and 2018 of the discontinued units, when applicable, are presented in the Note 43. NOVO BANCO | 2019 ANNUAL REPORT | 192 (in thousands of Euros)GNB VidaFair value net of selling costs 175 000 Net equity 385 576 Impairment( 210 576)31.12.2018 NOTE 30 – FINANCIAL LIABILITIES DESIGNATED AT FAIR VALUE THROUGH PROFIT OR LOSS AND FINANCIAL LIABILITIES MEASURED AT AMORTISED COST This caption as at 31 December 2019 and 2018 is analysed as follows: Deposits from banks The balance of Deposits from banks is composed, as to its nature, as follows: As at 31 December 2019, the caption Other funds from the European System of Central Banks includes Euro 6 087 million, covered by Group financial assets pledged as collateral (31 December 2018: Euro 6 410 million) (see Note 35). The balance of the caption Repurchase agreements operations corresponds to the sale of securities with purchasing agreement (repos), recorded in accordance with the accounting policy mentioned in Note 2.6. NOVO BANCO | 2019 ANNUAL REPORT | 193 (in tousands of Euros)Fair value through profit and lossMeasured at amortised costFair value changes *TotalDeposits from banks- 9 849 623 - 9 849 623 Due to customers- 28 400 127 - 28 400 127 Debt securities issued, subordinated debt and liabilities associated to transferred assets 102 012 1 065 211 - 1 167 223 Other financial liabilities- 358 688 - 358 688 102 012 39 673 649 - 39 775 661 * Fair value changes of the elements covered by the interest rate hedge portfolio 31.12.2019(in tousands of Euros)Fair value through profit and lossMeasured at amortised costFair value changes *TotalDeposits from banks- 8 355 560 - 8 355 560 Due to customers- 28 695 268 - 28 695 268 Debt securities issued, subordinated debt and liabilities associated to transferred assets 96 762 1 051 843 - 1 148 605 Other financial liabilities- 233 826 - 233 826 96 762 38 336 497 - 38 433 259 * Fair value changes of the elements covered by the interest rate hedge portfolio 31.12.2018(in thousands of Euros)31.12.201931.12.2018Deposits from Central BanksFrom the European System of Central BanksDeposits 36 176 461 Other funds 6 087 000 6 410 000 6 123 176 6 410 461 6 123 176 6 410 461 Deposits from credit institutionsDomesticDeposits 105 183 115 324 Other funds 12 827 41 890 118 010 157 214 ForeignDeposits 780 583 833 858 Loans 634 557 660 338 Operations with repurchase agreements 2 168 488 237 178 Other resources 24 809 56 511 3 608 437 1 787 885 3 726 447 1 945 099 9 849 623 8 355 560 As at 31 December 2019 and 2018, the analysis of Deposits from banks, by maturity, is as follows: The analysis of Repurchase agreements operations, by residual maturity, is as follows: Due to customers The balance of Deposits due to costumers is composed, as follows: As at 31 December 2019 and 2018, the caption Due to customers, by residual maturity periods, is as follows: NOVO BANCO | 2019 ANNUAL REPORT | 194 (in thousands of Euros)31.12.201931.12.2018InternationalFrom 3 months to 1 year 1 306 243 237 178 From 1 to 5 years 862 245 - 2 168 488 237 178 (in thousands of Euros)31.12.201931.12.2018Repayable on demand 12 159 032 11 023 476 Term depositsUp to 3 months 7 252 713 7 612 614 3 months to 1 year 5 930 567 6 898 305 1 to 5 years 2 598 190 2 691 429 More than 5 years 459 625 469 444 16 241 095 17 671 792 28 400 127 28 695 268 Debt Securities issued, subordinated debt and financial liabilities associated to transferred assets This caption has the following breakdown: Under the Covered Bonds Program (Programa de Emissão de Obrigações Hipotecárias), which has a maximum amount of Euro 10 000 million, the Group issued covered bonds which, on 31 December 2019, amount to Euro 5 500 million (31 December 2018: Euro 4 200 million), being these covered bonds totally repurchased by the Group. The main characteristics of the outstanding issues as at 31 December 2019 and 2018 are as follows: These covered bonds are guaranteed by a cover asset pool, comprising mortgage and other assets, segregated in NOVO BANCO Group’s accounts as autonomous patrimony and over which the holders of the relevant covered debt securities have a special creditor privilege. The conditions of the covered debt securities issues are framed in Decree-Law No. 59/2006, and in Notices No. 5, 6, 7 and 8 and Instruction No. 13 of Bank of Portugal. As at 31 December 2019, the assets that collateralize these covered debt securities amount to Euro 6 076.8 million (31 December 2018: Euro 4 617.4 million) (see Note 21). NOVO BANCO | 2019 ANNUAL REPORT | 195 (in thousands of Euros)31.12.201931.12.2018Fair value through profit and lossMeasured at amortised costTotalFair value through profit and lossMeasured at amortised costTotalDebt securities issuedEuro Medium Term Notes (EMTN) 102 012 559 837 661 849 96 762 537 424 634 186 Bonds- 45 855 45 855 - 55 066 55 066 102 012 605 692 707 704 96 762 592 490 689 252 Subordinated debtBonds- 415 069 415 069 - 414 903 414 903 Financial liabilities associated to transferred assetsAsset lending operations- 44 450 44 450 - 44 450 44 450 102 012 1 065 211 1 167 223 96 762 1 051 843 1 148 605 (in thousands of Euros)Moody'sDBRSNB 2015 SR.1 1 000 000 - 07/10/201507/10/2021QuarterlyEuribor 3 Months + 0.25%XDUBA2ANB 2015 SR.2 1 000 000 - 07/10/201507/10/2019QuarterlyEuribor 3 Months + 0.25%XDUBA2ANB 2015 SR.3 1 000 000 - 07/10/201507/10/2020QuarterlyEuribor 3 Months + 0.25%XDUBA2ANB 2015 SR.4 700 000 - 07/10/201507/10/2022QuarterlyEuribor 3 Months + 0.25%XDUBA2ANB 2015 SR.5 500 000 - 22/12/201622/12/2023QuarterlyEuribor 3 Months + 0.25%XDUBA2ANB 2019 SR.6 750 000 - 10/12/201910/06/2023QuarterlyEuribor 3 Months + 0.25%XDUBA2ANB 2019 SR.7 550 000 - 10/12/201910/12/2024QuarterlyEuribor 3 Months + 0.25%XDUBA2A 5 500 000 - 31.12.2019DesignationNominal value (in thousands of Euros)Carrying book value (in thousands of Euros)Issue dateMaturity dateInterest paymentInterest RateMarketRating(in thousands of Euros)Moody'sDBRSNB 2015 SR.1 1 000 000 - 07/10/201507/10/2021QuarterlyEuribor 3 Months + 0.25%XDUBA3ANB 2015 SR.2 1 000 000 - 07/10/201507/10/2019QuarterlyEuribor 3 Months + 0.25%XDUBA3ANB 2015 SR.3 1 000 000 - 07/10/201507/10/2020QuarterlyEuribor 3 Months + 0.25%XDUBA3ANB 2015 SR.4 700 000 - 07/10/201507/10/2022QuarterlyEuribor 3 Months + 0.25%XDUBA3ANB 2015 SR.5 500 000 - 22/12/201622/12/2023QuarterlyEuribor 3 Months + 0.25%XDUBA3A 4 200 000 - 31.12.2018DesignationNominal value (in thousands of Euros)Carrying book value (in thousands of Euros)Issue dateMaturity dateInterest paymentInterest RateMarketRating The changes in the financial years of 2019 and 2018 in Debt securities issued, subordinated debt and financial liabilities associated to transferred assets was as follows: On 29 June 2018, NOVO BANCO issued Euro 400 million of instruments of subordinated liabilities. This issuance was carried out jointly with tender and exchange offers addressed to holders of senior bonds of NOVO BANCO Group, having been prioritized the allocation of the new Tier 2 issuance to the investors participating in the exchange offer (65%), against the allocation to new investors (35%). The tender and exchange offers allowed the extinction of a balance sheet value of Euro 250.7 million of senior bonds. In accordance with the accounting policy mentioned in the Note 2.7, in case of purchases of securities representatives of the Bank’s liabilities, these securities are written off from liabilities and the difference between the purchase price and the respective book value is recognised in the income statement. Following the debt exchange operation addressed to holders of senior bonds of NOVO BANCO Group by subordinated liabilities (LME) and purchases made, the Group recognized, in the first half of 2018, a net loss of Euro 86.2 million from which Euro 81.8 million are related to operations of debt exchange by subordinated liabilities. During the financial year of 2019 the Group recognised a gain of Euro 0.5 million. As at 31 December 2019 and 2018, the analysis of Debt securities issued and subordinated debt, by maturity, is as follows: NOVO BANCO | 2019 ANNUAL REPORT | 196 (in thousands of Euros)Balance as at 31.12.2018IssuesRedemptionsLMENet purchasesOther movements a)Balance as at 31.12.2019Debt securities issuedEuro Medium Term Notes (EMTN) 634 186 - - - - 27 663 661 849 Bonds 55 066 - ( 9 210)- - ( 1) 45 855 Mortgage bonds- 1 300 000 - - (1 300 000)- - 689 252 1 300 000 ( 9 210)- (1 300 000) 27 662 707 704 Subordinated debtBonds 414 903 - - - - 166 415 069 Financial liabilities associated to transferred assetsAsset lending operations 44 450 - - - - - 44 450 1 148 605 1 300 000 ( 9 210)- (1 300 000) 27 828 1 167 223 a) Other movements include accrued interest, corrections for hedging operations, corrections of fair value and exchange rate changes.(in thousands of Euros)Balance as at 31.12.2017IssuesRedemptions b)LMENet purchasesOther movements a)Balance as at 31.12.2018Debt securities issuedEuro Medium Term Notes (EMTN) 864 325 - - ( 250 717)( 355) 20 933 634 186 Bonds 352 455 - ( 180 575)- ( 116 735)( 79) 55 066 1 216 780 - ( 180 575)( 250 717)( 117 090) 20 854 689 252 Subordinated debtBonds- 141 200 - 258 800 - 14 903 414 903 Financial liabilities associated to transferred assetsAsset lending operations 44 450 - - - - - 44 450 1 261 230 141 200 ( 180 575) 8 083 ( 117 090) 35 757 1 148 605 a) Other movements include accrued interest, corrections for hedging operations, corrections of fair value and exchange rate changes.b) Throughout 2018 the totality of Class A of Lusitano SME No. 3 emission was reimbursed in advance.(in thousands of Euros)31.12.201931.12.2018At fair value through profit and lossMeasured at amortised costTotalAt fair value through profit and lossMeasured at amortised costTotalDebt securities issued1 to 5 years- 2 237 2 237 - 2 218 2 218 More than 5 years 102 012 603 455 705 467 96 762 590 272 687 034 102 012 605 692 707 704 96 762 592 490 689 252 Subordinated debt1 to 5 years- 415 069 415 069 - 414 903 414 903 - 415 069 415 069 - 414 903 414 903 Financial liabilities associated to transferred assetsUndetermined maturity- 44 450 44 450 - 44 450 44 450 - 44 450 44 450 - 44 450 44 450 102 012 1 065 211 1 167 223 96 762 1 051 843 1 148 605 The main characteristics of these liabilities, as at 31 December 2019 and 2018, are as follows: As at 31 December 2019, this caption includes a balance sheet value of Euro 102 012 thousand of liabilities represented by securities recorded at fair value through profit or loss (31 December 2018: Euro 96 762 thousand) (see Note 39). This compares with Euro 104 699 thousand related to the amount to be repaid at the maturity date of this issue. The table below presents the fair value component attributable to the credit risk of the fair value through profit or loss: NOVO BANCO | 2019 ANNUAL REPORT | 197 (in thousands of Euros)EntityDescriptionCurrencyIssue dateCarrying Book valueMaturityInterest rateMarketBondsLusitano Mortgage nº 6 Lusitano Mortgage nr 6- Class AEUR2007 44 355 2031b)Euribor 3m + 0.40%IrelandLusitano Mortgage nº 6 Lusitano Mortgage nr 6- Class BEUR2007 1 500 2031b)Euribor 3m + 0.60%IrelandEuro Medium Term NotesNB (Luxemburgo Branch)BES Luxembourg 3.5% 02/01/43EUR2013 41 798 2043Fixed rate 3.5%XLUXNB (Luxemburgo Branch)BES Luxembourg 3.5% 23/01/43EUR2013 96 270 2043Fixed rate 3.5%XLUXNB (Luxemburgo Branch)BES Luxembourg 3.5% 19/02/2043EUR2013 62 461 2043Fixed rate 3.5%XLUXNB (Luxemburgo Branch)BES Luxembourg 3.5% 18/03/2043EUR2013 46 011 2043Fixed rate 3.5%XLUXNB (Luxemburgo Branch)BES Luxembourg ZCEUR2013 34 344 2048Zero CouponXLUXNB (Luxemburgo Branch)Banco Esp San Lux ZC 12/02/49EUR2014 42 861 2049Zero CouponXLUXNB (Luxemburgo Branch)Banco Esp San Lux ZC 19/02/49EUR2014 37 674 2049Zero CouponXLUXNB (Luxemburgo Branch)Banco Esp San Lux ZC 27/02/51EUR2014 32 615 2051Zero CouponXLUXNB (Luxemburgo Branch)BES Luxembourg ZC 06/03/2051EUR2014 14 236 2051Zero CouponXLUXNB (Luxemburgo Branch)BES Luxembourg ZC 03/04/48EUR2014 40 699 2048Zero CouponXLUXNB (Luxemburgo Branch)BES Luxembourg ZC 09/04/52EUR2014 36 317 2052Zero CouponXLUXNB (Luxemburgo Branch)BES Luxembourg ZC 16/04/46EUR2014 10 703 2046Zero CouponXLUXNB FinanceEMTN 40a)EUR2005 102 012 2035Indexed to swap 12mXLUXNB FinanceEMTN 56EUR2009 11 498 2043Zero CouponXLUXNB FinanceEMTN 57EUR2009 3 745 2044Zero CouponXLUXNB FinanceEMTN 58EUR2009 5 677 2045Zero CouponXLUXNB FinanceEMTN 59EUR2009 14 859 2042Zero CouponXLUXNB FinanceEMTN 60EUR2009 15 716 2040Zero CouponXLUXNB FinanceEMTN 61EUR2009 10 116 2041Zero CouponXLUXNB FinanceEMTN 114EUR2011 2 237 2021Fixed rate 6%XLUXSubordinated debtNOVO BANCONB 06/07/2028EUR2018 415 069 2023b)8.5%XDUB1 122 773 a) liabilities at fair value through profit and lossb) Date of the next call option31.12.2019(in thousands of Euros)EntityDescriptionCurrencyIssue dateCarrying Book valueMaturityInterest rateMarketBondsLusitano Mortgage nº 6 Lusitano Mortgage nr 6- Class AEUR2007 53 566 2031b)Euribor 3m + 0.40%IrelandLusitano Mortgage nº 6 Lusitano Mortgage nr 6- Class BEUR2007 1 500 2031b)Euribor 3m + 0.60%IrelandEuro Medium Term NotesNB (Luxemburgo Branch)BES Luxembourg 3.5% 02/01/43EUR2013 41 225 2043Fixed rate 3.5%XLUXNB (Luxemburgo Branch)BES Luxembourg 3.5% 23/01/43EUR2013 95 411 2043Fixed rate 3.5%XLUXNB (Luxemburgo Branch)BES Luxembourg 3.5% 19/02/2043EUR2013 61 704 2043Fixed rate 3.5%XLUXNB (Luxemburgo Branch)BES Luxembourg 3.5% 18/03/2043EUR2013 45 447 2043Fixed rate 3.5%XLUXNB (Luxemburgo Branch)BES Luxembourg ZCEUR2013 32 452 2048Zero CouponXLUXNB (Luxemburgo Branch)Banco Esp San Lux ZC 12/02/49EUR2014 40 223 2049Zero CouponXLUXNB (Luxemburgo Branch)Banco Esp San Lux ZC 19/02/49EUR2014 35 324 2049Zero CouponXLUXNB (Luxemburgo Branch)Banco Esp San Lux ZC 27/02/51EUR2014 30 550 2051Zero CouponXLUXNB (Luxemburgo Branch)BES Luxembourg ZC 06/03/2051EUR2014 13 329 2051Zero CouponXLUXNB (Luxemburgo Branch)BES Luxembourg ZC 03/04/48EUR2014 37 968 2048Zero CouponXLUXNB (Luxemburgo Branch)BES Luxembourg ZC 09/04/52EUR2014 34 169 2052Zero CouponXLUXNB (Luxemburgo Branch)BES Luxembourg ZC 16/04/46EUR2014 9 906 2046Zero CouponXLUXNB FinanceEMTN 40a)EUR2005 96 762 2035Indexed to swap 12mXLUXNB FinanceEMTN 56EUR2009 10 713 2043Zero CouponXLUXNB FinanceEMTN 57EUR2009 3 491 2044Zero CouponXLUXNB FinanceEMTN 58EUR2009 5 293 2045Zero CouponXLUXNB FinanceEMTN 59EUR2009 13 884 2042Zero CouponXLUXNB FinanceEMTN 60EUR2009 14 669 2040Zero CouponXLUXNB FinanceEMTN 61EUR2009 9 448 2041Zero CouponXLUXNB FinanceEMTN 114EUR2011 2 218 2021Fixed rate 6%XLUXSubordinated debtNOVO BANCONB 06/07/2028EUR2018 414 903 2023b)8.5%XDUB1 104 155 a) liabilities at fair value through profit and lossb) Date of the next call option31.12.2018 (in thousands Euros)31.12.201931.12.2018Fair value attributable to credit risk at the beginning of the exercise 50 806 77 529 Recognized in other comprehensive incomeChanges through other comprehensive income( 2 871) 1 202 Changes due to debt repurchases- ( 27 925)Fair value attributable to credit risk at the end of the exercise 47 935 50 806 The change in fair value attributable to changes in issuance credit risk is calculated using the credit spread observed in recent similar debt issues, adjusted for subsequent changes in the CDS credit spread of senior debt issued by Group entities. As of 1 January 2018, in accordance with IFRS 9, this liability component has been reflected in Other comprehensive income (see Note 34). The Group did not present capital or interest defaults on its debt issued in the financial years of 2019 and 2018. NOTE 31 – PROVISIONS As at 31 December 2019 and 2018, the caption Provisions presents the following changes: The changes in the caption Provisions for guarantees, are detailed as follows: The changes in the caption Provisions for commitments are detailed as follows: At the end of 2015, the Executive Board of Directors of NOVO BANCO presented to the European Commission a Restructuring Plan that was prepared in strict collaboration with Bank of Portugal and involved a set of NOVO BANCO | 2019 ANNUAL REPORT | 198 (in thousands of Euros)Restructuring provisionProvision for guarantees and commitmentsCommercial OffersProgramme of antecipated repayment of liabilitiesOther provisionsTotalBalance as at 31 December 2017 91 992 146 474 105 100 - 73 104 416 670 Impact of transition to IFRS 9- 4 471 - - - 4 471 Balance as at 1 January 2018 91 992 150 945 105 100 - 73 104 421 141 Allocation / (write-backs) for the period( 21 086) 26 189 ( 2 222) 182 800 53 189 238 870 Utilization during the period( 61 125)- ( 29 902)( 143 935)( 19 292)( 254 254)Foreign exchange differences and other- 12 527 ( 99)- 7 750 20 178 Balance as at 31 December 2018 9 781 189 661 72 877 38 865 114 751 425 935 Allocation / (write-backs) for the period 47 291 ( 60 776)( 1 366)( 1 172) 37 320 21 297 Utilization during the period( 33 052)- ( 29 937)( 37 694)( 22 188)( 122 871)Foreign exchange differences and other 24 ( 31 799)( 240) 1 15 470 ( 16 544)Balance as at 31 December 2019 24 044 97 086 41 334 - 145 353 307 817 (in thousands of Euros)Stage 1Stage 2Stage 3TotalBalance as at 31 December 2017 144 488 Impact of transition to IFRS 9 4 548 Balance as at 1 January 2018 14 196 7 948 126 892 149 036 Increases due to changes in credit risk 14 199 10 209 79 126 103 534 Decreases due to changes in credit risk( 2 100)( 11 963)( 63 675)( 77 738)Other movements 484 10 638 1 395 12 517 Balance as at 31 December 2018 26 779 16 832 143 738 187 349 New guarantees granted 312 6 729 37 973 45 014 Increases due to changes in credit risk( 2 511)( 7 710)( 96 409)( 106 630)Other movements( 21 331)( 1 753)( 8 715)( 31 799)Balance as at 31 December 2019 3 249 14 098 76 587 93 934 (in thousands of Euros)Stage 1Stage 2Stage 3TotalBalance as at 31 December 2017 1 986 Impact of transition to IFRS 9( 77)Balance as at 1 January 2018 1 328 581 - 1 909 Increases due to changes in credit risk 1 290 399 - 1 689 Decreases due to changes in credit risk( 666)( 626)( 4)( 1 296)Other movements( 85) 91 4 10 Balance as at 31 December 2018 1 867 445 - 2 312 Increases due to changes in credit risk 509 949 212 1 670 Decreases due to changes in credit risk( 432)( 183)( 215)( 830)Other movements 40 ( 43) 3 - Balance as at 31 December 2019 1 984 1 168 - 3 152 measures, highlighting the concentration of the retail and corporate banking activities in Portugal and Spain, the divestment in non-strategic assets and the reduction, in 2016, of Euro 150 million in recurring operating costs (excluding restructuring costs) associated with a decrease of 1 000 employees and a resizing of the distribution network to 550 branches. In the scope of IAS 37, during 2016 a provision for this restructuring was created in the amount of Euro 98.2 million, to cover the facilities’ closure costs and the employee downsizing. The restructuring plan was executed during 2016, and in 31 December 2016 the employees reduction goal was met, and the distribution network was reduced as well as the operational costs recorded a surpassing decrease. As at 31 December 2019, the provision booked in the balance sheet amounted to Euro 0.8 million. The goals agreed with the European Commission for 30 June 2017, included a Euro 230 million reduction on recurring operational costs (excluding restructuring costs) when compared to 2015. This cost reduction is due to a re-sizing to 5 908 employees at the Group level and the distribution network to 475 branches. In IAS 37 scope, in 2017 a provision for this restructure was created, in the amount of Euro 52.6 million, making up for the costs of shutting down facilities and reducing headcount. This new phase of the restructuring plan was executed, and as at 30 June 2017, the goal of downsizing employees and the distribution network was met and the operational costs recorded a decrease bigger than the established goal. Under the sale process of NOVO BANCO, concluded in October 2017, additional commitments were made with the European Commission. As such, at the end of 2017 a restructuring provision was established in the amount of Euro 82.3 million in order to address the new objectives. This provision contemplates restructuring measures including the focus of the banking activity in Portugal and Spain and on the retail and corporate segments, the divestment of non-strategic assets, the reduction of the number of employees and the resizing of the distribution network. As at 31 December 2019, the book value of restructuring provisions constituted in 2017 amounted to Euro 2.8 million. During the financial year of 2019, in order to comply with the objective of reduction of employees assumed with the European Commission, and the cost and headcount budget defined for the year 2019, a new provision for restructuring amounting to Euro 57.1 million was set up. As at 31 December 2019, the carrying amount of this provision amounted to Euro 20.5 million. Provisions for commercial offers, in the amount of Euro 41.3 million (31 December 2018: Euro 72.9 million), are intended to cover costs resulting from commercial offers approved by the Board of Directors of NOVO BANCO, aimed at retail customers holding NOVO BANCO unsubordinated bonds. The Board of Directors considers the amount of this provision to be adequate based on the experience gained in the negotiations already completed and sales price expectations concerning the bonds and financial instruments subscribed by customers. During 2018, the Group launched a program of early repayment of liabilities. In this regard, provisions of Euro 182.8 million were incorporated for the clients that adhered to this program, in return for a compensation for loss of capital revenue, from which were used approximately Euro 143.9 million still in 2018. During 2019, Euro 1.2 million were replaced and Euro 37.7 million were used, so the value of this provision at the end of the year was nil. Other provisions amounting to Euro 145.4 million (31 December 2018: Euro 114.8 million) are intended to cover certain duly identified contingencies related to the Group’s activities, the most relevant being: - Contingencies associated with ongoing tax processes. To cover for these contingencies, the Group maintains provisions of Euro 32.2 million (31 December 2018: Euro 20.6 million); NOVO BANCO | 2019 ANNUAL REPORT | 199 - The remaining amount, of Euro 113.2 million (31 December 2018: Euro 94.2 million), is intended to cover for losses in connection to the Group’s normal activities, such as, amongst others, fraud, theft and robbery, and ongoing legal lawsuits, among others, and also to the estimated losses from the sale of assets of the Spanish Branch (Project Albatros - see Note 42). NOTE 32 – OTHER LIABILITIES As at 31 December 2019 and 2018, the caption Other liabilities is analysed as follows: NOTE 33 – SHARE CAPITAL Ordinary shares In 2017 and following the acquisition of 75% of NOVO BANCO share capital by Lone Star, two capital increases in the amounts of Euro 750 million and Euro 250 million, in October and December, respectively, were realised. Thus, as at 31 December 2019 and 2018, the share capital of the Bank amounts to Euro 5 900 000 000, represented by 9 799 999 997 registered shares, with no nominal value, fully subscribed and realised by the following shareholders: As mentioned in Note 27, NOVO BANCO adhered to the Special Regime applicable to Deferred Tax Assets (DTA) approved by Law No. 61/2014, of 26 August. Said regime applies to deferred tax assets related to the non-deduction, for corporate income tax purposes, of costs and negative equity changes recorded up to 31 December 2015 for impairment losses on loans and advances to customers and with employee post- employment or long-term benefits. Said regime foresees that those assets can be converted into tax credits when the taxable entity reports an annual net loss. The conversion of the eligible deferred tax assets into tax credits was made according to the proportion of the amount of said net loss to total equity at the individual company level. NOVO BANCO | 2019 ANNUAL REPORT | 200 (in thousands of Euros)31.12.201931.12.2018Public sector 33 110 56 974 Creditors for supply of goods 78 686 29 464 Other creditors 77 350 101 524 Non-controlling interests of Open Investment Funds (ver Nota 34) 99 394 111 763 Career bonuses (see Note 16) 7 106 6 486 Retirement pensions and health-care benefits (see Note 16) 153 073 27 440 Other accrued expenses 86 277 84 520 Deferred income 2 557 3 241 Foreign exchange transactions pending settlement 6 577 7 193 Other transactions pending settlement 41 936 78 185 586 066 506 790 31.12.201931.12.2018Nani Holdings, SGPS, SA75.00%75.00%Fundo de Resolução (1)25.00%25.00%100.00%100.00%% Share Capital(1) In view of the commitments assumed by the Portuguese Republic before the European Commisson, the Resolution Fund is inhibited from exercising its voting rights. A special reserve was established with an amount identical to the tax credit approved, increased by 10%. This special reserve was established using the originating reserve and is to be incorporated in the share capital. The conversion rights are securities that grant the State the right to demand of NOVO BANCO the respective share capital increase, through the incorporation of the amount of the special reserve and the consequent issue and delivery of ordinary shares at no cost. It is estimated that the conversion rights to be issued and allocated to the State following the net loss of years 2015 and 2018 will confer a shareholding of up to approximately 10.3% of the share capital of NOVO BANCO, which will only dilute, in accordance to the sale contract, the Resolution Fund stake. NOTE 34 – ACCUMULATED OTHER COMPREHENSIVE INCOME, RETAINED EARNINGS, OTHER RESERVES AND MINORITY INTERESTS (NON-CONTROLLING INTERESTS) As at 31 December 2019 and 2018, the accumulated other comprehensive income, retained earnings and other reserves present the following detail: Other accumulated comprehensive income The movements in Other accumulated comprehensive income were as follows: NOVO BANCO | 2019 ANNUAL REPORT | 201 (in thousands of Euros)31.12.201931.12.2018Other accumulated comprehensive income( 702 311)( 790 884)Retained earnings( 6 115 245)( 4 682 300)Other reserves 5 942 501 4 872 841 Originating reserve 2 098 188 2 234 440 Special reserve 606 547 470 295 Other reserves and Retained earnings 3 237 766 2 168 106 ( 875 055)( 600 343)(in thousands of Euros)Balance as at 31 December 2017- - - 245 129 - ( 420 991)( 175 862)Impact of transition to IFRS 9 607 - - ( 476 346)- - ( 475 739)Balance as at 1 January 2018 607 - - ( 231 217)- ( 420 991)( 651 601)Actuarial deviations- - - - - ( 70 805)( 70 805)Fair value changes, net of taxes- - - ( 67 557)- - ( 67 557)Foreign exchange differences- - - - ( 8 665)- ( 8 665)Changes in credit risk of financial liabilities at fair value, net of taxes- 1 202 - - - - 1 202 Impairment reserves of securities at fair value through other comprehensive income 604 - ( 3 409)- - - ( 2 805)Reserves of sales of securities at fair value through other comprehensive income- - 94 - - - 94 Other comprehensive income of associated companies- - - 779 - - 779 Other- - - - 8 474 - 8 474 Balance as at 31 December 2018 1 211 1 202 ( 3 315)( 297 995)( 191)( 491 796)( 790 884)Actuarial deviations- - - - - ( 107 341)( 107 341)Fair value changes, net of taxes- - - 211 207 - - 211 207 Foreign exchange differences- - - - 31 - 31 Changes in credit risk of financial liabilities at fair value, net of taxes- ( 2 871)- - - - ( 2 871)Impairment reserves of securities at fair value through other comprehensive income 4 336 - - - - - 4 336 Reserves of sales of securities at fair value through other comprehensive income- - ( 4 470)- - - ( 4 470)Other comprehensive income of associated companies- - - 897 - - 897 Other- - - - ( 13 216)- ( 13 216)Balance as at 31 December 2019 5 547 ( 1 669)( 7 785)( 85 891)( 13 376)( 599 137)( 702 311) Total Other variations of other comprehensive income Impairment reserves Credit risk reserves Sales reserves Actuarial deviations (net of taxes) Fair value reserves Other accumulated comprehensive income The accumulated variation of the credit risk reserves of financial liabilities at fair value through profit or loss is, at 31 December 2019, Euro -1 669 thousand (at 31 December 2018: Euro 1 202 thousand). Fair value reserve The fair value reserves represent the amount of the unrealised gains and losses arising from the securities portfolio classified as at a fair value through other comprehensive income, net of impairment losses. The amount of this reserve is shown net of deferred taxes and non-controlling interests. The changes occurred in the fair value reserves, net of deferred taxes and impairment losses may be analysed as follows: The fair value reserves are analysed as follows: Originating reserve The originating reserve results from the difference between the assets and liabilities transferred from BES to NOVO BANCO, on the terms defined in the resolution measure applied by Bank of Portugal to BES. The amount of the reserve includes the effects of Bank of Portugal’s Resolution Measure (“Medida de Resolução”) and those of the conclusions reached through the audit conducted by the independent auditor at the time, nominated by Bank of Portugal. Special reserve As mentioned in Note 33, the special reserve was created as a result of the adhesion of NOVO BANCO to the Special Regime applicable to Deferred Tax Assets approved by Law No. 61/2014, of 26 August, which implied the conversion of eligible deferred tax assets into tax credits and the simultaneous establishment of a special reserve. Following the net losses recorded from 2015 until 2018 and with reference to the elegible deferred tax assets at the end of each year, the special reserve was set up for the same amount of the tax credit calculated, increased by 10%, as follows: NOVO BANCO | 2019 ANNUAL REPORT | 202 (in thousands of Euros) Financial assets at fair value through other comprehensive income Deferred tax reserves Total fair value reserves Financial assets at fair value through other comprehensive income Deferred tax reserves Total fair value reserves Balance at the beginning of the exercise( 293 622)( 4 373)( 297 995) 333 503 ( 88 374) 245 129 Impact of transition to IFRS 9- - - ( 533 037) 56 691 ( 476 346)Balance as at 1 January 2018( 293 622)( 4 373)( 297 995)( 199 534)( 31 683)( 231 217)Changes in fair value 383 497 - 383 497 ( 52 107)- ( 52 107)Foreign exchange differences( 6 678)- ( 6 678)( 17 980)- ( 17 980)Sales in the exercise( 70 140)- ( 70 140)( 24 001)- ( 24 001)Deferred taxes recognized in the exercise in reserves- ( 94 575)( 94 575)- 27 310 27 310 Balance at the end of the exercise 13 057 ( 98 948)( 85 891)( 293 622)( 4 373)( 297 995)31.12.2018 Fair value reserves 31.12.2019 Fair value reserves (in thousands of Euros)31.12.2019 31.12.2018 Amortised cost of financial assets at fair value through other comprehensive income8 837 309 7 985 680 Market value of financial assets at fair value through other comprehensive income8 849 896 7 661 207 Unrealised gains / (losses) recognized in fair value reserve 12 587 ( 324 473)Fair value reserves by the equity method 2 966 2 068 Fair value reserves of discontinued activities- 31 780 Non-controlling Interests( 2 496)( 2 997)Total fair value reserve 13 057 ( 293 622)Deferred Taxes( 98 948)( 4 373)Fair value reserve attributable to shareholders of the Bank( 85 891)( 297 995) Resulting from the credit tax certified by the Tax authority in 2015 and 2016, the amount of the Special Regime was adjusted, after correcting for the number of rights issued in favour of the Portuguese State. Other reserves and retained earnings Following the conditions agreed in the NOVO BANCO’S sale process, a Contingent Capitalization Agreement was created. In this context, if the capital ratios fall below a certain threshold and, cumulatively, losses are recorded in a delimited asset portfolio, the Resolution Fund makes a payment corresponding to the lower of the losses recorded and the amount necessary to restore the ratios to the defined threshold, of up to a maximum of Euro 3 890 million (see Note 35 – Contingent liabilities and commitments). The capital corresponds to a previously defined asset perimeter, with an initial net book value (June 2016) of around Euro 7.9 billion. As at 31 December 2019 these assets had a net value of Euro 3.0 billion, mainly as a result of payments and recoveries as well as losses recorded (31 December 2018: net value of Euro 4.0 billion). As a result of the losses recorded by NOVO BANCO on 31 December 2018 and 2017, the conditions determining the payment by Resolution Fund of Euro 1 149 295 thousand and Euro 791 695 thousand were meet and the payments occurred in May 2019 and 2018, respectively. In the financial year of 2019, the caption Reserves registered the responsibility of the Resolution Fund amounting to Euro 1 037 013 thousand relating to the Contingent Capitalization Agreement. The amount is accounted for under Other reserves and it results at each Balance Sheet date of the incurred losses and of the regulatory ratios in force at the moment of its determination. Non-controlling interests The caption Non-controlling interests, by subsidiary, is detailed as follows: The changes occurred in the caption Non-controlling interests may be analysed as follows: NOVO BANCO | 2019 ANNUAL REPORT | 203 (in thousands of Euros)31.12.201931.12.20182016 (net loss of 2015) 168 911 168 911 2017 (net loss of 2016) 109 421 133 658 2018 (net loss of 2017) 150 044 167 726 2019 (net loss of 2018) 178 171 - 606 547 470 295 (in thousands of Euros)Balance sheetIncome statement% Non-controlling interestsBalance sheetIncome statement% Non-controlling interestsNB Património a)- ( 7 189)44.27%- 4 778 45.23%NB Açores 18 745 1 736 42.47% 16 586 1 518 42.47%BES Vénétie- - - - 181 0.00%Amoreiras 9 222 ( 166)4.76% 9 419 94 5.84%Other 8 657 ( 2 034) 9 341 ( 1 916) 36 624 ( 7 653) 35 346 4 655 a) Non-controlling interests relating to Open real estate investment funds are recorded as Other liabilities (see Note 32)31.12.201931.12.2018(in thousands of Euros) 31.12.2019 31.12.2018 Non-controlling interests at the beginning of the exercise 35 346 79 212 Changes in consolidation perimeter and control percentages( 1 746)( 42 768)Increases / (decreases) in share capital of subsidiaries 1 798 - Changes in fair value reserves 225 ( 402)Other 8 654 ( 5 351)Net profit / (loss) for the period( 7 653) 4 655 Non-controlling interests at the end of the exercise 36 624 35 346 NOTE 35 – CONTINGENT LIABILITIES AND COMMITMENTS In addition to the derivative financial instruments, the balances relating to off-balance accounts as at 31 December 2019 and 2018 are the following: Guarantees and standby letters provided are banking operations that do not imply any mobilization of funds for the Group. As at 31 December 2019, the caption financial assets pledged as collateral includes: - The market value of financial assets pledged as collateral to the European Central Bank in the scope of a liquidity facility, in the amount of Euro 11.5 billion (31 December 2018: Euro 12.1 billion); - Securities pledged as collateral to the Portuguese Securities and Exchange Commission (“Comissão do Mercado de Valores Mobiliários” (CMVM)) in the scope of the Investors Indemnity System (“Sistema de Indemnização aos Investidores”), in the amount of Euro 9.5 million (31 December 2018: Euro 9.0 million); - Securities pledged as collateral to the Deposits’ Guarantee Fund (“Fundo de Garantia de Depósitos”), in the amount of Euro 73.1 million (31 December 2018: Euro 71.4 million); - Securities pledged as collateral to the European Investment Bank, in the amount of Euro 98.5 million (31 December 2018: Euro 155.4 million); - Securities pledged as collateral relating to derivatives trading with a central counterparty amounting to Euro 113.0 million. The above mentioned financial assets pledged as collateral are recorded in the various asset categories of the Group’s balance sheet and may be executed in the event the Group does not fulfil its obligations under the terms and conditions of the contracts celebrated. Documentary credits are irrevocable commitments made by the Group, on behalf of its customers, to pay or order to pay a certain amount to a supplier of goods or services, within a determined period, upon the presentation of documentation of the expedition of the goods or rendering of the services. The condition of “irrevocable” derives from the fact that they may not be cancelled neither changed without the agreement of all involved parties. Revocable and irrevocable commitments represent contractual agreements to extend credit to customers of the Group (e.g. undrawn credit lines), which are, generally, contracted for fixed periods of time or with other expiration conditions and, usually, require the payment of a fee. Almost all credit commitments in force require that customers continue meeting certain conditions that were verified at the time the credit was contracted. Despite the characteristics of these contingent liabilities and commitments, these operations require a previous rigorous risk assessment of the solvency of the customer and of its business, similarly to any other commercial operation. When necessary, the Group requires the collateralisation of these transactions. Since it is expected NOVO BANCO | 2019 ANNUAL REPORT | 204 (in thousands of Euros)31.12.201931.12.2018Contingent liabilities Guarantees and standby letters2 993 785 3 358 589 Financial assets pledged as collateral11 833 012 12 341 217 Open documentary credits 516 162 664 905 15 342 959 16 364 711 Commitments Revocable commitments6 845 430 5 155 118 Irrevocable commitments 411 378 455 264 7 256 808 5 610 382 that the majority of these operations will mature without any funds having been drawn, these amounts do not necessarily represent future cash out-flows. Additionally, liabilities recorded in off-balance sheet items related to banking services provided are as follows: Under the resolution measure applied to BES by deliberation of Bank of Portugal of 3 August 2014, (point 1., paragraph b), subparagraph (vii) of Appendix 2), as altered by the deliberation of Bank of Portugal of 11 August 2014, the “Excluded Liabilities” from the transfer to NOVO BANCO include “any obligations, guarantees, liabilities or contingencies assumed in the trading, financial intermediation and distribution of debt instruments issued by entities integrating Espírito Santo Group (…)”. Under the terms of the point and paragraph referred to above and sub point (v), the excluded liabilities also include “any liabilities or contingencies, namely those resulting from fraud or the violation of regulatory, penal or administrative offense provisions or regulations”. On 29 December 2015, Bank of Portugal adopted a new deliberation for the “Clarification and retransmission of liabilities and contingencies defined as excluded liabilities in subparagraphs (v) through (vii) of paragraph (b) of No. 1 of Appendix 2 of the Deliberation of Bank of Portugal of 3 August 2014 (8 p.m.), with the wording given it by the Deliberation of Bank of Portugal of 11 August 2014 (5 p.m.)”. Through this deliberation, Bank of Portugal: (i) Clarified the treatment as excluded liabilities of the contingent and unknown liabilities of BES (including litigation liabilities related to pending litigation and liabilities or contingencies arising from fraud or violation of rules or regulatory, criminal or administrative offence decisions), regardless of their nature (tax, labour, civil or other) and whether or not these are recorded in the accounts of BES, in accordance with subparagraph (v) of paragraph (b) of No. 1 of Appendix 2 of the Deliberation of 3 August; and (ii) Clarified that the following liabilities had not been transferred from BES to NOVO BANCO: a. All the liabilities relating to Preference Shares issued by vehicle companies established by BES and sold by BES; b. All liabilities, damages and expenses related to real estate assets that were transferred to NOVO BANCO; c. All indemnities related to breach of contracts (purchase and sale of real estate assets and others) signed and celebrated before 20h00 on 3 August 2014; d. All indemnities related to life insurance contracts, in which the insurer was BES - Companhia de Seguros de Vida, S.A.; e. All liabilities and indemnities related to the alleged annulment of certain clauses in loan agreements in which BES was the lender; f. All the indemnities and liabilities arising from the cancellation of operations carried out by BES whilst financial and investment service provider; and g. Any liability that is the object of any of the processes described in Appendix I of said deliberation. (iii) To the extent that, despite the clarifications made above, it is found that there has been an effective transfer of any liabilities from BES to NOVO BANCO which, in terms of any of those paragraphs and the NOVO BANCO | 2019 ANNUAL REPORT | 205 (in thousands of Euros)31.12.201931.12.2018 Deposit and custody of securities and other items36 644 517 30 625 948 Amounts received for subsequent collection 283 647 296 990 Securitized loans under management (servicing) 776 249 1 524 064 Other responsibilities related with banking services2 582 526 2 552 909 40 286 939 34 999 911 Deliberation of 3 August, should have remained in BES’s legal sphere, said liabilities will be retransmitted from NOVO BANCO to BES, with effect as at 8 p.m. of 3 August 2014. In the preparation of its consolidated financial statements as at 31 December 2019 (as well as in the previous financial statements), NOVO BANCO incorporated the decisions resulting from the referred resolution measure regarding the transfer of the assets, liabilities, off-balance sheet items and assets under management of BES, as well as from the deliberation of 29 December 2015 of Bank of Portugal, in particular, with regards to the clarification of the non-transmission to NOVO BANCO of contingent and unknown liabilities as well as the clarifications relating to the liabilities listed in paragraph (ii) above, herein also including the lawsuits listed in said deliberation. In addition, also by the deliberation of Bank of Portugal of 29 December 2015, it was decided that it is the responsibility of Resolution Fund to neutralize, at the NOVO BANCO level, the effects of decisions that are legally binding, beyond the control of NOVO BANCO and to which it did not contribute and that, simultaneously, translate into the materialization of liabilities and contingencies which, according to the perimeter of the transfer to NOVO BANCO as defined by Bank of Portugal, should remain in BES’s scope or give rise to the setting of indemnities in the scope of the implementation of court sentences annulling decisions adopted by Bank of Portugal. Considering that the establishment of the Bank results from the application of a resolution measure to BES, which had a significant impact on the net worth of third parties, and notwithstanding the deliberations of Bank of Portugal of 29 December 2015, there are still relevant litigation risks, albeit mitigated, namely regarding the various disputes relating to the loan made by Oak Finance to BES and regarding the senior bond issues retransmitted to BES, as well as the risk of the non-recognition and/or non-implementation of the various decisions of Bank of Portugal by Portuguese or foreign courts (as it is the case of the courts in Spain) in disputes related to the perimeter of the assets, liabilities, off-balance sheet items and assets under management transferred to NOVO BANCO. These disputes include the two lawsuits of late January 2016, with the Supreme Court of Justice of Venezuela, Banco de Desarrollo Económico y Social de Venezuela and the Fondo de Desarrollo Nacional against BES and NOVO BANCO, relating to the sale of debt instruments issued by entities belonging to the Espírito Santo Group, in the amount of 37 million dollars and 335 million dollars, respectively, and which requests the reimbursement of the amount invested, plus interest, compensation for the value of inflation and costs (in a total estimated amount by the claimants of 96 and 871 million dollars, respectively). In accordance with resolution measure, these responsibilities were not transferred to NOVO BANCO and the main actions and precautionary seizure procedures are still pending before the Supreme Court of Venezuela. In the preparation of the individual and consolidated financial statements of the Bank as at 31 December 2019, the Executive Board of Directors reflected the Resolution Deliberation and related decisions made by Bank of Portugal, in particular the decisions of 29 December 2015. In this context, the present financial statements, namely in what regards the provisions for contingencies arising from lawsuits, reflect the exact perimeter of the assets, liabilities, off-balance sheet elements and assets under management and liabilities transferred from BES to NOVO BANCO, as determined by Bank of Portugal and taking as reference the current legal bases and the information available at the present date. As part of the sale of NOVO BANCO, completed on 18 October 2017, the respective contractual documents include specific provisions that produce effects equivalent to the aforementioned resolution of the Board of Directors of the Bank of Portugal, dated 29 December 2015, concerning the neutralisation, at the level of NOVO NOVO BANCO | 2019 ANNUAL REPORT | 206 BANCO, of the effects of unfavourable decisions that are legally binding, although it is now contractual in nature, thus maintaining the contingent liabilities of the Resolution Fund. Significant lawsuits For the purpose of determining the contingent liabilities, and without prejudice to the information contained in these notes to the accounts, namely regarding the conformity of the policy for the constitution of provisions with the resolution measure and subsequent decisions of Bank of Portugal (and the criteria for the allocation of responsibilities and contingencies arising therefrom), it is also necessary to identify the following disputes whose effects or impacts on the financial statements of NOVO BANCO GROUP are, on this date, not susceptible of determination or quantification: - Lawsuit brought by Partran, SGPS, S.A., Massa Insolvente da Espírito Santo Financial Group, S.A. and Massa Insolvente da Espírito Santo Financial (Portugal), S.A. against NOVO BANCO and Calm Eagle Holdings, S.A.R.L. through which it is intended that the pledge of the shares of Companhia de Seguros Tranquilidade, S.A. be declared invalid and, secondarily, that said pledge be annulled or declared ineffective; - Lawsuit brought by NOVO BANCO, challenging the resolution decided in favour of the insolvent estate in respect of the acts of the constitution and subsequent execution of the pledge on the shares of the company Companhia de Seguros Tranquilidade, S.A., declared by the insolvency administrator of Partran, SGPS, S.A., due to considering that there are no grounds for the resolution of these acts, as well as demanding the reimbursement of the amount received by way of price (Euro 25 million, subject to possible positive adjustment) on the sale of the shares of Companhia de Seguros Tranquilidade, S.A.. NOVO BANCO challenged judicially the resolution act, with this process running its course attached to the insolvency proceedings of Partran, SGPS, S.A.; - Following the conclusion of the sale agreement of NOVO BANCO's share capital, signed between the Resolution Fund and Lone Star on 31 March 2017, certain legal suits have been lodged, related to the conditions of the sale, namely the administrative action brought by Banco Comercial Português, SA (BCP) against the Resolution Fund, of which NOVO BANCO is not a party, and according to the public disclosure of inside information made by BCP on the website of the CMVM on 1 September 2017, it requested the legal assessment of the contingent capitalization obligation assumed by the Resolution Fund within the CCA; - NOVO BANCO was informed by the publication in the Official Journal of the European Union of 16 July 2018, of the existence of an appeal to the General Court by Banco Comercial Português, SA and other entities of the group seeking the annulment of the decision of the European Commission C (2017 / N) of 11 October 2017 which considers the Contingent Capitalization Agreement agreed between the Resolution Fund and the Lone Star Group in connection with the sale of NOVO BANCO, compatible with the internal market. Although NOVO BANCO is not a party to this proceeding, it has asked the General Court to intervene as a party and this request was granted; - NOVO BANCO was notified of an order by the Central Court of Criminal Investigation (“TCIC”) that determines the provision of a guarantee by the NB in the approximate amount of EUR 51 million due to an alleged failure to comply with an arrest order bank accounts, having used the respective means of reaction to oppose the application of the aforementioned asset guarantee measure due to the absence of a legal basis. NOVO BANCO | 2019 ANNUAL REPORT | 207 Resolution Fund Resolution Fund is a public legal entity with administrative and financial autonomy, created by Decree-Law No. 31-A/2012, of 10 February, which is governed by the RGICSF and by its internal regulation, having as its mission to provide financial support for the resolution measures implemented by Bank of Portugal, whilst national resolution authority, and to carry out all the other functions conferred by law in the scope of the execution of such measures. The Bank, as with the generality of the financial institutions operating in Portugal, is one of the institutions participating in Resolution Fund, making contributions that result from the application of a rate defined annually by Bank of Portugal, based, essentially, on the amount of its liabilities. As at 31 December 2019, the periodic contribution made by the Group amounted to Euro 12 196 thousand (31 December 2018: Euro 10 995 thousand). As part of its responsibility as the supervisory and resolution authority, Bank of Portugal decided to apply, on 3 August 2014, a resolution measure to BES, under No. 5 of article 145-G of the RGICSF, which consisted on the transfer of most of its activity to NOVO BANCO, created specifically for this purpose and the capital was assured by the Resolution Fund. To realise the share capital of NOVO BANCO, Resolution Fund made available Euro 4 900 million, of which Euro 365 million corresponded to own funds. A loan was also granted by a banking syndicate to Resolution Fund, amounting to Euro 635 million, with the participation of each credit institution being weighted by various factors, including their respective size. The remaining amount (Euro 3 900 million) had its origin in a reimbursable loan granted by the Portuguese State. In December 2015, national authorities decided to sell most of the assets and liabilities associated with the activity of Banif - Banco Internacional do Funchal, SA (BANIF) to Banco Santander Totta, S.A. (Santander Totta), for Euro 150 million, also in the scope of the application of a resolution measure. In the context of this resolution measure, the assets of Banif identified as problematic were transferred to an asset management vehicle, created for the purpose – Oitante, S.A.. The serious financial imbalance of BES in 2014 and BANIF in 2015, which justified the application of resolution measures, created uncertainties related to the risk of litigation involving Resolution Fund, which is significant, as well as to the risk of an insufficiency of funds to ensure its compliance with its responsibilities, namely the short-term repayment of the loans contracted. It was in this context that, in the second half of 2016, the Portuguese Government reached an agreement with the European Commission to change the terms of the financing granted by the Portuguese State and by the banks participating in Resolution Fund in order to preserve its financial stability, through the promotion of conditions that endow predictability and stability of the contributory efforts to Resolution Fund. To this end, an addendum to the financing agreements with Resolution Fund was formalised, which introduced a number of changes to the repayment schedule, remuneration rates and other terms and conditions associated with said loans such that these are adjusted to Resolution Fund’s ability to fully meet its obligations based on its regular revenues, that is, without the need to charge the banks participating in Resolution Fund for special contributions or any other extraordinary contribution. As announced by the Resolution Fund in 21 March 2017, issued following the previous announcement of 28 September 2016 and the Portuguese Finance Ministry announcement issued at the same date, the review of the conditions of the funding granted by the Portuguese State and the participating banks aimed to ensure the sustainability and the financial balance of the Resolution Fund, with the basis of a stable, predictable and NOVO BANCO | 2019 ANNUAL REPORT | 208 affordable charge to the banking sector. Based on this review, the assumed Resolution Fund is assured the full payment of their responsibilities, and the respective remuneration, without need for recourse to special contributions or any other type of contributions extraordinary by the banking industry. On 31 March 2017, Bank of Portugal announced that it had selected Lone Star Funds for the acquisition of NOVO BANCO, which was completed on 18 October 2017, through the injection, by the new shareholder, of Euro 750 million, followed by another capital injection of Euro 250 million, made on 21 December 2017. Lone Star Funds came to hold 75% of the share capital of NOVO BANCO and Resolution Fund the remaining 25%. In addition, the approved conditions include: - A Contingent Capitalization Agreement, under which the Resolution Fund, whilst shareholder, may be called upon to make payments in the event of certain cumulative conditions related to: i) the performance of a restricted set of assets of NOVO BANCO and ii) the evolution of the Bank’s capitalization levels. The possible payments needed, in the agreed terms of this Contingent Capitalization Agreement are of an absolute maximum of Euro 3 890 million; - A Compensation Mechanism to NOVO BANCO if in the event that some conditions are met, and it is convicted to make payments of any responsibilities, due to a final court judicial decision not recognising or that is opposed to the resolution measure applied by Bank of Portugal, or to NOVO BANCO’s perimeter of assets and liabilities. Notwithstanding the possibility under the applicable legislation for the collection of special contributions, in light of the renegotiation of the conditions of the loans granted to Resolution Fund by the Portuguese State and by a syndicate of banks, and of the public press releases made by the Resolution Fund and the Office of the Finance Minister stating that this possibility is not to be used, the present financial statements reflect the expectation of the Board of Directors that the Bank will not be required to make special contributions or any other type of extraordinary contributions to finance the resolution measures applied to BES and Banif, as well as the Contingent Capitalization Agreement and the Compensation Mechanism referred to in the previous paragraphs. According to the announcement issued by the Resolution Fund on 1 March 2019, for the payment to be made to the NOVO BANCO under the Contingent Capitalization Agreement, the available financial resources will be used first, resulting from the contributions paid, directly or indirectly by the banking sector, and these resources are complemented by a loan agreed with the State in October 2017 with an annual maximum limit then defined of Euro 850 million. Any changes in this regard and the application of these mechanisms may have relevant implications in the Group’s financial statements. NOVO BANCO | 2019 ANNUAL REPORT | 209 NOTE 36 – ASSETS UNDER MANAGEMENT (DISTRIBUTION) In accordance with the legislation in force, the managing companies together with the depositary Bank are jointly liable to the participants of the funds for the non-fulfilment of obligations assumed under the terms of the law and the regulations of the funds managed. As at 31 December 2019 and 2018, the value of the assets under management by the Group companies are analysed as follows: The amounts included in these captions are measured at fair value, determined at the balance sheet date. NOTE 37 – RELATED PARTIES TRANSACTIONS The group of entities considered to be related parties by NOVO BANCO in accordance with the IAS 24 definitions, are (i) key management personnel (members of the Executive Board of Directors and members of the General Supervisory Board of NOVO BANCO); (ii) people or entities with a family, legal or business relationship with key management personnel; (iii) people or entities with a family, legal or business relationship with shareholders; (iv) shareholders holding direct or indirect stakes equal to or exceeding 2% of the share capital or voting rights of NOVO BANCO; (v) subsidiaries consolidated for accounting purposes under the full consolidation method; (vi) associated companies, that is, companies over which NOVO BANCO Group has significantly influence on the company’s financial and operational polices, despite not having control; and (vii) entities under joint control of NOVO BANCO (joint ventures). NOVO BANCO | 2019 ANNUAL REPORT | 210 (in thousands of Euros)31.12.201931.12.2018Investment funds1 344 949 1 123 369 Real estate investment funds 90 184 174 395 Pension funds2 386 809 2 112 011 Bancassurance- 381 839 Discretionary management1 103 025 977 102 4 924 967 4 768 716 During 2019, the following transactions with Related Parties (credit and other types) were carried out: 1) Credit Operations 2) Services rendered and other signed contracts NOVO BANCO | 2019 ANNUAL REPORT | 211 Entities / IndividualsCategoryOperationAmount (Euro)Bank guarantee8 090 174Bank guarantee41 359 876Bond Issue1 300 000 000Credit Limit - NB Express Bill100 000Limits - NB Factoring (Confirming)250 000MLT Funding500 000Bank guarantee77 000Bank guarantee159 067Authorized overdraft500 000Factoring650 000GNB Companhia de Seguros S.A.AssociateDirect Debits Limits81 200 000Op. Markets Rce10 000 000Direct Debits Limits80 100 000 Leasing45 500Bank guarantee106 000Loan Account Cc_175 000Shareholder loans340 000Limits Credit Card225 000Limits to Bank guarantee1 000 000Limits Credit Card117 500Collateral Line Guarantees1 750 000Credit limit - NB Express Bill2 500 000Authorized overdraft4 500 000 Factoring 9 200 000Limits Credit Card10 000Loan Account Cc_2 500 000Op. Markets Rce_3 000 000Credit Plafond - Leasing4 625 000AOV Contract - NB Vehicles5 726 880Credit Plafond - Leasing6 900 000Direct Debits Limits40 000 000Credit Plafond - Leasing41 500 000Limits Credit Card10 000Bank guarantee90 240Loan Account Cc_250 000Limits Credit Card3 500Credit Limit - NB Express Bill100 000Credit Limit - NB Express Bill Exclusive200 000MLT Funding275 000Nacional Conta – Contabilidade, Consultadoria e Administração, Lda.Director / Manager / FamilyLoan Account Cc_100 000Issuance of Credit Cards182 387Factoring750 000Shareholder loans4 750 000Loan Account Cc_45 000 000Novo Vanguarda SLSubsidiaryLoan Account Cc_250 000MLT Funding13 451 386MLT Funding1 962 826Unicre - Cartão Internacional de Crédito S.A.AssociateMLT Funding25 000 000GNB Companhia de Vida S.A.SubsidiaryGreendraive - Gestão e Exporação de Campos de Golf e Complexos Turísticos S.A.SubsidiaryGrupo Esegur (Esegur - Soluções de Segurança S.A.)AssociateBEST - Banco Electrónico de Serviço Total S.A.SubsidiaryCristalmax - Indústria Vidros S.A.AssociateEnkrot - Gestão e Tratamento de Águas S.A.AssociateNovo BancoServicios Corporativos SLSubsidiaryRighthour S.A.SubsidiaryGrupo Multipessoal(Multipessoal - Recursos Humanos SGPS S.A.)AssociateLocarent- Coompanhia Portuguesa Aluguer Viaturas S.A.AssociateLogiC Logística Integrada S.A.AssociateM N Ramos Ferreira Engenharia S.A.AssociateNexxpro - Fábrica de Capacetes S.A.AssociateEntities / IndividualsCategoryOperation1.Mortgage Offer Agreement for BEST employees2.Credit Intermediary Binding AgreementGNB Sociedade Gestora Fundos InvestimentoImobiliário S.A.SubsidiaryOutsoursing Contract(Real Estate Asset Management Agreement)GNB Sociedade Gestora Fundos InvestimentoMobiliário S.A.SubsidiaryAmendment to the Distribution Agreement1.RenewaloftheTechnicalAssistanceContractforSecurityEquipmentandCentral Security Service2.ContractfortheProvisionofServicesofTransportationofValuesandTreatment of CashNANI Holdings SGPS SA / LSF NANI Investments SarlAssociateAmendment and Consolidation of the Group's Financial Reporting and Shared Information Agreement (Amendment and Restatement Agreement to the Intragroup Financial Reporting and Information Sharing Agreement)Esegur - Soluções de Segurança S.A.AssociateBEST - Banco Electrónico de Serviço Total S.A.Subsidiary The Group Balance Sheet balances with related parties as at 31 December 2019 and 2018, as well as the respective profit and losses, can be summarised as follows: The amount of assets receivable from the Resolution Fund corresponds to the amount of the triggering of the Contingent Capitalization Agreement regarding the financial years 2019 and 2018. In June 2018 a contract was entered into between NANI HOLDINGS, SGPS, S.A., LSF NANI INVESTMENTS S.a.r.l. and NOVO BANCO, to provide support services for the preparation of consolidated information and regulatory reports. The assets on the balance sheet related to associated companies included in the table above refer mainly to loans and advances, and shareholder loans granted or debt securities acquired in the scope of the Group’s activity. The liabilities relate mainly to bank deposits taken. Related party transactions were carried out at arm's length, under similar terms and conditions, when compared with others carried out with unrelated parties, and when these conditions were not verified, those exceptions were substantiated in accordance with the Bank’s Related Party Transactions Policy. All the loans granted to related parties are included in the impairment model, being subject to the determination of impairment in the same manner as the commercial loans and advances granted by the Group in the scope of its activity. All assets placed with related parties earn interest between 0% and 4.5% (the rates correspond to the rates applied according to the original currency of the asset). The costs with remunerations and other benefits granted to Key Management Personnel of NOVO BANCO in 2019 and 2018, are as follows: In the financial year of 2018, no variable remuneration costs were recorded in relation to the Management and Supervisory Bodies and no variable remuneration was paid or attributed in 2018. Still in 2018 and resulting from the commitment to take up a new Executive Director, Euro 320 thousand were recorded as a sign-on bonus, which were actually paid in 2019, before taking up his duties. With regard to the financial year of 2019, NOVO BANCO | 2019 ANNUAL REPORT | 212 (in thousands of Euros)AssetsLiabilitiesGuaranteesIncomeExpensesAssetsLiabilitiesGuaranteesIncomeExpensesShareholdersNANI HOLDINGS- 153 - 332 - - 153 - 390 - FUNDO DE RESOLUÇÃO1 037 013 - - - 12 196 1 149 295 - - - 10 995 Associated companiesLINEAS 97 656 29 556 - 2 609 - 97 644 34 426 - 4 710 3 LOCARENT 122 802 376 - 1 176 4 215 31 304 1 295 - 1 323 5 607 GNB SEGUROS- 14 390 - 2 1 380 9 079 - 10 2 ESEGUR 4 157 1 510 69 - - 5 528 3 510 69 - 19 UNICRE 28 360 2 500 - 180 - 10 001 26 - 26 - MULTIPESSOAL 3 520 35 273 22 - 3 074 40 251 52 - BANCO DELLE TRE VENEZIE- 11 - - - - 31 - - - EDENRED 4 57 300 - - 22 9 62 400 26 6 128 ENKROTT 1 332 1 53 22 - 1 168 - 2 32 - YUNIT- - - - - - - 21 - - PNBC- - - - 1 477 - - - - - 1 294 844 105 832 395 4 343 16 434 1 298 403 110 960 369 6 549 16 754 OtherHUDSON ADVISORS PORTUGAL- - - - 2 767 - - - - 5 444 NACIONAL CONTA LDA (*) 117 8 - - - 120 7 - - - Other 117 8 - - 2 767 120 7 - - 5 444 (*) Companies controlled directly or indirectly by members of the corporate bodies.31.12.201831.12.2019(in thousands of Euros)Short-term employment benefits 2 812 980 3 792 2 265 993 3 258 Post-employment benefits 3 - 3 4 - 4 Other long-term benefits 43 21 64 33 26 59 Employment termination benefits- - - - - - Share-based payments- - - - - - 2 858 1 001 3 859 2 302 1 019 3 321 31.12.2019Executive Board of DirectorsGeneral and Supervisory BoardTotal31.12.2018Executive Board of DirectorsGeneral and Supervisory BoardTotal variable remuneration to the Management Bodies amounts to Euro 1,997 thousand, which relates to the remuneration that do not constitute acquired rights of the respective members until after the end of the restructuring period (currently, 31 December 2021) and its payment is subject to deferral and verification of certain conditions. As at 31 December 2019, the amount of credit granted to members of Key Management Personnel of NOVO BANCO was as follows: (i) to members of the Executive Board of Directors and their immediate relatives was Euro 447 thousand; and (ii) members of the General and Supervisory Board and their immediate relatives did not had credit granted. As at 31 December 2018, the amount of credit granted to members of Key Management Personnel of NOVO BANCO was as follows: (i) to members of the Executive Board of Directors and their immediate relatives was Euro 503 thousand; and (ii) members of the General and Supervisory Board and their immediate relatives was Euro 1 thousand. NOTE 38 – SECURITISATION OF ASSETS As at 31 December 2019 and 2018 the outstanding securitisation transactions made by the Group were as follows: The loans and advances to customers covered by the securitization operation Lusitano SME No. 3 was not derecognised from the balance sheet since the Group substantially retained all the risks and rewards of ownership associated with the securitised assets. The remaining securitisation operations were derecognised as the Group substantially transferred all the risks and rewards of ownership. In accordance with the consolidation rules established in IFRS 10, Lusitano Mortgages No. 6 plc, Lusitano Project Finance No. 1 FTC and Lusitano Mortgages No. 7 plc are consolidated using the full consolidation method as from the date of their incorporation (see Note1). During 2019, the Group proceeded to the early redemption of Lusitano Project Finance No. 1 FTC. The following are the main impacts of the consolidation of these entities on the Group's accounts: NOVO BANCO | 2019 ANNUAL REPORT | 213 (in thousands of Euros)31.12.201931.12.2018Lusitano Mortgages No.1 plcDecember 2002 1 000 000 - 182 361 Mortgage loans (subsidized scheme)Lusitano Mortgages No.2 plcNovember 2003 1 000 000 - 185 120 Mortgage loans (general and subsidized scheme)Lusitano Mortgages No.3 plcNovember 2004 1 200 000 - 291 087 Mortgage loans (general scheme)Lusitano Mortgages No.4 plcSeptember 2005 1 200 000 312 836 351 544 Mortgage loans (general scheme)Lusitano Mortgages No.5 plcSeptember 2006 1 400 000 463 413 513 952 Mortgage loans (general scheme)Lusitano Mortgages No.6 plcJuly 2007 1 100 000 434 463 478 943 Mortgage loans (general scheme)Lusitano Project Finance No.1, FTCDecember 2007 1 079 100 - 8 371 Project Finance loanLusitano Mortgages No.7 plcSeptember 2008 1 900 000 1 090 124 1 199 264 Mortgage loans (general scheme)Lusitano SME No.3November 2016 630 385 88 937 197 985 Loans to small and medium-sized enterprisesAsset securitizedIssueStart dateOriginal amountCurrent amount(in thousand of Euros)31.12.201931.12.2018Cash and deposits with banks 146 364 147 029 Loans and advances to customers (net of impairment losses) 1 608 684 1 877 235 Debt securities issued (a) 45 855 55 066 (a) see Note 30 Additionally, Lusitano Mortgages No. 1 plc, Lusitano Mortgages No. 2 plc, Lusitano Mortgages No. 3 plc, Lusitano Mortgages No. 4 plc and Lusitano Mortgages No. 5 plc are not consolidated since they do not meet the rules defined in IFRS 10, namely because the interest retained by the Group is residual, as demonstrated below. During the financial year of 2019, the Group repurchased credits from securitization operation Lusitano Mortgages No. 1 plc, Lusitano Mortgages No. 2 plc and Lusitano Mortgages No. 3 plc with a total amount of Euro 593.1 million. As at 31 December 2018, the following synthetic securitization operations were in progress: Lusitano Synthetic Limited was a synthetic loan securitization operation involving the contracting by the Group of a credit default swap (CDS) to eliminate credit risk associated with a portfolio of loans granted to companies. The loans associated to this portfolio continued to be recognized in the Group's balance sheet under the caption Loans and advances to customers. During the financial year of 2019, Lusitano Synthetic Limited was early terminated. The main characteristics of these operations, as at 31 December 2019 and 2018, may be analysed as follows: NOVO BANCO | 2019 ANNUAL REPORT | 214 (in thousands of Euros)31.12.201931.12.2018 Lusitano Synthetic LimitedDecember 2012 1 000 000 - 354 311 Financing M/L Term (SMEs)IssueStart dateCurrent amount of securitised creditAsset securitizedInitial amount of securitised credit(in thousands of Euros)FitchMoody'sS&PDBRSFitchMoody'sS&PDBRSLusitano Mortgages No.4 plcClass A1 134 000 241 493 - - December 2048AAAAaaAAA - BBAa3AA-Class B 22 800 15 985 - - December 2048AAAa2AA - BBBaa1BBB--Class C 19 200 13 461 - - December 2048A+A1A+ - BBBa3BB--Class D 24 000 16 827 - - December 2048BBB+Baa1BBB- - CCCCaa3B--Class E 10 200 5 100 - - December 2048NA - NA - ----Lusitano Mortgages No.5 plcClass A1 323 000 355 021 - - December 2059AAAAaaAAA - AAAAaaAAA-Class B 26 600 25 494 - - December 2059AAAa2AA - AAAa2AA-Class C 22 400 21 469 - - December 2059AA1A - AA1A-Class D 28 000 26 836 - - December 2059BBB+Baa2BBB - BBB+Baa2BBB-Class E 11 900 11 900 - - December 2059N/A - N/A - ----Lusitano Mortgages No.6 plcClass A 943 250 264 905 220 548 210 489 March 2060AAAAaaAAA - AAa3A--Class B 65 450 65 450 63 950 57 981 March 2060AAAa3AA - BBB-Baa1A--Class C 41 800 41 800 41 800 32 227 March 2060AA3A - BBa3BBB+-Class D 17 600 17 600 17 600 11 906 March 2060BBBBaa3BBB - CCCCaa3CCC-Class E 31 900 31 900 31 900 9 371 March 2060BB - BB - CC-D-Class F 22 000 22 000 22 000 - March 2060 - - - - ----Lusitano Mortgages No.7 plcClass A1 425 000 616 503 616 503 563 186 October 2064 - - AAAAAA--AAAAAClass B 294 500 294 500 294 500 264 601 October 2064 - - BBB- - --BBB-Class C 180 500 180 500 180 500 154 463 October 2064 - - - - ----Class D 57 000 57 000 57 000 - October 2064 - - - - ----Lusitano SME No.3Class A 385 600 - - - December 2037-A3-AA-WR--Class B 62 700 - - - December 2037-Baa3-BBB-WR--Class C 62 700 - - - December 2037-B1-B-A3-AAAClass D 116 000 103 316 103 316 100 534 December 2037--------Class E 9 500 3 135 3 135 2 776 December 2037--------Class S 88 771 5 214 5 214 3 218 December 2037--------31.12.2019Initial rating of the bondsCurrent rating of the bondsCurrent nominal valueBonds issuedInterest held by Group (Nominal value)Maturity dateInitial nominal valueInterest held by Group (Book value)Issue NOTE 39 – FAIR VALUE OF FINANCIAL ASSETS AND LIABILITIES The governance model of the valuation of the Bank's financial instruments is defined in internal regulations, which establish the policies and procedures to be followed in the identification and valuation of financial instruments, the control procedures and the definition of the responsibilities of the parties involved in this process. In accordance with the fair value valuation methodology of assets and liabilities followed, these are classified in the corresponding hierarchy of fair value defined in IFRS 13 - Fair Value. The following is a brief description of the type of assets and liabilities included in each level of the hierarchy and the corresponding valuation method: Quoted market prices (level 1) This category includes financial instruments with market prices quoted on official markets and those with dealer price quotations provided by entities that usually disclose transaction prices for these instruments traded on active markets. The priority in terms of which price is used is given to those observed on official markets; where there is more than one official market the choice falls on the main market on which those instruments are traded. The Bank considers market prices those disclosed by independent entities, assuming that these act for their own economic benefit and that such prices are representative of the active market, using, whenever possible, prices supplied by more than one entity (for a specific asset and/or liability). For the process of re-evaluating financial instruments, the Bank analyses the various prices in order to select the one it considers most representative for the instrument under analysis. Additionally, when they exist, prices relating to recent NOVO BANCO | 2019 ANNUAL REPORT | 215 (in thousands of Euros)FitchMoody'sS&PDBRSFitchMoody'sS&PDBRSLusitano Mortgages No.1 plcClass A 915 000 87 504 - - December 2035AAAAaaAAA - AAAa3AA- - Class B 32 500 32 500 - - December 2035AAAa3AA - AAAa3A - Class C 25 000 25 000 - - December 2035AA2A - AAAa3BBB- - Class D 22 500 22 500 - - December 2035BBBBaa2BBB - A+Baa1BB+ - Class E 5 000 5 000 - - December 2035BBBa1BB - BBB+B1B- - Class F 10 000 10 000 - - December 2035 - - - - - - - - Lusitano Mortgages No.2 plcClass A 920 000 99 505 - - December 2036AAAAaaAAA - AAAa3AA- - Class B 30 000 30 000 - - December 2046AAAa3AA - AAAa3A - Class C 28 000 28 000 - - December 2046AA3A - A+Aa3BBB- - Class D 16 000 16 000 - - December 2046BBBBaa3BBB - BBB-Baa2BBB- - Class E 6 000 6 000 - - December 2046BBB-Ba1BB - BB2B - Class F 9 000 9 000 - - December 2046 - - - - - - - - Lusitano Mortgages No.3 plcClass A1 140 000 250 799 - - December 2047AAAAaaAAA - AA1A - Class B 27 000 9 841 - - December 2047AAAa2AA - BBB+Ba1BB- - Class C 18 600 6 780 - - December 2047AA2A - BB+Ba3B - Class D 14 400 5 249 - - December 2047BBBBaa2BBB - BB3B- - Class E 10 800 5 400 - - December 2047 - - - - - - - - Lusitano Mortgages No.4 plcClass A1 134 000 272 930 - - December 2048AAAAaaAAA - BBAa3A - Class B 22 800 18 066 - - December 2048AAAa2AA - BBBaa1BBB- - Class C 19 200 15 214 - - December 2048A+A1A+ - BBBa3BB- - Class D 24 000 19 017 - - December 2048BBB+Baa1BBB- - CCCCaa3B- - Class E 10 200 5 529 - - December 2048NA - NA - - - - - Lusitano Mortgages No.5 plcClass A1 323 000 406 872 - - December 2059AAAAaaAAA - BBA1AA- - Class B 26 600 25 494 - - December 2059AAAa2AA - BB-B1BBB- - Class C 22 400 21 469 - - December 2059AA1A - CCCCaa2BB+ - Class D 28 000 26 836 - - December 2059BBB+Baa2BBB - CCCaCCC+ - Class E 11 900 11 900 - - December 2059N/A - N/A - - - - - Lusitano Mortgages No.6 plcClass A 943 250 319 906 266 342 253 795 March 2060AAAAaaAAA - A-Aa3BBB+ - Class B 65 450 65 450 63 950 57 394 March 2060AAAa3AA - BB+Baa1BBB+ - Class C 41 800 41 800 41 800 31 497 March 2060AA3A - B-Ba3BBB- - Class D 17 600 17 600 17 600 11 945 March 2060BBBBaa3BBB - CCCCaa3CCC - Class E 31 900 31 900 31 900 10 511 March 2060BB - BB - CC - D - Class F 22 000 22 000 22 000 - March 2060 - - - - - - - - Lusitano Project Finance No.1 FTC 198 101 8 833 8 833 8 789 March 2025 - - - - - - - - Lusitano Mortgages No.7 plcClass A1 425 000 749 529 749 529 681 379 October 2064 - - AAAAAA - - AA-AAHClass B 294 500 294 500 294 500 264 702 October 2064 - - BBB- - - - BBB- - Class C 180 500 180 500 180 500 152 195 October 2064 - - - - - - - - Class D 57 000 57 000 57 000 - October 2064 - - - - - - - - Lusitano SME No.3Class A 385 600 - - - December 2037-A3-AA - Aa3 - AAClass B 62 700 31 058 31 058 30 782 December 2037-Baa3-BBB - Aa3 - AALClass C 62 700 62 700 62 700 61 061 December 2037-B1-B - A3 - BBBHClass D 116 000 116 000 116 000 110 677 December 2037---- - - - - Class E 9 500 3 691 3 691 3 420 December 2037---- - - - - Class S 88 771 5 624 5 624 2 645 December 2037---- - - - - Lusitano Synthetic LimitedSenior 900 000 255 731 255 731 - April 2034---- - - - - Mezzanine 80 000 77 963 - - April 2034---- - - - - Junior 20 000 - - - April 2034---- - - - - 31.12.2018Initial rating of the bondsCurrent rating of the bondsBonds issuedInitial nominal valueCurrent nominal valueInterest held by Group (Nominal value)Interest held by Group (Book value)Maturity dateIssue transactions with similar financial instruments are used as inputs, being subsequently compared to those supplied by said entities to better justify the option taken by the Bank in favour of a specific price. This category includes, amongst others, the following financial instruments: (i) Derivatives traded on an organised market; (ii) Shares quoted on a stock exchange; (iii) Open investment funds quoted on a stock exchange; (iv) Closed investment funds whose subjacent assets are solely financial instruments listed on a stock exchange; (v) Bonds with more than one provider and for which the instruments are listed on a stock exchange; (vi) Financial instruments with market offers even if these are not available at the normal information sources (e.g. securities traded based on recovery rate). Valuation models based on observable market parameters / prices (level 2) In this category, the financial instruments are valued using internal valuation techniques, namely discounted cash flow models and option pricing models which imply the use of estimates and require judgments that vary in accordance with the complexity of the financial instruments. Notwithstanding, the Bank uses as inputs in its models, observable market data such as interest rate curves, credit spreads, volatility and market indexes. This category also includes instruments with dealer price quotations but which markets have a lower liquidity. Additionally, the Bank also uses as observable market variables, those that result from transactions with similar instruments and that are observed with a certain regularity on the market. This category includes, amongst others, the following financial instruments: (i) Bonds without observable market valuations valued using observable market inputs; (ii) OTC (over-the-counter) derivatives valued using observable market inputs; and (iii) Unlisted shares valued through internal models using observable market inputs. Valuation models based on unobservable market parameters (level 3) This level uses models relying on internal valuation techniques or quotations provided by third parties but which imply the use of non-observable market information. The bases and assumptions for the calculation of fair value are in accordance with IFRS 13. This category includes, amongst others, the following financial instruments: (i) Debt securities valued using non-observable market inputs; (ii) Unquoted shares; (iii) Closed real estate funds; (iv) Hedge funds; (v) Private equities; (vi) Restructuring funds; and (vii) Over the counter (OTC) derivatives with prices provided by third parties. The valuation models used by type of instrument are as follows: Money market operations and loans and advances to customers: fair value is determined by the discounted cash flows method, with future cash flow being discounted considering the currency yield curve plus the credit risk of the entity contractually liquidating that flow. NOVO BANCO | 2019 ANNUAL REPORT | 216 Commercial paper: its fair value is determined by discounting future cash flows considering the currency yield curve plus the credit risk of the issuer determined in the issuance program. Debt instruments (bonds) with liquidity: the selective independent valuation methodology is used based on observations available on Bloomberg, designated as 'Best Price', where all the valuations available are requested, but only previously validated sources considered as input, with the model excluding prices due to seniority and outlier prices. In the specific case of the Portuguese sovereign debt, and due to the market making activity and the materiality of the Bank's positions, the CBBT source valuations are always considered (the CBBT is a composite of valuations prepared by Bloomberg, which considers the average of executable prices with high liquidity). Debt instruments (bonds) with reduced liquidity: the models considered for the valuation of low liquidity bonds without observable market valuations are determined taking into account the information available on the issuer and the instrument, with the following models being considered: (i) discounted cash flows - cash flows are discounted considering the interest rate risk, credit risk of the issuer and any other risks subjacent to the instrument; or (ii) valuations made available by external counterparties, when it is impossible to determine the fair value of the instrument, with the selection always falling on reliable sources with reputed credibility in the market and impartiality in the valuation of the instruments being analysed. Convertible bonds: the cash flows are discounted considering the interest rate risk, the issuer's credit risk and any other risks that may be associated with the instrument, increased by the net present value (NPV) of the convertibility options embedded in the instrument. Shares and quoted funds: for quoted market products, the quotation on the respective stock exchange is considered. Unquoted Shares: the valuation is carried out using external valuations made of the companies in which the shareholding is held. In the event the request for an external valuation is not justified due to the immateriality of this position in the balance sheet, the position is revalued considering the book value of the entity. Unquoted funds: the valuation considered is that provided by the fund's management company, which considers assumptions not observable in the market. In the event there are calls for capital after the reference date of the last available valuation, the valuation is recalculated considering the capital calls subsequent to the reference date at the amount at which these were made, until a new valuation is made available by the management company, already considering the capital calls realised. It should be noted that, although it accepts the valuations provided by the management companies, when applicable in accordance with the funds' regulations, the Group requests the legal certification of accounts issued by independent auditors in order to obtain additional assurance about the information provided by the management company. Derivative instruments: if these are traded on organised markets, the valuations are observable in the market, otherwise these are valued using standard models and relying on observable variables in the market, namely: - Foreign currency options: are valued through the front office system, which considers models such as Garman-Kohlhagen, Binomial, Black & Scholes, Levy or Vanna-Volga; - Interest rate swaps and foreign currency swaps: the valuation of these instruments is done through the front office system, where the fixed leg cash flows of the instrument are discounted based on the yield curve of the respective currency, and the cash flows of the variable leg are projected considering the forward curve and discounted, also considering discount factors and forward rates based on the yield curve of the respective currency; NOVO BANCO | 2019 ANNUAL REPORT | 217 - Credit Default Swaps (CDS): both legs of the CDS are composed of cash flows contingent on the credit risk of the underlying asset and are therefore valued using market credit spreads; - Futures and Options: the Bank trades these products on an organised market, but also has the possibility to trade them on the OTC market. For futures and options traded on an organised market, the valuations are observable in the market, with the valuation being received daily through the broker selected for these products. For futures and options traded on the OTC market, and depending on the type of product and the underlying asset type, discrete time (binominal) or continuous time (Black & Scholes) models may be used. Investment properties: their fair value is determined based on periodic valuations performed by independent entities specializing in this type of service (see accounting policy in Note 2.23). Validation of the valuation of financial instruments is performed by an independent area, which validates the models used and the prices attributed. More specifically, this area is responsible for independent price verification for mark-to-market valuations, for mark-to-model valuations, validates the models used and changes to them wherever they exist. For prices supplied by external entities, the validation performed consists in confirming the use of the correct prices. The fair value of financial assets and liabilities and non-financial assets (investment properties) measured at fair value of the Group is as follows: NOVO BANCO | 2019 ANNUAL REPORT | 218 (in thousands of Euros)(Level 1)(Level 2)(Level 3)31 December 2019Financial assets held for trading 254 848 419 600 74 284 748 732 Securities held for trading 254 848 - - 254 848 Bonds issued by public entities 254 848 - - 254 848 Derivatives held for trading- 419 600 191 419 791 Exchange rate contracts- 34 540 - 34 540 Interest rate contracts- 352 748 191 352 939 Credit default contracts- 1 - 1 Other- 32 311 - 32 311 Economic hedging derivatives- - 74 093 74 093 Interest rate contracts- - 74 093 74 093 Financial assets mandatorily at fair value through profit or loss 172 030 48 1 142 664 1 314 742 Bonds issued by other entities 57 535 48 7 57 590 Shares 114 296 - 489 555 603 851 Other variable income securities 199 - 653 102 653 301 Financial assets at fair value through other comprehensive income8 783 741 28 976 37 179 8 849 896 Bonds issued by public entities7 108 022 - - 7 108 022 Bonds issued by other entities1 661 538 - - 1 661 538 Shares 14 181 28 976 37 177 80 334 Other variable income securities- - 2 2 Derivatives - Hedge Accounting- 7 452 - 7 452 Interest rate contracts- 7 452 - 7 452 Investment properties- - 700 744 700 744 Assets at fair value9 210 619 456 076 1 954 871 11 621 566 Financial liabilities held for trading- 542 988 1 837 544 825 Derivatives held for trading- 542 988 1 837 544 825 Exchange rate contracts- 33 953 33 953 Interest rate contracts- 499 852 1 837 501 689 Credit default contracts- 42 42 Other- 9 141 9 141 Financial liabilities at fair value through profit or loss 102 012 - - 102 012 Debt securities issued 102 012 - - 102 012 Derivatives - Hedge Accounting- 58 855 - 58 855 Interest rate contracts- 58 855 - 58 855 Liabilities at fair value 102 012 601 843 1 837 705 692 At Fair ValueTotal Fair ValueQuoted market pricesValuation models based on observable market parametersValuation models based on unobservable market parameters The changes occurred in financial assets and liabilities valued based on non-observable market information (level 3 of the fair value hierarchy) during the financial years of 2019 and 2018, may be analysed as follows: NOVO BANCO | 2019 ANNUAL REPORT | 219 (in thousands of Euros)(Level 1)(Level 2)(Level 3)31 December 2018Financial assets held for trading 257 270 515 940 70 573 843 783 Securities held for trading 257 270 - - 257 270 Bonds issued by public entities 257 269 - - 257 269 Bonds issued by other entities 1 - - 1 Derivatives held for trading- 515 940 396 516 336 Exchange rate contracts- 32 731 - 32 731 Interest rate contracts- 436 375 396 436 771 Credit default contracts- 9 - 9 Other- 46 825 - 46 825 Economic hedging derivatives- - 70 177 70 177 Interest rate contracts- - 70 177 70 177 Financial assets mandatorily at fair value through profit or loss 78 549 46 1 487 630 1 566 225 Bonds issued by other entities 1 46 - 47 Shares 78 304 - 596 519 674 823 Other variable income securities 244 - 891 111 891 355 Financial assets at fair value through profit or loss 480 - - 480 Bonds issued by other entities 480 - - 480 Financial assets at fair value through other comprehensive income7 587 936 27 558 45 713 7 661 207 Bonds issued by public entities6 620 509 - - 6 620 509 Bonds issued by other entities 951 085 - - 951 085 Shares 16 342 27 558 45 710 89 610 Other variable income securities- - 3 3 Derivatives - Hedge Accounting- 1 227 - 1 227 Interest rate contracts- 1 227 - 1 227 Investment properties- - 1 098 071 1 098 071 Assets at fair value7 924 235 544 771 2 701 987 11 170 993 Financial liabilities held for trading- 490 229 2 724 492 953 Derivatives held for trading- 490 229 2 724 492 953 Exchange rate contracts- 32 748 - 32 748 Interest rate contracts- 433 277 2 724 436 001 Credit default contracts- 117 - 117 Other- 24 087 - 24 087 Financial liabilities at fair value through profit or loss- 96 762 - 96 762 Debt securities issued- 96 762 - 96 762 Derivatives - Hedge Accounting- 36 150 - 36 150 Interest rate contracts- 36 150 - 36 150 Liabilities at fair value- 623 141 2 724 625 865 At Fair ValueQuoted market pricesValuation models based on observable market parametersValuation models based on unobservable market parametersTotal Fair Value(in thousands of Euros)Financial liabilities held for tradingSecurities held for tradingDerivatives held for tradingEconomic hedging derivativesDerivatives held for tradingBalance as at 31 December 2018- 396 70 177 1 487 630 - 45 713 1 098 071 2 701 987 2 724 2 724 Acquisitions- - - 86 828 100 14 309 - 101 237 - - Attainment of maturity- - ( 44 412)- - - ( 44 412)- - Liquidation- ( 396)- ( 93 656)- ( 14 692)- ( 108 744)( 347)( 347)Transfers in- - - - - - 9 455 9 455 - - Transfers out- - - - ( 16)- - ( 16)- - Sales- - - - - - ( 197 058)( 197 058)- - Changes in value- 191 3 916 ( 293 726)( 84)( 8 151)( 216 119)( 513 973)( 540)( 540)Other movements- - - - - - 6 395 6 395 - - Balance as at 31 December 2019- 191 74 093 1 142 664 - 37 179 700 744 1 954 871 1 837 1 837 Investment propertiesTotal assetsTotal liabilitiesFinancial assets at fair value through profit or loss31.12.2019Financial assets held for tradingFinancial assets mandatorily at fair value through profit or lossFinancial assets at fair value through other comprehensive income(in thousands of Euros)Financial liabilities held for tradingSecurities held for tradingDerivatives held for tradingEconomic hedging derivativesDerivatives held for tradingBalance as at 31 December 2017 81 448 103 779 29 563 - 2 070 262 1 144 432 3 348 565 2 440 2 440 Impact of transition to IFRS 9( 81)- - 1 352 143 - (2 019 781)- ( 667 719)- - Balance as at 1 January 2018- 448 103 779 1 381 706 - 50 481 1 144 432 2 680 846 2 440 2 440 Acquisitions- 163 - 32 872 - 7 576 13 720 54 331 - - Attainment of maturity- - - ( 44 020)- ( 6 377)- ( 50 397)- - Liquidation- - - ( 48 993)- ( 59)- ( 49 052)- - Transfers in- - 70 177 - - - 23 401 93 578 - - Transfers out- - ( 103 779)- - - - ( 103 779)- - Sales- - - - - ( 69 703)( 69 703)- - Changes in value- ( 215)- 166 065 - ( 5 908)( 16 518) 143 424 284 284 Other movements- - - - - - 2 739 2 739 - - Balance as at 31 December 2018- 396 70 177 1 487 630 - 45 713 1 098 071 2 701 987 2 724 2 724 31.12.2018Financial assets held for tradingFinancial assets mandatorily at fair value through profit or lossFinancial assets at fair value through other comprehensive incomeInvestment propertiesTotal assetsTotal liabilitiesFinancial assets at fair value through profit or loss Potential gains and losses on financial instruments and investment property classified at level 3 of the fair value hierarchy are recorded in profit or loss or revaluation reserves in accordance with the respective asset accounting policy. The amounts calculated at 31 December 2019 and 2018 were as follows: The following table presents, for assets included in level 3 of the fair value hierarchy, the main valuation methods used and the impact of changing the main variables used in their valuation, when applicable: NOVO BANCO | 2019 ANNUAL REPORT | 220 (in thousands of Euros)Recognised in reservesRecognised in the income statementTotalRecognised in reservesRecognised in the income statementTotalDerivatives held for trading- 682 682 - ( 464)( 464)Securities held for trading- - - - - - Economic hedging derivatives- 6 204 6 204 - 24 724 24 724 Financial assets mandatorily at fair value through profit or loss- ( 287 694)( 287 694)- ( 55 312)( 55 312)Financial assets at fair value through other comprehensive income 11 - 11 ( 106 848)- ( 106 848)Investment properties- ( 216 119)( 216 119)- ( 16 518)( 16 518) 11 ( 496 927)( 496 916)( 106 848)( 47 570)( 154 418)31.12.201831.12.2019(in millions of Euros)ChangeImpactChangeImpactFinancial assets held for trading 74.3 - -Derivatives held for tradingOther(a) 0.2 - -Economic hedging derivatives(b) 74.1 - -Financial assets mandatorily at fair value through profit or loss1 142.7( 34.1) 40.6Shares 489.6( 29.3) 31.0Discounted cash flow modelSpecific Impairment 74.7-50%( 29.3)+50% 31.0Other(a) 2.8 - -Valuation of the management companyNet assets value (c) 412.1 - -Other variable income securities 653.1( 4.8) 9.6Other 27.7 - -Valuation of the management company 625.4-50%( 4.8)+50% 9.6Financial assets at fair value through other comprehensive income 37.2 - -SharesOther 37.2 - -Investment PropertiesValuation of the management companyNet assets value (c) 700.7 - -Total1 954.9( 34.1) 40.6(b) In the specific case of derivatives valued according to information provided by external entities, it is not reasonable to carry out an analysis of the impact of changes of the variables subjacent to the determination of the quotation by the entity(c)Inthespecificcaseofparticipationunitsvaluedinaccordancewithquotationsprovidedbytherespectivemanagementcompany,itisnotreasonabletocarryoutananalysisoftheimpactofchangesofthevariablessubjacenttothedeterminationofthequotationby the entity(a) No sensitivity analysis was carried out for these categories as these include securities of an individually immaterial value.Assets classified under level 331.12.2019Valuation Model Variable analysedCarrying book valueUnfavorable scenarioFavorable scenario(in millions of Euros)ChangeImpactChangeImpactFinancial assets held for trading 70.6 - -Derivatives held for tradingOther(a) 0.4 - -Economic hedging derivatives(b) 70.2 - -Financial assets mandatorily at fair value through profit or loss1 487.6( 23.0) 30.1Shares 596.5( 23.0) 30.1Discounted cash flow modelSpecific Impairment 83.5-50%( 23.0)+50% 30.1Other(a) 2.8 - -Valuation of the management companyNet assets value (c) 510.3 - -Outros títulos de rendimento variável 891.1 - -Other(a) 0.2 - -Other 27.4 - -Valuation of the management companyNet assets value (c) 863.5 - -Financial assets at fair value through other comprehensive income 45.7 - -Shares 45.7 - -Other(a) 32.8 - -Other 10.9 - -Valuation of the management companyNet assets value (c) 2.1 - -Investment PropertiesValuation of the management companyNet assets value (c)1 098.1 - -Total2 702.0( 23.0) 30.1(c)Inthespecificcaseofparticipationunitsvaluedinaccordancewithquotationsprovidedbytherespectivemanagementcompany,itisnotreasonabletocarryoutananalysisoftheimpactofchangesofthevariablessubjacenttothedeterminationofthequotationby the entity(a) No sensitivity analysis was carried out for these categories as these include securities of an individually immaterial valueAssets classified under level 331.12.2018Valuation Model Variable analysedCarrying book valueUnfavorable scenarioFavorable scenario(b) In the specific case of derivatives valued according to information provided by external entities, it is not reasonable to carry out an analysis of the impact of changes of the variables subjacent to the determination of the quotation by the entity The main parameters used, at 31 December 2019 and 2018, in the valuation models were as follows: Interest rate curves The short-term rates presented reflect benchmark interest rates for the money market, whilst those presented for the long-term represent the interest rate swap quotations for the respective periods: Credit Spreads The credit spreads used by the Group in the valuation of credit derivatives are those disclosed on a daily basis by Markit, representing observations pertaining to around 85 renowned international financial entities. The evolution of the main indexes, understood as being representative of the credit spread behaviour in the market during the year, is presented as follows: Interest rate volatility The values presented below represent the implicit volatilities (at the money) used for the valuation of interest rate options: NOVO BANCO | 2019 ANNUAL REPORT | 221 (%)EURUSDGBPEURUSDGBPOvernight-0.45601.60000.7500-0.42002.40000.76501 month-0.43801.79000.7650-0.36302.70000.90503 months-0.38301.92000.8650-0.30902.87000.95006 months-0.32401.93000.9000-0.23702.95001.07009 months-0.31741.91000.9450-0.22953.03001.16001 year-0.31611.74900.7419-0.22502.74400.98983 years-0.23801.65560.8243-0.06502.58001.21935 years-0.12051.69900.88440.20102.57801.30507 years0.01601.76300.94060.46902.62101.357410 years0.21101.84701.01720.81502.71101.436515 years0.46701.96501.09681.16902.78901.513120 years0.59902.01601.12061.34502.81901.546125 years0.63702.03501.11301.37202.81901.549130 years0.63102.04201.10821.40502.81101.541131.12.201931.12.2018(basis points)IndexSeries1 year3 years5 years7 years10 years31 December 2019CDX USD Main339.0923.3145.3067.4790.08iTraxx Eur Main32-23.3244.2264.9985.26iTraxx Eur Senior Financial32--51.59-83.4531 December 2018CDX USD Main3028.3455.9187.74112.28132.90iTraxx Eur Main29-54.7688.08111.06131.23iTraxx Eur Senior Financial29--109.52-146.91(%)EURUSDGBPEURUSDGBP1 year12.7118.8748.8316.4811.2533.953 years22.7439.2357.7332.1722.87-5 years33.5136.5764.0448.2027.2958.017 years40.1239.2567.7957.4228.3561.2510 years46.4634.7170.8763.3430.20-15 years51.03--64.69--31.12.201931.12.2018 Foreign exchange rates and volatility Presented below, are the foreign exchange rates (European Central Bank) at the balance sheet date and the implicit volatilities (at the money) for the main currencies used in the derivatives’ valuation: Regarding foreign exchange rates, the Group uses in its valuation models the spot rate observed in the market at the moment of the valuation. Equity indexes The table below presents the evolution of the main market equity indexes and their respective volatilities, used in the valuation of equity derivatives: The fair value of financial assets and liabilities recorded in the balance sheet at amortised cost is analysed as follows, having been estimated based on the main methodologies and assumptions described below: NOVO BANCO | 2019 ANNUAL REPORT | 222 Foreign exchange rate31.12.201931.12.20181 month3 months6 months9 months1 yearEUR/USD1,12341,14505,035,245,435,585,85EUR/GBP0,85080,89457,106,786,836,806,95EUR/CHF1,08541,12693,984,204,354,584,68EUR/NOK9,86389,94836,296,306,406,506,58EUR/PLN4,25684,30143,803,854,044,134,20EUR/RUB69,956379,71537,518,078,719,299,58USD/BRL a)4,01973,881210,4510,5810,5710,6510,73USD/TRY b)5,95015,291512,0513,2014,3015,1315,93Volatility (%)a) Calculated based on EUR / USD and EUR / BRL exchange rates.b) Calculated based on EUR / USD and EUR / TRY exchange rates.31.12.201931.12.2018% Change1 month3 monthsDJ Euro Stoxx 50 3 745 3 001 -19.86%11.1511.68-PSI 20 5 214 4 731 -9.26%9.6710.42-IBEX 35 9 549 8 540 -10.57%12.1512.24-FTSE 100 7 542 6 728 -10.80%13.2111.9011.26DAX 13 249 10 559 -20.30%10.7012.1212.59S&P 500 3 231 2 507 -22.41%7.329.5311.14BOVESPA 115 645 87 887 -24.00%11.2415.0319.21Implied VolatilityHistorical volatilityQuotation(in thousands of Euros)(Level 1)(Level 2)(Level 3)31 December 2019Cash, cash balances at central bank and other demand deposits1 854 081 - 1 854 081 - 1 854 081 Financial assets at amortised costDebt securities1 622 545 84 535 636 336 1 046 352 1 767 223 Loans and advances to banks 369 228 - 369 228 - 369 228 Loans and advances to customers25 149 687 - - 25 478 179 25 478 179 Financial assets28 995 541 84 535 2 859 645 26 524 531 29 468 711 Financial liabilities measured at amortised costDeposits from banks9 849 623 - 9 875 850 - 9 875 850 Due to customers28 400 127 - - 28 400 127 28 400 127 Debt securities issued, subordinated debt and liabilities associated to transferred assets1 065 211 1 365 636 - 89 087 1 454 723 Other financial liabilities 358 688 - 358 688 358 688 Financial liabilities39 673 649 1 365 636 9 875 850 28 847 902 40 089 388 Assets / liabilities recorded at amortised costFair ValueQuoted market pricesValuation models based on observable market parametersValuation models based on unobservable market parametersTotal fair value Cash and deposits with Central Banks, Deposits with banks and Loans and advances to credit institutions and Deposits from Central Banks. Considering the short-term nature of these financial instruments, their carrying book value is a reasonable estimate of their fair value. Securities at amortised cost The fair value of securities recorded at fair value is estimated according to the methodologies used for the valuation of securities recorded at fair value, as described at the beginning of the current Note. Loans and advances to customers The fair value of loans and advances to customers is estimated based on the discounted expected future cash flows of principal and interest, assuming that the instalments are paid on the dates contractually defined. The expected future cash flows from portfolios of loans with similar credit risk characteristics, such as residential mortgage loans, are estimated collectively on a portfolio basis. The discount rates used by the Group are the current interest rates used for loans with similar characteristics. Deposits from credit institutions The fair value of deposits from Central Banks and Deposits from credit institutions is estimated based on the discounted expected future cash flows of principal and interest. Due to customers The fair value of these financial instruments is estimated based on the discounted expected future cash flows of principal and interest. The discount rate used by the Group is that which reflects the current interest rates applicable to deposits with similar characteristics at the balance sheet date. Given that the interest rates applicable to these instruments are renewed for periods under one year, there are no material relevant differences in their fair value. Debt Securities issued, subordinated debt and financial liabilities associated to transferred assets The fair value of these instruments is based on quoted market prices, when available. When not available, the Group estimates their fair value by discounting their expected future cash flows of principal and interest. Other financial liabilities These liabilities are short-term and therefore the book value is a reasonable estimate of their fair value. NOVO BANCO | 2019 ANNUAL REPORT | 223 (in thousands of Euros)(Level 1)(Level 2)(Level 3)31 December 2018Cash, cash balances at central bank and other demand deposits 977 672 - 977 672 - 977 672 Financial assets at amortised costDebt securities1 389 400 10 464 705 677 815 891 1 532 032 Loans and advances to banks 423 058 - 423 058 - 423 058 Loans and advances to customers24 720 610 - - 24 868 050 24 868 050 Financial assets27 510 740 10 464 2 106 407 25 683 941 27 800 812 Financial liabilities measured at amortised costDeposits from banks8 355 560 - 8 360 378 - 8 360 378 Due to customers28 695 268 - - 28 695 268 28 695 268 Debt securities issued, subordinated debt and liabilities associated to transferred assets1 051 843 1 137 312 - 98 160 1 235 472 Other financial liabilities 233 826 - - 233 826 233 826 Financial liabilities38 336 497 1 137 312 8 360 378 29 027 254 38 524 944 Fair ValueTotal fair valueAssets / liabilities recorded at amortised costQuoted market pricesValuation models based on observable market parametersValuation models based on unobservable market parameters NOTE 40 – ASSET TRANSFERS As part of the restructuring process of the Portuguese real estate sector, several initiatives were launched to create financial, operational and management conditions to the sector. Accordingly, the Government, in close liaison with the business and the financial sector, including BES, encouraged the creation of companies and specialised funds which, through concentration, aggregation, mergers and integrated management, could achieve the required synergies to recover the companies. Pursuing the goals established, companies (parent companies) were incorporated, in which the Originating Bank had minority interests and which, in turn, now hold almost all the share capital of certain subsidiaries (subsidiaries of those parent companies) to acquire certain real estate bank loans. Several assignments operations of financial assets (namely loans and advances to customers) were made to the latter entities (subsidiaries of the parent companies). These entities are responsible for managing the assets received as collateral and, after the assignment of the loans and advances to customers, for implementing a plan to increase their value. Almost all the financial assets assigned under these operations were derecognised from the balance sheet of the Group, since a substantial portion of the risks and rewards associated with these, as well as the respective control, were transferred to those third parties. These acquiring entities have a specific management structure, fully autonomous from the assignor banks, appointed on the date of their incorporation and have the following main responsibilities: - define the entity’s purpose; - to administer and manage, exclusively and independently, the assets acquired, to define the objectives and investment policy as well as the management and affairs of the entity. The acquiring entities are predominantly financed through the issuance of senior equity instruments, fully subscribed by the parent companies. The amount of capital represented by senior securities equals the fair value of the underlying asset, determined through a negotiation process based on valuations made by both parties. These securities are remunerated at an interest rate that reflects the risk of the company holding the assets. Additionally, the funding can be supplemented through bank underwriting of junior capital instruments in an amount equal to the difference between the carrying book value of the assets transferred and the fair value subjacent to the senior securities’ valuation. These junior capital instruments, when subscribed by the Group, will give rise to a contingent positive amount, if the value of the assets assigned exceeds the value of the senior securities plus their remuneration, and are normally limited to a maximum of 25% of the aggregate amount of the senior and junior securities issued. Given that these junior securities reflect a differential assessment (gap) of the fair value of the assets assigned, based on a valuation performed by independent entities and a negotiation process between the parties, they are fully provided for in the Group's balance sheet. Therefore, following the asset assignment operations, the Group subscribed: - equity instruments, representing the capital of parent companies in which the cash flow that will enable the company to be recovered come from a wide range of assets provided by the various banks. These securities are recognised in the assets portfolio mandatorily at fair value through profit or loss being valued to market, with valuation released regularly by the mentioned companies whose accounts are audited at the end of each year; - junior instruments issued by the loan acquiring companies, which are fully provided for to reflect the best estimate of the impairment of the financial assets transferred. NOVO BANCO | 2019 ANNUAL REPORT | 224 The instruments subscribed by NOVO BANCO Group represent clear minority positions in the share capital of the parent companies and of its subsidiaries. In this context, holding no control but being exposed to some of the risks and rewards of ownership, the NOVO BANCO Group, in accordance with IFRS 9 3.2.7, performed an analysis of its exposure to the variability of the risks and rewards of the transferred assets before and after the operation, having concluded that it has not substantially retained all the risks and rewards of ownership. Additionally, and considering that it has no control either, it proceeded, in accordance with IFRS 9 3.2.6c (i) with the derecognition of the assets transferred and (ii) the recognition of the assets received in return, as shown in the following table: As at 31 December 2019, the Group's total exposure to securities associated with the assignment operations amounted to Euro 839.9 million (December 31, 2018: Euro 1 086.0 million). With the adoption of IFRS 9, these securities were transferred from the fair value portfolio through other comprehensive income to the mandatorily measured at fair value through profit or loss portfolio place to the impairment register. The detail is as follows: The Group also maintains an indirect exposure to the assets ceded, considering its minority participation in the pool of assets ceded by other financial institutions, due to the minority participation subscribed in the parent NOVO BANCO | 2019 ANNUAL REPORT | 225 (in thousands of Euros)Net assets transferredTransfer amountResult of the transferShares(Senior securities)Junior securitiesTotalImpairment Carrying book valueUp to 31 December 2012Fundo Recuperação Turismo, FCR 282 121 282 121 - 256 892 34 906 291 798 ( 34 906) 256 892 FLIT SICAV 252 866 254 547 1 682 235 318 23 247 258 565 ( 23 247) 235 318 Discovery Portugal Real Estate Fund96 196 93 208 (2 988)96 733 - 96 733 - 96 733 Fundo Vallis Construction Sector 66 272 66 272 - 81 002 21 992 102 994 (21 992)81 002 Fundo Recuperação, FCR145 564 149 883 4 319 148 787 36 182 184 970 (23 000)161 970 Up to 31 December 2013Fundo Vallis Construction Sector 18 552 18 552 - 1 606 2 874 4 480 (2 874)1 606 FLIT SICAV80 769 80 135 ( 634)85 360 - 85 360 - 85 360 Discovery Portugal Real Estate Fund51 809 45 387 (6 422)51 955 - 51 955 - 51 955 Fundo Recuperação Turismo, FCR11 066 11 066 - - - - - - Fundo Recuperação, FCR52 983 52 963 ( 20) 726 - 726 - 726 Fundo Reestruturação Empresarial67 836 67 836 - 99 403 - 99 403 - 99 403 Up to 31 December 2014Discovery Portugal Real Estate Fund73 802 74 240 438 58 238 - 58 238 - 58 238 Fundo Vallis Construction Sector - - - 1 289 314 1 603 ( 314)1 289 Fundo Recuperação, FCR- - - 14 565 - 14 565 - 14 565 Fundo Reestruturação Empresarial5 389 5 389 - 4 078 - 4 078 - 4 078 Fundo Aquarius108 517 108 481 ( 36)104 339 - 104 339 - 104 339 FLIT SICAV- - - 1 500 - 1 500 - 1 500 Up to 31 December 2015Fundo Aquarius24 883 24 753 ( 130)30 406 - 30 406 - 30 406 Fundo Recuperação, FCR1 471 1 471 - - - - - - Discovery Portugal Real Estate Fund5 348 5 774 427 4 855 - 4 855 - 4 855 Up to 31 December 2016Fundo Aquarius 710 602 ( 108) 600 - 600 - 600 Fundo Vallis Construction Sector 14 156 14 156 - 14 453 - 14 453 - 14 453 Up to 31 December 2017Fundo Aquarius 555 470 ( 86) 624 - 624 - 624 FLIT SICAV 3 261 3 298 37 - - - - - FIAE CAPITAL CRIATIVO PROMOÇÃO E TURISMO 131 013 131 056 43 133 927 - 133 927 - 133 927 Up to 31 December 2018Fundo Aquarius 839 644 ( 194) 644 - 644 - 644 FLIT SICAV- - - 3 348 - 3 348 - 3 348 Fundo Vallis Construction Sector - - - ( 1)- ( 1)- ( 1)Up to 31 December 2019Fundo Aquarius 376 332 ( 44) 507 - 507 - 507 1 496 355 1 492 637 ( 3 718) 1 431 155 119 516 1 550 671 ( 106 333) 1 444 337 Amounts of the assets transferredSecurities subscribedAmounts at transfer date(in thousands of Euros)Participation units subscribed (no.)Book valueGross amount ImpairmentNet amountParticipation units subscribed (no.)Book valueGross amount ImpairmentNet amountFundo Recuperação Turismo, FCR 259 646 180 646 34 824 ( 34 824)- 14 807 270 627 225 478 34 824 ( 34 824)- 14 807 FLIT SICAV 279 515 197 744 14 900 ( 14 900)- 15 309 280 131 253 055 16 131 ( 16 131)- 16 634 Discovery Portugal Real Estate Fund 256 847 213 217 - - - 7 193 253 423 255 224 - - - 11 262 Fundo Vallis Construction Sector - - - - - - 122 108 249 - - - - 190 Fundo Recuperação, FCR 206 805 74 296 - - - 19 063 213 635 116 140 - - - 19 906 Fundo Reestruturação Empresarial 117 051 48 148 - - - 8 237 150 061 89 179 - - - 17 747 Fundo Aquarius 159 274 125 875 - - - 22 800 158 769 146 909 - - - 22 332 1 279 138 839 926 49 724 ( 49 724)- 87 409 123 434 895 1 085 985 50 955 ( 50 955)- 102 878 31.12.2018SecuritiesShareholder loans or supplementary capital Unrealised Subscribed Capital31.12.2019SecuritiesShareholder loans or supplementary capital Unrealised Subscribed Capital companies. There was, however, an operation with the company FLITPTREL VIII in respect of which, as the acquiring company substantially holds assets transferred by the Group and taking into consideration the junior securities held, the variability test resulted in a substantial exposure to all the risks and rewards. Under this circumstance, the operation amounting to Euro 60 million remains recognised in the Group’s balance sheet under Loans and advances to customers. NOTE 41 – RISK MANAGEMENT The Group is exposed to the following risks arising from the use of financial instruments: - Credit risk; - Market risk; - Liquidity risk; - Operational risk. Credit risk Credit risk represents the potential financial loss arising from the failure of a borrower or counterparty to honor its contractual obligation established with the Group in the scope of its credit granting activity. Credit risk is essentially present in traditional banking products – loans, guarantees provided and other contingent liabilities. In credit default swaps (CDS), the net exposure between selling and buying positions in relation to each reference entity, is also considered a credit risk to NOVO BANCO Group. CDSs are accounted for at fair value in accordance with the accounting policy described in Note 2.4. Credit portfolio management is an ongoing process that requires the interaction between the various teams responsible for risk management throughout the consecutive stages of the credit process. This approach is complemented by the continuous introduction of improvements in the valuation methodologies and tools used to evaluate and control risk, as well as in the procedures and decision making processes. The risk profile of the Group is analysed on a regular basis by the Risk Committee, especially regarding the evolution of the credit exposure and the monitoring of credit losses. Regular analyzes also include compliance with the approved credit limits and the correct operation of the mechanisms associated with the approval of credit lines within the scope of the current activity of the commercial areas. NOVO BANCO Group’s maximum credit risk exposure is analysed as follows: NOVO BANCO | 2019 ANNUAL REPORT | 226 (in thousands of Euros)31.12.201931.12.2018Deposits with and loans and advances to banks 635 181 698 847Derivatives for trading and fair value option derivatives 493 884 586 513Securities held for trading 254 848 257 270Securities at fair value through profit/loss- 480Securities at fair value through profit/loss - mandatory 57 590 47Securities at fair value through other comprehensive income 8 764 0047 570 381Securities at amortised cost 1 622 5451 389 400Loans and advances to customers25 202 22724 754 445Derivatives - hedge accounting 7 452 1 227Other assets 802 530 824 161Guarantees and standby letters provided2 899 8513 171 240Documentary credits 516 162 664 905Irrevocable commitments7 253 6565 608 070Credit risk associated with the credit derivatives' reference entities 2 883 7 81448 512 81345 534 800 For financial assets in the balance sheet, the maximum exposure to credit risk is represented by the carrying book value net of impairment. For the off-balance sheet elements, the maximum exposure of the guarantees is the maximum amount that the Group would have to pay if the guarantees were executed. For loan commitments and other credit-related commitments of an irrevocable nature, the maximum exposure is the total amount of the commitments assumed. The Group calculates impairment, on a collective or individual basis in accordance with the accounting policy described in Note 2.5. Whenever the value of the collateral, net of haircuts (taking into account the type of collateral), equals or exceeds the exposure, the individual impairment may be nil. Hence, NOVO BANCO Group does not have any overdue financial assets for which it has not performed a review regarding their recoverability and the subsequent impairment recognition, when necessary. The table below displays the assets impaired, or overdue by not impaired: Impairment exposures correspond to (i) exposures with objective evidence of loss ("Exposure in default", according to the internal definition of default - which corresponds to stage 3); and (ii) exposures classified as having specific impairment after an individual assessment of impairment. Exposures classified as non-impairing relate to (i) all exposures that do not show signs of significant deterioration of credit risk - exposures classified as stage 1; (ii) exposures that, with signs of a significant deterioration of credit risk, have no objective evidence of impairment or impairment after an individual assessment of impairment. NOVO BANCO | 2019 ANNUAL REPORT | 227 (in thousands of Euros)Neither overdue nor impairedOverdue but not impairedImpairedTotal exposureImpairment Net exposureDeposits with and loans and advances to banks 330 768 - 381 501 712 269 ( 77 088) 635 181 Securities held for trading 254 848 - - 254 848 - 254 848 Bonds issued by government and other public entities 254 848 - - 254 848 - 254 848 Securities at fair value through profit/loss - mandatory 57 590 - - 57 590 - 57 590 Bonds issued by other entities 57 590 - - 57 590 - 57 590 Securities at fair value through other comprehensive income8 724 040 - 45 520 8 769 560 ( 5 556)8 764 004 Bonds issued by government and other public entities7 108 022 - - 7 108 022 ( 4 527)7 103 495 Bonds issued by other entities1 616 018 - 45 520 1 661 538 ( 1 029)1 660 509 Securities at amortised cost 1 676 844 - 104 475 1 781 319 ( 158 774)1 622 545 Bonds issued by government and other public entities 459 260 - - 459 260 ( 704) 458 556 Bonds issued by other entities 1 217 584 - 104 475 1 322 059 ( 158 070)1 163 989 Loans and advances to customers 24 080 163 15 645 2 958 914 27 054 722 (1 852 495)25 202 227 31.12.2019(in thousands of Euros)Neither overdue nor impairedOverdue but not impairedImpairedTotal exposureImpairment Net exposureDeposits with and loans and advances to banks 400 113 - 374 474 774 587 ( 75 740) 698 847 Securities held for trading 257 270 - - 257 270 - 257 270 Bonds issued by government and other public entities 257 269 - - 257 269 - 257 269 Bonds issued by other entities 1 - - 1 - 1 Securities at fair value through profit/loss 480 - - 480 - 480 Bonds issued by other entities 480 - - 480 - 480 Securities at fair value through profit/loss - mandatory 47 - - 47 - 47 Bonds issued by other entities 47 - - 47 - 47 Securities at fair value through other comprehensive income7 526 094 - 45 500 7 571 594 ( 1 213)7 570 381 Bonds issued by government and other public entities6 620 509 - - 6 620 509 ( 816)6 619 693 Bonds issued by other entities 905 585 - 45 500 951 085 ( 397) 950 688 Securities at amortised cost 1 437 167 - 147 019 1 584 186 ( 194 786)1 389 400 Bonds issued by government and other public entities 503 123 - - 503 123 ( 771) 502 352 Bonds issued by other entities 934 044 - 147 019 1 081 063 ( 194 015) 887 048 Loans and advances to customers 22 416 810 15 628 6 279 929 28 712 367 (3 957 922)24 754 445 31.12.2018 The following table presents the assets that are impaired or overdue but not impaired, split by their respective maturity or ageing (when overdue): The following table shows the assets impaired or overdue but not impaired, broken down by the respective impairment Stage: In relation to assets that are not overdue or impaired, the distribution by rating level is presented below. For debt instruments, the rating assigned by the Rating Agencies is considered; for the loans and advances to customers and cash and deposits with banks the rating and scoring models for the attribution of a credit rating are used, with these being reviewed periodically. For the purpose of presenting the information, the ratings were aggregated into five large risk groups, with the last group including unrated exposures. NOVO BANCO | 2019 ANNUAL REPORT | 228 (in thousands of Euros)Overdue but not impairedImpairedOverdue but not impaired ImpairedOverdue but not impairedImpairedOverdueUp to 3 months - - - - 13 090 21 488 3 months to 1 year - 6 770 - - 643 68 364 1 to 3 years - 56 070 - - 1 015 315 286 3 to 5 years - 87 155 - - 742 351 725 More than 5 years - - - - 155 337 681 - 149 995 - - 15 645 1 094 544 DueUp to 3 months - - - - - 117 606 3 months to 1 year - - - - - 333 782 1 to 3 years - - - - - 488 369 3 to 5 years - - - - - 163 804 More than 5 years - - - 381 501 - 760 809 - - - 381 501 - 1 864 370 - 149 995 - 381 501 15 645 2 958 914 31.12.2019Deposits with and loans and advances to banksLoans and advances to customersSecurities Portfolio - debtinstruments (in thousands of Euros)Overdue but not impairedImpairedOverdue but not impaired ImpairedOverdue but not impairedImpairedOverdueUp to 3 months - - - - 12 947 59 280 3 months to 1 year - 11 000 - - 1 121 391 646 1 to 3 years - 72 697 - - 1 360 1 204 380 3 to 5 years - 97 775 - - 73 1 149 411 More than 5 years - 219 - 74 127 718 323 - 181 691 - 74 15 628 3 523 040 DueUp to 3 months - 3 880 - - - 231 491 3 months to 1 year - 2 890 - - - 642 055 1 to 3 years - 4 058 - - - 444 982 3 to 5 years - - - - - 290 806 More than 5 years - - - 374 400 - 1 147 555 - 10 828 - 374 400 - 2 756 889 - 192 519 - 374 474 15 628 6 279 929 31.12.2018Securities Portfolio - debtinstruments Deposits with and loans and advances to banksLoans and advances to customers(in thousands of Euros)Stage 1Stage 2Stage 3TotalStage 1Stage 2Stage 3TotalDeposits with and loans and advances to banks - 381 501 - 381 501 - 374 400 74 374 474 Securities at fair value through other comprehensive income - - 45 520 45 520 - - 45 500 45 500 Securities at amortised cost - - 104 475 104 475 - - 147 019 147 019 Loans and advances to customers 944 14 701 2 958 914 2 974 559 6 015 157 208 6 132 334 6 295 557 944 396 202 3 108 909 3 506 055 6 015 531 608 6 324 927 6 862 550 31.12.201931.12.2018 As at 31 December 2019 and 2018, the analysis of the gross loans and advances to customers’ exposure and impairment constituted, by segment, is presented as follows: NOVO BANCO | 2019 ANNUAL REPORT | 229 (in thousands of Euros)Prime +High gradeUpper Medium GradeLower Medium gradeNon Investment Grade Speculative + Highly speculativeOthersTotalDeposits with and loans and advances to banks 45 5 004 13 411 41 607 270 701 330 768 Securities held for trading - 5 070 249 778 - - 254 848 Bonds issued by government and other public entities - 5 070 249 778 - - 254 848 Securities at fair value through profit/loss - mandatory - 47 340 - - 10 250 57 590 Bonds issued by other entities - 47 340 - - 10 250 57 590 Securities at fair value through other comprehensive income1 615 203 2 407 116 3 935 197 - 766 524 8 724 040 Bonds issued by government and other public entities1 169 578 2 400 889 3 537 275 - 280 7 108 022 Bonds issued by other entities 445 625 6 227 397 922 - 766 244 1 616 018 Títulos ao custo amortizado - - 101 711 35 479 1 539 654 1 676 844 Bonds issued by government and other public entities - - - - 459 260 459 260 Bonds issued by other entities - - 101 711 35 479 1 080 394 1 217 584 Loans and advances to customers3 031 066 9 323 234 2 657 812 7 493 726 1 574 325 24 080 163 31.12.2019(in thousands of Euros)Prime +High gradeUpper Medium GradeLower Medium gradeNon Investment Grade Speculative + Highly speculativeOthersTotalDeposits with and loans and advances to banks - 1 020 27 907 20 507 350 679 400 113 Securities held for trading - - 257 269 - 1 257 270 Bonds issued by government and other public entities - - 257 269 - - 257 269 Bonds issued by other entities - - - - 1 1 Securities at fair value through profit/loss - - - - 480 480 Bonds issued by other entities - - - - 480 480 Securities at fair value through profit/loss - mandatory - - - - 47 47 Bonds issued by other entities - - - - 47 47 Securities at fair value through other comprehensive income1 081 656 2 088 725 3 977 041 - 378 672 7 526 094 Bonds issued by government and other public entities 784 128 2 047 323 3 789 058 - - 6 620 509 Bonds issued by other entities 297 528 41 402 187 983 - 378 672 905 585 Títulos ao custo amortizado - - - 533 577 903 590 1 437 167 Bonds issued by government and other public entities - - - 503 123 - 503 123 Bonds issued by other entities - - - 30 454 903 590 934 044 Loans and advances to customers2 672 018 8 591 766 2 767 289 6 455 751 1 929 986 22 416 810 31.12.2018(in thousands of Euros)31.12.2019PerfomingNon-PerfomingTotal CreditDays of delay<= 90 days> 90 daysExposureImpairmentExposureImpairmentExposureImpairmentExposureImpairmentExposureImpairmentExposureImpairmentCorporate12 583 643 154 399 59 792 3 154 12 643 435 157 553 1 089 904 504 311 1 498 692 983 700 2 588 596 1 488 011 15 232 031 1 645 564 Mortgage loans10 034 807 16 649 39 485 615 10 074 292 17 264 70 000 19 745 119 983 29 985 189 983 49 730 10 264 275 66 994 Consumer and other loans 1 280 872 3 101 7 217 389 1 288 089 3 490 149 700 54 426 120 627 82 021 270 327 136 447 1 558 416 139 937 Total 23 899 322 174 149 106 494 4 158 24 005 816 178 307 1 309 604 578 482 1 739 302 1 095 706 3 048 906 1 674 188 27 054 722 1 852 495 Segment Performing or with a delay < 30 days With a delay > 30 daysTotalTotalExposureImpairment(in thousands of Euros)31.12.2018PerfomingNon-PerfomingTotal CreditDays of delay<= 90 days> 90 daysExposureImpairmentExposureImpairmentExposureImpairmentExposureImpairmentExposureImpairmentExposureImpairmentCorporate11 744 329 159 981 39 607 1 552 11 783 936 161 533 1 736 821 710 176 4 074 170 2 936 135 5 810 991 3 646 311 17 594 927 3 807 844 Mortgage loans9 271 040 21 123 50 344 917 9 321 384 22 040 65 263 14 789 163 265 25 511 228 528 40 300 9 549 912 62 340 Consumer and other loans 1 233 946 400 8 697 528 1 242 643 928 180 376 5 895 144 509 80 915 324 885 86 810 1 567 528 87 738 Total 22 249 315 181 504 98 648 2 997 22 347 963 184 501 1 982 460 730 860 4 381 944 3 042 561 6 364 404 3 773 421 28 712 367 3 957 922 Segment TotalPerforming or with a delay < 30 days With a delay > 30 daysTotalExposureImpairment As at 31 December 2019 and 2018, the analysis of the Loans and advances to customers’ portfolio, by segment and by year of reference was as follows: The figures presented include, in addition to all new operations of the reference year, renewals, interventions and restructurings of operations originated in previous years, including the period prior to the setting up of NOVO BANCO. As at 31 December 2019 and 2018, the analysis of the gross loans and advances to customers’ exposure and impairment assessed individually and collectively, by segment, is presented as follows: NOVO BANCO | 2019 ANNUAL REPORT | 230 (in thousands of Euros)Number of operationsAmountImpairment Number of operationsAmountImpairment Number of operationsAmountImpairment Number of operationsAmountImpairment 2004 and prior 6 216 353 552 57 502 77 022 1 791 552 37 053 786 731 92 963 20 101 869 969 2 238 067 114 656 2005 1 296 112 000 11 771 9 502 412 770 2 494 15 980 12 119 332 26 778 536 889 14 597 2006 1 623 288 533 36 673 15 487 746 767 3 452 20 584 18 010 1 032 37 694 1 053 310 41 157 2007 2 035 426 192 42 231 22 824 1 100 894 5 434 29 054 23 832 1 459 53 913 1 550 918 49 124 2008 1 792 672 225 27 953 15 330 780 754 3 328 23 428 23 398 968 40 550 1 476 377 32 249 2009 1 409 369 324 42 067 10 095 542 438 2 266 14 421 28 184 4 717 25 925 939 946 49 050 2010 1 885 409 205 84 735 9 630 565 222 2 866 25 617 40 828 1 842 37 132 1 015 255 89 443 2011 1 641 349 494 54 693 5 198 254 617 1 277 25 716 26 981 1 188 32 555 631 092 57 158 2012 2 068 645 741 301 778 2 883 113 753 770 34 406 31 603 3 681 39 357 791 097 306 229 2013 3 006 718 017 194 251 3 319 172 221 882 30 278 48 750 13 377 36 603 938 988 208 510 2014 3 734 669 259 199 342 2 162 130 315 418 30 312 37 954 2 056 36 208 837 528 201 816 2015 5 238 970 889 136 138 3 257 213 195 603 38 060 142 049 37 492 46 555 1 326 133 174 233 2016 7 248 1 159 554 101 604 6 607 474 544 955 60 776 140 138 30 690 74 631 1 774 236 133 249 2017 10 328 1 748 742 159 893 10 163 840 918 2 788 68 816 202 931 11 014 89 307 2 792 591 173 695 2018 11 048 2 622 431 99 052 11 420 1 078 898 1 191 79 907 272 589 5 617 102 375 3 973 918 105 860 2019 21 838 3 716 873 95 881 10 529 1 045 417 1 217 77 853 416 087 4 371 110 220 5 178 377 101 469 Total 82 405 15 232 031 1 645 564 215 428 10 264 275 66 994 1 361 939 1 558 416 139 937 1 659 772 27 054 722 1 852 495 31.12.2019Year of productionCorporateMortgage loans Consumer and other loansTotal(in thousands of Euros)Number of operationsAmountImpairment Number of operationsAmountImpairment Number of operationsAmountImpairment Number of operationsAmountImpairment 2004 and prior 7 076 404 672 66 265 50 570 1 312 848 30 914 758 229 151 181 11 404 815 875 1 868 701 108 583 2005 1 465 159 938 31 114 9 580 430 394 2 110 19 145 20 105 674 30 190 610 437 33 898 2006 1 733 343 884 47 133 16 077 793 843 3 707 23 831 25 794 1 600 41 641 1 163 521 52 440 2007 2 208 500 710 90 495 25 994 1 217 984 5 724 33 344 33 051 1 816 61 546 1 751 745 98 035 2008 1 980 827 619 104 564 17 494 909 991 3 918 27 187 33 973 1 355 46 661 1 771 583 109 837 2009 1 770 702 954 204 950 11 703 625 950 3 009 24 291 42 401 3 093 37 764 1 371 305 211 052 2010 2 116 749 019 298 113 10 581 626 045 3 126 29 119 57 909 2 294 41 816 1 432 973 303 533 2011 1 908 558 724 127 234 5 893 288 555 1 506 29 394 34 978 1 432 37 195 882 257 130 172 2012 2 381 1 594 847 994 506 3 467 136 581 1 162 36 517 42 463 3 355 42 365 1 773 891 999 023 2013 4 009 1 006 143 336 861 4 174 208 675 1 384 33 044 71 750 12 911 41 227 1 286 568 351 156 2014 4 925 1 227 192 428 132 2 858 162 234 709 30 284 51 008 1 786 38 067 1 440 434 430 627 2015 7 233 1 534 222 306 119 3 835 252 123 696 38 944 172 117 23 618 50 012 1 958 462 330 433 2016 8 713 1 974 241 480 954 7 478 540 541 1 241 58 254 171 062 14 068 74 445 2 685 844 496 263 2017 11 393 2 297 086 141 198 11 094 924 331 1 556 63 878 269 867 6 367 86 365 3 491 284 149 121 2018 21 760 3 713 676 150 206 11 716 1 119 817 1 578 66 707 389 869 1 965 100 183 5 223 362 153 749 Total 80 670 17 594 927 3 807 844 192 514 9 549 912 62 340 1 272 168 1 567 528 87 738 1 545 352 28 712 367 3 957 922 31.12.2018Year of productionCorporateMortgage loans Consumer and other loansTotal(in thousands of Euros)ExposureImpairmentExposureImpairmentExposureImpairmentCorporate 2 358 394 1 391 397 12 873 637 254 167 15 232 031 1 645 564 Mortgage loans 11 065 2 395 10 253 210 64 599 10 264 275 66 994 Consumer and other loans 200 414 115 384 1 358 002 24 553 1 558 416 139 937 Total 2 569 873 1 509 176 24 484 849 343 319 27 054 722 1 852 495 (1) Loans and advances for which the final impairment was determined and approved by the Impairment Committee(2) Loans and advances for which the final impairment was determined according to the calculation rules of the collective impairment model31.12.2019Individual Assessment (1)Collective Assessment (2)Total The loans and advances analysed by the Impairment Committee, for which the impairment amount automatically determined by the model was not changed, are included and presented in the "Collective assessment". As at 31 December 2019 and 2018, the analysis of the gross loans and advances to customers’ exposure and impairment assessed individually and collectively, by geography, is presented as follows: In order to mitigate credit risk, credit operations are secured, namely with mortgages or pledges. The fair value of those guarantees is determined on the date of the loan disbursement, being revalued periodically. The gross amount of the loans to customers and the respective fair value of the collateral, limited to the amount of the associated loans, are as follows: NOVO BANCO | 2019 ANNUAL REPORT | 231 (in thousands of Euros)ExposureImpairmentExposureImpairmentExposureImpairmentCorporate 5 634 590 3 628 850 11 960 337 178 994 17 594 927 3 807 844 Mortgage loans 6 965 847 9 542 947 61 493 9 549 912 62 340 Consumer and other loans 270 710 57 088 1 296 818 30 650 1 567 528 87 738 Total 5 912 265 3 686 785 22 800 102 271 137 28 712 367 3 957 922 (1) Loans and advances for which the final impairment was determined and approved by the Impairment Committee(2) Loans and advances for which the final impairment was determined according to the calculation rules of the collective impairment model31.12.2018Individual Assessment (1)Collective Assessment (2)Total(in thousands of Euros)ExposureImpairmentExposureImpairmentExposureImpairmentPortugal 2 210 925 1 291 749 21 196 952 304 530 23 407 877 1 596 279 Luxembourg- - 109 318 310 109 318 310 United Kingdom 481 116 219 905 1 401 220 386 1 517 Spain 105 236 49 141 1 838 788 28 332 1 944 024 77 473 Cayman Island- - 298 6 298 6 Ireland- - 17 759 31 17 759 31 Other 253 231 168 170 1 101 829 8 709 1 355 060 176 879 Total 2 569 873 1 509 176 24 484 849 343 319 27 054 722 1 852 495 * Loans and advances which the final impairment was determined and approved by the Impairment Committee** Loans and advances for which the final impairment was determined according to the calculation rules of the collective impairment model31.12.2019Individual Assessment*Collective Assessment**Total(in thousands of Euros)ExposureImpairmentExposureImpairmentExposureImpairmentPortugal 4 383 016 2 611 728 19 985 053 237 138 24 368 069 2 848 866 Luxembourg 13 000 13 000 53 952 240 66 952 13 240 United Kingdom 4 330 2 160 187 088 1 033 191 418 3 193 Spain 551 972 261 685 1 607 369 21 145 2 159 341 282 830 Cayman Island- - 617 12 617 12 Ireland 346 245 334 473 15 300 88 361 545 334 561 Other 613 702 463 739 950 723 11 481 1 564 425 475 220 Total 5 912 265 3 686 785 22 800 102 271 137 28 712 367 3 957 922 * Loans and advances which the final impairment was determined and approved by the Impairment Committee** Loans and advances for which the final impairment was determined according to the calculation rules of the collective impairment modelIndividual Assessment*Collective Assessment**Total31.12.2018 The differential between the amount of the loans and advances to customers and the fair value of the collateral represents the total loans’ exposure that exceeds the value of the collateral. This value is not impacted by collaterals with a fair value in excess of the loan to which they are linked. The details of the collateral – mortgages is presented as follows: The amounts of the collateral – mortgages, presented above, represent the maximum coverage value of the assets collateralised, i.e. which are considered up to the gross amount of the individual loans collateralised. The assessment of the risk of an operation or set of operations considers the associated credit risk mitigation elements, according to the internal rules and procedures implemented. Relevant collaterals are essentially the following: - Real estate properties, where the value considered is that which corresponds to the latest available valuation; NOVO BANCO | 2019 ANNUAL REPORT | 232 (in thousands of Euros)31.12.201931.12.2018Amount of loansFair value of collateralAmount of loansFair value of collateralIndividuals - MortgageMortgages10 083 366 10 065 713 9 403 659 9 385 839 Pledges 82 044 81 368 60 033 59 648 Not collateralized 98 865 - 86 220 - 10 264 275 10 147 081 9 549 912 9 445 487 Individuals - OtherMortgages 268 964 263 156 280 404 268 346 Pledges 342 268 210 696 381 993 236 924 Not collateralized 947 184 - 905 131 - 1 558 416 473 852 1 567 528 505 270 CorporateMortgages 2 915 576 2 572 755 3 491 159 3 148 547 Pledges5 017 404 2 585 665 6 394 421 2 820 883 Not collateralized 7 299 051 - 7 709 347 - 15 232 031 5 158 420 17 594 927 5 969 430 Total 27 054 722 15 779 353 28 712 367 15 920 187 (in thousands of Euros)NumberAmountNumberAmountNumberAmountNumberAmount<0,5M€ 210 236 9 878 305 5 398 228 186 8 605 408 838 224 239 10 515 329 >= 0,5M€ e <1,0M€ 235 138 719 45 16 666 2 132 242 563 2 412 397 948 >= 1,0M€ e <5,0M€ 46 48 689 18 18 304 6 416 705 489 6 480 772 482 >= 5,0M€ e <10,0M€- - - - 692 323 224 692 323 224 >= 10,0M€ e <20,0M€- - - - 3 267 303 545 3 267 303 545 >= 20,0M€ e <50,0M€- - - - 222 518 961 222 518 961 >=50M€- - - - 1 70 135 1 70 135 210 517 10 065 713 5 461 263 156 21 335 2 572 755 237 313 12 901 624 a) The allocation by intervals was based on the total amount of collateral per credit agreementColateral intervals a)Individuals - Mortgage loansTotal31.12.2019Individuals - Other loansCorporate loans(in thousands of Euros)NumberAmountNumberAmountNumberAmountNumberAmount<0,5M€ 185 611 9 216 814 5 136 220 736 8 681 438 147 199 428 9 875 697 >= 0,5M€ e <1,0M€ 224 127 415 60 23 151 2 306 293 432 2 590 443 998 >= 1,0M€ e <5,0M€ 36 41 610 25 24 459 3 352 831 329 3 413 897 398 >= 5,0M€ e <10,0M€- - - - 635 414 388 635 414 388 >= 10,0M€ e <20,0M€- - - - 1 260 379 255 1 260 379 255 >= 20,0M€ e <50,0M€- - - - 161 453 519 161 453 519 >=50M€- - - - 1 603 338 477 1 603 338 477 185 871 9 385 839 5 221 268 346 17 998 3 148 547 209 090 12 802 732 a) The allocation by intervals was based on the total amount of collateral per credit agreement31.12.2018Colateral intervals a)Individuals - Mortgage loansIndividuals - Other loansCorporate loansTotal - Financial pledges, where the value considered corresponds to the quotation on the last day of the month - in the case of a quoted security - or to the value of the pledge - in the case of cash. The acceptance of collateral as a guarantee for loans and advances to customers leads to the need to define and implement risk mitigation techniques in respect of the exposures of said collateral. Thus, and as an approach to this matter, the Group stipulated several procedures applicable to collateral (namely the financial and real estate properties collateral), covering amongst others, the volatility of the value of the collateral, its liquidity as well as an indication as to the recovery rates associated with each type of collateral. Therefore, the internal rules governing the credit granting powers have a specific chapter on this point, "Acceptance of collateral - Risk mitigation techniques in respect of the exposures of said collateral, namely the risks of liquidity and volatility." The real estate properties revaluation process is conducted by valuation experts registered with the CMVM, and is based on the methodology described in Note 2.11. The analysis of risk exposure by sector of activity, as at 31 December 2019 and 2018, is presented as follows: The Group identifies and marks loan agreements restructured due to financial difficulties of the customer whenever there are changes to the terms and conditions of an agreement in respect of which the customer defaulted, or it is foreseeable that this will come to happen, in respect to a financial obligation. A change to the terms and conditions of the agreement is deemed to exist when (i) there are contractual changes to the NOVO BANCO | 2019 ANNUAL REPORT | 233 (in thousands of Euros)31.12.2019Guarantees and endorsements providedGross amountImpairmentGross amountImpairment Gross amountImpairment Gross amountImpairment Agriculture, Forestry and Fishery 374 469 ( 17 182)- 511 - - - 31 712 ( 15) 5 968 ( 15) 12 979 ( 517)Mining 84 012 ( 12 676)- - - - - 109 - - - 8 217 ( 115)Food, Beverages and Tobacco 510 044 ( 19 984)- 10 863 - - - - - 22 640 ( 2 218) 56 171 ( 413)Textiles and Clothing 306 688 ( 13 773)- 199 - - - 9 988 ( 9) 3 596 ( 3) 9 964 ( 4 545)Leather and Shoes 57 665 ( 4 321)- 51 - - - - - 1 999 ( 1) 1 660 ( 107)Wood and Cork 91 620 ( 3 405)- 178 - - - - - 996 ( 2) 6 347 ( 32)Paper and Printing Industry 201 151 ( 34 597)- - - - - - - 2 498 ( 5) 4 344 ( 30)Refining of Petroleum 9 337 ( 56)- - - - - - - - - 5 210 - Chemicals and Rubber 327 606 ( 7 888)- 958 - - - 19 305 ( 16) 2 985 ( 6) 25 461 ( 176)Non-metallic Minerals 127 028 ( 16 282)- - - - - 16 664 ( 16) 3 648 ( 3) 17 138 ( 370)Metallurgical Industries and Metallic Products 406 350 ( 10 453)- 750 - - - 21 142 ( 18) 6 706 ( 17) 40 531 ( 326)Production of Machinery, Equipment and Electrical Devices 131 352 ( 7 118)- 788 - - - 20 643 ( 12) 492 ( 1) 60 648 ( 1 127)Production of Transport Material 98 639 ( 2 952)- 87 - - - - - - - 10 413 ( 106)Other Transforming Industries 144 628 ( 8 094)- 1 - - - - - 4 987 ( 17) 26 382 ( 767)Electricity, Gas and Water 434 743 ( 22 595)- 31 996 - - - 54 410 ( 42) 195 061 ( 1 002) 79 249 ( 69)Construction and Public Works 1 411 666 ( 236 081)- 94 989 - - - - - 183 129 ( 34 604) 897 348 ( 43 165)Wholesale and Retail Trade 1 383 933 ( 84 799)- 1 435 - - - 40 450 ( 29) 13 834 ( 9) 246 231 ( 3 961)Tourism 911 311 ( 37 090)- 520 - - - 144 - - - 70 407 ( 6 347)Transport and Communication 1 079 857 ( 72 770)- 105 644 - - - 134 815 ( 89) 10 227 ( 11) 387 299 ( 9 108)Financial Activities 555 298 ( 66 979)- 217 480 - 1 237 207 7 452 698 324 ( 220) 79 083 ( 371) 145 391 ( 871)Real Estate Activities 2 105 462 ( 214 942)- 7 898 - 2 751 - 35 355 ( 19) 117 986 ( 18 163) 234 056 ( 15 604)Services Provided to Companies 2 890 012 ( 411 570)- 15 910 - 62 506 - 322 734 ( 77) 656 224 ( 101 424) 464 381 ( 4 218)Public Administration and Services 663 576 ( 26 294) 254 848 1 391 - - - 7 108 366 ( 4 527) 459 260 ( 704) 25 100 ( 279)Other activities of collective services 807 890 ( 274 143)- 2 235 - 12 278 - 172 519 ( 447) 10 000 ( 198) 130 767 ( 1 109)Mortgage Loans 10 264 275 ( 66 994)- - - - - - - - - 33 - Consumers Loans 1 558 416 ( 139 937)- - - - - - - - - 12 490 ( 345)Others 117 694 ( 39 520)- - - - - 163 216 ( 20)- - 15 568 ( 227)TOTAL 27 054 722 ( 1 852 495) 254 848 493 884 - 1 314 742 7 452 8 849 896 ( 5 556) 1 781 319 ( 158 774) 2 993 785 ( 93 934)Loans and advances tocustomersFinancial assets held for tradingDerivatives for trading and fair value option derivatesFinancial assets at fair value through profit or lossFinancial assets at fair value through profit or loss -mandatoryDerivatives - hedge accounting Financial assets at fair value through other comprehensive incomeFinancial assets at amortised cost(in thousands of Euros)31.12.2018Guarantees and endorsements providedGross amountImpairmentGross amountImpairment Gross amountImpairment Gross amountImpairment Agriculture, Forestry and Fishery 580 642 ( 212 154)- 87 - - - 10 870 - - - 14 061 ( 6 706)Mining 95 377 ( 3 508)- - - - - 102 - - - 5 407 ( 111)Food, Beverages and Tobacco 523 878 ( 27 172)- 10 475 - - - 9 601 ( 2) 23 460 ( 2 516) 54 391 ( 381)Textiles and Clothing 317 046 ( 18 593)- 79 - - - - - 2 495 - 11 728 ( 1 035)Leather and Shoes 62 486 ( 3 003)- 23 - - - - - 1 000 - 1 731 ( 101)Wood and Cork 106 487 ( 8 644)- 284 - - - - - 7 497 ( 12) 7 950 ( 50)Paper and Printing Industry 195 362 ( 19 274)- - - - - 22 150 ( 14) 1 498 - 7 538 ( 44)Refining of Petroleum 8 105 ( 111)- - - - - - - - - 11 371 - Chemicals and Rubber 339 091 ( 18 355)- 1 917 - - - 25 323 ( 38) 3 980 ( 8) 39 651 ( 251)Non-metallic Minerals 185 874 ( 40 089)- - - - - 4 014 ( 3) 23 344 ( 26) 15 303 ( 261)Metallurgical Industries and Metallic Products 355 218 ( 13 677)- 211 - - - 9 572 ( 8) 6 248 ( 11) 44 489 ( 674)Production of Machinery, Equipment and Electrical Devices 142 113 ( 10 096)- 2 086 - - - 37 880 ( 19)- - 81 344 ( 341)Production of Transport Material 84 671 ( 2 533)- - - - - 13 225 ( 10)- - 10 915 ( 113)Other Transforming Industries 162 832 ( 17 002)- 6 - - - - - 1 006 ( 1) 25 527 ( 1 795)Electricity, Gas and Water 530 551 ( 39 438)- 35 853 - - - 28 893 ( 24) 162 804 ( 496) 93 868 ( 75)Construction and Public Works 1 655 049 ( 398 173)- 83 229 - - - - - 206 384 ( 36 559) 939 364 ( 73 309)Wholesale and Retail Trade 1 569 335 ( 285 866)- 1 237 - - - 30 803 ( 22) 24 857 ( 131) 289 946 ( 44 194)Tourism 1 037 442 ( 37 643)- 712 - - - 144 - - - 95 592 ( 5 915)Transport and Communication 1 051 654 ( 95 377)- 110 358 - - - 107 920 ( 75) 33 285 ( 53) 428 379 ( 9 773)Financial Activities 567 125 ( 104 554) 1 309 939 480 1 479 900 1 227 613 325 ( 102) 34 308 ( 17 890) 324 127 ( 1 245)Real Estate Activities 2 373 015 ( 505 201)- 6 947 - 2 751 - 38 034 ( 21) 104 549 ( 18 010) 255 768 ( 20 548)Services Provided to Companies 3 705 324 ( 1 415 862)- 18 433 - 71 245 - 188 969 ( 39) 435 290 ( 114 345) 435 197 ( 11 370)Public Administration and Services 820 696 ( 59 170) 257 269 1 562 - - - 6 378 929 ( 788) 503 123 ( 771) 21 882 ( 1 241)Other activities of collective services 1 094 294 ( 472 254)- 3 075 - 12 329 - 73 359 ( 40) 9 058 ( 3 957) 117 199 ( 1 480)Mortgage Loans 9 549 912 ( 62 340)- - - - - - - - - 68 - Consumers Loans 1 567 528 ( 87 738)- - - - - - - - - 6 423 ( 322)Others 31 260 ( 95)- - - - - 68 094 ( 8)- - 19 370 ( 6 014)TOTAL 28 712 367 ( 3 957 922) 257 270 586 513 480 1 566 225 1 227 7 661 207 ( 1 213) 1 584 186 ( 194 786) 3 358 589 ( 187 349)Derivatives - hedge accounting Financial assets at fair value through other comprehensive incomeFinancial assets at amortised costLoans and advances tocustomersFinancial assets held for tradingDerivatives for trading and fair value option derivatesFinancial assets at fair value through profit or lossFinancial assets at fair value through profit or loss -mandatory customer's benefit, such as extension of the contract period, introduction of grace periods, reduction of rate or partial pardon of debt; (ii) a new loan operation is contracted to settle existing debt (total or partial); or (iii) the new terms of the agreement are more favorable than those applied to other customers with the same risk profile. The unmarking of a loan restructured due to financial difficulties of the customer can only occur after a minimum period of two years from the date of the restructuring, provided that the following conditions are cumulatively met: (i) regular payment of principal and interest; (ii) the customer has no principal or interest past due; and (iii) there was no new loan restructuring during that period. The amounts of the loans restructured due to financial difficulties of the customer as at 31 December 2019 and 2018, are as follows: The details of the restructuring measures applied to loans restructured up to 31 December 2019 and 2018 are the following: The changes occurred to the restructured loans during financial years 2019 and 2018 were as follows: NOVO BANCO | 2019 ANNUAL REPORT | 234 (in thousands of Euros)31.12.201931.12.2018Corporate2 388 446 4 435 754 Mortgage loans 135 361 148 670 Consumer and other loans 205 795 248 350 Total 2 729 602 4 832 774 (in thousands of Euros)No. TransactionExposureImpairmentNo. TransactionExposureImpairmentNo. TransactionExposureImpairmentPrincipal or interest forgiveness 38 50 181 5 330 207 239 255 135 618 245 289 436 140 948 Assets received in partial settlement of loan 10 144 3 26 3 344 2 481 36 3 488 2 484 Capitalization of interest 26 49 312 454 213 153 804 76 982 239 203 116 77 436 New loan in total or partial payment of existing loan 1 637 141 909 6 240 824 420 775 292 376 2 461 562 684 298 616 Extension of repayment period 974 415 161 26 675 909 636 007 375 184 1 883 1 051 168 401 859 Introduction of grace period of principal or interest 585 61 338 1 413 219 174 544 88 264 804 235 882 89 677 Decrease in the interest rates 124 57 293 1 706 54 99 258 33 641 178 156 551 35 347 Changes of the lease payment plan 54 16 547 862 46 36 674 10 548 100 53 221 11 410 Changes in the interest paymen 6 3 142 60 6 13 954 12 548 12 17 096 12 608 Other 2 270 97 382 1 564 1 214 59 578 20 696 3 484 156 960 22 260 Total 5 724 892 409 44 307 3 718 1 837 193 1 048 338 9 442 2 729 602 1 092 645 Solution31.12.2019PerformingNon PerformingTotal(in thousands of Euros)No. TransactionExposureImpairmentNo. TransactionExposureImpairmentNo. TransactionExposureImpairmentPrincipal or interest forgiveness 32 48 180 5 137 208 316 163 225 067 240 364 343 230 204 Assets received in partial settlement of loan 12 141 4 10 2 997 2 183 22 3 138 2 187 Capitalization of interest 19 5 449 111 227 566 141 466 469 246 571 590 466 580 New loan in total or partial payment of existing loan 1 864 145 490 4 264 801 833 633 524 928 2 665 979 123 529 192 Extension of repayment period 996 372 691 7 691 1 526 1 117 753 603 326 2 522 1 490 444 611 017 Introduction of grace period of principal or interest 674 91 015 2 567 264 392 730 250 854 938 483 745 253 421 Decrease in the interest rates 116 29 441 1 089 79 306 547 94 241 195 335 988 95 330 Changes of the lease payment plan 192 72 339 2 512 120 68 615 25 386 312 140 954 27 898 Changes in the interest paymen 14 10 438 160 27 239 300 166 710 41 249 738 166 870 Other 2 885 99 339 1 884 1 418 114 372 61 041 4 303 213 711 62 925 Total 6 804 874 523 25 419 4 680 3 958 251 2 420 205 11 484 4 832 774 2 445 624 Solution31.12.2018PerformingNon PerformingTotal(in thousands of Euros)31.12.201931.12.2018Balance at the beginning of the exercise4 832 774 7 098 757 Loans and advances restructured during exercise 609 428 580 682 Loans and advances reclassified to performing( 229 312)( 908 706)Loans and advances written off(1 055 863)( 372 682)Others(1 427 425)(1 565 277)Total 2 729 602 4 832 774 Market risk Market Risk represents the potential loss resulting from an adverse change in the value of a financial instrument due to fluctuations in interest rates, foreign exchange rates, equity prices, commodity prices, volatility and credit spread. Market risk management is integrated with the balance sheet management through the CALCO (Capital Asset and Liability Committee) structure, being this risk monitored by the Risk Committee. The main measurement of market risk is the assessment of unrealised losses under adverse market conditions, for which the Value at Risk (VaR) methodology is used. NOVO BANCO Group’s VaR model uses the Monte Carlo simulation, based on a confidence level of 99% and an investment period of 10 days. Volatilities and correlations are historical, based on an observation period of one year. As a complement to VaR, stress testing scenarios have been developed, which allow for the evaluation of the impact of losses potentially higher than those considered by the VaR measurement. NOVO BANCO Group has a VaR of Euro 44 155 thousand (31 December 2018: Euro 11 246 thousand) in respect of its trading positions. The increase is mainly explained by the increase in the position in derivatives to hedge interest rate risk in the banking portfolio. In accordance with the recommendations of European Banking Authority presented in the document EBA/GL/2018/02, NOVO BANCO Group calculates the exposure to its balance sheet interest rate risk based on the prescribed shocks, classifying all notional amounts of assets, liabilities and off-balance sheet captions which are sensitive to interest rate and are not part of the trading portfolio, by re-pricing intervals. NOVO BANCO | 2019 ANNUAL REPORT | 235 (in thousands of Euros)31.12.201931.12.2018DecemberAnnual averageMaximumMinimumDecemberAnnual averageMaximumMinimumExchange risk 3 876 2 223 2 412 1 204 599 2 257 3 096 4 168 Interest rate risk 42 292 29 127 50 203 11 231 9 870 10 525 18 566 6 163 Shares and commodities 295 333 207 784 199 324 414 305 Volatility 314 470 78 180 141 169 185 173 Credit spread 1 771 3 547 3 401 3 821 1 614 1 471 52 67 Diversification effect ( 4 393)( 5 512)( 4 383)( 3 742)( 1 176)( 3 139)( 2 126)( 3 124)Total 44 155 30 188 51 918 13 478 11 246 11 607 20 186 7 753 (in thousands of Euros)Eligible amountsNot sensitiveUp to 3 months3 to 6 months6 months to 1 year1 to 5 yearsMore than 5 yearsLoans to and deposits with banks2 208 463 230 656 1 637 131 28 348 5 968 306 360 - Loans and advances to customers25 332 075 - 14 844 924 4 883 296 2 689 944 1 759 049 1 154 862 Securities12 334 723 2 774 971 1 110 175 832 147 197 390 3 697 178 3 722 862 Total17 592 230 5 743 791 2 893 302 5 762 587 4 877 724 Deposits from banks9 846 463 - 4 160 092 3 517 272 85 141 2 083 958 - Due to customers28 076 547 - 13 976 901 3 022 732 4 990 307 5 987 582 99 025 Debt securities issued1 068 385 - 150 554 - - 2 233 915 597 - - - - - - - Total18 287 547 6 540 004 5 075 448 8 073 773 1 014 622 Balance sheet GAP (Assets - Liabilities)(2 121 761)( 695 317)( 796 213)(2 182 146)(2 311 187)3 863 103 Off-Balance sheet 871 2 097 110 2 561 159 ( 18 473)(1 780 690)(2 858 234)Structural GAP(2 120 890)1 401 792 1 764 945 (2 200 619)(4 091 877)1 004 869 Accumulated GAP 1 401 792 3 166 738 966 118 (3 125 758)(2 120 890)31.12.2019 In 2019, the values of Loans and advances to customers started to be considered net of impairment, for NPL (Non Performing Loans) contracts. The Bank performs sensitivity analyses of the interest rate risk of the banking portfolio, based on the current difference of the discounted interest rate mismatch at current rates and the discounted value of the same cash flows simulating scenarios of displacement of the parallel yield curves (displacements of +/- 200 bp) and non- parallel (short rate shock up / down, steepener / flattener shocks), according to the outliers tests defined by the EBA (assuming linear regulatory floors between -1% and 0%, in comparison with the single regulatory floor of 0% in 2018). Following the communication sent by the ECB, to the Banks considered to be systemic in the country in which they operate, on the measures adopted or to be adopted to face the discontinuation of the IBOR's market benchmarks and the future use of risk-free interest rates, the Bank carried out an identification of all its balance sheet and derivative operations indexed to market rates, as well as its valuation and risk analysis processes, based on the following scenario: - On 2 October 2019, the ECB would launch the new risk-free interest rate, €STR, which would be lower than the EONIA by 8.5 bp and being disclosed in T + 1; - From 3 October 2019 until 3 January 2022, EONIA would be calculated as €STR added by 8.5 bp and released by EMMI also in T + 1. As of January 3, 2022, EONIA would be discontinued; - Euribor could be discontinued as of the beginning of 2024; - Libors would cease from the beginning of 2022. Despite the uncertainties that still existed regarding the indexes that can replace EURIBOR and the various Libor, it was concluded that the potential impacts on the operating account would not be significant. NOVO BANCO | 2019 ANNUAL REPORT | 236 (in thousands of Euros)Eligible amountsNot sensitiveUp to 3 months3 to 6 months6 months to 1 year1 to 5 yearsMore than 5 yearsLoans to and deposits with banks1 470 977 215 462 858 477 15 360 6 153 4 468 371 057 Loans and advances to customers28 730 239 33 835 15 297 966 5 125 759 2 501 480 4 766 197 1 005 002 Securities11 822 116 2 937 419 825 026 913 541 482 866 4 000 518 2 662 746 Total16 981 469 6 054 660 2 990 499 8 771 183 4 038 805 Deposits from banks8 352 162 - 1 457 375 72 409 95 311 6 727 000 67 Due to customers28 865 412 - 12 099 667 3 163 941 5 521 559 7 893 992 186 253 Debt securities issued1 071 462 - 147 152 - - 2 215 922 095 Total13 704 194 3 236 350 5 616 870 14 623 207 1 108 415 Balance sheet GAP (Assets - Liabilities) 547 580 3 277 275 2 818 310 (2 626 371)(5 852 024)2 930 390 Off-Balance sheet- 1 629 988 741 001 ( 36 513)(1 112 953)(1 221 523)Structural GAP 547 580 4 907 263 3 559 311 (2 662 884)(6 964 977)1 708 867 Accumulated GAP 4 907 263 8 466 574 5 803 690 (1 161 287) 547 580 31.12.2018(in thousands of Euros)31.12.2019Parallel increase of 200 pbParallel decrease of 200 pbShort Rate Shock UpShort Rate Shock DownSteepener shockFlattener shockAs at 31 December( 44 487) 29 403 76 935 ( 42 071)( 176 020) 102 796 Exercise average( 85 848) 54 406 95 216 ( 103 194)( 238 745) 123 974 Exercise maximum 10 744 87 692 147 247 ( 16 798)( 176 020) 155 873 Exercise minimum( 163 540) 29 403 69 224 ( 317 456)( 301 807) 102 796 (in thousands of Euros)31.12.2018Parallel increase of 200 pbParallel decrease of 200 pbShort Rate Shock UpShort Rate Shock DownSteepener shockFlattener shockAs at 31 December( 160 845) 93 431 77 608 ( 165 232)( 252 901) 111 954 Exercise average( 169 481) 112 112 83 922 ( 178 864)( 270 616) 120 207 Exercise maximum ( 88 295) 151 369 101 446 ( 160 253)( 252 901) 125 787 Exercise minimum( 216 900) 60 213 75 131 ( 215 993)( 286 995) 111 954 The following table presents the average interest rates for the Group’s major financial asset and liability categories, as at 31 December 2019 and 2018, as well as the respective average balances and interest for the exercise: Regarding foreign exchange risk, the breakdown of assets and liabilities, by currency, as at 31 December 2019 and 2018, is analysed as follows: NOVO BANCO | 2019 ANNUAL REPORT | 237 (in thousands of Euros)Average balance of the periodInterest of the exerciseAverage interest rateAverage balance of the periodInterest of the exerciseAverage interest rateMonetary assets 1 441 545 19 357 1,32% 2 609 680 22 087 0,85%Loans and advances to customers 28 557 937 592 057 2,04% 30 722 342 629 475 2,05%Securities and other 10 344 022 124 997 1,19% 8 952 481 86 545 0,97%Financial assets and differentials 40 343 504 736 411 1,80% 42 284 503 738 107 1,75%Monetary Liabilities 8 931 365 16 817 0,19% 8 470 062 21 621 0,26%Due to customers 27 949 264 97 286 0,34% 28 835 937 194 327 0,67%Differential liabilities 2 383 273 8 573 0,00% 3 880 757 4 014 0,00%Financial liabilities and differentials 40 343 504 195 798 0,48% 42 284 503 283 765 0,67%Net interest income 540 613 1,32% 454 342 1,06%31.12.201931.12.2018(in thousands of Euros)SpotForwardOther elementsNet exposureSpotForwardOther elementsNet exposureUSDUNITED STATES DOLLAR( 965 967) 1 007 651 ( 16 381) 25 303 ( 1 683 634) 1 677 510 ( 5 933)( 12 057)GBPGREAT BRITISH POUND 3 298 3 076 6 878 13 252 26 131 ( 21 867)- 4 264 BRLBRAZILIAN REAL 103 672 ( 52 218)- 51 454 822 3 528 ( 4 287) 63 MOPMACAO PATACA 4 414 - - 4 414 4 360 - - 4 360 JPYJAPANESE YEN( 152) 311 - 159 ( 3 308) 3 359 5 947 5 998 CHFSWISS FRANC( 8 133) 12 981 ( 208) 4 640 ( 8 801) 11 381 - 2 580 SEKSWEDISH KRONE 47 140 ( 47 019)- 121 ( 11 826) 11 624 ( 1 080)( 1 282)NOKNORWEGIAN KRONE 48 672 ( 47 344) 976 2 304 ( 12 193) 12 635 2 260 2 702 CADCANADIAN DOLLAR( 20 391) 44 657 - 24 266 ( 41 516) 42 967 984 2 435 ZARSOUTH AFRICAN RAND 550 ( 491)- 59 ( 1 066) 1 167 - 101 AUDAUSTRALIAN DOLLAR 3 349 10 753 - 14 102 ( 8 463) 8 724 - 261 VEBVENEZUELAN BOLIVAR 1 - - 1 5 - - 5 PLNPOLISH ZLOTY 36 794 ( 5 988)- 30 806 ( 8 216) 8 741 - 525 MADMOROCCAN DIRHAN( 2 748) 2 708 - ( 40)( 3 196) 2 656 - ( 540)MXNMEXICAN PESO( 318) 608 - 290 393 ( 261)- 132 AOAANGOLAN KWANZA 13 053 - - 13 053 19 828 - - 19 828 CVECAPE VERDEAN ESCUDO( 65)- - ( 65)( 99)- - ( 99)HKDHONG-KONG DOLLAR( 2)- - ( 2)( 3 082) 3 390 - 308 CZKCZECH KORUNA 9 218 960 - 10 178 ( 321) 645 - 324 DZDALGERIAN DINAR 7 338 - - 7 338 - - - - CNYYUAN REN-MIN-BI 9 211 946 - 10 157 ( 3 531) 3 767 - 236 OTHER 266 3 023 - 3 289 2 988 2 964 3 977 9 929 ( 710 800) 934 614 ( 8 735) 215 079 ( 1 734 725) 1 772 930 1 868 40 073 Note: assets / (liabilities)31.12.201831.12.2019 Exposure to sovereign debt of “peripheral” Eurozone countries As at 31 December 2019 and 2018, the Group’s exposure to sovereign debt of “peripheral” Eurozone countries, is presented as follows: Except for Loans and advances to customers, all the exposures presented above, except those relating to loans and advances to customers, are recorded in the Group’s balance sheet at fair value, based on market quotations or, in the case derivatives, based on valuation techniques using observable market parameters / prices. The details of the exposure regarding the securities is as follows: NOVO BANCO | 2019 ANNUAL REPORT | 238 (in thousands of Euros)31.12.2019Portugal 627 469 249 778 ( 41) 3 362 756 458 556 4 698 518 Spain 35 924 5 070 - 2 181 282 - 2 222 276 Ireland- - - 227 581 - 227 581 Italy - - - 118 828 - 118 828 663 393 254 848 ( 41)5 890 447 458 556 7 267 203 (1) Net values: receivable / (payable)TotalDerivative instruments (1)Loans andadvances tocustomersSecurities at fair value through other comprehensive incomeSecurities at amortised cost Securities held for trading (in thousands of Euros)31.12.2018Portugal 766 306 257 269 ( 109) 3 674 410 502 352 5 200 228 Spain 54 243 - - 1 980 394 - 2 034 637 Ireland- - - 60 398 - 60 398 Italy - - - 83 037 - 83 037 820 549 257 269 ( 109)5 798 239 502 352 7 378 300 (1) Net values: receivable / (payable)Loans andadvances tocustomersDerivative instruments (1)Securities at fair value through other comprehensive incomeSecurities at amortised cost TotalSecurities held for trading (in thousands of Euros)Nominal AmountMarket quotationAccrued interestCarrying book valueImpairmentFair value reservesSecurities at fair value through other comprehensive incomePortugal 2 831 709 3 325 924 36 832 3 362 756 - 161 516 Maturity up to 1 year 369 377 10 387 - 1 Maturity exceeding 1 year 2 831 340 3 325 547 36 822 3 362 369 - 161 515 Spain 2 007 130 2 154 408 26 874 2 181 282 - 74 753 Maturity up to 1 year- - - - - - Maturity exceeding 1 year 2 007 130 2 154 408 26 874 2 181 282 - 74 753 Ireland 200 000 225 855 1 726 227 581 - 22 419 Maturity exceeding 1 year 200 000 225 855 1 726 227 581 - 22 419 Italy 115 606 118 261 567 118 828 - 2 816 Maturity exceeding 1 year 115 606 118 261 567 118 828 - 2 816 5 154 445 5 824 448 65 999 5 890 447 - 261 504 Securities at amortised costPortugal 202 280 245 105 4 673 249 778 - - Spain 5 000 5 065 5 5 070 - - 207 280 250 170 4 678 254 848 - - Securities held for tradingPortugal 457 230 526 916 2 030 458 556 704 - Maturity exceeding 1 year 457 230 526 916 2 030 458 556 704 - 457 230 526 916 2 030 458 556 704 - 31.12.2019 Liquidity risk Liquidity risk derives from the potential inability, current or future, of an institution satisfying its commitments as they mature, without incurring excessive losses. Liquidity risk can be divided into two types: - Market liquidity risk – the impossibility of selling an asset due to lack of liquidity in the market, leading to the widening of the bid / offer spread or the application of a haircut to its market value; - Funding liquidity risk – the impossibility to obtain market funding to finance assets and / or refinance debt coming to maturity in the desired tenors and currency. This can lead to a sharp increase in funding costs or to the requirement of collaterals to obtain funding. Difficulties in (re)financing may lead to the sale of asset, even if incurring in significant losses. The risk of (re)financing should be reduced through an adequate diversification of funding sources and maturities. Banks are subject to liquidity risk as an inherent consequence of the business of transforming maturities (long- term lenders and short-term deposit takers), with the prudent management of liquidity risk being therefore crucial. As at 31 December 2019, the value of the asset portfolio eligible as collateral for rediscounting operations with the ECB, after haircuts, amounted to Euro 15.3 billion (31 December 2018: Euro 14.6 billion). This amount includes all the exposure to Portuguese sovereign debt, in the total amount of approximately Euro 3.4 billion. During the financial year 2019, gross financing with the ECB decreased Euro 287 million to a total of Euro 6.1 billion. The liquidity of NOVO BANCO Group is managed in a centralised manner, at the Headoffice, for the prudential consolidation perimeter, and the analysis and decision making made based on the mismatch reports, which allow, not only to identify negative mismatches but also to make a dynamic hedging of those mismatches. As at 31 December 2019 and 2018, the calculation of the liquid contractual deficit and the counterbalancing capacity was performed following the ITS (Implementing Technical Standards) rules: NOVO BANCO | 2019 ANNUAL REPORT | 239 (in thousands of Euros)Nominal AmountMarket quotationAccrued interestCarrying book valueImpairmentFair value reservesSecurities at fair value through other comprehensive incomePortugal 3 231 229 3 629 157 45 253 3 674 410 - 27 425 Maturity up to 1 year 610 644 614 224 2 793 617 017 - 377 Maturity exceeding 1 year 2 620 585 3 014 933 42 460 3 057 393 - 27 048 Spain 1 832 372 1 950 455 29 939 1 980 394 - 16 930 Maturity up to 1 year 30 027 30 895 583 31 478 - 282 Maturity exceeding 1 year 1 802 345 1 919 560 29 356 1 948 916 - 16 648 Ireland 60 000 59 845 553 60 398 - ( 7)Maturity exceeding 1 year 60 000 59 845 553 60 398 - ( 7)Italy 80 000 82 644 393 83 037 - 2 011 Maturity exceeding 1 year 80 000 82 644 393 83 037 - 2 011 5 203 601 5 722 101 76 138 5 798 239 - 46 359 Securities held for trading 233 000 254 161 3 108 257 269 - - Portugal 233 000 254 161 3 108 257 269 - - 233 000 254 161 3 108 257 269 - - Securities at amortised costPortugal 501 022 570 587 2 085 502 352 771 - Maturity exceeding 1 year 501 022 570 587 2 085 502 352 771 - 501 022 570 587 2 085 502 352 771 - 31.12.2018 The one-year cumulative liquidity gap moved from Euro 316 million on 31 December 2018 to Euro 5 656 million on 31 December 2019. This decrease results from the fact that the financing with the ECB of EUR 6 410 million came within less than 1 year. The one-year counterbalancing capacity as at 31 December 2019 was Euro 10 224 million, Euro 2 432 million higher than the figure recorded at 31 December 2018 (Euro 7 792 million). NOVO BANCO | 2019 ANNUAL REPORT | 240 (in thousands of Euros)TotalUp to 7 days7 days to 1 month 1 to 3 months 3 to 6 months6 months to 1yearMore than 1 yearOUTPUTLiabilities from emited transferable securities (if they're not treated as retail deposits) 317 370 2 247 4 593- - - 310 530Liabilities from guaranteed lending operations and operations associated to financial markets 8 572 412 182 4281 064 0961 334 7203 210 000- 2 781 168Behavioral output from deposits30 163 144 389 848 145 906 271 957 473 958 572 82028 308 655Exchange swaps and derivatives 584 667 9 073 52 238 401 015 46 635 43 769 31 937Other output 409 894- - - 11 515- 398 379Total Output40 047 487 583 5961 266 8332 007 6923 742 108 616 58931 830 669INPUTSecured lending operations and operations associated to financial markets- - - - - - - Behavioral inputs from loans and advances26 664 085 65 307 24 399 39 856 58 074 123 64626 352 803Exchange swaps and derivatives 870 310 8 500 48 381 404 527 79 972 62 781 266 149Own portfolio securities maturing and other entries11 843 305 70 687 73 279 43 6011 254 462 203 77110 197 505Total Input 39 377 700 144 494 146 059 487 9841 392 508 390 19836 816 457Net contractual deficit( 669 786)( 439 103)(1 120 773)(1 519 709)(2 349 600)( 226 391)4 985 790Accumulated net contractual deficit - ( 439 103)(1 559 876)(3 079 585)(5 429 185)(5 655 576)( 669 786)CAPACITY TO READJUSTMENTStock InicialUp to 7 days7 days to 1 month1 to 3 months3 to 6 months6 months to 1 yearMore than 1 yearCash 179 219Deployable reserves from the central bank1 141 351(1 141 351)Negotiable and non-negotiable assets eligible for the central bank 7 749 500 182 0631 117 471 78 479( 22 239)( 201 402)(8 781 071)Authorized facilities and not utilized received - ( 39 646)( 79 970)( 227 545)1 655 230( 167 165)(1 140 903)Net variation of capacity to adjustment - ( 998 934)1 037 501( 149 066)1 632 991( 368 567)(9 921 974)Accumulated capacity to readjustment 9 070 0708 071 1369 108 6378 959 57110 592 56210 223 995 302 02131.12.2019(in thousands of Euros)TotalUp to 7 days7 days to 1 month 1 to 3 months 3 to 6 months6 months to 1yearMore than 1 yearOUTPUTLiabilities from emited transferable securities (if they're not treated as retail deposits) 306 941 2 247 4 593- - - 300 101Liabilities from guaranteed lending operations and operations associated to financial markets 6 740 104 961 237 143- - 40 0006 462 000Behavioral output from deposits31 085 656 330 138 241 827 300 477 402 236 714 96429 096 014Exchange swaps and derivatives 1 209 865 55 912 156 064 401 248 65 847 89 050 441 744Other output 398 229- - - - - 398 229Total Output39 740 795 389 258 639 627 701 725 468 083 844 01436 698 088INPUTSecured lending operations and operations associated to financial markets 11 760 2 010 9 750- - - - Behavioral inputs from loans and advances25 999 835 159 719 64 096 144 379 220 770 430 98924 979 882Exchange swaps and derivatives 1 190 062 57 034 151 022 389 962 67 239 77 087 447 718Own portfolio securities maturing and other entries9 967 029- 55 492 28 692 990 752 509 9148 382 179Total Input 37 168 686 218 763 280 360 563 0331 278 7611 017 99033 809 779Net contractual deficit(2 572 110)( 170 495)( 359 267)( 138 693) 810 678 173 976(2 888 309)Accumulated net contractual deficit - ( 170 495)( 529 762)( 668 455) 142 223 316 199(2 572 110)CAPACITY TO READJUSTMENTStock InicialUp to 7 days7 days to 1 month1 to 3 months3 to 6 months6 months to 1 yearMore than 1 yearCash 155 859Deployable reserves from the central bank 279 178( 279 178)Negotiable and non-negotiable assets eligible for the central bank 8 942 827( 36 510) 36 521( 263 447)( 430 452)( 612 820)(7 541 496)Authorized facilities and not utilized received - - - - - - - Net variation of capacity to adjustment - ( 315 688) 36 521( 263 447)( 430 452)( 612 820)(7 541 496)Accumulated capacity to readjustment 9 377 8649 062 1769 098 6978 835 2508 404 7987 791 978 250 48231.12.2018 To anticipate possible constraints, internal stress scenarios in terms of liquidity are carried out, which are representative of the types of crises that can occur, based on idiosyncratic scenarios (characterised by a loss of confidence in the Bank) and market scenarios. In addition, given the importance of liquidity risk management, regulatory legislation includes a liquidity coverage ratio (Liquidity Coverage Ratio - LCR) and a stable financing ratio (Net Stable Funding Ratio - NSFR). The LCR aims to promote the resilience of banks to short-term liquidity risk by ensuring they hold enough high- quality liquid assets to survive a severe stress scenario over a 30-day period, whilst the NSFR aims to ensure banks maintain a stable funding for their assets and off-balance sheet operations, for one year. In accordance with current regulatory legislation, the Bank is required to comply with a minimum limit of 100% in the LCR. The Bank continues to follow regulatory changes in order to comply with all obligations, namely the implementation of the NSFR and respective limit. The information on encumbered and unencumbered assets, as defined by Instruction no. 28/2014 of Bank of Portugal (note that this information is prepared from a prudential perspective, where the consolidation perimeter differs from that used in the financial statements presented) is shown in the table below: The encumbered assets are represented mainly by loans and securities used in funding operations with the ECB, in repo operations, in coverage bond issues and in securitisations. There are also assets given as collateral to cover the Bank's counterparty risk in derivative transactions. NOVO BANCO | 2019 ANNUAL REPORT | 241 (in thousands of Euros)Carrying book valueof encumberedassetsFair value ofencumbered assetsCarrying book valueof unencumberedassetsFair value ofunencumberedassetsAssets of the institution13 323 907n/a32 236 016n/aEquity instruments - -2 434 1312 434 131Debt securities2 375 3842 375 3848 329 1598 329 159Other assets10 948 523n/a21 472 726n/aAssets31.12.2019(in thousands of Euros)Carrying book valueof encumberedassetsFair value ofencumbered assetsCarrying book valueof unencumberedassetsFair value ofunencumberedassetsAssets of the institution11 368 163n/a32 793 333n/aEquity instruments - -2 711 2372 711 237Debt securities 872 238 872 2388 356 5228 356 522Other assets10 495 925n/a21 725 574n/aAssets31.12.2018(in thousands of Euros)Fair value of encumbered collateral received or of own debt securities issuedFair value of collateral received or of own debt securities issued and encumberableFair value of encumbered collateral received or of own debt securities issuedFair value of collateral received or of own debt securities issued and encumberableCollateral received - - - 10 870Equity instruments - - - -Debt securities - - - 10 870Other collateral received - - - -Own debt securities issued other than own covered bonds or ABS - - - -31.12.2018Collateral received31.12.2019(in thousands of Euros)Encumbered assets, encumbered collateral received and associated liabilitiesAssociated liabilities, contingent liabilities and securities loanedAssets, collateral received and own debt securities issued other than encumbered own covered bonds or ABS Associated liabilities, contingent liabilities and securities loanedAssets, collateral received and own debt securities issued other than encumbered own covered bonds or ABSCarrying book value of the selected financial liabilities8 715 66913 323 9067 334 36911 368 16431.12.201831.12.2019 Operational risk Operational Risk reflects, typically, the probability of the occurrence of events with negative impacts, on net income or equity, resulting from inadequacies or weaknesses in procedures and in information systems, staff behavior or external events, including legal risks. Operational risk is, therefore, understood to be the sum of the following risks: operational, information systems, compliance and reputational. To manage operational risk, a system was developed that standardizes, systematizes and regulates the frequency of actions undertaken with the objective of identifying, monitoring, controlling and mitigating this risk. This system is supported by an organizational structure, integrated within the Global Risk Department, exclusively dedicated to this task, as well as by Operational Risk Management Representatives designated by each of the relevant departments, branches and subsidiaries, whose responsibility it is to comply with the procedures in place and the daily management of this risk in their areas of competence. Capital Management and Solvency Ratio The main objective of the Group’s capital management is to ensure compliance with the Group’s strategic objectives in terms of capital adequacy, respecting and enforcing the requirements for calculating risk-weighted assets and own funds and ensuring compliance with the levels of solvency and leverage defined by the supervisory entities, in particular by the European Central Bank (ECB) – the entity directly responsible for the supervision of the NOVO BANCO Group - and by the Bank of Portugal, and internally stipulated risk appetite for capital metrics. The definition of the strategy for capital adequacy management rests with the Executive Board of Directors and is integrated in the global definition of the NOVO BANCO Group objectives. The capital ratios of NOVO BANCO Group are calculated based on the rules defined in Directive 2013/36/EU and Regulation (EU) no. 575/2013 (CRR) that define the criteria for the access to the credit institution and investment company activity and determine the prudential requirements to be observed by those same entities, in particular to the calculation of the ratios mentioned above. The NOVO BANCO Group is authorised to apply the Internal Ratings-Based Approach (IRB) for the calculation of risk weighted assets by credit risk. In particular, the IRB method is applied to the exposure classes of institutions, corporate and retail of NOVO BANCO Group. The equity’ risk classes, the positions taken in the form of securitization, the positions taken in the form of participation units in investment funds, and the elements that are not credit obligations are always handled by the IRB method regardless of the NOVO BANCO Group entities in which the respective exposures are recorded. The standard method is used in the determination of risk weighted assets by market and operational risks. The regulatory capital components considered in the determination of solvency ratios are divided into own funds of level 1 (common equity Tier I or CET I), additional own funds of level 1 (additional Tier I) which combined with the CET I constitute the own funds of level I (Tier I), and own funds of level 2 (or Tier II) which added to the Tier I represent the total own funds. The total own funds of NOVO BANCO Group are composed by elements of CET I and Tier II. NOVO BANCO | 2019 ANNUAL REPORT | 242 The summary of own funds, risk weighted assets and capital ratios capital of NOVO BANCO Group as at 31 December 2019 and 2018 are presented in the following table: As at 31 December 2019 the NOVO BANCO Group complied with the minimum capital requirements for every capital typology. NOVO BANCO | 2019 ANNUAL REPORT | 243 (in million Euros)31.12.201931.12.2018Realised ordinary share capital, issue premiums and own shares 5 900 5 900 Reserves and Retained earnings( 869)( 569)Net income for the year attributable to shareholders of the Bank( 1 058)( 1 428)Non-controlling interests (minorities) 18 16 A - Equity (prudential perspective) 3 992 3 919 Non-controlling interests (minorities)( 11)( 10)Adjustments of additional valuation ( 13)( 12)Transitional period to IFRS9 225 251 Goodwill and other intangibles ( 34)( 14)Insufficiency of provisions given the expected losses ( 85)( 34)Deferred tax assets and shareholdings in financial companies ( 9)( 226)Outros( 68)( 68)B - Regulatory adjustments to equity 4( 111)C - Own principal funds level 1 - CET I (A+B) 3 996 3 808 Other eligible instruments for additional Tier 1 1 1 D - Additional own funds Level 1 - Additional Tier 1 1 1 E - Level 1 own funds - Tier I (C+D) 3 998 3 809 Subordinated liabilities elegeible for Tier II 398 398 Other elements elegible for Tier II 124 131 Regulatory adjustments for Tier II( 45)( 10)F - Level 2 own funds - Tier II 478 519 G - Eligible own funds (E+F) 4 475 4 328 Credit risk 26 243 27 473 Market risk 1 857 895 Operational risk 1 479 1 506 H - Risk Weighted Assets 29 579 29 874 Solvability ratioCET I ratio(C/H)13.5%12.8%Tier I ratio(E/H)13.5%12.8%Solvability ratio (G/H)15.1%14.5%Leverage ratio(1)8.4%8.2%(1) The leverage ratio results from spliting Tier 1 for the exposure measure in accordance to the terms of the CRR NOTE 42 – RELEVANT TRANSACTIONS OCCURRED IN THE FINANCIAL YEARS OF 2019 AND 2018 2019 Exercise Sale of Non-Performing Loans portfolio (Project Nata II) In the last quarter of 2019, NOVO BANCO and Fundo Arrábida signed a Purchase and Sale Agreement with Burlington Loan Management DAC, a company affiliated and advised by Davidson Kempner European Partners, Llp, for the sale of a portfolio of overdue loans and exposures related (NATA II Project). The impact of this operation on the balance sheet resulted in a reduction of net assets of 145.9 million euro (gross assets: 1 202.1 million Euro, of which 1,180.7 million Euro of credit to customers; impairment: 1 056.2 million Euro, of which 1 038.8 million Euro in customer loans). In terms of the Group's income statement, the following impacts were noted: Sale of a portfolio of real estate assets (called Project Sertorius) In August 2019, the Group signed a promissory purchase and sale agreement with entities indirectly held by funds managed by Cerberus Capital Management, LP, a New York-based company, for the sale of a portfolio of real estate assets called Project Sertorius, with the following impacts on the income statement for the financial year of 2019: Sale of a portfolio of non-performing loans and real estate assets (referred to as Project Albatros): In August 2019, the Group, through its Spanish Branch and Novo Banco Servicios Corporativos, S.L entered into a purchase and sale agreement with Waterfall Asset Management LLC, an asset management company based in New York, for the sale of a portfolio of real estate assets and non-performing loans, designated Project Albatros. In terms of the Group's income statement, the following impacts were noted: NOVO BANCO | 2019 ANNUAL REPORT | 244 (in thousands of Euros)Impact on Income Statement31.12.2019Net interest income 69Results from the sale of financial assets and liabilities not designated at fair value through profit or loss1 703Impairment net of reversals of financial assets not designated at fair value through profit or loss -80 773Impact on Net Income-79 001(in thousands of Euros)Impact on Income Statement 31.12.2019Other operational income-34 980Impairment on othe assets net of reversals-191 494Non-controlling interests2 725Impact on Net Income -229 199(in thousands of Euros)Impact on Income Statement31.12.2019Results from the sale of financial assets and liabilities not designated at fair value through profit or loss-7 493Impairment net of reversals of financial assets not designated at fair value through profit or loss-53 300Impairment on other assets net of reversals26 902Impact on Net Income-33 891 Sale of GNB Vida Following the contract for the purchase and sale of the entire share capital of GNB Vida, entered into with Bankers Insurance Holdings, SA, a company of the Global Bankers Insurance Group, LLC, on September 12, 2018, the Group proceeded to derecognise this investment in September 2019, after obtaining the necessary regulatory authorizations. In terms of the Group's income statement, the following impact was noted: 2018 Exercise Sale of Non-Performing Loans portfolio (called Project NATA I) During 2018, NOVO BANCO and BEST, entered into a sale and purchase contract of a non-performing loans portfolio and related assets, named Project NATA I, with a consortium of funds managed by KKR Credit Advisors (US) L.L.C and LX Investment Partners II S.À.R.L. This operation impacted the balance sheet with a decrease on the loans and advances to customers in the amount of Euro 543.9 million (Euro 1 529.9 million of gross amount and Euro 986.1 million of impairment), a decreased in the securities portfolio in the amount of Euro 1.8 million (Euro 76.5 million of gross amount and Euro 74.7 million of impairment), and an increase on Other Assets in the amount of Euro 435.5 million. The operation had the following impacts on the Group’s income statement: Sale of Real Estate portfolio (called Project Viriato) The Group entered into a promissory sale and purchase agreement with several entities indirectly held by investment funds managed by Anchorage Capital Group L.L.C, to sell a real estate portfolio composed by approximately 9 thousand real estate properties, named Project Viriato, with the following impacts in the income statement: NOVO BANCO | 2019 ANNUAL REPORT | 245 (in thousands of Euros)Impact on Income Statement31.12.2019Impairment on other assets net of reversals-4 082Impact on Net Income-4 082(in thousands of Euros)Impact on Income Statement31.12.2018Net interest income 5 652Results from the sale of financial assets and liabilities not designated at fair value through profit or loss-208 305Impairment net of reversals of financial assets not designated at fair value through profit or loss 92 520Impact on Net Income-110 133(in thousands of Euros)Impact on Income Statement 31.12.2018Other operational income10 810Impairment on othe assets net of reversals-169 833Non-controlling interests-486Impact on Net Income -158 537 NOTE 43 – NON-CURRENT ASSETS HELD FOR SALE - DISCONTINUED OPERATIONS The financial statements as at 31 December 2019 and 2018 of the discontinued units, mentioned in Note 29 and when applicable, are as follows: NOVO BANCO | 2019 ANNUAL REPORT | 246 (in thousands of Euros)NOVO AF31.12.201931.12.201931.12.2018AssetsCash, cash balances at central banks and other demand deposits 782 114 22Financial assets at fair value through other comprehensive income 1--Financial assets at amortised cost 7 106--Loans and advances to credit institutions 7 106--Tangible assets 81 309 325Tangible fixed assets 81 309 325Intangible assets 122- 10Tax assets 618--Current Tax Assets 207--Deferred Tax Assets 411--Other assets 1 920 453 474Total Assets 10 630 876 831LiabilitiesTax liabilities 187--Current Tax liabilities 187--Other liabilities 865 1 726 3 568Total Liabilities 1 052 1 726 3 568EquityCapital 10 000 60 60Other Capital- 4 190 1 200Retained earnings( 90)( 4 424)( 3 605)Profit or loss attributable to parent company shareholders ( 332)( 676)( 392)Total Equity 9 578( 850)( 2 737)Total Liabilities and Equity 10 630 876 831BALANCE SHEET AS AT 31 DECEMBER OF 2019 AND 2018Greendraive(in thousands of Euros)NOVO AF31.12.201931.12.201931.12.2018Interest Income 9--Interest Expenses-( 65)-Net Interest Income 9( 65)-Fee and comission income 6 016--Fee and comission expenses ( 3 849)--Gains or losses on derecognition of financial assets and liabilities not measured at fair value through profit or loss( 180)--Other operating income 190 3 524 3 403Other operating expenses ( 211)( 289)( 238)Operating Income 1 975 3 170 3 165Administrative expenses( 2 617)( 3 741)( 3 388)Staff expenses( 1 510)( 1 732)( 1 659)Other administrative expenses( 1 107)( 2 009)( 1 729)Depreciation( 68)( 96)( 88)Impairment or reversal of impairment on financial assets not measured at fair value through profit or loss 1--Profit or loss before tax from continuing operations( 709)( 667)( 311)Tax expense or income related to profit or loss from continuing operationsCurrent tax 377( 9)( 81)Profit or loss for the period( 332)( 676)( 392)INCOME STATEMENTFOR THE YEAR ENDED IN 31 DECEMBER OF 2019 AND 2018Greendraive NOTE 44 – NPL DISCLOSURES Following the recommendations of the European Banking Authority explained in document EBA/GL/2018/10, credit institutions with an NPL (Non Performing Exposures) ratio greater than 5% must publish a set of information regarding NPE, restructured loans and foreclosed assets, according to a standard format, which we present below (we emphasize that this information is prepared from a prudential perspective, whose consolidation perimeter differs from the consolidation perimeter of the financial statements presented): Credit quality of forborne exposures Credit quality of performing and non-performing exposures by past due days NOVO BANCO | 2019 ANNUAL REPORT | 247 (in thousands of Euros) Of which defaultedOf which subject to impairmentLoans and advances892 4091 852 6071 808 6231 808 623-44 307-1 061 9041 054 429515 857Central banks00000000General governments6 370777-233-55 3620 Credit institutions00000000Other financial corporations5 565114 077114 077114 077-7-49 90862 20058 089Non-financial corporations750 8831 526 9571 502 2101 502 210-42 878-909 616816 537406 880Households129 590211 566192 329192 329-1 189-102 375170 33050 888Debt securities00000000Loan commitments given24 41010 16210 09810 1620000Total916 8191 862 7691 818 7211 818 786-44 307-1 061 9041 054 429515 857Gross carrying amount/nominal amount of exposures withforbearance measuresAccumulated impairment,accumulated negative changesin fair value due to credit riskand provisionsCollateral received and financial guarantees received on forborne exposuresPerformingforborneNon-performing forborneOn performing forborne exposuresOn non-performing forborne exposuresOf which collateral and financial guarantees received on nonperforming exposures with forbearance measures(in thousands of Euros)Not past due or past due < =30 daysPast due > 30 days <=90 daysUnlikely to pay that are not past due or are past due <=90 daysPast due > 90 days <=180 daysPast due > 180 days <=1 yearPast due > 1 year <= 2 yearsPast due > 2 years >=5 yearsPast due > 5 years >=7 yearsPast due > 7 yearsOf which defaultedLoans and advances25 675 23125 567 270107 9603 445 8211 773 820137 660192 060355 126619 437342 54925 1702 974 329Central banks1 408 9081 408 9080000000000General governments475 863475 72513857113800425700450 Credit institutions318 718318 7180381 501381 5010000000Other financial corporations294 236294 14591176 49283 39325352376 3766 9099 732176 406Non-financial corporations11 853 27611 792 08061 1962 426 9481 089 154103 839154 454311 629466 731291 07910 0602 392 429Of which SMEs6 459 0196 403 11855 9011 297 193644 76760 45391 734170 765151 692167 72210 0601 266 254Households11 324 23011 277 69446 536460 311219 63433 79737 57143 04976 32244 5615 378405 044Debt securities10 464 03010 464 0300149 995006 77011 000132 22500104 475Central banks000000000000General governments7 571 8097 571 8090000000000Credit institutions672 120672 120045 520003 88011 00030 6400045 520Other financial corporations96 82796 8270000000000Non-financial corporations2 123 2742 123 2740104 475002 8900101 58500104 475Off-balance-sheet exposures10 208 536558 622516 063Central banks000General governments104 6831313Credit institutions586 58918 6430Other financial corporations73 9607 7507 750Non-financial corporations8 426 424523 245500 875Households1 016 8808 9717 426Total46 347 79636 031 300107 9604 154 4391 773 820137 660198 830366 126751 662342 54925 1703 594 867Gross carrying amount/nominal amountPerforming exposuresNon-performing exposures Performing and non-performing exposures and related provisions Performing and non-performing exposures and related provisions Credit quality of loans and advances by industry NOVO BANCO | 2019 ANNUAL REPORT | 248 (in thousands of Euros)Of which stage 1Of which stage 2Of which stage 2Of which stage 3Das quais, Stage 1Das quais, Stage 2Das quais, Stage 2Das quais, Stage 3Loans and advances25 675 23120 115 3163 888 3803 445 821471 1302 974 329-179 093-69 463-109 630-1 764 056-80 808-1 683 249-530 52214 685 555925 997Central banks1 408 90800000000000000General governments475 863342 275133 588571120450-1 644-449-1 195-1290-129034 546315 Credit institutions318 71848 9456 785381 501381 5010-788-7880-76 300-76 300001 6220Other financial corporations294 236222 67771 680176 49286176 406-3 100-603-2 497-74 334-1-74 333-146 100196 00288 227Non-financial corporations11 853 2769 252 0452 601 4722 426 94834 3982 392 429-153 649-62 632-91 018-1 427 115-2 405-1 424 710-382 8914 128 815630 578Of which SMEs6 459 0194 863 8871 595 1321 297 19330 8171 266 254-63 997-14 101-49 896-656 835-2 341-654 494-86 7632 982 941431 644Households11 324 23010 249 3751 074 855460 31155 026405 044-19 912-4 992-14 919-186 178-2 101-184 077-1 53010 324 570206 876Debt securities10 464 03010 068 534337 906149 9950149 995-61 908-7 852-54 056-102 4220-102 422000Central banks000000000000000General governments7 571 8097 571 8090000-5 231-5 2310000000Credit institutions672 120624 780045 520045 520-238-2380000000Other financial corporations96 82783 5253 052000-353-41-312000000Non-financial corporations2 123 2741 788 420334 854104 4750104 475-56 086-2 342-53 744-102 4220-102 422000Off-balance-sheet exposures10 208 5367 929 7392 278 797558 62242 559516 06318 78713 9274 86078 3091 33976 97000Central banks00000000000000General governments104 68332 13472 5491301376100000Credit institutions586 589547 44639 14318 64318 6430398329693535000Other financial corporations73 96063 71110 2487 75007 750984751699069900Non-financial corporations8 426 4246 324 5872 101 837523 24522 370500 87516 94712 4324 51477 07498876 08700Households1 016 880961 86155 0198 9711 5457 4261 3381 11222650131718400Total46 347 79638 113 5896 505 0834 154 439513 6893 640 387-222 213-63 388-158 825-1 788 170-79 469-1 708 701-530 52214 685 555925 997Gross carrying amount/nominal amountAccumulated impairment, accumulated negative changes in fair value due to credit risk and provisionsAccumulated partial write-offCollateral and financial guarantees receivedPerforming exposuresNon-performing exposuresPerforming exposures – accumulated impairment and provisionsNon-performing exposures – accumulated impairment, accumulated negative changes in fair value due to credit risk and provisionsOn performing exposuresOn non-performing exposures(in thousands of Euros)Of which defaultedOn-balance-sheet exposures39 735 0773 595 8163 124 32439 677 487-2 107 4790Portugal30 281 8922 793 5402 710 69830 021 871-1 771 0290Spain4 197 223145 192142 7324 192 153-79 0270Other countries5 255 961657 084270 8935 463 462-257 4230Off-balance-sheet exposures10 767 158558 622516 06397 096Portugal8 532 518480 685458 99581 300Spain1 559 04058 17156 07015 000Other countries675 60019 766998795Total50 502 2354 154 4393 640 38739 677 487-2 107 47997 0960Gross carrying amount/nominal amountAccumulated impairmentProvisions on off-balance-sheet commitments and financial guarantees givenAccumulated negative changes in fair value due to credit risk on non-performing exposuresOf which non-performingOf which subject to impairment(in thousands of Euros)Of which defaultedAgriculture, forestry and fishing379 40745 08947 551379 407-18 1940Mining and quarrying83 62138 20437 24983 621-14 3890Manufacturing2 537 479249 189242 1402 537 479-133 3230Electricity, gas, steam and air conditioning supply363 75032 47232 472363 750-22 4610Water supply143 52614 24914 249143 526-11 1120Construction1 708 550431 525429 6981 708 550-281 8070Wholesale and retail trade1 512 436157 537156 6061 512 436-89 8620Transport and storage1 032 21999 07999 0791 032 219-79 7610Accommodation and food service activities944 32880 95079 692944 328-40 5950Information and communication243 72026 49525 786243 720-21 7210Financial and insurance activities1 293 949229 471229 4711 293 949-161 6470Real estate activities1 769 674323 914312 9651 769 674-167 1650Professional, scientific and technical activities1 073 138301 268301 2681 073 138-173 9860Administrative and support service activities318 34929 52129 521318 349-19 6530Public administration and defence, compulsory social security2 17853192 178-140Education40 1083 3292 60340 108-1 2460Human health services and social work activities252 32450 05450 054252 324-23 2130Arts, entertainment and recreation211 34585 46185 461211 345-57 6770Other services370 124229 088152 301370 124-262 9380Total14 280 2232 426 9482 328 18614 280 223-1 580 7640Gross carrying amountAccumulated impairmentAccumulated negative changes in fair value due to credit risk on non-performing exposuresOf which non-performingOf which loans and advances subject to impairment Collateral valuation – loans and advances Changes in the stock of non-performing loans and advances Collateral obtained by taking possession and execution processes Collateral obtained by taking possession and execution processes – vintage breakdown NOVO BANCO | 2019 ANNUAL REPORT | 249 (in thousands of Euros)Of which past due > 30 days <=90 daysOf which past due >90 days <= 180 daysOf which: past due > 180 days <= 1 yearOf which: past due > 1 years <= 2 yearsOf which: past due > 2 years <= 5 yearsOf which: past due > 5 years Of which: past due > 7 yearsGross carrying amount29 121 05225 675 231107 9603 445 8211 773 8201 672 002137 660192 060355 126619 437352 28015 438Of which secured19 142 27817 234 87485 4671 907 404943 818963 587105 872104 046223 184250 418270 9949 072 Of which secured with immovable property14 683 43613 373 06980 4371 310 366672 814637 55378 05096 68480 710212 894133 22435 992 Of which instruments with LTV higher than 60% and lower or equal to 80%5 188 6355 008 001180 63582 29198 344 Of which instruments with LTV higher than 80% and lower or equal to 100%2 179 5661 968 716210 851105 166105 685 Of which instruments with LTV higher than 100%1 682 753922 745760 009380 789379 219Accumulated impairment for secured assets-939 657-93 305-3 439-846 352-348 572-497 780-43 175-46 158-136 157-115 917-152 025-4 348CollateralOf which value capped at the value of exposure15 149 17914 230 04079 834919 138481 341437 79761 06355 57582 612129 094104 9794 474 Of which immovable property13 679 26812 943 97878 413735 289384 282351 00753 54051 28351 470104 17686 3164 221Of which value above the cap20 803 15017 987 62450 4062 815 526761 9592 053 567485 45178 550854 664327 576275 13532 191 Of which immovable property15 343 13314 467 47347 676875 660485 739389 92149 94164 17743 679130 69671 58329 845Financial guarantees received462 373455 5151 3056 8584 3472 5114519673472994480Accumulated partial write-off-530 522-331-305-530 191-8 143-522 047-3 292-51 366-82 520-352 261-28 383-4 225Loans and advancesPerformingNon-performingUnlikely to pay that are not past due or are past due <= 90 daysPast due > 90 days(in thousands of Euros)Gross carrying amountInitial stock of non-performing loans and advances6 772 180Inflows to non-performing portfolios574 381Outflows from non-performing portfolios-3 900 739 Outflow to performing portfolio-330 646 Outflow due to loan repayment, partial or total-389 078 Outflow due to collateral liquidation0 Outflow due to taking possession of collateral-71 833 Outflow due to sale of instruments-1 374 753 Outflow due to risk transfer0 Outflow due to write-off-1 697 154Outflow due to other situations-37 275Outflow due to reclassification as held for sale0Final stock of non-performing loans and advances3 445 821(in thousands of Euros)Value at initial recognitionAccumulated negative changesProperty, plant and equipment (PP&E)00Other than PP&E586 073-270 427 Residential immovable property168 348-39 503 Commercial Immovable property395 591-224 359 Movable property (auto, shipping, etc.)2 676-2 331 Equity and debt instruments14 8430 Other4 615-4 234Total586 073-270 427Collateral obtained by taking possession(in thousands of Euros)Collateral obtained by taking possession classified as PP&E00Collateral obtained by taking possession other than that classified as PP&E571 230-270 427104 177-29 579226 501-110 690240 552-130 1587 291-6 565 Residential immovable property168 348-39 50345 681-8 35957 784-11 95764 883-19 18700 Commercial immovable property395 591-224 35958 043-21 148168 717-98 733168 831-104 47800 Movable property (auto, shipping, etc.)2 676-2 33100002 676-2 3312 676-2 331 Equity and debt instruments0000000000 Other4 615-4 234453-72004 162-4 1624 615-4 234Total571 230-270 427104 177-29 579226 501-110 690240 552-130 1587 291-6 565Total collateral obtained by taking possessionForeclosed <=2 yearsForeclosed > 2 years <=5 yearsForeclosed > 5 yearsOf which non-current assets held-for-saleAccumulated negative changesValue at initial recognitionAccumulated negative changesValue at initial recognitionAccumulated negative changesValue at initial recognitionAccumulated negative changesValue at initial recognitionAccumulated negative changesValue at initial recognition NOTE 45 – RECENTLY ISSUED ACCOUNTING STANDARDS AND INTERPRETATIONS Applicable for 2019 The following standards and interpretations became effective for annual periods beginning on or after 1 January 2019: IFRS 16 – Leases The scope of IFRS 16 includes leases of all assets, with certain exceptions. A lease is defined as a contract, or part of a contract, that conveys the right to use an asset (the underlying asset) for a period of time in exchange for consideration. IFRS 16 requires lessees to account for all leases under a single on-balance sheet model in a similar way to finance leases under IAS 17. The standard includes two recognition exemptions for lessees: (1) leases of ’low- value’ assets (e.g., personal computers) and (2) short-term leases (i.e., leases with a lease term of 12 months or less). At the commencement date of a lease, a lessee will recognise a liability to make lease payments (i.e., the lease liability) and an asset representing the right to use the underlying asset during the lease term (i.e., the right-of-use asset). Lessees will be required to separately recognise the interest expense on the lease liability and the depreciation expense on the right-of-use asset. Lessees will be required to remeasure the lease liability upon the occurrence of certain events (e.g., a change in the lease term, a change in future lease payments resulting from a change in an index or rate used to determine those payments). The lessee will generally recognise the amount of the remeasurement of the lease liability as an adjustment to the right-of-use asset. Lessor accounting is substantially unchanged from today’s accounting under IAS 17. Lessors will continue to classify all leases using the same classification principle as in IAS 17 and distinguish between two types of leases: operating and finance leases. A lessee can choose to apply the standard using either a full retrospective or a modified retrospective approach. The standard’s transition provisions permit certain reliefs. Early application is permitted, but not before an entity applies IFRS 15 Revenue from Contracts with Customers. The lease expense recognition pattern for lessees will generally be accelerated as compared to today. Key balance sheet metrics such as leverage and finance ratios, debt covenants and income statement metrics, such as earnings before interest, taxes, depreciation and amortisation (EBITDA), could be impacted. Also, the cash flow statement for lessees could be affected as payments for the principal portion of the lease liability will be presented within financing activities. Lessor accounting will result in little change compared to today’s lessor accounting. The standard requires lessees and lessors to make more extensive disclosures than under IAS 17. Given the significant accounting implications, lessees will have to carefully consider the contracts they enter into to identify any that are, or contain, leases. This evaluation will also be important for lessors to determine which contracts (or portions of contracts) are subject to the new revenue recognition standard. NOVO BANCO | 2019 ANNUAL REPORT | 250 IFRIC Interpretation 23 Uncertainty over Income Tax Treatments In June 2017, the IASB issued IFRIC Interpretation 23 which clarifies application of the recognition and measurement requirements in IAS 12 Income Taxes when there is uncertainty over income tax treatments. The interpretation addresses the accounting for income taxes when tax treatments involve uncertainty that affects the application of IAS 12. The interpretation does not apply to taxes or levies outside the scope of IAS 12, nor does it specifically include requirements relating to interest and penalties associated with uncertain tax treatments. The interpretation specifically addresses the following: - Whether an entity considers uncertain tax treatments separately; - The assumptions an entity makes about the examination of tax treatments by taxation authorities; - How an entity determines taxable profit (tax loss), tax bases, unused tax losses, unused tax credits and tax rates; - How an entity considers changes in facts and circumstances. An entity has to determine whether to consider each uncertain tax treatment separately or together with one or more other uncertain tax treatments. The approach that better predicts the resolution of the uncertainty should be followed. Applying the interpretation could be challenging for entities, particularly those that operate in more complex multinational tax environments. Entities may also need to evaluate whether they have established appropriate processes and procedures to obtain information on a timely basis that is necessary to apply the requirements in the interpretation and make the required disclosures. Prepayment Features with Negative Compensation - Amendments to IFRS 9 Under IFRS 9, a debt instrument can be measured at amortised cost or at fair value through other comprehensive income, provided that the contractual cash flows are ‘solely payments of principal and interest on the principal amount outstanding’ (the SPPI criterion) and the instrument is held within the appropriate business model for that classification. The amendments to IFRS 9 clarify that a financial asset passes the SPPI criterion regardless of the event or circumstance that causes the early termination of the contract and irrespective of which party pays or receives reasonable compensation for the early termination of the contract. The basis for conclusions to the amendments clarified that the early termination can result from a contractual term or from an event outside the control of the parties to the contract, such as a change in law or regulation leading to the early termination of the contract. The amendments are intended to apply where the prepayment amount approximates to unpaid amounts of principal and interest plus or minus an amount that reflects the change in a benchmark interest rate. This implies that prepayments at current fair value or at an amount that includes the fair value of the cost to terminate an associated hedging instrument, will normally satisfy the SPPI criterion only if other elements of the change in fair value, such as the effects of credit risk or liquidity, are small. Most likely, the costs to terminate a ‘plain vanilla’ interest rate swap that is collateralised, so as to minimise the credit risks for the parties to the swap, will meet this requirement. The amendments must be applied retrospectively; earlier application is permitted. The amendment provides specific transition provisions if it is only applied in 2019 rather than in 2018 with the rest of IFRS 9. NOVO BANCO | 2019 ANNUAL REPORT | 251 Modification or exchange of a financial liability that does not result in derecognition In the basis for conclusions to the amendments, the IASB also clarified that the requirements in IFRS 9 for adjusting the amortised cost of a financial liability, when a modification (or exchange) does not result in derecognition, are consistent with those applied to the modification of a financial asset that does not result in derecognition. This means that the gain or loss arising on modification of a financial liability that does not result in derecognition, calculated by discounting the change in contractual cash flows at the original effective interest rate, is immediately recognised in profit or loss. The IASB made this comment in the basis for conclusions to the amendments as it believes that the existing requirements in IFRS 9 provided an adequate basis for entities to account for modifications and exchanges of financial liabilities and that no formal amendment to IFRS 9 was needed in respect of this issue. The IASB stated specifically that the clarification on modification or exchange of financial liabilities relates to the application of IFRS 9. As such, it would appear that this clarification does not need to be applied to the accounting for modification of liabilities under IAS 39 Financial Instruments: Recognition and Measurement. Any entities that have not applied this accounting under IAS 39 are therefore likely to have a change of accounting on transition. As there is no specific relief, this change needs to be made retrospectively. Plan Amendment, Curtailment or Settlement - Amendments to IAS 19 The amendments to IAS 19 Employee Benefits address the accounting when a plan amendment, curtailment or settlement occurs during a reporting period. Determining the current service cost and net interest When accounting for defined benefit plans under IAS 19, the standard generally requires entities to measure the current service cost using actuarial assumptions determined at the start of the annual reporting period. Similarly, the net interest is generally calculated by multiplying the net defined benefit liability (asset) by the discount rate, both as determined at the start of the annual reporting period. The amendments specify that when a plan amendment, curtailment or settlement occurs during the annual reporting period, an entity is required to: - Determine current service cost for the remainder of the period after the plan amendment, curtailment or settlement, using the actuarial assumptions used to remeasure the net defined benefit liability (asset) reflecting the benefits offered under the plan and the plan assets after that event; - Determine net interest for the remainder of the period after the plan amendment, curtailment or settlement using: - the net defined benefit liability (asset) reflecting the benefits offered under the plan and the plan assets after that event; and - the discount rate used to remeasure that net defined benefit liability (asset). A plan amendment, curtailment or settlement may reduce or eliminate a surplus in a defined benefit plan, which may cause the effect of the asset ceiling to change. The amendments clarify that an entity first determines any past service cost, or a gain or loss on settlement, without considering the effect of the asset ceiling. This amount is recognised in profit or loss. An entity then determines the effect of the asset ceiling after the plan amendment, curtailment or settlement. Any change in that effect, excluding amounts included in the net interest, is recognised in other comprehensive income. NOVO BANCO | 2019 ANNUAL REPORT | 252 This clarification provides that entities might have to recognise a past service cost, or a gain or loss on settlement, that reduces a surplus that was not recognised before. Changes in the effect of the asset ceiling are not netted with such amounts. The amendments apply to plan amendments, curtailments, or settlements occurring on or after the beginning of the first annual reporting period that begins on or after 1 January 2019. Early application is permitted and should be disclosed. Long-term interests in associates and joint ventures - Amendments to IAS 28 The amendments clarify that an entity applies IFRS 9 to long-term interests in an associate or joint venture to which the equity method is not applied but that, in substance, form part of the net investment in the associate or joint venture (long-term interests). This clarification is relevant because it implies that the expected credit loss model in IFRS 9 applies to such long-term interests. The Board also clarified that, in applying IFRS 9, an entity does not take account of any losses of the associate or joint venture, or any impairment losses on the net investment, recognised as adjustments to the net investment in the associate or joint venture that arise from applying IAS 28 Investments in Associates and Joint Ventures. To illustrate how entities apply the requirements in IAS 28 and IFRS 9 with respect to long-term interests, the Board also published an illustrative example when it issued the amendments. Entities must apply the amendments retrospectively, with certain exceptions. Early application of the amendments is permitted and must be disclosed. Annual improvements for the cycle 2015-2017 In the annual improvements for the 2015-2017 cycle, the IASB has introduced improvements in four standards summarized bellow: IFRS 3 Business Combinations - Previously held Interests in a joint operation - The amendments clarify that, when an entity obtains control of a business that is a joint operation, it applies the requirements for a business combination achieved in stages, including remeasuring previously held interests in the assets and liabilities of the joint operation at fair value. - In doing so, the acquirer remeasures its entire previously held interest in the joint operation. - An entity applies those amendments to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after 1 January 2019. Earlier application is permitted. IFRS 11 Joint Arrangements - Previously held Interests in a joint operation - A party that participates in, but does not have joint control of, a joint operation might obtain joint control of the joint operation in which the activity of the joint operation constitutes a business as defined in IFRS 3. The amendments clarify that the previously held interests in that joint operation are not remeasured. - An entity applies those amendments to transactions in which it obtains joint control on or after the beginning of the first annual reporting period beginning on or after 1 January 2019. Earlier application is permitted. NOVO BANCO | 2019 ANNUAL REPORT | 253 IAS 12 Income Taxes - Income tax consequences of payments on financial instruments classified as equity - The amendments clarify that the income tax consequences of dividends are linked more directly to past transactions or events that generated distributable profits than to distributions to owners. Therefore, an entity recognises the income tax consequences of dividends in profit or loss, other comprehensive income or equity according to where the entity originally recognised those past transactions or events. - An entity applies those amendments for annual reporting periods beginning on or after 1 January 2019. Earlier application is permitted. When an entity first applies those amendments, it applies them to the income tax consequences of dividends recognized on or after the beginning of the earliest comparative period. IAS 23 Borrowing Costs - Borrowing costs eligible for capitalisation - The amendments clarify that an entity treats as part of general borrowings any borrowing originally made to develop a qualifying asset when substantially all of the activities necessary to prepare that asset for its intended use or sale are complete. - An entity applies those amendments to borrowing costs incurred on or after the beginning of the annual reporting period in which the entity first applies those amendments. - An entity applies those amendments for annual reporting periods beginning on or after 1 January 2019. Earlier application is permitted. Sale or Contribution of Assets between an Investor and its Associate or Joint Venture – Amendments to IFRS 10 and IAS 28 The amendments address the conflict between IFRS 10 Consolidated Financial Statements and IAS 28 in dealing with the loss of control of a subsidiary that is sold or contributed to an associate or joint venture. The amendments clarify that a full gain or loss is recognised when a transfer to an associate or joint venture involves a business as defined in IFRS 3. Any gain or loss resulting from the sale or contribution of assets that does not constitute a business, however, is recognised only to the extent of unrelated investors’ interests in the associate or joint venture. In December 2015, the IASB decided to defer the effective date of the amendments until such time as it has finalised any amendments that result from its research project on the equity method. Early application of the amendments is still permitted. At the date of approval of these financial statements, the standards and interpretations endorsed by the European Union, but whose mandatory application occurs in future years, are as follows: Definition of Material - Amendments to IAS 1 and IAS 8 The purpose of this amendment was to align the definition of ‘material’ across the standards and to clarify certain aspects of the definition. The new definition states that, ’Information is material if omitting, misstating or obscuring it could reasonably be expected to influence decisions that the primary users of general purpose financial statements make on the basis of those financial statements, which provide financial information about a specific reporting entity.’ NOVO BANCO | 2019 ANNUAL REPORT | 254 The amendments clarify that materiality will depend on the nature or magnitude of information, or both. An entity will need to assess whether the information, either individually or in combination with other information, is material in the context of the financial statements. Obscuring information The amendments explain that information is obscured if it is communicated in a way that would have a similar effect as omitting or misstating the information. Material information may, for instance, be obscured if information regarding a material item, transaction or other event is scattered throughout the financial statements, or disclosed using a language that is vague or unclear. Material information can also be obscured if dissimilar items, transactions or other events are inappropriately aggregated, or conversely, if similar items are inappropriately disaggregated. New threshold The amendments replaced the threshold ‘could influence’, which suggests that any potential influence of users must be considered, with ‘could reasonably be expected to influence’ in the definition of ‘material’. In the amended definition, therefore, it is clarified that the materiality assessment will need to take into account only reasonably expected influence on economic decisions of primary users. Primary users of the financial statements The current definition refers to ‘users’ but does not specify their characteristics, which can be interpreted to imply that an entity is required to consider all possible users of the financial statements when deciding what information to disclose. Consequently, the IASB decided to refer to primary users in the new definition to help respond to concerns that the term ‘users’ may be interpreted too widely. This amendment is effective for annual periods beginning on or after 1 January 2020. The amendments must be applied prospectively. Early application is permitted and must be disclosed. Note: The definition of material in the Conceptual Framework and IFRS Practice Statement 2: Making Materiality Judgements were amended to align with the revised definition of material in IAS 1 and IAS 8. The Conceptual Framework for Financial Reporting The conceptual framework sets out a comprehensive set of concepts for: - Financial reporting; - Standard setting; - Guidance for preparers in developing consistent accounting policies; and - Assistance to others in their efforts to understand and interpret the standards. The Conceptual Framework includes: - some new concepts; - provides updated definitions and recognition criteria for assets and liabilities; and - clarifies some important concepts. It is organized as follows: - Chapter 1 – The objective of financial reporting - Chapter 2 – Qualitative characteristics of useful financial information - Chapter 3 – Financial statements and the reporting entity - Chapter 4 – The elements of financial statements NOVO BANCO | 2019 ANNUAL REPORT | 255 - Chapter 5 – Recognition and derecognition - Chapter 6 – Measurement - Chapter 7 – Presentation and disclosure - Chapter 8 – Concepts of capital and capital maintenance The amended conceptual framework for the financial reporting is not a standard and none of its concepts prevails on the concepts set out in other standards or requirements of any standard. It is applicable to entities that develop their accounting principles based on the conceptual framework applicable to annual reporting periods beginning on or after 1 January 2020. Interest Rate Benchmark Reform – Amendments to IFRS 9, IAS 39 and IFRS 7 In September 2019, the IASB issued amendments to IFRS 9, IAS 39 and IFRS 7 Financial Instruments: Disclosures, which concludes phase one of its work to respond to the effects of Interbank Offered Rates (IBOR) reform on financial reporting. The amendments provide temporary reliefs which enable hedge accounting to continue during the period of uncertainty before the replacement of an existing interest rate benchmark with an alternative nearly risk-free interest rate (an RFR). The amendments to IFRS 9 The amendments include a number of reliefs, which apply to all hedging relationships that are directly affected by the interest rate benchmark reform. A hedging relationship is affected if the reform gives rise to uncertainties about the timing and/or amount of benchmark-based cash flows of the hedged item or the hedging instrument. Application of the reliefs is mandatory. The first three reliefs provide for: - The assessment of whether a forecast transaction (or component thereof) is highly probable - Assessing when to reclassify the amount in the cash flow hedge reserve to profit and loss - The assessment of the economic relationship between the hedged item and the hedging instrument For each of these reliefs, it is assumed that the benchmark on which the hedged cash flows are based (whether or not contractually specified) and/or, for relief three, the benchmark on which the cash flows of the hedging instrument are based, are not altered as a result of IBOR reform. A fourth relief provides that, for a benchmark component of interest rate risk that is affected by IBOR reform, the requirement that the risk component is separately identifiable need be met only at the inception of the hedging relationship. Where hedging instruments and hedged items may be added to or removed from an open portfolio in a continuous hedging strategy, the separately identifiable requirement need only be met when hedged items are initially designated within the hedging relationship. To the extent that a hedging instrument is altered so that its cash flows are based on an RFR, but the hedged item is still based on IBOR (or vice versa), there is no relief from measuring and recording any ineffectiveness that arises due to differences in their changes in fair value The reliefs continue indefinitely in the absence of any of the events described in the amendments. When an entity designates a group of items as the hedged item, the requirements for when the reliefs cease are applied separately to each individual item within the designated group of items. NOVO BANCO | 2019 ANNUAL REPORT | 256 The amendments also introduce specific disclosure requirements for hedging relationships to which the reliefs are applied. The amendments to IAS 39 The corresponding amendments are consistent with those for IFRS 9, but with the following differences: - For the prospective assessment of hedge effectiveness, it is assumed that the benchmark on which the hedged cash flows are based (whether or not it is contractually specified) and/or the benchmark on which the cash flows of the hedging instrument are based, are not altered as a result of IBOR reform. - For the retrospective assessment of hedge effectiveness, to allow the hedge to pass the assessment even if the actual results of the hedge are temporarily outside the 80%-125% range, during the period of uncertainty arising from IBOR reform. - For a hedge of a benchmark portion (rather than a risk component under IFRS 9) of interest rate risk that is affected by IBOR reform, the requirement that the portion is separately identifiable need be met only at the inception of the hedge. The amendments must be applied retrospectively. However, any hedge relationships that have previously been de-designated cannot be reinstated upon application, nor can any hedge relationships be designated with the benefit of hindsight. Early application is permitted and must be disclosed. Standards and Interpretations issued by the IASB, but not yet endorsed by the European Union The following standards, interpretations, amendments and revisions, with mandatory application in future financial years, were not, until the date of approval of these financial statements, adopted (endorsed) by the European Union: Definition of a Business - Amendments to IFRS 3 The IASB issued amendments to the definition of a business in IFRS 3 Business Combinations to help entities determine whether an acquired set of activities and assets is a business or not. They clarify the minimum requirements for a business, remove the assessment of whether market participants are capable of replacing any missing elements, add guidance to help entities assess whether an acquired process is substantive, narrow the definitions of a business and of outputs, and introduce an optional fair value concentration test. Minimum requirements to be a business The amendments clarify that to be considered a business, an integrated set of activities and assets must include, at a minimum, an input and a substantive process that together significantly contribute to the ability to create output. They also clarify that a business can exist without including all of the inputs and processes needed to create outputs. That is, the inputs and processes applied to those inputs must have ‘the ability to contribute to the creation of outputs’ rather than ‘the ability to create outputs’. Market participants’ ability to replace missing elements Prior to the amendments, IFRS 3 stated that a business need not include all of the inputs or processes that the seller used in operating that business, ’if market participants are capable of acquiring the business and continuing to produce outputs, for example, by integrating the business with their own inputs and processes’. The reference to such integration is now deleted from IFRS 3 and the assessment must be based on what has been acquired in its current state and condition. NOVO BANCO | 2019 ANNUAL REPORT | 257 Assessing whether an acquired process is substantive The amendments specify that if a set of activities and assets does not have outputs at the acquisition date, an acquired process must be considered substantive only if: a. b. it is critical to the ability to develop or convert acquired inputs into outputs; and the inputs acquired include both an organised workforce with the necessary skills, knowledge, or experience to perform that process, and other inputs that the organised workforce could develop or convert into outputs. In contrast, if a set of activities and assets has outputs at that date, an acquired process must be considered substantive if: a. it is critical to the ability to continue producing outputs and the acquired inputs include an organised workforce with the necessary skills, knowledge, or experience to perform that process; or b. it significantly contributes to the ability to continue producing outputs and either is considered unique or scarce, or cannot be replaced without significant cost, effort or delay in the ability to continue producing outputs. Narrowed definition of outputs The amendments narrowed the definition of outputs to focus on goods or services provided to customers, investment income (such as dividends or interest) or other income from ordinary activities. The definition of a business in Appendix A of IFRS 3 was amended accordingly. Optional concentration test The amendments introduced an optional fair value concentration test to permit a simplified assessment of whether an acquired set of activities and assets is not a business. Entities may elect to apply the concentration test on a transaction-by-transaction basis. The test is met if substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or group of similar identifiable assets. If the test is met, the set of activities and assets is determined not to be a business and no further assessment is needed. If the test is not met, or if an entity elects not to apply the test, a detailed assessment must be performed applying the normal requirements in IFRS 3. The amendments must be applied to transactions that are either business combinations or asset acquisitions for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after 1 January 2020. Consequently, entities do not have to revisit such transactions that occurred in prior periods. Earlier application is permitted and must be disclosed. The amendments could also be relevant in other areas of IFRS (e.g., they may be relevant where a parent loses control of a subsidiary and has early adopted Sale or Contribution of Assets between an Investor and its Associate or Joint Venture (Amendments to IFRS 10 and IAS 28)). IFRS 17 Insurance Contracts IFRS 17 applies to all types of insurance contracts (i.e., life, non-life, direct insurance and re-insurance), regardless of the type of entities that issue them, as well as to certain guarantees and financial instruments with discretionary participation features. A few scope exceptions will apply. The overall objective of IFRS 17 is to provide an accounting model for insurance contracts that is more useful and consistent for insurers. In contrast to the requirements in IFRS 4, which are largely based on grandfathering previous local accounting NOVO BANCO | 2019 ANNUAL REPORT | 258 policies, IFRS 17 provides a comprehensive model for insurance contracts, covering all relevant accounting aspects. NOTE 46 – SUBSEQUENT EVENTS - Following the recent news about the case “Luanda Leaks”, despite being an event known in 2020, NOVO BANCO incorporated in the 2019 accounts the impacts that resulted from the analysis of this specific case in line with the accounting standards in force. NOVO BANCO will continue to monitor developments in this process during fiscal year 2020; - From January 2020, the COVID-19 outbreak has been spreading beyond China's borders, impacting financial markets and economic activity. NOVO BANCO is closely monitoring developments, which, on the date of production of this report, are still on a preliminary stage, and, as such, in constant change and with great uncertainty. As an example, the national state of emergency is in force since March 19 decreed for a period of 15 days, with the possibility of prolongation. On this date, the Portuguese Government announced an aid package covering several lines of funding, totalling EUR 3 billion including state guarantees, particularly for the tourism, food and entertainment, textile and clothing, footwear and wood and derivatives sectors. On the other hand, and on that same date, the ECB announced the implementation of the Pandemic Emergency Purchase Programme (PEPP), a programme for the acquisition of public and private sector assets, amounting to EUR 750 billion which could be increased. Purchases under this programme will run until the end of 2020 and will include all classes of assets eligible since the sovereign debt crisis (the amount of which had already been increased by EUR 120 billion). Also noteworthy are the monetary policy actions that have already been adopted by the Central Bank of China with the reduction of interest rates for 1 and 5 years. NOVO BANCO is also monitoring the potential impacts and, where relevant, is taking decisions that defend the interests of different stakeholders, including employees, depositors, customers and shareholders. The main impacts on the NOVO BANCO’s financial statements may come as a result of increased credit risk increased volatility in financial and non-financial assets and from business constraints due to the measures enacted to contain the spread of the virus. In view of these very recent facts, in constant progress and, as such, not yet definitive, NOVO BANCO, in the current fiscal year, will consider and include in its forecasts scenarios with different levels of severity, including also events resulting from the pandemic that are not yet fully known – as may be eventual payment holidays on the loans, and their impacts on impairment of assets, credit quality, assessment of significant increase in credit since inception, forbearance, estimated credit losses according to IFRS9, impacts on capital, among others, material and immaterial. This estimate is not quantifiable at this date. With regard to the fair value of the portfolio of financial assets measured at fair value, which as of December 31, 2019 amounted to 11 802 855 thousand Euro, as disclosed in Note 20, there has been increased volatility in the interest rate market, but, considering the measures announced by the ECB, it is not possible to reliably access the full impact of the pandemic. NOVO BANCO | 2019 ANNUAL REPORT | 259 Finally, regarding non-financial assets, NOVO BANCO holds a portfolio of real estate assets of 294 876 thousand Euro, as presented in note 26. The value of these assets may be affected by a decrease in occupancy rates that have been reported in the tourism sector, a decrease in economic activity in general and a reduction in the market's ability to transact these assets, all as a result of the impacts of Covid-19. On this date, management is not in a position to quantify the potential impacts of Covid- 19 on the fair value or recoverable amount of these assets. As a result of the evolution of the pandemic in Portugal, NOVO BANCO implemented the following measures: Adaptating the banking and financial offer to cope with the COVID-19 outbreak: - Corporate clients: NOVO BANCO has made available to its clients and to the national businesses a set of solutions to support treasury and corporate finances to support sectors of the national economy whose activity is affected by the resulting economic effects of covid-19, always taking into account the appropriate risk criteria. The support ranges from prorogation of capital repayments up to 12 months, extension of 90 days in factoring, advance of social security payments for eventual lay-off or access to the “Capitalizar” credit line. - Retail clients: NOVO BANCO has launched a package of products and services tailored to the needs exacerbated by the COVID 19 pandemic and aimed at reducing the risks of contagion. This package includes the temporary exemption of commissions on a set of essential transactions through digital channels (from interbank transfers, payment of services, cash-advance and MBWay payments, to the exemptions of the 1st annuity on new debit and prepaid cards or replacements). To meet the foreseeable increase in the use of digital channels, NOVO BANCO has also strengthened technological support for transactions made through electronic means of payment. These measures will have temporary effect and aim to drastically reduce the need to touch the terminals and the physical exchange of money which are little advised in this period. Protection of Employees and Customers: - Promotion and dissemination of recommended hygiene practices and availability of recommended sanitary products in buildings and branches of NOVO BANCO; - Availability of dedicated isolation rooms, in all central buildings and branches, for the confinement of employees suspected of infection; - Plan for the evacuation and disinfection of buildings and branches in case of confirmed infection of a team member; - Self-isolation/quarantine and telework measures for employees who have traveled to one of the affected countries or regions or who have been in close contact with someone who has been confirmed to be infected; NOVO BANCO | 2019 ANNUAL REPORT | 260 - Prohibition of all non-critical business trips and recommendation to all employees to reduce personal travel to a minimum; - Restriction of non-critical face-to-face internal meetings or with suppliers or partners, which are replaced by digital means (video and conference call or other team collaboration tools) and reduced to a minimum number of participants; - Replacement of face-to-face meetings with customers with remote alternatives whenever possible, with greater restrictions in the affected areas; - Implementation of telework plans and division of teams between various locations for critical and non- critical functions, in order to ensure the ability to maintain service levels without disruption; - Evaluation with our main suppliers and partners of their business continuity plans for COVID-19 to ensure minimization of business impact through third-party supplies. Customer Service: The customer phone service team has been strengthened to cope with a potential increase in demand. Also, the communication to customers about the means to conduct transactions, contracting and digital contact was strengthened and implemented an exemption on commissions for the generality of transactions carried out through digital channels. With regard to the availability of face-to-face service, NOVO BANCO's branches will remain open to the public in a conditioned manner. The conditionality is reflected solely in the restriction on the number of customers who can simultaneously be inside the branch, which will be limited to 4 customers. However, the following exceptions are foreseen for availability in face-to-face care: - In situations where customers who had visited the facilities and who subsequently tested positive for the COVID-19 virus, the service will be carried out exclusively by telephone during the period of 14 days; - In situations of branches with up to 3 employees, which will close during lunch time between 12:00 and 13:00; - In situations where there is a positive case of COVID-19 infection, the affected branch will be closed for the quarantine period. Whenever the period of operation or closure of a branch changes, this information will be posted in the storefront of the branch, customers of these branches will be informed by email or SMS, and information about the closed branches or with service limitations will always be up-to-date on the www.novobanco.pt website. These measures may have an impact on NOVO BANCO's activity, however, given the possibility of using remote and digital channels, NOVO BANCO does not expect these to be relevant through the mitigation measures implemented. However, risks of a longer overall impact, arising from any trigger that undermines confidence, are not yet completely ruled out. NOVO BANCO | 2019 ANNUAL REPORT | 261 It is also the conviction of the Board of Directors a continuous support from its shareholders, we, thus, consider adequate that the financial statements of NOVO BANCO continue to be prepared in a going concern basis, as described in note 2.1. - On February 11, 2020, Novo Banco, S.A. - Spanish Branch was informed by a former employee that he had performed several allegedly fraudulent acts involving several clients, relating to the management of a client portfolio of a given agency of the Spanish Branch, in parallel and in non- compliance with the internal procedures defined by the Bank. NOVO BANCO immediately took several steps to verify the veracity of the facts and to quantify the potential damages and identification of customers that may be at stake, which are still in progress. On the present date, there is no visibility as to the existence of NOVO BANCO's liability and, if confirmed, its effects or the amounts that could potentially be at stake, so the eventual liability of NOVO BANCO is, for the moment, insusceptible determined or quantified. NOVO BANCO | 2019 ANNUAL REPORT | 262 7.2 Annex – Adoption of the Financial Stability Forum (FSF) and Committee of European Banking Supervisors (CEBS) Recommendations on the Transparency of Information and the Valuation of Assets (Bank of Portugal’s Circular Letters no. 97/2008/DSB of 3 December and no. 58/2009/DSB of 5 August) In its Circular Letter no. 58/2009/DSB of 5 August 2009, the Bank of Portugal reiterated “the need for institutions to maintain adequate compliance with the recommendations of the Financial Stability Forum (FSF), as well as those issued by the Committee of European Banking Supervisors (CEBS), concerning the transparency of information and the valuation of assets, taking into account the proportionality principle”, as set out in Circular Letters no. 46/2008/DSBDR of 15 July 2008 and no. 97/2008/DSB of 3 December 2008. The Bank of Portugal recommends the inclusion in the reporting documents of a specific chapter or annex exclusively dedicated to the issues dealt with in the CEBS and FSF recommendations. This chapter aims to ensure compliance with the Bank of Portugal’s recommendations, including references to where the information provided may be found within the Management Report or in the Notes to the Financial Statements for fiscal years 2019 and 2018. I. BUSINESS MODEL 1. Description of the business model A description of the Group’s business model is provided in point 1 of the Management Report. The performance of the main business areas (operational segments) of the Group is also presented in Note 49. 2. Strategy and objectives A description of the Group's strategy and objectives is provided in point 2 of the Management Report. The securitisation transactions are detailed in Note38. 3., 4. and 5. Activities developed and contribution to the business Point 3 of the Management Report and Note 4 contain information about the activity and contribution to the business. 9 The numbering refers to the Notes to the Consolidated Financial Statements. NOVO BANCO | 2019 ANNUAL REPORT | 263 II. RISK AND RISK MANAGEMENT 6. and 7. Description and nature of the risks incurred Point 3.10 of the Management Report describes how the risk management function is organised within the Group. Note 41 contains diverse information that together enables the market to form a thorough perception about the risks incurred by the Group and the management mechanisms in place to monitor and control such risks. III. IMPACT OF THE PERIOD OF FINANCIAL TURMOIL ON THE RESULTS 8., 9., 10., and 11. Qualitative and quantitative description of the results and comparison of impacts between periods On 31 March 2017, the Resolution Fund signed the sale agreement of NOVO BANCO. On 18 October the NOVO BANCO sale process was concluded, following the acquisition of the majority (75%) of the Bank's share capital by Nani Holdings, SGPS, S.A., a company owned by the North-American Group Lone Star, through two share capital increases in the amount of Euro 750 million and Euro 250 million, in October and December, respectively. This sale was preceded by the completion of a Liability Management Exercise (LME) over bonds with a book value of approximately Euro 3 billion. 12. Decomposition of realised and non-realised write-downs The profit and loss of assets and liabilities held for trading, assets and liabilities at fair value through profit or loss, assets and liabilities at fair value through profit or loss mandatory, and assets and liabilities at fair value through comprehensive income are detailed by financial instrument in Notes 9 and 10. In addition, unrealised gains and losses on securities at fair value through other comprehensive income are detailed in Notes 21 and 34, while the most significant positions are broken down in Note 21. 13. Financial turmoil and the share price NOVO BANCO does not have listed shares. 14. Maximum loss risk Point 3.10 of the Management Report and Note 41 contain the relevant information about potential losses in market stress situations. 15. Debt issued by the Group and results Note 39 contains information on the impact of debt revaluation and the methods used to calculate this impact on the results. NOVO BANCO | 2019 ANNUAL REPORT | 264 IV. LEVEL AND TYPE OF EXPOSURES AFFECTED BY THE PERIOD OF FINANCIAL TURMOIL 16. Nominal and fair value of exposures 17. Credit risk mitigators 18. Information about the Group's exposures As at 31 December 2019 exposure to Portuguese sovereign debt totalled Euro 4 115 million (2018: Euro 4 434 million), exposure to Spanish sovereign debt totalled Euro 2 186 million (2018: Euro 3 855 million), exposure to Italian sovereign debt totalled Euro 119 million (2018: Euro 83 million) and exposure to Irish sovereign debt totalled Euro 228 million (2018: Euro 60 million). The information about the Group’s exposures is provided in Note 41. 19. Movement in exposures between periods Note 41 contains diverse information comparing the exposures and results in 2019 and 2018. The disclosed information is considered sufficient, given the detail and quantification provided. 20. Non-consolidated exposure All the structures related to securitisation operations originated by the Group are presented in Note 38. None of the SPEs (Special Purpose Entities) were consolidated due to the market turbulence. 21. Exposure to monoline insurers and quality of the assets insured The Group has no exposure to monoline insurers. V. ACCOUNTING POLICIES AND VALUATION METHODS 22. Structured Products These situations are described in Note 2 – Summary of Significant Accounting Policies. 23. Special Purpose Entities (SPEs) and consolidation Disclosure available in Notes 2 and 38. 24. and 25. Fair value of financial instruments See the comments to item 16 of this Annex. Notes 2 and 39 refer to the conditions for utilisation of the fair value option as well as the methodology used to value the financial instruments. NOVO BANCO | 2019 ANNUAL REPORT | 265 VI. OTHER RELEVANT ASPECTS OF DISCLOSURE 26. Description of the disclosure policies and principles NOVO BANCO Group, within the context of accounting and financial information disclosure, aims to comply with all the regulatory requirements, defined by the accounting standards or by the supervisory and regulatory entities. At the same time, the Bank aims to meet the best market practices in information disclosure, balancing the cost of preparing the relevant information with the benefit that it may provide to the users. From the information made available to the Bank’s shareholders, clients, employees, supervisory entities and the public in general, the Management Report, the Financial Statements and the respective Notes, the information on Corporate Governance and the Sustainability Accounts deserve a note. The Management Reports and Financial Statements, released on a half-yearly basis, are prepared under IFRS that comply with the highest degree of disclosure and transparency and facilitate comparison to other domestic and international banks. The information on Corporate Governance disclosure in point 4 of the Management Report, presents the most relevant topics about the governing structure of the Group. The Sustainability Accounts convey the Group’s perspective about social responsibility in the context of the numerous challenges that the modern world faces, whether of an environmental or social nature, or pertaining to innovation and entrepreneurship. NOVO BANCO | 2019 ANNUAL REPORT | 266 7.3 Separate Financial Statements of NOVO BANCO as at 31 December 2019 NOVO BANCO | 2019 ANNUAL REPORT | 267 (in thousands of Euros)31.12.201931.12.2018Interest Income4 765 259 762 633Interest Expenses4( 219 109)( 316 392)Net Interest Income 546 150 446 241Dividend income5 17 313 17 864Fee and comission income6 333 362 329 201Fee and comission expenses6( 48 049)( 49 395)Gains or losses on derecognition of financial assets and liabilities not measured at fair value through profit or loss7 59 377( 175 182)Gains or losses on financial assets and liabilities held for trading8( 60 446)( 22 625)Gains or losses on financial assets mandatorily at fair value through profit or loss9( 372 645)( 10 094)Gains or losses on financial assets and liabilities designated at fair value through profit and loss9( 102)-Gains or losses from hedge accounting10( 2 261)( 46 910)Exchange differences11 38 599 42 759Gains or losses on derecognition of non-financial assets12 7 996 19 943Other operating income13 62 522 124 327Other operating expenses13( 112 664)( 164 006)Operating Income 469 152 512 123Administrative expenses( 413 977)( 440 258)Staff expenses14( 242 098)( 244 104)Other administrative expenses16( 171 879)( 196 154)Depreciation23 and 24( 36 681)( 21 314)Provisions or reversal of provisions29( 101 844)( 239 973)Commitments and guarantees given 60 467( 26 161)Other provisions( 162 311)( 213 812)Impairment or reversal of impairment on financial assets not measured at fair value through profit or loss20( 631 044)( 298 792)Impairment or reversal of impairment of investment in subsidiaries, joint ventures and associates22( 36 040)( 47 605)Impairment or reversal of impairment on non-financial assets26 and 27( 298 424)( 236 460)Profit or loss before tax from continuing operations(1 048 858)( 772 279)Tax expense or income related to profit or loss from continuing operations( 38 726)( 660 596)Current tax( 2 541)( 2 714)Deferred tax( 36 185)( 657 882)Profit or loss after tax from continuing operations(1 087 584)(1 432 875)Profit or loss before tax from discontinued operations--Profit or loss for the period(1 087 584)(1 432 875)Attributable to Shareholders of the parent17(0,11)(0,15)Attributable to non-controlling interests17(0,11)(0,15)Basic earnings per share of continuing activities (in Euros)17(0,11)(0,15)Diluted earnings per share of continuing activities (in Euros)17(0,11)(0,15)INCOME STATEMENTNOVO BANCO, S.A.FOR THE YEARS ENDED 31 DECEMBER 2019 AND 2018The accompanying explanatory notes are an integral part of these separate financial statementsNotes NOVO BANCO | 2019 ANNUAL REPORT | 268 (in thousands of Euros)31.12.201931.12.2018Net profit / (loss) for the period( 1 087 584)( 1 432 875)Other comprehensive income/(loss) Items that will not be reclassified to results( 104 596)( 71 701)Actuarial gains / (losses) on defined benefit plansa)( 106 026)( 69 951)Fair value changes of equity instruments measured at fair value through other comprehensive incomea) 4 301( 2 952)Fair value changes of financial liabilities at fair value through profit or loss that isattributable to changes in their credit riska)( 2 871) 1 202Items that may be reclassified to results 223 579( 24 441)Foreign exchange differencesa)-( 2 549)Financial assets at fair value through other comprehensive incomea) 223 579( 21 892)Total other comprehensive income/(loss) for the period( 968 601)(1 529 017)a) See Statement of Changes in the EquityThe accompanying explanatory notes are an integral part of these separate financial statementsSTATEMENT OF COMPREHENSIVE INCOME FOR THE YEARS ENDED 31 DECEMBER 2019 AND 2018NOVO BANCO, S.A.Notes NOVO BANCO | 2019 ANNUAL REPORT | 269 (in thousands of Euros)Notes31.12.201931.12.2018ASSETSCash, cash balances at central banks and other demand deposits 181 674 826 802 330Financial assets held for trading 19 748 836 925 544Non-trading financial assets mandatorily at fair value through profit or loss 203 044 7242 949 597Financial assets at fair value through other comprehensive income 208 758 1317 567 290Financial assets at amortised cost 2026 042 24325 651 402Debt securities2 392 8432 302 765Loans and advances 495 252 558 652 (of which, Repurchase Agreement) 8 9 774Loans and advances23 154 14822 789 985Derivatives – Hedge accounting 21 7 992 1 721Fair value changes of the hedged items in portfolio hedge of interest rate risk 21 49 884 31 571Investments in subsidiaries, joint ventures and associates 22 231 425 645 871Tangible assets 194 753 135 731Tangible fixed assets 23 194 753 135 731Intangible assets 24 26 043 4 781Tax assets 25 892 7131 182 481Current Tax Assets 680 3 209Deferred Tax Assets 892 0331 179 272Other assets 263 333 5863 745 772Non-current assets and disposal groups classified as held for sale 27 21 273 186 508TOTAL ASSETS45 026 42943 830 599-LIABILITIESFinancial liabilities held for trading 19 544 400 493 403Financial liabilities measured at amortised cost 2839 924 56438 925 605Deposits from banks10 542 5499 119 139 (of which, Repurchase Agreement)2 168 488 237 178Due to customers27 980 57728 439 075Debt securities issued, Subordinated debt and liabilities associated to transferred assets1 044 4451 135 128Other financial liabilities 356 993 232 263Derivatives – Hedge accounting 21 58 854 36 150Provisions 29 371 744 423 883Tax liabilities 25 9 239 9 112Current Tax liabilities 9 239 9 112Other liabilities 30 471 626 343 167TOTAL LIABILITIES41 380 42740 231 320EQUITYCapital 315 900 0005 900 000Accumulated other comprehensive income 32( 632 033)( 751 016)Retained earnings 32(6 115 245)(4 682 368)Other reserves 325 580 8644 565 538Profit or loss attributable to Shareholders of the parent(1 087 584)(1 432 875)TOTAL EQUITY3 646 0023 599 279TOTAL LIABILITIES AND EQUITY45 026 42943 830 599NOVO BANCO, S.A.BALANCE SHEETAS AT 31 DECEMBER 2019 AND 2018The accompanying explanatory notes are an integral part of these separate financial statements NOVO BANCO | 2019 ANNUAL REPORT | 270 (in thousands of Euros)Balance as at 31 December 2017 * 5 900 000 ( 272 313)( 2 526 486) 3 403 352 ( 2 155 648) 4 348 905 Impact of transition to IFRS 9- ( 399 450)- 17 380 - ( 382 070)Balance as at 1 January 2018 5 900 000 ( 671 763)( 2 526 486) 3 420 732 ( 2 155 648) 3 966 835 Corrections to the impact of transition to IFRS 9- 14 342 ( 234)( 1 697)- 12 411 Other Increase / (Decrease) in Equity- 2 547 ( 2 155 648) 1 146 503 2 155 648 1 149 050 Appropriation to retained earnings of net profit / (loss) of the previous period *- - ( 2 155 648)- 2 155 648 - Reserve of Contingent Capital Agreement- - - 1 149 295 - 1 149 295 Other movements- 2 547 - ( 2 792)- ( 245)Total comprehensive income for the period- ( 96 142)- - ( 1 432 875)( 1 529 017)Changes in fair value, net of tax- ( 21 892)- - - ( 21 892)Foreign exchange differences, net of tax- ( 2 549)- - - ( 2 549)Remeasurement of defined benefit plans, net of tax- ( 69 951)- - - ( 69 951)Credit risk changes of financial liabilites at fair value, net of tax- 1 202 - - - 1 202 Reserves of impairment of securities at fair value through OCI- 605 - - - 605 Reserves of sales of securities at fair value through OCI- ( 3 557)- - - ( 3 557)Net profit / (loss) for the period- - - - ( 1 432 875)( 1 432 875)Balance as at 31 December 2018 5 900 000 ( 751 016)( 4 682 368) 4 565 538 ( 1 432 875) 3 599 279 Other Increase / (Decrease) in Equity- - ( 1 432 877) 1 015 326 1 432 875 1 015 324 Appropriation to retained earnings of net profit / (loss) of the previous period- - ( 1 432 875)- 1 432 875 - Reserve of Contingent Capital Agreement 32 - - - 1 037 013 - 1 037 013 Fusion reserve BES GMBH- - - ( 195 267)- ( 195 267)Fusion reserve BESIL- - - 173 679 - 173 679 Fusion reserve ES Plc- - - ( 97)- ( 97)Other movements- - ( 2)( 2)- ( 4)Total comprehensive income for the period- 118 983 - - ( 1 087 584)( 968 601)Changes in fair value, net of tax 32 - 228 454 - - - 228 454 Remeasurement of defined benefit plans, net of tax 15 - ( 106 026)- - - ( 106 026)Credit risk changes of financial liabilites at fair value, net of tax 32 - ( 2 871)- - - ( 2 871)Reserves of impairment of securities at fair value through OCI 32 - 4 301 - - - 4 301 Reserves of sales of securities at fair value through OCI 32 - ( 4 875)- - - ( 4 875)Net income of the period- - - - ( 1 087 584)( 1 087 584)Balance as at 31 December 2019 5 900 000 ( 632 033)( 6 115 245) 5 580 864 ( 1 087 584) 3 646 002 NOVO BANCO, S.A.STATEMENT OF CHANGES IN EQUITYFOR THE YEARS ENDED 31 DECEMBER 2019 AND 2018Net profit/(loss) for the period attributable to shareholders of the BankTotalNotesRetained earningsOther reservesShare CapitalThe accompanying explanatory notes are an integral part of these separate financial statementsOther Comprehensive Income* - restated by the amount of the activation of the Contingent Capital Agreement recognized in Other reserves NOVO BANCO | 2019 ANNUAL REPORT | 271 (in thousands of Euros)Notes31.12.201931.12.2018Cash flows from operating activitiesInterest received 751 730 776 272 Interest paid( 222 520)( 320 307)Fees and commissions received 333 902 329 767 Fees and commissions paid( 48 049)( 50 841)Recoveries on loans previously written off 30 230 41 971 Contributions to the pension fund- ( 92 863)Cash payments to employees and suppliers( 399 539)( 387 908) 445 754 296 091 Changes in operating assets and liabilities:Deposits with / from Central Banks( 297 651) 4 742 Financial assets mandatorily at fair value through profit or loss( 839 719) 124 074 Financial assets designated at fair value through profit or loss 164 896 ( 331 227)Financial assets at fair value through other comprehensive income( 907 485)(2 039 793)Financial assets at amortised cost(1 172 699)( 30 140)Debt securities( 29 161)( 122 121)Loans and advances to banks 63 182 198 083 Loans and advances to customers(1 206 720)( 106 102)Financial liabilities at amortised cost1 263 360 (1 786 027)Deposits from banks1 716 126 ( 169 638)Due to customers( 452 766)(1 616 389)Derivatives - Hedge accounting( 1 880) 13 121 Other operating assets and liabilities1 097 685 ( 243 033)Net cash from operating activities before corporate income tax( 247 739)(3 992 192)Corporate income taxes paid( 30 308)( 30 262)Net cash from operating activities( 278 047)(4 022 454)Cash flows from investing activitiesDividends received 17 313 17 864 Acquisition of tangible fixed assets ( 17 130)( 14 543)Sale of tangible fixed assets 16 387 315 Acquisition of intangible assets( 26 137)( 5 202)Net cash from investing activities( 9 567)( 1 566)Cash flows from financing activitiesContingent Capital Agreement1 149 295 791 695 Reimbursement of bonds and other debt securities 467 ( 74 768)Issue of subordinated liabilities- 141 200 Net cash from financing activities1 149 762 858 127 Net changes in cash and cash equivalents 862 148 (3 165 893)Cash and cash equivalents at the beginning of the period 544 199 3 710 092 Net changes in cash and cash equivalents 862 148 (3 165 893)Cash and cash equivalents at the end of the period1 406 347 544 199 Cash and cash equivalents include:Cash18 174 156 149 266 Deposits with Central Banks181 408 908 546 023 (of which, Restricted balances)( 268 479)( 258 131)Deposits with banks18 91 762 107 041 Total1 406 347 544 199 CONSOLIDATED CASH FLOW STATEMENTFOR THE YEARS ENDED 31 DECEMBER 2019 AND 2018The accompanying explanatory notes are an integral part of these individual financial statementsNOVO BANCO, S.A. NOVO BANCO Notes to the Separate Financial Statements as at 31 December 2019 (Amounts expressed in thousands of Euro, except when otherwise indicated) NOTE 1 – ACTIVITY NOVO BANCO, S.A. is the main entity of the financial Group NOVO BANCO focused on the banking activity, having been incorporated on the 3rd of August 2014 per deliberation of the Board of Directors of Bank of Portugal (the Central Bank of Portugal) dated 3rd of August 2014 (8 p.m.), under No. 5 of article 145-G of the General Law on Credit Institutions and Financial Companies (“Regime Geral das Instituições de Crédito e Sociedades Financeiras” (RGICSF)) , approved by Decree-Law No. 298/92, of 31 December, following the resolution measure applied by Bank of Portugal to Banco Espírito Santo, S.A. (BES), under the terms of paragraphs 1 and 3-c) of article 145-C of the RGICSF, from which resulted the transfer of certain assets, liabilities and off-balance sheet elements as well as assets under management of BES from BES to NOVO BANCO (NOVO BANCO or the Bank). As a result of the resolution measure applied, Fundo de Resolução (“Resolution Fund”) became the sole owner of the share capital of NOVO BANCO, in the amount of Euro 4 900 million, with the status of a transition bank, with a limited duration, due to the commitment assumed by the Portuguese State with the European Commission to sell its shares within two years from the date of its incorporation, extendable for one year. On 31 March 2017, the Resolution Fund signed the sale agreement of NOVO BANCO. On 18 October 2017 the sale process was concluded, following the acquisition of the majority (75%) of its share capital by Nani Holdings, SGPS, SA, a company belonging by the North-American Group Lone Star, through two share capital increases in the amount of Euro 750 million and Euro 250 million, in October and December, respectively. Thus, as at 31 December 2019, the share capital of NOVO BANCO amounted to Euro 5 900 million, represented by 9 799 999 997 nominative shares, with no nominal value. Within the sale process, a Contingent Capitalization Agreement was created with the sale process, which in case its capital ratios decrease below the regulatory requirements defined for NOVO BANCO, and cumulatively, losses are recorded in a delimited portfolio of assets, the Resolution Fund makes a payment corresponding to the lower of the losses recorded and the amount needed to restore the capital ratios at the relevant level, up to a maximum of Euro 3 890 million. With the conclusion of the sale process, NOVO BANCO ceased to be considered a transition bank and began to operate normally, although still being subject to certain measures restricting its activity, imposed by the European Competition Authority. Since 18 October 2017 the financial statements of NOVO BANCO are consolidated by Nani Holdings SGPS, S.A., with registered office at Avenida D. João II, No. 46, 4A, Lisbon. NOVO BANCO, S.A. has its registered office in Lisbon, at Avenida da Liberdade, No. 195. As at 31 December 2019, NOVO BANCO has a retail network comprising 368 branches in Portugal and abroad (31 December 2018: 383 branches), branches in Spain and Luxembourg and 4 representative offices in Switzerland (31 December 2018: 5 representative offices). NOVO BANCO | 2019 ANNUAL REPORT | 272 During 2019, the subsidiaries BES GMBH, BESIL and ESPLC were merged into NOVO BANCO. The branches in London and the Cayman Islands were also closed. NOTE 2 – MAIN ACCOUNTING POLICIES 2.1. Basis of presentation In accordance with Regulation (EC) No. 1606/2002 of 19 July 2002 of the European Council and the Parliament and Notices 5/2015 of Bank of Portugal, the separate financial statements from NOVO BANCO, S.A. were prepared in accordance with the International Financial Reporting Standards (IFRS) as adopted by the European Union effective as of 1 January 2019. The IFRS comprise accounting standards issued by International Accounting Standards Board (IASB) as well as interpretations issued by the International Reporting Interpretations Committee (IFRIC), and by their predecessor bodies Standing Interpretations Committee (“SIC”). The separate financial statements of NOVO BANCO are presented as at 31 December 2019. The accounting policies used by the Bank in their preparation are consistent with those used in the preparation of the financial statements as at 31 December 2018, except in what concerns with the new standards issued. These changes are presented below. Changes in accounting policies New and amended standards As described in Note 44, in the preparation of its separate financial statements as at 31 December 2019 the Bank adopted the accounting standards issued by the IASB and the IFRIC interpretations with mandatory effect as from 1 January 2019. The accounting policies used by the Bank in preparing the separate financial statements, described in this note, were adopted accordingly. In these financial statements, the Bank first applied IFRS 16, which is mandatory for periods beginning on or after 1 January 2019. The Bank did not early adopt any other regulation or interpretation. IFRS 16 Leases The Bank first adopted IFRS 16 Leases as at 1 January 2019 and the comparative information presented for 2018 has not been restated, so it is presented, as previous reported, in accordance with IAS 17 and related interpretations. According to IFRS 16: - as a lessee, the standard introduces a single accounting model with the recognition of rights-of-use assets representative of their rights of use of the underlying assets and lease liabilities representative of their obligations to make lease payments; - as a lessor, accounting remains the same as existing accounting policies and leases may be classified as financial or operating. NOVO BANCO | 2019 ANNUAL REPORT | 273 In the transition to IFRS 16, the Bank recognized assets under right of use and lease liabilities, with the following impact in the consolidated financial statements: Lease Definition The Bank first adopted IFRS 16 through the modified retrospective approach, so no impact was recognized in equity, since there were no differences between the right-of-use asset and the lease liability in the initial recognition on 1 January 2019. In the transition to IFRS 16, the Bank opted to apply the “practical expedient” allowed by the standard to support the assessment of which transactions are leases. The Bank has only applied IFRS 16 in contracts that were previously identified as leases. Contracts that were not identified as leases under IAS 17 and IFRIC 4 were not revalued to determine whether they were leases. Therefore, the definition of lease in accordance with IFRS 16 has been applied only to contracts that entered into force or have changed as of or after 1 January 2019 (including). Previously, the Bank classified real estate leases as operational leases in accordance with IAS 17. Leases typically take place over periods of up to 5 years. Some of them include an option to renew the lease for additional periods that vary between 1 month and 20 years after the end of the non-cancellable period. Some leases also provide for additional rent payments due to changes in local index prices. In the transition, for leases classified as operating leases in accordance with IAS 17, the lease liabilities were measured at the present value of the remaining lease payments, discounted at the Bank’s incremental financing rate on 1 January 2019. The right-of-use assets are measured at the amount equivalent to the lease liability, adjusted by the amount of any advance or accumulated lease payments. Practical expedients The Bank has adopted some practical expedients provided for in the standard in applying IFRS 16 to leases previously classified as operating leases in accordance with IAS 17. - Apply the exception of non-recognition of assets under right of use and liabilities for short-term leases (i.e. with a lease term of 12 months or less); - Apply the exception of non-recognition of assets under use and liabilities for low value leases (i.e. new value less than Euro 5 thousand); - Do not separate lease components from non-lease components. For leases that were classified as finance leases in accordance with IAS 17, the accounting amount of assets under lease use and the liability of the lease as at 1 January 2019 was determined at the accounting amount of the lease asset and the lease liability, according to IAS 17 immediately prior to that date. The accounting standards and interpretations recently issued, but not yet effective and which the Bank has not yet applied in the preparation of its financial statements, can be analysed in Note 40. NOVO BANCO | 2019 ANNUAL REPORT | 274 (in thousands of Euros)Assets under right-of-use presented in Other tangible assets 94 035 Lease liabilities 94 035 The separate financial statements are expressed in thousands of Euro, rounded to the nearest thousand. They have been prepared under the assumption of continuity of operations from the accounting records and following the historical cost convention, except for the assets and liabilities accounted for at fair value, namely derivative financial instruments, financial assets and liabilities at fair value through profit or loss, financial assets at fair value through other comprehensive income, investment properties and hedged assets and liabilities, in respect of their hedged component. Changes in accounting estimates The preparation of financial statements in accordance with IFRS requires the Bank to make judgements and estimates and use assumptions that affect the application of the accounting policies and the reported amounts of income, expenses, assets and liabilities. Changes in such assumptions or differences when compared to the reality may impact the current estimates and judgements. The areas involving a higher level of judgement or complexity, or areas where assumptions and estimates are significant to the consolidated financial statements are analysed in Note 3. The Separate financial statements and the Management Report of 31 December 2019 were approved at the Executive Board of Directors’ meeting held on 25 March 2020 and will be submitted to the General Assembly of Shareholders, which has the power to justifiably decide to change them. However, it is Executive Board of Directors conviction that these separate financial statements will be approved without changes. 2.2. Foreign currency transactions Foreign currency transactions are translated into the functional currency using the exchange rate prevailing at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies are translated into Euro at the foreign exchange rates ruling at the balance sheet date. Foreign exchange differences arising on this translation are recognised in the income statement. Non-monetary assets and liabilities recorded at historical cost, denominated in foreign currency, are translated using the exchange rate prevailing at the transaction date. Non-monetary assets and liabilities, denominated in foreign currency, that are stated at fair value are translated into Euro at the foreign exchange rates ruling at the dates the fair value was determined. The resulting exchange differences are accounted for in the income statement, except if related to equity instruments classified as financial assets at fair value through other comprehensive income, which are recorded in equity reserves. Foreign exchange differences relating to cash flow hedges and the hedging of the net investment in foreign operational units, when they exist, are recognised in other comprehensive income. NOVO BANCO | 2019 ANNUAL REPORT | 275 2.3. Derivative financial instruments and hedge accounting Classification The Bank classifies its derivative portfolio into (i) fair value hedge and (ii) trading derivatives, which include, in addition to the trading book, other derivatives contracted for the purpose of hedging certain assets and liabilities designated at fair value through profit or loss but not classified as hedging (fair value option). Recognition and measurement Derivative financial instruments are initially recognised at their fair value on the date the derivative contract is entered into (trade date). Subsequent to initial recognition, the fair value of derivative financial instruments is remeasured on a regular basis and the resulting gains or losses on remeasurement are recognised directly in the income statement, except for derivatives designated as hedging instruments. The recognition of the resulting gains or losses arising on the derivatives designated as hedging instruments depends on the nature of the risk being hedged and the hedge model used. Derivatives traded on organised markets, namely futures and some options contracts, are recorded as trading derivatives and their fair value changes are recorded against the income statement. The margin accounts are included under other assets and Other liabilities (see Notes 26 and 30) and comprise the minimum collateral mandatory for open positions. The fair value of the remaining derivative financial instruments corresponds to their market value, if available, or is determined using valuation techniques, including discounted cash flow models and options pricing models, as appropriate. Hedge accounting (iv) Classification criteria Derivative financial instruments used for hedging purposes may be classified in the accounts as hedging instruments provided the following criteria are cumulatively met: Hedging instruments and hedged items are eligible for the hedge relationship; (i) At the inception of the hedge, the hedge relationship is identified and documented, including identification of the hedged item and hedging instrument and evaluation of the effectiveness of the hedge; (ii) There is an economic relationship between the hedged item and the hedging instrument; (iii) The effect of credit risk does not dominate the changes in value that result from this economic relationship; (iv) The effectiveness of the hedge can be reliably measured, both at the inception of the hedge and on an ongoing basis. The use of derivatives is framed in the Bank’s risk management strategy and objectives. - Fair value hedge In a fair value hedging operation, the carrying value of the hedged asset or liability, determined in accordance with the respective accounting policy, is adjusted to reflect the changes in its fair value attributable to the risk NOVO BANCO | 2019 ANNUAL REPORT | 276 being hedged. Changes in the fair value of the derivatives that are designated as hedging instruments are recorded in the income statement, together with any changes in the fair value of the hedged asset or liability that are attributable to the risk hedged. In cases where the hedging instrument covers an equity instrument designated at fair value through other comprehensive income, changes in fair value are also recognised in other comprehensive income. If the hedge no longer meets the effectiveness requirement, but the objective of risk management stays the same, the Bank may adjust the hedging operation in order to meet the eligibility criteria (rebalancing). If the hedge no longer meets the criteria for hedge accounting (if the hedging instrument expires, is sold, terminated or exercised, without having been replaced in accordance with the entity's documented risk management objective), the derivative financial instrument is transferred to the trading portfolio and hedge accounting is discontinued prospectively. The cumulative adjustment to the carrying book value of a hedged asset or liability corresponding to a fixed income instrument, is amortised via the income statement over the period to its maturity, using the effective interest rate method. - Cash flow hedge When a derivative financial instrument is designated as a hedge against the variability of highly probable future cash flows, the effective portion of the changes in the fair value of the hedging derivative is recognised in reserves, being recycled to the income statement in the periods in which the hedged item affects the income statement. The ineffective portion is recognised in the income statement. When a hedging instrument expires or is sold, or when a hedge no longer meets the criteria for hedge accounting, any cumulative gain or loss recognised in reserves at that time is recognised in the income statement when the hedged transaction also affects the income statement. When a hedged transaction is no longer expected to occur, the cumulative gain or loss reported in equity is recognised immediately in the income statement and the hedging instrument is reclassified to the trading portfolio. Embedded derivatives If a hybrid contract includes a host contract that is a financial asset under IFRS 9, the Bank classifies the entire contract in accordance with the policy outlined in note Note 2.4. If a hybrid contract includes a host contract that is not an asset under IFRS 9, an embedded derivative shall be separated from the host contract and accounted for as a derivative under this Standard if, and only if: a. The economic characteristics and risks of the embedded derivative are not closely related to the economic characteristics and risks of the host contract; b. a separate financial instrument with the same terms as the embedded derivative satisfies the definition of a derivative; and c. The hybrid contract is not measured at fair value and changes in fair value are recognised in profit or loss (a derivative that is embedded in a financial liability at fair value through profit or loss is not separated). These embedded derivatives are measured at fair value with the changes in fair value being recognised in the income statement. NOVO BANCO | 2019 ANNUAL REPORT | 277 2.4. Other financial assets: placements with credit institutions, customer loans and securities From 1 January 2018, the Bank initially classifies all of its financial assets based on the business model for managing the assets and the asset’s contractual terms. This classification determines how the asset is measured after its initial recognition: - Amortised cost: if it is held within a business model with the objective to hold financial assets in order to collect contractual cash flows that are solely payments of principal and interest (SPPI - solely payments of principal and interest); - Fair value through other comprehensive income: if it is held within a business model, the objective of which is achieved by both collecting contractual cash flows and selling financial assets and the contractual cash flows fall under the scope of SPPI. In addition, upon initial recognition, the Bank may choose to classify irrevocably equity instruments in the fair value through other comprehensive income portfolio being the changes in the fair value recognised in equity; - Mandatorily measured at fair value through profit or loss: all cases not within the scope of SPPI; - Measured at fair value through profit or loss: other financial instruments not included in the business models described above. If these assets are acquired for the purpose of trading in the short term, they are classified as held for trading. In accordance with its documented strategy for risk management, the Bank contracts derivative financial instruments to hedge certain risks pertaining to a specific part of the loan portfolio, without, however, resorting to hedge accounting as described in Note 2.3. In these situations, the initial recognition of the loan is made measurement fair value through profit or loss. In this manner, measurement consistency is achieved between the loans and the derivatives for risk management purposes (accounting mismatch). Initial recognition and measurement and derecognition These financial assets are initially recognised at fair value plus transaction costs, except for financial assets at fair value through profit or loss, where transaction costs are directly recognised in the income statement. Financial assets are derecognised when (i) the Bank's contractual rights to its cash flows have expired, (ii) the Bank has transferred substantially all the risks and rewards with its holding, or (iii) retained part, but not substantially all the risks and rewards associated with their detention, control over the assets has been transferred. When a financial asset measured at fair value through OCI is derecognised, the accumulated gain or loss previously recognised in other comprehensive income is reclassified to profit or loss. In the specific case of equity instruments, the cumulative gain or loss previously recognised in other comprehensive income is not reclassified to profit or loss and is transferred between equity captions. Deposits and loans and advances to banks and loans and advances to customers are recorded on the date the amount of the transaction is advanced to the counterparty. Acquisitions and disposals of securities are recognised on the trade date, that is, on the date on which the Bank undertakes to acquire or dispose of the asset. Financial assets at amortised cost or accounted at fair value through other comprehensive income In accordance with IFRS 9 - Financial Instruments, for a financial asset to be classified and measured at amortised cost or at fair value through other comprehensive income, it is necessary that: (i) The contractual terms of the financial asset give rise to cash flows that are solely payments of principal and interest (SPPI - solely payments of principal and interest) on the principal amount outstanding. Principal, for the purposes of this test is defined as the fair value of the financial asset at initial recognition. NOVO BANCO | 2019 ANNUAL REPORT | 278 The contractual terms that are SPPI are consistent with a basic lending arrangement. Contractual terms that introduce exposure to risks or volatility in the contractual cash flows that are unrelated to a basic lending arrangement, such as exposure to changes in stocks or commodity prices, do not give rise to contractual cash flows that are solely payments of principal and interest on the amount outstanding. In such cases, the financial asset is required to be measured at fair value through profit or loss; (ii) The financial asset is held within a business model with the objective to hold financial assets to maturity to collect contractual cash flows (financial assets at amortised cost) or to collect the contractual cash flows until maturity and selling the financial asset (financial assets at fair value through other comprehensive income). The assessment of the business models of the financial asset is fundamental for its classification. The Bank determines the business models by financial asset groups according to how they are managed to achieve a particular business objective. The Bank's business models determine whether cash flows will be generated by obtaining only contractual cash flows, from selling the financial assets or both. At initial recognition of a financial asset, the Bank determines whether it is part of an existing business model or if it reflects a new business model. The Bank reassesses its business models in each reporting period in order to determine whether there have been changes in business models since the last reporting period. The above requirements do not apply to lease receivables, which meet the criteria defined in IFRS 16 – Leases. Financial assets that are subsequently measured at amortised cost or at fair value through other comprehensive income are subject to impairment. Financial assets at fair value through other comprehensive income are initially recorded at fair value and subsequently measured at fair value with changes in the fair value recognised in reserves (other comprehensive income) until derecognition, when cumulative potential gains and losses recognised in reserves are reclassified to the caption Gains and losses on financial assets and liabilities designated at fair value through profit or loss. In the specific case of equity instruments, the cumulative gains/ (losses) previously recognised in equity is not reclassified to profit or losses being reclassified between equity accounts. However, dividends received from these equity instruments are recognised in profit or loss. At initial recognition, financial assets at amortised cost are recorded at acquisition cost, and subsequently measured at amortised cost based on the effective interest rate. Interest, calculated at the effective interest rate, and dividends are recognised in profit or loss. Financial assets at fair value through profit or loss Financial assets measured at fair value through profit or loss present the following characteristics: - - contractual cash flows are not SPPI (mandatorily measured at fair value through profit or loss); and/or it is held within a business model which objective is neither to obtain only contractual cash flows or to obtain contractual cash flows and sale; or - it is designated at fair value through profit or loss as a result of applying the fair value option. These assets are measured at fair value and the respective revaluation gains or losses are recognised in the income statement. The fair value of listed financial assets is based on bid-prices, the bid price of the last transaction or on the bid known. In the absence of a price an active market, the Bank estimates fair value using (i) valuation techniques, including the use of recent similar arm’s length transactions, discounted cash flow techniques and option pricing models customized to reflect the specificities and circumstances of the instrument and (ii) valuation assumptions based on market information. NOVO BANCO | 2019 ANNUAL REPORT | 279 For assets included in the level 3 of fair value hierarchy, whose quotation is provided by a third-party using parameters that are not observable in the market, the Bank carries out, when applicable, a detailed analysis of the historical and liquidity performance of these assets, which may imply an additional adjustment to its fair value. Reclassifications If the Bank changes a business model, the financial assets included in that model are reclassified and the classification and measurement requirements for the new category are applied prospectively as from that date. Impairment The Bank records impairment allowance for expected credit losses ("ECLs") for the following debt instruments: - Loans and advances to customers; - Financial and performance guarantees; - Import documentary credits; - Confirmed export documentary credits; - Undrawn loan commitments; - Money market exposures; - Securities portfolio. Debt instruments at amortised cost or at fair value through other comprehensive income are in the scope of the impairment calculation. Impairment losses identified are recognised in the income statement and are subsequently reversed through the income statement if, in a subsequent period, the amount of impairment losses decreases. The impairment calculation approach distinguishes between the 12 months’ expected credit losses - Stage 1 - and the lifetime expected credit losses. To determine expected lifetime losses, the approach considers the projection of contractual cash flows - Stage 2 - or the present value of the expected recoveries - Stage 3. Thus, the model of impairment calculation by Stage is summarized as follows: - expected credit loss resulting from a potential loss event occurring within the next 12 months after the calculation date (Stage 1); or - expected credit loss, resulting from all potential loss events expected over the lifetime, applied to the projection of contractual cash flows (Stage 2); or - expected credit loss resulting from the difference between the amount outstanding and the present value of the cash flows estimated to be recovered from the exposure10 (Stage 3). Therefore, for the determination of impairment, the classification by Stage for all exposures according to their level of credit risk, as summarized in the figure below, is made beforehand: 10 Parameters used to determine recoveries vary, mainly depending on the risk profile / nature of the exposure. NOVO BANCO | 2019 ANNUAL REPORT | 280 Stage 3 The process of assigning Stage to an exposure starts by checking if the Stage 3 criteria applies. If the exposure is classified as Default - according to the current internal definition11 - this exposure is classified as Stage 3. Thus, the classification of exposures in Stage 3 is based on the occurrence of a default event, with objective evidence of loss occurring at the time from which a significant change occurs in the creditor-debtor relationship, being the creditor exposed to a monetary loss. Stage 2 Exposures are classified as Stage 2 whenever there is a significant increase in credit risk, since initial recognition. If there is no objective evidence of loss d with the exposure, criteria are analysed to determine whether exposure has significantly increased its credit risk. The significant increase in credit risk is assessed through qualitative and quantitative evidence. Once it is verified that - at least - one of these triggers is active, the exposure is classified in Stage 2. The table below describes the criteria and respective thresholds applicable: 11 The internal definition of Default is aligned with article 178 of CRD IV, providing criteria of material past due for more than 90 days and for unlikely to pay. NOVO BANCO | 2019 ANNUAL REPORT | 281 As explained in IFRS 9, the assessment of the significant increase in credit risk also involves comparing the current risk level of an exposure against the level of risk at origination. The Bank assigns an internal credit risk grade to the exposure / borrower, depending on its quality and associated with the probability of default. In assessing whether the exposure credit risk has increased significantly since initial recognition, the Bank compares, at the reporting date, the lifetime probability of default with the probability of default at origination of the exposure. Depending on whether the observed variation falls above a defined threshold - relative and / or absolute - the exposure is classified in Stage 2. In addition to this event, the Bank considers other events, that if verified imply the classification in Stage 2 (e.g.: material default for more than 30 days, risk events in the financial system, internal credit risk grade above a certain threshold, among others). Stage 1 A classificação de exposições em Stage 1 depende: (i) absence of active events that qualify for Stage 3 and Stage 2, which were mentioned and described above; or (ii) the framing of these exposures under the low-credit risk exemption. These exposures, if not in Stage 3, are automatically classified in Stage 1. The Bank assesses collective and individual impairment. In the collective assessment model, the impairment calculation is based on an initial classification of the credit risk level – Stage 1, 2 or 3; in the individual analysis the calculation is based on a going concern or gone concern approach. If for a particular loan there is no objective evidence of impairment in an individual level, the loan is grouped together with other loans that have similar credit risk characteristics (loan portfolio) and assessed collectively through the application of estimated risk factors for exposure segment - collective assessment of impairment. If an impairment loss is identified on an individual basis, the amount of the impairment loss determined prevails over the collective impairment. Individual assessment is carried out for the following exposures: - All borrowers classified as defaulted (stage 3), or classified in stage 2 and with no internal grade assigned, with exposure above Euro 1 million; - All borrowers classified in stage 2, with exposure above Euro 5 million; - All borrowers classified in stage 1 and with no internal grade assigned, with credit exposure above Euro 5 million; - All real estate entities and financial holdings with credit exposure above Euro 5 million; - All other low-risk borrowers (stage 1) with exposure above Euro 25 million; and - Additionally, the following borrowers are selected for individual analysis: o o o identified by the Committee based on other justified criteria (e.g.: sector of activity) exposures that in the past were subject to an individual impairment recognition; exposures that based on new events which may impact the impairment calculation, might be elected Impairment Committee members or by another body/committee. for analysis by one of the NOVO BANCO | 2019 ANNUAL REPORT | 282 For purposes of the collective assessment of impairment, loans are grouped on a basis of similar credit risk characteristics, taking in consideration the Bank’s credit risk management process. For each of these homogeneous risk groups, risk factors are estimated and then applied for impairment assessment purposes. For purposes of the collective assessment of impairment, loans are allocated to risk sub-segments in accordance with the following definitions in the table bellow: 1st Segmentation 2nd Segmentation 3rd Segmentation 4th Segmentation Scenarios Client type Corporate Risk segment Large companies Real Estate Medium companies Small companies Start-Ups Financial Institutions Sovereign Rating notation Collaterals – LTV Individuals Product type Mortgage Consumer loans Credit cards Other individuals Scoring notation Typically, Corporate segments consider the value of collateral for segmentation purposes The mortgage segment considers the value of the financed asset for the purposes of segmentation As required by IFRS 9, the impairment assessment should reflect different expectations of macroeconomic developments, i.e., it should incorporate multiple scenarios. In order to incorporate the effects of future macroeconomic behaviour on loss estimates, forward looking macroeconomic estimates are included in some of the risk parameters used to calculate impairment. In fact, different possible scenarios giving rise to the same number of impairment results are considered. In this context, the process of defining macroeconomic scenarios must consider the following principles: - Representative scenarios that capture the existing non-linearities (e.g. a base scenario, an optimistic and a pessimistic scenario); - The base scenario should be consistent with the inputs used in other exercises in the Bank (e.g., Planning). This is ensured since the option used for the purpose of calculating impairment was precisely the same methodology that the Bank uses in internal and / or regulatory planning exercises; - Alternative scenarios to the base scenario should not originate extreme scenarios; - The correlation between the projected variables should be realistic with the economic reality (e.g. if GDP is increasing it is expected that unemployment is decreasing). The macroeconomic scenarios and projections available also have a probability of occurrence. In the case of the base scenario, since it is the most representative, it has a 60% probability of occurrence. The other two alternative scenarios, considered to be variations of the central scenario, have probabilities of occurrence of 25% for the less favorable alternative scenario compared to the base scenario and 15% for the more favorable alternative scenario compared to the base scenario. The exercise of build the base and alternative macroeconomic scenarios for the Portuguese economy is based on a combination of econometric forecasts, information on forecasts from other external institutions and application of subjective expert judgment. NOVO BANCO | 2019 ANNUAL REPORT | 283 In the first component, GDP growth is estimated through estimates for the growth of expenditure components, obtaining GDP through the formula GDP = Consumption + Investment + Exports - Imports. The econometric specifications chosen are those that, after testing different alternatives, generate the best result. The econometric estimates thus obtained are then weighted with forecasts from external institutions, according to the principle that the combination of different projections tends to be more accurate than just a forecast (the risk of errors and bias associated with specific methods and variables is minimized). The forecasts for prices (consume and real estate) and unemployment follow a similar methodology: own forecasts based on an estimated model, weighted with forecasts from external institutions, if available. In a base scenario, the projections for interest rates start from market expectations (provided by Bloomberg), with possible adjustments in accordance with the principles defined above, if considered appropriate (weighting by expert judgment and forecasts from external institutions). The alternative scenarios are based on the historical observation of deviations from the trend in GDP behavior (cost and contraction cycles), the reference of EBA recommendations for extreme adverse scenarios, the stylized facts of economic cycles, with respect to the components of expenditure, prices, unemployment, etc. and estimates. So, when reviewing / updating the scenarios – at least once a year – the respective probabilities of execution are also reviewed. Once updated the scenarios, the values of the risk parameters are also updated for subsequent consideration on impairment calculation. The final impairment assessment will result from the addition of the impairment in each scenario weighted by the respective probability of execution. It is still relevant to mention the existence of specific portfolios where the internal credit risk grades incorporate, by its attribution process, forward-looking information. We refer to the commonly referred known Low Default Portfolios for which the attribution of an internal credit risk grade is based on a medium and long-term perspective and incorporating all the forward-looking information available. Therefore, for this universe of portfolios the incorporation of the forward-looking information is guaranteed. Write-offs Write-off is defined as the derecognition of a financial asset from the Bank’s balance sheet, which should only occur when cumulatively: (i) The total amount of the credit has been demanded, that is, the credit must be fully recognized as overdue credit. Exemptions from this requirement are extra-judicial agreements, PER and Insolvency, where part of the credit may remain due and the remaining debt is written off by judicial/ extra-judicial decision; (ii) All the recovery efforts, considered appropriate, have been developed (and the relevant evidence gathered) and additional efforts to recover the asset will not be considered economically viable. (iii) The credit recovery expectations are very low, leading to an extreme scenario of total impairment– 100% impairment. This rule is only applicable for contracts without real estate collateral and if the whole contract is classified as overdue. In all other cases, it is necessary to ensure that the amount to be written off is fully impaired (at least in the month prior to the month of the write-off); and (iv) A final agreement has been obtained as part of a restructuring process and the remaining debt can no longer be recovered. Or additionally, if it is considered more beneficial to sell the credit to a third party. At the time of sale, the difference between the sale amount and the balance sheet amount must be fully impaired, and at the time of sale the credit will be derecognized in exchange of the funds/assets received. Subsequent payments received after the write-off must be recognized as subsequent write-off recoveries. NOVO BANCO | 2019 ANNUAL REPORT | 284 2.5. Assets sold with repurchase agreements, securities loaned and short sales Securities sold subject to repurchase agreements (repos) at a fixed price or at a price that corresponds to the sales price plus a lender’s return are not derecognised from the balance sheet. The corresponding liability is included under amounts due to banks or to customers, as appropriate. The difference between the sale and repurchase price is treated as interest and deferred over the life of the agreement, using the effective interest rate method. Securities purchased under agreements to resell (reverse repos) at a fixed price or at a price that corresponds to the purchase price plus a lender’s return are not recognised in the balance sheet, the purchase price paid being recorded as loans and advances to banks or customers, as appropriate. The difference between the purchase and resale price is treated as interest and deferred over the life of the agreement, using the effective interest rate method. Securities ceded under loan agreements are not derecognised in the balance sheet, being classified and measured in accordance with the accounting policy described in Note 2.4. Securities received under borrowing agreements are not recognised in the balance sheet. Short sales correspond to securities sold that are not included in the Bank’s assets. They are recorded as financial liabilities held for trade, at the fair value of the assets to be returned in the scope of the repurchase agreement. Gains and losses resulting from the change in their respective fair value are recognised directly in the income statement. 2.6. Financial liabilities An instrument is classified as a financial liability when it contains a contractual obligation to transfer cash or another financial asset, regardless of its legal form. Financial liabilities are derecognised when the underlying obligation is liquidated, expires or is cancelled. Non-derivatives financial liabilities include deposits from banks and customers, loans, debt securities, subordinated debt and short sales. Preference shares issued are considered to be financial liabilities when the Bank assumes the obligation of reimbursement and/or the payment of dividends. These financial liabilities are recognised (i) initially, at fair value less transaction costs and (ii) subsequently, at amortised cost, using the effective interest rate method, except for short sales and financial liabilities designated at fair value through profit or loss, which are measured at fair value. The Bank designates, at inception, certain financial liabilities at fair value through profit or loss when: - It eliminates or significantly reduces, a measurement or recognition inconsistency (accounting mismatch) that would otherwise occur; - The financial liability it’s part of a portfolio of financial assets or financial liabilities or both, managed and evaluated on a fair value basis, according with the Bank’s risk management or investment strategy; or - These financial liabilities contain embedded derivatives and IFRS 9 allows designate the entire hybrid contract at fair value through profit and loss. Reclassifications between categories of liabilities are not allowed. NOVO BANCO | 2019 ANNUAL REPORT | 285 The structured products issued by the Bank – except for the structured products for which the embedded derivatives were separated, recorded separately and revalued at fair value - are classified under the fair value through profit or loss category because they always meet one of the abovementioned conditions. The fair value of listed financial liabilities is their current market bid prices. In the absence of a quoted price, the Bank establishes the fair value by using valuation techniques based on market information, including the Group issuer’s own credit risk. Profits or losses arising from the revaluation of liabilities at fair value are recorded in the income statement. However, the change in fair value attributable to changes in credit risk is recognised in other comprehensive income. At the time of derecognition of the liability, the amount recorded in other comprehensive income attributable to changes in credit risk is not transferred to the income statement. The Bank accounts material changes in the terms of an existing liability or part of it as an extinction of the original financial liability and recognises of a new liability. The terms are assumed to be substantially different if the present value of the cash flows under the new terms, including any fees paid net of commissions received, and discounted using the original effective interest rate is at least 10% different from the discounted present value of the remaining cash flows from the original financial liability. The difference between the carrying amount of the original liability and the value of the new liability is recognised in the income statement. If the Bank repurchases debt securities issued, these are derecognised from the balance sheet and the difference between the carrying book value of the liability and its acquisition cost is recognised in the income statement. 2.7. Financial and performance guarantees Financial guarantees Financial guarantee contracts are contracts that require the issuer to make specified payments to reimburse the holder for a loss due to non-compliance with the contractual terms of a debt instrument, namely the payment of principal and/or interest. Financial guarantees are initially recognised in the financial statements at fair value. Financial guarantees are subsequently measured at the higher of (i) the fair value recognised on initial recognition and (ii) the amount of any financial obligation arising as result of the guarantee contracts, measured at the balance sheet date. Any change in the amount of the liability relating to guarantees is taken to the income statement. Financial guarantee contracts issued by the Bank normally have a stated maturity date and a periodic fee, usually paid in advance, which varies in function of the counterpart risk, the amount and the time period of the contract. Consequently, the fair value of the financial guarantee contracts issued by the Bank, at the inception date, is approximately equal to the initial fee received, considering that the conditions agreed to are market conditions. Hence, the amount recognised at the contract date is equal to the amount of the commission initially received, which is recognised in the income statement over the period to which it relates. Subsequent periodic fees are recognised in the income statement in the period to which they relate. Performance guarantees Performance guarantees are contracts that result in the compensation of a party if the other does not comply with its contractual obligation. Performance guarantees are initially recognised at their fair value, which is NOVO BANCO | 2019 ANNUAL REPORT | 286 normally evidenced by the amount of the commissions received during the contract period. When there is a breach of contract, the Bank has the right to reverse the guarantee, recognizing the amounts in Loans and advances to customers after transferring the compensation for the losses to the collateral taker. 2.8. Equity instruments An instrument is classified as an equity instrument when it does not contain a contractual obligation to deliver cash or another financial asset, regardless of its legal form, but evidences a residual interest in the assets of an entity after deducting all of its liabilities. Transaction costs directly attributable to the issuance of equity instruments are recorded against equity as a deduction from the amount issued. Amounts paid or received relating to acquisitions or sales of equity instruments are recognised in equity, net of transaction costs. Distributions to holders of an equity instrument are deducted directly from equity as dividends, when declared. 2.9. Offsetting financial instruments Financial assets and liabilities are offset and the net amount reported in the balance sheet when there is a legally enforceable right to offset the recognised amounts and there is an intention to settle on a net basis, or to realize the asset and settle the liability simultaneously. The legally enforceable right may not be contingent on future events, and must be enforceable in the course of the normal activity of NOVO BANCO, as well as in the event of default, bankruptcy or insolvency of the Bank or the counterparty. 2.10. Foreclosed properties and non-current assets held for sale Non-current assets or disposal groups (groups of assets to be disposed of together and the related liabilities that include at least one non-current asset) are classified as held for sale when it is expectable that their carrying values will be recovered mainly through a sale transaction (including those acquired exclusively with a view to their subsequent disposal), the assets or disposal groups are available for immediate sale and the sale is highly probable (within the period of one year). Immediately before the initial classification as held for sale, the measurement of the non-current assets (or of all the assets and liabilities in a disposal group) is brought up to date in accordance with the applicable IFRS. Subsequently, these assets or disposal groups are remeasured at the lower of their carrying value and fair value less costs to sell. When the carrying book value of non-current assets corresponds to fair value less costs to sell, the fair value level of the IFRS 13 hierarchy corresponds mostly to level 3. In the scope of its loan granting activity, the Bank incurs in the risk of the borrower failing to repay all the amounts due. For mortgage loans, the Bank executes the collateral and receives the real estate properties. The Bank also receives real estate properties through foreclosing. Due to the provisions of the General Law on Credit Institutions and Financial Companies (“Regime Geral das Instituições de Crédito e Sociedades Financeiras” (RGICSF)), banks are prevented, unless authorised by Bank of Portugal, from acquiring real estate property that is not essential to their installation and daily operations and the pursuit of their object (No. 1 of article 112 of RGICSF), being able to acquire, however, real estate property in exchange for loans granted by same. This real estate property must be sold within 2 years, period which may, based on reasonable NOVO BANCO | 2019 ANNUAL REPORT | 287 grounds, be extended by Bank of Portugal, on the conditions to be determined by this Authority (article 114 of RGICSF). Although the Bank’s objective is to immediately dispose of all real estate property acquired as payment in kind for loans or through collaterals execution, during financial year 2016 the Bank changed the classification of this real estate properties from Non-current assets held for sale to Other assets, due to the permanence of same in the portfolio exceeding 12 months. However, the accounting method has not changed, these being initially recognized at the lower of their fair value less costs to sell and the carrying amount of the subjacent loans. Subsequently, these real estate properties are measured at the lower of its initial carrying amount and the corresponding fair value less costs to sell and it is not depreciated. Unrealized losses on these assets, so determined, are recorded in the income statement. The valuation of these real estate properties is performed in accordance with one of the following methodologies, applied in accordance with the specific situation of the asset: (i) Market Method The Market Comparison Criteria takes as a reference transaction values of similar and comparable real estate properties to the real estate property under valuation, obtained through market prospection carried out in the zone. (ii) Income Method Under this method, the real estate property is valued based on the capitalization of its net income, discounted to the present using the discounted cash-flow method. (iii) Cost Method This method aims to reflect the current amount that would be required to substitute the asset in its present condition, separating the value of the real estate property into its fundamental components: Urban Ground Value and Urbanity Value; Construction Value; and Indirect Costs Value. Valuations carried out are performed by independent entities. The valuation reports are analysed internally to assess the adequacy of the assumptions, comparing the historical sale values with the revalued amounts of the assets so as to assess the parameters and process adequacy with the market evolution. Additionally, since these are assets whose level in fair value hierarchy of IFRS 13 mostly corresponds to level 3, given the subjectivity of some assumptions used in the valuations and the fact that there are external indications with alternative values, the Bank proceeds to analyzes on the assumptions used, which may imply additional adjustments to their fair value. 2.11. Tangible fixed assets The Bank’s tangible fixed assets are measured at cost less accumulated depreciation and impairment losses. The cost includes expenditure that is directly attributable to the acquisition of the assets. Subsequent costs with tangible fixed assets are only recognized when it is probable that future economic benefits associated with them will flow to the Bank. All repair and maintenance costs are charged to the income statement during the period in which they are incurred, on the accrual basis. NOVO BANCO | 2019 ANNUAL REPORT | 288 Land is not depreciated. The depreciation of tangible fixed assets is calculated using the straight-line method, at the following depreciation rates that reflect their estimated useful lives: The useful lives and residual values of the tangible fixed assets are reviewed at each reporting date. When there is an indication that an asset may be impaired, IAS 36 requires its recoverable amount to be estimated and an impairment loss recognized when the book value of the asset exceeds its recoverable amount. Impairment losses are recognized in the income statement, being reversed in subsequent periods, when the reasons that led to their initial recognition cease to exist. For this purpose, the new depreciated amount shall not exceed that which would be recorded had the impairment losses not been imputed to the asset, but considering the normal depreciation the asset would have been subject to. The recoverable amount is determined as the lower of its net selling price and its value in use, which is based on the net present value of the estimated future cash flows arising from the continued use and ultimate disposal of the asset at the end of its useful life. On the date of the derecognition of a tangible fixed asset, the gain or loss determined as the difference between the net selling price and the net carrying book value is recognized under the caption Other operating income and expenses. 2.12. Intangible assets The costs incurred with the acquisition, production and development of software are capitalized, as are additional costs incurred by the Bank to implement said software. These costs are amortised on a straight-line basis over their expected useful lives, which usually range between 3 and 6 years. Costs that are directly associated with the development of specific software applications, that will probably generate economic benefits beyond one financial year, are recognized and recorded as intangible assets All remaining costs associated with information technology services are recognized as an expense as incurred. NOVO BANCO | 2019 ANNUAL REPORT | 289 2.13. Leases IFRS 16 – Leases According to IFRS 16: - as a lessee, the standard defines a single accounting model with the recognition of rights-of-use assets representative of their rights of use of the underlying assets and lease liabilities representative of their obligations to make lease payments; - as a lessor, accounting depends on the classification as financial or operating. The Bank adopted IFRS 16 using the Modified Retrospective approach, so there was no impact on its net worth as there are no differences between the right to use the asset and the lease liability at the time of initial recognition on 1 January 2019. A. Lease Definition - Determining whether an Agreement Contains a Lease The Bank assesses whether a contract is or contains a lease based on the lease definition. In accordance with IFRS 16, a contract is or contains a lease if it has the right to control the use of an identified asset for a certain period of time, in exchange for retribution. For leases in which the Bank is a lessee, it was decided not to separate the non-lease components and to account the lease and non-lease components as a single lease component. B. As lessee Finance lease contracts are recorded at the inception date, both under assets and liabilities, at the cost of the asset leased, which is equal to the present value of the outstanding lease instalments. Instalments comprise (i) an interest charge, which is recognised in the income statement and (ii) the repayment of principal, which is deducted from liabilities. Financial charges are recognised as costs over the lease period, in order to produce a constant periodic rate of interest on the remaining balance of the liability for each period. The Bank leases various assets, including real estate, vehicles and IT equipment. As lessee, the Bank initially classified leases as operating leases or finance leases based on the overall assessment of whether the lease substantially transfers all risks and rewards associated with ownership of the underlying assets. In accordance with IFRS 16, the Bank recognizes leased assets and lease liabilities for some asset classes, i.e., these leases are on the entity's balance sheet. However, the Bank has opted not to recognize assets under right of use and liabilities for short-term leases, with a lease term of 12 months or less, and low value asset leases (e.g. IT equipment). The Bank recognizes the lease payments associated with these leases as expenses on a straight-line basis over the lease term. The Bank presents assets under right of use that do not fit the definition of investment property as "tangible fixed assets", in the same line as the underlying assets of the same nature that they own. Right-of-use assets that fall under the definition of investment property are presented as investment property. The Bank presents the lease liabilities under "other liabilities" in the statement of financial position. NOVO BANCO | 2019 ANNUAL REPORT | 290 Significant judgment in determining contract lease term The Bank has applied judgment to determine the lease term of certain agreements, in which it acts as lessee, and which include renewal and termination options. The Bank determines the lease term as the non- cancellable lease term, together with any periods covered by an option to extend the lease if it is reasonably certain to be exercised, or any periods covered by an option to terminate the lease, if reasonably certain not to be exercised. This assessment will have an impact on the lease term, which will significantly affect the amount of the lease liabilities and recognized right-of-use assets. The Bank has the option, namely in real estate lease agreements, to lease assets for additional periods from 1 month to 20 years. The Bank applies judgment in assessing whether it is reasonably right to exercise the renewal option. That is, it considers all the relevant factors that create an economic incentive for renewal. For leases that were classified as finance leases in accordance with IAS 17, the accounting amount of assets under lease use and the liability of the lease as at 1 January 2019 was determined at the accounting amount of the lease asset and the lease liability, according to IAS 17 immediately prior to that date. Practical expedients The Bank has adopted some practical expedients provided for in the standard in applying IFRS 16 to leases previously classified as operating leases in accordance with IAS 17. - Apply the exception of non-recognition of assets under right of use and liabilities for short-term leases (i.e. with a lease term of 12 months or less); - Apply the exception of non-recognition of assets under use and liabilities for low value leases (i.e. new value less than Euro 5 thousand); - Do not separate lease components from non-lease components. C. As lessor Financial leases Assets leased out are recorded in the balance sheet as loans granted, at an amount equal to the net investment made in the leased assets, together with any estimated unguaranteed residual value. Interest included in instalments charged to customers is recorded as interest income, whilst repayments of principal, also included in the instalments, are deducted from the amount of the loans granted. The recognition of the interest reflects a constant periodic rate of return on the lessor's net outstanding investment. Operating leases Payments made by the Bank under operating leases are charged to the income statement in the period to which they relate. Until 31 December 2018, the Bank classified leasing operations as finance leases or operating leases, according to their substance and not their legal form, meeting the criteria set out in IAS 17 - Leases. Transactions in which the risks and rewards incidental to ownership of an asset are substantially transferred to the lessee are classified as finance leases. All other lease transactions are classified as operating leases. The accounting policies applicable to the Bank as lessor in the comparative period are not different from those policies applicable under IAS 17. NOVO BANCO | 2019 ANNUAL REPORT | 291 2.14. Employee benefits Pensions Pursuant to the signature of the Collective Labour Agreement (“Acordo Colectivo de Trabalho” (ACT)) for the banking sector and its subsequent amendments resulting from the 3 tripartite agreements described in Note 16, pension funds and other mechanisms were set up to cover liabilities assumed with pensions on retirement, disability, survival and health-care benefits. The liabilities’ coverage is assured, for most of the Group companies, by pension funds managed by GNB - Sociedade Gestora de Fundos de Pensões, SA, subsidiary of NOVO BANCO Group. The pension plans of the Bank are defined benefit plans, as they establish the criteria to determine the pension benefit to be received by employees during retirement, usually dependent on one or more factors such as age, years of service and salary level. The retirement pension liabilities are calculated semi-annually, in 31 December and 30 June of each year, for each plan individually, using the Projected Unit Credit Method, being annually reviewed by qualified independent actuaries. The discount rate used in this calculation is determined with reference to market rates associated with high-quality corporate bonds, denominated in the currency in which the benefits will be paid out and with a maturity similar to the expiry date of the plan’s liabilities. The Bank determines the net interest income / expense for the period incurred with the pension plan by multiplying the plan’s net assets / liabilities (liabilities net of the fair value of the fund’s assets) by the discount rate used to measure the retirement pension liabilities referred to above. On that basis, the net interest income / expense was determined based on the interest cost on the retirement pension liabilities net of the expected return on the funds’ assets, both calculated using the discount rate applied in the determination of the retirement pension liabilities. Re-measurement gains and losses, namely (i) actuarial gains and losses arising due to differences between actuarial assumptions used and real values verified (experience adjustments) and changes in actuarial assumptions and (ii) gains and losses arising due to the difference between the expected return on the fund’s assets and the actual investment returns, are recognised in equity under the caption other comprehensive income. The Bank recognizes as a cost in the income statement a net total amount that includes (i) current service costs, (ii) net interest income / expense with the pension fund, (iii) the effect of early retirement, (iv) past service costs, and (v) the effect of settlements or curtailments occurring during the period. The net interest income / expense with the pension plan is recognised as interest income or interest expense, depending on its nature. Early retirement costs correspond to increases in liabilities due to employees retiring before turning 65 (normal retirement age foreseen in the ACTV) and which forms the basis of the actuarial calculation of pension fund liabilities. Whenever the possibility of the early retirement provided for in the pension fund regulation is invoked, the responsibilities of same must be incremented by the value of the actuarial calculation of the liabilities corresponding to the period between the early retirement and the employee turning 65. The Bank makes payments to the funds to assure their solvency, the minimum levels set by Bank of Portugal being: (i) the liability with pensioners must be totally funded at the end of each period, and (ii) the liability relating to past service costs for active employees must be funded at a minimum level of 95%. NOVO BANCO | 2019 ANNUAL REPORT | 292 The Bank assesses the recoverability of any excess in a fund regarding he retirement pension liabilities, based on the expectation of reductions in future contributions. Health-care benefits The Bank provides to its banking employees health-care benefits through a specific Social-Medical Assistance Service. This Social-Medical Assistance Service (SAMS) is an autonomous entity which is managed by the respective Union. SAMS provides its beneficiaries services and/or contributions with medical assistance expenses, diagnostics, medication, hospitalization and surgeries, in accordance with its funding availability and internal regulations. Until 1 February 2017, the Bank’s annual mandatory contribution to SAMS amounted to 6.50% of the total annual remuneration of active employees, including, amongst others, the holiday subsidy and Christmas subsidy. Arising from the signature of the new Collective Labour Agreement (ACT) on 5 July 2016, published in Labour Bulletin (Boletim do Trabalho) No. 29, of 8 August 2016, the Bank’s contributions to SAMS as from 1 February 2017, correspond to a fixed amount (as per Annex VI of the new ACT) for each employee, 14 times a year. The calculation and recognition of the Bank’s liability with post-retirement health-care benefits is similar to the calculation and recognition of the pension liability described above. These benefits are covered by the Pension Fund, which presently covers all liabilities with pensions and health-care benefits. Long-term service bonus and Career bonus In accordance with the previous ACT ("Acordo Colectivo de Trabalho") for the Banking Sector, in force until July 2016, the Bank had the commitment to pay active employees who completed 15, 25 and 30 years of service in the Bank, long-term service bonuses corresponding to one, two and three times, respectively, their monthly salary paid at the date the bonuses were paid. At the date of early retirement due to disability or presumed disability, employees had the right to a long-term service bonus proportional to that which they would receive if they were to remain in service until meeting the next bonus level. The long-term service bonuses were accounted for by the Bank in accordance with IAS 19, as other long-term employee benefits. The Bank’s liability with these long-term service bonuses were periodically estimated by the Bank using the Projected Unit Credit Method. The actuarial assumptions used were based on expectations as to future salary increases and mortality tables. The discount rate used in this calculation was determined using the methodology described for retirement pensions. In each period, the increase in the liability for long- term service bonuses, including actuarial gains and losses and past service costs, was charged to the income statement. Upon the signature of the new ACT on 5 July 2016, the long-term service bonus was extinguished and the Bank paid its employees the proportional share of the bonuses due on entry into force of the new ACT. Under the new ACT, the long-term service bonus was replaced by a career bonus, payable immediately prior to the employee´s retirement date, if the employee retires at the service of the Bank, corresponding to 1.5 of his/her salary at the time of its payment. The career bonus is accounted for by the Bank in accordance with IAS 19, as a long-term employee benefit. The remeasurement effects and past service costs of this benefit are recognized in the income statement for the year, as occurred with the accounting model for long-term service bonuses. NOVO BANCO | 2019 ANNUAL REPORT | 293 The amount of the Bank's liabilities with this career bonus is likewise periodically estimated based on the Projected Unit Credit Method. The actuarial assumptions used are based on expectations of future salary increases and mortality tables. The discount rate used in this calculation is determined applying the same methodology described above for retirement pensions. Employees’ variable remuneration The Bank recognizes under costs the short-term benefits paid to employees who were at its services in the respective accounting period. - Profit-sharing and bonus plans The Bank recognizes the cost expected with profit-sharing pay-outs and bonuses when it has a present, legal or constructive, obligation to make such payments as a result of past events, and can make a reliable estimate of the obligation. - Obligations with holidays, holiday subsidy and Christmas subsidy In accordance with the legislation in force in Portugal, employees are annually entitled to one month of holidays and one month of holiday subsidy, this being a right acquired in the year prior to their payment. In addition, employees are annually entitled to one month of Christmas subsidy, which right is acquired throughout the year and settled during the month of December of each calendar year. Hence, these liabilities are recorded in the period in which the employees acquire the right to same, regardless of the date of their respective payment. 2.15. Corporate Income tax NOVO BANCO and its subsidiaries are subject to the tax regime consigned in the Código do Imposto sobre o Rendimento das Pessoas Coletivas (IRC code). The total amount of corporate income tax comprises current tax and deferred tax. Corporate income tax is recognized in the income statement except to the extent that it relates to items recognized directly in equity, in which case it is recognized under deferred tax reserves (other comprehensive income). Corporate income tax recognized directly in equity relating to fair value remeasurement of financial assets at fair value through other comprehensive income and cash flow hedges is subsequently recognized in the income statement when the gains or losses giving rise to said income tax are also recognized in the income statement. Current taxes Current tax is the tax expected to be paid on the taxable profit for the year, calculated using tax rules and tax rates enacted or substantively enacted in each jurisdiction. The tax is recognized in each financial reporting period based on management estimates as regards the average effective tax rate foreseen for the entire fiscal year. Current tax is calculated based on taxable income for the period, which differs from accounting income due to adjustments resulting from expenses or income not relevant for tax purposes or which will only be considered in subsequent years. NOVO BANCO | 2019 ANNUAL REPORT | 294 Deferred taxes Deferred tax is calculated on timing differences arising between the carrying book values of assets and liabilities for financial reporting purposes and their respective tax base and is calculated using the tax rates enacted or substantively enacted at the balance sheet date in each jurisdiction and that are expected to apply when the timing differences are reversed. Deferred tax liabilities are recognized for all taxable timing differences except for goodwill, non-deductible for tax purposes, differences arising on the initial recognition of assets and liabilities that neither affect the accounting nor taxable profit, and that do not result from a business combination, and differences relating to investments in subsidiaries to the extent that they will probably not reverse in the foreseeable future. Deferred tax assets are recognized to the extent that it is probable that future taxable profits will be available against which the deductible timing differences can be offset. Deferred tax liabilities are always accounted for, regardless of the performance of NOVO BANCO. Taxable income or tax loss reported by the Bank may be corrected by the Portuguese Tax Authorities within a period of four years, except when any deduction was made or a tax credit was used, in which case this period corresponds to the period during which this right may be exercised (5 or 12 years in the case of tax losses, depending on the financial year). The Executive Board of Directors considers that any corrections, resulting mainly from differences in interpretation of tax legislation, will not have a material effect on the financial statements. The Bank, as established in IAS 12, paragraph 74, offsets deferred tax assets and liabilities whenever (i) it has the legally enforceable right to offset current tax assets and current tax liabilities; and (ii) they relate to corporate income taxes levied by the same Taxation Authority, on the same tax entity or different taxable entities that intent to settle current tax liabilities and assets on a net basis, or to realize the assets and settle the liabilities simultaneously, in each future period in which the deferred tax liabilities or assets are expected to be settled or recovered. 2.16. Provisions and Contingent liabilities Provisions are recognized when: (i) the Bank has a current legal or constructive obligation, (ii) it is probable that its settlement will be required in the future and (iii) a reliable estimate of the obligation can be made. Provisions related to legal cases opposing the Bank to third parties, are constituted according to internal risk assessments made by Management, with the support and advice of its legal advisors. When the effect of the passage of time (discounting) is material, the provision corresponds to the net present value of the expected future payments, discounted at an appropriate rate considering the risk associated with the obligation. In these cases, the increase in the provision due to the passage of time is recognized in financial expenses. Restructuring provisions are recognized when the Bank has approved a formal, detailed restructuring plan and such restructuring has either commenced or has been publicly announced. A provision for onerous contracts is recognized when the benefits expected to be derived by the Bank from a contract are lower than the unavoidable costs of meeting its obligation under the contract. This provision is measured at the present value of the lower of the estimated cost of terminating the contract and the estimated net costs of continuing the contract. NOVO BANCO | 2019 ANNUAL REPORT | 295 If a future outflow of funds is not probable, this situation reflects a contingent liability. Contingent liabilities are always disclosed, except when the likelihood of their occurrence is remote. 2.17. Recognition of interest income and expense Interest income and expense is recognized in the income statement under interest and similar income and interest expense and similar charges for all financial instruments measured at amortised cost and for all financial assets at fair value through other comprehensive income, using the effective interest rate method. Interest arising on financial assets and liabilities at fair value through profit or loss is also included under interest and similar income or interest expense and similar charges, as appropriate. The effective interest rate is the rate that discounts the estimated future cash payments or receipts throughout the expected life of the financial instrument or, when appropriate, a shorter period to the net book value of the financial asset or liability. The effective interest rate is calculated at inception and is not subsequently revised, except in respect of financial assets and liabilities with a variable interest rate. In this case, the effective interest rate is periodically revised, taking into consideration the impact of the change in the interest rate of reference on the estimated future cash flows. When calculating the effective interest rate, the Bank estimates the cash flows considering all the contractual terms of the financial instrument (for example, prepayment options) but does not consider future credit losses. The calculation includes all the commissions that are an integral part of the effective interest rate, transaction costs and all other related premiums or discounts. Interest and similar income includes interest from financial assets for which were recognized impairment. The interest from financial assets classified as Stage 3 are determined based on the effective interest rate method applied to the net book value. When the asset is no longer classified as Stage 3, the interest is calculated based on the gross book value. For derivative financial instruments, excluding derivatives held for risk management purposes (see Note 2.3), the interest component of the changes in their fair value is not separated and is classified under net gains / (losses) from financial assets and liabilities at fair value through profit or loss. The interest component of the changes in the fair value of derivatives held for risk management purposes is recognized under interest and similar income or interest expense and similar charges. 2.18. Recognition of fee and commission income Fees and commissions income are recognized as revenue from customer contracts to the extent that performance obligations are met: - Fees and commissions that are earned on the execution of a significant act, such as loan syndication fees, are recognized as income when the significant act has been completed; - Fees and commissions earned over the period during which the services are provided are recognized as income in the financial year in which the services are provided; - Fees and commissions that are an integral part of the effective interest rate of a financial instrument are recognized as income using the effective interest rate method. NOVO BANCO | 2019 ANNUAL REPORT | 296 2.19. Recognition of dividend income Dividend income is recognized when the right to receive the dividend payment is established. 2.20. Segment reporting In accordance with the paragraph 4 of IFRS 8 – Operational Segments, the Bank is waived to present the report by segment on an individual basis, since the separated financial statements are presented together with the consolidated financial statements. 2.21. Earnings per share Basic earnings per share are calculated by dividing the net income attributable to the shareholders of the parent company by the weighted average number of ordinary shares outstanding during the period. For the calculation of diluted earnings per share, the weighted average number of ordinary shares outstanding is adjusted to reflect the impact of all potential dilutive ordinary shares, such as those resulting from convertible debt and share options granted to employees. The dilution effect translates into a decrease in earnings per share, based on the assumption that the convertible instruments will be converted or the options granted exercised. 2.22. Cash and cash equivalents For the purposes of the cash flow statement, cash and cash equivalents comprise balances with a maturity of less than three months from the date of acquisition / contracting and whose risk of change in value is immaterial, including cash, deposits with Central Banks and deposits with other credit institutions. Cash and cash equivalents exclude restricted balances with Central Banks. 2.23. Provision of insurance or reinsurance mediation services NOVO BANCO is an entity authorized by the Instituto de Seguros de Portugal for the practice of insurance mediation activity in the category of Mediator of Linked Insurance, in accordance with Article 8, a), i), of Decree- Law No. 144/2006, of July 31, developing the activity of insurance intermediation through sale of life and non- life insurance contracts. As remuneration for the rendered services of insurance mediation, the Bank receives commissions that are defined in agreements / protocols established between the Bank and the Insurers. The commissions received by the services of insurance mediation cover the following modalities: - commissions that include a fixed and variable component. The fixed component is calculated by applying a predetermined rate on the value of the subscriptions made through the Bank and the variable component is calculated monthly according to pre-established criteria, with the total annual commission equal to the sum of the commissions calculated monthly; - other variable commissions, which are calculated and paid annually by insurer in the beginning of the following year. NOVO BANCO | 2019 ANNUAL REPORT | 297 The commissions received by the insurance mediation services are recognized in accordance with the principle of accruals accrual, so that commissions paid at a different time than the period to which they relate are registered as an amount receivable under Other Assets. NOTE 3 – MAIN ACCOUNTING ESTIMATES AND JUDGEMENTS USED IN PREPARING THE FINANCIAL STATEMENTS Considering that the current accounting framework requires applying judgements and calculating estimates involving some degree of subjectivity, the use of different parameters or judgements based on different evidence may result in different estimates. The main accounting estimates and judgments used in applying the accounting principles by the Bank are discussed in this Note in order to improve the understanding of how their application affects the reported results of the Bank and its disclosure. 3.1. Impairment of financial assets at amortised cost and at fair value through other comprehensive income The critical judgements with greater impact on the recognized impairment values for the financial assets at amortised cost and at fair value through other comprehensive income are the following: - Assessment of the business model: the measurement and classification of financial assets depends on the results of SPPI test and on the business model setting. The Bank determines its business model based on how it manages the financial assets and its business objectives. The Bank annually monitors if the business model classification is appropriate based on the analysis on the anticipated derecognition of the assets at amortised cost or at fair value through other comprehensive income, assessing if it is necessary to prospectively apply any changes; - Significant increase on the credit risk: as mentioned on the Note 2.4 – Other financial assets investments in credit institutions, customer loans and securities, the determination of the transfer of an asset from stage 1 to stage 2 with the purpose of determining the respective impairment is made based on the significant increase of its credit risk, though IFRS 9 does not objectively define what constitutes a significant increase on credit risk; - Classification of default: the internal definition of exposure in default is broadly in line with the regulatory definition in Article 178 of CRR/CRD IV. This regulation defines qualitative criteria for assessing the default classification – unlikely to pay -, which are replicated in the internal definition implemented by NOVO BANCO and which result in performing judgements when assessing the high probability that the borrower does not fulfil its obligations within the conditions agreed with NOVO BANCO; - Definition of groups of financial assets with similar credit risk characteristics: when the expected credit losses are measured through collective model, the financial instruments are aggregated based on the same risk characteristics. The Bank monitors the credit risk characteristics in order to assure the correct reclassification of the assets, in cases of changes on the credit risk characteristics; - Models and assumptions: the Bank uses several models and assumptions on the measurement of the expected credit losses. The judgement is applied on the identification of the more appropriate model for each type of asset as well as in the determination of the assumptions used in these models, including the assumptions related with the main credit risk drivers. In addition, in compliance with the NOVO BANCO | 2019 ANNUAL REPORT | 298 IFRS 9 regulation that clarifies the need for the impairment result to consider multiple scenarios, a methodology for incorporating different scenarios into the risk parameters was implemented. Thus, the calculation of collective impairment considers several scenarios with a specific weighting, based on the internal methodology defined about scenarios - definition of multiple perspectives of macroeconomic evolution, with probability of relevant occurrence. 3.2. Fair value of derivative financial instruments and other financial assets and liabilities at fair value Fair value is based on listed market prices when available; otherwise fair value is determined based on similar recent arm’s length transaction prices or using valuation methodologies, based on the net present value of estimated future cash flows taking into consideration market conditions, the time value, the yield curve and volatility factors, in accordance with IFRS 13 - Fair Value Measurement. The Bank uses several models and assumption in measuring the fair value of financial assets. Judgement is applied on the identification of the more appropriate model for each type of asset as well as in the determination of the assumptions used in these models, including the assumptions related with the main credit risk drivers. Consequently, the use of a different methodology or different assumptions or judgements in applying a particular model could have produced different financial results, summarised in Note 36. 3.3. Corporate income taxes The Bank is subject to corporate income tax in numerous jurisdictions. Certain interpretations and estimates are required in determining the overall corporate income tax amount. Different interpretations and estimates could result in a different level of income tax, current and deferred, being recognized in the period and evidenced in Note 25. This aspect assumes additional relevance for effects of the analysis of the recoverability of deferred taxes, while the Bank considers forecasts of futures taxable profits based on a group of assumptions, including the estimate of income before taxes, adjustments to the taxable income and its interpretation of fiscal legislation. This way, the recoverability of deferred taxes depends on the concretization of the strategy of the Executive Board of Directors, namely in the capacity to generate the estimated taxable results and its interpretation of fiscal legislation. The Tax Authorities are entitled to review the determination of the taxable income of the Bank during a period of four years or twelve years, when there are tax loss carry forwards. Hence, it is possible that some additional taxes may be assessed, mainly as a result of differences in interpretation of tax law. However, it is the conviction of the Executive Board of Directors of the Bank, that there will be no significant corrections to the corporate income taxes recorded in the financial statements. 3.4. Pensions and other employee benefits The determination of the retirement pension liabilities presented in Note 15 requires the use of assumptions and estimates, including the use of actuarial tables, assumptions regarding the growth of pensions, salaries and discounts rates (which are determined based on the market rates associated with high quality corporate bond, denominated in the same currency in which the benefits will be paid and with a maturity similar to the NOVO BANCO | 2019 ANNUAL REPORT | 299 expiry date of the plan's obligations). These assumptions are based on the expectations of the NOVO BANCO for the period during which the liabilities will be settled as well as other factors that may impact the costs and liabilities of the pension plan. Changes in these assumptions could materially affect the amounts determined. 3.5. Provisions The Bank recognises provisions intended to cover costs arising from the implementation of offers, which by commercial reasons were presented and accepted by customer groups. The amount of the provisions reflects NOVO BANCO’s best estimate as each reporting date. The subjectivity inherent to the determination of the probability and amount of the internal resources required for the payment of the obligations may lead to significant adjustments (i) due to variations in the assumptions used (ii) for the future recognition of provisions previously disclosed as contingent liabilities; and/or (iii) for the future write-off of provisions, when they start to classify as contingent liabilities only. The provisions are detailed in Note 29. 3.6. Foreclosed properties and non-current assets held for sale Foreclosed properties and non-current assets held for sale are measured at the lower of net book value and fair value less selling costs. The fair value of these assets is determined based on valuations carried out by independent entities specializing in this type of service, using the market, income or cost methods defined in Note 2.10. The valuation reports are analysed internally, namely comparing the sales values with the revalued values of the properties in order to maintain the valuation parameters and processes aligned with the market evolution. The use of alternative methodologies and different assumptions could result in a different level of fair value with an impact on the respective balance sheet amount recognized. NOVO BANCO | 2019 ANNUAL REPORT | 300 NOTE 4 – NET INTEREST INCOME As at 31 December 2019 and 2018, the breakdown of this caption is as follows: Interest on deposits with and loans and advances to banks, due to customers and deposits from banks include as at 31 December 2019, respectively, the amounts of Euro -2 thousand, Euro 16 375 thousand and Euro 2 453 thousand related to repurchase agreement operations (31 December 2018: Euro 756 thousand of interest on deposits with and loans and advances to banks, Euro 576 thousand in interest on funds from customers and Euro 1 850 thousand in interest on deposits from Banks). Interest income and expense items related to derivative interest include interest from hedging derivatives and from derivatives used to manage the economic risk of certain financial assets and liabilities designated at fair value through profit or loss, as per the accounting policies described in Notes 2.3 e 2.6. The measures adopted to reduce the cost of customer deposits justify the decrease in the interest expense related to these liabilities. NOTE 5 – DIVIDEND INCOME The breakdown of this caption is as follows: During 2019, dividend income amounts to Euro 17 313 thousand, which includes dividends received from Unicre in the amount of Euro 4 165 thousand, from GNB Seguros in the amount of Euro 1 500 thousand, from Soluções Arrendamento in the amount of Euro 1 767 thousand, from Euronext in the amount of Euro 1 348 thousand, from NB Açores in the amount of Euro 1 083 thousand and from Sealion LTD A in the amount of Euro 989 thousand (31 December 2018: Euro 17 864 thousand, which includes dividends received from Unicre in the amount of Euro 2 765 thousand, from BEST in the amount of Euro 2 712 thousand, from Explorer III (FIQ) in the amount of Euro 3 027 thousand, from Locarent in the amount of Euro 1 727 thousand, from GNB NOVO BANCO | 2019 ANNUAL REPORT | 301 (in thousands of Euros)OtherOtherFrom assets / liabilities at fair value through other comprehensive income and assets at amortised costIncome/expenses from negative interest ratesFrom assets / liabilities at fair value through profit or lossFrom assets / liabilities at fair value through other comprehensive income and assets at amortised costIncome/expenses from negative interest ratesFrom assets / liabilities at fair value through profit or lossInterest IncomeInterest from loans and advances 575 696 - - 575 696 610 551 - - 610 551 Interest from deposits with and loans and advances to banks 22 360 3 118 - 25 478 28 187 10 777 28 974 Interest from securities 136 330 - 18 939 155 269 96 358 - 13 919 110 277 Interest from derivatives held for risk management purposes - 523 6 854 7 377 - 422 10 363 10 785 Other interest and similar income 1 439 - - 1 439 2 046 - - 2 046 735 825 3 641 25 793 765 259 737 142 432 25 059 762 633 Interest ExpensesInterest on debt securities issued 35 807 - - 35 807 44 620 - - 44 620 Interest on amounts due to customers 95 088 - - 95 088 191 127 - - 191 127 Interest on deposits from Central Banks and other banks 32 018 1 864 - 33 882 35 226 5 342 4 068 44 636 Interest on subordinated liabilities 34 166 - - 34 166 16 742 - - 16 742 Interest on derivatives held for risk management purposes - 4 114 9 237 13 351 - 2 903 11 850 14 753 Other interest and similar expenses 6 668 147 - 6 815 4 514 - - 4 514 203 747 6 125 9 237 219 109 292 229 8 245 15 918 316 392 532 078 ( 2 484) 16 556 546 150 444 913 ( 7 813) 9 141 446 241 31.12.201931.12.2018Calculated by the effective interest methodTotalCalculated by the effective interest methodTotal(in thousands of Euros)31.12.201931.12.2018Financial assets mandatorily at fair value through profit or lossShares 3 365 2 374 Participation units 3 656 4 538 Others 137 - Financial assets at fair value through other comprehensive incomeShares 1 777 1 586 Participation units 8 378 9 366 17 313 17 864 Seguros in the amount of Euro 1 422 thousand, from Euronext in the amount of Euro 1 514 thousand and from Haitong FCR in the amount of Euro 1 251 thousand). NOTE 6 – NET FEE AND COMMISSION INCOME The breakdown of this caption is as follows: NOTE 7 – GAINS OR LOSSES ON DERECOGNITION OF FINANCIAL ASSETS AND LIABILITIES NOT MEASURED AT FAIR VALUE THROUGH PROFIT OR LOSS The breakdown of this caption is as follows: NOVO BANCO | 2019 ANNUAL REPORT | 302 (in thousands of Euros)31.12.201931.12.2018Fee and commission incomeFrom banking services 226 517 223 130 From guarantees provided 46 314 52 529 From transaction of securities 4 780 5 327 From commitments to third parties 8 913 11 462 From transactions carried out on behalf of third parties - cross-selling 36 379 32 135 Other fee and commission income 10 459 4 618 333 362 329 201 Fee and commission expensesWith banking services rendered by third parties 35 514 37 508 With guarantees received 1 960 1 567 With transaction of securities 5 508 5 698 Other fee and commission income 5 067 4 622 48 049 49 395 285 313 279 806 (in thousands of Euros)GainsLossesTotalGainsLossesTotalFrom financial assets at fair value through other comprehensive incomeSecuritiesBonds and other fixed income securitiesIssued by government and public entities 65 735 2 021 63 714 52 153 18 411 33 742 Issued by other entities 2 443 443 2 000 644 712 ( 68) 68 178 2 464 65 714 52 797 19 123 33 674 From financial assets and liabilities at amortised costSecuritiesBonds and other fixed income securitiesIssued by other entities 2 050 - 2 050 4 221 1 4 220 Loans 23 610 31 997 ( 8 387) 40 392 253 468 ( 213 076) 25 660 31 997 ( 6 337) 44 613 253 469 ( 208 856) 93 838 34 461 59 377 97 410 272 592 ( 175 182)31.12.201931.12.2018 NOTE 8 - GAINS OR LOSSES ON FINANCIAL ASSETS AND LIABILITIES HELD FOR TRADING The breakdown of this caption is as follows: In accordance with the accounting policies followed by the Bank, financial instruments are initially recorded at fair value. It is deemed that the best evidence of the fair value of the instrument at inception is the transaction price. However, in certain circumstances, the fair value of a financial instrument at inception, determined based on valuation techniques, may differ from the transaction price, namely due to the existence of an intermediation fee, originating a day one profit. The Bank recognizes in its income statement the gains arising from the intermediation fee (day one profit), which is generated, primarily, through currency and derivative financial product intermediation, given that the fair value of these instruments, both at inception and subsequently, is determined based solely on observable market data and reflects the Banks access to the wholesale market. As at 31 December 2019, the gains recognised in the income statement arising from intermediation fees, which are essentially related to foreign exchange transactions, amounted to approximately Euro 3 114 thousand (31 December 2018: Euro 6 914 thousand). NOVO BANCO | 2019 ANNUAL REPORT | 303 (in thousands of Euros)GainsLossesTotalGainsLossesTotalTítulosSecuritiesObrigações e outros títulos de rendimento fixoBonds and other fixed income securitiesDe emissores públicos Issued by government and public entities 26 480 10 963 15 517 6 032 1 100 4 932 De outros emissoresIssued by other entities- - - 2 119 ( 117)Instrumentos financeiros derivadosFinancial DerivativesContratos sobre taxas de câmbioForeign exchange rate contracts 24 603 26 380 ( 1 777) 36 542 36 947 ( 405)Contratos sobre taxas de juroInterest rate contracts 756 013 829 825 ( 73 812) 444 503 483 139 ( 38 636)Contratos sobre ações/índicesEquity / Index contracts 93 119 92 296 823 65 570 63 000 2 570 Contratos sobre créditosCredit default contracts 78 241 78 622 ( 381) 47 055 52 180 ( 5 125)OutrosOther 2 036 2 852 ( 816) 15 775 1 619 14 156 980 492 1 040 938 ( 60 446) 615 479 638 104 ( 22 625)31.12.201931.12.2018 NOTE 9 - GAINS OR LOSSES ON FINANCIAL ASSETS MANDATORILY AT FAIR VALUE THROUGH PROFITS OR LOSS AND GAINS OR LOSSES ON FINANCIAL ASSETS AND LIABILITIES DESIGNATED AT FAIR VALUE THROUGH PROFIT AND LOSS The breakdown of this caption is as follows: NOTE 10 – GAINS OR LOSSES FROM HEDGE ACCOUNTING The breakdown of this caption is as follows: NOTE 11 – EXCHANGE DIFFERENCES The breakdown of this caption is as follows: This caption includes the results arising from the foreign currency revaluation of monetary assets and liabilities denominated in foreign currency in accordance with the accounting policy described in Note 2.2. NOVO BANCO | 2019 ANNUAL REPORT | 304 (in thousands of Euros)GainsLossesTotalGainsLossesTotalGains or losses on financial assets mandatorily at fair value through profit or lossSecuritiesBonds and other fixed income securitiesIssued by other entities 8 337 10 625 ( 2 288) 58 758 6 037 52 721 Shares 34 584 90 862 ( 56 278) 31 239 4 148 27 091 Other variable income securities 17 482 331 561 ( 314 079) 30 235 147 443 ( 117 208) 60 403 433 048 ( 372 645) 120 232 157 628 ( 37 396)Other financial assetsLoans to customers- - - 27 302 - 27 302 - - - 27 302 - 27 302 60 403 433 048 ( 372 645) 147 534 157 628 ( 10 094)Gains or losses on financial assets and liabilities designated at fair value through profit and lossSecuritiesBonds and other fixed income securitiesIssued by other entities- 102 ( 102)- - - - 102 ( 102)- - - 60 403 433 150 ( 372 747) 147 534 157 628 ( 10 094)31.12.201931.12.2018(in thousands of Euros)GainsLossesTotalGainsLossesTotalInstrumentos financeiros derivadosFair value changes of hedging instrumentsInterest rate contracts 51 063 67 846 ( 16 783) 124 964 131 615 ( 6 651)Instrumentos financeiros derivadosFair value changes of hedging item attributable to hedged risk 36 358 21 836 14 522 20 481 60 740 ( 40 259) 87 421 89 682 ( 2 261) 145 445 192 355 ( 46 910)Compensations for hedging operations interruptions (see Note 14) 461 - 461 46 714 - 46 714 Amount net of compensations 87 882 89 682 ( 1 800) 192 159 192 355 ( 196)31.12.201931.12.2018(in thousands of Euros)31.12.201931.12.2018GainsLossesTotalGainsLossesTotalForeign exchange revaluation 1 052 576 1 013 977 38 599 935 986 893 227 42 759 1 052 576 1 013 977 38 599 935 986 893 227 42 759 NOTE 12 – GAINS OR LOSSES ON DERECOGNITION OF NON-FINANCIAL ASSETS The breakdown of this caption is as follows: NOTE 13 – OTHER OPERATING INCOME AND OTHER OPERATING EXPENSES The breakdown of this caption is as follows: As at 31 December 2018, Other operating income includes the amount of Euro 46 714 thousand, received as part of the early repayment of a fixed rate financing agreement, corresponding to the amount of the early reimbursement of the credit risk contract interest rate, the loss of which was recorded under the caption Gains or losses in hedge accounting. As at 31 December 2019, the amount received for compensation for interruption of hedging operations amounts to Euro 461 thousand (see Note 10). NOTE 14 – STAFF EXPENSES The breakdown of staff expenses is as follows: The provisions and costs related to the restructuring process are presented in Note 29. NOVO BANCO | 2019 ANNUAL REPORT | 305 (in thousands of Euros)31.12.201931.12.2018Real Estate 6 732 32 152 Equipment( 490) 51 Other 1 754 ( 12 260) 7 996 19 943 (in thousands of Euros)31.12.201931.12.2018Other operating incomeGains / (losses) on recoveries of loans 30 230 41 971 Non-recurring advisory services 1 299 814 Other income 30 993 81 542 62 522 124 327 Other operating expensesPerdas na aquisição de dívida emitida pelo Banco (ver Nota 28)Losses on repurchase of Group debt securities (see Note 28)( 465)( 69 405)Impostos diretos e indiretosDirect and indirect taxes( 9 602)( 8 264)Contribuições para o fundo de garantia de depósitosContributions to the Deposit Guarantee Fund( 40)( 43)Contribuição para o fundo de resoluçãoContributions to the Resolution Fund( 11 996)( 10 803)Contribuição para o fundo único de resoluçãoContributions to the Single Resolution Fund( 22 412)( 20 621)Contribuição sobre o setor bancário (ver Nota 25)Contribution to the Banking Sector (see Note 25)( 26 647)( 26 800)Quotizações e donativosMembership subscriptions and donations( 1 616)( 1 290)Encargos com entidades de SupervisãoCharges with Supervisory entities( 2 456)( 2 360)Indemnizações contratuais (SPE)Contractual indemnities (SPE)( 297)( 4 844)Outros custosOther expenses( 19 576)( 112 664)( 164 006)Other operating income / (expenses) ( 50 142)( 39 679)(in thousands of Euros)31.12.201931.12.2018Wages and salaries 181 792 178 231 Remuneration 180 943 177 713 Long-term service / Career bonuses (see Note 15) 849 518 Mandatory social charges 55 651 56 524 Costs with post-employment benefits (see Note 15)- 734 Other costs 4 655 8 615 242 098 244 104 As at 31 December 2019 and 2018, the breakdown by professional category of the number of employees of the Bank is as follows: NOTE 15 – EMPLOYEE BENEFITS Pension and health-care benefits In compliance with the Collective Labour Agreement (ACT) for the banking sector established with the unions, the Bank undertook the commitment to grant its employees, or their families, pensions on retirement, disability and survival. These payments consist of a percentage that increases in accordance with the years of service, applied to each year’s negotiated salary table for the active workforce. Banking employees also receive health-care benefits through a specific Social-Medical Assistance Service (SAMS), managed by the respective Union, having the Bank made (until February 2017) annual contributions to SAMS amounting to 6.50% of the total annual remuneration of the active employees, including, amongst others, the holiday subsidy and Christmas subsidy. The measurement and recognition of the Bank liability with post-retirement health-care benefits is similar to the measurement and recognition of the pension liability. These benefits are covered by the Pension Fund, which currently covers all liabilities with pensions and health- care benefits. Arising from the signature of the new Collective Labour Agreement (ACT) on 5 July 2016, published in Labour Bulletin (Boletim do Trabalho) No. 29, of 8 August 2016, the Bank contributions to SAMS as from 1 February 2017, correspond to a fixed amount (as per Annex VI of the new ACT) for each employee, 14 times a year. For employees hired until 31 December 2008, the retirement pension and the disability, survival and death pensions consecrated under the ACT, as well as the liabilities for health-care benefits (SAMS), are covered by a closed pension fund, managed by GNB – Sociedade Gestora de Fundos de Pensões, S.A.. Protection of employees in the event of maternity, paternity and adoption, as well as old age, is covered by the General Social Security Regime, given that with the publication of Decree-Law No. 1-A/2011, of 3 January, all banking employees who were beneficiaries of “CAFEB – Caixa de Abono de Família dos Empregados Bancários” were integrated in the General Social Security Regime as from 1 January 2011. Employees hired after 31 December 2008 are covered by the Portuguese General Social Security Regime. Retirement pensions of banking employees integrated in the General Social Security Regime within the scope of the 2nd tripartite agreement continue to be calculated in accordance with the provisions of the ACT and other conventions; however, banking employees are entitled to receive a pension under the General Regime that considers the number of years of contributions under that regime. The Banks are responsible for the difference between the pension determined in accordance with the provisions of the ACT and that which the banking employees are entitled to receive from the General Social Security Regime. NOVO BANCO | 2019 ANNUAL REPORT | 306 31.12.201931.12.2018Directive functions 400 466 Management functions 541 489 Specific functions 2 169 1 997 Administrative and other functions 1 318 1 626 4 428 4 578 The contribution rate is 26.6%, 23.6% paid by the employer and 3% paid by the employees on the behalf of Caixa de Abono de Família dos Empregados Bancários (CAFEB), abolished by said Decree-law. In consequence of this change, pension entitlements of active employees are to be covered on the terms defined under the General Social Security Regime, for the length of their employment between 1 January 2011 and their retirement date. The differential required to make up the pension guaranteed under the ACT is paid by the Banks. At the end of financial year 2011 and pursuant to the 3rd tripartite agreement, it was decided to transfer, definitively and irreversibly, to the General Social Security Regime all the banks’ liabilities with pensions in payment to retirees and pensioners that were in that condition as at 31 December 2011 at constant values (0% discount rate) for the component foreseen in the “Instrumento de Regulação Colectiva de Trabalho” (IRCT) applicable to banking employees, including the eventualities of death, disability and survival. The liabilities relating to the updating of pension amounts, pension benefits other than those to be borne by Social Security, health-care contributions to SAMS, death allowances and deferred survivor’s pensions will remain under the banks’ responsibility, with the corresponding funding being met through the respective pension funds. The agreement further established that the financial institutions’ pension fund assets relating to the part allocated to the satisfaction responsibilities for those pensions, be transferred to the State. According to the deliberation of the Board of Directors of Bank of Portugal of 3 August 2014 (8 p.m.), considering the resolution by the same Board of Directors of 11 August 2014 (5 p.m.), and the additional clarifications contained in the deliberation of the Board of Directors of Bank of Portugal, of 11 February 2015, it was clarified that the BES responsibilities not transferred to NOVO BANCO relate to the retirement and survival pensions and complementary retirement and survival pensions of the Directors of BES who had been members of its Executive Committee, as defined in BES’s Articles of Association and BES’s General Assembly Regulations to which the Articles of Association refer, not having, therefore, been transferred to NOVO BANCO, without prejudice to the transfer of the responsibilities relating exclusively to the employment contracts with BES. Given the aforementioned, only the pension fund liabilities arising from the Executive Committee Complementary Plan were splited, with a part (described above) remaining in BES and the remaining responsibilities related to the Executive Committee Complementary Plan being transferred to NOVO BANCO, together with the liabilities of the Pension Fund regarding the Base Plan and the Complementary Plan. To quantify the amounts relating to the split of the Pension Fund assets allocated to the liabilities that remained in BES, following the decision of the Board of Directors of the Bank of Portugal of 11 February 2015, from those that were transferred to NOVO BANCO, the assets existing on 3 August 2014 were split in proportion to the liabilities calculated on the same date, allocated to each of the groups of former participants and beneficiaries allocated to each of the entities, after deducting the amounts already paid. The split performed on these terms resulted, on 3 August 2014, in a level of funding of the Complementary Plan of the Executive Commission, at that time, that was equal for each of the associates of the Fund (NOVO BANCO and BES). However, up to the present date, the formalization of the effective splitting of the liabilities / assets of BES and NB has not yet occurred, with both formally continuing to be members of the same Pension Fund, currently designated Fundo de Pensões NB. On 1 June 2016, an amendment was made to Fundo de Pensões NB´s constitutive contract, where the complementary plan became a defined contribution instead of a defined benefit plan. Considering this, and in NOVO BANCO | 2019 ANNUAL REPORT | 307 accordance with IAS 19, this plan´s responsibilities and assets are net of the amounts presented for the defined benefit plans. The key actuarial assumptions used to calculate retirement pension and health-care liabilities are identical and are as follows: Disability decreases are not considered in the calculation of the liabilities. The determination of the discount rate as at 31 December 2019 and 2018 was based on: (i) the evolution of the main indices for high quality corporate bonds and (ii) the duration of the liabilities. The pension plan participants have the following breakdown: The application of IAS 19 in terms of liabilities and coverage levels as at 31 December 2019 and 2018 is as follows: According to the policy defined in Note 2.14 - Employee Benefits, the Bank calculates liabilities for pensions and actuarial gains and losses half-yearly and evaluates at each balance sheet date and for each plan separately, the recoverability of the excess of the respective pension liabilities. As at 31 December 2019, the net balance sheet value includes Euro 30.4 million (31 December 2018: Euro 26.7 million) related to NOVO BANCO’s share of the deficit of the complementary plan CE. With respect to the base and complementary net liabilities, the Bank has already made the contribution. As at 31 December 2019 and 2018, the sensitivity analysis to a 0.25% increase in the rate of the assumptions and to a one-year increase in the mortality table results in the following changes in the present value of the liabilities determined for past services: NOVO BANCO | 2019 ANNUAL REPORT | 308 AssumptionsActualAssumptionsActualActuarial Assumptions Projected rate of return on plan assets1.35%6.82%2.10%-1.57% Discount rate1.35%-2.10%- Pension increase rate0.50%0.49%0.50%0.06% Salary increase rate0.25%1.20%0.75%1.00% Mortality table men Mortality table womenTV 88/90-2 yearsTV 88/90-2 years31.12.201931.12.2018TV 88/90TV 88/9031.12.201931.12.2018Employees 4 399 4 507 Pensioners and survivors 6 761 6 709 TOTAL 11 160 11 216 (in thousands of euros)Assets / (liabilities) recognized in the balance sheetTotal liabilities(1 811 526)(1 641 964) Pensioners(1 275 193)(1 122 761) Employees( 536 333)( 519 203)Coverage Fair value of plan assets1 659 2461 615 249Net assets / (liabilities) in the balance sheet (See Notes 28 and 32)( 152 280)( 26 715)Accumulated actuarial deviations recognized in other comprehensive income 583 396 477 37031.12.201931.12.2018 The evolution of liabilities for pensions and health-care benefits can be analysed as follows: The evolution of the value of the pension funds during 2019 and 2018 can be analysed as follows: The assets of the pension funds can be analysed as follows: The assets of the pension funds used by the Bank or representative of securities issued by the Bank are detailed as follows: NOVO BANCO | 2019 ANNUAL REPORT | 309 (in thousands of Euros)Assumptionsof +0.25% in the rate usedof -0.25% in the rate usedof +0.25% in the rate usedof -0.25% in the rate usedDiscount rate( 68 028) 72 833 ( 60 769) 59 795 Salary increase rate 27 028 ( 18 679) 19 489 ( 23 828)Pension increase rate 53 868 ( 49 940) 46 296 ( 46 124)of +1 year of -1 year of +1 year of -1 year Mortality table( 63 877) 64 542 ( 54 690) 51 631 Change in the amount of liabilities due to the change:31.12.201931.12.2018(in thousands of Euros)Retirement pension liabilities at beginning of exercise1 641 964 1 629 305 Current service cost- 550 Interest cost 31 121 33 126 Plan participants' contribution 2 605 2 639 Contributions from other entities 281 198 Actuarial (gains) / losses in the period: - Changes in financial assumptions- ( 68) - Changes in financial assumptions 122 794 ( 359) - Experience adjustments (gains) / losses 63 084 18 400 Pensions paid by the fund / transfers and once-off bonuses( 68 896)( 63 250)Early retirement 15 670 28 688 Foreign exchange differences and other 2 903 ( 7 265)Retirement pension liabilities at end of exercise1 811 526 1 641 964 31.12.201931.12.2018(in thousands of Euros)31.12.201931.12.2018Fair value of fund assets at beginning of exercise1 615 249 1 614 543 Net return from the fund 107 384 ( 21 037)- Share of the net interest on the assets 27 496 31 138 - Return on assets excluding net interest 79 888 ( 52 175)Group contributions- 92 863 Plan participants’ contributions 2 605 2 639 Pensions paid by the fund / transfers and once-off bonuses( 68 896)( 63 250)Foreign exchange differences and other 2 904 ( 10 509)Fund balance at the end of the year1 659 246 1 615 249 (in thousands of Euros)QuotedUnquotedTotalQuotedUnquotedTotalEquity instruments 162 928 59 309 222 237 131 613 56 732 188 345 Debt instruments1 000 530 - 1 000 530 859 101 - 859 101 Investment funds 201 927 52 836 254 763 214 115 50 953 265 068 Structured debt 5 984 7 733 13 717 9 183 9 518 18 701 Derivative instruments - 1 1 - - - Real estate properties - 107 166 107 166 - 103 942 103 942 Cash and cash equivalents - 60 832 60 832 - 180 092 180 092 Total1 371 369 287 877 1 659 246 1 214 012 401 237 1 615 249 31.12.201931.12.2018(in thousands of Euros)31.12.201931.12.2018Real estate properties 75 851 58 083 Total 75 851 58 083 The evolution of the actuarial gains and losses in the balance sheet can be analysed as follows: The cost with retirement pensions and health-care benefits during 2019 and 2018, can be analysed as follows: During 2019, the value of early retirements amounted to Euro 15.7 million (2018: Euro 28.7 million), which are related to the Bank restructuring process, and as such, were recognised against the restructuring provision (see Note 29). The evolution of net assets/ (liabilities) on balance sheet may be analysed, during 2019 and 2018 as follows: The summary of the liabilities and balance of the funds, as well as the experience gains and losses is analysed as follows: The weighted average maturity of the liabilities of the defined benefit plans is approximately 16 years (31 December 2018: approximately 16 years). The table below presents the temporal breakdown of the estimated benefits payable: NOVO BANCO | 2019 ANNUAL REPORT | 310 (in thousands of Euros)31.12.201931.12.2018Accumulated actuarial losses recognized in other comprehensive income at the beginning of the exercise 477 370 407 419 Actuarial (gains) / losses in the period: - Changes in assumptions - Demographic assumptions- ( 68) - Financial assumptions 122 794 ( 359) - Plan assets return (excluding net of interests)( 16 804) 70 575 Other 36 ( 197)Accumulated actuarial losses recognized in other comprehensive income at the end of the exercise 583 396 477 370 (in thousand of Euros)31.12.201931.12.2018Current service cost - 550 Net interest 3 625 1 988 Other - 184 Cost with post-employment benefits 3 625 2 722 (in thousands of Euros)31.12.201931.12.2018At the beginning of the exercise( 26 715)( 14 762)Cost for period( 3 625)( 2 722)Actuarial gains / (losses) recognized in other comprehensive income( 106 026)( 69 951)Contributions made in the period- 92 863 Other( 15 914)( 32 143)At the end of the exercise( 152 280)( 26 715)(in thousands of Euros)31.12.201931.12.201831.12.201731.12.201631.12.2015Retirement pension liabilities(1 811 526)(1 641 964)(1 629 305)(1 542 016)(1 513 154)Funds balance1 659 246 1 615 249 1 614 543 1 523 694 1 481 484 (Under) / overfunding of liabilities( 152 280)( 26 715)( 14 762)( 18 322)( 31 670)(Gains) / losses on experience adjustments in retirement pension liabilities 63 084 18 400 14 859 11 667 ( 2 835)(Gains) / losses on experience adjustments in plan assets( 79 888) 52 175 ( 91 005) 42 118 16 161 (in thousands of Euros)Estimated amount of benefits payable 66 852 67 162 203 035 1 907 637 Up to 1 yearFrom 1 to 2 yearsFrom 2 to 5 yearsMore than 5 years Career bonuses As at 31 December 2019, the liabilities assumed by the Bank amounted to Euro 6 981 thousand, corresponding to the liabilities for past services subjacent to the career bonuses, as described in Note 2.14 – Employee benefits (31 December 2018: Euro 6 376 thousand) (see Note 30). As at 31 December 2019, the costs recognised with career bonuses were Euro 849 thousand (31 December 2018: Euro 518 thousand) (see Note 14). NOTE 16 – OTHER ADMINISTRATIVE EXPENSES The breakdown of this caption is as follows: The caption Other administrative expenses includes, amongst others, training and costs with services rendered by Joint Ventures (Agrupamentos Complementares de Empresas (ACE)) in which NOVO BANCO has a stake. The fees invoiced during financial years 2019 and 2018 by the Statutory Audit Firm, according to that laid down in article 508-F of the Portuguese Companies Code (Código das Sociedades Comerciais), have the following breakdown: NOTE 17 – EARNINGS PER SHARE Basic earnings per share The basic earnings per share are calculated dividing the net profit attributable to the shareholders of the Bank by the weighted average number of ordinary shares in circulation during the financial year. NOVO BANCO | 2019 ANNUAL REPORT | 311 (in thousands of Euros)31.12.201931.12.2018Rentals 3 125 28 649 Advertising 7 448 8 130 Communication 10 214 11 316 Maintenance and repairs expenses 9 625 8 114 Travelling and representation 3 182 3 128 Transportation of valuables 4 076 4 048 Insurance 2 666 3 478 IT services 47 957 45 365 Independent work 3 015 4 418 Temporary work 1 549 1 429 Electronic payment systems 9 773 9 326 Legal costs 8 756 14 341 Consultancy and audit fees 26 954 17 620 Water, energy and fuel 3 693 4 901 Consumables 1 524 2 066 Other costs 28 322 29 825 171 879 196 154 (in thousands of Euros)31.12.201931.12.2018Statutory audit of annual accounts 1 471 500 Other reliability assurance services 947 497 Total value of billable services 2 418 997 (In thousands of Euros)31.12.201931.12.2018Net profit / (loss) attributable to shareholder of the Bank(1 087 584)(1 432 875)Weighted average number of common shares outstanding (thousands)9 800 000 9 800 000 Basic earnings per share attributable to shareholders of NOVO BANCO (in Euros)(0.11)(0.15)Basic earnings per share from continuing activities attributable to shareholders of NOVO BANCO (in Euros)(0.11)(0.15) Diluted earnings per share The diluted earnings per share are calculated considering the net profit attributable to the shareholders of the Bank and the weighted average number of ordinary shares in circulation, adjusted for the effects of all potential dilutive ordinary shares. The diluted earnings per share do not differ from the basic earnings per share, since there are no dilutive effects. NOTE 18 – CASH, CASH BALANCES AT CENTRAL BANKS AND OTHER DEMAND DEPOSITS As at 31 December 2019 and 2018, this caption is analysed as follows: The caption Demand Deposits with Bank of Portugal includes mandatory deposits to comply with the minimum legal cash reserve requirements in an amount of Euro 237.8 million (31 December 2018: Euro 243.8 million), which the objective to satisfy the legal requirements regarding the constitution of minimum cash available. According to the European Central Bank Regulation (EU) No. 1358/2011, of 14 December 2011, minimum cash requirements of demand deposits with Bank of Portugal are interest-bearing and correspond to 1% of the deposits and debt certificates maturing in less than 2 years, after excluding from these the deposits of institutions subject to the European System of Central Banks minimum reserve requirements. As at 31 December 2019, the average interest rate on these deposits was 0.00% (31 December 2018: 0.00%). Compliance with minimum cash requirements, for a given observation period, is monitored taking into account the average amount of the deposits with Bank of Portugal over said period. The balance of the account with Bank of Portugal as at 31 December 2019 was included in the observation period running from 18 December 2019 to 28 January 2020. Checks to be collected on credit institutions at home and abroad were sent for collection within the first business days following the reference dates. NOVO BANCO | 2019 ANNUAL REPORT | 312 (in thousands of Euros)31.12.201931.12.2018Cash 174 156 149 266 Demand deposits with Central BanksBank of Portugal 1 387 250 531 664 Other Central Banks 21 658 14 359 1 408 908 546 023 Deposits in other credit institutions in the countryRepayable on demand 11 850 7 495 Uncollected checks 50 915 59 055 62 765 66 550 Deposits with banks abroadRepayable on demand 28 997 40 491 28 997 40 491 1 674 826 802 330 NOTE 19 – FINANCIAL ASSETS AND LIABILITIES HELD FOR TRADING As at 31 December 2019 and 2018, this caption is analysed as follows: Securities held for trading In accordance with the accounting policy described in Note 2.5, securities held for trading are those acquired to be traded in the short-term regardless of their maturity. As at 31 December 2019 and 2018, the analysis of the securities held for trading, by maturity, is as follows: A breakdown of the securities held for trading, by fair value hierarchy, is presented in Note 36. NOVO BANCO | 2019 ANNUAL REPORT | 313 (in thousands of Euros)31.12.201931.12.2018Financial assets held for tradingSecuritiesSecurities held for tradingBonds and other fixed income securitiesIssued by government and public entities 254 848 257 269 Issued by other entities- 1 254 848 257 270 DerivativesDerivatives held for trading with positive fair value 419 895 520 135 Fair value option derivatives with positive fair value 74 093 148 139 493 988 668 274 748 836 925 544 Financial liabilities held for tradingDerivativesDerivatives held for trading with negative fair value 544 400 493 403 544 400 493 403 (in thousands of Euros)31.12.201931.12.2018Up to 3 months - 50 029 3 months to 1 year - 2 007 1 to 5 years 117 227 157 434 More than 5 years 137 621 47 800 254 848 257 270 Derivatives As at 31 December 2019 and 2018, the breakdown of this caption is as follows: Fair value option derivatives include instruments designed to manage the risk associated with certain financial assets and liabilities designated at fair value through profit or loss, in accordance with the accounting policy described in Notes 2.4 and 2.6, and which the Bank has not designated for hedge accounting. The Bank calculates the Credit Valuation Adjustment (CVA) for derivative instruments in accordance with the following methodology: (i) Portfolio basis – the calculation of the CVA corresponds to the application, to the aggregate exposure of each counterpart, of an expected loss and a recovery rate, considering the average duration period estimated for each exposure; (ii) Individual basis – the calculation of the CVA on an individual basis is based on the determination of the exposure using stochastic methods (Expected Positive Exposure) which translates into the calculation of the expected fair value exposure that each derivative is likely to assume NOVO BANCO | 2019 ANNUAL REPORT | 314 (in thousands of Euros)AssetLiabilitiesAssetLiabilitiesTrading derivativesExchange rate contractsForward- acquisition 702 690 517 448 - sales 704 147 517 243 Currency Swaps- acquisition1 060 009 1 743 604 - sales1 065 566 1 747 500 Currency Interest Rate Swaps- acquisition 22 951 23 417 - sales 22 947 23 413 Currency Options- acquisition 219 866 256 052 - sales 192 493 156 257 34 652 33 820 33 777 33 596 Interest rate contractsInterest Rate Swaps- acquisition7 391 231 7 033 268 - sales7 392 292 7 076 925 Swaption - Interest Rate Options- acquisition 400 000 - - sales- - Interest Rate Caps & Floors- acquisition 93 846 54 352 - sales 91 073 57 105 Interest Rate Futures a)- acquisition- - - sales- 50 000 352 939 501 632 439 653 435 963 Stock / index contractsEquity / Index Swaps- acquisition 152 294 116 752 - sales 152 294 116 752 Equity / Index Options- acquisition 710 616 1 018 950 - sales 742 699 1 130 016 Equity / Index Futures a)- acquisition- 1 330 - sales- - 32 303 8 906 46 696 23 727 Default risk contractsCredit Default Swaps- acquisition 2 883 7 814 - sales 2 883 7 814 1 42 9 117 419 895 544 400 520 135 493 403 Economic hedge derivativesInterest rate contractsInterest Rate Swaps- acquisition 171 371 171 370 - sales 171 371 171 370 74 093 - 70 176 - Default risk contractsCredit Default Swaps- acquisition- 77 963 - sales- 77 963 74 093 - 148 139 - 31.12.201931.12.2018NotionalFair valueNotionalFair value 5 307 5 574 4 920 6 297 1 230 540 2 586 991 21 875 21 870 21 036 21 029 6 240 5 836 5 235 5 279 349 152 499 562 439 070 435 363 966 893 583 600 2 821 1 177 - - - - - - 3 988 3 739 13 058 13 061 28 315 5 167 33 638 10 666 - - - - 1 42 9 117 a) Derivatives traded on organized markets, the market value of which is settled daily against the margin account (see Note 28) 70 176 - 74 093 - - - 77 963 - over its remaining life. Subsequently, are applied to the exposure determined, an expected loss and a recovery rate. In the financial year of 2019, the Bank recognized a gain of Euro 1.1 million related to the CVA of derivative instruments (31 December 2018: gain of Euro 13.9 million). As at 31 December 2019 and 2018, the analysis of the derivatives held for trading by maturity period is as follows: Credit Support Annex (CSA) NOVO BANCO has several contracts negotiated with counterparties with which it trades derivatives on the Over-the-counter market. The CSAs take the form of collateral agreements established between two parties negotiating over-the-counter derivatives with each other, with the main objective of providing protection against credit risk, defining for that purpose rules regarding collateral. Derivative transactions are regulated by the International Swaps and Derivatives Association (ISDA) and have minimum risk margin that may change according to the ratings of the parties. NOTE 20 – FINANCIAL ASSETS MANDATORILY AT FAIR VALUE THROUGH PROFIT OR LOSS, DESIGNATED AT FAIR VALUE THROUGH PROFIT OR LOSS, AT FAIR VALUE THROUGH OTHER COMPREHENSIVE INCOME AND AT AMORTISED COST As at 31 December 2019 and 2018, these captions are analysed as follows: NOVO BANCO | 2019 ANNUAL REPORT | 315 (in thousands of Euros)AssetsLiabilitiesAssetsLiabilitiesDerivatives held for negotiationUp to 3 months2 094 166 1 923 639 ( 647)2 651 657 2 603 006 ( 495)From 3 months to 1 year1 053 257 843 825 16 408 1 465 725 1 542 860 ( 4 321)From 1 to 5 years2 110 078 2 097 178 1 526 1 697 248 1 706 734 14 310 More than 5 years5 498 885 5 501 752 ( 141 792)4 958 357 5 030 425 17 238 10 756 386 10 366 394 ( 124 505)10 772 987 10 883 025 26 732 Fair value option derivativesMore than 5 years 171 371 171 371 74 093 249 333 249 333 148 139 171 371 171 371 74 093 249 333 249 333 148 139 31.12.201931.12.2018NotionalFair Value (net)NotionalFair Value (net)(in thousands of Euros)Mandatorily at fair value through profit and lossFair value through other comprehensive incomeAmortised costFair value changes * TotalSecurities 3 044 724 8 758 131 2 392 843 - 14 195 698 Loans and advances to banks- - 495 252 - 495 252 Loans and advances to customers- - 23 154 148 49 884 23 204 032 3 044 724 8 758 131 26 042 243 49 884 37 894 982 * Fair value changes of the elements covered by the interest rate hedge portfolio (see Note 21)31.12.2019 Securities As at 31 December 2019 and 2018, the detail of securities portfolio is as follows: The securities mandatorily accounted at fair value through profit or loss include the participation units held by the Group in Restructuring Funds, which are accounted for in accordance with the accounting policy described in Note 2.4, based on the net book value disclosed by the Management Companies, which may be adjusted according to information or analyzes that are considered to have an impact on the fair value of the participation units. In the second half of 2019, the Bank undertook a detailed analysis of the historical performance of these funds, as well as an analysis of the liquidity of the participation units held by the Bank, having concluded that, given their complexity and limitations inherent to their liquidity it should consider an adjustment to the net book value reported by the Management Companies based on historical market metrics. Additionally, the Bank is conducting an analysis of the valuation of all assets held by these funds. NOVO BANCO | 2019 ANNUAL REPORT | 316 (in thousands of Euros)Mandatorily at fair value through profit and lossFair value through other comprehensive incomeAmortised costFair value changes * TotalSecurities 2 949 597 7 567 290 2 302 765 - 12 819 652 Loans and advances to banks- - 558 652 - 558 652 Loans and advances to customers- - 22 789 985 31 571 22 821 556 2 949 597 7 567 290 25 651 402 31 571 36 199 860 * Fair value changes of the elements covered by the interest rate hedge portfolio (see Note 21)31.12.2018(in thousands of Euros)31.12.201931.12.2018Securities mandatorily at fair value through profit or lossBonds and other fixed income securitiesFrom other issuers 694 667 329 948 Shares 601 613 673 299 Other securities with variable income1 748 444 1 946 350 3 044 724 2 949 597 Securities at fair value through other comprehensive incomeBonds and other fixed income securitiesFrom public issuers7 027 343 6 537 547 From other issuers1 661 538 951 085 Shares 69 248 78 655 Other variable income securities 2 3 8 758 131 7 567 290 Securities at amortised costBonds and other fixed income securitiesFrom public issuers 459 260 503 123 From other issuers2 093 737 1 991 967 Impairment( 160 154)( 192 325)2 392 843 2 302 765 14 195 698 12 819 652 As at 31 December 2019 and 2018, the detail of the fair value securities through other comprehensive income is as follows: The changes in the impairment reserves in fair value securities through other comprehensive income are presented as follows: During the financial year of 2019, the Bank sold Euro 3 730.0 million of financial instruments classified at fair value through other comprehensive income (31 December 2018: Euro 9 208.3 million), with a gain of Euro 65.7 million (31 December 2018: gain of Euro 33.7 million), and a loss of Euro 4.9 million that were transferred from revaluation reserves to sales reserves (31 December 2018: loss of Euro 3.6 million). NOVO BANCO | 2019 ANNUAL REPORT | 317 (in thousands of Euros)PositiveNegativeBonds and other fixed income securitiesFrom public issuers6 705 039 322 996 ( 692)7 027 343 ( 4 476)Residents3 125 170 157 397 ( 490)3 282 077 ( 2 107)Non residents3 579 869 165 599 ( 202)3 745 266 ( 2 369)From other issuers1 575 607 87 363 ( 1 432)1 661 538 ( 1 029)Residents 33 212 20 711 - 53 923 ( 8)Non residents1 542 395 66 652 ( 1 432)1 607 615 ( 1 021)Shares 424 304 19 795 ( 374 851) 69 248 - Residents 348 161 18 614 ( 311 371) 55 404 - Non residents 76 143 1 181 ( 63 480) 13 844 - Other securities with variable income 2 2 ( 2) 2 - Residents 2 - ( 2)- - Non residents- 2 - 2 - Balance as at 31 December 20198 704 952 430 156 ( 376 977)8 758 131 ( 5 505)(1) Aquisition cost referring to shares and other equity instruments and amortized cost for debt securities.Cost (1)Fair value reserveBalance sheet valueImpairment reserves(in thousands of Euros)PositiveNegativeBonds and other fixed income securitiesFrom public issuers6 483 327 56 067 ( 1 847)6 537 547 ( 807)Residents3 566 419 25 641 ( 612)3 591 448 ( 381)Non residents2 916 908 30 426 ( 1 235)2 946 099 ( 426)From other issuers 934 722 24 490 ( 8 127) 951 085 ( 397)Residents 28 613 20 600 ( 54) 49 159 ( 22)Non residents 906 109 3 890 ( 8 073) 901 926 ( 375)Shares 429 667 13 969 ( 364 981) 78 655 - Residents 353 683 12 197 ( 304 500) 61 380 - Non residents 75 984 1 772 ( 60 481) 17 275 - Other securities with variable income 2 1 - 3 - Residents 2 - - 2 - Non residents- 1 - 1 - Balance as at 31 December 20187 847 718 94 527 ( 374 955)7 567 290 ( 1 204)(1) Aquisition cost referring to shares and other equity instruments and amortized cost for debt securities.Cost (1)Fair value reserveBalance sheet valueImpairment reserves(in thousands of Euros)Stage 1Stage 2Stage 3TotalBalance as at 31 December 2017* 1 651 578 Impact of transition to IFRS 9( 1 650 979)Balance as at 1 January 2018 599 - - 599 Increases due to changes in credit risk 9 024 23 12 9 059 Decreases due to changes in credit risk( 7 603)( 1)( 12)( 7 616)Utilization during the period( 850)- - ( 850)Other movements 12 - - 12 Balance as at 31 December 2018 1 182 22 - 1 204 Increases due to changes in credit risk 6 188 - - 6 188 Decreases due to changes in credit risk( 1 725)( 18)- ( 1 743)Utilization during the period( 137)- - ( 137)Other movements( 3)( 4)- ( 7)Balance as at 31 December 2019 5 505 - - 5 505 * The amount corresponds to accumulated impairment losses on available-for-sale securities at 31 December 2017, recorded in accordance with IAS 39.Impairment movement of securities at fair valuethrough other comprehensive income Changes in impairment losses on amortised cost securities are as follows: In accordance with the accounting policy mentioned on Note 2.4, the Bank regularly evaluate if there is any objective evidence of impairment in its securities portfolio at a fair value through other comprehensive income based on the judgement criteria mentioned on Note 3.1. As at 31 December 2019 and 2018, the securities portfolio, by residual maturity period, is as follows: The detail of the securities portfolio by fair value hierarchy is presented in Note 36. The portfolio securities pledged by the Bank are analysed in Note 33. NOVO BANCO | 2019 ANNUAL REPORT | 318 (in thousands of Euros)Stage 1Stage 2Stage 3TotalBalance as at 31 December 2017- - - - Impact of transition to IFRS 9 213 147 Balance as at 1 January 2018 3 266 3 784 206 097 213 147 Increases due to changes in credit risk 13 137 242 031 558 255 726 Decreases due to changes in credit risk( 10 576)( 235 057)( 918)( 246 551)Utilization during the period( 1 857)( 2 105)( 74 665)( 78 627)Other movements- 48 630 - 48 630 Balance as at 31 December 2018 3 970 57 283 131 072 192 325 Increases due to changes in credit risk 14 394 636 822 6 615 657 831 Decreases due to changes in credit risk( 14 664)( 640 167)( 7 247)( 662 078)Utilization during the period- ( 1)( 28 019)( 28 020)Other movements 58 37 1 96 Balance as at 31 December 2019 3 758 53 974 102 422 160 154 Impairment movement of securities at amortised cost(in thousands of Euros)31.12.201931.12.2018Securities at fair value through profit or loss - mandatoryUp to 3 months - 1 From 3 months to 1 year 7 - From 1 to 5 years 57 535 9 969 More than 5 years 637 126 319 979 Unlimited duration2 350 056 2 619 648 3 044 724 2 949 597 Securities at fair value through other comprehensive incomeUp to 3 months 164 095 153 776 From 3 months to 1 year 179 917 618 397 From 1 to 5 years4 311 899 4 185 852 More than 5 years4 032 970 2 530 607 Unlimited duration 69 250 78 658 8 758 131 7 567 290 Securities at amortised cost (*)Up to 3 months 927 397 734 468 From 3 months to 1 year 131 372 125 633 From 1 to 5 years 48 500 33 519 More than 5 years1 445 728 1 601 470 2 552 997 2 495 090 14 355 852 13 011 977 (*) Gross value before impairments Loans and advances to banks As at 31 December 2019 and 2018, the detail of Loans and advances to banks is as follows: Loans and advances to banks are all recorded in the amortised cost portfolio. As at 31 December 2019 and 2018, the analysis of loans and advances to banks, by residual maturity is as follows: Changes in impairment losses on loans and advances to banks are presented as follows: NOVO BANCO | 2019 ANNUAL REPORT | 319 (in thousands of Euros)Loans and advances to banks in PortugalVery short-term placements 8 902 64 517 Deposits 135 411 135 870 Loans 34 013 20 051 Other loans and advances 3 3 178 329 220 441 Loans and advances to banks abroadDeposits 10 851 28 075 Loans 1 645 1 700 Operations with reverse repurchase agreements 8 9 774 Other loans and advances 381 553 374 332 394 057 413 881 Outstanding applications- 74 572 386 634 396 Impairment losses( 77 134)( 75 744) 495 252 558 652 31.12.201931.12.2018(in thousands of Euros)31.12.201931.12.2018Up to 3 months 49 834 132 820 From 3 months to 1 year 109 277 106 613 From 1 to 5 years 407 175 14 471 More than 5 years 6 100 380 418 Undetermined (Overdue Loans)- 74 572 386 634 396 (in thousands of Euros)Stage 1Stage 2Stage 3TotalBalance as at 31 December 2017 71 157 Impact of transition to IFRS 9 8 009 Balance as at 1 January 2018 285 78 563 318 79 166 Increases due to changes in credit risk 316 3 389 426 4 131 Decreases due to changes in credit risk( 727)( 10 183)( 119)( 11 029)Utilizations- - ( 13)( 13)Other movements 303 3 374 ( 188) 3 489 Balance as at 31 December 2018 177 75 143 424 75 744 Increases due to changes in credit risk 416 2 837 - 3 253 Decreases due to changes in credit risk( 224)( 3 038)- ( 3 262)Other movements( 2) 1 421 2 1 421 Balance as at 31 December 2019 367 76 341 426 77 134 Loans and advances to banks Loans and advances to customers As at 31 December 2019 and 2018, the detail of loans and advances to customers is presented as follows: During the year of 2019, a sale of a portfolio of non-performing loans (called “NATA II”) was carried out, and the impact of this operation on the balance sheet resulted in a reduction in net loans and advances to customers of Euro 141.9 million (Euro 1 180.7 million in gross value and Euro 1 038.8 million in impairment), and the impact on results was a loss of Euro 79.7 million (see Note 39). In 2018, a non-performing loan portfolio was sold, and the impact of this operation on the balance sheet resulted in a reduction of Euro 496.6 million in loans and advances to customers (Euro 1 462.2 million gross value and Euro 965.6 million of impairment), and the impact on profit or loss resulted in a loss of Euro 104.8 million. Loans to customers are all recorded in the amortized cost portfolio. As at 31 December 2019, the caption Loans and advances to customers include Euro 6 076.8 million of mortgage loans related to the issuance of covered bonds (31 December 2018: Euro 4 617.4 million) (see Note 28). NOVO BANCO | 2019 ANNUAL REPORT | 320 (in thousands of Euros)Domestic loans and advancesCorporateCurrent account loans1 362 889 1 415 825 Loans8 345 875 8 407 358 Discounted bills 119 241 140 197 Factoring 709 747 865 656 Overdrafts 3 042 36 064 Financial leases1 523 226 1 547 978 Other loans and advances 29 477 30 432 IndividualsResidential Mortgage loans7 370 060 6 655 696 Consumer credit and other loans1 042 745 975 335 20 506 302 20 074 541 Foreign loans and advancesCorporateCurrent account loans 687 878 395 474 Loans1 068 038 1 355 859 Discounted bills 21 206 39 086 Factoring 138 292 101 980 Overdrafts 39 158 30 894 Financial leases 37 422 42 765 Other loans and advances 1 1 IndividualsResidential Mortgage loans1 084 606 955 902 Consumer credit and other loans 315 483 336 203 3 392 084 3 258 164 Overdue loans and advances and interestsUnder 90 days 24 025 63 116 Over 90 days1 073 220 3 466 007 1 097 245 3 529 123 24 995 631 26 861 828 Impairment losses(1 841 483)(4 071 843)23 154 148 22 789 985 Fair value adjustaments of interest rate hedges *CorporateLoans 14 390 31 571 IndividualsResidential Mortgage loans 35 494 - 49 884 31 571 23 204 032 22 821 556 * See Note 2131.12.201931.12.2018 As at 31 December 2019, the amount of interest income and commission fees recorded in the balance sheet relating to credit operations totals Euro 25 139 thousand (31 December 2018: Euro 28 222 thousand). As at 31 December 2019 and 2018, the analysis of loans and advances to customers, by residual maturity period, is as follows: Changes in credit impairment losses are presented as follows: Credit distribution by type of rate is as follows: An analysis of finance lease loans, by residual maturity period, is presented as follows: NOVO BANCO | 2019 ANNUAL REPORT | 321 (in thousands of Euros)31.12.201931.12.2018Up to 3 months 1 766 827 2 401 060 From 3 months to 1 year 1 424 761 1 886 779 From 1 to 5 years 5 084 654 4 539 776 More than 5 years 15 672 028 14 536 661 Unlimited duration (Overdue Loans) 1 097 245 3 529 123 25 045 515 26 893 399 (in thousands of Euros)Stage 1Stage 2Stage 3TotalBalance as at 31 December 2017 5 693 858 Impact of transition to IFRS 9 212 292 Balance as at 1 January 2018 401 610 224 083 5 280 457 5 906 150 Financial assets originated or acquired 2 359 - - 2 359 Financial assets derecognised ( 572)( 1 573)( 979 597)( 981 742)Increases due to changes in credit risk 139 316 61 262 783 153 983 731 Decreases due to changes in credit risk( 128 370)( 64 948)( 495 341)( 688 659)Utilization during the period( 94 287)( 2 189)( 1 008 607)( 1 105 083)Other movements 74 063 ( 110 557)( 8 419)( 44 913)Balance as at 31 December 2018 394 119 106 078 3 571 646 4 071 843 Financial assets derecognised ( 803)( 13)( 1 055 717)( 1 056 533)Increases due to changes in credit risk 665 254 105 897 700 362 1 471 513 Decreases due to changes in credit risk( 684 613)( 30 025)( 126 020)( 840 658)Utilization during the period( 46)( 403)( 1 720 474)( 1 720 923)Other movements( 320 846)( 44 562) 281 649 ( 83 759)Balance as at 31 December 2019 53 065 136 972 1 651 446 1 841 483 Impairment movements of loans and advances to customers (in thousands of Euros)31.12.201931.12.2018Fixed rate3 583 037 3 151 631 Variable rate21 462 478 23 741 768 25 045 515 26 893 399 (in thousands of Euros)31.12.201931.12.2018Gross investment in finance leases receivableUp to 1 year 293 189 275 621 1 to 5 years 827 824 819 974 More than 5 years 663 672 720 998 1 784 685 1 816 593 Unrealized finance income in finance leasesUp to 1 year 35 558 37 344 1 to 5 years 91 219 97 615 More than 5 years 57 541 46 048 184 318 181 007 Present value of minimum lease payments receivableUp to 1 year 257 631 238 277 1 to 5 years 736 605 722 359 More than 5 years 605 996 674 870 1 600 232 1 635 506 Impairment ( 202 575)( 289 405)1 397 657 1 346 101 NOTE 21 – DERIVATIVES – HEDGE ACCOUNTING AND FAIR VALUE CHANGES OF THE HEDGED ITEMS As at 31 December 2019 and 2018, the fair value of the hedging derivatives is analysed as follows: As at 31 December 2019 and 2018, fair value hedging operations may be analysed as follows: Changes in the fair value of the hedged assets and liabilities mentioned above and of the respective hedging derivatives are recognised in the income statement in the caption Net gains / (losses) from financial assets and liabilities at fair value through profit or loss (see Note 9). As at 31 December 2019, the ineffective portion of the fair value hedging operations resulted in a gain of Euro 2.2 million that was recognised in the income statement (31 December 2018: cost of Euro 3.5 million). The Bank periodically evaluates the effectiveness of the hedges. As at 31 December 2019 and 2018, the analysis of derivatives held for risk management and hedging purposes, by maturity, may be analysed as follows: NOVO BANCO | 2019 ANNUAL REPORT | 322 (in thousands of Euros)31.12.201931.12.2018Hedging derivativesAssets 7 992 1 721 Liabilities( 58 854)( 36 150)( 50 862)( 34 429)Fair value component of the assets and liabilities hedged for interest rate riskFinancial assetsLoans and advances to customers (see Note 21) 49 884 31 571 49 884 31 571 (in thousands of Euros)31.12.2019Interest Rate Swap/ CIRSLoans and advances to customersInterest and exchange rates3 312 380 ( 50 862)( 16 124) 49 884 18 311 3 312 380 ( 50 862)( 16 124) 49 884 18 311 (1) Attributable to hedged risk(2) Includes accrued interestFair valuecomponent ofitem hedged(1)Change in fairvaluecomponent ofitem hedgedin period (1)Derivative Hedged itemHedged riskNotionalFair value of derivatives (2)Change infair value ofderivative inperiod(in thousands of Euros)31.12.2018Interest Rate Swap/ CIRSLoans and advances to customersInterest and exchange rates2 611 422 ( 34 429) 42 591 31 571 ( 39 132) 2 611 422 ( 34 429) 42 591 31 571 ( 39 132)(1) Attributable to hedged risk(2) Includes accrued interestFair valuecomponent ofitem hedged(1)Change in fairvaluecomponent ofitem hedgedin period (1)Derivative Hedged itemHedged riskNotionalFair value of derivatives (2)Change infair value ofderivative inperiod(in thousands of Euros)BuySellBuySell3 months to 1 year- - - 25 000 25 000 ( 436)1 to 5 years 781 374 781 374 ( 13 873) 646 002 646 002 ( 11 528)More than 5 years 874 816 874 816 ( 36 989) 634 709 634 709 ( 22 465)1 656 190 1 656 190 ( 50 862)1 305 711 1 305 711 ( 34 429)31.12.201931.12.2018NotionalFair value (net)NotionalFair value (net) NOTE 22 – INVESTMENTS IN SUBSIDIARIES, JOINT VENTURES AND ASSOCIATES The financial information of the most relevant associated companies is presented in the following table: During 2019, ES PLC and BES GMBH were merged into NOVO BANCO. The associated companies GNB Seguros, ESEGUR and Multipessoal were transferred to Non-current assets held for sale because they are in active sale processes (see Note 27). The changes in impairment losses for investments in associates are presented as follows: NOVO BANCO | 2019 ANNUAL REPORT | 323 (in thousands of Euros)31.12.201931.12.2018DirectNominalDirectNominalNº ofparticipationvalueCost ofNº ofparticipationvalueCost ofsharesin capital(euros)participationsharesin capital(euros)participationNB AÇORES 2 144 40457,53% 5,00 10 308 2 144 40457,53% 5,00 10 308 NB FINANCE 100 000100,00%1,00 1 700 100 000100,00% 1 1 700 BEST 62 999 700100,00% 1,00 100 418 62 999 700100,00% 1,00 100 418 ES Plc- - - - 30 000100,00% 5,00 38 GNB SEGUROS- - - - 749 80024,99% 5,00 3 749 ES TECH VENTURES 71 500 000100,00% 1,00 71 500 71 500 000100,00% 1,00 71 500 GNB GA2 350 000100,00% 5,00 86 722 2 350 000100,00% 5,00 86 722 GNB CONCESSÕES 942 30698,97% 5,00 20 602 942 30698,97% 5,00 20 602 ESEGUR- - - - 242 00044,00% 5,00 9 634 E.S. REPRESENTAÇÕES 49 99599,99% 0,22 12 49 99599,99% 0,22 12 LOCARENT 525 00050,00% 5,00 2 967 525 00050,00% 5,00 2 967 BES GMBH- - - - 1100,00% 25 000,00 365 025 NOVO BANCO SERVICIOS2 676 665100,00% 0,40 1 057 2 676 665100,00% 0,40 1 057 NOVO VANGUARDA 500 000100,00% 1,00 500 500 000100,00% 1,00 500 NB ÁFRICA13 300 000100,00% 5,00 66 500 13 300 000100,00% 5,00 66 500 UNICRE 350 02917,50% 5,00 11 497 350 02917,50% 5,00 11 497 IJAR LEASING ALGERIE 122 49935,00% 74,94 12 362 122 49935,00% 72,66 12 362 EDENRED PORTUGAL101 477 60150,00% 0,01 4 984 101 477 60150,00% 0,01 4 984 MULTIPESSOAL- - - - 20 00022,52% 5,00 100 HERDADE DO PINHEIRINHO I5 280 000100,00% 1,00 5 280 5 280 000100,00% 1,00 5 280 HERDADE DO PINHEIRINHO II17 200 000100,00% 1,00 17 200 17 200 000100,00% 1,00 17 197 413 609 792 152 Impairment( 182 184)( 146 281) 231 425 645 871 (in thousands of Euros)31.12.201931.12.2018Balance at the beginning of the exercise 146 281 98 677 Charges 36 040 47 605 Utilizations( 38)- Foreign exchange differences( 99)( 1)Balance at the end of the exercise 182 184 146 281 NOTE 23 – TANGIBLE FIXED ASSETS This caption as at 31 December 2019 and 2018 is analysed as follows: The changes in this caption were as follows: NOVO BANCO | 2019 ANNUAL REPORT | 324 (in thousands of Euros)31.12.201931.12.2018Real estate propertiesFor own use 202 485 202 410 Improvements in leasehold properties 136 307 137 254 Assets under right-of-use 77 574 - 416 366 339 664 EquipmentComputer equipment 105 322 104 095 Fixtures 56 208 64 078 Furniture 67 528 69 707 Security equipment 24 284 26 579 Office equipment 7 739 7 800 Transport equipment 586 586 Assets under right-of-use 5 076 - Other 167 163 266 910 273 008 Work in progressImprovements in leasehold properties 22 793 Real estate properties 65 160 Equipment- 936 87 1 889 683 363 614 561 Accumulated impairment( 10 609)( 10 609)Accumulated depreciation( 478 001)( 468 221) 194 753 135 731 (in thousands of Euros)Real estate propertiesEquipmentWork in progressTotalAcquisition costBalance at 31 December 2017 368 441 281 984 560 650 985 Acquisitions 172 11 569 2 802 14 543 Disposals / write-offs( 12 546)( 18 887)- ( 31 433)Transfers (a)( 16 403)( 1 669)( 1 474)( 19 546)Foreign exchange differences and other - 11 1 12 Balance at 31 December 2018 339 664 273 008 1 889 614 561 Acquisitions 6 076 10 704 350 17 130 Disposals / write-offs( 20 089)( 21 511)- ( 41 600)Transfers (b) 438 950 ( 2 152)( 764)IFRS 16 transition impact 90 280 3 755 - 94 035 Foreign exchange differences and other( 3) 4 - 1 Balance at 31 December 2019 416 366 266 910 87 683 363 DepreciationBalance at 31 December 2017 233 300 254 865 - 488 165 Depreciation 5 893 10 348 - 16 241 Disposals / write-offs( 12 546)( 18 625)- ( 31 171)Transfers (a)( 4 077)( 1 690)- ( 5 767)Foreign exchange differences and other 424 329 - 753 Balance at 31 December 2018 222 994 245 227 - 468 221 Depreciation 24 434 11 076 - 35 510 Disposals / write-offs( 5 927)( 20 176)- ( 26 103)Transfers (b)( 210)( 74)- ( 284)Foreign exchange differences and other 91 566 - 657 Balance at 31 December 2019 241 382 236 619 - 478 001 ImpairmentBalance at 31 December 2017 11 122 - - 11 122 Transfers( 513)- - ( 513)Balance at 31 December 2018 10 609 - - 10 609 Balance at 31 December 2019 10 609 - - 10 609 Net book value at 31 December 2019 164 375 30 291 87 194 753 Net book value at 31 December 2018 106 061 27 781 1 889 135 731 (a) Includes Euro 10 053 thousand of fixed assets (real estate and equipment) and Euro 3 109 thousand of accumulated amortizations related to discontinued branches which were transferred by the net amount to the appropriate balance sheet items.(b) Includes Euro 764 thousand of fixed assets (real estate and equipment) and Euro 284 thousand of accumulated amortizations related to discontinued branches which were transferred by the net amount to the appropriate balance sheet items. NOTE 24 – INTANGIBLE ASSETS This caption as at 31 December 2019 and 2018 is analysed as follows: The caption Intangible assets developed internally includes costs incurred by the Bank units specialised in the development and implementation of software applications that will generate economic benefits in the future (see Note 2.12). The changes in this caption were as follows: NOTE 25 – INCOME TAXES NOVO BANCO is subject to taxation in accordance with the Corporate Income Tax (IRC) Code. As a result, deferred taxes are recorded depending on the temporary differences between accounting and tax income relevant for IRC purposes, whenever such temporary differences are to be reverted in the future. The income taxes correspond to the value of taxable income (if applicable) of the period, using the overall Corporate Income Tax rate in force at the balance sheet date (21%) and autonomous taxation. NOVO BANCO | 2019 ANNUAL REPORT | 325 (in thousands of Euros)31.12.201931.12.2018Internally developedSoftware - Automatic data processing system 65 270 68 575 Acquired from third partiesSoftware - Automatic data processing system 364 062 360 612 429 332 429 187 Work in progress 17 446 2 618 446 778 431 805 Accumulated amortization( 420 735)( 427 024) 26 043 4 781 (in thousands of Euros)Automatic data processing systemWork in progressTotalAcquisition costBalance as at 31 December 2017 465 762 1 921 467 683 AcquisitionsInternally developed- 1 446 1 446 Acquired from third parties 1 457 3 745 5 202 Disposals / write-offs( 37 829)- ( 37 829)Transfers (a)- ( 4 494)( 4 494)Foreign exchange differences and other( 203)- ( 203)Balance as at 31 December 2018 429 187 2 618 431 805 AcquisitionsAcquired from third parties 3 137 23 000 26 137 Disposals / write-offs( 7 460)- ( 7 460)Transfers 4 467 ( 8 172)( 3 705)Foreign exchange differences and other 1 - 1 Balance as at 31 December 2019 429 332 17 446 446 778 AmortizationsBalance as at 31 December 2017 459 823 - 459 823 Amortization for the period 5 073 - 5 073 Disposals / write-offs( 37 829)- ( 37 829)Foreign exchange differences and other( 43)- ( 43)Balance as at 31 December 2018 427 024 - 427 024 Amortization for the period 1 171 - 1 171 Disposals / write-offs( 7 460)- ( 7 460)Balance as at 31 December 2019 420 735 - 420 735 Net balance at 31 December 2019 8 597 17 446 26 043 Net balance at 31 December 2018 2 163 2 618 4 781 (a) Relates to discontinued investment projects that were allocated to costs. Corporate income taxes (current or deferred) are recognized in the income statement for the year, except when the underlying transactions or items to which they are related have been reflected under other equity captions (e.g. revaluation of financial assets at fair value through other comprehensive income). In these situations, the corresponding tax is also charged to equity, not affecting the net profit / (loss) for the year. Deferred taxes are calculated based on the anticipated tax rates to be effective at the date of reversal of temporary differences, which correspond to rates approved or substantially approved at the balance sheet date. Thus, at 31 December 2019 the deferred tax related to temporary differences was determined based on an aggregate rate of 31%, resulting from the sum of the general IRC rate (21%), the Municipal Surcharge of 1.5% and an average rate of State Surcharge of 8.5%. On 4th September 2019, Law No. 98/2019 was published, which amended the IRC Code on the tax treatment of credit institutions' impairments, creating rules applicable to impairment losses recorded in the tax periods beginning before 1st January 2019, not yet accepted for tax purposes. This Law established a transition period for the aforementioned tax regime, which allows taxpayers in the five tax periods beginning on or after January 1, 2019, to continue to apply the tax regime in force before publication of this law, except if they perform the exercise of opt in until the end of October of each tax period of the adaptation regime. Thus, on December 31, 2019, the Bank continued to apply Regulatory Decree nº 13/2018, of December 28, which aims to extend, for tax purposes, the tax framework resulting from Notice Noº 3/95 of Bank of Portugal. The IRC payment declarations are subject to inspection and possible adjustment by the Tax Authorities for a period of four years or during the period in which it is possible to deduct tax losses or tax credits (up to a maximum of twelve years, depending on the year of determination). Thus, possible additional tax assessments may take place due essentially to different interpretations of tax legislation. However, Management believes that, in the context of the separate financial statements, there will be no additional charges of significant value. In 2019 and 2018, NOVO BANCO recorded deferred tax assets associated with impairments not accepted for tax purposes for credit operations, which have already been written off, considering the expectation that these will contribute to a taxable profit in the periods taxation in which the conditions required for tax deductibility are met. Pursuant to Law No. 55-A/2010, of 31 December, a Bank Levy was established, which is levied on the average annual liabilities recorded on the balance sheet net of own funds and of deposits covered by the guarantee of the Deposit Guarantee Fund and on the notional amount of derivative financial instruments. The Bank Levy is not eligible as a tax cost, and the respective regime has been extended. As at 31 December 2019, NOVO BANCO recognised Banking Levy charges as a cost in the amount of Euro 26 647 thousand (31 December 2018: Euro 26 800 thousand). The cost recognised as at 31 December 2019 has been calculated and paid based on the maximum rate of 0.110% levied on the average annual liabilities recorded on the balance sheet, net of own funds and deposits covered by the guarantee of the Deposit Guarantee Fund, approved by Law No. 7-A/2016, of 30 March and by Ordinance No. 165-A/2016, of 14 June. NOVO BANCO | 2019 ANNUAL REPORT | 326 The deferred tax assets and liabilities recognized in the balance sheet as at 31 December 2019 and 2018 may be analysed as follows: The deferred tax assets and liabilities recognized in the balance sheet in this period are as follows: The changes occurred in the deferred tax captions are as follows: The current and deferred taxes recognised in the income statement and in reserves, in 2019 and 2018, had the following origins: NOVO BANCO | 2019 ANNUAL REPORT | 327 (in thousands of Euros)AssetsLiabilitiesAssetsLiabilitiesCurrent tax 680 9 239 3 209 9 112 Corporate tax recoverable- 5 278 - 4 547 Other 680 3 961 3 209 4 565 Deferred tax 892 033 - 1 179 272 - 892 713 9 239 1 182 481 9 112 31.12.201931.12.2018(in thousands of Euros)AssetsLiabilitiesNet31.12.201931.12.201831.12.201931.12.201831.12.201931.12.2018Financial instruments 54 200 57 152 ( 134 654)( 30 702)( 80 454) 26 450 Impairment losses on loans and advances to customers 903 759 903 769 - - 903 759 903 769 Other tangible assets- - ( 8 377)( 8 552)( 8 377)( 8 552)Provisions 48 375 81 583 - - 48 375 81 583 Pensions 26 938 37 189 - - 26 938 37 189 Other 1 792 803 - - 1 792 803 Tax losses carried forward- 138 030 - - - 138 030 Deferred tax asset / (liability)1 035 064 1 218 526 ( 143 031)( 39 254) 892 033 1 179 272 Asset / liability set-off for deferred tax purposes ( 143 031)( 39 254) 143 031 39 254 - - Net Deferred tax asset / (liability) 892 033 1 179 272 - - 892 033 1 179 272 (in thousands of Euros)31.12.201931.12.2018Balance at the beginning of the exercise1 179 272 1 947 425 Recognised in Results for the exercise( 36 185)( 657 882)Recognised in Fair value reserves( 105 153) 68 744 Impact of the transition to IFRS 9 (in other reserves) -( 48 570)Conversion of Deferred taxes into Tax credits( 145 899)( 152 478)Foreign exchange differences and other( 2) 22 033 Balance at the end of the exercise (Assets / (Liabilities)) 892 033 1 179 272 (in thousands of Euros)Recognised in the income statementRecognised in reservesRecognised in the income statementRecognised in reservesFinancial instruments 1 751 105 153 53 888 ( 68 744)Impairment losses on loans and advances to customers( 136 523)- 382 091 - Other tangible assets( 175)- ( 183)- Investments in subsidiaries and associated companies- - ( 1 058)- Provisions 33 208 - ( 9 713)- Pensions 885 - ( 17 773)- Other( 991)- ( 370)- Tax losses carried forward 138 030 - 251 000 - Deferred taxes 36 185 105 153 657 882 ( 68 744)Current taxes 2 541 - 2 714 - Total tax recognised (income) / (expense) 38 726 105 153 660 596 ( 68 744)31.12.201931.12.2018 The reconciliation of the corporate income tax rate, for the portion recognised in the income statement, may be analysed as follows: Deferred tax assets are recognised to the extent it is probable that taxable profits will be available allowing for the utilization of the deductible temporary differences. The Bank has evaluated the recoverability of the deferred tax assets considering its expectations of future taxable profits until 2028. The recoverable deferred tax assets covered by the Special Regime applicable to Deferred Tax Assets is not dependent on the generation of future taxable income. As at 31 December 2019, 2019 NOVO BANCO has not recorded deferred tax assets associated with tax losses (31 December 2018: Euro 138 030 thousand). The assessment of the recoverability of the deferred tax assets is made annually. With reference to 31 December 2019, exercise was made based on the business plan for the period 2019-2022. This evaluation led the Bank to the annulment of deferred tax assets generated by tax losses recognized in previous years in the amount during the last quarter of 2019. The reduction in the Bank capacity to recover the deferred tax assets generated from tax liabilities, which was the reason for the abovementioned write down at the end of 2019, when compared to the amount estimated by the Executive Board of Directors at the end of 2018, is due, with the commitments between the Portuguese State and Directorate-General for Competition of the European Commission (“DGCOMP”), reviewed upon the partial sale of NOVO BANCO concluded by the end of October 2017 and formally announced to the Bank in December 2017, and due to a higher level of conservatism on the Portuguese macroeconomic projections for the medium and long term, bearing in mind the challenges and difficulties faced by NOVO BANCO, as well as the current expectations for the reference rates in the medium term, in particular after the measures announced by the ECB in the summer of 2019. The plan incorporates also a greater focus on reducing non-performing assets, reflecting the requirements and commitments the Bank faces in the regulatory framework of the European Union, something that also contribute to this less favourable evolution when compared with the previous plan. In the evaluation of the expectation of future taxable income generation in Portugal for the purposes of the above recovery exercise, the following assumptions were also considered: - Growth of pre-tax income at a rate of 2.62% from 2022; NOVO BANCO | 2019 ANNUAL REPORT | 328 (in thousands of Euros)Income before tax (a)(1 048 858)( 772 277)Tax rate of NOVO BANCOTax rate of NOVO BANCO21.021.0Income tax calculated based on the tax rate of NOVO BANCO( 220 260)( 162 178)Tax-exempt dividendsImpairment on investments in subsidiaries or associated companies not subject to Participation Exemption0.2( 1 759)0.3( 2 106)Costs not accepted for tax purposes(2.2) 22 788 (2.5) 19 463 Profits / losses in units with a more favorable tax regime(0.3) 3 391 (0.7) 5 580 Taxes of Bank Branches and tax withheld abroad(3.7) 38 344 (4.2) 32 364 Annulment of tax losses carried forward(13.2) 138 030 (32.5) 251 000 Impairments for stocks21.5( 225 299)(32.9) 254 374 Provisions for other risks, costs and contingencies - -(3.2) 24 935 Annulment of tax losses carried forward(0.1) 922 (3.2) 24 491 Share of profits / (losses) of associated companies0.6( 6 264)0.6( 4 849)Deferred tax assets not recognized under tax losses for the exercise(24.2) 254 300 (27.2) 209 708 Other(3.3) 34 533 (1.0) 7 814 Total tax recognized(3.7) 38 726 (85.5) 660 596 (a) Includes the profit / (loss) of discontinued units31.12.201831.12.2019%Valor%Valor - Significantly unfavourable evolution of net interest income in relation to the projections presented in the previous Medium-term Plan (PMP), especially due to the effect of the reduction in interest rate benchmarks, according to the current macroeconomic estimates; - Reduction of operating costs, reflecting the favourable effect of the decreases in the number of employees and branches and, generally, of the simplification and increased process efficiency; and - Increase in credit impairment in line with the evolution of the Bank activity and based on the macroeconomic projections, especially bearing in mind the significant effort made in the last years in the provisioning of the loan portfolio. Special Regime applicable to Deferred Tax Assets During 2014, NOVO BANCO adhered to the Special Regime applicable to deferred tax assets, after a favourable decision of the Shareholders General Meeting. The Special Regime applicable to Deferred Tax Assets approved by Law No. 61/2014, of 26 August, covers deferred tax assets resulting from non-deduction of expenses and negative equity changes related to impairment losses on credit and with post-employment or long-term employee benefits. The changes to the mentioned above regime, introduced by Law No. 23/2016, of August 19, limited the temporal application of the above mentioned negative expenses and equity variations, accounted for in the tax periods beginning on or after 1January 2016, as well as the associated deferred taxes. Thus, the deferred taxes covered by this special regime correspond only to expenses and negative equity variations calculated up to 31 December 2015. Deferred tax assets covered by the above mentioned regime are convertible into tax credits when the taxpayer records a negative net result in the respective tax period, or in case of liquidation by voluntary dissolution or insolvency decreed by court decision. To convert to a tax credit (other than by liquidation or insolvency), a special reserve should be created for the amount of the respective tax credit increased by 10%. The exercise of conversion rights results in the capital increase of the taxable person by incorporation of the special reserve and issuance of new common shares. This special reserve may not be distributed. Deferred tax assets recorded by NOVO BANCO and considered eligible the special regime at 31 December 2019 and 2018, are as follows: Following the determination of a negative net income for the years between 2015 and 2018, the deferred tax assets converted or estimated to be converted by reference to the deferred tax assets eligible at the balance sheet date are as follows: As a result of Law No. 61/2014, the amount of deferred tax assets to be converted into a tax credit and the constitution of the special reserve shall be subject to certification by a statutory auditor, as well as to NOVO BANCO | 2019 ANNUAL REPORT | 329 (in thousands of Euros)31.12.201931.12.2018Credit impairment 516 072 598 058 Employees' benefits - 9 366 516 072 607 424 (in thousands of Euros)2018201720162015Tax credit 161 974 136 403 99 474 153 555 confirmation by the Tax and Customs Authority, within the scope of the review procedures for the assessment of the taxable income for the relevant tax periods. NOTE 26 – OTHER ASSETS As at 31 December 2019 and 2018, the caption Other assets is analysed as follows: The caption Other debtors includes, amongst others: - Euro 111.6 million of shareholder loans and supplementary capital contributions resulting from the assignment of loans and advances which are entirely provisioned (31 December 2018: Euro 112.8 million, entirely provisioned), and - Euro 237.3 million receivable in relation to the sale operation of non-performing loans (Project NATA I: Euro 126.5 million and NATA II: Euro 110.8 million) (31 December 2018: Euro 392.4 million in relation to NATA I) (see Note 39); - Euro 21.0 million receivable in relation to the sale operation of real estate assets in 2019 (denominated “Sertorius Project”); and - Euro 12.4 million receivable in relation to the sale operation of real estate assets and non-performing loans in the Spanish Branch in 2019 (denominated “Albatros Project”). As at 31 December 2019, the caption Deferred costs includes the amount of Euro 43 372 thousand (31 December 2018: Euro 46 826 thousand) related to the difference between the nominal amount of the loans and advances granted to Bank employees under the Collective Labour Agreement (ACT) for the banking sector and their respective fair value at grant date, calculated in accordance with IFRS 9. This amount is charged to the income statement under staff costs over the lower of the remaining period to the maturity of the loan granted and the estimated remaining years of service life of the employee. The captions of Real estate properties and Equipment relate to foreclosed assets through the recovery of loans and advances and to discontinued facilities, for which the Bank has the objective of immediate sale. NOVO BANCO | 2019 ANNUAL REPORT | 330 (in thousands of Euros)31.12.201931.12.2018Collateral deposits placed 807 810 680 685 Derivative products 631 994 468 442 Collateral CLEARNET and VISA 33 175 33 350 Collateral deposits relating to reinsurance operations 141 697 167 967 Other collateral deposits 944 10 926 Recoverable government subsidies on mortgage loans 4 441 1 270 Public sector 437 249 304 746 Contingent Capital Agreement1 037 013 1 149 295 Other debtors 730 419 889 214 Income receivable 31 061 21 362 Deferred costs 55 317 61 454 Precious metals, numismatics, medal collection and other liquid assets 9 510 9 339 Real estate properties a) 562 532 974 179 Equipment a) 3 130 22 157 Stock exchange transactions pending settlement - 2 010 Other assets 135 150 184 008 3 813 632 4 299 719 Impairment lossesReal estate properties a)( 267 656)( 313 195)Equipment a)( 2 404)( 19 479)Other debtors - Shareholder loans, supplementary capital contributions( 111 051)( 118 662)Other( 98 935)( 102 611)( 480 046)( 553 947)3 333 586 3 745 772 a) Real estate properties and equipment received in settlement of loans and discontinued The Bank implemented a plan aimed at the immediate sale of all real estate property recorded in Other assets, continuing its efforts to meet the sales program established, of which we highlight the following (i) the existence of a web site specifically aimed at the sale of real estate properties; (ii) the development and participation in real estate events both in Portugal and abroad; (iii) the establishment of protocols with several real estate agents; and (iv) the regular sponsorship of auctions. Despite its intention to sell these assets, the Bank regularly requests the Bank of Portugal’s authorization, under article 114 of RGICSF, to extend the period the Bank has to hold foreclosed assets. Stock exchange transactions pending settlement refer to transactions of securities, recorded at the trade date and pending settlement, in accordance with the accounting policy described in Note 2.4. In the financial year of 2019, the Bank recorded impacts related to the sale of a portfolio of real estate assets (Project Sertorius) and to a sale of a portfolio of non-performing loans and real estate assets (Project Albatros). During 2018, the Bank entered into a promissory contract to buy and sell a portfolio of real estate assets, called Project Viriato. The details of these operations can be found in Note 39. The caption Collateral deposits placed includes, amongst others, deposits made by the Bank as collateral in order to celebrate certain derivative contracts on organized markets (margin accounts) and on over the counter markets (Credit Support Annex – CSA). The changes occurred in impairment losses are presented as follows: The changes occurred in the real estate properties were as follows: NOVO BANCO | 2019 ANNUAL REPORT | 331 (in thousands of Euros)31.12.201931.12.2018Balance at the beginning of the exercise 553 947 527 185 Allocation for the exercise 263 227 233 350 Utilisation during the exercise( 318 985)( 193 740)Write-back for the exercise( 20 578)( 20 244)Foreign exchange differences and other 2 435 7 396 Balance at the end of the exercise 480 046 553 947 (in thousands of Euros)31.12.201931.12.2018Balance at the beginning of the exercise 974 179 1 284 259 Additions 85 678 176 313 Sales( 497 263)( 486 393)Other movements( 62)- Balance at the end of the exercise 562 532 974 179 As at 31 December 2019 and 2018, the detail of the real estate properties included in Other assets, by type, is as follows: The detail of the real estate properties included in Other assets, by ageing, is as follows: NOVO BANCO | 2019 ANNUAL REPORT | 332 (in thousands of Euros)Number of propertiesGross value ImpairmentNet book valueFair value of assets (a)LandUrban 315 52 309 24 496 27 813 94 931 Rural 225 190 678 127 859 62 819 63 771 540 242 987 152 355 90 632 158 702 Buildings under constructionCommercial 2 36 4 32 59 Residential 2 271 187 84 646 Other 1 1 577 752 825 825 5 1 884 943 941 1 530 Buildings constructedCommercial 335 58 269 28 282 29 987 39 554 Residential 2 081 169 596 47 733 121 863 144 225 Other 227 83 289 36 109 47 180 50 769 2 643 311 154 112 124 199 030 234 548 Other 5 6 507 2 234 4 273 4 273 3 193 562 532 267 656 294 876 399 053 (a) Determined in accordance with accounting policy mentioned in Note 2.1131.12.2019(in thousands of Euros)Number of propertiesGross value ImpairmentNet book valueFair value of assets (b)LandUrban 839 147 732 47 191 100 541 107 588 Rural 350 254 157 118 067 136 090 139 555 1 189 401 889 165 258 236 631 247 143 Buildings under constructionCommercial 3 115 14 101 127 Residential 3 756 110 646 844 Other 1 1 577 410 1 167 1 168 7 2 448 534 1 914 2 139 Buildings constructedCommercial 621 110 645 34 723 75 922 92 124 Residential 2 842 284 049 53 389 230 660 253 213 Other 359 172 432 45 995 126 437 140 785 3 822 567 126 134 107 433 019 486 122 Other (a) 24 2 716 13 296 ( 10 580)( 9 473) 5 042 974 179 313 195 660 984 725 931 (a) The net book value of this caption is negative due to the imputation of costs incurred with the sale of real estate properties(b) Determined in accordance with accounting policy mentioned in Note 2.1131.12.2018(in thousands of Euros)Up to 1 year1 to 2.5 years2.5 to 5 yearsMore than 5 yearsTotal net book valueLandUrban 2 225 3 272 11 890 10 426 27 813 Rural 7 698 13 459 1 977 39 685 62 819 9 923 16 731 13 867 50 111 90 632 Buildings under constructionCommercial- - 29 3 32 Residential 68 - - 16 84 Other- - 825 - 825 68 - 854 19 941 Buildings constructedCommercial( 3 231) 5 484 9 659 18 075 29 987 Residential 7 587 31 735 31 132 51 409 121 863 Other 8 887 10 332 10 364 17 597 47 180 13 243 47 551 51 155 87 081 199 030 Other 4 273 - - - 4 273 27 507 64 282 65 876 137 211 294 876 31.12.2019 As at 31 December 2019, the amount related to discontinued facilities included in the caption Real estate properties amounts to Euro 16 569 thousand (31 December 2018: Euro 22 355 thousand), having the Bank recorded impairment losses for these assets in the total amount of Euro 8 079 thousand (31 December 2018: Euro 9 433 thousand). NOTE 27 – NON-CURRENT ASSETS AND DISPOSAL GROUPS FOR SALE CLASSIFIED AS HELD FOR SALE This caption as at 31 December 2019 and 2018 is analysed as follows: Other non-current assets held for sale include shareholdings and respective shareholder loans, which were reclassified to this caption under IFRS 5. As at 31 December 2019 and 2018, the results from discontinued operations is as follows: NOVO BANCO | 2019 ANNUAL REPORT | 333 (in thousands of Euros)Up to 1 year1 to 2.5 years2.5 to 5 yearsMore than 5 yearsTotal net book valueLandUrban 23 227 18 239 18 300 40 775 100 541 Rural 13 594 24 592 34 456 63 448 136 090 36 821 42 831 52 756 104 223 236 631 Buildings under constructionCommercial- - 98 3 101 Residential- 53 109 484 646 Other- - 1 167 - 1 167 - 53 1 374 487 1 914 Buildings constructedCommercial 5 471 20 809 20 227 29 415 75 922 Residential 42 732 76 130 54 846 56 952 230 660 Other 22 997 22 411 35 780 45 249 126 437 71 200 119 350 110 853 131 616 433 019 Other (a)( 10 515)- - ( 65)( 10 580) 97 506 162 234 164 983 236 261 660 984 (a) The net book value of this caption is negative due to the imputation of costs incurred with the sale of real estate properties31.12.2018(in thousands of Euros)Assets of discontinued operationsGNB Vida- 620 472 Banco Well Link (former NB Ásia) 4 121 4 013 Banco Delle Tre Venezie 8 926 8 926 ESEGUR 9 634 - GNB - Companhia de Seguros, S.A. 3 749 - Other 3 619 1 470 30 049 634 881 Impairment lossesGNB Vida- ( 445 472)Banco Delle Tre Venezie( 6 626)( 2 901)Other( 2 150)- ( 8 776)( 448 373) 21 273 186 508 31.12.201931.12.2018(in thousands of Euros)31.12.201931.12.2018Balance at the beginning of the exercise 634 881 714 011 Transfers 15 532 ( 9 567)Sales( 620 472)( 68 791)Other movements 108 ( 772)Balance at the end of the exercise 30 049 634 881 During 2019, the Bank completed the sale of the GNB Vida (see Note 39). The impairment movement for non-current Assets for disposal classified as held for sale is as follow: NOTE 28 – FINANCIAL LIABILITIES MEASURED AT AMORTISED COST This caption as at 31 December 2019 and 2018 is analysed as follows: Deposits from banks The balance of Deposits banks is composed, as to its nature, as follows: As at 31 December 2019, the caption Other funds from the European System of Central Banks includes Euro 6 087 million, covered by Bank financial assets pledged as collateral (31 December 2018: Euro 6 410 million) (see Note 33). The balance of the caption Repurchase agreements operations corresponds to the sale of securities with purchasing agreement (repos), recorded in accordance with the accounting policy mentioned in Note 2.5. NOVO BANCO | 2019 ANNUAL REPORT | 334 (in thousands of Euros)Balance at the beginning of the exercise 448 373 468 194 Allocation / (reversals) for the exercise 55 775 23 354 Utilizations( 497 472)( 36 292)Transfers- ( 6 883)Exchange differences and other 2 100 - Balance at the end of the exercise 8 776 448 373 31.12.201831.12.2019(in tousands of Euros)Deposits from banks 10 542 549 9 119 139 Due to customers 27 980 577 28 439 075 Debt securities issued, subordinated debt and liabilities associated to transferred assets 1 044 445 1 135 128 Other financial liabilities 356 993 232 263 39 924 564 38 925 605 31.12.201931.12.2018(in thousands of Euros)31.12.201931.12.2018Deposits from Central BanksFrom the European System of Central BanksDeposits 36 176 461 Other funds 6 087 000 6 410 000 6 123 176 6 410 461 Deposits from credit institutionsDomesticDeposits 681 478 650 958 Other funds 12 674 41 882 694 152 692 840 ForeignDeposits 914 414 1 075 011 Loans 634 557 660 338 Operations with repurchase agreements 2 168 488 237 178 Other resources 7 762 43 311 3 725 221 2 015 838 4 419 373 2 708 678 10 542 549 9 119 139 * See Note 21 As at 31 December 2019 and 2018, the analysis of Deposits from banks, by maturity, is as follows: The analysis of Repurchase agreements operations, by residual maturity, is as follows: Due to customers The balance of Deposits due to costumers is composed, as follows: As at 31 December 2019 and 2018, the caption Due to customers, by residual maturity periods, is as follows: NOVO BANCO | 2019 ANNUAL REPORT | 335 (in thousands of Euros)31.12.201931.12.2018InternationalFrom 3 months to 1 year 1 306 243 237 178 From 1 to 5 years 862 245 - 2 168 488 237 178 (in thousands of Euros)31.12.201931.12.2018Repayable on demand 11 877 766 10 942 957 Term depositsUp to 3 months 7 204 511 7 614 228 3 months to 1 year 5 866 566 6 765 875 1 to 5 years 2 572 125 2 646 596 More than 5 years 459 609 469 419 16 102 811 17 496 118 27 980 577 28 439 075 Debt Securities issued, subordinated debt and financial liabilities associated to transferred assets This caption has the following breakdown: Under the Covered Bonds Program (Programa de Emissão de Obrigações Hipotecárias), which has a maximum amount of Euro 10 000 million, the Bank issued covered bonds which, on 31 December 2019, amount to Euro 5 500 million (31 December 2018: Euro 4 200 million) being these covered bonds totally repurchased by the Bank. The main characteristics of the outstanding issues as at 31 December 2019 and 2018 are as follows: These covered bonds are guaranteed by a cover asset pool, comprising mortgage and other assets, segregated in NOVO BANCO Group’s accounts as autonomous patrimony and over which the holders of the relevant covered debt securities have a special creditor privilege. The conditions of the covered debt securities issues are framed in Decree-Law No. 59/2006, and in Notices No. 5, 6, 7 and 8 and Instruction No. 13 of Bank of Portugal. As at 31 December 2019, the assets that collateralize these covered debt securities amount to Euro 6 076.8 million (31 December 2018: Euro 4 617.4 million) (see Note 20). NOVO BANCO | 2019 ANNUAL REPORT | 336 (in thousands of Euros)31.12.201931.12.2018Debt securities issuedEuro Medium Term Notes (EMTN) 495 989 477 787 Subordinated debtBonds 415 069 414 903 Financial liabilities associated to transferred assetsAsset lending operations 133 387 242 438 1 044 445 1 135 128 (in thousands of Euros)Moody'sDBRSNB 2015 SR.1 1 000 000 - 07/10/201507/10/2021QuarterlyEuribor 3 Months + 0.25%XDUBA2ANB 2015 SR.2 1 000 000 - 07/10/201507/10/2019QuarterlyEuribor 3 Months + 0.25%XDUBA2ANB 2015 SR.3 1 000 000 - 07/10/201507/10/2020QuarterlyEuribor 3 Months + 0.25%XDUBA2ANB 2015 SR.4 700 000 - 07/10/201507/10/2022QuarterlyEuribor 3 Months + 0.25%XDUBA2ANB 2015 SR.5 500 000 - 22/12/201622/12/2023QuarterlyEuribor 3 Months + 0.25%XDUBA2ANB 2019 SR.6 750 000 - 10/12/201910/06/2023QuarterlyEuribor 3 Months + 0.25%XDUBA2ANB 2019 SR.7 550 000 - 10/12/201910/12/2024QuarterlyEuribor 3 Months + 0.25%XDUBA2A 5 500 000 - (in thousands of Euros)Moody'sDBRSNB 2015 SR.1 1 000 000 - 07/10/201507/10/2021QuarterlyEuribor 3 Months + 0.25%XDUBA3ANB 2015 SR.2 1 000 000 - 07/10/201507/10/2019QuarterlyEuribor 3 Months + 0.25%XDUBA3ANB 2015 SR.3 1 000 000 - 07/10/201507/10/2020QuarterlyEuribor 3 Months + 0.25%XDUBA3ANB 2015 SR.4 700 000 - 07/10/201507/10/2022QuarterlyEuribor 3 Months + 0.25%XDUBA3ANB 2015 SR.5 500 000 - 22/12/201622/12/2023QuarterlyEuribor 3 Months + 0.25%XDUBA3A 4 200 000 - 31.12.2019DesignationNominal value (in thousands of Euros)Carrying book value (in thousands of Euros)Issue dateMaturity dateInterest paymentInterest RateMarketRatingDesignationNominal value (in thousands of Euros)Carrying book value (in thousands of Euros)Issue dateMaturity dateInterest paymentInterest RateMarketRating31.12.2018 The changes in the financial years of 2019 and 2018 in Debt securities issued, subordinated debt and financial liabilities associated to transferred assets was as follows: On 29 June 2018, NOVO BANCO issued Euro 400 million of instruments of subordinated liabilities. This issuance was carried out jointly with tender and exchange offers addressed to holders of senior bonds of NOVO BANCO, having been prioritized the allocation of the new Tier 2 issuance to the investors participating in the exchange offer (65%), against the allocation to new investors (35%). The tender and exchange offers allowed the extinction of a balance sheet value of Euro 250.7 million of senior bonds. In accordance with the accounting policy mentioned in the Note 2.6, in case of purchases of securities representatives of the Bank’s liabilities, these securities are written off from liabilities and the difference between the purchase price and the respective book value is recognised in the income statement. Following the debt exchange operation addressed to holders of senior bonds of NOVO BANCO by subordinated liabilities (LME) and purchases made, the Bank recognized, in the first half of 2018, a net loss of Euro 86.2 million from which Euro 81.8 million are related to operations of debt exchange by subordinated liabilities. During the financial year of 2019 the Bank recognised a gain of Euro 0.5 million. As at 31 December 2019 and 2018, the analysis of Debt securities issued and subordinated debt, by maturity, is as follows: NOVO BANCO | 2019 ANNUAL REPORT | 337 (in thousands of Euros)Balance as at 31.12.2018IssuesRedemptions b)LMENet purchasesOther movements a)Balance as at 31.12.2019Debt securities issuedEuro Medium Term Notes (EMTN) 477 787 - - - - ( 11 247) 495 989 Covered bonds c)- 1 300 000 - (1 300 000)- - 477 787 1 300 000 - - (1 300 000)( 11 247) 495 989 Subordinated debtBonds 414 903 - - - - ( 14 159) 415 069 Financial liabilities associated to transferred assetsAsset lending operations 242 438 - ( 107 660)- - ( 1 391) 133 387 1 135 128 1 300 000 ( 107 660)- (1 300 000)( 26 797)1 044 445 a) Other movements include accrued interest on the balance sheet, corrections for hedging operations, corrections of fair value and exchange rate variations.b) During the year of 2019, all classes B and C issued by Lusitano SME nº 3 and 12.6 thousand euros of class D were repaid in advance.c) During the financial year 2019, two covered bonds were issued in the amount of 750 million euros and 550 million euros.(in thousands of Euros)Balance as at 31.12.2017IssuesRedemptions b)LMENet purchasesOther movements a)Balance as at 31.12.2018Debt securities issuedEuro Medium Term Notes (EMTN) 617 861 - - ( 157 068)( 8 602) 25 596 477 787 Subordinated debtBonds- 141 200 - 258 800 - 14 903 414 903 Financial liabilities associated to transferred assetsAsset lending operations 447 548 - ( 199 968)- - ( 5 142) 242 438 1 065 409 141 200 ( 199 968) 101 732 ( 8 602) 40 499 1 135 128 a) Other movements include accrued interest, corrections for hedging operations, corrections of fair value and exchange rate changes.b) Throughout 2018 the totality of Class A of Lusitano SME No. 3 emission was reimbursed in advance.(in thousands of Euros)Debt securities issuedMore than 5 years 495 989 477 787 495 989 477 787 Subordinated debt1 to 5 years 415 069 414 903 415 069 414 903 Financial liabilities associated to transferred assetsMore than 5 years 88 937 197 987 Undertimined maturity 44 450 44 451 133 387 242 438 1 044 445 1 135 128 31.12.201931.12.2018 The main characteristics of these liabilities, as at 31 December 2019 and 2018, are as follows: The Bank did not present any capital or interest defaults regarding debt issued during the 2019 and 2018. The securitization operations not derecognized above, implied the registration of financial liabilities associated with transferred assets, which are detailed as follows: NOVO BANCO | 2019 ANNUAL REPORT | 338 (in thousands of Euros)EntityDescriptionCurrencyIssue dateCarrying Book valueMaturityInterest rateMarketEuro Medium Term NotesNB (Sucursal Luxemburgo)BES Luxembourg 3.5% 02/01/43EUR2013 41 798 2043Fixed Rate 3.5%XLUXNB (Sucursal Luxemburgo)BES Luxembourg 3.5% 23/01/43EUR2013 96 270 2043Fixed Rate 3.5%XLUXNB (Sucursal Luxemburgo)BES Luxembourg 3.5% 19/02/2043EUR2013 62 461 2043Fixed Rate 3.5%XLUXNB (Sucursal Luxemburgo)BES Luxembourg 3.5% 18/03/2043EUR2013 46 011 2043Fixed Rate 3.5%XLUXNB (Sucursal Luxemburgo)BES Luxembourg ZCEUR2013 34 344 2048Zero cupponXLUXNB (Sucursal Luxemburgo)Banco Esp San Lux ZC 12/02/49EUR2014 42 861 2049Zero cupponXLUXNB (Sucursal Luxemburgo)Banco Esp San Lux ZC 19/02/49EUR2014 37 674 2049Zero cupponXLUXNB (Sucursal Luxemburgo)Banco Esp San Lux ZC 27/02/51EUR2014 32 615 2051Zero cupponXLUXNB (Sucursal Luxemburgo)BES Luxembourg ZC 06/03/2051EUR2014 14 236 2051Zero cupponXLUXNB (Sucursal Luxemburgo)BES Luxembourg ZC 03/04/48EUR2014 40 699 2048Zero cupponXLUXNB (Sucursal Luxemburgo)BES Luxembourg ZC 09/04/52EUR2014 36 317 2052Zero cupponXLUXNB (Sucursal Luxemburgo)BES Luxembourg ZC 16/04/46EUR2014 10 703 2046Zero cupponXLUXSubordinated debtNOVO BANCONB 06/07/2028EUR2018 415 069 2023a)8.5%XDUB 911 058 a) Date of the next call option31.12.2019(in thousands of Euros)EntityDescriptionCurrencyIssue dateCarrying Book valueMaturityInterest rateMarketEuro Medium Term NotesNB (Sucursal Luxemburgo)BES Luxembourg 3.5% 02/01/43EUR2013 41 225 2043Fixed Rate 3.5%XLUXNB (Sucursal Luxemburgo)BES Luxembourg 3.5% 23/01/43EUR2013 95 411 2043Fixed Rate 3.5%XLUXNB (Sucursal Luxemburgo)BES Luxembourg 3.5% 19/02/2043EUR2013 61 704 2043Fixed Rate 3.5%XLUXNB (Sucursal Luxemburgo)BES Luxembourg 3.5% 18/03/2043EUR2013 45 447 2043Fixed Rate 3.5%XLUXNB (Sucursal Luxemburgo)BES Luxembourg ZCEUR2013 32 452 2048Zero cupponXLUXNB (Sucursal Luxemburgo)Banco Esp San Lux ZC 12/02/49EUR2014 40 223 2049Zero cupponXLUXNB (Sucursal Luxemburgo)Banco Esp San Lux ZC 19/02/49EUR2014 35 324 2049Zero cupponXLUXNB (Sucursal Luxemburgo)Banco Esp San Lux ZC 27/02/51EUR2014 30 550 2051Zero cupponXLUXNB (Sucursal Luxemburgo)BES Luxembourg ZC 06/03/2051EUR2014 13 329 2051Zero cupponXLUXNB (Sucursal Luxemburgo)BES Luxembourg ZC 03/04/48EUR2014 37 968 2048Zero cupponXLUXNB (Sucursal Luxemburgo)BES Luxembourg ZC 09/04/52EUR2014 34 169 2052Zero cupponXLUXNB (Sucursal Luxemburgo)BES Luxembourg ZC 16/04/46EUR2014 9 985 2046Zero cupponXLUXSubordinated debtNOVO BANCONB 06/07/2028EUR2018 414 903 2023a)8.5%XDUB 892 690 a) Date of the next call option31.12.2018(in thousands Euros)31.12.201931.12.2018Lusitano SME No. 3 88 937 197 987 FLITPTREL (1) 44 450 44 451 133 387 242 438 (1) asset transfer operation, with the Bank in the securities portfolio vehicle equity instruments NOTE 29 – PROVISIONS As at 31 December 2019 and 2018, the caption Provisions presents the following changes: The changes in the caption Provisions for guarantees, are detailed as follows: The changes in the caption Provisions for commitments are detailed as follows: At the end of 2015, the Board of Directors of NOVO BANCO presented to the European Commission a Restructuring Plan that was prepared in strict collaboration with Bank of Portugal and involved a set of measures, highlighting the concentration of the retail and corporate banking activities in Portugal and Spain, the divestment in non-strategic assets and the reduction, in 2016, of Euro 150 million in recurring operating costs (excluding restructuring costs) associated with a decrease of 1 000 employees and a resizing of the distribution network to 550 branches. In the scope of IAS 37, during 2016 a provision for this restructuring was created in the amount of Euro 94.5 million, to cover the facilities’ closure costs and the employee downsizing. The restructuring plan was executed during 2016, and in 31 December 2016 the employees reduction goal NOVO BANCO | 2019 ANNUAL REPORT | 339 (in thousands of Euros)Restructuring provisionProvision for guarantees and commitmentsCommercial OffersProgramme of antecipated repayment of liabilitiesOther provisionsTotalBalance as at 31 December 2017 91 992 146 184 105 100 - 70 720 413 996 Impact of transition to IFRS 9- 4 446 - - - 4 446 Balance as at 1 January 2018 91 992 150 630 105 100 - 70 720 418 442 Allocation / (write-backs) for the period( 21 086) 26 161 ( 2 222) 182 800 54 320 239 973 Utilization during the period( 61 125)- ( 29 902)( 143 935)( 12 022)( 246 984)Foreign exchange differences and other- 12 578 ( 99)- ( 27) 12 452 Balance as at 31 December 2018 9 781 189 369 72 877 38 865 112 991 423 883 Allocation / (write-backs) for the period 47 291 ( 60 467)( 1 366)( 1 172) 117 558 101 844 Utilization during the period( 33 052)- ( 29 937)( 37 694)( 21 567)( 122 250)Foreign exchange differences and other 24 ( 31 799)( 240) 1 281 ( 31 733)Balance as at 31 December 2019 24 044 97 103 41 334 - 209 263 371 744 (in thousands of Euros)Stage 1Stage 2Stage 3TotalBalance as at 31 December 2017 144 230 Impact of transition to IFRS 9 4 454 Balance as at 1 January 2018 14 131 7 905 126 648 148 684 Increases due to changes in credit risk 14 162 10 207 79 000 103 369 Decreases due to changes in credit risk( 2 056)( 11 852)( 63 649)( 77 557)Other movements 552 10 528 1 499 12 579 Balance as at 31 December 2018 26 789 16 788 143 498 187 075 New guarantees granted 307 6 724 37 959 44 990 Increases due to changes in credit risk( 2 191)( 7 701)( 96 350)( 106 242)Other movements( 21 330)( 1 750)( 8 720)( 31 800)Balance as at 31 December 2019 3 575 14 061 76 387 94 023 (in thousands of Euros)Stage 1Stage 2Stage 3TotalBalance as at 31 December 2017 1 954 Impact of transition to IFRS 9( 8)Balance as at 1 January 2018 1 380 566 - 1 946 Increases due to changes in credit risk 1 312 363 - 1 675 Decreases due to changes in credit risk( 722)( 603)( 1)( 1 326)Other movements( 100) 98 1 ( 1)Balance as at 31 December 2018 1 870 424 - 2 294 Increases due to changes in credit risk 504 918 210 1 632 Decreases due to changes in credit risk( 468)( 164)( 215)( 847)Other movements 29 ( 33) 5 1 Balance as at 31 December 2019 1 935 1 145 - 3 080 was met, and the distribution network was reduced as well as the operational costs recorded a surpassing decrease. As at 31 December 2019, the provision booked in the balance sheet amounted to Euro 0.8 million. The goals agreed with the European Commission for 30 June 2017, included a Euro 230 million reduction on recurring operational costs (excluding restructuring costs) when compared to 2015. This cost reduction is due to a re-sizing to 5 908 employees at the Group level and the distribution network to 475 branches. In IAS 37 scope, in 2017 a provision for this restructure was created, in the amount of Euro 52.0 million, making up for the costs of shutting down facilities and reducing headcount. This new phase of the restructuring plan was executed, and as at 30 June 2017, the goal of downsizing employees and the distribution network was met and the operational costs recorded a decrease bigger than the established goal. Under the sale process of NOVO BANCO, concluded in October 2017, additional commitments were made with the European Commission. As such, at the end of 2017 a restructuring provision was established in the amount of Euro 82.3 million in order to address the new objectives. This provision contemplates restructuring measures including the focus of the banking activity in Portugal and Spain and on the retail and corporate segments, the divestment of non-strategic assets, the reduction of the number of employees and the resizing of the distribution network. As at 31 December 2019, the book value of restructuring provisions constituted in 2017 amounted to Euro 2.8 million. During the financial year of 2019, in order to comply with the objective of reduction of employees assumed with the European Commission, and the cost and headcount budget defined for the year 2019, a new provision for restructuring amounting to Euro 57.1 million was set up. As at 31 December 2019, the carrying amount of this provision amounted to Euro 20.5 million. Provisions for commercial offers, in the amount of Euro 41.3 million (31 December 2018: Euro 72.9 million), are intended to cover costs resulting from commercial offers approved by the Board of Directors of NOVO BANCO, aimed at retail customers holding NOVO BANCO unsubordinated bonds. The Board of Directors considers the amount of this provision to be adequate based on the experience gained in the negotiations already completed and sales price expectations concerning the bonds and financial instruments subscribed by customers. During 2018, the Bank launched a program of early repayment of liabilities. In this regard, provisions of Euro 182.8 million were incorporated for the clients that adhered to this program, in return for a compensation for loss of capital revenue, from which were used approximately Euro 143.9 million still in 2018. During 2019, Euro 1.2 million were replaced and Euro 37.7 million were used, so the value of this provision at the end of the year was nil. Other provisions amounting to Euro 209.3 million (31 December 2018: Euro 113.0 million) are intended to cover certain duly identified contingencies related to the Bank activities, the most relevant being: - Contingencies associated with ongoing tax processes. To cover for these contingencies, the Bank maintains provisions of Euro 27.3 million (31 December 2018: Euro 14.5 million); - The remaining amount, of Euro 182.0 million (31 December 2018: Euro 98.5 million), is intended to cover for losses in connection to the Bank normal activities, such as, amongst others, fraud, theft and robbery, and ongoing legal lawsuits, among others Contingent liabilities are disclosed in Note 33. NOVO BANCO | 2019 ANNUAL REPORT | 340 NOTE 30 – OTHER LIABILITIES As at 31 December 2019 and 2018, the caption Other liabilities is analysed as follows: NOTE 31 – SHARE CAPITAL Ordinary shares In 2017 and following the acquisition of 75% of NOVO BANCO share capital by Lone Star, two capital increases in the amounts of Euro 750 million and Euro 250 million, in October and December, respectively, were realised. Thus, as at 31 December 2019 and 2018, the share capital of the Bank amounts to Euro 5 900 000 000, represented by 9 799 999 997 registered shares, with no nominal value, fully subscribed and realised by the following shareholders: As mentioned in Note 25, NOVO BANCO adhered to the Special Regime applicable to Deferred Tax Assets (DTA) approved by Law No. 61/2014, of 26 August. Said regime applies to deferred tax assets related to the non-deduction, for corporate income tax purposes, of costs and negative equity changes recorded up to 31 December 2015 for impairment losses on loans and advances to customers and with employee post- employment or long-term benefits. Said regime foresees that those assets can be converted into tax credits when the taxable entity reports an annual net loss. The conversion of the eligible deferred tax assets into tax credits was made according to the proportion of the amount of said net loss to total equity at the individual company level. A special reserve was established with an amount identical to the tax credit approved, increased by 10%. This special reserve was established using the originating reserve and is to be incorporated in the share capital. The conversion rights are securities that grant the State the right to demand of NOVO BANCO the respective share capital increase, through the incorporation of the amount of the special reserve and the consequent issue and delivery of ordinary shares at no cost. It is estimated that the conversion rights to be issued and allocated to the State following the net loss of years 2015 and 2018 will confer a shareholding of up to approximately 10.3% of the share capital of NOVO BANCO. NOVO BANCO | 2019 ANNUAL REPORT | 341 (in thousands of Euros)31.12.201931.12.2018Public sector 31 047 55 223 Creditors for supply of goods 88 315 25 818 Other creditors 70 197 75 298 Career bonuses (see Note 15) 6 981 6 376 Retirement pensions and health-care benefits (see Note 15) 152 280 26 715 Other accrued expenses 76 989 69 860 Deferred income 983 2 083 Foreign exchange transactions pending settlement 6 577 7 193 Other transactions pending settlement 38 257 74 601 471 626 343 167 31.12.201931.12.2018Nani Holdings, SGPS, SA75,00%75,00%Fundo de Resolução (1)25,00%25,00%100,00%100,00%% Share Capital(1) In view of the commitments assumed by the Portuguese Republic before the European Commisson, the Resolution Fund is inhibited from exercising its voting rights. NOTE 32 – ACCUMULATED OTHER COMPREHENSIVE INCOME, RETAINED EARNINGS, OTHER RESERVES As at 31 December 2019 and 2018, the accumulated other comprehensive income, retained earnings and other reserves present the following detail: Other accumulated comprehensive income The movements in Other accumulated comprehensive income were as follows: The accumulated variation of the credit risk reserves of financial liabilities at fair value through profit or loss is, at 31 December 2019, Euro -1 669 thousand (at 31 December 2018: Euro 1 202 thousand). Fair value reserve The fair value reserves represent the amount of the unrealised gains and losses arising from the securities portfolio classified as at a fair value through other comprehensive income, net of impairment losses. The amount of this reserve is shown net of deferred taxes and non-controlling interests. The changes occurred in the fair value reserves, net of deferred taxes and impairment losses may be analysed as follows: NOVO BANCO | 2019 ANNUAL REPORT | 342 (in thousands of Euros)31.12.201931.12.2018Other accumulated comprehensive income( 632 033)( 751 016)Retained earnings( 6 115 245)( 4 682 368)Other reserves 5 580 864 4 565 538 Originating reserve 2 098 187 2 234 440 Special reserve 606 547 470 295 Other reserves and Retained earnings 2 876 130 1 860 803 ( 1 166 414)( 867 846)(in thousands of Euros)Balance as at 31 December 2017- - - 135 104 - ( 407 417)( 272 313)Impact of IFRS 9 599 - - ( 385 707)- ( 385 108)Balance as at 1 January 2018 599 - - ( 250 603)- ( 407 417)( 657 421)Actuarial deviations- - - - - ( 69 951)( 69 951)Fair value changes, net of taxes- - - ( 21 892)- - ( 21 892)Foreign exchange differences- - - - ( 2 549)- ( 2 549)Changes in credit risk of financial liabilities at fair value, net of taxes- 1 202 - - - - 1 202 Impairment reserves of securities at fair value through other comprehensive income 605 - - - - - 605 Reserves of sales of securities at fair value through other comprehensive income- - ( 3 557)- - - ( 3 557)Other- - - - 2 549 ( 2) 2 547 Balance as at 31 December 2018 1 204 1 202 ( 3 557)( 272 495)- ( 477 370)( 751 016)Actuarial deviations- - - - - ( 106 026)( 106 026)Fair value changes, net of taxes- - - 228 454 - - 228 454 Changes in credit risk of financial liabilities at fair value, net of taxes- ( 2 871)- - - - ( 2 871)Impairment reserves of securities at fair value through other comprehensive income 4 301 - - - - - 4 301 Reserves of sales of securities at fair value through other comprehensive income- - ( 4 875)- - - ( 4 875)Balance as at 31 December 2019 5 505 ( 1 669)( 8 432)( 44 041)- ( 583 396)( 632 033) Total Other variations of other comprehensive income Impairment reserves Credit risk reserves Sales reserves Actuarial deviations (net of taxes) Fair value reserves Other accumulated comprehensive income The fair value reserves are analysed as follows: Originating reserve The originating reserve results from the difference between the assets and liabilities transferred from BES to NOVO BANCO, on the terms defined in the resolution measure applied by Bank of Portugal to BES. The amount of the reserve includes the effects of Bank of Portugal’s Resolution Measure (“Medida de Resolução”) and those of the conclusions reached through the audit conducted by the independent auditor at the time, nominated by Bank of Portugal. Special reserve As mentioned in Note 31, the special reserve was created as a result of the adhesion of NOVO BANCO to the Special Regime applicable to Deferred Tax Assets approved by Law No. 61/2014, of 26 August, which implied the conversion of eligible deferred tax assets into tax credits and the simultaneous establishment of a special reserve. Following the net losses recorded from 2015 until 2018 and with reference to the elegible deferred tax assets at the end of each year, the special reserve was set up for the same amount of the tax credit calculated, increased by 10%, as follows: Resulting from the credit tax certified by the Tax authority at the end of 2018, the amounts of the special reserve constituted during the year of 2017 (referring to the negative net result of 2016), should be adjusted in the course of 2019, after correcting for the number of rights issued in favour of the Portuguese State. Other reserves and retained earnings Following the conditions agreed in the Bank’s sale process, a Contingent Capitalization Agreement was created. In this context, if the capital ratios fall below a certain threshold and, cumulatively, losses are recorded NOVO BANCO | 2019 ANNUAL REPORT | 343 (in thousands of Euros) Financial assets at fair value through other comprehensive income Deferred tax reserves Total fair value reserves Financial assets at fair value through other comprehensive Deferred tax reserves Total fair value reserves Balance at the beginning of the exercise( 280 428) 7 933 ( 272 495) 195 915 ( 60 811) 135 104 Impact of transition to IFRS 9- - - ( 442 105) 56 398 ( 385 707)Balance as at 1 January 2018( 280 428) 7 933 ( 272 495)( 246 190)( 4 413)( 250 603)Changes in fair value 408 804 - 408 804 6 985 - 6 985 Foreign exchange differences( 6 678)- ( 6 678)( 17 980)- ( 17 980)Sales in the exercise( 68 519)- ( 68 519)( 23 243)- ( 23 243)Deferred taxes recognized in the exercise in reserves- ( 105 153)( 105 153)- 12 346 12 346 Balance at the end of the exercise 53 179 ( 97 220)( 44 041)( 280 428) 7 933 ( 272 495)31.12.201931.12.2018Fair value reservesFair value reserves(in thousands of Euros)31.12.2019 31.12.2018 Amortised cost of financial assets at fair value through other comprehensive income8 704 952 7 847 718 Market value of financial assets at fair value through other comprehensive income8 758 131 7 567 290 Unrealised gains / (losses) recognized in fair value reserve 53 179 ( 280 428)Deferred Taxes( 97 220) 7 933 Fair value reserve attributable to shareholders of the Bank( 44 041)( 272 495)(in thousands of Euros)31.12.201931.12.20182016 (net loss of 2015) 168 911 168 911 2017 (net loss of 2016) 109 421 133 658 2018 (net loss of 2017) 150 044 167 726 2019 (net loss of 2018) 178 171 - 606 547 470 295 in a delimited asset portfolio, the Resolution Fund makes a payment corresponding to the lower of the losses recorded and the amount necessary to restore the ratios to the defined threshold, of up to a maximum of Euro 3 890 million (see Note 33 – Contingent liabilities and commitments). The capital corresponds to a previously defined asset perimeter, with an initial net book value (June 2016) of around Euro 7.9 billion. As at 31 December 2019 these assets had a net value of Euro 3.0 billion, mainly as a result of payments and recoveries as well as losses recorded (31 December 2018: net value of Euro 4.0 billion). As a result of the losses recorded by NOVO BANCO on 31 December 2018 and 2017, the conditions determining the payment by Resolution Fund of Euro 1 149 295 thousand and Euro 791 695 thousand were meet and the payments occurred in May 2019 and 2018, respectively. In the financial year of 2019, the caption Reserves registered the responsibility of the Resolution Fund amounting to Euro 1 037 013 thousand relating to the Contingent Capitalization Agreement. The amount is accounted for under Other reserves and it results at each Balance Sheet date of the incurred losses and of the regulatory ratios in force at the moment of its determination. NOTE 33 – CONTINGENT LIABILITIES AND COMMITMENTS In addition to the derivative financial instruments, the balances relating to off-balance accounts as at 31 December 2019 and 2018 are the following: Guarantees and standby letters provided are banking operations that do not imply any mobilization of funds for the Bank. As at 31 December 2019, the caption financial assets pledged as collateral includes: - The market value of financial assets pledged as collateral to the European Central Bank in the scope of a liquidity facility, in the amount of Euro 11.5 billion (31 December 2018: Euro 12.1 billion); - Securities pledged as collateral to the Portuguese Securities and Exchange Commission (“Comissão do Mercado de Valores Mobiliários” (CMVM)) in the scope of the Investors Indemnity System (“Sistema de Indemnização aos Investidores”), in the amount of Euro 8.1 million (31 December 2018: Euro 7.7 million); - Securities pledged as collateral to the Deposits’ Guarantee Fund (“Fundo de Garantia de Depósitos”), in the amount of Euro 71.8 million (31 December 2018: Euro 70.1 million); - Securities pledged as collateral to the European Investment Bank, in the amount of Euro 98.6 million (31 December 2018: Euro 155.4 million); - Securities pledged as collateral relating to derivatives trading with a central counterparty amounting to Euro 113.0 million. NOVO BANCO | 2019 ANNUAL REPORT | 344 (in thousands of Euros)31.12.201931.12.2018Contingent liabilities Guarantees and standby letters3 148 216 3 361 309 Financial assets pledged as collateral11 930 201 12 338 526 Open documentary credits 516 162 664 905 15 594 579 16 364 740 Commitments Revocable commitments6 897 501 5 127 423 Irrevocable commitments 409 215 452 979 7 306 716 5 580 402 The above mentioned financial assets pledged as collateral are recorded in the various asset categories of the Bank balance sheet and may be executed in the event the Bank does not fulfil its obligations under the terms and conditions of the contracts celebrated. Documentary credits are irrevocable commitments made by the Bank, on behalf of its customers, to pay or order to pay a certain amount to a supplier of goods or services, within a determined period, upon the presentation of documentation of the expedition of the goods or rendering of the services. The condition of “irrevocable” derives from the fact that they may not be cancelled neither changed without the agreement of all involved parties. Revocable and irrevocable commitments represent contractual agreements to extend credit to customers of the Bank (e.g. undrawn credit lines), which are, generally, contracted for fixed periods of time or with other expiration conditions and, usually, require the payment of a fee. Almost all credit commitments in force require that customers continue meeting certain conditions that were verified at the time the credit was contracted. Despite the characteristics of these contingent liabilities and commitments, these operations require a previous rigorous risk assessment of the solvency of the customer and of its business, similarly to any other commercial operation. When necessary, the Bank requires the collateralisation of these transactions. Since it is expected that the majority of these operations will mature without any funds having been drawn, these amounts do not necessarily represent future cash out-flows. Additionally, liabilities recorded in off-balance sheet items related to banking services provided are as follows: Under the resolution measure applied to BES by deliberation of Bank of Portugal of 3 August 2014, (point 1., paragraph b), subparagraph (vii) of Appendix 2), as altered by the deliberation of Bank of Portugal of 11 August 2014, the “Excluded Liabilities” from the transfer to NOVO BANCO include “any obligations, guarantees, liabilities or contingencies assumed in the trading, financial intermediation and distribution of debt instruments issued by entities integrating Espírito Santo Group (…)”. Under the terms of the point and paragraph referred to above and sub point (v), the excluded liabilities also include “any liabilities or contingencies, namely those resulting from fraud or the violation of regulatory, penal or administrative offense provisions or regulations”. On 29 December 2015, Bank of Portugal adopted a new deliberation for the “Clarification and retransmission of liabilities and contingencies defined as excluded liabilities in subparagraphs (v) through (vii) of paragraph (b) of No. 1 of Appendix 2 of the Deliberation of Bank of Portugal of 3 August 2014 (8 p.m.), with the wording given it by the Deliberation of Bank of Portugal of 11 August 2014 (5 p.m.)”. Through this deliberation, Bank of Portugal: (i) Clarified the treatment as excluded liabilities of the contingent and unknown liabilities of BES (including litigation liabilities related to pending litigation and liabilities or contingencies arising from fraud or violation of rules or regulatory, criminal or administrative offence decisions), regardless of their nature (tax, labour, civil or other) and whether or not these are recorded in the accounts of BES, in accordance with subparagraph (v) of paragraph (b) of No. 1 of Appendix 2 of the Deliberation of 3 August; and NOVO BANCO | 2019 ANNUAL REPORT | 345 (in thousands of Euros)31.12.201931.12.2018 Deposit and custody of securities and other items36 782 430 34 433 770 Amounts received for subsequent collection 283 674 296 996 Securitized loans under management (servicing)3 660 539 3 791 918 Other responsibilities related with banking services 871 399 1 685 399 41 598 042 40 208 083 (ii) Clarified that the following liabilities had not been transferred from BES to NOVO BANCO: a. All the liabilities relating to Preference Shares issued by vehicle companies established by BES and sold by BES; b. All liabilities, damages and expenses related to real estate assets that were transferred to NOVO BANCO; c. All indemnities related to breach of contracts (purchase and sale of real estate assets and others) signed and celebrated before 8 p.m. on 3 August 2014; d. All indemnities related to life insurance contracts, in which the insurer was BES - Companhia de Seguros de Vida, S.A.; e. All liabilities and indemnities related to the alleged annulment of certain clauses in loan agreements in which BES was the lender; f. All the indemnities and liabilities arising from the cancellation of operations carried out by BES whilst financial and investment service provider; and g. Any liability that is the object of any of the processes described in Appendix I of said deliberation. (iii) To the extent that, despite the clarifications made above, it is found that there has been an effective transfer of any liabilities from BES to NOVO BANCO which, in terms of any of those paragraphs and the Deliberation of 3 August, should have remained in BES’s legal sphere, said liabilities will be retransmitted from NOVO BANCO to BES, with effect as at 8 p.m. of 3 August 2014. In the preparation of its consolidated financial statements as at 31 December 2019 (as well as in the previous financial statements), NOVO BANCO incorporated the decisions resulting from the referred resolution measure regarding the transfer of the assets, liabilities, off-balance sheet items and assets under management of BES, as well as from the deliberation of 29 December 2015 of Bank of Portugal, in particular, with regards to the clarification of the non-transmission to NOVO BANCO of contingent and unknown liabilities as well as the clarifications relating to the liabilities listed in paragraph (ii) above, herein also including the lawsuits listed in said deliberation. In addition, also by the deliberation of Bank of Portugal of 29 December 2015, it was decided that it is the responsibility of Resolution Fund to neutralize, at the Bank level, the effects of decisions that are legally binding, beyond the control of NOVO BANCO and to which it did not contribute and that, simultaneously, translate into the materialization of liabilities and contingencies which, according to the perimeter of the transfer to NOVO BANCO as defined by Bank of Portugal, should remain in BES’s scope or give rise to the setting of indemnities in the scope of the implementation of court sentences annulling decisions adopted by Bank of Portugal. Considering that the establishment of the Bank results from the application of a resolution measure to BES, which had a significant impact on the net worth of third parties, and notwithstanding the deliberations of Bank of Portugal of 29 December 2015, there are still relevant litigation risks, albeit mitigated, namely regarding the various disputes relating to the loan made by Oak Finance to BES and regarding the senior bond issues retransmitted to BES, as well as the risk of the non-recognition and/or non-implementation of the various decisions of Bank of Portugal by Portuguese or foreign courts (as it is the case of the courts in Spain) in disputes related to the perimeter of the assets, liabilities, off-balance sheet items and assets under management transferred to NOVO BANCO. These disputes include the two lawsuits of late January 2016, with the Supreme Court of Justice of Venezuela, Banco de Desarrollo Económico y Social de Venezuela and the Fondo de Desarrollo Nacional against BES and NOVO BANCO, relating to the sale of debt instruments issued by entities belonging to the Espírito Santo Group, in the amount of 37 million dollars and 335 million dollars, respectively, and which requests the reimbursement of the amount invested, plus interest, compensation for NOVO BANCO | 2019 ANNUAL REPORT | 346 the value of inflation and costs (in a total estimated amount by the claimants of 96 and 871 million dollars, respectively). In accordance with resolution measure, these responsibilities were not transferred to NOVO BANCO and the main actions and precautionary seizure procedures are still pending before the Supreme Court of Venezuela. In the preparation of the individual and consolidated financial statements of the Bank as at 31 December 2019, the Executive Board of Directors reflected the Resolution Deliberation and related decisions made by Bank of Portugal, in particular the decisions of 29 December 2015. In this context, the present financial statements, namely in what regards the provisions for contingencies arising from lawsuits, reflect the exact perimeter of the assets, liabilities, off-balance sheet elements and assets under management and liabilities transferred from BES to NOVO BANCO, as determined by Bank of Portugal and taking as reference the current legal bases and the information available at the present date. As part of the sale of NOVO BANCO, completed on 18 October 2017, the respective contractual documents include specific provisions that produce effects equivalent to the aforementioned resolution of the Board of Directors of the Bank of Portugal, dated 29 December 2015, concerning the neutralisation, at the level of NOVO BANCO, of the effects of unfavourable decisions that are legally binding, although it is now contractual in nature, thus maintaining the contingent liabilities of the Resolution Fund. Significant lawsuits For the purpose of determining the contingent liabilities, and without prejudice to the information contained in these notes to the accounts, namely regarding the conformity of the policy for the constitution of provisions with the resolution measure and subsequent decisions of Bank of Portugal (and the criteria for the allocation of responsibilities and contingencies arising therefrom), it is also necessary to identify the following disputes whose effects or impacts on the financial statements of NOVO BANCO are, on this date, not susceptible of determination or quantification: (i) Lawsuit brought by Partran, SGPS, S.A., Massa Insolvente da Espírito Santo Financial Group, S.A. and Massa Insolvente da Espírito Santo Financial (Portugal), S.A. against NOVO BANCO and Calm Eagle Holdings, S.A.R.L. through which it is intended that the pledge of the shares of Companhia de Seguros Tranquilidade, S.A. be declared invalid and, secondarily, that said pledge be annulled or declared ineffective; (ii) Lawsuit brought by NOVO BANCO, challenging the resolution decided in favour of the insolvent estate in respect of the acts of the constitution and subsequent execution of the pledge on the shares of the company Companhia de Seguros Tranquilidade, S.A., declared by the insolvency administrator of Partran, SGPS, S.A., due to considering that there are no grounds for the resolution of these acts, as well as demanding the reimbursement of the amount received by way of price (Euro 25 million, subject to possible positive adjustment) on the sale of the shares of Companhia de Seguros Tranquilidade, S.A.. NOVO BANCO challenged judicially the resolution act, with this process running its course attached to the insolvency proceedings of Partran, SGPS, S.A.; (iii) Following the conclusion of the sale agreement of NOVO BANCO's share capital, signed between the Resolution Fund and Lone Star on 31 March 2017, certain legal suits have been lodged, related to the conditions of the sale, namely the administrative action brought by Banco Comercial Português, SA (BCP) against the Resolution Fund, of which NOVO BANCO is not a party, and according to the public disclosure of inside information made by BCP on the website of the CMVM on 1 September 2017, it requested the NOVO BANCO | 2019 ANNUAL REPORT | 347 legal assessment of the contingent capitalization obligation assumed by the Resolution Fund within the CCA; (iv) NOVO BANCO was informed by the publication in the Official Journal of the European Union of 16 July 2018, of the existence of an appeal to the General Court by Banco Comercial Português, SA and other entities of the group seeking the annulment of the decision of the European Commission C (2017 / N) of 11 October 2017 which considers the Contingent Capitalization Agreement agreed between the Resolution Fund and the Lone Star Group in connection with the sale of NOVO BANCO, compatible with the internal market. Although NOVO BANCO is not a party to this proceeding, it has asked the General Court to intervene as a party and this request was granted; (v) NOVO BANCO was notified of an order by the Central Court of Criminal Investigation (“TCIC”) that determines the provision of a guarantee by the NB in the approximate amount of EUR 51 million due to an alleged failure to comply with an arrest order bank accounts, having used the respective means of reaction to oppose the application of the aforementioned asset guarantee measure due to the absence of a legal basis. Resolution Fund Resolution Fund is a public legal entity with administrative and financial autonomy, created by Decree-Law No. 31-A/2012, of 10 February, which is governed by the RGICSF and by its internal regulation, having as its mission to provide financial support for the resolution measures implemented by Bank of Portugal, whilst national resolution authority, and to carry out all the other functions conferred by law in the scope of the execution of such measures. The Bank, as with the generality of the financial institutions operating in Portugal, is one of the institutions participating in Resolution Fund, making contributions that result from the application of a rate defined annually by Bank of Portugal, based, essentially, on the amount of its liabilities. As at 31 December 2019, the periodic contribution made by the Bank amounted to Euro 11 996 thousand (31 December 2018: Euro 10 803 thousand). As part of its responsibility as the supervisory and resolution authority, Bank of Portugal decided to apply, on 3 August 2014, a resolution measure to BES, under No. 5 of article 145-G of the RGICSF, which consisted on the transfer of most of its activity to NOVO BANCO, created specifically for this purpose and the capital was assured by the Resolution Fund. To realise the share capital of NOVO BANCO, Resolution Fund made available Euro 4 900 million, of which Euro 365 million corresponded to own funds. A loan was also granted by a banking syndicate to Resolution Fund, amounting to Euro 635 million, with the participation of each credit institution being weighted by various factors, including their respective size. The remaining amount (Euro 3 900 million) had its origin in a reimbursable loan granted by the Portuguese State. In December 2015, national authorities decided to sell most of the assets and liabilities associated with the activity of Banif - Banco Internacional do Funchal, SA (BANIF) to Banco Santander Totta, S.A. (Santander Totta), for Euro 150 million, also in the scope of the application of a resolution measure. In the context of this resolution measure, the assets of Banif identified as problematic were transferred to an asset management vehicle, created for the purpose – Oitante, S.A.. NOVO BANCO | 2019 ANNUAL REPORT | 348 The serious financial imbalance of BES in 2014 and BANIF in 2015, which justified the application of resolution measures, created uncertainties related to the risk of litigation involving Resolution Fund, which is significant, as well as to the risk of an insufficiency of funds to ensure its compliance with its responsibilities, namely the short-term repayment of the loans contracted. It was in this context that, in the second half of 2016, the Portuguese Government reached an agreement with the European Commission to change the terms of the financing granted by the Portuguese State and by the banks participating in Resolution Fund in order to preserve its financial stability, through the promotion of conditions that endow predictability and stability of the contributory efforts to Resolution Fund. To this end, an addendum to the financing agreements with Resolution Fund was formalised, which introduced a number of changes to the repayment schedule, remuneration rates and other terms and conditions associated with said loans such that these are adjusted to Resolution Fund’s ability to fully meet its obligations based on its regular revenues, that is, without the need to charge the banks participating in Resolution Fund for special contributions or any other extraordinary contribution. As announced by the Resolution Fund in 21 March 2017, issued following the previous announcement of 28 September 2016 and the Portuguese Finance Ministry announcement issued at the same date, the review of the conditions of the funding granted by the Portuguese State and the participating banks aimed to ensure the sustainability and the financial balance of the Resolution Fund, with the basis of a stable, predictable and affordable charge to the banking sector. Based on this review, the assumed Resolution Fund is assured the full payment of their responsibilities, and the respective remuneration, without need for recourse to special contributions or any other type of contributions extraordinary by the banking industry. On 31 March 2017, Bank of Portugal announced that it had selected Lone Star Funds for the acquisition of NOVO BANCO, which was completed on 18 October 2017, through the injection, by the new shareholder, of Euro 750 million, followed by another capital injection of Euro 250 million, made on 21 December 2017. Lone Star Funds came to hold 75% of the share capital of NOVO BANCO and Resolution Fund the remaining 25%. In addition, the approved conditions include: - A Contingent Capitalization Agreement, under which the Resolution Fund, whilst shareholder, may be called upon to make payments in the event of certain cumulative conditions related to: i) the performance of a restricted set of assets of NOVO BANCO and ii) the evolution of the Bank’s capitalization levels. The possible payments needed, in the agreed terms of this Contingent Capitalization Agreement are of an absolute maximum of Euro 3 890 million; - A Compensation Mechanism to NOVO BANCO if in the event that some conditions are met, and it is convicted to make payments of any responsibilities, due to a final court judicial decision not recognising or that is opposed to the resolution measure applied by Bank of Portugal, or to NOVO BANCO’s perimeter of assets and liabilities. Notwithstanding the possibility under the applicable legislation for the collection of special contributions, in light of the renegotiation of the conditions of the loans granted to Resolution Fund by the Portuguese State and by a syndicate of banks, and of the public press releases made by the Resolution Fund and the Office of the Finance Minister stating that this possibility is not to be used, the present financial statements reflect the expectation of the Board of Directors that the Bank will not be required to make special contributions or any other type of extraordinary contributions to finance the resolution measures applied to BES and Banif, as well as the Contingent Capitalization Agreement and the Compensation Mechanism referred to in the previous paragraphs. NOVO BANCO | 2019 ANNUAL REPORT | 349 According to the announcement issued by the Resolution Fund on 1 March 2019, for the payment to be made to the Bank under the Contingent Capitalization Agreement, the available financial resources will be used first, resulting from the contributions paid, directly or indirectly by the banking sector, and these resources are complemented by a loan agreed with the State in October 2017 with an annual maximum limit then defined of Euro 850 million. Any changes in this regard and the application of these mechanisms may have relevant implications in the Bank’s financial statements. NOTE 34 – RELATED PARTIES TRANSACTIONS The group of entities considered to be related parties by NOVO BANCO in accordance with the IAS 24 definitions, are (i) key management personnel (members of the Executive Board of Directors and members of the General Supervisory Board of NOVO BANCO); (ii) people or entities with a family, legal or business relationship with key management personnel; (iii) people or entities with a family, legal or business relationship with shareholders; (iv) shareholders holding direct or indirect stakes equal to or exceeding 2% of the share capital or voting rights of NOVO BANCO; (v) subsidiaries consolidated for accounting purposes under the full consolidation method; (vi) associated companies, that is, companies over which NOVO BANCO Group has significantly influence on the company’s financial and operational polices, despite not having control; and (vii) entities under joint control of NOVO BANCO (joint ventures). NOVO BANCO | 2019 ANNUAL REPORT | 350 During 2019, the following transactions with Related Parties (credit and other types) were carried out: 1) Credit Operations 2) Services rendered and other signed contracts NOVO BANCO | 2019 ANNUAL REPORT | 351 Entities / IndividualsCategoryOperationAmount (Euro)Bank guarantee8 090 174Bank guarantee41 359 876Bond Issue1 300 000 000Credit Limit - NB Express Bill100 000Limits - NB Factoring (Confirming)250 000MLT Funding500 000Bank guarantee77 000Bank guarantee159 067Authorized overdraft500 000Factoring650 000GNB Companhia de Seguros S.A.AssociateDirect Debits Limits81 200 000Op. Markets Rce10 000 000Direct Debits Limits80 100 000 Leasing45 500Bank guarantee106 000Loan Account Cc_175 000Shareholder loans340 000Limits Credit Card225 000Limits to Bank guarantee1 000 000Limits Credit Card117 500Collateral Line Guarantees1 750 000Credit limit - NB Express Bill2 500 000Authorized overdraft4 500 000 Factoring 9 200 000Limits Credit Card10 000Loan Account Cc_2 500 000Op. Markets Rce_3 000 000Credit Plafond - Leasing4 625 000AOV Contract - NB Vehicles5 726 880Credit Plafond - Leasing6 900 000Direct Debits Limits40 000 000Credit Plafond - Leasing41 500 000Limits Credit Card10 000Bank guarantee90 240Loan Account Cc_250 000Limits Credit Card3 500Credit Limit - NB Express Bill100 000Credit Limit - NB Express Bill Exclusive200 000MLT Funding275 000Nacional Conta – Contabilidade, Consultadoria e Administração, Lda.Director / Manager / FamilyLoan Account Cc_100 000Issuance of Credit Cards182 387Factoring750 000Shareholder loans4 750 000Loan Account Cc_45 000 000Novo Vanguarda SLSubsidiaryLoan Account Cc_250 000MLT Funding13 451 386MLT Funding1 962 826Unicre - Cartão Internacional de Crédito S.A.AssociateMLT Funding25 000 000BEST - Banco Electrónico de Serviço Total S.A.SubsidiaryLogic C Logística Integrada S.A.AssociateM N Ramos Ferreira Engenharia S.A.AssociateGrupo Esegur (Esegur - Soluções de Segurança S.A.)AssociateCristalmax - Indústria Vidros S.A.AssociateEnkrot - Gestão e Tratamento de Águas S.A.AssociateGNB Companhia de Vida S.A.SubsidiaryGreendraive - Gestão e Exporação de Campos de Golf e Complexos Turísticos S.A.SubsidiaryNovo BancoServicios Corporativos SLSubsidiaryRighthour S.A.SubsidiaryGrupo Multipessoal(Multipessoal - Recursos Humanos SGPS S.A.)AssociateLocarent- Coompanhia Portuguesa Aluguer Viaturas S.A.AssociateNexxpro - Fábrica de Capacetes S.A.AssociateEntities / IndividualsCategoryOperation1.Mortgage Offer Agreement for BEST employees2.Credit Intermediary Binding AgreementGNB Sociedade Gestora Fundos InvestimentoImobiliário S.A.SubsidiaryOutsoursing Contract(Real Estate Asset Management Agreement)GNB Sociedade Gestora Fundos InvestimentoMobiliário S.A.SubsidiaryAmendment to the Distribution Agreement1.RenewaloftheTechnicalAssistanceContractforSecurityEquipmentandCentralSecurityService2.Contract for the Provision of Services of Transportation of Values and Treatment of CashNANI Holdings SGPS SA / LSF NANI Investments SarlAssociateAmendment and Consolidation of the Group's Financial Reporting and Shared Information Agreement (Amendment and Restatement Agreement to the Intragroup Financial Reporting and Information Sharing Agreement)BEST - Banco Electrónico de Serviço Total S.A.SubsidiaryEsegur - Soluções de Segurança S.A.Associate The Bank Balance Sheet balances with related parties as at 31 December 2019 and 2018, as well as the respective profit and losses, can be summarised as follows: The amount of assets receivable from the Resolution Fund corresponds to the amount of the triggering of the Contingent Capitalization Agreement regarding the financial years 2019 and 2018. In June 2018 a contract was entered into between NANI HOLDINGS, SGPS, S.A., LSF NANI INVESTMENTS S.a.r.l. and NOVO BANCO, to provide support services for the preparation of consolidated information and regulatory reports. The assets on the balance sheet related to associated companies included in the table above refer mainly to loans and advances, and shareholder loans granted or debt securities acquired in the scope of the Bank’s activity. The liabilities relate mainly to bank deposits taken. Related party transactions were carried out at arm's length, under similar terms and conditions, when compared with others carried out with unrelated parties, and when these conditions were not verified, those exceptions were substantiated in accordance with the Bank’s Related Party Transactions Policy. NOVO BANCO | 2019 ANNUAL REPORT | 352 (in thousands of Euros)AssetsLiabilitiesGuaranteesIncomeExpensesAssetsLiabilitiesGuaranteesIncomeExpensesShareholdersNANI HOLDINGS- 153 - 332 - - 153 - 390 - FUNDO DE RESOLUÇÃO1 037 013 - - - 11 996 1 149 295 - - - 10 803 Subsidiary companiesGNB RECUPERAÇÃO DE CRÉDITO- 156 - - 2 319 - 267 - 35 3 072 GNB CONCESSÕES 83 473 39 382 - - - 63 351 39 501 - - - GNB ACE- 309 - - 1 728 - 517 - - 2 041 GNB GA 2 698 44 507 6 6 009 1 549 54 278 4 026 6 013 30 NOVO BANCO SERVICIOS 4 777 2 - 438 1 316 42 803 - - 924 2 610 BES GMBH- - - - - - 3 872 - - - BESIL- - - 128 551 - 115 882 - 153 1 135 ES Plc- - - 41 043 52 409 443 281 454 - 19 620 14 583 ES TECH VENTURES 46 732 64 791 - - 10 46 732 65 277 - - 17 BEST 1 858 432 110 37 1 855 5 895 2 410 411 259 - 476 6 673 NB AÇORES 139 165 145 384 1 295 857 1 860 139 198 125 567 1 295 2 075 2 653 FCR PME- 121 - - - - 9 066 - - - FT LPF1- - - - - 1 509 505 - - - SPE-LM6 322 437 2 902 - 439 - 365 930 4 138 - 484 - SPE-LM7 827 787 5 414 - 1 177 - 681 379 7 062 - 1 281 - FCR NB GROWTH 15 414 3 147 - - - 15 456 1 471 - - - NB ÁFRICA- 7 229 - - - - 7 265 - - - GNB Vida- - - - - 14 835 218 807 - 16 961 462 NOVO VANGUARDA- 158 - - 627 199 309 - - 2 290 FUNGEPI- 58 666 - 29 15 - 52 017 1 898 35 18 FUNGEPI_II- 62 244 - 27 13 - 45 956 41 43 15 FUNGERE- 41 422 - 32 7 - 32 941 60 35 4 IMOINVESTIMENTO- 1 393 - 47 - - 817 - 74 - PREDILOC- 2 162 - - - - 973 - - - IMOGESTÃO- 36 925 409 42 6 - 7 854 436 45 - ARRABIDA- 1 308 - - - - 27 - - - INVESFUNDO VII- 1 180 - - - - 883 - 9 - NB LOGÍSTICA- 4 415 - - - - 3 095 - - 1 NB PATRIMÓNIO- 31 071 - - 4 791 - 24 348 387 - 5 790 FUNDES- 14 598 - - 3 - 11 115 - - 6 AMOREIRAS- 36 100 - - - - 1 899 4 674 - - FIMES ORIENTE- 14 766 - - 43 - 40 281 113 - 28 NB ARRENDAMENTO- 3 193 - - - - 2 620 - - - NB FINANCE- 72 911 168 578 268 4 323 - 68 692 - 114 5 274 ASAS INVEST- 660 - - - - 5 880 - - FEBAGRI- - - - - - 954 - - - AUTODRIL- 13 - - - - 8 - - - JCN- - - - - 17 920 11 - - - PORTUCALE- 66 - - - - 46 1 127 - - GREENWOODS- 132 - - - - 138 - - - QUINTA D. MANUEL I- 1 - - - - - - - - QUINTA DA AREIA- 79 - - - - - - - - PROMOTUR- 745 - - - - 17 - - - HERDADE DA BOINA- 21 - - - - - - - - BENAGIL- 6 - - - - 125 - - - IMOASCAY- 631 - - - - 639 - - - HERDADE PINHEIRINHO 24 713 - - - - 24 194 2 470 - - HERDADE PINHEIRINHO II 73 734 33 - - - 73 341 12 4 227 - - QUINTA DA RIBEIRA- - - - - - 53 - - - PROMOFUNDO- 531 - - - - 263 - 18 - OREY REABILITAÇÃO URBANA- - - - 1 - 25 - - - R INVEST- 1 709 - - - - 214 - - - GREENDRAIVE 4 165 20 106 1 - 3 784 104 - 46 - 2 583 966 1 132 766 170 431 52 724 87 914 3 086 166 1 361 784 19 634 48 831 57 505 Associated companiesLINEAS 97 656 29 556 - 2 609 - 97 644 34 426 - 4 710 3 LOCARENT 122 802 376 - 1 176 4 215 31 304 1 282 - 1 323 5 409 GNB SEGUROS- 14 390 - 2 1 - 8 237 - - 2 ESEGUR 4 157 1 510 69 - - 5 528 3 507 69 - - UNICRE 28 360 2 500 - 180 - 10 001 21 - 26 - MULTIPESSOAL 3 520 35 273 22 - 3 074 35 251 52 - OUTRAS 1 336 57 312 53 22 1 499 1 172 47 425 49 32 82 257 831 105 679 395 4 011 5 715 148 723 94 933 369 6 143 5 496 OtherHUDSON ADVISORS PORTUGAL- - - - 2 767 - - - - 5 444 NACIONAL CONTA LDA (*) 117 8 - - - 120 7 - - - 117 8 - - 2 767 120 7 - - 5 444 (*) Companies controlled directly or indirectly by members of the corporate bodies.31.12.201831.12.2019 All the loans granted to related parties are included in the impairment model, being subject to the determination of impairment in the same manner as the commercial loans and advances granted by the Bank in the scope of its activity. All assets placed with related parties earn interest between 0% and 4.5% (the rates correspond to the rates applied according to the original currency of the asset). The costs with remunerations and other benefits granted to Key Management Personnel of NOVO BANCO in 2019 and 2018, are as follows: In the financial year of 2018, no variable remuneration costs were recorded in relation to the Management and Supervisory Bodies and no variable remuneration was paid or attributed in 2018. Still in 2018 and resulting from the commitment to take up a new Executive Director, Euro 320 thousand were recorded as a sign-on bonus, which were actually paid in 2019, before taking up his duties. With regard to the financial year of 2019, variable remuneration to the Management Bodies amounts to Euro 1,997 thousand, which relates to the remuneration that do not constitute acquired rights of the respective members until after the end of the restructuring period (currently, 31 December 2021) and its payment is subject to deferral and verification of certain conditions. As at 31 December 2019, the amount of credit granted to members of Key Management Personnel of NOVO BANCO was as follows: (i) to members of the Executive Board of Directors and their immediate relatives was Euro 448 thousand; and (ii) members of the General and Supervisory Board and their immediate relatives did not had credit granted. As at 31 December 2018, the amount of credit granted to members of Key Management Personnel of NOVO BANCO was as follows: (i) to members of the Executive Board of Directors and their immediate relatives was Euro 503 thousand; and (ii) members of the General and Supervisory Board and their immediate relatives was Euro 1 thousand. NOVO BANCO | 2019 ANNUAL REPORT | 353 (in thousands of Euros)Short-term employment benefits 2 812 980 3 792 2 265 993 3 258 Post-employment benefits 3 - 3 4 - 4 Other long-term benefits 43 21 64 33 26 59 Employment termination benefits- - - - - - Share-based payments- - - - - - 2 858 1 001 3 859 2 302 1 019 3 321 Total31.12.2018Executive Board of DirectorsGeneral and Supervisory BoardTotal31.12.2019Executive Board of DirectorsGeneral and Supervisory Board NOTE 35 – SECURITISATION OF ASSETS As at 31 December 2019 and 2018 the outstanding securitisation transactions made by the Bank were as follows: The loans and advances to customers covered by the securitization operation Lusitano SME No. 3 was not derecognised from the balance sheet since the Bank substantially retained all the risks and rewards of ownership associated with the securitised assets. The remaining securitisation operations were derecognised as the Bank substantially transferred all the risks and rewards of ownership. During 2019 the Bank repurchased securitization operations credits Lusitano Mortgages No. 1 plc, Lusitano Mortgages No. 2 plc and Lusitano Mortgages No. 3 plc. As at 31 December 2018, the following synthetic securitization operations were in progress: Lusitano Synthetic Limited was a synthetic loan securitization operation involving the contracting by the Bank of a credit default swap (CDS) to eliminate credit risk associated with a portfolio of loans granted to companies. The loans associated to this portfolio continued to be recognized in the Bank's balance sheet under the caption Loans and advances to customers. During the financial year of 2019, Lusitano Synthetic Limited was early terminated. The main characteristics of these operations, as at 31 December 2019 and 2018, may be analysed as follows: NOVO BANCO | 2019 ANNUAL REPORT | 354 (in thousands of Euros)31.12.201931.12.2018Lusitano Mortgages No.1 plcDecember 2002 1 000 000 - 182 361 Mortgage loans (subsidized scheme)Lusitano Mortgages No.2 plcNovember 2003 1 000 000 - 185 120 Mortgage loans (general and subsidized scheme)Lusitano Mortgages No.3 plcNovember 2004 1 200 000 - 291 087 Mortgage loans (general scheme)Lusitano Mortgages No.4 plcSeptember 2005 1 200 000 312 836 351 544 Mortgage loans (general scheme)Lusitano Mortgages No.5 plcSeptember 2006 1 400 000 463 413 513 952 Mortgage loans (general scheme)Lusitano Mortgages No.6 plcJuly 2007 1 100 000 434 463 478 943 Mortgage loans (general scheme)Lusitano Project Finance No.1, FTCDecember 2007 1 079 100 - 8 371 Project Finance loanLusitano Mortgages No.7 plcSeptember 2008 1 900 000 1 090 124 1 199 264 Mortgage loans (general scheme)Lusitano SME No.3November 2016 630 385 88 937 197 985 Loans to small and medium-sized enterprisesAsset securitizedIssueStart dateOriginal amountCurrent amount(in thousands of Euros)31.12.201931.12.2018 Lusitano Synthetic LimitedDecember 2012 1 000 000 - 354 311 Financing M/L Term (SMEs)IssueStart dateCurrent amount of securitised creditAsset securitizedInitial amount of securitised credit(in thousands of Euros)IssueFitchMoody'sS&PDBRSFitchMoody'sS&PDBRSLusitano Mortgages No.4 plcClass A1 134 000 241 493 - - December 2048AAAAaaAAA - BBAa3AA-Class B 22 800 15 985 - - December 2048AAAa2AA - BBBaa1BBB--Class C 19 200 13 461 - - December 2048A+A1A+ - BBBa3BB--Class D 24 000 16 827 - - December 2048BBB+Baa1BBB- - CCCCaa3B--Class E 10 200 5 100 - - December 2048NA - NA - ----Lusitano Mortgages No.5 plcClass A1 323 000 355 021 - - December 2059AAAAaaAAA - AAAAaaAAA-Class B 26 600 25 494 - - December 2059AAAa2AA - AAAa2AA-Class C 22 400 21 469 - - December 2059AA1A - AA1A-Class D 28 000 26 836 - - December 2059BBB+Baa2BBB - BBB+Baa2BBB-Class E 11 900 11 900 - - December 2059N/A - N/A - ----Lusitano Mortgages No.6 plcClass A 943 250 264 905 220 548 210 489 March 2060AAAAaaAAA - AAa3A--Class B 65 450 65 450 63 950 57 981 March 2060AAAa3AA - BBB-Baa1A--Class C 41 800 41 800 41 800 32 227 March 2060AA3A - BBa3BBB+-Class D 17 600 17 600 17 600 11 906 March 2060BBBBaa3BBB - CCCCaa3CCC-Class E 31 900 31 900 31 900 9 371 March 2060BB - BB - CC-D-Class F 22 000 22 000 - - March 2060 - - - - ----Lusitano Mortgages No.7 plcClass A1 425 000 616 503 616 503 563 186 October 2064 - - AAAAAA--AAAAAClass B 294 500 294 500 294 500 264 601 October 2064 - - BBB- - --BBB-Class C 180 500 180 500 180 500 154 463 October 2064 - - - - ----Class D 57 000 57 000 - - October 2064 - - - - ----Lusitano SME No.3Class A 385 600 - - - December 2037-A3-AA-WR--Class B 62 700 - - - December 2037-Baa3-BBB-WR--Class C 62 700 - - - December 2037-B1-B-A3-AAAClass D 116 000 103 316 103 316 100 534 December 2037--------Class E 9 500 3 135 3 135 2 776 December 2037--------Class S 88 771 5 214 5 214 3 218 December 2037--------31.12.2019Initial rating of the bondsCurrent rating of the bondsCurrent nominal valueBonds issuedInterest held by Group (Nominal value)Maturity dateInitial nominal valueInterest held by Group (Book value) NOTE 36 – FAIR VALUE OF FINANCIAL ASSETS AND LIABILITIES The governance model of the valuation of the Bank's financial instruments is defined in internal regulations, which establish the policies and procedures to be followed in the identification and valuation of financial instruments, the control procedures and the definition of the responsibilities of the parties involved in this process. In accordance with the fair value valuation methodology of assets and liabilities followed, these are classified in the corresponding hierarchy of fair value defined in IFRS 13 - Fair Value. The following is a brief description of the type of assets and liabilities included in each level of the hierarchy and the corresponding valuation method: Quoted market prices (level 1) This category includes financial instruments with market prices quoted on official markets and those with dealer price quotations provided by entities that usually disclose transaction prices for these instruments traded on active markets. The priority in terms of which price is used is given to those observed on official markets; where there is more than one official market the choice falls on the main market on which those instruments are traded. The Bank considers market prices those disclosed by independent entities, assuming that these act for their own economic benefit and that such prices are representative of the active market, using, whenever possible, NOVO BANCO | 2019 ANNUAL REPORT | 355 (in thousands of Euros)IssueFitchMoody'sS&PDBRSFitchMoody'sS&PDBRSLusitano Mortgages No.1 plcClass A 915 000 87 504 - - December 2035AAAAaaAAA - AAAa3AA- - Class B 32 500 32 500 - - December 2035AAAa3AA - AAAa3A - Class C 25 000 25 000 - - December 2035AA2A - AAAa3BBB- - Class D 22 500 22 500 - - December 2035BBBBaa2BBB - A+Baa1BB+ - Class E 5 000 5 000 - - December 2035BBBa1BB - BBB+B1B- - Class F 10 000 10 000 - - December 2035 - - - - - - - - Lusitano Mortgages No.2 plcClass A 920 000 99 505 - - December 2036AAAAaaAAA - AAAa3AA- - Class B 30 000 30 000 - - December 2046AAAa3AA - AAAa3A - Class C 28 000 28 000 - - December 2046AA3A - A+Aa3BBB- - Class D 16 000 16 000 - - December 2046BBBBaa3BBB - BBB-Baa2BBB- - Class E 6 000 6 000 - - December 2046BBB-Ba1BB - BB2B - Class F 9 000 9 000 - - December 2046 - - - - - - - - Lusitano Mortgages No.3 plcClass A1 140 000 250 799 - - December 2047AAAAaaAAA - AA1A - Class B 27 000 9 841 - - December 2047AAAa2AA - BBB+Ba1BB- - Class C 18 600 6 780 - - December 2047AA2A - BB+Ba3B - Class D 14 400 5 249 - - December 2047BBBBaa2BBB - BB3B- - Class E 10 800 5 400 - - December 2047 - - - - - - - - Lusitano Mortgages No.4 plcClass A1 134 000 272 930 - - December 2048AAAAaaAAA - BBAa3A - Class B 22 800 18 066 - - December 2048AAAa2AA - BBBaa1BBB- - Class C 19 200 15 214 - - December 2048A+A1A+ - BBBa3BB- - Class D 24 000 19 017 - - December 2048BBB+Baa1BBB- - CCCCaa3B- - Class E 10 200 5 529 - - December 2048NA - NA - - - - - Lusitano Mortgages No.5 plcClass A1 323 000 406 872 - - December 2059AAAAaaAAA - BBA1AA- - Class B 26 600 25 494 - - December 2059AAAa2AA - BB-B1BBB- - Class C 22 400 21 469 - - December 2059AA1A - CCCCaa2BB+ - Class D 28 000 26 836 - - December 2059BBB+Baa2BBB - CCCaCCC+ - Class E 11 900 11 900 - - December 2059N/A - N/A - - - - - Lusitano Mortgages No.6 plcClass A 943 250 319 906 266 342 253 795 March 2060AAAAaaAAA - A-Aa3BBB+ - Class B 65 450 65 450 63 950 57 394 March 2060AAAa3AA - BB+Baa1BBB+ - Class C 41 800 41 800 41 800 31 497 March 2060AA3A - B-Ba3BBB- - Class D 17 600 17 600 17 600 11 945 March 2060BBBBaa3BBB - CCCCaa3CCC - Class E 31 900 31 900 31 900 10 511 March 2060BB - BB - CC - D - Class F 22 000 22 000 - - March 2060 - - - - - - - - Lusitano Project Finance No.1 FTC 198 101 8 833 1 521 1 509 March 2025 - - - - - - - - Lusitano Mortgages No.7 plcClass A1 425 000 749 529 749 529 681 379 October 2064 - - AAAAAA - - AA-AAHClass B 294 500 294 500 - - October 2064 - - BBB- - - - BBB- - Class C 180 500 180 500 - - October 2064 - - - - - - - - Class D 57 000 57 000 - - October 2064 - - - - - - - - Lusitano SME No.3Class A 385 600 - - - December 2037-A3-AA - Aa3 - AAClass B 62 700 31 058 31 058 30 782 December 2037-Baa3-BBB - Aa3 - AALClass C 62 700 62 700 62 700 61 061 December 2037-B1-B - A3 - BBBHClass D 116 000 116 000 116 000 110 677 December 2037---- - - - - Class E 9 500 3 691 3 691 3 420 December 2037---- - - - - Class S 88 771 5 624 5 624 2 645 December 2037---- - - - - Lusitano Synthetic LimitedSenior 900 000 255 731 255 731 - April 2034---- - - - - Mezzanine 80 000 77 963 - - April 2034---- - - - - Junior 20 000 - - - April 2034---- - - - - 31.12.2018Bonds issuedInitial nominal valueCurrent nominal valueInterest held by Group (Nominal value)Interest held by Group (Book value)Maturity dateInitial rating of the bondsCurrent rating of the bonds prices supplied by more than one entity (for a specific asset and/or liability). For the process of re-evaluating financial instruments, the Bank analyses the various prices in order to select the one it considers most representative for the instrument under analysis. Additionally, when they exist, prices relating to recent transactions with similar financial instruments are used as inputs, being subsequently compared to those supplied by said entities to better justify the option taken by the Bank in favour of a specific price. This category includes, amongst others, the following financial instruments: (i) Derivatives traded on an organised market; (ii) Shares quoted on a stock exchange; (iii) Open investment funds quoted on a stock exchange; (iv) Closed investment funds whose subjacent assets are solely financial instruments listed on a stock exchange; (v) Bonds with more than one provider and for which the instruments are listed on a stock exchange; (vi) Financial instruments with market offers even if these are not available at the normal information sources (e.g. securities traded based on recovery rate). Valuation models based on observable market parameters / prices (level 2) In this category, the financial instruments are valued using internal valuation techniques, namely discounted cash flow models and option pricing models which imply the use of estimates and require judgments that vary in accordance with the complexity of the financial instruments. Notwithstanding, the Bank uses as inputs in its models, observable market data such as interest rate curves, credit spreads, volatility and market indexes. This category also includes instruments with dealer price quotations but which markets have a lower liquidity. Additionally, the Bank also uses as observable market variables, those that result from transactions with similar instruments and that are observed with a certain regularity on the market. This category includes, amongst others, the following financial instruments: (i) Bonds without observable market valuations valued using observable market inputs; (ii) OTC (over-the-counter) derivatives valued using observable market inputs; and (iii) Unlisted shares valued through internal models using observable market inputs. Valuation models based on unobservable market parameters (level 3) This level uses models relying on internal valuation techniques or quotations provided by third parties but which imply the use of non-observable market information. The bases and assumptions for the calculation of fair value are in accordance with IFRS 13. This category includes, amongst others, the following financial instruments: (i) Debt securities valued using non-observable market inputs; (ii) Unquoted shares; (iii) Closed real estate funds; (iv) Hedge funds; (v) Private equities; (vi) Restructuring funds; and NOVO BANCO | 2019 ANNUAL REPORT | 356 (vii) Over the counter (OTC) derivatives with prices provided by third parties. The valuation models used by type of instrument are as follows: Money market operations and loans and advances to customers: fair value is determined by the discounted cash flows method, with future cash flow being discounted considering the currency yield curve plus the credit risk of the entity contractually liquidating that flow. Commercial paper: its fair value is determined by discounting future cash flows considering the currency yield curve plus the credit risk of the issuer determined in the issuance program. Debt instruments (bonds) with liquidity: the selective independent valuation methodology is used based on observations available on Bloomberg, designated as 'Best Price', where all the valuations available are requested, but only previously validated sources considered as input, with the model excluding prices due to seniority and outlier prices. In the specific case of the Portuguese sovereign debt, and due to the market making activity and the materiality of the Bank's positions, the CBBT source valuations are always considered (the CBBT is a composite of valuations prepared by Bloomberg, which considers the average of executable prices with high liquidity). Debt instruments (bonds) with reduced liquidity: the models considered for the valuation of low liquidity bonds without observable market valuations are determined taking into account the information available on the issuer and the instrument, with the following models being considered: (i) discounted cash flows - cash flows are discounted considering the interest rate risk, credit risk of the issuer and any other risks subjacent to the instrument; or (ii) valuations made available by external counterparties, when it is impossible to determine the fair value of the instrument, with the selection always falling on reliable sources with reputed credibility in the market and impartiality in the valuation of the instruments being analysed. Convertible bonds: the cash flows are discounted considering the interest rate risk, the issuer's credit risk and any other risks that may be associated with the instrument, increased by the net present value (NPV) of the convertibility options embedded in the instrument. Shares and quoted funds: for quoted market products, the quotation on the respective stock exchange is considered. Unquoted Shares: the valuation is carried out using external valuations made of the companies in which the shareholding is held. In the event the request for an external valuation is not justified due to the immateriality of this position in the balance sheet, the position is revalued considering the book value of the entity. Unquoted funds: the valuation considered is that provided by the fund's management company which considers assumptions not observable in the market. In the event there are calls for capital after the reference date of the last available valuation, the valuation is recalculated considering the capital calls subsequent to the reference date at the amount at which these were made, until a new valuation is made available by the management company, already considering the capital calls realised. It should be noted that, although it accepts the valuations provided by the management companies, when applicable in accordance with the funds' regulations, the Bank requests the legal certification of accounts issued by independent auditors in order to obtain additional assurance about the information provided by the management company. Derivative instruments: if these are traded on organised markets, the valuations are observable in the market, otherwise these are valued using standard models and relying on observable variables in the market, namely: - Foreign currency options: are valued through the front office system, which considers models such as Garman-Kohlhagen, Binomial, Black & Scholes, Levy or Vanna-Volga; NOVO BANCO | 2019 ANNUAL REPORT | 357 - Interest rate swaps and foreign currency swaps: the valuation of these instruments is done through the front office system, where the fixed leg cash flows of the instrument are discounted based on the yield curve of the respective currency, and the cash flows of the variable leg are projected considering the forward curve and discounted, also considering discount factors and forward rates based on the yield curve of the respective currency; - Credit Default Swaps (CDS): both legs of the CDS are composed of cash flows contingent on the credit risk of the underlying asset and are therefore valued using market credit spreads; - Futures and Options: the Bank trades these products on an organised market, but also has the possibility to trade them on the OTC market. For futures and options traded on an organised market, the valuations are observable in the market, with the valuation being received daily through the broker selected for these products. For futures and options traded on the OTC market, and depending on the type of product and the underlying asset type, discrete time (binominal) or continuous time (Black & Scholes) models may be used. The fair value of financial assets and liabilities and non-financial assets (investment properties) measured at fair value of the Bank is as follows: NOVO BANCO | 2019 ANNUAL REPORT | 358 (in thousands of Euros)(Stage 1)(Stage 2)(Stage 3)31 December 2019Financial assets held for trading 254 848 419 704 74 284 748 836 Securities held for trading 254 848 - - 254 848 Bonds issued by public entities 254 848 - - 254 848 Derivatives held for trading- 419 704 191 419 895 Exchange rate contracts- 34 652 34 652 Interest rate contracts- 352 748 191 352 939 Credit default contracts- 1 1 Other- 32 303 32 303 Economic hedging derivatives- - 74 093 74 093 Interest rate contracts- - 74 093 74 093 Financial assets mandatorily at fair value through profit or loss 169 606 48 2 875 070 3 044 724 Bonds issued by other entities 57 535 48 637 084 694 667 Shares 112 071 - 489 542 601 613 Other variable income securities- - 1 748 444 1 748 444 Financial assets at fair value through other comprehensive income8 703 046 20 485 34 600 8 758 131 Bonds issued by public entities7 027 343 - - 7 027 343 Bonds issued by other entities1 661 538 - - 1 661 538 Shares 14 165 20 485 34 598 69 248 Other variable income securities- - 2 2 Derivatives - Hedge Accounting- 7 992 - 7 992 Interest rate contracts- 7 992 - 7 992 Assets at fair value9 127 500 448 229 2 983 954 12 559 683 Financial liabilities held for trading- 542 563 1 837 544 400 Derivatives held for trading- 542 563 1 837 544 400 Exchange rate contracts- 33 820 - 33 820 Interest rate contracts- 499 795 1 837 501 632 Credit default contracts- 42 - 42 Other- 8 906 - 8 906 Derivatives - Hedge Accounting- 58 854 - 58 854 Interest rate contracts- 58 854 - 58 854 Liabilities at fair value- 601 417 1 837 603 254 At Fair ValueTotal Fair ValueQuoted market pricesValuation models based on observable market parametersValuation models based on unobservable market parameters The changes occurred in financial assets and liabilities valued based on non-observable market information (level 3 of the fair value hierarchy) during the financial years of 2019 and 2018, may be analysed as follows: Potential gains and losses on financial instruments and investment property classified at level 3 of the fair value hierarchy are recorded in profit or loss or revaluation reserves in accordance with the respective asset accounting policy. The amounts calculated at 31 December 2019 and 2018 were as follows: NOVO BANCO | 2019 ANNUAL REPORT | 359 (in thousands of Euros)(Stage 1)(Stage 2)(Stage 3)31 December 2018Financial assets held for trading 257 270 519 739 148 535 925 544 Securities held for trading 257 270 - - 257 270 Bonds issued by public entities 257 269 - - 257 269 Bonds issued by other entities 1 - - 1 Derivatives held for trading- 519 739 396 520 135 Exchange rate contracts- 33 777 - 33 777 Interest rate contracts- 439 257 396 439 653 Credit default contracts- 9 - 9 Other- 46 696 - 46 696 Economic hedging derivatives- - 148 139 148 139 Interest rate contracts- - 70 176 70 176 Credit default contracts- - 77 963 77 963 Financial assets mandatorily at fair value through profit or loss 86 755 46 2 862 796 2 949 597 Bonds issued by other entities 9 970 46 319 932 329 948 Shares 76 785 - 596 514 673 299 Other variable income securities- - 1 946 350 1 946 350 Financial assets at fair value through other comprehensive income7 504 959 20 155 42 176 7 567 290 Bonds issued by public entities6 537 547 - - 6 537 547 Bonds issued by other entities 951 085 - - 951 085 Shares 16 327 20 155 42 173 78 655 Other variable income securities- - 3 3 Derivatives - Hedge Accounting- 1 721 - 1 721 Interest rate contracts- 1 721 - 1 721 Assets at fair value7 848 984 541 661 3 053 507 11 444 152 Financial liabilities held for trading- 490 679 2 724 493 403 Derivatives held for trading- 490 679 2 724 493 403 Exchange rate contracts- 33 596 - 33 596 Interest rate contracts- 433 239 2 724 435 963 Credit default contracts- 117 - 117 Other- 23 727 - 23 727 Derivatives - Hedge Accounting- 36 150 - 36 150 Interest rate contracts- 36 150 - 36 150 Liabilities at fair value- 526 829 2 724 529 553 At Fair ValueQuoted market pricesValuation models based on observable market parametersValuation models based on unobservable market parametersTotal Fair Value(in thousands of Euros)Financial liabilities held for tradingSecurities held for tradingDerivatives held for tradingEconomic hedging derivativesDerivatives held for tradingBalance as at 31 December 2018- 396 148 139 2 862 796 - 42 176 3 053 507 2 724 2 724 Acquisitions- - - 831 491 100 14 140 845 731 - - Attainment of maturity- - - ( 317 114)- - ( 317 114)- - Liquidation- ( 396)( 77 963)( 93 656)- ( 14 569)( 186 584)( 347)( 347)Transfers in- - - 16 - - 16 - - Transfers out- - - - ( 16)- ( 16)- - Changes in value- 191 3 917 ( 408 463)( 84)( 7 147)( 411 586)( 540)( 540)Balance as at 31 December 2019- 191 74 093 2 875 070 - 34 600 2 983 954 1 837 1 837 Financial assets at fair value through other comprehensive incomeTotal assets31.12.2019Financial assets held for tradingFinancial assets mandatorily at fair value through profit or lossFinancial assets at fair value through profit or lossTotal liabilities(in thousands of Euros)Financial liabilities held for tradingSecurities held for tradingDerivatives held for tradingEconomic hedging derivativesDerivatives held for tradingBalance as at 31 December 2017 81 448 103 779 - 3 973 4 597 158 4 705 439 2 440 2 440 Impact of transition to IFRS 9( 81)- - 3 005 906 ( 3 973)(4 550 344)(1 548 492)- - Balance as at 1 January 2018- 448 103 779 3 005 906 - 46 814 3 156 947 2 440 2 440 Acquisitions- - - 57 667 - 7 516 65 183 - - Attainment of maturity- - - ( 43 016)- ( 7 661)( 50 677)- - Liquidation- ( 121)( 24 397)( 98 969)- ( 1)( 123 488)- - Transfers in- 163 70 169 - - - 70 332 40 40 Changes in value- ( 94)( 1 412)( 58 792)- ( 4 492)( 64 790) 244 244 Balance as at 31 December 2018- 396 148 139 2 862 796 - 42 176 3 053 507 2 724 2 724 Total liabilitiesFinancial assets mandatorily at fair value through profit or loss31.12.2018Financial assets held for tradingFinancial assets at fair value through profit or lossFinancial assets at fair value through other comprehensive incomeTotal assets The following table presents, for assets included in level 3 of the fair value hierarchy, the main valuation methods used and the impact of changing the main variables used in their valuation, when applicable: NOVO BANCO | 2019 ANNUAL REPORT | 360 (in thousands of Euros)Recognised in reservesRecognised in the income statementTotalRecognised in reservesRecognised in the income statementTotalDerivatives held for trading- 682 682 - ( 464)( 464)Securities held for trading- ( 71 759)( 71 759)- 24 724 24 724 Financial assets mandatorily at fair value through profit or loss- ( 405 766)( 405 766)- ( 55 216)( 55 216)Financial assets at fair value through other comprehensive income 1 015 - 1 015 ( 28 617)- ( 28 617) 1 015 ( 476 843)( 475 828)( 28 617)( 30 956)( 59 573)31.12.201931.12.2018(in millions of Euros)ChangeImpactChangeImpactFinancial assets held for trading 74,3 - -Derivatives held for tradingOther(a) 0,2 - -Economic hedging derivativesc)c) 74,1 - -Financial assets mandatorily at fair value through profit or loss2 875,1( 77,7) 96,3Obligations of other issuersDiscounted cash flow modelDiscount rate 637,1 (-) 100 bps( 48,3) (+) 100 bps 65,3Shares 489,5( 29,3) 31,0Discounted cash flow modelSpecific Impairment 74,7-50%( 29,3)+50% 31,0Other(a) 2,8 - -Valuation of the management companyNet assets value (b) 412,1 - -Other variable income securities1 748,4 - -Other(a) 0,2 - -Valuation of the management companySpecific Impairment1 748,2 - -Financial assets at fair value through other comprehensive income 34,6 - -Shares 34,6 - -Other(a) 0,3 - -OtherSpecific Impairment 34,3 - -Total2 983,9( 77,7) 96,3(b) In the specific case of derivatives valued according to information provided by external entities, it is not reasonable to carry out an analysis of the impact of changes of the variables subjacent to the determination of the quotation by the entity(c)Inthespecificcaseofparticipationunitsvaluedinaccordancewithquotationsprovidedbytherespectivemanagementcompany,itisnotreasonabletocarryoutananalysisoftheimpactofchangesofthevariablessubjacenttothedeterminationofthequotation by the entity(a) No sensitivity analysis was carried out for these categories as these include securities of an individually immaterial value.Assets classified under level 331.12.2019Valuation Model Variable analysedCarrying book valueUnfavorable scenarioFavorable scenario(in millions of Euros)ChangeImpactChangeImpactFinancial assets held for trading 148,5 - -Derivatives held for tradingOther(a) 0,4 - -Economic hedging derivativesc)c) 148,1 - -Financial assets mandatorily at fair value through profit or loss2 862,8( 37,9) 46,6Obligations of other issuersDiscounted cash flow modelDiscount rate 319,9(-) 100 bps( 14,9)(+) 100 bps 16,5Shares 596,5( 23,0) 30,1Discounted cash flow modelSpecific Impairment 83,5-50%( 23,0)+50% 30,1Others(a) 2,8 - -Valuation of the management companyNet assets value (b) 510,3 - -Other variable income securities1 946,4 - -Others(a) 0,5 - -Valuation of the management companyNet assets value (b)1 945,8 - -Financial assets at fair value through other comprehensive income 42,2 - -Shares 42,2 - -Others 10,9 - -Others(a) 31,2 - -Valuation of the management companyNet assets value (b) 0,1 - -Total3 053,5( 37,9) 46,6(c)Inthespecificcaseofparticipationunitsvaluedinaccordancewithquotationsprovidedbytherespectivemanagementcompany,itisnotreasonabletocarryoutananalysisoftheimpactofchangesofthevariablessubjacenttothedeterminationofthequotation by the entity(b) In the specific case of derivatives valued according to information provided by external entities, it is not reasonable to carry out an analysis of the impact of changes of the variables subjacent to the determination of the quotation by the entity(a) No sensitivity analysis was carried out for these categories as these include securities of an individually immaterial value.Assets classified under level 331.12.2018Valuation Model Variable analysedCarrying book valueUnfavorable scenarioFavorable scenario The main parameters used, at 31 December 2019 and 2018, in the valuation models were as follows: Interest rate curves The short-term rates presented reflect benchmark interest rates for the money market, whilst those presented for the long-term represent the interest rate swap quotations for the respective periods: Credit Spreads The credit spreads used by the Bank in the valuation of credit derivatives are those disclosed on a daily basis by Markit, representing observations pertaining to around 85 renowned international financial entities. The evolution of the main indexes, understood as being representative of the credit spread behavior in the market during the year, is presented as follows: Interest rate volatility The values presented below represent the implicit volatilities (at the money) used for the valuation of interest rate options: NOVO BANCO | 2019 ANNUAL REPORT | 361 (%)EURUSDGBPEURUSDGBPOvernight-0,45601,60000,7500-0,42002,40000,76501 month-0,43801,79000,7650-0,36302,70000,90503 months-0,38301,92000,8650-0,30902,87000,95006 months-0,32401,93000,9000-0,23702,95001,07009 months-0,31741,91000,9450-0,22953,03001,16001 year-0,31611,74900,7419-0,22502,74400,98983 years-0,23801,65560,8243-0,06502,58001,21935 years-0,12051,69900,88440,20102,57801,30507 years0,01601,76300,94060,46902,62101,357410 years0,21101,84701,01720,81502,71101,436515 years0,46701,96501,09681,16902,78901,513120 years0,59902,01601,12061,34502,81901,546125 years0,63702,03501,11301,37202,81901,549130 years0,63102,04201,10821,40502,81101,541131.12.201931.12.2018(basis points)IndexSeries1 year3 years5 years7 years10 years31 December 2019CDX USD Main339,0923,3145,3067,4790,08iTraxx Eur Main32-23,3244,2264,9985,26iTraxx Eur Senior Financial32--51,59-83,4531 December 2018CDX USD Main3028,3455,9187,74112,28132,90iTraxx Eur Main29-54,7688,08111,06131,23iTraxx Eur Senior Financial29--109,52-146,91(%)EURUSDGBPEURUSDGBP1 year12,7118,8748,8316,4811,2533,953 years22,7439,2357,7332,1722,87-5 years33,5136,5764,0448,2027,2958,017 years40,1239,2567,7957,4228,3561,2510 years46,4634,7170,8763,3430,20-15 years51,03--64,69--31.12.201931.12.2018 Foreign exchange rates and volatility Presented below, are the foreign exchange rates (European Central Bank) at the balance sheet date and the implicit volatilities (at the money) for the main currencies used in the derivatives’ valuation: With regard to exchange rates, the Bank uses in the valuation models the spot rate observed in the market at the time of evaluation. Equity indexes The table below presents the evolution of the main market equity indexes and their respective volatilities, used in the valuation of equity derivatives: The fair value of financial assets and liabilities recorded in the balance sheet at amortised cost is analysed as follows, having been estimated based on the main methodologies and assumptions described below: NOVO BANCO | 2019 ANNUAL REPORT | 362 Foreign exchange rate31.12.201931.12.20181 month3 months6 months9 months1 yearEUR/USD1,12341,14505,035,245,435,585,85EUR/GBP0,85080,89457,106,786,836,806,95EUR/CHF1,08541,12693,984,204,354,584,68EUR/NOK9,86389,94836,296,306,406,506,58EUR/PLN4,25684,30143,803,854,044,134,20EUR/RUB69,956379,71537,518,078,719,299,58USD/BRL a)4,01973,881210,4510,5810,5710,6510,73USD/TRY b)5,95015,291512,0513,2014,3015,1315,93Volatility (%)a) Calculated based on EUR / USD and EUR / BRL exchange rates.b) Calculated based on EUR / USD and EUR / TRY exchange rates.31.12.201931.12.2018% Change1 month3 monthsDJ Euro Stoxx 50 3 745 3 001 -19,86%11,1511,68-PSI 20 5 214 4 731 -9,26%9,6710,42-IBEX 35 9 549 8 540 -10,57%12,1512,24-FTSE 100 7 542 6 728 -10,80%13,2111,9011,26DAX 13 249 10 559 -20,30%10,7012,1212,59S&P 500 3 231 2 507 -22,41%7,329,5311,14BOVESPA 115 645 87 887 -24,00%11,2415,0319,21Implied VolatilityHistorical volatilityQuotation(in thousands of Euros)(Stage 1)(Stage 2)(Stage 3)31 December 2019Cash, cash balances at central bank and other demand deposits1 674 826 - 1 674 826 - 1 674 826 Financial assets at amortised costDebt securities2 392 843 84 535 636 336 1 859 016 2 579 887 Loans and advances to banks 495 252 - 495 252 - 495 252 Loans and advances to customers23 154 148 - - 23 482 498 23 482 498 Financial assets27 717 069 84 535 2 806 414 25 341 514 28 232 463 Financial liabilities measured at amortised costDeposits from banks10 542 549 - 10 568 776 - 10 568 776 Due to customers27 980 577 - - 27 980 577 27 980 577 Debt securities issued, subordinated debt and liabilities associated to transferred assets1 044 445 1 271 541 - 106 529 1 378 070 Other financial liabilities 356 993 - - 356 993 356 993 Financial liabilities39 924 564 1 271 541 10 568 776 28 444 099 40 284 416 Assets / liabilities recorded at amortised costFair ValueQuoted market pricesValuation models based on observable market parametersValuation models based on unobservable market parametersTotal fair value Cash and deposits with Central Banks, Deposits with banks and Loans and advances to credit institutions and Deposits from Central Banks. Considering the short-term nature of these financial instruments, their carrying book value is a reasonable estimate of their fair value. Securities at amortised cost The fair value of securities recorded at fair value is estimated according to the methodologies used for the valuation of securities recorded at fair value, as described at the beginning of the current Note. Loans and advances to customers The fair value of loans and advances to customers is estimated based on the discounted expected future cash flows of principal and interest, assuming that the instalments are paid on the dates contractually defined. The expected future cash flows from portfolios of loans with similar credit risk characteristics, such as residential mortgage loans, are estimated collectively on a portfolio basis. The discount rates used by the Bank are the current interest rates used for loans with similar characteristics. Deposits from credit institutions The fair value of deposits from Central Banks and Deposits from credit institutions is estimated based on the discounted expected future cash flows of principal and interest. Due to customers The fair value of these financial instruments is estimated based on the discounted expected future cash flows of principal and interest. The discount rate used by the Bank is that which reflects the current interest rates applicable to deposits with similar characteristics at the balance sheet date. Given that the interest rates applicable to these instruments are renewed for periods under one year, there are no material relevant differences in their fair value. Debt Securities issued, subordinated debt and financial liabilities associated to transferred assets The fair value of these instruments is based on quoted market prices, when available. When not available, the Group estimates their fair value by discounting their expected future cash flows of principal and interest. Other financial liabilities These liabilities are short-term and therefore the book value is a reasonable estimate of their fair value. NOVO BANCO | 2019 ANNUAL REPORT | 363 (in thousands of Euros)(Stage 1)(Stage 2)(Stage 3)31 December 2018Cash, cash balances at central bank and other demand deposits 802 330 - 802 330 - 802 330 Financial assets at amortised costDebt securities2 302 765 10 464 705 677 1 781 362 2 497 503 Loans and advances to banks 558 652 - 558 652 - 558 652 Loans and advances to customers22 789 985 - - 22 937 425 22 937 425 Financial assets26 453 732 10 464 2 066 659 24 718 787 26 795 910 Financial liabilities measured at amortised costDeposits from banks9 119 139 - 9 123 957 - 9 123 957 Due to customers28 439 075 - - 28 439 075 28 439 075 Debt securities issued, subordinated debt and liabilities associated to transferred assets1 135 128 1 055 795 - 252 864 1 308 659 Other financial liabilities 232 263 - - 232 263 232 263 Financial liabilities38 925 605 1 055 795 9 123 957 28 924 202 39 103 954 Fair ValueTotal fair valueAssets / liabilities recorded at amortised costQuoted market pricesValuation models based on observable market parametersValuation models based on unobservable market parameters NOTE 37 – RISK MANAGEMENT The Bank is exposed to the following risks arising from the use of financial instruments: - Credit risk; - Market risk; - Liquidity risk; - Operational risk. Credit risk Credit risk represents the potential financial loss arising from the failure of a borrower or counterparty to honor its contractual obligation established with the Bank in the scope of its credit granting activity. Credit risk is essentially present in traditional banking products – loans, guarantees provided and other contingent liabilities. In credit default swaps (CDS), the net exposure between selling and buying positions in relation to each reference entity, is also considered a credit risk to NOVO BANCO, CDSs are accounted for at fair value in accordance with the accounting policy described in Note 2.3. Credit portfolio management is an ongoing process that requires the interaction between the various teams responsible for risk management throughout the consecutive stages of the credit process. This approach is complemented by the continuous introduction of improvements in the valuation methodologies and tools used to evaluate and control risk, as well as in the procedures and decision making processes. The risk profile of the Bank is analysed on a regular basis by the Risk Committee, especially regarding the evolution of the credit exposure and the monitoring of credit losses. Regular analyzes also include compliance with the approved credit limits and the correct operation of the mechanisms associated with the approval of credit lines within the scope of the current activity of the commercial areas. NOVO BANCO maximum credit risk exposure is analysed as follows: For financial assets in the balance sheet, the maximum exposure to credit risk is represented by the carrying book value net of impairment. For the off-balance sheet elements, the maximum exposure of the guarantees is the maximum amount that the Bank would have to pay if the guarantees were executed. For loan commitments and other credit-related commitments of an irrevocable nature, the maximum exposure is the total amount of the commitments assumed. The Bank calculates impairment, on a collective or individual basis in accordance with the accounting policy described in Note 2.4. Whenever the value of the collateral, net of haircuts (taking into account the type of collateral), equals or exceeds the exposure, the individual impairment may be nil. Hence, NOVO BANCO Bank NOVO BANCO | 2019 ANNUAL REPORT | 364 (in thousands of Euros)31.12.201931.12.2018Deposits with and loans and advances to banks 587 014 665 693Derivatives for trading and fair value option derivatives 493 988 668 274Securities held for trading 254 848 257 270Securities at fair value through profit/loss - mandatory 694 667 329 948Securities at fair value through other comprehensive income 8 683 3767 487 428Securities at amortised cost 2 392 8432 302 765Loans and advances to customers23 204 03222 821 556Derivatives - hedge accounting 7 992 1 721Other assets 555 935 690 573Guarantees and standby letters provided3 054 1933 171 940Documentary credits 516 162 664 905Irrevocable commitments7 303 6365 578 108Credit risk associated with the credit derivatives' reference entities 2 883 7 81447 751 56944 647 995 does not have any overdue financial assets for which it has not performed a review regarding their recoverability and the subsequent impairment recognition, when necessary. The table below displays the assets impaired, or overdue but not impaired: Impairment exposures correspond to (i) exposures with objective evidence of loss ("Exposure in default", according to the internal definition of default - which corresponds to stage 3); and (ii) exposures classified as having specific impairment after an individual assessment of impairment. Exposures classified as non-impairing relate to (i) all exposures that do not show signs of significant deterioration of credit risk - exposures classified as stage 1; (ii) exposures that, with signs of a significant deterioration of credit risk, have no objective evidence of impairment or impairment after an individual assessment of impairment. The following table presents the assets that are impaired or overdue but not impaired, split by their respective maturity or ageing (when overdue): NOVO BANCO | 2019 ANNUAL REPORT | 365 (in thousands of Euros)Neither overdue nor impairedOverdue but not impairedImpairedTotal exposureImpairment Net exposureDeposits with and loans and advances to banks 282 647 - 381 501 664 148 ( 77 134) 587 014 Securities held for trading 254 848 - - 254 848 - 254 848 Bonds issued by government and other public entities 254 848 - - 254 848 - 254 848 Securities at fair value through profit/loss - mandatory 694 667 - - 694 667 - 694 667 Bonds issued by other entities 694 667 - - 694 667 - 694 667 Securities at fair value through other comprehensive income8 643 361 - 45 520 8 688 881 ( 5 505)8 683 376 Bonds issued by government and other public entities7 027 343 - - 7 027 343 ( 4 476)7 022 867 Bonds issued by other entities1 616 018 - 45 520 1 661 538 ( 1 029)1 660 509 Securities at amortised cost 2 448 522 - 104 475 2 552 997 ( 160 154)2 392 843 Bonds issued by government and other public entities 459 260 - - 459 260 ( 704) 458 556 Bonds issued by other entities 1 989 262 - 104 475 2 093 737 ( 159 450)1 934 287 Loans and advances to customers 22 115 138 15 390 2 914 987 25 045 515 (1 841 483)23 204 032 31.12.2019(in thousands of Euros)Neither overdue nor impairedOverdue but not impairedImpairedTotal exposureImpairment Net exposureDeposits with and loans and advances to banks 367 037 - 374 400 741 437 ( 75 744) 665 693 Securities held for trading 257 270 - - 257 270 - 257 270 Bonds issued by government and other public entities 257 269 - - 257 269 - 257 269 Bonds issued by other entities 1 - - 1 - 1 Securities at fair value through profit/loss - mandatory 329 948 - - 329 948 - 329 948 Bonds issued by other entities 329 948 - - 329 948 - 329 948 Securities at fair value through other comprehensive income7 443 132 - 45 500 7 488 632 ( 1 204)7 487 428 Bonds issued by government and other public entities6 537 547 - - 6 537 547 ( 807)6 536 740 Bonds issued by other entities 905 585 - 45 500 951 085 ( 397) 950 688 Securities at amortised cost 2 352 129 - 142 961 2 495 090 ( 192 325)2 302 765 Bonds issued by government and other public entities 503 123 - - 503 123 ( 771) 502 352 Bonds issued by other entities 1 849 006 - 142 961 1 991 967 ( 191 554)1 800 413 Loans and advances to customers 20 659 358 14 655 6 219 386 26 893 399 (4 071 843)22 821 556 31.12.2018(in thousands of Euros)Overdue but not impairedImpairedOverdue but not impaired ImpairedOverdue but not impairedImpairedOverdueUp to 3 months - - - - 12 938 21 436 3 months to 1 year - 6 770 - - 629 67 617 1 to 3 years - 56 070 - - 999 312 133 3 to 5 years - 87 155 - - 740 348 588 More than 5 years - - - - 84 332 081 - 149 995 - - 15 390 1 081 855 DueUp to 3 months - - - - - 117 387 3 months to 1 year - - - - - 320 262 1 to 3 years - - - - - 495 393 3 to 5 years - - - - - 161 206 More than 5 years - - - 381 501 - 738 884 - - - 381 501 - 1 833 132 - 149 995 - 381 501 15 390 2 914 987 31.12.2019Securities Portfolio - debtinstruments Deposits with and loans and advances to banksLoans and advances to customers The following table shows the assets impaired or overdue but not impaired, broken down by the respective impairment Stage: In relation to assets that are not overdue or impaired, the distribution by rating level is presented below. For debt instruments, the rating assigned by the Rating Agencies is considered; for the loans and advances to customers and cash and deposits with banks the rating and scoring models for the attribution of a credit rating are used, with these being reviewed periodically. For the purpose of presenting the information, the ratings were aggregated into five large risk groups, with the last group including unrated exposures. NOVO BANCO | 2019 ANNUAL REPORT | 366 (in thousands of Euros)Overdue but not impairedImpairedOverdue but not impaired ImpairedOverdue but not impairedImpairedOverdueUp to 3 months - - - - 11 999 43 758 3 months to 1 year - 11 000 - - 1 107 390 776 1 to 3 years - 72 697 - - 1 349 1 219 855 3 to 5 years - 97 775 - - 73 1 136 612 More than 5 years - 219 - - 127 723 467 - 181 691 - - 14 655 3 514 468 DueUp to 3 months - 3 880 - - - 231 351 3 months to 1 year - 2 890 - - - 623 333 1 to 3 years - - - - - 450 902 3 to 5 years - - - - - 275 401 More than 5 years - - - 374 400 - 1 123 931 - 6 770 - 374 400 - 2 704 918 - 188 461 - 374 400 14 655 6 219 386 Securities Portfolio - debtinstruments Deposits with and loans and advances to banksLoans and advances to customers31.12.2018(in thousands of Euros)Stage 1Stage 2Stage 3TotalStage 1Stage 2Stage 3TotalDeposits with and loans and advances to banks - 381 501 - 381 501 - 374 400 - 374 400 Securities at fair value through other comprehensive income - - 45 520 45 520 - - 45 500 45 500 Securities at amortised cost - - 104 475 104 475 - - 142 961 142 961 Loans and advances to customers 934 14 456 2 914 987 2 930 377 6 846 155 511 6 071 684 6 234 041 934 395 957 3 064 982 3 461 873 6 846 529 911 6 260 145 6 796 902 31.12.201931.12.2018(in thousands of Euros)Prime +High gradeUpper Medium GradeLower Medium gradeNon Investment Grade Speculative + Highly speculativeOthersTotalDeposits with and loans and advances to banks 45 5 004 13 411 33 961 230 226 282 647 Securities held for trading - 5 070 249 778 - - 254 848 Bonds issued by government and other public entities - 5 070 249 778 - - 254 848 Securities at fair value through profit/loss - mandatory - 47 340 - - 647 327 694 667 Bonds issued by other entities - 47 340 - - 647 327 694 667 Securities at fair value through other comprehensive income1 615 203 2 407 116 3 854 798 - 766 244 8 643 361 Bonds issued by government and other public entities1 169 578 2 400 889 3 456 876 - - 7 027 343 Bonds issued by other entities 445 625 6 227 397 922 - 766 244 1 616 018 Securities at amortised cost - - 101 711 35 479 2 311 332 2 448 522 Bonds issued by government and other public entities - - - - 459 260 459 260 Bonds issued by other entities - - 101 711 35 479 1 852 072 1 989 262 Loans and advances to customers2 742 396 7 937 525 2 541 376 7 373 023 1 520 819 22 115 138 31.12.2019(in thousands of Euros)Prime +High gradeUpper Medium GradeLower Medium gradeNon Investment Grade Speculative + Highly speculativeOthersTotalDeposits with and loans and advances to banks 1 13 732 44 909 64 031 244 364 367 037 Securities held for trading - - 257 269 - 1 257 270 Bonds issued by government and other public entities - - 257 269 - - 257 269 Instrumentos de dívida- outros emissores - - - - 1 1 Securities at fair value through profit/loss - mandatory - - - - 329 948 329 948 Bonds issued by other entities - - - - 329 948 329 948 Securities at fair value through other comprehensive income1 081 656 2 088 725 3 894 079 - 378 672 7 443 132 Bonds issued by government and other public entities 784 128 2 047 323 3 706 096 - - 6 537 547 Bonds issued by other entities 297 528 41 402 187 983 - 378 672 905 585 Securities at amortised cost - - - 533 577 1 818 552 2 352 129 Bonds issued by government and other public entities - - - 503 123 - 503 123 Bonds issued by other entities - - - 30 454 1 818 552 1 849 006 Loans and advances to customers2 399 987 7 093 238 2 630 639 6 283 981 2 251 513 20 659 358 31.12.2018 As at 31 December 2019 and 2018, the analysis of the gross loans and advances to customers’ exposure and impairment constituted, by segment, is presented as follows: As at 31 December 2019 and 2018, the analysis of the Loans and advances to customers’ portfolio, by segment and by year of reference was as follows: NOVO BANCO | 2019 ANNUAL REPORT | 367 (in thousands of Euros)31.12.2019PerfomingNon-PerfomingTotal CreditDays of delay<= 90 days> 90 daysExposureImpairmentExposureImpairmentExposureImpairmentExposureImpairmentExposureImpairmentExposureImpairmentCorporate12 470 938 153 664 59 316 3 144 12 530 254 156 808 1 150 070 522 725 1 425 941 966 163 2 576 011 1 488 888 15 106 265 1 645 696 Mortgage loans8 341 812 13 667 32 833 504 8 374 645 14 171 55 171 18 616 94 242 25 543 149 413 44 159 8 524 058 58 330 Consumer and other loans 1 143 292 3 738 7 160 387 1 150 452 4 125 149 401 54 750 115 339 78 582 264 740 133 332 1 415 192 137 457 Total 21 956 042 171 069 99 309 4 035 22 055 351 175 104 1 354 642 596 091 1 635 522 1 070 288 2 990 164 1 666 379 25 045 515 1 841 483 TotalExposureImpairmentSegment Performing or with a delay < 30 days With a delay > 30 daysTotal(in thousands of Euros)31.12.2018PerfomingNon-PerfomingTotal CreditDays of delay<= 90 days> 90 daysExposureImpairmentExposureImpairmentExposureImpairmentExposureImpairmentExposureImpairmentExposureImpairmentCorporate11 976 252 288 439 38 781 1 524 12 015 033 289 963 1 734 509 712 254 4 058 565 2 934 405 5 793 074 3 646 659 17 808 107 3 936 622 Mortgage loans7 435 397 17 951 37 559 651 7 472 956 18 602 49 689 13 000 130 661 20 390 180 350 33 390 7 653 306 51 992 Consumer and other loans 1 106 648 325 8 227 505 1 114 875 830 180 025 6 754 137 086 75 645 317 111 82 399 1 431 986 83 229 Total 20 518 297 306 715 84 567 2 680 20 602 864 309 395 1 964 223 732 008 4 326 312 3 030 440 6 290 535 3 762 448 26 893 399 4 071 843 Performing or with a delay < 30 days With a delay > 30 daysTotalExposureImpairmentSegment Total(in thousands of Euros)Number of operationsAmountImpairment Number of operationsAmountImpairment Number of operationsAmountImpairment Number of operationsAmountImpairment 2004 and earlier 5 944 323 531 50 349 69 815 1 498 793 35 252 738 795 91 401 - 814 554 1 913 725 85 601 2005 1 191 106 870 11 686 5 827 240 418 1 396 15 293 11 597 311 22 311 358 885 13 393 2006 1 418 278 837 36 363 8 204 374 449 1 552 19 804 17 362 1 078 29 426 670 648 38 993 2007 1 688 416 957 43 036 12 417 554 961 3 225 28 209 22 104 1 346 42 314 994 022 47 607 2008 1 658 663 195 27 284 11 751 584 123 2 361 22 463 22 534 976 35 872 1 269 852 30 621 2009 1 355 366 741 40 680 9 375 498 041 2 059 13 686 26 484 5 137 24 416 891 266 47 876 2010 1 806 414 791 95 760 9 080 529 007 2 583 24 196 38 142 1 851 35 082 981 940 100 194 2011 1 599 348 886 54 549 5 017 244 291 1 150 24 077 21 520 1 225 30 693 614 697 56 924 2012 2 006 641 597 300 890 2 813 110 965 762 33 038 26 048 4 271 37 857 778 610 305 923 2013 2 889 727 339 198 367 3 243 169 289 861 28 930 42 707 15 564 35 062 939 335 214 792 2014 3 545 660 642 198 803 2 102 127 272 415 29 000 26 631 2 147 34 647 814 545 201 365 2015 5 061 952 786 129 660 3 165 207 902 599 36 827 129 491 43 687 45 053 1 290 179 173 946 2016 7 046 1 147 180 100 319 6 481 464 941 953 59 469 120 473 35 678 72 996 1 732 594 136 950 2017 10 094 1 720 989 159 221 9 964 826 096 2 776 67 303 172 043 12 722 100 343 2 719 128 174 719 2018 10 784 2 632 707 101 621 11 152 1 059 847 1 178 78 299 257 016 6 473 100 235 3 949 570 109 272 2019 21 379 3 703 217 97 108 10 355 1 033 663 1 208 76 142 389 639 4 991 107 876 5 126 519 103 307 Total 79 463 15 106 265 1 645 696 180 761 8 524 058 58 330 1 295 531 1 415 192 137 457 1 568 737 25 045 515 1 841 483 31.12.2019Year of productionCorporateMortgage loans Consumer and other loansTotal(in thousands of Euros)Number of operationsAmountImpairment Number of operationsAmountImpairment Number of operationsAmountImpairment Number of operationsAmountImpairment 2004 and earlier 6 718 454 071 84 340 43 402 1 002 323 28 421 706 344 151 032 11 403 756 464 1 607 426 124 164 2005 1 334 153 867 30 717 5 762 244 337 1 183 18 243 18 941 486 25 339 417 145 32 386 2006 1 512 333 431 46 227 8 474 393 257 1 491 22 889 24 006 1 216 32 875 750 694 48 934 2007 1 792 472 602 88 964 14 579 604 373 2 827 32 138 30 311 1 299 48 509 1 107 286 93 090 2008 1 809 817 706 102 862 13 535 685 978 2 762 25 967 32 175 939 41 311 1 535 859 106 563 2009 1 677 699 604 203 033 10 902 575 855 2 878 23 131 39 948 2 659 35 710 1 315 407 208 570 2010 2 009 732 943 294 947 9 980 585 689 2 778 27 397 54 821 2 041 39 386 1 373 453 299 766 2011 1 843 556 323 126 675 5 707 277 873 1 459 27 342 28 186 1 250 34 892 862 382 129 384 2012 2 293 1 587 108 993 590 3 392 133 248 1 156 34 785 33 526 3 239 40 470 1 753 882 997 985 2013 3 861 970 845 337 116 4 090 205 182 1 350 31 289 65 781 12 547 39 240 1 241 808 351 013 2014 4 682 1 212 884 427 147 2 792 158 848 702 28 685 36 786 1 586 36 159 1 408 518 429 435 2015 7 017 1 501 406 301 536 3 733 245 966 653 37 673 160 225 22 985 48 423 1 907 597 325 174 2016 8 490 1 953 268 480 685 7 339 529 890 1 235 56 988 149 737 13 584 72 817 2 632 895 495 504 2017 11 141 2 264 472 140 797 10 876 907 970 1 543 62 446 235 962 6 119 100 343 3 408 404 148 459 2018 21 330 4 097 577 277 986 11 463 1 102 517 1 554 65 346 370 549 1 876 98 139 5 570 643 281 416 Total 77 508 17 808 107 3 936 622 156 026 7 653 306 51 992 1 200 663 1 431 986 83 229 1 450 077 26 893 399 4 071 843 31.12.2018Year of productionCorporateMortgage loans Consumer and other loansTotal The figures presented include, in addition to all new operations of the reference year, renewals, interventions and restructurings of operations originated in previous years, including the period prior to the setting up of NOVO BANCO. As at 31 December 2019 and 2018, the analysis of the gross loans and advances to customers’ exposure and impairment assessed individually and collectively, by segment, is presented as follows: The loans and advances analysed by the Impairment Committee, for which the impairment amount automatically determined by the model was not changed, are included and presented in the "Collective assessment". As at 31 December 2019 and 2018, the analysis of the gross loans and advances to customers’ exposure and impairment assessed individually and collectively, by geography, is presented as follows: The differential between the amount of the loans and advances to customers and the fair value of the collateral represents the total loans’ exposure that exceeds the value of the collateral. This value is not impacted by collaterals with a fair value in excess of the loan to which they are linked. NOVO BANCO | 2019 ANNUAL REPORT | 368 (in thousands of Euros)ExposureImpairmentExposureImpairmentExposureImpairmentCorporate 2 416 692 1 407 752 12 689 573 237 944 15 106 265 1 645 696 Mortgage loans 10 883 2 386 8 513 175 55 944 8 524 058 58 330 Consumer and other loans 200 414 115 384 1 214 778 22 073 1 415 192 137 457 Total 2 627 989 1 525 522 22 417 526 315 961 25 045 515 1 841 483 (1) Loans and advances for which the final impairment was determined and approved by the Impairment Committee(2) Loans and advances for which the final impairment was determined according to the calculation rules of the collective impairment model31.12.2019Individual Assessment (1)Collective Assessment (2)Total(in thousands of Euros)ExposureImpairmentExposureImpairmentExposureImpairmentCorporate 6 037 388 3 764 203 11 770 719 172 419 17 808 107 3 936 622 Mortgage loans 6 943 826 7 646 363 51 166 7 653 306 51 992 Consumer and other loans 269 965 56 576 1 162 021 26 653 1 431 986 83 229 Total 6 314 296 3 821 605 20 579 103 250 238 26 893 399 4 071 843 (1) Loans and advances for which the final impairment was determined and approved by the Impairment Committee(2) Loans and advances for which the final impairment was determined according to the calculation rules of the collective impairment model31.12.2018Individual Assessment (1)Collective Assessment (2)Total(in thousands of Euros)31.12.201931.12.2018Amount of loansFair value of collateralAmount of loansFair value of collateralIndividuals - MortgageMortgages8 361 300 8 347 345 7 524 800 7 511 810 Pledges 77 307 76 667 56 090 55 704 Not collateralized 85 451 - 72 416 - 8 524 058 8 424 012 7 653 306 7 567 514 Individuals - OtherMortgages 261 974 256 489 273 338 261 495 Pledges 295 965 165 438 337 031 191 572 Not collateralized 857 253 - 821 617 - 1 415 192 421 927 1 431 986 453 067 CorporateMortgages 2 868 316 2 535 429 3 448 299 3 109 864 Pledges5 002 788 2 568 332 6 386 323 2 795 794 Not collateralized 7 235 161 - 7 973 485 - 15 106 265 5 103 761 17 808 107 5 905 658 Total 25 045 515 13 949 700 26 893 399 13 926 239 The details of the collateral – mortgages is presented as follows: The amounts of the collateral – mortgages, presented above, represent the maximum coverage value of the assets collateralised, i.e. which are considered up to the gross amount of the individual loans collateralised. The assessment of the risk of an operation or set of operations considers the associated credit risk mitigation elements, according to the internal rules and procedures implemented. Relevant collaterals are essentially the following: - Real estate properties, where the value considered is that which corresponds to the latest available valuation; - Financial pledges, where the value considered corresponds to the quotation on the last day of the month - in the case of a quoted security - or to the value of the pledge - in the case of cash. The acceptance of collateral as a guarantee for loans and advances to customers leads to the need to define and implement risk mitigation techniques in respect of the exposures of said collateral. Thus, and as an approach to this matter, the Bank stipulated several procedures applicable to collateral (namely the financial and real estate properties collateral), covering amongst others, the volatility of the value of the collateral, its liquidity as well as an indication as to the recovery rates associated with each type of collateral. Therefore, the internal rules governing the credit granting powers have a specific chapter on this point, "Acceptance of collateral - Risk mitigation techniques in respect of the exposures of said collateral, namely the risks of liquidity and volatility." The real estate properties revaluation process is conducted by valuation experts registered with the CMVM, and is based on the methodology described in Note 2.10. NOVO BANCO | 2019 ANNUAL REPORT | 369 (in thousands of Euros)NumberAmountNumberAmountNumberAmountNumberAmount< 0.5M€ 175 277 8 160 435 5 205 221 517 5 299 384 020 185 781 8 765 972 >= 0.5M€ and <1.0M€ 234 138 221 44 16 666 2 100 238 306 2 378 393 193 >= 1.0M€ and <5.0M€ 46 48 689 18 18 306 6 365 697 100 6 429 764 095 >= 5.0M€ and <10.0M€- - - - 651 323 305 651 323 305 >= 10.0M€ and <20.0M€- - - - 3 267 303 602 3 267 303 602 >= 20.0M€ and <50.0M€- - - - 222 518 961 222 518 961 >= 50M€- - - - 1 70 135 1 70 135 175 557 8 347 345 5 267 256 489 17 905 2 535 429 198 729 11 139 263 31.12.2019Individuals - Mortgage loansIndividuals - Other loansCorporate loansTotal(in thousands of Euros)NumberAmountNumberAmountNumberAmountNumberAmount< 0.5M€ 148 766 7 343 301 4 943 213 885 7 826 412 373 161 535 7 969 559 >= 0.5M€ and <1.0M€ 223 126 899 60 23 151 2 257 289 076 2 540 439 126 >= 1.0M€ and <5.0M€ 36 41 610 25 24 459 3 322 822 777 3 383 888 846 >= 5.0M€ and <10.0M€- - - - 635 414 388 635 414 388 >= 10.0M€ and <20.0M€- - - - 1 260 379 255 1 260 379 255 >= 20.0M€ and <50.0M€- - - - 161 453 519 161 453 519 >= 50M€- - - - 1 603 338 476 1 603 338 476 149 025 7 511 810 5 028 261 495 17 064 3 109 864 171 117 10 883 169 31.12.2018Individuals - Mortgage loansIndividuals - Other loansCorporate loansTotal The analysis of risk exposure by sector of activity, as at 31 December 2019 and 2018, is presented as follows: The Bank identifies and marks loan agreements restructured due to financial difficulties of the customer whenever there are changes to the terms and conditions of an agreement in respect of which the customer defaulted, or it is foreseeable that this will come to happen, in respect to a financial obligation. A change to the terms and conditions of the agreement is deemed to exist when (i) there are contractual changes to the customer's benefit, such as extension of the contract period, introduction of grace periods, reduction of rate or partial pardon of debt; (ii) a new loan operation is contracted to settle existing debt (total or partial); or (iii) the new terms of the agreement are more favorable than those applied to other customers with the same risk profile. The unmarking of a loan restructured due to financial difficulties of the customer can only occur after a minimum period of two years from the date of the restructuring, provided that the following conditions are cumulatively met: (i) regular payment of principal and interest; (ii) the customer has no principal or interest past due; and (iii) there was no new loan restructuring during that period. NOVO BANCO | 2019 ANNUAL REPORT | 370 (in thousands of Euros)31.12.2019Gross amountImpairmentGross amountImpairment Gross amountImpairment Gross amountImpairment Agriculture, Forestry and Fishery 359 216 ( 16 846)- 511 - - 31 712 ( 15) 5 968 ( 15) 12 960 ( 517)Mining 83 884 ( 12 644)- - - - 109 - - - 8 082 ( 101)Food, Beverages and Tobacco 505 630 ( 19 921)- 10 863 - - - - 22 640 ( 2 218) 56 162 ( 413)Textiles and Clothing 301 433 ( 13 746)- 199 - - 9 988 ( 9) 3 596 ( 3) 9 964 ( 4 545)Leather and Shoes 57 665 ( 4 321)- 51 - - - - 1 999 ( 1) 1 660 ( 107)Wood and Cork 91 188 ( 3 307)- 178 - - - - 996 ( 2) 6 347 ( 32)Paper and Printing Industry 200 165 ( 34 492)- - - - - - 2 498 ( 5) 4 344 ( 30)Refining of Petroleum 9 337 ( 56)- - - - - - - - 5 210 - Chemicals and Rubber 326 185 ( 7 887)- 958 - - 19 305 ( 16) 2 985 ( 6) 25 461 ( 176)Non-metallic Minerals 125 689 ( 16 239)- - - - 16 664 ( 16) 3 648 ( 3) 17 083 ( 365)Metallurgical Industries and Metallic Products 405 106 ( 10 418)- 750 - - 21 142 ( 18) 6 706 ( 17) 40 531 ( 326)Production of Machinery, Equipment and Electrical De. 130 167 ( 6 998)- 788 - - 20 643 ( 12) 492 ( 1) 60 622 ( 1 126)Production of Transport Material 98 499 ( 2 951)- 87 - - - - - - 10 370 ( 106)Other Transforming Industries 140 900 ( 8 094)- 1 - - - - 4 987 ( 17) 26 357 ( 767)Electricity, Gas and Water 433 935 ( 22 594)- 31 996 - - 54 410 ( 42) 195 061 ( 1 002) 78 669 ( 69)Construction and Public Works 1 403 603 ( 233 728)- 94 989 - - - - 183 129 ( 34 604) 891 976 ( 43 175)Wholesale and Retail Trade 1 344 491 ( 76 997)- 1 435 - - 40 450 ( 29) 13 834 ( 9) 243 430 ( 3 933)Tourism 892 265 ( 36 761)- 520 - - 144 - - - 70 066 ( 6 338)Transport and Communication 1 069 908 ( 72 748)- 105 644 - - 134 815 ( 89) 10 227 ( 11) 386 904 ( 9 104)Financial Activities 569 697 ( 66 966)- 217 584 2 853 130 7 992 695 745 ( 220) 852 758 ( 1 833) 310 877 ( 1 231)Real Estate Activities 2 090 730 ( 214 247)- 7 898 2 751 - 35 355 ( 19) 115 989 ( 18 081) 233 628 ( 15 437)Services Provided to Companies 2 901 234 ( 424 259)- 15 910 176 565 - 314 227 ( 77) 656 224 ( 101 424) 464 190 ( 4 216)Public Administration and Services 654 481 ( 26 264) 254 848 1 391 - - 7 027 687 ( 4 476) 459 260 ( 704) 24 920 ( 279)Other activities of collective services 793 487 ( 273 696)- 2 235 12 278 - 172 519 ( 447) 10 000 ( 198) 130 625 ( 1 110)Mortgage Loans 8 524 058 ( 58 330)- - - - - - - - 33 - Consumers Loans 1 415 192 ( 137 457)- - - - - - - - 12 490 ( 345)Others 117 370 ( 39 516)- - - - 163 216 ( 20)- - 15 255 ( 175)TOTAL 25 045 515 ( 1 841 483) 254 848 493 988 3 044 724 7 992 8 758 131 ( 5 505) 2 552 997 ( 160 154) 3 148 216 ( 94 023)Guarantees and endorsements providedFinancial assets held for tradingDerivatives for trading and fair value option derivativesDerivatives - hedge accountingFinancial assets at fair value through other comprehensive incomeFinancial assets at fair value through profit or loss -mandatoryFinancial assets at amortised costLoans and advances tocustomers(in thousands of Euros)31.12.2018Gross amountImpairmentGross amountImpairment Gross amountImpairment Gross amountImpairment Agriculture, Forestry and Fishery 566 586 ( 211 768)- 87 - - 10 870 - - - 14 042 ( 6 706)Mining 94 954 ( 3 198)- - - - 102 - - - 5 256 ( 98)Food, Beverages and Tobacco 518 912 ( 26 963)- 544 - - 9 601 ( 2) 23 460 ( 2 516) 54 381 ( 381)Textiles and Clothing 314 532 ( 18 591)- 79 - - - - 2 495 - 11 728 ( 1 035)Leather and Shoes 62 486 ( 3 003)- 23 - - - - 1 000 - 1 731 ( 101)Wood and Cork 106 052 ( 8 545)- 284 - - - - 7 497 ( 12) 7 950 ( 50)Paper and Printing Industry 194 371 ( 19 166)- - - - 22 150 ( 14) 1 498 - 7 538 ( 44)Refining of Petroleum 8 105 ( 111)- - - - - - - - 11 371 - Chemicals and Rubber 337 344 ( 18 354)- 1 917 - - 25 323 ( 38) 3 980 ( 8) 39 651 ( 251)Non-metallic Minerals 184 135 ( 40 088)- - - - 3 174 ( 3) 23 344 ( 26) 15 248 ( 257)Metallurgical Industries and Metallic Products 354 059 ( 13 509)- 211 - - 9 572 ( 8) 6 248 ( 11) 44 489 ( 674)Production of Machinery, Equipment and Electrical De. 140 883 ( 10 001)- 2 086 - - 37 880 ( 19)- - 81 318 ( 341)Production of Transport Material 84 546 ( 2 533)- - - - 13 225 ( 10)- - 10 888 ( 113)Other Transforming Industries 160 969 ( 17 001)- 6 - - - - 1 006 ( 1) 25 527 ( 1 795)Electricity, Gas and Water 521 677 ( 39 416)- 35 853 - - 28 893 ( 24) 162 804 ( 496) 93 397 ( 75)Construction and Public Works 1 603 556 ( 394 600)- 57 515 - - - - 191 407 ( 36 219) 933 290 ( 73 233)Wholesale and Retail Trade 1 523 779 ( 275 893)- 1 237 - - 30 803 ( 22) 19 612 ( 100) 286 799 ( 44 135)Tourism 1 027 050 ( 37 072)- 712 - - 144 - - - 95 198 ( 5 900)Transport and Communication 1 023 995 ( 84 609)- 110 358 - - 107 920 ( 75) 33 285 ( 53) 427 984 ( 9 746)Financial Activities 951 155 ( 262 228) 1 427 345 2 863 272 1 721 610 628 ( 102) 969 492 ( 19 658) 329 183 ( 1 365)Real Estate Activities 2 381 579 ( 504 129)- 6 947 2 751 - 38 034 ( 21) 104 549 ( 18 010) 261 164 ( 20 407)Services Provided to Companies 3 735 290 ( 1 415 022)- 18 433 71 245 - 181 551 ( 39) 435 290 ( 114 345) 439 053 ( 11 368)Public Administration and Services 797 840 ( 59 056) 257 269 1 562 - - 6 295 967 ( 779) 503 123 ( 771) 21 717 ( 1 241)Other activities of collective services 1 083 327 ( 471 672)- 3 075 12 329 - 73 359 ( 40) 5 000 ( 99) 116 932 ( 1 480)Mortgage Loans 7 653 306 ( 51 992)- - - - - - - - 68 - Consumers Loans 1 431 986 ( 83 229)- - - - - - - - 6 423 ( 322)Others 30 925 ( 94)- - - - 68 094 ( 8)- - 18 983 ( 5 957)TOTAL 26 893 399 ( 4 071 843) 257 270 668 274 2 949 597 1 721 7 567 290 ( 1 204) 2 495 090 ( 192 325) 3 361 309 ( 187 075)Guarantees and endorsements providedFinancial assets at amortised costLoans and advances tocustomersFinancial assets held for tradingDerivatives for trading and fair value option derivativesFinancial assets at fair value through profit or loss -mandatoryDerivatives - hedge accountingFinancial assets at fair value through other comprehensive income The amounts of the loans restructured due to financial difficulties of the customer as at 31 December 2019 and 2018, are as follows: The details of the restructuring measures applied to loans restructured up to 31 December 2019 and 2018 are the following: Market risk Market Risk represents the potential loss resulting from an adverse change in the value of a financial instrument due to fluctuations in interest rates, foreign exchange rates, equity prices, commodity prices, volatility and credit spread. Market risk management is integrated with the balance sheet management through the CALCO (Capital Asset and Liability Committee) structure, being this risk monitored by the Risk Committee. The main measurement of market risk is the assessment of unrealised losses under adverse market conditions, for which the Value at Risk (VaR) methodology is used. NOVO BANCO VaR model uses the Monte Carlo simulation, based on a confidence level of 99% and an investment period of 10 days. Volatilities and correlations are historical, based on an observation period of one year. As a complement to VaR, stress testing scenarios have been developed, which allow for the evaluation of the impact of losses potentially higher than those considered by the VaR measurement. NOVO BANCO | 2019 ANNUAL REPORT | 371 (in thousands of Euros)31.12.201931.12.2018Corporate2 380 724 4 430 410 Mortgage loans 110 173 116 386 Consumer and other loans 203 163 245 966 Total 2 694 060 4 792 762 (in thousands of Euros)No. TransactionExposureImpairmentNo. TransactionExposureImpairmentNo. TransactionExposureImpairmentPrincipal or interest forgiveness 20 48 655 5 293 188 227 103 130 871 208 275 758 136 164 Assets received in partial settlement of loan 10 144 3 24 3 308 2 449 34 3 452 2 452 Capitalization of interest 26 49 312 454 213 153 804 76 982 239 203 116 77 436 New loan in total or partial payment of existing loan 1 596 141 014 6 228 802 419 195 291 095 2 398 560 209 297 323 Extension of repayment period 964 414 509 26 658 892 635 876 375 121 1 856 1 050 385 401 779 Introduction of grace period of principal or interest 585 61 338 1 413 219 174 544 88 264 804 235 882 89 677 Decrease in the interest rates 122 57 174 1 706 53 99 222 33 640 175 156 396 35 346 Changes of the lease payment plan 52 16 473 861 45 36 631 10 535 97 53 104 11 396 Changes in the interest paymen 6 3 142 60 6 13 954 12 548 12 17 096 12 608 Other 2 232 76 314 1 431 1 188 62 348 30 353 3 420 138 662 31 784 Total 5 613 868 075 44 107 3 630 1 825 985 1 051 858 9 243 2 694 060 1 095 965 Solution31.12.2019PerformingNon - PerformingTotal(in thousands of Euros)No. TransactionExposureImpairmentNo. TransactionExposureImpairmentNo. TransactionExposureImpairmentPrincipal or interest forgiveness 32 48 180 5 137 208 316 163 225 067 240 364 343 230 204 Assets received in partial settlement of loan 12 141 4 10 2 997 2 183 22 3 138 2 187 Capitalization of interest 19 5 449 111 226 560 754 463 192 245 566 203 463 303 New loan in total or partial payment of existing loan 1 823 144 122 4 211 773 827 213 522 931 2 596 971 335 527 142 Extension of repayment period 977 371 449 7 657 1 491 1 115 930 602 418 2 468 1 487 379 610 075 Introduction of grace period of principal or interest 662 90 281 2 557 254 392 044 250 714 916 482 325 253 271 Decrease in the interest rates 114 29 253 1 088 78 306 509 94 238 192 335 762 95 326 Changes of the lease payment plan 187 72 254 2 510 117 68 454 25 344 304 140 708 27 854 Changes in the interest paymen 14 10 438 160 27 239 300 166 710 41 249 738 166 870 Other 2 842 70 882 1 558 1 365 120 949 67 922 4 207 191 831 69 480 Total 6 682 842 449 24 993 4 549 3 950 313 2 420 719 11 231 4 792 762 2 445 712 Solution31.12.2018PerformingNon - PerformingTotal NOVO BANCO has a VaR of Euro 44 103 thousand (31 December 2018: Euro 11 215 thousand) in respect of its trading positions. The increase is mainly explained by the increase in the position in derivatives to hedge interest rate risk in the banking portfolio. In accordance with the recommendations of European Banking Authority presented in the document EBA/GL/2018/02, NOVO BANCO calculates the exposure to its balance sheet interest rate risk based on the prescribed shocks, classifying all notional amounts of assets, liabilities and off-balance sheet captions which are sensitive to interest rate and are not part of the trading portfolio, by re-pricing intervals. In 2019, the values of Loans and advances to customers started to be considered net of impairment, for NPL (Non Performing Loans) contracts. The Bank performs sensitivity analyses of the interest rate risk of the banking portfolio, based on the current difference of the discounted interest rate mismatch at current rates and the discounted value of the same cash flows simulating scenarios of displacement of the parallel yield curves (displacements of +/- 200 bp) and non- parallel (short rate shock up / down, steepener / flattener shocks), according to the outliers tests defined by the EBA (assuming linear regulatory floors between -1% and 0%, in comparison with the single regulatory floor of 0% in 2018). NOVO BANCO | 2019 ANNUAL REPORT | 372 (in thousands of Euros)31.12.201931.12.2018DecemberAnnual averageMaximumMinimumDecemberAnnual averageMaximumMinimumExchange risk 3 688 2 173 2 315 1 141 526 2 239 2 242 4 294 Interest rate risk 42 292 29 133 50 203 11 305 9 870 10 247 10 000 6 150 Shares and commodities 295 285 207 209 199 324 440 307 Volatility 314 470 78 189 140 169 241 173 Credit spread 1 771 3 537 3 401 3 705 1 614 3 147 20 209 45 Diversification effect ( 4 257)( 5 436)( 4 136)( 3 138)( 1 135)( 3 481)( 7 856)( 3 261)Total 44 103 30 162 52 068 13 411 11 215 12 645 25 276 7 707 (in thousands of Euros)Eligible amountsNot sensitiveUp to 3 months3 to 6 months6 months to 1 year1 to 5 yearsMore than 5 yearsLoans to and deposits with banks2 167 174 225 071 1 501 085 128 348 5 968 306 702 - Loans and advances to customers23 335 801 - 13 553 087 4 276 069 2 627 939 1 740 037 1 138 669 Securities13 971 377 2 905 580 2 677 412 831 792 197 390 3 665 492 3 693 711 Total17 731 584 5 236 209 2 831 297 5 712 231 4 832 380 Deposits from banks10 537 319 - 4 563 027 3 574 498 257 221 2 085 803 56 771 Due to customers27 340 955 - 13 590 830 2 944 059 4 873 671 5 833 381 99 014 Debt securities issued 853 987 - - - - - 853 987 - - - - - - - Total18 153 857 6 518 557 5 130 892 7 919 184 1 009 772 Balance sheet GAP (Assets - Liabilities)(2 388 561)( 422 273)(1 282 348)(2 299 595)(2 206 953)3 822 609 Off-Balance sheet 871 2 091 755 2 558 318 ( 18 154)(1 772 813)(2 858 234)Structural GAP(2 387 690)1 669 482 1 275 970 (2 317 749)(3 979 767) 964 375 Accumulated GAP 1 669 482 2 945 451 627 702 (3 352 064)(2 387 690)31.12.2019(in thousands of Euros)Eligible amountsNot sensitiveUp to 3 months3 to 6 months6 months to 1 year1 to 5 yearsMore than 5 yearsLoans to and deposits with banks1 432 687 208 321 727 328 115 360 6 153 4 468 371 057 Loans and advances to customers26 892 180 31 571 14 138 268 4 419 015 2 587 621 4 725 161 990 544 Securities13 637 600 3 601 447 2 052 434 912 614 482 836 3 966 200 2 622 069 Total16 918 030 5 446 989 3 076 610 8 695 829 3 983 670 Deposits from banks9 107 757 - 1 884 360 107 884 325 411 6 737 139 52 963 Due to customers28 137 995 - 11 694 911 3 103 276 5 408 313 7 745 260 186 235 Debt securities issued 864 597 - - - - - 864 597 - - - - - - - Total13 579 271 3 211 160 5 733 724 14 482 399 1 103 795 Balance sheet GAP (Assets - Liabilities) 10 779 3 338 759 2 235 829 (2 657 114)(5 786 570)2 879 875 Off-Balance sheet 1 1 625 996 738 161 ( 36 194)(1 106 439)(1 221 523)Structural GAP 10 780 4 964 755 2 973 990 (2 693 308)(6 893 009)1 658 352 Accumulated GAP 4 964 755 7 938 745 5 245 437 (1 647 572) 10 780 31.12.2018 Following the communication sent by the ECB, to the Banks considered to be systemic in the country in which they operate, on the measures adopted/adopted to face the discontinuation of the IBOR's market benchmarks and the future use of risk-free interest rates, the Bank carried out a survey of all its balance sheet and derivative operations indexed to market rates, as well as its valuation and risk analysis processes, based on the scenario in which: - On 2 October 2019, the ECB would launch the new risk-free interest rate, €STR, which would be lower than the EONIA by 8.5 bp and being disclosed in T + 1; - From 3 October 2019 until 3 January 2022, EONIA would be calculated as €STR added by 8.5 bp and released by EMMI also in T + 1. As of January 3, 2022, EONIA would be discontinued; - Euribor could be discontinued as of the beginning of 2024; - Libors would cease from the beginning of 2022. - Despite the uncertainties that still existed regarding the indexes that can replace EURIBOR and the various Libors, it was concluded that the potential impacts on the operating account would not be significant. The following table presents the average interest rates for the Bank major financial asset and liability categories, as at 31 December 2019 and 2018, as well as the respective average balances and interest for the exercise: NOVO BANCO | 2019 ANNUAL REPORT | 373 (in thousands of Euros)31.12.2019Parallel increase of 200 pbParallel decrease of 200 pbShort Rate Shock UpShort Rate Shock DownSteepener shockFlattener shockAs at 31 December( 38 150) 28 195 79 168 ( 43 701)( 174 784) 103 919 Exercise average( 78 271) 51 999 97 337 ( 105 932)( 237 513) 124 597 Exercise maximum 12 378 87 906 148 907 ( 18 861)( 174 784) 157 128 Exercise minimum( 154 349) 28 195 71 900 ( 320 758)( 303 674) 103 919 (in thousands of Euros)31.12.2018Parallel increase of 200 pbParallel decrease of 200 pbShort Rate Shock UpShort Rate Shock DownSteepener shockFlattener shockAs at 31 December( 146 882) 105 965 81 948 ( 174 200)( 255 289) 114 332 Exercise average( 163 496) 116 337 84 626 ( 180 168)( 269 236) 120 176 Exercise maximum ( 91 632) 153 907 100 355 ( 160 540)( 255 289) 123 513 Exercise minimum( 213 509) 60 213 75 345 ( 213 477)( 280 751) 114 332 (in thousands of Euros)Average balance of the exerciseInterest of the exerciseAverage interest rateAverage balance of the exerciseInterest of the exerciseAverage interest rateMonetary assets 856 696 16 385 1,89% 1 096 687 20 717 1,86%Loans and advances to customers 26 425 189 567 688 2,12% 28 291 979 598 312 2,09%Securities and other 11 701 853 155 270 1,31% 10 130 817 110 280 1,07%Financial assets and differentials 38 983 738 739 343 1,87% 39 519 483 729 309 1,82%Monetary Liabilities 9 839 928 33 056 0,33% 9 359 790 41 047 0,43%Due to customers 28 489 942 160 138 0,55% 29 066 652 242 021 0,82%Differential liabilities 653 868 - - 1 093 041 - -Financial liabilities and differentials 38 983 738 193 194 0,49% 39 519 483 283 068 0,71%Net interest income 546 149 1,38% 446 241 1,11%31.12.201931.12.2018 Regarding foreign exchange risk, the breakdown of assets and liabilities, by currency, as at 31 December 2019 and 2018, is analysed as follows: Exposure to sovereign debt of “peripheral” Eurozone countries As at 31 December 2019 and 2018, the Bank exposure to sovereign debt of “peripheral” Eurozone countries, is presented as follows: Except for Loans and advances to customers, all the exposures presented above, except those relating to loans and advances to customers, are recorded in the Bank balance sheet at fair value, based on market quotations or, in the case derivatives, based on valuation techniques using observable market parameters / prices. NOVO BANCO | 2019 ANNUAL REPORT | 374 (in thousands of Euros)Spot PositionsTerm positionsOther elementsNet PositionSpot PositionsTerm positionsOther elementsNet PositionUSDUNITED STATES DOLLAR( 969 129) 1 007 152 ( 16 381) 21 642 ( 1 684 760) 1 679 256 ( 5 933)( 11 437)GBPGREAT BRITISH POUND 3 111 3 076 6 878 13 065 26 001 ( 21 867)- 4 134 BRLBRAZILIAN REAL 103 672 ( 52 218)- 51 454 834 3 528 ( 4 287) 75 DKKDANISH KRONE( 1 324) 1 407 - 83 ( 2 092) 2 643 - 551 JPYJAPANESE YEN( 167) 311 - 144 ( 3 338) 3 359 5 947 5 968 CHFSWISS FRANC( 8 182) 12 981 ( 208) 4 591 ( 8 710) 11 381 - 2 671 SEKSWEDISH KRONE 47 022 ( 47 019)- 3 ( 11 850) 11 624 ( 1 080)( 1 306)NOKNORWEGIAN KRONE 48 444 ( 47 344) 976 2 076 ( 12 421) 12 635 2 260 2 474 CADCANADIAN DOLLAR( 21 734) 44 657 - 22 923 ( 42 282) 42 967 984 1 669 ZARSOUTH AFRICAN RAND 544 ( 491)- 53 ( 1 071) 1 167 - 96 AUDAUSTRALIAN DOLLAR 3 326 10 753 - 14 079 ( 8 522) 8 724 - 202 VEBVENEZUELAN BOLIVAR 1 - - 1 5 - - 5 MOPMACAO PATACA 4 413 - - 4 413 4 359 - - 4 359 MADMOROCCAN DIRHAN( 2 748) 2 708 - ( 40)( 3 196) 2 656 - ( 540)MXNMEXICAN PESO( 319) 608 - 289 392 ( 261)- 131 AOAANGOLAN KWANZA 13 053 - - 13 053 19 828 - - 19 828 PLNPOLISH ZLOTY 36 782 ( 5 988)- 30 794 ( 8 228) 8 741 - 513 CZKCZECH KORUNA 9 218 960 - 10 178 ( 321) 645 - 324 DZDALGERIAN DINAR 7 338 - - 7 338 2 427 - - 2 427 CNYYUAN REN-MIN-BI 9 204 946 - 10 150 ( 3 544) 3 767 - 223 OTHERS 1 305 1 616 - 2 921 1 719 3 712 3 977 9 408 ( 716 170) 934 115 ( 8 735) 209 210 ( 1 734 770) 1 774 677 1 868 41 775 Note: assets / (liabilities)31.12.201831.12.2019(in thousands of Euros)Portugal 618 374 249 778 ( 41) 3 282 077 458 556 4 608 744 Spain 35 924 5 070 - 2 181 282 - 2 222 276 Ireland- - - 227 581 - 227 581 Italy- - - 118 828 - 118 828 654 298 254 848 ( 41)5 809 768 458 556 7 177 429 (1) Amounts presented by net: receivable / (payable)31.12.2019Loans to customersSecurities held for tradingDerivative Instruments (1)Securities at fair value through other comprehensive incomeSecurities at amortized costTotal(in thousands of Euros)Portugal 743 450 257 269 ( 109) 3 591 448 502 352 5 094 410 Spain 54 243 - - 1 980 394 - 2 034 637 Ireland- - 60 398 - 60 398 Italy- - - 83 037 - 83 037 797 693 257 269 ( 109)5 715 277 502 352 7 272 482 (1) Amounts presented by net: receivable / (payable)31.12.2018Loans to customersSecurities held for tradingDerivative Instruments (1)Securities at fair value through other comprehensive incomeSecurities at amortized costTotal The details of the exposure regarding the securities is as follows: Liquidity risk Liquidity risk derives from the potential inability, current or future, of an institution satisfying its commitments as they mature, without incurring excessive losses. Liquidity risk can be divided into two types: - Market liquidity risk – the impossibility of selling an asset due to lack of liquidity in the market, leading to the widening of the bid / offer spread or the application of a haircut to its market value; - Funding liquidity risk – the impossibility to obtain market funding to finance assets and / or refinance debt coming to maturity in the desired tenors and currency. This can lead to a sharp increase in funding costs or to the requirement of collaterals to obtain funding. Difficulties in (re)financing may NOVO BANCO | 2019 ANNUAL REPORT | 375 (in thousands of Euros)Nominal valueQuotation ValueAccrued interestBook valueImpairmentFair Value ReservesSecurities at fair value through other comprehensive incomePortugal 2 762 168 3 246 711 35 366 3 282 077 - 156 907 Maturity up to 1 year 369 377 10 387 - 1 Maturity over 1 year 2 761 799 3 246 334 35 356 3 281 690 - 156 906 Spain 2 007 130 2 154 408 26 874 2 181 282 - 74 753 Maturity over 1 year 2 007 130 2 154 408 26 874 2 181 282 - 74 753 Ireland 200 000 225 855 1 726 227 581 - 22 419 Maturity over 1 year 200 000 225 855 1 726 227 581 - 22 419 Italy 115 606 118 261 567 118 828 - 2 816 Maturity over 1 year 115 606 118 261 567 118 828 - 2 816 5 084 904 5 745 235 64 533 5 809 768 - 256 895 Securities at amortized costPortugal 457 230 526 916 2 030 458 556 - - Maturity over 1 year 457 230 526 916 2 030 458 556 704 - 457 230 526 916 2 030 458 556 - - Securities held for tradingPortugal 202 280 245 105 4 673 249 778 - - Spain 5 000 5 065 5 5 070 - - 207 280 250 170 4 678 254 848 - - 31.12.2019(in thousands of Euros)Nominal valueQuotation ValueAccrued interestBook valueImpairmentFair Value ReservesSecurities at fair value through other comprehensive incomePortugal 3 157 428 3 547 804 43 644 3 591 448 - 25 029 Maturity up to 1 year 610 124 613 677 2 785 616 462 - 372 Maturity over 1 year 2 547 304 2 934 127 40 859 2 974 986 - 24 657 Spain 1 832 372 1 950 455 29 939 1 980 394 - 16 930 Maturity up to 1 year 30 027 30 895 583 31 478 - 282 Maturity over 1 year 1 802 345 1 919 560 29 356 1 948 916 - 16 648 Ireland 60 000 59 845 553 60 398 - ( 7)Maturity over 1 year 60 000 59 845 553 60 398 - ( 7)Italy 80 000 82 644 393 83 037 - 2 011 Maturity over 1 year 80 000 82 644 393 83 037 - 2 011 5 129 800 5 640 748 74 529 5 715 277 - 43 963 Securities at amortized costPortugal 501 022 570 587 2 085 502 352 - - Maturity over 1 year 501 022 570 587 2 085 502 352 771 - 501 022 570 587 2 085 502 352 - - Securities held for tradingPortugal 233 000 254 161 3 108 257 269 - - 233 000 254 161 3 108 257 269 - - 31.12.2018 lead to the sale of asset, even if incurring in significant losses. The risk of (re)financing should be reduced through an adequate diversification of funding sources and maturities. Banks are subject to liquidity risk as an inherent consequence of the business of transforming maturities (long- term lenders and short-term deposit takers), with the prudent management of liquidity risk being therefore crucial. The liquidity of NOVO BANCO is managed in a centralised manner, at the Head Office, for the prudential consolidation perimeter, and the analysis and decision making made based on the mismatch reports, which allow, not only to identify negative mismatches but also to make a dynamic hedging of those mismatches. As at 31 December 2019 and 2018, the calculation of the liquid contractual deficit and the counterbalancing capacity was performed following the ITS (Implementing Technical Standards) rules: NOVO BANCO | 2019 ANNUAL REPORT | 376 (in thousands of Euros)until 7 daysfrom 7 days to 1 monthfrom 1 to 3 monthsfrom 3 to 6 monthsfrom 6m to 1 yearhigher than1 yearOUTPUTSLiabilities arising from securities issued (if not treated as retail deposits) 105 205 2 247 4 593- - - 98 365Liabilities arising from secured loan operations and capital market operations8 572 412 182 4281 064 0961 334 7203 210 000- 2 781 168Behavioral exits resulting from deposits30 111 569 428 386 270 729 400 119 537 653 757 84127 716 841Foreign exchange swaps and derivatives 543 939 9 073 52 238 360 513 46 635 43 769 31 711Other outputs 409 894- - - 11 515- 398 379Total Exits39 743 019 622 1341 391 6562 095 3523 805 803 801 61031 026 464APPETIZERGuaranteed loan operations and operations associated with the capital market- - - - - - - Behavioral inflows resulting from loans and advances24 623 962 63 027 19 154 60 921 137 110 81 71824 262 032Foreign exchange swaps and derivatives 830 346 8 506 48 384 364 078 79 998 62 890 266 490Own portfolio securities to mature and Other entries13 171 465 70 687 73 279 43 6011 254 462 203 77111 525 665Total Entries38 625 773 142 220 140 817 468 6001 471 570 348 37936 054 187Net contractual deficit(1 117 245)( 479 914)(1 250 839)(1 626 752)(2 334 233)( 453 231)5 027 724Accumulated net contractual deficit- ( 479 914)(1 730 753)(3 357 505)(5 691 738)(6 144 969)(1 117 245)REBALANCE CAPACITYInitial stockuntil 7 daysfrom 7 days to 1 monthfrom 1 to 3 monthsfrom 3 to 6 monthsfrom 6m to 1 yearhigher than1 yearCoins and banknotes 174 156Central bank mobilisable reserves1 141 351(1 141 351)Marketable and non-marketable assets eligible for central banks7 670 900 182 0631 117 471 78 479( 22 239)( 201 402)(8 704 695)Authorized and unused facilities received- ( 39 646)( 79 970)( 227 545)1 655 230( 167 165)(1 140 903)Net change in rebalancing capacity- ( 998 934)1 037 501( 149 066)1 632 991( 368 567)(9 845 598)Accumulated rebalancing capacity8 986 4077 987 4739 024 9748 875 90810 508 89910 140 332 294 73431.12.2019 The one-year cumulative liquidity gap moved from Euro 388 million on 31 December 2018 to Euro 6 410 million on 31 December 2019. This decrease results from the fact that the financing with the ECB of EUR 6 410 million came within less than 1 year. The one-year counterbalancing capacity as at 31 December 2019 was Euro 10 140 million, Euro 2 302 million higher than the figure recorded at 31 December 2018 (Euro 7 838 million). To anticipate possible constraints, internal stress scenarios in terms of liquidity are carried out, which are representative of the types of crises that can occur, based on idiosyncratic scenarios (characterised by a loss of confidence in the Bank) and market scenarios. In addition, given the importance of liquidity risk management, regulatory legislation includes a liquidity coverage ratio (Liquidity Coverage Ratio - LCR) and a stable financing ratio (Net Stable Funding Ratio - NSFR). The LCR aims to promote the resilience of banks to short-term liquidity risk by ensuring they hold enough high- quality liquid assets to survive a severe stress scenario over a 30-day period, whilst the NSFR aims to ensure banks maintain a stable funding for their assets and off-balance sheet operations, for one year. In accordance with current regulatory legislation, the Bank is required to comply with a minimum limit of 100% in the LCR. The Bank continues to follow regulatory changes in order to comply with all obligations, namely the implementation of the NSFR and respective limit. Operational risk Operational Risk reflects, typically, the probability of the occurrence of events with negative impacts, on net income or equity, resulting from inadequacies or weaknesses in procedures and in information systems, staff behavior or external events, including legal risks. Operational risk is, therefore, understood to be the sum of the following risks: operational, information systems, compliance and reputational. NOVO BANCO | 2019 ANNUAL REPORT | 377 (in thousands of Euros)Initial stockuntil 7 daysfrom 7 days to 1 monthfrom 1 to 3 monthsfrom 3 to 6 monthsfrom 6m to 1 yearhigher than1 yearOUTPUTSLiabilities arising from securities issued (if not treated as retail deposits) 102 291 2 247 4 593- - - 95 451Liabilities arising from secured loan operations and capital market operations6 740 104 961 237 143- - 40 0006 462 000Behavioral exits resulting from deposits31 103 674 332 338 300 208 536 319 449 683 969 00928 516 117Foreign exchange swaps and derivatives1 166 385 55 912 156 064 358 005 65 829 89 050 441 525Other outputs 398 229- - - - - 398 229Total Exits39 510 683 391 458 698 008 894 324 515 5121 098 05935 913 322APPETIZERGuaranteed loan operations and operations associated with the capital market 11 760 2 010 9 750- - - - Behavioral inflows resulting from loans and advances24 155 126 154 165 49 080 139 336 260 706 311 11523 240 724Foreign exchange swaps and derivatives1 147 347 57 042 151 025 346 758 67 271 77 204 448 047Own portfolio securities to mature and Other entries11 118 961- 55 492 28 692 990 204 509 9149 534 659Total Entries36 433 194 213 217 265 347 514 7861 318 181 898 23333 223 430Net contractual deficit(3 077 487)( 178 240)( 432 661)( 379 538) 802 670( 199 826)(2 689 892)Accumulated net contractual deficit- ( 178 240)( 610 901)( 990 439)( 187 769)( 387 595)(3 077 487)REBALANCE CAPACITYInitial stockuntil 7 daysfrom 7 days to 1 monthfrom 1 to 3 monthsfrom 3 to 6 monthsfrom 6m to 1 yearhigher than1 yearCoins and banknotes 149 266Central bank mobilisable reserves 279 178( 279 178)Marketable and non-marketable assets eligible for central banks8 994 709( 36 510) 36 521( 263 447)( 429 904)( 612 820)(7 595 446)Authorized and unused facilities received- - - - - - - Net change in rebalancing capacity- ( 315 688) 36 521( 263 447)( 429 904)( 612 820)(7 595 446)Accumulated rebalancing capacity9 423 1539 107 4659 143 9868 880 5398 450 6357 837 815 242 36931.12.2018 To manage operational risk, a system was developed that standardizes, systematizes and regulates the frequency of actions undertaken with the objective of identifying, monitoring, controlling and mitigating this risk. This system is supported by an organizational structure, integrated within the Global Risk Department, exclusively dedicated to this task, as well as by Operational Risk Management Representatives designated by each of the relevant departments, branches and subsidiaries, whose responsibility it is to comply with the procedures in place and the daily management of this risk in their areas of competence. Capital Management and Solvency Ratio The main objective of the Bank’s capital management is to ensure compliance with the Bank’s strategic objectives in terms of capital adequacy, respecting and enforcing the requirements for calculating risk-weighted assets and own funds and ensuring compliance with the levels of solvency and leverage defined by the supervisory entities, in particular by the European Central Bank (ECB) – the entity directly responsible for the supervision of the Bank - and by the Bank of Portugal, and internally stipulated risk appetite for capital metrics. The definition of the strategy for capital adequacy management rests with the Executive Board of Directors and is integrated in the global definition of the Bank objectives. The capital ratios of NOVO BANCO are calculated based on the rules defined in Directive 2013/36/EU and Regulation (EU) no. 575/2013 (CRR) that define the criteria for the access to the credit institution and investment company activity and determine the prudential requirements to be observed by those same entities, in particular to the calculation of the ratios mentioned above. The Bank is authorised to apply the Internal Ratings-Based Approach (IRB) for the calculation of risk weighted assets by credit risk. In particular, the IRB method is applied to the exposure classes of institutions, corporate and retail of NOVO BANCO. The equity’ risk classes, the positions taken in the form of securitization, the positions taken in the form of participation units in investment funds, and the elements that are not credit obligations are always handled by the IRB method regardless of the Bank entities in which the respective exposures are recorded. The standard method is used in the determination of risk weighted assets by market and operational risks. The regulatory capital components considered in the determination of solvency ratios are divided into own funds of level 1 (common equity Tier I or CET I), additional own funds of level 1 (additional Tier I) which combined with the CET I constitute the own funds of level I (Tier I), and own funds of level 2 (or Tier II) which added to the Tier I represent the total own funds. The total own funds of NOVO BANCO are composed by elements of CET I and Tier II. NOVO BANCO | 2019 ANNUAL REPORT | 378 The summary of own funds, risk weighted assets and capital ratios capital of NOVO BANCO as at 31 December 2019 and 2018 are presented in the following table: As at 31 December 2019 the NOVO BANCO complied with the minimum capital requirements for every capital typology. NOTE 38 – RENDERING OF INSURANCE AND RE-INSURANCE BROKERING SERVICES At 31 December 2019 and 2018, services provided with insurance and re-insurance brokerage have the following composition: The Bank does not collect insurance premiums on behalf of the Insurance companies, nor does it undertake the movement of funds relating to insurance contracts. In this manner, there are no other assets, liabilities, income or expenses to report, relating to the insurance brokering activity carried out by the Bank, other than those already disclosed. NOVO BANCO | 2019 ANNUAL REPORT | 379 (million euros)31.12.201931.12.2018Realised ordinary share capital, issue premiums and own shares 5 900 5 900 Reserves and Retained earnings( 1 166)( 868)Net income for the year attributable to shareholders of the Bank( 1 088)( 1 433)A - Equity (prudential perspective) 3 646 3 599 Adjustments of additional valuation ( 13)( 13)Transitional period to IFRS9 220 246 Goodwill and other intangibles ( 26)( 5)Insufficiency of provisions given the expected losses ( 88)( 41)Deferred tax assets and shareholdings in financial companies ( 12)( 250)Others( 67)( 68)B - Regulatory adjustments to equity 13 ( 131)C - Own principal funds level 1 - CET I (A+B) 3 659 3 469 D - Additional own funds Level 1 - Additional Tier 1 - - E - Level 1 own funds - Tier I (C+D) 3 659 3 469 Subordinated liabilities elegeible for Tier II 398 398 Other elements elegible for Tier II 127 139 Regulatory adjustments for Tier II( 70)( 13)F - Level 2 own funds - Tier II 455 524 G - Eligible own funds (E+F) 4 115 3 993 Credit risk 26 738 29 471 Market risk 1 851 892 Operational risk 1 341 1 253 H - Risk Weighted Assets 29 930 31 617 Solvability ratioCET I ratio(C/H)12,2%11,0%Tier I ratio(E/H)12,2%11,0%Solvability ratio (G/H)13,7%12,6%Leverage ratio(1)7,7%7,3%(1) The leverage ratio results from dividing Tier 1 for the exposure measure in accordance to the terms of the CRR(thousands of euros)31.12.201931.12.2018Life BranchUnit Link and other life commissions 707 8 Credit protection insurance (life insurance) 1 241 1 435 Traditional products 17 936 15 640 19 884 17 083 Non-Life BranchPrivate insurance 7 459 6 051 Insurance for companies( 38) 755 Credit protection insurance (non-life part) 1 639 1 943 9 060 8 749 28 944 25 832 Note: the yields shown are net of periodization NOTE 39 – RELEVANT TRANSACTIONS OCCURRED IN THE FINANCIAL YEARS OF 2019 AND 2018 2019 Exercise Sale of Non-Performing Loans portfolio (Project Nata II) In the last quarter of 2019, NOVO BANCO and Fundo Arrábida signed a Purchase and Sale Agreement with Burlington Loan Management DAC, a company affiliated and advised by Davidson Kempner European Partners, Llp, for the sale of a portfolio of overdue loans and exposures related (NATA II Project). The impact of this operation on the balance sheet resulted in a reduction of net assets of Euro 145.9 million (gross assets: Euro 1 202.1 million, of which Euro 1,180.7 million of credit to customers; impairment: Euro 1 056.2 million, of which Euro 1 038.8 million in customer loans). In terms of the Bank income statement, the following impacts were noted: Sale of a portfolio of real estate assets (called Project Sertorius) In August 2019, the Bank signed a promissory purchase and sale agreement with entities indirectly held by funds managed by Cerberus Capital Management, LP, a New York-based company, for the sale of a portfolio of real estate assets called Project Sertorius, with the following impacts on the income statement for the financial year of 2019: Sale of a portfolio of non-performing loans and real estate assets (referred to as “Projeto Albatros): In August 2019, the Bank, through its Spanish Branch and Novo Banco Servicios Corporativos, S.L entered into a purchase and sale agreement with Waterfall Asset Management LLC, an asset management company based in New York, for the sale of a portfolio of real estate assets and non-performing loans, designated Project Albatros. In terms of the Bank's income statement, the following impacts were noted: Sale of GNB Vida Following the contract for the purchase and sale of the entire share capital of GNB Vida, entered into with Bankers Insurance Holdings, SA, a company of the Global Bankers Insurance Group, LLC, on September 12, NOVO BANCO | 2019 ANNUAL REPORT | 380 (in thousands of Euro)Impact on Income Statement31.12.2019Net interest income 69Results from the sale of financial assets and liabilities not designated at fair value through profit or loss1 703Impairment net of reversals of financial assets not designated at fair value through profit or loss -80 773Impact on Net Income-79 001(in thousands of Euro)Impairments or impairment reversal of non-financial assets-160 511Impact on Net Income -160 511Impact on Income Statement 31.12.2019(in thousands of Euros)Impact on Income Statement31.12.2019Results from the sale of financial assets and liabilities not designated at fair value through profit or loss-7 493Impairment net of reversals of financial assets not designated at fair value through profit or loss-53 300Impairment net of reversals of non financial assets26 902Impact on Net Income-33 891 2018, the Bank proceeded to derecognise this participation. in September 2019, after obtaining the necessary regulatory authorizations. In terms of the Bank income statement, the following impact was noted: 2018 exercise Sale of Non-Performing Loans portfolio (Project NATA) During 2018, NOVO BANCO and BEST, entered into a sale and purchase contract of a non-performing loans portfolio and related assets, named Project NATA, with a consortium of funds managed by KKR Credit Advisors (US) L.L.C and LX Investment Partners II S.À.R.L. This operation impacted the balance sheet with a decrease on the loans and advances to customers in the amount of Euro 496.6 million (Euro 1 462.2 million of gross amount and Euro 965.6 million of impairment), a decreased in the securities portfolio in the amount of Euro 1.8 million (Euro 76.5 million of gross amount and Euro 74.7 million of impairment), and an increase on Other Assets in the amount of Euro 392.4 million. The operation had the following impacts on the income statement: Sale of Real Estate portfolio (Project Viriato) The Bank entered into a promissory sale and purchase agreement with several entities indirectly held by investment funds managed by Anchorage Capital Group L.L.C, to sell a real estate portfolio, named Project Viriato, with the following impacts in the income statement: NOVO BANCO | 2019 ANNUAL REPORT | 381 (in thousands of Euros)Impact on Income Statement31.12.2019Impairment net of reversals of non financial assets-52 000Impact on Net Income-52 000(in thousands of Euros)Net Interest Income5 647Results from the sale of financial assets and liabilities not designated at fair value through profit or loss-204 053Impairment net of reversals of financial assets not designated at fair value through profit or loss92 356Impact on net income-106 050Impact on Income Statement31.12.2018(in thousands of Euros)Other operational income14 990Impairment on othe assets net of reversals-126 909Impact on Net Income-111 919Impact on Income Statement31.12.2018 NOTE 40 – RECENTLY ISSUED ACCOUNTING STANDARDS AND INTERPRETATIONS Applicable for 2019 The following standards and interpretations became effective for annual periods beginning on or after 1 January 2019: IFRS 16 – Leases The scope of IFRS 16 includes leases of all assets, with certain exceptions. A lease is defined as a contract, or part of a contract, that conveys the right to use an asset (the underlying asset) for a period of time in exchange for consideration. IFRS 16 requires lessees to account for all leases under a single on-balance sheet model in a similar way to finance leases under IAS 17. The standard includes two recognition exemptions for lessees: (1) leases of ’low- value’ assets (e.g., personal computers) and (2) short-term leases (i.e., leases with a lease term of 12 months or less). At the commencement date of a lease, a lessee will recognise a liability to make lease payments (i.e., the lease liability) and an asset representing the right to use the underlying asset during the lease term (i.e., the right-of-use asset). Lessees will be required to separately recognise the interest expense on the lease liability and the depreciation expense on the right-of-use asset. Lessees will be required to remeasure the lease liability upon the occurrence of certain events (e.g., a change in the lease term, a change in future lease payments resulting from a change in an index or rate used to determine those payments). The lessee will generally recognise the amount of the remeasurement of the lease liability as an adjustment to the right-of-use asset. Lessor accounting is substantially unchanged from today’s accounting under IAS 17. Lessors will continue to classify all leases using the same classification principle as in IAS 17 and distinguish between two types of leases: operating and finance leases. A lessee can choose to apply the standard using either a full retrospective or a modified retrospective approach. The standard’s transition provisions permit certain reliefs. Early application is permitted, but not before an entity applies IFRS 15 Revenue from Contracts with Customers. The lease expense recognition pattern for lessees will generally be accelerated as compared to today. Key balance sheet metrics such as leverage and finance ratios, debt covenants and income statement metrics, such as earnings before interest, taxes, depreciation and amortisation (EBITDA), could be impacted. Also, the cash flow statement for lessees could be affected as payments for the principal portion of the lease liability will be presented within financing activities. Lessor accounting will result in little change compared to today’s lessor accounting. The standard requires lessees and lessors to make more extensive disclosures than under IAS 17. Given the significant accounting implications, lessees will have to carefully consider the contracts they enter into to identify any that are, or contain, leases. This evaluation will also be important for lessors to determine which contracts (or portions of contracts) are subject to the new revenue recognition standard. NOVO BANCO | 2019 ANNUAL REPORT | 382 IFRIC Interpretation 23 Uncertainty over Income Tax Treatments In June 2017, the IASB issued IFRIC Interpretation 23 which clarifies application of the recognition and measurement requirements in IAS 12 Income Taxes when there is uncertainty over income tax treatments. The interpretation addresses the accounting for income taxes when tax treatments involve uncertainty that affects the application of IAS 12. The interpretation does not apply to taxes or levies outside the scope of IAS 12, nor does it specifically include requirements relating to interest and penalties associated with uncertain tax treatments. The interpretation specifically addresses the following: - Whether an entity considers uncertain tax treatments separately; - The assumptions an entity makes about the examination of tax treatments by taxation authorities; - How an entity determines taxable profit (tax loss), tax bases, unused tax losses, unused tax credits and tax rates; - How an entity considers changes in facts and circumstances. An entity has to determine whether to consider each uncertain tax treatment separately or together with one or more other uncertain tax treatments. The approach that better predicts the resolution of the uncertainty should be followed. Applying the interpretation could be challenging for entities, particularly those that operate in more complex multinational tax environments. Entities may also need to evaluate whether they have established appropriate processes and procedures to obtain information on a timely basis that is necessary to apply the requirements in the interpretation and make the required disclosures. Prepayment Features with Negative Compensation - Amendments to IFRS 9 Under IFRS 9, a debt instrument can be measured at amortised cost or at fair value through other comprehensive income, provided that the contractual cash flows are ‘solely payments of principal and interest on the principal amount outstanding’ (the SPPI criterion) and the instrument is held within the appropriate business model for that classification. The amendments to IFRS 9 clarify that a financial asset passes the SPPI criterion regardless of the event or circumstance that causes the early termination of the contract and irrespective of which party pays or receives reasonable compensation for the early termination of the contract. The basis for conclusions to the amendments clarified that the early termination can result from a contractual term or from an event outside the control of the parties to the contract, such as a change in law or regulation leading to the early termination of the contract. The amendments are intended to apply where the prepayment amount approximates to unpaid amounts of principal and interest plus or minus an amount that reflects the change in a benchmark interest rate. This implies that prepayments at current fair value or at an amount that includes the fair value of the cost to terminate an associated hedging instrument, will normally satisfy the SPPI criterion only if other elements of the change in fair value, such as the effects of credit risk or liquidity, are small. Most likely, the costs to terminate a ‘plain vanilla’ interest rate swap that is collateralised, so as to minimise the credit risks for the parties to the swap, will meet this requirement. NOVO BANCO | 2019 ANNUAL REPORT | 383 The amendments must be applied retrospectively; earlier application is permitted. The amendment provides specific transition provisions if it is only applied in 2019 rather than in 2018 with the rest of IFRS 9. Modification or exchange of a financial liability that does not result in derecognition In the basis for conclusions to the amendments, the IASB also clarified that the requirements in IFRS 9 for adjusting the amortised cost of a financial liability, when a modification (or exchange) does not result in derecognition, are consistent with those applied to the modification of a financial asset that does not result in derecognition. This means that the gain or loss arising on modification of a financial liability that does not result in derecognition, calculated by discounting the change in contractual cash flows at the original effective interest rate, is immediately recognised in profit or loss. The IASB made this comment in the basis for conclusions to the amendments as it believes that the existing requirements in IFRS 9 provided an adequate basis for entities to account for modifications and exchanges of financial liabilities and that no formal amendment to IFRS 9 was needed in respect of this issue. The IASB stated specifically that the clarification on modification or exchange of financial liabilities relates to the application of IFRS 9. As such, it would appear that this clarification does not need to be applied to the accounting for modification of liabilities under IAS 39 Financial Instruments: Recognition and Measurement. Any entities that have not applied this accounting under IAS 39 are therefore likely to have a change of accounting on transition. As there is no specific relief, this change needs to be made retrospectively. Plan Amendment, Curtailment or Settlement - Amendments to IAS 19 The amendments to IAS 19 Employee Benefits address the accounting when a plan amendment, curtailment or settlement occurs during a reporting period. Determining the current service cost and net interest When accounting for defined benefit plans under IAS 19, the standard generally requires entities to measure the current service cost using actuarial assumptions determined at the start of the annual reporting period. Similarly, the net interest is generally calculated by multiplying the net defined benefit liability (asset) by the discount rate, both as determined at the start of the annual reporting period. The amendments specify that when a plan amendment, curtailment or settlement occurs during the annual reporting period, an entity is required to: - Determine current service cost for the remainder of the period after the plan amendment, curtailment or settlement, using the actuarial assumptions used to remeasure the net defined benefit liability (asset) reflecting the benefits offered under the plan and the plan assets after that event; - Determine net interest for the remainder of the period after the plan amendment, curtailment or settlement using: - the net defined benefit liability (asset) reflecting the benefits offered under the plan and the plan assets after that event; and - the discount rate used to remeasure that net defined benefit liability (asset). A plan amendment, curtailment or settlement may reduce or eliminate a surplus in a defined benefit plan, which may cause the effect of the asset ceiling to change. NOVO BANCO | 2019 ANNUAL REPORT | 384 The amendments clarify that an entity first determines any past service cost, or a gain or loss on settlement, without considering the effect of the asset ceiling. This amount is recognised in profit or loss. An entity then determines the effect of the asset ceiling after the plan amendment, curtailment or settlement. Any change in that effect, excluding amounts included in the net interest, is recognised in other comprehensive income. This clarification provides that entities might have to recognise a past service cost, or a gain or loss on settlement, that reduces a surplus that was not recognised before. Changes in the effect of the asset ceiling are not netted with such amounts. The amendments apply to plan amendments, curtailments, or settlements occurring on or after the beginning of the first annual reporting period that begins on or after 1 January 2019. Early application is permitted and should be disclosed. Long-term interests in associates and joint ventures - Amendments to IAS 28 The amendments clarify that an entity applies IFRS 9 to long-term interests in an associate or joint venture to which the equity method is not applied but that, in substance, form part of the net investment in the associate or joint venture (long-term interests). This clarification is relevant because it implies that the expected credit loss model in IFRS 9 applies to such long-term interests. The Board also clarified that, in applying IFRS 9, an entity does not take account of any losses of the associate or joint venture, or any impairment losses on the net investment, recognised as adjustments to the net investment in the associate or joint venture that arise from applying IAS 28 Investments in Associates and Joint Ventures. To illustrate how entities apply the requirements in IAS 28 and IFRS 9 with respect to long-term interests, the Board also published an illustrative example when it issued the amendments. Entities must apply the amendments retrospectively, with certain exceptions. Early application of the amendments is permitted and must be disclosed. Annual improvements for the cycle 2015-2017 In the annual improvements for the 2015-2017 cycle, the IASB has introduced improvements in four standards summarized bellow: IFRS 3 Business Combinations - Previously held Interests in a joint operation - The amendments clarify that, when an entity obtains control of a business that is a joint operation, it applies the requirements for a business combination achieved in stages, including remeasuring previously held interests in the assets and liabilities of the joint operation at fair value. - In doing so, the acquirer remeasures its entire previously held interest in the joint operation. - An entity applies those amendments to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after 1 January 2019. Earlier application is permitted. IFRS 11 Joint Arrangements - Previously held Interests in a joint operation - A party that participates in, but does not have joint control of, a joint operation might obtain joint control of the joint operation in which the activity of the joint operation constitutes a business as defined in NOVO BANCO | 2019 ANNUAL REPORT | 385 IFRS 3. The amendments clarify that the previously held interests in that joint operation are not remeasured. - An entity applies those amendments to transactions in which it obtains joint control on or after the beginning of the first annual reporting period beginning on or after 1 January 2019. Earlier application is permitted. IAS 12 Income Taxes - Income tax consequences of payments on financial instruments classified as equity - The amendments clarify that the income tax consequences of dividends are linked more directly to past transactions or events that generated distributable profits than to distributions to owners. Therefore, an entity recognises the income tax consequences of dividends in profit or loss, other comprehensive income or equity according to where the entity originally recognised those past transactions or events. - An entity applies those amendments for annual reporting periods beginning on or after 1 January 2019. Earlier application is permitted. When an entity first applies those amendments, it applies them to the income tax consequences of dividends recognized on or after the beginning of the earliest comparative period. IAS 23 Borrowing Costs - Borrowing costs eligible for capitalisation - The amendments clarify that an entity treats as part of general borrowings any borrowing originally made to develop a qualifying asset when substantially all of the activities necessary to prepare that asset for its intended use or sale are complete. - An entity applies those amendments to borrowing costs incurred on or after the beginning of the annual reporting period in which the entity first applies those amendments. - An entity applies those amendments for annual reporting periods beginning on or after 1 January 2019. Earlier application is permitted. Sale or Contribution of Assets between an Investor and its Associate or Joint Venture – Amendments to IFRS 10 and IAS 28 The amendments address the conflict between IFRS 10 Consolidated Financial Statements and IAS 28 in dealing with the loss of control of a subsidiary that is sold or contributed to an associate or joint venture. The amendments clarify that a full gain or loss is recognised when a transfer to an associate or joint venture involves a business as defined in IFRS 3. Any gain or loss resulting from the sale or contribution of assets that does not constitute a business, however, is recognised only to the extent of unrelated investors’ interests in the associate or joint venture. In December 2015, the IASB decided to defer the effective date of the amendments until such time as it has finalised any amendments that result from its research project on the equity method. Early application of the amendments is still permitted. At the date of approval of these financial statements, the standards and interpretations endorsed by the European Union, but whose mandatory application occurs in future years, are as follows: NOVO BANCO | 2019 ANNUAL REPORT | 386 Definition of Material - Amendments to IAS 1 and IAS 8 The purpose of this amendment was to align the definition of ‘material’ across the standards and to clarify certain aspects of the definition. The new definition states that, ’Information is material if omitting, misstating or obscuring it could reasonably be expected to influence decisions that the primary users of general purpose financial statements make on the basis of those financial statements, which provide financial information about a specific reporting entity.’ The amendments clarify that materiality will depend on the nature or magnitude of information, or both. An entity will need to assess whether the information, either individually or in combination with other information, is material in the context of the financial statements. Obscuring information The amendments explain that information is obscured if it is communicated in a way that would have a similar effect as omitting or misstating the information. Material information may, for instance, be obscured if information regarding a material item, transaction or other event is scattered throughout the financial statements, or disclosed using a language that is vague or unclear. Material information can also be obscured if dissimilar items, transactions or other events are inappropriately aggregated, or conversely, if similar items are inappropriately disaggregated. New threshold The amendments replaced the threshold ‘could influence’, which suggests that any potential influence of users must be considered, with ‘could reasonably be expected to influence’ in the definition of ‘material’. In the amended definition, therefore, it is clarified that the materiality assessment will need to take into account only reasonably expected influence on economic decisions of primary users. Primary users of the financial statements The current definition refers to ‘users’ but does not specify their characteristics, which can be interpreted to imply that an entity is required to consider all possible users of the financial statements when deciding what information to disclose. Consequently, the IASB decided to refer to primary users in the new definition to help respond to concerns that the term ‘users’ may be interpreted too widely. This amendment is effective for annual periods beginning on or after 1 January 2020. The amendments must be applied prospectively. Early application is permitted and must be disclosed. Note: The definition of material in the Conceptual Framework and IFRS Practice Statement 2: Making Materiality Judgements were amended to align with the revised definition of material in IAS 1 and IAS 8. The Conceptual Framework for Financial Reporting The conceptual framework sets out a comprehensive set of concepts for: - Financial reporting; - Standard setting; - Guidance for preparers in developing consistent accounting policies; and - Assistance to others in their efforts to understand and interpret the standards. NOVO BANCO | 2019 ANNUAL REPORT | 387 The Conceptual Framework includes: - some new concepts; - provides updated definitions and recognition criteria for assets and liabilities; and - clarifies some important concepts. It is organized as follows: - Chapter 1 – The objective of financial reporting - Chapter 2 – Qualitative characteristics of useful financial information - Chapter 3 – Financial statements and the reporting entity - Chapter 4 – The elements of financial statements - Chapter 5 – Recognition and derecognition - Chapter 6 – Measurement - Chapter 7 – Presentation and disclosure - Chapter 8 – Concepts of capital and capital maintenance The amended conceptual framework for the financial reporting is not a standard and none of its concepts prevails on the concepts set out in other standards or requirements of any standard. It is applicable to entities that develop their accounting principles based on the conceptual framework applicable to annual reporting periods beginning on or after 1 January 2020. Interest Rate Benchmark Reform – Amendments to IFRS 9, IAS 39 and IFRS 7 In September 2019, the IASB issued amendments to IFRS 9, IAS 39 and IFRS 7 Financial Instruments: Disclosures, which concludes phase one of its work to respond to the effects of Interbank Offered Rates (IBOR) reform on financial reporting. The amendments provide temporary reliefs which enable hedge accounting to continue during the period of uncertainty before the replacement of an existing interest rate benchmark with an alternative nearly risk-free interest rate (an RFR). The amendments to IFRS 9 The amendments include a number of reliefs, which apply to all hedging relationships that are directly affected by the interest rate benchmark reform. A hedging relationship is affected if the reform gives rise to uncertainties about the timing and/or amount of benchmark-based cash flows of the hedged item or the hedging instrument. Application of the reliefs is mandatory. The first three reliefs provide for: - The assessment of whether a forecast transaction (or component thereof) is highly probable - Assessing when to reclassify the amount in the cash flow hedge reserve to profit and loss - The assessment of the economic relationship between the hedged item and the hedging instrument For each of these reliefs, it is assumed that the benchmark on which the hedged cash flows are based (whether or not contractually specified) and/or, for relief three, the benchmark on which the cash flows of the hedging instrument are based, are not altered as a result of IBOR reform. NOVO BANCO | 2019 ANNUAL REPORT | 388 A fourth relief provides that, for a benchmark component of interest rate risk that is affected by IBOR reform, the requirement that the risk component is separately identifiable need be met only at the inception of the hedging relationship. Where hedging instruments and hedged items may be added to or removed from an open portfolio in a continuous hedging strategy, the separately identifiable requirement need only be met when hedged items are initially designated within the hedging relationship. To the extent that a hedging instrument is altered so that its cash flows are based on an RFR, but the hedged item is still based on IBOR (or vice versa), there is no relief from measuring and recording any ineffectiveness that arises due to differences in their changes in fair value The reliefs continue indefinitely in the absence of any of the events described in the amendments. When an entity designates a group of items as the hedged item, the requirements for when the reliefs cease are applied separately to each individual item within the designated group of items. The amendments also introduce specific disclosure requirements for hedging relationships to which the reliefs are applied. The amendments to IAS 39 The corresponding amendments are consistent with those for IFRS 9, but with the following differences: - For the prospective assessment of hedge effectiveness, it is assumed that the benchmark on which the hedged cash flows are based (whether or not it is contractually specified) and/or the benchmark on which the cash flows of the hedging instrument are based, are not altered as a result of IBOR reform. - For the retrospective assessment of hedge effectiveness, to allow the hedge to pass the assessment even if the actual results of the hedge are temporarily outside the 80%-125% range, during the period of uncertainty arising from IBOR reform. - For a hedge of a benchmark portion (rather than a risk component under IFRS 9) of interest rate risk that is affected by IBOR reform, the requirement that the portion is separately identifiable need be met only at the inception of the hedge. The amendments must be applied retrospectively. However, any hedge relationships that have previously been de-designated cannot be reinstated upon application, nor can any hedge relationships be designated with the benefit of hindsight. Early application is permitted and must be disclosed. Standards and Interpretations issued by the IASB, but not yet endorsed by the European Union The following standards, interpretations, amendments and revisions, with mandatory application in future financial years, were not, until the date of approval of these financial statements, adopted (endorsed) by the European Union: Definition of a Business - Amendments to IFRS 3 The IASB issued amendments to the definition of a business in IFRS 3 Business Combinations to help entities determine whether an acquired set of activities and assets is a business or not. They clarify the minimum requirements for a business, remove the assessment of whether market participants are capable of replacing NOVO BANCO | 2019 ANNUAL REPORT | 389 any missing elements, add guidance to help entities assess whether an acquired process is substantive, narrow the definitions of a business and of outputs, and introduce an optional fair value concentration test. Minimum requirements to be a business The amendments clarify that to be considered a business, an integrated set of activities and assets must include, at a minimum, an input and a substantive process that together significantly contribute to the ability to create output. They also clarify that a business can exist without including all of the inputs and processes needed to create outputs. That is, the inputs and processes applied to those inputs must have ‘the ability to contribute to the creation of outputs’ rather than ‘the ability to create outputs’. Market participants’ ability to replace missing elements Prior to the amendments, IFRS 3 stated that a business need not include all of the inputs or processes that the seller used in operating that business, ’if market participants are capable of acquiring the business and continuing to produce outputs, for example, by integrating the business with their own inputs and processes’. The reference to such integration is now deleted from IFRS 3 and the assessment must be based on what has been acquired in its current state and condition. Assessing whether an acquired process is substantive The amendments specify that if a set of activities and assets does not have outputs at the acquisition date, an acquired process must be considered substantive only if: a. it is critical to the ability to develop or convert acquired inputs into outputs; and b. the inputs acquired include both an organised workforce with the necessary skills, knowledge, or experience to perform that process, and other inputs that the organised workforce could develop or convert into outputs. In contrast, if a set of activities and assets has outputs at that date, an acquired process must be considered substantive if: a. b. it is critical to the ability to continue producing outputs and the acquired inputs include an organised workforce with the necessary skills, knowledge, or experience to perform that process; or it significantly contributes to the ability to continue producing outputs and either is considered unique or scarce, or cannot be replaced without significant cost, effort or delay in the ability to continue producing outputs. Narrowed definition of outputs The amendments narrowed the definition of outputs to focus on goods or services provided to customers, investment income (such as dividends or interest) or other income from ordinary activities. The definition of a business in Appendix A of IFRS 3 was amended accordingly. Optional concentration test The amendments introduced an optional fair value concentration test to permit a simplified assessment of whether an acquired set of activities and assets is not a business. Entities may elect to apply the concentration test on a transaction-by-transaction basis. The test is met if substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or group of similar identifiable assets. If the test is met, the set of activities and assets is determined not to be a business and no further assessment is needed. If the test is not met, or if an entity elects not to apply the test, a detailed assessment must be performed applying the normal requirements in IFRS 3. NOVO BANCO | 2019 ANNUAL REPORT | 390 The amendments must be applied to transactions that are either business combinations or asset acquisitions for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after 1 January 2020. Consequently, entities do not have to revisit such transactions that occurred in prior periods. Earlier application is permitted and must be disclosed. The amendments could also be relevant in other areas of IFRS (e.g., they may be relevant where a parent loses control of a subsidiary and has early adopted Sale or Contribution of Assets between an Investor and its Associate or Joint Venture (Amendments to IFRS 10 and IAS 28)). IFRS 17 Insurance Contracts IFRS 17 applies to all types of insurance contracts (i.e., life, non-life, direct insurance and re-insurance), regardless of the type of entities that issue them, as well as to certain guarantees and financial instruments with discretionary participation features. A few scope exceptions will apply. The overall objective of IFRS 17 is to provide an accounting model for insurance contracts that is more useful and consistent for insurers. In contrast to the requirements in IFRS 4, which are largely based on grandfathering previous local accounting policies, IFRS 17 provides a comprehensive model for insurance contracts, covering all relevant accounting aspects. NOTE 41 – SUBSEQUENT EVENTS - Following the recent news about the case “Luanda Leaks”, despite being an event known in 2020, NOVO BANCO incorporated in the 2019 accounts the impacts that resulted from the analysis of this specific case in line with the accounting standards in force. NOVO BANCO will continue to monitor developments in this process during fiscal year 2020. - From January 2020, the COVID-19 outbreak has been spreading beyond China's borders, impacting financial markets and economic activity. NOVO BANCO is closely monitoring developments, which, on the date of production of this report, are still on a preliminary stage, and, as such, in constant change and with great uncertainty. As an example, the national state of emergency is in force since March 19 decreed for a period of 15 days, with the possibility of prolongation. On this date, the Portuguese Government announced an aid package covering several lines of funding, totalling EUR 3 billion including state guarantees, particularly for the tourism, food and entertainment, textile and clothing, footwear and wood and derivatives sectors. On the other hand, and on that same date, the ECB announced the implementation of the Pandemic Emergency Purchase Programme (PEPP), a programme for the acquisition of public and private sector assets, amounting to EUR 750 billion which could be increased. Purchases under this programme will run until the end of 2020 and will include all classes of assets eligible since the sovereign debt crisis (the amount of which had already been increased by EUR 120 billion). Also noteworthy are the monetary policy actions that have already been adopted by the Central Bank of China with the reduction of interest rates for 1 and 5 years. NOVO BANCO is also monitoring the potential impacts and, where relevant, is taking decisions that defend the interests of different stakeholders, including employees, depositors, customers and NOVO BANCO | 2019 ANNUAL REPORT | 391 shareholders. The main impacts on the NOVO BANCO’s financial statements may come as a result of increased credit risk, increased volatility in financial and non-financial assets and from business constraints due to the measures enacted to contain the spread of the virus. In view of these very recent facts, in constant progress and, as such, not yet definitive, NOVO BANCO, in the current fiscal year, will consider and include in its forecasts scenarios with different levels of severity of scenarios, including also in these scenarios unknown events resulting form the pandemic that are not yet fully known – as may be eventual payment holidays on the loans, and their impacts on impairment of assets, credit quality, assessment of significant increase in credit since inception, forbearance, estimated credit losses according to IFRS9, impacts on capital, among others, material and immaterial. This estimate is not quantifiable at this date. With regard to the fair value of the portfolio of financial assets measured at fair value, which as of December 31, 2019 amounted to Euro 11 802 855 thousand, as disclosed in Note 20, there has been increased volatility in the interest rate market, but, considering the measures announced by the ECB, it is not possible to reliably access the full impact of the pandemic. Finally, regarding non-financial assets, the NOVO BANCO holds a portfolio of real estate assets of Euro 294 876 thousand, as presented in note 26. The value of these assets may be affected by a decrease in occupancy rates that have been reported in the tourism sector, a decrease in economic activity in general and a reduction in the market's ability to transact these assets, all as a result of the impacts of Covid-19. On this date, management is not in a position to quantify the potential impacts of Covid-19 on the fair value or recoverable amount of these assets. As a result of the evolution of the pandemic in Portugal, the NOVO BANCO implemented the following measures: Adaptating the banking and financial offer to cope with the COVID-19 outbreak: - Corporate clients: NOVO BANCO has made available to its clients and to the national businesses a set of solutions to support treasury and corporate finances to support sectors of the national economy whose activity is affected by the resulting economic effects of covid-19, always taking into account the appropriate risk criteria. The support ranges from prorogation of capital repayments up to 12 months, extension of 90 days in factoring, advance of social security payments for eventual lay-off or access to the “Capitalizar” credit line. - Retail clients: NOVO BANCO has launched a package of products and services tailored to the needs exacerbated by the COVID 19 pandemic and aimed at reducing the risks of contagion. This package includes the temporary exemption of commissions on a set of essential transactions through digital channels (from interbank transfers, payment of services, cash-advance and MBWay payments, to the exemptions of the 1st annuity on new debit and prepaid cards or replacements). To meet the foreseeable increase in the use of digital channels, NOVO BANCO has also strengthened technological support for transactions made through electronic means of payment. NOVO BANCO | 2019 ANNUAL REPORT | 392 These measures will have temporary effect and aim to drastically reduce the need to touch the terminals and the physical exchange of money which are little advised in this period. Protection of Employees and Customers: - Promotion and dissemination of recommended hygiene practices and availability of recommended sanitary products in buildings and branches of NOVO BANCO; - Availability of dedicated isolation rooms, in all central buildings and branches, for the confinement of employees suspected of infection; - Plan for the evacuation and disinfection of buildings and branches in case of confirmed infection of a team member; - Self-isolation/quarantine and telework measures for employees who have traveled to one of the affected countries or regions or who have been in close contact with someone who has been confirmed to be infected; - Prohibition of all non-critical business trips and recommendation to all employees to reduce personal travel to a minimum; - Restriction of non-critical face-to-face internal meetings or with suppliers or partners, which are replaced by digital means (video and conference call or other team collaboration tools) and reduced to a minimum number of participants; - Replacement of face-to-face meetings with customers with remote alternatives whenever possible, with greater restrictions in the affected areas; - Implementation of telework plans and division of teams between various locations for critical and non- critical functions, in order to ensure the ability to maintain service levels without disruption; - Evaluation with our main suppliers and partners of their business continuity plans for COVID-19 to ensure minimization of business impact through third-party supplies. Customer Service: The customer phone service team has been strengthened to cope with a potential increase in demand. Also, the communication to customers about the means to conduct transactions, contracting and digital contact was strengthened and implemented an exemption on commissions for the generality of transactions carried out through digital channels. With regard to the availability of face-to-face service, NOVO BANCO's branches will remain open to the public in a conditioned manner. The conditionality is reflected solely in the restriction on the number of customers who can simultaneously be inside the branch, which will be limited to 4 customers. However, the following exceptions are foreseen for availability in face-to-face care: - In situations where customers who had visited the facilities and who subsequently tested positive for the COVID-19 virus, the service will be carried out exclusively by telephone during the period of 14 days; - In situations of branches with up to 3 employees, which will close during lunch time between 12:00 and 13:00; NOVO BANCO | 2019 ANNUAL REPORT | 393 - In situations where there is a positive case of COVID-19 infection, the affected branch will be closed for the quarantine period. Whenever the period of operation or closure of a branch changes, this information will be posted in the storefront of the branch, customers of these branches will be informed by email or SMS, and information about the closed branches or with service limitations will always be up-to-date on the www.novobanco.pt website. These measures may have an impact on the NOVO BANCO’s activity, however, given the possibility of using remote and digital channels, the NOVO BANCO does not expect these to be relevant through the mitigation measures implemented. However, risks of a longer overall impact, arising from any trigger that undermines confidence, are not yet completely ruled out. It is also the conviction of the Board of Directors that NOVO BANCO has the means to conduct business, despite the adversity we are facing and maintains a continuous support from its shareholders, we, thus, consider adequate that the financial statements of NOVO BANCO continue to be prepared in a going concern basis, as described in note 2.1. - On February 11, 2020, Novo Banco, S.A., Branch of Spain was informed by a former employee that he had performed several allegedly fraudulent acts involving several clients, relating to the management of a client portfolio of a given agency of the Spanish Branch, in parallel and in non- compliance with the internal procedures defined by the Bank. NOVO BANCO immediately took several steps to verify the veracity of the facts and to quantify the potential damages and identification of customers that may be at stake, which are still in progress. On the present date, there is no visibility as to the existence of NOVO BANCO's liability and, if confirmed, its effects or the amounts that could potentially be at stake, so the eventual liability of NOVO BANCO is, for the moment, insusceptible determined or quantified. NOVO BANCO | 2019 ANNUAL REPORT | 394 7.4 Auditor’s Report on the Consolidated Financial Statements NOVO BANCO | 2019 ANNUAL REPORT | 395 NOVO BANCO | 2019 ANNUAL REPORT | 396 NOVO BANCO | 2019 ANNUAL REPORT | 397 NOVO BANCO | 2019 ANNUAL REPORT | 398 NOVO BANCO | 2019 ANNUAL REPORT | 399 NOVO BANCO | 2019 ANNUAL REPORT | 400 NOVO BANCO | 2019 ANNUAL REPORT | 401 NOVO BANCO | 2019 ANNUAL REPORT | 402 NOVO BANCO | 2019 ANNUAL REPORT | 403 7.5 Auditor’s Report on the Separate Financial Statements NOVO BANCO | 2019 ANNUAL REPORT | 404 NOVO BANCO | 2019 ANNUAL REPORT | 405 NOVO BANCO | 2019 ANNUAL REPORT | 406 NOVO BANCO | 2019 ANNUAL REPORT | 407 NOVO BANCO | 2019 ANNUAL REPORT | 408 NOVO BANCO | 2019 ANNUAL REPORT | 409 NOVO BANCO | 2019 ANNUAL REPORT | 410 NOVO BANCO | 2019 ANNUAL REPORT | 411 7.6 Report of the General and Supervisory Board and the Opinion of the Financial Affairs (Audit) Committee on the Management Report and on the Separate and Consolidated Financial Statements of Novo Banco, S.A. for the year ended on 31 December 2019 Pursuant to the mandate we have been given and in compliance with the provisions of h) and q) of paragraph 1 of article 441° and article 444.º of the Commercial Companies Code and the bylaws of Novo Banco, S.A. ("Novo Banco" or “Bank”), the General and Supervisory Board is required to issue the Annual Report on the activity developed and the Committee for Financial Affairs is required to issue an opinion on the management report and the separate and consolidated financial statements of Novo Banco, which comprise the separate and consolidated income statement, separate and consolidated statement of comprehensive income, separate and consolidated balance sheet, separate and consolidated statement of changes in equity, separate and consolidated statement of cash flows and the respective Annexes, as well as on the proposed application of Results, presented by the Board of Directors of Novo Banco, for the year ended on 31 December 2019. 1. Report of the General and Supervisory Board for the year 2019 1.1. Composition and scope In accordance with the applicable law, Novo Banco’s bylaws and best practices at the date of this annual report, five of the nine members who comprise the General and supervisory board, including the Chairman, are independent. The General and Supervisory Board has the powers given by law, by the Bylaws and by own regulation, including the supervision of all matters related to risk management, compliance and internal audit. During 2019, we have monitored the activity of the Bank and its more significant subsidiaries. The activity of the General and Supervisory Board is directly supported by 5 (five) committees, in which were delegated some of its powers, namely the Financial Affairs Committee, the Risk Committee, the Compliance Committee, the Nomination Committee and the Remuneration Committee, as provided for in articles 6 and 16 of the Bylaws of Novo Banco and the Regulation of the General and Supervisory Board. These Committees are chaired and composed by members of the General and Supervisory Board and can also have the presence of the Executive members of the Board of Directors or other managers responsible for the areas covered by the activities of these Committees. The General and Supervisory Board meets monthly, performing the duties assigned to it by law, by the Bylaws of the Bank and by own regulation. The Executive Board of Directors informs the General and Supervisory Board on all relevant matters, timely and on a comprehensive written or verbally manner. NOVO BANCO | 2019 ANNUAL REPORT | 412 1.2. Activity undertaken in 2019 General and Supervisory Board During 2019, the General and Supervisory Board held 12 meetings, where several issues were discussed, analised and approved, including: - The separate and consolidated financial statements of Novo Banco for the year ended 31 December 2019 and the financial statements of the first, second and third quarters of 2019; - The budget for 2019; - 2019-2021 strategic plan; - The strategy and risk appetite; - The main sale of assets of Novo Banco, in particular, the sale of the GNB - Companhia de Seguros de Vida, S.A., the sale of real estate portfolios (Viriato,Sertorius and Cannas Projects), the sale of non-performing loans-NPLs portfolios and related assets (Nata I and Nata II Projects); the termination of the activities in the Branches of London, Cayman Islands and Venezuela, as well as the merge of ES PLC and BESIL into Novo Banco; - Compliance Department activity, including, the ratification of transactions with related parties, approved by this department; - Internal Audit Department activity; - Most relevant lawsuits against the Group; - Evolution of compliance with the commitments assumed before DGComp, through the analysis of the various updates and Monitoring Trustee reports; - Evolution of CCA calls and analysis of reports issued by the Verification Agent; - Review of the General and Supervisory Board own regulation and the regulations of their Committees delegating powers to some of the committees; - Changes to the Information disclosure policy; - Changes to Whistleblowing policy; - Changes to the Evaluation and selection policy of the governing bodies and key function holders; - Changes to the Related party policy; - Changes to the Conflict of interest policy; - Changes to Remuneration policies of the governing bodies and the rest of the Bank's staff; - Servicing contract of the CCA; - Group Impairment report; - Group Internal control report; - Approval of the Internal audit plan May 2019 - April 2020. Additionally, in all meetings, the General and Supervisory Board, in addition to the analysis of the evolution of the business, monitored, as well: - the evolution of the legal aspects and specific regulation of the financial sector, in particular the “Regime Geral das Instituições de Crédito e Sociedades Financeiras” ("RGICSF"), the regulations of the European Union and the notice and further instructions of the Bank of Portugal; NOVO BANCO | 2019 ANNUAL REPORT | 413 - the evolution of the main prudential ratios analyzed in the Executive Board of Directors and presentation of the measures arising from European banking regulation and the specific requirements set by the European Central Bank (SREP); - the liquidity position and respective regulatory ratios of the Bank, through information presented to the Executive Board of Directors. Under and for the purposes of analyses and verifications performed, the General and Supervisory Board requested, and obtained, documentation and clarification of several issues raised. Financial Affairs Committee The Financial Affairs Committee held 15 meetings during 2019 and concentrated its activity in the assessment of the Bank's financial statements, and reports of the statutory auditor for the financial year 2019, discussing and analyzing also the update reports submitted by the Internal Audit. Throughout 2019, the main Non- Performing Assets sales operations were monitored by the Financial Affairs Committee, namely, Project Nata II, Project Viriato, Project Albatros, Project Cannas, sale of GNB - Vida and GNB Seguros. During 2019, the Committee also followed the evolution of several relevant projects, including the RWA - Risk Weighted Assets review process, the MREL requirements management process - Minimum Requirements for Own Funds and Elegible Liabilities, and the MIS Project (with a view, among other things, to the separation of legacy and non- legacy activity). The Financial Affairs Committee monitored on a continued form, the independence and the work of the external auditor, including the supervision and approval of the provision by this of other additional services to NOVO BANCO Group. The annual audit process for 2019 was discussed at meetings of the Committee. The meeting agenda included an update on the regulatory aspects of the Bank's activity, the implementation of IFRS 9 and the conclusions of the analysis and evaluation process for supervisory purposes (SREP). The statutory auditor, as well as the person responsible for internal audit and the Chief Financial Officer (CFO) participated in the meetings as guests, where necessary. In addition, Committee members met separately with the statutory auditor and the person responsible for internal audit, without the presence of the members of the EBD. Risk Committee The risk Committee held 19 meetings during the year of 2019. In addition to the approval of loans to individual clients or groups of clients associated with, according to the own Regulation, appreciated and discussed the strategy and risk appetite to 2020, according to the budget for 2020. Other topics discussed by the Risk Committee included the major monthly indicators of risk (credit risk, market and operational) and the provisions and impairments of credit in the financial statements for the financial year of 2019. Non-performing loans of the Bank were also reviewed and compared with the institutions used as reference and with the indicators of the European banking authority (EBA). The governance model of risk was also subject to review in the year. The meeting agenda included a report about the regulatory aspects relating to the risks faced by the Bank, particularly in the context of the exercise TRIM (Targeted Review of Internal Models) and of the conclusions of the SREP. The calculation of risk-bearing capacity of the Bank is a frequent subject in the meetings of the Committee. Responsible for the risk function and the CRO participated in meetings as guests, where necessary. NOVO BANCO | 2019 ANNUAL REPORT | 414 Compliance committee The Compliance Committee held 5 meetings during 2019 and deliberated on issues of Government, regulatory and legal in which the Bank operates, having examined and discussed the issues of regulatory compliance of the Bank, including the DMIF2 implementation and of the law on the prevention of money laundering, the legislation on data protection, whistleblowing procedures and other legal and regulatory affairs and relevant ongoing projects. The Committee reviewed and discussed issues on related-party transactions and conflict of interest, as well as more relevant lawsuits regularly accompanied by the Bank. Nomination Committee The Nomination Committee held 1 meeting during the year 2019. Following the measures implemented in 2018, through the creation of an independent Office of evaluation of the adequacy and suitability (Fit & Proper), an annual assessment was performed (at individual and collective level) of adequacy and suitability - “Annual Fit & Proper Assessment - Individual Members and Collective ” of the members of the Executive Board of Directors of Novo Banco and members of the Board of Directors of the subsidiaries Novo Banco dos Açores, Banco BEST and GNB – GA. The evaluation and promotion policy for the Bank's essential functions (“Succession Plan Matrix - Key Function Holders”) was also analyzed. Remuneration Committee The Remuneration Committee held 5 meetings during the year 2019. At these meetings, the Committee monitored the implementation of policies relating to the remuneration of the management and supervisory bodies and adopted a set of decisions related to the variable component of remuneration. Additionally, were also established and approved at this meeting the main individual and collective performance indicators for the Executive members of the Board of Directors for the year 2020, based on the approved budget for this year. During the year of 2019, the General and supervisory board and their Committees have issued several opinions arising from requests made by the Executive Board of Directors, under article 15, paragraph 5 of the Bylaws. The General and Supervisory Board and the Financial Affairs Committee held meetings throughout the year with the audit firm Ernst Young Audit & Associados-SROC, S.A., both in the context of the audit of the separate and consolidated financial statements for the year ended 31 December 2019, and regular monitoring and discussion of the most relevant aspects resulting from the assessment of the internal control. Under the existing articulation with the audit firm, the General and Supervisory Board obtained the necessary and sufficient explanations to the questions within the scope of its functions and, in particular: - The completeness of the accounting records and documents that support them; - The existence of goods or values belonging to the NOVO BANCO Group or received in guarantee, deposit or other title; and - If the accounting policies and valuation criteria adopted lead to an adequate representation of the assets and of the results of NOVO BANCO. The General and Supervisory Board reviewed all matters contained in the Legal Certification of Accounts and Audit Report on the consolidated and individual financial statements issued by the statutory auditors for the NOVO BANCO | 2019 ANNUAL REPORT | 415 year ended 31 December 2019, having obtained from the auditors all the necessary clarifications, in particular on the relevant matters included under the same audit: - Impairment for loans and advances to customers; - Financial instruments measured at fair value and classified as level 3 under IFRS 13; - Measurement of real estate obtained through credit foreclosure; - Contingent Capitalization Agreement; - Disclosure of contingent liabilities. All these matters were monitored by the General and Supervisory Board and their Committees, which, on these matters, kept updated by the Executive Board of Directors, by the relevant Directions and by the external auditors. In preparing the accounts of the financial year, the General and Supervisory Board analyzed the management report as well as other documents submitted by the Executive Board of Directors, having proceeded to verifications and obtain the clarifications deemed necessary, which comply with the applicable legal requirements. The accounts were audited by the audit firm Ernst & Young Audit & Associados SROC, S.A., which issued the Audit Report on the financial information for the year ended 31 December 2019 in 26 March 2020, without qualifications and including an emphasis of matter related to Covid-19, on which the General and Supervisory Board expresses its agreement. The General and Supervisory Board reviewed the Additional Report to the Supervisory Board issued by the statutory auditors on the same date, which corresponds in substance to the issues that have been discussed along the year, and for which we have obtained all the necessary clarifications. NOVO BANCO | 2019 ANNUAL REPORT | 416 2. Opinion of the Committee for Financial Affairs on the management report and the separate and consolidated financial statements Within the scope of our work we verified that: (a) the separate and consolidated balance sheet, the separate and consolidated income statement, separate and consolidated statement of comprehensive income, separate and consolidated statement of changes in equity, the separate and consolidated cash flow statement and the corresponding separate and consolidated Annex, allow a proper understanding of the assets, liabilities and the separate and consolidated financial position of Novo Banco, their separate and consolidated changes in equity and the separate and consolidated cash flows; (b) the accounting policies and valuation criteria adopted are appropriate; (c) the management report is sufficiently clear as to the evolution of the business and the situation of the Bank and all the subsidiaries included in the consolidation, highlighting the most significant aspects, as well as a description of the principal risks and uncertainties that face; (d) the proposed application of results do not contradict the legal and statutory provisions applicable; (e) in accordance with paragraph 5 of article 420 of the “Código das Sociedades Comerciais”, apply for remission of articles 441, 444, paragraph 2 and paragraph 2, the information about the corporate governance includes the elements required under article 245 of the ”Código dos Valores Mobiliários” and other applicable legislation. Therefore, we are of the opinion of the: (a) Approval of the management report as well as other documents of account, for the year of 2019, presented by the Executive Board of Directors, considering the aspects highlighted in the Audit report on the separate and consolidated financial statements of the Bank of that year issued by the audit firm; (b) Approval of the proposed application of results submitted by the Board of Directors in Executive Management report. Finally, the General and Supervisory Board would like to express its appreciation to the Management Board, to the Executives in charge for the several areas of the Bank and to other employees, as well as the auditors, the cooperation and the support for the completion of your work. Lisbon, 1 April 2020 NOVO BANCO | 2019 ANNUAL REPORT | 417 General and Supervisory Board and the Financial Affairs Byron James Macbean Haynes Chairman of the General and Supervisory Board and member of the Financial Affairs Committee Karl-Gerhard Eick Vice-Chairman of the General and Supervisory Board and member of the Financial Affairs Committee Kambiz Nourbakhsh Member of the General and Supervisory Board and member of the Financial Affairs Committee Mark Andrew Coker Member of the General and Supervisory Board Benjamin Friedrich Dickgiesser Member of the General and Supervisory Board John Herbert Member of the General and Supervisory Board Donald John Quintin Member of the General and Supervisory Board Robert A. Sherman Member of the General and Supervisory Board Carla Antunes da Silva Member of the General and Supervisory Board NOVO BANCO | 2019 ANNUAL REPORT | 418 NOVO BANCO | 2019 ANNUAL REPORT | 419
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