NOVO BANCO
Annual Report 2022

Plain-text annual report

Additional Notes to this Report This document is the PDF/printed version of the Annual Report 2022 of Novo Banco S.A.. This version has been prepared for ease of use and does not contain ESEF information as specified in the Regulatory Technical Standards on ESEF (Delegated Regulation (EU) 2019/815). The official ESEF reporting package is available on our website at www.novobanco.pt/investidores. In case of discrepancies between this version and the official ESEF package, the latter prevails. Novo Banco, S.A. Head Office: Av. da Liberdade, n. 195, 1250-142 Lisbon - Portugal Commercial and Tax identification number: 513 204 016 Share Capital of €6 304 660 637.69 divided into 10 391 043 938 nominative dematerialised shares with no nominal value The novobanco Cultura's mission is to reflect novobanco's commitment to uphold, promote and share its important cultural and artistic heritage with Portuguese society. novobanco Cultura brings together novobanco's collections and cultural initiatives under a single concept, facilitating access and enjoyment of the various collections to art communities, students, researchers and the general public, both nationally and internationally. The collections and library of novobanco Cultura are: The Contemporary Photography Collection Amongst the finest Corporate Collections in the World; The Painting Collection A set of over 90 important Portuguese and European artworks from various eras; One of the largest and most complete collections of Portuguese numismatics; The Numismatic Collection One of the most valuable private libraries that specializes in the humanities. The Humanities Library www.novobancocultura.pt/en In the 2022 Report and Accounts, are presented a set of works from the Painting Collection The story of the beginning of a Collection The Collection was created in 2017 from a dispersed set of works, from different origins and eras, coming from various rooms of the Bank's administration and branches from north to south of the country. The artistic heritage of the Bank was the starting point for the constitution of the Painting Collection, based on three objectives: the investigation and descriptive study of the works, making the works available to the public on an online platform, and above all, giving a useful meaning to the Collection, making it an active part in bringing art closer to diverse audiences, through partnerships with museums, from north to south of the country, continent and islands, with a particular focus on institutions located outside major urban centers. Lisboa XXXII, Rua do Ouro 1986 – Maluda (Maria de Lourdes Ribeiro) The city reinvents itself, through the geometric shapes of the buildings volumes, in an almost abstract image of reality, calm and silent. MIRANDELA, Museu Municipal Armindo Teixeira Lopes Oil on canvas 72 x 91cm Abbreviations and Acronyms ECB EBD GSB European Central Bank Executive Board of Directors General and Supervisory Board DGCOMP Directorate-General | Competition CCA ESG YTD YoY NII Contingent Capital Agreement Environment, Sustainability and Governance Year-to-date - change since the start of the year Year-on-Year - change on a year earlier Net Interest Income RGICSF Regime Geral das Instituições de Crédito e Sociedades Financeiras Legal Framework of Credit Institutions and Financial Companies LCR € €mn €bn bps pp Liquidity Coverage Ratio euro million euro billion euro basis points percentage points CONTENT Message from the Chairman of the General and Supervisory Board . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 Interview with the Chief Executive Officer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 I. MANAGEMENT REPORT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 II. SUSTAINABILITY REPORT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 108 III. FINANCIAL STATEMENTS AND FINAL NOTES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 193 IV. ANNEX . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 454 Auditor’s Report on the Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . 455 Auditor’s Report on the Separate Financial Statements . . . . . . . . . . . . . . . . . . . . ... . . . . . . . . . . . . . . . . . . . . . . . . . . .463 Report of the General and Supervisory Board . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .470 Evaluation Report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . 473 Message from the Chairman of the General and Supervisory Board Dear Stakeholders, Novo Banco S.A. (“novobanco”, or “the Bank”) delivered significantly improved profitability with net income of €561mn for the full year 2022, reflecting the strong growth of our banking businesses and confirming the sustainability and viability of our business model. novobanco´s business model reflects its strategic program which during the year has been reshaped, simplified, and structured around four overarching pillars of being a “Customer-Centric Bank”, “Simple and Efficient Operations”, “Developing People and Culture” and “Delivering Sustainable Performance”, to better enable the Bank “to serve the needs and expectations of our customers”. Year 2022 financial results have been underpinned by an increase in commercial banking income (+7.3%) and net loan growth (+3.8%) which has generated sustainable revenue and capital growth confirming the Bank´s accretive business model. Throughout the year novobanco has continued to make significant investment (including IT with €85mn) in support of our commercial businesses and our people while keeping underlying run-rate cost discipline despite inflationary pressure. The viability of novobanco´s business model is confirmed with significantly strengthened year-end capital ratios complying with all regulatory and guidance requirements (Supervisory Review and Evaluation Process Compliance), solid year-end liquidity ratios were maintained following the partial repayment of €1.6bn of the TLTRO III in December and the year-end binding and linear (non-binding) MREL targets were exceeded. In June 2022, following its annual review of the year-end 2021 financial statements, Moody´s Investors Service upgraded novobanco's baseline credit assessment (BCA) rating by two notches to b2, long-term deposit rating to Ba3 and senior unsecured debt ratings to B3, with unchanged positive outlook. The multi-notch upgrade reflects novobanco's “improved credit profile as a result of the continued de-risking of its balance sheet and the significant restructuring of its operations over recent years”. In February 2023, the European Commission, State Aid Directorate General for Competition (“DG Comp”) announced the compliance of the Restructuring Plan and commitments (Structural, Behavioural & Viability) agreed with the Republic of Portugal in October 2017 have ended and that novobanco has now exited the Restructuring period following the Monitoring Trustee's final report which will be prepared after the submission of full year 2022 audited accounts. During the year the Bank continued to execute the de-risking of legacy assets and non-core assets. Several real estate sales were successfully completed taking advantage of the positive market momentum in certain segments. The logistics portfolio sale completed in May 2022 had a positive impact on net income and capital. Project Crow, the sale of certain restructuring funds and assets, was successfully completed in December 2022 also on a capital accretive basis, with a neutral impact on net income. novobanco reduced the non- performing loan (“NPL”) ratio to 4.3% at year-end 2022 leaving the NPL stock less than €1.4bn. Following the completion of the Spanish business sale in 2021, the Bank is formally closing the Spanish Branch entity and a subsequent opening of a Representation Office in this jurisdiction. The Bank continued to be very vigilant and cautious with respect to managing the many different aspects of risk. In particular, in 2022 the Bank was faced with the contagion impact of the Russian / Ukraine conflict on credit risk (direct & geographic proximity), heightened levels of market risk (interest rate and credit spread market volatility on investment portfolios) and operational risk (cyber-attacks and outsourcing); the end of the credit moratoria in Portugal; and the onset of a more uncertain macro-economic environment with the increased risk of recession, increased inflationary pressures, rising interest rates and the resulting cost-of- living crisis. In addition, there has been increased focus on emerging risks like climate and environment risk. The European Central Bank (“ECB”) concluded its first climate stress-test exercise on the Single Supervisory Mechanism (“SSM”) banks, with novobanco receiving a “Medium Classification” in-line with the overall SSM average. During the year the General and Supervisory Board (“GSB”) appointed and approved the new Executive Board of Directors (“EBD”) mandate term 2022 to 2025 under the new CEO Mark Bourke´s leadership. The GSB decided to enhance and strengthen the governance structure of the EBD by increasing its members to seven and realigning certain roles & responsibilities, including the introduction of a clear separation between Risk and Credit at the executive level in line with best practices across the SSM banks in Europe. In 2022, the Bank launched our “Sustainable Finance” project encapsulating novobanco´s group-wide ESG program covering the ESG governance and organization model including target operating model and institution-wide training and business and risk management. Sustainable Finance is expected to develop on an accelerated basis following the good progress made in 2022. As part of the “Developing People and Culture” strategic program, the Bank has recently launched some key initiatives to continue to build and empower a diverse workforce and to deliver on our commitments to diversity, equity, and inclusion. Throughout year 2022, the GSB and its respective committees supervised and supported the EBD in the monitoring and execution of the Bank’s strategic goals and financial targets as set out and agreed in the medium-term plan. For year 2022, the Bank delivered the key strategic goals and financial targets in our plans, including sustainable profitable growth supporting our corporate and retail banking customers and our people and the significant rebuilding and strengthening of our capital position. For year 2023, realistic strategic goals and financial targets for novobanco have been set which include building further sustainable net income benefiting from positive momentum from the net interest income growth in the last quarter of 2022 and the continued investment in and support of our commercial businesses and our people, while at the same time being cautious and vigilant in managing risk through this difficult economic period. On behalf of the GSB, I would like to thank our customers and our other stakeholders for their continued support, trust and loyalty to novobanco. Finally, the GSB and I would especially like to thank all the EBD members and the employees of novobanco for the hard work, dedication and commitment that has allowed the Bank to better serve the needs and expectations of our customers and to realise its targets and goals, despite the challenging year of 2022. Byron Haynes Chairman of the General and Supervisory Board CEO Talk with Mark Bourke Mark Bourke, Chairman of Executive Board of Directors, gives an interview highlighting 2022 achievements and the prospects for the future of novobanco. After the completion of the restructuring process, novobanco is now embarking on a phase of accelerated trajectory with consolidation of profitability and sustainable business growth. Welcome to novobanco, and to our master branch in Lisbon. This branch is part of the 240 branches already operating under the new distribution model – redesigned to have a greater focus on customised service. In a nutshell, a customer-centric bank where face-to-face service experience is an important piece of the omnichannel architecture. 1: 2022 was the year of the consolidation of novobanco profitability. Which key achievements you highlight? During the restructuring cycle, it was the belief that together we could rebuild the bank that made it possible: i) to normalise the balance sheet; ii) to optimize our operational model, and iii) to strength the risk management model, improving its resilience and allowing novobanco to reposition its activity in the domestic market. In 2022, despite a challenging macro environment, it was the same belief in and continued focus on serving our clients, adapting and evolving our offering and service that delivered the financial results. More than the bottom-line, it is really important to highlight improvements made in the following: o Corporate segment - solutions to support the effectiveness of programmes towards development of the economy by stimulating innovation, digital transformation and energy transition; and the definition of a sectorial approach evolving our know-how and expertise; o Retail segment – the progress made in the implementation our omnichannel strategy, highlighting not only the new distribution model and the 190 VTM (Virtual Teller Machine) already installed, but also the remote service and the investment in digital marketing tools towards and unique client’s journey; o ESG – creation of ESG Office and redefinition of our ESG Steering model, ensuring organization alignment towards integration of sustainability principles in our day-to-day activity and our strategy. 2: An impressive set of both operational and financial results were delivered in 2022. From the top to the bottom line what are the key takeaways? In 2022 novobanco delivered sustainable growth of business, demonstrating the ability to generate increased revenue and capital. I would highlight three elements: o Commercial Banking Income of €919mn (+7% YoY), with solid Net Interest Income performance, underpinned by improvement of average assets yield, which more than offset the cost with senior debt issued during the year and the change of TLTRO III interest rates; o A Cost to Income ratio of 44% excluding exceptional items, keeping costs under control while investment in digital transformation and streamlined operations; o Cost of Risk of 45bps (-50bps YoY) benefiting from the de-risking strategy executed over the years and reaching a NPL ratio of 4.3%, towards an NPL ratio in line with the European average. The financial performance was backed by our commercial activity. In 2022 Net loan book increased by 3.8% YoY, moving towards expanding loan book with €3.9bn customer loans originated, of which 58% were corporate. In summary, novobanco consistent performance allowed the bank to deliver on all our medium-term targets already in 2022, in detail: o Expanding loan book with performing commercial loan book growing 4.7% YoY (vs 2-3% target per year); o Net Interest Margin within the 1.30-1.50% range, at 1.47%; o Efficient operations with Cost to Income of below 45%, reaching 44% on a recurrent basis; o Achieving moderate risk profile with Cost of Risk below 50bps, at 45bps; o NPL converging towards EU average – at 4.3%, being lower than 5% o Delivering organic attractive returns with Return on Tangible Equity (pre-tax) above 10% target and totalling 14.4%; o And accelerating capital generation with CET 1 phased-in at 13.7%, being above 12% target Novobanco proved to have a capital accretive business model and is now positioned for its next stage of development. 3: Novobanco’s objective is to be a customer-centric domestic bank. Apart from being customer-centric, what are the key drivers of its strategy? Novobanco strategy is based on 4 pillars: i) Customer-centric bank – as mentioned, aiming to improve customer experience through by implementation of an omnichannel delivery model on the retail side, a sectorial approach for SMEs, a journey for standard products, improve your customer tools and time-to-market; ii) Simple and efficient operations – streamline operations and processes, transforming the core system and applications efficiency and risk; iii) Developing people and culture – through i) transformation of our value proposition to attract and retain talent, ii) accelerating the development of internal talent; iii) developing current and future leaders and planning the succession, and last but not least, an environment where speaking-up is welcome and safe; iv) Delivering sustainable performance – managing Risk and Capital, reshaping and simplification of internal risk and frameworks and assessment of climate and environmental risks, and efficient capital allocation backed by effectiveness of RAROC tools. Sustainable performance not only in the short term and financially but integrating sustainability and its principals in our day-to-day activities. The combination of these gives novobanco the confidence that its ambitious objectives will continue to be met, while becoming an exemplar of customer-centric in the European financial sector. 4: Looking at the future, ESG has an increased relevance in the regulatory and business landscape. What is novobanco’s approach to management of ESG risks towards more sustainable financial sector? Our ambition is to position novobanco as the leading ESG Bank in Portugal, which is only possible with the integration of sustainability within the Group's business model. This strategy is focused on 3 main areas: • Evolve the framework to manage ESG and Climate and Environmental risks, to accurately assess and monitor them, steering our portfolio to support our clients’ transition journeys • Improving the financial and social wellbeing of our people, clients and the communities we serve • Being a responsible bank behaving fairly and responsibly, maintaining high standards of conduct. In 2022, we reinforced our governance of ESG and climate and environmental risks through the creation of a dedicated ESG Office reporting directly to the Executive Board of Directors, the implementation of a specific team for ESG risks within the Risk function, and the revision of the composition and powers of monthly ESG steering meetings. This will enable us to accelerate the integration of ESG into the business, ensure the integration of sustainability principles into the strategy, and support and boost ESG aligned business in commercial areas. Our ESG monthly Steering, assisted by a Project Management Office team, oversees the implementation of the business model transformation workplan devised by 8 different cross-departmental teams, ensures the systematic discussion of the main ESG performance indicators, covers all the relevant areas of activity (business, operations, risk, human capital, among others), and monitors regulatory and legal developments. 5: In practical terms, how are environmental and climate risks being accessed in novobanco business model? One of our main challenges is supporting our customers transition towards a low carbon economy, while managing risks and opportunities. Reaching Net Zero by 2050 will only be possible if businesses, regardless of their size, are able to transform their business models and production processes. This will pose a great challenge specially for SMEs, and we recognize the key role that banks must play in financing that transition. So, more than just sustainable finance, we talk about transition finance. In integrating ESG risks into our loan origination frameworks and processes we are taking a structural approach, aligned with EU Taxonomy, that will allow us to assess materiality, define alignment targets, segment exposures with a sectorial scoring model, and pilot an ESG rating model that will inform decision making and pricing methodologies which will enable full ESG integration into loan origination in line with regulatory calendar. In parallel, we will continue to strive to reduce our environmental footprint through energy efficiency initiatives in our offices and branches, the conversion of our car fleet to eletric, the strengthening of a paperless culture, or water saving and waste management initiatives. 6: To conclude this interview, would you like to leave a final message to novobanco stakeholders? 2022 was the year to, with no restrictions, relaunch novobanco. This was recognized not only by rating agencies (with 2 notches upgraded in 2022) but also with the successful completion and end of novobanco’s restructuring period as recognized by DGCOMP. Novobanco is now in a position to grow in a sustainable manner and to support our clients, be they individual families or corporates (with focus on SMEs), to compete and endure as a strong and independent Portuguese bank. This journey was only possible with the dedication of our people, the confidence of our customers and the commitment of all the governing bodies of the bank. Therefore, I would like to take this opportunity to thank all our stakeholders for their continued confidence in novobanco. L’aube chromatique, 1969 - Vieira da Silva Oil on canvas, 81 x 100 cm In the 1960s Vieira da Silva was already a national and international renowned artist, with a work of great conceptual independence. “L’aube chromatique” shows her deep interest in issues related with space, its structural complexity and its relationship with light, a theme of constant research in her painting. Here, the chromatic vibrations are translated into an irregular grid, dense and luminous, atmospheric, infinite and free of defined geometric lines. The mesh of hundreds shades of white, the notes in yellow and orange in horizontal brushstrokes, the thicker or diluted palette, reflects a unique and unmistakable pictorial grammar. CRATO. Museu Municipal do Crato INDEX INDEX ............................................................................................................................................ 13 Who we are...................................................................................................................... 16 1 1.1 novobanco ........................................................................................................................ 16 1.2 Organisation ..................................................................................................................... 26 2 OUR STRATEGY ............................................................................................................. 32 2.1 Business Environment ...................................................................................................... 32 2.2 Strategic Pillars ................................................................................................................. 35 2.3 Risk Management ............................................................................................................. 42 2.4 DGCOMP Commitments................................................................................................... 49 3 OUR PERFORMANCE ..................................................................................................... 51 3.1 Highlights .......................................................................................................................... 51 3.2 Novo Banco Group (Consolidated) ................................................................................... 53 3.3 Business Segments .......................................................................................................... 57 3.4 Novo Banco Separate ....................................................................................................... 64 3.5 Relevant Facts from the Activity and Subsequent Events ................................................. 66 4 CAPITAL AND LIQUIDITY ............................................................................................... 68 4.1 Capital Ratios ................................................................................................................... 68 Liquidity and Funding ........................................................................................................ 69 4.2 5 CORPORATE GOVERNANCE ........................................................................................ 74 5.1 Shareholder Structure ....................................................................................................... 74 5.2 Corporate Bodies: Composition and Functioning .............................................................. 74 5.3 Internal Control ................................................................................................................. 80 5.4 Main Policies .................................................................................................................... 82 5.5 Credit to Members of the Corporate Bodies ...................................................................... 90 5.6 Remuneration of the Members of the Corporate Bodies and Identified Staff ..................... 91 5.7 Securities Held by Members of the Management and Supervisory Bodies ....................... 93 5.8 Non-Material Indirect Investment in Novo Banco .............................................................. 93 CONSOLIDATED FINANCIAL STATEMENTS AND FINAL NOTES ............................... 95 6 6.1 Consolidated Financial Statements ................................................................................... 95 6.2 Separate Financial Statements ......................................................................................... 97 Final Notes ....................................................................................................................... 99 6.3 6.4 Note of Recognition .......................................................................................................... 99 7 ANNEX – ALTERNATIVE PERFORMANCE MEASURES ............................................. 101 In this painting, Resende works a luminous palette, in shades of turquoise blues, greens and yellows, marking the contrast between the face, melancholic, somber, and the abstract shapes of the body, suggested in patches of blue multiples. CRATO, Museu Municipal do Crato Mulher, 1981 – Júlio Resende Oil on canvas 153 x 123cm 1 Who we are 1.1 novobanco Novo Banco, S.A. ("novobanco" or "the bank") together with the subsidiaries and equity holdings that make up the Novo Banco Group ("Group" or "novobanco Group") is mainly active in the Portuguese banking sector, in both corporate and retail segments, also developing activity in asset management. In addition, the bank has equity stakes in companies operating in venture capital, real estate and renting. novobanco was born in 2014 upon the resolution of Banco Espírito Santo S.A. (“BES”). From the outset, novobanco has shown its resilience, overcoming the huge challenges resulting from its status as a transitional bank and from 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, through Nani Holdings S.G.P.S., S.A.. The first years of novobanco's life laid the foundation for its renaissance in 2021. After completion of its restructuring process, novobanco is now geared towards commercial transformation: ANNUAL REPORT 2022 | MANAGEMENT REPORT - 16 - Legacy divestment carried out simultaneously with operational model optimization Execution of the process of divestment of non-productive assets despite the macroeconomic environment: Business recalibration, leading a balance sheet reduction, while maintaining the core business1: Significant profitability turnaround and a successful transition to capital-accretive performance2: In October 2017, the Portuguese State and the European Commission agreed on the Commitments within the scope of the state aid process. The business plan designed to demonstrate the Bank's viability, by the end of the restructuring period, laid out a strategy for a comprehensive transformation of novobanco. The successful and complete execution of the business plan, even with market conditions being more challenging than the ones embedded in the business plan (eg: negative Euribor rates; negative economic consequences of the pandemic crisis), enabled the achievement of the Commitments announced by the competent bodies, which will be assessed in the Monitoring Trustee’s final report and upon the release of novobanco 2022 year-end accounts. 1 2 Cost-to-Income defined has Operational Costs divided by Commercial Banking Income; 2022 recurrent Cost-to- Income 2022 Cost of risk of 45bps considers loan impairments and corporate bonds ANNUAL REPORT 2022 | MANAGEMENT REPORT - 17 - In this new phase, novobanco's vision leverages its knowledge and strong presence in the corporate segment, defining its identity, principles and values. A relationship bank at the service of Portuguese economic growth, and brand with the following principles and values: A Portuguese, Professional, Partner and Proximate bank and is intrinsically anchored in the principles and values that guide the way to do business. The purpose guides and underpins everything novobanco does. It enables novobanco to build long-term value, to invest for growth, to remain focused on delivering a social dividend with a positive contribution to society and driving sustainable returns to shareholders. ANNUAL REPORT 2022 | MANAGEMENT REPORT - 18 - 1.1.1 Business Model novobanco is a Portuguese universal bank that provides the full spectrum of financial products to individuals, corporate and institutional clients, serving the entire national territory, with a strong focus on servicing and supporting the Portuguese business community. novobanco business model is based on two main commercial banking segments: i) corporate; and ii) retail. In both segments, novobanco seeks to anticipate and respond to the needs of its clients through its offer of innovative, effective and transparent banking products and services, based on high ethical and integrity standards and customer satisfaction assessment tools. ANNUAL REPORT 2022 | MANAGEMENT REPORT - 19 - ANNUAL REPORT 2022 | MANAGEMENT REPORT - 20 - In addition to novobanco's branches, corporate and business centres, its business model is also supported by: novobanco dos Açores is the result of a strategic alliance between novobanco (57.5%) and Santa Casa da Misericórdia de Ponta Delgada (30.0%), which was joined by the Bensaude Group (10.0%) and thirteen other Santa Casa da Misericórdia units from all the Azores islands (2.5%). In 2022 novobanco dos Açores celebrated its 20th anniversary, which marked the historic strategic alliance established in 2002. novobanco dos Açores has as its mission to serve its clients (individuals and companies) and the Azorean regional economy. Its strategy relies on key competitive advantages such as economic and financial strength, a culture of service to the benefit of the population of the Azores, wide experience of the local market and a strong tradition of close relationships with the Clients. Moreover, novobanco dos Açores has set itself the important goal of becoming a benchmark ESG entity in the Azores, contributing to the promotion of sustainable investment practices and to accelerating the process of transition to a carbon-neutral economy. novobanco dos Açores is therefore developing a sustainability strategy in step with novobanco Group's, with special focus and priority given to the integration of climate risk into its business and risk management model. Detailed information on the activity of novobanco dos Açores available here: www.novobancodosacores.pt Banco Best - Banco Eletrónico de Serviço Total, S.A. is a digital platform that provides the whole range of products and services of a universal bank, standing out for its strong technological nature and open architecture business model, based on national and international partnerships in the areas of Savings, Asset Management and Trading. Banco Best operates in all segments of retail banking, providing a wide array of services ranging from banking solutions, savings, investments, credit, and day-to-day financial management. Banco Best's business strategy is especially competitive when it comes to meeting the investment needs of a segment of individual clients who seek and value more innovative financial services, not restricted to the domestic market, more independent, diversified and sophisticated. Banco Best's strong bet on innovation and dynamic management of a wide network of national and international partners has been key to assert its position as a digital Marketplace of investment solutions: the bank distributes around 6,000 products - Investment Funds, ETFs, Retirement Solutions, Capitalisation Insurance, Discretionary Management, Robot Advisor, etc. - managed by the most prestigious national and international financial entities. Technology is part of Banco Best's DNA. The Bank's digital channels - App and Website - give Clients total autonomy in their relationship with the Bank and a pleasant and effortless experience. Whether on the App or the Website Clients can, among others: open an account by video call or Digital Mobile Key, access information on the entire offer and use the various support tools, monitor market indicators and manage their portfolio - buy and sell, monitor returns -, perform the various operations and fulfil general duties, such as updating data. Detailed information on the activity of Banco Best available here: www.bancobest.pt GNB Gestão de Ativos is one of the national management companies with the largest track record, and the quality of the management of its products and services has been recognised over the years both nationally and internationally. GNB Gestão de Ativos offers financial products and services, including several types of funds – mutual funds, real estate funds and pension funds - besides providing discretionary and portfolio management services. As of December 2022, GNB Gestão de Ativos had €7.8bn in assets under management in Portugal and Luxembourg. Detailed information on the activity of GNB Gestão de Ativos available here: www.gnbga.pt ANNUAL REPORT 2022 | MANAGEMENT REPORT - 21 - ANNUAL REPORT 2022 | MANAGEMENT REPORT - 22 - 1.1.2 Main Events ANNUAL REPORT 2022 | MANAGEMENT REPORT - 23 - ANNUAL REPORT 2022 | MANAGEMENT REPORT - 24 - 1.1.3 Awards novobanco awarded "Best digital performer of Retail Banking” in Portugal With the solutions for remote account opening through Digital Mobile Key or by videocall, novobanco has improved even more the experience in the first contact of the client with the bank, offering a complete, fast and intelligent onboarding value for our future customers and for the bank. novobanco wins at the Digital CX Awards for underwriting solution for Life Insurance its digital This recognition demonstrates the novobanco's responsiveness in to build, in partnership with GamaLife, the most suitable solutions for the questions and challenges faced by our customers, improving their omnichannel experience with the bank, namely through the contribution of digital channels. novobanco voted as Best Sub-Custodian Bank 2022 in Portugal The international magazine Global Finance warded novobanco as the best bank in Portugal when it comes to securities custodian services. This nomination is international recognition of the bank’s knowledge and performance in this important business area which is essential for the financial market to function. GNB Gestão de Ativos distinguished with 2 awards from Jornal de Negócios/APFIPP Awards for asset management performance in 2021: - NB Obrigações Europa in Best Other Bond Funds category - Multireforma Plus in Best Risk 4 Pension Fund category novobanco App wins at Banking Tech Awards 2022 For the second year running, novobanco App won an award at the Banking Tech Awards, this time in the Best Mobile Initiative. In the 2021 edition novobanco had already won in the Best UX/UI in Finance Initiative category, with the App, and received two honourable mentions in the 2020 edition with the Small Business Finance offer in the Best Digital Initiative category and with the Digital Onboarding solution in the Best Use of IT in Retail Banking category. Novobanco was the winner at the HR Awards in the "Use of Technology” category” With robotics solutions applied to human resources processing and management tasks. This award is the result of teamwork among several departments with the aim of continuously improving and innovating our processes. NB PPR fund received an award in the IV Edition of the Rankia Portugal 2022 Awards The fund managed by GNB Gestão de Ativos was considered the Best Retirement Saving Plan (“PPR”) of 2022. ANNUAL REPORT 2022 | MANAGEMENT REPORT - 25 - 1.2 Organisation The share capital of novobanco totals €6,304,660,637.69 divided into 10,391,043,938 nominative dematerialised shares with no nominal value and fully subscribed. Novobanco's share capital is held by three entities: Lone Star (through Nani Holding S.G.P.S., S.A.), Fundo de Resolução and Direcção-Geral do Tesouro e Finanças. Further information on Shareholder Structure is provided Corporate Governance – chapter: 5.1 Shareholder Structure. 1.2.1 Governance Model novobanco 's management relies on a governance model that is unique and distinct if compared with systemic banks 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 changed its governance model, having a General and Supervisory Board (GSB) and an Executive Board of Directors (EBD). The governance model was designed to ensure monitoring of the Bank's activity and achievement of its strategic objectives: ANNUAL REPORT 2022 | MANAGEMENT REPORT - 26 - The GSB is responsible for regularly monitoring, advising and supervising the management of the Bank and of the group entities, as well as for supervising EBD activities with regard to compliance with the relevant regulatory requirements of banking activity. The GSB meets on a monthly basis, and its Chairman maintains regular communication and dialogue with the 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. The Financial Affairs (Audit) Committee also has competencies under the terms of the Commercial Companies Code. These committees are chaired by independent members of the GSB and its composition complies with the applicable legislation regarding the chairmanship and majority of independent members (when required). The GSB and its Committees have the responsibilities and powers provided for by law, by the Articles of Association and by its internal regulations, including the supervision of all matters related to risk management, compliance and internal audit, as well as granting approval on relevant matters for novobanco, which are detailed in the Articles of Association. The EBD is responsible for the management of the Bank, for the definition of the general policies and strategic objectives, and for ensuring the running of the business in compliance with the rules and good banking practices. Further information is provided in the Corporate Governance Report, chapters 5.2.3) General Supervisory Board and 5.2.4) Executive Board of Directors. 1.2.2 Organisational structure Board of the General Meeting Chairman: Fernando Augusto de Sousa Ferreira Vice-Chairwoman: Magdalena Ivanova Ilieva Secretary: Mário Nuno de Almeida Martins Adegas Monitoring Committee Chairman: José Bracinha Vieira Member: Carlos Miguel de Paula Martins Roballo Member: Pedro Miguel Marques e Pereira Statutory Auditor Ernst & Young, Audit & Associados – SROC, S.A., registered in the Portuguese Securities Market Commission (“CMVM”) under number 20161480 and in the Portuguese Institute of Statutory Auditors (“OROC”) 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. Company Secretary Mário Nuno de Almeida Martins Adegas Ana Rita Amaral Tabuada Fidalgo (Alternate Secretary) The composition of the corporate and statutory bodies, on 31 December 2022, was as follows: ANNUAL REPORT 2022 | MANAGEMENT REPORT - 27 - General and Supervisory Board (GSB) 3 ) C ( n a m r i a h C ● n a m r i a h C - e c V i r e b m e M / F M ● ● ● Karl-Gerhard Eick Donald John Quintin Kambiz Nourbakhsh Mark Andrew Coker Byron James Macbean Haynes M M M M M ● Benjamin Friedrich Dickgiesser M ● M John Ryan Herbert ● M Robert Alan Sherman ● F Carla Antunes da Silva ● M ● William Henry Newton l i a c n a n F i s r i a f f A ● C ● t n e d n e p e d n I ● ● ● ● ● ● t n e m t n o p p a i t s 1 f o e t a D e t a d y r i p x E 18-10-2017 31-12-2024 18-10-2017 31-12-2024 18-10-2017 31-12-2024 18-10-2017 31-12-2024 18-10-2017 31-12-2024 18-10-2017 31-12-2024 18-10-2017 31-12-2024 18-10-2017 31-12-2024 06-06-2018 31-12-2024 29-04-2021 31-12-2024 GSB Committes n o i t a r e n u m e R C ● ● e c n a i l p m o C n o i t a n m o N i ● ● C ● ● ● ● C k s R i ● ● ● ● C The Board is composed by 10 members, of which 6 are independent, showing diversity in several dimensions: age4, geo provenance, education and areas of expertise5: 3 On December 2022, was submitted the relevant Fit & Proper for Monika Wildner to become an independent GSB member for the current mandate. On February 2023, GSB approved, subject to Fit & Proper, Benjamin Dickgiesser as a new member of the EBD, becoming the next Chief Financial Officer, whose duties as a GSB member ended in February 2023. At the signature date of this Report, both F&P processes were under way, awaiting authorisation to assume duties. More information in chapter 5.2 Corporate Bodies. 4 As of 31 December 2022 5 Area of expertise assumes the appointment of Monika Wildner and the departure of Donald Quintin ANNUAL REPORT 2022 | MANAGEMENT REPORT - 28 - Executive Board of Directors (EBD) 6,7 A Board currently composed by 6 members and with diversity in several dimensions including age8 and geo provenance: Employees Highlights Novobanco's Employees were a fundamental pillar in the restructuring process of novobanco. Novobanco's decision-making processes seek to follow the best fair-process practices in decision-making, focusing not only on results but also on sustainability and involving the employees in the process of seeking results. The bank thus endeavours to be aware of the needs and difficulties experienced by employees throughout their life cycle and to meet their expectations, so as to contribute to their full development and allow them to fully unlock their potential and maintain their motivation. 6 Leigh Bartlett was Chief Financial Officer from August 25, 2022 to December 30, 2022. Mark Bourke (CEO) will also serve as interim CFO until the competent authorities authorise Benjamin Dickgiesser, appointed by GSB on February 2023, as the new member of the EBD and CFO. At the signature date of this Report, F&P is still under way. More information in chapter 5.2 Corporate Bodies. 7 Luísa Soares da Silva Amaro de Matos and Rui Miguel Dias Ribeiro Fontes were members of the board in the governance model previous to the sale of 75% stake to LoneStar. 8 As of 31 December 2022 ANNUAL REPORT 2022 | MANAGEMENT REPORT - 29 - Further information is provided in the Management Report – 2.2) Strategic Pillars – Develop People and Culture and in the Sustainability Report – 3.4) Our Employees. ANNUAL REPORT 2022 | MANAGEMENT REPORT - 30 - Resende's artistic path integrates multiple aesthetic experiences, resulting from the various movements that followed in Europe from the 40's to the 80's, such as Cubism, geometric abstraction, or expressionism. GUARDA, Museu Municipal da Guarda Coladera, 1994– Júlio Resende Oil on canvas 151 x 182cm 2 OUR STRATEGY 2.1 Business Environment The performance of the world economy and the financial markets in 2022 was strongly conditioned by the impacts of the war in Ukraine, namely an increase in energy and food prices. The annual average oil price (Brent) rose by 42%, to USD 99.9/barrel, having spiked above USD 120/barrel in the first half of the year. Despite a sharp drop at the end of the year, the annual average price of natural gas in Europe increased 179% YoY, to EUR 133/MWh, peaking at around EUR 340/MWh in August. This reflected the sharp reduction in supply of Russian gas to Europe and fears of supply disruption. Year-on-year inflation in the Eurozone rose from 5% to an annual high of 10.6% in October, before closing the year at 9.2%. Energy and unprocessed food prices rose by 25.7% and 12%, compared to December 2021. In addition to the adverse supply shock, which bloated production costs, the rise in inflation in 2022 reflected the ability of companies to pass on cost increases to final prices (thus improving their earnings) combined with the ability of consumers to accommodate these price increases. Private consumption growth was supported by persistently low unemployment, fiscal policy support to household income, and the use of savings accumulated during the pandemic. A gradual normalisation of global supply chains and energy price moderation in the 2nd semester allowed inflation to abate towards the end of the year, though remaining above target. Price of natural gas in Europe (EUR/MWh) Sources: Bloomberg, BLS, Eurostat Average annual inflation rate (%) Sources: Bloomberg, BLS, Eurostat, INE 400 300 200 100 0 2019 2021 2022 8.0 8.4 7.8 4.7 2.6 1.3 2020 2021 2022 2023 US Euro Zone Portugal To tackle the risk of more persistent inflationary pressures, the main central banks brought forward and accelerated the withdrawal of monetary stimuli. The ECB raised its policy interest rates by a cumulative 250 basis points, leaving the rate on the main refinancing operations at 2.5% and the deposit facility rate at 2%. Moreover, the Eurozone monetary authority put an end to its net asset purchases under the PEPP and APP programmes. The 3-month Euribor rose by 270 basis points, to 2.132%, and the market raised its expectations regarding its future evolution. The yield on the 10-year Bund increased from -0.177% to 2.571%. Expectations of tighter monetary and financial conditions and growing fears of recession heightened volatility in the financial markets and penalised the equity and credit markets. In the US, the S&P 500 and Nasdaq stock market indices fell by 19.4% and 33.1%, respectively. In Europe, the Euro Stoxx and DAX retreated by 12.9% and 12.3%. The year 2022 was notable for the simultaneous negative returns observed in equities, public debt and credit. The euro lost 5.9% against the dollar to EUR/USD 1.0711, trading below parity with the US currency between the end of August and the beginning of November. The Euro Zone GDP grew by 3.5% in 2022, slowing down from its 5.2% increase in the previous year. Domestic demand was constrained by rising inflation and interest rates, which penalised families’ disposable income and purchasing power. At the same time, the sharp rise in energy costs and the cooling of external demand resulted ANNUAL REPORT 2022 | MANAGEMENT REPORT - 32 - in lower industrial activity and a slowdown in exports of goods. Still, growth in the Euro Zone economy was supported by the elimination of the Covid-19 restrictions and by the strong performance of services, particularly tourism, which mainly benefited the peripheral economies. The slowdown in private consumption was mitigated by the drop in the unemployment rate, from 7% to 6.6% of the labour force. 3-month Euribor (%) Sources: Bloomberg Annual GDP growth (%) Sources: Bloomberg, FMI, BEA, Eurostat, INE. 2021 2022 8.4 6.0 5.9 3.1 3.0 2.0 6.7 5.5 5.2 3.5 2.5 2.0 1.5 1.0 0.5 0.0 -0.5 -1.0 2019 2020 2021 2022 2023 World US China Euro Zone Portugal In Portugal, GDP growth rose from 5.5% to 6.7% in 2022. The expansion of activity is mainly explained by the favourable performance of private consumption (+5.8%) and exports (+18.1%). The end of the pandemic restrictions in early 2022 allowed catching up on postponed expenses, including in tourism and leisure activities. Private consumption also benefited from measures to support household income and from the use of savings accumulated during the pandemic. The household savings rate is estimated to have fallen from 9.8% to 4.5% of disposable income. The unemployment rate retreated from 6.6% to 6% of the labour force, with companies still struggling with labour shortages. Private consumption, however, slowed down over the year, as rising inflation and interest rates eroded families’ real disposable income and confidence. Annual average inflation measured by the CPI rose from 1.3% to 7.8%. Exports benefited from the strong contribution of tourism services which, having surged by close to 80%, outperformed pre-Covid levels in the second half of the year. Exports of goods recorded relatively high growth (around 6%), but slowed down compared to 2021. In a context of high uncertainty, higher inflation, tighter financial conditions and shortages of productive resources, investment growth fell from 10.1% to 1.3%. Loans to non-financial companies decelerated throughout the year, with annual growth retreating from 4.6% in January to 0.6% in December. Loans to individuals showed greater resilience, although also slowing down towards the end of the year. Mortgage loans grew at a rate of 3.6% in the year to December, vs. 4.4% in the year to December 2021. Consumer loans, meanwhile, saw their annual growth rate increase from 2.4% to 6%. The Non-Performing Loans ratio trended downwards throughout the year, across all segments, falling from 3.7% to 3.2%. Activity in the real estate sector remained buoyant in 2022. Home prices grew at an average annual rate of 12.7% in the 3rd quarter, accelerating from 9.4% in 2021. This price escalation was supported by strong external demand, associated with the more highly-priced market segments, in a scenario of scarce supply. The number of transactions increased by 4.1% in the year. In a context of improved public accounts, the Portuguese sovereign rating was revised upwards from BBB to BBB+ by S&P and Fitch, and from BBB (high) to A (low) by DBRS. The yield spread of the Portuguese 10-year Government Bond versus the German benchmark widened in the first half of the year, from 64 bps to 108 bps, reflecting higher risk aversion bred by the beginning of the war in Ukraine, but reversed this trend as from the 3rd quarter and closed the year at 102 bps. ANNUAL REPORT 2022 | MANAGEMENT REPORT - 33 - Outlook The year 2023 will likely see a slowdown in the global economy. In the Euro Zone, GDP growth is expected to fall from 3.5% to around 0.7%. This should stem from more restrictive monetary and financial conditions, with adverse impacts on demand. With inflation remaining above the 2% target, the ECB is expected to continue rising policy interest rates in the first half of the year, to around 3.5%. The economic environment should remain constrained by the high level of uncertainty surrounding the war in Ukraine. The slowdown in global activity will likely be toned down by lower inflation and the persistence of contained unemployment rates in the main economies. The reopening of China's economy following the abandonment of the Covid-zero policy should also support global demand. In the Euro Zone, growth is expected to benefit from fiscal support to households and businesses, as well as from the implementation of investment programmes under NextGenEU. The main downside risks include higher and more persistent than expected inflation, forcing further interest rate hikes and feeding a recessionary scenario. Tighter monetary and financial conditions could lead to a revaluation of assets, generating financial instability. The possibility of an intensification of the war in Ukraine, and an escalation of tensions between Russia and the West, are also relevant risks. In the US, a political and legislative stalemate in Congress could condition fiscal policy and propensity to risk in the financial markets. The main upside risks include a faster decline in inflation, halting or reversing the rise in interest rates; and a pause or end to the war in Ukraine, reducing energy and commodity costs. In Portugal, GDP growth should retreat from 6.7% to between 1% and 1.5%. Private consumption should be penalised by higher interest rates and debt service, the loss of household purchasing power and the erosion of savings accumulated during the pandemic. Although retreating from 2022 levels, inflation should remain high, at around 4,5-5,5%%. The unemployment rate should remain contained, at around 6% of the labour force. Although constrained by rising interest rates and high levels of uncertainty, private investment is expected to grow more than in 2022, leveraged by the acceleration of public investment, in the context of the execution of the Recovery and Resilience Plan. In the real estate market, there should be a moderation in the number of transactions and a deceleration in prices, reflecting the more restrictive financial conditions. Exports of goods and services are expected to slow in 2023, but with tourism activity maintaining some momentum. Baseline Scenario – GDP Growth (%) Baseline Scenario – Investment and Exports (%) 2.2 2.0 1.1-1.5 Investment Exports 5.3 3.4 3.6 3.7 4.2 4.5 2023 2024 2025 2023 2024 2025 In 2024-25, the growth of the Portuguese economy is expected to gradually converge to its trend, around 2%. Activity should be shored up by a recovery in private consumption, also growing at close to 2%, benefiting from the decline in inflation and the recovery of real purchasing power. The execution of the Recovery and Resilience Plan should support an increase in investment growth, to around 4%-5%. After double-digit growth in 2021-22, driven by the reopening of the economies in the post-Covid period, exports growth is expected to slacken to more sustainable levels, although accelerating slightly compared to 2023. Short-term market interest rates should stabilise at around 3%, following the hikes in 2022-23. The medium-term outlook for the Portuguese economy should be conditioned by the need to adapt to several structural transformations underway in the global economy. These include the energy transition, involving the assessment and reporting of financial climate risks and a shift of financing towards carbon neutrality; the digitisation and automation of economic activity, and transformations in the labour market, forcing organisations to be highly agile and adaptive; changes in globalisation, leading to increased investment in production capacity and in locally and regionally sourced supply chains; and the ageing of the population, requiring an increase in spending and investment in healthcare. ANNUAL REPORT 2022 | MANAGEMENT REPORT - 34 - 2.2 Strategic Pillars Following the launch of novobanco's new brand and the presentation of its new strategic plan ("Fazer Futuro" / "Shaping the Future") in 2021, 2022 was a year of implementation of the various initiatives and programmes sustaining this plan, and, above all, of fulfilling its main objectives. This is reflected in the results achieved, both in the financial statements and in the bank's solvency levels, which were significantly strengthened despite the challenges of the macroeconomic context. This performance clearly demonstrates the increased confidence of both customers and the financial markets in novobanco, the alignment of its team and, naturally, the consistency of the strategic path outlined. novobanco’s strategy is to be focused on each of its customers, providing them with a simple and efficient experience, supported by an experienced and accessible team, and thus contributing to an organisation with robust and sustainable results. CUSTOMER-CENTRIC BANK novobanco's daily routine is focused on responding in an exemplary manner to the needs of its customers, both individuals and companies, and this purpose is reflected in the first pillar of its strategy. At each moment, novobanco seeks to exceed the expectations of its customers and partners, through a distinctive value proposition that relies on digital and on the omnichannel approach as key levers of proximity and experience. Serving customers with a full spectrum of channels with complementary roles: ANNUAL REPORT 2022 | MANAGEMENT REPORT - 35 - ANNUAL REPORT 2022 | MANAGEMENT REPORT - 36 - New channels, services and personalised customer experience allowed a rapid rise of digital… …unlocking current and future potential: ANNUAL REPORT 2022 | MANAGEMENT REPORT - 37 - In the Corporate segment, novobanco's in-depth knowledge of the Portuguese business sector allows it to develop specialised approaches, which offer each sector of the economy, and in particular those that are key for national economic growth, a set of products and services suited to their challenges and needs, both for the domestic activity of companies and to support the internationalisation of the national economy. Alongside this vertical vision of the main sectors of our economy, novobanco is also at the forefront when it comes to promoting the business sector's access to the main programmes aiming to revitalise the European economy. This in-depth knowledge of the market, of its opportunities, but also of its expectations and challenges, positions novobanco as the natural financial partner for large, medium and small national companies. In the Retail segment, which serves families and small businesses, novobanco develops value propositions and solutions centred on these customers’ needs at the most decisive moments of their professional or personal journeys, whether in consumer credit, mortgages, management of savings or means of payment, with a view to accelerating the growth of the customer base that has novobanco as its main financial partner. As part of its strategic plan, novobanco has been implementing an approach based on a principle of increasing the omnichannel approach, thus providing customers with a consistent and integrated experience through its multiple channels. To effectively achieve these objectives, novobanco has been investing on a global transformation. The most visible faces of this reinvention are, on the one hand, the branch network, where novobanco has developed an innovative concept in the market that combines technology, proximity to the customer and openness to the community, and, on the other, digital, which has been a determining factor for the accelerated transformation of novobanco. More information on products with an ESG impact is available in the Sustainability Report - 3.3) Our Customers. ANNUAL REPORT 2022 | MANAGEMENT REPORT - 38 - SIMPLE AND EFFICIENT To address the market of today, with its very exacting clients and the challenges posed by new players, which spur the sector to evolve its operating model, the second pillar of novobanco's strategy is to accelerate its transformation into an organisation that provides customers with a lean and straightforward experience, for which it is necessary to attain increasing levels of operating efficiency. In this area, novobanco has focused on reengineering the most critical processes for customers, with a view to simplifying them and thus provide an experience that stands out in the sector, both through its simplicity and through the consistent improvement of service levels, in particular in loan granting processes, which are the most decisive for companies and families. To this end, novobanco is implementing a transformation programme of its IT and data governance functions, focused not only on the evolution of the infrastructure, platforms and tools that support the bank's operation, but also on the timely availability of relevant information to support process improvement, the scrupulous reformulation of the bank's operating model, the permanent optimisation of the internal decision support models and, naturally, the regulatory commitments and requirements to which the banking sector is subject. PEOPLE AND CULTURE The strategic objectives of novobanco contain a high level of ambition, based on perfect alignment and total clarity within the organisation about the role and contribution of each employee to achieving them. This third pillar of novobanco's strategy is, therefore, a critical dimension and requires a high level of dedication from the bank's management. In this domain, novobanco's strategy seeks to ensure a clear distinctiveness (i) in the value proposition for its employees, (ii) in the development of internal talent and (iii) in the promotion of the organisational culture and values. With these dimensions in mind, novobanco seeks to assert itself as an organisation characterised by: • A strong capacity to attract, develop and retain the best talent in the sector; • A concern with the principle of gender equity and with the importance of being able to count on diversified profiles and backgrounds; • A daily routine supported on working methods aligned with the best international trends, both in terms of participation and collaboration practices and in terms of the working environment; • The promotion of innovation and the generation of ideas by the organisation itself, for the benefit of customers and the national economy; • The experiencing of values and of an organisational culture that translates and permanently reinforces these characteristics. ANNUAL REPORT 2022 | MANAGEMENT REPORT - 39 - More information is available in the Management Report – 2.2) Strategic Pillars – People and Culture Development, and in the Sustainability Report – 3.4) Our Employees. SUSTAINABLE PERFORMANCE The fourth pillar of novobanco's strategy is driven by the bank's resolve that its financial performance be characterised by its sustainability, by the robustness and quality of its balance sheet structure and by adequate solvency levels. This provides the framework into which the entire programme for integrating ESG (Environmental, Social and Governance) issues into the organisation is set, which includes (i) implementing the ESG operating model and training the organisation, (ii) adapting the offer of products and services, (iii) transforming investment and risk management policies, among other dimensions. novobanco considers ESG as an opportunity for the financial sector to contribute to the important transition objectives of the world economy, which justifies the importance it dedicates to this dimension. Based on the strategy and the 3 axes that reflect how material issues and Sustainable Development Goals (SDGs) are addressed, identified with the participation of stakeholders, was defined the Social Dividend model for 2022 - 2024 that integrates the three dimensions of sustainability: environmental, social and governance. Comprising three programmes - Environment, Financial and Social Well-Being and Responsible Banking -, objectives for 2024 and various initiatives, the quarterly monitoring model of ESG performance meets novobanco's strategic objectives, which include adopting the best sustainability practices in order to become an ESG benchmark in Portugal. The optimised management of the Bank's capital and its various funding sources and the improvement of the risk management processes associated with its activity are also materially relevant for the sustainability of novobanco's performance. To achieve this goal, novobanco's strategic plan is deployed through different programmes aimed at strengthening the quality of credit decisions, namely by driving their automation, improving pricing models and the measurement of profitability adjusted to risk and capital consumption (economic and regulatory), increasing the sophistication of the warning systems that monitor the life of credit operations and continuously improving the internal rating models (IRB). The combination of these dimensions gives novobanco the confidence that its ambitious medium-term objectives will continue to be met, thus allowing it to assert itself as a clear reference in the European financial sector, in terms of franchise and consistent growth, based on a robust financial profile that delivers high and sustainable levels of profitability. ANNUAL REPORT 2022 | MANAGEMENT REPORT - 40 - Consistent performance delivering medium-term targets already in 2022, positioning novobanco for its next stage of development. ANNUAL REPORT 2022 | MANAGEMENT REPORT - 41 - 2.3 Risk Management Main Risks and Uncertainties In 2021 and 2022, novobanco reported positive financial results, while the strategic lines it has been building become increasingly visible. novobanco's activity going forward will naturally be influenced by several risk factors, and in particular by the following: i) Regulatory risks, namely stemming from capital requirements (SREP), the various OSIs (On-Site Inspections) by the ECB, Liquidity Risk Stress Tests, the MREL (Minimum Requirement for Own Funds and Eligible Liabilities), and the various guidelines from the European Banking Authority (EBA), the ECB and the European Commission; ii) The Non-Performing Assets (NPAs) portfolio and the implementation of the NPA plan, particularly the part relating to real estate owned (REO); iii) Reputational, legal and compliance risks, arising both from the Group's current activity and from legacy issues; (iv) the military conflict that started on 24 February 2022, ensuing a military operation by the Russian Federation on the territory of Ukraine, involving three countries (Russia, Ukraine and Belarus). In response, a group of countries, including the NATO and European Union countries, and others, approved several sanctions with the aim of impacting Russia's economy, and also the economy of Belarus. novobanco's exposure - Customer Loans and Securities - to the Russian Federation, Belarus and Ukraine as at 31 December 2022 totalled €8.3 million. More detail, including the breakdown by asset type and country, is given in Note 47 to novobanco Group's Consolidated Financial Statements - Exposure to Ukraine, Russia and Belarus. v) Others relating to the national and international macroeconomic environment, namely political and trade tensions, and the performance of the Portuguese economy; vi) The remaining factors linked to the various types of risk described in this chapter. This environment generates risks for all Financial Institutions, namely linked to: i) the stock of non-performing assets and their potential growth; ii) cybercrime and disruption in Information Technology (IT); iii) fraud; and iv) growing competition from non-banking entities. novobanco is naturally exposed to the various types of risk inherent to the banking business, arising from external and internal factors, namely from the nature of the markets in which it operates. These risks include credit risk, market risk, liquidity risk and operational risk. novobanco develops its Risk Management function with the ultimate objective of internalising a risk culture and pre-empting the materialisation of risks across all levels of the Organisation. Risk Management Framework The definition of a risk management framework with standards, patterns, objectives and responsibilities assigned to all areas of novobanco Group, permits to implement the strategy in compliance of the established risk appetite. Supporting the Board in effective risk management and in the development of a strong risk culture, this framework defines: • • • • the main risks faced by the novobanco Group, as well as those to which it may be exposed the risk appetite requirements and monitoring; the responsibility functions in risk management; the governance structures and risk management and control committees. ANNUAL REPORT 2022 | MANAGEMENT REPORT - 42 - The Risk Culture at novobanco Group Risk is inherent to the banking business. As such, the novobanco Group is naturally exposed to the various classes of risk arising from external and internal factors, namely from the nature of the markets in which it operates and the activities it develops. The novobanco Group considers that Risk Management is a key pillar for sustained value creation over time. The Group's Risk management and control is therefore grounded on the following assumptions: • Universality, through application across novobanco Group; • Integrality of the risk culture, through a holistic and preemptive approach to risk. A holistic vision encompasses all phases of risk management - identification, assessment, monitoring and control - as well as all kinds of financial risks - credit, liquidity and market, capital - and non-financial risks, including ESG Risk. Independence from the Group's other units, and in particular risk-taking units. Following the three lines of defence model, viewing the adequate detection, measurement, monitoring and control of all material risks to which the novobanco Group is exposed. This model implies that all employees, in their sphere of activity, are responsible for the management and control of risk. • 3 Lines of Defence Principle Novo Banco Group 1st Line of Defence 2nd Line of Defence 3nd Line of Defence Business Areas Global Risk Department Internal Audit Department Compliance Department; Function Maximise return Control Limitation Mission Takes risk according to Risk Appetite Does not take risk • Accurate and timely identification of risks • Make sure that risk remains within defined limits • Measure, monitor, report • Independent review • Ensures adequacy of policies and processes • Ensures correct implementation of policies and processes ANNUAL REPORT 2022 | MANAGEMENT REPORT - 43 - A strong risk culture in the organisation is an essential factor for effective control of the various exposures to risk. This culture is reflected in the involvement and performance of all employees in the organisation, through their diligent, proactive and consistent compliance with the regulations, code of conduct, values, and risk appetite defined for all activities, businesses, segments and risk exposures. To this end, the timely identification of risk sources as well as risk-based mitigation and control actions are fundamental. A continuous effort in training, awareness raising, and communication is equally important to allow seamless adjustment to any arising situations. Risk Management Function The risk management function is organised in such a way as to allow effective management of the risks considered relevant and material by the novobanco Group - those to which top management pays special attention and which may impact the achievement of the objectives defined by the bank -, as well as risks considered as emerging - those where little is known about their components, and whose impact may occur over a longer time horizon. The risks identified as relevant and material are quantified within the scope of the Internal Capital Adequacy Self-Assessment (ICAAP) exercise, the most relevant being: credit risk, which includes default, counterparty and concentration risk, liquidity risk, i) ii) iii) market risk in the trading book and banking book, which includes interest rate risk (IRRBB), equities risk, credit spread risk, real estate risk and pension fund risk, iv) operational risk, which includes operations risk, information systems risk, compliance risk, and reputational risk, and v) business risk. The management of risks is considered vital for novobanco Group Risk Management, as a vital function for the development of novobanco Group’s activity, is centralised in the Risk Management Function, which comprises the Global Risk Department (GRD) and the Rating Department (RTD). It defines holistic principles for risk management and control, in close coordination with the remaining 2nd line units of novobanco Group, and with the Internal Audit Department. All materially relevant risks are reported to the Management and Supervisory bodies (as applicable, EBD, GSB, Risk Committees and specialised committees), which are responsible for supervising, monitoring, assessing and defining the Risk Appetite and control principles implemented. At operational level, the GRD centralises novobanco Group's Risk Management Function, namely in terms of the responsibilities inherent to the function, supervising the Group’s various materially relevant financial institutions and ensuring independence vis-à-vis the business areas. The Head of novobanco Group’s Risk Management Function is the Head of the GRD. In order to ensure the most effective articulation with the Risk Management Department, a local Head of the Risk Function was appointed in each relevant entity of the novobanco Group, who ensures continuous monitoring of the financial and non-financial risks to which these entities are exposed. The GRD acts either directly or as coordinator, in articulation with the units in charge of the local Risk Management Function. ANNUAL REPORT 2022 | MANAGEMENT REPORT - 44 - The Risk Appetite framework defines: This framework aims to ensure that the strategy of maximising value for the Client - one of the relevant stakeholders, along with employees, shareholders and the community - is executed, protecting the strength of the organisation through rational and solid risk management. ANNUAL REPORT 2022 | MANAGEMENT REPORT - 45 - ANNUAL REPORT 2022 | MANAGEMENT REPORT - 46 - ANNUAL REPORT 2022 | MANAGEMENT REPORT - 47 - More information available in the Sustainability Report - 3.2) ESG Risks. ANNUAL REPORT 2022 | MANAGEMENT REPORT - 48 - 2.4 DGCOMP9 Commitments Successful completion of novobanco’s Restructuring Period The Commitments were agreed in October 2017 by the Portuguese State and the European Commission in connection to the process of state aid to novobanco in the context of the sale of 75% of the bank's share capital to Lone Star. These commitments are divided into three categories, and compliance therewith was being closely monitored and confirmed by the Monitoring Trustee appointed by the European Commission: • Structural commitments, namely the divestment commitments in various geographies and businesses and the reduction of the bank's non-core assets, which included divestment of the insurance business - GNB Seguros -, concluded this year. • Behavioural commitments, namely the establishment of ROE (Return on Equity) based pricing tools subject to defined minimum limits, restrictions on acquisitions, dividend distribution ban, ban on the exercise of voting rights by the minority shareholder (the Resolution Fund) and caps (of 10x the bank's average salary) on the remuneration of any employee or member of the bank's corporate bodies10. • Viability commitments - interim targets and 2021 targets, notably Full Time equivalent (FTE) reduction targets, branch reduction targets, and Cost-to-Income targets, and the reinforcement of risk management policies, already carried out. In the commitment letter and in the business plan submitted by the buyer - which served as the basis for the viability commitments established by the European Commission - it is made clear that the CCA assets on the balance sheet would be cleaned by the end of 2020, with 2021 as the year from which the viability of the bank would have to be proven. The business plan designed to demonstrate the Bank's viability, by the end of the restructuring period, laid out a strategy for a comprehensive transformation of novobanco, based on six pillars: 1) divestment of non-core assets and focus on the Portuguese market; 2) restoring a leading position in the corporate segment and a focus on risk-adjusted profitability; 3) digital transformation and streamlining of the retail franchise; 4) improving balance sheet efficiency; 5) restructuring the operational platform; and 6) strengthening the risk management model to improve the solvency and resilience of the Bank. Faithful to the commitments’ basic business plan intrinsic, and despite real market conditions being much worse than projected in the business plan (eg: negative Euribor rates; negative economic consequences of the pandemic crisis), novobanco demonstrated its viability, both by systematically posting positive results in all quarters of 2021 and 2022 and through the success of the MREL issues made to meet the interim targets imposed by the Single Resolution Board for 1 January 2022. In February 2023, novobanco was informed about the successful completion of the Restructuring Period, with the Monitoring Trustee’s final report will be prepared upon the release of novobanco 2022 year-end accounts. The successful conclusion of the restructuring process is a significant milestone for novobanco, allowing it to support Portuguese corporates and households and to continue competing as a strong and independent bank, focused on the Portuguese market. 9 Directorate-General Competition – European Commission 10 In view of the fulfilment of the commitments for 2019, this latter restriction ceased to be effective in July 2020. ANNUAL REPORT 2022 | MANAGEMENT REPORT - 49 - Reality becomes painting, with color, imagination, and a poetic vision of multiple associations that the painter's brush interprets in an unmistakable creative process. LOUSÃ, Museu Municipal Professor Álvaro Vieira de Lemos Pássaro 1983, Graça Morais Acrylic on canvas 126 x 94cm 3 OUR PERFORMANCE 3.1 Highlights CONSISTENT STRATEGY DELIVERING INCREASED PROFITABILITY • Novobanco announces a net income of €560.8mn (2021: €184.5mn; 4Q22: €132.5mn). A strategic focus delivering a sustainable growth of business with increased revenues and capital generation despite the uncertain macro background, increased inflationary pressures and rising interest rates. Underlying pre-tax profitability totalled €406.7mn11, equivalent to a RoTE (before tax) of 14.4% (2021: 8.8%). • Net Interest Income was €625.5mn (4Q22: €219.5mn), an increase of 9.1% YoY (+59% QoQ), reflecting improvement of average assets yield, which more than offsets the cost of senior debt issued during the year and the change of TLTRO III interest rates. In 2022, Net Interest Margin was 1.47% (2021: 1.42%; 4Q22: 1.99%) with Net customer loans at €24.6bn (+3.8% YTD), reflecting an expanding loan book in both retail and corporate segments in a more favourable rates environment. • Fees and commissions increased to €293.3mn (+3.8% YoY; +8.9% QoQ), highlighting accounts and payments fees performance as a result of a pick-up in business activity. • Commercial Banking Income was €918.8mn (+7.3% YoY; +42% QoQ). Banking Income was also strong at €1,126.3mn (+15.9% YoY), including the positive contribution of Other operating results of €183.6mn, driven by an accelerated deleverage of the real estate portfolio, which also includes the gain on the sale of novobanco’ headquarters. • Commercial Cost to Income ratio was 48.8% (2021: 47.7%), equivalent to 44.1% excluding extraordinary items. Operating costs totalled €448.4mn (+9.8% YoY), reflects the continued strategic investment in digital transformation and streamlined operations. Excluding extraordinary items, Operating costs increased 2.4% YoY. • Cost of risk was 45bps (2021: 70bps) considering loan impairments and corporate bonds (2022: €133.3mn). SOLID BUSINESS MODEL WITH STRONG CUSTOMER OUTCOMES • Net Customers loans increased to €24.6bn (+3.8% YTD), confirming trajectory of an expanding loan book in both retail and corporate segments in a more favourable rates environment. Total customer funds improved 3.1% YTD, with customer deposits increasing 4.0% (+€1.1bn YTD). • Further reduction of the Non-performing loans (NPL) ratio to 4.3% (Dec/21: 5.7%), with coverage ratio increasing to 77.5% (Dec/21: 71.4%), reflecting the execution of the de-risking strategy and progress towards an NPL ratio in line with the European average. STRONG CAPITAL GENERATION WITH SOLID LIQUIDITY RATIOS • On a fully loaded basis, CET 1 increased 300bps in the year to 13.1% (13.7% on a phased-in basis) and Total capital ratio reached 15.5% (+330bps YTD; 16.0% on a phased-in basis), reflecting the capital accretive business model, RWA discipline, which combined with specific management actions, ensure a buffer above the normalised post-pandemic capital requirements and comfortably exceeds SREP requirement. High liquidity levels, with the liquidity ratio (LCR) improving further to 210%12 (Dec/21: 182%) and NSFR of 113% (Dec/21: 117%). 11 Calculated as pre-tax net income adjusted by extraordinary items 12 Preliminary ANNUAL REPORT 2022 | MANAGEMENT REPORT - 51 - ANNUAL REPORT 2022 | MANAGEMENT REPORT - 52 - 31-Dec-2131-Dec-22Activity (€mn)Net Assets 44 619 45 995Customer Loans (gross) 24 899 25 617Customer Deposits 27 315 28 412Equity 3 149 3 512SolvencyCommon EquityTier I / Risk Weighted Assets11.1%13.7%Tier I / Risk Weighted Assets11.1%13.7%Total Capital / Risk Weighted Assets 13.1%16.0%Leverage Ratio6.0%6.1%Liquidity (€mn)European Central Bank Funding (3)2,742385Eligible Assets for Repo Operations (ECB and others), net of haircut 16 476 16 917(Total Credit - Credit Provision) / Customer Deposits (2)86%83%Liquidity Coverage Ratio (LCR)182%210%Net Stable Funding Ratio (NSFR)117%113%Asset QualityOverdue Loans > 90 days / Customer Loans (gross)1.2%1.2%Non-Performing Loans (NPL) / (Customer Loans + Deposits with banks and Loans and advances to banks)5.7%4.3%Credit Provision / Overdue Loans > 90 days430.2%336.0%Credit Provision / Customer Loans (gross)5.0%4.2%Cost of Risk (1)0.70%0.45%ProfitabilityNet Income for the Period (mn€)184.5560.8Income before Taxes and Non-controlling interests / Average Net Assets (2)0.5%1.2%Banking Income / Average Net Assets (2)2.9%2.5%Income before Taxes and Non-controlling interests / Average Equity (2)7.1%18.1%EfficiencyOperating Costs / Banking Income (2)42.0%39.8%Operating Costs / Commercial Banking Income47.7%48.8%Staff Costs / Banking Income (2)24.0%20.7%Employees (No.)Total4 1934 090-Domestic4 1654 071-International 28 19Branch Network (No.)Total311292-Domestic310291-International11(1) Includes credit and corporate bonds(2) According to Banco de Portugal Instruction n. 16/2004, in its version in force(3) Includes funds from and placements with the ESCB; positive = net borrowing; negative = net lending3.2 Novo Banco Group (Consolidated) 3.2.1 Results In 2022, novobanco Group reported a profit of €560.8mn (+€376.3mn YoY), with annual performance underpinned by the improvement of its operating results (+€114.2mn; +20.2%) and a lower level of impairments and provisions (-€241.5mn; -68.5%). The underlying pre-tax profitability totalled €406.7mn, equivalent to a RoTE of 14.4% (2021: 8.8%). Net Interest Income Net Interest Income was €625.5mn (+€52.1mn; +9.1% YoY), reflecting improvement of average assets yield, which more than offset the cost of senior debt issued during the year and the change of TLTRO III interest rates. The performance of net interest income is in line with the expectations for 2022 and current macroeconomic context of generalized higher interest rates. The active management of assets and liabilities made it possible to mitigate the effects of inflationary pressure. ANNUAL REPORT 2022 | MANAGEMENT REPORT - 53 - absolute%Net Interest Income 625.5 573.4 52.19.1%+Fees and Commissions 293.3 282.5 10.83.8%=Commercial Banking Income918.8855.962.97.3%+Capital Markets Results 24.0 75.9-51.9-68.4%+Other Operating Results 183.6 40.4 143.2...=Banking Income1,126.3972.2154.215.9%-Operating Costs 448.4 408.4 40.09.8%=Net Operating Income678.0563.8114.220.2%-Net Impairments and Provisions 111.2 352.7-241.5-68.5%Credit 34.5 149.4-114.8-76.9%Securities 67.6 47.819.941.6%Other Assets and Contingencies 9.0 155.6-146.5-94.2%=Income before Taxes566.8211.1355.7...-Corporate Income Tax-53.3-15.2-38.1...-Special Tax on Banks34.134.10.00.1%=Income after Taxes585.9192.2393.8...-Non-Controlling Interests 25.1 7.7 17.4...=Net Income for the period560.8184.5376.3...Income Statement (mn€)31-Dec-2231-Dec-21ChangeIn the period, the average customer loan rate was 2.31% (+30bps YoY), and average balance increased by €470mn YoY (+1.9%). The average balance of customer deposits was €28.3bn, with an average yield of 0.17% (2021: 0.19%), and of monetary market funding was €10.5bn, with an average yield of -0.09% (2021: -0.51%). The performance of the average rate of interest earning assets (2022: 1.79%; 2021: 1.60%) offsets the increase in liabilities rates (2022:0.31%; 2021: 0.17%), with a positive impact in the overall net interest margin (2022:1.47%; 2021: 1.42%). This was biased towards the final quarter. Fees and Commissions Fees and commissions were €293.3mn (+3.8%; +€10.8mn YoY) with increased contribution of Accounts and Payments (+11.3%; +€12.9mn YoY) backed by higher volume of transactions. ANNUAL REPORT 2022 | MANAGEMENT REPORT - 54 - Interest Earning Assets41,9141.79%761.339,7991.60%645.4Customer Loans25,4242.31%595.424,9542.01%509.5Mortgage Loans9,8361.36%135.99,8691.04%104.0Consumer Loans and Others1,4305.96%86.41,3805.86%82.0Corporate Lending14,1582.60%373.213,7062.33%323.5Money Market Placements6,3080.20%12.74,6020.07%3.2Securities and Other Assets10,1811.48%153.310,2431.28%132.8Interest Earning Assets And Other41,9141.79%761.339,7991.60%645.4Interest Bearing Liabilities40,2300.32%131.238,1480.18%68.3Customer Deposits28,3220.17%48.526,5800.19%51.3Money Market Funding10,455-0.09%-10.010,497-0.51%-54.0Other Liabilities1,4526.30%92.71,0706.53%70.9Other Non-Interest Bearing Liabilities1,6840.00%0.01,651-0.0Interest Bearing Liabilities And Other41,9140.31%131.239,7990.17%68.31.48%630.11.43%577.1Stage 3 impairment-4.7-3.7NIM / NII1.47%625.51.42%573.431-Dec-21Average BalanceAvg. RateIncome / CostsIncome / Costs31-Dec-22NIM / NII(without stage 3 impairment adjustment)Net Interest Income (NII) andNet Interest Margin (NIM) (mn€)Average BalanceAvg. Rateabsolute%Payments Management127.2114.212.911.3%Commissions on Loans, Guarantees and Similar86.685.51.11.3%Asset Management and Bancassurance66.168.0-1.9-2.8%Advising, Servicing and Other13.514.8-1.3-8.9%Fees and Commissions Total293.3282.510.83.8%Fees and Commissions (mn€)31-Dec-2231-Dec-21ChangeCapital Markets and Other Operating Results In the period, the results of financial operations were positive by €24.0mn mostly due to gains from interest rate risk hedging, reflecting the volatility of sovereign debt in the market in the first half of the year. The fair value reserves of securities portfolio decreased by €267.1mn YTD. Other operating results of €183.6mn, includes: i) a gain of €77.1mn from the sale of a real estate (logistics) assets in 2Q22 (€58.5mn net of non-controlling interests); ii) a gain of €71.5mn on the sale of headquarters building in 3Q22 (€67.0mn net of contingencies), and; iii) a gain of €40.4mn on the recovery of overdue loans. It also includes €40.9mn of contributions to resolution funds (Single Resolution Fund: €24.5mn; Portuguese Resolution Fund: €15.4mn). Operating Costs Operating costs increased +9.8% YoY (+€40mn). Staff costs amounted to €233.7mn (+€0.4mn vs 2021), general and administrative costs totalled €162.2mn (+€21.1mn vs 2021) and depreciation amounted to €52.5mn (+€18.5mn vs 2021). Excluding exceptional items, these costs would have been €405.6mn (+2.4% YoY). Exceptional costs totaled €43mn, including €18mn of Intangible write-offs, €11mn Other investment in the business, €9mn of Restructuring related costs and €5mn of Legal and Regulatory nature. Commercial Cost to Income ratio was 48.8% (2021: 47.7%), equivalent to 44.1% if adjusted by extraordinary items (2021: 46.3%). As of 31 December 2022, novobanco Group had 4,090 employees (Dec/21: 4,193; -103 YTD) and total number of branches was 292 (Dec/21: 311; -19 branches YTD), of which more than 240 already redesigned in line with the new distribution model and more than 190 of these equipped with VTM (Virtual Teller Machine). The investment made in the new distribution model is part of the omnichannel strategy being implemented by novobanco, providing closer and more tailored interaction with different customer segments, including advanced transaction management solutions (withdrawals and deposits of banknotes, coins and checks) which are one of the pillars towards branch efficiency, customer satisfaction and a digital and integrated experience. Net Impairments and Provisions In 2022, novobanco Group recorded net impairments and provisions amounting to €111.2mn, showing a reduction compared to 2021 (-68.5%; -€241.5mn). The cost of risk was 45bps (including loans impairments and securities) benefiting from the de-risking strategy (vs 2021: 70bps on a comparable basis). ANNUAL REPORT 2022 | MANAGEMENT REPORT - 55 - absolute%Staff Costs 233.7 233.3 0.40.2%General and Administrative Costs 162.2 141.1 21.114.9%Depreciation 52.5 34.0 18.554.4%Operating Costs Total 448.4 408.4 40.09.8%Operating Costs (mn€)31-Dec-21 Change31-Dec-22absolute%Customer Loans34.5149.4-114.8-76.9%Securities67.647.819.941.6%Other Assets and Contingencies 9.0 155.6- 146.5-94.2%Net Impairments and Provisions Total 111.2 352.7- 241.5-68.5%31-Dec-21Net Impairments and Provisions (mn€)31-Dec-22ChangeOther assets and contingencies provisions include a provision for the taxation of real estate introduced by the 2021 State Budget Law, similarly to what happened in the last quarter of 2021 (2021: €116mn; 2022: €57mn). 3.2.2 Balance Sheet and Activity Customer Loans Novobanco's strategy is to support the domestic business community while maintaining a disciplined lending. This support has been provided across all industry sectors and all companies, with an emphasis on exporting SMEs and those that focus on innovation in their products, services or production systems. Loans to customers (gross) totalled €25,617mn (+2.9% YTD), of which corporate customers represented 56% (+1pp vs Dec/21), mortgage loans to households 39% (in line with Dec/21) and other loans to households 5%. Origination in the year totalled €3.9bn (4Q22: €1.0bn), of which 58% corporate, 32% mortgage and 10% consumer and others. The 3.9% annual growth in loans to corporate customers reflects novobanco commitment to Portuguese companies, increasing its offer and enhancing products dedicated to support clients’ funding needs while also promoting credit lines with financial guarantee by Banco Português de Fomento, financing lines with EIF/EIB guarantee to support companies’ liquidity needs. The asset quality indicators of December 2022, and comparison with previous year, are presented below: In the period, the new entries of non-performing loans were reduced. This together with the improvement in commercial activity led to a continuous decrease of the non-performing loans, and consequently an improvement in the respective asset quality ratio to 4.3% (2021: 5.7%). As of December 2022, NPL coverage by impairments increased to 77.5% (+6.1pp vs Dec/21). Securities The securities portfolio, which is the main source of assets eligible for funding operations with the European Central Bank (ECB), is €10.9bn on 31 December 2022, representing 23.6% of assets. ANNUAL REPORT 2022 | MANAGEMENT REPORT - 56 - absolute%Loans to corporate customers14 24413 710 5343.9%Loans to Individuals11 37311 189 1841.6%Residential Mortgage9 9789 782 1952.0%Other Loans1 3951 406-11-0.8%Customer Loans (gross)25 61724 899 7192.9%Provisions1 0661 248-182-14.5%Customer Loans (net)24 55123 6519003.8%Customer Loans (mn€)YTD Change31-Dec-2231-Dec-21absolute%Overdue Loans > 90 days 317 290 279.4%Non-Performing Loans (NPL)11 3761 749-372-21.3%Overdue Loans > 90 days / Customer Loans (gross)1.2%1.2%0.1p.p.Non-Performing Loans (NPL) 1 / Customer Loans (gross) + Deposits withBanks and advances to Banks (gross)4.3%5.7%-1.4p.p.Credit Provisions / Customer Loans4.2%5.0%-0.8p.p.Coverage of Overdue Loans > 90 days336.0%430.2%-94.2p.p.Coverage of Non-Performing Loans 177.5%71.4%6.1p.p.YtD Change1 Includes Deposits and Loans and advances to Banks and Customer LoansAsset Quality and Coverage Ratios (mn€)31-Dec-2231-Dec-21Funding As of December 2022, total customer funds were €34.8bn, an increase of 3.1% YTD, driven by the solid customer deposits performance (+4.0% YTD), which represent 81.7% of total customer funds. 3.3 Business Segments 3.3.1 Corporate We continue to support Companies. In 2022, novobanco continued to support companies, side-by-side, with the proximity, partnership, professionalism and experience that are part of its DNA. Positioning as a customer-centric bank offering a distinctive experience, novobanco has 2 hubs dedicated to large corporate customers (Porto and Lisbon) and 20 business centres distributed throughout the country, with specialised teams dedicated to the medium-sized companies’ segment. Even in a context of uncertainty, novobanco continued, in 2022, to strengthen its commitment to the Portuguese companies, to which it provided a set of solutions for investment and working capital needs, leading to the origination of €2.3bn in medium-long term loans, of which 57% to SMEs, with significant growth in short-term loans, especially through Factoring and Confirming. This underpinned the continued growth of the corporate customer base, with high levels of penetration in the Portuguese SMEs and large companies, of which more than 55% and 70%, respectively, are novobanco customers. The bank thus occupies a leading position in terms of support provided to the Portuguese companies, with market shares of 14.5% in loans to and 12.2% of deposits from Non-financial Companies13, reflecting companies’ confidence in novobanco. 13 novobanco analysis with Bank of Portugal, APS and APFIPP data as of December 2022 ANNUAL REPORT 2022 | MANAGEMENT REPORT - 57 - absoluterelativePortuguese sovereign debt 9953 056-2 061-67.5%Other sovereign debt5 4153 1972 21869.4%Bonds4 0673 413 65519.2%Other 387 805-418-51.9%Securities portfolio Total (net of impairment)10 86410 4713943.8%YTD ChangeSecurities portfolio (mn€)31-Dec-2231-Dec-21absolute%Deposits28 41227 3151 0974.0%Other Customer Funds (1) 866 267 599...Debt Securities (2)1 1691 054 11510.9%Subordinated Debt 416 415 00.0%Sub -Total30 86229 052 1 811 6.2%Off-Balance Sheet Funds3 9334 711-778-16.5%Total Funds34 79533 762 1 032 3.1%(1)Includes checks and pending payment instructions, Repos and other funds.(2)Includes funds associated to consolidated securitisation operations.YTD changeTotal Funds (mn€)31-Dec-2231-Dec-21We support the day-to-day business of Companies novobanco maintains a strong presence in the exports sector, with more than 65% of national exports made by novobanco clients. In Trade Finance, novobanco provides a wide range of products and specialised advice for international trade. Know-how in this segment is valued and recognised, as reflected in a market share of 18.6%14 and by being, for the 5th consecutive year, elected the best Trade Finance Bank in Portugal by Global Finance. In 2022, support to companies’ treasury was reinforced with Factoring and Confirming solutions, driving annual increases of 11% in cumulative invoicing undertaken and 16% in the balance on the balance sheet, and a market share increase of 12% in Factoring. With regard to Payments Solutions, the simplification and innovation was reflected in an annual increase of POS (point of sale) market share to 16.1% (+0.5pp). Some of the initiatives included: i) NB Express Cash; ii) virtual teller machines (VTMs) to simplify companies’ cash deposits (notes and coins); and ii) launch of the digital payments gateway, a solution that optimises e-commerce collection. We are Partners when it comes to investing In 2022, novobanco continued to develop and reinforce its position as a financial partner for Portuguese companies, with programmes designed to accelerate economic growth, stimulate innovation, digital transformation and energy transition, such as PT2020, RRP and PT2030. As a partner, novobanco provided solutions to streamline investment projects, including support in the application stage, advances on approved incentives, preliminary financial analysis, financing of liabilities, issuance of bank guarantees for the prepayment of incentives, Factoring and Confirming solutions, as well as a specialised team and a network of partners to support companies when applying projects backed by European Funds. In this context, in the year, novobanco made available support lines with financial guarantee provided by Banco Português de Fomento (BPF) and €1,325mn in financing lines guaranteed by the EIF/EIB for companies' liquidity and investment, of which more than €1,100mn was disbursed in only ten months. In addition, a €250mn ceiling and preferential conditions were allocated to support the treasury of companies operating in sustainable sectors as well as climate- and energy transition-related investments. Boosted by the investment made in digitisation and customer experience, novobanco's online corporate banking service has a 78% penetration rate. With a deep redesign of the user experience, the new version of the online corporate banking service was launched at the end of 2021. Throughout 2022, new functionalities were introduced in novo banco’s online corporate banking service, aimed at simplifying and providing a straightforward and distinctive customer experience, including: i) new Factoring and Confirming area in the corporate online bank; ii) new Trade Finance functionalities; and iii) financial aggregator of all bank accounts. 3.3.2 Retail During 2021 and 2022, novobanco’s Retail segment carried out a strong adjustment of its customer service structure, reshaping its geographic presence and deeply changing the service experience, in a move to deepen long-term relationships with clients. The diversity of consumer behaviours, underscored by the evolution of ways of contact, led novobanco to develop an articulated relationship between the convenience of the digital channels and the importance of face-to-face service to clients - omnicanality. Reflecting the strategy implemented by novobanco, customer acquisition in the Retail segment showed strong growth in 2022 (+80% YoY), allowing the bank to significantly raise its share as 1st bank, while salary domiciliation also recording a significant increase. The Cross-Segment Programme, which gives the employees of companies with which the Bank has protocols access to more favourable conditions, accounted for 22% of all individual clients onboarded in the year. 14 novobanco analysis with Bank of Portugal, APS and APFIPP data as of December 2022 ANNUAL REPORT 2022 | MANAGEMENT REPORT - 58 - Omnichannel Approach The process being now concluded of the full revamping of the branch network denotes the importance that novobanco gives to face-to-face customer experience - focused on personalisation and promoting a relaxed and deep engagement with clients. In addition to the layout and architectural elements where transparency is a key feature, the master branches are opened to the community through a space dedicated for social use. The concept of branch extensions for intermittent presence in smaller locations was also created. Currently, more than 240 branches operate under the new distribution model and more than 190 have a VTM (Virtual Teller Machine), which offers advanced transaction management solutions (withdrawals and deposits of banknotes, coins and cheques) and stands out as a tool towards branch efficiency and customer satisfaction. On the other hand, omnicanality also requires the development and implementation of technologies that enable interaction with the customer through digital, remote or face-to-face means with the appropriate intelligence to understand, in each situation, the added value that each channel brings to the client and redirecting contacts accordingly. In this context, the following developments were carried out: • Analysis of remote service performance: new journeys were designed to improve the way novobanco interacts with its customers, either by phone, e-mail or messaging, depending on the issue at stake and the channel best suited to address it; • Investment in digital marketing tools: sharp growth in the use of these tools to contact clients through digital journeys with value propositions that best suit each customer's situation, also involving face-to-face and remote channels; • Customer-centric information: shared by channels, enabling issues to be addressed by any means. Credit In 2022, novobanco granted more than €1.2bn in mortgage loans, strongly leveraged on the strategy of partnerships with Credit Intermediaries, which represents the bank's largest mortgage loan acquisition channel, and on the weight of affluent/360º clients (this segment accounts for 52% of loans granted). Saving and Investment novobanco continues to pay particular attention to the new saving and investment trends and market environment. In 2022, 16 new funds from the most prestigious international fund managers were included in the offer, and 7 structured products were launched, which promote, through their underlying assets, issues such as environmental and sustainability factors, healthy food, robotics or luxury, as well as an offer linked to the evolution of interest rates. As regards financial life Bancassurance, in 2022, offer was reinforced with a Unit Linked Capitalisation Insurance product, based on Portuguese and Spanish public debt - Rendimento Soberano Ibéria 2030 -, along with a new product aimed at the young public, with an associated life insurance policy - Investimento Vida Júnior -, and also a Retirement Savings Plan dedicated to the over 55 age group - Super PPR 55+. In August 2022, novobanco launched the Sustainability Preferences Questionnaire. Based on their replies to the questionnaire regarding their sustainability preferences, clients subsequently receive advice on the products that best suits their sustainability and ESG goals, as part of the Investment Advisory Service. According to the investor's profile and initial portfolio, the advisory service submits the most suitable investment proposal based, among others, on a strategic analysis of different asset classes and sectors, the macroeconomic environment and the definition of asset allocation. Small businesses Despite macroeconomic uncertainty, small businesses segment remained close to its clients allowing for a 14% increase in the customer base. This focus on the relationship also underpinned an 8% increase in the loan book, with production of investment loans reaching around €550mn, supporting the segment's significant contribution to net interest income and fee income. ANNUAL REPORT 2022 | MANAGEMENT REPORT - 59 - Digital Transformation As a customer-centric Bank, novobanco pursues the following goals through digital transformation, in both the Corporate and Retail segments: • • to accelerate front-to-back digitisation to improve experience and efficiency in the approach to the customer journeys and the transformation of the operating model, and to transform the digital channels to provide a fully omnichannel experience and greater personalisation, leveraging on best-in-class data science. This strategy drove an increase in active digital customers, to 61.9% by December 2022 (Dec/21: 57.6%; the number of digital customers increased by 11% YoY) and annual growth of 16% in the number of active mobile customers (48% of customers are mobile). In 2022, more than 67% of the operations in the individual client’s segment were carried out in self-service mode, this figure increased to 83% and 95% in the small businesses and medium-large companies segments, respectively. In turn, this underpinned an increase in the share of digital sales of Personal Loans (+207%; 14% of segment sales; +9pp YoY), Life and Non-Life Insurance (+101%; 5% of segment sales; +2pp YoY), and Credit Cards (+84%; 2% of sales; +0.4pp YoY). Active digital clients penetration rate Total Mobile 39.5% 19.3% 47.3% 50.6% 53.3% 25.6% 30.6% 57.6% 61.9% 34.0% 38.4% 43.1% Dec.17 Dec.18 Dec.19 Dec.20 Dec.21 Dec.22 Customer Touchpoints (Individual Clients) 5% 55% 33% 7% 2015 4% 51% 32% 13% 2016 4% 46% 27% 23% 2017 3% 41% 22% 34% 2018 2% 39% 15% 44% 1% 29% 15% 55% 1% 27% 12% 60% 1% 24% 10% 65% 2019 2020 2021 2022 Mobile Online ATM Branch In 2022, 75% of individual clients’ contacts with novobanco were made through the digital channels (+3 pp vs. 2021). Reflecting a reinforced focus on a "mobile digital first" strategy, mobile continues to be the main means of contact of individual clients, with annual interactions (as measured by the number of logins) growing by 24%. ANNUAL REPORT 2022 | MANAGEMENT REPORT - 60 - novobanco dos Açores The strategy of novobanco dos Açores is particularly focused on supporting the Azorean regional business fabric, namely SMEs and companies that incorporate innovation in their products, services or production systems. In 2022 novobanco dos Açores continued to work closely with its clients, providing support for the pressing and growing needs of the Azorean society. As a result of the activity developed and the proximity maintained with the market, novobanco dos Açores captured more than 1 300 new clients in 2022. Net Income (€million) - 4.8% 4.8 Customer Loans (€million) Customer Deposits (€million) + 0.8% 4.6 350.4 353.1 427.2 + 6.1% 453.2 2021 2022 2021 2022 2021 2022 novobanco dos Açores posted a net profit of €4.6 million in 2022, down by -4.8% on 2021. This performance is mainly explained by the booking, in 2021, of an extraordinary movement related to a readjustment in Revaluation Reserves (+€1.7 million in net income). In addition, in 2022, novobanco dos Açores distributed Liberalidades (donations) to its shareholders Santas Casas in the amount of €776 million, which is €323 million more than in 2021. Excluding these extraordinary factors, the result obtained through current activity increased by approximately €2 million. In 2022 novobanco dos Açores increased net assets by €7.9 million (+1.3%), to €635 million, and net customer loans by €2.7 million (+0.8%), to €353.1 million. At December 2022, overdue loans totalled €6.0 million, which corresponds to an overdue loans ratio of 1.6% only. As to customer funds, at December 2022 the total amount of customer deposits was €453.2 million, which represents a year-on-year increase of 6.1%. Banco Best - Banco Electrónico de Serviço Total, S.A. As in the last two years, in 2022 Banco Best increased the number of new Clients (+5%), who showed their preference for digital means, with nearly 40% of accounts being opened by video call or Digital Mobile Key. The use of the App increased by 22%, underpinned by more users, more operations and more products. The Customer satisfaction survey conducted in September 2022 revealed that 90% of respondents are satisfied or very satisfied with Best, with 50% of Customers considering that Best is better than the other banks they work with. Despite the negative performance of the financial markets, Best increased its banking income by 3.8%, with a strong contribution from net interest income. The ratio of overdue to total loans remained at a very good level (0.5%), thanks to a prudent risk policy based on loan collateralisation by financial assets. Banco Best closed 2022 with a positive net profit of €1.7 million, down from €3.3 million in the previous year. The annual performance benefited from the increase in net interest income, to €6.9 million, while being impacted by the costs of outsourcing to novobanco, which rose by more than €4.5 million. ANNUAL REPORT 2022 | MANAGEMENT REPORT - 61 - Highlights in 2022: Digital Channels (App and website) Offer Multiple evolutions in the product offer and introduction of several adjustments in the Customer's digital journey. Web - investment and deposits micro quiz: the answer to 3 simple questions permits to present the main savings and investment options among thousands of products available in the offer. App - data update: more functionalities so that Customers can easily and simply change their data. App - transfers: revision of the Customer journey, making the process more efficient for the Customer. App - protection insurance - Under a partnership with the largest national broker, MDS, BEST increased to 17 the types of insurance available (e.g.: car, health, golf, pleasure boats and cyber risk protection). Retirement products added on the app and website, increasing the offer to 16 options (e.g.: RSPs, pension and retirement funds). The App allows making long-term simulations with regular deposits and several return scenarios. Digital Margin Account process to apply for investment credit through the App by selecting collateral and amounts. App - introduction of investment dashboard, giving the Client an X-ray view of their portfolio, which shows, in addition to gains and losses, how it compares to the average for other customers, and also real profitability and volatility. Participation in the largest public sale/exchange offers in the market, with considerable relevance at national level. Launch of a structured product to diversify the offer. Sustainability In November 2022, the digital channels were responsible for 99.2% of the Bank's operations, there being a focus on personal contact combined with digital execution. Growth in the offer of products with sustainability objectives from prestigious independent entities. Readjustment of ‘Margem Plus’ account loans, for which allowed collaterals are financial assets classified by external entities. Circular economy initiative consisting in the donation of furniture and office materials, when moving premises, to be reused by Employees. Dissemination on the social networks of its ESG products and services, as well as promotion of ESG principles. Digitally broadcast face-to-face conferences to increase literacy in the areas of financial investments. GNB Gestão de Ativos 2022 was a particularly challenging year for the asset management segment, with a sharp devaluation of the main financial markets, in a context of high geopolitical risk, rising inflation and reference interest rate hikes by the central banks. However, the quality of GNB Gestão de Ativos’s management was once again recognised through various awards and distinctions. For the 11th consecutive year, in 2022, the Refinitiv Lipper Fund Awards distinguished ‘NB Euro Bond’ with the award for Best Euro Bond Fund sold in Europe at 3, 5 and 10 years. ‘NB Obrigações Europa’ and the ‘Multireforma Plus’ Pension Fund earned the Jornal de Negócios/APFIPP Best Funds Awards in the categories of Best Other Bond Funds and Best Pension Fund with Risk 4. ‘NB PPR’ received the prize for Best RSP in the Rankia Portugal 2022 Awards and also retained the "Right Choice" Seal awarded by DECO PROTESTE in November 2021. ANNUAL REPORT 2022 | MANAGEMENT REPORT - 62 - in assets under management). In terms of activity, GNB Gestão de Ativos continues to provide a diversified offer of products and value-added services aimed at fully meeting the various financial needs of its clients. In the mutual funds segment, the Management Company offers bond funds, where the widely awarded ‘NB Obrigações Europa’ fund stands out (€137 million in assets under management), equity funds, such as ‘NB Momentum Sustentável’ (€162 million in assets under management) and mixed funds, which include conservative, balanced and dynamic strategies – ‘NB Conservador’, ‘NB Equilibrado’ and ‘NB Dinâmico’ (€72 million In retirement solutions, the offer includes the Multireforma family of open- ended pension funds (4 funds totalling €350 million), 14 closed-end pension funds associated with company plans and 2 retirement savings products. The Management Company also offers a portfolio management service that includes discretionary management provided to more than 800 clients. GNB Real Estate manages open- and closed- end real estate funds. Assets under Management (December 2022) 50% 10% 29% 11% Total assets under management at the end of 2022 were €7.8 billion, which represents a reduction of 21.2% compared to the end of 2021. This reduction is mostly justified by the strong devaluation of the financial markets since the beginning of the year. Wealth Management Pension Funds Real Estate Mutual Funds Highlights in 2022 • Underpinned by GNB Gestão de Ativos' commitment to sustainability, two open-ended pension funds now promote environmental and social issues under Article 8 of Regulation (EU) 2019/2088 of the European Parliament. These are the ‘Multireforma Ações’ and ‘PPR Vintage Sustentável’ funds, which joined the ‘NB Momentum Sustentável’ fund. The Company will continue to expand its offer of products with the ESG seal. • According to APFIPP data, in 2022, several funds managed by GNB Fundos Mobiliários beat the competing funds, ending the year among the top places of the profitability rankings of the respective categories: At year-end, ‘NB Momentum Sustentável’, ‘NB Conservador’, and ‘NB Capital’ ranked #1 in their categories while ‘NB Equilibrado’ and ‘NB Dinâmico’ finished in #2 position. • GNB Real Estate's management remained faithful to its mission of creating financial value, pursuing its main objective of reducing exposure to non-strategic real estate and reorganising the portfolio of real estate funds under its management. At 31 December 2022 the volume under management of real estate investment funds totalled approximately €678.9 million (-37.3% vs. vs 2021). In line with the strategy of reducing exposure to real estate, the logistics portfolio was sold as part of the Connect Project, yielding significant capital gains for the ‘NB Logística’ and ‘NB Património’ funds. The reorganisation of the portfolio of real estate funds was continued, involving the merger of ‘Fungere’ into ‘Fungepi NB’, the liquidation of the ‘NB Logística’ and ‘Rendifundo’ funds and the start of the liquidation process of the ‘NB Alta Vista’ and ‘NB Património’ funds. • • In the area of discretionary portfolio management for individual and institutional customers, new types of portfolios more suited to the prevailing market conditions were created, thus broadening the existing offer. In the Pension Funds segment, the Management Company continues to play a very active role, having presented various proposals not only for new company plans, but also for the renewal of existing plans. The client base in collective and individual subscriptions grew by around 4%, to nearly 17 thousand clients. ANNUAL REPORT 2022 | MANAGEMENT REPORT - 63 - 3.4 Novo Banco Separate Results novobanco reported a net profit of €453.8mn in 2022, which compares with a net profit of €225.9mn in 2021. Commercial banking income reached €895.0mn (+7.6% YoY), driven by the increase in net interest income (+7.6%) and in fees and commissions (+7.6%). Capital market results were negative, at €20.2 million, which compares with +€78.0mn in 2021. Operating costs totalled €423.7mn (+11.3% YoY increase), reflecting the continued strategic investment in digital transformation and streamlined operations. Net operating income was positive, at €512.8mn. Impairments and provisions registered a notable reduction of 69.0% relative to the previous year, to €83.9mn. Activity novobanco’s activity in 2022 was developed under the same guidelines already referred for novobanco Group. At 31 December 2022, deposits totalled €27.6bn, an increase of €0.8mn compared to December 2021 (€26.7bn). Gross customer loans totalled €24,013 million (+3.7% vs. Dec-2021), reflects novobanco commitment towards its domestic market and the Portuguese companies, increasing its offer and enhancing products dedicated to support clients’ funding needs, promoting credit lines with financial guarantee by Banco Português de Fomento, financing lines with EIF/EIB guarantee to support companies’ liquidity needs and investments and sectoral financing lines, among others. ANNUAL REPORT 2022 | MANAGEMENT REPORT - 64 - ChangeabsoluteNet Interest Income 625.0 581.1 43.9+Fees and Commissions 270.0 251.0 19.1=Commercial Banking Income895.0832.063.0+Capital Markets Results-20.2 78.0-98.2+Other Operating Results61.7-23.685.2=Banking Income936.5886.450.1-Operating Costs 423.7 380.8 42.9=Net Operating Income512.8505.77.1-Net Impairments and Provisions 83.9 270.4-186.5Credit 36.9 147.1-110.2Securities 66.9 47.319.6Other Assets and Contingencies-19.8 76.0-95.8=Income before Taxes428.9235.3193.6-Corporate Income Tax-58.3-24.0-34.3-Special Tax on Banks33.433.40.0=Income after Taxes453.8225.9227.9=Net Income for the period453.8184.5269.3Income Statement (mn€)31-Dec-2131-Dec-22ANNUAL REPORT 2022 | MANAGEMENT REPORT - 65 - absolute%Assets45 46444 3411 1232.5%Customer Loans (gross)24 01323 165 8483.7%Loans to Individuals9 9189 599 3183.3%Residential Mortgage8 6328 334 2983.6%Other Loans1 2861 265 211.6%Loans to corporate customers14 09513 566 5293.9%On Balance Sheet Funds29 98228 4321 5505.5%Deposits27 57026 739 8313.1%Other Customer Funds (1) 855 259 597...Debt Securities1 1411 019 12212.0%Subordinated Debt 416 415 00.0%(1) Includes checks and pending payment instructions, Repos and other funds.31-Dec-22ChangeActivity Evolution (mn€)31-Dec-21absolute%Customer Loans (gross) 24 013 23 165 8483.7%Overdue Loans 338 301 3712.2%Overdue Loans > 90 days 326 283 4415.4%Forborne Loans 1 425 1 537-112-7.3%Non-Performing Loans (NPL)* 1 356 1 708-353-20.7%Customer Loans Impairment 1 058 1 236-178-14.4%Asset Quality And Coverage Ratios (%)31-Dec-2231-Dec-21Overdue Loans / Gross Loans to Customers1.4%1.3%0.1p.p.Overdue Loans > 90 days / Gross Loans to Customers1.4%1.2%0.1p.p.Forborne Loans / Gross Loans to Customers5.9%6.6%-0.7p.p.Non-Performing Loans (NPL)* / Gross Loans to Customers + Gross Loans to Credit Institutions4.5%5.9%-1.5p.p.Impairment / Total Loans to Customers4.4%5.3%-0.9p.p.Impairment / Overdue Loans312.8%409.9%-97.1p.p.Impairment / Overdue Loans > 90 days324.2%437.3%-113.1p.p.Impairment / Non-Performing Loans*78.0%72.3%5.7p.p.* includes Credit Institutions31-Dec-22Change31-Dec-21Asset QualityChangeIn the year 2022, non-performing loan inflows remained at low levels, which together with recovery activity, contributed to the continued decrease in the amount of non-performing loans and consequently to the improvement in the NPL ratio to 4.5% (2021: 5.9%). In December, the NPL coverage ratio was at 78.0% (+5.7 p.p. vs 2021). 3.5 Relevant Facts from the Activity and Subsequent Events Relevant Facts of 2022 are mentioned in point 1.1.3 Main Events of the Management Report. ANNUAL REPORT 2022 | MANAGEMENT REPORT - 66 - Jorge Pinheiro discovers new forms of expression, such as geometric abstractionism and constructivism. This experience led him to his first rupture with figuration, beginning one of his most fertile periods of work. FUNCHAL, MUDAS. Museu de Arte Contemporânea da Madeira Sem título, 1968 – Jorge Pinheiro Oil on plywood 160 x 160cm 4 CAPITAL AND LIQUIDITY 4.1 Capital Ratios Driven by strong bottom-line profitability and RWA reduction, as of 31 December 2022, CET 1 ratio was 13.7% (+260bp YTD; Dec/21: 11.1%) and Total capital ratio reached 16.0% (+290bp vs Dec/21: 13.1%), above 13.5% OCR requirement (applicable as of 1 January 2023) and P2G buffer. The compensation from the Resolution Fund under the Contingent Capital Agreement requested with reference to 2021, in the amount of €209.2mn, was calculated based on the losses incurred on the assets covered by the Contingent Capital Agreement, as well as verification of the minimum capital conditions applicable at the end of that year under the Contingent Capital Agreement. However, as instructed by the ECB, this amount was not considered in the calculation of regulatory capital with reference to 31 December 2022 as it was not paid by the Resolution Fund. novobanco considers this amount as due under the Contingent Capital Agreement and has triggered the legal and contractual mechanisms at its disposal to ensure its receipt. With respect to the amount requested to the Resolution Fund for the year 2020, two differences remain between novobanco and the Resolution Fund, concerning (i) the provision for discontinued operations in Spain and (ii) the valuation of participation units, which are being settled in an arbitration proceeding in progress, under which the difference regarding the application by novobanco, at the end of 2020, of the dynamic approach of the IFRS 9 transitional arrangements is also being assessed. ANNUAL REPORT 2022 | MANAGEMENT REPORT - 68 - Risk Weighted Assets(A)21 35521 23324 92924 689Own Funds Common Equity Tier 1(B)2 9272 7872 7682 507 Tier 1(C)2 9282 7892 7692 509 Total Own Funds(D)3 4183 2793 2763 016Common Equity Tier 1 Ratio(B/A)13.7%13.1%11.1%10.1%Tier 1 Ratio (C/A)13.7%13.1%11.1%10.1%Solvency Ratio(D/A)16.0%15.5%13.1%12.2%Leverage Ratio6.1%5.8%6.0%5.4%Capital Ratios (CRD IV/CRR) (€mn)31-Dec-21(Phased-in)31-Dec-21(fully loaded)31-Dec-22(Phased-in)31-Dec-22(fully loaded)4.2 Liquidity and Funding Highlights • Liquidity ratios were maintained above regulatory requirements. • Stable funding structure, relying mainly on customer deposits which increased by €1.1bn YoY. • Given the significant market disruption, the bank did not access the public markets in 2022 but managed to secure compliance with regulatory requirements through alternative transactions. Liquidity Management novobanco manages liquidity in accordance with all the regulatory requirements and its own management principles, guaranteeing that all responsibilities are met, whether in normal market conditions or under stress conditions. These include, among others, the ECB´s legal reserves, liquidity ratios (LCR and NSFR), maintenance of adequate levels of liquid assets, the definition of funding transfer pricing (FTP) framework and establishment of an offer of financial products that results in a diversified panel of funding sources. Short-term liquidity is monitored through daily mismatch reports, prepared in accordance with pre-established guidelines and internally defined metrics, which allows the bank to make early detection of 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. The report monitors the evolution of the liquidity position, including eligible assets and liquidity buffers, main cash inflows and outflows, deposits’ evolution, medium- and long-term funding, central banks funding, the evolution of the treasury gap (net interbank deposits), as well as several early warning indicators established for the purpose. This process ensures an ongoing and active role in liquidity risk management and risk assessment from the EBD and also allows the bank to take immediate action if needed. In addition, the liquidity position is also daily reported to the Joint Supervisory Team. In terms of structural liquidity, novobanco manages its activity and funding sources in order to achieve funding stability and cost optimization avoiding, to the extent possible, undesirable liquidity risks. The structural liquidity of the bank is analysed in detail on the Capital and Asset Liability Committee (“CALCO”), which meets on a monthly basis. Among others, CALCO analyses and discusses the bank's liquidity position, and performs a comprehensive analysis of the liquidity risk and its evolution, with a special focus on current liquidity buffers and generation/maintenance of eligible assets for rediscount with the ECB and respective impacts on the liquidity ratios. novobanco Group’s funding policy is one of the major components of the bank’s liquidity risk management, which stresses the diversification of funding sources by instruments, investors and maturities. Given the commercial nature of the balance sheet, novobanco's strategy has, since its inception, largely relied on boosting customer deposits as its major source of funding, as deposits were severely hit by the resolution and market access has not been normalized. Additionally, the bank prepares a monthly liquidity report (for more details see chapter 2.3. Risk Management), considering, not only the effective maturity but also the behavioural maturity of the various products, which allows for evaluation of the structural mismatches by time bucket. Based on this information and the bank’s medium-term plan, the annual activity funding plan is prepared considering the established budget targets. This plan, which is regularly reviewed, favours, as much as possible, stable funding instruments. The bank also has in place a contingency liquidity plan, which comprises a set of measures that, if triggered, would allow the bank to manage and/or minimize the effects of a severe liquidity crisis. These measures aim to address additional liquidity needs and boost the resilience of novobanco in a potential stress situation. Finally, the bank also performs, on an annual basis, an Internal Liquidity Adequacy Assessment Process or ILAAP, which evaluates the liquidity position of the bank in a normal and stressful scenario. The results of this process, which is approved by the EBD, must be sent to the regulatory authorities, and concluded that the bank’s funding and liquidity structure and internal processes are solid and that the bank could withstand a stress scenario. ANNUAL REPORT 2022 | MANAGEMENT REPORT - 69 - Funding Structure and Liquidity in 2022 As the financial markets experienced a major disruption in 2022, which translated into significant credit spread widening, the Bank adjusted its market funding plans and managed to comply with all regulatory requirements, without having to access the financial markets. As such, the bank did not exercise the call option on its €275mn senior preferred bond as the replacement would not have been at attractive terms. Throughout 2022, novobanco managed to improve its liquidity position. As of 31 December 2022, deposits at the ECB totalled €5.9bn (Dec/21: €5.3bn; +€0.7bn YoY), while net funding from the ECB (funding taken from the ECB minus deposits with the Europeans Central Banks) reduced to €0.4bn, from €2.7bn in 31 December 2021. At the end of 2022, novobanco’ s customer deposits totalled €28.4.bn (€27.3bn bn in 2021), having increased by €1.1bn YoY, with a strong contribution from the retail segment. At the end of 2022, customer deposits remained the bank's main funding source, accounting for 62% of its funding structure (61% at the end of 2021), of which 73% were deposits from the retail segment. In terms of asset evolution, the loan portfolio (gross) increased by €0.7bn to €25.6bn as of December 2022 (Dec/21: €24.9bn). On the other hand, in 2022, the securities portfolio increased by €0.4bn, to € 10.9bn, mostly reflecting a reduction of non-core securities (including restructuring funds and real estate funds) and an increase in the Sovereign debt portfolio. novobanco’s security portfolio remained substantially (more than 70%) composed of ANNUAL REPORT 2022 | MANAGEMENT REPORT - 70 - high-quality liquid assets (“HQLAs”), and among these more than 84% are sovereign or supranational debt securities. In addition to the sale of the non-core securities mentioned above, the bank also concluded the sale of other non-core assets throughout 2022 which had a positive impact on liquidity and capital/MREL ratios. In 2022 deposits at ECB remained consistently above €5.0bn staying at €5.9bn at the end of the year (Dec/21: €5.3bn). As a result, net funding from the ECB was €0.4bn in December 2022, decreasing €2.3bn YoY (Dec/21: €2.7bn). On 31 December 2022, gross funding from the ECB amounted to €6.3bn fully composed of the TLTRO III representing a decrease of €1.6bn YoY, as a result of a prepayment executed in December 2022. Throughout 2023 an additional amount of €5.4bn of the TLTRO III will mature, and the remaining €0.95bn are set to mature in December 2024. Given the maturity of these lines novobanco adopted as an exit strategy from TLTRO III, including among others, the reduction of the size of the balance sheet and the increase of other stable financing instruments, mainly collateralised interbank funding and customer deposits. In 2022, collateralised funding through medium-term repo agreements increased by €2.5bn. On 31 December 2022, the eligible assets portfolio available for use as collateral with the European Central Bank increased by €0.4bn versus 31 December 2021, totalling €16.9bn. In this context, in 2022, novobanco improved its liquidity buffer. The available amount of eligible assets for rediscount with the ECB totalled €7.0bn (net of haircuts), an increase of €0.8bn YoY. In addition to the abovementioned, novobanco has HQLA assets non-eligible with the ECB and deposits at ECB, which makes up to a total liquidity buffer of €13.7bn, composed of high-quality liquid assets (+€1.3bn YoY). As a result, in December 2022, novobanco maintained (i) the liquidity ratios above the regulatory levels, with LCR standing at 210% (Dec/22: 182%), and the NSFR at 113% (Dec/22: 117%). The NSFR reduction is mostly explained by TLTRO III maturity profile and other medium long-term funding maturity shortening; ii) a diversified and stable funding structure, with deposits representing the majority of the funding structure. ANNUAL REPORT 2022 | MANAGEMENT REPORT - 71 - From 1 January 2022 the regulatory requirement, in force is the following: ANNUAL REPORT 2022 | MANAGEMENT REPORT - 72 - Natureza morta XXV, 1967– Nikias Skapinakis Oil on canvas 98 x 148cm Skapinakis takes the classic theme of Still Life, rethought in a synthesis between figuration and abstraction. Some objects on top of a table appear in a mixing of color planes, that intersect with reality, in the stylized representation of the vase with flowers and some fruits. GUARDA, Museu Municipal da Guarda 5 CORPORATE GOVERNANCE 5.1 Shareholder Structure 5.1.1 Qualified holdings in Novo Banco’s share capital Novo Banco has a share capital of €6,304,660,637.69 (six thousand, three hundred and four million, six hundred and sixty thousand, six hundred and thirty-seven euros and sixty-nine cents), divided into 10,391,043,938 (ten thousand million, three hundred and ninety-one million, forty-three thousand, nine hundred and thirty-eight) nominative shares, in book-entry form, with no nominal value, and fully subscribed and paid up. Qualified holdings in Novo Banco’s share capital on the date of signature of this Report: Shareholder Number of shares % of share capital Nani Holdings S.G.P.S., S.A. 7 793 282 953 Fundo de Resolução 2 006 717 044 Direcção-Geral do Tesouro e Finanças 591 043 941 75.00% 19.31% 5.69% 5.1.2 Equity holders with special rights There are no shareholders with special rights. 5.1.3 Restrictions on voting rights By virtue of the commitments assumed by the Portuguese State before the European Commission in the context of the approval of the sale of a 75% holding in the share capital of Novo Banco under European Union rules on State aid, the shareholder Resolution Fund should refrain from exercising its non-economic rights, namely its voting rights. 5.2 Corporate Bodies: Composition and Functioning 5.2.1 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 novobanco are the Shareholder’s General Meeting, the General and Supervisory Board, the Executive Board of Directors, the Monitoring Committee, the Statutory Auditor and the Company’s Secretary. The members of the corporate bodies are elected for four-year mandates and they may be re-elected once or more than once. Also in accordance with the Articles of Association, the members of the Board of the Shareholder’s General Meeting, General and Supervisory Board, and Monitoring Committee are elected by the Shareholder’s General Meeting. The Shareholder’s General Meeting also has the powers to appoint and replace the bank's Statutory Auditor, acting upon a proposal of the General and Supervisory Board, based on a proposal of the Financial Affairs (Audit) Committee. The members of the Executive Board of Directors are appointed by the General and Supervisory Board. The Company’s Secretary and Alternate Secretary are appointed by the EBD, after consulting with the GSB. 5.2.2 Amendments to the Articles of Association Changes to Novo Banco’s Articles of Association are the responsibility of the General Meeting. In October 2022, Article 4 (Share Capital and Shares) of the Articles of Association of Novo Banco was amended, and now reads as follows: ANNUAL REPORT 2022 | MANAGEMENT REPORT - 74 - “1. The share capital of Novo Banco is €6,304,660,637.69 (six thousand, three hundred and four million, six hundred and sixty thousand, six hundred and thirty-seven euros and sixty-nine cents), divided into 10,391,043,938 (ten thousand million, three hundred and ninety-one million, forty-three thousand, nine hundred and thirty-eight) nominative shares, in book-entry form, with no nominal value, and fully subscribed and paid up”. 5.2.3 General and Supervisory Board The GSB is the supervisory body of novobanco and its members are elected by the Shareholder’s General Meeting. In October 2020, the General Meeting of novobanco appointed the following members of the General and Supervisory Board for the 2021-2024 mandate: • Byron James Macbean Haynes – Chairman • Karl-Gerhard Eick – Vice-Chairman • Donald Quintin • Kambiz Nourbakhsh • Mark Andrew Coker • Benjamin Friedrich Dickgiesser • John Ryan Herbert • Robert Alan Sherman • Carla Antunes da Silva • William Henry Newton At the General Meeting of Shareholders of novobanco that took place on 22 December 2022, Monika Wildner was appointed as an independent member of the General and Supervisory Board for the current mandate (2021- 2024). The commencement of Monika Wildner's duties is subject to approval by the competent authorities under the Fit & Proper process, which at the signature date of this Report was still under way. On 1 February 2023, the General and Supervisory Board approved, subject to Fit & Proper, Benjamin Dickgiesser as a new member of the Executive Board of Directors for the current 2022-2025 mandate, becoming the next Chief Financial Officer. Following this announcement, on 24 February 2023, Benjamin Dickgiesser resigned as member of the General and Supervisory Board. At the signature date of this Report, the authorisation process by the competent regulatory authorities was still under way. The GSB 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 novobanco and of the Group entities, as well as to supervise the EBD with regard to compliance with the relevant regulatory requirements of banking activity. Additionally, the GSB has specific powers to elect the members of the EBD and responsibilities in granting consents for approval by the EBD 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 registered address, and closure or changes to representation structures 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 Capital Agreement; and (vi) hiring of employees with annual remuneration above certain limits. The GSB holds meetings on a monthly basis. The Chairman of the General and Supervisory Board and the Chief Executive Officer maintain regular dialogue and communication between them. In its activity, the GSB is directly supported by 5 (five) Committees, the Financial Affairs (Audit) Committee, the Risk Committee, the Compliance Committee, the Nomination Committee and the Remuneration Committee, these holding the legal required powers and other powers delegated to the GSB. These Committees are composed of and chaired by independent members of the GSB. Their meetings may also be attended by members of the EBD responsible for the matters that are dealt with by said committees. ANNUAL REPORT 2022 | MANAGEMENT REPORT - 75 - > 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 and accounts reporting policies and procedures and the follow-up of the external auditor, and in particular, has the powers provided for in the Companies Code. This Committee also has delegated powers of the GSB with regard to, among others, material changes to accounting policies, the approval of the annual budget, and prior consent to the issuance of certain debt instruments. In addition, this Committee supports the GSB in overseeing the effectiveness of the internal control system, risk management system and internal audit system of the Bank and of the financial entities within its scope of prudential consolidation. As of 31 December 2022, the members of the Financial Affairs (Audit) Committee were the following: Chairman: Karl-Gerhard Eick Byron James Macbean Haynes Kambiz Nourbakhsh > Risk Committee The Risk Committee advises and supports the GSB 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 entities included in its prudential consolidation perimeter. This Committee also has the powers provided for by law and the delegated powers of the GSB with regard to certain credit transactions and changes in risk policies. As of 31 December 2022, the members of the Risk Committee were the following: Chairman: William Henry Newton Byron James Macbean Haynes Karl-Gerhard Eick Kambiz Nourbakhsh Benjamin Friedrich Dickgiesser > Compliance Committee The Compliance Committee advises and supports the GSB, among others, in monitoring compliance issues pertaining to the Bank, including those relating the members of corporate bodies and employees, internal policies and processes related to compliance, policies on business conduct and ethics, and compliance risk. In addition, it has delegated powers in matters related to related parties (except for transactions between the Bank and shareholders and their related parties, a non-delegable matter that falls to the GSB). The above functions also extend to the following financial subsidiaries: BEST, novobanco Açores and GNB Gestão de Ativos. As of 31 December 2022, the members of the Compliance Committee were the following: Chairman: Robert Alan Sherman John Ryan Herbert Mark Andrew Coker Monika Wildner will become a member of Compliance Committee, thereby expanding the number of members of this Committee after Fit & Proper approval by the regulatory authorities. ANNUAL REPORT 2022 | MANAGEMENT REPORT - 76 - > Nomination Committee The Nomination Committee supports the GSB in overseeing the EBD’ action in the establishment of, and in ensuring compliance with, consistent and well-integrated nomination policies at the bank, including the following financial subsidiaries: BEST, novobanco Açores and GNB Gestão de Ativos companies. As of 31 December 2022, members of the Nomination Committee were the following: Chairman: John Ryan Herbert Robert Alan Sherman Donald John Quintin Mark Andrew Coker Carla Antunes da Silva > Remuneration Committee The Committee advises and supports the GSB in the establishment of adequate, consistent and well-integrated remuneration policies in the bank and in monitoring the implementation of remuneration policies in the bank, including the following financial subsidiaries BEST, novobanco Açores and GNB Gestão de Ativos companies. This Committee also has several delegated powers, including with regard to the remuneration of the members of the EBD and identified employees, as well as to the hiring of employees with annual remuneration above €200,000.00. As of 31 December 2022, members of the Remuneration Committee were the following: Chairman: Byron James Macbean Haynes Karl-Gerhard Eick Benjamin Friedrich Dickgiesser The company documents and main regulations can be accessed at www.novobanco.pt > Institutional > Governance > Company Documents 5.2.4 Executive Board of Directors The members of the Executive Board of Directors (EBD) are appointed by the General and Supervisory Board, which also appoints the Chief Executive Officer (CEO). As to the composition of the EBD, at the date of this report its members for the 2022-2025 mandate are the following: • Mark George Bourke – Chief Executive Officer (“CEO”) and interim Chief Financial Officer (“CFO”)15 • Luís Miguel Alves Ribeiro - Chief Commercial Officer (Retail) (“CCOR”) • Andrés Baltar Garcia - Chief Commercial Officer (Corporate) (“CCOC”) • Luísa Marta Santos Soares da Silva Amaro de Matos - Chief Legal & Compliance Officer (“CLCO”) • Carlos Jorge Ferreira Brandão – Chief Risk Officer (“CRO”) • Rui Miguel Dias Ribeiro Fontes - Chief Credit Officer (“CCO”) The composition and mandate of novobanco's Executive Board of Directors underwent changes in the course of 2022. Following the communication of the resignation of António Manuel Palma Ramalho from the position of CEO, the GSB decided to appoint a new Executive Board of Directors, which took office on 26 August 2022 after the authorisations from the competent entities under the Fit & Proper process had been obtained. 15 Leigh James Bartlett resigned as CFO on 30 December 2022. Mark George Bourke will accumulate his duties as CEO with those of interim CFO until the new CFO takes office. ANNUAL REPORT 2022 | MANAGEMENT REPORT - 77 - Aware that the EBD's structure and duties and responsibilities would be increased with the creation of a new executive position, that of Chief Credit Officer ("CCO"), the GSB decided to increase the number of members from 6 (six) to 7 (seven). The GSB also concluded that because there were two new EBD members - Leigh James Bartlett and Carlos Jorge Ferreira Brandão - and because the roles and responsibilities of two of the current members - Mark George Bourke and Rui Miguel Dias Ribeiro Fontes - had changed substantially, there should be a new four-year mandate (2022-2025). The remaining EBD members were reappointed. On 15 December 2022, the General and Supervisory Board accepted the termination of duties of Leigh James Bartlett (CFO), at his request, with effect from 30 December 2022. Until the new CFO takes office, the CEO will also act as interim CFO. On 1 February 2023, the General and Supervisory Board approved, subject to Fit & Proper, Benjamin Dickgiesser as a new member of the Executive Board of Directors for the current 2022-2025 mandate, becoming the next Chief Financial Officer. At the signature date of this Report, the authorisation process by the competent regulatory authorities was still under way. Committees of the Executive Board of Directors The activity of the EBD is supported by several Committees. In accordance with its rules of procedure, the EBD 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 EBD, and monitoring novobanco Group’s policies and risk levels. In this context, the Risk Committee is responsible for monitoring the evolution of Grupo Novo Banco’s integrated risk profile, and for analysing and proposing methodologies, policies, procedures and instruments to deal with all types of risk, namely credit, market, liquidity and operational. Chairman: Carlos Jorge Ferreira Brandão > Credit Committee Responsible for deciding the main credit operations in which the novobanco Group participates, in line with the risk policies defined for novobanco Group. Chairman: Rui Miguel Dias Ribeiro Fontes > 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 novobanco Group level. The CALCO also monitors early warning indicators with regard to the Recovery Plan and Liquidity, proposing mitigation measures, and if necessary, triggering the recovery plan and/or the liquidity contingency plan. Chairman: Mark George Bourke (enquanto CFO interino) > Internal Control System Committee The Committee monitors all issues related to novobanco Group’s Internal Control System, without prejudice to the responsibilities attributed in this regard to the EBD and other Committees in place at novobanco Group, namely the Risk Committee, the Operational Risk Subcommittee and the Compliance and Product Committee. Chairman: Carlos Jorge Ferreira Brandão ANNUAL REPORT 2022 | MANAGEMENT REPORT - 78 - > Compliance and Product Committee Responsible for approving, from a compliance standpoint, products and services to be developed and/or distributed by the bank, issuing an opinion on all of them within the scope of the products’ sign-off process in force, as well as monitor the issues related to control implementation, without prejudice of competences of other governing bodies and GSB Committees. Chairwoman: Luísa Soares da Silva > Digital Transformation Committee Responsible for defining and driving digital transformation at novobanco. Chairman: Mark George Bourke > 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 acquisition’s strategy. Chairman: Mark George Bourke (enquanto CFO interino) > Impairment Committee Responsible for defining the amount of impairment to be allocated to each client, when novobanco has an exposure above €100 million to that client or group of clients. Chairman: Mark George Bourke (enquanto CFO interino) In addition, the Executive Board of Directors has set up 3 (three) subcommittees, (i) Non-Performing Assets (NPA) Subcommittee; (ii) Extended Models Risk Subcommittee; (iii) Operational Risk Subcommittee and 7 (seven) steering groups for the areas of (i) Retail, (ii) Corporate Clients, (iii) Human Capital, (iv) Management Information System (MIS), (v) Investment, (vi) Business Monitoring and (vii) ESG. The Steering Groups have no rules of their own, their composition and rules of procedure being decided on a case-by-case basis by the members of the EBD. 5.2.5 Monitoring Committee The Monitoring Committee is a statutory advisory body ruled by the Articles of Association and deriving from the CCA. It is composed of three members elected by the Shareholders’ General Meeting, one of whom to act as Chairman. The composition of the Monitoring Committee must respect the following criteria: one of its members must be independent from the parties to the CCA, and another shall be a registered charter accountant. Two of its members are appointed by the Resolution Fund. The Committee has as main tasks to discuss and issue (non-binding) opinions on any Relevant Issue concerning the CCA 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 GSB. 5.2.6 Supervision Supervision is the responsibility of the GSB and the Statutory Auditor. The Statutory Auditor and Alternate Statutory Auditor are elected and removed by the Shareholders’ General Meeting, under a proposal of the GSB, on a proposal from the Financial Affairs (Audit) Committee, and have the powers and responsibilities provided for in the law. 5.2.7 Powers of the management body Including regarding resolutions on share capital increases ANNUAL REPORT 2022 | MANAGEMENT REPORT - 79 - The EBD 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. 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 Shareholders’ General Meeting. In the case of securities’ issuance, it requires the prior opinion of the GSB. 5.3 Internal Control Definition and Objectives Internal Control is integral to the running of the organisation, combining strategies, policies, processes, systems and procedures to ensure the medium- and long-term sustainability of the institution and the prudent exercise of its activity. An efficient and effective internal control system is key for the organisation to ensure: • The fulfilment of the objectives set out in strategic planning, through the efficient execution of operations, the efficient use of the institution's resources and the safeguarding of its assets; • The proper identification, assessment, monitoring and control of the risks to which the institution is or may come to be exposed; • The existence of comprehensive, relevant, reliable, and timely financial and non-financial information; • The adoption of solid accounting principles; • Compliance with the legislation, regulations and guidelines applicable to the institution's activity, issued by the competent authorities, with the institution's own internal regulations, and with professional and ethical standards and practices and with rules on conduct and relationship with clients. Internal Control is a responsibility of all the members of the management and supervisory bodies, and Institution's employees, who perform their duties in accordance with internal policies and standards of ethics, integrity and professionalism, also applying to the structural units responsibilities and to all the institution's business segments, outsourced activities, and product distribution channels. Each employee has a role to play as well as duties and responsibilities, which contribute to ensure the efficiency and effectiveness of Internal Control. The EBD 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 organisational structure and independent and efficient functions in terms of risk management, compliance and audit. In turn, it is incumbent upon the GSB, among other duties detailed in the Bank’s Articles of Association, to ensure that the EBD establishes and maintains adequate, independent and effective internal control, in compliance with the law, regulations and internal policies. novobanco 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, novobanco Group's Internal Control System is based on the following principles: • Adequate control environment reflecting the importance recognized by novobanco Group for the Internal Control System and whose organization is supported by a model of 3 lines of defence, which defines the levels of responsibility in terms of governance and risk management for the different functions that integrate each line, including permanent, independent and effective Internal Control functions; • Solid risk management system, designed to identify, assess, monitor and control all risks that may influence the strategy, risk appetite and objectives of novobanco Group (as detailed in section 4.3 – Risk Management); ANNUAL REPORT 2022 | MANAGEMENT REPORT - 80 - • Efficient information and communication system that guarantees the capture, treatment and exchange of relevant, reliable, complete, 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 any deficiencies and opportunities for improvement that will enable the Internal Control System to be strengthened, promoting the triggering of corrective actions. Under novobanco Group’s Internal Control System, policies, processes, procedures, systems and controls are formalised 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 Annual Self-assessment Report itself. 3 Lines of Defence Model The Internal Control System is grounded on the 3 lines of defence model, which clearly defines the levels of intervention and responsibility in risk management and in the execution of controls, in order to guarantee the adequacy and overall effectiveness of Internal Control within in the organisation. The 1st line of defence is held by the organisational 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 EBD. 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. The mission of the 2nd line of defence 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 defence 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 complemented by activities carried out by other departments of the Bank (e.g., Accounting, Consolidation and Taxation Department, Internal Control and Data Protection Department, Chief Information Security Officer). The 2nd line of defence defines risk management and control policies, methodologies and tools, exercising functional supervision and monitoring over 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 3rd line of defence is held by the Internal Audit Department, and its mission is to assess, independently and based on risk, the adequacy and effectiveness of the entity's organizational culture and its governance and internal control systems. To ensure its necessary independence, the internal audit function: ANNUAL REPORT 2022 | MANAGEMENT REPORT - 81 - • Reports functionally to the Financial Affairs (Audit) Committee of the GSB, 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 Financial Affairs (Audit) Committee and acknowledged by the GSB; • Cannot have any kind of responsibility or authority over the design, implementation and execution of the control procedures which it audits. The EBD may request information and opinions from the internal audit function, namely in matters of risk, internal control and compliance. Additionally, and as external intervenient in the defence of the Internal Control System (4th line of defence): • • the Statutory Auditor, bearing in mind its functions, acts as an additional line of defence, essentially of an account’s supervision nature, including within the scope of the internal control report; and the Supervision Authorities (European Central Bank and Banco de Portugal) act as the last line of defence, 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 defence 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, including through detailed assessments and regular interaction with the EBD and top management; (ii) request improvements and remediation measures, when and if necessary. Control Functions Independence The independence of the control functions is ensured through implementation of the following mechanisms: • Internal authority: the functions are established at an appropriate hierarchical level and report hierarchically to the EBD and functionally to the GSB and respective committees, regularly participating in the meetings of these bodies; • 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 both the bank and in its branches and subsidiaries); • Remuneration: the remuneration of control functions employees is not linked to the results of the activities which they supervise and control, nor does it compromise, in any other way, their objectivity; • Technical resources and organisation: the functions have adequate technical resources at their disposal and are organisationally independent from each other; • Scope: the Bank's control functions carry out supervision and articulation activities over the control functions of its branches and subsidiaries. 5.4 Main Policies For novobanco Group, the legal framework that regulates its activities is as decisive for its course of action as the set of values, principles and good practices which it assumes and which steer its actions and define the standards that shape the manner in which the Group does business and carries out its activities. The existence and application of a Code of Conduct, policies on the Prevention of Conflicts of Interest, a Whistleblowing Policy and an Anti-Bribery and Anti-Corruption Policy are therefore paramount across the entire novobanco Group. Additionally, but no less importantly, the scrutiny and transparency requirements of the Related-Party Transactions Policy, the strict application of the Law and Policies on the Prevention of Money Laundering and Terrorist Financing, the care and transparency towards clients and investors derived from the Investor ANNUAL REPORT 2022 | MANAGEMENT REPORT - 82 - Protection and Market Transparency Policies, and the assurance of sound and prudent management ensured by the Remuneration Policies for the Management and Supervisory Bodies and for the Employees, altogether provide evidence of the importance that novobanco attributes to the compliance culture dimension. The commitment assumed by novobanco 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 The novobanco Group Code of Conduct came into force in 2015 and was revised and updated in 2021. The code applies to all the members of the management and supervisory bodies of the novobanco Group companies, to the employees of Novobanco and the novobanco Group entities, and also to providers of goods and services when such is contractually provided for, or mandatorily in the case of some outsourced services. 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. The Code of Conduct is available at novobanco’s website, in Portuguese and English, at www.novobanco.pt > Institutional > Governance > Compliance Monitoring the application of the Code of Conduct and clarifying employees’ doubts about its content and application is the responsibility of the Compliance Department. In 2022, in novobanco, as a result of non-compliance with internal regulations in the performance of their duties, 6 employees received sanctions, including: 3 dismissals without any indemnity or compensation; 2 cases of days of suspension without pay and with loss of seniority; and 1 registered reprimand. > Policy of Conflicts of Interest The Policy of Conflicts of Interest establishes rules on the identification, management and monitoring of potential conflicts of interest in the various activities of novobanco and the novobanco Group, but also with respect to their corporate bodies, employees, and ultimately, their suppliers. It enables compliance with the applicable legal and regulatory provisions, and seeks to ensure that any possible situation of conflict of interests identified is recorded, assessed, and, as the case may be, mitigated or, at limit, abstaining from action, by the group, the bank and its agents. The Conflicts of Interest Policy is available at novobanco 's website, in Portuguese and English, at www.novobanco.pt > Institutional > Governance > Compliance > Related-Party Transactions Policy Novobanco’s Related-Party Transactions Policy sets down rules aimed at identifying transactions concluded between novobanco and its Related Parties and at ensuring that the bank complies with s with the applicable legal and regulatory provisions, namely the Bank of Portugal's Notice no. 3/2020, the European Banking Authority (EBA) Guidelines and Articles 85 and 109 of the Legal Framework of Credit Institutions and Financial Companies. In this context, the control system implemented identifies those involved in transactions contracted with the bank, in strict compliance with the applicable legislation. The process of identification, analysis and validation is described in Internal Regulations. Certain assessments and approvals are mandatory prior to the conclusion of transactions (loan granting, placement or subscription of securities, real estate operations, acquisition or disposal of equity holdings or other contractual relationships). Specifically, proposed transactions with Related Parties must be submitted for analysis and opinion to the Compliance Department and the Risk Management function, for subsequent submission to the opinion of the Compliance Committee of the GSB (with subsequent ratification by the GSB), and for approval by the EBD and subsequent GSB ratification. ANNUAL REPORT 2022 | MANAGEMENT REPORT - 83 - The Related-Party Transactions Policy is available at novobanco's website, in Portuguese and English, at www.novobanco.pt > Institutional > Governance > Compliance During 2022, transactions were carried out with Related Parties (credit transactions, provision of services and other contracts) under which credit transactions, including extensions and renewals of limits, with persons and entities that as at 31 December 2022 were Related Parties of novobanco, were €1 105 million. Article 85 of the Legal Framework of Credit Institutions and Financial Companies stipulates that credit institutions may not grant credit, in any form or type, including the provision of guarantees, to members of their management or supervisory bodies and their relatives, or 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 favourable opinions on two credit transactions allowed under said paragraph 8 of Article 85, which subsequently received a favourable opinion and the approval of the Compliance Committee of the GSB, the approval of the EBD and the ratification of the GSB. In addition, under Article 109 of the Legal Framework of 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 2022 novobanco did not conclude any credit transactions with qualifying shareholders, under said legal rule. > Whistleblowing Policy novobanco remains strongly committed to the growing internalisation of a culture of compliance, namely entailing the reporting of undue or irregular behaviours or behaviours that go against the law, the regulations, good practices, and the bank's internal policies. The Whistleblowing Policy regulates, through specific, independent and autonomous means, 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. This Policy also aims to ensure compliance with the provisions of the Legal Framework of Credit Institutions and Financial Companies, Bank of Portugal Notice No. 3/2020, the Securities Code, and Law No. 83/2017 of 18 August establishing measures to combat money laundering and terrorist financing (the "LBCFT"). Whistleblowing reports may also be submitted through the following channels, at the choice of the whistleblower: a) By letter to the Compliance Officer, address Avenida da Liberdade, 195, 10º andar, 1250-142 Lisboa; b) Through the Form available at www.novobanco.pt or, alternatively, if the whistleblower is a novobanco employee, through ‘Somos novobanco’ (intranet); ou c) By e-mail to: irregularidades@novobanco.pt At the end of the current financial year, a new irregularity communication channel was implemented where it is possible to communicate irregularities in a safe and anonymous way, thus providing an alternative to the current channels. Whistleblowing reports may also be submitted verbally. The whistleblower who makes his/her report in written form may freely chose to do it anonymously, or else to sign it / identify him/herself, in which case he/she may request that his/her anonymity be maintained. The Compliance Department is the structural unit that, in coordination with the Compliance Committee of the GSB, is responsible for monitoring the implementation of this Policy and for ensuring that the procedure for analysing and handling whistleblowing reports is properly implemented and that the measures deemed appropriate are effectively adopted. ANNUAL REPORT 2022 | MANAGEMENT REPORT - 84 - In 2022, two reports of irregularities were received which, following enquiries, proved to be unfounded. The General and Supervisory Board is responsible for managing the irregularities communication system, ensuring the confidentiality of communications. The Whistleblowing Policy www.novobanco.pt > Institutional > Governance > Compliance is available at novobanco's website, in Portuguese and English, at > 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 organisations and public and private entities. The Anti-Bribery and Anti-Corruption Policy approved by the Compliance Committee of the GSB, and by the EBD aims to prevent and mitigate the risk of corruption and bribery, and related practices, reaffirming novobanco's commitment to building up integrity in society. The Anti-Bribery and Anti-Corruption Policy is available at novobanco's website, in Portuguese and English, at www.novobanco.pt > Institutional > Governance > Compliance > Policies on the Prevention of Money Laundering and Terrorist Financing A bank's ability to detect and prevent activities capable of constituting money laundering and terrorist financing is directly linked to the knowledge, by banks, of certain elements about their counterparties and respective transactions. The novobanco 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 and the Group being used as vehicles for money laundering or terrorist financing activities, such risks materialising to a significant extent within the financial system. Aware of the challenge that this control and preventive action represents, the novobanco Group maintains the ongoing reassessment of the risks it incurs, by virtue of its business, operations and the geographies where it operates, endeavouring to identify weaknesses and areas of greater exposure, in order to ensure it has in place adequate methods of control and mitigation of money laundering or terrorist financing risks. The ability to prevent and, if possible, detect 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 in an existing contract, through what is known as KYC (Know Your Customer) - i.e., the identification of contract parties, representatives and beneficial owners 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. • Analysis of counterparties risk in investment and divestment transactions, and of transaction and source of funds circuits, under the terms of the Law. To that end, novobanco Group, using software tools with internationally recognised 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. novobanco 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, members of the management and supervisory bodies). 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 2022, novobanco maintained the training on money laundering and terrorism financing prevention, having provided 11 532.5 hours of online training (including 1 283 hours for senior management). ANNUAL REPORT 2022 | MANAGEMENT REPORT - 85 - 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 crucial for the purpose of the adequate fulfilment of the legal and regulatory duties to which the bank is subject. 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 operational and strategic attention by the novobanco Group. In 2022 the novobanco Group examined 10 745 new contracts, of which 185 were rejected. In addition, 1 860 other contracts were analysed, upon which their ownership was changed. It also analysed 15 375 transactions under existing contracts, of which 616 were reported to the competent authorities. The bank's Policies on the Management of the Risk of money laundering and terrorist financing are available at novobanco's website, in Portuguese and English, at www.novobanco.pt > Institutional > Governance > Compliance > Policies on Investor Protection and Market Transparency The Markets in Financial Instruments Directive, 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. In addition, the national legislation on financial intermediation activities (in particular the Securities Code) and life insurance mediation activity (in particular Law 7/2019 of 16 January) constitutes the basic framework for fair and transparent action by financial market operators and, as such, for the novobanco Group. To address the international trend towards a tightening of the duties of financial intermediaries - of transparency, legality, completeness of information, diligence and protection of investors -, as well as changes in the rules for marketing financial instruments, novobanco has adopted the best practices in terms of the governance of products and services, ensuring the prior assessment and subsequent monitoring of its offer, with the Compliance Department having extended responsibilities in this area. In compliance with the legal framework, novobanco has approved its standards and policies, and discloses them in a dedicated area of its website, at www.novobanco.pt > Produtos > Poupança e Investimento > Informação ao Investidor. The most salient aspects of these standards and policies are summarised below: Recording and register of communications. novobanco 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. novobanco 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, novobanco asks its Customers and potential Customers to complete investor profile questionnaires, in order to obtain a more comprehensive and detailed image of, inter alia, their experience and knowledge of investment, their financial situation, their investment objectives (including capacity to withstand losses) and their risk tolerance. This sharing of information and knowledge permits to assess whether a given investment product or service is adequate to the specific situation of the investing client. Safeguard of Customer Assets. The Securities Code sets forth that in all acts performed, as well as in accounting and transactions 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 reorganisation 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 utilise, for its own or a third party’s benefit, the clients’ financial ANNUAL REPORT 2022 | MANAGEMENT REPORT - 86 - instruments or exercise the rights inherent thereto, unless the holders have agreed thereto. novobanco has in place procedures that ensure compliance with these rules. Offer screening process. novobanco 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 products and services offers, and the monitoring of the existing offer. > Remuneration Policies for the Management and Supervisory Bodies and Staff Members Under the terms and for the purposes of RGICSF, Bank of Portugal Notice no. 3/2020, and in compliance with the disclosure duties related to the remuneration policies provided therein, the Remuneration Committee shall undertake an annual review and assessment of the implementation of the remuneration policies and procedures. A report prepared by the Remuneration Committee regarding the annual review and assessment of the implementation of the remuneration policy for the Management and Supervisory Bodies and for the Staff Members is to be submitted to the GSB, to the General Shareholders’ Meeting of novobanco and to the EBD, which shall implement any identified measures to correct possible deficiencies that may be included in such annual review. Prior to the closing of the 2022 accounts, the Remuneration Committee has made such evaluation of the remuneration policies and procedures, with no deficiencies identifed. Also, an assessment and review of the remuneration policies for the Management and Supervisory Bodies and for Staff Members of novobanco has been made by several departments (Human Capital, Legal, Compliance and Risk), to ensure alignment of procedures and practices and also to reflect changes in legislation. In particular, the following was reflected in the Remuneration Policies (as applicable): • Variable Remuneration Deferral Period for Identified Staff and Board Members: updated to 5 years since novobanco is considered a significant institution for regulatory purposes; • Weight of Deferred Variable Remuneration for Identified Staff: introduction of a maximum of 60% upfront in the year of the award and defer 40% over the next 4 years (10% each year). The upfront amount shall consider the defined retention period regarding the Remuneration Units portion; • Weight of Deferred Variable Remuneration for Board Members: introduction of a maximum of 50% upfront in the year of the award and defer 50% over the next 4 years (12,5% each year); • Introduction of deferral exclusion conditions for Identified Staff when the total annual award is less than 50,000 € and it does not represent more than 1/3 of total annual remuneration for that employee; The Remuneration Policies have been prepared in accordance with the legislation in force on that date, and in particular with the RGICSF, Notice no. 3/2020, the EBA Guidelines 2021/04 relating to sound remuneration policies, and related legislation and reflect the objectives, strategy, structure and culture of the Bank, steered by principles of meritocracy and transparency. The Remuneration Committee considers that the Remuneration Policies are adequate to the current situation of novobanco and that the incentives defined for the members of the Executive Board of Directors and for the different categories of employees, as well as the structure of those incentives, are aligned to 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 structures, namely the Remuneration Committee, the Risk Committee of the GSB, 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. i) Limits to remuneration in novobanco Following the sale process of novobanco, and in the context of the State aid 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, whose termination is currently being reviewed by the European Commission and is pending confirmation (hereinafter the “Restructuring Period”). ANNUAL REPORT 2022 | MANAGEMENT REPORT - 87 - This situation entailed certain limitations to the remuneration of the members of the Management and Supervisory Bodies and to Employees of novobanco. These limitations will no longer be applicable upon the end of the Restructuring Period, without any review of the Remuneration Policies being required. Deferred amounts that were created as a result of this remuneration cap will then be due for payment. 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 GSB, and this Committee is also responsible for, among others: • Decide on the remuneration to be attributed to the members of the EBD, as well as their KPIs, and define and approve the budget for the total variable remuneration of employees, based, among other factors, on the operating results in 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 GSB shall receive remuneration from novobanco, approved by the General Shareholders’ Meeting, such remuneration being fixed only and paid 12 times per year. If applicable, the members of the GSB were also subject to the limitations referred to in i) above. Executive Board of Directors. The remuneration of the EBD 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 the remuneration is awarded on a discretionary basis, according to individual and collective performance assessment that takes into account quantitative and qualitative criteria. These criteria are set by the Remuneration Committee and informed in due time to the members of the EBD. The following criteria are also considered in the process of attribution of variable remuneration: • • • • • It may only be attributed if it does not jeopardise the Bank's ability to maintain a solid own funds base, if the Bank has achieved positive operating results, and if its attribution is consistent with sound and effective risk management practices; It is subject to a maximum cap of 100% of the annual fixed remuneration, or as otherwise approved by the General Shareholders’ Meeting; It is phased over a multi-year framework, being deferred over a period of five years from the reference year with 50% paid upfront in the first year and 12.5% in the following four. During the Restructuring Period, the amounts awarded relating to years 2019, 2020 and 2021 were 100% deferred and will only become a vested right and, consequently, will only be paid, at the end of that period and under the terms defined in the respective Policy. 50% of the Variable Remuneration awarded shall take the form of Remuneration Units, whose terms and conditions regarding the award, vesting and payment are defined in the Remuneration Units Regulation. The value of each Remuneration Unit is determined by the Remuneration Committee, according to financial indicators of the Bank, prior to settlement of any deferred amount. Any possible severances must be determined by Remuneration Committee. Besides any commitment agreed in the hiring process under the form of a sign-on bonus, no other Variable Remuneration shall be guaranteed in any way. All Variable Remuneration amounts paid or deferred, regardless of whether they constitute vested rights, are subject to risk-based adjustments, Clawback and/or Malus, including those that are deferred as a result of the application of the limits established in point i) (Limitations on remuneration at novobanco). In what concerns other benefits, such as Health Insurance or Mobile Phone, the internal policies defined for the purpose shall apply. ANNUAL REPORT 2022 | MANAGEMENT REPORT - 88 - iii) Description of the Remuneration Policy to 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. Identified Staff Selection of employees. The Bank's Employee Remuneration Policy includes specific chapters applicable to employees who have or may have a significant impact on novobanco's risk profile - classified as Identified Staff, as set forth in the Policy. The list of Identified Staff is reported annually to the Bank of Portugal, under Bank of Portugal Instruction no.18/2020. Components of Remuneration. The Fixed Remuneration shall reflect the skills, experience and responsibility inherent to the function performed, and shall not depend on performance. The attribution of Variable Remuneration to the Identified Staff, as well as its annual amount, depends on the decision of the Remuneration Committee and of the EBD. When a Variable Remuneration exists, it is calculated based on individual and collective performance, taking into account the following principles: • • • • • • • • • • Performance must be assessed according to quantitative and qualitative criteria and through 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 Staff. novobanco Policy defines that Variable Remuneration shall be deferred over a period of 5 years from reference year, with 60% paid upfront in the first year and 10% in the following four; Identified Staff Variable Remuneration shall be excluded from deferral, when total annual award is less than 50,000 € and it does not represent more than 1/3 of total annual remuneration for that employee; All Variable Remuneration amounts paid or deferred are subject to risk adjustment mechanisms (Malus and Clawback), as described in the Remuneration Policy; The amount attributed is limited to 100% of the annual Fixed Remuneration or as otherwise approved by the General Meeting; 50% of the Variable Remuneration awarded shall take the form of Remuneration Units, whose terms and conditions regarding the award, vesting and payment are defined in the Remuneration Units Regulation. The value of each Remuneration Unit is determined by the Remuneration Committee, according to financial indicators of the Bank, prior to settlement of any deferred amount. Variable remuneration, in the form of a sign-on bonus, can only be guaranteed in the first year of hiring. Retention Plans can be setup to Identified Staff and they might result in a Variable Remuneration award higher than 100% of annual Fixed Remuneration, with the exception detailed in a specific internal regulation that was approved in a General Meeting of shareholders. Besides any commitment agreed in the hiring process under the form of a sign-on bonus or possible compensation for retention under a retention plan, no other Variable Remuneration shall be guaranteed in any way. All Variable Remuneration amounts paid or deferred, regardless of whether they constitute vested rights, are subject to risk-based adjustments, Clawback and/or Malus, including those that are deferred as a result of the application of the limits established in point i) (Limitations on remuneration at novobanco). iv) Disclosure of Remuneration Refer to point 5.6 Remuneration of the Members of the Corporate Bodies and Identified Staff. ANNUAL REPORT 2022 | MANAGEMENT REPORT - 89 - > Policy for Selection and Assessment of the Management and Supervisory Bodies and Key Function Holders Novobanco has in place a Policy for Selection and Assessment of the Management and Supervisory Bodies and Key Function Holders (the “Policy”), thus ensuring compliance with the legal and regulatory framework in force and the implementation of the required governance standards for Significant Financial Institutions. The Policy was approved by the Nomination Committee, the EBD, the GSB, and the General Shareholders’ Meeting. The Policy aims 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, branch general managers and other managers identified by the Bank as having risk-taking functions, currently the heads of Treasury and Marketing) 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; (iii) Independence; iv) Availability; and v) Collective Suitability. > Policy for the Selection and Evaluation of Novo Banco’ Statutory Auditor and the Contracting of Non- prohibited Non-audit services. Novobanco revised in 2021 its Policy for the Selection and Evaluation of novobanco' Statutory Auditor and for the contracting of non-prohibited non-audit services, in compliance of the applicable regulations. This Policy was approved by the Financial Affairs (Audit) Committee of the GSB, by the GSB and by novobanco’s General Shareholders’ Meeting. This Policy applies to the selection, designation and assessment of the Statutory Auditor and aims to ensure that the Statutory Auditor fulfils the necessary requirements of suitability (“fit and proper”), professional experience, independence and availability, taking into account the nature, dimension and complexity of novobanco’ activity and the responsibilities inherent to the specific tasks to be performed. To achieve its purpose, the Policy defines the evaluation criteria, stipulates an obligation to monitor the Statutory Auditor's activity and establishes the internal responsibilities and the procedures that must be followed. In addition, the Policy defines the criteria and procedures to apply in case non-audit services are contracted with the Statutory Auditor and defines the ones which are allowed and the ones which are prohibited. In 2022, under this policy, the novobanco' Statutory Auditor was assessed for the year 2021. 5.5 Credit to Members of the Corporate Bodies At 31 December 2022 the outstanding amount of loans to persons and entities falling under the provisions of art. 85 of the Legal Framework of Credit Institutions and Financial Companies is presented below: Name Position Amount (in euros) Members of the Corporate Bodies in office at 31 December 2022 Executive Board of Directors Luís Miguel Alves Ribeiro Member of the Executive Board of Directors € 140 888.43 Closely related persons € 126 491.72 Carlos Jorge Ferreira Brandão Member of the Executive Board of Directors € 83 507.63 General and Supervisory Board Carla Alexandra Severino Antunes da Silva Member of the General and Supervisory Board Closely related persons ANNUAL REPORT 2022 | MANAGEMENT REPORT € 323 188.42 - 90 - Entity where a member of the Executive Board of Directors holds a management position APB – Associação Portuguesa de Bancos LOCARENT - Companhia Portuguesa Aluguer Viaturas S.A. NOVO BANCO dos AÇORES SIBS - SGPS SA UNICRE - Instituição Financeira de Crédito SA € 275.43 € 139 187 534.82 € 12 294 560.00 € 10 625 000.00 € 38 050 000.00 The amounts of loans to members of the Corporate Bodies in office on 31 December 2022 refer to mortgage loans, except for the loan to Carlos Jorge Ferreira Brandão, which is a personal loan made prior to his appointment, and the amount outstanding of loans to persons closely related to the member of the GSB, which consists corporate loans. Any existing credit card balances are not considered, providing they are payable at 100% and do not exceed the gross monthly salary. The amounts of credit to the Entity where a member of the EBD holds a management position refer to corporate loans and bank guarantees, also including the subscription of senior (non-preferred) debt securities issued by novobanco dos Açores. For the disclosure purposes of Art. 109 (7) of the RGICSF, on 31 December 2022 there were no outstanding loans to direct or indirect holders of qualified holdings. 5.6 Remuneration of the Members of the Corporate Bodies and Identified Staff i) Corporate Bodies (1) Additionally, an expat allowance of 142.835€ was granted, of which 102.000€ was paid in 2022. As previously agreed with the Monitoring Trustee, appointed by DG Comp, this amount was not considered a component of the total remuneration for the purpose of the remuneration limitations. (2) Member of the EBD since 25 August 2022. In addition to the fixed remuneration in the table above, a sign-on bonus of 80,000€ was paid. (3) Member of the EBD until 1st August 2022. From August 2022, this EBD member entered into a consultancy agreement for a period of one year, which can be extended by mutual consent. (4) Member of the EBD between 25 August and 30 December 2022. In addition to the fixed remuneration in the table above, a sign-on bonus of 180,000€ was awarded (of which 90,000€ was paid in year 2022) and allowances in the total amount of 82,626€ were paid in 2022. In 2022, there were no amounts paid to the members of the Corporate Bodies of novobanco by other group companies. ANNUAL REPORT 2022 | MANAGEMENT REPORT - 91 - RoleTotal Paid and DeferredPaidSalaryOther post-EBD benefitsDeferredExecutive Board of Directors1 914 0651 736 0771 733 6792 398177 988Mark Georges Bourke (1)CEO495 000387 118387 1180107 882Rui Miguel Dias Ribeiro FontesMember EBD321 199321 199320 0001 1990Luis Miguel Alves RibeiroMember EBD321 199321 199320 0001 1990Luisa Marta Santos Soares da Silva Amaro de MatosMember EBD320 000320 000320 00000Carlos Jorge Ferreira Brandão (2)Member EBD106 66736 56136 561070 106Andres Baltar Gracia Member EBD350 000350 000350 00000General Supervisory Board1 155 0001 117 1181 117 118037 882Byron James Macbean HaynesChairman GSB425 000387 118387 118037 882Karl - Gerhard EickVice-Chairman GSB300 000300 000300 00000Benjamin Friedrich DickgiesserMember GSB00000Kambiz NourbakhshMember GSB00000Donald John QuintinMember GSB00000John Ryan HerbertMember GSB95 00095 00095 00000Robert Alan ShermanMember GSB95 00095 00095 00000Mark Andrew CokerMember GSB00000Carla Alexandra Severino Antunes da SilvaMember GSB75 00075 00075 00000Willian Henry NewtonMember GSB165 000165 000165 00000Resign from EBD mandate during 2022António Manuel Palma Ramalho (3)Former CEO244 861225 680225 680019 181Leight James Bartlett (4)Former Member EBD166 792166 792166 732600Total 2022Fixed RemunerationFor year 2022, regarding Variable Remuneration, there was a conditional award, of 1.931 thousand € to the members of the EBD (including members who resigned during the reference year), subject to the verification of several conditions. This award was based on individual and collective performance of each member, which was assessed by the Remuneration Committee. This award did not create any vesting rights, no payment to the members was made and is subject to the verification of the conditions defined in the Remuneration Policy. Additionally, this award was fully deferred and there shall be no payments until after the end of the Restructuring Period. 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 Claw back. According to the Remuneration Policy, Variable Remuneration award 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 award is 1 (one) Euro 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 award. The 2022 Variable Remuneration awarded 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 received or when payments will be made. > 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 In 2022, two Members of the EBD left the Bank prior of the expiration of their mandates and a total of 460,000€ is due to be paid in 2023. > Plans for the attribution of shares or stock options Nothing to report. ii) Identified Staff Following the annual self-assessment procedure stated in the Remuneration Policy, the Identified Staff list was updated by the Executive Board of Directors and reviewed and approved by the Remuneration Committee. A group of 47 employees was classified as Identified Staff and the table below indicates their Fixed and Variable Remuneration awarded for 2022, of which 50% is awarded in cash and 50% in remuneration units. The 2022 Variable Remuneration will be paid and subject to deferral in accordance with the Remuneration Policy, as amended in 2023. These amounts may be subject to future adjustments in accordance with the conditions set out in the Remuneration Policy. Regarding the deferral exception introduced in the Remuneration Policy for Staff following latest changes to RGICSF, it applies to a total of 18 members of the Identified Staff that have an individual variable remuneration award lower than 50,000€ and it represents less than 1/3 of their total annual remuneration. (1) In 2022, regarding Variable Remuneration, the following was paid to Identified Staff Members: 1/3 of 2019 Bonus (714.122€), 1/3 of 2020 Bonus (807.225€) and 1/3 of 2021 Bonus (729.151€). ANNUAL REPORT 2022 | MANAGEMENT REPORT - 92 - Total Paid and awardedPaidSalaryOther post-employment benefitsIdentified Staff479 765 2696 323 9316 291 15632 7753 441 338Commercial81 427 998939 656933 0236 634488 342Control Functions3780 551491 466489 6091 857289 085Suport367 556 7204 892 8094 868 52424 2852 663 911Total 2022 (1)Remuneração FixaVariable Remuneration awarded2022 (2) (3)# Employees (2) The 2022 Variable Remuneration is going to be paid and deferred according to Remuneration Policy. At the date of this report, the amounts presented above are still subject to adjustments and approval. (3) Additionally, following the approval in the General Shareholder’s Meeting, the Shapping the Future retention program was implemented. Six members of Identified Staff have been selected for this program and a total 942.630€ was awarded. According to the applicable regulation these amounts shall be paid in 2025 if these members are still in the Bank at that time. During 2022, three Identified Staff members left the Bank and the severances were agreed in a total amount of 648.756€. 5.7 Securities Held by Members of the Management and Supervisory Bodies As of 31 December 2022, and with regard to fiscal year of 2022, the members of the management and supervisory bodies of novobanco did not hold any securities issued by novobanco or by companies in a control or group relationship with novobanco. Additionally, no acquisitions, disposals or transmissions of securities issued by novobanco or by companies in a control or group relationship with novobanco were carried out in this period by the members of the management and supervisory bodies. 5.8 Non-Material Indirect Investment in Novo Banco All current members of the EBD and certain members of the GSB acquired, using their own resources, holdings in an indirect investment structure in novobanco, which had been set up (and is controlled) by LSF Nani GP, LLP, which owns indirectly a 75% interest in novobanco. This indirect investment represents a shareholding of substantially less than 1% in novobanco and has no financial impact on the Bank, or in the exercise of the functions, suitability and independence of the aforesaid members, taking into account the reduced weight of the investment on the share capital’s percentage, and also for each individual. Non-material indirect investments in Novobanco have been disclosed in previous novobanco’s annual financial statements and were reported to the relevant supervisory authorities and internal control bodies. In addition, certain staff members also had the opportunity to make a non-material indirect investment in novobanco using their own resources, under the same terms as the above. ANNUAL REPORT 2022 | MANAGEMENT REPORT - 93 - Le Pianiste, 1950– Vieira da Silva Mixed technique on card 49 x 37cm In "Le Pianiste", the interior space organized into multiple structures closely linked by color (brown, black, gray, beige and white tones, with small touches of blue) creates an intimate atmosphere of concentration between the pianist and his piano. CHAVES, Museu de Arte Contemporânea Nadir Afonso 6 CONSOLIDATED FINANCIAL STATEMENTS AND FINAL NOTES 6.1 Consolidated Financial Statements ANNUAL REPORT 2022 | MANAGEMENT REPORT - 95 - thousands of Euros31.12.202231.12.2021Interest Income 834 679 740 459 Interest Expenses( 209 204)( 167 065)Net Interest Income 625 475 573 394 Dividend income 5 035 11 096 Fees and commissions income 337 335 325 511 Fees and commissions expenses( 47 155)( 47 357)Gains or losses on derecognition of financial assets and liabilities not measured at fair value through profit or loss( 88 255)( 5 123)Gains or losses on financial assets and liabilities held for trading 149 212 50 896 Gains or losses on financial assets mandatorily at fair value through profit or loss( 40 493) 46 697 Gains or losses on financial assets and liabilities designated at fair value through profit and loss 116 21 Gains or losses from hedge accounting( 1 713) 14 195 Exchange differences 6 789 10 805 Gains or losses on derecognition of non-financial assets 83 289 7 551 Other operating income 214 005 163 875 Other operating expenses( 118 357)( 181 604)Operating Income 1 125 283 969 957 Administrative expenses( 395 870)( 374 359)Staff expenses( 233 707)( 233 261)Other administrative expenses( 162 163)( 141 098)Cash contributions to resolution funds and deposit guarantee schemes( 41 155)( 40 535)Depreciation( 52 493)( 34 004)Provisions or reversal of provisions( 39 245)( 127 835)Commitments and guarantees given 2 685 9 840 Other provisions( 41 930)( 137 675)Impairment or reversal of impairment on financial assets not measured at fair value through profit or loss( 101 882)( 198 903)Impairment or reversal of impairment of investment in subsidiaries, joint ventures and associates 21 546 315 Impairment or reversal of impairment on non-financial assets 8 375 ( 26 314)Profit or loss before tax from continuing operations 532 913 172 116 Tax expense or income related to profit or loss from continuing operations 53 301 15 186 Current tax( 10 048)( 12 737)Deferred tax 63 349 27 923 Profit or loss after tax from continuing operations 586 214 187 302 Profit or loss from discontinued operations( 270) 4 887 Profit or loss for the period 585 944 192 189 Attributable to Shareholders of the parent 560 842 184 504 Attributable to non-controlling interests 25 102 7 685 585 944 192 189 NOVO BANCO, S.A.CONSOLIDATED INCOME STATEMENT AS AT 31 DECEMBER 2022 AND 2021ANNUAL REPORT 2022 | MANAGEMENT REPORT - 96 - thousands of Euros31.12.202231.12.2021ASSETSCash, cash balances at central banks and other demand deposits6 599 0785 871 538Financial assets held for trading 171 810 377 664Financial assets mandatorily at fair value through profit or loss 313 702 799 592Financial assets designated at fair value through profit or loss 13-Financial assets at fair value through other comprehensive income2 331 0997 220 996Financial assets at amortised cost32 777 69326 039 902Securities8 183 2092 338 697Loans and advances to banks 43 548 50 466Loans and advances to customers24 550 93623 650 739Derivatives – Hedge accounting 562 845 19 639Fair value changes of the hedged items in portfolio hedge of interest rate risk( 383 689) 30 661Investments in subsidiaries, joint ventures and associates 119 744 94 590Tangible assets 798 831 864 132Tangible fixed assets 299 264 238 945Investment properties 499 567 625 187Intangible assets 69 832 67 986Tax assets 956 000 779 892Current Tax Assets 32 570 35 653Deferred Tax Assets 923 430 744 239Other assets1 618 4842 442 550Non-current assets and disposal groups classified as held for sale 59 587 9 373Total Assets45 995 02944 618 515LIABILITIESFinancial liabilities held for trading 99 386 306 054Financial liabilities measured at amortised cost40 987 17740 215 994Deposits from central banks and other banks9 705 15410 745 155(of which: repos)2 150 8241 529 847Due to customers29 277 85827 582 093Debt securities issued, Subordinated debt and liabilities associated to transferred assets1 628 8971 514 153Other financial liabilities 375 268 374 593Derivatives – Hedge accounting 119 578 44 460Provisions 413 432 442 834Tax liabilities 8 427 15 297Current Tax liabilities 7 582 12 262Deferred Tax liabilities 845 3 035Other liabilities 839 919 443 437Liabilities included in disposal groups classified as held for sale 15 492 968Total Liabilities42 483 41141 469 044EQUITYCapital6 304 6616 054 907Accumulated other comprehensive income(1 234 573)(1 045 489)Retained earnings(8 577 074)(8 576 860)Other reserves6 439 4186 501 374Profit or loss attributable to Shareholders of the parent 560 842 184 504Minority interests (Non-controlling interests) 18 344 31 035Total Equity3 511 6183 149 471Total Liabilities And Equity45 995 02944 618 515NOVO BANCO, S.A.CONSOLIDATED BALANCE SHEET AS AT 31 DECEMBER 2022 AND 20216.2 Separate Financial Statements ANNUAL REPORT 2022 | MANAGEMENT REPORT - 97 - thousands of Euros31.12.202231.12.2021Interest Income 838 291 748 592 Interest Expenses( 213 295)( 167 508)Net Interest Income 624 996 581 084 Dividend income 17 452 18 400 Fees and commissions income 302 126 287 013 Fees and commissions expenses( 39 816)( 40 296)Gains or losses on derecognition of financial assets and liabilities not measured at fair value through profit or loss( 88 444)( 7 234)Gains or losses on financial assets and liabilities held for trading 146 715 51 222 Gains or losses on financial assets mandatorily at fair value through profit or loss( 95 948) 42 734 Gains or losses from hedge accounting( 535) 14 896 Exchange differences 7 305 10 653 Gains or losses on derecognition of non-financial assets 82 159 ( 4 582)Other operating income 56 579 79 753 Other operating expenses( 68 778)( 141 545)Operating Income 943 811 892 098 Administrative expenses( 369 730)( 346 975)Staff expenses( 216 821)( 214 994)Other administrative expenses( 152 909)( 131 981)Cash contributions to resolution funds and deposit guarantee schemes( 40 717)( 40 172)Depreciation( 53 961)( 33 799)Provisions or reversal of provisions( 10 894)( 111 770)Commitments and guarantees given 2 555 9 900 Other provisions( 13 449)( 121 670)Impairment or reversal of impairment on financial assets not measured at fair value through profit or loss( 103 265)( 196 230)Impairment or reversal of impairment of investment in subsidiaries, joint ventures and associates 16 166 49 691 Impairment or reversal of impairment on non-financial assets 14 081 ( 12 069)Profit or loss before tax from continuing operations 395 491 200 774 Tax expense or income related to profit or loss from continuing operations 58 339 24 043 Current tax( 4 611)( 4 249)Deferred tax 62 950 28 292 Profit or loss after tax from continuing operations 453 830 224 817 Profit or loss from discontinued operations- 1 091 Profit or loss for the period 453 830 225 908 NOVO BANCO, S.A.SEPARATE INCOME STATEMENT AS AT 31 DECEMBER 2022 AND 2021ANNUAL REPORT 2022 | MANAGEMENT REPORT - 98 - thousands of Euros31.12.202231.12.2021ASSETSCash, cash balances at central banks and other demand deposits6 387 2955 674 461Financial assets held for trading 170 847 377 709Financial assets mandatorily at fair value through profit or loss1 537 6702 250 308Financial assets designated at fair value through profit or loss 13-Financial assets at fair value through other comprehensive income2 183 0347 133 508Financial assets at amortised cost31 719 48924 977 300Securities8 618 7782 893 829Loans and advances to banks 145 464 186 089Loans and advances to customers22 955 24721 897 382Derivatives – Hedge accounting 562 886 20 150Fair value changes of the hedged items in portfolio hedge of interest rate risk( 382 933) 28 787Investments in subsidiaries, joint ventures and associates 251 457 241 066Tangible assets 258 963 231 419Tangible fixed assets 258 963 231 419Intangible assets 69 640 67 515Tax assets 947 500 776 769Current Tax Assets 30 298 35 448Deferred Tax Assets 917 202 741 321Other assets1 713 1162 555 852Non-current assets and disposal groups classified as held for sale 45 071 6 601Total Assets45 464 04844 341 445LIABILITIESFinancial liabilities held for trading 99 317 305 512Financial liabilities measured at amortised cost40 904 69740 346 362Deposits from central banks and other banks10 506 50911 497 829(of which: repos)2 150 8241 529 847Due to customers28 425 22326 997 858Debt securities issued, Subordinated debt and liabilities associated to transferred assets1 601 4541 479 066Other financial liabilities 371 511 371 609Derivatives – Hedge accounting 120 612 44 460Provisions 423 190 478 170Tax liabilities 4 505 4 703Current Tax liabilities 4 505 4 703Other liabilities 844 779 362 836Total Liabilities42 397 10041 542 043EQUITYCapital6 304 6616 054 907Accumulated other comprehensive income(1 155 271)( 968 987)Retained earnings(8 577 074)(8 576 860)Other reserves6 040 8026 064 434Profit or loss attributable to Shareholders of the parent 453 830 225 908Total Equity3 066 9482 799 402Total Liabilities And Equity45 464 04844 341 445NOVO BANCO, S.A.SEPARATE BALANCE SHEET AS AT 31 DECEMBER 2022 AND 20216.3 Final Notes 6.3.1 Declaration of Conformity with the Financial Information Reported In accordance with Article 29-G of the Portuguese Securities Code (“Código dos Valores Mobiliários”), the members of the EBD of Novo Banco, S.A., named below, state that: (i) (ii) (iii) the separate and consolidated financial statements of novobanco, for the year ended on 31 December 2022 were prepared in accordance with the International Financial Reporting Standards (IFRS) as adopted in the European Union; 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 novobanco and of novobanco Group, in accordance with the referred standards; the management report describes accurately the evolution of the businesses, the performance and the financial position of novobanco and of novobanco Group in 2022 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 EBD held on 2 March 2023. 6.3.2 Proposal for the distribution of novobanco results Under the terms of article 66(5)(f) and for the purposes of article 376(1)(b), both of the Portuguese Companies Code, and pursuant to Article 29 of the Bank’s Articles of Association, the Executive Board of Directors of novobanco proposes, for approval by the General Meeting, that the net profit reported in the separate accounts for fiscal year 2022, in the amount of €453 830 131.85, be allocated as follows: €45 383 013.19 to the Legal reserve, pursuant to article 97 of the Legal Framework of Credit Institutions and Financial Companies, and €408 447 118.66 to Other reserves and retained earnings, to cover losses from previous years. 6.4 Note of Recognition 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, 2 March 2023 O Conselho de Administração Executivo Mark George Bourke Luís Miguel Alves Ribeiro Andrés Baltar Garcia Luísa Marta Santos Soares da Silva Amaro de Matos Carlos Jorge Ferreira Brandão Rui Miguel Dias Ribeiro Fontes ANNUAL REPORT 2022 | MANAGEMENT REPORT - 99 - Paysage de la Vallée des Rois VII, 1979– Nikias Skapinakis Oil on canvas 44 x 51cm In the 1980s, Nikias Skapinakis carried out a serie of pictorial research around landscapes inspired and imagined from the Valley of the Kings, in Egypt, which he visited in 1979. MIRANDELA, Museu Municipal Armindo Teixeira Lopes ANNUAL REPORT 2022 | MANAGEMENT REPORT - - 100 7 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 novobanco 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: i) Reconciliation of the Income Statement Reconciliation between the Official Consolidated Income Statement and the Management Consolidated Income Statement used by novobanco's management as a work tool in the analysis of the Group's performance: ANNUAL REPORT 2022 | MANAGEMENT REPORT - - 101 euro thousandsNet Interest IncomeFees and CommissionsMarket ResultsOther Operating ResultsStaff CostsGeneral and Administrative CostsDepreciationRestructuring funds - independent valuationCredit ImpairmentSecurities ImpaimentOther Assets and Contingencies ProvisionsResultado antes de Impostos TaxesSpecial Tax on Banks 625 475 293 323 23 963 183 583( 233 707)( 162 163)( 52 493)-( 34 535)( 67 634)( 9 037) 566 775 53 301( 34 132)Interest Income 834 679 834 679Interest Expenses( 209 204)( 209 204)Net Interest Income 625 475 Dividend income 5 035 5 035Fee and comission income 337 335 337 335Fee and comission expenses( 47 155)( 47 155)Gains or losses on derecognition of financial assets and liabilities not measured at fair value through profit or loss( 88 255)( 89 296) 1 041Gains or losses on financial assets and liabilities held for trading 149 212 149 212Gains or losses on financial assets mandatorily at fair value through profit or loss( 40 493)( 40 493)Gains or losses on financial assets and liabilities designated at fair value through profit and loss 116 116Gains or losses from hedge accounting( 1 713)( 1 713)Exchange differences 6 789 6 789Gains or losses on derecognition of non-financial assets 83 289 83 289Other operating income 214 005 3 143 1 722 209 140Other operating expenses( 118 357)( 7 409)( 76 816)( 34 132)Operating Income 1 125 283 Administrative expenses-Staff expenses( 233 707)( 233 707)Other administrative expenses( 162 163)( 162 163)Contributions to resolution funds and deposit guarantee schemes( 41 155)( 41 155)Depreciation( 52 493)( 52 493)Provisions or reversal of provisions-Commitments and guarantees given 2 685 2 685Other provisions( 41 930)( 41 930)Impairment or reversal of impairment on financial assets not measured at fair value through profit or loss( 101 882)( 34 535)( 67 634) 287Impairment or reversal of impairment of investment in subsidiaries, joint ventures and associates 21 546 21 546Impairment or reversal of impairment on non-financial assets 8 375 8 375Share of the profit or loss of investments in subsidiaries, joint ventures and associates accounted for using the equity method 8 354 8 354Profit or loss before tax from continuing operations 532 913 Tax expense or income related to profit or loss from continuing operations-Current tax( 10 048)( 10 048)Deferred tax 63 349 63 349Profit or loss after tax from continuing operations 586 214 Profit or loss from discontinued operations( 270)( 270)Profit or loss for the period 585 944 Attributable to Shareholders of the parent 560 842 Attributable to non-controlling interests 25 102 585 944 Official Income StatementManagement Income Statement ii) Alternative performance measures Information on the Alternative Performance Measures (definition, calculation method and scope). Fees and Commissions Commercial banking income Indicator of results of financial activity directly related to services provided to clients Historical financial performance indicator Indicator of the results of commercial activity most directly related to customers Historical financial performance indicator Fee and commission income less fee and commission expenses (IS): Fee and commission income and Fee and commission expenses Financial margin + Customer services Capital markets results Indicator of results of activity in the financial markets Historical financial performance indicator indicator Results from trading hedging operations, assets at fair value through other comprehensive income and at amortized cost (IS): 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 differences Other operating results Indicator of other diverse results, not directly related to activity with customers and markets Historical financial performance Banking Income Operating costs Operational result Financial activity results indicator Historical financial performance indicator Indicator of structural costs that support commercial activity and whose analysis allows to assess the trajectory of progression of costs Indicator of histoncal financial performance Indicator 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 indicator Provisions, net of replacement / Impairments Indicator of net reinforcements of impairments made in the year Historical financial performance indicator 16 IS: Income Statement Item; BS: Balance Sheet Item ANNUAL REPORT 2022 | MANAGEMENT REPORT - 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 equity method (IS): 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 method Net interest income + Fees and commissions + Capital markets results + Other operating results Personnel expenses + Other administrative expenses + Depreciation (IS): Personnel expenses, Other administrative expenses and Depreciation Banking income - Operating costs Provisions 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 + (IS): 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 - 102 Impairment or reversal of impairment of non-financial assets reversal of impairment of non- assets financial Assets eligible for rediscount transactions with the ECB Trading 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 performance n.a. n.a. Securities portfolio Indicator 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 cost Historical financial performance indicator Securities (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. (BS): Securities held for trading and Securities portfolio Customer deposits Instruction No 16/2004 of Banco de Portugal Indicator of the asset’s financing capacity Historical financial performance indicator Set of amounts entered in the following general ledges accounting items: [#400 - #34120 + #52020 + #53100] (BS): Customer resources Net financing from the ECB Customer funds Indicator that reflects the net amount that was obtained from the ECB to finance the activity Historical financial performance indicator Indicator of the asset’s financing capacity Historical financial performance indicator Difference between the amount of financing obtained from the ECB and investments in the ECB Deposits + Other customer funds + Debt securities placed on customers (BS): Applications at the ECB and Resources from the ECB (BS): Customer funds, Debt securities issued, subordinated liabilities and Liabilities associated with transferred assets Off-balance funds Indicator of off-balance sheet customer funds Historical financial performance indicator Off-balance sheet resources managed by Group companies, which include real estate and investment funds, pension funds, banking insurance, portfolio management and discretionary management Total customer funds Indicator of customer resources registered on the balance sheet and off balance sheet Historical financial performance indicator Deposits + Other customer resources + Issued bonds + Subordinated liabilities + Disintermediation resources (BS): Customer resources, Liabilities represented by securities, subordinated liabilities and Liabilities associated with transferred assets Commercial gap Indicator that measures the need / excess of financing in absolute value of the commercial area Historical financial performance indicator Difference between customer deposits and net credit (BS): Net customer loans and customer deposits 17 IS: Income Statement Item; BS: Balance Sheet Item ANNUAL REPORT 2022 | MANAGEMENT REPORT - - 103 Liquidity gap Loans to Deposit Ratio Instruction No 16/2004 of Banco de Portugal Indicator that allows assessing the need / excess liquidity accumulated up to 1 year, in each cumulative scale of residual maturity. Historical financial performance indicator Indicator of the relationship between the financing of the activity and the funds raised from customers Historical financial performance indicator Difference between [(Net assets - volatile liabilities)] Ratio between [(total credit - accumulated impairment for credit) and deposits customer] (BS): Net customer loans and customer deposits Overdue loans ratio Ratio of loans overdue for more than 90 days Non-performing loans ratio Loans quality indicator, showing the proportion of the gross loan portfolio that is in default Historical financial performance indicator Loans quality indicator, reflects the proportion of the gross loan portfolio that has been in default for more than 90 days. Historical financial performance indicator. Loans portfolio quality indicator, reflects the proportion of the gross loans portfolio including cash and deposits with credit institutions that are in a non-performing situation. Historical financial performance indicator. Forborne ratio Instruction No 32/2013 of Banco de Portugal Loans quality indicator, reflects the proportion of the gross loan portfolio that was restructured. Historical financial performance indicator. Ratio between overdue loans and total loans (BS): Overdue loans, that is, loans with installments of capital and interest in default and loans to customers, gross Ratio between loans overdue for more than 90 days and total loans (BS): 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, gross Ratio between the total balance of loans agreements with customers and cash equivalents and investments in credit 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 Ratio between forborne and total loans (BS). Loans identified as non- productive loans and Gross customer loans (BS). Loans identified as restructured due to financial difficulties of the customer and loans to customers gross Overdue loans coverage Indicator of the ability to absorb potential losses related to loans default Historical financial performance indicator. Ratio between balance sheet impairments for loans to customers and the amount of overdue loans (BS): Provisions for loans and overdue loans to customers Coverage of loans overdue for more than 90 days Indicator of the ability to absorb potential losses related to loans default for more than 90 days. Historical financial performance indicator. Ratio between balance sheet impairments for loans to customers and loans overdue for more than 90 days (BS): Provisions for loans and loans to customers overdue by more than 90 days 18 IS: Income Statement Item; BS: Balance Sheet Item ANNUAL REPORT 2022 | MANAGEMENT REPORT - - 104 Non-performing loans coverage Indicator of the capacity to absorb potential losses related to non- performing loans default. Historical financial performance indicator. Ratio between balance sheet impairments for loans to customers and non-performing loans (BS): Provisions for loans and non-performing loans Coverage of loans to customers Cost of Risk Indicator of the ability to absorb potential losses related to the customer loan portfolio. Historical financial performance indicator. Measure of the cost recognised in the year to cover the risk default in the customer loans book and corporate bonds Ratio between balance sheet loan impairments and gross loans to customers (BS): Provisions for loans and gross loans to customers Ratio between impairment charges recorded in the period for loans risk and corporate bonds, and the balance of loans to customers gross and corporate bonds portfolio (IS): Reinforcement of provisions for loans and corporate bonds, in the year (BS): Gross customer loans and corporate bonds portfolio Efficiency I Instruction No 16/2004 of Banco de Portugal Efficiency II Instruction No 16/2004 of Banco de Portugal Cost to Income Profitability Instrucao n°16/2004 do Banco de Portugal It 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 resources. Historical financial performance indicator. Expresses 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 income financial performance indicator. It 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 organization. Historical financial performance indicator. Expresses 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 performance. Ratio between staff expenses and banking income (IS): Staff expenses Ratio between [administrative expenses and depreciation] and banking income (IS): Operating costs include Staff expenses, Other administrative expenses and Depreciation Ratio between operating costs and banking income Ratio between banking income and average net assets (BS): 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 considered. 19 IS: Income Statement Item; BS: Balance Sheet Item ANNUAL REPORT 2022 | MANAGEMENT REPORT - - 105 Return on average net assets Instruction No 16/2004 of Banco de Portugal Expresses 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 performance. Ratio between profits or losses of continuing operations before taxes and average net assets. Return on average equity Instruction No 16/2004 of Banco de Portugal Expresses 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 performance. Ratio between profits or losses of continuing operations before taxes and average equity. (IS): Profit or loss from continuing operations before taxes (BS): 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 considered (IS): Profit or loss from continuing operations before taxes (BS): 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. ANNUAL REPORT 2022 | MANAGEMENT REPORT - - 106 Estudo, 2003 – José Pedro Croft Mixed media on paper 122.5 x 160cm José Pedro Croft develops a plural work, which traverses the experience of sculpture and three- dimensionality, simultaneously dealing with issues of design and its limits. REGUENGOS DE MONSARAZ, Núcleo de Arte Contemporânea de Reguengos de Monsaraz ANNUAL REPORT 2022 | MANAGEMENT REPORT - - 107 CONTENTS 1 2 ESG PERFORMANCE IN 2022 .............................................................................................................. 111 SUSTAINABILITY STRATEGY .............................................................................................................. 113 2.1 Our ESG approach ............................................................................................................................. 113 2.2 Our commitments ............................................................................................................................... 119 2.3 novobanco’s ESG journey .................................................................................................................. 121 2.4 novobanco’s partners ......................................................................................................................... 121 3 SUSTAINABLE BUSINESS .................................................................................................................... 124 3.1 Sustainability governance ................................................................................................................... 124 3.2 ESG Risks .......................................................................................................................................... 126 3.3 Clients ................................................................................................................................................. 131 3.4 Employees .......................................................................................................................................... 140 3.5 Suppliers ............................................................................................................................................. 147 3.6 Environmental Footprint ..................................................................................................................... 149 4 SUSTAINABLE ATTITUDE .................................................................................................................... 153 4.1 Shaping the future together ................................................................................................................ 154 4.2 Well-being – Financial and Social ...................................................................................................... 155 4.3 Cultural Patronage .............................................................................................................................. 158 5 ESG PERFORMANCE INDICATORS .................................................................................................... 161 5.1 Environmental Indicators .................................................................................................................... 161 5.2 Social Indicators ................................................................................................................................. 162 5.3 Governance Indicators ....................................................................................................................... 168 5.4 About this report ................................................................................................................................. 168 5.5 Methodological Notes ......................................................................................................................... 168 5.6. GRI Table ........................................................................................................................................... 171 5.7 Independent Limited Assurance Report ............................................................................................. 190 2022 ANNUAL REPORT | SUSTAINABILITY REPORT - 109 - Achilles (series "Ulysses"), 1981 - Jorge Pinheiro Acrylic on canvas, 120 cm x 187 cm Painting inspired by the Iliad and the Odyssey. It is part of a vast series, entitled Ulysses. For Jorge Pinheiro, "the fact that each work in the Ulysses series stems from a reflection on a narrative, of a literary nature, obviously contaminates the pictorial work with that same semantic message". At the time, one of the roots of his work was "the organisation of the arts according to number, proportion, and rhythm, based on the beauty of the Greek concept of art". This research path towards a reflection centred on the countless possibilities of geometry and mathematical calculations, such as the Fibonacci sequence, integrates in the inspiration process areas as diverse as philosophy, literature, or classical mythology and history. In 1982 the series "Ulysses" was part of the Portuguese representation at the São Paulo Biennial. FUNCHAL. MUDAS - Madeira Contemporary Art Museum 1 ESG PERFORMANCE IN 2022 In 2022 novobanco continued to implement its sustainability strategy, further integrating environmental, social and governance issues into the way it runs its business, with the ambition of reducing the direct and indirect impact of its activity on the environment, supporting its clients in their transition to a carbon-neutral economy and contributing to the financial and social well-being of its clients, employees and the communities it serves. Particular attention was paid to including products that support the clients on their ESG journey (both in the corporate and retail finance offering), and to evolving the models for assessing, quantifying and managing ESG risks, with a particular focus on climate and environmental risks. In its own operations, novobanco Group continued to align its activity with the objectives set out in the Paris Climate Agreement, reducing consumption and emissions of greenhouse gases (GHG). The Group supported social entrepreneurship, promoted financial, digital and sustainability literacy in the communities it serves, and developed initiatives to foster greater diversity in its team and equal opportunities, both internally and externally. novobanco incorporates sustainability and ESG criteria across the whole business. This report aims to share novobanco Group's vision and agenda regarding the main sustainability challenges in the financial sector. 2022 ANNUAL REPORT | SUSTAINABILITY REPORT - 111 - Seas (6), 2003 - Ricardo da Cruz-Filipe Acrylic on digital print on canvas, 117 cm x 177 cm In 1970, Cruz-Filipe used photosensitive canvas for the first time. This was the starting point for a body of work that confronts painting and photography as a way of seeing and expressing reality and the imaginary. On the canvas, simultaneously pictorial and photographic support, timeless spaces and atmospheres emerge, scenarios that project us to various thematic and spatial planes, like successive screens, articulated in multiple imaginaries. "Seas (6)” develops a dialogue of images which, having reality as a reference, are removed from it by the will of the painter/photographer, who rethinks and manipulates them, in an elaborate intellectual work, creating a landscaped scenography marked by the technical ambiguity between photography and painting. This gives rise to a reflection on the place of photography and the place of painting and their numerous possibilities of confrontation and representation. FUNCHAL. MUDAS - Madeira Contemporary Art Museum 2 SUSTAINABILITY STRATEGY novobanco recognizes its important role in the current context where combating climate change is an imperative and sustainability issues dominate the world agenda. This is a defining moment, and one that calls for the adoption of a structured, ambitious and effective approach to the environmental, social and governance challenges of the transition to a sustainable and low-carbon economy and of an inclusive and fair society. In this context, novobanco Group inscribed in its strategy the important goal of becoming a reference entity in ESG in Portugal, contributing to promote sustainable investment practices that accelerate the transition to a carbon-neutral economy and further the social and governance criteria that this transition requires. The alignment between novobanco's sustainability strategy and its business strategy is achieved through a set of action streams aimed at transforming the business and management model to structurally incorporate ESG issues as well as internal and external communication initiatives. Such initiatives aim at gradually integrating ESG into the group's culture and promoting sustainability literacy among customers and the community. novobanco’s strategic approach addresses ESG (Environment, Social and Governance) issues not only as risks, but also as opportunities that it incorporates into the business strategy, ensuring the evolution of the governance and risk management model and a culture of transparency in the disclosure of information. Listening to the stakeholders and defining the priorities together with them. 2.1 Our ESG approach The definition of the Group’s business strategy is intrinsically linked to a collaborative and proactive approach to all its stakeholders. novobanco’s stakeholders are all the groups or individuals that the Group affects through its activities, products and services and that, in turn, may also affect the Group's ability to achieve its objectives. Based on this definition, novobanco recognises 7 main groups of stakeholders: customers, employees, regulators, investors, suppliers, the media and the community. To build and nurture a seamless relationship with the stakeholders and integrate their concerns and expectations, the Group set in place a wide range of communication channels. 2022 ANNUAL REPORT | SUSTAINABILITY REPORT - 113 - 2022 ANNUAL REPORT | SUSTAINABILITY REPORT - 114 - In addition to recurring interactions, novobanco also regularly assesses the materiality of ESG issues through a questionnaire, relying on the strong involvement of the various stakeholders to identify ESG opportunities, risks and challenges in the management of the Group’s business. This survey allows for the analysis of the main concerns and the definition of the issues with the greatest impact on management and value creation, not only in the medium term but also in the long term. Recognising the ecosystem nature of novobanco’s business environment and activity, the materiality analysis incorporates not only a vision of the financial impacts that ESG risks may have on the Group's performance, but also the impacts that the Group’s activity may generate from an environmental and social point of view. Impacts Environment and Climate Impacts of environmental and social risks on novobanco • Direct financial impact through the materialisation of physical risks with an impact on the bank's own assets, on loan collaterals, the supply chain or its employees • Direct financial impact through the materialisation of transition risks with an impact on the financial capacity of customers, impacting the loan book and the capacity to develop future business • Direct financial impact due to the adoption of new processes and more efficient technologies in terms of consumption and energy • Direct financial impact from innovation opportunities in the bank’s offer and the support provided to the transition efforts of corporate and individual customers novobanco's impacts on the Environment and Society • Direct environmental impact resulting from the bank's own operations and supply chain • Indirect environmental impact resulting from the bank's financing and investment activity • Direct economic and environmental impact through support for investment in the transition of the Portuguese business to more community sustainable business and production models • Indirect environmental impact from promoting, through the offering of financial services and products, more and sustainable production practices that further the circular economy and the use of renewable energy sources consumption 2022 ANNUAL REPORT | SUSTAINABILITY REPORT - 115 - Social • Direct reputational impact through the materialisation of greenwashing risks upstream on the Bank's supply chain, operations and activity, or downstream, on its customers • Direct financial impact from the implementation of environmental and climate legislation and regulations • Financial and reputational impact through the Bank's performance regarding labour rights, employee benefits and Human Rights in its own operations, and upstream in the supply chain • Financial and reputational impact through the Bank's performance regarding gender equality and equal opportunities, diversity and inclusion within its own operations • Indirect environmental impact through the inclusion of ESG criteria in the selection of the bank's suppliers improving the • Economic impact in terms of job families' well- creation, being and the productive fabric through its financing activity and the provision of other financial services and products to companies and individuals resilience of thus stimulating • Direct economic through impact the preponderance of furthering national suppliers in the supply chain and domestic production and the national economy • Direct social impact from fostering more socially responsible behaviours within the supply chain through the the inclusion of ESG criteria selection of suppliers in • Direct social and economic impact from providing a straightforward financial offer and a service model that promotes financial and digital inclusion In 2023 the Group will review its materiality matrix, incorporating its stakeholders' assessment of how sustainability issues affect the performance, positioning and development of the group's business, as well as the assessment of the impact of the group's activity on the economy, people and the environment. The sustainability materiality assessment allowed novobanco to define the material issues and Sustainable Development Goals (SDGs) and to structure its ESG approach based on 3 strategic axes: 2022 ANNUAL REPORT | SUSTAINABILITY REPORT - 116 - For each of these 3 strategic axes, novobanco defined action priorities and medium-term objectives: Aware of the important role of the financial sector in sustainability, the need for its alignment with the Paris Agreement objectives, as well as of the new European directives, and in particular the Taxonomy regulation, the Bank defined as one of its strategic priorities the integration of ESG risks in its business model, with a special focus on climate and environmental risks. novobanco adopted a structured and effective approach to face the challenges arising from the transition to a sustainable and low-carbon economy. This approach responds not only to the European Union's initiatives under its action plan on sustainable finance, but also to the expectations and recommendations of regulators, supervisors and sector associations, as well as to the needs and expectations of clients and the market. In order to steer cash flows towards financing the transition and sustainable activities, in 2022 novobanco devoted particular efforts to developing methodologies for assessing and quantifying the materiality of ESG risks in its operations, from upstream to downstream, as well as methodologies for assessing ESG risks in its counterparties. These developments will allow to: • Assess the impact of the bank's portfolio and activity on the environment and climate change and define their management framework in order to reduce the environmental impact and thus contribute to the European carbon-neutrality objectives; • Assess the impact of environmental and climate risks on the Bank's activity and portfolio and define the framework to manage these risks at portfolio and individual exposure levels. The holistic and integrated incorporation of these two visions will be instrumental for: • The innovation and development of product and service offerings that better support customers, particularly corporate customers, in formulating a robust plan and making the necessary investment for energy transition and the transformation of business models; • The integration of ESG criteria in the credit decision and pricing processes; • The definition of portfolio alignment targets and the revision of risk appetite. With this positioning we want the bank’s activity to be steered by the goal of limiting the planet's temperature increase to below 2 degrees centigrade, reducing scope 1, 2 and 3 CO2 emissions. + see how in the chapter ESG Risk and Sustainable Business (ESG products in Retail, Corporates and Asset Management) 2022 ANNUAL REPORT | SUSTAINABILITY REPORT - 117 - Bearing in mind that the well-being and prosperity of the community in which we operate depends on access to simple, safe and transparent financial services that enables customers to manage their financial resources appropriately, the Bank, under the second pillar of its ESG strategy, has set to develop an intervention plan aimed at improving the population's financial literacy skills. In this context, it provides financial products and services tailored to the profile and needs of each customer, based on a fair value exchange, both for financing and savings solutions, consequently furthering social well-being. Also under the second axis of its strategic plan and integrated into its operations, the Bank wants to provide the best experience to its employees so that they can develop and fulfil their potential. To this end, it has reinforced its programmes to promote holistic well-being (physical, mental, social and financial) and to attract, develop and retain talent. novobanco also supports the most vulnerable both internally and externally, contributing to minimise the vulnerabilities that may compromise their social well-being. With this positioning and being aware that financial concerns play an important role in mental health and stress levels, novobanco aims to contribute to the health and financial well-being of its employees and customers, thus precluding significant risks in the future. + see how in the chapter Sustainable Business (employees) and Sustainable Attitude Responsible Banking involves the voluntary adoption of a business model based on environmental, social and governance (ESG) factors. Accordingly, novobanco has focused its activity under a responsible business model based on values of equity, equal opportunities and gender equality, while also furthering its sustainable performance through the inclusion of ESG criteria in the relationship with its suppliers. To ensure sustainability across its value chain - downstream and upstream - it provides specialised ESG training to all its employees. With this positioning novobanco intend to align its culture and commercial strategy by increasing sustainable practices, favouring economic activities that create prosperity and a positive impact, with the proactive collaboration of all stakeholders, thus implementing a culture of responsible banking. + see how in the chapter Sustainable Business (Sustainability Governance, employees and suppliers) 2022 ANNUAL REPORT | SUSTAINABILITY REPORT - 118 - 2.2 Our commitments As part of its ESG strategy, in 2022 both the Group and the Bank made commitments anchored in the Paris Agreement targets and the priority SDGs for the Group. novobanco Group commitments *In 2022, due to contingencies in the automotive market, highly conditioned by disruptions in the production chain, it was necessary to revise the objective of low-emission vehicles (electric and hybrid) in the Group's fleet downwards. novobanco’s Social Dividend 2024 commitments The second edition of the Social Dividend model was developed to substantiate novobanco’s sustainability strategy. This model, which integrates the three dimensions of sustainability - environmental, social and corporate governance -, both in the business model and in the social responsibility framework, is a commitment made by novobanco to giving back to society and its employees. It comprises 3 programmes, namely i) Environment, ii) Financial and Social Well-Being and iii) Responsible Banking, defined on the basis of the material issues identified by the Bank's stakeholders, with concrete objectives for 2024 and different initiatives for their achievement, allowing the monitoring of the Bank's ESG performance. 2024 novobanco standalone commitments 1. Origination of financing or own portfolio investments in companies whose main economic activity is eligible to the EU Taxonomy and origination of financing or own portfolio investments where the use of funds by the borrower or the projects are directed to economic activities eligible to the EU Taxonomy or are aimed at investments in energy transition or the transition 2022 ANNUAL REPORT | SUSTAINABILITY REPORT - 119 - of the company’s business model towards green activities; 2. Economic sectors not financed by novobanco: Weapons, Prostitution, Pornography, Coal (mining and energy production) and Illegal trade of exotic or endangered species; 3. Investment Funds, Financial Insurance and Structured Products; 4. Reduction of photocopy paper consumption thanks to the implementation of the Phygital programme in the commercial network (started in 2019) and the dematerialisation of processes in the central services; 5. Scope 1 and 2 GHG emissions; 6. Percentage of employees who benefited from at least 2 programme initiatives per year. Programme of initiatives to promote balance between personal and professional life, mental and physical health, healthy living, etc.; 7. Annual psychosocial risk assessment study of novobanco’s employee base; 8. Assessment of the level of employee engagement carried through the Pulse survey (average % of employee engagement); 9. Net Promoter Score calculated for Individual Clients - BASEF; 10. Promotion of volunteering actions in strategic areas of social impact of the bank. Each employee can take 1 day leave per year for volunteer work; 11. First line managers and Executive Board of Directors; 12. “Gender pay gap weighted by the representativeness of each Performance Function” 13. Number of organisations with active partnerships being promoted by the Bank; 14. Recurrent suppliers to novobanco Group with annual turnover above 10 thousand euros. + information in the chapter Separate Financial Statements 2022 ANNUAL REPORT | SUSTAINABILITY REPORT - 120 - 2.3 novobanco’s ESG journey 2.4 novobanco’s partners The ESG path cannot be travelled alone, and therefore in this journey collaboration with relevant partners is a priority for the execution of the sustainability strategy: 2022 ANNUAL REPORT | SUSTAINABILITY REPORT - 121 - Signatory Members Associate Subscriber Corporate citizenship initiative which had its origin, in 2000, in a proposal by the then UN Secretary-General, Kofi Annan. It is based on ten fundamental Principles, in the areas of human rights, labour practices, environmental protection and anti-corruption, and aims to promote businesses’ public and voluntary commitment to endorse these principles. Non-profit association that brings together and represents more than 90 leading companies in Portugal, which are actively committed to the transition to sustainability. for Equality Forum, created in 2013, comprises 69 Organisations organisations committed to reinforcing and highlighting their organisational culture of social responsibility, their strategies and management models, the principles of equality between women and men at work. incorporating, in Global Compact accelerator programme, which supports companies in setting ambitious targets for women's representation and leadership in senior management. The Inclusive Community Forum (ICF) is a Nova SBE initiative dedicated to the lives of people with disabilities and the promotion of a more inclusive community. Non-profit business association, which works in the areas of Social Responsibility and Sustainability. It is part of the European network of CSR Europe, a leader in sustainability and corporate responsibility, supporting industrial sectors and companies at a global the transformation and search for solutions for sustainable growth. level in Main entity representing the Portuguese banking sector, it was created in 1984 to strengthen the financial system and contribute to the development of a more solid banking sector. Portuguese Association of Investment and Pension Funds and Asset Management Firms, which represents the interests of Mutual Funds management, Real Estate Funds management, Pension Funds Management and Asset Management, viewing a more efficient defence of these activities. The Portuguese Quality Association is a non-profit organisation, founded in 1969, that aims to promote and disseminate theoretical and practical knowledge in the field of Quality and Excellence in Portugal. National Customer Satisfaction Index is a system for measuring the quality of goods and services available in the national market, through customer satisfaction surveys. Document presented by the United Nations Global Compact, which has as its main objective to achieve the transition to a low-carbon economy and to avoid the overheating of the atmosphere. Letter of Commitment to Sustainable Finance in Portugal, which aims to contribute to the promotion of sustainable investment practices. 2022 ANNUAL REPORT | SUSTAINABILITY REPORT - 122 - Abstract 2, 2003 - Paulo Quintas Influenced by the diverse plastic experiences that marked the 20th century, Paulo Quintas explored aesthetic and technical possibilities, in experimental registers with references to abstract expressionism, abstraction, or geometry and signage. "Abstract 2" is essentially experimental, with an interest for the exercise of matter and the countless technical possibilities surrounding painting and its relationship with the space of the canvas. The painter himself says: "My paintings are always unfinished objects. I prefer art that sets me off wandering rather than depicting." Oil on canvas, 120 cm x 180 cm CHAVES. Nadir Afonso Museum of Contemporary Art 3 SUSTAINABLE BUSINESS Based on the Sustainability Policy novobanco assumed a clear position and defined priorities to develop a sustainable business based on the following objectives and guiding principles: • Contribute to the transition to a low carbon economy; • Support and promote financial well-being; • Promote equity, diversity and equal opportunities; • Perform according to the highest standards of ethics, responsibility and transparency. 3.1 Sustainability governance To novobanco Group it is essential to conduct its activity with the firm purpose of having a positive contribution to the entire ecosystem within which it operates. This course of action requires a robust governance model, sustained by policies and principles of ethics and transparency that ensure effective and prudent management. novobanco Group recognises that progress in terms of sustainability requires solid governance and an organisational model that guarantees the success of its implementation, ensuring accountability, mobilisation and alignment at all levels of the organisation. Under this premise, and to ensure adequate coordination of this issue, in 2022 the Group revised its sustainability governance structure, as reflected in the following bodies: • Executive Board of Directors and front-line management - To appoint a director responsible for ESG and ensure that the Executive Board of Directors (EBD) and remaining elements of the management team have specialised knowledge on this topic, through the implementation, since 2021, of training courses adapted to the Group's strategic priorities. In 2022, a total of 875 hours of ESG training was provided to these executives. The EBD is in charge of defining and implementing the ESG strategy. • Sustainability Steering Committee - To strengthen the Steering Committee that leads the ESG and Climate and Environmental Risk discussions and initiatives, supported by a specialised team responsible for coordinating novobanco Group’s ESG approach and for assigning specific duties and responsibilities to relevant departments so that these ensure the integration of ESG in the Group's various activities. This Steering Committee meets on a monthly basis and includes the four executive directors responsible for the ESG, Risk, Credit and Corporate Segment areas. The CEO and a member of the General Supervisory Board also attend the meetings on a quarterly basis. • ESG Office - To create a structure within novobanco Group that is exclusively dedicated to ESG issues and whose mission is to promote the integration of sustainability principles in the organisation, strategy and activity of the Group, also assuming responsibility for supporting and driving the activity of the business and commercial units, as well as for supporting the ESG performance of the support, risk and internal control central units. 2022 ANNUAL REPORT | SUSTAINABILITY REPORT - 124 - The Sustainability Target Operational model, which applies to the whole Bank and involves various structures that support the execution of the Bank's ESG action plan, is essentially based on the Steering Committee which, in 2022, met 11 times to ensure the integration of ESG issues in all business lines and activities. A governance and organisation model, was also established in 2022 for the integration of the ESG topics and the management of climate and environmental, social and governance risks into the business across the whole Group, which is based on 2 principles: • • To identify all existing activities that are affected or changed by the ESG programme, as well as additional activities that are expected to be created; To formally establish an operating model leveraged on the existing structures, with roles and responsibilities allocated to the different Group structures throughout their ESG journey. 3.1.1 Our ESG policies The fulfilment of the ESG strategy and objectives defined by novobanco Group can only be achieved if the management of the business is grounded on behaviours that everyone values and believes in. Therefore, the ESG commitments are underpinned by various policies and principles that define the Group's culture and describe the principles and actions to achieve the defined purposes. novobanco Group's Sustainability Policy, published in 2022, aims to establish and develop the following commitments: • The mapping of the main ESG topics, including climate change and other topics considered relevant after scenario and materiality analysis; • The integration of sustainability and ESG issues, along with risk factors, in the Group's strategy, namely in its business model and risk management; 2022 ANNUAL REPORT | SUSTAINABILITY REPORT - 125 - • The implementation of a culture and actions that foster the transition to a sustainable economic and social development model, which promotes responsible growth, job creation, valuing people and respect for the environment, including the promotion of sustainable financing and the incorporation of environmental concerns in the supply of products and services. + Policies in the Management Report - Governance chapter and the novobanco institutional website. 3.2 ESG Risks 3.2.1 Approach to ESG risks ESG risk management is integrated in novobanco Group's global sustainability framework, which comprises the following elements: • The group-wide sustainability strategy, which sets the objectives, targets, and actions for the business areas, the internal governance, the internal control and risk management of internal activities (e.g., own operations) and for internal and external reporting. • A public positioning, materialised by the ESG policies and principles that guide the bank's activity, but also by the commitments undertaken, in which novobanco discloses its sustainability objectives and main practices, and in particular: a) reduction of direct of financed GHG emissions, in line with the global objectives of the Paris agreement; b) increased use of sustainable finance instruments, namely through the commercial offer and its own investment policies, channelling direct financial support to the 2022 ANNUAL REPORT | SUSTAINABILITY REPORT - 126 - transition of the Portuguese economy; and c) adequate management of climate transition risks, systematically identifying and controlling their main factors; • A governance and operational structure specifically adapted to this strategy, ensuring that the internal teams have the necessary expertise and approaches/work plans to ensure the fulfilment of novobanco's objectives. Developments in the ESG risk component of the risk management system address three primary objectives: • Compliance with the regulatory requirements, namely those concerning the disclosure of non-financial information on the sustainability strategy and ESG risk management, with a special focus on climate and environmental risks; • • Effective alignment with regulatory and supervisory expectations in this area, and in particular, implementation of the European Central Bank (ECB)’s Guide on climate-related and environmental risks (C&A); Implementation of enhanced procedures for ESG risk management, adjusted to the activity of the novobanco Group, in particular: a) assessment and quantification of the materiality of these risks; b) routines for global monitoring of ESG risk exposure; c) integration in the business of specific controls for ESG risk factors that guide the origination and monitoring of risk exposures - including the necessary procedures to implement the European Taxonomy for sustainable activities; and d) implementation of risk assessment practices, considering sensitivity analysis or scenarisation methodologies. 3.2.2 ESG risk profile The definition of ESG risks focuses on the potential negative impacts deriving from the current or future effects of risk factors in clients and counterparties or in the Bank's assets and liabilities. Since 2020, these risks have been part of the novobanco Group's internal taxonomy, focusing on the climate change component (and respective impacts on the traditional risk categories). The Group is currently in the process of reviewing and updating its risk taxonomy - as part of the internal risk identification and assessment exercise - with the objective of recognising and assessing the impacts of each of the following components: ▪ ▪ ▪ A climate and environment component (C&E risk): relating to the quality and functioning of the environment and natural systems, including elements relating to climate change, biodiversity, pollution, and waste management, to the extent that these elements may affect the performance or financial value of novobanco Group's counterparties, clients and assets. A social component: relating to social rights, well-being and the general interest of society and communities, including factors such as equality, health, inclusion, labour relations, health and safety at work, human capital and the development of communities. A governance component: relating to aspects of internal governance, including the management and supervisory bodies, internal organisation, remuneration policies, internal control, tax practices, conduct and transparency. Each of these components is individually recognised and assessed for its impact on the other risk categories, with the main focus being on factors with an external origin, as much as internal factors are currently recognised and controlled by established processes (examples: internal factors relating to social aspects are managed and controlled by the reputational risk management policy; internal factors relating to governance aspects are controlled by the compliance policy; and internal factors relating to physical risk are recognised and controlled by business continuity policies and practices). 3.2.3 Strategy of alignment with the Paris Agreement objectives novobanco Group recognises the business opportunities inherent to the financing of an economy with lower levels of GHG emissions while simultaneously establishing enhanced controls for the more challenging exposures in terms of transition. Accordingly, it establishes business (and risk control) objectives based on the main variables of the financing of a less carbon-intensive economy, including: 2022 ANNUAL REPORT | SUSTAINABILITY REPORT - 127 - ▪ ▪ ▪ Adoption of sectoral policies (including exclusions and minimum safeguards) for those sectors with a special impact on the fulfilment of the Paris Agreement objectives; Establishment of general objectives for new 'green' investment, which orient commercial and financial action, and are supported by the reinforcement of the structuring of 'green' or sustainability-related products (including the elements relating to guarantees or real estate collateral in the credit offer); Implementation of metrics for regular monitoring of the alignment of the Group's business portfolios, including quantification of financed GHG emissions (i.e., scope 3) and the use of estimates of alignment with the European Taxonomy for sustainable activities. In this way, novobanco Group assumes the objective of gradually aligning its balance sheet with the general objectives of reducing carbon emissions while at the same time limiting exposure to transition risk. 3.2.4. Implementation of the European Taxonomy for sustainable activities Regulation (EU) 2020/852 of the European Parliament and of the Council of 18 June 2020 (e.g., the European Taxonomy Regulation) establishes a regime for the promotion of sustainable financing, setting out the criteria for determining whether a given economic activity qualifies as environmentally sustainable. Supplementing this Regulation, the Delegated Regulation (EU) 2021/2178, of 6 July 2021, of the European Parliament and of the Council, specifies the content and presentation of the information to be disclosed by institutions subject to the European Taxonomy, as well as the methodology to comply with that disclosure obligation. In this context, the clarifications provided by the European Commission (between the end of 2021 and the end of 2022 - "FAQs"), as well as the recent notice on disclosures under Article 8 of the Taxonomy Regulation (2022/C 385/01), should also be taken into account. novobanco Group recognises the centrality of the European Taxonomy for the integration of sustainability objectives in its business and, simultaneously, for improving the assessment and management of its clients' transition risk factors. Hence the global aim of the risk management and control approaches is to ensure alignment with the Taxonomy criteria, reinforcing the alignment between internal management procedures and the prudential framework of sustainable banking activities. novobanco has been taking steps to a) assess and control the eligibility and alignment of its operations under the Taxonomy criteria; and b) implement, until the end of 2023, the operational requirements, in terms of collection, confirmation and analysis of information - with its customers - with a view to determining whether its operations are aligned with the Taxonomy. In line with the applicable requirements, and in particular with article 10 of the European Taxonomy Regulation, the novobanco Group complies with the following mandatory disclosures1: • The proportion in its total assets of exposures to Taxonomy non-eligible and Taxonomy-eligible economic activities; • The proportion in its total assets of the exposures referred to in Article 7 (1 and 2) of the Regulation; • The proportion in its total assets of the exposures referred to in Article 7(3) of the Regulation; • The qualitative information referred to in Annex XI of the Regulation. 1 According to the European Commission's clarifications (December 2021 FAQ), eligibility estimates may only be reported on a voluntary basis. Bearing in mind the timetable for implementation of the European Taxonomy, particularly with regard to the non-financial business sector, no information is yet available (e.g., prepared by novobanco's clients) to enable eligibility reporting on a factual basis. 2022 ANNUAL REPORT | SUSTAINABILITY REPORT - 128 - Quantitative disclosures under Regulation (EU) 2020/852 Requirements of Article 10 of the European Taxonomy Regulation, paragraph 2: Thousand Euros Total assets Of which the proportion of the trading portfolio and on demand inter- bank loans in total assets. Exposures to central governments, central banks and supranational issuers Exposures to derivatives Exposures to companies not subject to the Non-financial Reporting Directive Eligible Non-eligible % of total assets 40.9% 59.1% 13.1% 16.6% 100.0% 0.9% 27.0% 1.2% 29.7% Qualitative disclosures under Regulation (EU) 2020/852 Contextual information in support of the quantitative indicators The data reported in the previous section relate to consolidated financial information, collected directly from the systems of the novobanco Group with reference to 31 December 2022. With regard to eligibility reporting, this information considers: • The classification of the profiles of counterparties, transactions and collateral received, based on information collected during the account opening and loan granting and monitoring processes; • The identification of the (main) activity of each non-financial company, based on the collection of official/legal data of each company; • An internal survey2 of companies subject to non-financial reporting obligations, considering the applicable legal requirements. In line with the principles of Notice 2022/C 385/01, novobanco has launched processes to collect and check information from its corporate customers in order to obtain data on the application of the Taxonomy, in terms of both eligibility and alignment. The first full report on alignment with the Taxonomy is to be disclosed by non-financial companies during 2023 (with reference to 31.12.2022). However, in 2023, the timing of reporting disclosures does not allow novobanco to have all the information (namely public information) on alignment available for this first annual reporting cycle, albeit voluntary. This situation will be enhanced in the next reporting cycles, and the information published by each company with reference to 2022 will be considered. With regard to eligibility reporting, novobanco endeavoured to collect public information about its customers. In total, 230 of the Bank's largest customers as of 31 December 2022 were analysed, corresponding to an exposure of approximately €6.3 billion. Despite the Bank's efforts to collect public information on the eligibility of its clients’ activities, it was not possible to achieve a satisfactory share of assets covered that would allow reporting with a significant degree of reliability. Of the customers analysed, less than 15% presented complete information on the European Taxonomy in 2022 (with reference date 31 December 2021) or already in 2023 (with reference date 31 December 2022). Therefore, it can be concluded that factual information, resorting exclusively to novobanco's clients’ public disclosures, is not yet available to meet the reporting requirements on eligibility. Description of the compliance with Regulation (EU) 2020/852 in the financial undertaking’s business strategy, product design processes and engagement with clients and counterparties 2Using external databases to obtain: a) a list of companies classified as Public Interest Entities (PIE) and, as such, obliged to apply the NFRD; and b) the number of employees. In addition, the transparency reports of the main national audit firms were also analysed to confirm this information. 2022 ANNUAL REPORT | SUSTAINABILITY REPORT - 129 - As described in the previous chapters, the novobanco Group has been implementing a group-wide sustainability strategy, which comprises the operational implementation of the European Taxonomy, focusing on the following elements: • Adoption of the Taxonomy, based on estimates, to ensure regular monitoring of new production and balance sheet exposures; • Definition of operational requirements for the implementation of the Taxonomy in lending and investment processes, including: a) establishment of principles of segmentation of clients and operations, to enhance the definition of the information to be collected; b) controls to be carried out on the information provided by the clients; and c) adaptation of the information system for the collection and maintenance of the Taxonomy indicators; • Consideration of the objectives and criteria of the European Taxonomy in the design of new products and financing solutions • Definition of the operational requirements for the implementation of the Taxonomy in the loan granting and investment processes, including: a) establishment of client and operation segmentation principles, aiming at the best definition of the information to be collected; b) controls to be carried out on the information provided by clients; and c) adaptation of the information system for the collection and maintenance of the Taxonomy indicators. • Development of methodologies for the adoption of processes to assess the climate & environmental risks of the Bank's customers and counterparties, which depend on information collected from customers (in progress). This information already considers the collection of data for application of the European Taxonomy. • Application of the European Taxonomy requirements in the characterisation of the (real estate) guarantees received on loans granted. • Setting in place practises to keep track and pass on legal and regulatory changes to allow for the timely adoption of any expected developments regarding the European Taxonomy. 3.2.5 Application of the Recommendations of the Task Force on Climate-related Financial Disclosures (TCFD) In 2015, the Financial Stability Board (FSB) established the Task Force on Climate-related Financial Disclosures (TCFD) to address concerns around insufficient disclosure of climate-related risks and opportunities. In June 2017, the TCFD released its final recommendations which aim to support companies and organisations to disclose climate-related risks and opportunities effectively and clearly, promoting transparency for investors and the public. We are aware of the importance of using this approach and believe that through application of these reporting recommendations, climate information will become clearer and easier to compare and contribute to promote more sustainable business strategies. An added benefit is that we approach climate-related issues not only as risks but also as opportunities and consider these two aspects in our business strategy. This year, for the first time, we are reporting climate-related risks and opportunities in accordance with the disclosures recommended by the TCFD. The report will be publicly disclosed on the novobanco website, in a stand-alone document - 2022 TCFD Report. In the table below we briefly disclose our approach on the four TCFD core elements: governance, strategy, risk management, and metrics and targets. 2022 ANNUAL REPORT | SUSTAINABILITY REPORT - 130 - Core Elements Novobanco approach (summary) GOVERNANCE Novobanco's governance around climate-related risks and opportunities Climate-related issues are managed in accordance with its Sustainability Governance model, led directly by the Executive Board of Directors and overseen by the General and Supervisory Board. In 2021, was created the Sustainability Steering Committee, with the participation of Executive Board members and multidisciplinary teams, responsible for coordinating the ESG approach at novobanco. STRATEGY To analyse the actual and potential impacts of climate-related risks and opportunities on the business, the strategy and financial planning at novobanco novobanco develops its activities with the firm objective of making a positive contribution to the entire ecosystem in which it operates. Based on its Sustainability Policy, we assume a clear position of developing a sustainable business that wants to contribute to the transition to a low-carbon economy. To this end, novobanco has subscribed to the "Business Ambition for 1.5ºC" initiative, which aims to define scientific targets for reducing novobanco's GHG emissions. The Bank also signed the "Letter of Commitment for Sustainable Finance in Portugal", which aims to contribute to the promotion of sustainable investment practices in the country. The Sustainability Governance model allows novobanco to integrate physical and transitional climate risks into its risk management models, as well as to take advantage of opportunities associated with climate change RISK MANAGEMENT The processes used by novobanco to identify, assess and manage climate- related risks Identifying, assessing and managing climate-related risks is part of the novobanco's overall risk management framework. Novobanco is progressively incorporating environmental and climate risks into its business model to effectively meet regulatory and supervisory requirements and reduce the negative impact arising from its activity. The Risk Management framework is centralised in the Risk Management Function and is composed of the Global Risk Department and the Rating Department. METRICS & TARGETS Metrics and targets used to assess and manage relevant climate-related risks and opportunities Novobanco has developed a set of metrics and targets to track the progress of its climate strategy (e.g., carbon footprint, water and paper consumption). In line with this objective, the Bank has defined a set of commitments that incorporate novobanco's ESG strategy on climate-related issues. The Bank has endorsed the Science Based Target Initiative (SBTi) with the objective of reducing its own, as well as financed GHG emissions, and contributing to a low-carbon economy in the long-term. These metrics and progress are reported on a semi-annual basis. . 3.3 Clients In order to offer the best experience to its customers, novobanco Group's model to monitor its clients’ satisfaction is based on several pillars. The aim is to bring the customer's voice into the organisation, allowing a better insight into their needs and satisfaction throughout their life cycle, and permitting to identify opportunities for improvement. The information obtained through this consultation and monitoring model is shared with the Group's commercial structures and with the central areas, enabling a set of actions to be taken to improve the clients’ experience of the Group in its various dimensions and to design an adequate offer of products and services. 2022 ANNUAL REPORT | SUSTAINABILITY REPORT - 131 - In 2022 were collected approximately 50.8 thousand replies to the satisfaction questionnaires made to novobanco individual and corporate clients. In this consultation process, customers have several channels available to submit their complaints, which the Bank endeavours to solve upon the customer's first contact. A frank and continuous contact with this group of stakeholders requires fast and efficient replies to their comments or complaints,and helps maintain and develop a relationship of trust. At novobanco and Banco Best, the rate of complaints in 2022 was 0.39 per one thousand active clients, a significant reduction compared to 2021 that reflects the customers’ satisfaction with the service provided. In recent years clients have shown increasing preference for using the digital channel to submit their complaints, especially at Banco Best where all clients have online access. At novobanco dos Açores this rate was 0.15. 2022 ANNUAL REPORT | SUSTAINABILITY REPORT - 132 - 3.3.1 Retail Banking and products with ESG impact novobanco purpose is to create a value proposition that enables the Bank to give an adequate response to its clients. To this end the Bank constantly seeks to learn about their needs at every step of their lives, actively listening to what they have to say through the various channels available, so as to keep delivering the product and service offering that best suits their expectations. In 2022, approximately 4.9 thousand replies to the questionnaires were obtained in the Retail segment. Around 84.8% of novobanco's clients and 90.9% of novobanco dos Açores’ clients are very satisfied with the quality of the service provided to them, which is 2.2 p.p. and 1.7 p.p., respectively, less than in 2021. One of the essential pillars of novobanco's strategic positioning is to be, by design, a customer-centric bank determined to provide an increasingly better service. In line with this positioning, the Bank decided to create the Customer Experience and Satisfaction Office, whose mission is to work with the entire organisation to promote the improvement of customer service in its various dimensions. Retail continues its innovation effort, progressively developing and launching the omni-channel capabilities associated with its Contact Hub, largely based on digital transformation, whereby it seeks to provide customers with maximum convenience, in a context of trust and relationship whenever this is relevant. The opinion of more than 2.9 thousand clients about their experience in the main moments of truth in their relationship with the Bank was also collected, namely account opening, mortgage loans, and personal loans. In 2022 the customer confidence index was 78.6% at novobanco and 86.0% at novobanco dos Açores, which compares with 77.5% and 85.9% in 2021. The Net Promoter Score (an index that measures the intention to recommend the Bank) was 31 at novobanco and 57 at novobanco dos Açores, compared to 29 and 58 in the previous year. Always taking into account i) the adequacy of products and services to customer needs, which is a direct result of the consultation process carried out on a regular basis, ii) new market trends and iii) regulatory requirements, 2022 ANNUAL REPORT | SUSTAINABILITY REPORT - 133 - Channels for submission of complaints the novobanco Group has been reshaping its offer in order to strengthen it and increasingly respond to environmental, social and ethical considerations. Action guidelines for sustainable and inclusive financing and investment With the firm resolve of contributing to the promotion of sustainable investment practices in the country and accelerating the path towards a carbon-neutral economy by 2050, the Group has in place a vast offering of ESG products available to its customers, with a focus on supporting the transition to a low- carbon economy and incorporating social and governance criteria. Bank Accounts The novobanco and novobanco dos Açores service accounts are bundle accounts that combine a set of products and services that meet the day-to-day needs of our customers and are associated with socially responsible causes of a social, cultural or environmental nature 18.25 I 26.31 I 18.31 Accounts Fully carbon-neutral accounts, with a lower environmental impact due to their low carbon footprint, as they are online accounts; most of the day-to-day services are free of charge when used online, and the Bank neutralises the resulting emissions by supporting sustainable projects. The emissions produced are calculated according to the PAS 2050:2008 methodology, which takes into account the entire life cycle of products and services. To neutralise these emissions novobanco supports Parque Solar Tamil Nadu, in India, a photovoltaic solar park that replaces the power generation from coal-fired power stations. This project not only reduces carbon emissions but also contributes with social and economic benefits for local communities and sustainable development by creating 285 jobs for people from villages close to the solar park. The 18.25 and 26.31 Accounts have an estimated carbon impact of about 944g CO2eq/year. In 2022, they accounted for 12% of the total service accounts of individual and small business clients at novobanco and 15% at novobanco dos Açores. 100% and 360º Accounts - The first edition of “Contas com Gestos que Contam” ("Accounts with Gestures that Count”) ended in 2022. These service accounts of novobanco and novobanco dos Açores were associated with social responsibility causes of a social, cultural or environmental nature, through the support provided to the following projects: Semear (sow) project Social inclusion programme for young people and adults with intellectual and developmental difficulties, organised by BIPP, Associação Inclusão para a Deficiência. The programme provides certified training and development of skills for employability and professional integration in the processing and production of components. This programme minimises the limitations of these young people and adults by encouraging them to develop their full potential and become autonomous. With this project the Group enabled the professional training and employability of 14 young people with intellectual and developmental difficulties living in socio-economic need and unable to afford the in from Este Espaço que habito (This Space I inhabit) Project promoted by the Photographic Expression Movement (MEF) in 5 Educational Centres hosting 77 young compulsory people institutionalisation. The project uses photography as a technical tool and a tool to for personal expression develop, the photographed spaces, a search and discovery of the identity of these young people. This gives these youths the freedom they have always lacked - a burden of their exclusion from society -, a freedom which, according to them, is made up of spaces they never felt were made for them. Each young person used 2 rolls of film, making a total of 154 rolls and 3,850 photos. From these, only a selected the few were used preparation of the photo albums. This in Replay Developed by ZERO WASTE LAB, the project helped address the problem of used plastic toys for which there is no adequate destination. By promoting recycling and the circulation of plastic toy materials and other for new purposes, it educated and raised awareness among citizens for the problems arising from the increase in waste production. More than 8,500 toys were collected through an initial network of 44 drop-off points in 11 cities throughout mainland Portugal and more than 120 partners from all areas of society. Around 1.2 thousand toys were donated and more than 80 thousand materials were separated and given a new life through an adequate recycling process. The Replay project was distinguished by 2022 ANNUAL REPORT | SUSTAINABILITY REPORT - 134 - monthly fees to attend the Semar project. project, developed in partnership with the Ministry of Justice and the Juvenile Justice Services, drove a positive transformation in the attitude of these young people during their time of institutionalisation, working as a huge force for change. The selected photos were published in a book, displaying their images and feelings. the European Commission with a European New Bauhaus Award, in the category "Shaping a circular industrial ecosystem and supporting life-cycle thinking". allowed novobanco’s REPLAY to develop the foundations of a solution with potential for national expansion, which may finally be able to divert the more than 30 million toys that end up every year in landfills or are incinerated in Portugal. support In 2023, the 100% and 360º accounts will continue to support social, environmental and cultural causes, with the launch of the 2nd edition of the "Accounts with Gestures that Count” programme. Minimum Banking Services Account This account provides a wider coverage of financial services provision and therefore wider social inclusion. It gives clients a current account and a debit card and the possibility to use the account through ATMs in the European Union, direct channels and the Bank's branches. Its annual maintenance fee that cannot exceed the equivalent of 1% of the social support reference rate at any given time. This product is designed for: • • Individuals who hold no other current account in any other institution, or who hold only one current account which is converted into a minimum banking services account. Individuals who hold other current accounts,but wish to open a minimum banking services account where one of the holders is over 65 years old or is dependent on others. novobanco held 11,900 Minimum Banking Services Accounts. ESG financing In 2022, novobanco and novobanco dos Açores reinforced the commercial offering with environmental criteria by making available a new credit line - Personal Loan for Renewable Energies - aimed at the acquisition of equipment to produce renewable energy, such as photovoltaic panels. At a more attractive interest rate, this 2022 ANNUAL REPORT | SUSTAINABILITY REPORT - 135 - allows customers to become producers and consumers of energy from renewable sources. Besides reducing the impact on the environment, it also reduces energy consumption costs, thus contributing to improve families’ monthly budget. Individual customers also have the following loans with ESG criteria available to them: Loans with ESG criteria ECO residential mortgage loans Description Home loans with a clear environmental focus where the client can benefit from a bonus on the spread when choosing to acquire a property with A+, A and B energy certification. Personal Loan - Hybrid and Electric Vehicles Microcredit 1% bonus in the Car Credit Line strategy for the acquisition of green mobility vehicles, new or used (plug-in, hybrid electric and non-electric hybrids) This type of loan, which fosters social inclusion and self-employment, is provided in close collaboration with that promote entrepreneurship, specific training and professional reorientation, access to markets and social support. the entities on the ground Performance 2022 €18.2 m 114 Clients 1.4% of Mortgage loans production in the year €2.9 m 10.7% of Car Loans €130.1 th We closed the year 2022 with €151.2 m in loans with ESG criteria. ESG Factors in the Investment Advisory Service novobanco’s advisory service model has been enriched with new ESG and sustainability dimensions. This means that ESG and sustainability are taken into account in the identification of the financial products that best meet the preferences of each client, as expressed through the Sustainability Preferences Questionnaire. In the current state of the industry, it is already possible to find investment funds with ESG features or sustainability objectives. Therefore, customers who express their preferences in terms of standards to classify financial products that have sustainability objectives or promote environmental or social characteristics (SFDR), will always find a proposal from novobanco that suits such preferences. ECO or ESG structured products Products whose remuneration is linked to the share performance of companies that stand out for their capacity to lead social and governance change subject to environmental and social criteria. In 2022, novobanco and novobanco dos Açores made another nine ESG and ECO structured products available to their clients. The selection of companies to integrate these products is subject to a rigorous assessment process and criteria, which was further strengthened in 2021. These not only are aligned with the Bank's risk policy, but also follow industry-sector exclusion criteria (companies producing or selling tobacco, or engaged in coal mining and nuclear energy are not eligible), and criteria that dictate the exclusion of companies engaging in practices involving violations of human and labour rights, including child and/or forced labour. When manufacturing, construction, transport, tourism, agriculture and forestry, electricity, gas and oil companies are at stake, the Bank undertakes to assess their environmental and social performance, and will not include companies with: • Air pollutant activity: > 50% of turnover, or • Reduction of the share of their air polluting activity in the last 5 years by: < 5%, or • No defined environmental objectives 2022 ANNUAL REPORT | SUSTAINABILITY REPORT - 136 - Performance 2022 – novobanco • €32.7 m in ESG/ ECO products subscribed in 2022, out of a cumulative total of €193.2 m on the customers’ portfolio at the end of 2022 Performance 2022 – novobanco dos Açores • €627 th in ESG/ ECO products subscribed in 2022, out of a cumulative total of €2.7 m on the customers’ portfolio at the end of 2022 • 55.9% of the total portfolio of structured • 58.8% of the total portfolio of structured products products ESG Funds - Funds that invest in companies committed to the environment and society, and to high standards of governance. In 2022 the Group offered more than 1,100 ESG funds with investment made by its clients. The Group classifies these funds into two categories: • Article 8 SFDR (Sustainable Finance Disclosure Regulation) - funds that invest in companies that have environmental, social and governance concerns; • Article 9 SFDR - Funds that have sustainable investment as their objective, and have environmental, social and governance concerns. • Performance 2022 novobanco Banco Best Article 8 Article 9 43 funds with an investment of €399.5 m 1% of the total portfolio of distributed funds 1160 funds with an investment of €257.8 m 39.0% of the total portfolio 5 funds with an investment of €11.7 m 31.0% of the total portfolio of distributed funds 132 funds with an investment of €18.1 m 3.0% of the total portfolio novobanco dos Açores 1 fund with an investment of €61.8 th 6.0% of the total portfolio of distributed funds 27 ETF with an investment of €1.7 m - At Banco Best, the share of funds and ETFs that follow ESG criteria increased by 28% compared to the previous year (from 30.5% to 39.2% of total client investments). This was essentially due to the restructuring of the Margem Plus Account, for which the permitted collaterals are financial assets classified by the management company under articles 8 and 9. The adaptation of products to the needs of customers also involves the integration of social concerns. novobanco intends to increasingly adapt its products to the new realities of its clients. Accordingly, its saving products permit to build up a nest according to each family's budget. This positioning was at the basis of a package of Micro Saving solutions, comprising three products: Savings Planned Saving Micro Saving Description Permits to build up savings from as low as 10 euros per month through the subscription of a monthly plan in which the clients set the amount and the time of month of deposits, thus adjusting savings to the family budget. Allows any client to start saving money by small amounts through the rounding up of debits of day-to- Performance 2022 €364.1 m in savings 61.8 th subscriber clients €8.1 m 39.8 th subscriber clients 2022 ANNUAL REPORT | SUSTAINABILITY REPORT - 137 - day expenses (such as residential mortgage loan instalments or personal loan repayments, insurance premiums, or direct debits), which are transferred to a saving account. Exclusive products for clients who have installed the novobanco or Banco Best apps: once the client has defined his/her saving objectives (how much and for how long he/she wants to save) the app traces the path to reach this objective. novobanco App Targeted savings Best Bank App Targeted Savings €31.9 m 19.1 th subscriber clients €286.5 th 186 subscriber clients At novobanco, these savings products make up a total of €404.1 m and represent 2% of the total in term deposits and saving accounts (excludes saving accounts linked to service accounts). Branch network and accessibility Accessibility may be one of the main factors of social exclusion within people with motor disabilities. In our new distribution model (NDM) we restructured our branch network and installed ramps and stair lifts, whenever and as much as possible. This was undertaken under our Social Well-being Programme, to develop a set of practices aimed at building a more inclusive society. Most of our NDM branches are thus accessible to people with reduced mobility for whom digital is not an alternative or a preference. 3.3.2 Corporate Banking and products with ESG impact Creating a value proposition for the Corporate segment that is innovative, competitive and profitable, and bolsters novobanco's role as the reference bank for companies in Portugal, remains one of the Group's key priorities, and the customers’ voice gives a crucial contribution to attaining this goal. Service Quality I Commercial Banking (%) 2.0% Corporate 10.9% 87.1% 3.2% Medium Sized 7.9% 88.9% Not satisatied Satisfied Very Satisfied In 2022, corporate banking collected approximately 1.4 thousand replies to customer service satisfaction surveys. The results show that 88.9% of medium-sized corporate customers and 87.1% of large companies are very satisfied with the service, with the same value for medium-sized companies and an increase of 2.2 p.p. in large companies compared to 2021. In 2022 the customer confidence index was 78.1% for Medium-sized Companies and 76.1% for Large Companies, which compares with 77.0% and 76.1%, respectively, in 2021. The Net Promoter Score was 32.4% in 2022, which compares with 32.2% for Medium-sized Companies and 31% for Large Companies in 2021. The positive evolution of the Corporate segment's indicators shows that the Bank's performance has been meeting its needs. 2022 ANNUAL REPORT | SUSTAINABILITY REPORT - 138 - Action guidelines for sustainable and inclusive financing and investment To create a proposition with sectoral-specific value for companies, focusing on European funds programmes, that drives more investment, more innovation, more digitalisation and more sustainability, and drives an increase in productivity and competitiveness in the business community. To continue to strengthen proximity and partnership with Portuguese companies, providing investment and working capital support solutions tailored to customers' needs, continues to be our mandate. novobanco also offers the Credit Line for Decarbonisation and the Circular Economy, which aims to facilitate access to finance for the implementation of sustainable projects. This credit line is available for, among many others, investment in the replacement of existing equipment for more innovative, modern and efficient equipment, investment in renewable energy sources for self-consumption in the production process or in circular strategies for any stage of the product/service life cycle, and for the implementation of monitoring, control and action devices that optimise the conditions of use, energy consumption and raw material consumption. We were also coordinators of issuances linked to sustainability, such as the Mota-Engil Sustainability-Linked Bonds, in which novobanco acted as Joint Global Coordinator of the Mota-Engil Sustainability-Linked Bonds 2022-2027, in the amount of 70 million euros and maturity of 5 years. This was the Company's 2nd issue in the sustainable format placed in the Portuguese market, the previous one having occurred in 2021, also with novobanco acting as Joint Global Coordinator. Also in 2022, we formalised two Sonae Group Sustainability- Linked Commercial Paper Programmes totalling up to 175 million euros and maturing in 2028. novobanco has set a Green Investment target of €600 million for financing companies or investing in its own portfolio from 2022 until the end of 2024. This target is integrated in its Social Dividend model, under the Sustainable Business programme, and the objective is to promote projects that support energy transition and are aligned with the main goals of the European taxonomy. In 2022 the Bank committed €342.7 million to this target. The criteria for classification as "Green Investment" are very strict. We check if the purpose of the funding or the activities are included in the EU Taxonomy (taxonomy eligible activities), to which objectives they contribute substantially, and which criteria they have to meet, tapering more than just taxonomy eligibility. We consider for "Green Investment": • A very restricted selection of companies in 8 CAE codes, which, due to the characteristics of their main • • • activity the bank considers to be aligned with the Taxonomy; In cases of Green Project Finance operations, or Sustainability Bonds/ Loans, the purpose of the funds should be aligned with the Taxonomy; In the case of Commercial Paper and Sustainability-Linked Bonds/Loans, the bank checks if the activity is eligible, and if the loan contributes to the client's energy transition according to the taxonomy criteria; In the case of real estate financing, the property must have, or be expected to have, a level A or BREEAM excellent energy certificate, or LEED gold. 3.3.3 Asset Management and investments with ESG impact Through GNBGA, novobanco Group offers two funds with ESG criteria: • Fundo NB Momentum Sustentável, which gives unit holders access to a diversified portfolio of assets of companies that adopt the best practices in terms of ESG criteria with the purpose of achieving a consistent long-term value increase based on the three pillars of Sustainability. A minimum of 75% of the direct investment component of the Fund is invested in companies with an ESG rating from Eikon above 50 points. The Fund will invest at least 85% of its net asset value in shares and other securities 2022 ANNUAL REPORT | SUSTAINABILITY REPORT - 139 - which are convertible into shares or give the right to subscribe shares. The fund had €161.4 million in 2022. • Fundo de Pensões Aberto Multireforma Ações - Pension fund that as of December began to consider ESG criteria, having closed the year with €11.0 million. Both funds promote sustainability characteristics and are classified under Article 8 of the SFDR Regulation. On 30 December 2022, the Fundo de Investimento Mobiliário NB Momentum Sustentável represented 21.8% of all the Securities Funds domiciled in Portugal managed by GNB Gestão de Ativos. On the same date the Multireforma Equities Pension Fund accounted for 2.5% of the stock of open pension funds managed by this company. 3.4 Employees novobanco’s employees are at the core of our business strategy. The Group is aware that they are its most valuable asset. That is why developing a robust talent and merit programme is one of novobanco’s priorities, as a means of retaining and attracting the best and fostering an inclusive culture that allows employees to realise their full potential. novobanco Group firmly believes that good results come from an organisational culture that promotes and values diversity as a strategic lever for transformation, innovation and growth, fostering an inclusive environment that allows its employees to fully realise their potential. The Human Capital Agenda is therefore one of the fundamental pillars of the Bank's strategic plan which, based on solid governance policies and guiding principles, aims to respond to five major challenges: To implement its human capital strategy, novobanco strives to follow the best fair-process practices in decision- making, focusing not only on results, but also deploying a fair and reasoned process with strong engagement of the employees, in order to deliver results. novobanco thus endeavour to be aware of the needs and difficulties 2022 ANNUAL REPORT | SUSTAINABILITY REPORT - 140 - experienced by employees throughout their life cycle and to meet their expectations, so as to contribute to their full development, and allow them to fully unlock their potential and maintain their motivation. During 2022, novobanco continued to invest in its communication through live broadcast events via Teams, thus reaching a large part of the employees, at the same time and anywhere in the country. Live events provide a broad base to reach the bank's employees and communicate issues such as the bank's strategy, the presentation of periodic results, and relevant projects, where the employees have the opportunity to ask and have their questions clarified. This reinforces transparency, clarity and the bilateral nature of communication, bringing the leadership closer to all employees. Every six months novobanco conducts an Engagement Survey - one of the main tools to evaluate the organisational climate of the Bank, which had a participation rate of around 80% and a favourability rate of 55% -, as well as an Internal Customer Satisfaction Survey and a Psychosocial Risk Questionnaire. Engagement survey (%) 21% 36% 42% 19% 32% 49% 9% 33% 15% 32% 15% 27% 58% 54% 58% 9% 21% 69% 15% 30% 55% Would I stay at novobanco even if I were offered the same salary and/or benefits in any other company? Would I recommend novobanco as a good company to work for? I am proud to work at novobanco Globally, at the moment, how would you rate your level of satisfaction with novobanco? Every day I feel motivated to come to work Engagement I am motivated and available to go beyond what is expected of me, to help drive novobanco's success % Favourable % Neutral % Unfavourable At novobanco dos Açores, the employee favourability rate stood at 37% in 2022, down by 16 p.p. on the results of the survey conducted in October 2021. Notwithstanding the large investment made and still being made in this area, the results of the various initiatives that have been developed in various dimensions and will allow the employees to feel novobanco dos Açores as their second home are not yet fully visible. At Banco Best the employee favourability rate was 61%, down by 16 p.p. on the results of the survey conducted in October 2021. Attracting and retaining talent continues to be one of our major objectives. To this end we have in place a set of means and initiatives not only to capture new talent but also to retain existing talent from within the personal and professional development of all our employees, which are deployed under a 4-stage model: 1. Attracting talent - The following programmes respond to the bank's staff recruitment and rejuvenation needs while at the same time enabling young students to acquire new skills that will enrich their curriculum and expand their network of contacts: • Talent Attracts Talent - in 2022 novobanco hosted 21 young graduates, who were distributed by several departments for a 12-month professional internship. In January 2023, 8 of these 21 young people were integrated into the bank's staff. • novobanco UP Programme - a programme for young university students with the duration of one month. In the 2022 edition, between July and September, a total of 85 participants attended 2022 ANNUAL REPORT | SUSTAINABILITY REPORT - 141 - this programme, taking the opportunity to have an approach to active life and paid professional experience during the summer holidays. 2. Internal Mobility - novobanco encourages the career development of each employee throughout his or her professional path. One of the instruments to achieve this is a programme that enhances the Group’s human capital and enables its employees to embrace new challenges and opportunities for individual development and progress. In 2022, 140 employees decided to take their professional path in hand and apply to new internal challenges. Of these, 12 were given the opportunity to change their jobs. This contributed to the development of a more motivating work environment as well as to retain talent. 3. Performance Assessment - all employees’ performance is assessed through the Employee Portal (called “My Portal”), which includes a personal development programme where each employee can define their objectives in terms of continuous improvement in the performance of their functions. Performance Assessment, carried out annually, focuses on two aspects: fulfilment of objectives; o o skills and behaviour observed (general, specific and technical). It is an important tool in the alignment between the organisational strategy and the performance of each employee/team, supporting a constructive and continuous dialogue between each Employee and his or her line manager. The "My Portal" is also available on the AppRH (human resources App), a new intuitive mobile tool that facilitates and speeds up access to the employees through their smartphone. 4. Training – novobanco is attentive to the employees’ knowledge requirements at any given time and promote their continuous development, to ensure they have the necessary skill to achieve the objectives that the Group has set out to reach. The bank provides training solutions that enhance the contribution of the employees, continuing to invest consistently in the design and adoption of distinctive and motivating training, enabling the improvement of performances and the development and evolution of novobanco's employees. 3.4.1 Training The development of its employees justifies the bank’s increased investment in their continuous training. This ensures the acquisition and updating of the necessary skills to achieve the best professional performance. To ensure adequate training, in 2022 the Group invested approximately €880 thousand and provided a total of 164 thousand hours of training (40.1 hours per employee), in 4 main areas of knowledge: • Leadership Training Programme - within the scope of its Leadership Academy, novobanco invested in the development and implementation of a Leadership Programme with the duration of 50 hours, for all its 1st and 2nd Lines. This programme, designed in partnership with Nova SBE, makes a precursory approach to the reality of the Bank and its current challenges. In its construction, there was a concern to promote the alignment of key skills for a modern leadership, which integrates the knowledge and tools necessary to manage new work models, to lead diverse teams and to deal in the best way with the new challenges facing the banking sector. Through the implementation of this programme, novobanco aims to strengthen a collaborative spirit among leaders, as well as to foster the continuous development of an agile, cooperative and effective organisational culture that provides a positive work space for all. The programme combines different methodologies and practical approaches, promoting curiosity, innovation and a synergic vision of the topics discussed. • New Distribution Model - novobanco continued to invest in the transformation of its branch network, which involves not only the physical transformation of the spaces, but above all the transformation of the way we serve our customers and deliver innovative solutions for a better customer experience. In 2022, novobanco continued to train its employees on the new distribution model. • Mandatory Training - Provides the indispensable knowledge that all our professionals, each in their different jobs, must have in order to perform their functions correctly. These training initiatives mainly focused on the Markets and Financial Instruments Directive, the Insurance and Reinsurance Distribution Law, the Mortgage Credit Marketing Directive, the Prevention of Money Laundering and Terrorist Financing, Conflicts of Interest and Related Parties, the Code of Conduct, Pari & Persi (Action 2022 ANNUAL REPORT | SUSTAINABILITY REPORT - 142 - Plan for Default Risk & Out-of-Court Procedure for the Regularisation of Defaults) and Information Security. • ESG Training - In 2022, due to the strategic importance of the topic, it was decided to invest in training on ESG-related contents for all the Group's employees. This training initiative focused on the importance of this issue in the transformation of and integration of ESG criteria into business models throughout the economy, and in particular in the financial sector, which is subject to a strong regulatory framework. 3.4.2 Gender equality, equal opportunities and inclusion The topic of gender equality, equal opportunities and inclusion remains on novobanco Group's agenda as a strategic priority. We continue to consolidate the bases for long-term sustainability, taking measures to promote inclusion and equality, with a particular focus on decision-making and management positions. Gender parity is a reality at novobanco Group, with women representing 54.0% of the workforce. However, the need to reinforce the gender balance in top management remains. In 2022, the following initiatives stand out: • Maintenance of subscription of the Target Gender Equality programme – with the aim of strengthening and accelerating our journey towards gender equality in leadership. • Gender equality integrated in the Responsible Banking pillar - quarterly monitoring of gender equality • indicators with quarterly reporting to the bank's CEO. Internal Report on Gender Equality - gender-sensitive monitoring of several human capital management processes (admissions, departures, performance assessment, distribution of each functional group, professional training, promotion and career progression process, and use of benefits for reconciling personal and professional life, among others). • Active participation in the iGen Forum for Gender Equality – with the objective of promoting gender balance, this is a forum for sharing successful practices that catalyse performance in order to achieve the established goals. As an integral part of its strategy, the novobanco Group set the target of increasing the share of the under- represented gender in directorship and first-line management positions to 30% in 2024. At the end of 2022 this share was 27.5%. The share of women in management positions is 36.6%, which represents a slight increase compared to 2021. Gender Equality novobanco Group (Under-represented gender %) Under-represented gender in directorship and first-line management positions* Management staff 2022 27.5% 36.7% 2021 25.5% 36.2% *Scope Novobanco Group includes: Board of directors of novobanco and Group companies (novobanco + novobanco dos Açores Banco Best + GNBGA) + First line managers of novobanco. The novobanco Group's pay gap, adjusted for function, stands at 5.7%. The absolute pay gap is 18.6%. As part of the bank’s strategy, novobanco monitors two gender equality indicators under the social dividend model (novobanco standalone scope). 2022 ANNUAL REPORT | SUSTAINABILITY REPORT - 143 - Social Dividend I Gender Equality (%) 27.5% 26.8% 30.0% 5.9% 2021 5.7% 2022 5.0% Goal 2024 Women in senior lidership roles* Pay gap * Scope novobanco includes: Executive Board of Directors +First line managers novobanco Group's positioning in terms of Responsible Banking does not target gender equality only, but also equal opportunities, diversity, equity, respect for freedom of association, Human Rights and repudiation of forced and child labour and discrimination. The Bank complies with the legislation, rules and regulations in force and develops its activity in full compliance with its Equality and Non-Discrimination Policy and Human Rights Policy, defined based on: the United Nations Global Compact Principles; • • The Universal Declaration of Human Rights; • The Guidelines of the Organization for Economic Cooperation and Development (OECD) for Multinational Enterprises; • The Core Conventions of the International Labour Organization (ILO). The Group also includes in its staff people with a certified disability or incapacity, who account for 2.7% of the Bank/Group's workforce, corresponding to 111 employees. This is more than required under Law no. 4/2019, which establishes the employment quota system for people with disabilities. In 2022 novobanco participated in NOVA SBE's Inclusive Community Forum, which addressed the lives of people with disabilities and aimed to promote a more inclusive community, and we endorsed a commitment to Inclusion. 3.4.3 Work-life balance and internal social responsibility that novobanco believes the balance between employees' professional, personal and family life is crucial for their holistic well- being, and consequently foster motivation, productivity, satisfaction, and a relationship of commitment to the Bank. On this basis, the management of our human capital is supported by instruments that aim to enhance the employees' well-being at all levels. to The Bank offers a set of measures that, by promoting flexibility at work, improve the conciliation between employees’ work and their personal and family life. These measures are included in the Social Dividend Model, under the Social Well-being pillar. This programme is also an instrument to attract and retain talent. The 2022 ANNUAL REPORT | SUSTAINABILITY REPORT - 144 - measures for reconciling personal and professional life, initially implemented with the main focus on novobanco, have been extended to the Group's companies. The Bank supplements these initiatives with support initiatives that strengthen the employees’ sense of belonging and pride in the Group and their personal satisfaction, and allow them to save on their monthly budget. These benefits are included in the internal social responsibility programme. By the end of 2022 920.6 thousand euros were allocated to support 3,160 employees. 2022 was a particularly challenging year for families. The general rise in the prices of essential goods, and the increase in interest rates and inflation to levels not seen for a long time, affected everyone's lives. In this context and in line with novobanco's Social Well-being program, a set of support measures were made available to the employees aimed at mitigating the impacts on their family budget. • one-off €500 support for employees with gross annual income below €30,000, and €250 for employees with income above this amount (not applicable to corporate bodies and first-line management); • possibility of interested employees to: o o increase the repayment period to 75 years of age for mortgage loans under the CHPP-ACT (permanent home loan under the collective wage agreement) scheme, limited to a maximum of 45 years; transfer the permanent home loan (HPP) from the general scheme to the CHPP-ACT scheme up to a maximum of €50,000. In 2022 the criteria for the allocation of social support in 2023 was revised to allow for a fairer and more efficient allocation. In 2023, the amount of support for children and young people with disabilities or special needs will be increased; the calculation of per capita income will be redefined; and three per capita income scales will be introduced for scholarship purposes. To further its work-family conciliation goal and in line with its tradition of giving employees one day off during the Christmas season, in 2022 novobanco gave its employees 2 days off. Employees, both active and retired, also have three canteens at their disposal where they can have lunch. These canteens serve low-cost nutritionally balanced meals, with 3 to 4 options to choose from each day, each coming with a nutrient information sheet (nutrition traffic light). In addition to providing meals at a low cost, the aim is also to encourage the employees to make responsible choices in terms of healthy eating. Awareness- raising initiatives sometimes also take place in the canteen areas. 3.4.5 Looking after the Safety, Health and Well-being of our employees 2022 ANNUAL REPORT | SUSTAINABILITY REPORT - 145 - The holistic well-being (physical, psychological, emotional, social, and financial) of its employees is essential for the development and success of the Group's activity. To this end, the Group has in place a health and well- being policy based on five lines of action: As part of the management of its business, novobanco also undertakes to strengthen a culture of safety and health in the workplace so as to minimise the risks of accidents and illnesses among its employees. All employees have access to free-of-charge health services, provided in three clinical centres: in Lisbon, Porto and Oeiras. These offer a set of privileged support services and conditions to employees, at preventive and curative level. Because the Safety, Health and Well-Being of novobanco's employees is at all times one of the Bank's management priorities, the area dedicated to the topic of "Employee Well-Being and Experience", deserved special attention, with the following main initiatives having been taken: • • • Launch of the new E-Learning on Safety and Health at Work (having as main improvements: the introduction of Well-being moments throughout the course and the reconciliation of SHW concepts with the good practices and well-being programmes in place in novobanco); Inclusion of nutrition consultations in the Porto Clinical Services (3 hours per week); Increase in the number of hours of psychology consultations in all novobanco Clinical Services (to a total of 7 hours per week); Increase in the number of Employees supported with the allowance "Sickness Benefit Supplement", applicable in cases of prolonged illness; Implementation of the 5+ programme. • • The 5+ programme, launched in 2022, has 5 objectives: +physical health, +mental health, +well-being, +balance, and +happiness. Its aim is to look after and promote the well-being of the employees by providing, through a set of initiatives, well-being experiences in various dimensions: health, nutrition, physical exercise, emotional management, family and home, interpersonal relationships, personal image, culture and leisure. In 2022 ANNUAL REPORT | SUSTAINABILITY REPORT - 146 - this context, a series of initiatives such as workshops, webinars, ateliers, conversations with experts and lectures are carried out, in virtual and face-to-face format. Every month a theme and respective timetable are defined, including: 5+ measures, 5+ Talk, 5+ Experiences and commemorative dates. In this context, a series of initiatives such as workshops, webinars, ateliers, conversations with experts and lectures are carried out in virtual and face-to-face format. Training, assessments, diagnoses and screenings may also be included in the initiatives, depending on the theme of the month. Within the scope of the 5+ programme, mental health deserved special attention in 2022. Talking about mental health and sharing experiences and testimonies was the first step towards combating the stigma and prejudice that still exists in society on this subject. At the end of the year, the Bank became a founding member of Mind Alliance Portugal, a non-profit global network of leading companies in their sectors committed to putting mental health at the top of their organisations' priorities, and making the mental health of their employees a strategic priority, by raising awareness and training their leaders. Still within the scope of mental health and to guarantee an adequate response to the real needs of the employees, an assessment of Psychosocial Risks is carried out on an annual basis. The global results of this survey are subject to a careful and rigorous analysis, being used as the rationale for the definition of an action plan of measures to be implemented in this area. A summary of the overall results is shared with the heads of all the Bank's Departments, who can also contribute with mitigation proposals. The employees are at the heart of our business strategy. We are aware that they are our most valuable asset. That is why developing a robust talent and merit programme is one of our priorities, as a means of retaining and attracting the best and fostering an inclusive culture that allows employees to realise their full potential. 3.5 Suppliers novobanco Group is aware that the management of a sustainable business covers the entire value chain, with suppliers playing an essential role in its ESG journey. The Group has therefore established a set of tools that allow the relationship with this group of stakeholders to be based on environmental, social and governance criteria. As a relevant buyer of products and services in the market, the Group has put in place a relationship model with its suppliers based on a commitment to good practices and principles established at international level and on the recognition of the importance of the economic, environmental and social impacts produced by this group of stakeholders. The model is structured along two axes: • Code of conduct, which determines that the process of supplier evaluation and selection is strict and carried out in accordance with the highest standards of transparency and ethics; • The Supplier Relationship Principles, which are aligned with the OECD guidelines for multinational companies, the United Nations Global Compact, the Universal Declaration of Human Rights and the Fundamental Principles and Rights at Work of the International Labour Organisation. These principles set the minimum requirements, not only for suppliers but also for the Bank, with regard to business practices, health and safety at work, ethics and environmental management. Supplier selection principles are based on: o Fairness - equal treatment, without privileges or cronyism, and always seeking to avoid conflicts of interest; o Transparency - with adequate disclosure of information; o Quality and Efficiency as criteria for selecting the best suppliers. 2022 ANNUAL REPORT | SUSTAINABILITY REPORT - 147 - novobanco Group's suppliers are invited to subscribe to these principles, which imply the adoption of strict conduct, namely with regard to the environment, employment conditions and ethics. In this context, in 2022, the Supplier Relationship Principles were revisited and reinforced with the introduction of the novobanco Group's Sustainability Policy, in the expectation that all suppliers will follow and act in accordance with what is established in both documents. A responsible, coherent, and consistent attitude towards the selection of suppliers starts with total availability to receive all presentations from the most varied entities that intend to provide services or supply goods to the Group. To this end, the Supplier Portal (https://fornecedores.novobanco.pt/) is the place where any supplier, actual or potential, may introduce itself and register. In 2022 there were 2.9 thousand suppliers registered in the portal. In addition to providing the prime sourcing basis for market consultation processes, the database of registered entities also allows for an easier and more effective detection, assessment and comparison of the suppliers' characteristics, technical skills and commercial propositions. The quality of this information permits to select the best propositions, i.e., the suppliers best capable of meeting the Group's needs and requirements in terms of the acquisition of goods and services. The percentage of suppliers with billing above €10 thousand that had completed their registration or were in the process of registering (pre-registered) in the Portal was 95% at 31 December 2022. For a more rigorous selection of this group of Stakeholders and based on the information provided, novobanco Group calculates the “sustainability scoring”, which takes into account ethical, labour, hygiene and safety at work, and environmental aspects. In 2022, new criteria were introduced in the calculation of the "sustainability scoring", such as new certifications (ISO 45001, ISO 2700, ISO 50001) and aspects related to suppliers' Sustainability and Environmental Policies. Additionally, this scoring is now included in the technical assessment of suppliers carried out by the Group's procurement structures, and is one of the criteria/elements considered and weighted in the overall rating. On 31 December 2022, suppliers with completed registration in the Suppliers' Portal represented approximately €163 million of invoicing to novobanco Group, with the following industry sectors standing out: novobanco Group suppliers - main sectors of activity (%) IT Services Consulting and auditing Electronic payment system Communications and dispatch Conservation and repair Judicial, litigation and notary services Advertising and publications Others 17.7% of the Group's registered suppliers have a score of Excellent. The decrease compared to the previous year is explained by the introduction the of new criteria the "sustainability assessment stricter and more robust. However, cumulatively, around 84% of suppliers have a positive score, maintaining their score of 2021. the calculation of score", which made in Sustainability Scoring (%) 4.3% Bad 11.7% To Improve 33.0% Acceptable 2022 27.1% 17.3% 7.6% 7.2% 5.1% 4.2% 3.4% 28.1% 17.7% Excellent 33.3% Good In 2022, the Bank continued the roll out of the New Distribution Model project. The aim was to change and innovate, offering clients a totally differentiating and unique experience in the financial sector, and transforming our branch network into spaces where the financial experience is not limited to a simple visit to the bank. novobanco ended the year with 247 totally revamped branches, in which: 2022 ANNUAL REPORT | SUSTAINABILITY REPORT - 148 - • National products were clearly promoted, and the projects were executed with national suppliers - a large majority of the suppliers were Portuguese companies with 100% national capital; • Supplier selection took into consideration if the entities could attest that they developed their business based on sustainability criteria, proven by environmental certifications, and presented sustainability scores of good and excellent. Maintaining a professional relationship with suppliers also implies responsible action, namely guaranteeing payment periods of 30 days, in line and in compliance with good market practices. This includes giving suppliers access to their current account, free of charge and at all times, simply by logging into the supplier's account on the Portal. In 2022, the payment period was 29 days compared to 22 days in 2021. 3.6 Environmental Footprint Climate change is one of the greatest world challenges, giving rise to a huge variety of potential risks, such as floods, forest fires, storms and other extreme events. In this context, the Bank gives prime focus in all its activity to the minimisation of its environmental impact, structuring its climate pathway around 3 axes: The National Roadmap for Carbon Neutrality and compliance with the Paris objectives call for a profound transformation of business models. Aware that its largest impact on the climate arises from its lending activity, novobanco's ESG strategic programme mainly focuses on: • Assessing environmental and climate risks when granting loans to companies; • Defining "Green Investment" objectives as key indicators of its ESG performance; • Incorporating environmental criteria in the products and services made available to customers. These priorities clearly reflect the importance given by the Bank not only to the indirect impact on the environment and to accompanying clients on their journey towards a carbon-neutral economy, but also to meeting the expectations of the Bank's other stakeholders, including regulators and supervisors. + information in chapter 3.2 ESG Risks and in TCDF Report. But novobanco Group’s operations also have a direct impact on the environment. For this reason, one of the strategic concerns of its environmental management is to find solutions that allow an adequate and rational use of the resources required to develop its activity. The pandemic showed that it is possible to carry on the business while reducing the consumption of some resources. Hence, although the return of the employees to the premises after two years in home office may increase consumption, the Group has prepared this return by creating scenarios focused on strengthening dematerialisation initiatives at the business level and in terms of raising employee awareness, thus seeking to maintain or reduce consumption, mainly of paper and electricity. 2022 ANNUAL REPORT | SUSTAINABILITY REPORT - 149 - Paper As a result of the measures implemented, including the digitalisation of processes, the Group has been reducing its paper consumption from one year to the next. In 2022 paper consumption decreased by 4.5%, or 6.9 tonnes, compared to 2021. In 2020, novobanco started its Phygital project, whereby, through the dematerialisaton of business processes and their formalisation through a digital signature, it contributes to a paperless organisation and fosters a paperless culture. 95% of the reduction in paper consumption was due to the Phygital project. Electricity In line with the measure implemented in November 2021, the Group's electricity consumption (novobanco, GNBGA and Banco Best) is fully green, i.e., from renewable sources, in all its buildings and branches in Portugal where this option is available (more than 95% of its premises). This measure, certified by the electricity supplier, had a strong contribution towards reducing CO2 emissions. This is one of the initiatives under the commitment to reduce scope 2 CO2 emissions, attesting to the Bank's transition to a low-carbon economy and to its full alignment with SDG 13 - Climate Action, one of its 5 priority SDGs. The teleworking scheme adopted since the beginning of the pandemic gave a key contribution to the reduction in electricity consumption. Among other factors, the reduction in space resulting from the move of Banco Best's premises to one of novobanco's buildings, which represented around 50% in office occupation in Lisbon, contributed to reduce this company's electricity consumption by around 30.1%. As a result of the war in Ukraine and the need to restrict energy consumption, all external lighting at Best's Investment Centres and Best Offices was completely switched off. In novobanco's branch network, the screens’ working hours were reduced, and they are now mostly switched off at midnight and switched on again at 8:00. In the branches located in rural regions or small villages, these communication channels are now switched off at 22:30. 2022 ANNUAL REPORT | SUSTAINABILITY REPORT - 150 - CO2 Emissions novobanco Group set the goal of reducing our Scope 1 and 2 CO2 emissions by 50% by 2030. This is a bold claim, but one that we intend to fulfil, and so we will continue to reduce the CO2 emissions that result from our various consumptions. To this end, in 2022, novobanco Group defined a new Vehicle Policy to regulate and homogenise fleet management, clarifying the rules of eligibility and responsibility in the use of this benefit. The ESG commitments assumed by the Group were reflected in the policy, promoting and boosting the choice of vehicles with green motorisation (electric or plug-in hybrid), through the following measures: • Price caps for electric or plug-in hybrid vehicles 10% higher than for combustion vehicles; • Predominance of electric and plug-in hybrid options in the list of protocoled vehicles. The teleworking scheme adopted from the beginning of the pandemic contributed decisively to a reduction of the environmental footprint, due to the reduction in commuting and the experience gained in the adaptation to digital of internal work processes and commercial relations with customers. Environmental Indicators - Emissions (tCO2e)* Direct emissions (Scope 1) Indirect emissions (Scope 2)** Indirect emissions (Scope 3)*** Total (Scope 1, 2 e 3) *See methodological notes. **Scope 2 calculation by location-based method since 2018 only. The Total (A1+A2) was calculated using the Market-Based approach. *** Includes the following categories of emissions: air travel, employees' commuting, waste, life cycle of paper consumed, paper recycling process, water consumption and wastewater treatment. 2020 4 888.3 4 490.3 4 663.2 14 033.8 2021 4 696.1 2 937.5 4 184.2 11 817.8 2022 4 158.1 811.3 6 102.6 -5.4% -86.5% 45.9% -3.2% 22 vs 21 11 072.0 The increase in scope 3 CO2 emissions is essentially due to the return of the employees to their offices and the increase in air travel after the end of the lockdowns, but the Group is are making every effort to ensure that this increase is limited only to the year of return to normality. With regard to scope 3 emissions - category 15 (investments), novobanco is aware that accounting for emissions in this category is crucial for financial institutions to assess the climate and environmental risks to which they are exposed and define objectives and strategies to reduce these emissions. Therefore, these are reported in the TCFD Report, published this year for the first time. Recycling The Group maintains an efficient management of waste, namely by recycling paper and printer toners. In 2022, the amount of paper sent for recycling dropped by 15.7%, which was due to lower paper consumption. In 2022, the Bank started the process of recycling its bank cards. The card treatment process involves the collection and destruction of customers’ expired bank cards, which are sent to Extruplás for recycling. Extruplás uses them to manufacture street furniture, significantly reducing the environmental impact of this waste if it were treated differently. In the second half of 2022 the Bank sent to Extruplás approximately 1.4 tonnes of bank cards for recycling, thus giving a new life to plastic. As another measure to reduce its direct impact on the environment, the Group stopped using single-use plastic, providing its employees with paper coffee and water cups and recyclable wooden straws. At Banco Best, all employees were given ceramic coffee cups and glass water bottles. It should also be noted that due to the move of Banco Best's head office to new premises, located in a building belonging to novobanco, all furniture intended for scrapping was offered to the employees, thus reducing the environmental impact that would result from its destruction and encouraging its reuse for private purposes. 2022 ANNUAL REPORT | SUSTAINABILITY REPORT - 151 - Summer of 83, 1983 - Ângelo de Sousa Oil on canvas, 80 cm x 80 cm A multifaceted artist, Ângelo de Sousa works in painting, sculpture, serigraphy, ceramics and photography. In the 1970s his painting focused mainly on abstraction, on surfaces that, while appearing monochrome, resulted from rigorous colour work that brought together, opposed, and overlayed minute chromatic particles that built up a surface that is depurated and simultaneously vibrant with light and colour. "Summer of 83" is part of a series of pictorial experiments in which the painter was engaged in the early 1980s. They are minute combinations of colour, diluted in a very simple geometry of fine lines, in an abstraction of absolute depuration. CHAVES. Nadir Afonso Museum of Contemporary Art 4 SUSTAINABLE ATTITUDE One of the challenges taken on by the novobanco Group is the financial and social well-being of the community in which it carries out its activity. Therefore, its concern with initiatives of an environmental, social and cultural nature with a positive impact on the community is reflected in its corporate social responsibility architecture, which consists of three pillars. In 2022, novobanco Group continued to develop internal and external actions that allow meeting the needs of its employees and the community, seeking to respond to new opportunities and assuming an active role in a society which it wants be sustainable and fairer. The bank's Corporate Social Responsibility framework was developed based on its ESG strategy and Social Dividend Model. With this positioning the Bank aims to continue to integrate the dialogue with and the expectations of stakeholders in the construction of the business strategy and give back to the community, thus reinforcing the trust they place in novobanco. 2022 ANNUAL REPORT | SUSTAINABILITY REPORT - 153 - 4.1 Shaping the future together novobanco is an active agent in the ecosystem to which it belongs, where it puts a particular focus on reviving the economy and supporting the communities it serves. In this context, it annually organises and participates in various initiatives to promote sustainability, including sectoral and/or regional initiatives, in a joint search for solutions or strategies that further social and financial well-being, responsible growth, job creation, capacity- building in people and respect for the environment. Among these there stands out in 2022 the first edition of the ESG Talks, a cycle of novobanco conferences dedicated to sustainability, held with the strategic partners Nova SBE and PwC Portugal and the media partners VISÃO and EXAME. This cycle, comprising a full-day major conference, ESG Talks - Rebuilding the Future, and 3 deep dives, addressed, through lectures, reflections and coffee table talks, the most important issues of the ESG universe, including the Future of Work, Diversity and Gender Equality in Companies, the Challenges of Sustainable Transition in a Low Carbon Economy, Sustainable Financing, and Circular Economy and Oceans, always within the context of the national economy. All the conferences were attended by renowned entrepreneurs, political decision-makers and academics. In order to recognise excellence and promote the sharing of best practices and experiences of companies with their peers and with society, the Bank also organises annual events such as the Portugal Exportador and the Export & Internationalisation Awards, and actions to promote the PME Líder and PME Excelência statuses, sponsoring the Publituris Portugal Awards and the Portuguese-French Trophies. The integration of environmental concerns in events that stimulate the national economy is one of the Bank's intervention streams, including the sponsorship of the Plastics Summit Global Event, one of the most important conferences on recycling and the circular economy in the plastics sector, and also events such as Ovibeja and the National Agricultural Fair, in which organic farming received special attention. novobanco once again placed its experience and knowledge at the service of the players and decision-makers of the country's economic future and shared specialised and technical information with its customers and society in general. Based on a sustainable attitude that aims to support the creation of solutions for important issues in the community where it carries out its activity, in 2022 the novobanco Group donated €1.6 million, distributed as follows: 2022 ANNUAL REPORT | SUSTAINABILITY REPORT - 154 - 4.2 Well-being – Financial and Social One of the challenges facing the banking sector is how to contribute to increasing the levels of financial knowledge and fostering the adoption of adequate behaviours that promote the well-being of the population and the stability of the financial system. With the creation of the Financial Literacy Programme, novobanco assumes its role as an institution that bases its positioning and management on principles of sustainability and corporate citizenship, contributing to train a new generation of consumers of financial services that is increasingly informed and has greater power of analysis and decision. In this context, the architecture of the Bank's financial literacy intervention is based on 2 pillars: Digital Literacy and Financial Literacy. 4.2.1 Financial well-being Digital Literacy Programme To address the fast pace of digitalisation of society and services in general and the need to develop financial literacy, it is a priority of novobanco not only to ensure a complete and innovative digital financial services offer, but also to promote and educate for the safe use of these channels in everyday financial management. With a special focus on the consumer and the people who everyday use digital channels to interact with the bank, novobanco has developed different initiatives: Everything you need to know about online banking - Digital Financial Education Project of the Portuguese Banking Association (APB) and its associates, consisting of 12 informative sessions on the basics of using banks' digital channels for the execution of essential daily operations. Aimed at the general public and the senior population, this programme, which is also articulated with Parish Councils and Senior Universities nationwide, and with Lisbon's network of Municipal Libraries, enabled 600 participants to acquire basic digital skills from the user's perspective, contributing to the safe use of the digital channels. Restructuring of the digital literacy website - An initiative that showcases the advantages of online banking and explains to customers everything they need to know about the digital channels. Online banking is an essential tool in the customer experience, as it ensures that the bank is always available, with all convenience and security, for a better management of customers’ financial and daily life. + information digital channels and information security Financial Literacy Programme The social and financial well-being of its customers is one of the Bank's main challenges. Therefore, one of its main priorities is to provide a range of saving and credit products suited to each family budget and addressing the customers’ new realities, for which it has developed different initiatives during 2022. Commercial Offer - Savings products adjusted to customers' realities, including not only microcredit but also savings products tailored to each one's family budget. In 2022, the Bank created an additional everyday offer specifically targeting the Ukrainian population that arrived in Portugal: a bank account with no maintenance fee for 1 year, availability of cards and temporary exemption of commissions on transfers to Ukraine. 2022 ANNUAL REPORT | SUSTAINABILITY REPORT - 155 - Personal Finance and Family Budget - Application that makes it easy to monitor and manage the monthly budget at the touch of a finger. Mental Right (Direito Mental) - Partnership with Associação Direito Mental, an association that fosters the creation of a positive culture of support for mental health in the legal community, advocating, among others, that mental health also involves financial well-being. novobanco’s contribution in this partnership involves providing tips and advice for the development of appropriate financial skills. #Corporate Talks - Road Show on financial literacy for small and medium-sized companies that during the year travels the country from north to south, debating several financial topics. The aim is to contribute to increase the level of financial culture within companies and individuals. This cycle included a session dedicated to Sustainable Finance, which dealt with the main challenges faced by national companies due to the new European directives. + information offer of products trade with social criteria 4.2.2 Social well-being The intervention of novobanco also involves contributing to the Social Well-being of the community in which it operates. Helping organisations that provide social support in areas such as equal opportunities and combating social exclusion and poverty with the aim of mitigating these inequalities and seeking to respond to new opportunities for progress, are part of the challenge taken on by the Bank in its corporate social responsibility strategy. WeHelpUkraine Platform - As a founding member, the Bank supported the development of the www.wehelpukraine.org platform which connects those in need of help with those in Portugal and abroad who are willing to help (with accommodation, financial, medical and psychological support, refugee status, logistics, employment and local language classes), thus uniting efforts from around the world, including from Canada, the USA and the United Kingdom. Under this partnership, the Bank has proactively contributed in various ways, namely account opening, donations and volunteer work, to welcoming the Ukrainian people to Portugal. Care International - Also as part of its support for the Ukrainian people, novobanco supported CARE International with a financial donation to the fund designed to help with the humanitarian crisis in Ukraine and the around 4 million people fleeing the conflict, through immediate emergency assistance in that country and in border countries. Play for Children | Special Edition Madeira 2022 - novobanco supported the solidarity football match between former football players and public figures, in which everyone was a winner. The ticket box income was donated to the Liga Portuguesa contra o Cancro - Núcleo Regional da Madeira (Portuguese League Against Cancer - Madeira Regional Centre). Quality-of-Life Action - novobanco was once again present at the Quality-of-Life Action of the Associação Salvador, an IPSS (private social solidarity institution) that operates in the area of motor disability. This year marked the 15th edition of this Action. In 2022 there were 82 applications, and a total of approximately 130 thousand euros to be distributed, under three categories - home works, training and employment, and adapted sports equipment. 36 people with reduced mobility were supported, 13 of whom in the training and employment category, which is supported by the bank. novobanco is a patron of Associação Salvador and has been associated with this project since its first edition. Over 15 years the project has supported more than 587 people with reduced mobility, with more than €1.7 million. Christmas hampers from novobanco's employees to AMI (International Medical Aid) users - The Christmas festivities at novobanco Group began with the usual internal solidarity action. Following a registration process to donate, participate in the preparation and deliver the Christmas hampers, €4.5 thousand were collected from employees to provide a decent Christmas for about 150 families, AMI users, throughout the country, including the Azores and Madeira. novobanco and novobanco Azores also joined this initiative by making a donation. Acreditar - Every year novobanco finances one of the 12 rooms of the Acreditar Association’s home in Lisbon. The Acreditar Association is an IPSS whose mission is to “treat children and young people with cancer and not only the cancer in children and young people", promoting their quality of life and that of their families. The Lisbon 2022 ANNUAL REPORT | SUSTAINABILITY REPORT - 156 - home is being rehabilitated and novobanco maintained its support for families who are housed in other residences in the Lisbon area. This annual support makes it possible for several children who have to leave their area of residence for oncological treatment in Lisbon to live with their families. Volunteering Programme - Created in May 2022, it encourages the involvement of employees in community support actions that contribute to addressing important socio-economic and environmental issues in the community. Any employee can participate, for which he or she has one day of leave per year to dedicate to a cause. This programme also fosters a culture of empathy, generates learning opportunities through the sharing of knowledge and experiences, and the development of innovative solutions and ideas by promoting collaborative and teamwork. With the volunteering actions the Bank strengthened the sense of belonging of its employees, consequently increasing their well-being. A total of 406 hours were worked in 2022 in voluntary service, grouped into 4 actions: WeHelpUkraine, Make a Wish, Reforestation of Natural Parks and AMI's Christmas Mission - Christmas Hampers. 2022 ANNUAL REPORT | SUSTAINABILITY REPORT - 157 - 4.3 Cultural Patronage novobanco Cultura is one of the Bank's main cultural patronage programmes. Its mission is to reflect novobanco's commitment to preserve, promote and share with Portuguese society its relevant cultural and art heritage, grouped in four collections: novobanco Photography Collection With around 1,000 works by more than 300 artists from 38 nationalities, it includes all the great names of the national and international art scene. It is one of the world's most important collections of photography, the only corporate collection to represent Portugal and also one of the most awarded collections and one that stands out in the global art scene, ranking among the 80 best corporate collections in the world. The exhibition of novobanco’s photography collection "Art in time of Ecological Disruption", was the first event of the ESG Talks conference cycle, held at Universidade Nova SBE, placing art at the centre of the promotion of the national and international debate on the issues and challenges facing humanity, including ecological challenges and the human condition. This exhibition was the motto for the public presentation of the international book with the same name "Art in Time of Ecological Disruption", a project developed by the IACCCA - The International Association of Corporate Collections of Contemporary Art, of which novobanco’s photography collection is a founding member, and which brings together curators from more than 50 corporate collections around the world and represents more than 150,000 works of art. Once again, novobanco’s photography collection is in the limelight, ranking second by number of works and texts selected to integrate this catalogue, published in 2022. Several works from the collection were also exhibited in various national and international exhibitions, namely "Chegar à Boca da Noite”, at the Contemporary Art Centre of Coimbra, "Arte e Território" at the novobanco space, and "Horizonte Y Limite. Visiones del Paisaje", in Spain, thus continuing to spread internationally the contemporary photography of novobanco. The study visits for students of Photography, Technologies, Innovation and Creation, Master in Artistic Photography, and Degree in Photography and Culture, among others, proved an important tool and resource to complement learning with the direct viewing and understanding of the works, awakening critical thinking, broadening horizons, promoting the sharing of knowledge and experiences, and thus providing a pedagogical service to society. The novobanco photography collection thus acts as a catalyst in filling up cultural gaps and contributing to the well-being of society. novobanco Painting Collection Comprising Portuguese and European paintings from the 16th to the 20th century, this collection is available to the public through the permanent exhibition circuit of museums from the north to the south of the country, under a protocol with the Ministry of Culture. At the end of 2022, 94 works were on permanent display in 37 museums throughout the country. The Bank provides in its platform the itinerary of the various regions and respective museums in the country where the works of its Painting Collection can be visited. Numismatics Collection The collection comprises approximately 13 thousand coins, all minted in territory that is or was Portuguese, from the period before Portugal was a nation up to the establishment of the Republic. Through this collection, it is possible to travel the entire history of Portugal. It portrays, through money, our formation as a people and a nation, and our culture, over a time span of more than 2000 years. Library of Humanistic Studies With about 1,100 Old Books, including 8 incunabula, around 90 works printed by the humanist Aldo Manuzio and his successors, and 600 titles printed in the 16th century. The remaining bibliography of about 8,600 titles serves as support to the study of the classical texts and their themes. The library is on deposit at the Faculty of Humanities of the University of Lisbon (FLUL). The partnership with Cais in REFLEX - CAIS photography Award | novobanco remained active in 2022. This award, which combines photography with socially relevant themes, is dedicated to the enhancement of 2022 ANNUAL REPORT | SUSTAINABILITY REPORT - 158 - photography in Portugal and strengthens and amplifies the positive impacts of a national initiative of artistic scope. The 15th edition of this award portrays and celebrates the diversity (ethnic, social, racial, gender, religious, political, among others) that surrounds us, through a multiplicity of images representing a world that one wants to be increasingly heterogeneous, promoting a sense of belonging and reducing exclusion. This edition was once again aligned with the Bank's positioning, more precisely with its Responsible Banking programme. 2022 ANNUAL REPORT | SUSTAINABILITY REPORT - 159 - Solitude, 1968 - Manuel D'Assumpção Oil on canvas, 128 cm x 190 cm D'Assumpção made this painting during his last stay in Berlin. In full artistic maturity, he works rigorously with forms and their fragmentation, in a structure between abstraction and cubist reminiscences, inseparable from a palette of dark hues - blacks, browns, greys - that contrast with the blues and reds of the central composition, achieving a dense composition of intense plastic force. A painter constantly questioning himself, disillusioned with the world and with life, D'Assumpção lived for several years in France, travelled throughout Europe, and absorbed new plastic languages such as expressionism, cubism and geometric abstraction. Moved by a strong mysticism, which he projects onto his painting, from the late 1950s he found in abstraction a field of transcendence and escape from reality. CRATO. Crato Municipal Museum 5 ESG PERFORMANCE INDICATORS 5.1 Environmental Indicators Environmental Indicators - Materials consumed White paper Internal use (tonnes) Paper for Internal use (Kg/employee) Forms - printing and finishing area (tonnes) 1 IT and electronic consumables Toner cartridges and Ink cartridges(units)2 Batteries Environmental Indicators - Energy Electricity 2022 2021 2020 22 vs 21 148.2 36.2 114.9 45 2 695.0 155.2 37.0 100.1 208.3 45.0 112.9 -4.5% -2.1% 14.8% 41 2 144.0 67 2 496.0 9.8% 25.7% Electricity consumption (kWh) 13 183 802.0 16 296 473.1 Total electricity consumption (GJ) Electricity consumption (kWh/employee) Diesel Generator diesel consumption (litres) 2 Generator diesel consumption (GJ)2 47 461.7 3 223.4 58 667.3 3 886.6 21 181 218.0 76 252.4 4 622.7 -19.1% -19.1% -17.1% 504.2 18.2 400.0 616.1% 14.4 616.5% 3 610.8 130.2 1 563 746.0 56219.8 58 244.3 1 620 056.6 1 680 495.6 60 417.2 Vehicles diesel consumption (litres) Vehicles diesel consumption (GJ) Gasoline Vehicles gasoline consumption (litres) Vehicles gasoline consumption (GJ) Total energy consumption (GJ) Total energy consumption per employee (GJ) Trips Number of vehicles Number of flights 1 novobanco 2 Diesel consumption is an estimate based on the number of hours generators were operating novobanco, Banco Best and GNBGA 840.0 27.5 136 711.5 29.8 1 680.0 55.1 103 867,0 25.4 840.0 27.5 116 957.3 27.9 100.0% 100.0% -11.2% -9.0% -3.7% 51.5% -3.5% -3.5% 922 783 987 463 957 517 Environmental Indicators - Emissions (tCO2e)* Direct emissions (Scope 1) Emissions from trips in company cars Emissions from emergency generators Emissions from leaks of fluorinated gases Indirect emissions (Scope 2)** Emissions from the production of electricity purchased (market-based method) Emissions from the production of electricity purchased (Location based method) Total (Scopes 1 and 2) Indirect emissions (Scope 3) Emissions from Employees’ business trips, including flights Emissions from employees’ home/ work daily trips*** Emissions from wastewater treatment Emissions over the life cycle of the paper consumed Emissions from the paper recycling process Emissions from water consumption Total (Scopes 1, 2 and 3) 2022 2021 4 158.1 3 999.2 10.2 148.7 811.3 811.3 2 013.3 4 969.4 6 102.6 357.4 5 649.5 71 3.21 10.6 10.8 11 072.0 4 696.1 4 311.8 2020 4 888.3 4 472.6 22 vs 21 -11.5% -7.3% 1.3 1.1 759.6% 382.9 2 937.5 406.6 4 490.3 -61.2% -72.4% 2 937.5 4 490.3 -72.4% 2 386.5 3 757.9 -15.6% 7 633.6 4 184.2 9 370,5 4 663.2 149.4 3 909.8 76.6 3.9 11.0 - 11 817.8 186.6 4 323.1 96.4 3.6 12.4 - 14 041.8 -34.9% 45.8% 139.2% 44.5% -7.3% -17.6% -3.6% - -6.3% *See methodological notes in GRI table**Scope 2 calculation by location-based method since 2018 only. The Total (S1+S2) was calculated using the Market-Based approach *** Scope novobanco. 2022 ANNUAL REPORT | SUSTAINABILITY REPORT - 161 - Environmental Indicators - Water consumption Water consumption from public supply network (m3) Water consumption per employee (m3/employee) 2022 39 870.2 9.7 2021 41 355.10 9.9 2020 46 772.60 10.2 22 vs 21 -3.6% -1.5% Environmental Indicators - Waste management Paper sent for recycling (tonnes) Cardboard sent for recycling (tonnes) Plastic Bank Cards sent for recycling (tons) Toner cartridges and Ink cartridges sent for recycling (units) Pilhas 5.2 Social Indicators Employees Total Men (#) Men (%) Women (#) Women (%) Employment contract Total permanent workforce Men (#) Men (%) Women (#) Women (%) Total Fixed-term Employees Men (#) Men (%) Women (#) Women (%) 2022 2021 2020 99.0 51.9 1.4 2 988 108 117.4 66.3 0 5 944 na 22 vs 21 -15.7% -21.7% 106.1 61.3 0 8 344 -49,7% na - 2022 2021 2020 22 vs 21 4 090 1 880 46.0% 2 210 54.0% 4 193 1 944 46.4% 2 249 53.6% 4 582 2 159 47.10% 2 423 52.90% -2.5% -3.3% -0,4 p.p. -1.7% 0,4 p.p. 2022 2021 2020 22 vs 21 4 026 1 857 46.1% 2 169 53.9% 64 23 35.9% 41 64.1% 4 153 1 929 46.4% 2 224 53.6% 40 15 37.5% 25 62.5% 4 417 2 088 47.3% 2 329 52.7% 165 -3.1% -3.7% -0,3 p.p. -2.5% 0,3 p.p 60.0% 71 53.3% 43.0% 94 57.0% 1.6 p.p. 64.0% 1.6 p.p. 2021 2022 2020 22 vs 21 Trainees and independent professionals* Estagiários Men (#) Women (#) Temporary work Men(#) Women (#) Provision of service Men(#) Women (#) Total(#) * Not included in the total number of the Grupo novobanco employees. These are self-employed professionals who carry out their activity on the premises of Group companies, to whom the companies are responsible for their general safety in the work environment. -28.6% -20.0% -33.3% 40.0% 42.9% 39.1% -50.0% - - 12.5% 14 5 9 30 7 23 4 2 2 54 19 35 34 11 23 5 2 3 10 4 6 42 0 2 54 10 32 2 48 93 2022 ANNUAL REPORT | SUSTAINABILITY REPORT - 162 - Employee distribution by gender and professional category Management Total Men (#) Men (%) Women (#) Women (%) < 30 years old 30 a 50 years old > 50 anos years old Leadership Total Men (#) Men (%) Women (#) Women (%) < 30 years old 30 a 50 years old > 50 anos years old Specific Total Men (#) Men (%) Women (#) Women (%) < 30 years old 30 a 50 years old > 50 anos years old Administrative Total Men (#) Men (%) Women (#) Women (%) < 30 years old 30 a 50 years old > 50 anos years old Auxiliary Total Men(#) Men (%) Women (#) Women (%) < 30 years old 30 a 50 years old > 50 anos years old 2022 2021 2020 22 vs 21 481 307 7.5% 174 4.3% 1 265 215 388 218 5.3% 170 4.2% 0 272 116 2 170 955 23.3% 1 215 29.7% 101 1 524 545 1 044 393 9.6% 651 15.9% 84 639 321 7 7 0.2% 0 - 0 4 3 472 301 7.2% 171 4.1% 2 292 178 461 257 6.1% 204 4.9% 0 346 115 1 973 891 21.2% 1 082 25.8% 111 1 459 403 1 279 487 11.6% 792 18.9% 61 831 387 8 8 0.2% 0 - 0 4 4 472 299 6.5% 173 3.8% 2 322 148 513 291 6.4% 222 4.8% 0 387 126 2 176 985 21.5% 1 191 26.0% 122 1 658 396 1 413 576 12.6% 837 18% 115 865 433 8 8 0.2% 0 - 0 4 4 1.9% 2.0% 0,3 p.p. 1.8% 0,2 p.p. -50.0% -9.2% 20.8% -15.8% -15.2% -0,8 p.p -16.7% -0,7 p.p. - -21.4% -0.9% 10.0% 7.2% 2,2 p.p. 12.3% 3,9 p.p. -9.0% 4.5% 35.2% -18.4% -19.3% -2.p.p -17.8% -3 p.p. 37.7% -23.1% -17.1% -12.5% -12.5% - - - - 0.00% -25.0% 2022 ANNUAL REPORT | SUSTAINABILITY REPORT - 163 - Employess Academic Qualifications 2022 2021 2020 22 vs 21 University Education Men (#) Men (%) Women (#) Women (%) High school/Basic Education Men (#) Men (%) Women (#) Women (%) 3 117 1 356 33.2% 1 761 43.1% 973 524 12.8% 449 11.0% 3 100 1357 32.4% 1 743 41.6% 1 093 587 14.0% 506 12.1% 3 313 1 461 31.9% 1 852 40.4% 1 269 698 14.4% 571 11.8% 0.5% -0.1% 0,9 p.p. 1.0% 1,5 p.p. -11.0% -10.7% -1,2 p.p. -11.3% -1,1p.p. Admissions and departures 2022 2021 2020 22 vs 21 A D A D A D A D Total Gender Men Wowen Age bracket < 30 anos 30 a 50 anos > 50 anos A - Admissions;D- Departures 159 262 66 455 192 479 140.9% -42.4% 77 82 83 68 8 141 121 49 85 128 39 27 27 34 5 254 201 68 156 231 98 94 135 53 4 276 203 97.4% -44.5% 203.7% -39.8% 28 207.4% -27.9% 202 249 100.0% -45.5% 60.0% -44.6% Staff Turnover (%) 2022 2021 2020 22 vs 21 Total Men (%) Women (%) Age bracket < 30 years old 30 a 50 years old > 50 anos years old 5.0% 2.6% 2.4% 1.6% 1.8% 1.6% 6.2% 3.5% 2.7% 1.1% 2.3% 2.8% 7.3% 4.1% 3.2% 1.8% 3.2% 2.8% -1,2 p.p. -0,9 p.p. -0,3 p.p. 0,5 p.p. -0,5 p.p. -1,2 p.p. Staff turnover including trainnees, Temporary work and Provision of Services (%) 2022 2021 2020 A D Rate Total Gender Men Women Age bracket < 30 years old 30 a 50 years old > 50 anos years old 218 314 92 126 124 84 10 155 159 88 97 129 6.3% 3.0% 3.5% 2.5% 2.2% 1.7% - - - - - - - - - - - - - - - 2022 ANNUAL REPORT | SUSTAINABILITY REPORT - 164 - Performance Evaluation 2022 2021 2020 22 vs 21 M F T M F T M F T M F T Employees (#) 1 884 2 173 4 057 2 074 2 318 4 392 2 089 2 237 4 326 -9.2% -6.3% -7.6% Management (#) Leadership (#) Specific (#) 286 254 166 199 452 453 294 285 168 220 462 505 260 307 132 226 392 -2.7% -1.2% -2.2% 533 -10.9% -9.5% -10.3% 860 1 041 1 901 951 1 152 2 103 976 1 156 2 132 -9.6% -9.6% -9.6% Administrative (#) 476 767 1 243 536 778 1 314 538 723 1 261 -11.2% -1.4% -5.4% Auxiliary (#) 0.0% 0 The performance evaluation ends in May of each year. The values presented refer to the evaluation received in the year, but referring to year n-1 M - Male; F – Female 0.0% 0 8 8 8 0 8 8 8 - Promotion Function change (#) Merit (#) Seniority (#) Total (#) Training hours / employee Total Gender Men Women Professional Category Management Men Women Leadership Men Women Specific Men Women Administrative Men Women Auxiliary Men Women T-Total A-Average 2022 2021 2020 22 vs 21 283 1 002 0.00 1 285 251 811 53 1 115 337 1 081 65 1 483 12.7% 23.6% -100.0% 15.2% 2022 2021 T A T 164 052.3 40.1 179 294.0 2020 T 196 958.0 A 42.8 22 vs21 A 43.0 T -8.5% A -6.3% 75 368.4 88 683.9 18 270.2 12 021.8 6 248.3 18 287.6 10 288.9 7 998.7 79 284.4 34 207.6 45 076.9 48 191.1 18 831.1 29 360.0 19.0 19.0 0.0 40.1 40.1 38.0 39.2 35.9 47.1 47.2 47.1 36.5 35.8 37.1 46.2 47.9 45.1 2.7 2.7 0.0 79 999.0 99 295.0 41.2 44.2 89 359.0 107 600.0 41.4 44.4 -5.8% -10.7% -5.9% -9.2% 19.9 19.4 20.7 21.5 21.2 22.0 48.1 48.3 47.9 50.9 52.7 49.8 9 372.0 5 838.0 3 534.0 9 914.0 5 436.0 4 478.0 94 958.0 43 078.0 51 880.0 65 049.0 25 647.0 39 403.0 0.0 0.0 0.0 9 297.0 5 690.0 3 607.0 8 217.0 4 758.0 3 460.0 99 218.0 46 210.0 53 008.0 80 226.0 32 701.0 47 525.0 0.0 0.0 0.0 19.7 94.9% 90.9% 19.0 105.9% 101.9% 76.8% 73.5% 20.8 84.5% 119.2% 16.0 89.3% 122.6% 16.4 78.6% 113.9% 15.6 -24.0% -16.5% 45.6 -25.8% -20.6% 46.9 -22.5% -13.1% 44.5 -9.3% -25.9% 56.8 -9.1% -26.6% 56.8 -9.4% -25.5% 56.8 - - 0.0 - - 0.0 - - 0.0 2022 ANNUAL REPORT | SUSTAINABILITY REPORT - 165 - Parental Leave Employees who took parental leave Employees who returned to work after parental leave ended Employees who returned to work after parental leave ended and remained in service after 12 months Return to work rate Retention rate after 12 months of work M-Male; F- Female 2022 2021 2020 22 vs 21 M F M F M F M F 58.0 107.0 58.0 58.0 39 39 88 50 82 82 130 48.7% 21.6% 85 48.7% 16.0% - - 36 80 74 116 - - 100% 54.2% 100.00% 56.8% 100% 65.4% - -2,6 p.p. 93.2% 90.0% 90.2% 89.2% - - Health Services Occupational Health - Occupational Medicine Medical Exams General Practice Consultations Curative Medicine consultations and prescriptions Consultations in other medical specialities Mental health consultations (psychology and psychiatry) Nutrition Consultations Nursing Total procedures (treatments, vaccination, medication, ECG) Risk Prevention and Control Programmes Cardiovascular screening Cancer screening Vision screening Executive Check-up (for senior executives) Health and Safety Indicators Work related accidents Men Women Occupational diseases Men Women Deaths Men Women Accident rate Men Women Lost days rate Men Women Absenteeism rate Men Women Health and Safety Training Health training hours (#) 2022 2021 2020 22 vs 21 2 493 7 038 583 1057 457 3 007 7 597 11 952 928 383 1 508 8 345 9 444 751 348 -17.1% -7.4% -95.1% 13.9% 19.3% 4 337 6 772 5 760 -36.0% 2 091 659 1 875 510 2 408 724 2 674 186 1 100 354 1 212 86 -13.2% 9.0% -29.9% 174.2% 2022 2021 2020 22 vs 21 29 11 18 - - - 0 0 0 3.9% 3.2% 4.6% 0.06% 0.06% 0.06% 2.7% 1.9% 3.4% 27 10 17 - - - 0 0 0 3.8% 3.0% 4.6% 0.05% 0.04% 0.04% 3.2% 2.3% 3.9% 29 11 18 - - - 0 0 0 3.5% 3.5% 4.3% 0.05% 0.03% 0.07% 4.5% 2.7% 6.1% 7.41% 10.00% 5.88% - - - - - - 0,1p.p. 0,2 p.p. - 0.01 p.p. 0.02 p.p. 0.01 p.p. -0,5 p.p. -0.4 p.p. -0.5 p.p. 3 844.0 29.0 50.0 13 155.2.% 2022 ANNUAL REPORT | SUSTAINABILITY REPORT - 166 - Safety training hours (#) Hours of health awareness promotion(#) Total (#) Safety audits to the premises (#) Ergonomic assessments (#) Expert identifications and risk assessment of activities (IPAR) (#) Thermal environment assessments (#) Indoor air quality assessments (#) Lighting assessments (#) Investigation of Causes of Work Injuries (#) Evaluation of conformity with COVID-19 requirements (#) Investigation of Causes of Occupational Illnesses (#) Elaboration/Follow-up of Integrated Action Plan (#) Risk Assessment and List of Work Equipment (#) 4 409.0 6 013.0 14 266.0 178 16 168 2 0 0 11 3 15 184 164 520.5 2 938.0 3 487.5 107 2 150 1 0 0 6 - - - - 1 292.1 1 085.0 2 127.1 155 2 110 1 1 6 13 - - - - 747.1% 104.7% 309.1% 66.4% 700.0% 12.0% 100.0% - -100.0% 83.3% - - - - Employee Benefits Education support (thousand €) Early childhood benefits (#) Early childhood benefits (thousand€) School grants (#) School grants(thousand €) Support to children and youths with special needs (#) Support to children and youths with special needs (thousand €) Christmas gift (#) Christmas gift (thousand€) Support to retired employees (thousand€) Expenses with senior residences, day-care centres, home support, medicines and other basic necessities. (#) Under the ACT (Collective wage agreement) (thousand €) Residential mortgage loans (thousand€) Acquisition of consumer goods (thousand€) In portfolio: Residential mortgage loans (thousand€) Individual loans (thousand€) Associativism Employees covered by Collective Bargaining Agreements (#) Employees covered by Collective Bargaining Agreements (%) Unionized employees (#) Unionized employees (%) Employees with disability more than 60% (Law No. 4/2019) Diretores (#) Chefias (#) Specific (#) Administrativos (#) Auxiliares (#) Total (#) 2022 ANNUAL REPORT | SUSTAINABILITY REPORT 2022 2021 2020 22 vs 21 833 367 423.4 268 196.5 94 86.6 3 160 126.4 87,7 67 833 398 454.4 224 164.1 91 87.4 3 340 126.8 124,7 68 905 436 511.6 262 192.8 81 79.9 3024 121.0 108,6 0.0% -7.8% -6.8% 19.6% 19.7% 3.3% -1.0% -5.4% -0.3% 29.7% 60 -1.5% 18 455.9 16 896.3 1 559.6 289 699.1 280 142.4 9 556.6 17 833.2 15 799.8 2 033.4 271 856.0 260 419.1 11 436.9 18 409.8 15 812.0 2 597.8 289 632.6 276 094.4 13 538.2 3.5% -6.9% -23.3% 6.6% 7.6% -16.4% 2022 2021 2020 22 vs 21 3 964 96.5% 3 786 92.6% M 3 4 16 14 1 38 4 032 4 392 -2.1% 96.2% 3901 93.0% 2022 F 5 4 42 22 0 73 95.9% 4239 92.5% 0,3 p.p. -3% -0,3 p.p. T 8 8 58 36 1 111 - 167 - 5.3 Governance Indicators Gender Equality (under-represented gender (Género sub-representado %) Board of Directors and 1st line managers (under- represented gender) Management staff Pay gap Ratio of women's total remuneration to men's total remuneration per employee category Management staff Lidership Specific Administrative Auxiliary Total 2022 2021 2020 22 vs 21 27.5% 36.7% 5.7% 0.90 0.97 0.90 0.91 - 0.81 25.5% 36.2% 5.9% 0.88 0.97 0.90 0.90 0.00 0.78 - 36.7% 9.4% 2.0 p.p. 0,5 p.p. -0,2 p.p. 0.87 0.95 0.89 0.89 0.00 0.76 0.02 p.p. 0.0 p.p. 0.00 p.p. 0.01 p.p. - 0.03 p.p. Sustainability scoring (%) 2022 2021 2020 22vs 21 Suppliers that endorsed novobanco Group’s relati4onship principles and have a sustainability scoring (%) 5.4 About this report 61.1% 52.0% 41% 9.1 p.p. This report describes the manner in which the novobanco Group approaches sustainability in the management of its activity, in its involvement with employees and clients, in carrying out sustainable business and in ensuring responsible conduct. It also details the Group’s sustainability performance in the last two years. This report was drawn up in accordance with the Global Reporting Initiative (GRI) model, standard option. The GRI table is available in the Bank’s website, at: NOVO BANCO/Institutional/Sustainability/ Sustainability Report. This report, which under the terms of Article 508-G of the Commercial Companies Code constitutes the Non- Financial Statement of the novobanco Group, is also drawn up for compliance with the legal requirements introduced by Decree-Law no. 89/2017, of 28 July. Ernst & Young, Audit & Associados, SROC, SA has provided independent assurance to this sustainability performance, considering that the relevant indicators were reported in accordance with the GRI sustainability reporting standards and with Decree-Law no. 89/2017, as can be seen on pages 190 and 191. The 2022 Sustainability Report complements and details the information contained in the 2022 Annual Report, providing evidence that sustainability is an integral part of the Bank’s strategy. In order to continue to progress and improve its performance, NOVO BANCO takes into account the concerns and suggestions of its stakeholders. To this end, any questions, comments or suggestions may be sent to the following email address. 5.5 Methodological Notes Social Staff Turnover New hires rate Accident Rate Absenteeism Rate Return to Work Rat ((Number of admissions + departures)/2) / total employees) New hires in 2022/total number of employees in 2022 Number of accidents at work/Hours worked*1000000 Number of absences (without maternity / paternity leave)/Possible working hours*100 Ratio between the number of employees who remain employed 12 months after returning to work from maternity/paternity leave and the number of employees who returned from maternity/paternity leave in the previous year. 2022 ANNUAL REPORT | SUSTAINABILITY REPORT - 168 - Average training hours per gender Average training hours per professional category Remuneration ratio Total number of training hours per gender/Total number of employees in each gender Total number of training hours per professional category/Total number of employees in each category Ratio of average base remuneration and average total remuneration of women to men by employee category - (women remuneration / men remuneration)*100 Environment Water Electricity Generators diesel Energy PCI diesel (road) PCI petrol (road) Density of diesel (generators) Electricity CO2 Emissions Scope 1 CO2 Emissions Scope 2 Estimate based on real water consumption in 100% of the central buildings and 48% of the branches. Amount calculated directly from EDP records and billing Diesel consumption in 2021 is an estimate based on the number of hours generators were operating. To calculate direct energy consumption (fuel consumption) in GJ, the following formula was used: Fuel consumption (l) * PCIX * Density X / 1000, using the following conversion factors: 42.8 GJ/t (Source: Order No. 17313/2008 (SGCIE) 0.84 kg/l (Source: DGEG 2017, data on 9/21/2019) 44.3 GJ/t (Source: Order No. 17313/2008 (SGCIE) 0.74 kg/l (Source: DGEG 2017, data on 09/21/2019) 43.07 GJ/ (Source: APA - Density values of fuels to be used under the CELE regime) 0.837 kg/l (Source: APA - Density values of fuels to be used under the CELE regime) 1 kWh = 0.0036 GJ (Source: International Energy Agency and GRI) To calculate emissions from energy consumption, the following formula was used: • PCI diesel (generators) - 0,078 ton CO2eq/GJ/ (Source: APA - Fuel density values to be used under the EU ETS) • Density of diesel (generators) - 0.837 kg/l Source: APA - Fuel density values to be used under the EU ETS) • It also takes into account the following emission factors and parameters used to calculate Greenhouse Gases (GHG) emissions: • Light vehicle, petrol, engine cubic capacity < 1 400 cm3 0.173 kg CO2e/km (Source: GHG Protocol: Emission Factors from Cross-Sector Tools, 2017) • Light vehicle, petrol, engine cubic capacity 1 400 and < 2000 cm3 - 0.215 kg CO2e/km (Source: GHG Protocol: Emission Factors from Cross-Sector Tools, 2017) • Light vehicle, petrol, engine cubic capacity ≥ 2000 cm3 - 0.299 kg CO2e/km (Source: GHG Protocol: Emission Factors from Cross-Sector Tools, 2017) • Light vehicle, diesel, engine cubic capacity < 2 000 cm3 - 0.181 kg CO2e/km (Source: GHG Protocol: Emission Factors from Cross-Sector Tools, 2017) • Light vehicle, diesel, engine cubic capacity ≥ 2 000 cm3 - 0.245 kg CO2e/km (Source: GHG Protocol: Emission Factors from Cross-Sector Tools, 2017) • Hybrid vehicle - 0.144 kg CO2e/km (Source: APA - NIR 2020) • Electric vehicle - 0.018 kg kg CO2e/km (consumption - 13.3 kW/100 km) (Source: APREN, 2020) To calculate emissions from energy consumption, the following formula was used:= Consumption X * Emission factor (EF)X It also takes into account the following emission factors and parameters used to calculate GHG emissions: • Electricity production mainland - market based method - 0.251 kg CO2e/kWh (Source: 2022 offer mix – EDP Business Customers) • Electricity production mainland - location based method - 0.137 kg CO2e/kWh (Source: APREN, 2022 energy mix) • Electricity production on the island of Madeira – location and market method - 0.487 kg CO2e/kWh (Source: EE Madeira 2022) • Electricity production on the Azores island – location and market method - 0.487 kg CO2e/kWh (Source: EDA, 2020 Report and Accounts) 2022 ANNUAL REPORT | SUSTAINABILITY REPORT - 169 - CO2 Emissions Scope 3 CO2 Emissions Scope 3 Governance Remuneration Ratio Sustainability Scoring The calculation includes the emissions resulting from employees’ business trips and home/work/home (HWH) trips, using the following formula: Emission = Trip (km) X * EFX It also takes into account the following emission factors and parameters used to calculate GHG emissions: • Diesel vehicle - 0.210 kg CO2e/km (Source: APA - NIR 2021) • Petrol vehicle - 0.208 kg CO2e/km (Source: APA - NIR 2021) • LPG vehicle - 0.193 kg CO2e/km (Source: APA - NIR 2021) • Hybrid vehicle - 0.144 kg CO2e/km (Source: APA - NIR 2021) • Electric vehicle - 0.018 kg CO2e/km (consumption of 13.3 kW/100 km) (Source: APREN 2021) • Bus - 0.131 kg CO2e/km (Source: DEFRA 2020); 1.420 kg CO2e/km (Source: STCP 2011) and 0.189 kg CO2e/km (Source: Carris 2020) • Subway - 0.06 kg CO2e (Source: Metro Lisboa 2016) and km, 0.040 kg CO2e/km (Source: Metro do Porto 2018) • Train - 0.024 kg CO2e/km (Source: CP 2019) and 0.021 kg CO2e/km (Source: Fertagus 2013/2014) • Boat - 0.190 CO2e/km (Source: Transtejo+Soflusa, 2014) • Motorcycle (pertrol) - 0.133 kg CO2e/km (Source: APA - NIR 2021) • Motorcycle (electric) - 0.012 kg CO2e/km (Consumption of 9 kW/100 km) (Source: APREN 2021) • Plane emission = Trip (Km) X * EFX * Takeoff factor * RFI2 • It also takes into account the following emission factors and parameters used to calculate GHG emissions: • Plane, Domestic flight FE CO2 - 0.17147 kg CO2e/km (Source: GHG Protocol: Emission Factors from Cross-Sector Tools 2017) • Plane, short-distance flight FE CO2 - 0.09700 kg CO2e/km (Source: GHG Protocol: Emission Factors from Cross-Sector Tools 2017) • Plane, long-distance flight FE CO2 - 0.11319 kg CO2e/km (Source: GHG Protocol: Emission Factors from Cross-Sector Tools 2017) • Plane, domestic flight FE CH4 - 0.0001 kg CO2e/km (Source: DEFRA 2020) • Plane, short-distance flight FE CH4 - 0.00001 kg CO2e/km (Source: DEFRA 2020) • Plane, long-distance flight FE CH4 - 0.00001 kg CO2e/km (Source: DEFRA 2020) • Plane, domestic flight FE N2O - 0.00002 kg CO2e/km (Source: DEFRA 2020) • Plane, short-distance flight FE N2O - 0.00076 kg CO2e/km (Source: DEFRA 2020) • Plane, long-distance flight FE N2O - 0.00095 kg CO2e/km (Source: DEFRA 2020) • Takeoff factor - 109% (Source: DEFRA/IPCC 1999) • RFI - 1.9% (Source: DEFRA/IPCC 1999) • The calculation of GHG emissions from wastewater treatment also takes into account the following emission factors and parameters: 0.0019 kgCH4/per day (8-hour working day; employees in-office workdays in 2020), with the following factors: • Global Warming Potential (GWP) CO2 – 1 • GWP CH4 – 28 • GWP N2O- 265 • The calculation of emissions associated with paper consumption, treatment of paper sent for recycling and water consumption also considers the following emission factors: • Paper life cycle - 0.3 t CO2e/t paper consumed (Source: CEPI - Key Statistics 2019) • Paper recycling: - 0.0213 kg CO2e/ kg of paper sent for recycling (Source: DEFRA 2021) • Water consumption - 0.265 kg CO2e/m3 of water collected (Source: EPAL 2017) • Water treatment - 0.272 kg CO2e/m3 of treated water Ratio of average base pay and average total pay between women and men, by function category - (women pay / men pay)*100 Calculated based on information collected through the registration form completed by suppliers on the Novobanco Group's Supplier Portal, based on a set of criteria in the following dimensions and with the respective weighting: Labour and Governance – 40%; Occupational health and safety– 30% and Environment – 30% 2022 ANNUAL REPORT | SUSTAINABILITY REPORT - 170 - Clients Customer service Global satisfaction Confidence Net Promoter Score Very Satisfied Clients Complaint rate per 1000 active clients Branches located in low density areas. 5.6. GRI Table The weight of customers very satisfied with the service is measured by the % of responses of 8 to 10 on a scale of 1 to 10 The weight of very satisfied customers with the Bank corresponds to the % of responses from 8 to 10 on a scale of 1 to 10. The confidence index corresponds to the average of responses on a scale of 0 to 10, with the average being converted into an index of 0 to 100 The Net Promoter Score is calculated based on the recommendation intention, as the difference between the % of promoters and the % of detractors The % of promoters corresponds to the % of responses of 9 to 10 on a scale of 0 to 10 The % of detractors corresponds to the % of responses of 0 to 6 on a scale of 0 to 10 The weight of very satisfied clients is measured by the % of responses of 8 to 10 on a scale of 1 to 10 Number of existing complaints divided by the number of active clients, with active clients considered as those that used the Bank's service in the last 3 months. Number of branches located in the 165 low-density municipalities identified by Deliberation 55/2015 of the Interministerial Commission for Coordination, Portugal 2020 Declaration of use novobanco reported in accordance with the GRI Standards for the period from January 1 to December 31, 2022 Version GRI: Foundation 2021 GRI Standards Applicable Sectors N.A. on the date of publication of this Report Page in the Report SDG GC Principles Omissions Scop e GRI 2: GENERAL DISCLOSURES 2021 ORGANISATIONAL PROFILE 2-1 Organizational details 2-2 Entities included in the organization’s sustainability reporting AR- Novo Banco, S.A. MR – Av. da Liberdade, nº 195, 1250-142 Lisboa SR – page 113 The 2022 Sustainability Report covers the novobanco Group – novobanco, novobanco dos Açores, Banco Best and GNBGA. MR – pages 16- 22; 57-64 F S– page 209 The 2022 Sustainability Report covers the novobanco Group – novobanco, novobanco dos Açores, Banco Best and GNBGA. The information on employees reported in this report has the same scope as the Annual Report, i.e., it covers permanent employees, fixed-term contracts and employees on loan. Reporting period: 1 January to 31 December 2022 2-3 Reporting period, frequency and contact point Frequency: yearly 2-4 Restatements of information Sustainability points of contacts: sustentabilidade@novobanco.pt The 2022 Sustainability Report covers the novobanco Group scope (novobanco, novobanco dos Açores, Banco Best and novobanco Gestão 2022 ANNUAL REPORT | SUSTAINABILITY REPORT - 171 - Page in the Report SDG GC Principles Omissions Scop e de Ativos Group), and the figures for the 2020 Sustainability Report were recalculated based on this scope. Appointment of new CEO and CFO Creation of the Sustainability Office Increase in the Bank's share capital to the amount of 6,054,907,314.00 Euros. Nani Holdings S.G.P.S., S.A – 75.00% Fundo de Resolução (Resolution Fund) – 19.31% Directorate General for the Treasury and Finance – 5.69% SR- pages 121; 124-126. MR- pages 23-24 SR – pages 190-191 SR – pages 111; 121-124; 124-126; 131-149;153-159. MR – pages 16- 22; 23-24; 35-41; 58-65. FS – Page 209 Bank institutional website, products and services. The 2022 Sustainability Report covers the novobanco Group scope (novobanco, novobanco dos Açores, Banco Best and novobanco Gestão de Ativos Group), and the figures for the 2020 Sustainability Report were recalculated based on this scope. The information on employees reported in this report has the same scope as the Annual Report, i.e., it covers permanent employees, fixed- term contracts and employees on loan. The employees with the remaining employment contracts - interns, temporary workers and service providers - totalling 54 (14 men and 40 women) in 2022 - represent 1.3 % of the group's total workforce. SR – pages 140-147;162-168. MR – pages 35, 39-41. SR – pages 140-147;162-168. MR – pages 35, 39-41. SR – pages 124-127. 8 8 6 6 2-5 External assurance ACTIVITIES, VALUE CHAIN AND OTHER BUSINESS RELATIONSHIPS Activities, value chain and other business relationships 2-6 2-7 Employees 2-8 Workers who are not employees Governance of the organization Governance structure and composition 2-9 MR – pages 16- 22, 23-24; 35-41; 57-63, 74-93. 5, 16 Nomination and selection of the highest governance body 2-10 MR – pages 26- 29, 74-93. 5, 16 Institucional website SR – pages 124-127. 2022 ANNUAL REPORT | SUSTAINABILITY REPORT - 172 - 2-11 Chair of the highest governance body 2-12 Role of the highest governance body in overseeing the management of impacts SDG GC Principles Omissions Scop e 16 16 Page in the Report Bank institutional website. SR – pages 127-130. MR – pages 27- 30, 75-96 Bank institutional website. The Chairman of the Executive Board of Directors and remaining members of the Executive Board of Directors and General and Supervisory Board who are part of the Sustainability Steering Committee, control and approve sustainability management on a monthly basis, based on the objectives defined for 2024,2030 and 20250. These objectives are monitored through an action plan and the coordination of teams appointed to implement both the E - pillar (ESG pillar) of the bank's strategy, and the Social Dividend model, with objectives defined for 2021, quarterly assessed. The social dividend aims to give back to the bank's employees and the community in general what the bank generates with its activity. These models and respective procedures ensure the alignment of sustainability performance across the Bank's various operations, through coordination of the initiatives with the officers appointed in each operation SR – pages 124-127. MR – pages 26- 29, 74-93. Bank institutional website. Board Of Directors, Committees Sustainability Steering. 2-13 Delegation of responsibility for managing impacts SR – pages 124-127. 2-14 Role of the highest governance body in sustainability reporting MR – pages 26- 29, 74-93. Bank institutional website. The Annual Report and the Sustainability Report are approved by the Executive Board of Directors and the General and Supervisory Board. SR – pages 124-127. 2-15 Conflicts of interest MR – pages 26- 29, 83-88. 16 2-16 Communication of critical concerns MR – pages 26- 29, 84. Institutional website, Policy Conflict of Interest SR – pages 124-127. 2022 ANNUAL REPORT | SUSTAINABILITY REPORT - 173 - Page in the Report SDG GC Principles Omissions Scop e 2-17 Collective knowledge of the highest governance body 2-18 Evaluation of the performance of the highest governance body 2-19 Remuneration policies 4 Institutional website - supervision committees and Irregularities Reporting policy Institutional website - supervision committees and Whistle-blowing Policy SR – pages 124-127. MR – pages 26- 29, 83-88. Institutional website, Policy Conflict of Interest The performance assessment processes, with regard to the identification of risks and opportunities in economic, social and environmental issues, are identified and managed by the Executive Board of Directors, Committees, Departments and subsequently submitted to the highest governance body and to the Chairman of the Executive Board of Directors. For more information see SR – pages 124-129. MR – pages 26- 29, 74-95. SR – pages 124-1277. MR – pages 26- 29, 87-93. Institutional website, Remuneration Policies SR – pages 124-1277. 2-20 Process to determine remuneration MR – pages 26- 29, 87-93. Institutional website, Remuneration Policies Median annual total compensation for all employees (excluding the highest-paid individual); €39 986,53 CEO total annual remuneration: €387 117,78 .0 Change in CEO remuneration: 4.1% Ratio of the CEO total annual compensation to the median annual total compensation for all employees (excluding the highest-paid individual) 9.68% In 2022 and within the scope of the Collective Bargaining Agreement, there was a salary increase of 1.10%. Average Remuneration: 3.9% AR- CEO Talk com Mark Bourke pages 9-11. 2-21 Annual total compensation ratio STRATEGY, POLICIES AND PRACTICES 2-22 Statement on sustainable development strategy 2022 ANNUAL REPORT | SUSTAINABILITY REPORT - 174 - Page in the Report SR – pages 111- 121;124-133; 144;147-148;153-156. SDG GC Principles Omissions Scop e 2-23 Policy commitments MR - 43-50 82-90. 16 10 Institutional website SR – pages 111- 121;124-133; 144;147-148;153-156. 2-24 Embedding policy commitments MR - 43-50 82-90. 16 10 16 10 16 10 16 8 Institutional website SR – pages 111-119; 125-127; 127- 133;153-160. MR – pages 32 -48. SR – pages 113-118;125- 127;131.140; 141-147;147-149; 153- 160. MR – pages 16-31; 82-90. In 2022, the novobanco Group was considered responsible for 9 infractions that resulted in sanctions in the amount of €743.6m to the following entities: • Central Banks / Regulatory Entities Town Halls SR – pages 121-122; 153-159. • Institutional website SR – pages 113-118;125- 127;131.140; 141-147;147-149; 153- 160. SR – page 167. 8 3 2-25 Processes to remediate negative impacts 2-26 Mechanisms for seeking advice and raising concerns 2-27 Compliance with laws and regulations 2-28 Membership associations STAKEHOLDER ENGAGEMENT 2-29 Approach to stakeholder engagement 2-30 Collective bargaining agreements GRI 3: DISCLOSURES ON MATERIAL TOPICS 2021 Process to determine material topics SR – pages 113-121. List of material topics SR – pages 113-121. 3-1 3-2 ECONOMIC INDICATORS TOPIC: ECONOMIC PERFORMANCE 3-3 Explanation of the material topic and its Boundary The Strategic Plan defined for the 2021-2024 three- year period, on which the management approach has been based, was designed to put in place the necessary conditions for the novobanco Group to transition from a restructuring bank into a growth bank prepared for the future. To this end, the Bank is defining a new distribution model, streamlining its technological and process infrastructure, rejuvenating and enhancing its human capital, and fine-tuning its risk model, electing as cross-cutting priorities optimisation, digitisation and differentiation The novobanco Group has over the years promoted several initiatives with economic impacts. The group's activity has been shaped by and developed in accordance with the objectives established in the Strategic Plan, which resulted in the growth of the 2022 ANNUAL REPORT | SUSTAINABILITY REPORT - 175 - Omissions Scop e SDG Page in the Report GC Principles 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. The Bank monitors the indicators defined for this topic on a monthly basis. Banking Income: €: 918.8. million MR – page 53 Banking Income: €: 918.8 million MR – Page 53 General and administrative expenses: €162.2 million MR - page 55 Staff Costs: €233.7 million MR- page 55 Payments to providers of Capital - Shareholders - There was no distribution of dividends Taxes: €10.0M million FS – page 265, note 30 Community Investments: €1.6 million in donations SR – pages 154-155 Economic Value Distributed: €407.5.7M million Economic Value Retained €511.3million 2, 5, 8, 9 201-1 Direct economic value generated and distributed 201-2 201-3 201-4 Financial implications and other risks and opportunities due to climate change Defined benefit plan obligations and other retirement plans Financial assistance received from governance TOPIC: MARKET PRESENCE SR – pages 126-131. MR – pages 42-49. 13 SR -– pages 141-143;144-147;167. FS – page 420, note 34 novobanco's strategy is centered on being a bank focused on each of its customers, providing them with a simple and efficient experience, supported by an experienced and close team, thus contributing to an organization with robust and sustainable results. Novobanco's strategic plan comprises 4 pillars: i) Customer-centric bank; ii) Simple and efficient operations; iii) Developing people and cultures and iv) Achieving sustainable performance. The novobanco Group has over the years promoted several initiatives with economic impacts. The group's activity has been shaped by and developed in accordance with the objectives established in 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. The Bank monitors the indicators defined for this topic on a monthly basis. For the professional categories that are representative of its workforce, novobanco pays a minimum salary that is higher than the national minimum wage (the lowest salary paid by novobanco is 1.27 times higher than the national minimum wage). 5, 7, 8 6 3-3 Explanation of the material topic and its Boundary 202-1 Ratios of standard entry level wage by gender compared to local minimum wage 2022 ANNUAL REPORT | SUSTAINABILITY REPORT - 176 - 202-2 Proportion of senior management hired from the local community Page in the Report SDG GC Principles Omissions Scop e The group develops most of its activity in Portugal. Local hiring is an integral part of the Bank's hiring practices. Priority is always given to local employees, so as to build a sustained and competent workforce, with possibilities for career advancement, moving on to leadership positions. Consequently, management positions are mostly held by local employees and non- local employees are few. For positions on the Executive Board of Directors, please see: MR – page 28. 8 6 TOPIC: INDIRECT ECONOMIC IMPACTS 3-3 Explanation of the material topic and its Boundary The novobanco Group has promoted several initiatives with indirect economic impacts over the years. The novobanco Group monitors indicators associated with this topic and reports them both in the Annual Report, on the website and in the Sustainability Report. 203-1 The management approach and its components SR – pages 131-140. MR – pages 57-64. 203-2 Evaluation of the management approach SR – pages 113-1119; 131-140. MR – pages 32-35; 57-64. TOPIC: PROCUREMENT PRACTICES 2, 5, 7, 9, 11 1, 2, 3, 8, 10, 17 3-3 Explanation of the material topic and its Boundary 204-1 Percentage of the procurement budget used for significant locations of operation that is spent on suppliers local to that operation TOPICS: ANTI-CORRUTION 3-3 Explanation of the material topic and its Boundary The novobanco Group has promoted several initiatives in this area over the years by creating a sustainability score in the process of registering its suppliers on the Suppliers portal. The novobanco Group monitors indicators associated with this topic and reports them both in the Annual Report, on the website and in the Sustainability Report. SR – pages147-148;168. The novobanco Group acquires its regular consumption products, such as stationery, equipment and specialised services for mainland Portugal and the Islands, from national companies. Around 91.9% of the expenses refer to national suppliers vs 8.1% of international suppliers. SR – pages147-148;168. 12 The novobanco 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. The novobanco Group monitors indicators pertaining to this topic and reports the results in its Annual Report, institutional website and Sustainability Report.. 205-1 205-2 Total number and percentage of operations assessed for risks related to corruption Total number and percentage of employees trained in the MR – page 86. MR – page 86. 16 10 16 10 2022 ANNUAL REPORT | SUSTAINABILITY REPORT - 177 - Page in the Report SDG GC Principles Omissions Scop e organization's anti-corruption policies and practices Confirmed incidents of corruption and actions taken 205-3 TOPICS: ANTI COMPETITIVE BEHAVIOUR 3-3 Explanation of the material topic and its Boundary 206-1 Number of legal actions pending or completed during the reporting period regarding anti-competitive behaviour and violations of anti-trust and monopoly legislation in which the organisation has been identified as a participant ENVIRONMENTAL INDICATORS TOPIC: MATERIAL 3-3 Explanation of the material topic and its Boundary 301-1 Materials used by weight or volume TOPIC: ENERGY WATER AND CO2 EMISSIONS 3-3 Explanation of the material topic and its Boundary Please see indicator 2-27. 16 10 Novobanco has participated over the years in various initiatives in terms of sustainable financing in partnership with its competitors. In 2019, it signed the "Commitment Letter for Sustainable Financing in Portugal", which aims to contribute to the promotion of sustainable investment practices in the country, with the purpose of accelerating the process of a carbon neutral economy by 2050 in full partnership with its peers. It also participates in two more working groups underlying the theme of Sustainable Financing, namely the Portuguese Association of Banks and the Portuguese Association of Investment Funds, Pensions and Assets-. As part of its new strategic plan, one of the priorities is the pillar of partnerships that try to find added value and new relevant partners for the development of value propositions in the financial sector, trying to provide a global ecosystem response to customers by finding value in partners. The Group integrates several working groups whose objective is to create methodologies and tools to respond to the challenges of sustainability, both for individuals and companies. The Bank monitors indicators associated with this topic and reports them in the Annual Report, on the institutional website and in the Sustainability Report. There is no record of any legal action regarding anti-competitive behaviour and violations of anti-trust and monopoly legislation involving the Bank in 2022. 16 The novobanco Group has over the years promoted several initiatives aimed at reducing its direct environmental impact. Some of these measures are included it is Environmental programme, which is integrated in its Social Dividend model. The novobanco Group monitors indicators pertaining to this topic and reports the results in its Sustainability Report and institutional website. SR – pages149-152;161-162. 8,12 7,8 Over the years, the novobanco Group has promoted various initiatives aimed at reducing its direct environmental impact, some of which are included in its Environment programme, which is integrated into its Social Dividend model. novobanco has promoted several initiatives that allow the reduction of energy consumption, mainly in terms of electricity consumption. In most of its buildings, energy consumption comes from renewable sources. It carries out its annual inventory of CO2 emissions, in 2021 for the first time carried out within the scope of the novobanco Group. In 2019, and within the scope of the commitment to reduce CO2 emissions, the bank 2022 ANNUAL REPORT | SUSTAINABILITY REPORT - 178 - Page in the Report SDG GC Principles Omissions Scop e signed the letter “Business Ambition for 1.5ºC”, a document recently presented by the United Nations Global Compact, with this signature, the bank assumes the commitment to preserve the planet and limiting temperature increases to 1.5ºC by 2050, committing to present a scientific project to reduce CO2 emissions resulting from its activity. The Group has also promoted initiatives that aim to reduce its direct environmental impact in terms of its water consumption in view of the scarcity of this resource. The novobanco Group monitors indicators associated with this topic and reports them in the Sustainability Report and on the institutional website. SR – pages149-151;161-162. 302-1 Energy consumption within the organisation 302-3 Energy intensity SR – pages149-151;161-162. 302-4 302-5 Reduction of energy consumption Reductions in energy requirements of products and services 305-1 Direct (Scope 1) GHG emissions SR – pages149-151;161-162. SR – pages149-151;161-162. SR –pages 151;161. 305-2 Energy indirect (Scope 2) GHG emissions SR –pages 151;161. 305-3 Energy indirect (Scope 3) GHG emissions SR –pages 151;161. 305-4 GHG emissions intensity SR –pages 151;161. 305-5 Reduction of GHG emissions SR –pages 151;161. 7,8,1 2,13 7,8,1 2,13 7,8,1 2,13 7,8,1 2,13 3,12, 13,14 ,15 3,12, 13,14 ,15 3,12, 13,14 ,15 13,14 ,15 13,14 ,15 7,8 8 8,9 8,9 7, 8 7, 8 7, 8 8 8, 9 305-6 Emissions of ozone-depleting substances (ODS) 305-7 Nitrogen oxides (NOx), sulphur oxides (SOx), and other significant air emissions 307-1 Significant fines and non- monetary sanctions for non- compliance with environmental laws and/or regulations TOPIC: SUPPLIERS ENVIRONMENTAL ASSESSMENT 3-3 Explanation of the material topic and its Boundary There have been no recharges of gases with the potential to destroy the ozone layer since 2015, as these are prohibited under Regulation (EC) No. 1005/2009, on substances that deplete the ozone layer. Moreover, novobanco had been gradually replacing equipment that emit ozone- depleting gases, when such still exist. SOx and NOx emissions linked to the group's activity result from combustion associated with transportation, emergency generators and boilers. However, due to the reduced expression of these activities within the group's typical activity, these emissions are immaterial and therefore are not accounted for. In 2022 there were no instances of non-compliance with environmental laws and/or regulations, nor were any fines paid in connection therewith. 3,12 7, 8 3,12, 14,15 7, 8 16 8 The novobanco Group has over the years promoted several initiatives to ensure a judicious selection of its suppliers, based on the information provided. The 2022 ANNUAL REPORT | SUSTAINABILITY REPORT - 179 - 308-1 New suppliers that were screened using environmental criteria Negative environmental impacts in the supply chain and actions taken INDICADORES SOCIAIS 308-2 TOPIC: EMPLOYMENT 3-3 Explanation of the material topic and its Boundary 401-1 Total number and rate of new employee hires during the reporting period, by age group, gender and region. 401-2 Benefits provided to full-time employees that are not provided to temporary or part- time employees Page in the Report SDG GC Principles Omissions Scop e group calculates the suppliers’ ‘sustainability scoring’, which takes into account environmental, ethical, labour, hygiene and safety in the workplace aspects of its suppliers. The novobanco Group monitors indicators pertaining to this topic and reports the results in its Sustainability Report and institutional website. SR – pages147-149;168. SR – pages147-149;168. 8 8 The novobanco Group has over the years promoted several initiatives concerning the development of programmes that ensure human capital management focused on talent acquisition and retention, the rejuvenation of teams and the unlocking of the potential of the more experienced employees, using methodologies and programmes aimed at individual development, a balance between professional and personal life, and the creation of a circle of knowledge and sharing. The information on employees reported in this report has the same scope as the Annual Report, i.e., it covers permanent employees, fixed- term contracts and employees on loan. The employees with the remaining types of employment contracts, totalling 54 (14 men and 40 women) in 2022, represent 1.3 of the group's total workforce. The novobanco Group monitors indicators pertaining to this topic and reports the results in its Sustainability Report and institutional website. SR – page 170. 5, 8 6 and subsidies The novobanco Group does not usually hire part-time employees, or only on an exceptional basis. In this context, benefits are granted under equal circumstances to all the group's are employees attributed based on the employee's income. Trainees and temporary workers are not entitled to these benefits and are not covered by the Their scope representativeness within the group is very small: it covers permanent employees, fixed-term contracts and employees on loan. The employees of remaining with employment contracts, totalling 54 (14 men and 40 women) in 2022, represent 1.3 of the group's total workforce. report. types this the of 8 401-3 Total number of employees that were entitled to parental leave, by gender and return to work and retention rates of SR – page 166. 8 6 2022 ANNUAL REPORT | SUSTAINABILITY REPORT - 180 - Page in the Report SDG GC Principles Omissions Scop e employees that took parental leave, by gender TOPIC: LABOUR/MANAGEMENT RELATIONS 3-3 Explanation of the material topic and its Boundary talent acquisition and retention, The novobanco Group has over the years promoted several initiatives concerning the development of programmes that ensure human capital management focused on the rejuvenation of teams and the unlocking of the potential of the more experienced employees, using methodologies and programmes aimed at individual development, a balance between professional and personal life, and the creation of a circle of knowledge and sharing. 402-1 Minimum notice periods regarding operational changes and whether the notice period and provisions for consultation and negotiation are specified in collective agreements TOPIC: OCCUPATIONAL HEALTH AND SAFETY 3-3 Explanation of the material topic and its Boundary 403-1 Percentage of workers whose work, or workplace, is controlled by the organisation, that are represented by formal joint management-worker health and safety committees. The Group monitors indicators pertaining to this topic and reports the results in its Sustainability Report and institutional website. The novobanco Group informs its facts employees of any relevant pertaining career to management in accordance with the established notice periods, seeking compliance with clause 27 of the Collective Wage Agreement, which stipulates that workplace transfers are subject to an advance notice of at least 30 days. their 5 3 The physical, psychological and social wellbeing of its employees is essential for the group, which to this end has in place a health and wellbeing policy based on five lines of action: 1. Communicate and raise awareness; 2. Diagnose and prevent: 3. Encourage and promote; 4. Offer and provide; 5. Reconcile and flexibilise: practices for a balance between professional, personal and family life. The novobanco Group monitors indicators pertaining to this topic and reports the results in its Sustainability Report and institutional website. novobanco group has no formal safety committees, however it engages its employees in the definition and implementation of safety practices and the prevention of occupational hazards. The national legislation requires a minimum guarantee of hygiene, health and safety conditions. The group goes beyond the requirements of the law, annually reporting its practices and results in the management of hygiene, health and safety of all its employees. 8 403-2 Types of injury and rates of injury, occupational diseases, lost days, and absenteeism, and number of work-related fatalities by gender 403-3 Workers with high incidence or high risk of diseases related to their occupation SR – page 172. The novobanco Group is not aware of a high incidence or high risk of work-related diseases amongst its employees. 8 8 2022 ANNUAL REPORT | SUSTAINABILITY REPORT - 181 - Page in the Report SDG GC Principles Omissions Scop e SR - pages 144-147;166-167. novobanco has entered into Company-level Agreements with all the trade unions represented in the institution, which enshrine the obligations of Occupational Medicine and hygiene and safety in the workplace. In addition to the legally mandatory consultations and exams, the Bank has in place other measures. SR – page 167. 8 The Group has over the years promoted several initiatives and programmes to ensure that human capital management is focused on talent attraction and retention. The novobanco Group monitors indicators pertaining to this topic and reports the results in its Sustainability Report. SR – pages 142;165 4, 5, 8 6 SR – pages 142;165 8 SR –pages 142; 165. 5, 8 6 Novobanco Group has over the years promoted several initiatives within its Responsible Banking programme, which monitors three indicators and aims to develop a fair and gender-equal model, having for the purpose defined specific objectives for 2024. The group monitors indicators pertaining to this topic and annually reports the results in its website and Sustainability Report. SR - pages 143-144; 168. SR – page 28. 5, 8 6 403-4 Health and safety topics covered in formal agreements with trade unions TOPIC: TRAINING AND EDUCATION 3-3 Explanation of the material topic and its Boundary 404-1 404-2 404-3 Average hours of training that the organisation’s employees have undertaken during the reporting period, by gender and employee category Programmes for upgrading employee skills and transition assistance programmes Percentage of employees receiving regular performance and career development reviews TOPIC: DIVERSITY AND EQUAL OPPORTUNITIES 3-3 Explanation of the material topic and its Boundary 405-1 Percentage of individuals within the organisation's governance bodies in each of the following diversity categories: Gender, Age group, Other indicators of diversity where relevant (such as minority or vulnerable groups). SR –page 168. 405-2 Ratio of basic salary and remuneration of women to men for each employee category The novobanco Group calculates the ratio based on total rather than base remuneration as the latter is linked to a level defined by the collective labour agreement (ACT). 5, 8, 10 6 TOPIC: NON-DISCRIMINATION 2022 ANNUAL REPORT | SUSTAINABILITY REPORT - 182 - Page in the Report SDG GC Principles Omissions Scop e 3-3 Explanation of the material topic and its Boundary 406-1 Total number of incidents of discrimination and corrective actions taken, TOPIC: FREEDOM OF ASSOCIATION AND COLLECTIVE BARGAINING 3-3 Explanation of the material topic and its Boundary 407-1 Operations and suppliers in which the right to freedom of association and collective bargaining may be at risk TOPIC: CHILD LABOUR AND FORCED OR COMPULSORY LABOUR 3-3 Explanation of the material topic and its Boundary Novobanco has promoted several initiatives over the years with the aim of reducing negative impacts in terms of discrimination through its Responsible Banking pillar, which is integrated into its Social Dividend model. Over the years, novobanco has promoted various initiatives in its Responsible Banking program aimed at monitoring and creating a more fair and gender-equal Bank, having, for this purpose, defined concrete objectives for 2024. In 2022 no incidents or lawsuits came to the attention of the novobanco Group concerning discrimination on grounds of race, colour, gender, religion, public opinion or social background. 5, 8, 16 6 The group has over the years promoted several initiatives viewing non-discrimination, and in this context often meets with the Workers’ Committee and the Trade Unions. The Group monitors indicators pertaining to this topic and reports the results in its Sustainability Report SR - page 167 In 2022, the group was not aware of any instances of non-compliance with laws or regulations for breaches of the right to freedom of association and collective bargaining, or of the payment of fines in connection thereof, within its value chain. 3 The novobanco group complies with the legislation, rules and regulations in force and develops its activity in full compliance with its Equality and Non- Discrimination Policy and Human Rights Policy, defined based on: the United Nations Global Compact • Principles; the Universal Declaration of Human Rights; • • The Guidelines of the Organization for Economic Cooperation and Development (OECD) for Multinational Enterprises; • Labour Organization (ILO). the Core Conventions of the International novobanco's Human Rights Policy reflects its endorsement of and commitment to the Global Compact Principles. The compliance and audit functions and the mechanisms in place for the anonymous reporting of irregularities minimise the risk of any such occurrences within the Group's operations and in connection to its employees. The novobanco Group monitors indicators pertaining to this topic and reports the results in its Sustainability Report and institutional. 2022 ANNUAL REPORT | SUSTAINABILITY REPORT - 183 - Page in the Report SDG GC Principles Omissions Scop e 408-1 409-1 Operations and suppliers at significant risk for incidents of child labour During 2022 no instances came to the attention of novobanco Group concerning operations and suppliers where the risk of child labour or forced or compulsory labour had been identified. 8, 16 5 TOPIC: SECURITY PRACTICES 3-3 Explanation of the material topic and its Boundary 410-1 Security personnel trained in human rights policies or procedures TOPIC: RIGHTS OF INDIGENOUS PEOPLES 3-3 Explanation of the material topic and its Boundary 411-1 Total number of identified incidents of violations involving the rights of indigenous peoples during the reporting period and remediation action taken TOPIC: HUMAN RIGHTS ASSESSMENT 3-3 Explanation of the material topic and its Boundary The group has over the years promoted several initiatives in this area for compliance with the legislation in force. The novobanco Group monitors indicators pertaining to this topic and reports the results in its Sustainability Report. The subject of Human Rights was addressed in the ESG training provided by the Group in 2022 to its employees. 16 1 The group does not promote initiatives in this regard as its activity is developed in urban or urbanised areas.. The group's operations are located in urban or urbanised areas, therefore there are no instances of violation of the rights of indigenous people. 2 1 Over the years, the Group has promoted various initiatives aimed at reducing the negative impact on issues related to Human Rights, more precisely through the #Bancasponsible program which is integrated into its Social Dividend model. One of the standards of excellence of the novobanco Group is the development of a culture of respect for human beings: respect for employees, respect in the way we work with customers, suppliers and other stakeholders, respect in the relationships established with the communities in which the group operates. The Group has a Human Rights policy that can be consulted on its institutional website. The novobanco Group monitors indicators associated with this topic and reports them in the Sustainability Report and institutional website. Total number and percentage of operations that have been subject to human rights reviews or impact assessments Employee training on human rights policies or procedures 412-1 412-2 412-3 Significant investment agreements and contracts that include human rights clauses or that underwent human rights screening Not applicable This was one of the topics addressed in the ESG training. All novobanco Group's suppliers are covered by its Principles for Suppliers, which require compliance with Human Rights obligations. These criteria are included in the agreements entered into with all 1 1 2 2022 ANNUAL REPORT | SUSTAINABILITY REPORT - 184 - Page in the Report SDG GC Principles Omissions Scop e suppliers (100%). The certification of suppliers requires answering mandatory response questions concerning human rights policies and practices. The Bank visits all its material suppliers to check their supply capabilities and their compliance with the requirements of the Principles for Suppliers. In 2022 the group found no instance of non- compliance with these principles by its material Suppliers, namely through its regular visits to their facilities. Should any cases of violation of human rights occur, the group undertakes to investigate them and reserves the right to terminate the agreement with the Supplier in question if it finds evidence of non- compliance with Human Rights obligations. TOPIC: LOCAL COMMUNITIES 3-3 Explanation of the material topic and its Boundary 413-1 413-2 Operations with local community engagement, impact assessments, and development programmes Operações com impactes Operations with significant actual and potential negative impacts on local communities TOPIC: SUPPLIERS SOCIAL ASSESSMENT 3-3 Explanation of the material topic and its Boundary novobanco Group has over the years promoted several initiatives under its Corporate Social Responsibility programme, which aims to help devise solutions for important issues within the community in which the Bank operates. This programme is deployed based on three pillars, namely: culture, financial literacy and solidarity. Some of the initiatives under these pillars are an integral part of the Financial and social wellbeing programme, included within novobanco's Social Dividend Model. The novobanco Group monitors indicators pertaining to this topic and reports the results in its Sustainability Report and institutional website. SR – pages 153-160. 1 The novobanco Group is not aware of any operations having negative impacts on local communities. 1, 2 1 novobanco Group has over the years promoted several initiatives addressing its value chain, namely endorsing the Principles of Relationship with Suppliers, and calculating the “sustainability scoring”, which takes into account environmental, ethical, labour, hygiene and safety in the workplace aspects of its suppliers. The Group monitors indicators pertaining to this topic and reports the results in its Sustainability Report and institutional website. 414-1 414-2 New suppliers that were screened using social criteria Negative social impacts in the supply chain and actions taken SR – pages 147- 149;168. In 2022 novobanco was not aware of any negative impacts at this level. 5, 16 5, 16 2 2 TOPIC: PUBLIC POLICY 3-3 Explanation of the material topic and its Boundary The novobanco Group manages its activity in full compliance with the legislation in force. 2022 ANNUAL REPORT | SUSTAINABILITY REPORT - 185 - Page in the Report SDG GC Principles Omissions Scop e 415-1 Political contributions TOPIC: CUSTOMER HEALTH AND SAFETY 3-3 Explanation of the material topic and its Boundary 416-1 Assessment of the health and safety impacts of product and service categories 416-2 Total number of incidents of non-compliance concerning the health and safety impacts of products and services TOPIC: LABELLING OF PRODUCTS AND SERVICES 3-3 Explanation of the material topic and its Boundary 417-1 Requirements for product and service information and labelling and percentage of significant product or service categories covered by and assessed for compliance with such procedures. Total number of incidents of non-compliance with regulations and/or voluntary codes concerning product and service information and labelling, by type of result Total number of incidents of non-compliance with regulations and/or voluntary codes concerning marketing 417-2 417-3 Novobanco monitors indicators pertaining to this topic and reports the results in its Sustainability Report. Political contributions by companies are not permitted under Decree Law No. 19/2003, of 20 June, and novobanco Group complies with these provisions. 16 10 The group has over the years promoted several initiatives across all client security activities, namely with respect to the clients’ safety, the security of transactions, and the safeguard of the personal data of clients and other data subjects. The novobanco Group monitors indicators pertaining to this topic and reports the results in its Sustainability Report. The group's facilities comply with all existing rules for secure and private customer service. The group conducts its relationship with clients in accordance with the new General Data Protection Regulation, guaranteeing privacy and security in the treatment of customer data. More information may be found in Indicator 418-1. In 2022, there were no sanctions and/or fines imposed on novobanco Group in connection to the General Data Protection Regulation (GDPR). 16 novobanco Group has over the years promoted several initiatives aimed at providing clear and transparent information about the products and services it provides to its clients. Products disclosure is subject to prior approval by the competent supervision authority. 12, 16 The Group monitors indicators pertaining to this topic and reports the results in its Sustainability Report and institutional website. The group provides clear information about each product or service offered, including about their characteristics and specific conditions. This information and underlying processes are subject to strict internal controls in terms of the Bank's internal audit and quality control, as well as strict external controls, through the supervision conducted by the Bank of Portugal, the CMVM and the external audits to the Bank's processes. In 2022 no incidents of non- compliance with voluntary procedures and voluntary codes concerning product and service information or labelling of novobanco Group were identified. In 2022 no incidents of non- compliance with voluntary procedures and voluntary codes on marketing communications, including 16 2022 ANNUAL REPORT | SUSTAINABILITY REPORT - 186 - communications, including advertising, promotion, and sponsorship, by type of result TOPIC: CUSTOMER PRIVACY Page in the Report advertising, promotion, and sponsorship by novobanco Group, were identified. TOPIC: CUSTOMER PRIVACY SDG GC Principles Omissions Scop e 3-3 Explanation of the material topic and its Boundary novobanco Group has over the years promoted several initiatives to ensure it performs its activity in accordance with best market practices and the legal and regulatory requirements. The Bank ensures the confidentiality, integrity and availability of the information. The novobanco Group monitors indicators pertaining to this topic and reports the results in its Sustainability Report 418-1 Total number of substantiated complaints received concerning breaches of customer privacy In 2022, there were no sanctions and/or fines imposed on the group in connection to the General Data Protection Regulation (GDPR). 12 FINANCIAL SUPPLEMENT INDICATORS TOPIC: SOCIOECONOMIC COMPLIANCE 3-3 Explanation of the material topic and its Boundary Policies with specific environmental and social components applied to business lines. Procedures for assessing and screening environmental and social risks in business lines. Processes for monitoring clients’ implementation of and compliance with environmental and social requirements included in agreements or transactions. Process(es) for improving staff competency to implement the environmental and social policies and procedures as applied to business lines Interactions with clients/investees/business partners regarding environmental and social risks and opportunities Percentage of the portfolio for business lines by specific Manage- ment Approach FS6 The novobanco Group been enhancing its customer experience monitoring model with a view to offering the best experience to its clients. Knowing the clients’ expectations throughout their life cycle permits to identify opportunities for improvement, using a robust model for monitoring the customer experience based on several action pillars. The Bank has also reinforced its offering and services based on environmental and social criteria. The group monitors indicators pertaining to this topic and reports the results in its Sustainability Report and institutional website. SR – page 125-126. MR – pages 82-90. 10 Bank Institutional website SR – pages 113-121. 10 The novobanco Group has in place several mechanisms to regulate customer monitoring. In cases which may be considered more sensitive, prevention and monitoring plans are negotiated, and the situations are monitored, resorting, when necessary, to external experts. The novobanco Group provides adequate training to its employees on the marketing of products with environmental and social concerns. 10 SR – pages 113-121; 124-131; 131- 140;140-147;147-148;153-155. 10 SR – pages 131-140. MR – pages 16-26;57-64. 1, 8, 9 2022 ANNUAL REPORT | SUSTAINABILITY REPORT - 187 - Page in the Report SDG GC Principles Omissions Scop e region, size (e.g., micro/SME/ large) and by sector Monetary value of products and services designed to deliver a specific social benefit for each business line broken down by purpose Monetary value of products and services designed to deliver a specific social benefit for each business line broken down by purpose FS7 FS8 TOPIC: AUDIT SR – pages 131-140. MR – pages 16-26;57-64. 1, 8, 9, 10, 11 SR – pages 131-140. MR – pages 16-26;57-64. FS9 Coverage and frequency of audits to assess implementation of environmental and social policies and risk assessment procedures No audits strictly dedicated to the implementation of environmental and social policies are carried out. The group annually assesses the practices implemented and the quantitative data through an external independent verification of its AR and Sustainability Report. 10 ASPECTO: PROPRIEDADE ATIVA FS10 Percentage and number of companies held in the institution’s portfolio with which the reporting organisation has interacted on environmental or social issues FS11 Percentage of assets subject to positive and negative environmental or social screening FS12 Voting policy(ies) applied to environmental or social issues for shares over which the reporting organisation holds the right to vote shares or advises on voting TOPIC: LOCAL COMMUNITIES FS13 Access points in low-populated or economically disadvantaged areas by type FS14 Initiatives to improve access to financial services for disadvantaged people SR – pages 168; 171-189. 10 10 This year, for the first time, the bank will report climate-related risks and opportunities in accordance with the disclosures recommended by the TCFD. The report will be publicly disclosed on the novobanco website, in a separate document - TCFD Report 2022 SR -pages 127-130. novobanco Group's equity holdings in other companies are always aimed at obtaining profitability in the long term. Having said that, the Bank's stance as a shareholder takes into account the relevant principles to ensure consistent ethical, social and environmental management. Despite the downsizing carried out, the group still has a large network of branches across the country. The group has been investing in the digitisation of its services, which has permitted greater coverage and easier contact with its clients, wherever they may be. SR – page111. 1, 10 Under its new distribution model, the group has been increasing the number of access ramps and lifting platforms in its branch network. It also provides lowered ATMs with 1, 10 2022 ANNUAL REPORT | SUSTAINABILITY REPORT - 188 - Page in the Report SDG GC Principles Omissions Scop e TOPIC: LABELLING OF PRODUCTS AND SERVICES FS15 Policies for the fair design and sale of financial products and services Braille keyboards. his equipment is being installed if and when necessary, as the branch network is refurbished. The aim is to gradually extend these access improvements to all novobanco's branches and services. SR – pages 111; 135,138,155-156. All the financial products and services are designed in compliance with the legal requirements, the regulators’ guidelines and the policies of the institution. novobanco Group regularly reports to its regulators proof of its respect for and compliance with politics and rules of conduct, externally and internally. The internal and external audits to the group's procedures verify whether its procedures comply with the requirements issued by the Bank of Portugal and the Portuguese Insurance Institute. 10 FS16 Initiatives to enhance financial literacy by type of beneficiary SR – pages 155-156. 1, 8, 10 AR - Annual Report MR – Management Report SR - Sustainability Report FS - Financial Statements and Final Notes novobanco Group novobanco Group (novobanco,novobanco dos Açores, Banco Best and GNBGA novobanco 2022 ANNUAL REPORT | SUSTAINABILITY REPORT - 189 - Ernst & Young Audit & Associados - SROC, S.A. Avenida da República, 90-6º 1600-206 Lisboa Portugal Tel: +351 217 912 000 Fax: +351 217 957 586 www.ey.com (Translation from the original Portuguese language. In case of doubt, the Portuguese version prevails) Independent Limited Assurance Report To the Board of Directors of Novo Banco, S.A. Introduction We have been engaged by Novo Banco, S.A. (“Novo Banco”) to perform a limited assurance engagement, as defined by International Standards on Assurance Engagements, to report on the disclosures identified in the chapter “5.6 GRI Table” of the Sustainability Report, which include the sustainability information included in the Annual Report 2022 (the “Sustainability Information”), for the year ended 31 December 2022. Criteria applied Novo Banco prepared the Sustainability Information in accordance with the sustainability reporting standards of the Global Reporting Initiative – GRI Standards and with the provisions of article 508.º-G of the Portuguese Companies Act (Código das Sociedades Comerciais) (disclose of non-financial information) (together the “Criteria”). Responsibilities of the Management Novo Banco’s management is responsible for selecting the Criteria, and for preparing the Sustainability Information in accordance with that Criteria, in all material respects. This responsibility includes establishing and maintaining an appropriate internal control system, maintaining adequate records and making estimates that are relevant to the preparation of the Sustainability Information, such that it is free from material misstatement, whether due to fraud or error. Responsibilities of the Auditor Our responsibility is to examine the Sustainability Information prepared by Novo Banco and to issue a limited assurance report based on the evidence obtained. Our engagement was conducted in accordance with the International Standards for Assurance Engagements Other Than Audits or Reviews of Historical Financial Information – ISAE 3000 (Revised) issued by the International Auditing and Assurance Standards Board (IAASB) of the International Federation of Accountants (IFAC) and other technical standards and recommendations issued by the Portuguese Institute of Statutory Auditors (Ordem dos Revisores Oficiais de Contas). These standards require that we plan and perform our engagement to obtain limited assurance about whether, in all material respects, the Sustainability Information is prepared in accordance with the Criteria. Procedures performed in a limited assurance engagement vary in nature and timing from, and are less in extent than for a reasonable assurance engagement. Consequently, the level of assurance obtained in a limited assurance engagement is substantially lower than the assurance that would have been obtained had a reasonable assurance engagement been performed. In these circumstances, our independent review procedures comprised the following: ► Inquiries to management with the objective to understand the business context and the sustainability reporting process; ► Conducting interviews with personnel responsible for preparing the information in order to understand the processes for collecting, collating, reporting and validating of the Sustainability Information for the reporting period; ► Conducting analytical review procedures to support the reasonableness of the data; ► Execution, on a sample basis, of tests to the calculations carried out, as well as tests to prove the quantitative and qualitative information included in the report; Sociedade Anónima - Capital Social 1.340.000 euros - Inscrição n.º 178 na Ordem dos Revisores Oficiais de Contas - Inscrição N.º 20161480 na Comissão do Mercado de Valores Mobiliários Contribuinte N.º 505 988 283 - C. R. Comercial de Lisboa sob o mesmo número A member firm of Ernst & Young Global Limited Novo Banco, S.A. Independent Limited Assurance Report (Translation from the original Portuguese language. In case of doubt, the Portuguese version prevails) 31 December 2022 ► Verification of the conformity of the Sustainability Information with the results of our work and with the Criteria applied. We consider that the evidence obtained is sufficient and appropriate to provide the basis for our conclusion. Quality and Independence We apply the International Standard on Quality Control 1 and, accordingly, maintain a system of quality control including documented policies and procedures regarding compliance with ethical requirements, professional standards and applicable legal and regulatory requirements. We comply with the independence and other ethical requirements of the Ordem dos Revisores Oficiais de Contas’ Code of ethics and of the International Code of Ethics for Professional Accountants (including international independence standards) (IESBA Code), which is founded on fundamental principles of integrity, objectivity, professional competence and due care, confidentially and professional behavior. Conclusion Based on our work and evidence obtained, nothing has come to our attention that cause us to believe that the Sustainability Information, for the year ended 31 December 2022, has not been prepared, in all material respects, in accordance with the Criteria. Lisbon, 03 March 2023 Ernst & Young Audit & Associados – SROC, S.A. Sociedade de Revisores Oficiais de Contas Represented by: (signed) Manuel Ladeiro de Carvalho Coelho da Mota - ROC nº 1410 Registered with the Portuguese Securities Market Commission under license nr. 20161020 2/2 Sem título, 1947 – Vieira da Silva Oil on paper pasted on canvas 46 x 27cm Architecture and urban landscapes volumetry are captured in a synthesis between the observation of reality and the deconstruction of that same reality. The memory of the urban vision and of a spatial reality appears in colorful and luminous planes, rhythmed by the diversity of shapes and colors, which intersect and fit into each other in different planes and dimensions. LISBOA, Fundação Arpad Szenes-Vieira da Silva NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - 195 - (in thousands of Euros)31.12.202231.12.2021Interest Income10 834 679 740 459Interest Expenses10( 209 204)( 167 065)Net Interest Income 625 475 573 394Dividend income11 5 035 11 096Fees and comission income12 337 335 325 511Fees and comission expenses12( 47 155)( 47 357)Gains or losses on derecognition of financial assets and liabilities not measured at fair value through profit or loss13( 88 255)( 5 123)Gains or losses on financial assets and liabilities held for trading13 149 212 50 896Gains or losses on financial assets mandatorily at fair value through profit or loss13( 40 493) 46 697Gains or losses on financial assets and liabilities designated at fair value through profit and loss13 116 21Gains or losses from hedge accounting13( 1 713) 14 195Exchange differences13 6 789 10 805Gains or losses on derecognition of non-financial assets14 83 289 7 551Other operating income15 214 005 163 875Other operating expenses15( 118 357)( 181 604)Operating Income1 125 283 969 957Administrative expenses( 395 870)( 374 359)Staff expenses16( 233 707)( 233 261)Other administrative expenses18( 162 163)( 141 098)Contributions to resolution funds and deposit guarantee19( 41 155)( 40 535)Depreciation27, 29( 52 493)( 34 004)Provisions or reversal of provisions34( 39 245)( 127 835)Commitments and guarantees given 2 685 9 840Other provisions( 41 930)( 137 675)Impairment or reversal of impairment on financial assets not measured at fair value through profit or loss20( 101 882)( 198 903)Impairment or reversal of impairment of investment in subsidiaries, joint ventures and associates20 21 546 315Impairment or reversal of impairment on non-financial assets20 8 375( 26 314)Share of the profit or loss of investments in subsidiaries, joint ventures and associates accounted for using the equity method26 8 354 3 794Profit or loss before tax from continuing operations 532 913 172 116Tax expense or income related to profit or loss from continuing operations 53 301 15 186Current tax( 10 048)( 12 737)Deferred tax 63 349 27 923Profit or loss after tax from continuing operations 586 214 187 302Profit or loss before tax from discontinued operations32( 270) 4 887Profit or loss for the year 585 944 192 189Attributable to Shareholders of the parent 560 842 184 504Attributable to non-controlling interests37 25 102 7 685 585 944 192 189Basic earnings per share (in Euros)210,060,02Diluted earnings per share (in Euros)210,060,02Basic earnings per share of continuing activities (in Euros)210,060,02Diluted earnings per share of continuing activities (in Euros)210,060,02The accompanying explanatory notes are an integral part of these consolidated financial statementsnovobanco GROUPCONSOLIDATED INCOME STATEMENTFOR THE YEARS ENDED 31 DECEMBER 2022 AND 2021Notes NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - 196 - (in thousands of Euros)31.12.202231.12.2021Net profit / (loss) for the exercise 585 944 192 189 Other comprehensive income/(loss) Items that will not be reclassified to results 116 903( 82 878)Actuarial gains / (losses) on defined benefit plansa) 101 726( 75 584)Other comprehensive income from associates accounted for using the equity methoda) 332( 252)Fair value changes of equity instruments measured at fair value through other comprehensive incomea) 14 845( 7 042)Items that may be reclassified to results( 305 988)( 139 191)Foreign exchange differencesa)( 892) 95Cash flow hedging( 100 418)-Financial assets at fair value through other comprehensive incomea)( 204 678)( 139 286)Total other comprehensive income/(loss) for the period 396 859( 29 880)Attributable to non-controlling interest 25 102 7 685Attributable to Shareholders of the Parent 371 757( 37 565)a) See Consolidated Statement of Changes in the EquityThe accompanying explanatory notes are an integral part of these consolidated financial statementsnovobanco GROUPCONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME FOR THE YEARS ENDED 31 DECEMBER 2022 AND 2021Notes NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - 197 - (in thousands of Euros)Notes31.12.202231.12.2021AssetsCash, cash balances at central banks and other demand deposits 226 599 0785 871 538Financial assets held for trading 23 171 810 377 664 24 313 702 799 592Financial assets at fair value through profit or loss 24 13-Financial assets at fair value through other comprehensive income 242 331 0997 220 996Financial assets at amortised cost 2432 777 69326 039 902Securities8 183 2092 338 697Loans and advances to banks 43 548 50 466Loans and advances to customers24 550 93623 650 739Derivatives – Hedge accounting 25 562 845 19 639 25( 383 689) 30 661Investments in subsidiaries, joint ventures and associates 26 119 744 94 590Tangible assets 798 831 864 132Tangible fixed assets 27 299 264 238 945Investment properties 28 499 567 625 187Intangible assets 29 69 832 67 986Tax assets 30 956 000 779 892Current Tax Assets 32 570 35 653Deferred Tax Assets 923 430 744 239Other assets 311 618 4842 442 550Non-current assets and disposal groups classified as held for sale 32 59 587 9 373Total Assets45 995 02944 618 515-Liabilities Financial liabilities held for trading 23 99 386 306 054 Financial liabilities measured at amortised cost 3340 987 17740 215 994Deposits from banks9 705 15410 745 155 (of which, Repurchase Agreement)2 150 8241 529 847Due to customers29 277 85827 582 0931 628 8971 514 153Other financial liabilities 375 268 374 593 Derivatives – Hedge accounting 25 119 578 44 460 Provisions 34 413 432 442 834 Tax liabilities 30 8 427 15 297Current Tax liabilities 7 582 12 262Deferred Tax Liabilities 845 3 035 Other liabilities 35 839 919 443 437 Liabilities included in disposal groups classified as held for sale 32 15 492 968Total Liabilies42 483 41141 469 044Equity Capital 366 304 6616 054 907 Accumulated other comprehensive income 37(1 234 573)(1 045 489) Retained earnings 37(8 577 074)(8 576 860) Other reserves 376 439 4186 501 374 Profit or loss attributable to Shareholders of the parent 560 842 184 504 Minority interests (Non-controlling interests) 37 18 344 31 035Total Equity3 511 6183 149 471Total Liabilities and Equity45 995 02944 618 515The accompanying explanatory notes are an integral part of these consolidated financial statementsnovobanco GROUPCONSOLIDATED BALANCE SHEETAS OF 31 DECEMBER 2022 AND 2021Financial assets mandatorily at fair value through profit or lossFair value changes of the hedged items in portfolio hedge of interest rate riskDebt securities issued, Subordinated debt and liabilities associated to transferred assets NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - 198 - (in thousands of Euros)Other Comprehensive IncomeOtherBalance as at 31 December 2020 5 900 000 ( 823 420)( 7 202 828) 6 570 154 ( 1 329 317)( 42 986) 75 032 3 146 635 Capital increase by incorporation of special reserve for deferred taxes 36 154 907 - - ( 154 907)- - - - Other Increase / (Decrease) in Equity- - ( 1 374 032) 86 127 1 329 317 - ( 8 696) 32 716 Appropriation to retained earnings of net profit / (loss) of the previous exercise- - ( 1 374 246) 44 929 1 329 317 - - - Reserve of Contingent Capital Agreement 37 - - - 39 920 - - - 39 920 Other movements- - 214 1 278 - - ( 8 696)( 7 204)Total comprehensive income for the exercise- ( 222 069)- - 184 504 7 685 - ( 29 880)Changes in fair value, net of tax 37 - ( 125 801)- - - - - ( 125 801)Foreign exchange differences, net of tax- 95 - - - - - 95 Remeasurement of defined benefit plans, net of tax 16 - ( 75 584)- - - - - ( 75 584)Other comprehensive income appropriated from affiliates- ( 252)- - - - - ( 252)Reserves of impairment of securities at fair value through OCI 37 - 12 - - - - - 12 Reserves of sales of securities at fair value through OCI 37 - ( 20 539)- - - - - ( 20 539)Net income of the exercise- - - - 184 504 7 685 - 192 189 Balance as at 31 December 2021 6 054 907 ( 1 045 489)( 8 576 860) 6 501 374 184 504 ( 35 301) 66 336 3 149 471 Balance as at 31 December 2021 6 054 907 ( 1 045 489)( 8 576 860) 6 501 374 184 504 ( 35 301) 66 336 3 149 471 Capital increase by incorporation of special reserve for deferred taxes 36 249 754 - - ( 249 754)- - - - Other increase / (Decrease) in Equity- 1 ( 214) 187 798 ( 184 504)- ( 37 793)( 34 712)Appropriation to retained earnings of net profit / (loss) of the previous year- - - 184 504 ( 184 504)- - - Other movements- 1 ( 214) 3 294 - - ( 37 793)( 34 712)Total comprehensive income for the year- ( 189 085)- - 560 842 25 102 - 396 859 Changes in fair value, net of tax 37 - ( 185 616)- - - - - ( 185 616)Foreign exchange differences, net of tax- ( 892)- - - - - ( 892)Remeasurement of defined benefit plans, net of tax 17 - 101 726 - - - - - 101 726 Other comprehensive income appropriated from affiliates- 332 - - - - - 332 Reserves of impairment of securities at fair value through OCI 37 - ( 3 052)- - - - - ( 3 052)Reserves of sales of securities at fair value through OCI 37 - ( 1 165)- - - - - ( 1 165)Cash flow hedge reserves- ( 100 418)- - - - - ( 100 418)Net income of the exercise- - - - 560 842 25 102 - 585 944 Balance as at 31 December 2022 6 304 661 ( 1 234 573)( 8 577 074) 6 439 418 560 842 ( 10 199) 28 543 3 511 618 CONSOLIDATED STATEMENT OF CHANGES IN EQUITYFOR THE YEARS ENDED 31 DECEMBER 2022 AND 2021NotesShare CapitalOther Comprehensive IncomeRetained earningsThe accompanying explanatory notes are an integral part of these consolidated financial statementsOther reservesNet profit/(loss) for the exercise attributable to shareholders of the BankNon-controlling interestsTotal Grupo novobanco NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - 199 - (in thousands of Euros)Notes31.12.202231.12.2021Cash flows from operating activitiesInterest received 862 685 678 735 Interest paid( 211 860)( 160 704)Fees and commissions received 337 335 325 537 Fees and commissions paid( 47 155)( 47 357)Recoveries on loans previously written off 40 423 27 293 Contributions to the pension fund( 249)( 86 708)Contributions to resolution funds and deposit guarantee( 41 155)( 40 535)Cash payments to employees and suppliers( 362 179)( 330 884) 577 845 365 377 Changes in operating assets and liabilities:Deposits with / from Central Banks(1 702 869) 972 363 Financial assets mandatorily at fair value through profit or loss 361 790 290 095 Financial assets designated at fair value through profit or loss 146 801 93 984 Financial assets at fair value through other comprehensive income4 463 594 479 439 Financial assets at amortised cost(6 738 365)( 344 041)Debt securities(5 831 051)( 129 026)Loans and advances to banks 7 342 59 242 Loans and advances to customers( 914 656)( 274 257)Financial liabilities at amortised cost2 343 653 927 928 Deposits from banks 635 597 ( 331 734)Due to customers1 708 056 1 259 662 Derivatives - Hedge accounting( 53 738)( 1 552)Other operating assets and liabilities 960 322 ( 565 133)Net cash from operating activities before corporate income tax 359 033 2 218 460 Corporate income taxes paid( 44 800)( 35 560)Net cash from operating activities 314 233 2 182 900 Cash flows from investing activitiesAcquisition of investments in subsidiaries and associated companies- ( 4)Sale of investments in subsidiaries and associated companies( 1 560) 365 Dividends received 5 035 11 096 Acquisition of investment properties( 16 464)( 4 973)Sale of investment properties 367 213 100 028 Acquisition of tangible fixed assets ( 137 533)( 81 973)Sale of tangible fixed assets 107 261 424 Acquisition of intangible assets( 25 306)( 25 696)Sale of intangible assets 4 - Net cash from investing activities 298 650 ( 733)Cash flows from financing activitiesContingent Capitalisation Mechanism- 429 013 Issuance of bonds and other securitised liabilities 106 000 575 000 Repayment of bonds and other liabilities( 14 285)( 11 834)Net cash from financing activities 91 715 992 179 Net changes in cash and cash equivalents 704 598 3 174 346 Cash and cash equivalents at the beginning of the exercise5 606 583 2 432 237 Net changes in cash and cash equivalents 704 598 3 174 346 Cash and cash equivalents at the end of the exercise6 311 181 5 606 583 Cash and cash equivalents include:Cash22 182 895 151 699 Deposits with Central Banks225 942 498 5 264 629 (of which, Restricted balances)( 287 897)( 264 955)Deposits with banks22 473 685 455 210 Total6 311 181 5 606 583 novobanco GROUPCONSOLIDATED CASH FLOW STATEMENTFOR THE YEARS ENDED 31 DECEMBER 2022 AND 2021The accompanying explanatory notes are an integral part of these consolidated financial statements Notes to the Consolidated Financial Statements as of 31 December 2022 (Amounts expressed in thousands of Euros, except when otherwise indicated) NOTE 1 – ACTIVITY AND GROUP STRUCTURE Novo Banco, S.A. is the main entity of the financial novobanco Group 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))1, 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 novobanco (novobanco or Bank). As a result of the resolution measure applied, Fundo de Resolução (“Resolution Fund”) became the sole owner of the share capital of novobanco, in the amount of Euro 4,900 million, which acquired 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 novobanco. 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 to 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. With the conclusion of the sale process, novobanco 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 novobanco are consolidated by Nani Holdings SGPS, S.A., with registered office at Avenida D. João II, No. 46, 4A, Lisbon. LSF Nani Investments S.à.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. novobanco Group (hereinafter also designated as Group or novobanco Group) has a retail network comprising 292 branches in Portugal and abroad (31 December 2021: 311 branches), including branches in Spain and Luxembourg, and 2 representative offices in Switzerland (31 December 2021: 4 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. 1 References made to RGICSF refer to the version in force at the date of the resolution measure. The current version of the RGICSF has suffered changes, namely in article 145, following the publication of Law 23-A 2015, of 26 March, that came into force on the day following its publication. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - 200 - The entities directly consolidated into novobanco are the following: Subgroups: Additionally, and considering the requirements of IFRS 10, the Group’s consolidation perimeter includes the following structured entities: NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - 201 - NOVO BANCO, SA2014-PortugalCommercial Banking Novo Banco dos Açores, SA (novobanco Açores)20022002PortugalCommercial Banking57,53%Full consolidation BEST - Banco Electrónico de Serviço Total, SA (BEST)20012001PortugalElectronic banking100,00%Full consolidation NB África, SGPS, SA20092009PortugalHolding100,00%Full consolidation GNB - Gestão de Ativos, SGPS, SA (GNB GA)19921992PortugalHolding100,00%Full consolidation ES Tech Ventures, S.G.P.S., SA (ESTV)20002000PortugalHolding100,00%Full consolidation NB Finance, Ltd. (NB FINANCE)20152015Cayman IslandsIssue and distribution of securities100,00%Full consolidation GNB Concessões, SGPS, SA (GNB CONCESSÕES)20022003PortugalHolding100,00%Full consolidation Espírito Santo Representações, Ltda. (ESREP)19961996BrazilRepresentation services99,99%Full consolidation Aroleri, SLU20212021SpainReal estate development100,00%Full consolidation Fundo de Capital de Risco NOVO BANCO PME Capital Growth20092009PortugalVenture capital fund100,00%Full consolidationFundo de Gestão de Património Imobiliário - FUNGEPI - Novo Banco19972012PortugalReal estate fund management100,00%Full consolidation Fundo de Gestão de Património Imobiliário - FUNGEPI - Novo Banco II20112012PortugalReal estate fund management100,00%Full consolidationImoInvestimento – Fundo Especial de Investimento Imobiliário Fechado20122012PortugalReal estate fund management100,00%Full consolidationPrediloc Capital – Fundo Especial de Investimento Imobiliário Fechado20062012PortugalReal estate fund management100,00%Full consolidationImogestão – Fundo de Investimento Imobiliário Fechado20062013PortugalReal estate fund management100,00%Full consolidationInvesfundo VII – Fundo de Investimento Imobiliário Fechado20082013PortugalReal estate fund management100,00%Full consolidationNB Património - Fundo de Investimento Imobiliário Aberto19922014PortugalReal estate fund management56,39%Full consolidationNB Arrendamento - Fundo de Investimento Imobiliário Fechado para Arrendamento Habitacional20092012PortugalReal estate fund management100,00%Full consolidationFimes Oriente - Fundo de Investimento Imobiliário Fechado20042012PortugalReal estate fund management100,00%Full consolidationFundo de Investimento Imobiliário Fechado Amoreiras20062015PortugalReal estate fund management95,24%Full consolidationNB Branches - Fundo Especial de Investimento Imobiliário Fechado20062019PortugalReal estate fund management100,00%Full consolidationFebagri-Actividades Agropecuárias e Imobiliárias SA20062012PortugalReal estate development100,00%Full consolidationJCN - IP - Investimentos Imobiliários e Participações, SA19952012PortugalReal estate development100,00%Full consolidationGreenwoods Ecoresorts empreendimentos imobiliários, SA20122012PortugalReal estate development100,00%Full consolidationImalgarve - Sociedade de Investimentos Imobiliários, SA19862014PortugalReal estate development100,00%Full consolidationHerdade da Boina - Sociedade Imobiliária19992012PortugalReal estate development100,00%Full consolidationBenagil - Promoção Imobiliária, SA19702012PortugalReal estate development100,00%Full consolidationPromofundo - Fundo Especial de Investimento Imobiliário Fechado20082018PortugalReal estate fund management100,00%Full consolidation Locarent - Companhia Portuguesa de Aluguer de Viaturas, SA (LOCARENT)20032003PortugalRenting50,00% b)Equity methodUNICRE - Instituição Financeira de Crédito, SA19742010PortugalNon banking financing17,50% a)Equity method Edenred Portugal, SA19842013PortugalServices provider50,00% b)Equity method Multipessoal Recursos Humanos - SGPS, S.A19931993PortugalManagement of shareholdings22,52%Equity methodb) Entities consolidated under the equity method as the voting rights grant control to the other shareholdersYear incorporatedYear acquiredRegistered officeActivityShare-holding %Consolidation methoda) 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 GNB - Gestão de Ativos, SGPS, SA (GNB GA)19921992PortugalHolding100,00%Full consolidation GNB Fundos Mobiliários - Sociedade Gestora de Organismos de Investimento Coletivo, SA19871987PortugalInvestment fund management100,00%Full consolidation GNB Real Estate - Sociedade Gestora de Organismos de Investimento Coletivo, 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 Islands Investment fund management50% b)Equity method GNB - Sociedade Gestora de Patrimónios, SA19871987PortugalWealth management100,00%Full consolidation GNB - International Management, SA19951995LuxembourgInvestment fund 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, SA20132013PortugalServices100,00%Full consolidation GNB Concessões, SGPS, SA (GNB CONCESSÕES)20022003PortugalHolding100,00%Full consolidation Lineas – Concessões de Transportes, SGPS, SA20082010PortugalHolding40,00%Equity methoda) 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 shareholdersConsolidation methodYear incorporatedYear acquiredRegistered officeActivityShare-holding %a)a) During 2022, the main changes in novobanco Group’s structure were as follows: - Subsidiaries and branches • • • • • • • • • • • • • • In January 2022, the NB Pension Fund redeemed participation units in Fungere, with the novobanco Group's holding changing to 98.22%. In March 2022, novobanco redeemed 12,688,194 participation units of Fungere, in the amount of Euro 15,051 thousand, changing the Group's holding to 97.87%. In September 2022, Fungere was merged into Fungepi. Following this merge, novobanco redeemed participation units of Fungepi in the amount of Euro 39,964 thousand; In February 2022, the Five Stars Fund changed its name to NB Branches and in November 2022 it increased its capital by Euro 43 million; In March 2022, the stake held in Autodril was sold, with a negative impact of Euro 591 thousand. In May 2022, the FCR PME NB Fund repaid the capital, with novobanco receiving Euro 3,174 thousand; In June 2022, novobanco redeemed its participation units in the Imogestão Fund in the amount of Euro 38,000 thousand; In August 2022, the Imoinvestimento Fund sold the companies Várzea da Lagoa and Quinta D. Manuel I, for 2,592 thousand euros and Euro 1,107 thousand, respectively. At the novobanco Group level, these sales generated a capital gain of Euro 88 thousand; In September 2022, novobanco redeemed Fungepi II participation units in the amount of Euro 4,068 thousand; In September 2022, the novobanco Pension Fund redeemed all the participation units held in NB Património, with novobanco now holding 96.24% of the Fund; In September 2022, Fundes was liquidated; In December 2022, the Real Estate Funds Quinta da Ribeira, Novimove and NB Logística and the FCR PME NB were liquidated; In December 2022, the stake in Ribagolfe was sold with a positive impact of Euro 270 thousand; In December 2022, the stake in the Arrábida Fund was sold with a positive impact of Euro 999 thousand; In December 2022, the stake in Herdade da Vargem Fresca VI was sold with a positive impact of Euro 136 thousand; In December 2022, Espírito Santo International Management was liquidated. - Associated companies • • • • • In March 2022, FCR PME NB sold its stake in Epedal for Euro 1,709 thousand, generating a capital gain of Euro 67 thousand; In May 2022, FCR PME NB sold its interest, supplementary payments and shareholder loans in Nexxpro, with no impact on the Group's results; In September 2022, FCR PME NB acquired the remaining capital and supplementary capital of Ach Brito for Euro 1, holding now 100% of the company's capital; In October 2022, FCR PME NB sold its stake in Cristalmax for Euro 2,667 thousand, with no impact on the Group's results; In December 2022, FCR PME NB sold the stake it held in M N Ramos Ferreira for Euro 340 thousand, with no impact on the Group's results. During 2021, the main changes in novobanco Group’s structure were as follows: - Subsidiaries and branches • • • • • • • • • • In February 2021, Imoinvestimento Fund granted additional supplementary payments to the real estate companies Quinta D. Manuel I, Várzea da Lagoa and Promotur in the amounts of Euro 50 thousand, Euro 110 thousand and Euro 260 thousand, respectively; In March 2021, GNB - Serviços de Suporte Operacional, ACE was dissolved, with no impact on the income statement; In July 2021, GNB – Recuperação de Crédito, ACE was dissolved, with no impact on the income statement; In July 2021, the real estate company Imoascay was liquidated, with no impact on the income statement; In September 2021, the real estate fund ASAS Invest was liquidated, with no impact on the income statement; In September 2021, FCR PME NB Fund partially redeemed participation units in the total amount of Euro 1,550 thousand, with novobanco receiving Euro 941 thousand; In October 2021, the redemption of Fungepi's participation units in the amount of Euro 45,000 thousand was carried out; In October 2021, the redemption of NB Arrendamento participation units in the amount of Euro 500 thousand was carried out; In November 2021, a capital increase of Euro 9,216 thousand in NB Logística was carried out, fully subscribed by novobanco and Fungepi, through the delivery of real estate properties; n November 2021, a redemption of participation units of Novimove in the amount of Euro 1,250 thousand was carried out; NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - 202 - Lusitano Mortgages No.6 plc (*)20072007IrelandSpecial Purpose Entity100%Full consolidationLusitano Mortgages No.7 plc (*)20082008IrelandSpecial Purpose Entity100%Full consolidationConsolidation method(*)-Structuredentitiessetupinthescopeossecuritizationoperations,recordedintheconsolidatedfinancialstatementsinaccordancewiththecontinuedinvolvementoftheGroupinthese operations, determined based on the percentage of the equity pieces held of the respective vehicles (see Note 41)Year incorporatedYear acquiredRegistered officeActividadeShare-holding % • • • • • In November 2021, the real estate company Promotur was liquidated, with no impact on the income statement; In November 2021, a 100% equity stake in Aroleri, SLU was acquired for Euro 4 thousand; In December 2021, the real estate company Quinta da Areia was liquidated, with no impact on the income statement; In December 2021, there were two capital increases of Fungepi II in the amount of Euro 24,090 thousand and Euro 11,696 thousand, fully subscribed by novobanco and through the delivery of real estate properties, and a capital reduction of Euro 70,932 thousand; In December 2021, the capital of Five Stars was increased in the amount of Euro 26,006 thousand, fully subscribed and paid up by novobanco. - Associated companies • In September 2021, FCR PME NB Fund sold its stake in LOGI C - Logística Integrada, SA, recording a capital gain of Euro 84 thousand. novobanco holds in its balance mandatory convertible securities (VMOC) from two entities, obtained through credit recovery, measured at the fair value which was estimated to be nill. The extension of the conversion of these VMOC into shares ended during the month of December 2021. The Group contests this conversion, having addressed to the issuers, letters of formal notice for payment of the payable amounts. During 2022 and 2021, the movements relating to acquisitions, sales and other investments and repayments in subsidiary and associated companies are detailed as follows: NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - 203 - The subsidiaries classified under IFRS 5 as non-current assets held for sale and discontinued operations, are detailed in Note 32. NOTE 2 – BASIS OF PRESENTATION The consolidated financial statements of novobanco are presented as of 31 December, 2022, expressed in thousands of euros, rounded to the nearest thousand. The accounting policies used by the Group in the preparation are consistent with those used in the preparation of the financial statements as of 31 December 2021. The changes to the most relevant accounting policies are described in Note 5. The consolidated financial statements of novobanco 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 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. The consolidated financial statements and the Management Report of 31 December 2022 were approved at the Executive Board of Directors’ meeting held on 1 March 2023 and will be submitted to the General Assembly of Shareholders, which has the power to NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - 204 - (in thousands of Euros)Acquisition ValueOther Investments (a)TotalSales ValueOther Refunds (a)TotalCapital gains/losses on sales/settlementsSubsidiary companiesAutodril- - - 504 - 504 ( 591)Fungere- - - - ( 15 051)( 15 051)- FCR PME NB- - - - ( 3 174)( 3 174)- Várzea da Lagoa- - - 2 592 - 2 592 66 Quinta D. Manuel I- - - 1 107 - 1 107 22 Fungepi II- - - - ( 4 068)( 4 068)- Fungepi- - - - ( 39 965)( 39 965)- Arrábida- - - 20 057 - 20 057 999 Herdade da Vargem Fresca VI- - - 500 - 500 136 Imogestão- - - - ( 38 000)( 38 000)- NB Branches- 43 000 43 000 - - - - Ribagolfe- - - 7 613 - 7 613 270 - 43 000 43 000 32 373 ( 100 258)( 67 885) 902 Associated companiesEpedal- - - 1 709 - 1 709 67 Nexxpro- - - 2 790 - 2 790 - Cristalmax- - - 2 667 - 2 667 - M N Ramos Ferreira- - - 340 - 340 - - - - 7 506 - 7 506 67 - 43 000 43 000 39 879 ( 100 258)( 60 379) 969 (a) Capital increases/decreases, supplementary benefits, supplies, financial instrument exchange operations and company formation(in thousands of Euros)Acquisition ValueOther Investments (a)TotalSales ValueOther Refunds (a)TotalCapital gains/losses on sales/settlementsSubsidiary companiesQuinta D. Manuel I- 50 50 - - - - Várzea da Lagoa- 110 110 - - - - Promotur- 260 260 - - - - FCR PME NB- - - - ( 4 427)( 4 427)- Fungepi II- 41 493 41 493 - ( 70 932)( 70 932)- Fungepi- - - - ( 45 000)( 45 000)- NB Logística- 9 216 9 216 - - - - NB Arrendamento- - - - ( 500)( 500)- Novimove- - - - ( 1 250)( 1 250)- Aroleri 4 - 4 - - - - Imogestão- - - - - - - Five Stars- 26 006 26 006 - - - - Ribagolfe- - - - - - - 4 77 135 77 139 - ( 122 109)( 122 109)- Associated companiesLOGI C - Logística Integrada- - - 365 - 365 84 - - - 365 - 365 84 4 77 135 77 139 365 ( 122 109)( 121 744) 84 (a) Capital increases/decreases, supplementary benefits, supplies, financial instrument exchange operations and company formation31.12.2022AcquisitionsReductions(cid:9)(cid:9)(cid:9)(cid:9)31.12.2021AcquisitionsReductions(cid:9)(cid:9)(cid:9)(cid:9) justifiably decide to change them. However, it is Executive Board of Directors conviction that these consolidated financial statements will be approved without changes. NOTE 3 –STATEMENT OF COMPLIANCE The consolidated financial statements of novobanco have been prepared in accordance with International Financial Reporting Standards (IFRS) as adopted in the European Union in force on January 1, 2022, under Regulation (EC) nº 1606/2002 of the European Parliament and of the Council, of 19 July 2002, and Notice nº 5/2015 of Bank of Portugal. IFRS comprise accounting standards issued by the International Accounting Standards Board (IASB) and interpretations issued by the International Financial Reporting Interpretation Committee (IFRIC) and its predecessor body the Standing Interpretations Committee (SIC). NOTE 4 – PRESENTATION OF FINANCIAL STATEMENTS The Group presents its statement of financial position in order of liquidity based on the Group’s intention and perceived ability to recover/settle the majority of assets/liabilities of the corresponding financial statement line caption. An analysis regarding recovery or settlement within 12 months after the reporting date (current) and more than 12 months after the reporting date (noncurrent) is presented throughout the different balance sheet notes. NOTE 5 – CHANGES IN ACCOUNTING POLICIES In the preparation of its financial statements with reference to 31 December 2022, the Group did not early adopt any new standard, interpretation or amendment issued, but not yet in force. The changes to the standards adopted by the Group are as follows: Standards, interpretations, amendments, and revisions that came into force in the fiscal exercise The following standards, interpretations, amendments, and revisions adopted ("endorsed") by the European Union have mandatory application for the first time in the fiscal year beginning 1 January 2022: Standard / Interpretation Description This amendment updates the references to the Conceptual Structure in the IFRS 3 text without having made changes to the accounting requirements for concentrations of business activities. Amendments to IFRS 3 - References to the Conceptual Structure for Financial Reporting It is also clarified the accounting treatment to be adopted in relation to liabilities and contingent liabilities under IAS 37 and IFRIC 21, incurred separately versus those included in a concentration of business activities. It should be applied prospectively. Amendments to IAS 16 - Income obtained prior to entry into operation It clarifies the accounting treatment given to the payment obtained from the sale of products resulting from the test production of tangible fixed assets, prohibiting their deduction at the cost of acquiring the assets. The entity acknowledges the income obtained from the sale of such products and the costs of their production in the results. Amendments to IAS 37 - Onerous contracts - costs of fulfilling a contract This amendment specifies that in the assessment of whether or not a contract is onerous, only expenses directly related to the performance of the contract can be considered, such as incremental costs related to direct labor and materials and the allocation of other directly related expenses such as the allocation of depreciation expenses of tangible assets used to perform the contract. General and administrative costs do not relate directly to a contract and are excluded unless they are explicitly debited to the party in accordance with the contract. It should apply to contracts which, at the beginning of the first annual reporting period to which the amendment is applied, still include unmet contractual obligations, without re-expression of the comparison. Amendments to IFRS 1 - Subsidiary as an IFRS adopter for the first time (included in annual improvements for the 2018-2020 cycle) This amendment clarifies that when a subsidiary chooses to measure its assets and liabilities by the amounts included in the consolidated financial statements of the parent company (assuming that there has been no adjustment in the consolidation process), the measurement of accumulated transposition differences may be made by the amounts that would be recorded in the consolidated financial statements, based on the date of transition from the parent company to IFRS. Amendments to IFRS 9 - Derecognition of financial liabilities - Commissions to be included in the '10 per cent' variation This amendment clarifies which commissions an entity should include when assessing whether the terms of a financial liability are substantially different from the terms of the original financial liability. Thus, in the context of the derecognition tests carried out on renegotiated liabilities, only the NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - 205 - test (included in the annual improvements for the 2018-2020 cycle) commissions paid or received between the debtor and the creditor should be included, including the commissions paid or received by the debtor or the creditor on behalf of the other. Amendments to IAS 41 - Taxation and fair value measurement (included in annual improvements for the 2018-2020 cycle) This amendment removes the requirement set out in paragraph 22 of IAS 41 to exclude income tax-related cash flows in the fair value of biological assets, ensuring consistency with IFRS 13 principles. Amendments to IFRS 16 - Leases - Concessions related to COVID-19 at the level of rents beyond 30 June 2021 On May 28th of 2020, the amendment to IFRS 16 called 'COVID-19 related concessions' was issued, introducing the following practical expedient: a lessee may choose not to assess whether a Covid-19-related rent concession is a lease modification. Lessees who choose to apply this file, account the change on rent payments arising from a concession related to COVID-19 in the same way that they account for a change other than a modification of the lease in accordance with IFRS 16. Initially, the practical working hours applied to payments originally due until 30 June 2021, however, due to the prolongation of the impact of the pandemic, on 31 March 2021, it was extended to payments originally due until 30 June 2022. The amendment applies to annual reporting periods initiated on or after 1 April 2021. In a sense, the practical expedient can be applied provided that the following criteria are fulfilled: • • • the change in lease payments results in a revised remuneration for the lease which is substantially equal to or less than the remuneration immediately preceding the change; any reduction in rental payments only affects payments due on, or until 30 June 2022; and there are no significant changes to other rental terms and conditions. These standards and changes had no material impact on the Group's financial statements. NOTE 6 – BASIS OF CONSOLIDATION These consolidated financial statements comprise the assets, liabilities, income, expenses, other comprehensive income, and cash flows of novobanco and of its subsidiaries (Group or novobanco 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 companies during the financial years covered by these consolidated financial statements. 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 (facto control) and could 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 or the limited duration that requires the delivery of values to the remaining participants. 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. Gains or losses arising from the dilution or sale of a portion of the financial interest in a subsidiary, with loss of control, are recognised by the Group in the income statement. 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 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - 206 - "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 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 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 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. The Group 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, 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 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 of 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. For business combinations that are not completed at the end of the reporting period, the Group estimates the provisional amounts of assets and liabilities to be included in the consolidated financial statements, including the related goodwill. During the measurement period, which does not exceed one year from the acquisition date, the provisional amounts recognised will be retrospectively adjusted to reflect new information obtained, including the recognition of additional assets or liabilities. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - 207 - Goodwill is tested for impairment annually and whenever circumstances indicate that its book value may be impaired. Any impairment losses determined are recognised in the income statement. The recoverable amount reduction is determined by assessing the recoverable amount of each cash-generating unit (or group of cash-generating units) to which the goodwill refers. When the recoverable amount of the cash-generating unit is less than its carrying amount, an impairment loss is recognised. Impairment losses related to goodwill cannot be reversed in future periods. 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. Non-controlling interests for open investment funds are presented in the caption Other liabilities. 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 the same are applied consistently throughout the Group. 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 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. NOTE 7 – MAIN ACCOUNTING POLICIES 7.1. Foreign currency operations 7.1.1 Functional and presentational 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 novobanco functional currency. 7.1.2 Transactions and balances Foreign currency transactions are translated into 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 from 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. 7.2. Recognition of interest income/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 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - 208 - 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 include 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. 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 recognised 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 held for trading (see note 7.5). 7.3. Fee and commission income recognition Fees and commissions income is 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, as described in note 7.2. 7.4. Recognition of dividend income Dividend income is recognised when the right to receive the dividend payment is established. 7.5. Net trading income Net income from financial assets and liabilities held for trading includes changes in fair value, interest or expenses and dividends, as well as income from derivatives held for economic hedging that do not qualify as hedging derivatives. 7.6. Net gain/ (loss) on financial assets and liabilities designated at fair value through profit or loss Net gain or loss on financial assets and liabilities designated at fair value through profit or loss includes the net gain or loss from financial assets and financial liabilities designated as of fair value through profit or loss and also from non-trading assets measured at fair value through profit or loss, as required by or elected under IFRS 9. The line caption includes fair value changes, interest, dividends and foreign exchange differences. 7.7. Net gain/ (loss) on derecognition of financial assets measured at amortised cost Net loss on derecognition of financial assets measured at amortised cost includes loss (or income) recognised on sale or derecognition of financial assets measured at amortised cost calculated as the difference between the net book value (including impairment until the recoverable amount) and the proceeds received. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - 209 - 7.8. Financial Instruments – Initial recognition 7.8.1. Date of Recognition Financial assets and liabilities, apart from loans and advances to customers and balances due to customers, are initially recognised on the trade date, i.e., the date on which the Group becomes a party to the contractual provisions of the instrument. This includes regular way trades, i.e., purchases or sales of financial assets that require delivery of assets within the time frame generally established by regulation or convention in the marketplace. Loans and advances to customers are recognised when funds are transferred to the customers’ accounts. The Group recognises balances due to customers when funds are transferred to the Group. 7.8.2. Initial measurement of financial instruments The classification of financial instruments at initial recognition depends on their contractual terms and the business model for managing the instruments, as described in note 7.10 Financial instruments are initially measured at their fair value (as defined in note 7.9), except in the case of financial assets and financial liabilities recorded at fair value through profit or loss, transaction costs are added to, or subtracted from, this amount. Trade receivables are measured at the transaction price. When the fair value of financial instruments at initial recognition differs from the transaction price, the Group accounts for the Day 1 profit or loss, as described below. 7.8.3. Day one profit When the transaction price of the instrument differs from the fair value at origination and the fair value is based on a valuation technique using only inputs observable in market transactions, the Group recognizes the difference between the transaction price and fair value in net trading income. In those cases where fair value is based on models for which some of the inputs are not observable, the difference between the transaction price and the fair value is deferred and is only recognised in profit or loss when the inputs become observable, or when the instrument is derecognised 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. 7.8.4. Measurement categories for financial assets and liabilities The Group classifies all its financial assets based on the business model for managing the assets and the asset’s contractual terms, measured at either: • Amortised cost, as explained in note 7.10.1; • Fair Value Through Other Comprehensive Income, as explained in notes 7.10.1, 7.10.2 and 7.10.3; • Fair Value Through Profit or Loss, as set out in note 7.10.4. • Mandatorily measured at fair value through profit or loss, as set out in note 7.10.4. The Group classifies and measures its derivative and trading portfolio at fair value through profit or loss, as explained in note 7.10.5. The Group may designate financial instruments at fair value through profit or loss, if so doing eliminates or significantly reduces measurement or recognition inconsistencies, as explained in note 7.10.6. Financial liabilities, other than loan commitments and financial guarantees, are measured at amortised cost or at fair value through profit or loss when they are held for trading and derivative. 7.9. Fair value of financial assets and liabilities The fair value of listed financial assets is determined based on the closing price (bid-price), the price of the last transaction made or the value of the last known price (bid). In the absence of quotation, the Group estimates fair value using (i) valuation methodologies, such as the use of prices for recent transactions, similar and carried out under market conditions, discounted cash flow techniques and customised option valuation models in order to reflect the particularities and circumstances of the instrument and (ii) valuation assumptions based on market information. For the assets included in level 3 of fair value hierarchy, whose quotation is provided by a third-party using parameters not observable in the market, the Group proceeds, when applicable, to a detailed analysis of the historical and liquidity performance of these assets, which may imply an additional adjustment to its fair value, as well as a result of additional internal or external valuations. The following is a brief description of the type of assets and liabilities included in each level of the hierarchy and the corresponding form of valuation: 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. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - 210 - 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 Group 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 Group 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 Group in favour of a specific price. This category includes, amongst others, the following financial instruments: (i) (ii) (iii) (iv) (v) (vi) Derivatives traded on an organised market; Shares quoted on a stock exchange; Open investment funds quoted on a stock exchange; Closed investment funds whose subjacent assets are solely financial instruments listed on a stock exchange; Bonds with observable market quotes; 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 Group 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 Group 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) (ii) (iii) Bonds without observable market valuations valued using observable market inputs; Derivatives (OTC) over-the-counter valued using observable market inputs; and Unlisted shares valued using 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) (ii) (iii) (iv) (v) (vi) (vii) Debt securities valued using non-observable market inputs; Unquoted shares; Closed real estate funds; Hedge funds; Private equities; Restructuring funds; and Over the counter (OTC) derivatives with prices provided by third parties 7.10. Financial Assets and Liabilities Amortised cost: if it is held within a business model with the objective to hold financial assets in order to collect contractual cash 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: • 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 Group 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. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - 211 - 7.10.1 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 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, as explained in note 7.16. 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. 7.10.2 Debt instruments at fair value through other comprehensive income The Group classifies debt instruments at fair value through other comprehensive income when both of the following conditions are met: • • The financial asset is held within a business model, the objective of which is achieved by both collecting contractual cash flows and selling financial assets; The contractual terms of the financial asset give rise to, on specific dates, cash flows that are solely payments of principal and interests on the principal amount outstanding. Debt instruments classified as of fair value through other comprehensive income are subsequently measured at fair value with gains and losses arising due to changes in fair value being recognised in Other Comprehensive Income, at which point the accumulated value of potential gains and losses recorded in reserves is transferred to income statement under the caption of gains or losses with financial assets and liabilities accounted for at fair value through profit or loss. Interest income and foreign exchange gains and losses are recognised in profit or loss in the same manner as for financial assets measured at amortised cost as explained in Note 7.2. The expected credit loss calculation is explained in Note 7.16. When the Group holds more than one investment in the same security, they are deemed to be disposed of on a first–in first–out basis. 7.10.3. Equity instruments at Fair Value through Other Comprehensive Income Upon initial recognition, the Group occasionally elects to classify irrevocably some of its equity investments as equity instruments at fair value through other comprehensive income when they meet the definition of equity under IAS 32 and are not held for trading. Such classification is determined on an instrument-by-instrument basis. Gains and losses on these equity instruments are never recycled to profit. Dividends are recognised in profit or loss as other operating income when the right of the payment has been established, except when the Group benefits from such proceeds as a recovery of part of the cost of the instrument, in which case, such gains are recorded in other comprehensive income. Equity instruments measured at fair value through other comprehensive income are not subject to an impairment assessment. 7.10.4. Financial assets measured 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 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - 212 - • • 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. 7.10.5. Assets and liabilities held for trading The Group classifies financial assets or financial liabilities as held for trading when they have been purchased or issued primarily for short-term profit-making through trading activities or form part of a portfolio of financial instruments that are managed together, for which there is evidence of a recent pattern of short-term profit taking. Held-for-trading assets and liabilities are recorded and measured in the statement of financial position at fair value. Changes in fair value are recognised in net trading income. Interest and dividend income or expense is recorded in net trading income according to the terms of the contract, or when the right to payment has been established. Included in this classification are debt securities, equities, short positions and customer loans that have been acquired principally for the purpose of selling or repurchasing in the near term. 7.10.6. 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). 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 31 and 35) 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. Classification criteria Hedge accounting • Derivative financial instruments used for hedging purposes may be classified in the accounts as hedging instruments provided the following criteria are cumulatively met: (i) (ii) (iii) (iv) (v) Hedging instruments and hedged captions are eligible for the hedge relationship; At the inception of the hedge, the hedge relationship is identified and documented, including identification of the hedged caption and hedging instrument and evaluation of the effectiveness of the hedge; There is an economic relationship between the hedged caption and the hedging instrument; The effect of credit risk does not dominate the changes in value that result from this economic relationship; The effectiveness of the hedge can be reliably measured, both at the inception of the hedge and on an ongoing basis. For the cases in which the Group uses macro hedging, accounting is performed in accordance with IAS 39 (using the policy choice permitted under IFRS 9), with the Group carrying out prospective tests on the hedge relationship start date, when applicable, and retrospective tests in order to confirm, on each balance sheet date, the effectiveness of hedging relationships, demonstrating that changes in the fair value of the hedging instrument are covered by changes in the fair value of the hedged caption in the portion attributed to the hedged risk. Any ineffectiveness found is recognised in the income statement when it occurs in gains or losses of hedge accounting. 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). NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - 213 - 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 exercises in which the hedged caption 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 7.9. 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. 7.10.7. 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. 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 to 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. These liabilities are measured at fair value, and the respective gains or losses on revaluation are recognised in profit or loss except for changes resulting from changes in the Group's own risk, the Debt Valuation Adjustment (DVA), which is recognised in other comprehensive income. novobanco Group does not record any gain associated with own credit risk. Gains 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 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - 214 - 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. 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. 7.10.8. 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 a result of 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, recognising the amounts in Loans and advances to customers after transferring the compensation for the losses to the collateral taker. 7.11. Reclassifications of financial assets and financial liabilities 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. 7.12. Modification of financial assets and financial liabilities The activity of commercial renegotiation of financial assets is one of the tools that the Group has available and regularly uses in the management and recovery of these instruments. Accordingly, the Group believes that the assessment of whether these renegotiations result in the derecognition of financial assets should be exceptional and case-by-case, taking into account the identification of the transactions in question by professional judgment and their materiality. When the contractual cash flows of a financial asset are renegotiated or otherwise modified as a result of commercial restructuring activity rather than due to credit risk and impairment considerations, the Group performs an assessment to determine whether the modifications result in the derecognition of that financial asset. For financial assets, this assessment is based on qualitative factors. When assessing whether or not to derecognise a loan to a customer, amongst others, the Group considers the following factors: Introduction of an equity feature; • Change in loan currency; • • Change in counterparty; • Whether the modification is such that the instrument would no longer meet the SPPI criterion. If the modification does not result in cash flows that are substantially different, as set out below, then it does not result in derecognition. Based on the change in cash flows discounted at the original effective interest rate, the Group records a modification gain or loss, to the extent that an impairment loss has not already been recorded. The Group’s accounting policy in respect of forborne loans is set out in note 7.14. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - 215 - When the modification of the terms of an existing financial liability is not classified as material, and consequently does not result in derecognition, the amortised cost of the financial liability is recalculated by calculating the present value of estimated future contractual cash flows that are discounted based on the original effective interest rate of the financial liability. Any resulting difference is recognised immediately as profit or loss. For financial liabilities, the Group considers a modification to be substantial based on qualitative factors and if it results in a difference between the adjusted discounted present value and the original carrying amount of the financial liability. 7.13. Derecognition Financial assets are derecognised from the balance sheet when (i) the Group's contractual rights relating to the respective cash flows have expired, (ii) the Group has substantially transferred all the risks and benefits associated with its ownership, or (iii) despite the Group having withholding part, but not substantially all of the risks and benefits associated with its ownership, control over the assets has been transferred. When an operation measured at fair value through other comprehensive income is derecognised, the accumulated gain or loss previously recognised in other comprehensive income is reclassified to results. In the specific case of equity instruments, the accumulated gain or loss previously recognised in other equity is not reclassified to profit or loss, being transferred between equity captions. In the specific case of loans to customers, at the time of sale, the difference between the sale value and the book value must be 100% provisioned, and at the time of the sale, the credit sold will be derecognised against the funds / assets received. and consequent use of impairment on the balance sheet. 7.14. Forborne modified loans The Group sometimes makes concessions or modifications to the original terms of loans as a response to the borrower’s financial difficulties, rather than taking possession or to otherwise enforce collection of collateral. The Group considers a loan forborne when such concessions or modifications are provided as a result of the borrower’s present or expected financial difficulties and the Group would not have agreed to them if the borrower had been financially healthy. Indicators of financial difficulties include defaults on covenants, or significant concerns raised by the Global Risk Department. Forbearance may involve extending the payment arrangements and/or the agreement of new loan conditions. If modifications are substantial, the loan is derecognied, as explained in Note 7.12. Once the terms have been renegotiated without this resulting in the derecognition of the loan, any impairment is measured using the original effective interest rate as calculated before the modification of terms. The Group also reassesses whether there has been a significant increase in credit risk, as set out in Note 44 and whether the assets should be classified as Stage 3. Derecognition decisions and classification between Stage 2 and Stage 3 are determined on a case-by-case basis. If these procedures identify a loss in relation to a loan, it is disclosed and managed as an impaired Stage 3 forborne asset. Once an asset has been classified as forborne, it will remain forborne for a minimum 24-month probation period. In order for the loan to be reclassified out of the forborne category, the customer has to meet all of the following criteria: • All of its facilities have to be considered performing; • • Regular payments of more than an insignificant amount of principal or interest have been made during at least half of the The probation period of two years has passed from the date the forborne contract was considered performing; probation period; The customer does not have any contracts that are more than 30 days past due. • 7.15. Offsetting of 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 novobanco Group, as well as in the event of default, bankruptcy or insolvency of the Group or the counterparty. 7.16. Impairment of Financial Assets Impairment principles The Group 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. Equity instruments are not subject to impairment under IFRS 9. Debt instruments at amortised cost or at fair value through other comprehensive income are in the scope of the impairment calculation. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - 216 - 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. Impairment is based on the credit losses expected to arise over the life of the asset (LTECL), unless there has been no significant increase in credit risk since origination, in which case, the allowance is based on the 12 months’ expected credit losses. The 12mECL is the portion of LTECL that represent the ECL that result from default events on a financial instrument that are possible within the 12 months after the reporting date. Both LTECL and 12mECL are calculated on either an individual basis or a collective basis, depending on the nature of the underlying portfolio of financial instruments. The Group has established a policy to perform an assessment, at the end of each reporting period, of whether a financial instrument’s credit risk has increased significantly since initial recognition, by considering the change in the risk of default occurring over the remaining life of the financial instrument. Based on the above process, the Group aggregates its loans by stage as described below: • Stage 1: includes all exposures without any indication of significant deterioration in credit risk and without an active default status. For these exposures the impairment is recognised as a 12-month expected loss; • Stage 2: includes all exposures where at least one indication of significant deterioration of credit risk has been identified. For these exposures, impairment is recognised at the present value of the expected losses accumulated until maturity. This universe also includes exposures in a quarantine period, that is, exposures that have recently ceased to have (1) indications of significant deterioration of credit risk and/or (2) default classification; • Stage 3: includes all exposures classified in default - according to the Group's internal definition which is aligned with the regulatory definition . This definition includes, cumulatively: o Exposures that have materially defaulted for more than 90 consecutive days; or o Exposures that, not having material default for more than 90 consecutive days, are classified as "Unlikely to pay". Purchased or originated impaired financial assets (POCI), that is, for which impairment was identified upon initial recognition, can be classified as stage 2 or stage 3. The calculation of collective impairment For the calculation of impairment on a collective basis, exposures are segmented based on similar credit risk characteristics according to the risk assessment defined by the Group. For each of these homogeneous risk segments, risk factors are estimated and applied as part of the impairment calculation. To determining collective impairment, the risk factors considered in each risk segment must, in accordance with IFRS regulations, reflect forward-looking information. In addition, the calculation of impairment should also reflect consideration of multiple scenarios, whereby the final impairment is the result of the sum of the amounts calculated in each scenario, weighted by the respective associated probability. The calculation of the expected loss always involves the consideration of: • Probability of default (PD) - this risk factor is an estimate of the probability of default over a given period. Default can only occur at a given point in time in the evaluation period if the credit line has not been previously derecognised and is still on balance sheet; • Loss Given Default (LGD) - this risk factor is an estimate of the loss that arises if the default occurs at a given time. It is based on the difference between the contractual cash flows and those that the Group estimates it will receive, including the execution of collateral or other contractual changes that become an integral part of the loan and do not meet the criteria to be recognised separately. • Exposure - represents the nominal value of the exposure at the reporting date and it is this amount that is considered for the basis of the collective impairment calculation. In the case of off-balance sheet exposures, a credit conversion factor (CCF) is applied to the nominal value of the exposure. This factor represents the probability that the off-balance sheet exposures will convert into on- balance sheet exposures. When an exposure is classified in stage 2, it is considered for impairment calculation purposes that the exposure evolves according to the contracted principal and interest repayment plan, or in the absence of this information, that the disbursement occurs at maturity. The details of the impairment calculation are presented as follows: • Stage 1: this calculation focuses on performing exposures that do not show any active evidence of significant deterioration of credit risk compared to origination. The impairment represents the expected loss resulting from default events on a financial instrument that are possible to occur within 12 months after the balance sheet date. The risk factors - PD and LGD - consider the 12-month horizon and are applied to the value of the exposure. This calculation is done by scenario, since each scenario considered has specific risk factors - PD and LGD; NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - 217 - • Stage 2: this calculation focuses on productive exposures that present an indication of a significant increase in credit risk since origination. The impairment represents the present value of the sum of expected losses until the maturity of the exposure. Expected losses are calculated on the projected exposure at each debt repayment time, according to the exposure repayment schedule, and these expected losses are discounted at the original effective rate of the contract to obtain its present value at the reporting date. As mentioned above, this calculation is made by scenario since different risk factors are considered for each scenario; • Stage 3: this calculation focuses on non-productive exposures, where impairment corresponds to the difference between the amount owed and the current value of expected recoveries for this exposure, given its characteristics. To determine the present value of expected recoveries, the original effective rate of the contract is also used; • POCI are financial assets with impairment at initial recognition. Exposures in this situation cannot be classified as stage 1; • Irrevocable commitments and letters of credit: as detailed above, given the off-balance sheet nature of irrevocable commitments, the Group estimates for these contracts the respective amount that it expects to be converted into an on-balance sheet amount (credit). Accordingly, the estimated conversion factor for this type of exposure is applied to its nominal value and the respective result is taken into account as the basis for calculating collective impairment; • Impairment is calculated and deducted from assets for credit cards and revolving lines that include an irrevocable commitment. For irrevocable commitments and letters of credit, impairment is recognised in Provisions on the liabilities side. Impairment for debt instruments measured at fair value through other comprehensive income does not reduce the carrying amount of those financial assets, which remains at fair value. Accordingly, an amount equal to the provision that would arise if the assets were measured at amortised cost is recognised in other comprehensive income as an accumulated impairment charge, with a corresponding charge to profit or loss. The cumulative loss recognised in other comprehensive income is recycled to profit or loss on derecognition of the assets. 7.17. Collateral and financial guarantees valuation To mitigate its credit risks on financial assets, the Group seeks to use collateral, where possible. The collateral comes in various forms, such as cash, securities, letters of credit/guarantees, real estate, receivables, inventories, other non-financial assets and credit enhancements such as netting agreements. Collateral, unless repossessed, is not recorded on the Group’s statement of financial position. Collateral is generally assessed, at a minimum, at inception and re-assessed on a quarterly basis. However, some collateral, for example, cash or securities relating to margining requirements, is valued daily. To the extent possible, the Group uses active market data for valuing financial assets held as collateral. Other financial assets which do not have readily determinable market values are valued using models. Non-financial collateral, such as real estate, is valued based on data provided by third parties such as mortgage brokers or based on housing price indices. 7.18. Foreclosed properties and non-current assets held for sale In the scope of its loan granting activity, the Group incurs in the risk of the borrower failing to repay all the amounts due. In case of loans and advances with mortgage collateral, the Group executes these and receives real estate properties resulting from foreclosure. 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, 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 novobanco 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 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: NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - 218 - (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 specialised in these services. The valuation reports are analysed internally, namely comparing the sales 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 fair value level in the 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 analysis on the assumptions used, which may imply additional adjustments to their fair value, supported by additional internal or external valuations. For assets of greater relevance, the challenge of the appraisals that serve as a basis for the valuation of the real estate assets is carried out by a specialised area of the Group that is independent of this valuation process, in accordance with an annual work plan previously approved by the Executive Board of Directors. 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 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. Where the carrying 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. 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: • 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. • 7.19. 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 balance sheet date are recognised in the income statement, under the caption Other NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - 219 - operating income and expenses, based on periodic valuations performed by independent entities specialised in this type of service. Investment properties are not depreciated. Since these are assets whose fair value level in the 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 analysis on the assumptions used, which may imply additional adjustments to their fair value, supported by additional internal or external valuations. 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 or Other operating expenses. Investment properties recorded relate solely to non-banking activities (Investment Funds and Real Estate Companies). 7.20. 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) (ii) (iii) the total amount of the credit has been demanded, that is, the credit must be fully recognised as overdue credit. Exemptions from this requirement are (i) 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, and (ii) situations in which, despite the contract not being totally overdue, the Group believes to be facing a scenario of total or partial loss; All the recovery efforts, considered appropriate, have been developed (and the relevant evidence gathered); The credit recovery expectations are very low, being necessary that the amount to be written off (either total or partial write- off of the debt) is fully covered by impairment and under management of the central credit recovery application. 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). Subsequent payments received after the write-off must be recognised as subsequent write-off recoveries at other operating income. 7.21. 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. 7.22. 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 7.10. Securities received under borrowing agreements are not recognised in the balance sheet. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - 220 - 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 in Gains or Losses from financial assets and liabilities held for trading. 7.23. Property, plant and equipment The Group’s property, plant and equipment 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 property, plant and equipment 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 an accrual basis. Land is not depreciated. The depreciation of property, plant and equipment 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 property, plant and equipment 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 or Other operating expenses. 7.24. Leases Lease Definition The Group assesses at contract inception whether a contract is, or contains, a lease. That is, if the contract conveys the right to control the use of an identified asset for a period of time in exchange for consideration. As lessee As a lessee, the Group leases various assets, including real estate, vehicles and IT equipment. The Group recognises lease liabilities to make lease payments and right-of-use assets representing the right to use the underlying assets. As previously mentioned, 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) with a new value of less than Euro 5 thousand. The Group recognizes the lease payments associated with these leases as expenses on a straight-line basis over the lease term in income statement as “Other administrative expenses – rents and rentals”. 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. Right-of-use assets are measured at cost, less any accumulated depreciation and impairment losses, and adjusted for any remeasurement of lease liabilities. The cost of right-of-use assets includes the amount of lease liabilities recognised, initial direct costs incurred and less any lease incentives received. The Group presents the lease liabilities under "Other liabilities" in the statement of financial position. The lease liability corresponds to the present value of the future cash flows to be paid during the lease contract. The lease rents include fixed amounts, variable NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - 221 - Number of yearsProperty for own use35 to 50Improvements in rented buildings10IT equipment4 to 5Furniture and fixtures4 to 10Interior installations5 to 10Security equipment4 to 10Machines and tools4 to 10Transport equipment4Other equipment5 amounts that depend on an interest rate, amounts to be payable relating to guarantees on the residual value of the asset. Any options are also included if they are reasonably expected to be exercised. Variable amounts that do not depend on interest rate are recognised as cost in the period to which they relate. During the lease period, the lease liability increases by the interest accrual and decreases by the lease rents payment. The value of the lease liability changes if the terms of the lease (such as the term or the value of the index) change or if the valuation of the exercise of the option to acquire the asset changes. As Lessor Financial leases Transactions in which the risks and benefits inherent in the ownership of an asset are substantially transferred to the lessee are classified as finance leases. Financial leasing contracts are recorded in the balance sheet as credits granted for an amount equivalent to the net investment made in the leased assets, together with any estimated non-guaranteed residual value. Interest included in rents charged to customers is recorded as income while capital amortizations, also included in rents, are deducted from the amount of credit granted to customers. The recognition of interest reflects a constant periodic rate of return on the lessor's remaining net investment. Operating leases All lease transactions that do not fall under the definition of finance lease are classified as operating leases. Receipts relating to these contracts are recognised on a straight-line basis over the lease term and recorded in “Other operating income”. 7.25. 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 exercise, are recognised and recorded as intangible assets. All remaining costs associated with information technology services are recognised as an expense as incurred. 7.26. Impairment of non-financial assets The Group assesses at each reporting date, whether there is an indication that an asset may be impaired. If any indication exists, or when annual impairment testing for an asset is required, the Group estimates the asset’s recoverable amount. An asset’s recoverable amount is the higher of an asset orcash-generating unit fair value fewer costs of disposal and its value in use. The recoverable amount is determined for an individual asset, unless the asset does not generate cash inflows that are largely independent of those from other assets or groups of assets. When the carrying amount of an asset or cash-generating unit exceeds its recoverable amount, the asset is considered impaired and is written down to its recoverable amount. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. In determining fair value fewer costs of disposal, recent market transactions are taken into account. If no such transactions can be identified, an appropriate valuation model is used. These calculations are corroborated by valuation multiples, quoted share prices for publicly traded companies or other available fair value indicators. The Group bases its impairment calculation on most recent budgets and forecast calculations, which are prepared separately for each of the Group’s cash-generating units to which the individual assets are allocated. These budgets and forecast calculations generally cover a period of five years. A long-term growth rate is calculated and applied to project future cash flows after the fifth year (perpetuity). Impairment losses of continuing operations are recognised in the statement of profit or loss in expense categories consistent with the function of the impaired asset, except for properties previously revalued with the revaluation taken to OCI. For such properties, the impairment is recognised in other comprehensive income up to the amount of any previous revaluation. For assets excluding goodwill, an assessment is made at each reporting date to determine whether there is an indication that previously recognised impairment losses no longer exist or have decreased. If such indication exists, the Group estimates the asset’s recoverable value or cash-generating unit recoverable amount. A previously recognised impairment loss is reversed only if there has been a change in the assumptions used to determine the asset’s recoverable amount since the last impairment loss was recognised. The reversal is limited so that the carrying amount of the asset does not exceed its recoverable amount, nor exceed the carrying amount that would have been determined, net of depreciation, had no impairment loss been recognised for the asset in prior exercises. Such reversal is recognised in the statement of profit or loss unless the asset is carried at a revalued amount, in which case, the reversal is treated as a revaluation increase. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - 222 - Intangible assets with indefinite useful lives are tested for impairment annually at the cash-generating unit level, as appropriate, and when circumstances indicate that the carrying value may be impaired. 7.27. Employee Benefits Pensions Pursuant to the signature of the Collective Labour Agreement (“Acordo Coletivo de Trabalho” (ACT)) for the banking sector and its subsequent amendments resulting from the 3 tripartite agreements described in Note 17, 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, a 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, on 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 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 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 exercise, 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 the 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. 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, correspond to a monthly fixed amount (as per Annex VI of the new ACT) for each employee, 14 times a year, recorded on a monthly basis in personnel costs, while the component to be paid by the employee is discounted monthly in the processing of salary, against the caption Amounts payable (SAMS). 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 (defined benefit plan). Career bonus The ACT provides for the payment by the Group of a career bonus, due at the time immediately prior to the employee's retirement if he retires at the Group's service, corresponding to 1.5 of his salary at the time of payment. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - 223 - 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, in Personnel Expenses. Employees’ variable remuneration and other obligations 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 recognises 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. 7.28. Provisions and Contingent liabilities Provisions are recognised when: (i) the Group 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 Group to third parties, are constituted according to internal risk assessments made by Management, with the support and advice of its internal or 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 terminating 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. 7.29. Contingent assets Contingent assets are not recognised in the financial statements, being disclosed when it is probable that there will be a future economic inflow of resources. 7.30. Income taxes novobanco and its subsidiaries are subject to the tax regime consigned in the Código do Imposto sobre o Rendimento das Pessoas Coletivas (IRC Code), to the Special Regime applicable to Deferred Tax Assets (approved by Law No. 61/2014, of August 26), and to other legislation. 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 captions recognised directly in equity, in which case it is recognised under equity. 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 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - 224 - 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 and any adjustments to prior period taxes. 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 exercise. 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 exercises. 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 the Group. The taxable profit or tax loss determined by the Group can be adjusted by the Portuguese Tax Authorities within a period of four years, except in the case of any deduction or use of tax credit, in which the expiry period is the exercise of that right. The Executive Board of Directors considers that any corrections, resulting mainly from differences in the interpretation of tax legislation, will not have a materially relevant effect on the financial statements. Following the changes set forth in Law no. 27-A/2020, of July 24, within the scope of the Supplementary Budget for 2020, the deadline for carrying forward tax losses is now 14 years for tax losses generated in 2014, 2015 and 2016 and 7 years for tax losses generated in 2017, 2018 and 2019. Tax losses generated in 2020 and 2021 have a limit of 12 years and can be deducted until 2032 and 2033, respectively. The limit for tax losses is increased from 70% to 80%, applicable only to tax losses generated in 2020 and 2021. Law 24-D/2022, of December 30 (State Budget Law for 2023) introduced changes in terms of the carry forward of tax losses. A period for carrying forward tax losses is no longer foreseen. On the other hand, the annual limit of the deduction to taxable income is reduced to 65% (currently 70%). This change applies to the deduction of losses from taxable profits in taxable periods beginning on or after 1 January 2023, as well as to tax losses assessed in taxable periods prior to 1 January 2023. The elimination of the time limitation on tax losses does not apply to those ascertained in tax periods prior to 1 January 2023, in which one of the situations provided for in No 1 of the Article 6 of the Special Regime applicable to Deferred Tax Assets (REAID), approved as an annexe to Law No. 61/2014, of August 26 (conversion of deferred tax assets into tax credits), applying to tax losses ascertained in these tax periods the deduction period in force on 31 December 2022. This change does not affect the application of paragraph 2 of article 11 of Law 27-A/2020, of July 24 (which allows an increase of 10 percentage points in the deduction of taxable income when dealing with tax losses ascertained in 2020 and 2021). 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. The Group complies with the guidelines of IFRIC 23 - Uncertainty on the Treatment of Income Tax regarding the determination of taxable profit, tax bases, tax losses to be reported, tax credits to be used and tax rates in scenarios of uncertainty regarding the treatment of income tax, with no material impact on its financial statements resulting from its application. On 22 December 2022, Council Directive (EU) 2022/2523 of December 14 on ensuring a worldwide minimum level of taxation for multinational and large national corporate groups in the Union, commonly referred to as the Pillar 2 Directive, was published. This Directive entered into force on the day following its publication, and Member States must transpose the laws, regulations and administrative provisions necessary to comply with it by 31 December 2023. These provisions will apply to tax years beginning on or after December 31, 2023, apart from the so-called Insufficiently Taxed Profit Rule (UTPR), which will only apply to tax years beginning on or after December 31, 2024. To date, this Directive has not yet been transposed into Portuguese law. novobanco together with its tax advisors will initiate a qualitative and quantitative analysis regarding the possible impacts on the taxation of the novobanco Group for fiscal years beginning on or after 1 January 2024. 7.31. Treasury shares Own equity instruments of the Group which are acquired by it or by any of its subsidiaries (treasury shares) are deducted from equity. Consideration paid or received on the purchase, sale, issue or cancellation of the Group’s own equity instruments is recognised directly in equity. No gain or loss is recognised in profit or loss on the purchase, sale, issue or cancellation of own equity instruments. As of 31 December 2022, the the Group does not hold own equity instruments. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - 225 - 7.32. Disintermediation and custody The Group provides trust and other fiduciary services that result in the holding or investing of assets on behalf of its clients. Assets held in a fiduciary capacity, unless recognition criteria are met, are not reported in the financial statements, as they are not assets of the Group. Fees and commissions arising from these activities are recognised in the income statement in the year in which they occur. 7.33. Dividends on ordinary shares Dividends on ordinary shares are recognised as a liability and deducted from equity when they are approved by the Bank’s shareholders. Interim dividends are deducted from equity when they are declared and are no longer at the discretion of the Bank. Dividends for the year that are approved after the reporting date are disclosed as an event after the reporting date. 7.34. Equity Reserves The reserves recorded in equity on the Group’s statement of financial position include: • Other Comprehensive Income: o o o o o o o o Fair value reserves which comprises: (i) The cumulative net change in the fair value of debt instruments classified at fair value through other comprehensive income, less the allowance for expected credit loss, when applicable; (ii) The cumulative net change in fair value of equity instruments at fair value through other comprehensive income; Impairment reserves of debt instruments classified at fair value through other comprehensive income; Reserves associated with sales of equity instruments classified as fair value through other comprehensive income, which include the proceeds from sales of these securities; Actuarial deviation reserves that correspond to actuarial gains and losses, resulting from differences between the actuarial assumptions used and the values actually verified (experience gains and losses) and from changes in actuarial assumptions and the gains and losses arising from the difference between the income expected from the fund's assets and the values obtained; Own credit revaluation reserve, which comprises the cumulative changes in the fair value of the financial liabilities designated at fair value through profit or loss attributable to changes in the Group’s own credit risk; Cash flow hedge reserve, which comprises the portion of the gain or loss on a hedging instrument in a cash flow hedge that is determined to be an effective hedge; Foreign currency translation reserve, which is used to record exchange differences arising from the translation of the net investment in foreign operations, net of the effects of hedging; Other capital reserve, which includes the portion of compound financial liabilities that qualify for treatment as equity. • Retained earnings, which corresponds to earnings of the Group carried over from previous years; • Other reserves (originary reserve, special reserve and other reserves). 7.35. 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. 7.36. The accounting standards and interpretations The accounting standards and interpretations recently issued but not yet effective and that the Group has not yet applied in the preparation of its financial statements may be analysed as follows: Standards, interpretations, amendments and revisions that become effective in future years: The following standards, interpretations, amendments and revisions, with mandatory application in future financial years, have been adopted ("endorsed") by the European Union, until the date of approval of these financial statements: Standard / Interpretation Applicable in the European Union in the Description NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - 226 - financial years initiated in or after IFRS 17 – Insurance Contracts January 1st of 2023 Amendments to IFRS 17 - Insurance contracts - Initial application of IFRS 17 and IFRS 9 - Comparative information January 1st of 2023 Amendments to IAS 1 - Disclosure of accounting policies January 1st of 2023 Amendments to IAS 8 - Definition of accounting estimates January 1st of 2023 Amendments to IAS 12 - Deferred tax related to assets and liabilities arising from a single transaction January 1st of 2023 IFRS 17 applies to all insurance contracts (i.e., life, non-life, direct insurance, and reinsurance), regardless of the type of entities that issue them, as well as to some guarantees and some financial instruments with discretionary holding characteristics. In general terms, the IFRS 17 provides an accounting model for insurance contracts that are more useful and more consistent for issuers. In contrast to the requirements of IFRS 4, which are based on previously adopted local accounting policies, IFRS 17 provides a comprehensive model for insurance contracts, covering all relevant accounting aspects. This amendment to IFRS 17 refers to the presentation of comparative information on financial assets in the initial application of IFRS 17. It adds a transition option that allows an entity to apply an overlay to the classification of a financial asset in the comparative period(s) presented in the initial application of IFRS 17. The overlay allows all financial assets, including those held in relation to non-contract-related activities within the scope of IFRS 17, to be classified, instrument by instrument, in the comparative period(s) in line with how the entity expects these assets to be classified in the initial application of IFRS 9. This amendment are intended to assist the entity in the dissemination of 'material' accounting policies, formerly referred to as 'significant' policies. However, due to the lack of this concept in IFRS standards, it was decided to replace the concept of "materiality", a concept already known to users of the financial statements. When evaluating the materiality of accounting policies, the entity must consider not only the size of the transactions but also other events or conditions and the nature of them. This amendment sheds light on the distinction between change in accounting estimate, change in accounting policy and correction of errors. Additionally, it clarifies how an entity uses measurement techniques and inputs to develop accounting estimates. This amendment clarifies that payments that settle a liability are fiscally deductible, but it is a matter of professional judgment whether such deductions are attributable to the liability that is recognized in the financial statements or related assets. This is important for determining whether there are temporary differences in initial asset or liability recognition. Thus, the initial recognition exception does not apply to transactions which have resulted in temporary taxable and deductible differences equal. It shall apply only if the recognition of an active lease and a passive lease give rise to taxable and deductible temporary differences that are not equal. The Group did not early adopt any of these standards in the financial statements for the year ended 31 December 2022. No significant impacts on the financial statements are expected as a result of their adoption. Standards, interpretations, amendments and revisions not yet adopted by the European Union The following standards, interpretations, amendments and revisions, with mandatory application in future financial years, have not been adopted ("endorsed") by the European Union, until the date of approval of these financial statements: NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - 227 - Standard / Interpretation Description Amendments to IAS 1 - Presentation of Financial Statements - Classification of current and non-current liabilities Amendments to IFRS 16 - Lease liabilities in sales and relocation transactions This amendment seeks to clarify the classification of liabilities as current or non-current balances according to the rights that an entity has to defer its payment at the end of each reporting period. The classification of liabilities is not affected by the entity's expectations (the assessment shall determine whether a right exists but should not consider whether or not the entity will exercise such right), or by events occurring after the reporting date, such as non-compliance with a covenant. However, if the right to postpone the settlement for at least twelve months is subject to compliance with certain conditions after the balance sheet date, those criteria do not affect the right to defer settlement whose purpose is to classify a liability as current or non-current. It also includes a new definition of "settlement" of a liability and should be applied prospectively. This amendment specifies the requirements for the subsequent measurement of lease liabilities related to sale & leaseback transactions that qualify as "sale" in accordance with the principles of IFRS 15, focusing on variable lease payments that do not depend on an index or a fee. In subsequent measurement, seller-lessees should determine "lease payments" and "revised lease payments". When subsequently measuring rental liabilities, sellers-lessees shall determine "lease payments" and "revised lease payments" in such a way that they do not recognize any gain or loss related to the retained right of use. The application of these requirements shall not prevent the seller-lessee from recognizing, in the income statement, any gain or loss related to the partial or total "sale" as required by paragraph 46 (a) of IFRS 16. It should be applied prospectively. These standards have not yet been endorsed by the European Union and, as such, have not been applied by the Group for the year ended 31 December 2022. No significant impacts on the financial statements are expected as a result of their adoption. NOTE 8 - MAIN ACCOUNTING ESTIMATES AND JUDGEMENTS USED IN THE PREPARATION OF 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 Group 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. 8.1 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: o 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 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; o Significant increase on the credit risk: as mentioned on the Note 7.16 – 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 judgement that, in accordance to the Group management, constitutes a significant increase on credit risk; o Classification of default: Grupo novobanco’s 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 Grupo novobanco and which result in performing judgements when assessing the high probability that the borrower does not fulfil its obligations within the conditions agreed with Grupo novobanco. This concept is covered in more detail below; o 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; o 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 to 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 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - 228 - 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. 8.2. Fair value of derivative financial instruments and other financial assets and financial 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 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 42. 8.3. 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 30. This aspect assumes additional relevance for effects of the analysis of the recoverability of deferred taxes, while the Group 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 charged with reviewing the calculation of the tax base made by the Group during a period of four or twelve years, in the event of reportable tax losses. Thus, it is possible that there are corrections to the tax base, resulting mainly from differences in the interpretation of tax legislation. However, the novobanco's Executive Board of Directors believes that there will be no significant corrections to taxes on profits recorded in the financial statements. 8.4. Pensions and other employee benefits The determination of the retirement pension liabilities presented in Note 16 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 expiry date of the plan's obligations). These assumptions are based on the expectations of the novobanco 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. 8.5. Provisions and Contingent liabilities The recognition of provisions involves a significant degree of complex judgment, namely identifying whether there is a present obligation and estimating the probability and timing, as well as quantifying the outflows that may arise from past events. When events are at an early stage, judgments and estimates can be difficult to quantify due to the high degree of uncertainty involved. The Executive Board of Directors monitors these matters as they develop to regularly reassess whether the provisions should be recognised. However, it is often not feasible to make estimates, even when events are already at a more advanced stage, due to existing uncertainties. The complexity of such issues often requires expert professional advice in determining estimates, particularly in terms of legal and regulatory issues. The amount of recognised provisions may also be sensitive to the assumptions used, which may result in a variety of potential results that require judgment in order to determine a level of provision that is considered appropriate in view of the event in question. 8.6. Investment properties, Foreclosed assets and Non-current assets held for sale Investment properties are initially recognised at cost, including directly related transaction costs and subsequently at fair value. Foreclosed assets 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. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - 229 - The fair value of these assets is determined based on valuations conducted by independent entities specialised in this type of service, using the market, income or cost methods, as defined in Notes 7.18 and 7.19. 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. 8.7. 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 Group 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. 8.8 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 recognised 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 y ears. 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. NOTE 9 – SEGMENT REPORTING novobanco Group activities are centered on the financial sector targeting corporate, institutional and private individual customers. Its decision center is in Portugal, making the domestic territory its main 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 of 31 December 2022, the Group has novobanco as its main operating unit - with 273 branches in Portugal (31 December 2021: 291 branches), with branches in Luxembourg and Spain and 2 representation offices – with novobanco Açores (12 branches), Banco BEST (6 branches), GNB GA, amongst other companies. When evaluating performance by business area, the Group considers the following Operating Segments: (1) Domestic Commercial Banking, including Retail and Corporate (2) International Commercial Banking; (3) Asset Management; (4) Markets; and (5) Corporate Centre. Each segment integrates the novobanco 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 Executive Board of Directors of novobanco level, by the definition of specific strategies and commercial programs for each unit. 9.1. 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; NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - 230 - 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 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 commitments made to the Directorate General for Competition of the European Commission, the Bank discontinued the provision of private banking services and therefore this segment is no longer reported. 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 novobanco’s branches in Luxembourg and Spain. 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. 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 operational segment in the true sense of the concept, it is an aggregation of transversal corporate structures that ensure the basic functions of the Group's global management, such as those linked to the Administration and Supervision, Compliance, Planning, Accounting, Risk Management and Control, Institutional Communication, Internal Audit, Organization and Quality, among others. Since the Group is in a tax loss situation in 2022 and 2021, the deferred taxes recognised were fully allocated to this segment. 9.2. 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 7, 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. novobanco’s structures dedicated to the Segment novobanco’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 novobanco ‘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 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - 231 - 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 Group’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 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 novobanco’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. novobanco 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 presenting the financial information by geographical areas, the operating units that make up the International Area are the branches of novobanco in Spain and Luxembourg, the units located outside GNB GA and Ijar Leasing Algérie as discontinued operations. 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. The segment reporting is presented as follows: NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - 232 - NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - 233 - (in thousands of Euros)RetailCorporate and InstitutionalInternational Commercial BankingAsset ManagementMarketsCorporate centreTotalNet interest income 353 581 256 005 51 202 110 ( 35 423)- 625 475 Net fees and comissions 187 394 88 700 11 057 23 244 ( 20 215)- 290 180 Other operating income 22 136 ( 4 970)( 759)( 925) 194 146 - 209 628 Total operating income 563 111 339 735 61 500 22 429 138 508 - 1 125 283 Operating expenses 271 848 71 488 19 456 16 878 101 257 119 797 600 724 Of which:Provisions / Impairment losses 10 533 46 217 5 383 3 668 45 405 - 111 206 Depreciation and amortization 28 709 1 956 1 485 665 1 698 17 980 52 493 Net gains / (losses) from investments in subsidiaries, joint ventures and associated companies registered by the equity method- - - - 8 354 - 8 354 Profit / (loss) from continued operations before taxes and non-controlling interests 291 263 268 247 42 044 5 551 45 605 ( 119 797) 532 913 Taxes- - 956 2 450 - ( 56 707)( 53 301)Profit / (loss) of discontinued operations- - - - ( 270)- ( 270)Net Profit / (loss) for the period attributable to non-controlling interests 1 941 - - - 23 161 - 25 102 Net Profit / (loss) for the period attributable to Shareholders of the parent 289 322 268 247 41 088 3 101 22 174 ( 63 090) 560 842 Intersegment operating income (1) 4 952 6 303 42 163 ( 720)( 45 672)- 7 026 Total Net Assets22 296 396 10 209 447 2 869 324 106 467 10 513 395 - 45 995 029 Total Liabilities21 790 972 9 931 391 2 775 793 12 606 7 972 649 - 42 483 411 Investments in associated companies- - - - 119 744 - 119 744 Investments in tangible fixed assets 440 - - 175 136 912 6 137 533 Investments in intangible assets 83 - - 63 25 160 - 25 306 Investments in investment properties- - - - 16 464 - 16 464 Investments in other assets - real estate properties 758 - - - 15 587 829 17 174 (1) Intersegment operating income refers essentially to interest (net interest income)(in thousands of Euros)RetailCorporate and InstitutionalInternational Commercial BankingAsset ManagementMarketsCorporate centreTotalNet interest income 184 453 196 875 30 391 ( 4) 161 679 - 573 394 Net fees and comissions 177 343 85 548 10 053 27 303 ( 22 093)- 278 154 Other operating income( 9 690) 15 640 22 162 ( 643) 90 940 - 118 409 Total operating income 352 106 298 063 62 606 26 656 230 526 - 969 957 Operating Costs 257 673 208 273 21 064 12 620 196 775 105 230 801 635 Of which:Provisions / Impairment losses 16 167 178 816 13 418 330 144 006 - 352 737 Depreciation and amortization 14 979 915 576 715 1 097 15 722 34 004 Net gains / (losses) from investments in subsidiaries, joint ventures and associated companies registered by the equity method- - - - 3 794 - 3 794 Profit / (loss) from continued operations before taxes and non-controlling interests 94 433 89 790 41 542 14 036 37 545 ( 105 230) 172 116 Taxes- - 1 734 4 102 - ( 21 022)( 15 186)Profit / (loss) of discontinued operations- - 8 796 - ( 3 909)- 4 887 Net Profit / (loss) for the period attributable to non-controlling interests 2 053 - - - 5 632 - 7 685 Net Profit / (loss) for the period attributable to Shareholders of the parent 92 380 89 790 48 604 9 934 28 004 ( 84 208) 184 504 Intersegment operating income (1) 2 018 6 486 122 553 9 ( 126 289)- 4 777 Total Net Assets20 912 255 10 131 250 2 347 139 97 837 11 130 034 - 44 618 515 Total Liabilities20 605 900 9 983 157 2 262 731 11 127 8 606 129 - 41 469 044 Investments in associated companies- - - - 94 590 - 94 590 Investments in tangible fixed assets 859 - - 78 81 030 6 81 973 Investments in intangible assets 288 - - 27 25 381 - 25 696 Investments in other assets - real estate properties 449 - 2 511 - 41 702 - 44 662 (1) Intersegment operating income refers essentially to interest (net interest income)31.12.202231.12.2021 The geographical information of the different business units of the Group is as follows: NOTE 10 – NET INTEREST INCOME The breakdown of this caption as of 31 December 2022 and 2021 is as follows: NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - 234 - (in thousands of Euros)PortugalSpainLuxembourgBrazilAngolaOtherTotalNet profit / (loss) for the period attributable to Shareholders of the parent 533 282 ( 5 568) 30 893 2 235 - - 560 842 (of which: rel. to discontinued units)( 270)- - - - - ( 270)Total income6 933 076 463 226 885 2 235 - - 7 162 659 Intersegment operating income ( 29 845)- 36 871 - - - 7 026 Net assets43 490 936 47 959 2 448 197 2 747 864 4 326 45 995 029 (of which: rel. to discontinued units) 51 650 - - 2 747 864 4 326 59 587 Investments in associated companies 119 744 - - - - - 119 744 Investments in tangible fixed assets 137 533 - - - - - 137 533 Investments in intangible assets 25 306 - - - - - 25 306 Investments in non-current assets- - - - - - - Investments in investment properties 16 464 - - - - - 16 464 Investments in other assets - real estate properties 16 345 829 - - - - 17 174 Profits / (losses) of continuing operating units before taxes and non-controlling interests 494 784 ( 5 568) 41 462 2 235 - - 532 913 Turnover (a) (b)1 406 239 352 97 712 2 235 - - 1 506 538 Number of employees (a) 4 071 6 10 - - 3 4 090 (a) Financial information presented according to art. 2 of DL no. 157/2014 31.12.2022(b)Turnovercorrespondstothesumofthefollowingitemsintheconsolidatedoperatingaccount:interestincome,dividendincome,feeandcommissionincome,gainsorlossesonderecognitionoffinancialassetsandliabilitiesnotmeasuredatfairvaluethroughprofitorlossonfinancialassetsandliabilitiesheldfortrading,gainsorlossesonfinancialassetsmandatorilyatfairvaluethroughprofitorloss,gainsorlossesonfinancialassetsandliabilitiescarriedatfairvaluethroughprofitorlosshedgeaccountinglosses,exchangedifferences,gainsorlossesonderecognitionofnon-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.(in thousands of Euros)PortugalSpainLuxembourgBrazilAngolaOtherTotalNet profit / (loss) for the period attributable to Shareholders of the parent 151 404 2 436 31 016 ( 352)- - 184 504 (of which: rel. to discontinued units) 87 5 171 - ( 371)- - 4 887 Total income4 609 947 8 890 243 098 - - - 4 861 935 Intersegment operating income ( 110 374)- 115 151 - - - 4 777 Net assets42 650 983 56 346 1 902 794 1 006 3 060 4 326 44 618 515 (of which: rel. to discontinued units) 3 339 - - 1 006 702 4 326 9 373 Investments in associated companies 94 590 - - - - - 94 590 Investments in tangible fixed assets 81 973 - - - - - 81 973 Investments in intangible assets 25 696 - - - - - 25 696 Investments in non-current assets- - - - - - - Investments in investment properties 4 973 - - - - - 4 973 Investments in other assets - real estate properties 42 151 2 511 - - - - 44 662 Profits / (losses) of continuing operating units before taxes and non-controlling interests (a) 126 120 4 898 41 450 ( 352)- - 172 116 Turnover (a) (b)1 196 888 94 172 529 - - - 1 369 511 Number of employees (a) 4 165 10 11 - - 7 4 193 (a) Financial information presented according to art. 2 of DL no. 157/2014 31.12.2021(b)Turnovercorrespondstothesumofthefollowingitemsintheconsolidatedoperatingaccount:interestincome,dividendincome,feeandcommissionincome,gainsorlossesonderecognitionoffinancialassetsandliabilitiesnotmeasuredatfairvaluethroughprofitorlossonfinancialassetsandliabilitiesheldfortrading,gainsorlossesonfinancialassetsmandatorilyatfairvaluethroughprofitorloss,gainsorlossesonfinancialassetsandliabilitiescarriedatfairvaluethroughprofitorlosshedgeaccountinglosses,exchangedifferences,gainsorlossesonderecognitionofnon-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. As of 31 December 2022, the caption interest on loans and advances includes Euro 30,046 thousand related to finance lease operations (December 31, 2021: Euro 31,037 thousand). In relation to repurchase agreement operations, interest from deposits from Other banks, customer deposits and credit institutions includes, as of 31 December 2022, the amount of Euro -160 thousand, Euro 3,397 thousand and Euro 4,859 thousand, respectively (December 31, 2021: Euro 2,301 thousand in customer deposits). Interest income and expense captions related to derivative interest include, according to the accounting policy described in Notes 7.10.6 and 7.2, 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 7.10.6 and 7.10.7. NOTE 11 – DIVIDEND INCOME The breakdown of this caption is as follows: NOTE 12 – FEE AND COMMISSION INCOME AND FEE AND COMISSION EXPENSES The breakdown of this caption is as follows: NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - 235 - (in thousands of Euros)OthersOthersFrom assets/liabilities at amortized costFrom assets at fair value through other comprehensive incomeIncome/expenses resulting from negative interest ratesFrom assets/liabilities to fair value through resultsFrom assets/liabilities at amortized costFrom assets at fair value through other comprehensive incomeIncome/expenses resulting from negative interest ratesFrom assets/liabilities to fair value through resultsInterest incomeCredit interest to customers 580 430 15 982 - - 596 412 498 967 12 965 - - 511 932 Interest on deposits and applications/resources in credit institutions 24 958 - 38 413 2 63 373 13 528 - 75 062 - 88 590 Interest on securities 112 981 38 850 - 1 453 153 284 51 973 71 585 - 9 211 132 769 Interest on derivatives- - 1 729 19 055 20 784 - - 1 544 4 576 6 120 Other interest and similar income 826 - - - 826 1 048 - - - 1 048 719 195 54 832 40 142 20 510 834 679 565 516 84 550 76 606 13 787 740 459 Interest expensesInterest on lishes represented by securities 58 520 - - - 58 520 36 732 - - - 36 732 Interest on customer resources 45 050 - - - 45 050 51 328 - - - 51 328 Interest on deposits and applications/resources in credit institutions 22 268 - 12 306 - 34 574 7 026 - 11 380 - 18 406 Interest on subordinated liabilities 34 178 - - - 34 178 34 168 - - - 34 168 Interest on derivatives- - 6 850 21 863 28 713 - - 6 991 11 311 18 302 Other interest and similar income 7 588 - 581 - 8 169 7 024 - 1 105 - 8 129 167 604 - 19 737 21 863 209 204 136 278 - 19 476 11 311 167 065 551 591 54 832 20 405 ( 1 353) 625 475 429 238 84 550 57 130 2 476 573 394 31.12.202231.12.2021Effective interest methodEffective interest methodTotalTotal(in thousands of Euros)31.12.202231.12.2021Financial assets mandatorily at fair value through profit or lossShares 113 2 162 Euronext NV 1 801 Visa Inc CL C 107 226 Others 6 135 Participation units 1 164 7 604 Explorer III B 1 164 7 604 Financial assets measured at fair value through other comprehensive incomeShares 3 759 1 330 FLITPTREL X 1 035 - SIBS SGPS 1 866 785 ESA Energia 2 275 Others 856 270 5 035 11 096 31.12.202231.12.2021De ativos financeiros obrigatoriamente contabilizados pelo justo valor através dos resultadosAções 102 2 162 Euronext NV- 1 801 Visa Inc CL C 98 226 Outros 4 135 Unidades de participação 164 7 604 Explorer III B 164 7 604 De ativos financeiros contabilizados pelo justo valor através de outro rendimento integralAções 2 561 1 330 ESA ENERGIA-AM 238 - SIBS SGPS 1 866 785 RAMADA INV. 2 275 Outros 455 270 2 826 11 096 NOTE 13 – NET TRADING INCOME The breakdown of this caption is as follows: NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - 236 - (in thousands of Euros)31.12.202231.12.2021Fees and commissions incomeFrom banking services 250 119 237 550 Cards 42 336 36 905 Management of Means of Payment 109 290 102 033 Asset Management 38 256 41 964 Credit operations 60 237 56 648 From guarantees provided 32 202 32 917 From transaction of securities 10 968 11 222 From commitments to third parties 6 601 7 998 Bancassurance 30 294 28 386 Other fee and commission income 7 151 7 438 337 335 325 511 Fees and commissions expensesWith banking services rendered by third parties 30 902 29 703 Cards 9 438 9 752 Management of Means of Payment 15 026 14 945 Asset Management 2 488 2 371 Credit operations 3 950 2 635 With guarantees received 1 903 1 564 With transaction of securities 5 147 5 498 Other fee and commission income 9 203 10 592 47 155 47 357 290 180 278 154 Gains or losses on financial assets and financial liabilities held for trading In accordance with the accounting policy described in Note 7.5, 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). NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - 237 - (in thousands of Euros)GainsLossesTotalGainsLossesTotalDe ativos financeiros pelo justo valor através de outro rendimento integralFrom financial assets at fair value through other comprehensive incomeTítulosSecuritiesBonds and other fixed income securitiesBonds and other fixed income securitiesDe emissores públicos Issued by government and public entities 29 069 59 837 ( 30 768) 17 198 12 758 4 440 De outros emissoresIssued by other entities 2 980 55 014 ( 52 034) 11 021 1 073 9 948 32 049 114 851 ( 82 802) 28 219 13 831 14 388 De ativos e passivos financeiros pelo custo amortizadoFrom financial assets and liabilities at amortised costTítulosSecuritiesObrigações e outros títulos de rendimento fixoBonds and other fixed income securitiesDe emissores públicos Issued by government and public entities 2 - 2 - - - De outros emissoresIssued by other entities 17 6 513 ( 6 496)- 142 ( 142)CréditoLoans 4 588 3 547 1 041 12 639 32 008 ( 19 369) 4 607 10 060 ( 5 453) 12 639 32 150 ( 19 511) 36 656 124 911 ( 88 255) 40 858 45 981 ( 5 123)SecuritiesBonds and other fixed income securitiesIssued by government and public entities 2 367 25 987 ( 23 620) 3 252 14 507 ( 11 255)Issued by other entities 39 - 39 43 20 23 Financial DerivativesForeign exchange rate contracts 52 791 47 406 5 385 59 421 62 678 ( 3 257)Interest rate contracts 645 713 482 028 163 685 424 716 360 721 63 995 Equity / Index contracts 3 898 2 682 1 216 31 491 30 678 813 Credit default contracts 187 - 187 16 18 ( 2)Other 9 079 6 759 2 320 4 179 3 600 579 714 074 564 862 149 212 523 118 472 222 50 896 Gains or losses on financial assets mandatorily measured at fair value through profit or lossSecuritiesBonds and other fixed income securitiesIssued by other entities 215 623 ( 408) 15 796 5 497 10 299 Shares 57 792 43 718 14 074 25 726 471 25 255 Other variable income securities 98 888 121 850 ( 22 962) 24 956 13 813 11 143 156 895 166 191 ( 9 296) 66 478 19 781 46 697 Other financial assetsLoans and advances to customers- 31 197 ( 31 197)- - - - 31 197 ( 31 197)- - - 156 895 197 388 ( 40 493) 66 478 19 781 46 697 Gains or losses on financial assets and liabilities designated at fair value through profit and lossSecuritiesOther variable income securities 125 9 116 34 13 21 125 9 116 34 13 21 Gains or losses from hedge accountingFair value changes of hedging instrumentsForeign exchange rate contracts 626 570 186 634 439 936 89 079 41 684 47 395 Instrumentos financeiros derivadosFair value changes of hedging item attributable to hedged risk 2 976 444 625 ( 441 649) 9 778 42 978 ( 33 200) 629 546 631 259 ( 1 713) 98 857 84 662 14 195 Foreign exchange revaluation 1 865 089 1 858 300 6 789 1 134 393 1 123 588 10 805 3 402 385 3 376 729 25 656 1 863 738 1 746 247 117 491 (in thousands of Euros)GainsLossesTotalGainsLossesTotalCompensation for interruption of coverage operations (see Note 14) 89 - 89 1 166 - 1 166 31.12.202231.12.2021NOTE 13 - RESULTS OF FINANCIAL OPERATIONS31.12.202231.12.2021Gains or losses on financial assets and liabilities not measured at fair value through profit or loss(cid:9)(cid:9)(cid:9)Gains or losses on financial assets and liabilities held for trading As of 31 December 2022, the gains recognised in the income statement arising from intermediation fees, which are essentially related to foreign exchange transactions, amounted to approximately Euro 3,693 thousand (31 December 2021: Euro 1,867 thousand). Gains or losses on financial assets mandatorily at fair value through profit or loss As of December 31, 2021, gains or losses on financial assets that are mandatorily accounted for at fair value through profit or loss - securities – include a gain of Euro 4.8 million resulting from the completion of the sale process of shares and participation units in the restructuring funds, as described in Note 24. Gains or losses on hedge accounting Gains or losses on hedge accounting include the fair value variations of the hedging instrument (derivative) and the fair value variations of the hedged caption attributable to the hedged risk. In the case where the hedge operations are interrupted early, there may occur the payment/receipt of compensation, which is recorded in Other operating expenses/Other operating income. As of December 31, 2022, the amount of compensation received amounted to Euro 89 thousand (December 31, 2021: Euro 1,726 thousand). Foreign exchange differences 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 7.1. NOTE 14 – GAINS OR LOSSES ON DERECOGNITION OF NON-FINANCIAL ASSETS The breakdown of this caption is as follows: The caption Gains or losses on derecognition of non-financial assets - real estate includes the gain of Euro 66,797 thousand on the sale of the novobanco headquarters building, as detailed in Note 27. NOTE 15 – OTHER OPERATING INCOME AND OTHER OPERATING EXPENSES The breakdown of these captions is as follows: NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - 238 - (in thousands of Euros)31.12.202231.12.2021Real estate 86 516 6 761 Equipment( 5 790) 294 Others 2 563 495 83 289 7 551 (in thousands of Euros)31.12.202231.12.2021Other operating incomeGains / (losses) on recoveries of loans 40 423 27 293 Non-recurring consulting services 334 355 Income of Funds and real estate companies 35 461 13 537 Gains on the acquisition of debt issued by the Group (see Note 31) 13 - Gains on investment properties revaluation (see Note 26) 118 433 49 935 Other income 19 341 72 755 214 005 163 875 Other operating expensesLosses on repurchase of Group debt securities (see Note 31)- ( 73 522)Direct and indirect taxes( 5 275)( 6 588)Contribution on the banking sector and solidarity additional( 34 132)( 34 087)Membership fees and donations( 2 490)( 2 430)Expenses of Funds and real estate companies( 7 465)( 6 458)Charges with Supervisory entities( 2 254)( 1 849)Contractual Indemnities (SPE)- ( 1 723)Losses on investments properties revaluation (see Note 26)( 27 300)( 18 753)Other expenses( 39 441)( 36 194)( 118 357)( 181 604)Other operating income / (expenses) 95 648 ( 17 729) As of 31 December 2022, the amount received as compensation for discontinued hedging operations, included in other income, amounts to Euro 89 thousand (31 December 2021: Euro 1,726 thousand) (see Note 13). 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, and whose regime has been extended. As of 31 December 2022, novobanco Group recognised Banking Levy charges as a cost in the amount of Euro 28,881 thousand (31 December 2021: Euro 28,893 thousand). The cost recognised as of 31 December 2022 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. In 2020, following one of the measures provided in Economic and Social Stabilization Program (SSPE) and following the art. 18 of Law no. 27 -A / 2020, of July 24, the Solidarity Additional on the Banking Sector was created, which, similarly to what happens with the Contribution on the Banking Sector (Banking Levy), is levied on the average annual liability calculated balance sheet deducted from own funds and deposits covered by the Deposit Guarantee Fund guarantee and on the notional value of derivative financial instruments. Its settlement is carried out until the end of June of the year following the year to which the surcharge relates. As of 31 December 2022, the Group recognised as an expense in relation to the Solidarity Additional on the Banking Sector the amount of Euro 5,251 thousand (31 December 2021: Euro 5,194 thousand). The recognised expense was calculated and paid based on the maximum rate of 0.02% which is levied on the average annual liability calculated on the balance sheet less the own funds and deposits covered by the Deposit Guarantee Fund guarantee. NOTE 16 – STAFF EXPENSES The breakdown of this caption is as follows: The provisions and costs related to the restructuring process are presented in Note 34. As of 31 December 2022 and 2021, the number of employees of novobanco Group has the following breakdown: By professional category, the number of employees at novobanco Group is analysed as follows: NOTE 17 – EMPLOYEE BENEFITS Pension and health-care benefits NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - 239 - (in thousands of Euros)31.12.202231.12.2021Wages and salaries 179 909 179 007 Remuneration 179 904 178 468 Long-term service / Career bonuses (see Note 17) 5 539 Mandatory social charges 49 384 49 365 Costs with post-employment benefits (see Note 17) 301 946 Other costs 4 113 3 943 233 707 233 261 31.12.202231.12.2021novobanco employees 3 817 3 918 Employees of the Group's subsidiaries 273 275 Total employees of the Group 4 090 4 193 31.12.202231.12.2021Senior management functions 481 469 Middle management positions 388 456 Specific positions 2 170 1 980 Administrative and other functions 1 051 1 288 4 090 4 193 As mentioned in accounting policy 7.27, the Group has undertaken to provide its employees, or their families, with cash benefits for old-age retirement, disability and survivors' pensions and other liabilities such as a Serviço de Assistência Médico-Social (SAMS), managed by the Union. 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 exercise 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 of 31 December 2011 at constant values (0% discount rate) for the component foreseen in the “Instrumento de Regulação Coletiva 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 novobanco 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 novobanco, without prejudice to the transfer of the responsibilities relating exclusively to the employment contracts with BES. Given the aforementioned, liabilities arising exclusively from the employment contracts with BES were transferred to novobanco. Considering the foregoing, only the pension fund liabilities arising from the Complementary Executive Committee Plan were split, with a part (described above) remaining in BES, with the other part being transferred to novobanco, together with the Pension Fund’s liabilities relating to 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 Bank of Portugal of 11 February 2015, from those that were transferred to novobanco, 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. The split performed on these terms will result, on 3 August 2014, in a level of funding of the Complementary Plan of the Executive Commission that is equal for each of the associates of the Fund (novobanco and BES). On 16 June 2020, the Insurance and Pension Funds Supervisory Authority (“ASF”) approved the extinction of the portion that finances the Plan of the former Executive Committee and, simultaneously, the amendment of the Constitutive Contract of the novobanco Pension Fund. This approval led to the creation of three aspects of the Executive Committee's Pension Plan: (i) Executive Committee - BES, (ii) Executive Committee - novobanco and (iii) Undivided Party. The assets of the undivided party are not allocated to any liability of novobanco or BES until the final decision of the court (limit of article 402º), so novobanco transferred the amount of Euro 19.2 million of net liabilities of the amount of the fund's assets relating to the undivided portion for Provisions. 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. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - 240 - On 31 December 2022, the amount of Euro 548 thousand was recorded in Personnel Costs related to the defined contribution plan (31 December 2021: Euro 553 thousand). During 2021, two changes were made to the Pension Fund: • Inclusion of Social Security Pension – Pensioners Until 2020, the methodology applied considered pensions in payment by the Pension Fund for the calculation of liabilities with pensioners. In 2021, this methodology was changed for pensioners who started a pension after 2011, and do not have a Social Security pension. For this group of pensioners with age below the normal retirement age of the General Social Security Regime (RGSS), the liability arising from a Social Security pension, to be paid from the normal retirement age of the RGSS, was deducted. As for pensioners over the normal retirement age of the RGSS, the liability arising from a Social Security pension, to be paid from the moment of assessment, was deducted. • Inclusion of acquired rights (Clause 98 ACT) In 2021, liabilities with former employees who left novobanco Group after 2011, and who can claim rights to the Pension Fund under Clause 98 of the ACT, were included. Pension plan participants are detailed as follows: The Group's liabilities and coverage levels, calculated in accordance with the accounting policy defined in Note 7.27 - Employee benefits, reportable as of 31 December 2022 and 2021 are analysed as follows: According to the policy defined in Note 7.27 - 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. The evolution of the actuarial gains and losses in the balance sheet can be analysed as follows: NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - 241 - 31.12.202231.12.2021Employees 3 958 4 095 Pensioners and survivors 7 066 6 997 Participants under clause 98 1 084 990 TOTAL 12 108 12 082 (in thousand Euros)Assets / (liabilities) recognised in the balance sheetTotal liabilities(1 418 647)(1 929 188) Pensioners(1 075 292)(1 334 872)Employees( 343 355)( 594 316)Coverage Fair value of plan assets1 478 2631 907 928Net assets / (liabilities) in the balance sheet (See Notes 31 and 35) 59 616( 21 260)Accumulated actuarial deviations recognised in other comprehensive income 697 306 799 05231.12.202231.12.2021 The evolution of the value of pension funds in the exercises ended 31 December 2022 and 2021 can be analysed as follows: Pension fund assets can be analysed as follows: Pension fund assets used by the Group or representative of securities issued by entities of the Group are detailed as follows: The key actuarial assumptions used to calculate retirement pension and health-care liabilities are identical and are as follows: NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - 242 - (in thousands of Euros)Retirement pension liabilities at beginning of the exercise1 929 188 1 934 668 Current service cost( 26) 434 Interest cost 25 469 18 836 Plan participants' contribution 2 601 2 656 Contributions from other entities 206 219 Actuarial (gains) / losses in the exercise: - Changes in financial assumptions( 527 073) 10 612 - Experience adjustments (gains) / losses 52 113 46 984 Pensions paid by the fund / transfers and once-off bonuses( 81 459)( 76 269)Early retirement 19 473 38 562 Social Security and clause 98- ( 37 187)Foreign exchange differences and other ( 1 845)( 10 327)Retirement pension liabilities at end of the exercise1 418 647 1 929 188 31.12.202231.12.2021(in thousands of Euros)31.12.202231.12.2021Fair value of fund assets at beginning of the exercise1 907 928 1 907 616 Net return from the fund( 348 984) 238 - Share of the net interest on the assets 23 153 15 928 - Return on assets excluding net interest( 372 137)( 15 690)Group contributions 249 86 708 Employee contributions 2 601 2 656 Pensions paid by the fund / transfers and once-off bonuses( 81 459)( 76 269)Foreign exchange differences and other ( 2 072)( 13 021)Fund balance at the end of the exercise1 478 263 1 907 928 (in thousands of Euros)QuotedUnquotedTotalQuotedUnquotedTotalEquity instruments - 63 411 63 411 914 51 215 52 129 Debt instruments 947 801 - 947 801 1 187 975 - 1 187 975 Investment funds 155 923 55 794 211 717 279 949 103 278 383 227 Structured debt 60 15 75 63 15 78 Derivatives - - - - 74 74 Real estate properties - 181 960 181 960 - 150 344 150 344 Cash and cash equivalents - 73 299 73 299 - 134 101 134 101 Total1 103 784 374 479 1 478 263 1 468 901 439 027 1 907 928 31.12.202231.12.2021(in thousands of Euros)31.12.202231.12.2021Cash and cash equivalents 63 802 41 827 Participation units - 86 684 Real estate 39 056 43 032 Total 102 858 171 543 Disability decreases are not considered in the calculation of the liabilities. The determination of the discount rate as of 31 December 2022 and 2021 was based on: (i) the evolution of the main indices for high quality corporate bonds and (ii) the duration of the liabilities. As of 31 December 2022 and 2021, the sensitivity analysis to a 0.25% change in the assumptions rate used and one year in the mortality table results in the following changes in the current value of liabilities determined for past services: The evolution of actuarial deviations on the balance sheet can be analysed as follows: The costs of retirement pensions and health benefits for the exercises ended 31 December 2022 and 2021 can be analysed as follows: The evolution of net assets / (liabilities) on the balance sheet can be analysed in the exercises ended 31 December 2022 and 2021 as follows NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - 243 - AssumptionsActualAssumptionsActualActuarial Assumptions Projected rate of return on plan assets4,00%-18,92%1,35%-0,24% Discount rate4,00%-1,35%- Pension increase rate0,75%1,41%0,50%0,36% Salary increase rate1,00%2,54%0,75%2,05% Mortality table men Mortality table womenTV 88/90-3 yearsTV 88/90-3 years31.12.202231.12.2021TV 88/90TV 88/90(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( 41 764) 43 959 ( 73 171) 77 795 Salary increase rate 6 893 ( 6 658) 13 507 ( 13 009)Pension increase rate 44 420 ( 42 463) 68 855 ( 64 469)de +1 ano de -1 ano de +1 ano de -1 ano Mortality table( 41 178) 40 787 ( 68 096) 68 413 Change in the amount of liabilities due to the change:31.12.202231.12.2021(in thousands of Euros)31.12.202231.12.2021Accumulated actuarial losses recognised in other comprehensive income at the beginning of the exercise 799 052 723 723 Actuarial (gains) / losses in the exercise: - Changes in assumptions - Financial assumptions( 527 073) 10 612 - Plan assets return (excluding net of interests) 424 250 62 674 Other 1 077 2 043 Accumulated actuarial losses recognised in other comprehensive income at the end of the exercise 697 306 799 052 (in thousand of Euros)31.12.202231.12.2021Current service cost (a)( 26) 434 Net interest 2 316 2 908 Early retirements (a) 327 512 Post-employment benefits costs 2 617 3 854 (a) recorded in Staff expenses (see Note 16) In 2022, the value of early retirements amounted to Euro 19.4 million (31 December 2021: Euro 39.1 million), of which Euro 19.1 million are part of the Group's restructuring process (31 December 2021: Euro 38.6 million) and as such, they were recognised against the use of the provision for restructuring (see Note 34). These amounts are considered in Other in the previous table. The summary of the last five years of the fund’s liabilities and the funds balances, as well as experience gains and losses, is analysed as follows: The average duration of defined benefit plan liabilities is approximately 13 years (31 December 2021: approximately 16 years). Career bonuses As of 31 December 2022, the liabilities assumed by the Group amounted to Euro 5,621 thousand, corresponding to the liabilities for past services subjacent to the career bonuses, as described in Note 7.27 – Employee benefits (31 December 2021: Euro 7,467 thousand) (see Note 33). As of 31 December 2022, the costs recognised with career bonuses were Euro 4 thousand (31 December 2021: Euro 539 thousand) (see Note 17). NOTE 18 – OTHER ADMINISTRATIVE EXPENSES The breakdown of this caption is as follows: NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - 244 - (in thousands of Euros)31.12.202231.12.2021At the beginning of the exercise( 21 260)( 27 052)Cost for exercise( 2 617)( 3 854)Actuarial gains / (losses) recognised in other comprehensive income 101 746 ( 75 329)Contributions made in the exercise 249 86 708 Social Security and clause 98- 37 187 Other( 18 502)( 38 920)At the end of the exercise 59 616 ( 21 260)(in thousands of Euros)31.12.202231.12.202131.12.202031.12.201931.12.2018Retirement pension liabilities(1 418 647)(1 929 188)(1 934 668)(1 848 930)(1 675 608)Funds balance1 478 263 1 907 928 1 907 616 1 695 857 1 648 168 (Under) / overfunding of liabilities 59 616 ( 21 260)( 27 052)( 153 073)( 27 440)(Gains) / losses on experience adjustments in retirement pension liabilities 52 113 46 984 50 737 64 098 17 839 (Gains) / losses on experience adjustments in plan assets 372 137 15 690 ( 27 512)( 82 287) 53 917 (in thousands of Euros)31.12.202231.12.2021Rentals 4 250 3 886 Advertising 5 513 6 345 Communication 11 600 10 954 Maintenance and repairs expenses 8 206 8 311 Travelling and representation 2 211 1 531 Transportation of valuables 2 711 3 323 Insurance 6 190 5 362 IT services 43 983 39 381 Independent work 2 470 1 735 Temporary work 1 284 915 Electronic payment systems 12 395 11 023 Legal costs 6 781 3 533 Consultancy and audit fees 28 066 22 284 Water, energy and fuel 2 826 2 988 Consumables 1 586 1 409 Other costs 22 091 18 118 162 163 141 098 The caption Other costs includes, amongst others, specialised service costs incurred with security and surveillance, information services, training and sundry external supplies. As of 31 December 2022, rental costs includes an amount of Euro 704 thousand related to short-term operating lease contracts (31 December 2021: Euro 582 thousand), as described in note 7.24. The fees invoiced during the years 2022 and 2021 by the Statutory Auditor, according to that laid down in article 508-F of the Portuguese Companies Code (Código das Sociedades Comerciais), have the following: NOTE 19 – CONTRIBUTIONS TO RESOLUTION FUNDS AND DEPOSIT GUARANTEE SCHEMES As of 31 December 2022 and 2021, this caption is analysed as follows: NOTE 20 – IMPAIRMENT As of 31 December 2022 and 2021, this caption is analysed as follows: NOTE 21 – 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 exercise. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - 245 - (in thousands of Euros)31.12.202231.12.2021Statutory audit of annual accounts 1 445 1 962 Other reliability assurance services 1 264 1 392 Total value of billable services 2 709 3 354 (In thousands of Euros)31.12.202231.12.2021Contribution to the Resolution Fund 24 492 25 341 Contribution to the National Resolution Fund 16 364 15 150 Contribution to the Deposit Guarantee Fund 299 44 41 155 40 535 (in thousands of Euros)ChargesReversalsTotalChargesReversalsTotalProvisions or reversal of provisions (see Note 34)Provisions for guarantees 23 829 ( 21 119) 2 710 18 764 ( 31 517)( 12 753)Provisions for commitments 3 051 ( 8 446)( 5 395) 10 768 ( 7 855) 2 913 Other provisions 78 893 ( 36 963) 41 930 159 400 ( 21 725) 137 675 105 773 ( 66 528) 39 245 188 932 ( 61 097) 127 835 Impairment or reversal of impairment on financial assets not measured at fair value through profit or loss (see Note 24)Securities at fair value through equity 2 339 ( 2 772)( 433) 1 302 ( 928) 374 Securities at amortised cost 1 876 940 ( 1 808 873) 68 067 1 215 760 ( 1 168 355) 47 405 Loans and advances to banks 762 ( 1 049)( 287) 135 814 ( 134 065) 1 749 Loans and advances to customers 214 814 ( 180 279) 34 535 301 426 ( 152 051) 149 375 2 094 855 ( 1 992 973) 101 882 1 654 302 ( 1 455 399) 198 903 Impairment or reversal of impairment of investment in subsidiaries, joint ventures and associates (see Note 26)- ( 21 546)( 21 546) 678 ( 993)( 315)Impairment or reversal of impairment on non-financial assetsNon-current assets and disposal groups classified as held for sale (see Note 32) 162 ( 826)( 664) 10 182 ( 520) 9 662 Tangible fixed assets (see Note 27) 46 ( 1 822)( 1 776) 3 484 ( 5 167)( 1 683)Other assets (see Note 31) 18 458 ( 24 393)( 5 935) 34 694 ( 16 359) 18 335 18 666 ( 27 041)( 8 375) 48 360 ( 22 046) 26 314 2 219 294 ( 2 108 088) 111 206 1 892 272 ( 1 539 535) 352 737 31.12.202231.12.2021 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 22 – CASH, CASH BALANCES AT CENTRAL BANKS AND OTHER DEMAND DEPOSITS As of 31 December 2022 and 2021, 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 287.9 million (31 December 2021: Euro 264.3 million), which aim to satisfy the legal requirements regarding the constitution of minimum cash balances. 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 of 31 December 2022 the average interest rate on these deposits was 2% and as of 31 December 2021 it was 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 of 31 December 2022 was included in the observation period running from 21 December 2022 to 07 February 2023. 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 23 – FINANCIAL ASSETS AND LIABILITIES HELD FOR TRADING As of 31 December 2022 and 2021, this caption is analysed as follows: NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - 246 - (In thousands of Euros)31.12.202231.12.2021Net consolidated profit / (loss) attributable to shareholder of the Bank 560 910 184 504 Weighted average number of common shares outstanding (thousands)10 034 965 9 800 000 Basic earnings per share attributable to shareholders of novobanco (in Euros)0,060,02Basic earnings per share from continuing activities attributable to shareholders of novobanco (in Euros)0,060,02(in thousands of Euros)31.12.202231.12.2021Cash 182 895 151 699 Demand deposits with Central BanksBank of Portugal 5 936 637 5 261 912 Other Central Banks 5 861 2 717 5 942 498 5 264 629 Deposits in other domestic credit institutionsRepayable on demand 62 900 85 433 Uncollected checks 159 966 163 138 222 866 248 571 Deposits with banks abroadRepayable on demand 213 506 162 632 Other deposits 37 313 44 007 250 819 206 639 6 599 078 5 871 538 Securities held for trading In accordance with the accounting policy described in Note 7.10.5, securities held for trading are those acquired to be traded in the short-term regardless of their maturity. As of 31 December 2022 and 2021, the schedule of 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 42. Derivatives As of 31 December 2022 and 2021, this caption is analysed as follows: NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - 247 - (in thousands of Euros)31.12.202231.12.2021Financial assets held for tradingSecuritiesBonds and other fixed income securitiesIssued by government and public entities 36 428 114 465 36 428 114 465 DerivativesDerivatives held for trading with positive fair value 135 382 263 199 135 382 263 199 171 810 377 664 Financial liabilities held for tradingDerivativesDerivatives held for trading with negative fair value 99 386 306 054 99 386 306 054 (in thousands of Euros)31.12.202231.12.2021From 3 months to a year 4 911 - From 1 to 5 years 10 055 - More than 5 years 21 462 114 465 36 428 114 465 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 7.10.6 and 7.10.7, and which the Group has not designated for hedge accounting. In the exercise of 2022, the Group recognised a loss of Euro 1,820 thousand related to the CVA of derivative instruments (31 December 2021: loss of Euro 454 thousand). The way of determining the CVA is explained in Note 42. As of 31 December 2022 and 2021, the analysis of the derivatives held for trading by maturity period is as follows: NOTE 24 – FINANCIAL ASSETS MANDATORILY AT FAIR VALUE THROUGH PROFIT OR LOSS, AT FAIR VALUE THROUGH As of 31 December 2022 and 2021, these captions are analysed as follows: NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - 248 - (in thousands of Euros)AssetsLiabilitiesAssetsLiabilitiesTrading derivativesExchange rate contractsForward- buy 664 046 587 774 - sell 662 467 591 858 Currency Swaps- buy 715 504 451 112 - sell 713 759 452 353 Currency Interest Rate Swaps- buy- 21 083 - sell- 21 083 Currency Options- buy 293 418 304 349 - sell 293 419 304 349 23 141 22 069 29 127 34 910 Interest rate contractsInterest Rate Swaps- buy3 071 249 5 988 949 - sell3 071 249 5 988 949 Swaption - Interest Rate Options- buy 142 992 86 436 - sell 233 310 166 554 103 673 74 413 225 186 267 962 Equity / Index contractsEquity / Index Options- buy 423 960 526 502 - sell 423 956 526 498 8 279 2 695 8 190 2 608 Commodities ContractsCommodities Swaps- buy 15 759 29 633 - sell 15 759 29 633 289 209 696 574 135 382 99 386 263 199 306 054 31.12.202231.12.2021NotionalFair ValueNotionalFair Value 13 976 13 326 2 704 7 107 2 559 2 137 633 1 934 - - 20 024 20 103 6 606 6 606 5 766 5 766 98 468 70 120 224 317 265 143 5 205 4 293 869 2 819 8 279 2 695 8 190 2 608 289 209 696 574 (in thousands of Euros)AssetsLiabilitiesAssetsLiabilitiesTrading DerivativesUp to 3 months1 342 255 1 340 594 5 332 1 137 915 1 142 432 ( 6 380)From 3 months to 1 year 735 763 735 132 847 654 256 654 868 5 224 From 1 to 5 years 963 226 983 950 4 584 1 633 635 1 640 297 2 778 More than 5 years2 285 684 2 354 243 25 233 4 570 032 4 643 680 ( 44 477)5 326 928 5 413 919 35 996 7 995 838 8 081 277 ( 42 855)31.12.202231.12.2021NotionalFair Value (net)NotionalFair Value (net) Securities As of 31 December 2022 and 2021, the detail of securities portfolio is as follows: On December 29, 2022, the Crow Project was concluded, between novobanco, Banco Comercial Português, S.A., Caixa Geral de Depósitos, S.A., Banco Santander Totta, S.A. and Oitante, S.A. (the sellers) and Davidson Kempner (the buyer), regarding the sale process of the participation units held by these banks in the restructuring funds. This transaction resulted in: (i) the transfer of the units held in FRT together with the assets directly and indirectly held by the fund to the buyer; (ii) the transfer of the shares in FLIT together with the assets directly and indirectly held by the fund to the buyer; (iii) certain hotel assets indirectly held by the Recovery Fund, FCR were indirectly acquired by FLIT; and (iv) certain assets indirectly held by FLIT and FRT were transferred to the Sellers. As a result of this transaction, novobanco received, in net terms, Euro 224 million, derecognised Euro 267 million of participating units NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - 249 - (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 313 684 13 2 331 099 8 183 209 ( 218 545) 10 609 460 Loans and advances to banks- - - 43 548 - 43 548 Loans and advances to customers 18 - - 24 550 936 ( 165 144) 24 385 810 313 702 13 2 331 099 32 777 693 ( 383 689) 35 038 818 * Fair value changes of the elements covered by the interest rate hedge portfolio (see Note 25)31.12.2022(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 799 592 - 7 220 996 2 338 697 ( 3 136) 10 356 149 Loans and advances to banks- - - 50 466 - 50 466 Loans and advances to customers- - - 23 650 739 33 797 23 684 536 799 592 - 7 220 996 26 039 902 30 661 34 091 151 * Fair value changes of the elements covered by the interest rate hedge portfolio (see Note 25)31.12.2021(in thousands of Euros)31.12.202231.12.2021Securities mandatorily at fair value through profit or lossBonds and other fixed income securitiesFrom other issuers 13 473 54 960 Shares 141 119 427 886 Other variable income securities 159 092 316 746 313 684 799 592 Securities at fair value through resultsBonds and other fixed income securitiesFrom other issuers 13 - 13 - Securities at fair value through other comprehensive incomeBonds and other fixed income securitiesFrom public issuers1 764 578 5 761 717 From other issuers 479 406 1 398 899 Shares 87 115 60 380 2 331 099 7 220 996 Securities at amortised costBonds and other fixed income securitiesFrom public issuers4 610 412 377 335 From other issuers3 864 328 2 208 359 Impairment( 291 531)( 246 997)8 183 209 2 338 697 Value adjustments for interest rate risk hedging (see Note 25)( 218 545)( 3 136)10 609 460 10 356 149 and acquired assets recorded as non-current assets in the amount of Euro 48 million, with a positive impact on results of Euro 4.8 million. The remaining participations in restructuring funds that remained in the Group's balance sheet are accounted for as shares and other variable income securities mandatorily measured at fair value through profit or loss, in accordance with the accounting policy described in Note 7.10.4, based on the net book value disclosed by the Management Companies, adjusted based on independent information, analyses or valuations deemed necessary to determine their fair value, in response to guidance from the European Central Bank. As these are "level 3" assets in accordance with the IFRS 13 fair value hierarchy (quotations supplied by third parties whose parameters used are mostly not observable in the market), details of the valuation methodology are described in Note 42. As of 31 December 2022 and 2021, the detail of the fair value securities through other comprehensive income is as follows: During the exercises 2022, the Group sold Euro 5,921.9 million of financial instruments classified at fair value through other comprehensive income (31 December 2021: Euro 956.1 million), with a loss of Euro 82.8 million (31 December 2021: gain of Euro 14.4 million), recorded in the income statement, from the sale of debt instruments and a loss of Euro 1.2 million that were transferred from revaluation reserves to sales-related reserves (31 December 2021: loss of Euro 20.5 million), from the sale of equity instruments. The movements in the impairment reserves in fair value securities through other comprehensive income are presented as follows: NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - 250 - (in thousands of Euros)PositiveNegativeBonds and other fixed income securitiesFrom public issuers1 783 420 321 ( 19 163)- 1 764 578 ( 453)Residents 349 818 10 ( 13 271)- 336 557 ( 115)Non residents1 433 602 311 ( 5 892)- 1 428 021 ( 338)From other issuers 541 022 - ( 49 628)( 11 988) 479 406 ( 207)Residents 29 610 - ( 4 769)- 24 841 ( 2)Non residents 511 412 - ( 44 859)( 11 988) 454 565 ( 205)Shares 445 229 41 222 ( 399 336)- 87 115 - Residents 343 854 38 443 ( 310 492)- 71 805 - Non residents 101 375 2 779 ( 88 844)- 15 310 - Other securities with variable income 3 - ( 3)- - - Residents 3 - ( 3)- - - Non residents- - - - - - Balance as at 31 December 20222 769 674 41 543 ( 468 130)( 11 988)2 331 099 ( 660)(1) Aquisition cost referring to shares and other equity instruments and amortized cost for debt securities.(2) In the context of fair value hedge operations (see Note 25)(in thousands of Euros)PositiveNegativeBonds and other fixed income securitiesFrom public issuers5 560 962 205 567 ( 4 812)- 5 761 717 ( 3 043)Residents2 478 402 87 103 ( 918)- 2 564 587 ( 1 511)Non residents3 082 560 118 464 ( 3 894)- 3 197 130 ( 1 532)From other issuers1 374 554 30 008 ( 5 663)- 1 398 899 ( 673)Residents 29 609 63 ( 2 335)- 27 337 ( 3)Non residents1 344 945 29 945 ( 3 328)- 1 371 562 ( 670)Shares 442 843 15 963 ( 398 426)- 60 380 - Residents 344 174 14 633 ( 310 732)- 48 075 - Non residents 98 669 1 330 ( 87 694)- 12 305 - Other securities with variable income 3 - ( 3)- - - Residents 3 - ( 3)- - - Balance as at 31 December 20217 378 362 251 538 ( 408 904)- 7 220 996 ( 3 716)(1) Aquisition cost referring to shares and other equity instruments and amortized cost for debt securities.(2) In the context of fair value hedge operations (see Note 25)Cost (1)Fair value reserveFair value reserve transferred to Results (2)Book valueImpairment reservesCost (1)Fair value reserveFair value reserve transferred to Results (2)Book valueImpairment reserves Changes in impairment losses on securities at amortised cost are as follows: Transfers between stages in the portfolio of securities at fair value through other comprehensive income and amortised cost are presented as follows: In accordance with the accounting policy mentioned on Note 7.16, the Group 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 8.1. As of 31 December 2022 and 2021, the securities portfolio, by residual maturity period, is as follows: NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - 251 - (in thousands of Euros)Stage 1Stage 2Stage 3TotalBalance as at 31 December 2020 3 690 - - 3 690 Increases due to changes in credit risk 1 302 - - 1 302 Decreases due to changes in credit risk( 928)- - ( 928)Utilization during the exercise( 384)- - ( 384)Other movements 36 - - 36 Balance as at 31 December 2021 3 716 - - 3 716 Changes in the value of the impairment - transfers to stage 3( 20)- 20 - Increases due to changes in credit risk 2 339 - - 2 339 Decreases due to changes in credit risk( 2 752)- ( 20)( 2 772)Utilization during the exercise( 2 654)- - ( 2 654)Other movements 30 - 1 31 Balance as at 31 December 2022 659 - 1 660 Impairment movement of securities at fair valuethrough other comprehensive income(in thousands of Euros)Stage 1Stage 2Stage 3TotalBalance as at 31 December 2020 3 925 87 652 109 660 201 237 Increases due to changes in credit risk 9 347 1 058 301 148 112 1 215 760 Decreases due to changes in credit risk( 7 688)( 1 107 621)( 53 046)( 1 168 355)Utilization during the exercise( 12)( 1)( 1 640)( 1 653)Other movements( 101)( 48) 157 8 Balance as at 31 December 2021 5 471 38 283 203 243 246 997 Changes in the value of the impairment - transfers to stage 1 76 ( 76)- - - transfers to stage 2( 61) 61 - - - transfers to stage 3( 6 357)- 6 357 - Increases due to changes in credit risk 15 463 173 771 1 687 706 1 876 940 Decreases due to changes in credit risk( 9 262)( 208 666)( 1 590 945)( 1 808 873)Utilization during the exercise( 41)- ( 25 237)( 25 278)Other movements 58 - 1 687 1 745 Balance as at 31 December 2022 5 347 3 373 282 811 291 531 58 Impairment movement of securities at amortised cost(in thousands of Euros)From Stage 1 to Stage 2 From Stage 2 to Stage 1From Stage 2 to Stage 3 From Stage 3 to Stage 2From Stage 3 to Stage 1 From Stage 1 to Stage 3Debt securitiesOther issuers 18 523 1 405 - - 29 263 - 18 523 1 405 - - 29 263 - Capital(cid:9)(cid:9)(cid:9)(cid:9)(cid:9)(cid:9)(cid:9)Transfers between Stage 1 and 2(cid:9)Transfers between Stage 2 and 3(cid:9)Transfers between Stage 1 and 2(cid:9) The detail of the securities portfolio by fair value hierarchy is presented in Note 42. The portfolio securities pledged by the Group are analysed in Note 38. Loans and advances to Banks As of 31 December 2022 and 2021, the detail of Loans and advances to Banks is as follows: Investments in credit institutions are all recorded in the amortised cost portfolio. As of 31 December 2022 and 2021, the analysis of loans and advances to banks, by residual maturity is as follows: NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - 252 - (in thousands of Euros)31.12.202231.12.2021Securities at fair value through profit or loss - mandatoryUp to 3 months - 41 741 From 1 to 5 years 2 469 2 443 More than 5 years 11 004 10 776 Undetermined duration 300 211 744 632 313 684 799 592 Securities at fair value through profit or loss From 3 months to 1 year 13 - 13 - Securities at fair value through other comprehensive incomeUp to 3 months 142 588 451 416 From 3 months to 1 year1 655 714 989 621 From 1 to 5 years 285 809 3 033 249 More than 5 years 159 873 2 686 330 Undetermined duration 87 115 60 380 2 331 099 7 220 996 Securities at amortised cost (*)Up to 3 months 785 649 710 014 From 3 months to 1 year 545 902 139 547 From 1 to 5 years2 891 069 478 503 More than 5 years4 252 120 1 257 630 8 474 740 2 585 694 11 119 536 10 606 282 (*) Gross value before impairment(in thousands of Euros)Loans and advances to banks in PortugalDeposits 1 715 Loans 39 228 44 770 Other loans and advances 3 3 39 232 45 488 Loans and advances to banks abroadDeposits 5 096 6 089 Other loans and advances- 2 5 096 6 091 44 328 51 579 Impairment losses( 780)( 1 113) 43 548 50 466 31.12.202231.12.2021 Changes in impairment losses on loans and advances to banks are presented as follows: The increase of impairment for investments in credit institutions verified in 2020 results from the degradation of the credit risk of international exposures analysed on an individual basis, whose partial default situation at the end of 2020, among other signs of impairment, led to the transfer of the same to stage 3 and the constitution of additional impairments of Euro 189.6 million. During 2021 part of this exposure was settled, with the remaining exposure being restructured and subsequently derecognised, in line with the amendment made in May 2021 to the Contingent Capital Mechanism contract, which extinguished novobanco’s rights and risks on this asset. Loans and advances to customers As of 31 December 2022 and 2021, the detail of loans and advances to customers is presented as follows: NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - 253 - (in thousands of Euros)31.12.202231.12.2021Up to 3 months 320 861 From 3 months to 1 year 666 6 558 From 1 to 5 years 38 365 38 193 More than 5 years 4 977 5 967 44 328 51 579 (in thousands of Euros)Stage 1Stage 2Stage 3TotalBalance as at 31 December 2020 430 2 249 706 250 138 Increases due to changes in credit risk 1 210 541 134 063 135 814 Decreases due to changes in credit risk( 1 399)( 102)( 132 564)( 134 065)Utilization during the exercise( 101 282)- ( 167 728)( 269 010)Other movements 101 258 33 ( 83 055) 18 236 Balance as at 31 December 2021 217 474 422 1 113 Increases due to changes in credit risk 371 391 - 762 Decreases due to changes in credit risk( 413)( 636)- ( 1 049)Other movements 25 ( 75) 4 ( 46)Balance as at 31 December 2022 200 154 426 780 Loans and advances to Banks As of 31 December 2021, Loans to customers are all recorded in the amortised cost portfolio. As of 31 December 2022, there are transactions mandatorily recorded at fair value through profit or loss, with a nominal value of Euro 31,197 thousand and a fair value of Euro 18 thousand, the impact of which was recorded in the line Gain or loss on financial assets mandatorily recorded at fair value through profit or loss in the income statement (see Note 13). As of 31 December 2022, the amount of loans and advances to customers (net of impairment) includes the amount of Euro 1,127.6 million (31 December 2021: Euro 1,255.1 million), related to securitization operations in which, according to the accounting policy referred to in Note 6, structured entities are consolidated by the Group (see Notes 1 and 41). The liabilities associated with these securitization operations were recognised as Debt Securities (see Note 33). As of 31 December 2022, the caption Loans and advances to customers include Euro 6,078.4 million of mortgage loans related to the issuance of mortgage bonds (31 December 2021: Euro 6,075.1 million) (see Note 33). As of 31 December 2022, the amount of interest and commissions recorded in the balance sheet relating to credit operations amounts to Euro 37,310 thousand (31 December 2021: Euro 18,614 thousand). As of 31 December 2022 and 2021, the analysis of loans and advances to customers, by residual maturity, is as follows: NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - 254 - (in thousands of Euros)Domestic loans and advancesCorporateCurrent loans1 124 902 1 139 614 Loans9 124 011 8 917 738 Discounted bills 87 357 76 741 Factoring 669 689 595 334 Overdrafts 46 637 13 457 Financial leases 796 661 1 245 885 Other loans and advances 29 404 17 814 IndividualsResidential Mortgage loans8 748 678 8 733 283 Consumer credit and other loans1 261 226 1 193 500 21 888 565 21 933 366 Foreign loans and advancesCorporateCurrent loans 46 898 66 348 Loans1 992 439 1 319 819 Discounted bills 14 2 Factoring 31 019 40 519 Financial leases 72 54 Other loans and advances 1 1 IndividualsResidential Mortgage loans1 217 702 1 038 286 Consumer credit and other loans 110 030 190 201 3 398 175 2 655 230 Overdue loans and advances and interestsUnder 90 days 13 267 20 010 Over 90 days 317 339 290 050 330 606 310 060 25 617 346 24 898 656 Impairment losses(1 066 392)(1 247 917)24 550 954 23 650 739 Fair value adjustaments of interest rate hedges (See Note 25)CorporateLoans( 16 805) 4 035 IndividualsResidential Mortgage loans( 148 339) 29 762 ( 165 144) 33 797 24 385 810 23 684 536 31.12.202231.12.2021 Changes in credit impairment losses are presented as follows: The increase of impairment for credit risk during the exercise 2021 include Euro 71.8 million, reflecting the updating of the information in the IFRS 9 models, anticipating the losses related to the Covid-19 pandemic. The transfers between stages that occurred in Loans to customers are presented as follows: NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - 255 - (in thousands of Euros)31.12.202231.12.2021Up to 3 months 1 354 779 1 211 004 From 3 months to 1 year 1 528 511 1 303 386 From 1 to 5 years 6 261 236 5 825 536 More than 5 years 15 977 070 16 282 467 Undetermined duration (Overdue) 330 606 310 060 25 452 202 24 932 453 (in thousands of Euros)Stage 1Stage 2Stage 3TotalBalance as at 31 December 2020 61 429 310 005 1 228 341 1 599 775 Financial assets derecognised( 1 282)( 3 073)( 239 704)( 244 059)Increases due to changes in credit risk 22 683 123 196 155 547 301 426 Decreases due to changes in credit risk( 47 899)( 57 439)( 46 713)( 152 051)Utilizations- ( 194)( 267 008)( 267 202)Other movements 28 644 ( 50 301) 31 685 10 028 Balance as at 31 December 2021 63 575 322 194 862 148 1 247 917 Changes in the value of the impairment- transfers to stage 1 73 627 ( 73 627)- - - transfers to stage 2( 19 094) 47 974 ( 28 880)- - transfers to stage 3( 249)( 18 699) 18 948 - Financial assets derecognised( 4)- ( 26 847)( 26 851)Increases due to changes in credit risk 19 743 64 166 130 905 214 814 Decreases due to changes in credit risk( 94 166)( 41 063)( 45 050)( 180 279)Utilizations- ( 38)( 198 740)( 198 778)Other movements 18 842 ( 300)( 8 973) 9 569 Balance as at 31 December 2022 62 274 300 607 703 511 1 066 392 Credit Parity Movement(cid:9)(cid:9)(cid:9)(cid:9)(cid:9)(cid:9)(in thousands of Euros)Stage 1Stage 2Stage 3totalStage 1Stage 2Stage 3totalBalance as at 31 December 202061 429307 179141 721510 329- 2 8261 086 6201 089 4461 599 775Financial assets originated or acquiredFinancial assets derecognised-1 282-3 073-42 700-47 055- 0-197 004-197 004-244 059Increases due to changes in credit risk22 683122 72634 438179 847- 470121 109121 579301 426Decreases due to changes in credit risk-47 899-55 457-29 950-133 306- -1 982-16 763-18 745-152 051Utilizations0-194-15 262-15 456- 0-251 746-251 746-267 202Other movements28 644-49 842-702-21 900- -45932 38731 92810 028Balance as at 31 December 202163 575321 33987 545472 459- 855774 603775 4581 247 917Financial assets originated or acquiredFinancial assets derecognised-40-315-319- 0-26 532-26 532-26 851Increases due to changes in credit risk19 74364 16533 274117 182- 197 63197 632214 814Decreases due to changes in credit risk-94 166-40 599-6 669-141 434- -464-38 381-38 845-180 279Utilizations0-38-5 102-5 140- 0-193 638-193 638-198 778Other movements73 126-44 652-23 1515 323- 04 2464 2469 569Balance as at 31 December 202262 274300 21585 582448 071- 392617 929618 3211 066 392Loans and Advances to customers - of which on a portfolio basis(cid:9)(cid:9)(cid:9)Loans and Advances to customers - of which on an individual basisTotal Credit Parity  Credit distribution by type of rate is as follows: An analysis of finance lease loans, by residual maturity period, is presented as follows: Sales of credit portfolios 2021 Sale of a non-performing loans portfolio (Project Orion) novobanco entered into sale and purchase agreements with a consortium of funds managed by WEST INVEST UK LIMITED PARTNERSHIP and LX INVESTMENT PARTNERS III S.À.R.L. for the sale of a non-performing loans and related assets portfolio (Project Orion). The net book value of the receivables at the date of derecognition amounted to Euro 76.1 million (gross book value of Euro 162.9 million), with an impact on net income for the exercise 2021 of approximately Euro 1.8 million: Sale of a non-performing loans portfolio (Project Wilkinson) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - 256 - (in thousands of Euros)From Stage 2 to Stage 1From Stage 1 to Stage 2From Stage 3 to Stage 2From Stage 2 to Stage 3From Stage 3 to Stage 1 From Stage 1 to Stage 3Corporate 555 353 514 595 81 989 40 423 29 605 2 250 Mortgage and Consumer Loans 393 129 317 341 35 718 41 354 8 668 22 856 948 482 831 936 117 707 81 777 38 273 25 106 Capital(cid:9)(cid:9)(cid:9)(cid:9)(cid:9)(cid:9)(cid:9)Transfers between Stage 1 and 2(cid:9)Transfers between Stage 2 and 3(cid:9)Transfers between Stage 1 and 2(cid:9)(in thousands of Euros)31.12.202231.12.2021Fixed rate2 802 871 4 075 515 Variable rate22 649 331 20 856 938 25 452 202 24 932 453 (in thousands of Euros)31.12.202231.12.2021Gross investment in finance leases receivableUp to 1 year 216 621 278 587 1 to 5 years 496 962 693 762 More than 5 years 202 119 533 443 915 702 1 505 792 Unrealized finance income in finance leasesUp to 1 year 26 238 43 611 1 to 5 years 54 097 94 599 More than 5 years 17 146 91 120 97 481 229 330 Present value of minimum lease payments receivableUp to 1 year 190 383 234 976 1 to 5 years 442 865 599 163 More than 5 years 184 973 442 323 818 221 1 276 462 Impairment ( 84 922)( 226 204) 733 299 1 050 258 (in thousands of Euros)Impact on Income Statement31.12.2021Gains or losses on the derecognition of financial assets and liabilities not measured at fair value through results -10 159Credit parity or reversal of credit parity of financial assets not measured at fair value through the results19 295Provisions or reversal of provisions-7 310Impact on Net Income1 826 On March 5, 2021, novobanco entered into a sale and purchase agreement to sell a non-performing loans and related assets portfolio (Project Wilkinson), with a net book value of Euro 62.3 million (gross book value of Euro 210.4 million), with Burlington Loan Management, a company owned by companies affiliated to and advised by Davidson Kempner European Partners, LLP. The impact of this operation on net income for 2021 resulted in a loss of Euro 4.5 million. NOTE 25 – DERIVATIVES – HEDGE ACCOUNTING AND FAIR VALUE CHANGES OF THE HEDGED CAPTIONS At 31 December 2022 and 2021, the fair value of the hedging derivatives is 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 Gains and losses from hedge accounting (see Note 13). The Group calculates the “Credit Valuation Adjustment” (CVA) for derivative instruments in accordance with the methodology described in Note 42 - Fair value of financial assets and liabilities. Fair value hedging As of 31 December 2022 and 2021, fair value hedging operations can be analysed as follows: NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - 257 - (in thousands of Euros)Impact on Income Statement31.12.2021Gains or losses on the derecognition of financial assets and liabilities not measured at fair value through results -1 363Credit parity or reversal of credit parity of financial assets not measured at fair value through the results-3 175Impact on Net Income-4 538(in thousands of Euros)31.12.202231.12.2021Hedging derivativesAssets 562 845 19 639 Liabilities( 119 578)( 44 460) 443 267 ( 24 821)Fair value component of the assets and liabilities hedged for interest rate riskFinancial assetsSecurities (see Note 24)( 218 545)( 3 136)Loans to customers (see Note 24)( 165 144) 33 797 ( 383 689) 30 661 Financial assets at fair value through other comprehensive incomeSecurities (see Note 24)*( 11 988)- ( 395 677) 30 661 *Amount recorded in fair value reserves transferred to results(in thousands of Euros)Interest Rate SwapSecurities at amortized costInterest rate 5 456 500 359 089 214 274 ( 218 545)( 215 410)Interest Rate Swap/ CIRSLoans to customersInterest and exchange rates 3 300 704 166 110 192 999 ( 165 144)( 198 940)Interest Rate SwapSecurities at fair value through other comprehensive incomeInterest rate 200 000 19 140 27 272 ( 11 988)( 27 298) 8 957 204 544 339 434 545 ( 395 677)( 441 648)(1) Attributable to hedged risk(2) Includes accrued interest(in thousands of Euros)Interest Rate SwapSecurities at amortized costInterest rate 378 000 4 184 3 675 ( 3 136)( 4 265)Interest Rate Swap/ CIRSLoans to customersInterest and exchange rates 2 473 019 ( 29 005) 31 118 33 797 ( 28 935) 2 851 019 ( 24 821) 34 793 30 661 ( 33 200)(1) Attributable to hedged risk(2) Includes accrued interest31.12.2022Derivative Hedged itemHedged riskNotionalFair value of derivatives (2)Change infair value ofderivative inperiodFair value component of item hedged (1)Change in fair value component of item hedged in period (1)31.12.2021Derivative Hedged itemHedged riskNotionalFair value of derivatives (2)Change infair value ofderivative inperiodFair value component of item hedged (1)Change in fair value component of item hedged in period (1) On 31 December 2022, the ineffective part of the fair value hedging operations, which translated into a cost of Euro 7.1 million, was recorded in the income statement (31 December 2021: profit of Euro 1.6 million). The Group periodically conducts tests of the effectiveness of existing hedging relationships. Cash flow hedging Transactions with hedge derivatives as of 31 December 2022 and 2021, by maturity, can be analysed as follows: NOTE 26 – 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 changes in this caption for the exercise ended as of 31 December 2022 and 2021, are analysed as follows: NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - 258 - (in thousands of Euros)Loans to customers 4 732 583 4 732 000 ( 101 072)( 100 418)( 881) 4 732 583 4 732 000 ( 101 072)( 100 418)( 881)31.12.2022Asset balance valueDerivate balance valueCash flow coverage reserveIneffectiveness value - recorded in resultsHedged itemNotional(in thousands of Euros)BuySellBuySellUp to 3 months 3 020 3 020 5 65 000 65 000 ( 705)From 3 months to 1 year 63 678 63 678 ( 197) 76 070 76 070 ( 1 212)From 1 to 5 years4 629 088 4 629 088 80 590 418 161 418 161 1 171 More than 5 years4 514 816 4 514 816 362 869 866 278 866 279 ( 24 075)9 210 602 9 210 602 443 267 1 425 509 1 425 510 ( 24 821)31.12.202231.12.2021NotionalFair Value (net)NotionalFair Value (net)(in thousands of Euros)31.12.202231.12.202131.12.202231.12.202131.12.202231.12.202131.12.202231.12.202131.12.202231.12.202131.12.202231.12.2021LOCARENT 2 967 2 967 50,00%50,00% 23 231 21 349 - - 23 231 21 349 1 326 1 054 LINEAS - CONCESSÕES DE TRANSPORTES 146 769 146 769 40,00%40,00% 68 438 59 737 ( 7 406)( 26 361) 61 032 33 376 - ( 1 908)EDENRED 4 984 4 984 50,00%50,00% 2 932 2 692 - - 2 932 2 692 967 904 UNICRE a) 11 497 11 497 17,50%17,50% 31 506 27 242 - - 31 506 27 242 4 660 3 120 ESEGUR- 9 634 - 44,00%- 13 847 - ( 8 673)- 5 174 - 98 Others 7 549 14 445 - - 1 043 11 474 - ( 6 717) 1 043 4 757 1 401 526 173 766 190 296 127 150 136 341 ( 7 406)( 41 751) 119 744 94 590 8 354 3 794 a) Despite the Group's economic interest being less than 20%, this entity was included in the consolidated balance sheet using the equity method since the Group exercises significant influence over its activities.Cost of participationEconomic interest (b)Gross Book ValueImpairmentNet Book ValueProfit / (losses) attributable to the Group(in thousands of Euros)AssetsLiabilitiesEquityIncome Profit / (loss) for the period31.12.202231.12.202131.12.202231.12.202131.12.202231.12.202131.12.202231.12.202131.12.202231.12.2021LOCARENT 302 057 271 440 256 207 229 358 45 850 42 082 35 080 28 253 2 651 2 108 LINEAS - CONCESSÕES DE TRANSPORTES 165 608 226 769 77 396 138 557 88 212 88 212 52 870 1 503 51 869 ( 4 770)EDENRED 88 605 84 502 76 520 72 897 12 085 11 605 7 528 11 175 1 934 1 807 UNICRE a) 452 219 376 148 272 185 220 481 180 034 155 667 206 048 142 625 26 631 17 827 ESEGUR b)- 28 923 - 13 007 - 15 916 - 39 947 - 220 Note: Data adjusted for consolidation purposes(a) Although the Group's economic interest is less than 20%, this entity was included in the balance sheet consolidated by the equity method as the Group has a significant influence on its activities.b) Reclassified during 2021 from discontinued operations (see Note 32) In 2022, dividend income of Euro 4,805 thousand was recorded in financial assets in investments in associates and subsidiaries, which include dividends received from Unicre in the amount of Euro 3,080 thousand, from Edenred in the amount of Euro 1,009 thousand (31 December 2021: Euro 7,499 thousand, which include dividends received from Unicre in the amount of Euro 6,321 thousand and Edenred in the amount of Euro 660 thousand). The changes in impairment losses for investments in associates are presented as follows: NOTE 27 – PROPERTY, PLANT AND EQUIPMENT This caption as of 31 December 2022 and 2021 is analysed as follows: NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - 259 - (in thousands of Euros)31.12.202231.12.2021Balance at the beginning of the exercise 41 751 37 963 Charges- 678 Utilizations( 9 939)- Reversals( 21 546)( 993)Foreign exchange differences (a)( 2 860) 4 103 Balance at the end of the exercise 7 406 41 751 (a)For2021itincludesEUR4,326thousandimpairmentforIjarLeasingtransferredtodiscontinuedoperationsand5,232thousandeurosand669thousandeurosrelatingtothe reclassification of ESEGUR and Multipessoal, respectively, to discontinued operations (see Note 32).(in thousands of Euros)31.12.202231.12.2021Balance at the beginning of the exercise 94 590 93 630 Disposals and other reimbursements (see Note 1)- ( 153)Share of profits / (losses) of associated companies 8 353 3 794 Impairment in associated companies 21 546 315 Fair value reserves of investments in associated companies 332 ( 774)Dividends received( 4 679)( 7 499)Foreign exchange differences and other (a)( 398) 5 277 Balance at the end of the exercise 119 744 94 590 (a)Intheyear2021includesEUR4,326thousandrelatedtothereclassificationofIjarLeasingtodiscontinuedoperationsandEUR5,232thousandandEUR669thousandrelatedtothereclassificationof ESEGUR and Multipessoal, respectively, from discontinued operations (see Note 32)(cid:9)(cid:9) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - 260 - (in thousands of Euros)31.12.202231.12.2021Real estate propertiesFor own use 175 117 245 988 Improvement in leasehold properties 86 114 120 800 Other- - 261 231 366 788 EquipmentComputer equipment 118 739 114 847 Fixtures 34 571 49 276 Furniture 56 890 54 728 Security equipment 17 471 21 775 Transport equipment 8 215 8 407 Right of use assets 583 583 Other 86 146 236 555 249 762 Assets under right of use Real estate properties 58 898 55 993 Equipment 11 758 9 819 70 656 65 812 Other assets- - Work in progressImprovements in leasehold properties 32 004 952 Real estate properties 29 827 9 891 Equipment 22 6 Others 277 336 62 130 11 185 630 572 693 547 Accumulated impairment( 11 445)( 13 221)Accumulated depreciation( 319 863)( 441 381) 299 264 238 945 The changes in this caption were as follows: During September the Head Office building was sold for Euro 112.2 million, the gross book value was Euro 106.4 million (Euro 38.2 million net of accumulated depreciation) resulting in a capital gain of Euro 67 million, net of costs related to the sale process. Until the construction of the new headquarters is concluded, the Bank will continue to use the building, having signed a lease contract for this purpose. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - 261 - - - - - (in thousand of Euros)Real Estate PropertiesEquipmentRight of Use AssetsWork in ProgressTotalAcquisition CostBalance at 31 December 2020 361 480 248 582 63 310 1 566 674 938 Acquisitions 37 989 24 853 2 502 16 629 81 973 Disposals/write-offs( 37 561)( 23 835)- - ( 61 396)Transfers 4 881 160 - ( 7 010)( 1 969)Foreign exchange differences and other (a)( 1) 2 - - 1 Balance at 31 December 2021 366 788 249 762 65 812 11 185 693 547 Acquisitions 42 414 24 138 19 699 51 282 137 533 Disposals/write-offs( 146 117)( 37 050)( 14 855)( 15)( 198 037)Transfers (d)( 1 848)( 310)- ( 322)( 2 480)Foreign exchange differences and other( 6) 15 - - 9 Balance at 31 December 2022 261 231 236 555 70 656 62 130 630 572 DepreciationBalance at 31 December 2020 228 200 221 037 24 706 - 473 943 Depreciation 5 391 10 668 11 400 - 27 459 Disposals/write-offs( 31 068)( 23 200)( 7 229)- ( 61 497)Transfers (b)( 1 512)( 284)- - ( 1 796)Foreign exchange differences and other (c) 3 101 171 - 3 272 Balance at 31 December 2021 204 112 208 392 28 877 - 441 381 Depreciation 5 348 13 045 10 639 29 032 Disposals/write-offs( 107 935)( 36 589)( 7 138)( 151 662)Transfers (d)( 771)( 309)- ( 1 080)Foreign exchange differences and other 2 106 86 - 2 192 Balance at 31 December 2022 102 860 184 625 32 378 - 319 863 ImpairmentBalance at 31 December 2020 13 943 - - - 13 943 Impairment loss 3 484 - - - 3 484 Reversão de perdas por imparidade( 5 167)- - - ( 5 167)Transfers (d) 303 - - - 303 Variação cambial e outros movimentos 658 - - - 658 Balance at 31 December 2021 13 221 - - - 13 221 Impairment losses 46 - - - 46 Reversal of impairment losses( 1 822)- - - ( 1 822)Balance at 31 December 2022 11 445 - - - 11 445 Net book value at 31 December 2022 146 926 51 930 38 278 62 130 299 264 Net book value at 31 December 2021 149 455 41 370 36 935 11 185 238 945 (a) includes EUR 3.471 thousand of fixed assets (real estate and equipment) and EUR 1.650 thousand of accumulated depreciation sums for discontinued counters that have been transferred at net value to the appropriate balance sheet items.(cid:9)(cid:9)(cid:9)(cid:9)(cid:9)(cid:9)(cid:9)(cid:9)(cid:9)(cid:9)(cid:9)(b) includes EUR 2.479 thousand of fixed assets (real estate and equipment) and EUR 1.079 thousand of accumulated depreciation sums for discontinued counters that have been transferred at net value to the appropriate balance sheet items.(cid:9)(cid:9)(cid:9)(cid:9)(cid:9)(cid:9)(cid:9)(cid:9)(cid:9)(cid:9)(cid:9)(C) Includes EUR 106.395 thousand of fixed assets (real estate and equipment) and EUR 68.164 thousand of accumulated depreciation stemming from the Head Office Building that was sold in 2022.(cid:9)(cid:9)(cid:9)(cid:9)(cid:9)(cid:9)(cid:9)(cid:9)(cid:9)(cid:9)(cid:9) NOTE 28 – INVESTMENT PROPERTIES The changes in Investment properties are presented as follows: According to the accounting policy described in Note7.19, 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. 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 42). Investment properties comprise some assets held by Funds and Real Estate firms, 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. During 2022, the increase in the fair value of investment properties in the amount of Euro 91.1 million (31 December 2021: increase of Euro 31.2 million) (see Note 15), and the rental income from investment properties in the amount of Euro 17.1 million (31 December 2021: Euro 19.2 million), are recognised under Other operating income and expenses. NOTE 29 – INTANGIBLE ASSETS This caption as of 31 December 2022 and 2021, is analysed as follows: NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - 262 - (in thousands of Euros)31.12.202231.12.2021Balance at the beginning of the exercise 625 187 592 605 Acquisitions 16 464 4 973 Disposals( 242 068)( 49 727)Improvements 10 139 -Changes in fair value 91 133 31 179 Other( 1 288) 46 157 Balance at the end of the exercise 499 567 625 187 (in thousands of Euros)31.12.202231.12.2021Goodwill 13 907 13 907 Impairment losses( 13 907)( 13 907)- - Internally developedSoftware - Automatic data processing system 69 511 69 511 Other 1 1 Acquired from third partiesSoftware - Automatic data processing system 374 108 387 358 Other- - 443 620 456 870 Work in progress 31 986 13 455 475 606 470 325 Accumulated amortization( 405 774)( 402 339) 69 832 67 986 The changes in this caption were as follows: Goodwill is recognised in accordance with the accounting policy described in Note 6, and can be analysed as follows: NOTE 30 – INCOME TAXES Tax assets and liabilities recognised in the balance sheet as of 31 December 2022 and 2021 can be analysed as follows: The deferred tax assets and liabilities recognised in the balance sheet as of 31 December 2022 and 2021 are as follows: NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - 263 - (in thousands of Euros)GoodwillSoftwareWork in progressTotalAcquisition costBalance as at 31 December 2020 13 907 423 190 21 439 458 536 AcquisitionsAcquired from third parties- 3 499 22 197 25 696 Transfers- 30 181 ( 30 181)- Balance as at 31 December 2021 13 907 456 870 13 455 484 232 AcquisitionsAcquired from third parties- 6 560 18 746 25 306 Disposals / write-offs- ( 20 030)( 20 030)Transfers- 216 ( 216)- Exchange variation and other movements- 4 1 5 Balance as at 31 December 2022 13 907 443 620 31 986 489 513 AmortizationsBalance as at 31 December 2020- 395 796 - 395 796 Amortization for the period- 6 545 - 6 545 Foreign exchange differences and other- ( 2)- ( 2)Balance as at 31 December 2021- 402 339 - 402 339 Amortization for the period- 23 461 - 23 461 Disposals / write-offs- ( 20 026)- ( 20 026)Balance as at 31 December 2022- 405 774 - 405 774 ImpairmentBalance as at 31 December 2020 13 907 - - 13 907 Balance as at 31 December 2021 13 907 - - 13 907 Balance as at 31 December 2022 13 907 - - 13 907 Net balance at 31 December 2022- 37 846 31 986 69 832 Net balance at 31 December 2021- 54 531 13 455 67 986 (in thousands of Euros)31.12.202231.12.2021SubsidiariesImbassaí13 526 13 526 GNB Concessões 381 381 13 907 13 907 Impairment lossesImbassaí(13 526)(13 526)GNB Concessões( 381)( 381)(13 907)(13 907)- - (in thousands of Euros)AssetsLiabilitiesAssetsLiabilitiesCurrent tax 32 570 7 582 35 653 12 262 Corporate Tax recoverable / (payable) 1 793 7 248 142 12 162 Other 30 777 334 35 511 100 Deferred tax 923 430 845 744 239 3 035 956 000 8 427 779 892 15 297 31.12.202231.12.2021 As of 31 December 2022, 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%. As at 31 December 2022, the Group recognised deferred tax assets associated with tax losses amounting to Euro 63.5 million. 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. Therefore, on December 31, 2021, the Group continued to apply Regulatory Decree no. 13/2018, of December 28, which aims to extend, for tax purposes, the tax framework that derives from Notice no. 3/95 of the 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 exercise 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. As of 31 December 2022 and 2021, the 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. As of 31 December 2022, the amounts held by the novobanco Group referring to these realities amount to approximately Euro 57 million (31 December 2021: Euro 37 million). 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 2022 and 2021, had the following origins: NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - 264 - (in thousands of Euros)AssetsLiabilitiesNet31.12.202231.12.202131.12.202231.12.202131.12.202231.12.2021Financial instruments 94 830 92 300 ( 14 637)( 78 526) 80 193 13 774 Impairment losses on loans (not covered) 331 523 339 022 - - 331 523 339 022 Impairment losses on loans (covered) 295 310 267 341 - - 295 310 267 341 Other tangible assets- - ( 76)( 8 029)( 76)( 8 029)Provisions 100 914 82 240 - - 100 914 82 240 Pensions 51 049 48 995 - - 51 049 48 995 Long-term service bonuses 20 21 - - 20 21 Other 991 124 ( 845)( 3 035) 146 ( 2 911)Tax losses carried forward 63 506 751 - - 63 506 751 Deferred tax asset / (liability) 938 143 830 794 ( 15 558)( 89 590) 922 585 741 204 Asset / liability set-off for deferred tax purposes ( 14 713)( 86 555) 14 713 86 555 - - Net Deferred tax asset / (liability) 923 430 744 239 ( 845)( 3 035) 922 585 741 204 (in thousands of Euros)31.12.202231.12.2021Balance at the beginning of the exercise 741 204 769 767 Recognised in Results for the exercise 63 349 27 923 Recognised in Fair value reserves 81 804 60 294 Recognised in Other reserves -( 74)Conversion of Deferred taxes into Tax credits 33 640 ( 124 721)Foreign exchange differences and other 2 588 8 015 Balance at the end of the exercise (Assets / (Liabilities)) 922 585 741 204 The reconciliation of the corporate income tax rate, for the portion recognised in the income statement, may be analysed as follows: Deferred tax assets recoverability analysis Deferred tax assets are recognised to the extent they are expected to be recovered with future taxable income. The Group has evaluated the recoverability of the deferred tax assets considering its expectations of future taxable profits until 2027. The recoverability of 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 2022, this exercise was made based on the latest draft version of the business plan (“MTP”) for the period of 2023-2025 and a stress scenario exercise, preliminarily considered by the General Supervisory Board in December 2022 and which, upon inclusion of the end of 2022 accounts will be definitively approved. 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: • In addition to the detailed estimates up to 2025, it is assumed, thereafter an increase in pre-tax results at a rate of 4.00% from 2026; • Growth in the commercial finance result based on the expected evolution of interest rate benchmarks, as well as the continued development of new lines of activity that should also provide a recovery in commissioning levels to values similar to previous exercises; • Significant increase in interest rate benchmarks in line with the macroeconomic outlook and ECB monetary policy decisions; • Maintenance of operating costs, despite the expected increase in inflation, based on the specific cost reduction plan and the implementation of a new distribution model, reflecting the favorable effect of the reduction in the number of employees and NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - 265 - (in thousands of Euros)Recognised in the income statementRecognised in reservesRecognised in the income statementRecognised in reservesFinancial instruments 15 777 ( 81 804)( 28 322)( 60 294)Impairment losses on loans and advances to customers 13 170 - 59 699 - Other tangible assets( 7 953)- ( 174)- Provisions( 18 673)- ( 43 105)- Pensions( 2 048)- ( 17 393) 74 Long-term service bonuses- - 1 - Other( 867)- 1 371 - Tax losses carried forward( 62 755)- - - Deferred taxes( 63 349)( 81 804)( 27 923)( 60 220)Current taxes 10 048 - 12 737 - Total tax recognised (income) / expense( 53 301)( 81 804)( 15 186)( 60 220)31.12.202231.12.2021Income before tax 532 643 177 003 Tax rate of novobanco21,021,0Income tax calculated based on the tax rate of novobanco 111 855 37 171 Tax-exempt dividends(0,2)( 1 248)(0,9)( 1 593)Impairment on investments in subsidiaries or associated companies subject to Participation Exemption(0,7)( 3 525)(23,3)( 41 203)Rate differential on the generation / reversal of timing differences2,2 11 949 17,9 31 650 Profits / losses in units with a more favorable tax regime(1,2)( 6 518)0,2 326 Taxes of Bank Branches and tax withheld abroad0,2 956 1,2 2 138 Impairments and provisions for loans(4,2)( 22 476)(30,1)( 53 201)Impairment and fair value adjustments on securities1,6 8 648 (21,3)( 37 715)Provisions for other risks, costs and contingencies(2,0)( 10 519)(8,9)( 15 830)Employees' long term benefits(0,4)( 2 163)(5,7)( 10 044)Deffered tax assets not recognized under tax losses for the exercise7,7 40 811 36,8 65 183 Contribution and Solidarity additional contribution over the Banking Sector 1,3 7 168 4,0 7 158 Deferred taxes on tax losses from previous years(11,8)( 62 755) -- Capital gains/losses on asset sales(19,1)( 101 924) -- Other(4,4)( 23 560)0,4 774 Total income recognised(10,0)( 53 301)(8,6)( 15 186)31.12.202231.12.2021%Valor%Valor branches and, in general, the simplification and increased efficiency of processes, in particular the focus on the digital component; and • Appropriations for credit impairment in line with the evolution of the Group's activity and supported by macroeconomic projections, bearing in mind the significant effort made in recent exercises to provision the credit portfolio and the progressive convergence to gradually normalised costs of risk. Depending on the analysis mentioned above, the amount of deferred taxes not recognised for tax losses, per year of expiry, is as follows: In addition, the Group became aware of the Tax Authority’s position with regards to adjustments resulting from the application of fair value to units in real estate investment funds and private equity funds. Such position implies that fair value adjustments to units of real estate investment funds and private equity funds do not contribute to the taxable profit in the respective year of booking. For the purpose of taxable income, such adjustments will only be accounted for at the moment of the respective realization, namely upon sale of the participation units or liquidation of the funds. The total amount of deferred tax assets related to these temporary differences, not recognised in the balance sheet, at 31 December 2022 amounts to Euro 229 million. Special Regime applicable to Deferred Tax Assets During 2014, novobanco adhered to the Special Regime applicable to deferred tax assets, after a favorable 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. Following the determination of a negative net income for the exercises between 2018 and 2020, 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. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - 266 - (in thousands of Euros)31.12.202231.12.2021No expiry period 933 178 -With expiry period 478 489 1 476 870 2025 91 728 123 124 2026 135 452 190 068 2028 - 877 771 2029 170 236 170 236 2032 81 073 115 671 1 411 667 1 476 870 (in thousands of Euros)202020192018Tax Credit 124 721 106 197 133 061 NOTE 31 – OTHER ASSETS As of 31 December 2022 and 2021, 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). 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. The decrease during 2022 in the caption Public Administrative Sector includes about Euro 272.9 million related to the conversion into capital of the rights resulting from the Special Regime Applicable to Deferred Tax Assets, as detailed in Note 36. As of 31 December 2022, the caption Other debtors includes, amongst others: • Euro 2.3 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 2021: Euro 2.3 million, entirely provisioned); • Euro 61.9 million of shareholder loans and supplementary capital contributions resulting from the assignment of loans and advances which are entirely provisioned (31 December 2021: Euro 111.6 million, entirely provisioned), • Euro 1.8 million receivable relation to the sale operation of non-performing loans (Project NATA II) (31 December 2021: Euro 61.3 million); • Euro 1.8 million of receivables related to non-productive receivables sale transactions (NATA II Project) (31 December 2021: Euro 61.3 million); • Euro 0.7 million of receivables related to the property sale operation carried out in 2019 (called “Project Sertorius”) (31 December 2021: Euro 1.3 million); • Euro 0.4 million receivable in relation to the sale operation of non-performing loans in 2020 (denominated “Project Carter”). (31 December 2021: Euro 4.4 million); and • Euro 20.9 million of receivables related to the sale of the restructuring funds. Securities transactions pending settlement reflect the transactions with securities, recorded on the trade date, in accordance with the accounting policy described in Note 7.10, pending settlement. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - 267 - (in thousands of Euros)31.12.202231.12.2021Collateral deposits placed 251 225 525 229 Derivative products 133 864 399 631 Collateral CLEARNET and VISA 41 423 33 092 Collateral deposits relating to reinsurance operations 71 387 92 457 Other collateral deposits b) 4 552 49 Debtors for mortgage credit interest subsidies 18 714 12 300 Public sector 498 349 956 130 Contingent Capital Agreement 198 180 209 220 Other debtors 328 366 498 681 Income receivable 127 771 138 703 Deferred costs 13 984 48 430 Retirement pensions and health benefits (see Note 16) 59 616 1 684 Precious metals, numismatics, medal collection and other liquid assets 10 440 10 034 Real estate properties a) 237 243 589 390 Equipment a) 3 013 3 189 Stock exchange transactions pending settlement 4 449 - Other assets 122 167 25 001 1 873 517 3 017 991 Impairment lossesReal estate properties a)( 123 008)( 390 762)Equipment a)( 2 195)( 2 180)Other debtors - Shareholder loans, supplementary capital contributions( 76 968)( 88 485)Other( 52 862)( 94 014)( 255 033)( 575 441)1 618 484 2 442 550 a) Real estate properties and equipment received in settlement of loans and discontinuedb) Includes the amount of 4.5M€ in the escrowaccount related to the sale of the Headquarters 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 must hold foreclosed assets. During 2022, an impairment charge of Euro 12.8 million was recorded for the properties in the portfolio (31 December 2021: Euro 16.2 million). As described in accounting policy 7.26, the Group evaluates at each reporting date, the recoverability of these assets and assesses for signs of impairment, with impairment losses being recognised in the income statement. The changes occurred in impairment losses are presented as follows: The changes occurred in the real estate properties were as follows: As of 31 December 2022 and 2021, the detail of the real estate properties included in Other assets, by type of property, is as follows: NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - 268 - (in thousands of Euros)31.12.202231.12.2021Balance at the beginning of the exercise 575 441 686 099 Dotation for the exercise 18 458 34 694 Utilisation during the exercise( 165 464)( 134 726)Write-back for the exercise( 24 393)( 16 359)Foreign exchange differences and other (a)( 149 009) 5 733 Balance at the end of the exercise 255 033 575 441 (a) In 2022 includes EUR 122.291 thousand of other Fungere assets at the time of the merger of Fungepi.(in thousands of Euros)31.12.202231.12.2021Balance at the beginning of the exercise 589 390 770 054 Additions 17 174 44 662 Disposals( 194 033)( 170 501)Other movements (a)( 175 288)( 54 825)Balance at the end of the exercise 237 243 589 390 (a) Includes EUR 156.489 thousand of Fungere's assets which, with the merger with Fungepi, were transferred to Investment Properties during the financial year 2022.(cid:9)(cid:9)(cid:9)(in thousands of Euros)Number of propertiesGross value ImpairmentNet book valueFair value of assets (b)LandUrban 66 15 939 8 062 7 877 8 840 Rural 61 81 199 55 771 25 428 26 568 127 97 138 63 833 33 305 35 408 Buildings under constructionCommercial 278 51 247 22 400 28 847 39 781 Residential 898 76 450 23 134 53 316 67 441 Others 148 3 529 884 2 645 3 350 1 324 131 226 46 418 84 808 110 572 Others (a)- 8 879 12 757 ( 3 878)( 3 878) 1 451 237 243 123 008 114 235 142 102 (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 7.1831.12.2022 The detail of the real estate properties included in Other Assets, by ageing, is as follows: As of 31 December 2022, the amount related to discontinued facilities included in the caption Real estate properties amounts to Euro 9,970 thousand (31 December 2021: Euro 9,848 thousand), having the Group recorded impairment losses for these assets in the total amount of Euro 2,954 thousand (31 December 2021: Euro 4,863 thousand). NOTE 32 – NON-CURRENT ASSETS AND DISPOSAL GROUPS FOR SALE CLASSIFIED AS HELD FOR SALE AND LIABILITIES INCLUDED IN DISPOSAL GROUPS CLASSIFIED AS HELD FOR SALE NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - 269 - (in thousands of Euros)Number of propertiesGross value ImpairmentNet book valueFair value of assets (b)LandUrban 341 83 965 42 853 41 112 38 955 Rural 91 190 648 149 359 41 289 44 214 432 274 613 192 212 82 401 83 169 Buildings under constructionCommercial 496 179 579 134 729 44 850 47 210 Residential 1 187 104 084 29 341 74 743 84 378 Others 151 4 277 1 184 3 093 3 129 1 834 287 940 165 254 122 686 134 717 Others (a)- 26 837 33 296 ( 6 459)( 6 459) 2 266 589 390 390 762 198 628 211 427 (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 7.1831.12.2021(in thousands of Euros)Up to 1 year1 to 2.5 years2.5 to 5 yearsMore than 5 yearsTotal net book valueLandUrban 482 74 52 7 269 7 877 Rural 246 33 552 24 597 25 428 728 107 604 31 866 33 305 Buildings under constructionCommercial455611281106812095 28 847 Residential122133611091837816 53 316 Other417111818399 2 645 6 194 4 500 23 804 50 310 84 808 Other (a) 2 ( 3 882) 2 - ( 3 878) 6 924 725 24 410 82 176 114 235 (a) The net book value of this caption is negative due to the imputation of costs incurred with the sale of real estate properties(in thousands of Euros)Up to 1 year1 to 2.5 years2.5 to 5 yearsMore than 5 yearsTotal net book valueLandUrban 15 945 145 201 24 821 41 112 Rural 13 95 14 526 26 655 41 289 15 958 240 14 727 51 476 82 401 Buildings under constructionCommercial 1 309 2 562 9 483 31 496 44 850 Residential 3 883 5 528 21 647 43 685 74 743 Other 6 2 509 309 269 3 093 5 198 10 599 31 439 75 450 122 686 Other (a) 5 ( 3 959)- ( 2 505)( 6 459) 21 161 6 880 46 166 124 421 198 628 (a) The net book value of this caption is negative due to the imputation of costs incurred with the sale of real estate properties31.12.202231.12.2021 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 Group 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. The breakdown of Non-current assets and liabilities held for sale and discontinued operations on 31 December 2022 and 2021, net of consolidation adjustments, is as follows: As of 31 December 2022 and 2021, the results from discontinued operations are as follows: The impairment movement for non-current Assets and Liabilities for disposal classified as held for sale is as follows: Ijar Leasing During 2021 the associated company Ijar Leasing was transferred to non-current assets held for sale as it is in the process of selling assets with the objective of their sale in the short term. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - 270 - (in thousand of Euros)31.12.202231.12.2021AssetsLiabilitiesAssetsLiabilitiesNon-current assets and liabilities disposal groups classified as held for saleInternational Investment Bank, S.A. (previous BICV) International Investment Bank, S.A. (previous BICV) 1 300 - 1 300 - Banco Well Link (previous NB Ásia)Banco Well Link (previous NB Ásia) 2 175 - 2 039 - Económico FIEconómico FI 3 060 - 3 060 - GreendraiveGreendraive 1 596 2 028 1 392 563 ESEGURESEGUR 4 5 - - MultipessoalMultipessoal 30 784 5 744 - - novobanco - Spain Branchnovobanco - Spain Branch 17 387 6 882 - - Ijar LeasingIjar Leasing 9 051 - 9 051 - ImbassaíImbassaí 2 747 833 1 006 405 68 104 15 492 17 848 968 Impairment lossesImpairment lossesEconómico FIEconómico FI( 2 196)- ( 2 358)- GreendraiveGreendraive( 1 596)- ( 1 392)- Ijar LeasingIjar Leasing( 4 725)- ( 4 725)- ( 8 517)- ( 8 475)- 59 587 15 492 9 373 968 (in thousand of Euros)31.12.202231.12.2021Profit / (loss) generated by discontinued operationsGreendraive( 270) 87 novobanco - Spain Branch- 8 796 NB Servicios- ( 3 588)Novo Vanguarda- ( 37)Imbassaí- ( 371)( 270) 4 887 (in thousands of Euros)31.12.202231.12.2021Balance at the beginning of the exercise 8 475 186 072 Charges / (Write-backs)( 664) 9 662 Utilizations( 3 837)( 164 954)Foreign exchange differences and other (a) 4 543 ( 22 305)Balance at the end of the exercise 8 517 8 475 (a) Includes EUR 4,725 thousand of Ijar Leasing's cost-effectiveness transferred from investments in associates in the first half of 2021 and EUR 8,829 thousand of ESEGUR's unevenness reclassified to members in the second half of 2021 (see Note 26)(cid:9)(cid:9)(cid:9) Spanish Branch Following the accounting policy followed by the Group, and in accordance with IFRS5 5 - Non-current assets held for sale and discontinued operations, during the 2020 the Group transferred its activity in Spain to the caption of Non-current assets and divestiture groups classified as held for sale, as their value is expected to be recovered through a sale transaction and it is highly probable, with the respective assets in immediate sale conditions. The determination of fair value less costs to sell, which took into account the amounts received from potential interested in partial sales of this activity, the cost of selling a selected loan portfolio, and the cost of discontinuing the remaining residual activity, resulted in a need to establish an impairment of Euro 166.0 million. On April 2, 2021, novobanco entered into an agreement with ABANCA CORPORACIÓN BANCARIA, S.A to sell a set of assets and liabilities of the Spanish Branch, which took place on 30 November 2021 with the derecognition of the assets and liabilities sold. The assets and liabilities excluded from this transaction, of residual value, remained in the branch's balance sheet, having integrated the consolidation perimeter of novobanco, as presented below: The conclusion of this transaction had no impact on the income statement at the date of derecognition, since there was a provision recorded in the balance sheet for Euro 176 million (of which Euro 10 million reinforced already during 2021), which was partially used. The remaining amount of Euro 15.2 million was transferred to Provisions for other contingencies related to this transaction (advisory costs, tax contingencies and other possible claims). As part of the aforementioned operation, the subsidiaries Novo Vanguarda and NB Servicios were liquidated, with no impact on the operating account. Compagris, Barrosinha and Solago In December 2022, as a result of the conclusion of the sale process of the Restructuring Funds, novobanco acquired 100% of the share capital of Compagris and Barrosinha and 84.16% of the share capital of Solago. As the Group intends to sell these assets, they were classified as discontinued operations. NOTE 33 – FINANCIAL LIABILITIES MEASURED AT AMORTISED COST This caption as of 31 December 2022 and 2021 is analysed as follows: NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - 271 - (in thousands of Euros)Disposed assets/liabilitiesAssets/liabilities remaining in the BranchAssetsCash, cash balances at central banks and other demand deposits- 5 000 Ativos financeiros contabilizados pelo justo valor através dos resultados- 2 751 Financial assets at amortised cost( 462 796) 33 794 Loans and advances to banks( 462 796) 33 794 Investments in subsidiaries, joint ventures and associates- 604 Tax assets- 37 910 Current Tax Assets- 11 929 Deferred Tax Assets- 25 981 Other assets- 9 591 Non-current assets and disposal groups classified as held for sale( 1 294 344)- Total Assets( 1 757 140) 89 650 LiabilitiesDeposits from banks- 33 885 Provisions- 6 611 Other liabilities- 28 259 Passivos incluídos em grupos para alienação classificados como detidos para venda( 1 757 140)- Total Liabilities( 1 757 140) 68 755 EquityOther equity- 19 804 Profit or loss attributable to Shareholders of the parent- 1 091 Total Equity- 20 895 Total Liabilities and Equity( 1 757 140) 89 650 Deposits from Banks The balance of Deposits from banks is composed, as to its nature, as follows: As of 31 December 2022, the balance of the European Resources System of Central Banks caption includes Euro 6,327 million backed by the Group's financial assets, within the scope of the third series of long-term refinancing operations of the European Central Bank (TLTRO III). The bonus introduced by the ECB in the interest rate of these operations, in accordance with the stipulated in IAS 20 - Accounting for Government Grants and Disclosure of Government Assistance, is being deducted from the financing costs on a linear basis for accounting purposes, considering the Bank's expectation of complying with the requirements of eligibility criteria defined by the ECB. It should be recalled that on 28 October 2022, with the Central Bank raising its main interest rates, the ECB announced the recalibration of TLTRO III to cope with unexpected and extraordinary increases in inflation, reinforcing the transmission of reference rates to bank lending conditions and funding costs. Accordingly, on this date, the ECB also announced changes to the terms and conditions of TLTRO III as of 23 November 2022. These changes consisted, in particular, of: • • to maintain the calculation of the interest rate existing at that time (28 October 2022) only until 22 November 2022; and changing the calculation of the interest rate as of 23 November 2022, for those Banks that met the eligibility requirements defined by the ECB. The interest rate applicable to TLTRO III from 23 November 2022 until the maturity of each tranche will be equal to the average interest rate of the deposit facility during that period. This change in the TLTRO III remuneration conditions means that as of 22 November 2022, it is financially neutral to maintain the lines of this third series, since these lines will have a cost approximately equal to the income obtained from the application of these funds at the ECB. Based on the DFR projection (as of 31 December 2022), the average cost of these lines from 22 November 2022 to maturity is expected to be 2.55%. After the December 2022 repayment of Euro 1.6 billion, an additional Euro 5.4 billion of TLTRO III will mature in 2023, with the remaining Euro 0.95 billion maturing in December 2024. Given the maturity of these lines, novobanco's exit strategy from TLTRO III was to reduce the size of the balance sheet and increase other stable financing instruments, mainly collateralised interbank operations and customer deposits. It should be recalled that already in 2022, to mitigate the impact of the shortening of the term and/or maturity of TLTRO III, collateralised funding through medium-term repurchase agreements increased by Euro 2.5 billion and the Group completed a private placement (senior preferred bond issue) in the amount of Euro 0.1 billion. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - 272 - (in thousands of Euros)Deposits from banks 9 705 154 10 745 155 Due to customers 29 277 858 27 582 093 Debt securities issued, subordinated debt and liabilities associated to transferred assets 1 628 897 1 514 153 Other financial liabilities 375 268 374 593 40 987 177 40 215 994 31.12.202231.12.2021(in thousands of Euros)31.12.202231.12.2021Deposits from Central BanksFrom the European System of Central BanksDeposits 198 53 126 Other funds 6 327 000 7 954 000 6 327 198 8 007 126 Deposits from credit institutionsDomesticDeposits 209 663 158 366 Other funds 39 216 24 523 248 879 182 889 ForeignDeposits 459 328 455 484 Loans 479 880 531 973 Operations with repurchase agreements 2 150 824 1 529 847 Other resources 39 045 37 836 3 129 077 2 555 140 3 377 956 2 738 029 9 705 154 10 745 155 Repurchase agreements operations corresponds to the sale of securities with purchasing agreement (repos), recorded in accordance with the accounting policy mentioned in Note 7.22. The breakdown of Deposits from Central Banks and other credit institutions, by residual maturity, as of 31 December 2022 and 2021, is as follows: The analysis of Repurchase agreements operations, by residual maturity, is as follows: Due to customers The balance of Deposits due to customers is composed, as follows: NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - 273 - (in thousands of Euros)31.12.202231.12.2021Deposits from Central BanksUp to 3 months 1 627 198 53 126 From 3 months to 1 year 3 750 000 9 705 154 From 1 to 5 years 950 000 29 277 858 6 327 198 8 007 126 Deposits from credit institutionsUp to 3 months 574 838 1 061 398 From 3 months to 1 year 296 221 963 050 From 1 to 5 years 2 214 958 181 609 More than 5 years 291 939 531 972 3 377 956 2 738 029 9 705 154 10 745 155 (in thousands of Euros)31.12.202231.12.2021InternationalUp to 3 months 123 620 679 782 From 3 months to 1 year- 850 065 From 1 to 5 years 2 027 204 - 2 150 824 1 529 847 (in thousands of Euros)31.12.202231.12.2021Repayable on demandDemand depositsCompanies and other entities 7 101 102 7 497 457 Particular 6 068 233 5 361 531 13 169 335 12 858 988 Time depositsTime depositsCompanies and other entities 2 938 417 2 601 457 Particular 6 490 962 6 427 256 9 429 577 9 028 904 Savings accountsRetirement saving accounts 215 968 226 362 Other 5 597 165 5 200 726 Companies and other entities 2 138 058 1 899 679 Particular 3 459 107 3 301 047 5 813 133 5 427 088 Other funds Transactions with repurchase agreement 450 906 Other 450 906 254 062 865 813 254 062 Value changes due to hedging- 13 051 29 277 858 27 582 093 As of 31 December 2022 and 2021, the caption Due to customers, by residual maturity periods, is as follows: 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 2022, amount to Euro 5,500 million (31 December 2021: Euro 5,500 million), being these covered bonds totally repurchased by the Group. The main characteristics of the outstanding issues as of 31 December 2022 and 2021 are as follows: NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - 274 - (in thousands of Euros)31.12.202231.12.2021Repayable on demand 13 169 335 12 858 988 Term depositsUp to 3 months 9 001 163 7 641 456 From 3 months to 1 year 5 614 270 5 722 112 From 1 to 5 years 1 493 090 1 319 466 More than 5 years- 40 071 16 108 523 14 723 105 29 277 858 27 582 093 (in thousands of Euros)Debt securities issuedEuro Medium Term Notes (EMTN) 463 528 447 453 Bonds 705 346 606 855 1 168 874 1 054 308 Subordinated debtBonds 415 572 415 394 Financial liabilities associated with transferred assetsAsset lending operations 44 451 44 451 1 628 897 1 514 153 31.12.202231.12.2021(in thousands of Euros)Moody'sDBRSNB 2015 SR.1 1 000 000 - 07/10/201507/10/2025TrimestralEuribor 3 Meses + 0,25%XDUBA2ANB 2015 SR.2 1 000 000 - 07/10/201507/10/2024TrimestralEuribor 3 Meses + 0,25%XDUBA2ANB 2015 SR.3 1 000 000 - 07/10/201507/10/2027TrimestralEuribor 3 Meses + 0,25%XDUBA2ANB 2015 SR.4 700 000 - 07/10/201507/10/2022TrimestralEuribor 3 Meses + 0,25%XDUBA2ANB 2015 SR.5 500 000 - 22/12/201622/12/2023TrimestralEuribor 3 Meses + 0,25%XDUBA2ANB 2019 SR.6 750 000 - 10/12/201910/06/2023TrimestralEuribor 3 Meses + 0,25%XMSMA2ANB 2019 SR.7 550 000 - 10/12/201910/12/2024TrimestralEuribor 3 Meses + 0,25%XMSMA2A 5 500 000 - (in thousands of Euros)Moody'sDBRSNB 2015 SR.1 1 000 000 - 07/10/201507/10/2025TrimestralEuribor 3 Meses + 0,25%XDUBA2ANB 2015 SR.2 1 000 000 - 07/10/201507/10/2024TrimestralEuribor 3 Meses + 0,25%XDUBA2ANB 2015 SR.3 1 000 000 - 07/10/201507/10/2027TrimestralEuribor 3 Meses + 0,25%XDUBA2ANB 2015 SR.4 700 000 - 07/10/201507/10/2022TrimestralEuribor 3 Meses + 0,25%XDUBA2ANB 2015 SR.5 500 000 - 22/12/201622/12/2023TrimestralEuribor 3 Meses + 0,25%XDUBA2ANB 2019 SR.6 750 000 - 10/12/201910/06/2023TrimestralEuribor 3 Meses + 0,25%XMSMA2ANB 2019 SR.7 550 000 - 10/12/201910/12/2024TrimestralEuribor 3 Meses + 0,25%XMSMA2A 5 500 000 - 31.12.2021DesignationNominal value (in thousands of Euros)Carrying book value (in thousands of Euros)Issue dateMaturity dateInterest paymentInterest RateMarketRating31.12.2022DesignationNominal value (in thousands of Euros)Carrying book value (in thousands of Euros)Issue dateMaturity dateInterest paymentInterest RateMarketRating These covered bonds are guaranteed by a cover asset pool, comprising mortgage and other assets, segregated in novobanco 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 and 8 and Instruction nº 13/2006 of Bank of Portugal. As of 31 December 2022, the assets that collateralize these covered debt securities amount to Euro 6,078.4 million (31 December 2021: Euro 6,075.1 million) (see Note 24). The changes in the financial exercises of 2022 and 2021 in debt securities issued, subordinated debt and financial liabilities associated to transferred assets was as follows: Liability Management Exercise (LME) On 30 July 2021, following a voluntary tender offer (Tender Offer and Solicitation Memorandum), EMTN (i) issued by the Luxembourg branch, with a total nominal value of Euro 84.3 million (representing 31.9% of the total nominal amount issued), and (ii) issued by the subsidiary NB Finance with a total nominal value of Euro 0.1 million (representing 4.8% of the total nominal amount issued). This operation resulted in a loss of Euro 73,480 thousand. The main characteristics of these liabilities, as of 31 December 2022 and 2021, are as follows: NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - 275 - (in thousands of Euros)Balance as at 31.12.2021IssuesRedemptions b)LMENet purchasesOther movements a)Balance as at 31.12.2022Debt securities issuedEuro Medium Term Notes (EMTN) 447 453 - - - ( 500) 16 575 463 528 Bonds 606 855 106 000 - 29 277 858 ( 13 798) 6 289 705 346 1 054 308 106 000 - - ( 14 298) 22 864 1 168 874 40 987 177 Subordinated debtBonds 415 394 - - - - 178 415 572 Financial liabilities associated to transferred assetsAsset lending operations 44 451 - - - - - 44 451 1 514 153 106 000 - - ( 14 298) 23 042 1 628 897 (in thousands of Euros)Balance as at 31.12.2020IssuesRedemptions b)LMENet purchasesOther movements a)Balance as at 31.12.2021Debt securities issuedEuro Medium Term Notes (EMTN) 518 866 - ( 1 623)( 81 124)( 4 097) 15 431 447 453 Bonds 39 377 580 000 ( 6 110)- ( 5 000)( 1 412) 606 855 558 243 580 000 ( 7 733)( 81 124)( 9 097) 14 019 1 054 308 Subordinated debtBonds 415 234 - - - - 160 415 394 Financial liabilities associated to transferred assetsAsset lending operations 44 451 - - - - - 44 451 1 017 928 580 000 ( 7 733)( 81 124)( 9 097) 14 179 1 514 153 a) Other movements include accrued interest, corrections for hedging operations, corrections of fair value and exchange rate changes.a) Other movements include accrued interest, corrections for hedging operations, corrections of fair value and exchange rate changes.b) During 2021, the total EMTN 114 issue of NB Finance in the amount of EUR 1,623m and the Class A issue of Lusitano Mortgage nr 6 in the amount of EUR 6,110m were repaid in advance.(cid:9)(cid:9)(cid:9)(cid:9)(cid:9)(cid:9)(cid:9)(in thousands of Euros)EntityISINDescriptionCurrencyIssue dateUnit Price (€)Carrying Book valueMaturityInterest rateMarketBondsLusitano Mortgage nº 6 XS0312981649Lusitano Mortgage nr 6- Classe AEUR20070,16 23 989 2025a)Euribor 3m + 0,40%XDUBLusitano Mortgage nº 6 XS0312982290Lusitano Mortgage nr 6- Classe BEUR20071,00 1 502 2035a)Euribor 3m + 0,60%XDUBnovobancoPTNOBIOM0014NB 3,5% 23/07/24 OBRG.EUR2021100,00 303 992 2024Taxa Fixa 3,5%XDUBnovobancoPTNOBJOM0005NB 4,25% 09/23 OBRG.EUR2021100,00 275 874 2023Euribor 3M + 4,25%XDUBEuro Medium Term NotesnovobancoPTNOBKOM0002NB 5.5% 30/12/24 OBRG.EUR2022100,00 99 989 2024Taxa fixa 5,5%XDUBnovobanco LuxemburgoXS0869315241BES Luxembourg 3.5% 02/01/43EUR20131,00 43 363 2043Taxa fixa 3,5%XLUXnovobanco LuxemburgoXS0877741479BES Luxembourg 3.5% 23/01/43EUR20131,00 99 065 2043Taxa fixa 3,5%XLUXnovobanco LuxemburgoXS0888530911BES Luxembourg 3.5% 19/02/2043EUR20131,00 64 774 2043Taxa fixa 3,5%XLUXnovobanco LuxemburgoXS0897950878BES Luxembourg 3.5% 18/03/2043EUR20131,00 47 641 2043Taxa fixa 3,5%XLUXnovobanco LuxemburgoXS0972653132BES Luxembourg ZCEUR20131,00 35 711 2048Cupão ZeroXLUXnovobanco LuxemburgoXS1031115014Banco Esp San Lux ZC 12/02/49EUR20141,00 43 694 2049Cupão ZeroXLUXnovobanco LuxemburgoXS1034421419Banco Esp San Lux ZC 19/02/49EUR20141,00 12 146 2049Cupão ZeroXLUXnovobanco LuxemburgoXS1038896426Banco Esp San Lux ZC 27/02/51EUR20141,00 16 672 2051Cupão ZeroXLUXnovobanco LuxemburgoXS1042343308BES Luxembourg ZC 06/03/2051EUR20141,00 11 729 2051Cupão ZeroXLUXnovobanco LuxemburgoXS1053939978BES Luxembourg ZC 03/04/48EUR20141,00 40 180 2048Cupão ZeroXLUXnovobanco LuxemburgoXS1055501974BES Luxembourg ZC 09/04/52EUR20141,00 38 891 2052Cupão ZeroXLUXnovobanco LuxemburgoXS1058257905BES Luxembourg ZC 16/04/46EUR20141,00 7 710 2046Cupão ZeroXLUXNB FinanceXS0439764191EMTN 57EUR20091,00 1 952 2044Cupão ZeroXLUXSubordinated debtNOVO BANCOPTNOBFOM0017NB 06/07/2028EUR2018100,00 415 572 2023a)8,50%XDUB1 584 446 a) Date of the next call option31.12.2022 The residual duration of debt securities issued and subordinated liabilities, as of 31 December 2022 and 2021, is as follows: The change in fair value attributable to changes in the credit risk of the issues is calculated using the credit spread observed in recent issues of similar debt, adjusted for subsequent changes in the credit spread of the senior debt CDS issued by Group entities. As of 1 January 2018, in accordance with IFRS 9, this liability component is reflected in Other comprehensive income. With the redemption in 2020 of the issue recorded at fair value through profit or loss, the Group no longer has associated credit risk. However, the credit risk 276ecognized since 1 January 2018 in the amount of Euro 9,214 thousand, was fixed in the respective credit risk reserve caption, in accordance with IFRS 9 (see Note 37). The Group did not present capital or interest defaults on its debt issued in the financial exercises of 2022 and 2021. NOTE 34 – PROVISIONS As of 31 December 2022 and 2021, the caption Provisions presents the following changes: NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - 276 - (in thousands of Euros)EntityISINDescriptionCurrencyIssue dateUnit Price (€)Carrying Book valueMaturityInterest rateMarketBondsLusitano Mortgage nº 6 XS0312981649Lusitano Mortgage nr 6- Classe AEUR20070,20 31 767 2025a)Euribor 3m + 0,40%XDUBLusitano Mortgage nº 6 XS0312982290Lusitano Mortgage nr 6- Classe BEUR20071,00 1 500 2035a)Euribor 3m + 0,60%XDUBnovobancoPTNOBIOM0014NB 3,5% 23/07/24 OBRG.EUR2021100,00 303 571 2024Taxa Fixa 3,5%XDUBnovobancoPTNOBJOM0005NB 4,25% 09/23 OBRG.EUR2021100,00 270 017 2022a)Euribor 3M + 4,25%XDUBEuro Medium Term Notesnovobanco LuxemburgoXS0869315241BES Luxembourg 3.5% 02/01/43EUR20131,00 42 807 2043Taxa fixa 3,5%XLUXnovobanco LuxemburgoXS0877741479BES Luxembourg 3.5% 23/01/43EUR20131,00 98 081 2043Taxa fixa 3,5%XLUXnovobanco LuxemburgoXS0888530911BES Luxembourg 3.5% 19/02/2043EUR20131,00 63 952 2043Taxa fixa 3,5%XLUXnovobanco LuxemburgoXS0897950878BES Luxembourg 3.5% 18/03/2043EUR20131,00 47 063 2043Taxa fixa 3,5%XLUXnovobanco LuxemburgoXS0972653132BES Luxembourg ZCEUR20131,00 33 649 2048Cupão ZeroXLUXnovobanco LuxemburgoXS1031115014Banco Esp San Lux ZC 12/02/49EUR20141,00 40 947 2049Cupão ZeroXLUXnovobanco LuxemburgoXS1034421419Banco Esp San Lux ZC 19/02/49EUR20141,00 11 375 2049Cupão ZeroXLUXnovobanco LuxemburgoXS1038896426Banco Esp San Lux ZC 27/02/51EUR20141,00 15 602 2051Cupão ZeroXLUXnovobanco LuxemburgoXS1042343308BES Luxembourg ZC 06/03/2051EUR20141,00 10 974 2051Cupão ZeroXLUXnovobanco LuxemburgoXS1053939978BES Luxembourg ZC 03/04/48EUR20141,00 37 479 2048Cupão ZeroXLUXnovobanco LuxemburgoXS1055501974BES Luxembourg ZC 09/04/52EUR20141,00 36 512 2052Cupão ZeroXLUXnovobanco LuxemburgoXS1058257905BES Luxembourg ZC 16/04/46EUR20141,00 7 192 2046Cupão ZeroXLUXNB FinanceXS0439764191EMTN 57EUR20091,00 1 820 2044Cupão ZeroXLUXSubordinated debtNOVO BANCOPTNOBFOM0017NB 06/07/2028EUR2018100,00 415 394 2023a)8,50%XDUB1 469 702 a) Date of the next call option31.12.2021(in thousands of Euros)Debt securities issuedFrom 3 months to 1 year 275 874 270 017 From 1 to 5 years 427 970 335 338 More than 5 years 465 030 448 953 1 168 874 1 054 308 Subordinated debtFrom 3 months to 1 year 415 572 - From 1 to 5 years- 415 394 415 572 415 394 Financial liabilities associated with transferred assetsUndetermined maturity 44 451 44 451 44 451 44 451 1 628 897 1 514 153 31.12.202231.12.2021 In order to meet the financial needs of its customers, the Group assumes several irrevocable commitments and contingent liabilities, consisting of financial guarantees, letters of credit and other credit commitments, which may require the payment by the Group, on behalf of its customers, in the event of specific, contractually prescribed events. Although these commitments are not recorded on the balance sheet, they carry credit risk and, therefore, are part of the Group’s overall risk exposure. The changes in the caption provisions for guarantees, are detailed as follows: The changes in the caption provisions for commitments are detailed as follows: The transfers between stages that occurred in guarantees and commitments are presented as follows: NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - 277 - (in thousands of Euros)Restructuring provisionProvision for guarantees and commitmentsCommercial OffersOther provisionsTotalBalance as at 31 December 2020 96 973 101 986 11 199 174 224 384 382 Charge / (Write-back) 10 070 ( 9 840)- 127 605 127 835 Utilization ( 60 358)- ( 10 205)( 23 373)( 93 936)Foreign exchange differences and other 1 190 - 24 362 24 553 Balance as at 31 December 2021 46 686 92 336 994 302 818 442 834 Charge / (Write-back) 1 332 ( 2 685)( 123) 40 721 39 245 Utilization ( 28 870)- ( 871)( 36 747)( 66 488)Foreign exchange differences and other- 246 - ( 2 405)( 2 159)Balance as at 31 December 2022 19 148 89 897 - 304 387 413 432 (in thousands of Euros)Stage 1Stage 2Stage 3TotalBalance as at 31 December 2020 1 316 24 069 66 778 92 163 Increases due to changes in credit risk 873 3 044 14 847 18 764 Decreases due to changes in credit risk( 861)( 17 833)( 12 823)( 31 517)Other movements 135 ( 2 361) 2 415 189 Balance as at 31 December 2021 1 463 6 919 71 217 79 599 Changes in the value of impairment- transfers to stage 1 620 ( 620)- - - transfers to stage 2( 432) 548 ( 116)- - transfers to stage 3( 13)( 1 204) 1 217 - Increases due to changes in credit risk 344 1 964 21 521 23 829 Decreases due to changes in credit risk( 1 028)( 2 401)( 17 690)( 21 119)Other movements 5 34 199 238 Balance as at 31 December 2022 959 5 240 76 348 82 547 (in thousands of Euros)Stage 1Stage 2Stage 3TotalBalance as at 31 December 2020 5 819 4 004 - 9 823 Increases due to changes in credit risk 1 933 6 938 1 897 10 768 Decreases due to changes in credit risk( 1 843)( 5 979)( 33)( 7 855)Other movements 647 ( 734) 88 1 Balance as at 31 December 2021 6 556 4 229 1 952 12 737 Changes in the value of impairment- transfers to stage 1 1 635 ( 1 635)- - - transfers to stage 2( 707) 707 - - - transfers to stage 3- ( 3) 3 - Increases due to changes in credit risk 1 703 561 787 3 051 Decreases due to changes in credit risk( 3 951)( 1 753)( 2 742)( 8 446)Other movements 6 2 - 8 Balance as at 31 December 2022 5 242 2 108 - 7 350 The restructuring provisions were set up within the scope of the commitments assumed before the European Commission arising from the Group’s sale and restructuring process. During 2021 and 2022, a net reinforcement of Euro 10.1 million and Euro 1.3 million respectively was made, having been used Euro 60.4 million and Euro 28.9 million, respectively. As of 31 December 2022, the amount of restructuring provisions in the balance sheet is Euro 19.1 million. Other provisions amounting to Euro 304.4 million (31 December 2021: Euro 302.8 million), are intended to cover certain identified contingencies related to the Group’s activities, the most relevant being: • Contingencies associated with ongoing tax processes, for which the Group maintains provisions of Euro 24.2 million (31 December 2021: Euro 32.2 million); • Contingencies associated with legal proceedings amounting to Euro 4.0 million (31 December 2021: Euro 9.5 million); • Contingencies associated with sales processes in the amount of Euro 7.1 million (31 December 2021: Euro 39.3 million); • Contingencies related to the undivided part of the Executive Committee’s pension plan, in the amount of Euro 19.2 million (31 December 2021: Euro 19.2 million), transferred from the liability captions net of the value of the assets of the Pension Fund (see Note 17);. • The remaining amount, of Euro 249.9 million (31 December 2021: Euro 202.6 million), is intended to cover losses arising from the Group’s activity, such as fraud, theft and robbery and ongoing lawsuits for contingencies related to asset sale processes, among others. The increase occurred in 2021 results from the State Budget Law for 2021 (“LOE 21”), which amended the rules of the Property Transfer Tax Code (“IMT”) and the Municipal Property Tax (“IMI”), with the extension of the scope of the aggravated rate of IMI and IMT, and loss of exemptions, to real estate owned by taxpayers that are controlled, directly or indirectly, by an entity that is subject to a more favorable tax regime, included in the list approved by the Minister of Finance. At this date is pending clarification, as per the request for binding information made to the Tax Authority, the breadth of application of these new rules in terms of subjection to novobanco Group. At 31 December 2022, based on the opinions obtained from legal and tax experts, and as a result of internal evaluation, it is not considered possible, with complete assurance, to remove the doubt as to the application of the new rules referred to above, although it is admitted that there may be other interpretations since these are new rules, not yet applied, and therefore subject to interpretation. As of this date, the calculation of the application of the increased IMI rates to all the properties directly and indirectly owned by novobanco Group amounts to approximately Euro 173.1 million for 31 December 2022 (31 December 2021: Euro 115.8 million), and there is no expectation as to the date on which clarification will be obtained from the Tax Authority or other similar entity that will determine the existence or not of an effective increase in liabilities for novobanco. NOTE 35 – OTHER LIABILITIES As of 31 December 2022 and 2021, the caption Other liabilities is analysed as follows: As of 31 December 2022, the caption Creditors for supply of goods includes Euro 44,474thousand related to creditors of assets for right of use, under IFRS 16 (31 December 2021: Euro 38,673 thousand), whose residual maturities present the following detail: NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - 278 - (in thousands of Euros)From Stage 1 to Stage 2From Stage 2 to Stage 1From Stage 2 to Stage 3From Stage 3 to Stage 2From Stage 1 to Stage 3From Stage 3 to Stage 1Guarantees and Commitments 44 418 40 470 45 480 2 234 1 775 181 Capital(cid:9)(cid:9)(cid:9)(cid:9)(cid:9)(cid:9)(cid:9)Transfers between Stage 1 e 2Transfers between Stage 2 e 3Transfers between Stage 1 e 3(in thousands of Euros)31.12.202231.12.2021Public sector 35 034 38 017 Creditors for supply of goods 71 102 59 323 Margin Accounts Derivative instruments 478 750 - Other creditors 115 147 107 898 Non-controlling interests of Open Investment Funds (see Note 37) 14 417 90 181 Career bonuses (see Note 17) 5 621 7 467 Retirement pensions and health-care benefits (see Note 17)- 22 944 Other accrued expenses 83 275 76 333 Deferred income 1 950 2 077 Foreign exchange transactions pending settlement- 14 Other operations to be regularized 34 623 39 183 839 919 443 437 NOTE 36 – SHARE CAPITAL Ordinary shares As of 31 December 2022, the Bank’s share capital of Euro 6,304,660,637.69 is represented by 10,391,043,938 registered shares with no par value and is fully subscribed and paid up by the following shareholders (December 31, 2021: share capital of Euro 6,054,907,314 represented by 9,954,907,311 registered shares): In 2017 and following the acquisition of 75% of novobanco by Lone Star, two capital increases in the amounts of Euro 750 million and Euro 250 million, in October and December, respectively, were realised. In December 2021, a capital increase of Euro 154,907 thousand was carried out through the conversion of the conversion rights (resulting from the Special Regime Applicable to Deferred Tax Assets) for the exercise 2015, which gave the State a 1.56% stake in the novobanco, and which resulted in the issuance of 154,907,314 new ordinary shares (Note 37). In November 2022, a capital increase of Euro 249,753 thousand was carried out through the conversion of the conversion rights (resulting from the Special Regime Applicable to Deferred Tax Assets) for the exercises 2016 and 2017, which gave the State an additional 4.13% stake in novobanco, and which resulted in the issuance of 436,136,627 new ordinary shares (see Note 37). As mentioned in Note 30, novobanco 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 entitle the State to require novobanco to increase its share capital by incorporating the amount of the special reserve and consequently issuing and delivering free of charge ordinary shares. It is estimated that the conversion rights to be issued and attributed to the State following the negative net results of the exercises 2015 to 2020 will give it a stake of up to approximately 15.84% of the share capital of novobanco, which will only dilute, in accordance with the sale agreement, the stake of the Resolution Fund. For the 2018 and 2019’s exercises, the Tax Authority has already validated the tax credit, and the final amount of conversion rights attributed to the State represents an additional 6.27% stake in the share capital of novobanco (11.96% for the 2015 to 2019’s exercises). NOTE 37 – ACCUMULATED OTHER COMPREHENSIVE INCOME, RETAINED EARNINGS, OTHER RESERVES NON- CONTROLLING INTERESTS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - 279 - (in thousands of Euros)31.12.202231.12.2021Up to 3 months 262 234 From 3 months to 1 year 4 613 1 199 From 1 to 5 years 15 950 16 293 More than 5 years 23 649 20 947 44 474 38 673 31.12.202231.12.2021Nani Holdings, SGPS, SA (1)75,00%73,83%Resolution Fund (2)19,31%24,61%Directorate General for the Treasury and Finance5,69%1,56%100,00%100,00%% Share Capital(1)On31December2021,bytheeffectoftheagreementsconcludedbetweentheResolutionFundandtheshareholderLoneStarinthecontextofthesaleof75%ofthenovobanco'ssharecapital, only the Resolution Fund will see its participation diluted by the conversion of conversion rights. Nani Holdings' economic interest in the new bank remains unchanged at 75%.(cid:9)(cid:9)(cid:9)(2) Under the commitments made between the Portuguese State and the European Commission, the Resolution Fund is inhibited from exercising its voting rights.(cid:9)(cid:9)(cid:9) As of 31 December 2022 and 2021, 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: Fair value reserves The fair value reserves represent the amount of the unrealised gains and losses arising from the securities portfolio classified as of 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: NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - 280 - (in thousands of Euros)31.12.202231.12.2021Other accumulated comprehensive income( 1 234 573)( 1 045 489)Retained earnings( 8 577 074)( 8 576 860)Other reserves 6 439 418 6 501 374 Originating reserve 1 885 693 1 848 691 Special reserve 400 377 701 136 Legal reserve 36 594 - Other reserves and Retained earnings 4 116 754 3 951 547 ( 3 372 229)( 3 120 975)(in thousands of Euros)Balance as at 31 December 2020 3 695 9 214 ( 22 757)( 75 210)- ( 14 894)( 723 468)( 823 420)Actuarial deviations- - - - - - ( 75 584)( 75 584)Fair value changes, net of taxes- - - ( 125 801)- - - ( 125 801)Foreign exchange differences- - - - - 95 - 95 Impairment reserves of securities at fair value through other comprehensive income 12 - - - - - - 12 Reserves of sales of securities at fair value through other comprehensive income- - ( 20 539)- - - - ( 20 539)Other comprehensive income of associated companies- - - ( 252)- - - ( 252)Balance as at 31 December 2021 3 707 9 214 ( 43 296)( 201 263)- ( 14 799)( 799 052)(1 045 489)Actuarial deviations- - - - - - 101 726 101 726 Fair value changes, net of taxes- - - ( 185 616)- - - ( 185 616)Foreign exchange differences- - - - - ( 892)- ( 892)Impairment reserves of securities at fair value through other comprehensive income( 3 052)- - - - - - ( 3 052)Reserves of sales of securities at fair value through other comprehensive income- - ( 1 165)- - - - ( 1 165)Other comprehensive income of associated companies- - - 332 - - - 332 Cash flow hedging- - - - ( 100 418)- - ( 100 418)Other movements- - - - - 1 - 1 Balance as at 31 December 2022 655 9 214 ( 44 461)( 386 547)( 100 418)( 15 690)( 697 326)(1 234 573)Other accumulated comprehensive income Total Impairment reserves Credit risk reserves Sales reserves Fair value reserves Cash flow hedging reserves Other variations of other comprehensive income Actuarial deviations (net of taxes) (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( 157 910)( 43 353)( 201 263) 28 437 ( 103 647)( 75 210)Changes in fair value( 331 887)- ( 331 887)( 200 897)- ( 200 897)Foreign exchange differences 2 006 - 2 006 2 351 - 2 351 Disposals in the exercise 43 394 - 43 394 13 560 - 13 560 Impairment in the exercise 19 399 - 19 399 ( 1 361)- ( 1 361)Deferred taxes recognized in the exercise in reserves- 81 804 81 804 - 60 294 60 294 Balance at the end of the exercise( 424 998) 38 451 ( 386 547)( 157 910)( 43 353)( 201 263) 31.12.2022 31.12.2021 Fair value reserves Fair value reserves The movement in cash flow hedging reserves is presented as follows: Originating reserve The originating reserve results from the difference between the assets and liabilities transferred from BES to novobanco, 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 nominated by Bank of Portugal. Special reserve As mentioned in Note 30, the special reserve was created as a result of the adhesion of novobanco 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 calculation of a negative net result in the exercises between 2015 and 2020, with reference to the deferred tax assets eligible at the closing date of these exercises, from the application of the special regime applicable to deferred tax assets, novobanco recorded a special reserve, in the same amount as the tax credit calculated, increased by 10%, which is broken down as follows: Other reserves and retained earnings Following the conditions agreed in the novobanco’s sale process, a Contingent Capital 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 38 – 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 of 31 December 2022 these assets had a net value of Euro 1.1 billion, mainly as a result of losses recorded as well as payments and recoveries (31 December 2021: net value of Euro 1.8 billion). Taking into consideration the losses presented by novobanco at December 31, 2020, 2019, 2018 and 2017, the conditions were met that determined the payment by the Resolution Fund of Euro 429,013 thousand, Euro 1,035,016 thousand, Euro 1,149,295 thousand and Euro 791,695 thousand in 2021, 2020, 2019 and 2018, respectively. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - 281 - (in thousands of Euros)31.12.2022 31.12.2021 Amortised cost of financial assets at fair value through other comprehensive income2 769 674 7 378 362 Market value of financial assets at fair value through other comprehensive income2 331 099 7 220 996 Unrealised gains / (losses) recognized in fair value reserve( 438 575)( 157 366)Fair value reserve transferred to Results (1)( 11 988)- Potential gains / (losses) recognized in the fair value reserve( 426 587)( 157 366)Fair value reserves by the equity method 997 665 Non-controlling Interests 592 ( 1 209)Total fair value reserve( 424 998)( 157 910)Deferred Taxes 38 451 ( 43 353)Fair value reserve attributable to shareholders of the Bank( 386 547)( 201 263)(1) In the context of fair value hedge operations (see Note 25)(in thousands of Euros)31.12.202231.12.2021Balance at the beginning of the exercise- - Change in the fair value of the covered item recognized in another comprehensive income( 101 299)- Reclassification of other comprehensive income for results 881 - Balance at the end of the exercise( 100 418)- (in thousands of Euros)31.12.202231.12.20212016 (net loss of 2015)- 14 004 2017 (net loss of 2016)- 109 421 2018 (net loss of 2017)- 140 332 2019 (net loss of 2018) 146 367 178 171 2020 (net loss of 2019) 116 817 122 015 2021 (net loss of 2020) 137 193 137 193 400 377 701 136 The amount related to the Contingent Capital Agreement recorded in 2020, as receivable by the Resolution Fund (Euro 598,312 thousand), differs from the amount paid as a result of disagreements, between novobanco and the Resolution Fund, regarding (i) the provision for discontinued operations in Spain and (ii) the valuation of participation units, leading to a limitation to the immediate access to this amount, which despite being recorded as receivables, the Group deducted, as of 31 December 2021, to the regulatory capital calculation (EUR 165,442 thousand). Novobanco considers this amount to be due under the Contingent Capital Agreement and is triggering the legal and contractual mechanisms at its disposal to ensure receipt of the same (see Note 38). Additionally, the variable remuneration of the Executive Board of Directors for 2019 and 2020 (Euro 3,857 thousand) was also deducted. In 2021 an amount receivable by the Resolution Fund of Euro 209,220 thousand was recorded in relation to the Contingent Capital Agreement, under Other Reserves and which results, on the date of each balance sheet, from losses incurred and regulatory ratios in force at the time of their determination. As a result of the above and in line with the Regulator’s guidelines, at 31 December 2021, this value was also deducted from the regulatory capital calculation. Novobanco considers this amount to be due under the Contingent Capitalization Mechanism and is triggering the legal and contractual mechanisms at its disposal to ensure receipt of the same (see Note 38). 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: NOTE 38 – CONTINGENT LIABILITIES AND COMMITMENTS In addition to the derivative financial instruments, the balances relating to off-balance accounts as of 31 December 2022 and 2021 are the following: Guarantees and standby letters provided are banking operations that do not imply any mobilization of funds for the Group. As of 31 December 2022, the caption financial assets pledged as collateral includes: NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - 282 - (in thousands of Euros)Balance sheetIncome statement% Non-controlling interestsBalance sheetIncome statement% Non-controlling interestsNB Património a)- 20 104 3,75%- 6 007 43,67%novobanco Açores 21 975 1 941 42,47% 20 445 2 053 42,47%Amoreiras- 332 4,76% 9 012 ( 87)4,76%Other( 3 631) 2 725 1 578 ( 288) 18 344 25 102 31 035 7 685 a) Non-controlling interests relating to Open real estate investment funds are recorded as Other liabilities (see Note 35)31.12.202231.12.2021(in thousands of Euros) 31.12.2022 31.12.2021 Non-controlling interests at the beginning of the exercise 31 035 32 046 Changes in consolidation perimeter and control percentages( 7 935)( 3 288)Changes in fair value reserves( 1 364) 142 Other( 28 494)( 5 550)Net profit / (loss) for the exercise 25 102 7 685 Non-controlling interests at the end of the exercise 18 344 31 035 (in thousands of Euros)31.12.202231.12.2021Contingent liabilities Guarantees and standby letters2 397 867 2 234 243 Financial assets pledged as collateral12 050 642 13 997 048 Open documentary credits 169 410 402 332 14 698 292 16 633 623 Commitments Revocable commitments5 646 053 5 298 799 Irrevocable commitments 559 995 546 458 6 206 048 5 845 257 • 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 11.2 billion (31 December 2021: Euro 13.2 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 8.0 million (31 December 2021: Euro 9.1 million); • Securities pledged as collateral to the Deposits’ Guarantee Fund (“Fundo de Garantia de Depósitos”), in the amount of Euro 65.6 million (31 December 2021: Euro 67.5 million); • Securities pledged as collateral to the European Investment Bank, in the amount of Euro 578.3 million (31 December 2021: Euro 651.4 million); • Securities delivered as collateral in connection with derivatives trading with a central counterparty in the amount of Euro 100.5 million (31 December 2021: Euro 100.5 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. The increase in the value of securities pledged as collateral to the European Investment Bank is related to the reinforcement of the collateral due to changes in the minimum required amounts. 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 that most 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 captions related to banking services provided are as follows: Pursuant to the resolution measure applied to BES by resolution of Bank of Portugal of 3 August 2014 (point 1., point b), subparagraph (vii) of Annex 2), as amended by the decision of Bank of Portugal of 11 August 2014, the “excluded liabilities” of transfer to novobanco include “any obligations, guarantees, liabilities or contingencies assumed in the commercialization, financial intermediation and distribution of debt instruments issued by entities that are part of the Espírito Santo Group (…) ”. Pursuant to point and subparagraph above and subpoint (v), liabilities excluded also include “any liabilities or contingencies, namely those arising from fraud or violation of regulatory, criminal or administrative offenses or provisions”. On December 29, 2015, Bank of Portugal adopted a new resolution on “Clarification and retransmission of responsibilities and contingencies defined as liabilities excluded in subparagraphs (v) to (vii) of paragraph 2 (b) of Annex 2 to the Resolution of Bank of Portugal of 3 August 2014 (8 pm), as amended by the Resolution of Bank of Portugal of 11 August 2014 (5 pm) ”. Under the terms of this resolution, Bank of Portugal came: (i) Clarify the treatment as liabilities excluded from BES's contingent and unknown liabilities (including litigious liabilities related to pending litigation and liabilities or contingencies resulting from fraud or the violation of regulatory, criminal or administrative offenses or provisions), regardless of their nature ( tax, Labour, civil or other) and whether or not they are registered in BES's accounts, under the terms of sub-paragraph (v) of paragraph (b) of paragraph 1 of Exhibit 2 of the Resolution of 3 August; and (ii) Clarify that the following BES liabilities have not been transferred from BES to novobanco: a. All credits related to preferred shares issued by vehicle companies established by BES and sold by BES; b. All credits, indemnities and expenses related to real estate assets that have been transferred to novobanco; c. All indemnities related to non-compliance with contracts (purchase and sale of real estate and other assets) signed and executed before 8:00 pm on August 3, 2014; d. All indemnities related to life insurance contracts, in which the insurer was BES - Companhia de Seguros de Vida, S.A; NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - 283 - (in thousands of Euros)31.12.202231.12.2021 Deposit and custody of securities and other items30 936 968 31 739 971 Amounts received for subsequent collection 206 387 197 567 Securitized loans under management (servicing) 544 136 620 091 Other responsibilities related with banking services 372 762 652 518 32 060 253 33 210 147 e. All credits and indemnities related to the alleged cancellation of certain loan agreement clauses in which BES was the lender; f. All indemnities and credits resulting from the cancellation of operations carried out by BES as a provider of financial and investment services; g. Any responsibility that is the subject of any of the processes described in Appendix I of said resolution. (iii) To the extent that, despite the clarifications made above, it turns out that any liabilities of BES that, under the terms of any of those paragraphs and the Resolution of August 3, were effectively transferred to novobanco legal liabilities, these liabilities will be retransmitted from novobanco to BES, with effect from 8:00 pm on August 3, 2014. In the preparation of its consolidated financial statements for 31 December 2021 (as well as in the previous financial statements), novobanco incorporated the determinations resulting from the resolution measure, as amended, with regard to the perimeter of transfer of assets, liabilities, off-balance sheet captions and assets under BES management, as well as the decisions of Bank of Portugal of 29 December 2015, in particular, regarding the clarification of the non-transmission to novobanco of contingent and unknown liabilities and clarifications relating to the liabilities contained in paragraph (ii) above, including the lawsuits listed in that resolution. Additionally, also by resolution of Bank of Portugal of 29 December 2015, it was decided that the Resolution Fund is responsible for neutralising, at the level of novobanco, the effects of decisions that are legally binding, outside the will of novobanco and for the which it has not contributed and that, simultaneously, translate into the materialization of responsibilities and contingencies that, according to the transfer perimeter to novobanco, as defined by Bank of Portugal, should remain within the sphere of BES or give rise to the establishment compensation in the context of the execution of annulments of decisions adopted by Bank of Portugal. Considering that the creation of the Bank results from the application of a resolution measure to BES, which had significant impacts on the equity of third parties, and without prejudice to the decisions of Bank of Portugal of 29 December 2015, there are still relevant litigation risks , although mitigated, namely, regarding the various litigations related to the loan made by Oak Finance to BES, the commercialization by BES of debt instruments and those related to the issue of senior bonds relayed to BES, as well as the risk of non-recognition and / or application of the various decisions of Bank of Portugal by Portuguese or foreign courts (as in the case of courts in Spain) in disputes related to the perimeter of assets, liabilities, off-balance sheet captions and assets under BES management transferred to novobanco. These disputes include the two lawsuits brought at the end of January 2016, before the Supreme Court of Justice of Venezuela, by the Banco de Desarrollo Económico y Social de Venezuela and the Fondo de Desarrollo Nacional against BES and novobanco, relating to the sale of debt instruments issued by entities belonging to the Espírito Santo Group, in the amount of US $ 37 million and US $ 335 million, respectively, and in which reimbursement of the amount invested is requested, plus interest, indemnity for the inflation value and costs (in the global value estimated by the respective authors of US $ 96 milion and US $ 871 million, respectively). These main actions are still pending before the Supreme Court of Justice of Venezuela. In the preparation of novobanco 's individual and consolidated financial statements of 31 December 2021 (as well as in the previous financial statements), the Executive Board of Directors reflected the Resolution Measure and related decisions taken by Bank of Portugal, in particular the decisions of 29 December 2015. In this context, these financial statements, namely regarding provisions for contingencies arising from lawsuits, reflect the exact perimeter of assets, liabilities, off-balance sheet captions and assets under BES management and liabilities transferred to novobanco, as determined by Bank of Portugal and with reference to the current legal bases and the information available at the present date. Additionally, within the scope of the novobanco sale operation, concluded on 18 October 2017, the respective contractual documents contain specific provisions that produce effects equivalent to the resolution of the Board of Directors of Bank of Portugal, of December 29, 2015, regarding the neutralization, at the level of novobanco, of the effects of unfavorable decisions that are legally binding, although, now, with contractual origin, thus maintaining the framework of contingent responsibilities of the Resolution Fund. Relevant disputes For the purposes of contingent liabilities, and without prejudice to the information contained in these notes to the accounts, namely with regard to the conformity of the policy of setting up provisions with the resolution measure and subsequent decisions of Bank of Portugal (and 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 novobanco GROUP are, at the present date, insusceptible to determine or quantify: (i) Legal action brought by Partran, SGPS, S.A., Massa Insolvente by Espírito Santo Financial Group, S.A. and Massa Insolvente by Espírito Santo Financial (Portugal), S.A. against novobanco and Calm Eagle Holdings, S.A.R.L. through which it is intended the declaration of nullity of the pledge constituted on the shares of Companhia de Seguros Tranquilidade, S.A. and, alternatively, the annulment of the pledge or the declaration of its ineffectiveness; (ii) Lawsuits brought after the execution of the contract for the purchase and sale of novobanco 's share capital, signed between the Resolution Fund and Lone Star on 31 March 2017, related to the conditions of the sale, namely the lawsuit administrative action brought by Banco Comercial Português, SA against the Resolution Fund, of which novobanco is not a party and, under which, according to the public disclosure of privileged information made by BCP on the CMVM website on 1 September 2017, the legal assessment of the contingent capitalization obligation assumed by the Resolution Fund within the scope of the Contingent Capitalization Mechanism is requested. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - 284 - With respect to the amount requested to the Resolution Fund, for the year 2020, differences remain between novobanco and the Resolution Fund regarding (i) the provision for discontinued operations in Spain and (ii) the valuation of participation units, which are subject to an ongoing arbitration. novobanco considers these amounts (Euro 165 million) to be due under the Contingent Capitalization Mechanism and has filed arbitration proceedings to claim payment of these amounts. There is also another divergence related to the application, by novobanco, at the end of 2020, of the dynamic option of the IFRS 9 transitional regime, which is also being assessed in the same arbitration action. These amounts (Euro 165 million) are recorded as receivables and are subject to a favorable arbitration decision. Resolution Fund The Resolution Fund is a public legal person with administrative and financial autonomy, created by Decree-Law no. 31-A / 2012, of 10 February, which is governed by the RGICSF and its regulations and whose mission is provide financial support to the resolution measures applied by Bank of Portugal, as the national resolution authority, and to perform all other functions conferred by law in the scope of the execution of such measures. The Bank, like most financial institutions operating in Portugal, is one of the institutions participating in the 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 of 31 December 2022, the Group's periodic contribution amounted to Euro 16,017 thousand (31 December 2021: Euro 14,854 thousand). Within the scope of its responsibility as a supervisory and resolution authority, Bank of Portugal, on August 3, 2014, decided to apply a resolution measure to BES, pursuant to paragraph 5 of article 145-G of the General Regime of Institutions Credit and Financial Companies (RGICSF), which consisted of transferring most of its activity to novobanco, created especially for this purpose, with the capitalization being ensured by the Resolution Fund. For the realization of novobanco’s share capital, the Resolution Fund made available Euro 4,900 million, of which Euro 365 million corresponded to its own financial resources. A loan from a banking syndicate was also granted to the Resolution Fund, in the amount of Euro 635 million, with the participation of each credit institution being weighted according to several factors, including the respective size. The remaining amount (Euro 3,900 million) originated from a loan granted by the Portuguese State. In December 2015, the 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, SA (Santander Totta), for Euro 150 million, also within the framework of the application of a resolution measure. In the context of this resolution measure, Banif's assets identified as problematic were transferred to an asset management vehicle, created for this purpose - Oitante, S.A. This operation involved public support estimated at Euro 2,255 million, which aimed at covering future contingencies, financed at Euro 489 million by the Resolution Fund and Euro 1,766 million directly by the Portuguese State. The situation of serious financial imbalance in which BES was in 2014 and BANIF in 2015, which justified the application of resolution measures, created uncertainties related to the risk of litigation involving the Resolution Fund, which is significant, as well as with the risk of an eventual insufficiency of resources to ensure the fulfilment of the liabilities, in particular the short-term repayment of the borrowings. 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 financing conditions granted by the Portuguese State and by the banks participating in the Resolution Fund, in order to preserve financial stability. through the promotion of conditions that provide predictability and stability to the contributory effort for the Resolution Fund. To this end, an amendment to the financing contracts to the Resolution Fund was formalised, which introduced a set of changes on the repayment plans, the remuneration rates and other terms and conditions associated with these loans in order to adjust them. the Resolution Fund's ability to fully meet its obligations based on its regular revenues, that is, without the need to be charged, to the banks participating in the Resolution Fund, special contributions or any other type of extraordinary contribution. According to the statement of the Resolution Fund of March 21, 2017, issued following an earlier statement of September 28, 2016 and the statement of the Ministry of Finance issued on the same date, the revision of the conditions of financing granted by the State Portuguese and participating banks aimed to ensure the sustainability and financial balance of the Resolution Fund, based on a stable, predictable and affordable charge for the banking sector. Based on this review, the Resolution Fund assumed that the full payment of its liabilities is ensured, as well as the respective remuneration, without the need for recourse to special contributions or any other type of extraordinary contributions by the banking sector. On March 31, 2017, Bank of Portugal announced that it had selected the Lone Star Fund for the purchase of novobanco, which was completed on October 18, 2017, through the injection, by the new shareholder, of Euro 750 million, which was followed by a new a capital contribution of Euro 250 million, made on December 21, 2017. The Lone Star Fund now holds 75% of novobanco 's share capital and the Resolution Fund the remaining 25%. Additionally, the approved conditions include: • A contingent capitalization mechanism, under which the Resolution Fund may be called upon to make payments in the event of certain cumulative conditions materialising, related to: (i) the performance of a restricted set of assets of novobanco and (ii) the evolution of the Bank's capitalization levels. Any payments to be made under this contingent mechanism are subject to an absolute ceiling of EUR 3,890 million; NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - 285 - • An indemnity mechanism to novobanco, if certain conditions are met, it will be sentenced to pay any liability, by a final judicial decision that does not recognize or is contrary to the resolution measure applied by Bank of Portugal, or to the perimeter novobanco’s assets and liabilities. Notwithstanding the possibility provided for in the applicable legislation for the collection of special contributions, in view of the renegotiation of the conditions for loans granted to the Resolution Fund by the Portuguese State and a banking union, and to public notices issued by the Resolution Fund and the Office of the Minister of Finance. Finances that state that this possibility will not be used, these financial statements reflect the expectation of the Executive 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 mechanism and the indemnity mechanism referred to in the preceding paragraphs. Any changes regarding this matter and the application of these mechanisms may have relevant implications for the Group's financial statements. NOTE 39 – DISINTERMEDIATION 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 of 31 December 2022 and 2021, 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 40 – RELATED PARTIES BALANCES AND TRANSACTIONS The group of entities considered to be related parties by novobanco 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 novobanco); (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 novobanco; (v) subsidiaries consolidated for accounting purposes under the full consolidation method; (vi) associated companies, that is, companies over which novobanco Group has significantly influence on the company’s financial and operational polices, despite not having control; and (vii) entities under joint control of novobanco (joint ventures). During 2022, the following transactions with Related Parties (credit and other types) were carried out: 1) Credit Operations NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - 286 - (in thousands of Euros)31.12.202231.12.2021Investment funds1 095 611 1 309 544 Real estate investment funds 40 124 67 408 Pension funds2 180 753 2 633 464 Discretionary management 616 060 700 260 3 932 547 4 710 676 2) Services rendered and other signed contracts The Group balances with related parties as at 31 December 2022 and 2021, as well as the respective profit and losses, can be summarised as follows: NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - 287 - Entities / IndividualsCategoryOperationAmount (euros)APB - Associação Portuguesa de BancosEntities for which there is a relationship of economic interdependenceCredit Card Limits750 Byron James MacBean HaynesCommon Management and/or Supervisory MembersCredit Card Limits10 000 Direct Debits Limits (RCE) (renewal)1 000 000 Credit Card Limits (renewal)24 000 Credit Card Limits (renewal)10 000 Current-Account Loan Account (renewal)2 500 000 Trading Room Operations (RCE)3 000 000 Direct Debits Limits (RCE) (renewal)4 000 000 Leasing (renewal with alteration)68 250 000 23 000 000 50 000 000 Current-Account Loan Account (renewal)100 000 Credit Card Limits (renewal)1 000 Novobanco dos AçoresCommon Management and/or Supervisory MembersFull subscription of the issue of Senior Debt Securities (non-preferred) at the novobanco dos Açores by the novobancoUp to 7 000 000Novo Banco Group(BEST, NB Açores e NB Finance)Common Management and/or Supervisory Members• Interbank Limits (Trading Room Operations)• Commercial Limits1 818 000 000 Nuno DuarteMembers or entities whose relationship with the institution potentially influences their managementCredit Card Limits10 000 Unicre - Cartão Internacional de Crédito S.A.Entities for which there is a relationship of economic interdependenceCurrent-Account Loan Account (renewal) Up to 38 050 000 Vicente Moreira RatoMembers or entities whose relationship with the institution potentially influences their managementMortgage Loan (increase)50 000 William Henry NewtonCommon Management and/or Supervisory MembersCredit Card Limits7 500 EDENRED - Portugal S.A.Entities for which there is a relationship of economic interdependenceLOCARENT - Companhia Portuguesa Aluguer Viaturas S.A.Entities for which there is a relationship of economic interdependenceCommercial paper (renewal with alteration)NACIONAL CONTA – Contabilidade, Consultadoria e Administração, Lda.Entity dominated by members of the Administration / SupervisionEntities / IndividualsCategoryOperationAmount (euros)GNB Soc Gestora de Fundo de Pensões S.A.Entities for which there is a relationship of economic interdependenceChange to distribution agreement na GNB Gestão de AtivosEntidades relativamente às quais existe uma relação de interdependência económicaChange to distribution agreement na GNB International Management S.A.Entidades relativamente às quais existe uma relação de interdependência económicaChange to distribution agreement na LOCARENT Companhia Portuguesa de Aluguer de Viaturas SAEntidades relativamente às quais existe uma relação de interdependência económicaChange to distribution agreement na The amount of assets receivable from the Resolution Fund corresponds to the amount of the triggering of the Contingent Capital Agreement regarding the financial year 2021. The liability corresponds to the amount to be delivered to the Resolution Fund arising from an addendum made in May 2021 to the Contingent Capitalization Mechanism contract. In June 2018 a contract was entered into between NANI HOLDINGS, SGPS, S.A., LSF NANI INVESTMENTS S.à.r.l. and novobanco, 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. The guarantees related to associated companies included in the table above refer essentially to guarantees provided. 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 9.60% (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 novobanco in 2022 and 2021, are as follows: In 2022 and 2021, variable remuneration to the Executive Board of Directors amounted to Euro 1,931 thousand and Euro 1,600 thousand, respectively, which respects to the remuneration that does not constitute acquired rights of the respective members until after the end of the restructuring period, and its payment is subject to approval and verification of certain conditions. Additionally, in 2022, costs of Euro 260 thousand were recorded as sign-on bonus resulting from the admission of a new Executive Director, and compensations for the termination of the mandate of three Executive Directors were recorded in the amount of Euro 460 thousand. As at 31 December 2022 and 2021, the amount of credit granted and deposits from Key Management Personnel of novobanco was as follows: Credit Granted (i) to members of the Executive Board of Directors and their immediate relatives was Euro 351 thousand (December 31, 2021: Euro 317 thousand); and (ii) members of the General and Supervisory Board and their immediate relatives did not had credit granted (December 31, 2021: no exposure); Deposits NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - 288 - (in thousands of Euros)31.12.202231.12.2021AssetsLiabilitiesGuaranteesIncomeExpensesAssetsLiabilitiesGuaranteesIncomeExpensesShareholdersNANI HOLDINGS- 152 - 389 - - 153 - 332 - FUNDO DE RESOLUÇÃO 198 180 54 101 - - 16 364 209 220 11 040 - - 26 190 Associated companiesLINEAS- 3 176 - - - - 3 123 - 2 395 - LOCARENT 139 286 3 218 - 1 727 3 163 121 982 3 146 - 1 040 3 282 ESEGUR- - - - - 1 894 919 915 - - UNICRE 38 365 76 - 919 - 38 193 6 - 522 - MULTIPESSOAL 2 023 35 273 - - 2 017 43 273 - - BANCO DELLE TRE VENEZIE- - - - - - 222 - - - EDENRED 2 99 716 62 1 968 41 1 93 081 62 2 039 24 YUNIT- 1 - - - - - - - - 377 856 160 475 335 5 003 19 568 373 307 111 733 1 250 6 328 29 496 OtherHUDSON ADVISORS PORTUGAL- - - - 4 638 - - - - 4 138 NACIONAL CONTA LDA 324 5 - - - 375 18 - - - ESMALGLASS- - - - - - 100 2 - - Other 324 5 - - 4 638 375 118 2 - 4 138 (in thousands of Euros)31.12.202231.12.2021Short-term employment benefits 3 092 1 257 4 349 2 524 1 183 3 707 Post-employment benefits 2 - 2 2 - 2 Other long-term benefits 197 38 235 51 50 101 3 291 1 295 4 586 2 577 1 233 3 810 Executive Board of DirectorsGeneral and Supervisory BoardTotalExecutive Board of DirectorsGeneral and Supervisory BoardTotal (i) members of the Executive Board of Directors and their immediate relatives was Euro 1,138 thousand; (December 31, 2021: Euro 1,080 thousand) and (ii) the members of the General and Supervisory Board and their immediate relatives was Euro 1,544 thousand (December 31, 2021: Euro 1,562 thousand). NOTE 41 – SECURITISATION OF ASSETS As of 31 December 2022 and 2021, the outstanding securisation transactions made by the Group were as follows In accordance with the consolidation rules established in IFRS 10, Lusitano Mortgages No. 6 plc and Lusitano Mortgages No. 7 plc are consolidated using the full consolidation method as from the date of their incorporation (see Note 1). The following are the main impacts of the consolidation of these entities on the Group's accounts: Additionally, 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. The main characteristics of these operations, as of 31 December 2022 and 2021, can be analysed as follows: NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - 289 - (in thousands of Euros)IssueStart DateOriginal AmountSecuritized Asset31.12.202231.12.2021Lusitano Mortgages No.4 plcSeptember 2005 1 200 000 214 061 246 943 Mortgage Loans (general scheme)Lusitano Mortgages No.5 plcSeptember 2006 1 400 000 330 075 373 147 Mortgage Loans (general scheme)Lusitano Mortgages No.6 plcJuly 2007 1 100 000 317 612 355 513 Mortgage Loans (general scheme)Lusitano Mortgages No.7 plcSeptember 2008 1 900 000 817 287 907 327 Mortgage Loans (general scheme)Current Amount(in thousands of Euros)31.12.202231.12.2021Cash, cash balances in Central Banks and other current deposits 124 031 246 943 Loans to Customers (impairment liquid)1 127 628 373 147 Responsibilities represented by securities (a) 25 491 373 147 (a) see Note 33(in thousands of Euros)31.12.2022FitchMoody'sS&PDBRSFitchMoody'sS&PDBRSLusitano Mortgages No.4 plcClasse A1 134 000 163 785 - - Dezembro de 2048AAAAaaAAA - AA-Aa2AA+-Classe B 22 800 10 842 - - Dezembro de 2048AAAa2AA - A-A2AA--Classe C 19 200 9 130 - - Dezembro de 2048A+A1A+ - BB+Baa3A--Classe D 24 000 11 412 - - Dezembro de 2048BBB+Baa1BBB- - CCCCaa1B--Classe E 10 200 5 100 - - Dezembro de 2048NA - NA - ----Lusitano Mortgages No.5 plcClasse A1 323 000 245 724 - - Dezembro de 2059AAAAaaAAA - A+Aa2AA+-Classe B 26 600 20 113 - - Dezembro de 2059AAAa2AA - BBB+Baa2AA+-Classe C 22 400 16 937 - - Dezembro de 2059AA1A - B+Ba3BBB-Classe D 28 000 21 172 - - Dezembro de 2059BBB+Baa2BBB - CCCaa3B-Classe E 11 900 11 301 - - Dezembro de 2059N/A - N/A - ----Lusitano Mortgages No.6 plcClasse A 943 250 152 014 128 051 124 100 Março de 2060AAAAaaAAA - AA+Aa2A--Classe B 65 450 65 450 63 950 55 286 Março de 2060AAAa3AA - AAAa2A--Classe C 41 800 41 800 41 800 31 303 Março de 2060AA3A - BB+A3A--Classe D 17 600 17 600 17 600 12 414 Março de 2060BBBBaa3BBB - CCCB3B-Classe E 31 900 31 900 31 900 20 017 Março de 2060BB - BB - CC-D-Classe F 22 000 22 000 22 000 - Março de 2060 - - - - ----Lusitano Mortgages No.7 plcClasse A1 425 000 345 770 345 770 326 254 Outubro de 2064 - - AAAAAA--AA+AAAClasse B 294 500 294 500 294 500 242 031 Outubro de 2064 - - BBB- - --AA+-Classe C 180 500 180 500 180 500 59 141 Outubro de 2064 - - - - ----Classe D 57 000 57 000 57 000 - Outubro de 2064 - - - - ----Current rating of the bondsIssueBonds issuedInitial nominal valueCurrent nominal valueInterest held by Group (Nominal value)Interest held by Group (Book value)Maturity dateInitial rating of the bonds In December 2022, novobanco contracted an operation for the transfer of part of the credit risk of a loan portfolio to companies in the amount of around Euro 1.0 billion, through a synthetic securitization, with maturity date of February 2031 (and possibility of a call option in September 2025). Given the nature of this operation, there was no derecognition of credits in the balance sheet, having been recorded the guarantee received, which will be updated according to activation triggers defined in the contract. NOTE 42 – FAIR VALUE OF FINANCIAL ASSETS AND LIABILITIES The governance model of the valuation of the Group'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. The fair value of listed financial assets is determined based on the closing price (bid-price), the price of the last transaction made or the value of the last known price (bid). In the absence of quotation, the Group estimates fair value using (i) valuation methodologies, such as the use of prices for recent transactions, similar and carried out under market conditions, discounted cash flow techniques and customised option valuation models. in order to reflect the particularities and circumstances of the instrument and (ii) valuation assumptions based on market information. For the assets included in the level 3 of fair value hierarchy, whose quotation is provided by a third-party using parameters not observable in the market, the Group proceeds, when applicable, to a detailed analysis of the historical and liquidity performance of these assets, which may imply an additional adjustment to its fair value, as well as a result of additional internal or external valuations. 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 Group'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. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - 290 - (in thousands of Euros)FitchMoody'sS&PDBRSFitchMoody'sS&PDBRSLusitano Mortgages No.4 plcClass A1 134 000 189 071 - - December 2048AAAAaaAAA - A+Aa2AA-Class B 22 800 12 515 - - December 2048AAAa2AA - BBB+A2A--Class C 19 200 10 539 - - December 2048A+A1A+ - BB+Ba1BBB--Class D 24 000 13 174 - - December 2048BBB+Baa1BBB- - CCCCaa1B--Class E 10 200 5 100 - - NA - NA - ----December 2059Lusitano Mortgages No.5 plcClass A1 323 000 277 689 - - December 2059AAAAaaAAA - AAa2AA-Class B 26 600 22 729 - - December 2059AAAa2AA - BBB-Baa2AA-Class C 22 400 19 141 - - December 2059AA1A - BBa3BBB-Class D 28 000 23 926 - - December 2059BBB+Baa2BBB - CCCaa3B-Class E 11 900 11 301 - - N/A - N/A - ----March 2060Lusitano Mortgages No.6 plcClass A 943 250 189 723 157 956 152 431 March 2060AAAAaaAAA - AAAa2A--Class B 65 450 65 450 63 950 61 124 March 2060AAAa3AA - AAa2A--Class C 41 800 41 800 41 800 33 936 March 2060AA3A - BB-A3A--Class D 17 600 17 600 17 600 12 388 March 2060BBBBaa3BBB - CCCB3B-Class E 31 900 31 900 31 900 8 568 March 2060BB - BB - CC-D-Class F 22 000 22 000 22 000 - - - - - ----Lusitano Mortgages No.7 plcClass A1 425 000 437 435 437 434 409 580 October 2064 - - AAAAAA--AAAAAClass B 294 500 294 500 294 500 266 902 October 2064 - - BBB- - --A-Class C 180 500 180 500 180 500 121 349 October 2064 - - - - ----Class D 57 000 57 000 57 000 - October 2064 - - - - ----Issue31.12.2021Initial 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) 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. 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. Note that although the valuations made available by the management companies are accepted, whenever applicable in accordance with the fund regulations, the Group requests the legal certification of accounts issued by independent auditors, in order to obtain the necessary additional comfort to the information made available by the management company. Additionally, and for the largest assets held by real estate investment funds, and according to an annual work plan previously approved by the Executive Board of Directors, a process of challenge to their valuations is carried out, consisting of a detailed technical analysis of the main assumptions considered in the valuations. This process may lead to the need for new valuations, as well as adjustments to the fair value of these assets. In the specific case of the Restructuring Funds (“Assessed Assets”), their assessment was carried out during the exercise of 2020 by an independent external international entity (“Appraiser”), which engaged renowned real estate appraisal companies to determine the fair value of real estate assets, which represent a significant part of the funds' portfolio. The fair vale estimation Assessed Assets requires a multi-step approach, taking into account the following (i) The fair value of the assets invested by each fund (the “Underlying Assets”); (ii) The nature of the participation of the respective Fund in each of the Underlying Assets; (iii) The other assets and liabilities on the Fund's balance; (iv) The nature of novobanco's investment in each of the funds; and (v) Consideration of any applicable discounts or premiums. The fair value of the Underlying Assets was estimated using three valuation approaches (market, income and cost) depending, among other things, on the specific nature of each asset, its state of development, the information available and the date of the initial investment. The other assets and liabilities in the fund's balances would normally be valued using the cost approach, with potential adjustments based on the market, and the consideration of discounts and premiums, normally assessed using market data and benchmarks. Underlying assets are mainly divided into Non-Real Estate assets and Real Estate assets (which can be subdivided into Hotels and Other Real Estate assets). For Non-Real Estate Assets, the Appraiser considered the Market approach based essentially on Market Multiples for comparable assets and considering the historical performance of each asset. For Real Estate Assets, the appraiser considered either the market approach or the income approach, depending on the state of each asset. In the case of hotels, the main value-based assumptions considered were the average room rate, the occupancy rate, the GOP margin, the EBITDA margin, the Capex needs and the discount rate. In relation to Other Real Estate Assets, the main assumptions of value were sales prices, construction costs, timeline (both to development and sale) and Discount Rates. Each of the assumptions described above considered in the valuation of real estate assets was determined from asset to asset (total of 80 major assets subdivided into a total of more than 500 assets), depending on the status of the asset, the asset's historical performance, location and market competitors. Regarding the information on quantitative indicators underlying the fair value measurements of the Restructuring Funds, the following is presented: Notes: 1. All assumptions presented above were calculated based on the averages of the values considered by the external appraisers per appraised property. 2.The average presented was calculated on the weighted average per property in the sum of the value of the underlying assets per category presented 3.Hotel - Includes hotels and aparthotels currently in operation (Hotels under development or project are incorporated in Real Estate under Development along with their respective property 4. €/m2 considers the gross construction area In addition, additional assumptions considered in the fair value measurement of the financial investments held in the restructuring funds are presented below: NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - 291 - AssumptionHotelsReal Estate under developmentReal EstateCommercial CentresAgriculture propertiesMin AverageMaxMin AverageMaxMin AverageMaxMin AverageMaxMin AverageMaxBedroom average rate (€)5117749795145207n.a.n.a.n.a.n.a.n.a.n.a.n.a.n.a.n.a.Occupancy rate %40%58%78%54%66%75%n.a.n.a.n.a.n.a.n.a.n.a.n.a.n.a.n.a.€/square metern.a.n.a.n.a.303 2276 0591732 0244 6101 0073 4604 560n.a.n.a.n.a.€/Ha n.a.n.a.n.a.n.a.n.a.n.a.n.a.n.a.n.a.n.a.n.a.n.a.3 95423 08877 296Discount rate7.5%8.2%10.6%8.1%12.1%20.0%5.0%6.0%7.0%9.3%9.7%10.6%n.a.n.a.n.a.Valuation methodologyMarket approachIncome approachMarket approachIncome approachMarket approachIncome approachMarket approachIncome approachMarket approachIncome approach 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; • • 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 Group 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 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. The Group chooses not to register "Debt Valuation Adjustment" (DVA), which represents the market value of own credit risk of the group of a certain negative exposure to a counterparty, reflecting a prudent perspective of application of this regulation. It should be noted that the exposure potentially subject to DVA is controlled monthly and has assumed immaterial values. Investment properties: its fair value is determined based on periodic evaluations carried out by independent entities specialised in this type of service, however, given the subjectivity of some assumptions used in the assessments, the Group carries out internal analysis on the assumptions used, which may imply additional adjustments to fair value, supported by additional internal or external valuations (see accounting policy in Note 7.19). The market value of properties for which a promissory purchase and sale agreement has been entered into corresponds to the value of that contract. 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 price The fair value of financial assets and liabilities and non-financial assets (investment properties) measured at fair value of the Group is as follows: NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - 292 - Type of FundDiscount based on P/BV observable market dataReal estate and Tourism14.5%Real estate and Tourism/Other13.6%Other10.6% NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - 293 - (in thousands of Euros)Quoted market pricesValuation models based on observable market parametersValuation models based on unobservable market parameters(Level 1)(Level 2)(Level 3)31 December 2022Financial assets held for trading 36 428 135 382 - 171 810 Securities held for trading 36 428 - - 36 428 Bonds issued by public entities 36 428 - - 36 428 Derivatives held for trading- 135 382 - 135 382 Exchange rate contracts- 23 141 - 23 141 Interest rate contracts- 103 673 - 103 673 Others- 8 568 - 8 568 Financial assets mandatorily at fair value through profit or loss 16 566 21 730 275 406 313 702 Securities mandatorily accounted for at fair value through the results 16 566 21 730 275 388 313 684 Bonds issued by other entities 11 045 50 2 378 13 473 Shares 5 464 - 135 655 141 119 Other variable income securities 57 21 680 137 355 159 092 Credit- - 18 18 Financial assets accounted for at fair value through results- - 13 13 Obligations of other issuers- - 13 13 Financial assets at fair value through other comprehensive income2 229 304 30 528 71 267 2 331 099 Bonds issued by public entities1 764 578 - - 1 764 578 Bonds issued by other entities 458 913 20 493 - 479 406 Shares 5 813 10 035 71 267 87 115 Derivatives - Hedge Accounting- 562 845 - 562 845 Interest rate contracts- 562 845 - 562 845 Investment properties- - 499 567 499 567 Assets at fair value2 282 298 750 485 846 253 3 879 036 Financial liabilities held for trading- 96 780 2 606 99 386 Derivatives held for trading- 96 780 2 606 99 386 Exchange rate contracts- 22 069 - 22 069 Interest rate contracts- 71 807 2 606 74 413 Other- 2 904 - 2 904 Derivatives - Hedge Accounting- 119 578 - 119 578 Interest rate contracts- 119 578 - 119 578 Liabilities at fair value- 216 358 2 606 218 964 Total Fair ValueAt Fair Value The changes occurred in financial assets and financial liabilities valued based on non-observable market information (level 3 of the fair value hierarchy) during the financial exercises of 2022 and 20201 can be analysed as follows: NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - 294 - (in thousands of Euros)Quoted market pricesValuation models based on observable market parametersValuation models based on unobservable market parameters(Level 1)(Level 2)(Level 3)31 December 2021Financial assets held for trading 114 465 263 199 - 377 664 Securities held for trading 114 465 - - 114 465 Bonds issued by public entities 114 465 - - 114 465 Derivatives held for trading- 263 199 - 263 199 Exchange rate contracts- 29 127 - 29 127 Interest rate contracts- 225 186 - 225 186 Others- 8 886 - 8 886 Financial assets mandatorily at fair value through profit or loss 190 252 22 890 586 450 799 592 Bonds issued by other entities 52 532 50 2 378 54 960 Shares 137 607 - 290 279 427 886 Other variable income securities 113 22 840 293 793 316 746 Financial assets at fair value through other comprehensive income7 167 814 9 958 43 224 7 220 996 Bonds issued by public entities5 761 717 - - 5 761 717 Bonds issued by other entities1 398 899 - - 1 398 899 Shares 7 198 9 958 43 224 60 380 Derivatives - Hedge Accounting- 19 639 - 19 639 Interest rate contracts- 19 639 - 19 639 Investment properties- - 625 187 625 187 Assets at fair value7 472 531 315 686 1 254 861 9 043 078 Financial liabilities held for trading- 304 104 1 950 306 054 Derivatives held for trading- 304 104 1 950 306 054 Exchange rate contracts- 34 910 - 34 910 Interest rate contracts- 266 012 1 950 267 962 Crédito- - - - Other- 3 182 - 3 182 Derivatives - Hedge Accounting- 44 460 - 44 460 Interest rate contracts- 44 460 - 44 460 Liabilities at fair value- 348 564 1 950 350 514 At Fair ValueTotal Fair Value(in thousands of Euros)Financial liabilities held for tradingSecurities CreditDerivatives held for tradingBalance as at 31 December 2021 586 450 - - 43 224 625 187 1 254 861 1 950 1 950 Acquisitions 45 390 - - 3 520 16 464 65 374 - - Attainment of maturity( 177 720)- - - - ( 177 720)- - Settlements( 115 754)- - ( 762)- ( 116 516)- - Transfers per entry 200 - - - 200 - - Outbound transfers( 200)- - - ( 200)- - Disposals- - - - ( 242 068)( 242 068)- - Changes in value( 62 978) 18 13 25 285 101 237 63 575 656 656 Other movements- - - - ( 1 253)( 1 253)- - Balance as at 31 December 2022 275 388 18 13 71 267 499 567 846 253 2 606 2 606 Total liabilitiesFinancial assets mandatorily at fair value through profit or lossFinancial assets at fair value through profit or lossFinancial assets at fair value through other comprehensive incomeInvestment propertiesTotal assets In fiscal exercise 2022 and 2021 there were no significant transfers of value between the different levels of the fair value hierarchy. 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 2022 and 2021 were as follows: The following table presents, for financial 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: NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - 295 - (in thousands of Euros)Financial liabilities held for tradingSecurities CreditDerivatives held for tradingBalance as at 31 December 2020 709 231 - - 43 222 592 605 1 345 058 2 158 2 158 Acquisitions 11 200 - - 556 4 973 16 729 24 117 24 117 Attainment of maturity( 22 352)- - - - ( 22 352)- - Settlements( 122 743)- - ( 4 247)- ( 126 990)( 24 117)( 24 117)Transfers per entry 2 751 - - 2 300 5 051 - - Disposals- - - - ( 49 727)( 49 727)- - Changes in value 8 363 - - 1 393 31 179 40 935 ( 208)( 208)Other movements- - - - 46 157 46 157 - - Balance as at 31 December 2021 586 450 - - 43 224 625 187 1 254 861 1 950 1 950 Financial assets mandatorily at fair value through profit or lossFinancial assets at fair value through profit or lossFinancial assets at fair value through other comprehensive incomeInvestment propertiesTotal assetsTotal liabilities(in thousands of Euros)31.12.202231.12.2021Recognised in reservesRecognised in the income statementTotalRecognised in reservesRecognised in the income statementTotalDerivatives held for trading- ( 655)( 655)- 144 144 Economic hedging derivatives- - - - ( 24 117)( 24 117)Financial assets mandatorily at fair value through profit or loss- ( 58 545)( 58 545)- 21 662 21 662 Financial assets at fair value through other comprehensive income 25 584 - 25 584 9 122 - 9 122 Investment properties- 91 133 91 133 - 31 182 31 182 25 584 31 933 57 517 9 122 28 871 37 993 (in millions of Euros)31.12.2022ChangeImpactChangeImpactFinancial assets mandatorily at fair value through profit or loss 275,4( 2,4) 10,8Obligations of other issuersCash flow discount modelSpecific Impairment 2,4-50%( 2,4)50% 10,8Shares 135,7 - -Management company adjusted valuation (b) 135,7 - -Others(a) - -Other variable income securities 137,4 - -Management company adjusted valuation (b) 117,6 - -Management company adjusted valuation (c) 19,8 - -Credit 0,0Financial assets at fair value through other comprehensive income 71,3( 2,9) 0,1Shares 71,3( 2,9) 0,1Cash flow discount modelRenewable energy Rates 16,2( 2,9) 0,1Other(a) 55,1 - -Total 346,7( 5,3) 10,9(c) In the specific case of units valued according to the quotation provided by the respective management company, it is unreasonable to carry out an analysis of the impact of the change in the variables underlying the clearance of the quotation by that entity(cid:9)(cid:9)(cid:9)(cid:9)(cid:9)(cid:9)(cid:9)(cid:9)(cid:9)(cid:9)(cid:9)(cid:9)Unfavorable scenarioFavorable scenarioAssets classified under level 3Valuation Model Variable analysedCarrying book value(a) No sensitivity analysis was carried out for these categories as these include securities of an individually immaterial value.(b) For the sensitivity analysis made to the valuation of restructuring funds, taking into account the valuation methodologies applied and considering that real estate assets represent about 90% of the underlying assets of the Funds, a change of +10% and -10% in the fair value of the main real estate assets of each Fund was considered, which leads to an impact of +5.2% and -5.2% in the fair value of the restructuring funds.(cid:9)(cid:9)(cid:9)(cid:9)(cid:9)(cid:9)(cid:9)(cid:9) The main parameters used, at 31 December 2022 and 2021, 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: NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - 296 - (in millions of Euros)ChangeImpactChangeImpactFinancial assets mandatorily at fair value through profit or loss 586,5( 2,4) 4,8Obligations of other issuersCash flow discount modelSpecific Impairment 2,4-50%( 2,4)50% 4,8Shares 290,3 - -Management company adjusted valuation (b) 287,5 - -Others(a) 2,8 - -Other variable income securities 293,8 - -Management company adjusted valuation (b) 236,5 - -Management company adjusted valuation (c) 57,3 - -Financial assets at fair value through other comprehensive income 43,2( 2,9) 0,1Shares 43,2( 2,9) 0,1Cash flow discount modelRenewable energy Rates 16,2( 2,9) 0,1Outros(a) 27,0 - -Total 629,7( 5,3) 4,9(c) In the specific case of participation units valued in accordance with quotations provided by the respective management company, 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(b)ForthesensitivityanalysiscarriedoutonthevaluationoftheRestructuringFunds,takingintoaccountthevaluationmethodologiesappliedandconsideringthatrealestateassetsrepresentmorethan95%oftheunderlyingassetsoftheFunds,avariation of + 10% was considered and -10% in the fair value of the main real estate assets of each Fund, which leads to an impact of + 6.15% and -5.8% in the fair value of the restructuring funds.Assets classified under level 331.12.2021Valuation Model Variable analysedCarrying book valueUnfavorable scenarioFavorable scenario(a) No sensitivity analysis was carried out for these categories as these include securities of an individually immaterial value.31.12.202231.12.2021EURUSDGBPEURUSDGBPOvernight1.95014.3653.5750-0.57400.06440.21001 month1.88404.42003.6500-0.58300.10120.24003 months2.13204.77003.8000-0.57200.20910.39006 months2.69305.15004.3350-0.54600.33880.61009 months2.99205.23504.5250-0.52350.46030.67001 year3.29105.11304.6768-0.50100.58310.82463 years3.30054.30104.6088-0.14501.14951.29725 years3.23904.01104.32800.01601.34601.29107 years3.20203.87804.13500.13001.45301.237310 years3.20203.82203.99200.30301.56101.209515 years3.14103.79703.93770.49201.68001.181720 years2.93103.72603.86470.54801.77081.151825 years2.71503.61703.79670.52401.73161.126430 years2.53203.47203.72570.47901.71601.10300 Interest rate volatility The values presented below represent the implicit volatilities (at the money) used for the valuation of interest rate options: 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: NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - 297 - (basis points)IndexSeries1 year3 years5 years7 years10 years31 December 2022CDX USD Main370.0056.8782.02101.74117.73iTraxx Eur Main3635.0566.4090.60106.87122.66iTraxx Eur Senior Financial360.000.0099.290.000.0031 December 2021CDX USD Main370.000.0049.5768.550.00iTraxx Eur Main3610.4326.8247.7666.7187.01iTraxx Eur Senior Financial360.000.0054.860.0085.86(%)31.12.202231.12.2021EURUSDGBPEURUSDGBP1 year99.2823.32955.2423.1673.73576.143 years124.2338.10449.5955.7959.15463.5725 years124.7740.72147,0065.8156.87771.1727 years121.639.37745.7368.3454.58679.97510 years115.6635.94642.8168.9850.92588.08115 years107.02--66.28--Foreign exchange rate31.12.202231.12.20211 month3 months6 months9 months1 yearEUR/USD1.06661.13268.60258.88.418.258.15EUR/GBP0.886930.840287.577.687.767.877.94EUR/CHF0.98471.03315.86,006.056.126.12EUR/NOK10.51389.98888.759.19.239.369.42EUR/PLN4.68084.59697.277.6758.038.288.45EUR/RUB117.20185.30047.5058.0688.7089.2889.583USD/BRL a)5.28655.571319.54519.42519.20519.12419.045USD/TRY b)18.718313.45008.75713.012521.1925.2328.235Volatility (%)a) Calculated based on EUR / USD and EUR / BRL exchange rates.b) Calculated based on EUR / USD and EUR / TRY exchange rates. 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: 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 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - 298 - 31.12.202231.12.2021% Change1 month3 monthsDJ Euro Stoxx 50 3 794 4 298 -11.74%16.1719.2718.70PSI 20 5 726 5 569 2.81%11.2716.45-IBEX 35 8 229 8 714 -5.56%12.6716.72-FTSE 100 7 452 7 385 0.91%9.7713.2813.15DAX 13 924 15 885 -12.35%15.0819.5318.72S&P 500 3 840 4 766 -19.44%19.5725.4319.84BOVESPA 109 735 104 822 4.69%22.8125.1924.85QuotationHistorical volatilityImplied Volatility(in thousands of Euros)(Level 1)(Level 2)(Level 3)31 December 2022Cash, cash balances at central bank and other demand deposits6 599 078 - 6 599 078 - 6 599 078 Financial assets at amortised costDebt securities8 183 209 6 322 522 270 317 1 203 015 7 795 854 Loans and advances to banks 43 548 - 43 548 - 43 548 Loans and advances to customers24 550 936 - - 25 072 152 25 072 152 Financial assets39 376 771 6 322 522 6 912 943 26 275 167 39 510 632 Financial liabilities measured at amortised costDeposits from banks9 705 154 - 9 696 251 - 9 696 251 Due to customers29 277 858 - - 29 277 858 29 277 858 Debt securities issued, subordinated debt and liabilities associated to transferred assets1 628 897 1 696 133 - 68 964 1 765 097 Other financial liabilities 375 268 - - 375 268 375 268 Financial liabilities40 987 177 1 696 133 9 696 251 29 722 090 41 114 474 (in thousands of Euros)(Level 1)(Level 2)(Level 3)31 December 2021Cash, cash balances at central bank and other demand deposits5 871 538 - 5 871 538 - 5 871 538 Financial assets at amortised costDebt securities2 338 697 1 096 479 327 192 1 126 334 2 550 005 Loans and advances to banks 50 466 - 50 466 - 50 466 Loans and advances to customers23 650 739 - - 24 028 198 24 028 198 Financial assets31 911 440 1 096 479 6 249 196 25 154 532 32 500 207 Financial liabilities measured at amortised costDeposits from banks10 745 155 - 10 779 351 - 10 779 351 Due to customers27 582 093 - - 27 582 093 27 582 093 Debt securities issued, subordinated debt and liabilities associated to transferred assets1 514 153 1 739 388 - 77 349 1 816 737 Other financial liabilities 374 593 - 374 593 374 593 Financial liabilities40 215 994 1 739 388 10 779 351 28 034 035 40 552 774 Assets / liabilities recorded at amortised costFair ValueQuoted market pricesValuation models based on observable market parametersValuation models based on unobservable market parametersTotal fair valueAssets / liabilities recorded at amortised costFair ValueQuoted market pricesValuation models based on observable market parametersValuation models based on unobservable market parametersTotal fair value 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 and Subordinated debt 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. NOTE 43 – TRANSFER OF ASSETS 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 • The instruments subscribed by novobanco Group represent clear minority positions in the share capital of the parent companies and of its subsidiaries. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - 299 - In this context, holding no control but being exposed to some of the risks and rewards of ownership, the novobanco 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: During fiscal exercise 2022, as part of the Crow project, the Group sold all the participating units in the Tourism Recovery Fund and FLIT SICAV, and partially sold the participating units in the FCR Recovery Fund (see note 13), wherefore as of 31 December 2022, the Group's total exposure to securities associated with credit assignment operations, amounted to Euro 253.2 thousand (31 December 2021: Euro 524.1 million). The detail is as follows: NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - 300 - (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 - - - - - 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 Up to 31 December 2020Fundo Aquarius1 947 1 488 ( 458)1 313 - 1 313 - 1 313 Up to 31 December 2021Fundo Aquarius6 628 6 625 ( 3)7 000 - 7 000 - 7 000 Up to 31 December 2022Fundo Aquarius 375 375 ( 0)- - - - - 1 374 292 1 370 070 ( 4 222) 1 305 541 119 516 1 425 057 ( 106 333) 1 318 724 Amounts at transfer dateAmounts of the assets transferredSecurities subscribed NOTE 44 – RISK MANAGEMENT novobanco, S.A., “institutional” area in the website presents the information directed to investors which complements the available information presented in this document, namely, novobanco, S.A., Market Discipline Report 2022 which addresses the public disclosure obligations as defined in Part VIII of the Regulation n.º 575/2013 of the European Parliament and the Council at 26 of July, 2013 (CRR) and EBA guidelines transposed to the Portuguese legislation through the Instruction n.º 5/2018 of the Bank of Portugal. In the case where the information of the present annual report supports the information in the Market Discipline Report, it is identified through references to this Report as systematised in the Annex VI of the Market Discipline Report. 44.1 – Framework Risk is implicit in the banking business and as such novobanco Group is naturally exposed to several categories of risks arising from external and internal factors, and which arise according to the characteristics of the markets in which the Bank operates and the activities it undertakes. Thus, the novobanco Group's risk management and control is based on the following premises: Independence vis-à-vis the other units of the Group, in particular the risk-taking units; Integrality of the risk culture, through a holistic vision and anticipation of its materialization; • • Universality by application in the whole novobanco Group; • • 3 Lines of defense model, with the objective of detecting, measuring, monitoring and controlling in an adequate manner the materially relevant risks to which the novobanco Group is subject to. This model implies that all employees, in their sphere of action, are responsible for risk management and control. 44.2 Governance and risk management structure Risk Management, vital to the development of the novobanco Group's activity, is centralised in the Risk Management Function, comprising the Global Risk Department (Departamento de Risco Global (DRG)) and the Rating Department (Departamento de Rating (DRT)), which holistically defines the principles of risk management and control, in close coordination with the other second line units of novobanco Group, as well as with the Internal Audit Department. All materially relevant risks are reported to the respective Management and Supervisory Bodies (EBD, GSB and both Risk Committees and specialised Committees), which assume responsibility for supervising, monitoring, assessing and defining the Risk Appetite and the control principles implemented. Operationally, DRG centralizes the Risk Management Function of novobanco Group, namely the responsibilities inherent to the function, supervising the various materially relevant financial institutions of the Group, ensuring independence from the business areas. novobanco Group Head of the Risk Management Function is the head of the DRG. In order to ensure greater efficiency in liaison with the DRG, a local Risk Officer has been appointed in each relevant entity of the novobanco Group. The DRG intervention is direct or in coordination and articulation with the units that assume the local Risk Management Function. The risks identified as relevant and material are quantified as part of the Internal Capital Adequacy Self-Assessment (ICAAP) exercise, the most relevant of which are: • Credit risk; • Market risk; • Liquidity risk; NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - 301 - (in thousands of Euros)31.12.202231.12.2021Participation units subscribed (no.)Book valueGross amount ImpairmentNet amountParticipation units subscribed (no.)Book valueGross amount ImpairmentNet amountFundo Recuperação Turismo, FCR- - - - - - 261 656 87 288 34 824 ( 34 824)- 12 796 FLIT SICAV 25 000 - - - - - 282 793 158 486 14 900 ( 14 900)- 12 423 Discovery Portugal Real Estate Fund 259 527 135 655 - - - 3 950 259 527 129 037 - - - 3 950 Fundo Recuperação, FCR 186 602 21 567 - - - 17 569 206 805 46 960 - - - 18 034 Fundo Reestruturação Empresarial 80 719 21 798 - - - 5 680 80 719 29 886 - - - 5 680 Fundo Aquarius 166 861 74 202 - - - 20 980 167 602 72 401 - - - 21 073 718 709 253 222 - - - 48 179 1 259 102 524 058 49 724 ( 49 724)- 73 956 Unrealised Subscribed CapitalUnrealised Subscribed CapitalSecuritiesShareholder loans or supplementary capital contributionsSecuritiesShareholder loans or supplementary capital contributions • Operational risk. We also highlight ESG (Environmental, Social and Governance) risk - in particular, the subcategories of climate and environmental risk and other environmental risks - as risks with growing relevance, and whose impact is estimated to be materialised in the medium and long term (and, therefore, over a longer horizon than the other risk categories): ESG risk is part of the Group's risk management framework, in close articulation between the DRG and the ESG Office, which contributes specific knowledge to the identification of climate and environmental risk factors and social risk factors. Thus, it is formally defined in the taxonomy of risks of novobanco as the exposure to unfavorable events resulting from inadequacy or failures in procedures, systems or policies related to the environment (adaptation to or mitigation of climate change, sustainable use and protection of water or marine resources, transition to the circular economy, waste prevention and recycling, pollution control and ecosystem protection) and natural resources (Biodiversity), Social (equality, social cohesion, social integration, labor relations) and Governance (adequate management structures, labor relations, employee compensation and tax compliance). The evaluation of the materiality of its impacts is analysed transversally, since the ESG factors are intrinsically present in the other risk categories foreseen in the Group's taxonomy of risks. In this context, we highlight the factors that have merited greater specialisation by the Group, in terms of its methodologies for risk assessment and control and their respective integration into business processes: • Climate transition risks: defined as the impacts associated with the transition to a low-carbon economy. In other words, these risks are caused by legislation/regulation, technology and market changes resulting from the requirements associated with climate change. Depending on the response of each economic sector (and each company in particular) to the need for transition, different scenarios (and severities of transition risk factors) can be projected and, as a result, different risks and risk levels can be identified and assessed. • Physical risks: defined as the impacts associated with the physical effects of climate change. These risks may result from factors arising from an extreme event - severe risk - or through a medium or long-term factor - chronic risk (for example, the negative effect that global warming, resulting from the continuous rise in temperatures, may have on the production cycles of some sectors). Physical risks may result in internal financial impacts (damage to own assets) or external financial impacts (disruption of the production cycles of clients/counterparties or the impact on the Group's real estate collateral). The following are the main risk management guidelines for the risks identified above: • credit risk: the management and control of this type of risk is supported by the use of an internal system of risk identification, assessment and quantification, as well as internal processes for attributing ratings and scorings to portfolios and their continuous monitoring in specific decision forums; • market risk: existence of a specialised team that centralizes the management and control of market risk and balance sheet • interest rate risk (IRRBB) of the Group, in line with the regulations and good risk practices; liquidity risk: based on the measurement of liquidity outflows from contractual and contingent positions in normal or stressed situations, the management and control of this risk consists, on the one hand, in determining the size of the pool of liquidity available at each moment, and on the other hand, in planning for medium and long term stable financing sources; • operational risk: operational risk policies are defined by a specialised DRG team, with other units such as the Compliance department and the Information security office issuing specific risk policies. The effectiveness of the methodologies for the identification and control of operational risk is guaranteed through the actions of the operational risk management representatives appointed for each organic unit, who promote the risk culture in the first line of defense in continuous collaboration with the DRG. 44.3 Credit Risk Credit risk results from the possibility of financial losses arising from the default of the client or counterparty in relation to the contractual obligations established with the Group within the scope of its credit activity. Credit risk is essentially present in traditional banking products - loans, guarantees and other contingent liabilities and derivatives. In credit default swaps (CDS), the net exposure between protection seller and buyer positions on each entity underlying the transactions, constitutes credit risk for novobanco Group. CDS are recorded at their fair value in accordance with the accounting policy described in Note 7.10.6. A permanent management of the credit portfolios is carried out, which favors interaction between the various teams involved in risk management throughout the successive stages of the life of the credit process. This approach is complemented by the introduction of continuous improvements both in terms of methodologies and tools for risk assessment and control, as well as in terms of procedures and decision circuits. The Group's credit risk profile, namely regarding the evolution of credit exposures and monitoring of credit losses, is regularly monitored by the Risk Committees of the Executive Board of Directors and the General and Supervisory Board. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - 302 - Main events in 2022 During 2022, we highlight below in chronological order, the non-recurring situations that had the greatest impact on the cost of risk for the period: 1. Classification as Unlikely to pay - and, consequently, change to stage 3 - on the universe of clients who ended the moratorium and where there were later situations of overdue credit with more than 45 days throughout the first half of the year; Increases in impairments arising from individual analysis for counterparties from countries in the conflict zone; 2. 3. Constitution of impairments due to the deterioration of macroeconomic expectations, rise in reference interest rates and increase in the inflation rate. With regard to the reinforcements of impairment mentioned in points 1. and 2. above, these situations had a manageable impact on the cost of risk since (1) exposure to countries from the conflict zone is reduced and (2) the level of claims verified with the criteria defined for the purpose was insignificant. In relation to point 3. above, this addressed the timely recording of impairments arising from the deterioration of the macroeconomic outlook as a result of the effects of the conflict between Russia and Ukraine and the increases observed in both reference interest rates and inflation. Accordingly, given the need for the impairment to reflect prospective information, the impact relative to this framework was estimated and accounted for, contemplating: 3.1 Effects arising from the continuation of the Russia/Ukraine conflict, with an increase in raw material costs, but also from the generalised increase in prices of goods and services. To consider this situation, the practical expedient was followed of increasing the weight attributed to the less favorable scenario that is currently used to support the IFRS9 impairment calculation, against the other scenarios used - base and most favorable; 3.2 Effects arising from the rise in reference interest rates, whose impact on impairment was estimated via the LGD risk parameter. The estimation/development of this parameter was based on interest rate values prior to 2022, where reference rates assumed negative values. With the recent rise in these rates to positive values it became urgent to ensure that the LGD risk parameter and, consequently, the impairment constituted for the credit portfolio to date incorporated this impact. 3.3 Effects of potential deterioration in the level of risk of companies in sectors more vulnerable to the current economic environment, in this case companies whose activities involve intensive energy consumption. To anticipate this impact, the sectors in these conditions were defined as well as the clients associated with the same in order to simulate and account for the impact on impairment resulting from a generalised deterioration of the rating on the exposures of this specific portfolio. Until it is possible to complete and implement updated collective risk parameters according to revised macroeconomic scenarios as well as to ensure a complete review of the risk assessment in companies most exposed to the effect of the energy crisis, the above impacts were estimated based on simulations and accounted for until the release of accounts on 30 September 2022. 2022, based on the revised macroeconomic scenarios, the collective risk parameters were updated and fully implemented, and the risk ratings associated with customers with economic activity more exposed to the increase in the cost of energy were revised. Thus, the impairment effects arising from these events replaced the amount of impairment estimated based on simulations - criteria described above - which had previously been accounted for without allocation to specific exposures. Although the effect of these changes is not immediately measurable, it was estimated that the impact on impairments arising from these events would be around Euro 40 million. Even so, despite this specific effect, the annual observed cost of credit risk remained at controlled levels and below those of 2021. 44.3.1 Credit Risk Exposure novobanco Group’s 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 accounting book value, net of impairment. For the off-balance sheet elements, the maximum exposure of the guarantees is the maximum amount that the Group NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - 303 - (in thousands of Euros)31.12.202231.12.2021Gross ValueImpairmentNet ValueGross ValueImpairmentNet ValueDeposits with and loans and advances to banks 518 014( 780) 517 234 506 789( 1 113) 505 676Derivatives for trading and fair value option derivatives 135 382- 135 382 263 199- 263 199Securities held for trading 36 428- 36 428 114 465- 114 465Securities at fair value through results 13 13--Securities at fair value through profit/loss - mandatory 13 473- 13 473 54 960- 54 960Securities at fair value through other comprehensive income 2 243 984( 660)2 243 3247 160 616( 3 716)7 156 900Securities at amortised cost 8 256 195( 291 531)7 964 6642 582 558( 246 997)2 335 561Loans and advances to customers25 452 202(1 066 392)24 385 81024 932 453(1 247 917)23 684 536Derivatives - hedge accounting 562 845- 562 845 19 639- 19 639Other assets 551 797( 129 830) 421 967 923 866( 182 499) 741 367Guarantees and standby letters provided2 397 867( 82 547)2 315 3202 234 243( 79 599)2 154 644Documentary credits 169 410- 169 410 402 332- 402 332Irrevocable commitments6 206 048 7 3506 213 3985 845 257( 12 737)5 832 520Credit risk associated with the credit derivatives' reference entities------46 543 658(1 564 390)44 979 26845 040 377(1 774 578)43 265 799 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 as described in Note 7.16. In the cases where 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, novobanco 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. 44.3.2 Impairment Models scenarios As proposed in IFRS 9 regulations, the Group's calculation of impairment reflects different expectations of macroeconomic evolution, that is, it incorporates multiple scenarios. In order to incorporate the effects of future macroeconomic behavior in the loss estimates, forward looking macroeconomic estimates are included in some of the risk parameters used in the impairment calculation. In effect, different possible scenarios are considered which give rise to the same number of impairment results. In this context, the process of defining the macroeconomic scenarios considers the following principles: • Representative scenarios that capture existing non-linearities (e.g. a base case scenario, a scenario with a more favorable • • • macroeconomic outlook and a scenario with a less favorable macroeconomic outlook); The base case scenario is consistent with inputs used in other exercises in the Group, since the same methodology is used for the impairment calculation as the Group uses in internal and regulatory planning exercises; The alternative scenarios to the base case do not reflect extreme scenarios; The correlation between the projected variables is realistic with the economic reality (e.g. if GDP is increasing, unemployment is expected to be decreasing). 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 minimised). 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 stylised facts of economic cycles, with respect to the components of expenditure, prices, unemployment, etc. and estimates. Thus, when revising / updating the scenarios, the respective probabilities of execution are also reviewed. Once the scenarios are updated, the values of the risk parameters are updated for later consideration in the scope of the Impairment calculation. The final impairment calculated will thus result from the sum of the impairment value of each scenario, weighted by the respective probability of execution. Currently, 3 scenarios are considered for the calculation of impairment on a collective basis: base case, downside case (or adverse) and more favourable case. The scenarios considered and the respective evolution of the main macroeconomic variables are described in the tables below: A - Base Scenario, with a relative weight of 60%. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - 304 - The baseline scenario assumes strong GDP growth in 2022, supported by the favorable performances of private consumption and exports, and the removal of Covid-19 constraints. Private consumption is also seen to benefit from household income support, the use of savings accumulated during the pandemic, and a contained unemployment rate. Exports benefit from the strong contribution of tourism services, with demand picking up after the confinement periods. For 2023, the baseline scenario assumes that the economy suffers a strong deceleration, especially with the falling contributions of private consumption and exports. These developments result from the effects of rising inflation (loss of purchasing power), tighter monetary and financial conditions, with rising interest rates, and unfavorable base effects. In the period 2024-2025, GDP growth is assumed to trend around 2%. After the highest records in 2022 and 2023, inflation gradually declines until 2025. This picture translates into rising long-term market interest rates, but with the Portuguese OT spread against the German benchmark remaining contained. Real estate prices reflect rising interest rates and cooling demand and decelerate sharply in 2023, then recover to moderate growth. B - Less favourable / adverse scenario, with a relative weight of 20% NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - 305 - Unit20182019202020212022202320242025GDPReal growth %2,62,7-8,44,96,42,42,12,0Private ConsumptionReal growth %2,93,0-5,54,44,91,31,61,8Government ExpenditureReal growth %0,92,10,45,02,2-0,9-0,20,1InvestmentReal growth %6,23,2-5,76,15,17,45,04,2ExportsReal growth %4,54,1-18,613,013,65,53,74,5ImportsReal growth %5,74,9-12,112,88,84,83,44,4Domestic DemandReal growth %2,83,1-5,65,14,52,12,02,0PricesCPI%1,00,30,01,35,92,62,01,7Real Estate (Residential)%10,310,08,89,48,32,54,85,0Real Estate (Commercial)%4,93,12,85,13,6-0,21,31,5Equity prices (incremental change)%-11,010,2-6,113,70,00,00,00,0Unemployment% labour force7,06,67,06,65,85,75,85,8Euribor (annual average)3-month%-0,32-0,36-0,43-0,550,011,622,022,08end-of-period%-0,31-0,38-0,55-0,571,222,012,022,136-month%-0,27-0,30-0,37-0,520,281,752,042,10end-of-period%-0,24-0,32-0,53-0,551,462,032,042,1612-month%-0,17-0,22-0,31-0,490,651,872,062,15end-of-period%-0,12-0,25-0,50-0,501,702,042,072,22Sovereign Yields (average)Bund 10Y%0,46-0,21-0,47-0,311,101,691,791,87end-of-period%0,24-0,19-0,57-0,181,641,741,831,91PGB 10Y%1,850,770,420,292,102,853,043,21end-of-period%1,720,440,030,472,752,953,123,29PGB 2Y%-0,13-0,42-0,42-0,650,781,802,052,39end-of-period%-0,35-0,55-0,73-0,661,721,882,222,5510Y PGB-Bund spreadAnnual Averagebps138988960100116125134end-of-periodbps148636065111121129138Annual Averagebps19811984941321059982end-of-periodbps2079976113103107907410Y-2Y PGB Spread The adverse scenario assumes a scenario of stagflation in the European and Portuguese economies. In Portugal, inflation is higher and more persistent than in the baseline scenario, mainly due to a negative energy shock and also a more visible transmission of the increase in energy and food prices to wages and the prices of other goods and services. Inflation reaches 8.7% in 2022 and 6.6% in 2023, remaining above the 2% target in 2024. Activity falls back significantly in 2023, and the contraction extends into 2024, not only due to the energy shock but also resulting from a more aggressive rise in reference interest rates by the ECB, creating restrictive monetary and financial conditions. A high and persistent increase in interest rates is assumed (3-month Euribor rises to close to 4.3% in 2024 and remains around 3.6% in 2025, in annual average terms). This picture translates into contractions in private consumption and investment in 2023-24. It is assumed that the adverse conditions associated with this scenario postpone the execution of RRP funds. In any case, their effect on investment becomes visible towards the end of the projection horizon. The recession and rising interest rates contribute to a sharp contraction in activity and property prices. With the Portuguese economy being seen as especially vulnerable to interest rate increases, a more pronounced widening of the spread between the yields on Treasury bonds and the German benchmark is assumed. C - Most favourable scenario, with a relative weight of 15% NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - 306 - Unit20182019202020212022202320242025GDPReal growth %2,62,7-8,44,95,7-3,7-0,92,0Private ConsumptionReal growth %2,9-3,3-7,14,53,8-3,9-1,21,6Government ExpenditureReal growth %0,92,10,44,11,80,61,5-0,2InvestmentReal growth %6,23,3-5,77,94,9-5,3-0,45,0ExportsReal growth %4,54,1-18,613,19,2-2,91,64,7ImportsReal growth %5,74,9-12,113,14,4-2,32,34,4Domestic DemandReal growth %2,83,1-5,65,13,7-3,4-0,61,9PricesCPI (12m/12m average rate)%1,00,30,01,38,76,64,32,4Real Estate (Residential)%10,310,08,89,47,1-8,5-10,1-1,3Real Estate (Commercial)%4,93,12,85,13,3-10,3-12,2-1,6Equity prices (incremental change)%-11,010,2-6,113,70,00,00,00,0Unemployment% labour force7,06,67,06,66,39,413,79,6Euribor (annual average)3-month%-0,32-0,36-0,43-0,550,373,234,283,60end-of-period%-0,31-0,38-0,55-0,572,064,404,153,056-month%-0,27-0,30-0,37-0,520,643,344,273,55end-of-period%-0,24-0,32-0,53-0,552,254,424,122,9712-month%-0,17-0,22-0,31-0,490,983,414,273,53end-of-period%-0,12-0,25-0,50-0,502,384,434,102,95Sovereign Yields (average)Bund 10Y%0,46-0,21-0,47-0,310,991,781,891,84end-of-period%0,24-0,19-0,57-0,181,711,841,931,75PGB 10Y%1,850,770,420,292,013,313,573,16end-of-period%1,720,440,030,472,783,833,313,02PGB 2Y%-0,13-0,42-0,42-0,650,782,542,772,25end-of-period%-0,35-0,55-0,73-0,661,973,102,442,0510Y PGB-Bund spreadAnnual Averagebps138988960102153169132end-of-periodbps148636065107199138127Annual Averagebps1981198494123778092end-of-periodbps20799761138173879710Y-2Y PGB Spread The favorable scenario assumes that the increase in inflation in 2022 is transitory. After recording more than 5%, price growth converges, over the remaining projection horizon, to values around or below 2%. This evolution could be associated with a quick resolution of the war in Ukraine and/or a strong easing of energy and food prices, thus not observing the normalisation of inflation to values around its target, allowing for a rise in benchmark and short-term market interest rates, but to contained values, up to 2.5%. In this context, economic activity is assumed to expand at an above-trend pace over the entire projection horizon. GDP growth benefits from positive performances in investment (with the implementation of RRP funds) and exports. Strong external demand and favorable financing conditions support house price growth, albeit at single-digit records. The unemployment rate is seen receding to near 5% of the labor force. 44.3.3 Impairment Models As of 31 December 2022 and 2021, the detail of the amount of gross credit exposure and impairment assessed individually and collectively, by segment was as follows: NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - 307 - Unit2019202020212022202320242025GDPReal growth %2,7-8,44,96,73,63,42,5Private ConsumptionReal growth %3,0-5,54,45,13,52,82,6Government ExpenditureReal growth %2,10,45,02,20,40,40,1InvestmentReal growth %3,2-5,76,15,18,67,14,2ExportsReal growth %4,1-18,613,013,921,111,26,6ImportsReal growth %4,9-12,112,88,721,610,86,5Domestic DemandReal growth %3,1-5,65,14,63,93,22,5PricesCPI%0,30,01,35,92,11,81,7Real Estate (Residential)%10,08,89,48,36,95,74,9Real Estate (Commercial)%3,12,85,13,63,12,62,1Equity prices (2022-25, change vs. base year)%10,2-6,113,70,015,020,025,0Unemployment% labour force6,67,06,65,75,45,35,1Euribor (annual average)3-month%-0,36-0,43-0,550,011,752,402,53end-of-period%-0,38-0,55-0,571,222,272,522,536-month%-0,30-0,37-0,520,281,882,422,55end-of-period%-0,32-0,53-0,551,462,302,542,5512-month%-0,22-0,31-0,490,652,012,452,58end-of-period%-0,25-0,50-0,501,702,322,572,58Sovereign Yields (average)Bund 10Y%-0,21-0,47-0,311,182,012,282,43end-of-period%-0,19-0,57-0,181,772,252,302,55PGB 10Y%0,770,420,292,102,963,053,13end-of-period%0,440,030,472,873,053,053,20PGB 2Y%-0,42-0,42-0,650,781,902,072,30end-of-period%-0,55-0,73-0,661,821,982,152,4510Y PGB-Bund spreadAnnual Averagebps98896092957870end-of-periodbps636065110807565Annual Averagebps11984941321069983end-of-periodbps9976113105107907510Y-2Y PGB Spread In the case of credits analysed by the Impairment Committee for which the impairment determined automatically by the Impairment Model has not been changed, they are included and presented in the "Collective assessment". As of 31 December 2022 and 2021, the analysis of the gross loans and advances to customers’ exposure and impairment assessed individually and collectively, by geography, is presented as follows: NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - 308 - (in thousands of Euros)31.12.2022ExposureImpairmentExposureImpairmentExposureImpairmentCorporate 1 093 692 542 602 13 133 980 333 908 14 227 672 876 510 Stage 1- - 10 187 063 43 504 10 187 063 43 504 Stage 2 1 587 392 2 898 148 260 974 2 899 735 261 366 Stage 3 1 092 105 542 210 48 769 29 430 1 140 874 571 640 Mortgage loans 3 626 395 9 825 757 54 440 9 829 383 54 835 Stage 1- - 8 939 605 3 595 8 939 605 3 595 Stage 2- - 781 080 20 958 781 080 20 958 Stage 3 3 626 395 105 072 29 887 108 698 30 282 Consumer and other loans 80 441 74 467 1 314 706 60 580 1 395 147 135 047 Stage 1- - 1 090 919 14 912 1 090 919 14 912 Stage 2- - 177 390 18 448 177 390 18 448 Stage 3 80 441 74 467 46 397 27 220 126 838 101 687 Total 1 177 759 617 464 24 274 443 448 928 25 452 202 1 066 392 (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 model(in thousands of Euros)31.12.2021ExposureImpairmentExposureImpairmentExposureImpairmentCorporate 1 329 469 643 005 12 384 556 369 675 13 714 025 1 012 680 Stage 1- - 8 880 630 48 658 8 880 630 48 658 Stage 2 2 831 855 3 443 770 286 174 3 446 601 287 029 Stage 3 1 326 638 642 150 60 156 34 843 1 386 794 676 993 Mortgage loans 3 138 155 9 808 875 55 865 9 812 013 56 020 Stage 1- - 8 832 378 4 834 8 832 378 4 834 Stage 2- - 804 007 17 150 804 007 17 150 Stage 3 3 138 155 172 490 33 881 175 628 34 036 Consumer and other loans 148 390 132 298 1 258 025 46 919 1 406 415 179 217 Stage 1- - 1 038 767 10 530 1 038 767 10 530 Stage 2- - 181 283 18 033 181 283 18 033 Stage 3 148 390 132 298 37 975 18 356 186 365 150 654 Total 1 480 997 775 458 23 451 456 472 459 24 932 453 1 247 917 (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 modelIndividual Assessment (1)Collective Assessment (2)TotalIndividual Assessment (1)Collective Assessment (2)Total(in thousands of Euros)31.12.2022ExposureImpairmentExposureImpairmentExposureImpairmentPortugal 1 090 184 563 773 20 879 466 396 301 21 969 650 960 074 Spain 2 1 945 611 12 447 945 613 12 448 United Kingdom- - 366 848 4 279 366 848 4 279 France- - 389 677 13 946 389 677 13 946 Switzerland- - 246 780 2 263 246 780 2 263 Luxembourg- - 282 807 1 996 282 807 1 996 Other 87 573 53 690 1 163 254 17 696 1 250 827 71 386 Total 1 177 759 617 464 24 274 443 448 928 25 452 202 1 066 392 * 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**Total 44.3.3.1 - Individual Credit Analysis The Individual Credit Analysis comprises a staging analysis and an individual impairment quantification analysis. The staging analysis is performed for debtors previously classified as stage 1 and stage 2, with the purpose of evaluating the adequacy of the assigned stage with additional information obtained on an individual basis. The individual impairment quantification analysis aims to determine the most appropriate impairment rate for each credit customer, regardless of the amount resulting from the Collective Impairment Model. Clients that have been subject to Individual Analysis, but for which an objective impairment loss was not considered, are again included in the Collective Impairment Model. The Individual Analysis of the selected clients is carried out based on the information provided by the Commercial Structures regarding the client / Group's framework, historical and forecast cash flows (when available) and existing collateral. The scheme below is illustrative of the individual credit analysis to be carried out for the purpose of concluding on the classification in terms of staging of debtors. Selection Criteria Individual Analysis (staging analysis and, when applicable, quantification of individual impairment) should be carried out for the borrowers who: • Register Stage 3 exposure equal to or greater than Euro 1 million. • Register Stage 2 exposure equal to or greater than Euro 5 million. • Register Stage 2 exposure equal to or greater than Euro 1 million and have no rating assigned. • Register Stage 1 exposure equal to or greater than Euro 5 million and have no rating assigned. • Register Stage 1 exposure equal or greater than Euro 25 million (individually significant exposure). • Fit into the risk segment Financial Holding and liability equal to or greater than Euro 5 million. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - 309 - (in thousands of Euros)31.12.2021ExposureImpairmentExposureImpairmentExposureImpairmentPortugal 1 300 717 683 754 20 969 733 425 794 22 270 450 1 109 548 Spain 58 906 8 008 566 121 13 495 625 027 21 503 United Kingdom- - 269 010 3 417 269 010 3 417 France- - 309 486 11 831 309 486 11 831 Switzerland- - 240 456 1 825 240 456 1 825 Luxembourg- - 264 525 2 552 264 525 2 552 Other 121 374 83 696 832 125 13 545 953 499 97 241 Total 1 480 997 775 458 23 451 456 472 459 24 932 453 1 247 917 * 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**Total • Fit into the Financial Holding risk segment and register exposure equal to or greater than Euro 5 million. • Fit into the Real Estate risk segment and register exposure equal to or greater than Euro 5 million. • Are identified by the Committee itself based on another criteria that justify (e.g., sector of activity); • • In the past, specific impairment has been attributed to them. In the face of any new element that may have an impact on the calculation of impairment, be proposed for analysis by one of the stakeholders of the Impairment Committee or by another Body. The identification of the target customers for Individual Analysis will be updated monthly, in order to contemplate any changes that may occur throughout the year. The Committee analysis of the customers identified in the previous paragraph will be carried out in the month in which: • The client registers, for the first time, one of the selection criteria for Individual Impairment Analysis, mentioned in the previous paragraph. • Expiry of the Analysis expiration date. • Its analysis is requested by one of the participants of the Impairment Committee or by another Body. The Individual Impairment Analysis can be carried out for individual customers but should whenever possible consider the Economic Group view of the selected customers. Rules of Operation The Individual Analysis of the selected clients is carried out based on the information provided by the Commercial Units regarding the client / Group's framework, historical and forecast cash flows (when available) and existing collateral. For the analysis of the impairment quantification on an individual basis, a scenario is established that is expected to recover credit: through the continuity of the client's business or through the execution of the collateral. If this analysis results in no impairment being necessary, the impairment will be determined by collective analysis, that is, by the collective impairment model (except for cases with objective evidence of loss / Default, in which the final rate will have to be defined). The Individual Impairment quantification analysis determines, for each period, the best recovery scenario, aligning the commercial strategies defined for the client, with the different recovery possibilities. When, due to lack of information, it is not possible to identify or update the recovery scenario, the previous rate is maintained, and a new date is set for the client's review. 44.3.3.2 - Collective analysis adjustments to the automatic result of the model After processing the automatic impairment calculation and validating the consistency of the results obtained, all situations that may need an adjustment to the calculated impairment value are assessed. These adjustments are reflected, whenever possible, directly in the exposures. When this is not possible, the calculated impairment value is recorded without being allocated to specific exposures and, for that purpose, the stage and the type of credit to which it refers are associated. Having the prerogative to ensure that all impairment is allocated to specific exposures, these impairment amounts initially constituted in the unallocated form will, once conditions exist, be fully distributed over the exposures in which their allocation is determined. In terms of the governance model, both adjustments to specific exposures and impairment amounts constituted in the unallocated form must be validated and supported by an approval by a competent body, which, as a rule, will be the Extended Impairment Committee. Apart from adjustments made during the first half of the year on the universe that was moratorium in 2021, the remaining adjustments made in 2022 result mainly from the need for revision / correction of data that, punctually and on a temporary basis, led to the respective adjustment. In relation to the adjustments related to the universe of clients who benefited from the above-mentioned moratorium, they were progressively discontinued during the second semester. This decision resulted from the assessment in this universe over a reasonable period of the ability to resume the amortization plan after it was resumed, so the implemented risk assessment model would faithfully translate the appropriate level of parity, without the need for additional adjustments. 44.3.4 Credit Risk Monitoring (DRG) 44.3.4.1 Internal rating models for Corporates, Institutions and shares Regarding the rating models for corporate portfolios, different approaches are adopted depending on the size and sector of activity of the clients. Specific models are also used, adapted to loan operations of project finance, acquisition finance, object finance, commodity finance and real estate development finance. Below is a summary table on the types of risk models adopted in the internal assignment of credit ratings: NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - 310 - The Bank's Rating Department has a Rating Model for the following segments: Start-ups; Individual Entrepreneurs (ENIs); Small business; Medium-sized companies; Big companies; Real Estate and Real Estate Income; Holding Large Company; Financial Institution; Municipalities and Institutional; Sovereign; Project Finance; Object, Commodity and Acquisition Finance; Financial Holding. The segments for which rating models are not available are: Insurance and Pension Funds. • • Churches, political parties, and non-profit associations with a turnover of less than Euro 500 thousand. Regarding the credit portfolios of Large Companies, Financial Institutions, Institutional, Local and Regional Administrations and Specialised Loans - namely Project Finance, Object Finance, Commodity Finance and Acquisition Finance - the credit ratings are assigned by the novobanco’s Rating representation. This structure is made up of 7 multisectoral teams that comprise a team leader and several specialised technical analysts. The attribution of internal risk ratings by this team to these risk segments, classified as low default portfolios, is based on the use of “expert-based” rating models (templates) that are based on qualitative and quantitative variables, strongly correlated with the sector or sectors of activity in which the clients under analysis operate. Apart from assigning a rating to specialised loans, the methodology used by the Rating representation is also governed by a risk analysis at the level of the maximum consolidation perimeter and by the identification of the status of each company in the respective economic group. The internal credit ratings are validated daily in a Rating Committee composed of members of the Rating Department's Management and the various specialised teams. For the medium-sised companies’ segment, statistical rating models are used, which combine financial data with qualitative and behavioral information. However, the publication of credit ratings requires the execution of a previous validation process that is carried out by a technical team of risk analysts, who also consider behavioral variables. In addition to rating, these teams also monitor the customers’ loan portfolio of novobanco through the preparation of risk analysis reports, as provided for in internal regulations, in accordance with the current responsibilities / customer rating binomial, which may include specific recommendations on the credit relationship with a given customer, as well as technical advice on investment support operations, restructuring, or other operations subject to credit risk. For the business segment, statistical scoring models are also used which have, in addition to financial and qualitative information, the behavioral variables of the companies and the partner(s) in the calculation of credit ratings. There are also implemented scoring models specifically aimed at quantifying the risk of start-ups (companies established less than 2 years ago) and individual entrepreneurs (ENI). These customers together with the small companies, depending on the exposure value, are included in the regulatory retail portfolios. Finally, for companies in the real estate sector (companies dedicated to the activity of real estate promotion and investment, especially small and medium-sised companies), considering their specificities, the respective ratings are assigned by a specialised central team, based on use of specific models that combine the use of quantitative and technical variables (real estate appraisals carried out by specialised offices), as well as qualitative and behavioral variables. Regarding exposures equated to shares held by the novobanco Group, directly or indirectly through the holding of investment funds, as well as shareholders loans and supplementary capital contributions, all included in the risk class of shares for the purposes of calculating credit risk weighted assets, they are classified in the various risk segments according to the characteristics of their issuers NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - 311 - or borrowers, following the segmentation criteria presented above. These segmentation criteria determine the type of rating model to be applied to the issuers of the shares (or borrowers of the shareholders loans / supplementary capital contributions) and, therefore, to them. 44.3.4.2 Relationships between internal and external ratings The assignment of an internal rating to entities with an external rating is made through the Markets Template available in the Rating Calculation application. The Markets Template gathers the external ratings that were assigned to a specific entity by the rating agencies Standard & Poor’s (S&P), Moody’s and Fitch. Specifically, the functionality of providing external ratings from S&P - XpressFeed feeds the application of External Ratings daily, which allows the external ratings published by these agencies for a given entity to be filled in the Markets Template. The external ratings assigned by Moody’s and Fitch are not obtained automatically, having to be entered manually in the Markets Template, after consulting the respective websites (www.moodys.com and www.fitchratings.com). The internal rating results, in the majority of situations, from the S&P equivalent external rating and, in exceptional situations, from the S&P equivalent external rating plus an internal adjustment, which must always be accompanied by justifying comments prepared by the analyst. It should be noted that the S&P equivalent external rating is obtained by making a correspondence between the available external ratings and the rating scale of the referred financial rating agencies. The internal ratings produced by the Markets Template, and which have had adjustments must be mandatorily approved and validated by the Rating Committee The table below shows the correspondence between the external ratings S&P, Moody's and Fitch and the equivalent external rating S&P: NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - 312 - S&P Moody's Fitch S&P equivalent external rating Rating aggregation classes* AAA AA+ AA AA- A+ A A- BBB+ BBB BBB- BB+ BB BB- B+ B B- CCC+ CCC CCC- CC SD D Aaa Aa1 Aa2 Aa3 A1 A2 A3 Baa1 Baa2 Baa3 Ba1 Ba2 Ba3 B1 B2 B3 Caa1 Caa2 Caa3 Ca C AAA AA+ AA AA- A+ A A- BBB+ BBB BBB- BB+ BB BB- B+ B B- CCC+ CCC CCC- CC C RD/D Prime Grade High grade Upper medium grade Lower medium grade Non investment grade speculative Highly speculative AAA AA+ AA AA- A+ A A- BBB+ BBB BBB- BB+ BB BB- B+ B B- CCC+ CCC Lower than CCC Others 44.3.4.3 Internal scoring models for Individual portfolios Regarding scoring models for individual portfolios, NB has origination / concession and behavioral scoring models (applied to operations older than 6 months). These models are automatic, based on statistical models developed with internal information, considering socio-demographic information, loan characteristics, behavioral information and automatic penalties (if there are warning signs). In the case of behavioral models, information on the remaining loans of the contract holders is also considered. The Group is authorised by Bank of Portugal to use internal models in the calculation of regulatory capital requirements for the main portfolios of individuals: Mortgage Loans and Individual Loans. In addition, it has origination and behavioral scorings for the Credit Card, Overdraft and Loan Accounts products, which it uses for the purposes of designing and monitoring credit quality, however, not being IRB portfolios. 44.3.4.4 – Other specific disclosures • Specific disclosures under Decreto-Lei nº 80-A/2022"Measures aimed at mitigating the effects of increasing the reference indexes of credit agreements for the acquisition or construction of permanent own housing", although at this stage it still goes fundamentally through the operationalization of contacts with customers and monitoring of requests that, according to the Bank, are still residual taking into account the universe at this stage: In the current context of continuous increase in housing credit indexes, and in line with the legislative measures provided in Decreto-Lei nº 80-A/2022 aimed at mitigating their effects on credit agreements for the acquisition or construction of permanent housing, novobanco has developed different initiatives aimed at supporting customers who are or are expected to find themselves in a situation of financial difficulty to ensure compliance with their own responsibilities. In cases where it has up-to-date information on household income, the Bank has the possibility to determine the current stress rate and identify those cases that are at a significant stress rate level or that have significantly increased their value, providing their support with the presentation of renegotiation solutions when required by the situation of proven financial difficulty. In cases where it does not have up-to-date income information, the novobanco has an action strategy consistent with those legislative requirements, communicating at an initial moment with all eligible customers, and later and in anticipation of each NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - 313 - indexing update event, with the aim of ensuring adequate information from customers, requesting them to provide up-to- date income information and being able to offer remediation solutions in cases where the financial difficulty requires it. • Follow up of the moratoriums that is in the "discontinuation" phase in terms of monitoring by the Bank: As a result of the time elapsed since the end of the moratoriums granted in the Covid pandemic period under public and private regimes, the history of regular compliance with the claims that have re-entered the amortization phase, and due to the small claims observed, the novobanco considers it currently unnecessary to maintain a dedicated follow-up on the set of private clients and companies that during that phase had a conditioning in the form of exercising their activity and the level of income earned. • Segmentation by affected macro clusters, which the bank has been identifying throughout 2022, after the degradation of macroeconomic scenarios Due to the macroeconomic developments that have occurred throughout 2022 - and the impact from the business fabric – novobanco monitored the most affected economic sectors very closely, with particular emphasis on those energy consumers more intensively. Although the Bank continues to monitor its clients in general in various forums, 15 particularly impacted sectors (mainly related to industry and related to textile activity) have been identified, and the effect on the business risk of the offending companies in these sectors has been identified and targeted at this more specific type of monitoring. For 2023, the same type of surveillance is envisaged, but sectoral selection variables can be adjusted in line with developments in the macroeconomic environment. 44.3.5. Delinquency The table below displays the assets impaired, or overdue but not impaired: Impaired 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 individual impairment assessment. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - 314 - (in thousands of Euros)31.12.2022Neither overdue nor impairedOverdue but not impairedImpairedTotal exposureImpairment Net exposureDeposits with and loans and advances to banks 518 014 - - 518 014 ( 780) 517 234 Securities held for trading 36 428 - - 36 428 - 36 428 Bonds issued by government and other public entities 36 428 - - 36 428 - 36 428 Securities at fair value through results 13 - - 13 - 13 Bonds issued by other entities 13 - - 13 - 13 Securities at fair value through profit/loss - mandatory 13 473 - - 13 473 - 13 473 Instrumentos de dívida - emissores públicos - - - - - - Bonds issued by other entities 13 473 - - 13 473 - 13 473 Securities at fair value through other comprehensive income2 218 736 - 25 248 2 243 984 ( 660)2 243 324 Bonds issued by government and other public entities1 764 578 - - 1 764 578 ( 453)1 764 125 Bonds issued by other entities 454 158 - 25 248 479 406 ( 207) 479 199 Securities at amortised cost 7 846 101 - 410 094 8 256 195 ( 291 531)7 964 664 Bonds issued by government and other public entities4 610 412 - - 4 610 412 ( 1 722)4 608 690 Bonds issued by other entities 3 235 689 - 410 094 3 645 783 ( 289 809)3 355 974 Loans and advances to customers 24 235 312 5 625 1 376 409 25 617 346 (1 066 392)24 550 954 (in thousands of Euros)31.12.2021Neither overdue nor impairedOverdue but not impairedImpairedTotal exposureImpairment Net exposureDeposits with and loans and advances to banks 506 789 - - 506 789 ( 1 113) 505 676 Securities held for trading 114 465 - - 114 465 - 114 465 Bonds issued by government and other public entities 114 465 - - 114 465 - 114 465 Securities at fair value through profit/loss - mandatory 54 960 - - 54 960 - 54 960 Bonds issued by other entities 54 960 - - 54 960 - 54 960 Securities at fair value through other comprehensive income7 137 846 - 22 770 7 160 616 ( 3 716)7 156 900 Bonds issued by government and other public entities5 761 717 - - ( 3 043)5 758 674 Bonds issued by other entities1 376 129 - 22 770 1 398 899 ( 673)1 398 226 Securities at amortised cost 2 270 371 - 312 187 2 582 558 ( 246 997)2 335 561 Bonds issued by government and other public entities 377 335 - - 377 335 ( 543) 376 792 Bonds issued by other entities 1 893 036 - 312 187 2 205 223 ( 246 454)1 958 769 Loans and advances to customers 23 175 161 8 506 1 748 786 24 932 453 (1 247 917)23 684 536 The exposures classified as not having impairment relate to (i) all exposures that do not show signs of significant deterioration in credit risk - exposures classified in Stage 1; (ii) exposures that, showing signs of significant deterioration in credit risk, have no objective evidence of loss or specific 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): The following table shows the assets impaired or overdue but not impaired, broken down by the respective impairment Stage: Distribution of credit risk by rating level NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - 315 - (in thousands of Euros)31.12.2022Overdue but not impairedImpairedOverdue but not impaired ImpairedOverdue but not impairedImpairedOverdueUp to 3 months - - - - 3 258 15 607 3 months to 1 year - - - - 1 467 102 758 1 to 3 years - - - - 824 78 713 3 to 5 years - 6 696 - - 55 38 988 More than 5 years - 96 272 - - 21 88 915 - 102 968 - - 5 625 324 981 DueUp to 3 months - 327 619 - - - 49 933 3 months to 1 year - - - - - 176 350 1 to 3 years - - - - - 228 510 3 to 5 years - 4 755 - - - 83 834 More than 5 years - - - - - 512 801 - 332 374 - - - 1 051 428 - 435 342 - - 5 625 1 376 409 Securities Portfolio - debtinstruments Deposits with and loans and advances to banksLoans and advances to customers(in thousands of Euros)31.12.2021Overdue but not impairedImpairedOverdue but not impaired ImpairedOverdue but not impairedImpairedOverdueUp to 3 months - - - - 6 942 16 199 3 months to 1 year - 210 598 - - 1 110 18 033 1 to 3 years - 1 940 - - 387 48 558 3 to 5 years - 37 594 - - 38 71 646 More than 5 years - 84 825 - - 29 147 118 - 334 957 - - 8 506 301 554 DueUp to 3 months - - - - - 95 322 3 months to 1 year - - - - - 205 485 1 to 3 years - - - - - 250 897 3 to 5 years - - - - - 139 442 More than 5 years - - - - - 756 086 - - - - - 1 447 232 - 334 957 - - 8 506 1 748 786 Securities Portfolio - debtinstruments Deposits with and loans and advances to banksLoans and advances to customers(in thousands of Euros)31.12.202231.12.2021Stage 1Stage 2Stage 3TotalStage 1Stage 2Stage 3TotalDeposits with and loans and advances to banks - - - - - - - - Securities at fair value through other comprehensive income - - 25 248 25 248 - - 22 770 22 770 Securities at amortised cost - - 410 094 410 094 - - 312 187 312 187 Loans and advances to customers 911 4 714 1 376 409 1 382 034 4 881 3 625 1 748 786 1 757 292 911 4 714 1 811 751 1 817 376 4 881 3 625 2 083 743 2 092 249 Regarding assets that are neither past due nor impaired, the distribution by rating grade is presented below. For the debt instruments, the rating assigned by the Rating Agencies is taken into account, for the credit to clients and cash and deposits with credit institutions, the internal rating and scoring models are used, that assign a risk rating, which is periodically reviewed. For the purposes of presenting the information, the ratings have been aggregated into five major risk groups, with the last group including the unrated exposures. As of 31 December 2022 and 2021, the analysis of the gross loans and advances to customers’ exposure and impairment constituted, by segment, is presented as follows: NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - 316 - (in thousands of Euros)31.12.2022Prime +High gradeUpper Medium GradeLower Medium gradeNon Investment Grade Speculative + Highly speculativeOthersTotalDeposits with and loans and advances to banks 3 4 967 41 908 39 031 432 105 518 014 Securities held for trading - - - - 36 428 36 428 Bonds issued by government and other public entities - - - - 36 428 36 428 Securities at fair value through results - - - - 13 13 Bonds issued by other entities - - - - 13 13 Securities at fair value through profit/loss - mandatory - - - - 13 473 13 473 Bonds issued by other entities - - - - 13 473 13 473 Securities at fair value through other comprehensive income 718 692 721 320 729 815 - 48 909 2 218 736 Bonds issued by government and other public entities 704 803 687 433 372 342 - - 1 764 578 Bonds issued by other entities 13 889 33 887 357 473 - 48 909 454 158 Securities at amortised cost 2 935 513 2 037 825 1 068 575 553 872 1 250 316 7 846 101 Bonds issued by government and other public entities2 252 149 1 668 779 355 594 - 333 890 4 610 412 Bonds issued by other entities 683 364 369 046 712 981 553 872 916 426 3 235 689 Loans and advances to customers6 583 527 6 391 723 2 597 044 7 744 731 753 143 24 070 168 (in thousands of Euros)31.12.2021Prime +High gradeUpper Medium GradeLower Medium gradeNon Investment Grade Speculative + Highly speculativeOthersTotalDeposits with and loans and advances to banks 1 100 139 814 38 972 47 728 279 175 506 789 Securities held for trading - - - - 114 465 114 465 Bonds issued by government and other public entities - - - - 114 465 114 465 Securities at fair value through results - - - - - - Bonds issued by government and other public entities - - - - - - Bonds issued by other entities - - - - - - Securities at fair value through profit/loss - mandatory - - - - 54 960 54 960 Bonds issued by government and other public entities - - - - - - Bonds issued by other entities - - - - 54 960 54 960 Securities at fair value through other comprehensive income1 453 919 1 982 997 3 550 221 1 788 148 921 7 137 846 Bonds issued by government and other public entities 993 474 1 934 969 2 785 748 - 47 526 5 761 717 Bonds issued by other entities 460 445 48 028 764 473 1 788 101 395 1 376 129 Securities at amortised cost 10 631 157 161 422 751 229 072 1 450 756 2 270 371 Bonds issued by government and other public entities - - - - 377 335 377 335 Bonds issued by other entities 10 631 157 161 422 751 229 072 1 073 421 1 893 036 Loans and advances to customers3 447 441 8 905 980 2 591 239 6 953 998 1 276 503 23 175 161 As of 31 December 2022 and 2021, the analysis of the Loans and advances to customers’ portfolio, by segment and by year of reference was as follows: NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - 317 - (in thousands of Euros)31.12.2022PerfomingNon-PerfomingTotal CreditDays of delay<= 90 days> 90 daysExposureImpairmentExposureImpairmentExposureImpairmentExposureImpairmentExposureImpairmentExposureImpairmentCorporate13 053 682 274 903 33 134 3 632 13 086 816 278 535 724 413 324 410 416 443 273 565 1 140 856 597 975 14 227 672 876 510 Mortgage loans9 689 291 27 858 35 682 1 881 9 724 973 29 739 55 744 13 308 48 666 11 788 104 410 25 096 9 829 383 54 835 Consumer and other loans 1 255 883 26 866 8 138 1 587 1 264 021 28 453 53 968 43 424 77 158 63 170 131 126 106 594 1 395 147 135 047 Total 23 998 856 329 627 76 954 7 100 24 075 810 336 727 834 125 381 142 542 267 348 523 1 376 392 729 665 25 452 202 1 066 392 (in thousands of Euros)31.12.2021PerfomingNon-PerfomingTotal CreditDays of delay<= 90 days> 90 daysExposureImpairmentExposureImpairmentExposureImpairmentExposureImpairmentExposureImpairmentExposureImpairmentCorporate12 191 609 320 313 132 381 8 736 12 323 990 329 049 873 543 361 247 516 492 322 384 1 390 035 683 631 13 714 025 1 012 680 Mortgage loans9 606 873 25 093 33 754 1 337 9 640 627 26 430 123 210 20 723 48 176 8 867 171 386 29 590 9 812 013 56 020 Consumer and other loans 1 207 196 22 130 8 612 1 552 1 215 808 23 682 153 471 136 985 37 136 18 550 190 607 155 535 1 406 415 179 217 Total 23 005 678 367 536 174 747 11 625 23 180 425 379 161 1 150 224 518 955 601 804 349 801 1 752 028 868 756 24 932 453 1 247 917 Segment Segment Performing or with a delay < 30 days With a delay > 30 daysTotalTotalExposureImpairmentPerforming or with a delay < 30 days With a delay > 30 daysTotalTotalExposureImpairment(in thousands of Euros)31.12.2022Number of operationsAmountImpairment Number of operationsAmountImpairment Number of operationsAmountImpairment Number of operationsAmountImpairment 2004 and prior 3 823 201 587 18 281 58 261 987 666 8 872 739 976 12 245 12 765 802 060 1 201 498 39 918 2005 717 31 474 3 122 7 553 285 777 2 126 9 649 6 746 236 17 919 323 997 5 484 2006 890 153 885 31 646 12 611 538 293 3 735 11 937 7 053 325 25 438 699 231 35 706 2007 1 129 206 228 41 288 18 686 803 616 5 964 18 474 9 560 561 38 289 1 019 404 47 813 2008 1 031 349 863 14 284 12 704 570 092 4 103 17 723 7 470 263 31 458 927 425 18 650 2009 761 133 985 13 975 8 133 390 247 2 582 10 428 16 487 8 835 19 322 540 719 25 392 2010 818 119 542 15 204 7 666 408 947 3 112 16 191 20 681 603 24 675 549 170 18 919 2011 867 98 217 14 951 3 974 177 536 955 18 495 13 517 279 23 336 289 270 16 185 2012 1 057 161 198 30 331 2 118 76 338 803 23 971 12 122 418 27 146 249 658 31 552 2013 1 422 324 476 57 217 2 547 116 007 1 342 22 980 11 558 580 26 949 452 041 59 139 2014 1 426 208 148 52 871 1 608 83 848 658 20 653 17 850 768 23 687 309 846 54 297 2015 2 048 503 622 74 436 2 483 145 657 739 23 505 55 135 38 538 28 036 704 414 113 713 2016 2 778 464 764 53 392 5 133 331 037 1 477 37 488 61 110 19 313 45 399 856 911 74 182 2017 4 922 661 124 46 925 7 897 595 054 3 115 41 169 66 104 6 137 53 988 1 322 282 56 177 2018 6 237 1 035 429 82 184 9 037 790 378 3 541 50 261 100 228 5 409 65 535 1 926 035 91 134 2019 8 594 1 811 417 149 236 9 290 869 666 3 412 56 631 167 640 10 116 74 515 2 848 723 162 764 2020 10 301 1 910 110 58 482 6 879 668 607 3 006 38 094 146 449 6 205 55 274 2 725 166 67 693 2021 7 477 2 152 348 38 054 7 574 826 242 3 821 55 181 247 761 8 744 70 232 3 226 351 50 619 2022 15 028 3 700 255 80 631 9 119 1 164 375 1 472 79 102 415 431 14 952 103 249 5 280 061 97 055 Total 71 326 14 227 672 876 510 193 273 9 829 383 54 835 1 291 908 1 395 147 135 047 1 556 507 25 452 202 1 066 392 Year 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 novobanco. 44.3.6 - Collaterals In order to mitigate credit risk, credit operations have associated guarantees, namely mortgages or pledges. The fair value of these guarantees is determined at the date of granting the credit and is periodically reassessed. Below is the gross value of the credits and the respective fair value of the collateral, limited to the value of the associated credit: NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - 318 - (in thousands of Euros)31.12.2021Number of operationsAmountImpairment Number of operationsAmountImpairment Number of operationsAmountImpairment Number of operationsAmountImpairment 2004 and prior 4 099 219 797 4 585 64 530 1 322 039 10 531 717 590 54 041 11 689 786 219 1 595 877 26 805 2005 759 47 005 2 883 8 057 320 861 2 726 10 142 6 837 266 18 958 374 703 5 875 2006 975 171 971 29 831 13 477 600 300 4 098 12 829 7 999 849 27 281 780 270 34 778 2007 1 336 284 776 50 359 20 113 891 891 6 739 23 922 11 051 705 45 371 1 187 718 57 803 2008 1 140 473 578 24 647 13 553 633 292 4 542 19 181 9 037 349 33 874 1 115 907 29 538 2009 851 200 431 24 417 8 745 438 134 2 452 11 337 17 744 8 663 20 933 656 309 35 532 2010 1 003 170 833 19 125 8 215 455 499 3 204 17 657 24 310 794 26 875 650 642 23 123 2011 994 184 975 48 473 4 307 199 745 1 221 19 395 18 364 493 24 696 403 084 50 187 2012 1 280 242 759 41 290 2 368 85 133 834 25 833 15 821 1 094 29 481 343 713 43 218 2013 1 659 415 767 77 995 2 754 130 239 1 518 23 129 25 084 1 769 27 542 571 090 81 282 2014 1 760 314 087 110 955 1 760 94 755 737 21 449 21 714 615 24 969 430 556 112 307 2015 2 570 626 789 122 220 2 713 164 306 810 26 890 118 868 91 085 32 173 909 963 214 115 2016 3 692 648 093 51 245 5 573 373 517 1 958 42 807 77 401 21 746 52 072 1 099 011 74 949 2017 6 282 879 951 63 746 8 633 675 178 3 757 48 286 94 954 6 888 63 201 1 650 083 74 391 2018 7 851 1 506 020 89 004 9 888 899 601 3 656 57 520 144 321 6 393 75 259 2 549 942 99 053 2019 9 349 2 429 806 153 837 10 070 969 282 3 519 63 893 232 921 10 950 83 312 3 632 009 168 306 2020 11 324 2 486 691 60 824 7 358 723 917 2 125 41 957 198 295 6 576 60 639 3 408 903 69 525 2021 12 984 2 410 696 37 244 7 450 834 324 1 593 60 640 327 653 8 293 81 074 3 572 673 47 130 Total 69 908 13 714 025 1 012 680 199 564 9 812 013 56 020 1 244 457 1 406 415 179 217 1 513 929 24 932 453 1 247 917 Year of productionCorporateMortgage loans Consumer and other loansTotal The difference between the value of the credit and the fair value of the collateral represents the total credit exposure that exceeds the value of the collateral, this value not being impacted by collaterals with a fair value higher than the credit to which they are associated. The details of the collateral – mortgages are presented as follows: NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - 319 - (in thousands of Euros)31.12.202231.12.2021Amount of loansImpairmentNet ValueFair value of collateralAmount of loansImpairmentNet ValueFair value of collateralIndividuals - MortgageStage 1Mortgages8 636 253 ( 3 391)8 632 862 8 636 253 8 601 421 ( 4 407)8 597 014 8 593 058 Pledges 221 446 ( 74) 221 372 213 902 161 267 ( 73) 161 194 154 908 Not collateralized 81 906 ( 130) 81 776 - 69 690 ( 354) 69 336 - Stage 2Mortgages 752 170 ( 18 919) 733 251 750 649 794 589 ( 16 763) 777 826 793 436 Pledges 22 138 ( 722) 21 416 20 561 7 542 ( 193) 7 349 7 395 Not collateralized 6 772 ( 1 317) 5 455 - 1 876 ( 194) 1 682 - Stage 3Mortgages 105 800 ( 28 744) 77 056 105 296 172 798 ( 31 919) 140 879 171 707 Pledges 33 ( 12) 21 33 211 ( 41) 170 211 Not collateralized 2 865 ( 1 526) 1 339 - 2 619 ( 2 076) 543 - TotalMortgages9 494 223 ( 51 054)9 443 169 9 492 198 9 568 808 ( 53 089)9 515 719 9 558 201 Pledges 243 617 ( 808) 242 809 234 496 169 020 ( 307) 168 713 162 514 Not collateralized 91 543 ( 2 973) 88 570 - 74 185 ( 2 624) 71 561 - 9 829 383 ( 54 835)9 774 548 9 726 694 9 812 013 ( 56 020)9 755 993 9 720 715 Individuals - OtherStage 1Mortgages 248 227 ( 345) 247 882 247 789 207 169 ( 419) 206 750 206 579 Pledges 134 587 ( 1 171) 133 416 131 725 131 879 ( 850) 131 029 126 403 Not collateralized 708 105 ( 13 396) 694 709 - 699 719 ( 9 261) 690 458 - Stage 2Mortgages 44 899 ( 1 118) 43 781 44 543 34 905 ( 923) 33 982 34 733 Pledges 5 145 ( 243) 4 902 4 930 4 423 ( 291) 4 132 4 219 Not collateralized 127 346 ( 17 087) 110 259 - 141 955 ( 16 819) 125 136 - Stage 3Mortgages 6 529 ( 2 521) 4 008 5 975 7 958 ( 3 465) 4 493 6 064 Pledges 67 318 ( 62 162) 5 156 13 711 127 018 ( 119 183) 7 835 14 147 Not collateralized 52 991 ( 37 004) 15 987 - 51 389 ( 28 006) 23 383 - TotalMortgages 299 655 ( 3 984) 295 671 298 307 250 032 ( 4 807) 245 225 247 376 Pledges 207 050 ( 63 576) 143 474 150 366 263 320 ( 120 324) 142 996 144 769 Not collateralized 888 442 ( 67 487) 820 955 - 893 063 ( 54 086) 838 977 - 1 395 147 ( 135 047)1 260 100 448 673 1 406 415 ( 179 217)1 227 198 392 145 CorporateStage 1Mortgages2 075 009 ( 12 988)2 062 021 1 857 873 1 842 664 ( 13 700)1 828 964 1 685 996 Pledges1 704 798 ( 5 945)1 698 853 713 852 1 379 204 ( 4 538)1 374 666 426 190 Not collateralized6 407 256 ( 24 571)6 382 685 - 5 658 762 ( 30 420)5 628 342 - Stage 2Mortgages 901 315 ( 89 074) 812 241 811 303 1 169 145 ( 105 669)1 063 476 1 067 665 Pledges 585 543 ( 93 760) 491 783 305 654 484 955 ( 73 845) 411 110 246 018 Not collateralized1 412 877 ( 78 532)1 334 345 - 1 792 501 ( 107 515)1 684 986 - Stage 3Mortgages 467 644 ( 225 737) 241 907 372 476 513 803 ( 235 595) 278 208 404 614 Pledges 192 799 ( 84 122) 108 677 99 366 194 729 ( 89 232) 105 497 88 989 Not collateralized 480 431 ( 261 781) 218 650 - 678 262 ( 352 166) 326 096 - TotalMortgages3 443 968 ( 327 799)3 116 169 3 041 652 3 525 612 ( 354 964)3 170 648 3 158 275 Pledges2 483 140 ( 183 827)2 299 313 1 118 872 2 058 888 ( 167 615)1 891 273 761 197 Not collateralized8 300 564 ( 364 884)7 935 680 - 8 129 525 ( 490 101)7 639 424 - 14 227 672 ( 876 510)13 351 162 4 160 524 13 714 025 (1 012 680)12 701 345 3 919 472 Total 25 452 202 ( 1 066 392) 24 385 810 14 335 891 24 932 453 ( 1 247 917) 23 684 536 14 032 332 (in thousands of Euros)31.12.2022NumberAmountNumberAmountNumberAmountNumberAmount<0.5M€ 187 451 9 170 509 6 846 281 122 19 163 466 692 213 460 9 918 323 >= 0.5M€ e <1.0M€ 367 228 517 13 8 659 2 393 241 638 2 773 478 814 >= 1.0M€ e <5.0M€ 65 93 172 4 8 526 9 833 722 959 9 902 824 657 >= 5.0M€ e <10.0M€- - - - 1 904 539 832 1 904 539 832 >= 10.0M€ e <20.0M€- - - - 134 399 451 134 399 451 >= 20.0M€ e <50.0M€- - - - 5 717 401 813 5 717 401 813 >=50M€- - - - 1 567 269 267 1 567 269 267 187 883 9 492 198 6 863 298 307 40 711 3 041 652 235 457 12 832 157 a) The allocation by intervals was based on the total amount of collateral per credit agreementTotalCollateral intervals a)Individuals - Mortgage loansIndividuals - Other loansCorporate loans The values of mortgages collateral, shown above, represents the maximum coverage value of the covered assets, i.e., which concur to the gross value of the individual covered credits. In assessing the risk of an operation or set of operations, the elements of credit risk mitigation associated with them are considered, in accordance with internal rules and procedures. The relevant collaterals are essentially the following: • Real estate, where the value considered is the correspondent to the last available valuation. • Financial pledges, where the value considered corresponds to the quotation on the last day of the month, in the case of being a listed security, or the value of the pledge, in the case of being cash. The acceptance of collateral as a guarantee for credit operations refers to the need to define and implement risk mitigation techniques to which these collaterals are exposed. Thus, and as an approach to this matter, the Group stipulated a set of procedures applicable to collateral (namely financial and real estate), which cover, among others, the volatility of the collateral value, its liquidity, and an indication as to the recovery rates associated with each type of collateral. The internal rules on credit powers thus have a specific chapter on this point, "Acceptance of collateral - techniques for mitigating the risks to which collateral is exposed, namely liquidity and volatility risks". The revaluation process for real estate is performed by independent valuation experts registered in CMVM, following the methodologies as described in Note 8.6. 44.3.7 - Concentration of credit risk The analysis of risk exposure by sector of activity, on 31 December 2022 and 2021, is presented as follows: NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - 320 - (in thousands of Euros)31.12.2021NumberAmountNumberAmountNumberAmountNumberAmount<0.5M€ 194 158 9 332 748 5 823 234 146 11 125 490 422 211 106 10 057 316 >= 0.5M€ and <1.0M€ 264 161 929 14 6 039 1 965 256 215 2 243 424 183 >= 1.0M€ and <5.0M€ 47 63 524 3 7 191 18 534 799 951 18 584 870 665 >= 5.0M€ and <10.0M€- - - - 13 225 460 762 13 225 460 762 >= 10.0M€ and <20.0M€- - - - 2 241 530 515 2 241 530 515 >= 20.0M€ and <50.0M€- - - - 155 451 567 155 451 567 >=50M€- - - - 1 565 168 843 1 565 170 322 194 469 9 558 201 5 840 247 376 48 810 3 158 275 249 119 12 965 330 a) The allocation by intervals was based on the total amount of collateral per credit agreementIndividuals - Mortgage loansIndividuals - Other loansCorporate loansTotalCollateral intervals a)(in thousands of Euros)31.12.2022Guarantees and endorsements providedGross amountImpairmentGross amountImpairment Gross amountImpairment Gross amountImpairment Agriculture, Forestry and Fishery 336 749 ( 6 673)- - - - - 8 616 - 5 788 ( 15) 11 893 ( 5 902)Mining 65 487 ( 5 033)- - - - - 14 277 ( 7) 18 445 ( 8) 8 983 ( 361)Food, Beverages and Tobacco 455 764 ( 11 179)- 4 302 - - - 19 152 ( 9) 113 036 ( 188) 35 923 ( 260)Textiles and Clothing 407 303 ( 21 411)- 298 - - - - - 9 690 ( 9) 7 026 ( 958)Leather and Shoes 71 976 ( 1 253)- - - - - - - 5 522 ( 1) 1 518 ( 117)Wood and Cork 136 226 ( 2 493)- 609 - - - - - 53 959 ( 114) 7 563 ( 255)Paper and Printing Industry 95 930 ( 5 905)- 629 - - - - - 28 906 ( 139) 5 780 ( 22)Refining of Petroleum 16 314 ( 114)- 1 - - - 13 718 ( 2) 61 925 ( 16) 2 264 - Chemicals and Rubber 289 130 ( 7 071)- 357 - - - - - 221 901 ( 186) 15 775 ( 135)Non-metallic Minerals 187 993 ( 2 763)- 4 - - - 14 839 ( 5) 96 002 ( 105) 35 523 ( 174)Metallurgical Industries and Metallic Products 390 928 ( 16 069)- 145 - - - 433 - 48 658 ( 75) 34 232 ( 390)Production of Machinery, Equipment and Electrical Devices 229 425 ( 10 750)- 42 - - - 41 511 ( 25) 193 710 ( 64) 21 848 ( 3 559)Production of Transport Material 176 541 ( 4 941)- - - - - - - 59 963 ( 65) 12 856 ( 290)Other Transforming Industries 146 243 ( 4 877)- - - - - - - 39 244 ( 22) 18 174 ( 2 452)Electricity, Gas and Water 238 741 ( 3 466)- 4 916 - - - 6 435 - 173 789 ( 2 675) 34 245 ( 94)Construction and Public Works 1 408 447 ( 133 850)- 16 597 - - - 14 533 ( 6) 229 922 ( 117 563) 841 796 ( 45 720)Wholesale and Retail Trade 1 491 507 ( 48 880)- 7 371 - - - 17 373 ( 10) 89 653 ( 58) 181 761 ( 3 301)Tourism 1 186 040 ( 84 091)- - - - - 124 - - - 48 625 ( 1 056)Transport and Communication 916 930 ( 28 617)- 7 345 - - - 46 531 ( 20) 228 236 ( 304) 398 424 ( 1 773)Financial Activities 702 846 ( 65 729)- 91 076 - 311 177 562 845 210 520 ( 92) 1 196 010 ( 446) 150 889 ( 128)Real Estate Activities 1 750 110 ( 162 449)- 1 428 - - - 29 699 ( 11) 151 982 ( 73 610) 90 391 ( 3 537)Services Provided to Companies 2 272 827 ( 148 975)- 98 13 129 - 89 798 ( 11) 694 125 ( 93 479) 354 904 ( 10 737)Public Administration and Services 421 680 ( 25 288) 36 428 - - - - 1 764 802 ( 453) 4 610 412 ( 1 722) 21 623 ( 110)Other activities of collective services 429 360 ( 42 418)- 145 - 2 378 - 24 849 ( 9) 93 600 ( 663) 38 047 ( 958)Mortgage Loans 9 829 383 ( 54 835)- - - - - - - - - - - Consumers Loans 1 395 147 ( 135 047)- - - - - - - - - - - Others 403 175 ( 32 215)- 19 - - - 13 889 - 50 262 ( 4) 17 804 ( 258)TOTAL 25 452 202 ( 1 066 392) 36 428 135 382 13 313 684 562 845 2 331 099 ( 660) 8 474 740 ( 291 531) 2 397 867 ( 82 547)Loans and advances tocustomersFinancial assets at fair value through other comprehensive incomeFinancial assets at amortised costFinancial 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 Exposure to sovereign debt of “peripheral” Eurozone countries On 31 December 2022 and 2021, 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 are as follows: NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - 321 - (in thousands of Euros)31.12.2021Guarantees and endorsements providedGross amountImpairmentGross amountImpairment Gross amountImpairment Gross amountImpairment Agriculture, Forestry and Fishery 329 579 ( 8 977)- 397 - - - 29 007 ( 14) 20 249 ( 45) 11 196 ( 6 318)Mining 40 882 ( 333)- - - - - 14 189 ( 13) 19 391 ( 4) 5 972 ( 205)Food, Beverages and Tobacco 511 938 ( 14 257)- 7 233 - - - - - 76 401 ( 196) 49 435 ( 319)Textiles and Clothing 372 933 ( 13 920)- 290 - - - - - 4 298 ( 2) 7 450 ( 741)Leather and Shoes 79 044 ( 728)- 5 - - - - - 1 501 ( 6) 1 363 ( 122)Wood and Cork 108 868 ( 2 996)- 500 - - - - - 2 199 ( 12) 7 322 ( 259)Paper and Printing Industry 149 815 ( 10 180)- 96 - - - - - 1 497 ( 4) 2 150 ( 18)Refining of Petroleum 11 459 ( 20)- - - - - - - 40 793 ( 22) 4 022 ( 1)Chemicals and Rubber 338 994 ( 5 157)- 271 - - - 19 410 ( 13) 133 694 ( 123) 18 453 ( 80)Non-metallic Minerals 168 159 ( 3 342)- - - - - - - 33 754 ( 153) 15 177 ( 305)Metallurgical Industries and Metallic Products 391 734 ( 11 974)- 370 - - - 16 235 ( 11) 1 299 ( 62) 31 575 ( 456)Production of Machinery, Equipment and Electrical Devices 170 744 ( 9 219)- 159 - - - 66 078 ( 49) 48 010 ( 24) 20 503 ( 2 248)Production of Transport Material 119 030 ( 3 514)- 43 - - - - - 15 046 ( 8) 10 669 ( 527)Other Transforming Industries 141 936 ( 10 598)- - - - - - - 4 983 ( 20) 19 208 ( 2 821)Electricity, Gas and Water 296 885 ( 3 323)- 17 062 - - - 53 579 ( 41) 113 203 ( 3 988) 33 504 ( 687)Construction and Public Works 1 295 265 ( 135 843)- 75 005 - - - - - 196 417 ( 94 332) 672 470 ( 37 764)Wholesale and Retail Trade 1 405 455 ( 48 479)- 765 - - - 40 669 ( 29) 50 398 ( 90) 202 603 ( 3 481)Tourism 1 055 211 ( 97 092)- 191 - - - 118 - - - 51 900 ( 1 076)Transport and Communication 864 952 ( 51 401)- 49 111 - - - 96 999 ( 61) 43 865 ( 191) 351 109 ( 2 039)Financial Activities 469 127 ( 44 808)- 101 410 - 794 368 19 639 913 525 ( 317) 479 556 ( 1 424) 150 817 ( 3 380)Real Estate Activities 1 666 331 ( 144 565)- 6 281 - 2 751 - 908 - 178 280 ( 33 430) 107 615 ( 5 246)Services Provided to Companies 2 438 656 ( 225 158)- 3 250 - 95 - 85 155 ( 45) 655 753 ( 111 600) 386 548 ( 10 115)Public Administration and Services 582 357 ( 22 872) 114 465 - - - - 5 761 969 ( 3 043) 377 335 ( 543) 20 611 ( 110)Other activities of collective services 592 331 ( 75 562)- 758 - 2 378 - 123 155 ( 80) 84 636 ( 718) 36 256 ( 955)Mortgage Loans 9 812 013 ( 56 020)- - - - - - - - - - - Consumers Loans 1 406 415 ( 179 217)- - - - - - - - - - - Others 112 340 ( 68 362)- 2 - - - - - - - 16 315 ( 326)TOTAL 24 932 453 ( 1 247 917) 114 465 263 199 - 799 592 19 639 7 220 996 ( 3 716) 2 582 558 ( 246 997) 2 234 243 ( 79 599)Derivatives - hedge accounting Financial 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 -mandatoryLoans and advances tocustomersFinancial assets at fair value through other comprehensive incomeFinancial assets at amortised cost(in thousands of Euros)31.12.2022Portugal 326 159 31 517 - 336 557 626 448 1 320 681 Spain- - - 627 273 1 520 591 2 147 864 Ireland- - - - 230 216 230 216 Italy - - - 24 878 62 606 87 484 326 159 31 517 - 988 708 2 439 861 3 786 245 (1) Net values: receivable / (payable)TotalLoans andadvances tocustomersSecurities held for trading Derivative instruments (1)Securities at fair value through other comprehensive incomeSecurities at amortised cost (in thousands of Euros)31.12.2021Portugal 557 419 114 465 - 2 564 587 376 792 3 613 263 Spain- - - 1 619 260 - 1 619 260 Ireland- - - 171 608 - 171 608 Italy - - - 148 601 - 148 601 557 419 114 465 - 4 504 056 376 792 5 552 732 (1) Net values: receivable / (payable)Loans andadvances tocustomersSecurities held for trading Derivative instruments (1)Securities at fair value through other comprehensive incomeSecurities at amortised cost Total 44.3.8 - Forborne modified loans The Group proceeds to the identification and register of restructured credit contracts due to the client's financial difficulties whenever there are changes to the terms and conditions of a contract in which the client has defaulted, that is, it is foreseeable that it will default, with a financial obligation. It is considered that there is a change to the terms and conditions of the contract when (i) there are contractual changes to the benefit of the customer, such as extending the term, introducing grace periods, reducing the rate or partial debt forgiveness; (ii) there is a contracting of a new credit operation to settle the existing debt (total or partial); or (iii) the new terms of the contract are more favorable than those applied to other customers with the same risk profile. The cancellation of a restructured credit due to the client's financial difficulties can only occur after a minimum period of two years from the date of the restructuring, provided that the following conditions are cumulatively fulfilled: (i) regular payment of capital and NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - 322 - (in thousands of Euros)31.12.2022Nominal AmountMarket quotationAccrued interestCarrying book valueImpairmentFair value reservesSecurities at fair value through other comprehensive incomePortugal 350 140 336 307 250 336 557 - ( 13 261)Maturity exceeding 1 year 350 140 336 307 250 336 557 - ( 13 261)Spain 638 000 627 117 156 627 273 - ( 1 759)Maturity exceeding 1 year 638 000 627 117 156 627 273 - ( 1 759)Italy 25 000 24 878 - 24 878 - ( 3)Maturity exceeding 1 year 25 000 24 878 - 24 878 - ( 3)1 013 140 988 302 406 988 708 - ( 15 023)Securities at amortised costPortugal 35 000 31 315 202 31 517 - - 35 000 31 315 202 31 517 - - Securities held for tradingPortugal 627 855 621 138 3 212 626 448 405 - Maturity exceeding 1 year 627 855 621 138 3 212 626 448 405 - Espanha 1 663 250 1 396 284 3 118 1 520 591 482 - Maturity exceeding 1 year 1 663 250 1 396 284 3 118 1 520 591 482 - Ireland 241 000 200 775 638 230 216 82 - Maturity exceeding 1 year 241 000 200 775 638 230 216 82 - Italy 67 000 54 203 116 62 606 25 - Maturity exceeding 1 year 67 000 54 203 116 62 606 25 - 2 599 105 2 272 400 7 084 2 439 861 994 - (in thousands of Euros)31.12.2021Nominal AmountMarket quotationAccrued interestCarrying book valueImpairmentFair value reservesSecurities at fair value through other comprehensive incomePortugal 2 298 790 2 538 669 25 918 2 564 587 - 86 185 Maturity up to 1 year 412 050 419 341 1 582 420 923 - 2 994 Maturity exceeding 1 year 1 886 740 2 119 328 24 336 2 143 664 - 83 191 Spain 1 529 200 1 594 096 25 164 1 619 260 - 46 283 Maturity up to 1 year 755 000 758 261 17 334 775 595 - 1 729 Maturity exceeding 1 year 774 200 835 835 7 830 843 665 - 44 554 Ireland 153 600 170 350 1 258 171 608 - 13 457 Maturity exceeding 1 year 153 600 170 350 1 258 171 608 - 13 457 Italy 148 561 148 286 315 148 601 - 215 Maturity exceeding 1 year 148 561 148 286 315 148 601 - 215 4 130 151 4 451 401 52 655 4 504 056 - 146 140 Securities at amortised costPortugal 106 500 114 017 448 114 465 - - 106 500 114 017 448 114 465 - - Securities held for tradingPortugal 375 646 425 189 1 689 376 792 543 - Maturity exceeding 1 year 375 646 425 189 1 689 376 792 543 - 375 646 425 189 1 689 376 792 543 - interest; (ii) the customer has no capital or interest due; and (iii) there were no debt restructuring mechanisms by the client in that period. The amounts of the restructured loans due to financial difficulties of the customer as of 31 December 2022 and 2021, are as follows: The details of the restructuring measures applied to loans restructured up to 31 December 2022 and 2021 are the following: The movement of restructured loans throughout the 2022 and 2021’s exercises was as follows: NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - 323 - (in thousands of Euros)31.12.202231.12.2021Corporate1 179 166 1 274 056 Mortgage loans 184 859 149 363 Consumer and other loans 82 298 138 369 Total 1 446 323 1 561 788 (in thousands of Euros)31.12.2022No. TransactionExposureImpairmentNo. TransactionExposureImpairmentNo. TransactionExposureImpairmentPrincipal or interest forgiveness 41 13 990 901 64 100 870 57 886 105 114 860 58 787 Assets received in partial settlement of loan 23 1 068 164 8 146 129 31 1 214 293 Capitalization of interest 16 4 965 923 87 52 218 29 659 103 57 183 30 582 New loan in total or partial payment of existing loan 1 056 192 245 14 193 528 179 421 80 151 1 584 371 666 94 344 Extension of repayment exercise 1 374 262 543 50 340 635 236 658 150 998 2 009 499 201 201 338 Introduction of grace exercise of principal or interest 818 115 453 6 867 172 71 851 27 533 990 187 304 34 400 Decrease in the interest rates 482 40 604 461 40 76 768 29 642 522 117 372 30 103 Changes of the lease payment plan 120 16 763 1 639 62 12 183 6 139 182 28 946 7 778 Changes in the interest payment 6 2 014 207 3 674 198 9 2 688 405 Other 1 513 52 391 1 323 431 13 498 5 343 1 944 65 889 6 666 Total 5 449 702 036 77 018 2 030 744 287 387 678 7 479 1 446 323 464 696 (in thousands of Euros)31.12.2021No. TransactionExposureImpairmentNo. TransactionExposureImpairmentNo. TransactionExposureImpairmentPrincipal or interest forgiveness 37 14 027 1 886 101 169 163 102 454 138 183 190 104 340 Assets received in partial settlement of loan 16 1 043 145 19 420 195 35 1 463 340 Capitalization of interest 36 6 796 359 100 79 248 46 515 136 86 044 46 874 New loan in total or partial payment of existing loan 1 334 171 823 12 731 444 123 983 57 630 1 778 295 806 70 361 Extension of repayment exercise 2 111 389 486 60 177 868 428 489 261 517 2 979 817 975 321 694 Introduction of grace exercise of principal or interest 344 28 207 787 85 55 586 25 331 429 83 793 26 118 Decrease in the interest rates 83 10 598 460 24 19 823 6 050 107 30 421 6 510 Changes of the lease payment plan 115 7 103 394 45 8 719 2 891 160 15 822 3 285 Changes in the interest payment 4 2 020 228 2 1 997 1 694 6 4 017 1 922 Other 1 218 35 408 1 014 286 7 849 3 986 1 504 43 257 5 000 Total 5 298 666 511 78 181 1 974 895 277 508 263 7 272 1 561 788 586 444 SolutionSolutionPerformingNon PerformingTotalPerformingNon PerformingTotal(in thousands of Euros)31.12.202231.12.2021Opening balance1 561 788 2 084 128 Restructured loans in the exercise 374 775 272 250 Loans reclassified to "normal"( 38 668)( 186 700)Loans written off( 127 276)( 179 239)Others( 324 296)( 428 651)Total 1 446 323 1 561 788 44.4 - 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 potential losses under adverse market conditions, for which the Value at Risk (VaR) methodology is used. novobanco 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. novobanco Group has a VaR of Euro 898 thousand (31 December 2021: Euro 30,356 thousand) in respect of its trading positions. Following the recommendations of Basel II (Pillar 2) and Instruction No. 19/2005 of Banco de Portugal, the novobanco Group calculates its exposure to balance sheet interest rate risk based on the Bank of International Settlements (BIS) methodology classifying all asset, liability and off-balance sheet captions, which do not belong to the trading book, by repricing tiers. Analyses of the bank portfolio are carried out due to interest rate risk sensitivity based on an approximation to the duration model, and several scenarios of shifting the yield curve are carried out at all interest rate levels. 44.4.1 - Interest Rate Risk In accordance with the recommendations of European Banking Authority presented in the document EBA/GL/2018/02, novobanco 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. Sensitivity analyzes are carried out for the interest rate risk of the banking portfolio based on the current difference in the interest rate mismatch discounted at current rates and the discounted value of the same cash flows, through scenarios of displacement of the parallel yield curves (displacements of +/- 200 bp) and non-parallel (short rate shock up/down, steepened/flattener shocks), according to the outliers’ tests defined by the EBA. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - 324 - (in thousands of Euros)31.12.202231.12.2021DecemberAnnual averageMaximumMinimumDecemberAnnual averageMaximumMinimumExchange risk 340 1 375 4 379 340 2 494 1 983 3 451 826 Interest rate risk 586 7 445 47 720 586 31 454 24 522 41 240 10 628 Shares and commodities 0 0 3 - 3 33 225 0 Volatility 1 348 2 117 1 0 66 422 0 Credit spread 415 934 2 386 229 719 1 329 4 146 579 Diversification effect ( 444)( 1 941)( 7 819)( 259)( 4 314)( 3 014)( 7 004) 1 388 Total 898 8 162 48 787 898 30 356 24 919 42 480 13 421 (in thousands of Euros)31.12.2022Eligible amountsUp to 3 months3 to 6 months6 months to 1 year1 to 5 yearsMore than 5 yearsLoans to and deposits with banks6 604 336 6 599 797 0 4 502 18 20 Loans and advances to customers24 913 126 14 553 860 4 715 044 2 975 173 1 767 460 901 589 Securities10 927 447 709 787 787 353 2 152 441 3 021 337 4 256 529 Other assets 134 045 134 045 - - - - Total42 578 954 21 997 489 5 502 398 5 132 116 4 788 815 5 158 137 Deposits from banks9 695 523 9 279 092 36 913 89 518 - 290 000 Due to customers29 460 793 18 739 506 2 743 146 3 828 237 3 286 384 863 520 Debt securities issued2 681 999 301 876 6 000 299 964 99 788 1 974 371 Other liabilities 791 294 740 803 6 974 9 957 27 402 6 158 Total42 629 610 29 061 277 2 793 033 4 227 676 3 413 575 3 134 049 Balance sheet GAP (Assets - Liabilities)( 50 656)(7 063 788)2 709 364 904 440 1 375 240 2 024 088 Off-Balance sheet 1 045 (1 295 901)1 306 840 ( 590 245) 807 031 ( 226 679)Structural GAP( 49 611)(8 359 689)4 016 204 314 194 2 182 271 1 797 409 Accumulated GAP - (8 359 689)(4 343 486)(4 029 291)(1 847 020)( 49 611) 44.4.2 – Average rates of financial assets and liabilities The following table presents the average interest rates for the Group’s major financial asset and liability categories, on 31 December 2022 and 2021, as well as the respective average balances and interest for the exercise: 44.4.3 - Foreign Exchange Risk Regarding foreign exchange risk, the breakdown of assets and liabilities, by currency, at 31 December 2022 and 2021, is analyzed as follows: NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - 325 - (in thousands of Euros)31.12.2022Parallel increase of 200 pbParallel decrease of 200 pbShort Rate Shock UpShort Rate Shock DownSteepener shockFlattener shockAs at 31 December( 361 341) 195 808 ( 241 571) 131 255 39 850 ( 144 912)Exercise average( 25 294)( 96 866)( 106 585) 70 159 72 455 ( 138 995)Exercise maximum 70 179 195 808 ( 68 229) 131 255 105 417 ( 78 024)Exercise minimum( 361 341)( 263 636)( 241 571) 43 154 30 496 ( 170 498)(in thousands of Euros)31.12.2021Parallel increase of 200 pbParallel decrease of 200 pbShort Rate Shock UpShort Rate Shock DownSteepener shockFlattener shockAs at 31 December 95 122 ( 11 629)( 65 505) 64 401 100 431 ( 159 934)Exercise average 24 364 22 301 ( 68 842) 66 386 62 974 ( 99 945)Exercise maximum 95 122 37 393 ( 65 229) 73 334 100 431 ( 65 726)Exercise minimum( 6 001)( 11 629)( 73 380) 62 405 44 158 ( 159 934)(in thousands of Euros)31.12.202231.12.2021Average balance of the exerciseInterest of the exerciseAverage interest rateAverage balance of the exerciseInterest of the exerciseAverage interest rateMonetary assets 6 308 062 12 654 0,20% 4 601 590 2 148 0,05%Loans and advances to customers 25 424 392 590 751 2,29% 24 994 703 506 745 2,00%Securities and other 10 181 113 153 284 1,48% 10 241 464 132 769 1,28%Financial assets and differentials 41 913 567 756 689 1,78% 39 837 757 641 662 1,59%Monetary Liabilities 10 455 407 ( 19 542)-0,18% 10 496 796 ( 68 036)-0,64%Due to customers 28 321 910 48 466 0,17% 26 580 488 51 328 0,19%Resources titled and other 1 452 268 92 698 0 1 070 387 70 900 0 Differential liabilities 1 683 982 9 592 0,00% 1 690 086 14 076 0,00%Financial liabilities and differentials 41 913 567 131 214 0,31% 39 837 757 68 268 0,17%Net interest income 625 475 1,47% 573 394 1,42% 44.5 - Liquidity Risk Liquidity risk is the current or future risk that arises from an institution's inability to meet its liabilities as they mature, without incurring substantial losses. Liquidity risk can be divided into two types: • Liquidity of assets (market liquidity risk) - consists in the impossibility of selling a certain type of asset due to the lack of liquidity in the market, which translates into the widening of the bid / offer spread or the application of a haircut to the market value. • Financing (funding liquidity risk) - consists of the impossibility of financing the assets in the market and / or refinancing the debt that is maturing, in the terms and in the desired currency. This impossibility can be reflected through a strong increase in the cost of financing or the requirement for collateral to obtain funds. The difficulty of (re) financing can lead to the sale of assets, even if incurring significant losses. The risk of (re) financing must be minimised through an adequate diversification of funding sources and maturity terms. Banks are subject to liquidity risk due to their maturity transformation business (long-term lenders and short-term depositors), so prudent liquidity risk management is therefore crucial. As of 31 December 2022, the value of the asset portfolio eligible as collateral for rediscounting operations with the ECB, after haircuts, amounted to Euro 16.9 billion (31 December 2021: Euro 16.5 billion). This amount includes all the exposure to Portuguese sovereign debt, in the total amount of approximately Euro 0.9 billion (31 December 2021: Euro 2.5 billion). During 2022, gross financing from the ECB decreased by Euro 1,6 million to a total of Euro 6.3 billion (2021: increase in the amount of Euro 974 million for a total of Euro 8.0 billion). The liquidity of novobanco Group is managed in a centralised manner, in the Headquarters, 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. At 31 December 2022 and 2021, the calculation of the liquid contractual deficit and the counterbalancing capacity was performed following the ITS (Implementing Technical Standards) rules: NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - 326 - (in thousands of Euros)31.12.202231.12.2021SpotForwardOther elementsNet exposureSpotForwardOther elementsNet exposureUSDUNITED STATES DOLLAR( 635 256) 634 533 91 ( 632)( 176 696) 169 546 ( 15)( 7 165)GBPGREAT BRITISH POUND( 48 068) 47 867 - ( 201)( 42 582) 47 842 - 5 260 BRLBRAZILIAN REAL 866 - - 866 783 - - 783 MOPMACAO PATACA 2 409 - - 2 409 2 261 - - 2 261 JPYJAPANESE YEN( 2 326) 2 318 - ( 8)( 1 340) 2 310 - 970 CHFSWISS FRANC( 9 289) 9 769 - 480 ( 13 138) 16 281 - 3 143 SEKSWEDISH KRONE 17 593 ( 17 578)- 15 19 782 ( 19 077)- 705 NOKNORWEGIAN KRONE 53 291 ( 53 059)- 232 54 399 ( 54 035)- 364 CADCANADIAN DOLLAR( 16 710) 19 003 - 2 293 ( 17 728) 21 502 - 3 774 ZARSOUTH AFRICAN RAND( 10)( 530)- ( 540) 1 129 ( 1 207)- ( 78)AUDAUSTRALIAN DOLLAR 9 613 ( 9 463)- 150 10 257 ( 9 990)- 267 VEBVENEZUELAN BOLIVAR 2 - - 2 2 - - 2 PLNPOLISH ZLOTY ( 2 995) 3 010 - 15 36 100 ( 35 643)- 457 MADMOROCCAN DIRHAN( 2 558) 2 256 - ( 302)( 2 996) 2 936 - ( 60)MXNMEXICAN PESO( 6)- - ( 6)( 13) 9 - ( 4)AOAANGOLAN KWANZA( 23)- - ( 23)( 1)- - ( 1)CVECAPE VERDEAN ESCUDO( 137)- - ( 137)( 146)- - ( 146)HKDHONG-KONG DOLLAR( 706) 595 - ( 111)( 1 916) 2 434 - 518 CZKCZECH KORUNA 6 ( 114)- ( 108) 16 208 ( 17 041)- ( 833)DZDALGERIAN DINAR 7 638 - - 7 638 5 507 - - 5 507 CNYYUAN REN-MIN-BI 333 ( 347)- ( 14) 51 352 ( 50 975)- 377 OTHER( 2 957) 4 057 0 1 101 ( 7 802) 6 785 - ( 1 017)( 629 290) 642 317 91 13 119 ( 66 578) 81 677 ( 15) 15 084 Note: assets / (liabilities) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - 327 - (in thousands of Euros)31.12.2022TotalUp 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)1 480 787 2 247 4 593 10 700 5 986 297 6371 159 624Liabilities from guaranteed lending operations and operations associated to financial markets 10 059 656 57 154 66 5131 732 2493 341 048 739 1884 123 504Behavioral output from deposits30 194 492 573 588 41 352 133 529 149 284 414 20028 882 540Exchange swaps and derivatives 751 818 5 224 52 647 385 288 82 861 65 007 160 791Other output 623 245 4 477- - 15 824 34 000 568 944Total Output43 109 997 642 690 165 1042 261 7663 595 0031 550 03134 895 403INPUTSecured lending operations and operations associated to financial markets- - - - - - - Behavioral inputs from loans and advances38 461 3335 838 109 68 447 183 143 273 970 548 60931 549 055Exchange swaps and derivatives 753 169 6 049 53 146 386 808 83 515 63 026 160 625Own portfolio securities maturing and other entries10 550 649 49 284 163 514 265 079 222 4622 144 3027 706 009Total Input 49 765 1515 893 442 285 107 835 029 579 9472 755 93739 415 689Net contractual deficit6 655 1555 250 752 120 003(1 426 737)(3 015 056)1 205 9064 520 287Accumulated net contractual deficit 5 250 7525 370 7553 944 018 928 9622 134 8686 655 155CAPACITY TO READJUSTMENTStock InicialUp to 7 days7 days to 1 month 1 to 3 months 3 to 6 months6 months to 1yearMore than 1 yearCash 182 895Deployable reserves from the central bank5 653 802(5 653 802)Negotiable and non-negotiable assets eligible for the central bank 7 924 420 56 109 62 178( 116 348)( 131 290)(1 924 380)(5 866 209)Authorised facilities and not utilised received - ( 23 829)( 77 909)1 378 6762 739 531( 84 317)(3 932 151)Net variation of capacity to adjustment (5 621 523)( 15 731)1 262 3282 608 241(2 008 697)(9 798 361)Accumulated capacity to readjustment 13 761 1188 139 5958 123 8649 386 19211 994 4339 985 736 187 375(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) 756 943- - - - 22 055 734 888Liabilities from guaranteed lending operations and operations associated to financial markets 9 948 705- 626 980 52 669- 2 514 5556 754 500Behavioral output from deposits29 491 108 390 972 86 929 93 663 116 964 296 77428 505 805Exchange swaps and derivatives 567 652 5 940 45 222 423 127 43 099 25 964 24 299Other output 478 049- - - 11 515 33 814 432 720Total Output41 242 456 396 912 759 132 569 460 171 5782 893 16336 452 212INPUTSecured lending operations and operations associated to financial markets 172 139- - - - 40 991 131 148Behavioral inputs from loans and advances32 363 6865 164 062 2 244 5 177 14 194 15 12527 162 885Exchange swaps and derivatives 721 805 7 824 40 849 422 980 61 078 39 323 149 751Own portfolio securities maturing and other entries10 385 672 147 916 130 887 503 691 707 936 607 8808 287 362Total Input 43 643 3035 319 802 173 980 931 848 783 208 703 32035 731 145Net contractual deficit2 400 8464 922 890( 585 152) 362 388 611 630(2 189 843)( 721 067)Accumulated net contractual deficit 4 922 8904 337 7384 700 1265 311 7563 121 9132 400 846CAPACITY TO READJUSTMENTStock InicialUp to 7 days7 days to 1 month 1 to 3 months 3 to 6 months6 months to 1yearMore than 1 yearCash 151 699Deployable reserves from the central bank4 999 674(4 999 674)Negotiable and non-negotiable assets eligible for the central bank 7 261 006- 432 159( 326 174)( 537 314)( 451 865)(6 233 780)Authorised facilities and not utilised received ( 0)( 42 401)( 73 498)( 226 102)( 281 873)1 314 154( 690 281)Net variation of capacity to adjustment (5 042 075) 358 662( 552 276)( 819 187) 862 289(6 924 061)Accumulated capacity to readjustment 12 412 3797 370 3047 728 9667 176 6906 357 5037 219 792 295 73131.12.2021 At the end of 2021 there was an accumulated one-year net contractual surplus of Euro 3,122 million, having shifted at the end of 2022 to an accumulated one-year net contractual surplus accumulated at a year of Euro 2,135 million. This decrease is mainly due to the increase in the period of less than one year taken to the ECB in the amount of Euro 3,750 million. The one-year counterbalancing capacity at the end of 2022 was Euro 9,986 million, higher by Euro 2,766 million at the end of 2021 (Euro 7,220 million). This increase is mainly due to increased customer deposits and secured funding. In order to anticipate any negative impacts, internal liquidity stress scenarios representing the types of crises that may occur are carried out, based on idiosyncratic scenarios (characterised by a loss of confidence in the Bank), and market scenarios. Additionally, given the importance of liquidity risk management, a Liquidity Coverage Ratio (LCR) and a stable financing ratio (NSFR) are included in regulatory legislation. The LCR aims to promote banks' resilience to short-term liquidity risk by ensuring that they hold high-quality liquid assets sufficient to survive a severe stress scenario for a period of 30 days, while the NSFR aims to ensure that Banks maintain stable financing for their assets and off-balance sheet operations, for a period of one year. The average CSF in the 12 months of 2022 was 190% compared to 150% in 2021. In turn, the NSFR stood at 113% on 31 December 2022, 4 p.p. less than at the end of 2021, mainly due to the shortening of financing operations with the ECB. In accordance with existing regulatory legislation, the Group is required to comply with a regulatory minimum limit of 100% in the CSF and NSFR. 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: NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - 328 - (in thousands of Euros)31.12.2022Carrying book valueof encumberedassetsFair value ofencumbered assetsCarrying book valueof unencumberedassetsFair value ofunencumberedassetsAssets of the institution13 495 242n/a32 720 766n/aEquity instruments - -1 203 5951 203 595Debt securities1 475 2651 475 2659 001 8429 001 842Other assets12 019 977n/a22 515 329n/aAssets(in thousands of Euros)31.12.2021Carrying book valueof encumberedassetsFair value ofencumbered assetsCarrying book valueof unencumberedassetsFair value ofunencumberedassetsAssets of the institution13 890 508n/a31 052 745n/aEquity instruments - -1 754 7711 754 771Debt securities2 306 9802 306 9807 361 7587 361 758Other assets11 583 528n/a21 936 216n/aAssets(in thousands of Euros)31.12.202231.12.2021Fair 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 - - - -Equity instruments - - - -Debt securities - - - -Other collateral received - - - -Own debt securities issued other than own covered bonds or ABS - - - -Collateral received The encumbered assets are represented essentially by credits and securities used in financing operations with the ECB, in repo operations, in mortgage bond issues and in securitizations. There are also assets given in collateral to hedge the Bank's counterparty risk in derivative transactions. 44.6 - Operational risk Operational risk generally translates into the probability of the occurrence of events with negative impacts, in the results or in the capital, resulting from the inadequacy or deficiency of procedures and information systems, the behaviour of people or motivated by external events, including legal risks. Thus, operational risk is understood as the calculation of the following risks: operational, information systems, compliance and reputation. For the management of operational risk, a system was developed and implemented to ensure the uniformity, systematization and recurrence of the activities for the identification, monitoring, control and mitigation of this risk. This system is supported by an organizational structure, integrated in the Global Risk Department exclusively dedicated to this task, as well as by Operational Risk Management Representatives designated by each of the departments, branches and subsidiaries considered relevant, which are responsible for complying with the procedures. and the day-to-day management of this Risk in its areas of competence. 44.7 - Capital Management and Solvency Ratio The main objective of the Group’s capital management is to ensure compliance with the Group novobanco’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 novobanco - 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 novobanco Group objectives. The capital ratios of novobanco 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, to the calculation of the ratios mentioned above. novobanco 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 novobanco 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 novobanco’s 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 novobanco Group are composed by elements of CET I and Tier II Additional information on the evolution and composition of novobanco Group's capital ratios can be found in the Group's Market Discipline Document (point 3. Capital Adequacy). The summary of own funds, risk weighted assets and capital ratios capital of novobanco Group as of 31 December 2022 and 2021 are presented in the following table: NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - 329 - (in thousands of Euros)31.12.202231.12.2021Encumbered 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 liabilities9 968 34613 495 24210 115 52213 890 508 NOTA 45 – 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 is presented below (it should be emphasised that this information is prepared from a prudential perspective, whose consolidation perimeter differs from the consolidation perimeter of the financial statements presented): NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - 330 - (in million Euros)31.12.202231.12.2021Realised ordinary share capital, issue premiums and own shares 6 305 6 055 Reserves and Retained earnings( 3 388)( 3 109)Net income for the year attributable to shareholders of the Bank 556 159 Non-controlling interests (minorities) 18 19 A - Equity (prudential perspective) 3 491 3 124 Non-controlling interests (minorities)( 10)( 13)Adjustments of additional valuation ( 4)( 10)Transitional period to IFRS9 126 237 Goodwill and other intangibles ( 73)( 69)Insufficiency of provisions given the expected losses - ( 8)Pension fund assets with defined benefits( 60)- Deferred tax assets and shareholdings in financial companies ( 296)( 168) Other(1)( 244)( 325)B - Regulatory adjustments to equity ( 560)( 357)C - Own principal funds level 1 - CET I (A+B) 2 931 2 768 Other eligible instruments for additional Tier 1 2 1 D - Additional own funds Level 1 - Additional Tier 1 2 1 E - Level 1 own funds - Tier I (C+D) 2 933 2 769 Subordinated liabilities elegible for Tier II 399 399 Other elements elegible for Tier II 91 108 F - Level 2 own funds - Tier II 490 507 G - Eligible own funds (E+F) 3 423 3 276 Credit risk 19 608 22 043 Market risk 78 1 207 Operational risk 1 670 1 678 H - Risk Weighted Assets 21 355 24 929 Solvability ratioCET I ratio(C/H)13,7%11,1%Tier I ratio(E/H)13,7%11,1%Solvability ratio (G/H)16,0%13,1%Leverage ratio(2)6,1%6,0%(2) The leverage ratio results from dividing Tier 1 by the exposure measure calculated under the CRR.(cid:9)(cid:9)(cid:9)(cid:9)(1) It includes adjustments to the CCA to be received, reflected at the level of reserves, and not received from the Resolution Fund as well as the amount relating to the backstop.(cid:9)(cid:9)(cid:9)(cid:9)(cid:9)(cid:9) Credit quality of forborne exposure Credit quality of performing and non-performing exposures by past due days NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - 331 - (in thousands of Euros) Of which defaultedOf which subject to impairmentLoans and advances702 036759 337759 337759 337-77 018-400 845702 092274 345Central banks00000000General governments47000-6000 Credit institutions00000000Other financial corporations181 68781 68781 6870-38 74735 81835 818Non-financial corporations532 143580 337580 337580 337-74 063-289 636484 752215 644Households169 84497 31397 31397 313-2 949-72 463181 52322 883Debt securities00000000Loan commitments given1 4111 1951 1951 1950000Total703 446760 532760 532760 532-77 018-400 845702 092274 345Gross 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 defaultedCash in Central Banks6 373 9786 373 9780000000000Loans and advances24 285 22924 208 27476 9541 391 459834 12538 883132 956168 143104 25829 51583 5791 391 459Central banks000000000000General governments368 805368 78619410000041000410 Credit institutions44 32744 3270000000000Other financial corporations590 859566 74424 11588 75142 7970235 345164 4906 10088 751Non-financial corporations12 143 90312 134 9049 0001 066 762681 61624 54075 040109 22287 22622 60366 5161 066 762Of which SMEs7 334 1237 326 4757 648737 260433 69024 28656 46996 15239 35021 10566 207737 260Households11 137 33411 093 51443 820235 535109 71214 34357 91423 57616 6062 42110 963235 535Debt securities10 295 09610 295 0960437 774334 806000015 54387 425437 774Central banks000000000000General governments6 375 4436 375 4430000000000Credit institutions961 621961 6210000000000Other financial corporations434 182434 182025 2484 755000015 5434 95025 248Non-financial corporations2 523 8502 523 8500412 526330 0510000082 475412 526Off-balance-sheet exposures8 015 532472 177472 177Central banks000General governments170 05300Credit institutions251 30500Other financial corporations82 3417 5407 540Non-financial corporations6 280 340462 525462 525Households1 231 4932 1122 112Total48 969 83440 877 34876 9542 301 4111 168 93138 883132 956168 143104 25845 058171 0042 301 411Gross carrying amount/nominal amountPerforming exposuresNon-performing exposures Performing and non-performing exposures and related provisions Quality of non-productive exhibitions by geography NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - 332 - (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 3Cash in Central Banks6 373 9786 373 9780000000000000Loans and advances24 285 22920 426 2623 858 9671 391 45901 391 442-363 843-63 044-300 799-716 4970-716 497-475 30714 241 766476 044Central banks000000000000000General governments368 805347 26221 5434100410-1 424-282-1 142-4090-409032 9291 Credit institutions44 32743 530797000-780-752-28000000Other financial corporations590 859455 214135 64688 751088 751-23 015-4 099-18 915-41 6820-41 682-188 398164 97537 978Non-financial corporations12 143 9039 431 2122 712 6911 066 76201 066 745-280 432-39 403-241 029-542 7160-542 716-228 8103 908 976352 526Of which SMEs7 334 1235 837 2721 496 852737 2600737 260-124 406-29 066-95 339-390 0250-390 025-149 3302 879 707246 314Households11 137 33410 149 043988 290235 5350235 535-58 192-18 506-39 685-131 6900-131 690-58 09910 134 88685 539Debt securities10 295 09610 253 91541 181437 7742 432435 342-9 380-6 007-3 373-282 8110-282 811000Central banks000000000000000General governments6 375 4436 375 4430000-2 175-2 1750000000Credit institutions961 621961 6210000-229-2290000000Other financial corporations434 182434 182025 248025 248-311-3110000000Non-financial corporations2 523 8502 482 66941 181412 5262 432410 094-6 665-3 292-3 373-282 8110-282 811000Off-balance-sheet exposures8 015 5326 989 6601 025 872472 1770472 17713 5236 1857 33876 376076 376205 85919 893Central banks00000000000000General governments170 053168 9941 0590003112180003 9360Credit institutions251 305171 15080 1550007933076300024 7930Other financial corporations82 34179 6252 7157 54007 5406231303803810 3066 477Non-financial corporations6 280 3405 357 085923 255462 5250462 5258 8242 4276 39676 200076 200156 29713 356Households1 231 4931 212 80618 6862 11202 1123 8143 684129138013810 52761Total48 969 83444 043 8154 926 0202 301 4112 4322 298 961-359 700-62 866-296 834-922 9320-922 932-475 30714 447 625495 938Gross 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 exposures36 409 5581 829 2331 829 23336 396 054-1 372 5310Portugal24 713 3311 724 6131 724 61324 699 868-1 261 9040Other countries11 696 227104 621104 62111 696 186-110 6270Off-balance-sheet exposures8 487 709472 177472 17789 899Portugal8 055 240469 922469 92287 891Other countries432 4692 2552 2552 008Total44 897 2672 301 4112 301 41136 396 054-1 372 53189 8990Gross 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 Credit quality of loans and advances by industry Collateral valuation – loans and advances NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - 333 - (in thousands of Euros)Of which defaultedAgriculture, forestry and fishing335 4798 2528 252335 479-9 3630Mining and quarrying65 1685 6775 67765 168-7 1480Manufacturing2 783 873133 873133 8732 783 873-120 4080Electricity, gas, steam and air conditioning supply248 4988 7248 724248 498-4 8990Water supply118 453469469118 453-7540Construction1 380 421137 259137 2591 380 421-102 8570Wholesale and retail trade1 582 31795 56395 5631 582 317-66 0250Transport and storage814 57057 20557 205814 570-39 1820Accommodation and food service activities1 117 942174 408174 4081 117 942-117 4740Information and communication160 4416 2206 220160 441-6 6200Financial and insurance activities504 35130 60530 605504 351-54 0260Real estate activities1 519 348183 700183 7001 519 348-123 6110Professional, scientific and technical activities1 242 35378 35378 3531 242 353-59 4080Administrative and support service activities348 0708 2788 278348 070-15 1450Public administration and defence, compulsory social security2 085002 085-170Education48 8825 1375 13748 882-2 7580Human health services and social work activities302 55237 86837 868302 552-21 5140Arts, entertainment and recreation172 90177 55077 550172 884-48 9340Other services462 96117 62217 622462 961-23 0050Total13 210 6661 066 7621 066 76213 210 648-823 1480Gross 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(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 amount25 676 68824 285 22976 9541 391 459834 125557 33438 883132 956168 143104 25829 51583 579Of which secured16 840 54815 866 44865 811974 100570 979403 12122 01095 855123 17286 7949 52565 765 Of which secured with immovable property13 622 67012 963 38040 539659 289319 368339 92119 45055 528117 31076 7596 19364 681 Of which instruments with LTV higher than 60% and lower or equal to 80%2 493 5112 451 73141 78021 18520 595 Of which instruments with LTV higher than 80% and lower or equal to 100%734 836553 949180 88776 597104 290 Of which instruments with LTV higher than 100%800 627534 952265 674143 707121 967Accumulated impairment for secured assets-688 689-238 281-5 302-450 408-224 382-226 025-11 084-59 688-76 995-40 843-6 330-31 085CollateralOf which value capped at the value of exposure14 657 73714 195 29949 867462 438298 587163 8518 91334 38244 65645 9192 86227 119 Of which immovable property12 896 00212 559 08238 121336 920185 489151 4318 65232 63943 57538 2981 84426 423Of which value above the cap27 884 44026 638 87654 1621 245 564715 630529 93524 28778 71383 485166 445120 38756 619 Of which immovable property19 763 31519 204 73453 248558 581269 986288 59521 40962 54362 76386 9537 37047 557Financial guarantees received60 07346 46710313 60611 4212 1851 282705198000Accumulated partial write-off-475 307-14-14-475 293-7 194-468 1000-57 000-795-23 572-311 639-75 094Loans and advancesPerformingNon-performingUnlikely to pay that are not past due or are past due <= 90 daysPast due > 90 days 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 NOTA 46 - PROVISION OF INSURANCE OR REINSURANCE MEDIATION SERVICE On 31 December 2022 and 2021, the compensation arising from the provision of insurance or reinsurance mediation services has the following composition: NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - 334 - (in thousands of Euros)Gross carrying amountInitial stock of non-performing loans and advances1 763 836Inflows to non-performing portfolios313 256Outflows from non-performing portfolios-685 633 Outflow to performing portfolio-160 486 Outflow due to loan repayment, partial or total-210 047 Outflow due to collateral liquidation0 Outflow due to taking possession of collateral-13 465 Outflow due to sale of instruments-56 138 Outflow due to risk transfer0 Outflow due to write-off-200 327Outflow due to other situations-45 171Outflow due to reclassification as held for sale0Final stock of non-performing loans and advances1 391 459(in thousands of Euros)Value at initial recognitionAccumulated negative changesProperty, plant and equipment (PP&E)00Other than PP&E280 875-132 687 Residential immovable property73 104-23 134 Commercial Immovable property136 724-84 010 Movable property (auto, shipping, etc.)3 013-2 195 Equity and debt instruments40 640-7 297 Other27 394-16 051Total280 875-132 687Collateral 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&E280 875-132 68710 781-1 16453 287-29 240216 808-102 28300 Residential immovable property73 104-23 1343 678-29515 131-4 05254 295-18 78600 Commercial immovable property136 724-84 0106 590-7338 745-1 768121 389-81 50900 Movable property (auto, shipping, etc.)3 013-2 195513-135453-722 047-1 98800 Equity and debt instruments40 640-7 297001 564-7 29739 076000 Other27 394-16 0510027 394-16 0510000Total280 875-132 68710 781-1 16453 287-29 240216 808-102 28300Total 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 The Group does not collect insurance premiums on behest insurers, nor does it move funds related to insurance contracts. Thus, there is no other asset, liability, income or charge to be reported, related to the insurance mediation activity carried out by the Group, other than those already disclosed. NOTA 47 – EXPOSURE TO UKRAINE, RUSSIA AND BELARUS On February 24, 2022, the Russian Federation began a military operation on Ukrainian territory and triggered a war that currently engulfed three countries (Russia, Ukraine and Belarus). In response, various sanctions were adopted with the aim of impacting Russia's economy, as well as Belarus, by a several countries including NATO, the European Union and others. There is a possibility that the novobanco will be impacted by losses in assets exposed to those countries as a result of these sanctions, as well as the destruction that occurs in Ukraine with the war. The exhibition of the novobanco with reference to 31 December 2022 and 2021, by type of asset and by country is presented as follows: NOTE 48 – SUBSEQUENT EVENTS • On 1 February 2023, the novobanco reported that the General and Supervisory Board approved, subject to the authorization of the competent regulatory bodies (Fit & Proper), Benjamin Dickgiesser as a new member of the Executive Board of Directors for the current warrant terminated in 2025, for the role of Chief Financial Officer. • On 13 February 2023, novobanco informed the Communication from the European Commission's Directorate General for Competition regarding the successful completion of the novobanco Restructuring Period. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - 335 - (in thousands of Euros)31.12.202231.12.2021Life InsuranceUnit Link and other life commissions 1 795 1 828 Credit protection insurance (life) 881 841 Traditional Products 17 547 15 672 20 223 18 341 Non-Life InsurancePersonal lines insurance 8 464 7 593 Corporate insurance 177 178 Credit protection insurance (non-life) 1 430 2 274 10 071 10 045 30 294 28 386 Note: the yields shown are net of periodizations(in thousands of Euros)31.12.2022Russian FederationBelarusUkraineTotalLoans and advances to customers 3 766 56 1 115 4 937Securities 4 755-- 4 755Bonds recorded at fair value through other comprehensive income 4 755-- 4 755Total Assets 8 521 56 1 115 9 692(in thousands of Euros)31.12.2021Russian FederationBelarusUkraineTotalLoans and advances to customers 5 049 209 938 6 196Securities 43 140-- 43 140Bonds recorded at fair value through other comprehensive income 22 744-- 22 744Bonds recorded at amortised cost 20 396-- 20 396Total Assets 48 189 209 938 49 336 SEPARATE EXPLANATORY NOTES - 337 - (in thousands of Euros)31.12.202231.12.2021Interest Income8 838 291 748 592Interest Expenses8( 213 295)( 167 508)Net Interest Income 624 996 581 084Dividend income9 17 452 18 400Fees and commissions income10 302 126 287 013Fee and commissions expenses10( 39 816)( 40 296)Gains or losses on derecognition of financial assets and liabilities not measured at fair value through profit or loss11( 88 444)( 7 234)Gains or losses on financial assets and liabilities held for trading11 146 715 51 222Gains or losses on financial assets mandatorily at fair value through profit or loss11( 95 948) 42 734Gains or losses from hedge accounting11( 535) 14 896Exchange differences11 7 305 10 653Gains or losses on derecognition of non-financial assets12 82 159( 4 582)Other operating income13 56 579 79 753Other operating expenses13( 68 778)( 141 545)Operating Income 943 811 892 098Administrative expenses( 369 730)( 346 975)Staff expenses14( 216 821)( 214 994)Other administrative expenses16( 152 909)( 131 981)Contributions to resolution funds and deposit guarantee17( 40 717)( 40 172)Depreciation, ( 53 961)( 33 799)Provisions or reversal of provisions18( 10 894)( 111 770)Commitments and guarantees given 2 555 9 900Other provisions( 13 449)( 121 670)Impairment or reversal of impairment on financial assets not measured at fair value through profit or loss18( 103 265)( 196 230)Impairment or reversal of impairment of investment in subsidiaries, joint ventures and associates18 16 166 49 691Impairment or reversal of impairment on non-financial assets18 14 081( 12 069)Profit or loss before tax from continuing operations 395 491 200 774Tax expense or income related to profit or loss from continuing operations27 58 339 24 043Current tax( 4 611)( 4 249)Deferred tax 62 950 28 292Profit or loss after tax from continuing operations 453 830 224 817Profit or loss before tax from discontinued operations29- 1 091Profit or loss for the year 453 830 225 908Basic earnings per share (in euros)190,050,02Diluted earnings per share (in euros)190,050,02Basic earnings per share of continuing activities (in Euros)190,050,02Diluted earnings per share of continuing activities (in Euros)190,050,02The accompanying explanatory notes are an integral part of these separate financial statementsNOVO BANCO, S.A.SEPARATE INCOME STATEMENTFOR THE YEARS ENDED 31 DECEMBER 2022 AND 2021Notes SEPARATE EXPLANATORY NOTES - 338 - (in thousands of Euros)31.12.202231.12.2021Net profit / (loss) for the exercise 453 830 225 908 Other comprehensive income/(loss)Items that will not be reclassified to results 110 205( 83 367)Actuarial gains / (losses) on defined benefit plansa) 96 485( 75 649)Fair value changes of equity instruments measured at fair value through other comprehensive incomea) 13 720( 7 718)Items that may be reclassified to results( 296 489)( 136 361)Cash flow hedging( 100 418)-Financial assets at fair value through other comprehensive incomea)( 196 071)( 136 361)Total other comprehensive income/(loss) for the exercise 267 546 6 180a) See Statement of Changes in EquityThe accompanying explanatory notes are an integral part of these separate financial statementsNOVO BANCO, S.A.SEPARATE STATEMENT OF COMPREHENSIVE INCOME FOR THE YEARS ENDED 31 DECEMBER 2022 AND 2021Notas SEPARATE EXPLANATORY NOTES - 339 - (in thousands of Euros)Notes31.12.202231.12.2021AssetsCash, cash balances at central banks and other demand deposits 206 387 2955 674 461Financial assets held for trading 21 170 847 377 709 221 537 6702 250 308Financial assets at fair value through profit or loss 22 13-Financial assets at fair value through other comprehensive income 222 183 0347 133 508Financial assets at amortised cost 2231 719 48924 977 300Debt securities8 618 7782 893 829Loans and advances to Banks 145 464 186 089Loans and advances to customers22 955 24721 897 382Derivatives – Hedge accounting 23 562 886 20 150 23( 382 933) 28 787Investments in subsidiaries, joint ventures and associates 24 251 457 241 066Tangible assets 258 963 231 419Property, Plant and Equipment 25 258 963 231 419Intangible assets 26 69 640 67 515Tax assets 27 947 500 776 769Current Tax Assets 30 298 35 448Deferred Tax Assets 917 202 741 321Other assets 281 713 1162 555 852Non-current assets and disposal groups classified as held for sale 29 45 071 6 601Total Assets45 464 04844 341 445LiabilitiesFinancial liabilities held for trading 21 99 317 305 512Financial liabilities measured at amortised cost 3040 904 69740 346 362Deposits from banks10 506 50911 497 829(of which, Repurchase Agreement)2 150 8241 529 847Due to customers28 425 22326 997 858(of which, Repurchase Agreement) 450 906-1 601 4541 479 066Other financial liabilities 371 511 371 609Derivatives – Hedge accounting 23 120 612 44 460 Provisions 31 423 190 478 170Tax liabilities 27 4 505 4 703Current Tax Assets 4 505 4 703Other liabilities 32 844 779 362 836Total Liabilies42 397 10041 542 043EquityCapital 336 304 6616 054 907Accumulated other comprehensive income 34(1 155 271)( 968 987)Retained earnings 34(8 577 074)(8 576 860)Other reserves 346 040 8026 064 434Profit or loss attributable to Shareholders of the parent 453 830 225 908Total Equity3 066 9482 799 402Total Liabilities and Equity45 464 04844 341 445NOVO BANCO, S.A.SEPARATE BALANCE SHEETAS AT 31 DECEMBER 2022 AND 2021Non-trading financial assets mandatorily at fair value through profit or lossFair value changes of the hedged items in portfolio hedge of interest rate riskDebt securities issued, Subordinated debt and liabilities associated to transferred assetsThe accompanying explanatory notes are an integral part of these separate financial statements SEPARATE EXPLANATORY NOTES - 340 - (in thousands of Euros)31.12.202231.12.2021Cash flows from operatins activitiesInterest received 855 033 689 622 Interest paid( 207 797)( 160 639)Fees and commissions received 302 126 287 013 Fees and commissions paid( 39 816)( 40 296)Recoveries on loans previously written off 39 741 26 310 Cash payments to employees and suppliers( 321 850)( 314 871) 586 720 362 232 Changes in operating assets and liabilities:Deposits with / from Central Banks(1 702 869) 972 363 Financial assets mandatorily at fair value through profit or loss 558 483 262 479 Financial assets designated at fair value through profit or loss 146 847 94 905 Financial assets at fair value through other comprehensive income4 535 561 475 983 Financial assets at amortised cost(6 732 655)( 302 090)Securities(5 699 590)( 26 501)Loans and advances to banks 41 890 55 162 Loans and advances to customers(1 074 955)( 330 751)Financial liabilities at amortised cost2 121 448 1 624 592 Deposits from banks 682 009 405 818 Due to customers1 439 439 1 218 774 Derivatives - Hedge accounting( 54 864)( 2 438)Other operating assets and liabilities1 171 677 (1 161 671)Net cash from operating activities before corporate income tax 630 348 2 326 355 Corporate income taxes paid( 35 231)( 33 557)Net cash from operating activities 595 117 2 292 798 Cash flows from investing activitiesAcquisition of investments in subsidiaries and associated companies- ( 4)Sale of investments in subsidiaries and associated companies 1 867 - Dividends received 17 452 18 400 Acquisition of tangible fixed assets ( 105 881)( 116 630)Sale of tangible fixed assets 107 072 59 579 Acquisition of intangible assets( 25 160)( 25 380)Net cash from investing activities( 4 650)( 64 035)Cash flows from financing activitiesIssuance of bonds and other securitised liabilities 100 000 575 000 Reimbursement of bonds and other debt securities( 575)( 84 916)Net cash from financing activities 99 425 919 097 Net changes in cash and cash equivalents 689 892 3 147 860 Cash and cash equivalents at the beginning of the period5 409 506 2 261 646 Net changes in cash and cash equivalents 689 892 3 147 860 Cash and cash equivalents at the end of the period6 099 398 5 409 506 Cash and cash equivalents include:Cash 176 797 144 220 Deposits with Central Banks5 942 501 5 264 629 (of which, Restricted balances)( 287 897)( 264 955)Deposits with banks 267 997 265 612 Total6 099 398 5 409 506 NOVO BANCO, S.A.CASH FLOW STATEMENTFOR THE YEAR ENDED ON 2022 AND 2021The accompanying explanatory notes are an integral part of these separate financial statements SEPARATE EXPLANATORY NOTES - 341 - (in thousands of Euros)Balance as at 31 December 2020 5 900 000 ( 749 259)( 7 202 828) 6 179 422 ( 1 374 246) 2 753 089 Capital increase by incorporation of special reserve for deferred taxes 154 907 - - ( 154 907)- - Other Increase / (Decrease) in Equity- - ( 1 374 032) 39 919 1 374 246 40 133 Appropriation to retained earnings of net profit / (loss) of the previous year- - ( 1 374 246)- 1 374 246 - Reserve of Contingent Capital Agreement 34 - - - 39 920 - 39 920 Other movements- - 214 ( 1)- 213 Total comprehensive income for the year- ( 219 728)- - 225 908 6 180 Changes in fair value, net of tax 34 - ( 134 562)- - - ( 134 562)Remeasurement of defined benefit plans, net of tax 15 - ( 75 649)- - - ( 75 649)Reserves of impairment of securities at fair value through OCI 34 - 1 - - - 1 Reserves of sales of securities at fair value through OCI 34 - ( 9 518)- - - ( 9 518)Net profit / (loss) for the year- - - - 225 908 225 908 Balance as at 31 December 2021 6 054 907 ( 968 987)( 8 576 860) 6 064 434 225 908 2 799 402 Capital increase by incorporation of special reserve for deferred taxes 33 249 754 - - ( 249 754)- - Other Increase / (Decrease) in Equity- - ( 214) 226 122 ( 225 908)- Appropriation to retained earnings of net profit / (loss) of the previous year- - - 225 908 ( 225 908)- Other movements- - ( 214) 214 - - Total comprehensive income for the year- ( 186 284)- - 453 830 267 546 Changes in fair value, net of tax 34 - ( 178 410)- - - ( 178 410)Remeasurement of defined benefit plans, net of tax 15 - 96 485 - - - 96 485 Reserves of impairment of securities at fair value through OCI 34 - ( 3 079)- - - ( 3 079)Reserves of sales of securities at fair value through OCI 34 - ( 862)- - - ( 862)Cash flow hedging reserves- ( 100 418)- - - ( 100 418)Net profit / (loss) for the year- - - - 453 830 453 830 Balance as at 31 December 2022 6 304 661 ( 1 155 271)( 8 577 074) 6 040 802 453 830 3 066 948 NOVO BANCO, S.A.SEPARATE STATEMENT OF CHANGES IN EQUITYFOR THE YEARS ENDED 31 DECEMBER 2022 AND 2021NotesShare CapitalOther Comprehensive IncomeRetained earningsThe accompanying explanatory notes are an integral part of these separate financial statementsOther reservesNet profit/(loss) for the yearTotal novobanco Notes to the Separate Financial Statements as of 31 December 2022 (Amounts expressed in thousands of euros, except when otherwise indicated) NOTE 1 – ACTIVITY Novo Banco, S.A. is the main entity of the financial novobanco Group 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))1, 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 novobanco (novobanco or Bank). As a result of the resolution measure applied, Fundo de Resolução (“Resolution Fund”) became the sole owner of the share capital of novobanco, in the amount of Euro 4,900 million, which acquired 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 novobanco. 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 to 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. With the conclusion of the sale process, novobanco 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 novobanco are consolidated by Nani Holdings SGPS, S.A., with registered office at Avenida D. João II, No. 46, 4A, Lisbon. LSF Nani Investments S.à.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 2022, novobanco has a retail network comprising 274 branches in Portugal and abroad (31 December 2021: 292 branches), including branches in Spain and Luxembourg, and 2 representative offices in Switzerland (31 December 2021: 4 representative offices). NOTE 2 – BASIS OF PRESENTATION The separate financial statements of novobanco are presented as of 31 December 2022, expressed in thousands of euros, rounded to the nearest thousand. The accounting policies used by the Bank in the preparation are consistent with those used in the preparation of the financial statements as of 31 December 2021. The changes to the most relevant accounting policies are described in Note 5. The separate financial statements of novobanco 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 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. The separate financial statements and the Management Report of 31 December 2022 were approved at the Executive Board of Directors’ meeting held on 2 March 2023 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 financial statements will be approved without changes. NOTE 3 – STATEMENT OF COMPLIANCE The separate financial statements of novobanco have been prepared in accordance with International Financial Reporting Standards (IFRS) as adopted in the European Union in force on 1 January 2022, under Regulation (EC) nº 1606/2002 of the European Parliament and of the Council, of 19 July 2002, and Notice nº 5/2015 of Bank of Portugal. IFRS comprise accounting standards issued by the International Accounting Standards Board (IASB) and interpretations issued by the International Financial Reporting Interpretation Committee (IFRIC) and its predecessor body the Standing Interpretations Committee (SIC). 1 References made to RGICSF refer to the version in force at the date of the resolution measure. The current version of the RGICSF has suffered changes, namely in article 145, following the publication of Law 23-A 2015, of 26 March, that came into force on the day following its publication. SEPARATE EXPLANATORY NOTES - 342 - NOTE 4 – PRESENTATION OF FINANCIAL STATEMENTS The Bank presents its statement of financial position in order of liquidity based on the Bank’s intention and perceived ability to recover/settle the majority of assets/liabilities of the corresponding financial statement line caption. An analysis regarding recovery or settlement within 12 months after the reporting date (current) and more than 12 months after the reporting date (noncurrent) is presented throughout the different balance sheet notes. NOTE 5 – CHANGES IN ACCOUNTING POLICIES In the preparation of its financial statements with reference to 31 December 2022, the Bank did not early adopt any new standard, interpretation or amendment issued, but not yet in force. The changes to the standards adopted by the Bank are as follows: Norms, interpretations, amendments, and revisions that came into force in the exercise The following norms, interpretations, amendments, and revisions adopted ("endorsed") by the European Union have mandatory application for the first time in the exercise beginning 1 January 2022: Standard / Interpretation Description This amendment updates the references to the Conceptual Structure in the IFRS 3 text without having made changes to the accounting requirements for concentrations of business activities. Amendments to IFRS 3 - References to the Conceptual Structure for Financial Reporting It is also clarified the accounting treatment to be adopted in relation to liabilities and contingent liabilities under IAS 37 and IFRIC 21, incurred separately versus those included in a concentration of business activities. Amendments obtained prior to entry into operation IAS 16 to - Income Amendments contracts - costs of fulfilling a contract IAS 37 - Onerous to IFRS adopter Amendments to IFRS 1 – Subsidiary as an time (included in annual improvements for the 2018-2020 cycle) first the for The amendment is to be applied prospectively. It clarifies the accounting treatment given to the payment obtained from the sale of products resulting from the test production of tangible fixed assets, prohibiting their deduction at the cost of acquiring the assets. The entity acknowledges the income obtained from the sale of such products and the costs of their production in the results. This amendment specifies that in the assessment of whether or not a contract is onerous, only expenses directly related to the performance of the contract can be considered, such as incremental costs related to direct labor and materials and the allocation of other directly related expenses such as the allocation of depreciation expenses of tangible assets used to perform the contract. General and administrative costs do not relate directly to a contract and are excluded unless they are explicitly debited to the party in accordance with the contract. This amendment should apply to contracts which, at the beginning of the first annual reporting period to which the amendment is applied, still include unmet contractual obligations, without re- expression of the comparison. This amendment clarifies that when a subsidiary chooses to measure its assets and liabilities by the amounts included in the consolidated financial statements of the parent company (assuming that there has been no adjustment in the consolidation process), the measurement of accumulated transposition differences may be made by the amounts that would be recorded in the consolidated financial statements, based on the date of transition from the parent company to IFRS. Amendments to IFRS 9 - Derecognition of financial liabilities - Commissions to be included in the '10 per cent' variation test (included in the annual improvements for the 2018-2020 cycle) This amendment clarifies which commissions an entity should include when assessing whether the terms of a financial liability are substantially different from the terms of the original financial liability. Thus, in the context of the derecognition tests carried out on renegotiated liabilities, only the commissions paid or received between the debtor and the creditor should be included, including the commissions paid or received by the debtor or the creditor on behalf of the other. Amendments to IAS 41 - Taxation and fair value measurement (included in annual improvements for the 2018-2020 cycle) This amendment removes the requirement set out in paragraph 22 of IAS 41 to exclude income tax-related cash flows in the fair value of biological assets, ensuring consistency with IFRS 13 principles. Amendments to IFRS 16 - Leases - Concessions related to COVID-19 at the level of rents beyond 30 June 2021 On May 28, 2020, the amendment to IFRS 16 called 'COVID-19 related concessions' was issued, introducing the following practical expedient: a lessee may choose not to assess whether a Covid- 19-related rent concession is a lease modification. Lessees who choose to apply this file, account the change on rent payments arising from a concession related to COVID-19 in the same way that they account for a change other than a modification of the lease in accordance with IFRS 16. Initially, the practical working hours applied to payments originally due until 30 June 2021, however, due to the prolongation of the impact of the pandemic, on 31 March 2021, it was extended to SEPARATE EXPLANATORY NOTES - 343 - Standard / Interpretation Description payments originally due until 30 June 2022. The amendment applies to annual reporting periods initiated on or after 1 April 2021. In a sense, the practical expedient can be applied provided that the following criteria are fulfilled: • • • the change in lease payments results in a revised remuneration for the lease which is substantially equal to or less than the remuneration immediately preceding the change. any reduction in rental payments only affects payments due on, or until 30 June 2022; and there are no significant changes to other rental terms and conditions. These standards and changes had no material impact on the Bank’s financial statements. NOTE 6 – MAIN ACCOUNTING POLICIES 6.1. Foreign currency transactions 6.1.1 Functional and presentational currency The Bank’s separate financial statements are prepared in Euro, which is novobanco‘s functional currency. 6.1.2 Transactions and balances Foreign currency transactions are translated into 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 from 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. 6.2. 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 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 include 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. 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 recognised 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 held for trading (see Note 6.5). SEPARATE EXPLANATORY NOTES - 344 - 6.3. 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, as described in note 6.2. 6. 4. Recognition of dividend income Dividend income is recognised when the right to receive the dividend payment is established. 6.5. Net trading income Net income from financial assets and liabilities held for trading includes changes in fair value, interest or expenses and dividends, as well as income from derivatives held for economic hedging that do not qualify as hedging derivatives. 6.6. Net gain or loss on financial assets and liabilities designated at fair value through profit or loss Net gain or loss on financial assets and liabilities designated at fair value through profit or loss includes the net gain or loss from financial assets and financial liabilities designated as at fair value through profit or loss and also from non-trading assets measured at fair value through profit or loss, as required by or elected under IFRS 9. The line caption includes fair value changes, interest, dividends and foreign exchange differences. 6.7. Net gain or loss on derecognition of financial assets measured at amortised cost Net loss on derecognition of financial assets measured at amortised cost includes loss (or income) recognised on sale or derecognition of financial assets measured at amortised cost calculated as the difference between the net book value (including impairment until the recoverable amount) and the proceeds received. 6.8. Financial Instruments – Initial recognition 6.8.1. Date of recognition Financial assets and liabilities, with the exception of loans and advances to customers and balances due to customers, are initially recognised on the trade date, i.e., the date on which the Bank becomes a party to the contractual provisions of the instrument. This includes regular way trades, i.e., purchases or sales of financial assets that require delivery of assets within the time frame generally established by regulation or convention in the marketplace. Loans and advances to customers are recognised when funds are transferred to the customers’ accounts. The Bank recognises balances due to customers when funds are transferred to the Bank. 6.8.2. Initial measurement of financial instruments The classification of financial instruments at initial recognition depends on their contractual terms and the business model for managing the instruments, as described in 6.10 Financial instruments are initially measured at their fair value (as defined in Note 6.9), except in the case of financial assets and financial liabilities recorded at FVPL, transaction costs are added to, or subtracted from, this amount. Trade receivables are measured at the transaction price. When the fair value of financial instruments at initial recognition differs from the transaction price, the Bank accounts for the Day 1 profit or loss, as described below. 6.8.3. Day one profit When the transaction price of the instrument differs from the fair value at origination and the fair value is based on a valuation technique using only inputs observable in market transactions, the Bank recognises the difference between the transaction price and fair value in net trading income. In those cases where fair value is based on models for which some of the inputs are not observable, the difference between the transaction price and the fair value is deferred and is only recognised in profit or loss when the inputs become observable, or when the instrument is derecognised. The Bank recognises 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 Bank’s access to the (wholesale market). 6.8.4. Measurement categories for financial assets and liabilities The Bank classifies all of its financial assets based on the business model for managing the assets and the asset’s contractual terms, measured at either: • Amortised cost, as explained in Note 6.10.1; • Fair Value of through Other Comprehensive Income, as explained in Notes 6.10.1, 6.10.2 and 6.10.3; SEPARATE EXPLANATORY NOTES - 345 - • Fair Value Through Profit or Losses, as set out in Note 6.10.4; • Mandatorily measured at fair value through profit or loss, as set out in Note 6.10.4. The Bank classifies and measures its derivative and trading portfolio at FVPL, as explained in Note 6.10.5. The Bank may designate financial instruments at FVPL, if so doing eliminates or significantly reduces measurement or recognition inconsistencies, as explained in Note 6.10.6. Financial liabilities, other than loan commitments and financial guarantees, are measured at amortised cost or at FVPL when they are held for trading and derivative. 6.9. Fair value of Financial Assets and Liabilities The fair value of listed financial assets is determined based on the closing price (bid-price), the price of the last transaction made or the value of the last known price (bid). In the absence of quotation, the Bank estimates fair value using (i) valuation methodologies, such as the use of prices for recent transactions, similar and carried out under market conditions, discounted cash flow techniques and customised option valuation models. in order to reflect the particularities and circumstances of the instrument and (ii) valuation assumptions based on market information. For the assets included in the level 3 of fair value hierarchy, whose quotation is provided by a third-party using parameters not observable in the market, the Bank proceeds, when applicable, to a detailed analysis of the historical and liquidity performance of these assets, which may imply an additional adjustment to its fair value, as well as a result of additional internal or external valuations. The following is a brief description of the type of assets and liabilities included in each level of the hierarchy and the corresponding form of valuation: 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 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) (ii) (iii) (iv) (v) (vi) Derivatives traded on an organised market; Shares quoted on a stock exchange; Open investment funds quoted on a stock exchange; Closed investment funds whose subjacent assets are solely financial instruments listed on a stock exchange; Bonds with observable market quotes; 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) (ii) (iii) Bonds without observable market valuations valued using observable market inputs; and Derivatives (OTC) over-the-counter valued using observable market inputs; and Unlisted shares valued using 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; SEPARATE EXPLANATORY NOTES - 346 - (ii) (iii) (iv) (v) (vi) (vii) Unquoted shares; Closed real estate funds; Hedge funds; Private equities; Restructuring funds; and Over the counter (OTC) derivatives with prices provided by third parties 6.10. Financial Assets and Liabilities 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. 6.10.1 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 classifica tion. 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 calculation. 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. 6.10.2 Debt instruments at FVOCI The Bank classifies debt instruments at FVOCI when both of the following conditions are met: • • The financial asset is held within a business model, the objective of which is achieved by both collecting contractual cash flows and selling financial assets; The contractual terms of the financial asset give rise to, on specific dates, cash flows that are solely payments of principal and interests on the principal amount outstanding. Debt instruments classified as fair value through other comprehensive income are subsequently measured at fair value with gains and losses arising due to changes in fair value being recognised in Other Comprehensive Income, until the assets are derecognised, at which time the accumulated amount of potential gains and losses recorded without reserves is transferred to results under the heading of gains or losses on financial assets and liabilities accounted for at fair value through profit or loss. Interest income and foreign exchange gains and losses. The expected credit loss calculation is explained in Note 6.16. When the Bank holds more than one investment in the same security, they are deemed to be disposed of on a first–in first–out basis. SEPARATE EXPLANATORY NOTES - 347 - 6.10.3. Equity instruments at Fair Value through Other Comprehensive Income Upon initial recognition, the Bank occasionally elects to classify irrevocably some of its equity investments as equity instruments at fair value through other comprehensive income when they meet the definition of equity under IAS 32 and are not held for trading. Such classification is determined on an instrument-by-instrument basis. Gains and losses on these equity instruments are never recycled to profit. Dividends are recognised in profit or loss as other operating income when the right of the payment has been established, except when the Bank benefits from such proceeds as a recovery of part of the cost of the instrument, in which case, such gains are recorded in other comprehensive income. Equity instruments measured at fair value through other comprehensive income are not subject to an impairment assessment. 6.10.4. 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. • 6.10.5. Assets and liabilities held for trading The Bank classifies financial assets or financial liabilities as held for trading when they have been purchased or issued primarily for short-term profit-making through trading activities or form part of a portfolio of financial instruments that are managed together, for which there is evidence of a recent pattern of short-term profit taking. Held-for-trading assets and liabilities are recorded and measured in the statement of financial position at fair value. Changes in fair value are recognised in net trading income. Interest and dividend income or expense is recorded in net trading income according to the terms of the contract, or when the right to payment has been established. Included in this classification are debt securities, equities, short positions and customer loans that have been acquired principally for the purpose of selling or repurchasing in the near term. 6.10.6. 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 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 • Derivative financial instruments used for hedging purposes may be classified in the accounts as hedging instruments provided the following criteria are cumulatively met: Classification criteria (i) (ii) (iii) (iv) (v) Hedging instruments and hedged captions are eligible for the hedge relationship; At the inception of the hedge, the hedge relationship is identified and documented, including identification of the hedged caption and hedging instrument and evaluation of the effectiveness of the hedge; There is an economic relationship between the hedged caption and the hedging instrument; The effect of credit risk does not dominate the changes in value that result from this economic relationship; The effectiveness of the hedge can be reliably measured, both at the inception of the hedge and on an ongoing basis. For the cases in which the Bank uses macro hedging, accounting is performed in accordance with IAS 39 (using the policy choice permitted under IFRS 9), with the Bank carrying out prospective tests on the hedge relationship start date, when applicable, and retrospective tests in order to confirm, on each balance sheet date, the effectiveness of hedging relationships, demonstrating that changes in the fair value of the hedging instrument are covered by changes in the fair value of the hedged caption in the portion SEPARATE EXPLANATORY NOTES - 348 - attributed to the hedged risk. Any ineffectiveness found is recognised in the income statement when it occurs in gains or losses of hedge accounting. 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 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 exercises in which the hedged caption 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 6.9. 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. 6.10.7. 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. 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 to designate the entire hybrid contract at fair value through profit and loss. Reclassifications between categories of liabilities are not allowed. SEPARATE EXPLANATORY NOTES - 349 - 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 above-mentioned 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 Bank 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. These liabilities are measured at fair value, and the respective gains or losses on revaluation are recognised in profit or loss except for changes resulting from changes in the Bank's own risk, the Debt Valuation Adjustment (DVA), which is recognised in other comprehensive income. novobanco does not record any gain associated with own credit risk. 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. 6.10.8. 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 a result of 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 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 Bank has the right to reverse the guarantee, recognising the amounts in Loans and advances to customers after transferring the compensation for the losses to the collateral taker. 6.11. Reclassifications of financial assets and liabilities 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. 6.12. Modification of financial assets and liabilities The activity of commercial renegotiation of financial assets is one of the tools that the Bank has available and regularly uses in the management and recovery of these instruments. Accordingly, the Bank believes that the assessment of whether these renegotiations result in the derecognition of financial assets should be exceptional and case-by-case, taking into account the identification of the transactions in question by professional judgment and their materiality. When the contractual cash flows of a financial asset are renegotiated or otherwise modified as a result of commercial restructuring activity rather than due to credit risk and impairment considerations, the Bank performs an assessment to determine whether the modifications result in the derecognition of that financial asset. For financial assets, this assessment is based on qualitative factors. When assessing whether or not to derecognise a loan to a customer, amongst others, the Bank considers the following factors: Introduction of an equity feature; • Change in loan currency; • • Change in counterparty; • Whether the modification is such that the instrument would no longer meet the SPPI criterion. If the modification does not result in cash flows that are substantially different, as set out below, then it does not result in derecognition. Based on the change in cash flows discounted at the original effective interest rate, the Bank records a modification gain or loss, to the extent that an impairment loss has not already been recorded. The Bank’s accounting policy in respect of forborne loans is set out in note 6.14. SEPARATE EXPLANATORY NOTES - 350 - When the modification of the terms of an existing financial liability is not judged to be substantial and, consequently, does not result in derecognition, the amortised cost of the financial liability is recalculated by computing the present value of estimated future contractual cash flows that are discounted at the financial liability’s original effective interest rate. Any resulting difference is recognised immediately in the income statement. The Bank accounts for a substantial modification of the terms of an existing liability or part thereof as an extinguishment of the original financial liability and the recognition 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 any fees received, and discounted using the original effective interest rate is at least 10% different from the discounted present value of the remaining cash flows of the original financial liability. The difference between the carrying value of the original liability and the value of the new liability is recorded in profit or loss. 6.13. Derecognition Financial assets are derecognised from the balance sheet when (i) the Bank’s contractual rights relating to the respective cash flows have expired, (ii) the Bank has substantially transferred all the risks and benefits associated with its ownership, or (iii) despite the Bank having withholding part, but not substantially all of the risks and benefits associated with its ownership, control over the assets has been transferred. When an operation measured at fair value through other comprehensive income is derecognised, the accumulated gain or loss previously recognised in other comprehensive income is reclassified to results. In the specific case of equity instruments, the accumulated gain or loss previously recognised in other equity is not reclassified to profit or loss, being transferred between equity captions. In the specific case of loans to customers, at the time of sale, the difference between the sale value and the book value must be 100% provisioned, and at the time of the sale, the credit sold will be derecognised against the funds / assets received. and consequent use of impairment on the balance sheet. 6.14. Forborne modified loans The Bank sometimes makes concessions or modifications to the original terms of loans as a response to the borrower’s financial difficulties, rather than taking possession or to otherwise enforce collection of collateral. The Bank considers a loan forborne when such concessions or modifications are provided as a result of the borrower’s present or expected financial difficulties and the Bank would not have agreed to them if the borrower had been financially healthy. Indicators of financial difficulties include defaults on covenants, or significant concerns raised by the Global Risk Department. Forbearance may involve extending the payment arrangements and/or the agreement of new loan conditions. If modifications are substantial, the loan is derecognised, as explained in Note 6.12. Once the terms have been renegotiated without this resulting in the derecognition of the loan, any impairment is measured using the original effective interest rate as calculated before the modification of terms. The Bank also reassesses whether there has been a significant increase in credit risk, as set out in Note 39 and whether the assets should be classified as Stage 3. Derecognition decisions and classification between Stage 2 and Stage 3 are determined on a case-by-case basis. If these procedures identify a loss in relation to a loan, it is disclosed and managed as an impaired Stage 3 forborne asset. Once an asset has been classified as forborne, it will remain forborne for a minimum 24-month probation period. In order for the loan to be reclassified out of the forborne category, the customer has to meet all of the following criteria: • All of its facilities have to be considered performing; • The probation period of two years has passed from the date the forborne contract was considered performing; • Regular payments of more than an insignificant amount of principal or interest have been made during at least half of the probation period; • The customer does not have any contracts that are more than 30 days past due. 6.15. Offsetting of 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 realise 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 novobanco, as well as in the event of default, bankruptcy or insolvency of the Bank or the counterparty. 6.16. Impairment of financial assets Impairment principles The Bank record 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. Equity instruments are not subject to impairment under IFRS 9. Debt instruments at amortised cost or at fair value through other comprehensive income are in the scope of the impairment calculation. SEPARATE EXPLANATORY NOTES - 351 - 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. Impairment is based on the credit losses expected to arise over the life of the asset (LTECL), unless there has been no significant increase in credit risk since origination, in which case, the allowance is based on the 12 months’ expected credit losses. The 12mECL is the portion of LTECL that represent the ECL that result from default events on a financial instrument that are possible within the 12 months after the reporting date. Both LTECL and 12mECL are calculated on either an individual basis or a collective basis, depending on the nature of the underlying portfolio of financial instruments. The Bank has established a policy to perform an assessment, at the end of each reporting period, of whether a financial instrument’s credit risk has increased significantly since initial recognition, by considering the change in the risk of default occurring over the remaining life of the financial instrument. Based on the above process, the Bank aggregates its loans by stage as described below: • Stage 1: includes all exposures without any indication of significant deterioration in credit risk and without an active default status. For these exposures the impairment is recognised as a 12-month expected loss; • Stage 2: includes all exposures where at least one indication of significant deterioration of credit risk has been identified. For these exposures, impairment is recognised at the present value of the expected losses accumulated until maturity. This universe also includes exposures in a quarantine period, that is, exposures that have recently ceased to have (1) indications of significant deterioration of credit risk and/or (2) default classification; • Stage 3: includes all exposures classified in default - according to the Bank's internal definition which is aligned with the regulatory definition . This definition includes, cumulatively: o Exposures that have materially defaulted for more than 90 consecutive days; or o Exposures that, not having material default for more than 90 consecutive days, are classified as "Unlikely to pay". Purchased or originated impaired financial assets (POCI), that is, for which impairment was identified upon initial recognition, can be classified as stage 2 or stage 3. The calculation of collective impairment For the calculation of impairment on a collective basis, exposures are segmented based on similar credit risk characteristics according to the risk assessment defined by the Bank. For each of these homogeneous risk segments, risk factors are estimated and applied as part of the impairment calculation. To determining collective impairment, the risk factors considered in each risk segment must, in accordance with IFRS regulations, reflect forward-looking information. In addition, the calculation of impairment should also reflect consideration of multiple scenarios, whereby the final impairment is the result of the sum of the amounts calculated in each scenario, weighted by the respective associated probability. The calculation of the expected loss always involves the consideration of: • Probability of default (PD) - this risk factor is an estimate of the probability of default over a given period. Default can only occur at a given point in time in the evaluation period if the credit line has not been previously derecognised and is still on balance sheet; • Severity (LGD) - this risk factor is an estimate of the loss that arises if the default occurs at a given time. It is based on the difference between the contractual cash flows and those that the Bank estimates it will receive, including the execution of collateral or other contractual changes that become an integral part of the loan and do not meet the criteria to be recognised separately. • Exposure - represents the nominal value of the exposure at the reporting date and it is this amount that is considered for the basis of the collective impairment calculation. In the case of off-balance sheet exposures, a credit conversion factor (CCF) is applied to the nominal value of the exposure. This factor represents the probability that the off-balance sheet exposures will convert into on-balance sheet exposures. When an exposure is classified in stage 2, it is considered for impairment calculation purposes that the exposure evolves according to the contracted principal and interest repayment plan, or in the absence of this information, that the disbursement occurs at maturity. The details of the impairment calculation are presented as follows: • Stage 1: this calculation focuses on performing exposures that do not show any active evidence of significant deterioration of credit risk compared to origination. The impairment represents the expected loss resulting from default events on a financial instrument that are possible to occur within 12 months after the balance sheet date. The risk factors - PD and LGD - consider SEPARATE EXPLANATORY NOTES - 352 - the 12-month horizon and are applied to the value of the exposure. This calculation is done by scenario, since each scenario considered has specific risk factors - PD and LGD; • Stage 2: this calculation focuses on productive exposures that present an indication of a significant increase in credit risk since origination. The impairment represents the present value of the sum of expected losses until the maturity of the exposure. Expected losses are calculated on the projected exposure at each debt repayment time, according to the exposure repayment schedule, and these expected losses are discounted at the original effective rate of the contract to obtain its present value at the reporting date. As mentioned above, this calculation is made by scenario since different risk factors are considered for each scenario; • Stage 3: this calculation focuses on non-productive exposures, where impairment corresponds to the difference between the amount owed and the current value of expected recoveries for this exposure, given its characteristics. To determine the present value of expected recoveries, the original effective rate of the contract is also used; • POCI are financial assets with impairment at initial recognition. Exposures in this situation cannot be classified as stage 1; • • Irrevocable commitments and letters of credit: as detailed above, given the off-balance sheet nature of irrevocable commitments, the Bank estimates for these contracts the respective amount that it expects to be converted into an on-balance sheet amount (credit). Accordingly, the estimated conversion factor for this type of exposure is applied to its nominal value and the respective result is taken into account as the basis for calculating collective impairment; Impairment is calculated and deducted from assets for credit cards and revolving lines that include an irrevocable commitment. For irrevocable commitments and letters of credit, impairment is recognised in Provisions on the liabilities side. Impairment for debt instruments measured at fair value through other comprehensive income does not reduce the carrying amount of those financial assets, which remains at fair value. Accordingly, an amount equal to the provision that would arise if the assets were measured at amortised cost is recognised in other comprehensive income as an accumulated impairment charge, with a corresponding charge to profit or loss. The cumulative loss recognised in other comprehensive income is recycled to profit or loss on derecognition of the assets. Individual impairment analysis process The Individual Credit Analysis comprises a staging analysis and an individual impairment quantification analysis. The staging analysis is performed for debtors previously classified as stage 1 and stage 2, with the purpose of evaluating the adequacy of the assigned stage with additional information obtained on an individual basis. The individual impairment quantification analysis aims to determine the most appropriate impairment rate for each credit customer, regardless of the amount resulting from the Collective Impairment Model. Clients that have been subject to Individual Analysis, but for which an objective impairment loss was not considered, are again included in the Collective Impairment Model. The Individual Analysis of the selected clients is carried out based on the information provided by the Commercial Structures regarding the client / Bank’s framework, historical and forecast cash flows (when available) and existing collateral. 6.17. Collateral and financial guarantees valuation To mitigate its credit risks on financial assets, the Bank seeks to use collateral, where possible. The collateral comes in various forms, such as cash, securities, letters of credit/guarantees, real estate, receivables, inventories, other non-financial assets and credit enhancements such as netting agreements. Collateral, unless repossessed, is not recorded on the Bank’s statement of financial position. Collateral is generally assessed, at a minimum, at inception and re-assessed on a quarterly basis. However, some collateral, for example, cash or securities relating to margining requirements, is valued daily. To the extent possible, the Bank uses active market data for valuing financial assets held as collateral. Other financial assets which do not have readily determinable market values are valued using models. Non-financial collateral, such as real estate, is valued based on data provided by third parties such as mortgage brokers or based on housing price indices. 6.18. Foreclosed properties and non-current assets held for sale In the scope of its loan granting activity, the Bank incurs in the risk of the borrower failing to repay all the amounts due. In case of loans and advances with mortgage collateral, the Bank executes these and receives real estate properties resulting from foreclosure. 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 Bank’s objective is to immediately dispose of all real estate property acquired as payment in kind for loans or through foreclosure, during exercise 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 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 novobanco, the immediate sale value is considered to be the respective fair value. The market value of property for which a promissory contract of sale and purchase has been signed corresponds to the value of that contract. SEPARATE EXPLANATORY NOTES - 353 - The valuation of the real estate properties received for credit recovery 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 specialised in these services. The valuation reports are analysed internally, namely comparing the sales 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 fair value level in the 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 analysis on the assumptions used, which may imply additional adjustments to their fair value, supported by additional internal or external valuations. For assets of greater relevance, the challenge of the appraisals that serve as a basis for the valuation of the real estate assets is carried out by a specialised area of the Bank that is independent of this valuation process, in accordance with an annual work plan previously approved by the Executive Board of Directors. 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 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. Where the carrying 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. 6.19. 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) (ii) (iii) The total amount of the credit has been demanded, that is, the credit must be fully recognised as overdue credit. Exemptions from this requirement are (i) 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, and (ii) situations in which, despite the contract not being fully matured, the Bank understands that it is facing a scenario of total or partial loss; All the recovery efforts, considered appropriate, have been developed (and the relevant evidence gathered); 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). Subsequent payments received after the write-off must be recognised as subsequent write-off recoveries at other operating income. 6.20. 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. 6.21. 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. SEPARATE EXPLANATORY NOTES - 354 - 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 6.10. 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 in Gains or Losses from financial assets and liabilities held for trading. 6.22. Property, plant and equipment 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 recognised 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 exercise 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 or Other operating expenses. 6.23. Leases Lease Definition The Bank assesses at contract inception whether a contract is, or contains a lease. That is, if the contract conveys the right to control the use of an identified asset for a period of time in exchange for consideration. As lessee As a lessee, the Bank leases various assets, including real estate, vehicles and IT equipment. The Bank recognises lease liabilities to make lease payments and right-of-use assets representing the right to use the underlying assets. As previously mentioned, the Bank has opted not to recognise assets under the 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) with a new value of less than Euro 5 SEPARATE EXPLANATORY NOTES - 355 - Number of YearsSelf-Serviced Buildings35 to 50Leasehold improvements10IT equipment4 to 5Furniture and fixtures4 to 10Interior installations5 to 10Security equipment4 to 10Machines and tools4 to 10Transport equipment4Other equipment5 thousand. The Bank recognises the lease payments associated with these leases as expenses on a straight-line basis over the lease term in the income statement as “Other administrative expenses – rents and rentals”. 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 an investment property. Right-of-use assets are measured at cost, less any accumulated depreciation and impairment losses, and adjusted for any remeasurement of lease liabilities. The cost of right-of-use assets includes the amount of lease liabilities recognised, initial direct costs incurred and less any lease incentives received. The Bank presents the lease liabilities under "Other liabilities" in the statement of financial position. The lease liability corresponds to the present value of the future cash flows to be paid during the lease contract. The lease rents include fixed amounts, variable amounts that depend on an interest rate, and amounts to be payable relating to guarantees on the residual value of the asset. Any options are also included if they are reasonably expected to be exercised. Variable amounts that do not depend on interest rate are recognised as costs in the period to which they relate. During the lease period, the lease liability increases by the interest accrual and decreases by the lease rents payment. The value of the lease liability changes if the terms of the lease (such as the term or the value of the index) change or if the valuation of the exercise of the option to acquire the asset changes. As Lessor Financial leases Transactions in which the risks and benefits inherent in the ownership of an asset are substantially transferred to the lessee are classified as finance leases. Financial leasing contracts are recorded in the balance sheet as credits granted for an amount equivalent to the net investment made in the leased assets, together with any estimated non-guaranteed residual value. Interest included in rents charged to customers is recorded as income while capital amortizations, also included in rents, are deducted from the amount of credit granted to customers. The recognition of interest reflects a constant periodic rate of return on the lessor's remaining net investment. Operating leases All lease transactions that do not fall under the definition of finance lease are classified as operating leases. Revenues relating to these contracts are recognised on a straight-line basis over the lease term and recorded in “Other operating income”. 6.24. Intangible assets The costs incurred with the acquisition, production and development of software are capitalised, 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 exercise, are recognised and recorded as intangible assets. All remaining costs associated with information technology services are recognised as an expense as incurred. 6.25. Impairment of non-financial assets The Bank assesses at each reporting date, whether there is an indication that an asset may be impaired. If any indication exists, or when annual impairment testing for an asset is required, the Bank estimates the asset’s recoverable amount. An asset’s recoverable amount is the higher of an asse or cash generating unit fair value less costs of disposal and its value in use. The recoverable amount is determined for an individual asset, unless the asset does not generate cash inflows that are largely independent of those from other assets or groups of assets. When the carrying amount of an asset or cash generating unit exceeds its recoverable amount, the asset is considered impaired and is written down to its recoverable amount. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. In determining fair value less costs of disposal, recent market transactions are taken into account. If no such transactions can be identified, an appropriate valuation model is used. These calculations are corroborated by valuation multiples, quoted share prices for publicly traded companies or other available fair value indicators. The Bank bases its impairment calculation on most recent budgets and forecast calculations, which are prepared separately for each of the Bank’s cash generating units to which the individual assets are allocated. These budgets and forecast calculations generally cover a period of five years. A long-term growth rate is calculated and applied to project future cash flows after the fifth year (perpetuity). Impairment losses of continuing operations are recognised in the statement of profit or loss in expense categories consistent with the function of the impaired asset, except for properties previously revalued with the revaluation taken to OCI. For such properties, the impairment is recognised in other comprehensive income up to the amount of any previous revaluation. SEPARATE EXPLANATORY NOTES - 356 - For assets excluding goodwill, an assessment is made at each reporting date to determine whether there is an indication that previously recognised impairment losses no longer exist or have decreased. If such indication exists, the Bank estimates the assets or cash generating unit recoverable amount. A previously recognised impairment loss is reversed only if there has been a change in the assumptions used to determine the asset’s recoverable amount since the last impairment loss was recognised. The reversal is limited so that the carrying amount of the asset does not exceed its recoverable amount, nor exceed the carrying amount that would have been determined, net of depreciation, had no impairment loss been recognised for the asset in prior exercises. Such reversal is recognised in the statement of profit or loss unless the asset is carried at a revalued amount, in which case, the reversal is treated as a revaluation increase. Intangible assets with indefinite useful lives are tested for impairment annually at the cash generating unit level, as appropriate, and when circumstances indicate that the carrying value may be impaired. The Bank assesses where climate risks may have a significant impact, such as the introduction of emissions reduction legislation that may increase production costs. These risks in relation to climate-related issues are included as key assumptions when they materially affect the impairment measurement. These assumptions have been included in the cash flow forecasts in the value in use assessment. 6.26. Employee benefits Pensions Pursuant to the signature of the Collective Labour Agreement (“Acordo Coletivo de Trabalho” (ACT)) for the banking sector and its subsequent amendments resulting from the 3 tripartite agreements described in Note 15, 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 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 recognises 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 exercise, and (ii) the liability relating to past service costs for active employees must be funded at a minimum level of 95%. The Bank assesses the recoverability of any excess in a fund regarding the 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 with services and/or contributions on medical assistance expenses, auxiliary diagnostic means, medication, hospital admissions and surgical interventions, in accordance with its financial resources and internal regulations. SEPARATE EXPLANATORY NOTES - 357 - 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, correspond to a monthly fixed amount (as per Annex VI of the new ACT) for each employee, 14 times a year, recorded on a monthly basis in personnel costs, while the component to be paid by the employee is discounted monthly in the processing of salary, against the caption Amounts payable (SAMS). 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 (defined benefit plan). Career bonus The ACT provides for the payment by the Bank of a career bonus, due at the time immediately prior to the employee's retirement if he retires at the Bank's service, corresponding to 1.5 of his salary at the time of payment. These 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, in Personnel Expenses. Employees’ variable remuneration and other obligations The Bank 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 Bank recognises 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 exercise. 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. 6.27. Provisions and Contingent Liabilities Provisions are recognised 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, both internal and external. When the effect the 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 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 recognised 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. 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. 6.28. Contingent assets Contingent assets are not recognised in the financial statements, being disclosed when it is probable that there will be a future economic inflow of resources. 6.29. Income taxes novobanco is subject to the tax regime consigned in the Código do Imposto sobre o Rendimento das Pessoas Coletivas (IRC Code), to the Special Regime applicable to Deferred Tax Assets (approved by Law No. 61/2014, of August 26), and to other legislation. Corporate income tax comprises current tax and deferred tax. SEPARATE EXPLANATORY NOTES - 358 - Corporate income tax is recognised in the income statement except to the extent that it relates to captions recognised directly in equity, in which case it is recognised under equity. 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 and any adjustments to prior period taxes. The tax is recognised in each financial reporting period based on management estimates as regards the average effective tax rate foreseen for the entire exercise. 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 exercises. 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 Bank 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 the Bank. The taxable profit or tax loss determined by the Bank can be adjusted by the Portuguese Tax Authorities within a period of four years, except in the case of any deduction or use of tax credit, in which the expiry period is the exercise of that right. The Executive Board of Directors considers that any corrections, resulting mainly from differences in the interpretation of tax legislation, will not have a materially relevant effect on the financial statements. Following the changes set forth in Law no 27-A/2020, of July 24, within the scope of the Supplementary Budget for 2020, the deadline for carrying forward tax losses is now 14 years for tax losses generated in 2014, 2015 and 2016 and 7 years for tax losses generated in 2017, 2018 and 2019. Tax losses generated in 2020 and 2021 have a limit of 12 years and can be deducted until 2032 and 2033, respectively. The limit for tax losses is increased from 70% to 80%, applicable only to tax losses generated in 2020 and 2021. Law 24-D/2022, of December 30 (State Budget Law for 2023) introduced changes in terms of the carry forward of tax losses. A period for carrying forward tax losses is no longer foreseen. On the other hand, the annual limit of the deduction to taxable income is reduced to 65% (currently 70%). This change applies to the deduction of losses from taxable profits in taxable periods beginning on or after 1 January 2023, as well as to tax losses assessed in taxable periods prior to 1 January 2023. The elimination of the time limitation on tax losses does not apply to those ascertained in tax periods prior to 1 January 2023, in which one of the situations provided for in No 1 of the Article 6 of the Special Regime applicable to Deferred Tax Assets (REAID), approved as an annex to Law No. 61/2014, of August 26 (conversion of deferred tax assets into tax credits), applying to tax losses ascertained in these tax periods the deduction period in force on 31 December 2022. This change does not affect the application of paragraph 2 of article 11 of Law 27-A/2020, of July 24 (which allows an increase of 10 percentage points in the deduction of taxable income when dealing with tax losses ascertained in 2020 and 2021). 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 realise 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. The Bank complies with the guidelines of IFRIC 23 - Uncertainty on the Treatment of Income Tax regarding the determination of taxable profit, tax bases, tax losses to be reported, tax credits to be used and tax rates in scenarios of uncertainty regarding the treatment of income tax, with no material impact on its financial statements resulting from its application. On 22 December 2022, Council Directive (EU) 2022/2523 of December 14 on ensuring a worldwide minimum level of taxation for multinational and large national corporate groups in the Union, commonly referred to as the Pillar 2 Directive, was published. This Directive entered into force on the day following its publication, and Member States must transpose the laws, regulations and administrative provisions necessary to comply with it by 31 December 2023. These provisions will apply to tax years beginning on or after 31 December 2023, apart from the so-called Insufficiently Taxed Profit Rule (UTPR), which will only apply to exercises beginning on or after December 2024. To date, this Directive has not yet been transposed into Portuguese law. SEPARATE EXPLANATORY NOTES - 359 - novobanco together with its tax advisors will initiate a qualitative and quantitative analysis regarding the possible impacts on the taxation of novobanco or exercises beginning on or after 1 January 2024. 6.29. Treasury shares Own equity instruments of the Bank which are acquired by it are deducted from equity. Consideration paid or received on the purchase, sale, issue or cancellation of the Bank’s own equity instruments is recognised directly in equity. No gain or loss is recognised on the result of the purchase, sale, issue or cancellation of own equity instruments. At 31 December 2022, the Bank does not hold own equity instruments. 6.31. Disintermediation and custody The Bank provides trust and other fiduciary services that result in the holding or investing of assets on behalf of its clients. Assets held in a fiduciary capacity, unless recognition criteria are met, are not reported in the financial statements, as they are not assets of the Bank. Fees and commissions arising from these activities are recognised in the income statement in the exercise in which they occur. 6.32. Dividends Dividends on ordinary shares are recognised as a liability and deducted from equity when they are approved by the Bank’s shareholders. Interim dividends are deducted from equity when they are declared and are no longer at the discretion of the Bank.. Dividends for the exercise that are approved after the reporting date are disclosed as an event after the reporting date. 6.33. Reserves The reserves recorded in equity on the Bank’s statement of financial position include: • Other Comprehensive Income: o Fair value reserves which comprise: (i) The cumulative net change in the fair value of debt instruments classified at fair value through other comprehensive income, minus the allowance for expected credit loss, when applicable; (ii) The cumulative net change in fair value of equity instruments at fair value through other comprehensive income; Impairment reserves of debt instruments classified at fair value through other comprehensive income; o o Reserves associated with sales of equity instruments classified as fair value through other comprehensive income, which include the proceeds from sales of these securities; o Actuarial deviation reserves that correspond to actuarial gains and losses, resulting from differences between the actuarial assumptions used and the values actually verified (experience gains and losses) and from changes in actuarial assumptions and the gains and losses arising from the difference between the income expected from the fund's assets and the values obtained; o Own credit revaluation reserve, which comprises the cumulative changes in the fair value of the financial liabilities designated at fair value through profit or loss attributable to changes in the Bank’s own credit risk; o Cash flow hedge reserve, which comprises the portion of the gain or loss on a hedging instrument in a cash flow hedge that is determined to be an effective hedge; o Foreign currency translation reserve, which is used to record exchange differences arising from the translation of the net investment in foreign operations, net of the effects of hedging; o Other capital reserve, which includes the portion of compound financial liabilities that qualify for treatment as equity. • Retained earnings, which corresponds to earnings of the Bank carried over from previous years; • Other reserves (originary reserve, special reserve and other reserves). 6.34. 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 will be exercised. 6.35. Provision of insurance or reinsurance mediation services novobanco is an entity authorised by the Insurance and Pension Funds Supervisory Authority (ASF) to practice the activity of insurance mediation, through which it sells insurance contracts, receiving commissions for the services rendered, in accordance with the protocols established with the Insurance Companies, which are recognised on an accrual basis. SEPARATE EXPLANATORY NOTES - 360 - 6.36. The accounting standards and interpretations The accounting standards and interpretations recently issued but not yet effective and that the Bank has not yet applied in the preparation of its financial statements may be analyzed as follows: Standards, interpretations, amendments and revisions that become effective in future years: The following standards, interpretations, amendments and revisions, with mandatory application in future exercises, have, up to the date of approval of these financial statements, been adopted ("endorsed") by the European Union: Standard / Interpretation Applicable in the European Union in the exercises initiated in or after Description IFRS 17 – Insurance Contracts January 1st, 2023 - to Amendments Insurance Initial contracts application of IFRS 17 and IFRS 9 - Comparative information IFRS 17 - January 1st, 2023 Amendments to IAS 1 - Disclosure of accounting policies January 1st, 2023 Amendments to IAS 8 - Definition of accounting estimates January 1st, 2023 Amendments to IAS 12 - Deferred tax related to assets and liabilities arising from a single transaction January 1st, 2023 IFRS 17 applies to all insurance contracts (i.e., life, non-life, direct insurance, and reinsurance), regardless of the type of entities that issue them, as well as to some instruments with discretionary holding guarantees and some characteristics. financial In general terms, the IFRS 17 provides an accounting model for insurance contracts that are more useful and more consistent for issuers. In contrast to the requirements of IFRS 4, which are based on previously adopted local accounting policies, IFRS 17 provides a comprehensive model for insurance contracts, covering all relevant accounting aspects. This amendment to IFRS 17 refers to the presentation of comparative information on financial assets in the initial application of IFRS 17. It adds a transition option that allows an entity to apply an overlay to the classification of a financial asset in the comparative period(s) presented in the initial application of IFRS 17. The overlay allows all financial assets, including those held in relation to non-contract-related activities within the scope of IFRS 17, to be classified, instrument by instrument, in the comparative period(s) in line with how the entity expects these assets to be classified in the initial application of IFRS 9. These amendments are intended to assist the entity in the dissemination of 'material' accounting policies, formerly referred to as 'significant' policies. However, due to the lack of this concept in IFRS standards, it was decided to replace the concept of "materiality", a concept already known to users of the financial statements. When evaluating the materiality of accounting policies, the entity must consider not only the sise of the transactions but also other events or conditions and the nature of them. This amendment sheds light on the distinction between change in accounting estimate, change in accounting policy and correction of errors. Additionally, it clarifies how an entity uses measurement techniques and inputs to develop accounting estimates. This amendment clarifies that payments that settle a liability are fiscally deductible, but it is a matter of professional judgment whether such deductions are attributable to the liability that is recognised in the financial statements or related assets. This is important for determining whether there are temporary differences in initial asset or liability recognition. Thus, the initial recognition exception does not apply to transactions which have resulted in temporary taxable and deductible differences equal. It shall apply only if the recognition of an active lease and a passive lease give rise to taxable and deductible temporary differences that are not equal. The Bank did not early adopt any of these standards in the financial statements for the exercises ended 31 December 2022. No significant impacts on the financial statements are expected as a result of their adoption. Standards, interpretations, amendments and revisions not yet adopted by the European Union The following standards, interpretations, amendments and revisions, with mandatory application in future exercises, have not been adopted ("endorsed") by the European Union, until the date of approval of these financial statements: SEPARATE EXPLANATORY NOTES - 361 - Standard / Interpretation Description Amendments to IAS 1 - Presentation of Financial Statements - Classification of current and non-current liabilities Amendments liabilities in transactions IFRS 16 to sales and - Lease relocation This amendment seeks to clarify the classification of liabilities as current or non-current balances according to the rights that an entity has to defer its payment at the end of each reporting period. The classification of liabilities is not affected by the entity's expectations (the assessment shall determine whether a right exists but should not consider whether or not the entity will exercise such right), or by events occurring after the reporting date, such as non-compliance with a covenant. However, if the right to postpone the settlement for at least twelve months is subject to compliance with certain conditions after the balance sheet date, those criteria do not affect the right to defer settlement whose purpose is to classify a liability as current or non-current. It also includes a new definition of "settlement" of a liability and should be applied prospectively This amendment specifies the requirements for the subsequent measurement of lease liabilities related to sale & leaseback transactions that qualify as "sale" in accordance with the principles of IFRS 15, focusing on variable lease payments that do not depend on an index or a fee. In subsequent measurement, seller- lessees should determine "lease payments" and "revised lease payments" When subsequently measuring rental liabilities, sellers-lessees shall determine "lease payments" and "revised lease payments" in such a way that they do not recognise any gain or loss related to the retained right of use. The application of these requirements shall not prevent the seller-lessee from recognising, in the income statement, any gain or loss related to the partial or total "sale" as required by paragraph 46(a) of IFRS 16. It should be applied prospectively. These standards have not yet been endorsed by the European Union and, as such, have not been applied by the Bank for the exercise ended 31 December 2022. No significant impacts on the financial statements are expected as a result of their adoption. NOTE 7 – 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 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 Bank's accounting policies and the main sources of uncertainty in the estimates were the same as those described in the last report of the Financial Statements. 7.1. 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 Bank determines its business model based on how it manages the financial assets and its business objectives. The Bank 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 accounting policy 6.16, 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 judgement that, in accordance to the Bank management, 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 novobanco and which result in performing judgements when assessing the high probability that the borrower does not fulfil its obligations within the conditions agreed with novobanco. This concept is covered in more detail below; • 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 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. SEPARATE EXPLANATORY NOTES - 362 - 7.2. 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 38. 7.3. 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 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 concretisation 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. 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 losses carry forward. Hence, it is possible that some additional taxes may be assessed, mainly as a result of differences in the 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. 7.4. 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 expiry date of the plan's obligations). These assumptions are based on the expectations of the novobanco 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. 7.5. Provisions and Contingent liabilities The recognition of provisions involves a significant degree of complex judgment, namely identifying whether there is a present obligation and estimating the probability and timing, as well as quantifying the outflows that may arise from past events. When events are at an early stage, judgments and estimates can be difficult to quantify due to the high degree of uncertainty involved. The Executive Board of Directors monitors these matters as they develop to regularly reassess whether the provisions should be recognised. However, it is often not feasible to make estimates, even when events are already at a more advanced stage, due to existing uncertainties. The complexity of such issues often requires expert professional advice in determining estimates, particularly in terms of legal and regulatory issues. The amount of recognised provisions may also be sensitive to the assumptions used, which may result in a variety of potential results that require judgment in order to determine a level of provision that is considered appropriate in view of the event in question. 7.6. Investment properties, Foreclosed assets and Non-current assets held for sale Foreclosed assets 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 carried out by independent entities specialising in this type of service, using the market, income or cost methods defined in Note 6.18. The valuation reports are analysed internally, namely comparing the sales values with the revalued values of the properties to maintain the valuation parameters and processes aligned with the market evolution. SEPARATE EXPLANATORY NOTES - 363 - 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 recognised. 7.7 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 recognised 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. NOTE 8 – NET INTEREST INCOME The breakdown of this caption as of 31 December 2022 and 2021 is as follows: As of 31 December 2022, the caption interest on loans and advances includes Euro 30,046 thousand related to finance lease operations (December 31, 2021: Euro 31,037 thousand). In relation to repurchase agreement operations, interest from deposits from Other banks, customer deposits and credit institutions includes, as of 31 December 2022, the amount of Euro -160 thousand, Euro 3,397 thousand and Euro 4,859 thousand, respectively (December 31, 2021: Euro 2,300 thousand in customer deposits). Interest income and expense captions 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 6.10.6 e 6.10.7. NOTE 9 – DIVIDEND REVENUE The breakdown of this caption is as follows: SEPARATE EXPLANATORY NOTES - 364 - (in thousands of Euros)OtherOtherFrom assets / liabilities at amortised costFrom assets / liabilities at fair value through other comprehensive incomeIncome/expenses from negative interest ratesFrom assets / liabilities at fair value through profit or lossFrom assets / liabilities at amortised costFrom assets / liabilities at fair value through other comprehensive incomeIncome/expenses from negative interest ratesFrom assets / liabilities at fair value through profit or lossInterest IncomeInterest from loans and advances 560 888 15 947 - 18 576 853 484 946 12 922 - - 497 868 Interest from deposits with and loans and advances to banks 25 692 - 38 253 - 63 945 14 033 - 75 062 - 89 095 Interest from securities 124 887 38 162 - 13 053 176 102 65 266 70 982 - 18 631 154 879 Interest from derivatives - - 1 753 19 172 20 925 - - 1 579 4 730 6 309 Other interest and similar income 466 - - - 466 441 - - - 441 711 933 54 109 40 006 32 243 838 291 564 686 83 904 76 641 23 361 748 592 Interest ExpensesInterest on debt securities issued 58 252 - - - 58 252 36 513 - - - 36 513 Interest on amounts due to customers 44 224 - - - 44 224 50 231 - - - 50 231 Interest on deposits from Central Banks and other banks 27 733 - 12 306 - 40 039 8 937 - 11 380 - 20 317 Interest on subordinated liabilities 34 178 - - - 34 178 34 168 - - - 34 168 Interest on derivatives - - 6 850 21 921 28 771 - - 6 980 11 308 18 288 Other interest and similar expenses 7 280 - 551 - 7 831 6 940 - 1 051 - 7 991 171 667 - 19 707 21 921 213 295 136 789 - 19 411 11 308 167 508 540 266 54 109 20 299 10 322 624 996 427 897 83 904 57 230 12 053 581 084 31.12.202231.12.2021Calculated by the effective interest methodTotalCalculated by the effective interest methodTotal NOTE 10 – FEES AND COMMISSIONS INCOME AND EXPENSES The breakdown of this caption is as follows: NOTE 11 – GAINS OR LOSSES ON FINANCIAL OPERATIONS The breakdown of this caption is as follows: SEPARATE EXPLANATORY NOTES - 365 - (in thousands of Euros)31.12.202231.12.2021Financial assets mandatorily at fair value through profit or lossShares 107 2 146 Euronext NV- 1 801 Visa Inc CL C 107 226 Others- 119 Participation Units 9 135 7 604 Explorer III B 1 164 7 604 NB Património 7 971 - Financial assets at fair value through other comprehensive incomeShares 3 406 1 062 FLITPTREL X 1 035 - SIBS SGPS 1 866 785 ESA Energia 238 275 Rádio Popular 163 - TF Turismo SGFII 103 - Others 1 2 Financial assets in investments in associates and subsidiaries 4 804 7 588 Unicre 3 070 6 322 Locarent 613 518 Edenred 1 009 660 ESEGUR 112 88 17 452 18 400 (in thousands of Euros)31.12.202231.12.2021Fees and commissions incomeFrom banking services 220 269 204 748 Cards 40 697 35 508 Management of Means of Payment 106 866 99 793 Asset Management 13 887 14 219 Credit operations 58 819 55 228 From guarantees provided 31 879 32 654 From transaction of securities 8 235 8 560 From commitments to third parties 6 599 7 997 Bancassurance 29 043 27 048 Other fee and commission income 6 101 6 006 302 126 287 013 Fees and commissions expensesWith banking services rendered by third parties 27 729 26 703 Cards 9 122 9 447 Management of Means of Payment 14 645 14 616 Asset Management 17 6 Credit operations 3 945 2 634 From guarantees provided 1 903 1 564 From transaction of securities 4 389 4 593 Other fee and commission income 5 795 7 436 39 816 40 296 262 310 246 717 Gains or losses on financial assets and financial liabilities held for trading In accordance with the accounting policy described in Note 6.5, 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 Bank recognises 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 Bank’s access to the wholesale market. As of 31 December 2022, gains recognised in the income statement arising from intermediation fees, which are essentially related to foreign exchange transactions, amounted to approximately Euro 3,597 thousand (31 December 2021: Euro 1,800 thousand). SEPARATE EXPLANATORY NOTES - 366 - (in thousands of Euros)GainsLossesTotalGainsLossesTotalOf financial assets at fair value through other comprehensive incomeSecuritiesObrigações e outros títulos de rendimento fixoBonds and other fixed income securitiesDe emissores públicos Issued by government and public entities 28 671 59 831 ( 31 160) 15 088 12 758 2 330 De outros emissoresIssued by other entities 2 980 55 014 ( 52 034) 11 021 1 073 9 948 31 651 114 845 ( 83 194) 26 109 13 831 12 278 Of financial assets and liabilities at amortized costSecuritiesObrigações e outros títulos de rendimento fixoBonds and other fixed income securitiesIssued by government and public entities 2 - 2 - - - De outros emissoresIssued by other entities 17 6 310 ( 6 293)- 142 ( 142)Credit 4 588 3 547 1 041 12 639 32 009 ( 19 370) 4 607 9 857 ( 5 250) 12 639 32 151 ( 19 512) 36 258 124 702 ( 88 444) 38 748 45 982 ( 7 234)SecuritiesBonds and other fixed income securitiesIssued by government and public entities 2 367 25 987 ( 23 620) 3 252 14 507 ( 11 255)Issued by other entities 39 - 39 43 20 23 Derivative financial instrumentsContratos sobre taxas de câmbioExchange rates contracts 52 574 47 400 5 174 59 419 62 526 ( 3 107)Contratos sobre taxas de juroInterest rate contracts 642 565 480 915 161 650 422 828 358 646 64 182 Contratos sobre ações/índicesEquity / Index contracts 3 615 2 650 965 31 440 30 638 802 Contratos sobre créditosCredit default contracts 187 - 187 16 18 ( 2)OutrosOther 9 079 6 759 2 320 4 179 3 600 579 710 426 563 711 146 715 521 177 469 955 51 222 Gains or losses on financial assets mandatorilyat fair value through profit or lossSecuritiesObrigações e outros títulos de rendimento fixoBonds and other fixed income securitiesDe outros emissoresIssued by other entities 11 638 105 286 ( 93 648) 26 377 6 714 19 663 Shares 57 330 43 211 14 119 25 726 457 25 269 Other variable income securities 153 955 139 177 14 778 46 328 48 526 ( 2 198) 222 923 287 674 ( 64 751) 98 431 55 697 42 734 Other financial assetsCostumer's credit- 31 197 ( 31 197)- - - - 31 197 ( 31 197)- - - 222 923 318 871 ( 95 948) 98 431 55 697 42 734 Gains or losses from hedge accountingChanges in fair value of the hedge instrumentInterest rate contracts 626 558 188 074 438 484 89 031 41 945 47 086 Instrumentos financeiros derivadosChanges in fair value of the hedged item attributable to the hedged risk 2 953 441 972 ( 439 019) 9 732 41 922 ( 32 190) 629 511 630 046 ( 535) 98 763 83 867 14 896 Exchange rate revaluation1 830 358 1 823 053 7 305 1 115 721 1 105 068 10 653 3 429 476 3 460 383 ( 30 907)1 872 840 1 760 569 112 271 Gains or losses on financial assets and liabilities held for trading31.12.202231.12.2021Gains or losses on financial assets and liabilities not measured at fair value through profit or loss(cid:9)(cid:9) Gains or losses on hedge accounting Gains or losses on hedge accounting include the fair value variations of the hedging instrument (derivative) and the fair value variations of the hedged caption attributable to the hedged risk. In the case where the hedge operations are interrupted early, there may occur the payment/receipt of compensation, which is recorded in Other operating expenses/ Other operating income. As of 31 December 2022, the amount of compensation received amounted to Euro 89 thousand (31 December 2021: Euro 1,726 thousand). Exchange differences 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 6.1. NOTE 12 – GAINS OR LOSSES ON DERECOGNITION OF NON-FINANCIAL ASSETS The breakdown of this caption is as follows: In 2021, as part of the reorganisation of the Real Estate Funds held by the novobanco Group, the Bank sold properties of its own service and received in donation to the Real Estate Funds, recording a net loss of 10.6 million euros. In 2022, the caption Gains or losses on derecognition of non-financial assets includes the gain of Euro 66,797 thousand on the sale of the novobanco headquarters building, as detailed in note 25. NOTE 13 – OTHER OPERATING INCOME AND OTHER OPERATING EXPENSES The breakdown of this caption is as follows: As of 31 December 2022, the amount received as compensation for discontinued hedging operations, included in other income, amounts to Euro 89 thousand (31 December 2021: Euro 1,726 thousand) (see Note 11). 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 national amount of derivative financial instruments, and whose regime has been extended. As of 31 December 2022, novobanco recognised Banking Levy charges as a cost in the amount of Euro 28,270 thousand (31 December 2021: Euro 28,334 thousand). The cost recognised as of 31 December 2022 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. In 2020, following one of the measures provided in Economic and Social Stabilization Program (SSPE) and following the art. 18 of Law no. 27 -A / 2020, of July 24, the Solidarity Additional on the Banking Sector was created, which, similarly to what happens with SEPARATE EXPLANATORY NOTES - 367 - (in thousands of Euros)31.12.202231.12.2021Real Estate 85 386 ( 5 372)Equipment( 5 790) 294 Others 2 563 495 82 159 ( 4 582)(in thousands of Euros)31.12.202231.12.2021Other operating incomeGains / (losses) on recoveries of loans 39 741 26 310 Non-recurring advisory services 334 355 Other income 16 504 53 088 56 579 79 753 Other operating expensesLosses on the acquisition of debt issued by the Bank (see Note 29)- ( 73 451)Direct and indirect taxes( 2 748)( 3 877)Contribution to the Banking Sector (see Note 26)( 33 410)( 33 424)Membership subscriptions and donations( 1 643)( 1 923)Charges with Supervisory entities( 2 254)( 1 849)Contractual Indemnities (SPE)( 63)( 1 723)Other expenses( 28 660)( 25 298)( 68 778)( 141 545)Other operating income / (expenses) ( 12 199)( 61 792) the Contribution on the Banking Sector (Banking Levy), is levied on the average annual liability calculated balance sheet deducted from own funds and deposits covered by the Deposit Guarantee Fund guarantee and on the notional value of derivative financial instruments. Its settlement is carried out until the end of June of the year following the year to which the surcharge relates. As of 31 December 2022, the Bank recognised as an expense in relation to the Solidarity Additional on the Banking Sector the amount of Euro 5,140 thousand (31 December 2021: Euro 5,090 thousand). The recognised expense was calculated and paid based on the maximum rate of 0.02% which is levied on the average annual liability calculated on the balance sheet less the own funds and deposits covered by the Deposit Guarantee Fund guarantee. NOTE 14 – STAFF EXPENSES The breakdown of these captions is as follows: The provisions and costs related to the restructuring process are presented in Note 31. As of 31 December 2022 and 2021, the number of employees of the Bank, considering the staff and the contracted term, presents the following breakdown by professional category: NOTE 15 –EMPLOYEE BENEFITS Pension and health-care benefits As mentioned in accounting policy 6.26, the Bank has undertaken to provide its employees, or their families, with cash benefits for old-age retirement, disability and survivors’ pensions and other liabilities such as a Serviço de Assistência Médico-Social (SAMS), managed by the Union. 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 2 nd 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 Collective Bargaining Agreement. 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 exercise 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 of 31 December 2011 at constant values (0% discount rate) for the component foreseen in the “Instrumento de SEPARATE EXPLANATORY NOTES - 368 - (in thousands of Euros)31.12.202231.12.2021Wages and salaries 166 593 164 816 Remuneration 166 593 164 285 Long-term service / Career bonuses (see Note 15)- 531 Mandatory social charges 46 127 45 940 Costs with post-employment benefits (see Note 15) 263 769 Other costs 3 838 3 469 216 821 214 994 31.12.202231.12.2021Directive functions 408 394 Management functions 365 431 Specific functions 2 058 1 869 Administrative and other functions 986 1 224 3 817 3 918 Regulação Coletiva 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 novobanco 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 novobanco, without prejudice to the transfer of the responsibilities relating exclusively to the employment contracts with BES. Given the aforementioned, liabilities arising exclusively from the employment contracts with BES were transferred to novobanco. Considering the foregoing, only the pension fund liabilities arising from the Complementary Executive Committee Plan were split, with a part (described above) remaining in BES, with the other part being transferred to novobanco, together with the Pension Fund’s liabilities relating to 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 Bank of Portugal of 11 February 2015, from those that were transferred to novobanco, 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. The split performed on these terms will result, on 3 August 2014, in a level of funding of the Complementary Plan of the Executive Commission that is equal for each of the associates of the Fund (novobanco and BES). On 16 June 2020, the Insurance and Pension Funds Supervisory Authority (“ASF”) approved the extinction of the portion that finances the Plan of the former Executive Committee and, simultaneously, the amendment of the Constitutive Contract of the novobanco Pension Fund. This approval led to the creation of three aspects of the Executive Committee's Pension Plan: (i) Executive Committee - BES, (ii) Executive Committee - NOVO BANCO and (iii) Undivided Party. The assets of the undivided party are not allocated to any liability of novobanco or BES until the final decision of the court (limit of article 402º), so novobanco transferred the amount of Euro 19,.2 million of net liabilities of the amount of the fund's assets relating to the undivided portion for Provisions. 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. On 31 December 2022, the amount of Euro 548 thousand was recorded in Personnel Costs related to the defined contribution plan (31 December 2021: Euro 553 thousand). During exercise 2021, two changes were made to the Pension Fund: • Inclusion of Social Security Pension – Pensioners Until 2020, the methodology applied considered pensions in payment by the Pension Fund for the calculation of liabilities with pensioners. In 2021, this methodology was changed for pensioners who started a pension after 2011, and do not have a Social Security pension. For this group of pensioners with age below the normal retirement age of the General Social Security Regime (RGSS), the liability arising from a Social Security pension, to be paid from the normal retirement age of the RGSS, was deducted. As for pensioners over the normal retirement age of the RGSS, the liability arising from a Social Security pension, to be paid from the moment of assessment, was deducted. • Inclusion of acquired rights (Clause 98 ACT) In 2021, liabilities with former employees who left novobanco after 2011, and who can claim rights to the Pension Fund under Clause 98 of the ACT, were included. Pension plan participants are detailed as follows: The Bank's liabilities and coverage levels, calculated in accordance with the accounting policy defined in Note 6.26 - Employee benefits, reportable as of 31 December 2022 and 2021 are analysed as follows: SEPARATE EXPLANATORY NOTES - 369 - 31.12.202231.12.2021Employees 3 861 3 995 Pensioners and survivors 6 993 6 914 Participants under Clause 98 1 060 982 TOTAL 11 914 11 891 According to the policy defined in Note 6.26 - 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. The evolution of the actuarial gains and losses in the balance sheet can be analysed as follows: The evolution of the value of pension funds in the exercises ended 31 December 2022 and 2021 can be analysed as follows: Pension fund assets can be analysed as follows: Pension fund assets used by the Bank or representative of securities issued by the Bank are detailed as follows: SEPARATE EXPLANATORY NOTES - 370 - (in thousands of Euros)Assets / (liabilities) recognized in the balance sheetTotal liabilities(1 389 421)(1 887 967) Pensioners(1 057 119)(1 312 843) Employees( 332 302)( 575 124)Coverage Fair value of plan assets1 441 4421 865 405Net assets / (liabilities) in the balance sheet (see Note 28 and 32) 52 021( 22 562)Accumulated actuarial deviations recognized in other comprehensive income 684 759 781 24431.12.202231.12.2021(in thousands of Euros)Retirement pension liabilities at beginning of exercise1 887 967 1 892 669 Current service cost- 441 Interest cost 24 946 18 421 Plan participants' contribution 2 568 2 613 Contributions from other entities 201 214 Actuarial (gains) / losses in the period: - Changes in financial assumptions( 515 423) 12 260 - Experience adjustments (gains) / losses 50 016 46 124 Pensions paid by the fund / transfers and once-off bonuses( 80 263)( 75 183)Social Security and Clause 98- ( 35 463)Early retirement 19 409 38 562 Foreign exchange differences and other- ( 12 691)Retirement pension liabilities at end of exercise1 389 421 1 887 967 31.12.202231.12.2021(in thousands of Euros)31.12.202231.12.2021Fair value of fund assets at beginning of exercise1 865 405 1 867 977 Net return from the fund( 346 268)( 1 718)- Share of the net interest on the assets 22 654 15 546 - Return on assets excluding net interest( 368 922)( 17 264)Group contributions- 84 735 Plan participants’ contributions 2 568 2 613 Pensions paid by the fund / transfers and once-off bonuses( 80 263)( 75 183)Foreign exchange differences and other - ( 13 019)Fund balance at the end of the exercise1 441 442 1 865 405 (in thousands of Euros)QuotedUnquotedTotalQuotedUnquotedTotalEquity instruments - 63 411 63 411 - 51 214 51 214 Debt instruments 933 370 - 933 370 1 171 603 - 1 171 603 Investment funds 137 105 53 434 190 539 258 990 100 513 359 503 Real estate properties - 181 960 181 960 - 150 344 150 344 Cash and cash equivalents - 72 162 72 162 - 132 741 132 741 Total1 070 475 370 967 1 441 442 1 430 593 434 812 1 865 405 31.12.202231.12.2021 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 of 31 December 2022 and 31 December 2021 was based on: (i) the evolution of the main indices for high quality corporate bonds and (ii) the duration of the liabilities. As of 31 December 2022 and 2021, the sensitivity analysis to a 0.25% change in the assumptions rate used and one year in the mortality table results in the following changes in the current value of liabilities determined for past services: The evolution of actuarial deviations on the balance sheet can be analysed as follows: The costs of retirement pensions and health benefits for the exercises ended 31 December 2022 and 2021 can be analysed as follows: SEPARATE EXPLANATORY NOTES - 371 - (in thousands of Euros)31.12.202231.12.2021Cash and Cash Equivalents 63 802 41 827 Real estate properties 39 056 43 032 Total 102 858 84 859 AssumptionsActualAssumptionsActualActuarial Assumptions Projected rate of return on plan assets4,00%-18,92%1,35%-0,24% Discount rate4,00%-1,35%- Pension increase rate0,75%1,41%0,50%0,36% Salary increase rate1,00%2,54%0,75%2,05% Mortality table men Mortality table womenTV 88/90-3 yearsTV 88/90-2 years31.12.202231.12.2021TV 88/90TV 88/90(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( 41 268) 43 438 ( 72 318) 76 890 Salary increase rate 6 809 ( 6 577) 13 336 ( 12 845)Pension increase rate 43 853 ( 41 917) 67 955 ( 63 608)of +1 year of -1 year of -1 year of -1 year Mortality table( 40 699) 40 314 ( 67 288) 67 602 Change in the amount of liabilities due to the change:31.12.202231.12.2021(in thousands of Euros)31.12.202231.12.2021Accumulated actuarial losses recognised in other comprehensive income at the beginning of the exercise 781 244 705 595 Actuarial (gains) / losses in the exercise: - Changes in assumptions - Financial assumptions( 515 423) 12 260 - Plan assets return (excluding net interest) 418 938 63 388 Other- 1 Accumulated actuarial losses recognised in other comprehensive income at the end of the exercise 684 759 781 244 (in thousands of Euros)31.12.202231.12.2021Current service cost (a) - 441 Net interest 2 292 2 875 Early retirement (a) 263 328 Cost with post-employment benefits 2 555 3 644 (a) recorded in Staff Expenses (see Note 15) The evolution of net assets / (liabilities) on the balance sheet can be analysed in the years ended 31 December 2022 and 2021 as follows: In 2022, the value of early retirements amounted to Euro 19.4 million (31 December 2021: Euro 38.9 million), which Euro 19.1 million are part of the Bank's restructuring process and, as such, they were recognised against the use of the provision for restructuring (see Note 31). The summary of the last five years of the funds’ liabilities and the funds balances, as well as experience gains and losses, is analysed as follows: The average duration of defined benefit plan liabilities is approximately 13 years (31 December 2021: approximately 16 years). Career Bonuses As of 31 December 2022, the liabilities assumed by the Bank amounted to Euro 5,506 thousand, corresponding to the liabilities for past services subjacent to the career bonuses, as described in Note 6.26 – Employee benefits (31 December 2021: Euro 7,335 thousand) (see Note 32). In 2022, no costs with career bonuses were recognised (31 December 2021: Euro 531 thousand) (see Note 14). NOTE 16 – OTHER ADMINISTRATIVE EXPENSES The breakdown of this caption is as follows: SEPARATE EXPLANATORY NOTES - 372 - (in thousands of Euros)31.12.202231.12.2021At the beginning of the exercise( 22 562)( 24 692)Cost for period( 2 555)( 3 644)Actuarial gains / (losses) recognized in other comprehensive income 96 485 ( 75 649)Contributions made in the period- 84 735 Undivided transfer and reduction of responsabilities- - Social Security and Clause 98- 35 463 Other( 19 347)( 38 775)At the end of the exercise 52 021 ( 22 562)(in thousands of Euros)31.12.202231.12.202131.12.202031.12.201931.12.2018Retirement pension liabilities(1 389 421)(1 887 967)(1 892 669)(1 811 526)(1 641 964)Funds balance1 441 442 1 865 405 1 867 977 1 659 246 1 615 249 (Under) / overfunding of liabilities 52 021 ( 22 562)( 24 692)( 152 280)( 26 715)(Gains) / losses on experience adjustments in retirement pension liabilities 50 016 46 124 49 382 63 084 18 400 (Gains) / losses on experience adjustments in plan assets 368 922 17 264 ( 26 649)( 79 888) 52 175 The caption Other costs includes, amongst others, specialised service costs incurred with security and surveillance, information services, training and sundry external supplies. As of 31 December 2022, rental costs include an amount of Euro 704 thousand related to short-term operating lease contracts (31 December 2021: Euro 582 thousand), as described in Note 6.23. The fees invoiced during the exercises 2022 and 2021 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: NOTE 17 – CONTRIBUTIONS TO RESOLUTION FUNDS AND DEPOSIT GUARANTEE SCHEMES As of 31 December 2022 and 2021, this caption is analysed as follows: NOTE 18 – IMPAIRMENT As of 31 December 2022 and 2021, this caption is analysed as follows: SEPARATE EXPLANATORY NOTES - 373 - (in thousands of Euros)31.12.202231.12.2021Rentals 5 896 5 716 Advertising 4 884 5 426 Communication 8 782 8 637 Maintenance and repairs expenses 7 918 8 026 Travelling and representation 2 050 1 399 Transportation of valuables 2 630 3 079 Insurance 5 955 5 162 IT services 41 606 36 845 Independent work 2 147 1 355 Temporary work 1 271 902 Electronic payment systems 11 359 10 084 Legal costs 6 447 3 402 Consultancy and audit fees 26 998 20 982 Water, energy and fuel 2 712 2 867 Consumables 1 484 1 318 Other costs 20 770 16 781 152 909 131 981 (in thousands of Euros)31.12.202231.12.2021Statutory audit of annual accounts 1 326 1 743 Other services 1 177 1 309 Total value of services invoiced 2 503 3 052 (in thousands of Euros)31.12.202231.12.2021Contribution to the Resolution Fund 24 416 25 276 Contribution to the National Resolution Fund 16 017 14 854 Contribution to the Deposit Guarantee Fund 284 42 40 717 40 172 NOTE 19 – 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 exercise /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. NOTE 20 – CASH, CASH BALANCES AT CENTRAL BANKS AND OTHER DEMAND DEPOSITS As of 31 December 2022 and 31 December 2021, this caption is analysed as follows: SEPARATE EXPLANATORY NOTES - 374 - (in thousands of Euros)ChargesReversalsTotalChargesReversalsTotalProvisions net of cancellations (see Note 31)Provisions for guarantees 23 808 ( 20 993) 2 815 18 435 ( 31 191)( 12 756)Provisions for commitments 2 929 ( 8 299)( 5 370) 10 630 ( 7 774) 2 856 Other provisions 73 782 ( 60 333) 13 449 159 330 ( 37 660) 121 670 100 519 ( 89 625) 10 894 188 395 ( 76 625) 111 770 Impairments or reversal of impairments on financial assets not measured at fair value through profit or loss (see Note 22)Securities at fair value through equity 2 278 ( 2 735)( 457) 1 252 ( 895) 357 Securities at amortized cost 1 876 928 ( 1 809 604) 67 324 1 215 623 ( 1 168 664) 46 959 Loans and advances to credit institutions 558 ( 1 029)( 471) 135 018 ( 133 210) 1 808 Loans and advances to customers 209 774 ( 172 905) 36 869 289 202 ( 142 096) 147 106 2 089 538 ( 1 986 273) 103 265 1 641 095 ( 1 444 865) 196 230 Impairments or reversal of impairments for investments in subsidiaries, joint ventures and associates (see Note 24) 3 255 ( 19 421)( 16 166)- ( 49 691)( 49 691)Impairments or reversal of impairments on non-financial assetsNon-current assets held for sale and Discontinued operations (see Note 29)- ( 623)( 623) 10 000 - 10 000 Property, plant and equipment (see Note 25)- ( 1 696)( 1 696) 3 484 ( 5 101)( 1 617)Other assets (see Note 28) 16 070 ( 27 832)( 11 762) 17 543 ( 13 857) 3 686 16 070 ( 30 151)( 14 081) 31 027 ( 18 958) 12 069 2 209 382 ( 2 125 470) 83 912 1 860 517 ( 1 590 139) 270 378 31.12.202231.12.2021(in thousands of Euros)31.12.202231.12.2021Net profit / (loss) attributable to shareholders of the Bank 453 830 225 908 Weighted average number of common shares outstanding (thousands)10 034 965 9 800 000 Basic earnings per share attributable to shareholders of novobanco (in Euros)0,050,02Basic earnings per share from continuing activities attributable to shareholders of novobanco (in Euros)0,050,02(in thousands of Euros)31.12.202231.12.2021Cash 176 797 144 220 Demand Deposits in central banksBank of Portugal 5 936 640 5 261 912 Other Central Banks 5 861 2 717 5 942 501 5 264 629 Deposits in other credit institutions in the countryRepayable on demand 20 331 63 116 Uncollected checks 159 129 162 783 179 460 225 899 Deposits with banks abroadRepayable on demand 88 537 39 713 88 537 39 713 6 387 295 5 674 461 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 275.7 million (31 December 2021: Euro 250.3 million), which aim to satisfy the legal requirements regarding the constitution of minimum cash balances. 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 of 31 December 2022, the average interest rate on these deposits was 2.00% (31 December 2021: 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 of 31 December 2022 was included in the observation period running from 21 December 2022 to 07 February 2023. 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 21 – FINANCIAL ASSETS AND LIABILITIES HELD FOR TRADING As of 31 December 2022 and 31 December 2021, this caption is analysed as follows: Securities held for trading In accordance with the accounting policy described in Note 6.10.5, securities held for trading are those acquired to be traded in the short-term regardless of their maturity. As of 31 December 2022 and 2021, the schedule of 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 38. Derivatives As of 31 December 2022 and 2021, this caption is analysed as follows: SEPARATE EXPLANATORY NOTES - 375 - (in thousands of Euros)31.12.202231.12.2021Financial assets held for tradingSecuritiesSecurities held for tradingBonds and other fixed income securitiesIssued by government and public entities 36 428 114 465 36 428 114 465 DerivativesDerivatives held for trading with positive fair value 134 419 263 244 134 419 263 244 170 847 377 709 Financial liabilities held for tradingDerivativesDerivatives held for trading with negative fair value 99 317 305 512 99 317 305 512 (in thousands of Euros)31.12.202231.12.2021From 3 months to 1 year 4 911 - From 1 to 5 years 10 055 - More than 5 years 21 462 114 465 36 428 114 465 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 6.10.6 and 6.10.7, and which the Bank has not designated for hedge accounting. In the exercise of 2022, the Bank recognised a loss of Euro 1,820 thousand related to the CVA of derivative instruments (31 December 2021: loss of Euro 454 thousand). The way of determining the CVA is explained in Note 38. As of 31 December 2022 and 2021, the analysis of the derivatives held for trading by maturity period is as follows: NOTE 22 – 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 of 31 December 2022 and 2021, this caption is analysed as follows: SEPARATE EXPLANATORY NOTES - 376 - (in thousands of Euros)AssetsLiabilitiesAssetsLiabilitiesTrading derivativesExchange rate contractsForward- buy 618 333 541 169 - sell 616 911 545 093 Currency Swaps- buy 760 315 497 717 - sell 758 406 499 124 Currency Interest Rate Swaps- buy- 21 083 - sell- 21 083 Currency Options- buy 293 418 304 349 - sell 293 419 304 349 23 145 22 024 29 172 34 690 Interest rate contractsInterest Rate Swaps- buy2 766 363 5 645 388 - sell2 766 363 5 645 388 Interest Rate Caps & Floors- buy 142 992 86 436 - sell 233 310 166 554 102 729 74 413 225 196 267 889 Stock / index contractsEquity / Index Options- buy 422 894 525 436 - sell 422 894 525 436 8 256 2 671 8 180 2 359 Commodities contractsCommodities Swaps- buy 15 759 29 633 - sell 15 759 29 633 289 209 696 574 134 419 99 317 263 244 305 512 31.12.202231.12.2021NotionalFair valueNotionalFair value 13 563 12 896 2 702 6 872 2 976 2 522 680 1 949 - - 20 024 20 103 6 606 6 606 5 766 5 766 97 524 70 120 224 327 265 070 5 205 4 293 869 2 819 8 256 2 671 8 180 2 359 289 209 696 574 a) Derivatives traded on organised markets, the market value of which is settled daily against the margin account (see Note 31)(in thousands of Euros)AssetsLiabilitiesAssetsLiabilitiesTrading DerivativesUp to 3 months1 340 287 1 338 619 5 381 1 136 849 1 142 438 ( 6 115)From 3 months to 1 year 737 080 736 449 850 654 256 653 806 5 459 From 1 to 5 years 964 458 985 186 4 605 1 634 973 1 641 635 2 792 More than 5 years1 978 249 2 046 808 24 266 4 225 133 4 298 781 ( 44 404)5 020 074 5 107 062 35 102 7 651 211 7 736 660 ( 42 268)31.12.202231.12.2021NotionalFair Value (net)NotionalFair Value (net) Securities As of 31 December 2022 and 31 December 2021, the detail of securities portfolio is as follows: On December 29, 2022, the Crow Project was concluded, between novobanco, Banco Comercial Português, S.A., Caixa Geral de Depósitos, S.A., Banco Santander Totta, S.A. and Oitante, S.A. (the sellers) and Davidson Kempner (the buyer), regarding the sale process of the participation units held by these banks in the restructuring funds. This transaction resulted in: (i) the transfer of the units held in FRT together with the assets directly and indirectly held by the fund to the buyer; (ii) the transfer of the shares in FLIT together with the assets directly and indirectly held by the fund to the buyer; (iii) certain hotel assets indirectly held by the Recovery Fund, FCR were indirectly acquired by FLIT; and (iv) certain assets indirectly held by FLIT and FRT were transferred to the Sellers. As a result of this transaction, novobanco received, in net terms, Euro 224 million, derecognised Euro 267 million of participating units and acquired assets recorded as non-current assets in the amount of Euro 48 million, with a positive impact on results of Euro 4.8 million. The remaining participations in restructuring funds that remained in the Bank's balance sheet are accounted for as shares and other variable income securities mandatorily measured at fair value through profit or loss, in accordance with the accounting policy described in Note 7.10.4, based on the net book value disclosed by the Management Companies, adjusted based on independent SEPARATE EXPLANATORY NOTES - 377 - (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 1 537 652 13 2 183 034 8 618 778 ( 218 545) 12 120 932 Loans and advances to banks- - - 145 464 - 145 464 Loans and advances to customers 18 - - 22 955 247 ( 164 388) 22 790 877 1 537 670 13 2 183 034 31 719 489 ( 382 933) 35 057 273 * Fair value changes of the elements covered by the interest rate hedge portfolio (see Note 23)31.12.2022(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 2 250 308 - 7 133 508 2 893 829 ( 3 136) 12 274 509 Loans and advances to banks- - - 186 089 - 186 089 Loans and advances to customers- - - 21 897 382 31 923 21 929 305 2 250 308 - 7 133 508 24 977 300 28 787 34 389 903 * Fair value changes of the elements covered by the interest rate hedge portfolio (see Note 23)31.12.2021(in thousands of Euros)31.12.202231.12.2021Securities mandatorily at fair value through profit or lossBonds and other fixed income securitiesFrom other issuers 433 665 559 227 Shares 140 442 425 363 Other securities with variable income 963 545 1 265 718 1 537 652 2 250 308 Securities at fair value through results Bonds and other fixed income securitiesFrom other issuers 13 - 13 - Securities at fair value through other comprehensive incomeBonds and other fixed income securitiesFrom public issuers1 629 639 5 685 067 From other issuers 479 406 1 398 899 Shares 73 989 49 542 2 183 034 7 133 508 Securities at amortised costBonds and other fixed income securitiesFrom public issuers4 590 460 371 273 From other issuers4 319 885 2 770 328 Impairment( 291 567)( 247 772)8 618 778 2 893 829 Value adjustments for hedging operations for interest rate risk (See Note 23)( 218 545)( 3 136)12 120 932 12 274 509 information, analyses or valuations deemed necessary to determine their fair value, in response to guidance from the European Central Bank. As these are "level 3" assets in accordance with the IFRS 13 fair value hierarchy (quotations supplied by third parties whose parameters used are mostly not observable in the market), details of the valuation methodology are described in Note 38. As of 31 December 2022 and 2021, the detail of the fair value securities through other comprehensive income is as follows: During the exercise 2022, the Bank sold Euro 5,902.2 million of financial instruments classified at fair value through other comprehensive income (31 December 2021: Euro 934,4 million), with a gain of Euro 83.2 million (31 December 2021: gain of Euro 12.3 million), recorded in the income statement, from the sale of debt instruments and a loss of Euro 0.9 million that were transferred from revaluation reserves to sales-related reserves (31 December 2021: loss of Euro 9.5 million), from the sale of equity instruments. The movements in the impairment reserves in fair value securities through other comprehensive income are presented as follows: SEPARATE EXPLANATORY NOTES - 378 - (in thousands of Euros)PositiveNegativeBonds and other fixed income securitiesFrom public issuers1 634 375 311 ( 5 047)- 1 629 639 ( 382)Residents 224 013 - ( 486)- 223 527 ( 52)Non residents1 410 362 311 ( 4 561)- 1 406 112 ( 330)From other issuers 541 022 - ( 49 628)( 11 988) 479 406 ( 207)Residents 29 610 - ( 4 769)- 24 841 ( 2)Non residents 511 412 - ( 44 859)( 11 988) 454 565 ( 205)Shares 400 636 34 763 ( 361 410)- 73 989 - Residents 327 930 33 335 ( 299 182)- 62 083 - Non residents 72 706 1 428 ( 62 228)- 11 906 - Other securities with variable income 3 - ( 3)- - - Residents 3 - ( 3)- - - Balance as at 31 December 20222 576 036 35 074 ( 416 088)( 11 988)2 183 034 ( 589)(1) Aquisition cost referring to shares and other equity instruments and amortised cost for debt securities.(2) In the context of fair value hedge operations (see Note 23)Cost (1)Fair value reserveFair value reserve transferred to Results (2)Balance sheet valueImpairment reserves(in thousands of Euros)PositiveNegativeBonds and other fixed income securitiesFrom public issuers5 484 078 204 864 ( 3 875)- 5 685 067 ( 2 995)Residents2 406 121 86 400 - - 2 492 521 ( 1 466)Non residents3 077 957 118 464 ( 3 875)- 3 192 546 ( 1 529)From other issuers1 374 554 30 008 ( 5 663)- 1 398 899 ( 673)Residents 29 609 63 ( 2 335)- 27 337 ( 3)Non residents1 344 945 29 945 ( 3 328)- 1 371 562 ( 670)Shares 398 186 11 810 ( 360 454)- 49 542 - Residents 328 230 10 567 ( 298 226)- 40 571 - Non residents 69 956 1 243 ( 62 228)- 8 971 - Other securities with variable income 3 - ( 3)- - - Residents 3 - ( 3)- - - Balance as at 31 December 20217 256 821 246 682 ( 369 995)- 7 133 508 ( 3 668)(1) Aquisition cost referring to shares and other equity instruments and amortised cost for debt securities.(2) In the context of fair value hedge operations (see Note 23)Cost (1)Fair value reserveFair value reserve transferred to Results (2)Balance sheet valueImpairment reserves(in thousands of Euros)Stage 1Stage 2Stage 3TotalBalance as at 31 December 2020 3 667 - - 3 667 Increases due to changes in credit risk 1 252 - - 1 252 Decreases due to changes in credit risk( 895)- - ( 895)Utilisation during the exercise( 384)- - ( 384)Other movements 28 - - 28 Balance as at 31 December 2021 3 668 - - 3 668 Changes in the value of the impairment- transfers to stage 3( 20)- 20 - Increases due to changes in credit risk 2 278 - - 2 278 Decreases due to changes in credit risk( 2 715)- ( 20)( 2 735)Utilisation during the exercise( 2 654)- - ( 2 654)Other movements 32 - - 32 Balance as at 31 December 2022 589 - - 589 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 6.16, 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 7.1. Transfers between stages that occurred in the portfolio of securities at fair value through other comprehensive income and amortised cost are presented as follows: As of 31 December 2022 and 2021, the securities portfolio, by residual maturity period, is as follows: SEPARATE EXPLANATORY NOTES - 379 - (in thousands of Euros)Stage 1Stage 2Stage 3TotalBalance as at 31 December 2020 5 180 87 620 109 660 202 460 Increases due to changes in credit risk 9 264 1 058 247 148 112 1 215 623 Decreases due to changes in credit risk( 8 074)( 1 107 544)( 53 046)( 1 168 664)Utilisation during the exercise( 12)( 1)( 1 640)( 1 653)Other movements( 112)( 39) 157 6 Balance as at 31 December 2021 6 246 38 283 203 243 247 772 Changes in the value of the impairment- transfers to stage 1 76 ( 76)- - - transfers to stage 2( 61) 61 - - - transfers to stage 3( 6 357)- 6 357 - Increases due to changes in credit risk 15 451 173 771 1 687 706 1 876 928 Decreases due to changes in credit risk( 9 993)( 208 666)( 1 590 945)( 1 809 604)Utilisation during the exercise( 40)- ( 25 237)( 25 277)Other movements 61 - 1 687 1 748 Balance as at 31 December 2022 5 383 3 373 282 811 291 567 Impairment movement of securities at amortised cost(in thousands of Euros)To Stage 2 from Stage 1To Stage 1 from Stage 2To Stage 3 from Stage 2To Stage 2 from Stage 3To Stage 3 from Stage 1To Stage 1 from Stage 3Bonds and other fixed income securitiesNon-financial corporations 18 523 1 405 - - 5 622 - 18 523 1 405 - - 5 622 - Capital(cid:9)(cid:9)(cid:9)(cid:9)(cid:9)(cid:9)(cid:9)Transfers between Stage 1 and Stage 2Transfers between Stage 2 and Stage 3Transfers between Stage 1 and Stage 3 The detail of the securities portfolio by fair value hierarchy is presented in Note 38. The portfolio securities pledged by the bank are analysed in Note 35. Loans and advances to Banks As of 31 December 2022 and 2021, the detail of Loans and advances to banks is as follows: Investments in credit institutions are all recorded in the amortised cost portfolio. As of 31 December 2022 and 2021, 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: SEPARATE EXPLANATORY NOTES - 380 - (in thousands of Euros)31.12.202231.12.2021Securities mandatorily at fair value through profit or lossUp to 3 months - 41 741 From 1 to 5 years 2 469 2 443 More than 5 years 431 196 515 043 Undetermined (Overdue Loans)1 103 987 1 691 081 1 537 652 2 250 308 Securities at fair value through resultsFrom 3 months to 1 year 13 - 13 - Securities mandatorily at fair value through other comprehensive incomeUp to 3 months 142 178 451 043 From 3 months to 1 year1 588 220 988 943 From 1 to 5 years 252 293 3 021 902 More than 5 years 126 354 2 622 078 Undetermined (Overdue Loans) 73 989 49 542 2 183 034 7 133 508 Securities at amortised cost (*)Up to 3 months 786 798 709 932 From 3 months to 1 year 535 014 139 547 From 1 to 5 years2 889 069 483 503 More than 5 years4 699 464 1 808 619 8 910 345 3 141 601 12 631 044 12 525 417 (*) Gross value before impairment(in thousands of Euros)Loans and advances to banks in PortugalDeposits 101 811 136 408 Loans 39 228 44 770 Other loans and advances 3 3 141 042 181 181 Loans and advances to banks abroadDeposits 5 096 6 089 Other loans and advances- 2 5 096 6 091 Impairment losses( 674)( 1 183) 145 464 186 089 31.12.202231.12.2021(in thousands of Euros)31.12.202231.12.2021Up to 3 months 363 35 213 From 3 months to 1 year 101 476 107 809 From 1 to 5 years 39 322 38 282 More than 5 years 4 977 5 968 146 138 187 272 The increase of impairment for investments in credit institutions verified in 2020 results from the degradation of the credit risk of international exposures analysed on an individual basis, whose partial default situation at the end of 2020, among other signs of impairment, led to the transfer of the same to stage 3 and the constitution of additional impairments of Euro 189.6 million. During 2021 part of this exposure was settled, with the remaining exposure being restructured and subsequently derecognised, in line with the amendment made in May 2021 to the CCA contract, which extinguished novobanco’s rights and risks on this asset. Loans and advances to customers As of 31 December 2022 and 2021, the detail of loans and advances to customers is presented as follows: SEPARATE EXPLANATORY NOTES - 381 - (in thousands of Euros)Stage 1Stage 2Stage 3TotalBalance as at 31 December 2020 445 2 249 706 250 153 Increases due to changes in credit risk 414 541 134 063 135 018 Decreases due to changes in credit risk( 544)( 102)( 132 564)( 133 210)Uses( 101 282)- ( 167 728)( 269 010)Other movements 101 251 33 ( 83 052) 18 232 Balance as at 31 December 2021 284 474 425 1 183 Increases due to changes in credit risk 167 391 - 558 Decreases due to changes in credit risk( 318)( 711)- ( 1 029)Other movements( 42)- 4 ( 38)Balance as at 31 December 2022 91 154 429 674 Loans and advances to banks As of 31 December 2021, Loans to customers are all recorded in the amortised cost portfolio. As of 31 December 2022, there are transactions mandatorily recorded at fair value through profit or loss, with a nominal value of Euro 31,197 thousand and a fair value of Euro 18 thousand, the impact of which was recorded in the line Gain or loss on financial assets mandatorily recorded at fair value through profit or loss in the income statement (see Note 11). As of 31 December 2022, the caption Loans and advances to customers include Euro 6,078.4 million of mortgage loans related to the issuance of mortgage bonds (31 December 2021: Euro 6,075.1 million) (see Note 30). As of 31 December 2022, the value of interest and commissions recorded in the balance sheet for loan operations amounts to Euro 36,145 thousand (31 December 2021: Euro 17,773 thousand). As of 31 December 2022 and 2021, the analysis of loans and advances to customers, by residual maturity, is as follows: SEPARATE EXPLANATORY NOTES - 382 - (in thousands of Euros)Domestic loans and advancesCorporateCurrent account loans1 080 349 1 097 525 Loans9 009 712 8 819 590 Discounted bills 86 539 75 502 Factoring 668 975 593 512 Overdrafts 46 626 13 453 Financial leases 796 669 1 245 885 Other loans and advances 29 666 17 693 IndividualsResidential Mortgage loans7 409 318 7 260 274 Consumer credit and other loans1 162 840 1 063 923 20 290 694 20 187 357 Foreign loans and advancesCorporateCurrent account loans 46 898 66 348 Loans1 992 337 1 319 819 Discounted bills 13 2 Factoring 30 805 40 519 Overdrafts 72 54 Other loans and advances- 1 IndividualsResidential Mortgage loans1 212 880 1 037 140 Consumer credit and other loans 100 983 180 412 3 383 988 2 644 295 Overdue loans and advances and interestsUnder 90 days 11 943 18 931 Over 90 days 326 207 282 556 338 150 301 487 24 012 832 23 133 139 Impairment losses(1 057 567)(1 235 757)22 955 265 21 897 382 Fair value adjustaments of interest rate hedges (See Note 23)CorporateLoans( 16 805) 4 035 IndividualsResidential Mortgage loans( 147 583) 27 888 ( 164 388) 31 923 22 790 877 21 929 305 31.12.202231.12.2021 Changes in credit impairment losses are presented as follows: The increase of impairment for credit risk during the exercise 2021 include Euro 71.8 million, reflecting the updating of the information in the IFRS 9 models, anticipating the losses related to the Covid-19 pandemic. The transfers between stages that occurred in Loans to customers are presented as follows: Credit distribution by type of rate is as follows: SEPARATE EXPLANATORY NOTES - 383 - (in thousands of Euros)31.12.202231.12.2021Up to 3 months 371 820 1 139 039 From 3 months to 1 year 1 452 802 1 217 721 From 1 to 5 years 6 202 703 5 771 766 More than 5 years 15 482 969 14 735 049 Undetermined duration (Overdue) 338 150 301 487 23 848 444 23 165 062 (in thousands of Euros)Stage 1Stage 2Stage 3TotalBalance as at 31 December 2020 60 127 306 444 1 220 432 1 587 003 Financial assets derecognised ( 1 282)( 3 073)( 239 704)( 244 059)Increases due to changes in credit risk 21 760 120 072 147 370 289 202 Decreases due to changes in credit risk( 46 443)( 56 533)( 39 120)( 142 096)Utilisation during the exercise- ( 194)( 266 278)( 266 472)Other movements 27 894 ( 49 445) 33 730 12 179 Balance as at 31 December 2021 62 056 317 271 856 430 1 235 757 Changes in the value of the impairment- transfers to stage 1 72 212 ( 72 212)- - - transfers to stage 2( 18 735) 47 083 ( 28 348)- - transfers to stage 3( 248)( 18 534) 18 782 - Financial assets derecognised ( 4)- ( 26 847)( 26 851)Increases due to changes in credit risk 19 465 62 244 128 065 209 774 Decreases due to changes in credit risk( 90 575)( 38 332)( 43 998)( 172 905)Utilisation during the exercise- ( 38)( 197 122)( 197 160)Other movements 16 853 ( 786)( 7 115) 8 952 Balance as at 31 December 2022 61 024 296 696 699 847 1 057 567 Impairment movements of loans and advances to customers (in thousands of Euros)To Stage 2 from Stage 1To Stage 1 from Stage 2To Stage 3 from Stage 2To Stage 2 from Stage 3To Stage 3 from Stage 1To Stage 1 from Stage 3Loans and advancesCompanies Loans 548 205 510 364 81 931 40 297 29 605 2 250 Households 386 142 306 701 35 570 40 507 8 638 22 636 934 347 817 065 117 501 80 804 38 243 24 886 Capital(cid:9)(cid:9)(cid:9)(cid:9)(cid:9)(cid:9)(cid:9)Transfers between Stage 1 and Stage 2Transfers between Stage 2 and Stage 3Transfers between Stage 1 and Stage 3(in thousands of Euros)31.12.202231.12.2021Fixed rate2 710 318 3 965 414 Variable rate21 138 126 19 199 648 23 848 444 23 165 062 An analysis of finance lease loans, by residual maturity period, is presented as follows: Sales of credit portfolios 2021 Sale of a non-performing loans portfolio (Project Orion) novobanco entered into sale and purchase agreements with a consortium of funds managed by WEST INVEST UK LIMITED PARTNERSHIP and LX INVESTMENT PARTNERS III S.À.R.L. for the sale of a non-performing loans and related assets portfolio (Project Orion). The net book value of the receivables at the date of derecognition amounted to Euro 72.0 million (gross book value of Euro 156.7 million), with an impact on net income for the exercise 2021 of approximately Euro 1.8 million: Sale of a non-performing loans portfolio (Project Wilkinson) On 5 March 2021, novobanco entered into a sale and purchase agreement to sell a non-performing loans and related assets portfolio (Project Wilkinson), with a net book value of Euro 62.3 million (gross book value of Euro 210.4 million), with Burlington Loan Management, a company owned by companies affiliated to and advised by Davidson Kempner European Partners, LLP. The impact of this operation on net income for 2021 resulted in a loss of Euro 4.5 million. NOTE 23 – DERIVATIVES – HEDGE ACCOUNTING AND FAIR VALUE CHANGES OF THE HEDGED CAPTIONS As of 31 December 2022 and 2021, the fair value of the hedging derivatives is analysed as follows: SEPARATE EXPLANATORY NOTES - 384 - (in thousands of Euros)31.12.202231.12.2021Gross investment in finance leases receivableUp to 1 year 216 621 278 587 1 to 5 years 496 962 693 762 More than 5 years 202 119 533 443 915 702 1 505 792 Unrealised finance income in finance leasesUp to 1 year 26 238 43 611 1 to 5 years 54 097 94 599 More than 5 years 17 146 91 120 97 481 229 330 Capital falling dueUp to 1 year 190 383 234 976 1 to 5 years 442 865 599 163 More than 5 years 184 973 442 323 818 221 1 276 462 Impairment ( 84 922)( 226 204) 733 299 1 050 258 (in thousands of Euros)Impact on Income StatementGains or losses on the derecognition of financial assets and liabilities not measured at fair value through results- 9 329Impairment or reversal of impairment of financial assets not measured at fair value through the results18 395Provisions or reversal of provisions - 7 310Impact on Net Income1 756(in thousands of Euros)Impact on Income StatementGains or losses on the derecognition of financial assets and liabilities not measured at fair value through results- 1 363Impairment or reversal of impairment of financial assets not measured at fair value through the results- 3 175Impact on Net Income- 4 538 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 Gains and losses from hedge accounting (see Note 11). The Bank calculates the “Credit Valuation Adjustment” (CVA) for derivative instruments in accordance with the methodology described in Note 38 - Financial assets and liabilities held for trading. Fair value hedging As of 31 December 2022 and 2021, fair value hedging operations may be analysed as follows: As of 31 December 2022, the ineffective part of the fair value hedging operations, which translated into a cost of Euro 5.9 million, was recorded in the income statement (31 December 2021: profit of Euro 0.2 million). The Bank periodically conducts tests of the effectiveness of existing hedging relationships. Cash flow hedging As of 31 December 2022, the cash flow hedging operations can be analysed as follows SEPARATE EXPLANATORY NOTES - 385 - (in thousands of Euros)31.12.202231.12.2021Hedging derivativesAssets 562 886 20 150 Liabilities( 120 612)( 44 460) 442 274 ( 24 310)Fair value component of the assets and liabilities hedged for interest rate riskFinancial assetsSecurities (see Note 22)( 218 545)( 3 136)Loans and advances to customers (see Note 22)( 164 388) 31 923 ( 382 933) 28 787 Financial assets at amortised costSecurities at fair value through other comprehensive income (see Note 22) *( 11 988)- ( 394 921) 28 787 * Amount recorded at fair value reserves transferred to results(in thousands of Euros)31.12.2022Interest Rate Swap/CIRSLoans and advances to customersInterest rate and exchange rate3 319 104 165 117 191 565 ( 164 388)( 196 310)Interest Rate SwapSecurities at amortised costInterest rate5 456 500 359 089 214 274 ( 218 545)( 215 410)Interest Rate SwapSecurities at fair value through other comprehensive incomeInterest rate 200 000 19 140 27 272 ( 11 988)( 27 298) 8 975 604 543 346 433 111 ( 394 921)( 439 018)(1) Includes accrued interest(2) Attributable to the hedged riskFair valuecomponent ofitem hedged(2)Change in fairvaluecomponent ofitem hedgedin exercise (2)Derivative Hedged itemHedged riskNotionalFair value of derivatives (1)Change infair value ofderivative inexercise(in thousands of Euros)31.12.2021Interest Rate Swap/CIRSLoans and advances to customersInterest rate and exchange rate2 491 995 ( 28 494) 31 004 31 923 ( 27 925)Interest Rate SwapSecurities at amortised costInterest rate 378 000 4 184 3 675 ( 3 136)( 4 265) 2 869 995 ( 24 310) 34 679 28 787 ( 32 190)(1) Includes accrued interest(2) Attributable to the hedged riskFair valuecomponent ofitem hedged(2)Change in fairvaluecomponent ofitem hedgedin exercise (2)Derivative Hedged itemHedged riskNotionalFair value of derivatives (1)Change infair value ofderivative inexercise(in thousands of Euros)Customers credit 4 732 583 4 732 000 ( 101 072)( 100 418)( 881) 4 732 583 4 732 000 ( 101 072)( 100 418)( 881)31.12.2022Covered assetAsset balance valueDerivate notionalDerivate balance valueCash flow coverage reserveIneffectiveness value - recorded in results Transactions with hedge derivatives as of 31 December 2022 and 2021, by maturity, can be analysed as follows: NOTE 24 – INVESTMENTS IN SUBSIDIARIES, JOINT VENTURES AND ASSOCIATES Investments in subsidiaries, joint ventures and associates are presented as follows: The changes in impairment losses for investments in associates are presented as follows: NOTE 25 – PROPERTY, PLANT AND EQUIPMENT This caption as of 31 December 2022 and 2021 is analysed as follows: SEPARATE EXPLANATORY NOTES - 386 - (in thousands of Euros)BuySellBuySellUp to 3 months 3 020 3 020 5 65 000 65 000 ( 705)From 3 months to 1 year 63 678 63 678 ( 197) 76 537 76 537 ( 1 200)From 1 to 5 years4 631 088 4 631 088 80 436 425 032 425 032 1 514 More than 5 years4 522 016 4 522 016 362 030 868 428 868 429 ( 23 919)9 219 802 9 219 802 442 274 1 434 997 1 434 998 ( 24 310)31.12.202231.12.2021NotionalFair value (net)NotionalFair value (net)(in thousands of Euros)31.12.202231.12.2021novobanco dos Açores 2 144 40457,53% 5,00 10 308 - 10 308 2 144 40457,53% 5,00 10 308 - 10 308 NB Finance 100 000100,00%1,00 1 700 - 1 700 100 000100,00%1,00 1 700 - 1 700 BEST 62 999 700100,00% 1,00 100 418 ( 20 755) 79 663 62 999 700100,00% 1,00 100 418 ( 17 501) 82 917 ES Tech Ventures 71 500 000100,00% 1,00 71 500 ( 44 559) 26 941 71 500 000100,00% 1,00 71 500 ( 48 293) 23 207 GNB GA2 350 000100,00% 5,00 86 720 - 86 720 2 350 000100,00% 5,00 86 722 - 86 722 GNB Concessões 942 30698,96% 5,00 20 602 ( 4 915) 15 687 942 30698,96% 5,00 20 602 ( 20 602)- ESEGUR- - - - - - 242 00044,00% 5,00 9 634 ( 4 460) 5 174 ES Representações 49 99599,99% 0,18 9 ( 9)- 49 99599,99% 0,16 8 ( 8)- Locarent 525 00050,00% 5,00 2 967 - 2 967 525 00050,00% 5,00 2 967 - 2 967 NB África13 300 000100,00% 5,00 66 500 ( 55 514) 10 986 13 300 000100,00% 5,00 66 500 ( 55 514) 10 986 Unicre 350 02917,50% 5,00 11 497 - 11 497 350 02917,50% 5,00 11 497 - 11 497 Edenred Portugal101 477 60150,00% 0,01 4 984 - 4 984 101 477 60150,00% 0,01 4 984 - 4 984 Multipessoal 20 00022,52% 5,00 100 ( 100)- 20 00022,52% 5,00 100 ( 100)- Aroleri 3 500100,00% 1,00 4 - 4 3 500100,00% 1,00 604 - 604 377 309 ( 125 852) 251 457 387 544 ( 146 478) 241 066 Net ValueNº of sharesDirect participation in capitalNominal value (euros)Cost of participationImpairmentNet ValueNº of sharesDirect participation in capitalNominal value (euros)Cost of participationImpairment(in thousands of Euros)31.12.202231.12.2021Balance at the beginning of the exercise 146 478 199 643 Charges 3 255 - Reversals( 19 421)( 49 691)Foreign exchange differences( 4 460)( 3 474)Balance at the end of the exercise 125 852 146 478 The changes in this caption were as follows: SEPARATE EXPLANATORY NOTES - 387 - (in thousands of Euros)31.12.202231.12.2021Real estate propertiesFor own use 79 501 181 868 Improvements in leasehold properties 85 414 117 734 164 915 299 602 EquipmentComputer equipment 113 428 109 729 Fixtures 27 503 41 687 Furniture 53 173 51 116 Security equipment 16 915 21 223 Office equipment 7 702 7 898 Transport equipment 562 562 Other 82 134 219 365 232 349 Right-of-Use AssetsReal estate properties 111 518 107 573 Equipment 10 615 8 468 122 133 116 041 Work in progressImprovements in leasehold properties 31 376 431 Real estate properties 25 508 5 685 Equipment 16 - Others 277 336 57 177 6 452 563 590 654 444 Accumulated impairment( 10 375)( 12 071)Accumulated depreciation( 294 252)( 410 954) 258 963 231 419 In the 2021’s exercise, as part of the reorganisation of the Real Estate Funds held by the novobanco, the Bank sold own service properties to the Real Estate Funds, recording a loss of Euro 14,751 thousand. These properties were subsequently leased to the Bank and are being recorded in accordance with IFRS 16. In September the Head Office building was sold for Euro 112.2 million, the gross book value was Euro 106.4 million (Euro 38.2 million net of accumulated depreciation) resulting in a capital gain of Euro 67 million, net of costs related to the sale process. Until construction of the new headquarters is concluded, the Bank will continue to use the building, having signed a lease contract for this purpose. NOTE 26 – INTANGIBLE ASSETS This caption as of 31 December 2022 and 2021, is analysed as follows: SEPARATE EXPLANATORY NOTES - 388 - (in thousands of Euros)Real estate propertiesEquipmentRight-of-Use AssetsWork in progressTotalAcquisition costBalance at 31 December 2020 353 230 236 768 78 264 1 418 669 680 Acquisitions 30 013 24 184 46 182 16 251 116 630 Disposals / write-offs( 88 521)( 28 764)( 8 405)( 4 206)( 129 896)Transfers (a) 4 880 161 - ( 7 011)( 1 970)Balance at 31 December 2021 299 602 232 349 116 041 6 452 654 444 Acquisitions 11 483 23 811 19 526 51 061 105 881 Disposals / write-offs (c)( 145 389)( 36 693)( 13 434)( 15)( 195 531)Transfers (d)( 781)( 101)- ( 322)( 1 204)Foreign exchange differences and other - ( 1)- 1 - Balance at 31 December 2022 164 915 219 365 122 133 57 177 563 590 DepreciationBalance at 31 December 2020 225 160 210 715 31 452 - 467 327 Depreciation 5 146 10 044 12 412 - 27 602 Disposals / write-offs (a)( 51 182)( 28 224)( 6 188)- ( 85 594)Transfers (b)( 1 512)( 137)- - ( 1 649)Foreign exchange differences and other 3 268 ( 1) 1 - 3 268 Balance at 31 December 2021 180 880 192 397 37 677 - 410 954 Depreciation 4 307 12 386 14 230 - 30 923 Disposals / write-offs (c)( 107 557)( 36 242)( 5 546)- ( 149 345)Transfers (d)( 390)( 101)- - ( 491)Foreign exchange differences and other 2 125 86 - - 2 211 Balance at 31 December 2022 79 365 168 526 46 361 - 294 252 ImpairmentBalance at 31 December 2020 13 385 - - - 13 385 Impairment losses 3 484 - - - 3 484 Reversion of impairment losses( 5 101)- - - ( 5 101)Transfers 303 - - - 303 Balance at 31 December 2021 12 071 - - - 12 071 Reversion of impairment losses( 1 696)- - - ( 1 696)Balance at 31 December 2022 10 375 - - - 10 375 Net book value at 31 December 2022 75 175 50 839 75 772 57 177 258 963 Net book value at 31 December 2021 106 651 39 952 78 364 6 452 231 419 (a)(a)IncludesEUR66483thousandoffixedassets(realestateandequipment)andEUR25068thousandofaccumulateddepreciationstemmingfromOwnServicePropertiesthathavebeendivestedtoRealEstateFundsofthenovobanco Group.(cid:9)(cid:9)(cid:9)(cid:9)(cid:9)(cid:9)(cid:9)(cid:9)(cid:9)(cid:9)(cid:9)(cid:9)(b)(b)includesEUR3471thousandoffixedassets(realestateandequipment)andEUR1650thousandofaccumulateddepreciationsumsfordiscontinuedbrancheswhichhavebeentransferredatnetvaluetotheappropriatebalancesheet items.(cid:9)(cid:9)(cid:9)(cid:9)(cid:9)(cid:9)(cid:9)(cid:9)(cid:9)(cid:9)(cid:9)(cid:9)(c) Includes EUR 106 395 thousand of fixed assets (real estate and equipment) and EUR 68 164 thousand in accumulated depreciation stemming from the Head Office Building that was sold in 2022.(cid:9)(cid:9)(cid:9)(cid:9)(cid:9)(cid:9)(cid:9)(cid:9)(cid:9)(cid:9)(cid:9)(cid:9)(cid:9)(d)IncludesEUR1203thousandoffixedassets(realestateandequipment)andEUR490thousandofaccumulateddepreciationstemmingfromdiscontinuedcountersthathavebeentransferredatnetvaluetotheappropriatebalancesheet items.(cid:9)(cid:9)(cid:9)(cid:9)(cid:9)(cid:9)(cid:9)(cid:9)(cid:9)(cid:9)(cid:9)(cid:9) Internally generated intangible assets include expenses incurred by the Bank's units specialising in the implementation of IT solutions that will bring future economic benefits (see Note 6.24). The changes in this caption were as follows: NOTE 27 – INCOME TAXES The deferred tax assets and liabilities recognised in the balance sheet as of 31 December 2022 and 2021 may be analysed as follows: The deferred tax assets and liabilities recognised in the balance sheet in this period are as follows: SEPARATE EXPLANATORY NOTES - 389 - (in thousands of Euros)31.12.202231.12.2021Internally developedSoftware - Automatic data processing system 65 373 65 373 Acquired from third partiesSoftware - Automatic data processing system 366 444 379 779 431 817 445 152 Work in progress 31 881 13 410 463 698 458 562 Accumulated amortisation( 394 058)( 391 047) 69 640 67 515 (in thousands of Euros)Automatic data processing systemWork in progressTotalAcquisition costBalance as at 31 December 2020 411 762 21 420 433 182 AcquisitionsAcquired from third parties 3 209 22 171 25 380 Transfers 30 181 ( 30 181)- Balance as at 31 December 2021 445 152 13 410 458 562 AcquisitionsAcquired from third parties 6 474 18 686 25 160 Disposals/write-offs( 20 026)- ( 20 026)Transfers 216 ( 216)- Foreign exchange differences and other 1 1 2 Balance as at 31 December 2022 431 817 31 881 463 698 AmortizationsBalance as at 31 December 2020 384 851 - 384 851 Amortization for the period 6 197 - 6 197 Foreign exchange differences and other( 1)- ( 1)Balance as at 31 December 2021 391 047 - 391 047 Amortization for the period 23 038 - 23 038 Disposals/write-offs( 20 026)- ( 20 026)Foreign exchange differences and other( 1)- ( 1)Balance as at 31 December 2022 394 058 - 394 058 Net balance at 31 December 2022 37 759 31 881 69 640 Net balance at 31 December 2021 54 105 13 410 67 515 (in thousands of Euros)AssetsLiabilitiesAssetsLiabilitiesCurrent tax 30 298 4 505 35 448 4 703 Corporate tax recoverable- 4 174 - 4 606 Other 30 298 331 35 448 97 Deferred tax 917 202 - 741 321 - 947 500 4 505 776 769 4 703 31.12.202231.12.2021 As of 31 December 2022, the deferred tax related to temporary differences was determined based on an aggregate rate of 31% (31 December 2021: 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%. At 31 December 2022, the novobanco recognised deferred tax assets associated with tax losses amounting to Euro 63 million. On 4 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 st 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. Therefore, on 31 December 2022, the Bank continued to apply Regulatory Decree no. 13/2018, of December 28, which aims to extend, for tax purposes, the tax framework that derives from Notice no. 3/95 of the 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 exercise in which it is possible to deduct tax losses or tax credits (up to a maximum of twelve years, depending on the exercise 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. As of 31 December 2022 and 2021, the Bank 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. As of 31 December 2022, the amounts held by novobanco referring to these realities amount to approximately Euro 57 million (31 December 2021: Euro 37 million). 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 2022 and 2021, had the following origins: SEPARATE EXPLANATORY NOTES - 390 - (in thousands of Euros)AssetsLiabilitiesNet31.12.202231.12.202131.12.202231.12.202131.12.202231.12.2021Financial instruments 91 249 91 763 (13 369)(77 349) 77 880 14 414 Credit impairment (not covered by the special regime) 330 072 337 267 - - 330 072 337 267 Credit impairment (covered by the special regime) 295 119 267 043 - - 295 119 267 043 Other tangible assets- - ( 76)( 8 029)( 76)( 8 029)Provisions 100 583 82 092 - - 100 583 82 092 Pensions 50 624 48 534 - - 50 624 48 534 Reportable tax losses 63 000 - - - 63 000 - Deferred tax asset / (liability) 930 647 826 699 ( 13 445)( 85 378) 917 202 741 321 Asset / liability set-off for deferred tax purposes ( 13 445)( 85 378) 13 445 85 378 - - Net Deferred tax asset / (liability) 917 202 741 321 - - 917 202 741 321 (in thousands of Euros)31.12.202231.12.2021Balance at the beginning of the exercise 741 321 771 854 Recognised in Results for the exercise 62 950 28 292 Recognised in Fair value reserves 79 291 59 271 Conversion of Deferred taxes into Tax credits 33 640 ( 124 721)Foreign exchange differences and other - 6 625 Balance at the end of the exercise (Assets / (Liabilities)) 917 202 741 321 The reconciliation of the corporate income tax rate, for the portion recognised in the income statement, may be analysed as follows: Deferred tax assets recoverability analysis Deferred tax assets are recognised to the extent they are expected to be recovered with future taxable income. The Bank has evaluated the recoverability of the deferred tax assets considering its expectations of future taxable profits until 2027. The recoverability of 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 2022, this exercise was made based on the latest draft version of the business plan (“MTP”) for the period of 2023-2025 and a stress scenario exercise, preliminarily considered by the General Supervisory Board in December 2022 and which, upon inclusion of the end of 2022 accounts will be definitively approved. 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: • In addition to the detailed estimates up to 2025, it is assumed, thereafter an increase in pre-tax results at a rate of 4.00% from 2026; • Growth in the commercial finance result based on the expected evolution of interest rate benchmarks, as well as the continued development of new lines of activity that should also provide a recovery in commissioning levels to values similar to previous exercises; • Significant increase in interest rate benchmarks in line with the macroeconomic outlook and ECB monetary policy decisions; • Maintenance of operating costs, despite the expected increase in inflation, based on the specific cost reduction plan and the implementation of a new distribution model, reflecting the favorable effect of the reduction in the number of employees and branches and, in general, the simplification and increased efficiency of processes, in particular the focus on the digital component; and SEPARATE EXPLANATORY NOTES - 391 - (in thousands of Euros)Recognised in the income statementRecognised in reservesRecognised in the income statementRecognised in reservesFinancial instruments 15 825 ( 79 291)( 27 975)( 59 271)Impairment losses on loans and advances to customers 12 759 - 59 309 - Other tangible assets( 7 953)- ( 174)- Provisions( 18 491)- ( 43 118)- Pensions( 2 090)- ( 17 349)- Other- - 1 015 - Tax losses carried forward( 63 000)- - - Deferred taxes( 62 950)( 79 291)( 28 292)( 59 271)Current taxes 4 611 - 4 249 - Total tax recognised (income) / (expense)( 58 339)( 79 291)( 24 043)( 59 271)31.12.202231.12.2021(in thousands of Euros)Income before tax 395 491 201 865 Tax rate of NOVO BANCOTax rate of novobanco21,021,0Income tax calculated based on the tax rate of novobanco 83 053 42 392 Tax-exempt dividends(0,3)( 1 248)(0,8)( 1 593)Impairment on investments in subsidiaries or associated companies not subject to Participation Exemption(0,9)( 3 525)(20,4)( 41 203)Branch Tax and Tax Withheld Abroad0,2 956 1,1 2 138 Rate differential in the generation / reversal of temporary differences3,0 11 949 15,7 31 650 Impairments and provisions for credit(5,7)( 22 476)(26,4)( 53 201)Impairments and fair value adjustments of securities2,2 8 648 (18,7)( 37 715)Provisions for other risks and charges and contingencies(2,7)( 10 519)(7,8)( 15 830)Deferred tax asset not recognized on tax loss for the year10,3 40 811 32,3 65 183 Pension Fund(0,5)( 2 163)(5,0)( 10 044)Extraordinary Contribution and Additional Solidarity over the Banking Sector1,8 7 016 3,5 7 019 Deferred taxes on tax losses from previous years(15,9)( 63 000) - -Capital gains/losses on asset sales(25,8)( 101 924) - -Others(1,5)( 5 917)(6,4)( 12 839)Total tax recognized(14,8)( 58 339)(11,9)( 24 043)31.12.202131.12.2022%Value%Value • Appropriations for credit impairment in line with the evolution of the Bank’s activity and supported by macroeconomic projections, bearing in mind the significant effort made in recent exercises to provision the credit portfolio and the progressive convergence to gradually normalised costs of risk. Depending on the analysis mentioned above, the amount of deferred taxes not recognised for tax losses, per year of expiry, is as follows: In addition, the Bank became aware of the Tax Authority’s position with regards to adjustments resulting from the application of fair value to units in real estate investment funds and private equity funds. Such position implies that fair value adjustments to units of real estate investment funds and private equity funds do not contribute to the taxable profit in the respective year of booking. For the purpose of taxable income, such adjustments will only be accounted for at the moment of the respective realization, namely upon sale of the participation units or liquidation of the funds. The total amount of deferred tax assets related to these temporary differences, not recognised in the balance sheet, at 31 December 2022 amounts to Euro 229 million. Special Regime applicable to Deferred Tax Assets During 2014, novobanco 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. Following the determination of a negative net income for the exercises between 2018 and 2020, 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 of 31 December 2022 and 2021, the caption other assets is analysed as follows: SEPARATE EXPLANATORY NOTES - 392 - (in thousands of Euros)31.12.202231.12.2021No expiry period 933 178 -With expiry period 478 489 1 476 870 2025 91 728 123 124 2026 135 452 190 068 2028 - 877 771 2029 170 236 170 236 2033 81 073 115 671 1 411 667 1 476 870 (in thousands of Euros)202020192018Tax credit 124 721 106 197 133 061 The caption Collateral deposits placed includes, amongst others, deposits made by the Bank as collateral in order to celebrate certain derivative contracts on organised markets (margin accounts) and on over the counter markets (Credit Support Annex – CSA). 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. The decrease during 2022 in the caption Public Administrative Sector includes about Euro 272.9 million related to the conversion into capital of the rights resulting from the Special Regime Applicable to Deferred Tax Assets, as detailed in Note 33. As of 31 December 2022, the caption other debtors includes, amongst others: • Euro 61.9 million of shareholder loans and ancillary services following loan assignment transactions, which are fully provisioned (31 December 2021: Euro 111.6 million, fully provisioned); • Euro 1.8 million of receivables from the sale of non-performing loans (NATA II Project) (31 December 2021: Euro 60.5 million); • Euro 0.7 million of amounts receivable related to the real estate sale transaction carried out in 2019 (called "Sertorius Project") (31 December 2021: Euro 1.1 million); • Euro 0.4 million of amounts receivable relating to the operation to sell non-productive receivables carried out in 2020 (called the "Carter Project") (31 December 2021: Euro 4.2 million); • Euro 20.9 million of amounts receivable related to the operation to sell Restructuring Funds (Crow Project). The securities transactions to be settled reflect the transactions with securities, recorded on the trade date, which were pending settlement, in accordance with the accounting policy described in Note 6.10. 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. The bank implemented a plan aiming 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 holding period for properties acquired on repayment of own credit. During 2022, an impairment charge of Euro 12.9 million was recorded for the properties in the portfolio (31 December 2021: reinforcement of Euro 4.2 million). As described in accounting policy 6.25, the Bank evaluates at each reporting date, the recoverability of these assets and assesses for signs of impairment, with impairment losses being recognised in the income statement. SEPARATE EXPLANATORY NOTES - 393 - (in thousands of Euros)31.12.202231.12.2021Collateral deposits placed 251 225 525 229 Derivative products 133 864 399 631 Collateral CLEARNET and VISA 41 423 33 092 Collateral deposits relating to reinsurance operations 71 387 92 457 Other collateral deposits 4 551 49 Recoverable government subsidies on mortgage loans 18 304 11 961 Public sector 481 198 934 717 Contingent Capital Agreement 198 180 209 220 Other debtors 440 912 591 267 Income receivable 131 814 132 929 Deferred costs 13 184 47 166 Retirement pensions and health benefits (see Note 16) 52 020 - Precious metals, numismatics, medal collection and other liquid assets 10 395 9 989 Real estate properties a) 221 097 357 644 Equipment a) 3 013 3 189 Stock exchange transactions pending settlement 4 465 70 918 Other assets 119 949 22 048 1 945 756 2 916 277 Impairment lossesReal estate properties a)( 112 855)( 192 413)Equipment a)( 2 195)( 2 180)Other debtors - Shareholder loans, supplementary capital contributions( 74 164)( 107 724)Other( 43 426)( 58 108)( 232 640)( 360 425)1 713 116 2 555 852 a) Real estate properties and equipment received in settlement of loans and discontinued The changes occurred in impairment losses are presented as follows: The changes occurred in the real estate properties were as follows: As of 31 December 2022 and 2021, the detail of the real estate properties included in Other assets, by type, is as follows: The detail of real estate properties included in Other Assets, by ageing, is as follows: SEPARATE EXPLANATORY NOTES - 394 - (in thousands of Euros)31.12.202231.12.2021Balance at the beginning of the exercise 360 425 435 063 Allocation for the exercise 16 070 17 543 Utilisation during the exercise( 114 484)( 81 568)Write-back for the exercise( 27 832)( 13 857)Foreign exchange differences and other( 1 539) 3 244 Balance at the end of the exercise 232 640 360 425 (in thousands of Euros)31.12.202231.12.2021Balance at the beginning of the exercise 357 644 500 917 Additions 15 510 34 066 Sales( 151 092)( 123 600)Other movements (a)( 965)( 53 739)Balance at the end of the exercise 221 097 357 644 (a) Includes 50,208 thousand euros of real estate assets sold to the Group's Real Estate Funds, with an associated gain of 4.1 million euros.(in thousands of Euros)Number of propertiesGross value ImpairmentNet book valueFair value of assets (b)LandUrban 44 15 468 8 008 7 460 8 421 Rural 39 80 529 55 557 24 972 25 961 83 95 997 63 565 32 432 34 382 Buildings constructedCommercial 261 49 413 22 347 27 066 37 697 Residential 858 72 315 22 379 49 936 63 985 Others 128 3 264 879 2 385 3 145 1 247 124 992 45 605 79 387 104 827 Others (a)- 108 3 685 ( 3 577)( 3 577) 1 330 221 097 112 855 108 242 135 632 (a) the net book value in this item is negative due to the fact that costs with real estate sales are imputed(b) Determined in accordance with accounting policy mentioned in Note 6.1831.12.2022(in thousands of Euros)Number of propertiesGross value ImpairmentNet book valueFair value of assets (b)LandUrban 73 40 333 11 372 28 961 26 497 Rural 58 150 231 109 444 40 787 43 554 131 190 564 120 816 69 748 70 051 Buildings constructedCommercial 336 65 410 36 906 28 504 30 604 Residential 1 118 97 329 27 877 69 452 78 833 Others 134 4 133 1 176 2 957 2 994 1 588 166 872 65 959 100 913 112 431 Others (a)- 208 5 638 ( 5 430)( 5 430) 1 719 357 644 192 413 165 231 177 052 (a) the net book value in this item is negative due to the fact that costs with real estate sales are imputed(b) Determined in accordance with accounting policy mentioned in Note 6.1831.12.2021 As of 31 December 2022, the amount related to discontinued facilities included in the caption Real estate properties amounts to Euro 9,970 thousand (31 December 2021: Euro 9,848 thousand), having the Bank recorded impairment losses for these assets in the total amount of Euro 2,954 thousand (31 December 2021: Euro 4,863 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 This caption on 31 December 2022 and 2021, 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. SEPARATE EXPLANATORY NOTES - 395 - (in thousands of Euros)Up to 1 year1 to 2.5 years2.5 to 5 yearsMore than 5 yearsTotal net book valueLandUrban 353 74 52 6 981 7 460 Rural 30 20 543 24 379 24 972 383 94 595 31 360 32 432 Buildings constructedCommercial 4 223 1 128 10 588 11 127 27 066 Residential 1 221 2 255 9 852 36 608 49 936 Other 296 11 1 680 398 2 385 5 740 3 394 22 120 48 133 79 387 Others (a) 2 ( 3 582) 3 - ( 3 577) 6 125 ( 94) 22 718 79 493 108 242 (a) the net book value in this item is negative due to the fact that costs with real estate sales are imputed31.12.2022(in thousands of Euros)Up to 1 year1 to 2.5 years2.5 to 5 yearsMore than 5 yearsTotal net book valueLandUrban 15 945 92 33 12 891 28 961 Rural 14 71 14 525 26 177 40 787 15 959 163 14 558 39 068 69 748 Buildings constructedCommercial 1 309 2 562 8 339 16 294 28 504 Residential 3 492 4 721 19 574 41 665 69 452 Other 6 2 509 173 269 2 957 4 807 9 792 28 086 58 228 100 913 Others (a) 5 ( 5 435)- - ( 5 430) 20 771 4 520 42 644 97 296 165 231 (a) the net book value in this item is negative due to the fact that costs with real estate sales are imputed31.12.2021(in thousands of Euros)Assets of discontinued operationsBanco Well Link (formerly known as NB Ásia) 2 175 2 039 Banco Delle Tre Venezie 17 437 - ESEGUR 7 473 - novobanco - Spain branch 12 875 - Ijar Leasing Algerie 13 146 12 597 Others 50 50 53 156 14 686 Impairment lossesIjar Leasing Algerie( 8 035)( 8 035)Others( 50)( 50)( 8 085)( 8 085) 45 071 6 601 31.12.202231.12.2021 The impairment movement for non-current Assets for disposal classified as held for sale is as follow: As of 31 December 2022 and 2021, the results from discontinued operations is as follows: During 2021 the associated company Ijar Leasing was transferred to non-current assets held for sale as it is in the process of selling assets with the objective of their sale in the short term. Spanish Branch Following the accounting policy followed by the Bank, and in accordance with IFRS5 5 - Non-current assets held for sale and discontinued operations, during 2020 the Bank transferred its activity in Spain to the caption Non-current assets and disposal groups classified as held for sale, as it is expected that its value will be recovered through a sale transaction and this is highly probable, and the respective assets are in immediate sale conditions. The determination of fair value less costs of sale, carried out by an independent external entity, took into consideration the amounts received from potential parties interested in partial sales of this activity, the cost of sale of selected credit portfolios, and the cost of discontinuing the remaining residual activity, and resulted in a need for impairment of 166.0 million euros. On 2 April 2021, novobanco entered into an agreement to sell a number of assets and liabilities of the Spanish Branch with ABANCA CORPORACIÓN BANCARIA, S.A, which was completed on 30 November 2021 with the derecognition of the assets and liabilities sold. The assets and liabilities excluded from this transaction, of residual value, remained in the branch's balance sheet, having integrated the consolidation perimeter of novobanco, as presented below: The conclusion of this transaction had no impact on the income statement at the date of derecognition, since there was a provision recorded in the balance sheet for Euro 176 million (of which Euro 10 million reinforced already during 2021), which was partially used. The remaining amount of Euro 15.2 million was transferred to Provisions for other contingencies related to this transaction (advisory costs, tax contingencies and other possible claims). SEPARATE EXPLANATORY NOTES - 396 - (in thousands of Euros)Balance at the beginning of the exercise 8 085 179 236 Allocation / (reversals) for the exercise( 623) 10 000 Utilizations( 3 837)( 164 954)Transfers 4 460 - Exchange differences and other- ( 16 197)Balance at the end of the exercise 8 085 8 085 31.12.202131.12.2022(in thousands of Euros)31.12.202231.12.2021Results from discontinued operationsnovobanco - Spain branch- 1 091 - 1 091 (in thousands of Euros)Sold Assets / LiabilitiesAssets / Liabilities remaining in the BranchAssetsCash, cash balances at Central Banks and other demand deposits- 5 000 Financial assets held for trading Financial assets at fair value through profit or loss- 2 751 Financial assets at amortized cost( 462 796) 33 794 TítulosDeposits( 462 796) 33 794 Investments in subsidiaries, joint ventures and associates- 604 Tax assets - 37 910 Current tax assets- 11 929 Deferred tax assets- 25 981 Other assets- 9 591 Non-current assets and disposal groups classified as held for sale( 1 294 344)- Total Assets( 1 757 140) 89 650 LiabilitiesResources from Central Banks and other credit institutions- 33 885 Provisions- 6 611 Other liabilities- 28 259 Liabilities included in disposal groups classified as held for sale( 1 757 140)- Total Liabilities( 1 757 140) 68 755 EquityOther reserves- 19 804 Results attributable to shareholders of the parent company- 1 091 Total Equity- 20 895 Total Liabilities and Equity( 1 757 140) 89 650 Compagris, Barrosinha and Solago In December 2022, as a result of the conclusion of the sale process of the Restructuring Funds, novobanco acquired 100% of the share capital of Compagris and Barrosinha and 84.16% of the share capital of Solago. As the Bank intends to sell these assets, they were classified as discontinued operations. NOTE 30 – FINANCIAL LIABILITIES MEASURED AT AMORTISED COST This caption as of 31 December 2022 and 2021 is analysed as follows: Deposits from Central Banks and other credit institutions The balance of Deposits from Central Banks and other credit institutions is composed, as to its nature, as follows: As of 31 December 2022, the balance of the European Resources System of Central Banks includes Euro 6,327 million collateralised by the Bank's financial assets as part of the third series of longer-term refinancing operations of the European Central Bank (TLTRO III) (31 December 2021: Euro 7,954 million). The subsidy introduced by the ECB in the interest rate of these transactions, in accordance with the provisions of IAS 20, is being deducted from financing costs on a linear basis for accounting purposes, as the Bank has complied with the eligibility requirements set by the ECB. It should be recalled that on 28 October 2022, with the Central Bank raising its main interest rates, the ECB announced the recalibration of TLTRO III to cope with unexpected and extraordinary increases in inflation, reinforcing the transmission of reference rates to bank lending conditions and funding costs. Accordingly, on this date, the ECB also announced changes to the terms and conditions of TLTRO III as of 23 November 2022. These changes consisted, in particular, of: • • to maintain the calculation of the interest rate existing at that time (28 October 2022) only until 22 November 2022; and changing the calculation of the interest rate as of 23 November 2022, for those Banks that met the eligibility requirements defined by the ECB. The interest rate applicable to TLTRO III from 23 November 2022 until the maturity of each tranche will be equal to the average interest rate of the deposit facility during that period. This change in the TLTRO III remuneration conditions means that as of 22 November 2022, it is financially neutral to maintain the lines of this third series, since these lines will have a cost approximately equal to the income obtained from the application of these SEPARATE EXPLANATORY NOTES - 397 - (in thousands of Euros)Deposits from Central Banks and Other credit institutions 10 506 509 11 497 829 Due to customers 28 425 223 26 997 858 Debt securities issued, subordinated debt and liabilities associated to transferred assets 1 601 454 1 479 066 Other financial liabilities 371 511 371 609 40 904 697 40 346 362 31.12.202231.12.2021(in thousands of Euros)31.12.202231.12.2021Deposits from Central BanksFrom the European System of Central BanksDeposits 198 53 126 Other funds 6 327 000 7 954 000 6 327 198 8 007 126 Deposits from Other credit institutionsDomesticDeposits 1 071 278 968 975 Other funds 39 187 24 534 1 110 465 993 509 ForeignDeposits 430 487 426 711 Loans 479 880 531 973 Operations with repurchase agreements 2 150 824 1 529 847 Other resources 7 655 8 663 3 068 846 2 497 194 4 179 311 3 490 703 10 506 509 11 497 829 funds at the ECB. Based on the DFR projection (as of 31 December 2022), the average cost of these lines from 22 November 2022 to maturity is expected to be 2.55%. After the December 2022 repayment of Euro 1.6 billion, an additional Euro 5.4 billion of TLTRO III will mature in 2023, with the remaining Euro 0.95 billion maturing in December 2024. Given the maturity of these lines, novobanco's exit strategy from TLTRO III was to reduce the size of the balance sheet and increase other stable financing instruments, mainly collateralised interbank operations and customer deposits. It should be recalled that already in 2022, to mitigate the impact of the shortening of the term and/or maturity of TLTRO III, collateralised funding through medium-term repurchase agreements increased by Euro 2.5 billion and the Bank completed a private placement (senior preferred bond issue) in the amount of Euro 0.1 billion. Repurchase agreements operations corresponds to the sale of securities with purchasing agreement (repos), recorded in accordance with the accounting policy mentioned in Note 7.22. The breakdown of Deposits from Central Banks and other credit institutions, by residual maturity, as of 31 December 2022 and 2021, 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 to its nature, as follows: SEPARATE EXPLANATORY NOTES - 398 - (in thousands of Euros)31.12.202231.12.2021Deposits from Central BanksUp to 3 months 1 627 198 53 126 From 3 months to 1 year 3 750 000 1 627 000 From 1 to 5 years 950 000 6 327 000 6 327 198 8 007 126 Deposits from Other Credit InstitutionsUp to 3 months 1 001 089 1 487 742 From 3 months to 1 year 669 315 1 287 514 From 1 to 5 years 2 214 958 181 609 More than 5 years 293 949 533 838 4 179 311 3 490 703 10 506 509 11 497 829 (in thousands of Euros)31.12.202231.12.2021ForeignUp to 3 months 123 620 679 782 From 3 months to 1 year- 850 065 From 1 to 5 years 2 027 204 - 2 150 824 1 529 847 As of 31 December 2022 and 2021, the schedule of Due to customers, by residual maturity periods, is as follows: Debt Securities issued, Subordinated Debt and Financial liabilities associated to transferred assets This caption breaks down as follows: 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 2022, amount to Euro 5,500 million (31 December 2021: Euro 5,500 million), being these covered bonds totally repurchased by the Bank. The main characteristics of the outstanding issues as of 31 December 2022 and 2021 are as follows: SEPARATE EXPLANATORY NOTES - 399 - (in thousands of Euros)31.12.202231.12.2021Repayable on demandDemand depositsCompanies and other entities 7 190 941 7 584 926 Private companies 5 453 281 4 803 868 12 644 222 12 388 794 Time depositsTime depositsCompanies and other entities 2 964 295 2 856 548 Private companies 6 229 606 6 155 100 Other 187 180 9 194 088 9 011 828 Savings accountsRetirement saving accounts 215 643 226 003 Other 5 516 120 5 125 652 Companies and other entities 2 549 547 1 864 335 Private companies 3 416 573 3 261 317 5 731 763 5 351 655 Other funds Repurchase agreement 450 906 - Other 404 244 245 581 855 150 245 581 28 425 223 26 997 858 (in thousands of Euros)31.12.202231.12.2021Repayable on demand 12 644 222 12 388 794 Term depositsUp to 3 months 8 850 798 7 670 678 From 3 months to 1 year 5 460 348 5 607 590 From 1 to 5 years 1 469 855 1 290 725 More than 5 years- 40 071 15 781 001 14 609 064 28 425 223 26 997 858 (in thousands of Euros)31.12.202231.12.2021Debt securities issuedEuro Medium Term Notes (EMTN) 461 576 445 633 Bonds 679 855 573 588 1 141 431 1 019 221 Subordinated debtBonds 415 572 415 394 Financial liabilities associated to transferred assetsAsset lending operations 44 451 44 451 1 601 454 1 479 066 These covered bonds are guaranteed by a cover asset pool, comprising mortgage and other assets, segregated in novobanco Bank’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 and 8 and Instruction nº 13/2006 of Bank of Portugal. As of 31 December 2022, the assets that collateralize these covered debt securities amount to Euro 6,078.4 million (31 December 2021: Euro 6,075.1 million) (see Note 22). The changes in the exercises of 2022 and 2021 in debt securities issued, subordinated debt and financial liabilities associated to transferred assets was as follows: SEPARATE EXPLANATORY NOTES - 400 - (in thousands of Euros)Moody'sDBRSNB 2015 SR.1 1 000 000 - 07/10/201507/10/2025QuarterlyEuribor 3 Months + 0.25%XDUBAa3ANB 2015 SR.2 1 000 000 - 07/10/201507/10/2024QuarterlyEuribor 3 Months + 0.25%XDUBAa3ANB 2015 SR.3 1 000 000 - 07/10/201507/10/2027QuarterlyEuribor 3 Months + 0.25%XDUBAa3ANB 2015 SR.4 700 000 - 07/10/201507/10/2028QuarterlyEuribor 3 Months + 0.25%XDUBAa3ANB 2015 SR.5 500 000 - 22/12/201622/12/2023QuarterlyEuribor 3 Months + 0.25%XDUBAa3ANB 2019 SR.6 750 000 - 10/12/201910/06/2029QuarterlyEuribor 3 Months + 0.25%XMSMAa3ANB 2019 SR.7 550 000 - 10/12/201910/12/2024QuarterlyEuribor 3 Months + 0.25%XMSMAa3A 5 500 000 - 31.12.2022DesignationNominal 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 - 07/10/201507/10/2025QuarterlyEuribor 3 Months + 0.25%XDUBA2ANB 2015 SR.2 1 000 000 - 07/10/201507/10/2024QuarterlyEuribor 3 Months + 0.25%XDUBA2ANB 2015 SR.3 1 000 000 - 07/10/201507/10/2027QuarterlyEuribor 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%XMSMA2ANB 2019 SR.7 550 000 - 10/12/201910/12/2024QuarterlyEuribor 3 Months + 0.25%XMSMA2A 5 500 000 - 31.12.2021DesignationNominal value (in thousands of Euros)Carrying book value (in thousands of Euros)Issue dateMaturity dateInterest paymentInterest RateMarketRating(in thousands of Euros)Balance as at 31.12.2021IssuesNet purchasesOther movements a)Balance as at 31.12.2022Debt securities issuedEuro Medium Term Notes (EMTN) 445 633 - ( 500) 16 443 461 576 Bonds 573 588 100 000 - 6 267 679 855 1 019 221 100 000 ( 500) 22 710 1 141 431 Subordinated debtBonds 415 394 - - 178 415 572 Financial liabilities associated to transferred assetsAsset lending operations 44 451 - - - 44 451 1 479 066 100 000 ( 500) 22 888 1 601 454 a) The other movements include accrued interest on the balance sheet, corrections for hedging operations, corrections of fair value and exchange rate variations. Liability Management Exercise (LME) On 30 July 2021, following a voluntary tender offer (Tender Offer and Solicitation Memorandum), EMTN issued by the Luxembourg branch were redeemed, with a total nominal value of 84.3 million euros (representing 31.9% of the total nominal amount issued). This operation resulted in a loss of Euro 73,415 thousand. The main characteristics of the debt securities issued and the subordinated debt, as of 31 December 2022 and 2021, are as follows: The Bank did not present capital or interest defaults on its debt issued in the exercises of 2022 and 2021. SEPARATE EXPLANATORY NOTES - 401 - (in thousands of Euros)Balance as at 31.12.2020IssuesNet purchasesOther movements a)Balance as at 31.12.2021Debt securities issuedEuro Medium Term Notes (EMTN) 515 311 - ( 84 916) 15 238 445 633 Bonds- 575 000 - ( 1 412) 573 588 515 311 575 000 ( 84 916) 13 826 1 019 221 Subordinated debtBonds 415 234 - - 160 415 394 Financial liabilities associated to transferred assetsAsset lending operations 44 451 - - - 44 451 44 451 575 000 ( 84 916) 13 986 1 479 066 a) The other movements include accrued interest on the balance sheet, corrections for hedging operations, corrections of fair value and exchange rate variations.(in thousands of Euros)EntityISINDescriptionCurrencyIssue dateUnit price (€)Carrying Book valueMaturityInterest rateMarketBondsnovobancoPTNOBIOM0014NB 3,5% 23/07/24 OBRG.EUR2021100,00 303 992 2024Fixed rate 3.5%XDUBnovobancoPTNOBJOM0005NB 4,25% 09/23 OBRG.EUR2021100,00 275 874 2023Euribor 3M + 4.25%XDUBEuro Medium Term NotesnovobancoPTNOBKOM0002NB 5.5% 30/12/24 OBRG.EUR2022100,00 99 989 2024Fixed rate 5.5%XDUBnovobanco LuxemburgoXS0869315241BES Luxembourg 3.5% 02/01/43EUR20131,00 43 363 2043Fixed rate 3.5%XLUXnovobanco LuxemburgoXS0877741479BES Luxembourg 3.5% 23/01/43EUR20131,00 99 065 2043Fixed rate 3.5%XLUXnovobanco LuxemburgoXS0888530911BES Luxembourg 3.5% 19/02/2043EUR20131,00 64 774 2043Fixed rate 3.5%XLUXnovobanco LuxemburgoXS0897950878BES Luxembourg 3.5% 18/03/2043EUR20131,00 47 641 2043Fixed rate 3.5%XLUXnovobanco LuxemburgoXS0972653132BES Luxembourg ZCEUR20131,00 35 711 2048Zero CouponXLUXnovobanco LuxemburgoXS1031115014Banco Esp San Lux ZC 12/02/49EUR20141,00 43 694 2049Zero CouponXLUXnovobanco LuxemburgoXS1034421419Banco Esp San Lux ZC 19/02/49EUR20141,00 12 146 2049Zero CouponXLUXnovobanco LuxemburgoXS1038896426Banco Esp San Lux ZC 27/02/51EUR20141,00 16 672 2051Zero CouponXLUXnovobanco LuxemburgoXS1042343308BES Luxembourg ZC 06/03/2051EUR20141,00 11 729 2051Zero CouponXLUXnovobanco LuxemburgoXS1053939978BES Luxembourg ZC 03/04/48EUR20141,00 40 180 2048Zero CouponXLUXnovobanco LuxemburgoXS1055501974BES Luxembourg ZC 09/04/52EUR20141,00 38 891 2052Zero CouponXLUXnovobanco LuxemburgoXS1058257905BES Luxembourg ZC 16/04/46EUR20141,00 7 710 2046Zero CouponXLUXSubordinated debtnovobancoPTNOBFOM0017NB 06/07/2028EUR2018100,00 415 572 2023a)8,50%XDUB1 557 003 a) Date of the next call option31.12.2022(in thousands of Euros)EntityISINDescriptionCurrencyIssue dateUnit price (€)Carrying Book valueMaturityInterest rateMarketObrigaçõesnovobancoPTNOBIOM0014NB 3,5% 23/07/24 OBRG.EUR2021100,00 303 571 2024Fixed rate 3.5%XDUBnovobancoPTNOBJOM0005NB 4,25% 09/23 OBRG.EUR2021100,00 270 017 2022a)Euribor 3M + 4.25%XDUBEuro Medium Term Notesnovobanco LuxemburgoXS0869315241BES Luxembourg 3.5% 02/01/43EUR20131,00 42 807 2043Fixed rate 3.5%XLUXnovobanco LuxemburgoXS0877741479BES Luxembourg 3.5% 23/01/43EUR20131,00 98 081 2043Fixed rate 3.5%XLUXnovobanco LuxemburgoXS0888530911BES Luxembourg 3.5% 19/02/2043EUR20131,00 63 952 2043Fixed rate 3.5%XLUXnovobanco LuxemburgoXS0897950878BES Luxembourg 3.5% 18/03/2043EUR20131,00 47 063 2043Fixed rate 3.5%XLUXnovobanco LuxemburgoXS0972653132BES Luxembourg ZCEUR20131,00 33 649 2048Zero CouponXLUXnovobanco LuxemburgoXS1031115014Banco Esp San Lux ZC 12/02/49EUR20141,00 40 947 2049Zero CouponXLUXnovobanco LuxemburgoXS1034421419Banco Esp San Lux ZC 19/02/49EUR20141,00 11 375 2049Zero CouponXLUXnovobanco LuxemburgoXS1038896426Banco Esp San Lux ZC 27/02/51EUR20141,00 15 602 2051Zero CouponXLUXnovobanco LuxemburgoXS1042343308BES Luxembourg ZC 06/03/2051EUR20141,00 10 974 2051Zero CouponXLUXnovobanco LuxemburgoXS1053939978BES Luxembourg ZC 03/04/48EUR20141,00 37 479 2048Zero CouponXLUXnovobanco LuxemburgoXS1055501974BES Luxembourg ZC 09/04/52EUR20141,00 36 512 2052Zero CouponXLUXnovobanco LuxemburgoXS1058257905BES Luxembourg ZC 16/04/46EUR20141,00 7 192 2046Zero CouponXLUXSubordinadosNOVO BANCOPTNOBFOM0017NB 06/07/2028EUR2018100,00 415 394 2023a)8,50%XDUB1 434 615 a) Date of the next call option31.12.2021 The residual duration of debt securities issued and subordinated liabilities as of 31 December 2022 and 2021 is as follows: NOTE 31 – PROVISIONS As of 31 December 2022 and 2021, the caption Provisions presents the following changes: In order to meet the financial needs of its customers, the Bank assumes several irrevocable commitments and contingent liabilities, consisting of financial guarantees, letters of credit and other credit commitments, which may require the payment by the Bank, on behalf of its customers, in the event of specific, contractually prescribed events. Although these commitments are not recorded on the balance sheet, they carry credit risk and, therefore, are part of the Bank's overall risk exposure. The changes in the caption provisions for guarantees are detailed as follows: SEPARATE EXPLANATORY NOTES - 402 - (in thousands of Euros)Debt securities issuedFrom 3 months to 1 year 275 874 270 017 From 1 to 5 years 403 981 303 571 More than 5 years 461 576 445 633 1 141 431 1 019 221 Subordinated debtFrom 3 months to 1 year 415 572 - From 1 to 5 years- 415 394 415 572 415 394 Financial liabilities associated to transferred assetsUndertimined maturity 44 451 44 451 44 451 44 451 1 601 454 1 479 066 31.12.202231.12.2021(in thousands of Euros)Provision for restructuringProvision for guarantees and commitmentsCommercial OffersOther ProvisionsTotalBalance as at 31 December 2020 96 973 101 484 11 199 228 916 438 572 Charges / (Write-backs) 10 070 ( 9 900)- 111 600 111 770 Utilizations( 60 358)- ( 10 205)( 26 083)( 96 646)Exchange differences and others 1 191 - 24 282 24 474 Balance as at 31 December 2021 46 686 91 775 994 338 715 478 170 Charges / (Write-backs) 1 332 ( 2 555)( 123) 12 240 10 894 Utilizations( 28 870)- ( 871)( 36 746)( 66 487)Exchange differences and others- 238 - 375 613 Balance as at 31 December 2022 19 148 89 458 - 314 584 423 190 (in thousands of Euros)Stage 1Stage 2Stage 3TotalBalance as at 31 December 2020 1 314 24 005 66 586 91 905 Increases due to changes in credit risk 596 3 006 14 833 18 435 Decreases due to changes in credit risk( 593)( 17 826)( 12 772)( 31 191)Other moviments (a) 128 ( 2 355) 2 417 190 Balance as at 31 December 2021 1 445 6 830 71 064 79 339 Changes in the value of the impairment- transfers to stage 1 615 ( 615)- - - transfers to stage 2( 427) 538 ( 111)- - transfers to stage 3( 13)( 1 200) 1 213 - Increases due to changes in credit risk 346 1 960 21 502 23 808 Decreases due to changes in credit risk( 1 027)( 2 360)( 17 606)( 20 993)Other movements 5 34 199 238 Balance as at 31 December 2022 944 5 187 76 261 82 392 The changes in the caption provisions for commitments are detailed as follows: The transfers between stages that have occurred in guarantees and commitments are presented as follows: The restructuring provisions were set up within the scope of the commitments assumed before the European Commission arising from the Bank's sale and restructuring process. Other provisions amounting to Euro 314.6 million (31 December 2021: Euro 338.7 million), are intended to cover certain identified contingencies related to the Bank’s activities, the most relevant being: • Contingencies associated with ongoing tax processes. To cover for these contingencies, the Bank maintains provisions of Euro 24.2 million (31 December 2021: Euro 21.9 million); • Contingencies associated with legal proceedings amounting to Euro 4.0 million (31 December 2021: Euro 4.2 million); • Contingencies associated with sales processes in the amount of Euro 7.1 million (31 December 2021: Euro 39.9 million); • Contingencies related to the undivided part of the Executive Committee's pension plan, in the amount of Euro 19.2 million (31 December 2021: Euro 19.2 million), transferred from the liability captions net of the value of the assets of the Pension Fund (see Note 15); The remaining amount, of Euro 260.1 million (31 December 2021: Euro 253.5 million), is intended to cover losses arising from the Bank's normal activity, such as fraud, theft and robbery and lawsuits ongoing lawsuits for contingencies related to asset sale processes, among others. • The increase in 2021 stems from the State Budget Law for 2021 ("LOE 21"), which changed the rules of the Code of Tax on Onerous Real Estate Transfers ("IMT") and the Municipal Property Tax ("IMI"), with the extension of the scope of incidence of the increased rate of IMI and IMT, and losses of exemptions, for properties held by taxpayers who are controlled, directly or indirectly, by an entity that is subject to a more favorable tax regime, listed approved by order of the Minister of Finance. At this date the calculation of the application of the aggravated IMI rates to all properties in the direct and indirect ownership of the novobanco amounts to approximately Euro 172.1 million at 31 December 2022 (31 December 2021: Euro 115.8 million). NOTE 32 – OTHER LIABILITIES As of 31 December 2022 and 2021, the caption other liabilities are analysed as follows: SEPARATE EXPLANATORY NOTES - 403 - (in thousands of Euros)Stage 1Stage 2Stage 3TotalBalance as at 31 December 2020 5 623 3 956 - 9 579 Increases due to changes in credit risk 1 876 6 857 1 897 10 630 Decreases due to changes in credit risk( 1 780)( 5 961)( 33)( 7 774)Other moviments (a) 636 ( 723) 88 1 Balance as at 31 December 2021 6 355 4 129 1 952 12 436 Changes in the value of the impairment- transfers to stage 1 1 584 ( 1 584)- - - transfers to stage 2( 688) 688 - - - transfers to stage 3- ( 3) 3 - Increases due to changes in credit risk 1 635 507 787 2 929 Decreases due to changes in credit risk( 3 838)( 1 719)( 2 742)( 8 299)Other movements( 2) 2 - - Balance as at 31 December 2022 5 046 2 020 - 7 066 (in thousands of Euros)To Stage 2 from Stage 1To Stage 1 from Stage 2To Stage 3 from Stage 2To Stage 2 from Stage 3To Stage 3 from Stage 1To Stage 1 from Stage 3Commitments and financial guarantees given 43 164 40 385 45 450 2 234 1 775 181 CapitalTransfers between Stage 1 and Stage 2Transfers between Stage 2 and Stage 3Transfers between Stage 1 and Stage 3 As of 31 December 2022, the caption Creditors for supply of goods includes Euro 82,088 thousand related to creditors of assets for right of use (31 December 2021: Euro 79,998 thousand), whose maturity dates are present the following detail: NOTE 33 – SHARE CAPITAL Ordinary Shares As of 31 December 2022, the Bank's share capital of Euro 6,304,660,638 is represented by 10,391,043,938 registered shares with no par value and is fully subscribed and paid up by the following shareholders (31 December 2021: share capital of Euro 6,054,907,314 represented by 9,954,907,311 registered shares): During 2017, following the acquisition of 75% of the share capital of novobanco by Lone Star, two capital increases of Euro 750 million and Euro 250 million were made in October and December, respectively. In December 2021, a capital increase of Euro 154,907 thousand was carried out through the conversion of the conversion rights (resulting from the Special Regime Applicable to Deferred Tax Assets) for the exercise 2015, which gave the State a 1.56% stake in the novobanco, and which resulted in the issuance of 154,907,314 new ordinary shares (see Note 34). In November 2022, a capital increase of Euro 249,753 thousand was carried out through the conversion of the conversion rights (resulting from the Special Regime Applicable to Deferred Tax Assets) for the exercises 2016 and 2017, which gave the State a 4,13 % stake in the novobanco, and which resulted in the issuance of 436,136,627 new ordinary shares (see Note 34). As mentioned in Note 27, novobanco 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. SEPARATE EXPLANATORY NOTES - 404 - (in thousands of Euros)31.12.202231.12.2021Public sector 32 830 36 290 Creditors for supply of goods 105 063 98 983 Creditors for insurance operations 478 750 - Other creditors 113 244 92 499 Career bonuses (see Note 15) 5 506 7 335 Retirement pensions and health-care benefits (see Note 15)- 22 562 Other accrued expenses 81 501 69 069 Deferred income 1 111 888 Foreign exchange transactions to be settled- 14 Other transactions pending settlement 26 774 35 196 844 779 362 836 (in thousands of Euros)31.12.202231.12.2021Up to 3 months 255 233 From 3 months to one year 6 016 1 177 From one to five years 18 490 18 429 More than five years 57 327 60 159 82 088 79 998 31.12.202231.12.2021Nani Holdings, SGPS, SA (1)75,00%73,83%Resolution Fund (2)19,31%24,61%Directorate General for the Treasury and Finance 5,69%1,56%100,00%100,00%% Share Capital(1)asaresultoftheagreementscelebratedbetweentheResolutionFundandtheshareholderLoneStarinthecontextofthesaleof75%ofthesharecapitalofnovobanco,onlytheResolutionFundwillseeitsparticipationdilutedwiththeconversionoftheconversionrights,pendingthedeliveryofthesharesbytheResolutionFundtoNaniHoldingsonDecember31,2021.Whensuchdeliveryoccurs,NaniHoldings'shareholdingpercentagewillincreaseto75.00%andtheResolutionFund'sto23.44%.NaniHoldings'economicinterestinthenewbankremains unchanged at 75%.(2) In view of the commitments assumed by the Portuguese Republic before the European Commisson, the Resolution Fund is inhibited from exercising its voting rights. 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 entitle the State to require novobanco to increase its share capital by incorporating the amount of the special reserve and consequently issuing and delivering free of charge ordinary shares. It is estimated that the conversion rights to be issued and attributed to the State following the negative net results of the exercises between 2015 and 2020 will give it a stake of up to approximately 15.84% of the share capital of novobanco, which will only dilute, in accordance with the sale agreement, the stake of the Resolution Fund. For the exercises 2018 and 2019, the Tax Authority has already validated the tax credit, and the final value of conversion rights granted to the State represents an additional participation of 6.27% of the novobanco's share capital (11.96% for the exercises 2015 to 2019). NOTE 34 – ACCUMULATED OTHER COMPREHENSIVE INCOME, RETAINED EARNINGS, OTHER RESERVES As of 31 December 2022 and 2021, the accumulated other comprehensive income, retained earnings and other reserves present the following detail: Other accumulated comprehensive income The changes in Other accumulated comprehensive income were as follows: 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. SEPARATE EXPLANATORY NOTES - 405 - (in thousands of Euros)31.12.202231.12.2021Other accumulated comprehensive income( 1 155 271)( 968 987)Retained earnings( 8 577 074)( 8 576 860)Other reserves 6 040 802 6 064 434 Originating reserve 1 885 693 1 848 691 Special reserve 400 377 701 136 Legal reserve 36 594 - Other reserves and Retained earnings 3 718 138 3 514 607 ( 3 691 543)( 3 481 413)(in thousands of Euros)Balance as at 31 December 2020 3 667 9 214 ( 24 788)( 31 757)- ( 705 595)( 749 259)Actuarial deviations- - - - - ( 75 649)( 75 649)Fair value changes, net of taxes- - - ( 134 562)- - ( 134 562)Impairment reserves of securities at fair value through other comprehensive income 1 - - - - - 1 Reserves of sales of securities at fair value through other comprehensive income- - ( 9 518)- - - ( 9 518)Balance as at 31 December 2021 3 668 9 214 ( 34 306)( 166 319)- ( 781 244)( 968 987)Actuarial deviations- - - - - 96 485 96 485 Fair value changes, net of taxes- - - ( 178 410)- - ( 178 410)Impairment reserves of securities at fair value through other comprehensive income( 3 079)- - - - - ( 3 079)Reserves of sales of securities at fair value through other comprehensive income- - ( 862)- - - ( 862)Other comprehensive income of associated companies- - - - ( 100 418)- ( 100 418)Balance as at 31 December 2022 589 9 214 ( 35 168)( 344 729)( 100 418)( 684 759)(1 155 271)Other accumulated comprehensive income Total Impairment reserves Credit risk reserves Sales reserves Fair value reserves Actuarial deviations (net of taxes) Cash flow hedging reserves 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: The movements in cash flow hedging reserves are presented as follows: Originating reserve The originating reserve results from the difference between the assets and liabilities transferred from BES to novobanco, 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 nominated by Bank of Portugal. Special reserve As mentioned in Note 27, the special reserve was created as a result of the adhesion of novobanco 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 clearance of a negative net result in the exercises between 2015 and 2020, with reference to deferred tax assets eligible at the date of closures of those exercises, the application of that special regime applicable to deferred tax assets, novobanco recorded a special reserve, in the same amount of the tax credit calculated, increased by 10%, which has the following decomposition: SEPARATE EXPLANATORY NOTES - 406 - (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( 123 313)( 43 006)( 166 319) 70 520 ( 102 277)( 31 757)Changes in fair value( 325 981)- ( 325 981)( 191 007)- ( 191 007)Foreign exchange differences 2 006 - 2 006 2 351 - 2 351 Disposals in the exercise 66 274 - 66 274 ( 5 177)- ( 5 177)Impairment in the exercise- - - - - - Deferred taxes recognized in the exercise in reserves- 79 291 79 291 - 59 271 59 271 Balance at the end of the exercise( 381 014) 36 285 ( 344 729)( 123 313)( 43 006)( 166 319)31.12.202231.12.2021Fair value reserves Fair value reserves (in thousands of Euros)31.12.2022 31.12.2021 Amortised cost of financial assets at fair value through other comprehensive income2 576 036 7 256 821 Market value of financial assets at fair value through other comprehensive income2 183 034 7 133 508 Unrealised gains / (losses) recognized in fair value reserve( 393 002)( 123 313)Fair value reserve transferred to Results (1)( 11 988)- Potential gains / (losses) recognized in the fair value reserve( 381 014)( 123 313)Deferred Taxes 36 285 ( 43 006)Fair value reserve attributable to shareholders of the Bank( 344 729)( 166 319)(1) In the context of fair value hedge operations (see Note 23)(in thousands of Euros)31.12.202231.12.2021Balance at the beginning of the exercise- - Change in the fair value of the covered item recognized in another comprehensive income( 101 299)- Reclassification of other comprehensive income for results 881 - Balance at the end of the exercise( 100 418)- Legal reserve The legal reserve can only be used to cover accumulated losses or to increase capital. The Portuguese legislation applicable to the banking sector (Article 97 of Decree-Law 298/92, 31 December) requires that the legal reserve be credited annually with at least 10% of the annual net income, up to a limit equal to the value of the share capital or the sum of the free reserves constituted, and the results carried over, if higher. In addition, a value of Euro 14,004 thousand for the conversion of tax credits into capital as referred to in the preceding paragraph has been incorporated into the legal reserve. Other reserves and retained earnings Following the conditions agreed in the novobanco’s sale process, a Contingent Capital 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 of 31 December 2022, these assets had a net value of Euro 1.1 billion, mainly as a result of losses recorded as well as payments and recoveries (31 December 2021: net value of Euro 1.8 billion) Taking into consideration the losses presented by novobanco on 31 December 2020, 2019, 2018 and 2017, the conditions were met that determined the payment by the Resolution Fund of Euro 429,013 thousand, Euro 1,035,016 thousand, Euro 1,149,295 thousand and Euro 791,695 thousand in 2021, 2020, 2019 and 2018, respectively. The amount related to the Contingent Capital Agreement recorded in 2020 as receivable by the Resolution Fund (Euro 598,312 thousand) differs from the amount paid as a result of disagreements, between novobanco and the Resolution Fund, regarding (i) the provision for discontinued operations in Spain and (ii) the valuation of participation units, leading to a limitation to the immediate access to this amount, which despite being recorded as receivables, the Bank deducted, as at 31 December 2021, to the regulatory capital calculation (Euro 165,442 thousand). Additionally, the variable remuneration of the Executive Board of Directors for 2019 and 2020 (Euro 3,857 thousand) was also deducted. In 2021, an amount receivable by the Resolution Fund of Euro 209,220 thousand was recorded in relation to the Contingent Capital Agreement, under Other Reserves and which results, on the date of each balance sheet, from the losses incurred and the regulatory ratios in force at the time of its determination. As a result of the above and in line with the Regulator's guidelines, on 31 December of 2022 and 2021, this value was also deducted from the regulatory capital calculation. Novobanco considers this amount as due under the Contingent Capitalisation Mechanism and is triggering the legal and contractual mechanisms at its disposal to ensure the receipt of them. NOTE 35 – CONTINGENT LIABILITIES AND COMMITMENTS In addition to the derivative financial instruments, the balances relating to off-balance accounts as of 31 December 2022 and 2021 are the following: SEPARATE EXPLANATORY NOTES - 407 - (in thousands of Euros)31.12.202231.12.20212016 (net loss of 2015)- 14 004 2017 (net loss of 2016)- 109 421 2018 (net loss of 2017)- 140 332 2019 (net loss of 2018) 146 367 178 171 2020 (net loss of 2019) 116 817 122 015 2021 (net loss of 2020) 137 193 137 193 400 377 701 136 Guarantees and standby letters provided are banking operations that do not imply any mobilization of funds for the Bank. As of 31 December 2022, 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 11.2 billion (31 December 2021: Euro 13.1 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 6.8 million (31 December 2021: Euro 7.9 million); • Securities pledged as collateral to the Deposits’ Guarantee Fund (“Fundo de Garantia de Depósitos”), in the amount of Euro 64.6 million (31 December 2021: Euro 66.1 million); • Securities pledged as collateral to the European Investment Bank, in the amount of Euro 578.3 million (31 December 2021: Euro 651.4 million); • Securities delivered as collateral in connection with derivatives trading with a central counterparty in the amount of Euro 99.5 million (31 December 2021: 100.5 million). • Deposits delivered as collateral in connection with derivatives trading with a central counterparty in the amount of Euro 100.0 million (31 December 2021: 100.0 million). The above-mentioned financial assets pledged as collateral are recorded in the various asset categories of the Bank’s 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. The increase in the value of securities pledged as collateral to the European Investment Bank is related to the reinforcement of the collateral due to changes in the minimum required amounts. 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 collateralization 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 captions related to banking services provided are as follows: Pursuant to the resolution measure applied to BES by resolution of Bank of Portugal of 3 August 2014 (point 1., point b), subparagraph (vii) of Annex 2), as amended by the decision of Bank of Portugal of 11 August 2014, the “excluded liabilities” of transfer to novobanco include “any obligations, guarantees, liabilities or contingencies assumed in the commercialization, financial intermediation and distribution of debt instruments issued by entities that are part of the Espírito Santo Group (…) ”. SEPARATE EXPLANATORY NOTES - 408 - (in thousands of Euros)31.12.202231.12.2021Contingent liabilities Guarantees and standby letters2 262 092 2 221 575 Financial assets pledged as collateral12 036 520 14 086 256 Open documentary credits 169 410 402 332 Others 80 373 32 929 14 548 395 16 743 092 Commitments Revocable commitments5 397 330 5 305 121 Irrevocable commitments 557 766 544 160 5 955 096 5 849 281 (in thousands of Euros)31.12.202231.12.2021 Deposit and custody of securities and other items31 031 260 31 812 211 Amounts received for subsequent collection 207 006 197 907 Securitized loans under management (servicing)1 697 076 2 018 237 Other responsibilities related with banking services 723 197 537 957 33 658 539 34 566 312 Pursuant to point and subparagraph above and subpoint (v), liabilities excluded also include “any liabilities or contingencies, namely those arising from fraud or violation of regulatory, criminal or administrative offenses or provisions”. On December 29, 2015, Bank of Portugal adopted a new resolution on “Clarification and retransmission of responsibilities and contingencies defined as liabilities excluded in subparagraphs (v) to (vii) of paragraph 2 (b) of Annex 2 to the Resolution of Bank of Portugal of 3 August 2014 (8 pm), as amended by the Resolution of Bank of Portugal of 11 August 2014 (5 pm) ”. Under the terms of this resolution, Bank of Portugal came: (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 novobanco: 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 novobanco; 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 novobanco 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 novobanco to BES, with effect as at 8 p.m. of 3 August 2014. In the preparation of its separate and consolidated financial statements as of 31 December 2022 (as well as in the previous financial statements), novobanco incorporated the decisions resulting from the referred resolution measure regarding the transfer of the assets, liabilities, off-balance sheet captions 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 novobanco 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 neutralise, at the Bank level, the effects of decisions that are legally binding, beyond the control of novobanco 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 novobanco 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, although 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 captions and assets under management transferred to novobanco. 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 novobanco, 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 novobanco and the main actions and precautionary seizure procedures are still pending before the Supreme Court of Venezuela. In the preparation of the separate and consolidated financial statements of the Bank as of 31 December 2022 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 novobanco, as determined by Bank of Portugal and taking as reference the current legal bases and the information available at the present date. Additionally, within the scope of the novobanco sale operation, concluded on 18 October 2017, the respective contractual documents contain specific provisions that produce effects equivalent to the resolution of the Board of Directors of Bank of Portugal, of 29 December 2015, regarding the neutralization, at the level of novobanco, of the effects of unfavorable decisions that are legally binding, although, now, with contractual origin, thus maintaining the framework of contingent responsibilities of the Resolution Fund. SEPARATE EXPLANATORY NOTES - 409 - Relevant disputes For the purposes of contingent liabilities, and without prejudice to the information contained in these notes to the accounts, namely with regard to the conformity of the policy of setting up provisions with the resolution measure and subsequent decisions of Bank of Portugal (and 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 novobanco are, at the present date, insusceptible to determine or quantify: (i) Legal action brought by Partran, SGPS, S.A., Massa Insolvente by Espírito Santo Financial Group, S.A. and Massa Insolvente by Espírito Santo Financial (Portugal), S.A. against novobanco and Calm Eagle Holdings, S.A.R.L. through which it is intended the declaration of nullity of the pledge constituted on the shares of Companhia de Seguros Tranquilidade, S.A. and, alternatively, the annulment of the pledge or the declaration of its ineffectiveness. (ii) Lawsuits brought after the execution of the contract for the purchase and sale of NOVO BANCO's share capital, signed between the Resolution Fund and Lone Star on 31 March 2017, related to the conditions of the sale, namely the lawsuit administrative action brought by Banco Comercial Português, SA against the Resolution Fund, of which novobanco is not a party and, under which, according to the public disclosure of privileged information made by BCP on the CMVM website on September 1, 2017, the legal assessment of the contingent capitalization obligation assumed by the Resolution Fund within the scope of the CCA is requested. With respect to the amount requested to the Resolution Fund for the exercise 2020, differences remain between novobanco and the Resolution Fund regarding (i) the provision for discontinued operations in Spain and (ii) the valuation of participation units, which are subject to an ongoing arbitration. novobanco considers these amounts (Euro 165 million) to be due under the Contingent Capitalization Mechanism and has filed arbitration proceedings to claim payment of these amounts. There is also another divergence related to the application, by novobanco, at the end of 2020, of the dynamic option of the IFRS 9 transitional regime, which is also being assessed in the same arbitration action. These amounts (Euro 165 million) are recorded as receivables and are subject to a favorable arbitration decision. 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 of 31 December 2022, the periodic contribution made by the Bank amounted to Euro 16,017 thousand (31 December 2021: Euro 14,854 thousand). Within the scope of its responsibility as a supervisory and resolution authority, Bank of Portugal, on August 3, 2014, decided to apply a resolution measure to BES, pursuant to paragraph 5 of article 145-G of the General Regime of Institutions Credit and Financial Companies (RGICSF), which consisted of transferring most of its activity to novobanco, created especially for this purpose, with the capitalization being ensured by the Resolution Fund. For the realization of novobanco’s share capital, the Resolution Fund made available Euro 4,900 million, of which Euro 365 million corresponded to its own financial resources. A loan from a banking syndicate was also granted to the Resolution Fund, in the amount of Euro 635 million, with the participation of each credit institution being weighted according to several factors, including the respective sise. The remaining amount (Euro 3,900 million) originated from a 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.. This operation involved public support estimated at Euro 2,255 million, which aimed to cover future contingencies, financed at Euro 489 million by the Resolution Fund and Euro 1,766 million directly by the Portuguese State. The situation of serious financial imbalance in which BES was in 2014 and BANIF in 2015, which justified the application of resolution measures, created uncertainties related to the risk of litigation involving the Resolution Fund, which is significant, as well as with the risk of an eventual insufficiency of resources to ensure the fulfilment of the liabilities, in particular the short-term repayment of the borrowings. 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 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 SEPARATE EXPLANATORY NOTES - 410 - is, without the need to charge the banks participating in Resolution Fund for special contributions or any other extraordinary contribution. According to the statement of the Resolution Fund of March 21, 2017, issued following an earlier statement of September 28, 2016 and the statement of the Ministry of Finance issued on the same date, the revision of the conditions of financing granted by the State Portuguese and participating banks aimed to ensure the sustainability and financial balance of the Resolution Fund, based on a stable, predictable and affordable charge for the banking sector. Based on this review, the Resolution Fund assumed that the full payment of its liabilities is ensured, as well as the respective remuneration, without the need for recourse to special contributions or any other type of extraordinary contributions by the banking sector. On 31 March 2017, Bank of Portugal announced that it had selected the Lone Star Fund for the purchase of novobanco, which was completed on 18 October 2017, through the injection, by the new shareholder, of Euro 750 million, which was followed by a new a capital contribution of Euro 250 million, made on 21 December 2017. The Lone Star Fund now holds 75% of NOVO BANCO's share capital and the Resolution Fund the remaining 25%. Additionally, the approved conditions include: • A contingent capitalization mechanism, under which the Resolution Fund may be called upon to make payments in the event of certain cumulative conditions materialising, related to: (i) the performance of a restricted set of assets of novobanco and (ii) the evolution of the Bank's capitalization levels. Any payments to be made under this contingent mechanism are subject to an absolute ceiling of EUR 3,890 million. • An indemnity mechanism to novobanco, if certain conditions are met, it will be sentenced to pay any liability, by a final judicial decision that does not recognise or is contrary to the resolution measure applied by Bank of Portugal, or to the perimeter novobanco’s 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 Capital Agreement and the Compensation Mechanism referred to in the previous paragraphs. Any changes in this regard and the application of these mechanisms may have relevant implications in the Bank’s financial statements. NOTE 36 – RELATED PARTIES BALANCES AND TRANSACTIONS The group of entities considered to be related parties by novobanco 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 novobanco); (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 novobanco; (v) subsidiaries consolidated for accounting purposes under the full consolidation method; (vi) associated companies, that is, companies over which novobanco has significantly influence on the company’s financial and operational polices, despite not having control; and (vii) entities under joint control of novobanco (joint ventures). During 2022, the following transactions with Related Parties identified on 31 December 2022 (credit and other types) were carried out: 1) Credit Operations SEPARATE EXPLANATORY NOTES - 411 - 2) Services rendered and other signed contracts SEPARATE EXPLANATORY NOTES - 412 - Entities / IndividualsCategoryOperationAmount (euros)APB - Associação Portuguesa de BancosEntities for which there is a relationship of economic interdependenceCredit Card Limits 750 Byron James MacBean HaynesMembers of the Administration and Supervision bodiesCredit Card Limits 10 000 Direct Debits Limits (RCE) (renewal)1 000 000 Credit Card Limits (renewal)24 000 Credit Card Limits (renewal)10 000 Current-Account Loan Account (renewal)2 500 000 Trading Room Operations (RCE)3 000 000 Direct Debits Limits (RCE) (renewal)4 000 000 Leasing (renewal with changes)68 250 000 23 000 000 50 000 000 Current-Account Loan Account (renewal)100 000 Credit Card Limits (renewal)1 000 Novobanco dos AçoresEntity dominated by members of the Administration / SupervisionFull subscription of the issue of Senior Debt Securities (non-preferred) at the novobanco dos Açores by the novobancoup to 7 000 000Novo Banco Group(BEST, NB Açores e NB Finance)Entity dominated by members of the Administration / Supervision• Interbank Limits (Trading Room Operations)• Commercial Limits1 818 000 000 Nuno DuartePersons or entities whose relationship with the institution potentially influences their managementCredit Card Limits 10 000 Unicre - Cartão Internacional de Crédito S.A.Entities for which there is a relationship of economic interdependenceCurrent-Account Loan Account (renewal) up to 38 050 000 Vicente Moreira RatoPersons or entities whose relationship with the institution potentially influences their managementHousing Credit (increase)50 000 William Henry NewtonMembers of the Administration and Supervision bodiesCredit Card Limits 7 500 EDENRED - Portugal S.A.Entities for which there is a relationship of economic interdependenceLOCARENT - Companhia Portuguesa Aluguer Viaturas S.A.Entities for which there is a relationship of economic interdependenceCommercial Paper (renewal with change)NACIONAL CONTA – Contabilidade, Consultadoria e Administração, Lda.Entity dominated by members of the Administration / SupervisionEntities / IndividualsCategoryOperationAmount (euros)GNB Soc Gestora de Fundo de Pensões S.A.Entities for which there is a relationship of economic interdependenceChange to distribution agreement na GNB Gestão de AtivosEntities for which there is a relationship of economic interdependenceChange to distribution agreement na GNB International Management S.A.Entities for which there is a relationship of economic interdependenceChange to distribution agreement na LOCARENT Companhia Portuguesa de Aluguer de Viaturas SAEntities for which there is a relationship of economic interdependenceChange to distribution agreement na The Bank balances with related parties as of 31 December 2022 and 2021, 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 Capital Agreement regarding the financial exercise 2021. The liability corresponds to the amount to be delivered to the Resolution Fund arising from an addendum made in May 2021 to the Contingent Capitalisation Mechanism contract. In June 2018 a contract was entered into between NANI HOLDINGS, SGPS, S.A., LSF NANI INVESTMENTS S.à.r.l. and novobanco, 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. The guarantees relating to associated undertakings included in the table above mainly refer to guarantees provided. 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 Bank in the scope of its activity. All assets placed with SEPARATE EXPLANATORY NOTES - 413 - (in thousands of Euros)AssetsLiabilitiesGuaranteesIncomeExpensesAssetsLiabilitiesGuaranteesIncomeExpensesShareholdersNANI HOLDINGS- 152 - 389 - - 153 - 332 - FUNDO DE RESOLUÇÃO 198 180 54 101 - - 16 017 209 220 11 040 - - 25 894 Subsidiary companiesGNB RECUPERAÇÃO DE CRÉDITO- - - - - - - - - 42 GNB CONCESSÕES 83 473 39 189 - - - 83 473 39 264 - - - GNB GA 3 552 14 752 4 025 6 303 - 2 261 73 201 6 6 486 - ES TECH VENTURES 46 732 74 426 - - - 46 732 70 348 - - - BEST 2 610 647 221 37 7 878 5 900 1 716 605 863 37 2 250 3 112 novobanco AÇORES 124 017 216 280 1 295 1 369 2 898 145 649 204 898 1 295 967 1 381 FCR PME- - - - - - 218 - - - SPE-LM6 243 371 1 915 - 338 - 268 623 1 909 - 287 - SPE-LM7 628 541 3 000 - 932 - 797 831 4 586 - 985 - FCR NB CAPITAL GROWTH 15 015 3 547 - - - 15 050 3 357 - - - NB ÁFRICA- 7 166 - - - - 7 145 - - - FUNGEPI- 40 180 2 414 44 446 - 25 614 1 232 45 83 FUNGEPI II- 23 742 35 2 692 513 - 84 523 35 5 681 3 631 FUNGERE- - - 13 1 - 57 841 1 182 28 4 IMOINVESTIMENTO- 5 561 - 20 - - 3 196 - 25 - PREDILOC- 3 938 - - - - 2 668 - - - IMOGESTÃO- 478 - 28 1 - 38 787 - - 3 ARRABIDA- - - - 1 - 2 553 - - 1 INVESFUNDO VII- 980 - 4 - - 1 088 - 4 - NB LOGÍSTICA- - - - 1 - 29 741 - - 3 NB PATRIMÓNIO- 46 022 387 - 4 199 - 60 365 - - 4 433 FUNDES- - - - 1 - 16 796 - - 1 AMOREIRAS- 30 671 - - - - 30 168 - - - FIMES ORIENTE 16 13 551 - - 10 18 13 948 - - 1 NB ARRENDAMENTO- 897 - - - - 797 - - - NB FINANCE- 7 067 1 952 - 145 - 6 968 1 820 16 331 FEBAGRI- 1 150 71 - - - 913 71 - - AUTODRIL- - - - - - 63 - - - GREENWOODS- 7 483 - - - - 3 156 - - - QUINTA DA AREIA- - - - - - 7 - - - VÁRZEA DA LAGOA- - - - - - 42 - - - HERDADE DA BOINA- - - - - - 6 - - - RIBAGOLFE- - - - - - 49 - - - BENAGIL- 21 - - - - 101 - - - QUINTA DA RIBEIRA- - - - - - 247 - - - PROMOFUNDO- 65 - - - - 124 - - - GREENDRAIVE 6 445 20 106 - - 6 445 252 106 - - FIVE STARS- 17 986 - - 1 885 - 4 634 - 4 811 17 468 AROLERI 4 262 - - - - - - - - - IMALGARVE- 10 887 - - - - - - - - 1 356 214 1 272 448 10 322 20 010 32 018 1 577 018 1 406 629 5 784 21 917 56 388 Associated CompaniesLINEAS- 3 176 - - - - 3 123 - 2 395 - LOCARENT 139 286 3 218 - 1 727 3 161 121 982 3 146 - 1 040 3 278 ESEGUR- - - - - 1 894 919 915 - - UNICRE 38 365 76 - 919 - 38 193 6 - 522 - MULTIPESSOAL 2 023 35 273 - - 2 017 43 273 - - OUTRAS 2 88 601 - 1 968 29 1 76 197 - 2 039 11 179 676 95 106 273 4 614 3 190 164 087 83 434 1 188 5 996 3 289 Other related entitiesHUDSON ADVISORS PORTUGAL- - - - 4 638 - - - - 4 138 NACIONAL CONTA LDA 324 5 - - - 375 18 - - - ESMALGLASS- - - - - - 100 2 - - Other 324 5 - - 4 638 375 118 2 - 4 138 31.12.202131.12.2022 related parties earn interest between 0% and 9,6% (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 novobanco in 2022 and 2021, are as follows: In 2022 and 2021, the value of variable remuneration for the management bodies amounted to Euro 1,931 thousand and Euro 1,600 thousand, respectively, which relates to remuneration that does not constitute vested rights of the respective members until after the end of the restructuring period and is subject to deferral and verification of certain conditions. Additionally, in 2022, costs of Euro 260 thousand were recorded as sign-on bonus resulting from the entry into office of two new Executive Directors were registered, and compensation for termination of the mandate of two Executive Directors in the amount of Euro 460 thousand was recorded. As of 31 December 2022 and 2021, the value of loans and deposits of members of the Key Management Personnel of the novobanco was as follows: Credit granted (i) to members of the Executive Board of Directors and their direct relatives was Euro 351 thousand (31 December 2021: Euro 317 thousand); and (ii) members of the General and Supervisory Board and their direct relatives had no credit liabilities (31 December 2021: no exposure). Deposits (i) of members of the Executive Board of Directors and their direct relatives was Euro 1,138 thousand (31 December 2021: Euro 1,080 thousand); and (ii) of members of the General and Supervisory Board and their direct relatives was Euro 1,544 thousand (31 December 2021: Euro 1,562 thousand). NOTE 37 – SECURITISATION OF ASSETS As of 31 December 2022 and 2021, the outstanding securitisation transactions made by the Bank were as follows: SEPARATE EXPLANATORY NOTES - 414 - (in thousands of Euros)Short-term employment benefits 3 092 1 257 4 349 2 524 1 183 3 707 Post-employment benefits 2 - 2 2 - 2 Other long-term benefits 197 38 235 51 50 101 Termination benefits- - - - - - Stock-based payment- - - - - - 3 291 1 295 4 586 2 577 1 233 3 810 31.12.202231.12.2021Executive Board of DirectorsGeneral and Supervisory BoardTotalExecutive Board of DirectorsGeneral and Supervisory BoardTotal(in thousands of Euros)31.12.202231.12.2021Lusitano Mortgages No.4 plcSeptember 2005 1 200 000 214 061 246 943 Mortgage loans (general scheme)Lusitano Mortgages No.5 plcSeptember 2006 1 400 000 330 075 373 147 Mortgage loans (general scheme)Lusitano Mortgages No.6 plcJuly 2007 1 100 000 317 612 355 513 Mortgage loans (general scheme)Lusitano Mortgages No.7 plcSeptember 2008 1 900 000 817 287 907 327 Mortgage loans (general scheme)IssueStart dateOriginal amountCurrent amountAsset securitized The main characteristics of these operations, as of 31 December 2022 and 2021, may be analysed as follows: In December 2022 novobanco contracted a loan risk transfer operation from a credit portfolio to companies worth around Euro 1 billion through synthetic securitisation, due to a maturity date of February 2031 (and the possibility of call option in September 2025). Given the nature of this transaction, there was no derecognition of the balance sheet claims, and the guarantee received was recorded, which will be updated according to activation triggers defined in the contract. NOTE 38 – 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. The fair value of listed financial assets is determined based on the closing price (bid-price), the price of the last transaction made or the value of the last known price (bid). In the absence of a quotation, the Bank estimates fair value using (i) valuation methodologies, such as the use of recent transaction prices, similar and carried out under market conditions, discounted cash flow techniques and customised option valuation models in order to reflect the particularities and circumstances of the instrument and (ii) valuation assumptions based on market information. For assets included in the fair value hierarchy 3, whose quotation is provided by a third-party using parameters that are not observable in the market, the Bank proceeds, when applicable, to a detailed analysis of the historical and liquidity performance of these assets, which may imply an additional adjustment to its fair value, as well because of additional internal or external valuations. 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. SEPARATE EXPLANATORY NOTES - 415 - (in thousands of Euros)31.12.2022FitchMoody'sS&PDBRSFitchMoody'sS&PDBRSLusitano Mortgages No.4 plcClasse A1 134 000 163 785 - - Dezembro de 2048AAAAaaAAA - AA-Aa2AA+-Classe B 22 800 10 842 - - Dezembro de 2048AAAa2AA - A-A2AA--Classe C 19 200 9 130 - - Dezembro de 2048A+A1A+ - BB+Baa3A--Classe D 24 000 11 412 - - Dezembro de 2048BBB+Baa1BBB- - CCCCaa1B--Classe E 10 200 5 100 - - Dezembro de 2048NA - NA - ----Lusitano Mortgages No.5 plcClasse A1 323 000 245 724 - - Dezembro de 2059AAAAaaAAA - A+Aa2AA+-Classe B 26 600 20 113 - - Dezembro de 2059AAAa2AA - BBB+Baa2AA+-Classe C 22 400 16 937 - - Dezembro de 2059AA1A - B+Ba3BBB-Classe D 28 000 21 172 - - Dezembro de 2059BBB+Baa2BBB - CCCaa3B-Classe E 11 900 11 301 - - Dezembro de 2059N/A - N/A - ----Lusitano Mortgages No.6 plcClasse A 943 250 152 014 128 051 124 100 Março de 2060AAAAaaAAA - AA+Aa2A--Classe B 65 450 65 450 63 950 55 286 Março de 2060AAAa3AA - AAAa2A--Classe C 41 800 41 800 41 800 31 303 Março de 2060AA3A - BB+A3A--Classe D 17 600 17 600 17 600 12 414 Março de 2060BBBBaa3BBB - CCCB3B-Classe E 31 900 31 900 31 900 20 017 Março de 2060BB - BB - CC-D-Classe F 22 000 22 000 22 000 - Março de 2060 - - - - ----Lusitano Mortgages No.7 plcClasse A1 425 000 345 770 345 770 326 254 Outubro de 2064 - - AAAAAA--AA+AAAClasse B 294 500 294 500 294 500 242 031 Outubro de 2064 - - BBB- - --AA+-Classe C 180 500 180 500 180 500 59 141 Outubro de 2064 - - - - ----Classe D 57 000 57 000 57 000 - Outubro de 2064 - - - - ----IssueBonds 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(in thousands of Euros)FitchMoody'sS&PDBRSFitchMoody'sS&PDBRSLusitano Mortgages No.4 plcClass A1 134 000 189 071 - - December 2048AAAAaaAAA - A+Aa2AA-Class B 22 800 12 515 - - December 2048AAAa2AA - BBB+A2A--Class C 19 200 10 539 - - December 2048A+A1A+ - BB+Ba1BBB--Class D 24 000 13 174 - - December 2048BBB+Baa1BBB- - CCCCaa1B--Class E 10 200 5 100 - - NA - NA - ----December 2059Lusitano Mortgages No.5 plcClass A1 323 000 277 689 - - December 2059AAAAaaAAA - AAa2AA-Class B 26 600 22 729 - - December 2059AAAa2AA - BBB-Baa2AA-Class C 22 400 19 141 - - December 2059AA1A - BBa3BBB-Class D 28 000 23 926 - - December 2059BBB+Baa2BBB - CCCaa3B-Class E 11 900 11 301 - - N/A - N/A - ----March 2060Lusitano Mortgages No.6 plcClass A 943 250 189 723 157 956 152 431 March 2060AAAAaaAAA - AAAa2A--Class B 65 450 65 450 63 950 61 124 March 2060AAAa3AA - AAa2A--Class C 41 800 41 800 41 800 33 936 March 2060AA3A - BB-A3A--Class D 17 600 17 600 17 600 12 388 March 2060BBBBaa3BBB - CCCB3B-Class E 31 900 31 900 31 900 8 568 March 2060BB - BB - CC-D-Class F 22 000 22 000 22 000 - - - - - ----Lusitano Mortgages No.7 plcClass A1 425 000 437 435 437 434 409 580 October 2064 - - AAAAAA--AAAAAClass B 294 500 294 500 294 500 266 902 October 2064 - - BBB- - --A-Class C 180 500 180 500 180 500 121 349 October 2064 - - - - ----Class D 57 000 57 000 57 000 - October 2064 - - - - ----31.12.2021Bonds 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 bondsIssue 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. 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 after 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 to obtain additional assurance about the information provided by the management company. Additionally, and for the major assets held by the real estate investment funds, and according to an annual work plan previously approved by the Executive Board of Directors, a process of challenge to their valuations is carried out, consisting of a detailed technical analysis of the main assumptions considered in the valuations. This process may lead to the need of new valuations as well as to adjustments to the fair value of those assets. In the specific case of the Restructuring Funds (“Assessed Assets”), their assessment was carried out during the exercise 2022 by an independent external international entity (“Appraiser”), which engaged renowned real estate appraisal companies to determine the fair value of real estate assets, which represent a significant part of the funds' portfolio. The fair vale estimation Assessed Assets requires a multi-step approach, considering the following (i) The fair value of the assets invested by each fund (the “Underlying Assets”); (ii) The nature of the participation of the respective Fund in each of the Underlying Assets; (iii) The other assets and liabilities on the Fund's balance; (iv) The nature of novobanco investment in each of the funds; and (v) Consideration of any applicable discounts or premiums. The fair value of the Underlying Assets was estimated using three valuation approaches (market, income and cost) depending, among other things, on the specific nature of each asset, its state of development, the information available and the date of the initial investment. The other assets and liabilities in the fund's balances would normally be valued using the cost approach, with potential adjustments based on the market, and the consideration of discounts and premiums, normally assessed using market data and benchmarks. Underlying assets are mainly divided into Non-Real Estate assets and Real Estate assets (which can be subdivided into Hotels and Other Real Estate assets). For Non-Real Estate Assets, the Appraiser considered the Market approach based essentially on Market Multiples for comparable assets and considering the historical performance of each asset. For Real Estate Assets, the appraiser considered either the market approach or the income approach, depending on the state of each asset. In the case of hotels, the main value-based assumptions considered were the average room rate, the occupancy rate, the GOP margin, the EBITDA margin, the Capex needs and the discount rate. In relation to Other Real Estate Assets, the main assumptions of value were sales prices, construction costs, timeline (both to development and sale) and Discount Rates. Each of the assumptions described above considered in the valuation of real estate assets was determined from asset to asset (total of 80 major assets subdivided into a total of more than 500 assets), depending on the status of the asset, the asset's historical performance, location and market competitors. With regards to information on quantitative indicators underlying the fair value measurements of the Restructuring Funds, the following is presented: SEPARATE EXPLANATORY NOTES - 416 - Notes: 1. All the above assumptions were calculated based on the average of the values considered by the external evaluators per property assessed 2. The average presented was calculated on the property-weighted average in the sum of the value of the underlying assets per category presented 3. Hotel - Includes hotels and aparthotels currently in operation (Hotels under development or projects are included under Real Estate under Development together with their respective property) 4. €/m2 consider the gross construction area In addition, additional assumptions considered in the fair value measurement of the financial investments held in the restructuring funds are presented below: 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. • 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 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 over its remaining life. Subsequently, are applied to the exposure determined, an expected loss and a recovery rate. The Bank chooses not to register "Debt Valuation Adjustment" (DVA), which represents the market value of own credit risk of the group of a certain negative exposure to a counterparty, reflecting a prudent perspective of application of this regulation. It should be noted that the exposure potentially subject to DVA is controlled on a monthly basis and has assumed immaterial values. The validation of the valuation of financial instruments is performed by an independent area, which validates the models used and the prices assigned. More specifically, this area is responsible for carrying out independent verification of the prices for mark-to- market valuations, and for mark-to-model valuations, it validates the models used and any changes thereto, whenever they exist. For prices provided by external entities, the validation performed consists in confirming the use of correct prices. SEPARATE EXPLANATORY NOTES - 417 - Min AverageMaxMin AverageMaxMin AverageMaxMin AverageMaxMin AverageMaxAverage Rate per Room (€)55197650133177207n.a.n.a.n.a.n.a.n.a.n.a.n.a.n.a.n.a.Occupancy Rate %40%62%80%60%70%75%n.a.n.a.n.a.n.a.n.a.n.a.n.a.n.a.n.a.€/m2n.a.n.a.n.a.301 5183 1508002 5946 7509601 0851 180n.a.n.a.n.a.€/Ha n.a.n.a.n.a.n.a.n.a.n.a.n.a.n.a.n.a.n.a.n.a.n.a.2 80013 27020 200Discount Rate8,5%9,4%10,1%8,0%12,3%16,0%4,5%6,4%10,0%10,0%10,3%10,8%n.a.n.a.n.a.Evaluation MethodologyPresuppositionHotels(cid:9)(cid:9)(cid:9)(cid:9)Real Estate in Development(cid:9)(cid:9)Real EstateYieldYieldYieldYieldYieldAgricultural PropertiesMarketMarketMarketMarketMarketShopping MallsBackground typologyReal Estate and TourismReal Estate and Tourism / OthersOtherDiscount based on P/BV observed in the market16,6%15,3%12,0% The fair value of the financial assets and liabilities and non-financial assets of the Bank measured at fair value is as follows: SEPARATE EXPLANATORY NOTES - 418 - (in thousands of Euros)(Stage 1)(Stage 2)(Stage 3)31 December 2022Financial assets held for trading 36 428 134 419 - 170 847 Securities held for trading 36 428 - - 36 428 Bonds issued by public entities 36 428 - - 36 428 Derivatives held for trading- 134 419 - 134 419 Exchange rate contracts- 23 145 - 23 145 Interest rate contracts- 102 729 - 102 729 Other- 8 545 - 8 545 Financial assets mandatorily at fair value through profit or loss 15 832 21 409 1 500 429 1 537 670 Titles 15 832 21 409 1 500 411 1 537 652 Bonds issued by other entities 11 045 50 422 570 433 665 Shares 4 787 - 135 655 140 442 Other variable income securities- 21 359 942 186 963 545 Loans- - 18 18 Financial assets accounted for at fair value through results- - 13 13 Obligations of other issuers- - 13 13 Financial assets at fair value through other comprehensive income2 094 365 27 124 61 545 2 183 034 Bonds issued by public entities1 629 639 - - 1 629 639 Bonds issued by other entities 458 913 20 493 - 479 406 Shares 5 813 6 631 61 545 73 989 Derivatives - Hedge Accounting- 562 886 - 562 886 Interest rate contracts- 562 886 - 562 886 Assets at fair value2 146 625 745 838 1 561 987 4 454 450 Financial liabilities held for trading- 96 711 2 606 99 317 Derivatives held for trading- 96 711 2 606 99 317 Exchange rate contracts- 22 024 - 22 024 Interest rate contracts- 71 807 2 606 74 413 Other- 2 880 - 2 880 Derivatives - Hedge Accounting- 120 612 - 120 612 Loans- 120 612 - 120 612 Liabilities at fair value- 217 323 2 606 219 929 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 financial liabilities valued based on non-observable market information (level 3 of the fair value hierarchy) during the exercises 2022 and 2021, can be analysed as follows: In the exercises 2022 and 2021 there were no significant transfers of value between the different levels of the fair value hierarchy. SEPARATE EXPLANATORY NOTES - 419 - (in thousands of Euros)(Stage 1)(Stage 2)(Stage 3)31 December 2021Financial assets held for trading 114 465 263 244 - 377 709 Securities held for trading 114 465 - - 114 465 Bonds issued by public entities 114 465 - - 114 465 Derivatives held for trading- 263 244 - 263 244 Exchange rate contracts- 29 172 - 29 172 Interest rate contracts- 225 196 - 225 196 Other- 8 876 - 8 876 Financial assets mandatorily at fair value through profit or loss 187 621 26 309 2 036 378 2 250 308 Bonds issued by other entities 52 532 50 506 645 559 227 Shares 135 089 - 290 274 425 363 Other variable income securities- 26 259 1 239 459 1 265 718 Financial assets at fair value through other comprehensive income7 091 159 6 624 35 725 7 133 508 Bonds issued by public entities5 685 067 - - 5 685 067 Bonds issued by other entities1 398 899 - - 1 398 899 Shares 7 193 6 624 35 725 49 542 Derivatives - Hedge Accounting- 20 150 - 20 150 Interest rate contracts- 20 150 - 20 150 Assets at fair value7 393 245 316 327 2 072 103 9 781 675 Financial liabilities held for trading- 303 562 1 950 305 512 Derivatives held for trading- 303 562 1 950 305 512 Exchange rate contracts- 34 690 - 34 690 Interest rate contracts- 265 939 1 950 267 889 Credit default contracts- 574 - 574 Other- 2 359 - 2 359 Derivatives - Hedge Accounting- 44 460 - 44 460 Loans- 44 460 - 44 460 Liabilities at fair value- 348 022 1 950 349 972 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 CreditDerivatives held for tradingBalance as at 31 December 20212 036 378 - - 35 725 2 072 103 1 950 1 950 Acquisitions 236 516 - - 3 477 239 993 - - Attainment of maturity( 533 151)- - - ( 533 151)- - Settlements( 131 465)- - ( 707)( 132 172)- - Changes in value( 107 867) 18 13 23 050 ( 84 786) 656 656 Balance as at 31 December 20221 500 411 18 13 61 545 1 561 987 2 606 2 606 31.12.2022Financial assets at fair value through resultsTotal liabilitiesFinancial assets mandatorily at fair value through profit or lossFinancial assets at fair value through other comprehensive incomeTotalativos(in thousands of Euros)Financial liabilities held for tradingSecurities CreditDerivatives held for tradingBalance as at 31 December 20202 188 519 - - 35 733 2 224 252 2 158 2 158 Acquisitions 81 650 - - 556 82 206 24 117 24 117 Attainment of maturity( 138 500)- - - ( 138 500)- - Settlements( 122 392)- - ( 4 246)( 126 638)( 24 117)( 24 117)Transfers in 2 751 - - 2 300 5 051 - - Changes in value 24 350 - - 1 382 25 732 ( 208)( 208)Balance as at 31 December 20212 036 378 - - 35 725 2 072 103 1 950 1 950 Total liabilities31.12.2021Financial assets at fair value through resultsFinancial assets at fair value through other comprehensive incomeTotalativosFinancial assets mandatorily 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 on 31 December 2022 and 2021 were as follows: The following table presents, for financial 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: SEPARATE EXPLANATORY NOTES - 420 - (in thousands of Euros)Recognised in reservesRecognised in the income statementTotalRecognised in reservesRecognised in the income statementTotalDerivatives held for trading- ( 655)( 655)- 144 144 Risk Management Derivatives- - - - ( 24 117)( 24 117)Financial assets mandatorily at fair value through profit or loss- ( 117 028)( 117 028)- 29 501 29 501 Financial assets at fair value through other comprehensive income 23 350 - 23 350 9 122 - 9 122 23 350 ( 117 683)( 94 333) 9 122 5 528 14 650 31.12.202231.12.2021(in millions of Euros)ChangeImpactChangeImpactFinancial assets at fair value through results 0,0Obligations of other issuersOther(a) 0,0Financial assets mandatorily at fair value through profit or loss1 500,4( 43,3) 54,5Obligations of other issuers 422,6( 43,3) 54,5Discounted cash flow modelSpecific Impairment 2,4-50%( 2,4)+50% 10,8Discounted cash flow modelDiscount rate 420,2 (-) 100 bps( 40,9) (+) 100 bps 43,7Shares 135,7 - -Valuation of the management company (adjusted) (b) 137,7 - -Other variable income securities 942,2 - -Valuation of the management company (adjusted) (b) 117,6 - -Valuation of the management company (c) 824,6 - -Credit 0,0Financial assets at fair value through other comprehensive income 61,5( 1,7) 0,1Shares 61,5( 1,7) 0,1Discounted cash flowsRenewable Energy Tariff 9,6( 1,7) 0,1Other(a) 51,9 - -Total1 562,0( 45,0) 54,6Favorable scenario(b) For the sensitivity analysis carried out on the valuation of the Restructuring Funds, taking into account the valuation methodologies applied and considering that real estate assets represent more than 90% of the underlying assets of the Funds, a variation of + 10% was considered and -10% in the fair value of the main real estate assets of each Fund, which leads to an impact of + 5.8% and -5.7% in the fair value of the restructuring funds.(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 331.12.2022Valuation Model Variable analysedCarrying book valueUnfavorable scenario The main parameters used, on 31 December 2022 and 2021, 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: SEPARATE EXPLANATORY NOTES - 421 - (in millions of Euros)ChangeImpactChangeImpactFinancial assets mandatorily at fair value through profit or loss2 036,4( 37,6) 58,7Obligations of other issuers 506,6Discounted cash flow modelSpecific Impairment 2,4-50%( 2,4)+50% 4,8Discounted cash flow modelDiscount rate 504,3 (-) 100 bps( 35,2) (+) 100 bps 54,0Shares 290,3 - -Valuation of the management company (adjusted) (b) 287,5 - -Others(a) 2,8 - -Other variable income securities1 239,5 - -Valuation of the management company (adjusted) (b) 236,5 - -Valuation of the management company (c)1 002,9 - -Financial assets at fair value through other comprehensive income 35,7( 1,7) 0,1Shares 35,7 - -Discounted cash flowsRenewable Energy Tariff 9,6( 1,7) 0,1Other(a) 26,1 - -Total2 072,1( 39,3) 58,8Valuation Model Variable analysedCarrying book valueUnfavorable scenarioFavorable scenario(b) For the sensitivity analysis carried out on the valuation of the Restructuring Funds, taking into account the valuation methodologies applied and considering that real estate assets represent more than 95% of the underlying assets of the Funds, a variation of + 10% was considered and -10% in the fair value of the main real estate assets of each Fund, which leads to an impact of + 5.8% and -5.7% in the fair value of the restructuring funds.(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 331.12.2021(%)EURUSDGBPEURUSDGBPOvernight1,95014,36503,5750-0,57400,06440,21001 month1,88404,42003,6500-0,58300,10130,24003 months2,13204,77003,8000-0,57200,20910,39006 months2,69305,15004,3350-0,54600,33880,61009 months2,99205,23504,5250-0,52350,46030,67001 year3,29105,11304,6768-0,50100,58310,82463 years3,30054,30104,6088-0,14501,14951,29725 years3,23904,01104,32800,01601,34601,29107 years3,20203,87804,13500,13001,45301,237310 years3,20203,82203,99200,30301,56101,209515 years3,14103,79703,93770,49201,68001,181720 years2,93103,72603,86470,54801,77081,151825 years2,71503,61703,79670,52401,73161,126430 years2,53203,47203,72570,47901,71601,103031.12.202231.12.2021 Interest rate volatility The values presented below represent the implicit volatilities (at the money) used for the valuation of interest rate options: 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 Bank 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: SEPARATE EXPLANATORY NOTES - 422 - (basis points)IndexSeries1 year3 years5 years7 years10 years31 December 2022CDX USD Main39-56,8782,02101,74117,73iTraxx Eur Main3835,0566,4090,60106,87122,66iTraxx Eur Senior Financial38--99,29--31 December 2021CDX USD Main370,000,0049,5768,550,00iTraxx Eur Main3610,4326,8247,7666,7187,01iTraxx Eur Senior Financial360,000,0054,860,0085,86(%)EURUSDGBPEURUSDGBP1 year99,2823,3355,2423,1673,7476,143 years124,2338,1049,5955,7959,1563,575 years124,7740,7247,0065,8156,8871,177 years121,6039,3845,7368,3454,5979,9810 years115,6635,9542,8168,9850,9388,0815 years107,02--66,28--31.12.202231.12.2021Foreign exchange rate31.12.202231.12.20211 month3 months6 months9 months1 yearEUR/USD1,06661,13268,608,808,418,258,15EUR/GBP0,88690,84037,577,687,767,877,94EUR/CHF0,98471,03315,806,006,056,126,12EUR/NOK10,51389,98888,759,109,239,369,42EUR/PLN4,68084,59697,277,688,038,288,45EUR/RUB117,201085,30047,518,078,719,299,58USD/BRL a)5,28655,571319,5519,4319,2119,1219,05USD/TRY b)18,718313,45008,7613,0121,1925,2328,24Volatility (%)a) Calculated based on EUR / USD and EUR / BRL exchange rates.b) Calculated based on EUR / USD and EUR / TRY exchange rates. 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: 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. SEPARATE EXPLANATORY NOTES - 423 - (in thousands of Euros)(Stage 1)(Stage 2)(Stage 3)31 December 2022Cash, cash balances at central bank and other demand deposits6 387 295 - 6 387 295 - 6 387 295 Financial assets at amortised costDebt securities8 618 778 6 296 968 281 254 1 662 275 8 240 497 Loans and advances to credit institutions 145 464 - 145 464 - 145 464 Loans and advances to customers22 955 229 - - 23 450 085 23 450 085 Financial assets38 106 766 6 296 968 6 814 013 25 112 360 38 223 341 Financial liabilities measured at amortised costDeposits from Central Banks and other credit institutions10 506 509 - 10 497 606 - 10 497 606 Due to customers28 425 223 - - 28 425 223 28 425 223 Debt securities issued, subordinated debt and liabilities associated to transferred assets1 601 454 1 693 216 - 44 451 1 737 667 Other financial liabilities 371 511 - - 371 511 371 511 Financial liabilities40 904 697 1 693 216 10 497 606 28 841 185 41 032 007 Assets / liabilities recorded at amortised costFair ValueQuoted market pricesValuation models based on observable market parametersValuation models based on unobservable market parametersTotal fair value(in thousands of Euros)(Stage 1)(Stage 2)(Stage 3)31 December 2021Cash, cash balances at central bank and other demand deposits5 674 461 - 5 674 461 - 5 674 461 Financial assets at amortised costDebt securities2 893 829 1 065 084 332 194 1 729 846 3 127 124 Loans and advances to credit institutions 186 089 - 186 089 - 186 089 Loans and advances to customers21 897 382 - - 22 263 293 22 263 293 Financial assets30 651 761 1 065 084 6 192 744 23 993 139 31 250 967 Financial liabilities measured at amortised costDeposits from Central Banks and other credit institutions11 497 829 - 11 532 025 - 11 532 025 Due to customers26 997 858 - - 26 997 858 26 997 858 Debt securities issued, subordinated debt and liabilities associated to transferred assets1 479 066 1 736 200 - 44 451 1 780 651 Other financial liabilities 371 609 - - 371 609 371 609 Financial liabilities40 346 362 1 736 200 11 532 025 27 413 918 40 682 143 Fair ValueTotal fair valueAssets / liabilities recorded at amortised costQuoted market pricesValuation models based on observable market parametersValuation models based on unobservable market parameters31.12.202231.12.2021% Change1 month3 monthsDJ Euro Stoxx 50 3 794 4 298 -1174,36%16,1719,2718,70PSI 20 5 726 5 569 281,23%11,2716,45-IBEX 35 8 229 8 714 -556,24%12,6716,72-FTSE 100 7 452 7 385 91,00%9,7713,2813,15DAX 13 924 15 885 -1234,68%15,0819,5318,72S&P 500 3 840 4 766 -1944,28%19,5725,4319,84BOVESPA 109 735 104 822 468,62%22,8125,1924,85Implied VolatilityHistorical volatilityQuotation 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 liabilities associated to transferred assets The fair value of these instruments is based on quoted market prices, when available. When not available, the Bank 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. NOTE 39 – RISK MANAGEMENT The institutional area of the Novo Banco, S.A.’s website (www.novobanco.pt) presents the information directed to investors, namely, Novo Banco, S.A., Market Discipline Report 2022 which addresses the public disclosure obligations as defined in Part VIII of the Regulation n.º 575/2013 of the European Parliament and the Council at 26 of July 2013 (CRR) and EBA guidelines transposed to the Portuguese legislation through the Instruction n.º 5/2018 the Bank of Portugal. In the case where the information of the present annual report supports the information in the Market Discipline report, this information is identified through references to this report as systematised in the Annex VI of the Market Discipline Report. 39.1 - Framework Risk is implicit in the banking business and as such novobanco is naturally exposed to several categories of risks arising from external and internal factors, and which arise according to the characteristics of the markets in which the Bank operates and the activities it undertakes. Thus, the novobanco risk management and control is based on the following premises. Independence from the other units of the group, in particular from the risk-taking units. Integrality of the risk culture, through a holistic vision and anticipation of its materialization. • • Universality by application throughout novobanco; • • 3 Lines of defense model, with the objective of adequately detecting, measuring, monitoring and controlling the materially relevant risks to which novobanco is subject. This model implies that all employees, in their sphere of activity, are responsible for risk management and control. 39.2 - Governance and risk management structure Risk Management, vital to the development of the novobanco’s activity, is centralised in the Risk Management Function, comprising the Global Risk Department (Departamento de Risco Global (DRG)) and the Rating Department (Departamento de Rating (DRT)), which holistically defines the principles of risk management and control, in close coordination with the other second line units of novobanco, as well as with the Internal Audit Department. All materially relevant risks are reported to the respective Management and Supervisory Bodies (EBD, GSB and both Risk Committees and specialised Committees), which assume responsibility for supervising, monitoring, assessing, and defining the Risk Appetite and the control principles implemented. Operationally, DRG centralises the Risk Management Function of novobanco, namely the responsibilities inherent to the function, supervising the various materially relevant financial institutions of the, ensuring independence from the business areas. novobanco Head of the Risk Management Function is the head of the DRG. To ensure greater efficiency in liaison with the DRG, a local Risk Officer has been appointed in each relevant entity of the novobanco. The DRG intervention is direct or in coordination and articulation with the units that assume the local Risk Management Function. The risks identified as relevant and material are quantified as part of the Internal Capital Adequacy Self-Assessment (ICAAP) exercise, the most relevant of which are: SEPARATE EXPLANATORY NOTES - 424 - • Credit risk. • Market risk. • Liquidity risk. • Operational risk. We also highlight ESG (Environmental, Social and Governance) risk - in particular, the subcategories of climate and environmental risk and other environmental risks - as risks with growing relevance, and whose impact is estimated to be materialised in the medium and long term (and, therefore, over a longer horizon than the other risk categories): ESG risk is part of the Bank’s risk management framework, in close articulation between the DRG and the ESG Office, which contributes specific knowledge to the identification of climate and environmental risk factors and social risk factors. Thus, it is formally defined in the taxonomy of risks of novobanco as the exposure to unfavorable events resulting from inadequacy or failures in procedures, systems or policies related to the environment (adaptation to or mitigation of climate change, sustainable use and protection of water or marine resources, transition to the circular economy, waste prevention and recycling, pollution control and ecosystem protection) and natural resources (Biodiversity), Social (equality, social cohesion, social integration, labor relations) and Governance (adequate management structures, labor relations, employee compensation and tax compliance). The evaluation of the materiality of its impacts is analysed transversally, since the ESG factors are intrinsically present in the other risk categories foreseen in the Bank's taxonomy of risks. In this context, we highlight the factors that have merited greater specialization by the Bank, in terms of its methodologies for risk assessment and control and their respective integration into business processes: • Climate transition risks: defined as the impacts associated with the transition to a low-carbon economy. In other words, these risks are caused by legislation/regulation, technology and market changes resulting from the requirements associated with climate change. Depending on the response of each economic sector (and each company in particular) to the need for transition, different scenarios (and severities of transition risk factors) can be projected and, as a result, different risks and risk levels can be identified and assessed. • Physical risks: defined as the impacts associated with the physical effects of climate change. These risks may result from factors arising from an extreme event - severe risk - or through a medium or long-term factor - chronic risk (for example, the negative effect that global warming, resulting from the continuous rise in temperatures, may have on the production cycles of some sectors). Physical risks may result in internal financial impacts (damage to own assets) or external financial impacts (disruption of the production cycles of clients/counterparties or the impact on the Bank’s real estate collateral). The following are the main risk management guidelines for the risks identified above: • credit risk: the management and control of this type of risk is supported using an internal system of risk identification, assessment and quantification, as well as internal processes for attributing ratings and scorings to portfolios and their continuous monitoring in specific decision forums. • market risk: existence of a specialised team that centralises the management and control of market risk and balance sheet • interest rate risk (IRRBB) of the Bank, in line with the regulations and good risk practices. liquidity risk: based on the measurement of liquidity outflows from contractual and contingent positions in normal or stressed situations, the management and control of this risk consists, on the one hand, in determining the size of the pool of liquidity available at each moment, and on the other hand, in planning for medium and long term stable financing sources. • operational risk: operational risk policies are defined by a specialised DRG team, with other units such as the Compliance department and the Information security office issuing specific risk policies. The effectiveness of the methodologies for the identification and control of operational risk is guaranteed through the actions of the operational risk management representatives appointed for each organic unit, who promote the risk culture in the first line of defense in continuous collaboration with the DRG. 39.3 - Credit Risk Credit risk results from the possibility of financial losses arising from the default of the client or counterparty in relation to the contractual obligations established with the Bank within the scope of its credit activity. Credit risk is essentially present in traditional banking products - loans, guarantees and other contingent liabilities and derivatives. In credit default swaps (CDS), the net exposure between protection seller and buyer positions on each entity underlying the transactions, constitutes credit risk for novobanco Bank. CDS are recorded at their fair value in accordance with the accounting policy described in Note 6.10.6. A permanent management of credit portfolios is carried out, which privileges the interaction between the various teams involved in risk management throughout the successive stages of the life of the credit process. This approach is complemented by the introduction of continuous improvements both in the level of methodologies and tools for risk assessment and control, as well as in the level of decision-making procedures and circuits. The monitoring of the Bank's credit risk profile, regarding the evolution of credit exposures and monitoring of credit losses, is carried out regularly on the Risk Committees of the Executive Board of Directors and the General and Supervisory Board. SEPARATE EXPLANATORY NOTES - 425 - Main events in 2022 During 2022, we highlight below in chronological order, the non-recurring situations that had the greatest impact on the cost of risk for the period: 1. Classification as Unlikely to pay - and, consequently, change to stage 3 - on the universe of clients who ended the moratorium and where there were later situations of overdue credit with more than 45 days throughout the first half of the year. Increases in impairments arising from individual analysis for counterparties from countries in the conflict zone. 2. 3. Constitution of impairments due to the deterioration of macroeconomic expectations, rise in reference interest rates and increase in the inflation rate. Regarding the reinforcements of impairment mentioned in points 1. and 2. above, these situations had a manageable impact on the cost of risk since (1) exposure to countries from the conflict zone is reduced and (2) the level of claims verified with the criteria defined for the purpose was insignificant. In relation to point 3. above, this addressed the timely recording of impairments arising from the deterioration of the macroeconomic outlook as a result of the effects of the conflict between Russia and Ukraine and the increases observed in both reference interest rates and inflation. Accordingly, given the need for the impairment to reflect prospective information, the impact relative to this framework was estimated and accounted for, contemplating: 3.1 Effects arising from the continuation of the Russia/Ukraine conflict, with an increase in raw material costs, but also from the generalised increase in prices of goods and services. To consider this situation, the practical expedient was followed of increasing the weight attributed to the less favorable scenario that is currently used to support the IFRS9 impairment calculation, against the other scenarios used - base and most favorable; 3.2 Effects arising from the rise in reference interest rates, whose impact on impairment was estimated via the LGD risk parameter. The estimation/development of this parameter was based on interest rate values prior to 2022, where reference rates assumed negative values. With the recent rise in these rates to positive values it became urgent to ensure that the LGD risk parameter and, consequently, the impairment constituted for the credit portfolio to date incorporated this impact. 3.3 Effects of potential deterioration in the level of risk of companies in sectors more vulnerable to the current economic environment, in this case companies whose activities involve intensive energy consumption. To anticipate this impact, the sectors in these conditions were defined as well as the clients associated with the same in order to simulate and account for the impact on impairment resulting from a generalised deterioration of the rating on the exposures of this specific portfolio. Until it is possible to complete and implement updated collective risk parameters according to revised macroeconomic scenarios as well as to ensure a complete review of the risk assessment in companies most exposed to the effect of the energy crisis, the above impacts were estimated based on simulations and accounted without allocation to specific exposures since 31 March 2022 until the release of accounts on 30 September 2022. During the last quarter of 2022, based on the revised macroeconomic scenarios: • • collective risk parameters have been updated and fully implemented in accordance with the models for incorporating forward-looking information, incorporating appropriate adjustments, including the shock effect of interest rates on both the probability of non-compliance parameters and their severity in all segments; and the weighting attributed to the results of each scenario was reviewed, in particular the adverse scenario that went from 30% to 20% in return for the basic and alternative scenarios. Despite this reduction, the weighting allocated remains at the appropriate level Also, in this period of the last quarter of 2022, the review of the credit rating associated with customers with economic activity most exposed to the increase in energy costs was completed. Thus, the effects on impairment resulting from these events came to replace the estimated amount of parity based on simulations - criteria described above - an amount that was previously accounted for without allocation to specific exposures. Although the effect of these changes is not immediately measurable, it was estimated that the impact on impairments arising from these events would be around Euro 40 million. Even so, despite this specific effect, the annual observed cost of credit risk remained at controlled levels and below those of 2021. 39.3.1 - Credit risk exposure novobanco maximum credit risk exposure is analysed as follows: SEPARATE EXPLANATORY NOTES - 426 - For financial assets in the balance sheet, the maximum exposure to credit risk is represented by the accounting 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 as described in Note 6.16. In the cases where the value of the collateral, net of haircuts (considering the type of collateral), equals or exceeds the exposure, the individual impairment may be nil. Hence, novobanco 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. 39.3.2 - Impairment Models scenarios As proposed in IFRS 9 regulations, the Bank’s calculation of impairment reflects different expectations of macroeconomic evolution, that is, it incorporates multiple scenarios. To incorporate the effects of future macroeconomic behavior in the loss estimates, forward looking macroeconomic estimates are included in some of the risk parameters used in the impairment calculation. In effect, different possible scenarios are considered which give rise to the same number of impairment results. In this context, the process of defining the macroeconomic scenarios considers the following principles: • Representative scenarios that capture existing non-linearities (e.g., a base case scenario, a scenario with a more favorable • • • macroeconomic outlook and a scenario with a less favorable macroeconomic outlook). The base case scenario is consistent with inputs used in other exercises in the Bank, since the same methodology is used for the impairment calculation as the Bank uses in internal and regulatory planning exercises. The alternative scenarios to the base case do not reflect extreme scenarios. The correlation between the projected variables is realistic with the economic reality (e.g., if GDP is increasing, unemployment is expected to be decreasing). The exercise of building 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 minimised). 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 stylised facts of economic cycles, with respect to the components of expenditure, prices, unemployment, etc. and estimates. Thus, when revising / updating the scenarios, the respective probabilities of execution are also reviewed. Once the scenarios are updated, the values of the risk parameters are updated for later consideration in the scope of the Impairment calculation. The final impairment calculated will thus result from the sum of the impairment value of each scenario, weighted by the respective probability of execution. Currently, 3 scenarios are considered for the calculation of impairment on a collective basis: base case, downside case (or adverse) and an upside case. The scenarios considered and the respective evolution of the main macroeconomic variables are described in the tables below: SEPARATE EXPLANATORY NOTES - 427 - (in thousands of Euros)Gross valueImpairmentNet ValueGross valueImpairmentNet ValueDeposits with and loans and advances to banks 414 135( 674) 413 461 452 884( 1 183) 451 701Derivatives for trading and fair value option derivatives 134 419- 134 419 263 244- 263 244Securities held for trading 36 428- 36 428 114 465- 114 465Securities at fair value through profit/loss 13- 13---Securities at fair value through profit/loss - mandatory 433 665- 433 665 559 227- 559 227Securities at fair value through other comprehensive income 2 109 045( 589)2 108 4567 083 966( 3 668)7 080 298Securities at amortised cost 8 691 800( 291 567)8 400 2333 138 465( 247 772)2 890 693Loans and advances to customers23 848 444(1 057 567)22 790 87723 165 062(1 235 757)21 929 305Derivatives - hedge accounting1 537 652-1 537 6522 250 308-2 250 308Other assets 591 030( 117 590) 473 440 783 245( 165 832) 617 413Guarantees and standby letters provided2 262 092( 82 392)2 179 7002 221 575( 79 339)2 142 236Documentary credits 169 410- 169 410 402 332- 402 332Revocable and irrevocable commitments5 955 096( 7 066)5 948 0305 849 281( 12 436)5 836 84546 183 229(1 557 445)44 625 78446 284 054(1 745 987)44 538 06731.12.202231.12.2021 A - Base Scenario, with a relative weight of 65%. The baseline scenario assumes strong GDP growth in 2022, supported by the favorable performances of private consumption and exports, and the removal of Covid-19 constraints. Private consumption is also seen to benefit from household income support, the use of savings accumulated during the pandemic, and a contained unemployment rate. Exports benefit from the strong contribution of tourism services, with demand picking up after the confinement periods. For 2023, the baseline scenario assumes that the economy suffers a strong deceleration, especially with the falling contributions of private consumption and exports. These developments result from the effects of rising inflation (loss of purchasing power), tighter monetary and financial conditions, with rising interest rates, and unfavorable base effects. In the period 2024-25, GDP growth is assumed to trend around 2%. After the highest records in 2022 and 2023, inflation gradually declines until 2025. This picture translates into rising long-term market interest rates, but with the Portuguese OT spread against the German benchmark remaining contained. Real estate prices reflect rising interest rates and cooling demand and decelerate sharply in 2023, then recover to moderate growth. SEPARATE EXPLANATORY NOTES - 428 - Unit20182019202020212022202320242025GDPReal growth %2,62,7-8,44,96,42,42,12,0Private ConsumptionReal growth %2,93,0-5,54,44,91,31,61,8Government ExpenditureReal growth %0,92,10,45,02,2-0,9-0,20,1InvestmentReal growth %6,23,2-5,76,15,17,45,04,2ExportsReal growth %4,54,1-18,613,013,65,53,74,5ImportsReal growth %5,74,9-12,112,88,84,83,44,4Domestic DemandReal growth %2,83,1-5,65,14,52,12,02,0PricesCPI%1,00,30,01,35,92,62,01,7Real Estate (Residential)%10,310,08,89,48,32,54,85,0Real Estate (Commercial)%4,93,12,85,13,6-0,21,31,5Equity prices (incremental change)%-11,010,2-6,113,70,00,00,00,0Unemployment% labour force7,06,67,06,65,85,75,85,8Euribor (annual average)3-month%-0,32-0,36-0,43-0,550,011,622,022,08end-of-period%-0,31-0,38-0,55-0,571,222,012,022,136-month%-0,27-0,30-0,37-0,520,281,752,042,10end-of-period%-0,24-0,32-0,53-0,551,462,032,042,1612-month%-0,17-0,22-0,31-0,490,651,872,062,15end-of-period%-0,12-0,25-0,50-0,501,702,042,072,22Sovereign Yields (average)Bund 10Y%0,46-0,21-0,47-0,311,101,691,791,87end-of-period%0,24-0,19-0,57-0,181,641,741,831,91PGB 10Y%1,850,770,420,292,102,853,043,21end-of-period%1,720,440,030,472,752,953,123,29PGB 2Y%-0,13-0,42-0,42-0,650,781,802,052,39end-of-period%-0,35-0,55-0,73-0,661,721,882,222,5510Y PGB-Bund spreadAnnual Averagebps138988960100116125134end-of-periodbps148636065111121129138Annual Averagebps19811984941321059982end-of-periodbps2079976113103107907410Y-2Y PGB Spread B - Less favourable / adverse scenario, with a relative weight of 20% The adverse scenario assumes a scenario of stagflation in the European and Portuguese economies. In Portugal, inflation is higher and more persistent than in the baseline scenario, mainly due to a negative energy shock and a more visible transmission of the increase in energy and food prices to wages and the prices of other goods and services. Inflation reaches 8.7% in 2022 and 6.6% in 2023, remaining above the 2% target in 2024. Activity falls back significantly in 2023, and the contraction extends into 2024, not only due to the energy shock but also resulting from a more aggressive rise in reference interest rates by the ECB, creating restrictive monetary and financial conditions. A high and persistent increase in interest rates is assumed (3-month Euribor rises to close to 4.3% in 2024 and remains around 3.6% in 2025, in annual average terms). This picture translates into contractions in private consumption and investment in 2023- 24. It is assumed that the adverse conditions associated with this scenario postpone the execution of RRP funds. In any case, their effect on investment becomes visible towards the end of the projection horizon. The recession and rising interest rates contribute to a sharp contraction in activity and property prices. With the Portuguese economy being seen as especially vulnerable to interest rate increases, a more pronounced widening of the spread between the yields on Treasury bonds and the German benchmark is assumed. SEPARATE EXPLANATORY NOTES - 429 - Unit20182019202020212022202320242025GDPReal growth %2,62,7-8,44,95,7-3,7-0,92,0Private ConsumptionReal growth %2,9-3,3-7,14,53,8-3,9-1,21,6Government ExpenditureReal growth %0,92,10,44,11,80,61,5-0,2InvestmentReal growth %6,23,3-5,77,94,9-5,3-0,45,0ExportsReal growth %4,54,1-18,613,19,2-2,91,64,7ImportsReal growth %5,74,9-12,113,14,4-2,32,34,4Domestic DemandReal growth %2,83,1-5,65,13,7-3,4-0,61,9PricesCPI (12m/12m average rate)%1,00,30,01,38,76,64,32,4Real Estate (Residential)%10,310,08,89,47,1-8,5-10,1-1,3Real Estate (Commercial)%4,93,12,85,13,3-10,3-12,2-1,6Equity prices (incremental change)%-11,010,2-6,113,70,00,00,00,0Unemployment% labour force7,06,67,06,66,39,413,79,6Euribor (annual average)3-month%-0,32-0,36-0,43-0,550,373,234,283,60end-of-period%-0,31-0,38-0,55-0,572,064,404,153,056-month%-0,27-0,30-0,37-0,520,643,344,273,55end-of-period%-0,24-0,32-0,53-0,552,254,424,122,9712-month%-0,17-0,22-0,31-0,490,983,414,273,53end-of-period%-0,12-0,25-0,50-0,502,384,434,102,95Sovereign Yields (average)Bund 10Y%0,46-0,21-0,47-0,310,991,781,891,84end-of-period%0,24-0,19-0,57-0,181,711,841,931,75PGB 10Y%1,850,770,420,292,013,313,573,16end-of-period%1,720,440,030,472,783,833,313,02PGB 2Y%-0,13-0,42-0,42-0,650,782,542,772,25end-of-period%-0,35-0,55-0,73-0,661,973,102,442,0510Y PGB-Bund spreadAnnual Averagebps138988960102153169132end-of-periodbps148636065107199138127Annual Averagebps1981198494123778092end-of-periodbps20799761138173879710Y-2Y PGB Spread C - Most favourable scenario, with a relative weight of 15% The favorable scenario assumes that the increase in inflation in 2022 is transitory. After recording more than 5%, price growth converges, over the remaining projection horizon, to values around or below 2%. This evolution could be associated with a quick resolution of the war in Ukraine and/or a strong easing of energy and food prices, thus not observing the normalization of inflation to values around its target, allowing for a rise in benchmark and short-term market interest rates, but to contained values, up to 2.5%. In this context, economic activity is assumed to expand at an above-trend pace over the entire projection horizon. GDP growth benefits from positive performances in investment (with the implementation of RRP funds) and exports. Strong external demand and favorable financing conditions support house price growth, albeit at single-digit records. The unemployment rate is seen receding to near 5% of the labor force. 39.3.3 – Impairment Models At 31 December 2022 and 2021, the detail of the amount of gross credit exposure and impairment assessed individually and collectively, by segment was as follows: SEPARATE EXPLANATORY NOTES - 430 - Unit2019202020212022202320242025GDPReal growth %2,7-8,44,96,73,63,42,5Private ConsumptionReal growth %3,0-5,54,45,13,52,82,6Government ExpenditureReal growth %2,10,45,02,20,40,40,1InvestmentReal growth %3,2-5,76,15,18,67,14,2ExportsReal growth %4,1-18,613,013,921,111,26,6ImportsReal growth %4,9-12,112,88,721,610,86,5Domestic DemandReal growth %3,1-5,65,14,63,93,22,5PricesCPI%0,30,01,35,92,11,81,7Real Estate (Residential)%10,08,89,48,36,95,74,9Real Estate (Commercial)%3,12,85,13,63,12,62,1Equity prices (2022-25, change vs. base year)%10,2-6,113,70,015,020,025,0Unemployment% labour force6,67,06,65,75,45,35,1Euribor (annual average)3-month%-0,36-0,43-0,550,011,752,402,53end-of-period%-0,38-0,55-0,571,222,272,522,536-month%-0,30-0,37-0,520,281,882,422,55end-of-period%-0,32-0,53-0,551,462,302,542,5512-month%-0,22-0,31-0,490,652,012,452,58end-of-period%-0,25-0,50-0,501,702,322,572,58Sovereign Yields (average)Bund 10Y%-0,21-0,47-0,311,182,012,282,43end-of-period%-0,19-0,57-0,181,772,252,302,55PGB 10Y%0,770,420,292,102,963,053,13end-of-period%0,440,030,472,873,053,053,20PGB 2Y%-0,42-0,42-0,650,781,902,072,30end-of-period%-0,55-0,73-0,661,821,982,152,4510Y PGB-Bund spreadAnnual Averagebps98896092957870end-of-periodbps636065110807565Annual Averagebps11984941321069983end-of-periodbps9976113105107907510Y-2Y PGB Spread In the case of credits analysed by the Impairment Committee for which the impairment determined automatically by the Impairment Model has not been changed, they are included and presented in the "Collective Assessment". As of 31 December 2022 and 2021, the analysis of the gross loans and advances to customers’ exposure and impairment assessed individually and collectively, by geography, is presented as follows: SEPARATE EXPLANATORY NOTES - 431 - (in thousands of Euros)31.12.2022ExposureImpairmentExposureImpairmentExposureImpairmentCorporate1 095 291 549 032 12 983 009 330 599 14 078 300 879 631 Stage 1- - 10 082 118 43 347 10 082 118 43 347 Stage 2 1 587 392 2 854 536 259 527 2 856 123 259 919 Stage 31 093 704 548 640 46 355 27 725 1 140 059 576 365 Mortgage Loans 3 443 385 8 480 691 44 504 8 484 134 44 889 Stage 1- - 7 714 906 3 213 7 714 906 3 213 Stage 2- - 679 096 18 826 679 096 18 826 Stage 3 3 443 385 86 689 22 465 90 132 22 850 Other Loans 80 441 74 467 1 205 569 58 580 1 286 010 133 047 Stage 1- - 987 539 14 462 987 539 14 462 Stage 2- - 173 264 18 134 173 264 18 134 Stage 3 80 441 74 467 44 766 25 984 125 207 100 451 Total 1 179 175 623 884 22 669 269 433 683 23 848 444 1 057 567 Individual AssessmentCollective AssessmentTotal(in thousands of Euros)31.12.2021ExposureImpairmentExposureImpairmentExposureImpairmentCorporate1 295 587 623 390 12 270 140 390 865 13 565 727 1 014 255 Stage 1- - 8 802 731 66 005 8 802 731 66 005 Stage 2 2 831 855 3 411 737 293 028 3 414 568 293 883 Stage 31 292 756 622 535 55 672 31 832 1 348 428 654 367 Mortgage Loans 2 955 145 8 330 891 44 480 8 333 846 44 625 Stage 1- - 7 522 047 4 336 7 522 047 4 336 Stage 2- - 670 959 14 503 670 959 14 503 Stage 3 2 955 145 137 885 25 641 140 840 25 786 Other Loans 147 997 132 353 1 117 492 44 524 1 265 489 176 877 Stage 1- - 907 983 10 001 907 983 10 001 Stage 2- - 173 550 17 674 173 550 17 674 Stage 3 147 997 132 353 35 959 16 849 183 956 149 202 Total 1 446 539 755 888 21 718 523 479 869 23 165 062 1 235 757 Individual AssessmentCollective AssessmentTotal(in thousands of Euros)31.12.2022ExposureImpairmentExposureImpairmentExposureImpairmentPortugal1 091 599 570 194 19 319 288 381 306 20 410 887 951 500 Spain 2 1 943 137 12 445 943 139 12 446 United Kingdom- - 380 798 13 933 380 798 13 933 France- - 360 053 4 258 360 053 4 258 Switzerland- - 237 023 2 167 237 023 2 167 Luxembourg- - 280 338 1 973 280 338 1 973 Others 87 574 53 689 1 148 632 17 601 1 236 206 71 290 Total 1 179 175 623 884 22 669 269 433 683 23 848 444 1 057 567 * Loans and advances for 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 modelCountryIndividual Assessment *Colective Assessment **Total 39.3.3.1 - Individual Credit Analysis The Individual Credit Analysis comprises a staging analysis and an individual impairment quantification analysis. The staging analysis is performed for debtors previously classified as stage 1 and stage 2, with the purpose of evaluating the adequacy of the assigned stage with additional information obtained on an individual basis. The individual impairment quantification analysis aims to determine the most appropriate impairment rate for each credit customer, regardless of the amount resulting from the Collective Impairment Model. Clients that have been subject to Individual Analysis, but for which an objective impairment loss was not considered, are again included in the Collective Impairment Model. The Individual Analysis of the selected clients is carried out based on the information provided by the Commercial Structures regarding the client / Group's framework, historical and forecast cash flows (when available) and existing collateral. The scheme below is illustrative of the individual credit analysis to be carried out for the purpose of concluding on the classification in terms of staging of debtors. Selection Criteria Individual Analysis (staging analysis and, when applicable, quantification of individual impairment) should be carried out for the borrowers who: • Register Stage 3 exposure equal to or greater than Euro 1 million. • Register Stage 2 exposure equal to or greater than Euro 5 million. • Register Stage 2 exposure equal to or greater than Euro 1 million and have no rating assigned. • Register Stage 1 exposure equal to or greater than Euro 5 million and have no rating assigned. • Register Stage 1 exposure equal or greater than Euro 25 million (individually significant exposure). • Fit into the risk segment Financial Holding and liability equal to or greater than Euro 5 million. • Fit into the Financial Holding risk segment and register exposure equal to or greater than Euro 5 million. • Fit into the Real Estate risk segment and register exposure equal to or greater than Euro 5 million. SEPARATE EXPLANATORY NOTES - 432 - (in thousands of Euros)31.12.2022ExposureImpairmentExposureImpairmentExposureImpairmentPortugal1 091 599 570 194 19 319 288 381 306 20 410 887 951 500 Spain 2 1 943 137 12 445 943 139 12 446 United Kingdom- - 380 798 13 933 380 798 13 933 France- - 360 053 4 258 360 053 4 258 Switzerland- - 237 023 2 167 237 023 2 167 Luxembourg- - 280 338 1 973 280 338 1 973 Others 87 574 53 689 1 148 632 17 601 1 236 206 71 290 Total 1 179 175 623 884 22 669 269 433 683 23 848 444 1 057 567 * Loans and advances for 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 modelCountryIndividual Assessment *Colective Assessment **Total • Are identified by the Committee itself based on another criteria that justify (e.g., sector of activity). • • In the past, specific impairment has been attributed to them. In the face of any new element that may have an impact on the calculation of impairment, be proposed for analysis by one of the stakeholders of the Impairment Committee or by another Body. The identification of the target customers for Individual Analysis will be updated monthly, in order to contemplate any changes that may occur throughout the year. The Committee analysis of the customers identified in the previous paragraph will be carried out in the month in which: • The client registers, for the first time, one of the selection criteria for Individual Impairment Analysis, mentioned in the previous paragraph. • Expiry of the Analysis expiration date. • Its analysis is requested by one of the participants of the Impairment Committee or by another Body The Individual Impairment Analysis can be carried out for individual customers but should whenever possibly consider the Economic Group view of the selected customers. Rules of Operation The Individual Analysis of the selected clients is carried out based on the information provided by the Commercial Units regarding the client / Group's framework, historical and forecast cash flows (when available) and existing collateral. For the analysis of the impairment quantification on an individual basis, a scenario is established that is expected to recover credit: through the continuity of the client's business or through the execution of the collateral. If this analysis results in no impairment being necessary, the impairment will be determined by collective analysis, that is, by the collective impairment model (except for cases with objective evidence of loss / Default, in which the final rate will have to be defined). The Individual Impairment quantification analysis determines, for each period, the best recovery scenario, aligning the commercial strategies defined for the client, with the different recovery possibilities. When, due to lack of information, it is not possible to identify or update the recovery scenario, the previous rate is maintained, and a new date is set for the client's review. 39.3.3.2 - Collective analysis adjustments to the automatic result of the model After processing the automatic impairment calculation and validating the consistency of the results obtained, all situations that may need an adjustment to the calculated impairment value are assessed. These adjustments are reflected, whenever possible, directly in the exposures. When this is not possible, the calculated impairment value is recorded without being allocated to specific exposures and, for that purpose, the stage and the type of credit to which it refers are associated. Having the prerogative to ensure that all impairment is allocated to specific exposures, these impairment amounts initially constituted in the unallocated form will, once conditions exist, be fully distributed over the exposures in which their allocation is determined. In terms of the governance model, both adjustments to specific exposures and impairment amounts constituted in the unallocated form must be validated and supported by an approval by a competent body, which, as a rule, will be the Extended Impairment Committee. Apart from adjustments made during the first half of the year on the universe that was moratorium in 2021, the remaining adjustments made in 2022 result mainly from the need for revision / correction of data that, punctually and on a temporary basis, led to the respective adjustment. In relation to the adjustments related to the universe of clients who benefited from the above-mentioned moratorium, they were progressively discontinued during the second semester. This decision resulted from the assessment in this universe over a reasonable period of the ability to resume the amortization plan after it was resumed, so the implemented risk assessment model would faithfully translate the appropriate level of parity, without the need for additional adjustments. 39.3.4 - Credit Risk Monitoring (DRG) 39.3.4.1 - Internal rating models for Corporates, Institutions and shares Regarding the rating models for corporate portfolios, different approaches are adopted depending on the size and sector of activity of the clients. Specific models are also used, adapted to loan operations of project finance, acquisition finance, object finance, commodity finance and real estate development finance. Below is a summary table on the types of risk models adopted in the internal assignment of credit ratings: SEPARATE EXPLANATORY NOTES - 433 - The segments for which rating models are not available are: Insurance and Pension Funds. • • Churches, political parties, and non-profit associations with a turnover of less than Euro 500 thousand. Regarding the credit portfolios of Large Companies, Financial Institutions, Institutional, Local and Regional Administrations and Specialised Loans - namely Project Finance, Object Finance, Commodity Finance and Acquisition Finance - the credit ratings are assigned by the novobanco’s Rating representation. This structure is made up of 7 multisectoral teams that comprise a team leader and several specialised technical analysts. The attribution of internal risk ratings by this team to these risk segments, classified as low default portfolios, is based on the use of “expert-based” rating models (templates) that are based on qualitative and quantitative variables, strongly correlated with the sector or sectors of activity in which the clients under analysis operate. Apart from assigning a rating to specialised loans, the methodology used by the Rating representation is also governed by a risk analysis at the level of the maximum consolidation perimeter and by the identification of the status of each company in the respective economic group. The internal credit ratings are validated daily in a Rating Committee composed of members of the Rating Department's Management and the various specialised teams. For the medium-sized companies’ segment, statistical rating models are used, which combine financial data with qualitative and behavioral information. However, the publication of credit ratings requires the execution of a previous validation process that is carried out by a technical team of risk analysts, who also consider behavioral variables. In addition to rating, these teams also monitor the customers’ loan portfolio of novobanco through the preparation of risk analysis reports, as provided for in internal regulations, in accordance with the current responsibilities / customer rating binomial, which may include specific recommendations on the credit relationship with a given customer, as well as technical advice on investment support operations, restructuring, or other operations subject to credit risk. For the business segment, statistical scoring models are also used which have, in addition to financial and qualitative information, the behavioral variables of the companies and the partner(s) in the calculation of credit ratings. There are also implemented scoring models specifically aimed at quantifying the risk of start-ups (companies established less than 2 years ago) and individual entrepreneurs (ENI). These customers together with the small companies, depending on the exposure value, are included in the regulatory retail portfolios. Finally, for companies in the real estate sector (companies dedicated to the activity of real estate promotion and investment, especially small and medium-sized companies), considering their specificities, the respective ratings are assigned by a specialised central team, based on use of specific models that combine the use of quantitative and technical variables (real estate appraisals carried out by specialised offices), as well as qualitative and behavioral variables. Regarding exposures equated to shares held by the novobanco, directly or indirectly through the holding of investment funds, as well as shareholders loans and supplementary capital contributions, all included in the risk class of shares for the purposes of calculating credit risk weighted assets, they are classified in the various risk segments according to the characteristics of their issuers or borrowers, following the segmentation criteria presented above. These segmentation criteria determine the type of rating model to be applied to the issuers of the shares (or borrowers of the shareholders loans / supplementary capital contributions) and, therefore, to them. SEPARATE EXPLANATORY NOTES - 434 - 39.3.4.2 - Relationships between internal and external ratings The assignment of an internal rating to entities with an external rating is made through the Markets Template available in the Rating Calculation application. The Markets Template gathers the external ratings that were assigned to a specific entity by the rating agencies Standard & Poor’s (S&P), Moody’s and Fitch. Specifically, the functionality of providing external ratings from S&P - XpressFeed feeds the application of External Ratings daily, which allows the external ratings published by these agencies for a given entity to be filled in the Markets Template. The external ratings assigned by Moody’s and Fitch are not obtained automatically, having to be entered manually in the Markets Template, after consulting the respective websites (www.moodys.com and www.fitchratings.com). The internal rating results, in the majority of situations, from the S&P equivalent external rating and, in exceptional situations, from the S&P equivalent external rating plus an internal adjustment, which must always be accompanied by justifying comments prepared by the analyst. It should be noted that the S&P equivalent external rating is obtained by making a correspondence between the available external ratings and the rating scale of the referred financial rating agencies. The internal ratings produced by the Markets Template, and which have had adjustments must be mandatorily approved and validated by the Rating Committee The table below shows the correspondence between the external ratings S&P, Moody's and Fitch and the equivalent external rating S&P: S&P AAA AA+ AA AA- A+ A A- BBB+ BBB BBB- BB+ BB BB- B+ B B- CCC+ CCC CCC- CC SD D Moody's Fitch S&P equivalent external rating Rating aggregation classes* Aaa Aa1 Aa2 Aa3 A1 A2 A3 Baa1 Baa2 Baa3 Ba1 Ba2 Ba3 B1 B2 B3 Caa1 Caa2 Caa3 Ca C AAA AA+ AA AA- A+ A A- BBB+ BBB BBB- BB+ BB BB- B+ B B- CCC+ CCC CCC- CC C RD/D Prime Grade High grade Upper medium grade Lower medium grade Non-investment grade speculative Highly speculative AAA AA+ AA AA- A+ A A- BBB+ BBB BBB- BB+ BB BB- B+ B B- CCC+ CCC Lower than CCC Others 39.3.4.3 - Internal scoring models for Individual portfolios Regarding scoring models for individual portfolios, NB has origination / concession and behavioral scoring models (applied to operations older than 6 months). These models are automatic, based on statistical models developed with internal information, considering socio-demographic information, loan characteristics, behavioral information and automatic penalties (if there are warning signs). In the case of behavioral models, information on the remaining loans of the contract holders is also considered. The Bank is authorised by Bank of Portugal to use internal models in the calculation of regulatory capital requirements for the main portfolios of individuals: Mortgage Loans and Individual Loans. In addition, it has origination and behavioral scorings for the Credit SEPARATE EXPLANATORY NOTES - 435 - Card, Overdraft and Loan Accounts products, which it uses for the purposes of designing and monitoring credit quality, however, not being IRB portfolios. 39.3.4.4 - Other specific disclosures • Specific disclosures under Decreto-Lei nº 80-A/2022"Measures aimed at mitigating the effects of increasing the reference indexes of credit agreements for the acquisition or construction of permanent own housing", although at this stage it still goes fundamentally through the operationalization of contacts with customers and monitoring of requests that, according to the Bank, are still residual taking into account the universe at this stage: In the current context of continuous increase in housing credit indexes, and in line with the legislative measures provided in Decreto-Lei nº 80-A/2022 aimed at mitigating their effects on credit agreements for the acquisition or construction of permanent housing, novobanco has developed different initiatives aimed at supporting customers who are or are expected to find themselves in a situation of financial difficulty to ensure compliance with their own responsibilities. In cases where it has up-to-date information on household income, the Bank has the possibility to determine the current stress rate and identify those cases that are at a significant stress rate level or that have significantly increased their value, providing their support with the presentation of renegotiation solutions when required by the situation of proven financial difficulty. In cases where it does not have up-to-date income information, the novobanco has an action strategy consistent with those legislative requirements, communicating at an initial moment with all eligible customers, and later and in anticipation of each indexing update event, with the aim of ensuring adequate information from customers, requesting them to provide up-to-date income information and being able to offer remediation solutions in cases where the financial difficulty requires it. • Follow up of the moratoriums that is in the "discontinuation" phase in terms of monitoring by the Bank: As a result of the time elapsed since the end of the moratoriums granted in the Covid pandemic period under public and private regimes, the history of regular compliance with the claims that have re-entered the amortization phase, and due to the small claims observed, the novobanco considers it currently unnecessary to maintain a dedicated follow-up on the set of private clients and companies that during that phase had a conditioning in the form of exercising their activity and the level of income earned. • Segmentation by affected macro clusters, which the bank has been identifying throughout 2022, after the degradation of macroeconomic scenarios Due to the macroeconomic developments that have occurred throughout 2022 - and the impact from the business fabric – novobanco monitored the most affected economic sectors very closely, with particular emphasis on those energy consumers more intensively. Although the Bank continues to monitor its clients in general in various forums, 15 particularly impacted sectors (mainly related to industry and related to textile activity) have been identified, and the effect on the business risk of the offending companies in these sectors has been identified and targeted at this more specific type of monitoring. For 2023, the same type of surveillance is envisaged, but sectoral selection variables can be adjusted in line with developments in the macroeconomic environment. 39.3.5 – Delinquency The table below displays the assets impaired, or overdue but not impaired: SEPARATE EXPLANATORY NOTES - 436 - (in thousands of Euros)Neither overdue nor impairedOverdue but not impairedImpairedTotal exposureImpairment Net exposureDeposits with and loans and advances to banks 414 135 - - 414 135 ( 674) 413 461 Securities held for trading 36 428 - - 36 428 - 36 428 Bonds issued by government and other public entities 36 428 - - 36 428 - 36 428 Securities at fair value through results 13 - - 13 - 13 Debt instruments - other issuers 13 - - 13 - 13 Securities at fair value through profit/loss - mandatory 433 665 - - 433 665 - 433 665 Bonds issued by other entities 433 665 - - 433 665 - 433 665 Securities at fair value through other comprehensive income2 083 797 - 25 248 2 109 045 ( 589)2 108 456 Bonds issued by government and other public entities1 629 639 - - 1 629 639 ( 382)1 629 257 Bonds issued by other entities 454 158 - 25 248 479 406 ( 207) 479 199 Securities at amortised cost 8 281 706 - 410 094 8 691 800 ( 291 567)8 400 233 Bonds issued by government and other public entities4 590 460 - - 4 590 460 ( 1 714)4 588 746 Bonds issued by other entities 3 691 246 - 410 094 4 101 340 ( 289 853)3 811 487 Loans and advances to customers 22 487 282 5 765 1 355 397 23 848 444 (1 057 567)22 790 877 31.12.2022 Impaired 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 individual impairment assessment. The exposures classified as not having impairment relate to (i) all exposures that do not show signs of significant deterioration in credit risk - exposures classified in Stage 1; (ii) exposures that, showing signs of significant deterioration in credit risk, have no objective evidence of loss or specific 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): SEPARATE EXPLANATORY NOTES - 437 - (in thousands of Euros)Neither overdue nor impairedOverdue but not impairedImpairedTotal exposureImpairment Net exposureDeposits with and loans and advances to banks 452 884 - - 452 884 ( 1 183) 451 701 Securities held for trading 114 465 - - 114 465 - 114 465 Bonds issued by government and other public entities 114 465 - - 114 465 - 114 465 Securities at fair value through profit/loss - mandatory 559 227 - - 559 227 - 559 227 Bonds issued by other entities 559 227 - - 559 227 - 559 227 Securities at fair value through other comprehensive income7 061 196 - 22 770 7 083 966 ( 3 668)7 080 298 Bonds issued by government and other public entities5 685 067 - - 5 685 067 ( 2 995)5 682 072 Bonds issued by other entities1 376 129 - 22 770 1 398 899 ( 673)1 398 226 Securities at amortised cost 2 826 278 - 312 187 3 138 465 ( 247 772)2 890 693 Bonds issued by government and other public entities 371 273 - - 371 273 ( 540) 370 733 Bonds issued by other entities 2 455 005 - 312 187 2 767 192 ( 247 232)2 519 960 Loans and advances to customers 21 448 271 8 422 1 708 369 23 165 062 (1 235 757)21 929 305 31.12.2021(in thousands of Euros)Overdue but not impairedImpairedOverdue but not impaired ImpairedOverdue but not impairedImpairedOverdueUp to 3 months - - - - 3 423 15 525 From 3 months to 1 year - - - - 1 448 102 395 From 1 to 3 years - - - - 822 91 577 From 3 to 5 years - 6 696 - - 53 38 165 More than 5 years - 96 272 - - 19 84 723 - 102 968 - - 5 765 332 385 DueUp to 3 months - 327 619 - - - 49 932 From 3 months to 1 year - - - - - 172 570 From 1 to 3 years - - - - - 225 914 From 3 to 5 years - 4 755 - - - 81 317 More than 5 years - - - - - 493 279 - 332 374 - - - 1 023 012 - 435 342 - - 5 765 1 355 397 31.12.2022Securities 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: Distribution of credit risk by rating level Regarding assets that are neither past due nor impaired, the distribution by rating grade is presented below. For the debt instruments, the rating assigned by the Rating Agencies is taken into account, for the credit to clients and cash and deposits with credit institutions, the internal rating and scoring models are used, that assign a risk rating, which is periodically reviewed. For the purposes of presenting the information, the ratings have been aggregated into five major risk groups, with the last group including the unrated exposures. SEPARATE EXPLANATORY NOTES - 438 - (in thousands of Euros)Overdue but not impairedImpairedOverdue but not impaired ImpairedOverdue but not impairedImpairedOverdueUp to 3 months - - - - 6 879 16 132 From 3 months to 1 year - 210 598 - - 1 095 17 628 From 1 to 3 years - 1 940 - - 385 45 925 From 3 to 5 years - 37 594 - - 36 70 988 More than 5 years - 84 825 - - 27 142 392 - 334 957 - - 8 422 293 065 DueUp to 3 months - - - - - 95 219 From 3 months to 1 year - - - - - 201 267 From 1 to 3 years - - - - - 246 010 From 3 to 5 years - - - - - 137 820 More than 5 years - - - - - 734 988 - - - - - 1 415 304 - 334 957 - - 8 422 1 708 369 Securities Portfolio - debtinstruments Deposits with and loans and advances to banksLoans and advances to customers31.12.2021(in thousands of Euros)Stage 1Stage 2Stage 3TotalStage 1Stage 2Stage 3TotalDeposits with and loans and advances to banks - - - - - - - - Securities at fair value through other comprehensive income - - 25 248 25 248 - - 22 770 22 770 Securities at amortised cost - - 410 094 410 094 - - 312 187 312 187 Loans and advances to customers - - 1 361 162 1 361 162 4 874 3 548 1 708 369 1 716 791 - - 1 796 504 1 796 504 4 874 3 548 2 043 326 2 051 748 31.12.202231.12.2021(in thousand of Euros)Prime +High gradeUpper Medium GradeLower Medium gradeNon Investment Grade Speculative + Highly speculativeOthersTotalDeposits with and loans and advances to banks 625 26 595 57 692 72 881 256 342 414 135 Securities held for trading - - - - 36 428 36 428 Bonds issued by government and other public entities - - - - 36 428 36 428 Securities at fair value through results - - - - 13 13 Debt instruments - other issuers - - - - 13 13 Securities at fair value through profit/loss - mandatory - - - - 433 665 433 665 Bonds issued by other entities - - - - 433 665 433 665 Securities at fair value through other comprehensive income 700 313 717 790 616 785 - 48 909 2 083 797 Bonds issued by government and other public entities 686 424 683 903 259 312 - - 1 629 639 Bonds issued by other entities 13 889 33 887 357 473 - 48 909 454 158 Securities at amortised cost 2 935 513 2 036 816 1 048 626 553 872 1 706 879 8 281 706 Bonds issued by government and other public entities2 252 149 1 668 779 341 704 - 327 828 4 590 460 Bonds issued by other entities 683 364 368 037 706 922 553 872 1 379 051 3 691 246 Loans and advances to customers5 783 346 5 852 343 2 457 978 7 677 338 716 277 22 487 282 31.12.2022 As of 31 December 2022 and 2021, the analysis of the gross loans and advances to customers’ exposure and impairment constituted, by segment, is presented as follows: As of 31 December 2022 and 2021, the analysis of the Loans and advances to customers’ portfolio, by segment and by year of reference was as follows: SEPARATE EXPLANATORY NOTES - 439 - (in thousand of Euros)Prime +High gradeUpper Medium GradeLower Medium gradeNon Investment Grade Speculative + Highly speculativeOthersTotalDeposits with and loans and advances to banks 625 26 580 57 521 78 598 289 560 452 884 Securities held for trading - - - - 114 465 114 465 Bonds issued by government and other public entities - - - - 114 465 114 465 Securities at fair value through profit/loss - mandatory - - - - 559 227 559 227 Bonds issued by other entities - - - - 559 227 559 227 Securities at fair value through other comprehensive income1 449 335 1 982 997 3 478 155 1 788 148 921 7 061 196 Bonds issued by government and other public entities 988 890 1 934 969 2 713 682 - 47 526 5 685 067 Bonds issued by other entities 460 445 48 028 764 473 1 788 101 395 1 376 129 Securities at amortised cost 10 631 157 161 417 707 258 867 1 981 912 2 826 278 Bonds issued by government and other public entities - - - - 371 273 371 273 Bonds issued by other entities 10 631 157 161 417 707 258 867 1 610 639 2 455 005 Loans and advances to customers3 130 230 7 773 753 2 460 371 6 865 797 1 218 120 21 448 271 31.12.2021(in thousands of Euros)31.12.2022PerfomingNon-PerfomingTotal CreditDays of delay<= 90 days> 90 daysExposureImpairmentExposureImpairmentExposureImpairmentExposureImpairmentExposureImpairmentExposureImpairmentCorporate12 906 116 299 681 32 143 3 585 12 938 259 303 266 714 541 318 183 425 500 258 182 1 140 041 576 365 14 078 300 879 631 Mortgage Loans8 367 083 23 506 29 490 1 617 8 396 573 25 123 46 635 10 845 40 926 8 921 87 561 19 766 8 484 134 44 889 Other Loans 1 150 131 27 932 8 101 1 580 1 158 232 29 512 53 747 43 274 74 031 60 261 127 778 103 535 1 286 010 133 047 Total 22 423 330 351 119 69 734 6 782 22 493 064 357 901 814 923 372 302 540 457 327 364 1 355 380 699 666 23 848 444 1 057 567 Segment Performing or with a delay < 30 days With a delay > 30 daysTotalTotalExposureImpairment(in thousands of Euros)31.12.2021PerfomingNon-PerfomingTotal CreditDays of delay<= 90 days> 90 daysExposureImpairmentExposureImpairmentExposureImpairmentExposureImpairmentExposureImpairmentExposureImpairmentCorporate12 041 900 312 746 137 406 17 497 12 179 306 330 243 876 737 367 913 509 684 316 099 1 386 421 684 012 13 565 727 1 014 255 Mortgage Loans8 166 486 19 899 28 662 1 139 8 195 148 21 038 100 041 16 894 38 657 6 693 138 698 23 587 8 333 846 44 625 Other Loans 1 070 498 23 262 8 499 1 539 1 078 997 24 801 153 151 136 809 33 341 15 267 186 492 152 076 1 265 489 176 877 Total 21 278 884 355 907 174 567 20 175 21 453 451 376 082 1 129 929 521 616 581 682 338 059 1 711 611 859 675 23 165 062 1 235 757 Segment TotalPerforming or with a delay < 30 days With a delay > 30 daysTotalExposureImpairment 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 novobanco. 39.3.6 - Collaterals In order to mitigate credit risk, credit operations have associated guarantees, namely mortgages or pledges. The fair value of these guarantees is determined at the date of granting the credit and is periodically reassessed. Below is the gross value of the credits and the respective fair value of the collateral, limited to the value of the associated credit: SEPARATE EXPLANATORY NOTES - 440 - (in thousands of years)Number of operationsAmountImpairment Number of operationsAmountImpairment Number of operationsAmountImpairment Number of operationsAmountImpairment 2004 and prior 3 627 227 417 31 575 52 397 787 292 6 745 698 312 10 982 ( 173) 754 336 1 025 691 38 147 2005 621 26 979 2 914 4 520 159 082 1 077 9 163 6 341 242 14 304 192 402 4 233 2006 733 147 139 31 412 6 552 255 933 1 719 11 333 6 491 260 18 618 409 563 33 391 2007 866 194 270 40 847 9 981 389 134 3 375 17 891 8 467 399 28 738 591 871 44 621 2008 930 343 977 14 122 9 695 421 363 2 819 17 016 6 983 274 27 641 772 323 17 215 2009 740 133 329 12 768 7 532 356 920 2 479 9 919 15 327 9 765 18 191 505 576 25 012 2010 781 127 631 26 623 7 197 380 456 2 685 15 158 18 510 375 23 136 526 597 29 683 2011 846 98 075 14 913 3 825 169 886 888 17 214 11 834 298 21 885 279 795 16 099 2012 1 024 158 404 29 806 2 063 74 162 785 23 003 10 125 455 26 090 242 691 31 046 2013 1 362 322 549 58 136 2 480 113 585 1 318 21 984 9 324 564 25 826 445 458 60 018 2014 1 331 204 112 52 263 1 566 81 895 652 19 821 11 847 642 22 718 297 854 53 557 2015 1 962 492 473 67 776 2 412 141 877 727 22 760 50 177 40 867 27 134 684 527 109 370 2016 2 680 459 603 50 837 5 029 323 792 1 470 36 742 53 456 21 727 44 451 836 851 74 034 2017 4 765 650 642 45 917 7 735 583 437 3 073 40 314 54 312 6 862 100 343 1 288 391 55 852 2018 6 031 1 023 117 79 664 8 813 775 037 3 498 49 232 93 553 6 032 64 076 1 891 707 89 194 2019 8 384 1 794 181 147 647 9 121 857 142 3 385 55 414 157 754 11 238 72 919 2 809 077 162 270 2020 9 879 1 881 547 57 468 6 681 653 994 2 948 36 886 126 459 6 844 53 446 2 662 000 67 260 2021 7 187 2 126 034 36 636 7 373 809 229 3 782 53 793 230 688 9 669 68 353 3 165 951 50 087 2022 14 671 3 666 821 78 307 8 940 1 149 918 1 464 77 519 403 380 16 707 Total 68 420 14 078 300 879 631 163 912 8 484 134 44 889 1 233 474 1 286 010 133 047 1 412 205 18 628 325 961 089 31.12.2022Year of productionCorporateMortgage loans Consumer and other loansTotal(in thousands of years)Number of operationsAmountImpairment Number of operationsAmountImpairment Number of operationsAmountImpairment Number of operationsAmountImpairment 2004 and prior 3 886 251 754 20 380 58 196 1 090 237 8 193 674 193 54 086 2 736 275 1 396 077 28 575 2005 663 44 858 4 602 4 826 179 557 1 516 9 622 6 466 269 15 111 230 881 6 387 2006 808 168 268 33 528 6 989 287 520 1 715 12 196 7 499 808 19 993 463 287 36 051 2007 1 039 268 896 47 712 10 832 433 898 3 331 23 227 9 766 526 35 098 712 560 51 569 2008 1 032 478 108 31 258 10 340 468 928 3 221 18 427 8 455 304 29 799 955 491 34 783 2009 822 192 832 19 262 8 099 400 808 2 351 10 777 16 420 9 222 19 698 610 060 30 835 2010 953 180 669 32 221 7 720 424 284 2 898 16 591 21 945 555 25 264 626 898 35 674 2011 968 183 065 47 648 4 146 191 270 1 121 18 055 13 257 381 23 169 387 592 49 150 2012 1 243 235 250 36 521 2 307 82 796 819 24 783 11 479 491 28 333 329 525 37 831 2013 1 587 419 132 86 678 2 686 127 725 1 503 22 115 19 703 1 815 26 388 566 560 89 996 2014 1 653 310 977 113 995 1 710 92 430 719 20 551 13 349 424 23 914 416 756 115 138 2015 2 457 607 522 106 205 2 633 159 906 803 26 067 110 583 96 719 31 157 878 011 203 727 2016 3 564 638 085 50 094 5 459 365 317 1 952 41 939 65 244 23 583 50 962 1 068 646 75 629 2017 6 104 863 002 55 074 8 457 662 614 3 706 47 247 79 283 7 392 100 343 1 604 899 66 172 2018 7 630 1 492 690 84 909 9 644 882 450 3 594 56 365 134 694 6 847 73 639 2 509 834 95 350 2019 9 113 2 399 569 147 112 9 886 955 084 3 493 62 443 218 276 11 720 81 442 3 572 929 162 325 2020 10 891 2 452 419 59 859 7 148 709 118 2 107 40 602 170 741 6 963 58 641 3 332 278 68 929 2021 12 497 2 378 631 37 197 7 262 819 904 1 583 58 848 304 243 8 856 78 607 3 502 778 47 636 Total 66 910 13 565 727 1 014 255 168 340 8 333 846 44 625 1 184 048 1 265 489 176 877 1 457 833 23 165 062 1 235 757 Total31.12.2021Year of productionCorporateMortgage Loans Other loans The difference between the value of the credit and the fair value of the collateral represents the total credit exposure that exceeds the value of the collateral, this value not being impacted by collaterals with a fair value higher than the credit to which they are associated. The details of the collateral – mortgages are presented as follows: SEPARATE EXPLANATORY NOTES - 441 - (in thousands of Euros)31.12.202231.12.2021Amount of loansImpairmentNet ValueFair value of collateralAmount of loansImpairmentNet ValueFair value of collateralMortgage LoansStage 1Mortgages7 429 201 ( 3 017)7 426 184 7 429 201 7 316 635 ( 3 913)7 312 722 7 310 111 Pledges 210 610 ( 71) 210 539 203 912 154 202 ( 69) 154 133 148 386 Not collateralized 75 095 ( 125) 74 970 - 51 210 ( 354) 50 856 - Stage 2Mortgages 644 671 ( 16 762) 627 909 643 353 654 743 ( 14 055) 640 688 653 823 Pledges 21 188 ( 699) 20 489 19 797 7 264 ( 192) 7 072 7 223 Not collateralized 13 237 ( 1 365) 11 872 - 8 952 ( 256) 8 696 - Stage 3Mortgages 87 312 ( 22 346) 64 966 87 016 137 681 ( 24 849) 112 832 137 007 Pledges 33 ( 12) 21 33 133 ( 25) 108 133 Not collateralized 2 787 ( 492) 2 295 - 3 026 ( 912) 2 114 - TotalMortgages8 161 184 ( 42 125)8 119 059 8 159 570 8 109 059 ( 42 817)8 066 242 8 100 941 Pledges 231 831 ( 782) 231 049 223 742 161 599 ( 286) 161 313 155 742 Not collateralized 91 119 ( 1 982) 89 137 - 63 188 ( 1 522) 61 666 - 8 484 134 ( 44 889)8 439 245 8 383 312 8 333 846 ( 44 625)8 289 221 8 256 683 Other LoansStage 1Mortgages 241 787 ( 330) 241 457 241 434 201 811 ( 407) 201 404 201 349 Pledges 91 867 ( 1 081) 90 786 91 047 82 933 ( 723) 82 210 81 251 Not collateralized 653 885 ( 13 051) 640 834 - 623 239 ( 8 871) 614 368 - Stage 2Mortgages 44 122 ( 1 109) 43 013 43 769 33 818 ( 892) 32 926 33 659 Pledges 4 821 ( 239) 4 582 4 630 3 882 ( 289) 3 593 3 706 Not collateralized 124 321 ( 16 786) 107 535 - 135 850 ( 16 493) 119 357 - Stage 3Mortgages 5 994 ( 2 035) 3 959 5 562 7 373 ( 2 965) 4 408 5 665 Pledges 66 953 ( 61 799) 5 154 13 428 126 637 ( 118 802) 7 835 13 847 Not collateralized 52 260 ( 36 617) 15 643 - 49 946 ( 27 435) 22 511 - TotalMortgages 291 903 ( 3 474) 288 429 290 765 243 002 ( 4 264) 238 738 240 673 Pledges 163 641 ( 63 119) 100 522 109 105 213 452 ( 119 814) 93 638 98 804 Not collateralized 830 466 ( 66 454) 764 012 - 809 035 ( 52 799) 756 236 - 1 286 010 ( 133 047)1 152 963 399 870 1 265 489 ( 176 877)1 088 612 339 477 CorporateStage 1Mortgages2 053 125 ( 12 881)2 040 244 1 839 860 1 820 752 ( 13 552)1 807 200 1 669 918 Pledges1 691 145 ( 5 851)1 685 294 701 387 1 366 149 ( 4 442)1 361 707 413 881 Not collateralized6 337 848 ( 24 615)6 313 233 - 5 615 830 ( 48 011)5 567 819 - Stage 2Mortgages 890 069 ( 88 368) 801 701 800 854 1 159 566 ( 104 994)1 054 572 1 059 059 Pledges 573 690 ( 93 599) 480 091 294 167 475 631 ( 73 679) 401 952 236 698 Not collateralized1 392 364 ( 77 952)1 314 412 - 1 779 371 ( 115 210)1 664 161 - Stage 3Mortgages 457 887 ( 220 793) 237 094 366 273 503 219 ( 229 829) 273 390 397 851 Pledges 190 047 ( 82 518) 107 529 97 470 191 285 ( 87 305) 103 980 87 188 Not collateralized 492 125 ( 273 054) 219 071 - 653 924 ( 337 233) 316 691 - TotalMortgages3 401 081 ( 322 042)3 079 039 3 006 987 3 483 537 ( 348 375)3 135 162 3 126 828 Pledges2 454 882 ( 181 968)2 272 914 1 093 024 2 033 065 ( 165 426)1 867 639 737 767 Not collateralized8 222 337 ( 375 621)7 846 716 - 8 049 125 ( 500 454)7 548 671 - 14 078 300 ( 879 631)13 198 669 4 100 011 13 565 727 (1 014 255)12 551 472 3 864 595 Total 23 848 444 ( 1 057 567) 22 790 877 12 883 193 23 165 062 ( 1 235 757) 21 929 305 12 460 755 (in thousands of Euros)NumberAmountNumberAmountNumberAmountNumberAmount<0,5M€ 157 859 7 837 881 6 635 273 580 18 414 440 729 182 908 8 552 190 >= 0,5M€ e <1,0M€ 367 228 517 13 8 659 2 364 238 296 2 744 475 472 >= 1,0M€ e <5,0M€ 65 93 172 4 8 526 9 816 717 599 9 885 819 297 >= 5,0M€ e <10,0M€- - - - 1 904 539 832 1 904 539 832 >= 10,0M€ e <20,0M€- - - - 134 399 451 134 399 451 >= 20,0M€ e <50,0M€- - - - 5 717 401 813 5 717 401 813 >=50M€- - - - 1 567 269 267 1 567 269 267 158 291 8 159 570 6 652 290 765 39 916 3 006 987 204 859 11 457 322 a) The allocation by intervals was based on the total amount of collateral per credit agreement31.12.2022Collateral intervals a)Mortgage LoansOther LoansCorporate LoansTotal The values of mortgages collateral, shown above, represents the maximum coverage value of the covered assets, i.e., which concur to the gross value of the individual covered credits. In assessing the risk of an operation or set of operations, the elements of credit risk mitigation associated with them are considered, in accordance with internal rules and procedures. The relevant collaterals are essentially the following: • Real estate, where the value considered is the correspondent to the last available valuation. • Financial pledges, where the value considered corresponds to the quotation on the last day of the month, in the case of being a listed security, or the value of the pledge, in the case of being cash. The acceptance of collateral as a guarantee for credit operations refers to the need to define and implement risk mitigation techniques to which these collaterals are exposed. Thus, and as an approach to this matter, the Bank stipulated a set of procedures applicable to collateral (namely financial and real estate), which cover, among others, the volatility of the collateral value, its liquidity, and an indication as to the recovery rates associated with each type of collateral. The internal rules on credit powers thus have a specific chapter on this point, "Acceptance of collateral - techniques for mitigating the risks to which collateral is exposed, namely liquidity and volatility risks". The revaluation process for real estate is performed by independent valuation experts registered in CMVM, following the methodologies as described in Note 7.6. 39.3.7 - Concentration of credit risk The analysis of risk exposure by sector of activity, on 31 December 2022 and 2021, is presented as follows: SEPARATE EXPLANATORY NOTES - 442 - (in thousands of Euros)NumberAmountNumberAmountNumberAmountNumberAmount<0,5M€ 162 672 7 875 489 5 625 227 443 10 326 466 686 178 623 8 569 618 >= 0,5M€ and <1,0M€ 264 161 929 14 6 039 1 935 252 393 2 213 420 361 >= 1,0M€ and <5,0M€ 47 63 523 3 7 191 18 518 794 583 18 568 865 297 >= 5,0M€ and <10,0M€- - - - 13 225 460 762 13 225 460 762 >= 10,0M€ and <20,0M€- - - - 2 241 530 515 2 241 530 515 >= 20,0M€ and <50,0M€- - - - 155 451 567 155 451 567 >=50M€- - - - 1 565 170 322 1 565 170 322 162 983 8 100 941 5 642 240 673 47 965 3 126 828 216 590 11 468 442 a) The allocation by intervals was based on the total amount of collateral per credit agreement31.12.2021Collateral intervals a)Mortgage LoansOther LoansCorporate LoansTotal(in thousands of Euros)31.12.2022Gross amountImpairmentGross amountImpairment Gross amountImpairment Gross amountImpairment Agriculture, Forestry and Fishery 314 282 ( 6 361)- - - - - 8 616 - 5 788 ( 15) 11 878 ( 5 902)Mining 65 487 ( 5 033)- - - - - 14 277 ( 7) 18 445 ( 8) 8 851 ( 335)Food, Beverages and Tobacco 451 857 ( 11 092)- 4 302 - - - 19 152 ( 9) 112 027 ( 188) 35 920 ( 260)Textiles and Clothing 399 438 ( 21 326)- 298 - - - - - 9 690 ( 9) 7 026 ( 958)Leather and Shoes 71 976 ( 1 253)- - - - - - - 5 522 ( 1) 1 518 ( 117)Wood and Cork 135 642 ( 2 490)- 609 - - - - - 53 959 ( 114) 7 563 ( 255)Paper and Printing Industry 95 294 ( 5 900)- 629 - - - - - 28 906 ( 139) 5 780 ( 22)Refining of Petroleum 16 314 ( 114)- 1 - - - 13 718 ( 2) 59 816 ( 16) 2 264 - Chemicals and Rubber 288 743 ( 7 069)- 357 - - - - - 221 901 ( 186) 15 775 ( 135)Non-metallic Minerals 186 565 ( 2 412)- 4 - - - 14 839 ( 5) 93 571 ( 105) 35 468 ( 165)Metallurgical Industries and Metallic Products 389 416 ( 16 041)- 145 - - - 433 - 48 649 ( 75) 34 232 ( 390)Production of Machinery, Equipment and Electrical De. 229 052 ( 10 721)- 42 - - - 41 511 ( 25) 191 510 ( 63) 21 824 ( 3 559)Production of Transport Material 176 450 ( 4 941)- - - - - - - 58 643 ( 65) 12 813 ( 290)Other Transforming Industries 146 223 ( 4 877)- - - - - - - 39 244 ( 22) 18 174 ( 2 452)Electricity, Gas and Water 235 377 ( 3 438)- 4 916 - - - 6 435 - 170 300 ( 2 675) 33 760 ( 88)Construction and Public Works 1 402 541 ( 133 395)- 16 597 - - - 14 533 ( 6) 229 922 ( 117 563) 709 328 ( 45 840)Wholesale and Retail Trade 1 455 117 ( 41 766)- 7 371 - - - 17 373 ( 10) 87 673 ( 58) 178 985 ( 3 190)Tourism 1 159 301 ( 83 692)- - - - - 124 - - - 48 385 ( 1 027)Transport and Communication 908 728 ( 28 609)- 7 345 - - - 46 531 ( 20) 228 236 ( 304) 394 609 ( 1 762)Financial Activities 717 583 ( 65 727)- 90 113 - 1 535 145 562 886 207 058 ( 92) 1 639 254 ( 492) 152 540 ( 133)Real Estate Activities 1 736 996 ( 162 024)- 1 428 - - - 29 699 ( 11) 150 030 ( 73 610) 90 041 ( 3 484)Services Provided to Companies 2 263 447 ( 161 737)- 98 13 129 - 80 134 ( 11) 692 736 ( 93 479) 358 605 ( 10 716)Public Administration and Services 409 300 ( 25 241) 36 428 - - - - 1 629 863 ( 382) 4 403 137 ( 1 714) 21 158 ( 109)Other activities of collective services 423 173 ( 42 174)- 145 - 2 378 - 24 849 ( 9) 92 579 ( 662) 38 037 ( 962)Mortgage Loans 8 484 134 ( 44 889)- - - - - - - - - - - Consumers Loans 1 286 010 ( 133 047)- - - - - - - - - - - Others 399 998 ( 32 198)- 19 - - - 13 889 - 50 262 ( 4) 17 558 ( 241)TOTAL 23 848 444 ( 1 057 567) 36 428 134 419 13 1 537 652 562 886 2 183 034 ( 589) 8 691 800 ( 291 567) 2 262 092 ( 82 392)Financial assets at fair value through profit or lossFinancial assets at fair value through profit or loss -mandatoryFinancial assets at amortised costLoans and advances tocustomersFinancial assets held for tradingDerivatives for tradingDerivatives held for risk management purposesFinancial assets at fair value through other comprehensive incomeGuarantees and endorsements provided Exposure to sovereign debt of “peripheral” Eurozone countries On 31 December 2022 and 2021, 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’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 are as follows: SEPARATE EXPLANATORY NOTES - 443 - (in thousands of Euros)31.12.2021Gross amountImpairmentGross amountImpairment Gross amountImpairment Gross amountImpairment Agriculture, Forestry and Fishery 311 832 ( 8 492)- 397 - - - 29 007 ( 14) 20 249 ( 45) 11 175 ( 6 318)Mining 40 882 ( 333)- - - - - 14 189 ( 13) 19 391 ( 4) 5 841 ( 183)Food, Beverages and Tobacco 507 539 ( 14 190)- 7 233 - - - - - 75 391 ( 195) 49 419 ( 319)Textiles and Clothing 366 985 ( 13 791)- 290 - - - - - 4 298 ( 2) 7 450 ( 741)Leather and Shoes 79 044 ( 728)- 5 - - - - - 1 501 ( 6) 1 363 ( 122)Wood and Cork 108 090 ( 2 866)- 500 - - - - - 2 199 ( 12) 7 322 ( 259)Paper and Printing Industry 148 885 ( 10 071)- 96 - - - - - 1 497 ( 4) 2 150 ( 18)Refining of Petroleum 11 459 ( 20)- - - - - - - 40 793 ( 22) 4 022 ( 1)Chemicals and Rubber 337 394 ( 5 155)- 271 - - - 19 410 ( 13) 133 694 ( 123) 18 453 ( 80)Non-metallic Minerals 166 695 ( 3 112)- - - - - - - 33 754 ( 153) 15 122 ( 297)Metallurgical Industries and Metallic Products 389 961 ( 11 905)- 370 - - - 16 235 ( 11) 1 299 ( 62) 31 575 ( 456)Production of Machinery, Equipment and Electrical De. 170 624 ( 9 123)- 159 - - - 66 078 ( 49) 48 010 ( 24) 20 425 ( 2 248)Production of Transport Material 118 847 ( 3 514)- 43 - - - - - 15 046 ( 8) 10 625 ( 526)Other Transforming Industries 140 459 ( 10 598)- - - - - - - 4 983 ( 20) 19 208 ( 2 821)Electricity, Gas and Water 293 197 ( 3 320)- 17 062 - - - 53 579 ( 41) 113 203 ( 3 988) 33 018 ( 687)Construction and Public Works 1 288 788 ( 134 972)- 75 005 - - - - - 196 417 ( 94 332) 667 673 ( 37 863)Wholesale and Retail Trade 1 366 114 ( 40 405)- 765 - - - 40 669 ( 29) 49 398 ( 53) 200 010 ( 3 401)Tourism 1 029 948 ( 96 443)- 191 - - - 118 - - - 51 565 ( 1 024)Transport and Communication 861 457 ( 51 305)- 49 111 - - - 96 999 ( 61) 42 850 ( 178) 347 343 ( 2 008)Financial Activities 483 518 ( 44 807)- 101 455 - 2 133 630 20 150 909 281 ( 317) 1 045 549 ( 2 254) 151 950 ( 3 408)Real Estate Activities 1 650 174 ( 144 160)- 6 281 - 2 751 - 908 - 178 280 ( 33 430) 107 266 ( 5 075)Services Provided to Companies 2 429 405 ( 238 573)- 3 250 - 111 549 - 78 561 ( 45) 655 753 ( 111 600) 386 254 ( 10 111)Public Administration and Services 571 501 ( 22 809) 114 465 - - - - 5 685 319 ( 2 995) 371 273 ( 540) 19 965 ( 108)Other activities of collective services 581 079 ( 75 218)- 758 - 2 378 - 123 155 ( 80) 83 637 ( 717) 36 158 ( 959)Mortgage Loans 8 333 846 ( 44 625)- - - - - - - - - - - Consumers Loans 1 265 489 ( 176 877)- - - - - - - - - - - Others 111 850 ( 68 345)- 2 - - - - - - - 16 223 ( 306)TOTAL 23 165 062 ( 1 235 757) 114 465 263 244 - 2 250 308 20 150 7 133 508 ( 3 668) 3 138 465 ( 247 772) 2 221 575 ( 79 339)Loans and advances tocustomersFinancial assets held for tradingDerivatives for tradingFinancial assets at fair value through profit or lossFinancial assets at fair value through profit or loss -mandatoryDerivatives held for risk management purposesFinancial assets at fair value through other comprehensive incomeFinancial assets at amortised costGuarantees and endorsements provided(in thousands of Euros)Portugal 319 849 31 517 - 223 527 609 502 1 184 395 Spain- - - 623 743 1 520 591 2 144 334 Ireland- - - - 230 216 230 216 Italy - - - 24 878 59 608 84 486 319 849 31 517 - 872 148 2 419 917 3 643 431 (1) Amounts presented by the net: payable/(payable) 31.12.2022Loans andadvances tocustomersSecurities held for trading Derivative instruments (1)Securities at fair value through other comprehensive incomeSecurities at amortised cost Total(in thousands of Euros)Portugal 546 563 114 465 - 2 492 521 370 733 3 524 282 Spain- - - 1 619 260 - 1 619 260 Ireland- - - 171 608 - 171 608 Italy - - - 148 601 - 148 601 546 563 114 465 - 4 431 990 370 733 5 463 751 (1) Amounts presented by the net: payable/(payable) 31.12.2021Loans andadvances tocustomersSecurities held for trading Derivative instruments (1)Securities at fair value through other comprehensive incomeSecurities at amortised cost Total 39.3.8 - Forborne modified loans The ´Bank proceeds to the identification and register of restructured credit contracts due to the client's financial difficulties whenever there are changes to the terms and conditions of a contract in which the client has defaulted, that is, it is foreseeable that it will default, with a financial obligation. It is considered that there is a change to the terms and conditions of the contract when (i) there are contractual changes to the benefit of the customer, such as extending the term, introducing grace periods, reducing the rate or partial debt forgiveness; (ii) there is a contracting of a new credit operation to settle the existing debt (total or partial); or (iii) the new terms of the contract are more favorable than those applied to other customers with the same risk profile. SEPARATE EXPLANATORY NOTES - 444 - (in thousands of Euros)Nominal valueQuotation ValueAccrued interestBook valueImpairmentFair Value ReservesSecurities at fair value through other comprehensive incomePortugal 227 000 223 527 - 223 527 - ( 486)Maturity exceeding 1 year 227 000 223 527 - 223 527 - ( 486)Spain 634 000 623 587 156 623 743 - ( 1 335)Maturity exceeding 1 year 634 000 623 587 156 623 743 - ( 1 335)Italy 25 000 24 878 - 24 878 - ( 3)Maturity exceeding 1 year 25 000 24 878 - 24 878 - ( 3) 886 000 871 992 156 872 148 - ( 1 824)Securities held for tradingPortugal 610 855 604 757 3 150 609 502 401 - Maturity exceeding 1 year 610 855 604 757 3 150 609 502 401 - Espanha 1 663 250 1 396 284 3 118 1 520 591 482 - Maturity exceeding 1 year 1 663 250 1 396 284 3 118 1 520 591 482 - Ireland 241 000 200 775 638 230 216 82 - Maturity exceeding 1 year 241 000 200 775 638 230 216 82 - Italy 64 000 51 331 110 59 608 21 - Maturity exceeding 1 year 64 000 51 331 110 59 608 21 - 2 579 105 2 253 147 7 016 2 419 917 986 - Securities at amortised costPortugal 35 000 31 315 202 31 517 - - 35 000 31 315 202 31 517 - - 31.12.2022(in thousands of Euros)Nominal valueQuotation ValueAccrued interestBook valueImpairmentFair Value ReservesTítulos ao justo valor através de outro rendimento integralPortugal 2 231 290 2 466 964 25 557 2 492 521 - 86 400 Maturity up to 1 year 411 385 418 663 1 581 420 244 - 2 986 Maturity exceeding 1 year 1 819 905 2 048 301 23 976 2 072 277 - 83 414 Spain 1 529 200 1 594 096 25 164 1 619 260 - 46 283 Maturity up to 1 year 755 000 758 261 17 334 775 595 - 1 729 Maturity exceeding 1 year 774 200 835 835 7 830 843 665 - 44 554 Ireland 153 600 170 350 1 258 171 608 - 13 457 Maturity exceeding 1 year 153 600 170 350 1 258 171 608 - 13 457 Italy 148 561 148 286 315 148 601 - 215 Maturity exceeding 1 year 148 561 148 286 315 148 601 - 215 4 062 651 4 379 696 52 294 4 431 990 - 146 355 Securities at amortised costPortugal 369 646 418 828 1 627 370 733 540 - Maturity exceeding 1 year 369 646 418 828 1 627 370 733 540 - 369 646 418 828 1 627 370 733 540 - Securities held for tradingPortugal 106 500 114 017 448 114 465 - - 106 500 114 017 448 114 465 - - 31.12.2021 The cancellation of a restructured credit due to the client's financial difficulties can only occur after a minimum period of two years from the date of the restructuring, provided that the following conditions are cumulatively fulfilled: (i) regular payment of capital and interest; (ii) the customer has no capital or interest due; and (iii) there were no debt restructuring mechanisms by the client in that period. The amounts of the restructured loans due to financial difficulties of the customer as of 31 December 2022 and 2021, are as follows: The details of the restructuring measures applied to loans restructured up to 31 December 2022 and 2021 are the following: 39.4 - 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 potential losses under adverse market conditions, for which the Value at Risk (VaR) methodology is used. novobanco’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. SEPARATE EXPLANATORY NOTES - 445 - (in thousands of Euros)31.12.202231.12.2021Corporate1 180 626 1 272 621 Mortgage loans 162 891 128 219 Consumer and other loans 81 378 137 276 Total 1 424 895 1 538 116 (in thousands of Euros)No. TransactionExposureImpairmentNo. TransactionExposureImpairmentNo. TransactionExposureImpairmentPrincipal or interest forgiveness 41 13 990 901 61 95 035 53 859 102 109 025 54 760 Assets received in partial settlement of loan 23 1 068 164 8 146 129 31 1 214 293 Capitalization of interest 16 4 965 923 87 52 218 29 659 103 57 183 30 582 New loan in total or partial payment of existing loan 1 028 191 512 14 132 506 177 111 79 690 1 534 368 623 93 822 Extension of repayment period 1 366 262 295 50 333 631 246 792 162 833 1 997 509 087 213 166 Introduction of grace period of principal or interest 809 114 982 6 864 169 71 619 27 336 978 186 601 34 200 Decrease in the interest rates 481 40 574 461 39 76 714 29 588 520 117 288 30 049 Changes of the lease payment plan 118 16 714 1 637 59 9 389 4 517 177 26 103 6 154 Changes in the interest payment 5 2 011 207 3 674 198 8 2 685 405 Other 1 491 34 137 1 035 423 12 949 4 814 1 914 47 086 5 849 Total 5 378 682 248 76 657 1 986 742 647 392 623 7 364 1 424 895 469 280 Solution31.12.2022PerformingNon PerformingTotal(in thousands of Euros)No. TransactionExposureImpairmentNo. TransactionExposureImpairmentNo. TransactionExposureImpairmentPrincipal or interest forgiveness 37 14 027 1 886 98 163 190 98 330 135 177 217 100 216 Assets received in partial settlement of loan 16 1 043 145 19 420 195 35 1 463 340 Capitalization of interest 35 6 754 346 100 79 248 46 515 135 86 002 46 861 New loan in total or partial payment of existing loan 1 307 170 750 12 664 422 121 570 57 096 1 729 292 320 69 760 Extension of repayment period 2 100 389 220 60 170 859 434 881 272 462 2 959 824 101 332 632 Introduction of grace period of principal or interest 335 27 700 783 80 55 167 25 157 415 82 867 25 940 Decrease in the interest rates 82 10 549 459 24 19 823 6 050 106 30 372 6 509 Changes of the lease payment plan 112 6 994 390 44 8 682 2 885 156 15 676 3 275 Changes in the interest payment 3 2 017 228 2 1 997 1 694 5 4 014 1 922 Other 1 193 17 015 675 274 7 069 3 265 1 467 24 084 3 940 Total 5 220 646 069 77 746 1 922 892 047 513 649 7 142 1 538 116 591 395 Solution31.12.2021PerformingNon PerformingTotal novobanco has a VaR of Euro 897 thousand (31 December 2021: Euro 13,346 thousand) in respect of its trading positions. The decrease is essentially explained by the decrease in the position in interest rate risk hedging derivatives of the bank portfolio. 39.4.1 - Interest Rate Risk In accordance with the recommendations of European Banking Authority presented in the document EBA/GL/2018/02, novobanco Bank 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. Sensitivity analyses are carried out for the interest rate risk of the banking portfolio based on the current difference in the interest rate mismatch discounted at current rates and the discounted value of the same cash flows, through scenarios of displacement of SEPARATE EXPLANATORY NOTES - 446 - (in thousands of Euros)31.12.202231.12.2021DecemberAnnual averageMaximumMinimumDecemberAnnual averageMaximumMinimumExchange risk 328 1 299 4 362 328 2 551 1 966 3 464 807 Interest rate risk 586 5 532 47 720 586 31 454 24 522 41 240 10 628 Shares and commodities 0 0 0 - 3 33 225 0 Volatility 1 380 2 117 1 0 66 422 0 Credit spread 415 841 2 386 229 719 1 329 4 146 579 Diversification effect ( 433)( 1 738)( 7 766)( 248)( 4 399)( 3 017)( 7 032) 1 422 Total 897 6 314 48 820 897 30 329 24 899 42 465 13 436 (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 banks6 530 130 - 6 425 590 100 000 4 502 18 20 Loans and advances to customers23 311 653 - 13 474 715 4 299 392 2 898 241 1 748 925 890 380 Securities11 863 628 - 1 813 859 787 465 2 086 492 2 953 975 4 221 837 Other assets 134 045 - 134 045 - - - - Total21 848 209 5 186 857 4 989 235 4 702 918 5 112 237 Deposits from banks10 493 818 - 9 704 967 325 100 171 592 ( 752) 292 911 Due to customers28 403 671 - 18 000 157 2 670 859 3 702 650 3 179 172 850 833 Debt securities issued2 640 658 - 275 000 - 299 964 100 036 1 965 658 Other liabilities 787 899 - 738 146 6 882 9 783 26 990 6 098 - - - - - - - Total28 718 270 3 002 841 4 183 989 3 305 446 3 115 500 Balance sheet GAP (Assets - Liabilities)( 486 591)(6 870 062)2 184 016 805 246 1 397 473 1 996 736 Off-Balance sheet 1 045 (1 300 422)1 302 320 ( 590 086) 810 306 ( 221 073)Structural GAP( 485 545)(8 170 484)3 486 336 215 161 2 207 779 1 775 663 Accumulated GAP (8 170 484)(4 684 148)(4 468 987)(2 261 208)( 485 545)31.12.2022(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 banks5 790 475 - 5 646 973 100 000 10 967 32 522 14 Loans and advances to customers22 211 085 - 7 215 292 3 148 017 3 829 143 6 556 216 1 462 417 Securities10 238 741 - 1 511 857 802 196 964 450 3 656 609 3 303 630 Other assets 399 920 - 399 920 - - - - Total14 774 042 4 050 213 4 804 560 10 245 347 4 766 061 Deposits from banks11 493 449 - 6 102 027 4 778 199 321 025 ( 569) 292 767 Due to customers26 981 348 - 16 099 055 2 264 928 3 830 371 3 571 640 1 215 353 Debt securities issued2 540 658 - - - 275 000 700 000 1 565 658 Other liabilities 257 274 - 118 484 28 687 54 587 55 517 - - - - - - - - Total22 319 566 7 071 814 4 480 983 4 326 588 3 073 778 Balance sheet GAP (Assets - Liabilities)(2 632 509)(7 545 524)(3 021 602) 323 577 5 918 758 1 692 282 Off-Balance sheet( 4 829)2 867 467 813 050 ( 99 357)(1 307 266)(2 278 723)Structural GAP(2 637 338)(4 678 057)(2 208 552) 224 220 4 611 492 ( 586 441)Accumulated GAP (4 678 057)(6 886 609)(6 662 389)(2 050 897)(2 637 338)31.12.2021 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. 39.4.2 - Average rates of financial assets and liabilities The following table presents the average interest rates for the Bank’s major financial asset and liability categories, on 31 December 2022 and 2021, as well as the respective average balances and interest for the exercise: 39.4.3 - Foreign Exchange Risk Regarding foreign exchange risk, the breakdown of assets and liabilities, by currency, on 31 December 2022 and 2021, is analysed as follows: SEPARATE EXPLANATORY NOTES - 447 - (in thousands of Euros)Average balance of the periodInterest of the exerciseAverage interest rateAverage balance of the periodInterest of the exerciseAverage interest rateMonetary assets 7 703 743 13 385 0,17% 4 566 715 2 653 0,06%Loans and advances to customers 23 922 921 571 255 2,39% 23 162 232 492 762 2,10%Securities and other 11 586 916 180 306 1,56% 11 254 711 154 879 1,36%Differential liabilities- - - - - - Financial assets and differentials 43 213 580 764 946 1,77% 38 983 658 650 294 1,65%Monetary Liabilities 11 314 546 ( 13 917)-0,12% 11 252 385 ( 66 125)-0,58%Due to customers 27 911 300 47 622 0,17% 25 988 282 50 231 0,19%Resources titled and other 1 429 109 106 245 7,43% 1 030 250 85 104 8,26%Differential liabilities 2 558 625 - - 712 741 - - Financial liabilities and differentials 43 213 580 139 950 0,32% 38 983 658 69 210 0,18%Net interest income 624 996 1,45% 581 084 1,47%31.12.202231.12.2021(in thousands of Euros)31.12.2022Parallel increase of 200 pbParallel decrease of 200 pbShort Rate Shock UpShort Rate Shock DownSteepener shockFlattener shockAs at 31 December( 334 517) 200 038 ( 227 249) 123 841 38 128 ( 132 267)Exercise average( 17 375) 2 525 ( 94 998) 68 433 69 877 ( 118 588)Exercise maximum 69 075 205 226 ( 57 198) 123 841 98 327 ( 71 234)Exercise minimum( 334 517)( 235 847)( 227 249) 35 622 30 932 ( 143 180)(in thousands of Euros)31.12.2021Parallel increase of 200 pbParallel decrease of 200 pbShort Rate Shock UpShort Rate Shock DownSteepener shockFlattener shockAs at 31 December 75 258 49 546 ( 55 767) 68 719 87 821 ( 100 929)Exercise average 8 175 64 196 ( 59 017) 70 148 52 295 ( 44 255)Exercise maximum 75 258 81 887 ( 55 767) 77 666 87 821 ( 15 767)Exercise minimum( 21 605) 49 546 ( 63 163) 65 671 34 359 ( 100 929) 39.5 - Liquidity Risk Liquidity risk is the current or future risk that arises from an institution's inability to meet its liabilities as they mature, without incurring substantial losses. Liquidity risk can be divided into two types: • Liquidity of assets (market liquidity risk) - consists in the impossibility of selling a certain type of asset due to the lack of liquidity in the market, which translates into the widening of the bid / offer spread or the application of a haircut to the market value. • Financing (funding liquidity risk) - consists of the impossibility of financing the assets in the market and / or refinancing the debt that is maturing, in the terms and in the desired currency. This impossibility can be reflected through a strong increase in the cost of financing or the requirement for collateral to obtain funds. The difficulty of (re) financing can lead to the sale of assets, even if incurring significant losses. The risk of (re) financing must be minimised through an adequate diversification of funding sources and maturity terms. Banks are subject to liquidity risk due to their maturity transformation business (long-term lenders and short-term depositors), so prudent liquidity risk management is therefore crucial. As of 31 December 2022, the value of the asset portfolio eligible as collateral for rediscounting operations with the ECB, after haircuts, amounted to Euro 16,9 billion (31 December 2021: Euro 16,5 billion). This amount includes all the exposure to Portuguese sovereign debt, in the total amount of approximately Euro 0,9 billion. During 2022, gross financing from the ECB decreased by Euro 1,6 million to a total of Euro 6.3 billion (2021: increase in the amount of Euro 974 million for a total of Euro 8,0 billion). The liquidity of novobanco is managed in a centralised manner, in the Headquarters, 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. On 31 December 2022 and 2021, the calculation of the liquid contractual deficit and the counterbalancing capacity was performed following the ITS (Implementing Technical Standards) rules: SEPARATE EXPLANATORY NOTES - 448 - (in thousands of Euros)SpotForwardOther elementsNet exposureSpotForwardOther elementsNet exposureUSDUNITED STATES DOLLAR( 635 627) 634 533 91 ( 1 003)( 177 489) 169 546 ( 15)( 7 958)GBPGREAT BRITISH POUND( 47 219) 46 965 - ( 254)( 42 549) 47 842 - 5 293 BRLBRAZILIAN REAL 866 - - 866 783 - - 783 MOPMACAO PATACA( 3 439) 3 079 - ( 360)( 6 542) 6 885 - 343 JPYJAPANESE YEN( 2 357) 2 318 - ( 39)( 1 353) 2 310 - 957 CHFSWISS FRANC( 9 359) 9 769 - 410 ( 13 303) 16 281 - 2 978 SEKSWEDISH KRONE 17 568 ( 17 578)- ( 10) 19 751 ( 19 077)- 674 NOKNORWEGIAN KRONE 53 277 ( 53 059)- 218 54 362 ( 54 035)- 327 CADCANADIAN DOLLAR( 17 250) 19 003 - 1 753 ( 18 620) 21 502 - 2 882 ZARSOUTH AFRICAN RAND( 11)( 530)- ( 541) 1 128 ( 1 207)- ( 79)AUDAUSTRALIAN DOLLAR 9 589 ( 9 463)- 126 10 216 ( 9 990)- 226 VEBVENEZUELAN BOLIVAR 2 - - 2 2 - - 2 PLNPOLISH ZLOTY 2 409 - - 2 409 2 256 - - 2 256 MADMOROCCAN DIRHAN( 2 558) 2 256 - ( 302)( 2 996) 2 936 - ( 60)MXNMEXICAN PESO( 7)- - ( 7)( 14) 9 - ( 5)AOAANGOLAN KWANZA( 23)- - ( 23)( 1)- - ( 1)PLNZLOTY ( 2 998) 3 010 - 12 36 099 ( 35 643)- 456 CZKCZECH KORUNA 6 ( 114)- ( 108) 16 208 ( 17 041)- ( 833)DZDALGERIAN DINAR 7 638 - - 7 638 5 507 - - 5 507 CNYYUAN REN-MIN-BI 326 ( 347)- ( 21) 51 351 ( 50 975)- 376 OTHER( 406) 1 574 - 1 168 ( 3 337) 2 334 - ( 1 003)( 629 573) 641 416 91 11 934 ( 68 541) 81 677 ( 15) 13 121 31.12.202131.12.2022 SEPARATE EXPLANATORY NOTES - 449 - (in thousands of Euros)Totaluntil 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)1 426 968 2 247 4 593 10 535 5 486 296 7761 107 331Liabilities arising from secured loan operations and capital market operations10 059 656 57 154 66 5131 732 2493 341 048 739 1884 123 504Behavioral exits resulting from deposits29 944 525 490 403 45 719 145 209 166 803 416 28728 680 104Foreign exchange swaps and derivatives 753 198 5 230 52 647 384 395 82 939 65 165 162 822Other outputs 623 245 4 477- - 15 824 34 000 568 944Total Exits42 807 592 559 511 169 4722 272 3883 612 1001 551 41634 642 705EntriesBehavioral inflows resulting from loans and advances36 105 6745 817 950 63 286 169 329 252 210 507 32329 295 576Foreign exchange swaps and derivatives 753 433 6 056 53 146 385 920 83 582 63 089 161 640Own portfolio securities to mature and Other entries12 335 751 49 286 167 097 266 806 225 2152 091 8829 535 465Total Entries49 194 8585 873 292 283 529 822 055 561 0072 662 29438 992 681Net contractual deficit6 387 2675 313 782 114 057(1 450 332)(3 051 094)1 110 8784 349 976Accumulated net contractual deficit- 5 313 7825 427 8393 977 507 926 4132 037 2916 387 267REBALANCE CAPACITYTotaluntil 7 daysfrom 7 days to 1 monthfrom 1 to 3 monthsfrom 3 to 6 monthsfrom 6m to 1 yearhigher than1 yearCoins and banknotes 176 797Central bank mobilisable reserves5 653 802(5 653 802)Marketable and non-marketable assets eligible for central banks7 841 356 56 109 62 178( 116 348)( 126 324)(1 918 431)(5 794 060)Authorised and unused facilities received- ( 23 829)( 77 909)1 378 6762 739 531( 84 317)(3 932 151)Net change in rebalancing capacity- (5 621 522)( 15 731)1 262 3282 613 207(2 002 748)(9 726 211)Accumulated rebalancing capacity13 671 9558 050 4338 034 7029 297 03011 910 2379 907 489 181 27831.12.2022(in thousands of Euros)Totaluntil 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) 710 947- - - - 22 054 688 893Liabilities arising from secured loan operations and capital market operations9 948 704- 626 980 52 669- 2 514 5556 754 500Behavioral exits resulting from deposits29 286 247 459 384 316 628 213 461 216 116 575 32127 505 337Foreign exchange swaps and derivatives 520 853 5 940 45 222 376 528 43 099 25 734 24 330Other outputs 478 049- - - 11 515 33 814 432 720Total Exits40 944 800 465 324 988 830 642 658 270 7303 171 47835 405 780EntriesGuaranteed loan operations and operations associated with the capital market 172 139- - - - 40 991 131 148Behavioral inflows resulting from loans and advances30 327 1485 180 565 52 796 175 110 316 874 420 76424 181 039Foreign exchange swaps and derivatives 675 752 7 826 40 850 376 467 61 089 39 413 150 107Own portfolio securities to mature and Other entries11 752 499 148 242 130 897 503 810 707 762 607 7679 654 021Total Entries42 927 5385 336 633 224 5431 055 3871 085 7251 108 93534 116 315Net contractual deficit1 982 7374 871 309( 764 288) 412 728 814 995(2 062 541)(1 289 466)Accumulated net contractual deficit- 4 871 3094 107 0214 519 7495 334 7443 272 2031 982 737REBALANCE CAPACITYTotaluntil 7 daysfrom 7 days to 1 monthfrom 1 to 3 monthsfrom 3 to 6 monthsfrom 6m to 1 yearhigher than1 yearCoins and banknotes 144 220Central bank mobilisable reserves4 999 674(4 999 674)Marketable and non-marketable assets eligible for central banks7 178 648- 432 159( 326 174)( 537 314)( 451 505)(6 154 300)Authorised and unused facilities received- ( 42 401)( 73 498)( 226 102)( 281 873)1 314 154( 690 281)Net change in rebalancing capacity- (5 042 075) 358 661( 552 276)( 819 187) 862 649(6 844 581)Accumulated rebalancing capacity12 322 5427 280 4677 639 1287 086 8526 267 6657 130 314 285 73331.12.2021 At the end of 2021 there was an accumulated one-year net contractual surplus of Euro 3,272 million (considering in the entries the availability in central banks, deducted from the minimum reserves), having shifted at the end of 2022 to an accumulated one-year net contractual surplus accumulated at a year of Euro 2,037 million. The one-year counterbalancing capacity at the end of 2022 was Euro 9,907 million, higher by Euro 2,777 million at the end of 2021 (Euro 7,130 million). This increase is mainly due to increased customer deposits and secured funding. In order to anticipate any negative impacts, internal liquidity stress scenarios representing the types of crises that may occur are carried out, based on idiosyncratic scenarios (characterised by a loss of confidence in the Bank), and market scenarios. Additionally, given the importance of liquidity risk management, a Liquidity Coverage Ratio (LCR) and a stable financing ratio (NSFR) are included in regulatory legislation. The LCR aims to promote banks' resilience to short-term liquidity risk by ensuring that they hold high-quality liquid assets sufficient to survive a severe stress scenario for a period of 30 days, while the NSFR aims to ensure that Banks maintain stable financing for their assets and off-balance sheet operations, for a period of one year. In accordance with existing regulatory legislation, the Bank is required to comply with a regulatory minimum limit of 100% in the LCR. The Bank continues to follow regulatory changes to comply with all obligations, including the implementation of the NSFR and its limit. 39.6 - Operational risk Operational risk generally translates into the probability of the occurrence of events with negative impacts, in the results or in the capital, resulting from the inadequacy or deficiency of procedures and information systems, the behaviour of people or motivated by external events, including legal risks. Thus, operational risk is understood as the calculation of the following risks: operational, information systems, compliance and reputation. For the management of operational risk, a system was developed and implemented to ensure the uniformity, systematisation and recurrence of the activities for the identification, monitoring, control and mitigation of this risk. This system is supported by an organizational structure, integrated in the Global Risk Department exclusively dedicated to this task, as well as by Operational Risk Management Representatives designated by each of the departments, branches and subsidiaries considered relevant, which are responsible for complying with the procedures. and the day-to-day management of this Risk in its areas of competence. 39.7 - Capital Management and Solvency Ratio The main objective of the capital management is to ensure compliance with the novobanco’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 novobanco - 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 novobanco‘s objectives. The capital ratios of novobanco 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, to the calculation of the ratios mentioned above. novobanco 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 novobanco Portugal. 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 novobanco’s 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 novobanco are composed by elements of CET I and Tier II. The summary of own funds, risk weighted assets and capital ratios capital of novobanco as of 31 December 2022 and 2021 are presented in the following table: SEPARATE EXPLANATORY NOTES - 450 - NOTE 40 – PROVISION OF INSURANCE OR REINSURANCE MEDIATION SERVICE On 31 December of 2022 and 2021, the compensation arising from the provision of insurance or reinsurance mediation services has the following composition: SEPARATE EXPLANATORY NOTES - 451 - (in thousands of Euros)31.12.202231.12.2021Life InsuranceUnit Link and other life commissions 1 795 1 828 Credit protection insurance (life) 877 823 Traditional Products 16 480 14 529 19 152 17 180 Non-Life InsurancePersonal lines insurance 8 300 7 442 Corporate insurance 177 177 Credit protection insurance (non-life) 1 414 2 249 9 891 9 868 29 043 27 048 Note: the yields shown are net of periodizations(in millions of Euros)31.12.202231.12.2021Realised ordinary share capital, issue premiums and own shares 6 305 6 055 Reserves and Retained earnings( 3 692)( 3 481)Net income for the year attributable to shareholders of the Bank 454 226 A - Equity (prudential perspective) 3 067 2 799 Adjustments of additional valuation ( 5)( 10)Transitional period to IFRS9 122 229 Goodwill and other intangibles ( 70)( 68)Insufficiency of provisions given the expected losses - ( 9)Pension fund assets with defined benefits( 52)- Deferred tax assets and shareholdings in financial companies ( 332)( 198) Other(1)( 248)( 321)B - Regulatory adjustments to equity ( 584)( 378)C - Own principal funds level 1 - CET I (A+B) 2 483 2 422 D - Additional own funds Level 1 - Additional Tier 1 - - E - Level 1 own funds - Tier I (C+D) 2 483 2 422 Subordinated liabilities elegible for Tier II 399 399 Other elements elegible for Tier II 91 108 Regulatory adjustments for Tier II- - F - Level 2 own funds - Tier II 490 506 G - Eligible own funds (E+F) 2 973 2 928 Credit risk 19 855 22 063 Market risk 77 1 205 Operational risk 1 621 1 620 H - Risk Weighted Assets 21 553 24 888 Solvability ratioCET I ratio(C/H)11,5%9,7%Tier I ratio(E/H)11,5%9,7%Solvability ratio (G/H)13,8%11,8%Leverage ratio(2)5,2%5,2%(2) The leverage ratio results from dividing Tier 1 by the exposure measure determined under the CRR.(1) Since the end of 2020 it encompasses the adjustments to the CCA receivable, reflected at the level of reserves, and not received from the Resolution Fund. The Bank does not collect insurance premiums on behest insurers, nor does it move funds related to insurance contracts. Thus, there is no other asset, liability, income or charge to be reported, related to the insurance mediation activity carried out by the Bank, other than those already disclosed. NOTE 41 – SUBSEQUENT EVENTS • On February 1, 2023, the novobanco reported that the General and Supervisory Board approved, subject to the authorization of the competent regulatory bodies (Fit & Proper), Benjamin Dickgiesser as a new member of the Executive Board of Directors for the current warrant terminated in 2025, for the role of Chief Financial Officer. • On 13 February 2023, novobanco informed the Communication from the European Commission's Directorate General for Competition regarding the successful completion of the novobanco Restructuring Period. SEPARATE EXPLANATORY NOTES - 452 - Sem título, 1988 – Menez (Maria Inês Ribeiro da Fonseca) Oil on canvas 81 x 100cm "Untitled" transports us to a tranquil and luminous universe, with open contrasts between light and shadow. Menez suggests and deconstructs realities, in imaginary windows that multiply and let in light, interior spaces that evoke exterior spaces, patches of color that are impressions of everyday spaces and objects. CRATO, Museu Municipal do Crato Ernst & Young Audit & Associados - SROC, S.A. Avenida da República, 90-6º 1600-206 Lisboa Portugal Tel: +351 217 912 000 www.ey.com (Translation from the original document in the Portuguese language. The opinion on European Single Electronic Format is only applicable in the Portuguese Version. In case of doubt, the Portuguese version prevails) Statutory and Auditor’s Report REPORT ON THE AUDIT OF THE CONSOLIDATED FINANCIAL STATEMENTS Opinion We have audited the accompanying consolidated financial statements of Novo Banco S.A. (the Group), which comprise the Consolidated Balance Sheet as at 31 December 2022 (showing a total of 45,995,029 thousand euros and a total equity of 3,511,618 thousand euros, including a net profit for the year of 560,842 thousand euros), and the Consolidated Income Statement, the Consolidated Statement of Comprehensive Income, the Consolidated Statement of Changes in Equity and the Consolidated Cash Flow Statement for the year then ended, and notes to the consolidated financial statements, including a summary of significant accounting policies. In our opinion, the accompanying consolidated financial statements give a true and fair view, in all material respects, of the consolidated financial position of Novo Banco, S.A. as at 31 December 2022, and of its financial performance and its consolidated cash flows for the year then ended in accordance with International Financial Reporting Standards as endorsed by the European Union. Basis for opinion We conducted our audit in accordance with International Standards on Auditing (ISAs) and other technical and ethical standards and guidelines as issued by the Institute of Statutory Auditors. Our responsibilities under those standards are further described in the “Auditor’s responsibilities for the audit of the consolidated financial statements” section below. We are independent of the entities comprising the Group in accordance with the law and we have fulfilled other ethical requirements in accordance with the Institute of Statutory Auditors´ code of ethics. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Key audit matters Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the financial statements of the current period. These matters were addressed in the context of our audit of the financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. The key audit matters in the current year audit are the following: 1. Impairment for loans and advances to customers Description of the most significant assessed risks of material misstatement Summary of our response to the most significant assessed risks of material misstatement The caption Loans and advances to customers includes an accumulated impairment amount of 1,066,392 thousand euros ("K€"), with an impairment loss of 34,535 K€ recorded in the period on Impairment or reversal of impairment on financial assets not measured at fair value through profit or loss. The details of the impairment for loans and advances to customers, the related accounting policies, methodologies, definitions and assumptions are disclosed in the notes to the Our audit approach included, amongst others, the execution of the following procedures: ► obtaining the understanding, evaluating the design and testing the operational effectiveness of the existing internal control procedures in the process of quantification of impairment losses for loans and advances to customers; ► performing analytical procedures on the evolution of the balance of the impairment for loans and advances to Sociedade Anónima - Capital Social 1.340.000 euros - Inscrição n.º 178 na Ordem dos Revisores Oficiais de Contas - Inscrição N.º 20161480 na Comissão do Mercado de Valores Mobiliários Contribuinte N.º 505 988 283 - C. R. Comercial de Lisboa sob o mesmo número A member firm of Ernst & Young Global Limited 1/8 Statutory and Auditor’s Report (Translation from the original document in Portuguese language In case of doubt, the Portuguese version prevails) 31 December 2022 Description of the most significant assessed risks of material misstatement Summary of our response to the most significant assessed risks of material misstatement consolidated financial statements (Notes 7.16, 8.1, 20, 24 and 44.3). customers, comparing it with last year and with the expectations considering the changes in the loan portfolio; In order to calculate this estimate on the impairment loss of the loans and advances to customers, management made judgments such as the business model assessment, the evaluation of significant increase in credit risk, the classification as default, the definition of groups of financial assets with similar credit risk characteristics and the use of models and assumptions. For relevant exposures on an individual approach, the impairment is determined based on the judgment from Group specialists on the evaluation of credit risk. In addition to the complexity of the models, its use requires the treatment of a significant volume of data, which raises issues on its quality and availability. Given the degree of subjectivity and complexity involved, especially in a rapidly changing macroeconomic environment, the use of alternative approaches, models or assumptions may have a material impact on the value of the estimated impairment, which makes we consider this topic as key auditing matter. ► selecting a sample of customers individually assessed for impairment to evaluate the assumptions used by management in quantifying impairment. This analysis included the information containing business models, the financial situation of the debtors and the collateral appraisal reports. Inquiring of Group experts in order to obtain an understanding of the recovery strategy defined and the assumptions used; ► analyzing the documents formalizing the relevant sale operations of loans and advances to customers and assessed the impact in the financial statements; ► obtaining the understanding and evaluating the design of the model used to calculate the expected loss, testing the calculation, comparing the information used in the model with the source information, through the reconciliations prepared by the Group staff, evaluating the assumptions used to fill gaps in data, comparing the parameters used with the results of the estimation models and comparing the results with the values in the financial statements; ► evaluating the reasonableness of the parameters used in the calculation of impairment, highlighting the following procedures: i) understanding the methodology formalized and adopted by management and comparing with the one effectively used; ii) evaluating the changes to models used by the Group to determine the parameters used in the impairment calculation; iii) testing, for the Group credit portfolio, of the application of the rules to measure the significant increase in credit risk, and on a sample basis, the assessment of such classification; iv) inquiries to management’s experts responsible for models and inspection of reports from internal audit and regulators; and v) analyzing the work of the validation area and internal audit on the collective assessment models; ► reading the minutes of the Credit Impairment Committee, Broad Credit Impairment Committee and Credit Risk Monitoring Group and of the correspondence with the Resolution Fund; and ► analyzing the disclosures included in the explanatory notes to the consolidated financial statements, based on the requirements of international financial reporting standards and accounting records. 2/8 Statutory and Auditor’s Report (Translation from the original document in Portuguese language In case of doubt, the Portuguese version prevails) 31 December 2022 2. Measurement of real estate obtained through credit foreclosure Description of the most significant assessed risks of material misstatement Summary of our response to the most significant assessed risks of material misstatement The captions Investment properties and Other assets, include real estate assets of 499,567 K€ and 114,235 K€, respectively. The accounting policies and the details of these assets are disclosed in the notes to the financial statements (notes 7.18, 7.19, 8.6, 28, 31 and 42). As disclosed in note 7.18 to the consolidated financial statements, the Other assets include real estate that were essentially obtained by credit foreclosure and for which the Group has implemented a plan pursuant to its sale. These real estate assets are valued at the lower of net book value and the fair value less cost to sell. The notes to the consolidated financial statements (note 28) disclose the detail and the movement of investment properties, which are held by investment funds and which are rented to third parties for obtaining income or held to generate capital gains. The real estate assets in this category are valued at fair value which is calculated by experts registered at CMVM contracted by the management. The fair value results from an estimation process by the management that relies on judgments and assumptions and is embodied in an evaluation carried out by contracted experts. The assumptions considered include the best use that can be given to the asset, what could be considered as a comparable transaction or the potential yield that can be obtained. As the use of different valuation techniques or assumptions could lead to different estimates of fair value, with a potential material impact in the consolidated financial statements, we consider this topic as a key audit matter. Our audit approach included, amongst others, the execution of the following procedures: ► performing analytical procedures on the value of the assets included in the Investment properties and Other assets, compared with last year and with the expectation formed, which include the understanding of the variations that have occurred and identification of changes in the assumptions and methodologies; ► for a sample of real estate assets, testing the reasonableness of the methodologies and assumptions used by management’s external experts registered in CMVM. For these assets, inspection of the eventual promissory sale contracts and the certificate of land register; ► For the more significant real estate transactions: ► inspecting the real estate sale contracts; ► analyzing the Group internal documentation on the assessment of conflicts of interest and of the competitive sale process; ► for the real estate assets in the scope of the contingent capital agreement, analyzing the Resolution Fund approvals; and ► testing the derecognition of the assets and the calculation of gains or losses recorded; ► inquiries to the management experts on the assumptions used for a sample of assets and read the minutes of the executive board; ► Inquiring the management about potential sale operations and, when applicable, examining the offers received on the assets and comparing with the fair value calculated by the management; and ► analyzing the disclosures included in the explanatory notes to the consolidated financial statements, based on the requirements of international financial reporting standards and accounting records. 3. Disclosure of contingent liabilities Description of the most significant assessed risks of material misstatement Summary of our response to the most significant assessed risks of material misstatement The notes to the consolidated financial statements disclose the contingent liabilities (Note 38) that may represent a possible obligation to the Group resulting from past events. The occurrence of these obligations is dependent on one or more future Our audit approach included, amongst others, the execution of the following procedures: ► reading the minutes of the management bodies of the Group, the correspondence with regulators and with the Resolution Fund; 3/8 Statutory and Auditor’s Report (Translation from the original document in Portuguese language In case of doubt, the Portuguese version prevails) 31 December 2022 Description of the most significant assessed risks of material misstatement Summary of our response to the most significant assessed risks of material misstatement ► analyzing the responses to external confirmations from external legal experts of the Group and inquiries to the management and to the legal experts on the contingent liabilities of the Group; ► inspecting the documentation of the Resolution Fund, in particular the annual report of 2021 and the public communications from the Resolution Fund; and ► analyzing the disclosures contained in the consolidated financial statements, based on the requirements of international financial reporting standards and in the accounting records. events that are not entirely under the control of the Group. The accounting policies for the recognition of provision or disclosure of contingent liabilities are described in note 7.28 and the main estimates and assumptions in note 8.5. The main contingent liabilities arise from various situations, most notably: ► notwithstanding the clarifications and existing neutralization guarantees, potential adjustments that may occur to "excluded liabilities” payable by Banco Espírito Santo, S.A. ("BES") and that have not been transferred to the Group; ► the existence of litigation resulting from the resolution measure applied to BES, which, in spite of existing guarantees, may lead to effects or impacts in the Group which not possible to determine or quantify; ► existing lawsuits following the closing of the sale and purchase agreement of the Group and the setting up of the contingent capital mechanism, signed between the Resolution Fund and Lone Star; ► the Group participates in the Resolution Fund, which, as a result of the measures implemented in the past, presents uncertainties related to ongoing litigation and the risk of a possible insufficiency of resources to ensure compliance with its responsibilities. Management expects that the Group will not be required to make special contributions or any other kind of extraordinary contributions to fund resolution measures applied to the BES and Banif, as well as the contingent capital mechanism and the indemnities mechanism. There are, also, divergent views between the Group and the Resolution Fund regarding the amount requested to this Fund that the Group considers due in accordance with the contingent capital agreement. The risk assessment and the assumptions are matters of judgment by the Management of the Group which requires complex analysis using internal and external legal experts. Given the relevance of these contingencies for the Group, we consider this topic as a key audit matter. 4/8 Statutory and Auditor’s Report (Translation from the original document in Portuguese language In case of doubt, the Portuguese version prevails) 31 December 2022 4. Responsibilities with pensions Description of the most significant assessed risks of material misstatement Summary of our response to the most significant assessed risks of material misstatement The responsibilities with pensions amount to 1,389,421 K€, with a total of 515,423 K€ recognizes in the other comprehensive income as an actuarial gain resulting from the update of the actuarial assumptions. The accounting policies for the recognition of responsibilities with pensions are disclosed in the notes do the financial statements (Notes 6.26, 7.4 and 15). The discount rate used in the calculation of the responsibilities with pensions is derived based on market yields of high quality corporate bonds, in the currency on which the liabilities will be settled, with a maturity similar to the responsibilities within the pension plan. Estimating the responsibilities with pensions requires the use of actuarial assumptions, which if different from the ones used by Management, could result in a materially different amount. For this reason, we consider this topic as a key audit matter. Our audit approach included, amongst others, the execution of the following procedures: ► Inspection of the actuarial note as of December 31, 2022 prepared by the independent actuary contracted by the Management; ► inquiries of the key personnel of the Bank and with the independent actuary in order to understand the assumptions used; ► assessment of the assumptions used as of December 31, 2022, in particular the discount rate, with the assistance of our internal actuarial specialists; and ► analyzing the disclosures contained in the financial statements, based on the requirements of international financial reporting standards and in the accounting records. Responsibilities of management and the supervisory board for the consolidated financial statements Management is responsible for: ► the preparation of consolidated financial statements that presents a true and fair view of the Group´s financial position, financial performance and cash flows in accordance with International Financial Reporting Standards as endorsed by the European Union; ► the preparation of the Management Report, the Corporate Governance Report and the Non-financial statement in accordance with the laws and regulations; ► designing and maintaining an appropriate internal control system to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error; ► the adoption of accounting policies and principles appropriate in the circumstances; and ► assessing the Group’s ability to continue as a going concern, and disclosing, as applicable, matters related to going concern that may cast significant doubt on the Group´s ability to continue as a going concern. The supervisory body is responsible for overseeing the Group’s financial reporting process. Auditor’s responsibilities for the audit of the consolidated financial statements Our objectives are to obtain reasonable assurance about whether the consolidated financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with ISAs will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these financial statements. As part of an audit in accordance with ISAs, we exercise professional judgment and maintain professional scepticism throughout the audit. We also: 5/8 Statutory and Auditor’s Report (Translation from the original document in Portuguese language In case of doubt, the Portuguese version prevails) 31 December 2022 ► identify and assess the risks of material misstatement of the consolidated financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control; ► obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Group’s internal control; ► evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by management; ► conclude on the appropriateness of management’s use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Group ’s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor’s report to the related disclosures in the financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor’s report. However, future events or conditions may cause the Group to cease to continue as a going concern; ► evaluate the overall presentation, structure and content of the consolidated financial statements, including the disclosures, and whether the financial statements represent the underlying transactions and events in a manner that achieves fair presentation; ► obtain sufficient and appropriate audit evidence regarding the financial information of the entities or business activities within the Group to express an opinion on the consolidated financial statements. We are responsible for the direction, supervision and performance of the group audit. We remain solely responsible for our audit opinion; ► communicate with those charged with governance, including the supervisory body, regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit; ► from the matters communicated with those charged with governance, including the supervisory body, we determine those matters that were of most significance in the audit of the consolidated financial statements of the current period and are therefore the key audit matters. We describe these matters in our auditor’s report unless law or regulation precludes public disclosure about the matter; and ► we also provide the supervisory body with a statement that we have complied with relevant ethical requirements regarding independence, and to communicate all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, the measures we took to eliminate those matters or the related safeguards we applied. Our responsibility also includes the verification of the consistency of the Management Report with the consolidated financial statements, and the verifications under nr. 4 and nr. 5 of article 451 of the Commercial Companies Code regarding corporate governance, as well as verifying that the Non-financial statement was presented. REPORT ON OTHER LEGAL AND REGULATORY REQUIREMENTS On the Management Report Pursuant to article 451, nr. 3, paragraph e) of the Commercial Companies Code, it is our opinion that the Management Report was prepared in accordance with the applicable legal and regulatory requirements and the information contained therein is consistent with the audited consolidated financial statements and, having regard to our knowledge and assessment over the Group, we have not identified any material misstatement. As mentioned in article 451. Nr. 7 of the Commercial Companies Code, this opinion is not applicable to the Non- financial statement included in the Management Report. 6/8 Statutory and Auditor’s Report (Translation from the original document in Portuguese language In case of doubt, the Portuguese version prevails) 31 December 2022 On the Corporate Governance Report Pursuant to article 451, nr. 4 of the Commercial Companies Code, in our opinion, the “Corporate Governance” chapter included in the Management Report includes the information required to the Group to provide as per article 29-H of the Securities Code, and we have not identified material misstatements on the information provided therein in compliance with paragraphs c), d), f), h), i) and m) of nr.1 of the said article. On the Non-financial statement Pursuant to article 451, nr. 6 of the Commercial Companies Code, we inform that the Group prepared the Sustainability Report separated from the Management Report, which includes the Non-financial statement, as required in article 508-G of the Commercial Companies Code, being the same disclosed together with Management Report. On additional items set out in article 10 of the Regulation (EU) nr. 537/2014 Pursuant to article 10 of the Regulation (EU) nr. 537/2014 of the European Parliament and of the Council, of 16 April 2014, and in addition to the key audit matters mentioned above, we also report the following: ► We were appointed as auditors of Novo Banco, S.A. (Group´s Parent Entity) for the first time in the shareholders' general meeting held on 21 December 2017 for a mandate from 2018 to 2020. We were reappointed in the shareholders' general meeting held on 22 October 2020 for a second mandate from 2021 to 2024; ► Management has confirmed that they are not aware of any fraud or suspicion of fraud having occurred that has a material effect on the financial statements. In planning and executing our audit in accordance with ISAs we maintained professional skepticism and we designed audit procedures to respond to the possibility of material misstatement in the consolidated financial statements due to fraud. As a result of our work we have not identified any material misstatement to the consolidated financial statements due to fraud; ► We confirm that our audit opinion is consistent with the additional report that we have prepared and delivered to the supervisory body of the Group on this date; and ► We declare that we have not provided any prohibited services as described in article 5 of the Regulation (EU) nr. 537/2014 of the European Parliament and of the Council, of 16 April 2014, and we have remained independent of the Group in conducting the audit. European Single Electronic Format (ESEF) The accompanying consolidated financial statements of Novo Banco, S.A. for the year ended 31 December 2022 must comply with the applicable requirements set out in the Commission Delegated Regulation (EU) 2019/815 of 17 December 2018 (ESEF Regulation). Management is responsible for preparing and disclosing the annual report in accordance with the ESEF Regulation. Our responsibility is to obtain reasonable assurance about whether the consolidated financial statements, included in the annual report, are presented in accordance with the requirements set out in the ESEF Regulation. Our procedures considered the OROC Technical Application Guide (GAT 20) on report in ESEF and included, among others: ► gaining understanding of the financial reporting process, including the submission of the annual report in valid XHTML format; and ► the identification and evaluation of the risks of material distortion associated with the marking-up of the information of the financial statements, in XBRL format using iXBRL technology. This evaluation was based on the understanding of the process implemented by the Group to mark-up the information. In our opinion, the accompanying consolidated financial statements included in the annual report are presented, in all material respects, in accordance with the requirements set out in the ESEF Regulation. Lisbon, March XX, 2023 7/8 Statutory and Auditor’s Report (Translation from the original document in Portuguese language In case of doubt, the Portuguese version prevails) 31 December 2022 Ernst & Young Audit & Associados – SROC, S.A. Sociedade de Revisores Oficiais de Contas Represented by: (Signed) António Filipe Dias da Fonseca Brás - ROC nr. 1661 Registered with the Portuguese Securities Market Commission under license nr. 20161271 8/8 Ernst & Young Audit & Associados - SROC, S.A. Avenida da República, 90-6º 1600-206 Lisboa Portugal Tel: +351 217 912 000 www.ey.com (Translation from the original document in the Portuguese language. The opinion on European Single Electronic Format is only applicable in the Portuguese Version. In case of doubt, the Portuguese version prevails) Statutory and Auditor’s Report REPORT ON THE AUDIT OF THE FINANCIAL STATEMENTS Opinion We have audited the accompanying financial statements of Novo Banco, S.A. (the Bank), which comprise the Balance Sheet as at 31 December 2022 (showing a total of 45,464,048 thousand euros and a total equity of 3,066,948 thousand euros, including a net profit for the year of 453,830 thousand euros), and the Income Statement, the Statement of Comprehensive Income, the Statement of Changes in Equity and the Cash Flow Statement for the year then ended, and notes to the financial statements, including a summary of significant accounting policies. In our opinion, the accompanying financial statements give a true and fair view, in all material respects, of the financial position of Novo Banco, S.A. as at 31 December 2022, and of its financial performance and its cash flows for the year then ended in accordance with International Financial Reporting Standards as endorsed by the European Union. Basis for opinion We conducted our audit in accordance with International Standards on Auditing (ISAs) and other technical and ethical standards and guidelines as issued by the Institute of Statutory Auditors. Our responsibilities under those standards are further described in the “Auditor’s responsibilities for the audit of the financial statements” section below. We are independent of the Bank in accordance with the law and we have fulfilled other ethical requirements in accordance with the Institute of Statutory Auditors´ code of ethics. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Key audit matters Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the financial statements of the current period. These matters were addressed in the context of our audit of the financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. The key audit matters in the current year audit are the following: 1. Impairment for loans and advances to customers Description of the most significant assessed risks of material misstatement Summary of our response to the most significant assessed risks of material misstatement The caption Loans and advances to customers includes an accumulated impairment amount of 1,057,567 thousand euros ("K€"), with an impairment loss of 36,869 K€ recorded in the period on Impairment or reversal of impairment on financial assets not measured at fair value through profit or loss. The details of the impairment for loans and advances to customers, the related accounting policies, methodologies, definitions and assumptions are disclosed in the notes to the financial statements (Notes 6.16, 7.1, 18, 22 and 39.3) Our audit approach included, amongst others, the execution of the following procedures: ► obtaining the understanding, evaluating the design and testing the operational effectiveness of the existing internal control procedures in the process of quantification of impairment losses for loans and advances to customers; ► performing analytical procedures on the evolution of the balance of the impairment for loans and advances to customers, comparing it with last year and with the expectations, considering the changes in the loan portfolio; Sociedade Anónima - Capital Social 1.340.000 euros - Inscrição n.º 178 na Ordem dos Revisores Oficiais de Contas - Inscrição N.º 20161480 na Comissão do Mercado de Valores Mobiliários Contribuinte N.º 505 988 283 - C. R. Comercial de Lisboa sob o mesmo número A member firm of Ernst & Young Global Limited Statutory and Auditor’s Report (Translation from the original document in Portuguese language In case of doubt, the Portuguese version prevails) 31 December 2022 Description of the most significant assessed risks of material misstatement Summary of our response to the most significant assessed risks of material misstatement In order to calculate this estimate on the impairment loss of the loans and advances to customers, management made judgments such as the business model assessment, the evaluation of significant increase in credit risk, the classification as default, the definition of groups of financial assets with similar credit risk characteristics and the use of models and assumptions. For relevant exposures on an individual approach, the impairment is determined based on the judgment from Bank specialists on the evaluation of credit risk. In addition to the complexity of the models, its use requires the treatment of a significant volume of data, which raises issues on its quality and availability. Given the degree of subjectivity and complexity involved, especially in a rapidly changing macroeconomic environment, the use of alternative approaches, models or assumptions may have a material impact on the value of the estimated impairment, which makes we consider this topic as key auditing matter. ► selecting a sample of customers individually assessed for impairment to evaluate the assumptions used by management in quantifying impairment. This analysis included the information containing business models, the financial situation of the debtors and the collateral appraisal reports. Inquiring of Bank experts in order to obtain an understanding of the recovery strategy defined and the assumptions used. ► analyzing the documents formalizing the relevant sale operations of loans and advances to customers and assessed the impact in the financial statements; ► obtaining the understanding and evaluating the design of the model used to calculate the expected loss, testing the calculation, comparing the information used in the model with the source information, through the reconciliations prepared by the Bank staff, evaluating the assumptions used to fill gaps in data, comparing the parameters used with the results of the estimation models and comparing the results with the values in the financial statements; ► evaluating the reasonableness of the parameters used in the calculation of impairment, highlighting the following procedures: i) understanding the methodology formalized and adopted by management and comparing with the one effectively used; ii) evaluating the changes to models used by the Bank to determine the parameters used in the impairment calculation; iii) testing, for the Bank’s credit portfolio, of the application of the rules to measure the significant increase in credit risk, and on a sample basis, the assessment of such classification; iv) inquiries to management’s experts responsible for models and inspection of reports from internal audit and regulators; and v) analyzing the work of the validation area and internal audit on the collective assessment models; ► reading the minutes of the Credit Impairment Committee, Broad Credit Impairment Committee and Credit Risk Monitoring Group and of the correspondence with the Resolution Fund; and ► analyzing the disclosures included in the explanatory notes to the financial statements, based on the requirements of international financial reporting standards and accounting records. 2/7 Statutory and Auditor’s Report (Translation from the original document in Portuguese language In case of doubt, the Portuguese version prevails) 31 December 2022 2. Measurement of real estate obtained through credit foreclosure Description of the most significant assessed risks of material misstatement Summary of our response to the most significant assessed risks of material misstatement The caption Other assets includes real estate assets of 108,242 K€. The accounting policies and the details of these assets are disclosed in the notes to the financial statements (notes 6.18, 7.6 and 28). As disclosed in note 6.18 to the financial statements, the Other assets include real estate that were essentially obtained by credit foreclosure and for which the Bank has implemented a plan pursuant to its sale. These real estate assets are valued at the lower of net book value and the fair value less cost to sell. The fair value results from an estimation process by the management that relies on judgments and assumptions and is embodied in an evaluation carried out by contracted experts. The assumptions considered include the best use that can be given to the asset, what could be considered as a comparable transaction or the potential yield that can be obtained. As the use of different valuation techniques or assumptions could lead to different estimates of fair value with a potential material impact in the financial statements, we consider this topic as a key audit matter. Our audit approach included, amongst others, the execution of the following procedures: ► performing analytical procedures on the value of the assets included in the Other assets, compared with last year and with the expectation formed, which include the understanding of the variations that have occurred and identification of changes in the assumptions and methodologies; ► for a sample of real estate assets, testing the reasonableness of the methodologies and assumptions used by management’s external experts registered in CMVM. For these assets, inspection of the eventual promissory sale contracts and the certificate of land register; ► For the more significant real estate transactions: ► inspecting the real estate sale contracts; ► analyzing the Bank´s internal documentation on the assessment of conflicts of interest and of the competitive sale process; ► for the real estate assets in the scope of the contingent capital agreement, analyzing the Resolution Fund approvals; and ► testing the derecognition of the assets and the calculation of gains or losses recorded; ► inquiries to the management experts on the assumptions used for a sample of assets and read the minutes of the executive board; ► Inquiring the management about potential sale operations and, when applicable, examining the offers received on the assets and comparing with the fair value calculated by the management; and ► analyzing the disclosures included in the explanatory notes to the financial statements, based on the requirements of international financial reporting standards and accounting records. 3. Disclosure of contingent liabilities Description of the most significant assessed risks of material misstatement Summary of our response to the most significant assessed risks of material misstatement The notes to the financial statements disclose the contingent liabilities (note 35) that may represent a possible obligation to the Bank resulting from past events. The occurrence of these obligations is dependent on one or more future events that are not entirely under the control of the Bank. Our audit approach included, amongst others, the execution of the following procedures: ► reading the minutes of the management bodies of the Bank, the correspondence with regulators and with the Resolution Fund; 3/7 Statutory and Auditor’s Report (Translation from the original document in Portuguese language In case of doubt, the Portuguese version prevails) 31 December 2022 Description of the most significant assessed risks of material misstatement Summary of our response to the most significant assessed risks of material misstatement ► analyzing the responses to external confirmations from external legal experts of the Bank and inquiries to the management and to the legal experts on the contingent liabilities of the Bank ; ► inspecting the documentation of the Resolution Fund, in particular the annual report of 2021 and the public communications from the Resolution Fund; and ► analyzing the disclosures contained in the financial statements, based on the requirements of international financial reporting standards and in the accounting records. The accounting policies for the recognition of provision or disclosure of contingent liabilities are described in note 6.27 and the main estimates and assumptions in note 7.5. The main contingent liabilities arise from various situations, most notably: ► notwithstanding the clarifications and existing neutralization guarantees, potential adjustments that may occur to "excluded liabilities” payable by Banco Espírito Santo, S.A. ("BES") and that have not been transferred to the Bank; ► the existence of litigation resulting from the resolution measure applied to BES, which, in spite of existing guarantees, may lead to effects or impacts in the Bank which not possible to determine or quantify; ► existing lawsuits following the closing of the sale and purchase agreement of the Bank and the setting up of the contingent capital mechanism, signed between the Resolution Fund and Lone Star; ► the Bank participates in the Resolution Fund, which, as a result of the measures implemented in the past, presents uncertainties related to ongoing litigation and the risk of a possible insufficiency of resources to ensure compliance with its responsibilities. Management expects that the Bank will not be required to make special contributions or any other kind of extraordinary contributions to fund resolution measures applied to the BES and Banif, as well as the contingent capital mechanism and the indemnities mechanism. There are, also, divergent views between the Bank and the Resolution Fund regarding the amount requested to this Fund that the Bank considers due in accordance with the contingent capital agreement. The risk assessment and the assumptions are matters of judgment by the Management of the Bank, which requires complex analysis using internal and external legal experts. Given the relevance of these contingencies for the Bank, we consider this topic as a key audit matter. 4/7 Statutory and Auditor’s Report (Translation from the original document in Portuguese language In case of doubt, the Portuguese version prevails) 31 December 2022 4. Responsibilities with pensions Description of the most significant assessed risks of material misstatement Summary of our response to the most significant assessed risks of material misstatement The responsibilities with pensions amount to 1,389,421 K€, with a total of 515,423 K€ recognizes in the other comprehensive income as an actuarial gain resulting from the update of the actuarial assumptions. The accounting policies for the recognition of responsibilities with pensions are disclosed in the notes do the financial statements (Notes 6.26, 7.4 and 15). The discount rate used in the calculation of the responsibilities with pensions is derived based on market yields of high quality corporate bonds, in the currency on which the liabilities will be settled, with a maturity similar to the responsibilities within the pension plan. Estimating the responsibilities with pensions requires the use of actuarial assumptions, which if different from the ones used by Management, could result in a materially different amount. For this reason, we consider this topic as a key audit matter. Our audit approach included, amongst others, the execution of the following procedures: ► Inspection of the actuarial note as of December 31, 2022 prepared by the independent actuary contracted by the Management; ► inquiries of the key personnel of the Bank and with the independent actuary in order to understand the assumptions used; ► assessment of the assumptions used as of December 31, 2022, in particular the discount rate, with the assistance of our internal actuarial specialists; and ► analyzing the disclosures contained in the financial statements, based on the requirements of international financial reporting standards and in the accounting records. Responsibilities of management and the supervisory board for the financial statements Management is responsible for: ► the preparation of financial statements that presents a true and fair view of the Bank´s financial position, financial performance and cash flows in accordance with International Financial Reporting Standards as endorsed by the European Union; ► the preparation of the Management Report, the Corporate Governance Report and the Non-financial statement in accordance with the laws and regulations; ► designing and maintaining an appropriate internal control system to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error; ► the adoption of accounting policies and principles appropriate in the circumstances; and ► assessing the Bank’s ability to continue as a going concern, and disclosing, as applicable, matters related to going concern that may cast significant doubt on the Bank´s ability to continue as a going concern. The supervisory body is responsible for overseeing the Bank’s financial reporting process. Auditor’s responsibilities for the audit of the financial statements Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with ISAs will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these financial statements. As part of an audit in accordance with ISAs, we exercise professional judgment and maintain professional scepticism throughout the audit. We also: ► identify and assess the risks of material misstatement of the financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material 5/7 Statutory and Auditor’s Report (Translation from the original document in Portuguese language In case of doubt, the Portuguese version prevails) 31 December 2022 misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control; ► obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Bank’s internal control; ► evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by management; ► conclude on the appropriateness of management’s use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Bank’s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor’s report to the related disclosures in the financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor’s report. However, future events or conditions may cause the Bank to cease to continue as a going concern; ► evaluate the overall presentation, structure and content of the financial statements, including the disclosures, and whether the financial statements represent the underlying transactions and events in a manner that achieves fair presentation; ► communicate with those charged with governance, including the supervisory body, regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit; ► from the matters communicated with those charged with governance, including the supervisory body, we determine those matters that were of most significance in the audit of the financial statements of the current period and are therefore the key audit matters. We describe these matters in our auditor’s report unless law or regulation precludes public disclosure about the matter; and ► we also provide the supervisory body with a statement that we have complied with relevant ethical requirements regarding independence, and to communicate all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, the measures we took to eliminate those matters or the related safeguards we applied. Our responsibility also includes the verification of the consistency of the Management Report with the financial statements, and the verifications under nr. 4 and nr. 5 of article 451 of the Commercial Companies Code regarding corporate governance, as well as verifying that the Non-financial statement was presented. REPORT ON OTHER LEGAL AND REGULATORY REQUIREMENTS On the Management Report Pursuant to article 451, nr. 3, paragraph e) of the Commercial Companies Code, it is our opinion that the Management Report was prepared in accordance with the applicable legal and regulatory requirements and the information contained therein is consistent with the audited financial statements and, having regard to our knowledge and assessment over the Bank, we have not identified any material misstatement. As mentioned in article 451. Nr. 7 of the Commercial Companies Code, this opinion is not applicable to the Non- financial statement included in the Management Report. On the Corporate Governance Report Pursuant to article 451, nr. 4 of the Commercial Companies Code, in our opinion, the “Corporate Governance” chapter included in the Management Report includes the information required to the Bank to provide as per article 29-H of the Securities Code, and we have not identified material misstatements on the information provided therein in compliance with paragraphs c), d), f), h), i) and m) of nr.1 of the said article. 6/7 Statutory and Auditor’s Report (Translation from the original document in Portuguese language In case of doubt, the Portuguese version prevails) 31 December 2022 On the Non-financial statement Pursuant to article 451, nr. 6 of the Commercial Companies Code, we inform that the Bank prepared the Sustainability Report separated from the Management Report, which includes the Non-financial statement, as required in article 508-G of the Commercial Companies Code, being the same disclosed together with Management Report. On additional items set out in article 10 of the Regulation (EU) nr. 537/2014 Pursuant to article 10 of the Regulation (EU) nr. 537/2014 of the European Parliament and of the Council, of 16 April 2014, and in addition to the key audit matters mentioned above, we also report the following: ► We were appointed as auditors of the Bank for the first time in the shareholders' general meeting held on 21 December 2017 for a mandate from 2018 to 2020. We were reappointed in the shareholders' general meeting held on 22 October 2020 for a second mandate from 2021 to 2024; ► Management has confirmed that they are not aware of any fraud or suspicion of fraud having occurred that has a material effect on the financial statements. In planning and executing our audit in accordance with ISAs we maintained professional skepticism and we designed audit procedures to respond to the possibility of material misstatement in the financial statements due to fraud. As a result of our work we have not identified any material misstatement to the financial statements due to fraud; ► We confirm that our audit opinion is consistent with the additional report that we have prepared and delivered to the supervisory body of the Bank on this date; and ► We declare that we have not provided any prohibited services as described in article 5 of the Regulation (EU) nr. 537/2014 of the European Parliament and of the Council, of 16 April 2014, and we have remained independent of the Bank in conducting the audit. European Single Electronic Format (ESEF) The accompanying financial statements of the Bank for the year ended 31 December 2022 must comply with the applicable requirements set out in the Commission Delegated Regulation (EU) 2019/815 of 17 December 2018 (ESEF Regulation). Management is responsible for preparing and disclosing the annual report in accordance with the ESEF Regulation. Our responsibility is to obtain reasonable assurance about whether the financial statements, included in the annual report, are presented in accordance with the requirements set out in the ESEF Regulation. Our procedures considered the OROC Technical Application Guide (GAT 20) on report in ESEF and included, among others gaining understanding of the financial reporting process, including the submission of the annual report in valid XHTML format. In our opinion, the accompanying financial statements included in the annual report are presented, in all material respects, in accordance with the requirements set out in the ESEF Regulation. Lisbon, March xx, 2023 Ernst & Young Audit & Associados – SROC, S.A. Sociedade de Revisores Oficiais de Contas Represented by: (Signed) António Filipe Dias da Fonseca Brás - ROC nr. 1661 Registered with the Portuguese Securities Market Commission under license nr. 20161271 7/7 Evaluation Report from the General and Supervisory Board on the adequacy and effectiveness of the organizational culture in place in Group Novo Banco, S.A. and the governance and internal control frameworks as defined in Article 60 of Notice N 3/2020 from the Bank of Portugal INTRODUCTION 1. This evaluation report is presented to comply with Article 60 of Notice N 3/2020 from the Bank of Portugal (“Notice”) and belongs to the annual report on the evaluation of the adequacy and effectiveness of the organizational culture in place in Group Novo Banco, S.A. (the “Group”) and the governance and internal control frameworks with reference to the period from December 1, 2021 to November 30, 2022. RESPONSIBILITIES 2. The management and the supervisory bodies are responsible, under their respective competencies, for promoting the existence in the Group of an organizational culture supported in high ethical standards which: ► promotes an integral risk culture which encompasses all activity areas of the Group and ensures the identifications, assessment, monitoring and control of the risks that the Group is or can become exposed to; ► promotes a professional conduct of prudence and responsibility to be observed by all employees and members of the management and supervisory boards under their roles and aligned with high ethical standards documented in a code of conduct specific for the Group; ► reinforces the reputation and levels of confidence in the Group, both internally and in its relations with customers, investors, supervisory bodies and other third parties. It is also the responsibility of the management and supervisory bodies to ensure that: the organizational culture of the Group, and the governance and internal control frameworks, including the remuneration actions and policies and other matters included in the Notice, are adequate and effective and promote a sound and prudent management; the Group evaluates the adequacy and effectiveness of the organizational culture in place and the governance and internal control frameworks and issues a yearly report on the results of that evaluation (the “Report”). 3. For the purposes of inclusion in the Report, it is our responsibility to issue this report prepared in accordance with paragraphs b), c) and d) of nº1 of article 58 of the Notice. ACTIVITIES PERFORMED 4. To comply with our responsibilities regarding the organizational culture and the governance and internal control frameworks, we performed the following activities, for which we present a summary: ► Maintained regular interactions with the Executive Board of Directors. For that purpose, we met with members of the Executive Board of Directors to clarify issues and we read the minutes of the meetings of the Executive Board of Directors. During these meetings, the situation of the Group was presented to us, including matters related to the subsidiaries, which allowed us to understand the internal controls in place at Group level; ► We met with the managers responsible for the Risk Management, Compliance, and Internal Audit functions at Group level; we read the annual reports of these control functions; we reviewed the statement of independence and inquired if there was any fact or circumstance which may impair that ANNUAL REPORT 2022 independence. Regarding the internal audit annual report, we took into consideration the validation of the classification of internal control deficiencies; ► We assessed the audit plan for 2022 and the results of the internal audit actions described in the reports; ► We analyzed the Group Novo Banco Self Assessment – Conclusions & Action Plan Report on the implementation of the Notice in the Group, and met with the managers responsible for this report; ► We met with the external auditor and analyzed the contents of the Audit report, Impairment Reports, Asset Safekeeping Report, Additional Report to the Supervisory Board, the interim limited review reports for March 31, June 30, and September 30 of 2022 and the preliminary version of the Factual Findings Report to be issued by Ernst & Young – Audit & Associados – SROC, S.A., including the test on the classification of the deficiencies. We reviewed the content of the communication of significant deficiencies of internal control of the Group sent by the external auditor on December 12, 2022; ► We read the Group Report and the individual reports of the relevant subsidiaries, including the deficiencies and planned measures to correct them, and assessed the status of those measures; ► We assessed the coherence between the internal control systems of the subsidiaries, having analyzed the content of the evaluation reports of the supervisory boards of the relevant subsidiaries, in addition to the procedures mentioned above. INHERENT LIMITATIONS 5. The General and Supervisory Board is aware of the inherent limitations of any internal control framework which, irrespective of its adequacy and effectiveness, may only provide reasonable assurance to the management and supervisory bodies on the purposes related to organizational culture, governance, and internal control systems, as well as other matters described in the Notice. Additionally, the existence of an appropriate internal control regarding the financial and prudential reporting is not in itself sufficient to ensure the reliability of the disclosed financial and prudential information. In fact, there are prior processes in the different operational and support areas of the Group, where it is critical to have an adequate internal control in place to ensure the reliability of the information provided to the areas responsible for the prudential and financial reporting. Therefore, given the inherent limitations on any control system, deficiencies, fraud, or errors may occur without being detected. Given the usual dynamic in any internal control system, any conclusion on the adequacy or effectiveness of that system cannot be projected for future periods, as there is the risk that the controls and procedures in place may become inappropriate due to changes in the context or deterioration in the compliance with the policies, procedures, and controls. The evaluation of the impacts of the deficiencies is an estimate of the Executive Board of Directors and follows the criteria defined by the Group and the process to classify the deficiencies according to the criteria and assumptions. Given the judgement associated with the definition of the criteria, the assumptions and in the evaluation of the impacts, different classification could be given to the deficiencies in case different criteria or assumptions were defined. Equally, an evaluation performed on another date on the same deficiency could reach different conclusions, and the impact of a deficiency can materialize differently from what was estimated. CONCLUSION 6. As described in the Report, there are deficiencies classified as F3 – High risk and F4 – Severe, which can lead to a high or very high impact on the financial position, capital requirements, governance, leverage, business model or risk monitoring of the Group. 7. For each of the deficiencies a mitigation plan and a proposed implementation timeline was presented to us. Considering the importance of the matter in the Group, these deficiencies are being monitored by the internal structure, by the internal control functions and by the Executive Board of Directors, and the implementation status will be regularly reviewed by the General and Supervisory Board. ANNUAL REPORT 2022 8. The Group Novo Banco Self Assessment – Conclusions & Action Plan report identifies several matters of the Notice where the Group is still in the process of implementing the measures to adequately comply with it. 9. Considering the activities we performed, which are described in paragraph 4 above, and except for the eventual impact of the matters described in paragraphs 6 to 7, notwithstanding the ongoing implementation of the new requirements of the Notice and with reasonable assurance in respect to the material aspects: ► In our opinion, the organizational culture and the governance and internal control frameworks of Novo Banco, S.A. were adequate and effective on November 30, 2022. ► We appreciated positively the completeness status of the defined measures from December 1, 2021 to November 30, 2022 to correct the deficiencies identified in the Report. ► We declare that the classification given to the deficiencies classified as level F3 “High” or level F4 “Severe” is adequate. ► In our opinion, the internal control functions, including the outsourced operational procedures, are performed with adequate quality and independence. ► The financial and prudential reporting processes were, insofar as we could appreciate due to the procedures inherent in our responsibilities, reliable from December 1, 2021 to November 30, 2022. ► The processes to produce information disclosed to the public by the Group due to legal or regulatory requirements, including the financial and prudential disclosures were, insofar as we could appreciate due to the procedures inherent in our responsibilities, reliable from December 1, 2021 to November 30, 2022. ► The requirements to disclose information to the public resulting from applicable law or regulation and related to the matters described in the Notice were, insofar as we could appreciate due to the procedures inherent in our responsibilities, adequately complied with from December 1, 2021 to November 30, 2022. ► The internal control systems of the subsidiaries were, insofar as we could appreciate due to the procedures inherent in our responsibilities, coherent with the internal control system of the parent; ► The Group has no foreign branches or offshore institutions with remuneration policies, as these entities do not make payments of remuneration to any member of governing bodies or personnel. OTHER MATTERS 10. This Evaluation Report is prepared and issued solely for the information of the Executive Board of Directors of the Group and to be presented to the Bank of Portugal as required by the Notice and as an integral part of the Report. Therefore, it cannot be used for any other purpose, or read outside the context of the Report, nor can it be presented to third parties without our previous written consent. (This report was approved by the General and Supervisory Board at a meeting held on December 15, 2022) Lisbon, December 15, 2022 ANNUAL REPORT 2022 Report of the General and Supervisory Board and 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 31 December 2022 Pursuant to the mandate we have been given and in compliance with the provisions of paragraphs h) and q) of paragraph 1 of article 441 and article 444 of the Commercial Companies Code and the Articles of Association of Novo Banco, S.A. ("novobanco"), the General and Supervisory Board (“GSB”) is required to issue the Annual Report on the activity developed and the Financial Affairs (Audit) Committee is required to issue an opinion on the Management Report and the separate and consolidated financial statements of novobanco, which comprise the separate and consolidated income statement and separate and consolidated statement of comprehensive income, separate and consolidated balance sheet, separate and consolidated statement of changes in equity and separate and consolidated statement of cash flows and the respective Annexes, as well as on the proposed application of Results, presented by the Executive Board of Directors (“EBD”) of novobanco, for the year ended on 31 December 2022. 1. Report of the General and Supervisory Board for the year 2022 1.1. Composition and scope In accordance with the applicable law, novobanco’s bylaws and best practices at the date of this Annual Report, six of the ten members who comprise the GSB, including the Chairman, are independent. A new independent member was approved at the Shareholders meeting on the 22nd December 2022 for mandate 2021-2024, with the approval process still ongoing. The GSB has the powers given to it by law, by the Bylaws and by its own regulation, including the supervision of all matters related to risk management, compliance and internal audit. During 2022, we monitored the activity of the Bank and its most significant subsidiaries. The activity of the General and Supervisory Board is directly supported by 5 (five) Committees, to which some of its powers have been delegated, namely, the Financial Affairs (Audit) Committee, the Risk Committee, the Compliance Committee, the Nomination Committee and the Remuneration Committee, as provided for in Articles 6 and 16 of the statutes of novobanco and in the GSB Regulations. These Committees are chaired and composed by members of the GSB and can also have the presence of EBD members or other managers responsible for the areas covered by the activities of these Committees. The GSB meets monthly and additionally when required, performing the duties assigned to it by law, by the Bylaws of the Bank and by its own regulation. 1.2. Activity undertaken in 2022 General and Supervisory Board During the year 2022, the GSB held 15 meetings, where several issues were discussed, analyzed and approved. These issues included the separate and consolidated financial statements of novobanco for the year ended 31 December 2022 and the Half Year 2022 consolidated financial statements as well as the financial results for the first and third quarters of 2022, the 2022-2024 Strategic and Medium Term-Plans, the NPA Plan for 2022-2024 and the strategy and risk appetite for 2022. Other matters also included the approval and/or monitoring of the sale of assets by novobanco, the closure of the Spanish Branch and the opening of a Representative Office in that country, the sale of non-performing loans (NPLs) portfolios and related assets (Projects Crow and Phoenix), as well as participation in Project Crow’s syndicated loan, the sale of REOs portfolios and individual assets (Logistics Portfolio), the follow-up of the Court of Auditors audit, the follow-up of the external communication strategy, the follow-up of the activity of the Internal Audit Department, the Annual Activity Internal Audit Plan 2022, the follow-up of the main legal processes to ANNUAL REPORT 2022 which the Bank is exposed, the follow-up of the IFRS 9 and 2020 arbitration processes, the follow-up of the Special Audit for the 2021 financial year, and the follow-up of the headquarters project in Tagus Park. In addition, the GSB analyzed and/or approved several changes to internal policies, namely the Code of Conduct, Conflict of Interest Policy, Policy on Transactions with Related Parties, Policy for Reporting Irregularities (Whistleblowing), Anti-Bribery and Anti-Corruption Policy, Money Laundering and Terrorism Financing Prevention Policies, as well as amendments to the Policy for Selection and Evaluation of the Statutory Auditor at novobanco, Remuneration Policies for Management and Supervisory Bodies and approval of the Shaping the Future Regulation of novobanco. With regard to matters relating to the CCA, the GSB regularly monitored all matters relating to the 2021 capital call and contracting and activity of Verification Agent. The GSB also closely monitored the evolution of the commitments assumed with DGComp, through the analysis of the various Monitoring Trustee reports, analyzed the Group's Impairment Report, the Group's Internal Control Report, the Self-Assessment Reports of the Risk, Audit and Compliance Functions and approved the 2023 Internal Audit Plan. With regard to other interactions with regulators, the GSB closely monitored the MREL objectives set by the SRB and approved the operations implemented to achieve these objectives, reviewed and approved the ICAAP and ILAAP for 2022, as well as the Liquidity and Capital Plans, closely monitored the evolution of the implementation of the ESG Strategy, its Governance and approved the Group's ESG Climate Stress Test, was regularly updated on regulatory changes and correspondence with the key stakeholders of novobanco, and approved the annual Fit and Proper revision for the Executive Board of Directors members, General and Supervisory Board members and the members of the Board of Directors of the subsidiaries Novobanco dos Açores, Banco BEST and GNB Gestão de Ativos. The GSB also approved the 2022 Recovery Plan, the IRB Renovation Strategy and Operational Plan, the AML Annual Report 2021, accompanied the SREP Supervisory Dialogue 2022. During 2022 the GSB discussed, reviewed and approved a new EBD mandate term (2022 to 2025), new EBD organization structure with updated roles and responsibilities, an increase in the number of EBD members from 6 to 7 with two new members joining and the appointment of a new CEO following the resignation of the previous CEO. The GSB also approved the activity plan of the General and Supervisory Board and the respective Committees for 2023 (to be updated regularly throughout the year) and monitored issues related to the changes introduced by the State Budget for 2021 (Law no.75-B/2020, of 31 December), as well as the response, actions and initiatives of novobanco regarding the economic crisis arising from the Russia / Ukraine conflict. The GSB was also informed of the results of the KPMG Report on Organizational Culture, as well as the measures to be taken by the Executive Board of Directors to improve this culture. Throughout the year, the GSB was updated with regard to the Group's operating results, the evolution of the retail, corporate, treasury and digital businesses, the capital and liquidity position of novobanco, as well as regular forecasts (capital and results) for the end of the 2022 financial year. At the end of the 2022 financial year, the General and Supervisory Board concluded its assessment report on the adequacy and effectiveness of the organizational culture in force in the novobanco Group (the "Group") and the governance and internal control framework with reference to the period from 1 December 2021 to 30 November 2022, in accordance with paragraphs b), c) and d) of Article 58 of Notice no. 3/2020 (the "Notice") of the Bank of Portugal, in which the GSB recognized deficiencies detected, approved the mitigation plans and proposed implementation deadlines for each of these deficiencies, presented by the Executive Board of Directors. These deficiencies included 37 deficiencies classified as F3 - High Risk and 6 classified as F4 - Severe. The CEO and CFO participated in the meetings as guests. When requested, other EBD members participated in meetings to discuss specific topics. The Monitoring Committee was present at most of the meetings. ANNUAL REPORT 2022 Within the scope and for the purpose of the analyzes and verifications carried out, the General and Supervisory Board requested, and obtained, documentation and clarification of the multiple issues raised. Financial Affairs (Audit) Committee The Financial Affairs (Audit) Committee held 14 meetings during 2022 and focused its activity on assessing the Bank's financial statements and the Statutory Auditor's reports for the 2022 financial year, as well as supervising and monitoring the activity of Internal Audit (IA). The oversight activity included, among others, the discussion and analysis of monthly update reports (covering topics such as the implementation of the agreed plan and related findings, follow-up on outstanding issues and issues related to IA resources and practices), and the assessment of the Annual Activity Execution Report for 2022, as well as the approval of the Internal Audit Plans for 2023 (including multi-annual plans). Throughout 2022, the Financial Affairs Committee monitored the main operations for the sale of Non-Productive Assets, namely Project Crow and Project Phoenix, sale of REOs (portfolios and individual assets), as well as the opening of a Representative Office in Spain, following the sale and decision to close the Branch and also the capital impacts of the changes introduced by the State Budget for 2021, Law n.º 75-B/2020, of December 31), as well as the capital increase due to the conversion rights attributed to the State deferred tax assets (“DTAs”) related to the exercises of 2016 and 2017. During 2022, the Committee also monitored the evolution of novobanco’s capital ratios, as well as the evolution of several other relevant projects, including the RWA (Risk Weighted Assets) review process, the MREL requirements process and issuance, the RaRoc levels and the activity of the Valuation Unit. In addition, during 2022, the Financial Affairs Committee monitored the assessment of novobanco's equity investments, including restructuring funds. The Committee monitored on a continued basis, the independence and the work of the external auditor, including the supervision and approval of the provision of other additional services to novobanco’s Group performed by that auditor. The meeting agendas included updates on the regulatory aspects of the Bank's activity, the follow-up of the 2022-2024 Medium-Term Plan (as well as the preparation of the 2023-2025 Medium-Term Plan) and the evaluation process for supervisory purposes (SREP) for 2022. The Committee also followed up closely the OSI on Internal Audit Function and the 2022 Recovery Plan. During the year the Financial Affairs Committee undertook detailed business reviews of the main business segments: (1) Retail & Small Business; (2) Corporates & SME; and (3) Treasury & Capital Markets. In addition, there were regular updates as to the performance of NB’s Pension Fund and the approval of the new governance structure introduced for the monitoring and review of NB’s Pension Fund’s Assets and Liabilities. Specific reviews of the costs execution also took place. The Audit Committee monitored the internal control systems during the year and concluded the annual review of the evaluation of the Internal Audit function, in accordance with Notice 3/2020 of the Bank of Portugal. The Statutory Auditor, as well as the Head of Internal Audit, the CEO and the Chief Financial Officer (CFO) participated in the meetings as guests, whenever necessary. The members of the Committee met with the Supervisory Boards of the Subsidiaries, namely, Banco BEST, Novo Banco dos Açores, GNB Fundos Mobiliários – Sociedade Gestora de OIC (GNB FM), S.A., GNB Gestão de Patrimónios – Empresa de Investimento, S.A., S.A. (GNB GP), GNB Gestão de Ativos, SGPS, S.A (GNB SGPS), GNB Real Estate – Sociedade Gestora de OIC, S.A (GNB RE) and GNB Sociedade Gestora de Fundos de Pensões, S.A (GNB FP), having discussed the matters proposed by these Audit Committees. In addition, the Committee members met separately with the Statutory Auditor and the Head of Internal Audit, without the presence of EBD members. Risk Committee The Risk Committee held 17 meetings during 2022. In addition to approving loans to individual customers or groups of associated customers, in accordance with its Regulations, it also assessed and discussed the strategy and risk appetite and limits for 2022, in accordance with the Medium-Term Plan for 2022-2024, the NPA Plan for 2022-2024 and the Main Initiatives and Activities in 2022 related to the economic crisis arising from the Russia / Ukraine conflict. Other topics discussed by the Risk Committee included the main monthly risk indicators (credit risk, market risk and operational risk) and the credit provisions and impairments contained in the financial statements for the 2022 financial year, as well as the approval of the Risk Activity Plan for 2023. The Bank's non-performing loans portfolio (NPL) was also reviewed and compared with the portfolio of similar ANNUAL REPORT 2022 institutions and with the European Banking Authority (EBA) benchmarks. The risk governance model was also subject to review in 2022. The agendas of the meetings regularly included reports on the regulatory aspects relating to the risks faced by the Bank, particularly in the context of the IRB Plan, especially on LGD (loss given default), IRBB (interest rate risk of the banking book) and the review of the risks inherent to the sectors affected by COVID 19, the analysis of economic groups with high exposure to these sectors and the conclusions of the SREP. The calculation of the Bank's risk-bearing capacity was also a frequent topic at the Risk Committee meetings. Other regulatory risk matters were also discussed and analyzed throughout the year, including the results of the OSI (On-Site Inspections). The Risk Committee approved ICAAP, ILAAP, ESG Stress Tests and the IRB Renovation Strategy and Operational Plan. At the end of 2022, the Risk Committee analyzed the assessment of the risk management activities, in accordance with Bank of Portugal Notice 3/2020, including the Annual Self-Assessment Report (RAA). The head of the Risk Function, the CEO, the CFO, the CCO and the CRO attended the meetings as guests, whenever necessary. Compliance Committee The Compliance Committee held 6 meetings during 2022, deliberating on government, regulatory and legal issues related to the Bank's Complianceactivity and analyzing and discussing the Bank's regulatory compliance issues, including the those relating to Notice 3/2020 of the Bank of Portugal and the EBA Guidelines on internal control and implementation in the areas of compliance, legislation on the prevention of money laundering, legislation on personal data protection, whistleblowing procedures, other legal and regulatory matters and other relevant ongoing projects, such as APIC (for updated information on clients to be obtained). Also the activity plan of the Compliance Department has been followed by the Compliance Committee. The Committee also analyzed and discussed topics related to transactions with related parties and conflicts of interest, compliance matters relating to subsidiaries and the branches of Spain and Luxemburg, including local inspections and audits on AML in Luxemburg and the remediation plan that encompassed the transfer of legacy accounts from Luxembourg to Lisbon, as well as regularly monitoring the most relevant fines and sanctions against the Bank. Nomination Committee The Nomination Committee held 9 meetings during 2022. Through the Fit & Proper Office, it carried out an annual assessment (individually and collectively) of the adequacy and suitability of the members of the Executive Board of Directors of novobanco and of the members of the Board of Directors of the subsidiaries novobanco dos Açores, Banco BEST and GNB – Gestão de Ativos and of the Bank's Key functions (“Key Function Holders”). During 2022, the Fit and Proper processes were also approved for the new interim head of the risk area of novobanco, as well as for the governing bodies for Banco BEST and the governing bodies for GNB-GA and its subsidiaries. During 2022 the Nomination Committee discussed, reviewed and approved a new EBD mandate term (2022 to 2025), new EBD organization structure with updated roles and responsibilities, an increase in the number of EBD members from 6 to 7 with two new members joining and the appointment of a new CEO following the resignation of the previous CEO. The report on gender diversity and the performance of top management at novobanco were also analysed. The Nomination Committee also approved the appointment of a new member to the General and Supervisory Board, submitted to the General and Supervisory Board and approved by General Shareholders' Meeting, subject to Fit & Proper's approval by the competent authorities. Remuneration Committee The Remuneration Committee held 6 meetings during the year 2022. At these meetings, the Committee monitored the implementation of policies relating to the remuneration of the management and supervisory bodies and staff and adopted a set of decisions related to the variable component of remuneration for EBD and identified staff for year 2021. The Remuneration Committee also set and approved the main individual and collective performance indicators for the EBD members for the year 2022, based on the approved budget for this year and approved the 2021’s EBD KPI results. The Remuneration Committee approved the Identified Staff ANNUAL REPORT 2022 for year 2022 following a recommendation of the EBD. It also approved the budget for 2022 for variable remuneration and the amounts allocated to identified staff and EBD members (subject to the rules in the respective policy). The Remuneration Committee also approved the regulations for novobanco's “Shaping the Future” Program, proposed at the General Shareholders' Meeting. At the end of 2022, the Remuneration Committee concluded the review of a centralized and independent internal analysis aimed at verifying compliance of the remuneration policies in force with Notice 3/2020 of the Bank of Portugal. During 2022, the GSB and the respective Committees approved various requests made by the EBD, namely under article 15, paragraph 5 of the Articles of Association. The GSB and the Financial Affairs Committee held working meetings throughout the year with the Statutory Auditor Ernst & Young Audit & Associados - SROC, S.A., both within the scope of the audit of the individual and consolidated financial statements for the year ended on December 31, 2022, as well as within the scope of regular monitoring and discussion of the most relevant aspects arising from the evaluation of internal control. Within the scope of the existing articulation with the Statutory Auditor, the GSB obtained the necessary and sufficient clarifications to the questions raised within the scope of its functions and, in particular to the following aspects: • The completeness of the accounting records and documents that support them; • The existence of goods or values belonging to novobanco’s 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 novobanco. The General and Supervisory Board analyzed all matters contained in the Legal Certifications of Accounts and Audit Reports on the individual and consolidated financial statements issued by the Statutory Auditor for the year ended December 31, 2022, having obtained from the auditors all clarifications necessary for their understanding, in particular on the relevant audit matters included therein: Impairment for loans and advances to customers; Financial instruments measured at fair value and classified as level 3 under IFRS 13; Pension funds liabilities valuation; • • • Restructuring provisions; • Restructuring funds valuation; • • Measurement of real estate obtained through credit foreclosure; • NPA sale transactions; • Contingency on property tax; • Disclosure of other contingent liabilities; • Financial impacts and impairments arising from the amendment to the State Budget Law 2021, Law No. 75B/2020 of December 31; • Contingent Capital mechanism matters; and Aviso 3/2020 Bank of Portugal matters. • All these matters were monitored by the GSB and their Committees, which, on these matters, were kept updated by the EBD, by the relevant Departments and by the external auditors. In preparing the accounts of the financial year, the GSB analyzed the management report as well as other documents submitted by the EBD, having proceeded to verifications and obtaining 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 20212 on 1 March 2023, without qualifications nor emphasis of matter, to which the GSB expresses its agreement. ANNUAL REPORT 2022 The GSB 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 they have obtained all the necessary clarifications. 2. Opinion of the Audit Committee on the Management Report and the separate and consolidated financial statements Within the scope of our work, and in accordance with article 444, number 2, of the Code of Commercial Companies, we verified that: (a) (b) (c) (d) (e) the separate and consolidated balance sheet, the separate and consolidated income statement and the separate and consolidated statement of comprehensive income, the demonstration of changes in individual and consolidated equity, the separate and consolidated cash flow statement and the corresponding Annex, allow a proper understanding of the asset, liabilities and the separate and consolidated financial position of novobanco, its separate and consolidated results of changes in equity and the separate and consolidated cash flows; the accounting policies and valuation criteria adopted are appropriate; 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 main risks and uncertainties that the Bank faces; the proposed application of results does not contradict the legal and statutory provisions applicable; and pursuant to paragraph 5 of article 420 of the Commercial Companies Code, applicable by reference to article 441, paragraph 2, the information on corporate governance includes the elements required under the terms of article 29-H20 of the Securities Code and other applicable legislation. Therefore, it is the Committee’s opinion to: (a) (b) Approve the management report as well as the other documents of account, for the year of 2022, presented by the Executive Board of Directors, considering the aspects highlighted in the Audit report on the consolidated and separate financial statements of the Bank for that year issued by the audit firm; and Approve the proposed application of results submitted by the EBD in its Management Report. Finally, the General and Supervisory Board would like to express its appreciation to the Executive Board of Directors, to the managers in charge of the various areas of the Bank and to the remaining employees, as well as to the auditors, for the cooperation and the support in the completion of its work. Lisbon, 3 March 2023 General and Supervisory Board and the Financial Affairs (Audit) Committee Byron James Macbean Haynes Chairman of the General and Supervisory Board and member of the Financial Matters Committee (Audit) Karl-Gerhard Eick Vice-Chairman of the General and Supervisory Board and Chairman of the Financial Matters Committee (Audit) 20 Article 245.º-A of the Securities Code - which is indicated in article 420.º, paragraph 5 of the Commercial Companies Code - was revoked by Law nº 99-A/2021 of 31 December. The matters included therein are now addressed in article 29.º- H of the Securities Code in its current version. ANNUAL REPORT 2022 Kambiz Nourbakhsh Member of the General and Supervisory Board and member of the Financial Matters Committee (Audit) Mark Andrew Coker 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 William Henry Newton Member of the General and Supervisory Board ANNUAL REPORT 2022 

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