NOVO BANCO
Annual Report 2023

Plain-text annual report

ANNUAL REPORT 2023 ABBREVIATIONS AND ACRONYMS ECB EBD GSB European Central Bank Executive Board of Directors General and Supervisory Board DGCOMP Directorate-General | Competition ESG CCA YTD YoY NII Environment, Sustainability and Governance Contingent Capital Agreement 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 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 € 6 567 843 862,91, composed of 11.130.841.957 nominative dematerialised shares with no nominal value 2 CONTENT 4 8 MESSAGE FROM THE CHAIRMAN OF THE GENERAL AND SUPERVISORY BOARD CEO TALK WITH MARK BOURKE 14 MANAGEMENT REPORT 118 290 574 576 584 592 SUSTAINABILITY REPORT FINANCIAL STATEMENTS AND FINAL NOTES ANNEX AUDITOR’S REPORT ON THE CONSOLIDATED FINANCIAL STATEMENTS AUDITOR’S REPORT ON THE SEPARATE FINANCIAL STATEMENTS REPORT OF THE GENERAL AND SUPERVISORY BOARD 596 EVALUATION REPORT This document is the PDF/printed version of the Annual Report 2023 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/grupo-novobanco > Investidores and CMVM website. In case of discrepancies between this version and the official ESEF package, the latter prevails. 3 Annual Report 2023 | novobancoByron Haynes Chairman of the General and Supervisory Board 4 Message from the Chairman of the General and Supervisory Board Dear Stakeholders, Novobanco delivered strong results with record net income of €743mn and annual capital generation of ~500bps for the full year 2023, reflecting the continued growth of our banking businesses and confirming the sustainability and resilience of our capital accretive business model. Novobanco´s business model reflects its “Strategic Program”, anchored on four pillars: “Customer-Centric Bank,” “Simple and Efficient Operations,” “Developing People and Culture” and “Delivering Sustainable Performance,” geared towards better enabling the bank “to serve the needs and expectations of our customers.” During the year, the bank consistently executed its “Strategic Program” outperforming and exceeding its 2023 guidance targets and goals, including increased sustainable profitability, in a context that continued to prove challenging. Throughout the year the bank was vigilant and cautious with respect to managing the many different aspects of risk. Specifically: the challenging macro-economic environment with the increased risk of recession, high inflationary pressures, rising and high interest rates, rising unemployment levels and the cost-of-living crisis; the contagion effects of increased financial market volatility impact from the continuing Russian / Ukraine conflict, the Israel / Hamas conflict or by the collapse of Silicon Valley Bank triggering other bank failures in the United States and as well as the fall of Credit Suisse in Switzerland; heightened levels of operational risk, (cyber-attacks and outsourcing); and increased focus on emerging risks like climate and environmental risk. Year 2023 financial results reflect an increase in commercial banking income (+57%), stable net loans and new client acquisition growth of >45%, particularly in our Retail and Corporate SME commercial businesses. Novobanco has continued to make significant investment (increased IT investment totaling €58mn) in support of our commercial businesses and our people (3.3% increase in Group employee training hours), while maintaining cost discipline despite the on-going inflationary pressure. 5 Annual Report 2023 | novobancoImproved profitability was accompanied by continued strengthening of the asset quality of the balance sheet as demonstrated through the enhanced credit metrics and the completion of the de-risking of legacy assets and non-core assets. Risk costs for the year of 48bps are lower than target. Year-end 2023, net NPL ratio reduced to 0.7%, in line with peers, with strong NPL coverage ratios being maintained. In addition, despite challenging conditions in the real estate market across Europe, novobanco further reduced its real estate exposure by €154mn (stock representing 1.1% of total assets) with a positive net income and capital gain. The sustainability and resilience of our capital accretive business model is confirmed with significantly strengthened 2023 capital ratios with all regulatory and guidance requirements (Supervisory Review and Evaluation Process Compliance, “SREP”) being exceeded. This improvement in the capital position of the bank has been recognized by the Supervisor with the SREP Pillar 2 requirement (“P2R”) for novobanco in 2024 being reduced to 2.85%. During the year novobanco was subject to the 2023 EU-wide stress test conducted by the European Central Bank (“ECB”) applied to the balance sheet year-end 2022. This provided input into the SREP decision and had no negative impact on novobanco´s capital requirements. The overall year-end 2023 SREP decision and score have improved reflecting the substantial progress that the bank has made during the year, highlighting particularly the improvements made with respect to the Business Model and Capital Adequacy. The bank increased its deposit annual market share to 9.7% (+0.4pp), maintained stable funding and liquidity position and strengthened liquidity ratios throughout the year. Novobanco repaid €5.4bln TLTRO III during the year with a remaining small outstanding year-end balance and is now a net lender to the ECB. The year- end binding and linear (non-binding) MREL targets were exceeded. Novobanco´s long-term deposit ratio is investment grade rated, Baa2, by Moody´s Investors Service. Recognizing the bank’s positive trajectory, both Moody’s and Fitch, have upgraded the bank’s rating. Moody´s Investors Service upgraded novobanco’s Baseline Credit Assessment (“BCA”) rating to Ba1 with a positive outlook reflecting the “ongoing improvements in the bank´s creditworthiness resulting from enhanced asset risk and capital levels and the significant improvement in recurrent profitability”. In February 2024, and ahead of our stated goals, the bank achieved an investment grade rating, with Fitch assigning a ‘BBB-’ LT rating to novobanco’s senior preferred debt. 2023 was also marked by the launching and execution of key initiatives to support the workstreams “Employee Value Proposition”, “Talent Development” and “Culture & Values” that underpin the “Developing People and Culture” Strategic Program pillar. Good progress is being made in continuing to build and empower a diverse workforce and to deliver on our commitments to diversity, equity, and inclusion, which is expected to develop on an accelerated basis going forward. ESG matters have remained a regular topic on the General and Supervisory Board (“GSB”) agenda in 2023. We further integrated ESG goals in our performance appraisal frameworks across all levels of the organization and reinforced our commitment to contribute to accelerate the Portuguese economy’s transition to a low-carbon future by reducing our environmental impact, 6 managing our climate-related risks, mobilizing capital and, most importantly, working alongside our clients and partners in this energy transition, supporting companies of all sizes and sectors with financial solutions that fit their needs, including lending or specialized services. In 2023 novobanco surpassed its 2024 green financing targets as well as its scope 1 and 2 GHG emissions’ reduction targets, more than one year ahead of the commitments. On behalf of the GSB, I would like to thank all our stakeholders, particularly our customers, 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 their hard work, dedication and commitment that has allowed the bank to exceed its goals and targets and to better serve the needs and expectations of our customers. Byron Haynes Chairman of the General and Supervisory Board During the year, GSB appointed a new member to the Executive Board of Directors (“EBD”), Benjamin Dickgiesser (CFO), in the mandate term 2022 to 2025. Following this appointment, EBD organization roles and responsibilities were reassessed and realigned with effect from October 2023. Two new members of the GSB, Monika Wildner and Evgeniy Kazarez, were also appointed during the year in the mandate term 2021 to 2024. The GSB now comprises ten members (including seven independent members) as of year-end 2023. Throughout year 2023, 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 2024, realistic strategic goals and financial targets have been set and agreed as part of the updated medium-term plan focusing on continued execution of our Strategic Program, while at the same time being cautious and vigilant in managing risk through this on-going challenging economic and geo-political context. 7 Annual Report 2023 | novobancoMark Bourke, CEO 8 CEO Talk with Mark Bourke Mark Bourke, Chairman of Executive Board of Directors, gives an interview highlighting 2023 achievements and the prospects for the future of novobanco. 1 In 2023, novobanco established a strong track record in execution and delivery, further consolidating its profitability. How would you characterise 2023? In 2023 we’ve consolidated our position as a strong, profitable and independent Portuguese bank. In a context that continued to be marked by a challenging macro backdrop and geo-political instability, we delivered increased profitability, very strong capital generation, twice outperforming guidance, and ultimately achieved investment grade rating. The interest rate environment has impacted us as it did to the entire industry, but the impressive results achieved would not have been possible if we hadn’t remained focused and disciplined on executing and delivering against our strategy program and putting the customer at the centre of everything we do. and working capital needs, with significant growth, in 2023, in short-term loans, especially through factoring and confirming. This underpinned the continued growth of the corporate customer base, with high levels of penetration, with 55% of Portuguese SMEs and 70% of large companies being novobanco customers. On the Retail segment, we continued to build out our omnichannel customer service structure, reshaping our geographic footprint, changing the digital experience and deepening long-term relationships with clients. Currently, more than 265 branches operate under the new distribution model which offers advanced transaction management solutions and value adding client interaction processes. 2 As you said, novobanco delivered an impressive set of results in 2023. What are the key achievements worth highlighting? On the Corporate segment, novobanco continued to strengthen its commitment to Portuguese companies, to which we provide a set of solutions for investment 2023 was a year full of remarkable achievements, not only in terms of our financial performance, but also in terms of external recognition, with novobanco being 9 Annual Report 2023 | novobancoupgraded by 7 notches in 2 years by Moody’s, and being awarded investment grade by Fitch, in addition to being awarded Bank of the Year1 in Portugal by the Financial Times. In terms of our financial performance, it is worth to highlight: • The Commercial Banking Income of €1,439mn (+57% YoY), solid Net Interest Income performance, underpinned by the favorable interest rate environment and a prudent and targeted management of interest rates on assets and cost of financing; • A Commercial Cost to Income ratio of 33% (2022: 49%), beating guidance of ~35%; • A Cost of Risk of 48bps (including management overlays), consistent with 2023 guidance of ~50bps; • The strong capital generation, with FL CET1 ratio increasing by ~500bps YoY to 18.2%, beating the already upward revised capital generation guidance of >400bps. Whilst we have strengthened our profitability and kept the cost of risk under control, we have managed to grow our market share, in an environment marked by a decreasing credit demand and strong competition for clients’ savings. The bank has increased its footprint in the Portuguese market with global market share at 9.8% (Nov/23; +0.2pp YTD). Net Customers loans stood at €24.5bn (stable YTD), with €3.5bn YTD origination partially offset by increased amortization and supported by new client acquisition. Customer deposits totalled €28.1bn, with novobanco’s deposit market share growing to 9.7% in Nov/23 (Dec/22: 9.3%). Novobanco consistent performance allowed the bank to outperform 2023 financial targets, and enhanced our ability to remain focused on our customers and well positioned to meet their financial needs, supported by a rock-solid balance sheet. 3 You mentioned that you have been focused on executing and delivering on the strategic program. Apart from being a customer-centric domestic bank, what are the key drivers of the bank’s strategy? I would start by emphasizing the “customer-centric domestic bank”. Novobanco, besides having the client at the centre of its mission and strategy, is a pure Portuguese player, committed to support Portuguese families and companies throughout their lifetime. The customer-centric bank is one of the four pillars of our strategic program. At each moment, novobanco seeks to exceed the expectations of its customers and partners, through a distinctive value proposition that relies on an omnichannel approach as the key lever of proximity and experience. The daily routine of our teams is focused on responding in an exemplary manner to the needs of our customers, with an improved customer experience through an omnichannel delivery model on the retail side and a sectorial approach for SMEs. To effectively achieve these objectives, novobanco has been investing in a global transformation. The most visible facets of this reinvention are, on the one hand, the branch network, where novobanco has combined technology, proximity to the customer and openness to the community, and, on the other, our digital channel, which has been a determining factor for the accelerated transformation of the bank. The second pillar is “Simple and efficient operations”, under which we accelerate novobanco’s transformation (1) In Nov/23, novobanco was awarded as “Bank of the Year in Portugal” by The Banker, a publication within the Financial Times Group. 10 into an organisation that provides customers with a lean and straight through process which allows to attain increased 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 far-reaching transformation programme of its IT and data governance functions (focused not only on the infrastructure, platforms and tools that support the bank’s operation, but also on the timely availability of data to support process improvement), optimisation of the models that support decision-making and, above all, the delivery of regulatory commitments and requirements to which the banking sector is subject. A third pillar is “Developing 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, the most critical dimension. the achievement of a financial performance that is characterised by its sustainability, by the robustness and quality of our balance sheet, by adequate solvency levels and efficient and effective capital allocation and management of risk. It is within this framework that our programme for embedding ESG (Environmental, Social and Governance) into our business and organisation is set, which includes (i) implementing the ESG operating model and training the organisation, (ii) adapting the offer of products and services, and (iii) transforming investment and risk management policies. 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 vital to the sustainability of novobanco’s performance. To achieve this goal, novobanco’s strategic plan is executed through different operational programmes ensuring the quality of credit decisions, namely by driving their automation, improving pricing models and the measurement of risk-adjusted profitability. Our performance clearly demonstrates the increased confidence of both our customers and the financial markets in novobanco, the alignment of our team and, naturally, the consistency of the strategic path outlined. Novobanco’s strategy seeks to (i) attract, train and retain through a compelling value proposition for its employees, (ii) the development of talent, and (iii) the promotion of the organisational culture and values. And finally, the fourth pillar of novobanco’s strategy - “Delivering sustainable performance” - is driven by 4 On the “Developing people and culture” pillar, could you please share more insight on the initiatives novobanco is pursuing? Delivering on our strategy requires having the whole organization aligned towards our vision and having the best talent, which means retaining and attracting the 11 Annual Report 2023 | novobancoright people, whose performance drives our collective success as a bank. It also means fostering a positive and inclusive culture and a leadership that nurtures talent and empower its teams to succeed. In 2023, we launched and executed several key initiatives of our “Developing People and Culture” strategic pillar, advancing our Talent, Leadership and Mission & Values workstreams. In the talent stream, we have been working on how we focus on the experience of working at novobanco and how we recognise those who contribute to the bank’s success, with a renewed value proposition for employees. On the Leadership front, we have launched development programmes for our leaders so that they act as role models and foster the right environment for people to succeed, with the ultimate goal of us all being able to better serve our customers. With regard to Mission & Values, we have been working on engaging and activating the whole novobanco organisation around our Mission, which has our clients at the center, symbolizing how everything we do is in service of delivering exceptional service that builds and sustains long-lasting relationships. 5 And on the integration of ESG in the bank’s day- to-day activities, how is it progressing and what are the main challenges? Sustainability and the management of ESG risks and opportunities is a strategic priority for novobanco, and in 2023 we consolidated our goal of being a ESG “leader” in the Portuguese financial services by continuing to deliver significant progress. Sustainable finance has a pivotal role to play in achieving national and European climate goals and, for novobanco, enabling our customers to lower their carbon footprint is a priority that can only be achieved through major investment in energy transition and climate action. Having invested 369M€ in green financing in 2023, novobanco surpassed its 2024 green financing targets more than one year ahead of the commitment. We’ve renewed and reinforced our commitment with a target of €2bn in green investments for the next 3 years. This reflects our focus on giving customers more choice and making their transition journey easier. Going forward we will continue to contribute to accelerate the pace of the required transition – identifying new ways of doing business and ensuring speed to market in supporting our customers with products and services. In our own operations, we have surpassed the Scope 1 and 2 GHG emissions’ reduction targets set for 2024 and remain confident we will meet our 50% reduction target before the committed date of 2030. I was particularly pleased with the success of our ESG literacy initiatives, aimed at supporting Portuguese SMEs understand, discuss, and share experiences, best practices and challenges surrounding their sustainability journeys. A positive social impact in the communities we serve is also a key concern in the way we do business, both through our people agenda and through our client and community programs, promoting social well-being initiatives and financial and digital literacy programs. 12 To conclude, would you like to leave a final message to novobanco stakeholders? 6 The remarkable achievements of the past year were made possible by the collective commitment of novobanco’s stakeholders. Each milestone reached, every challenge overcome and all the progress made stand as a testament of the dedication of our people, the confidence of our customers and the engagement of all the governing bodies of the bank. Therefore, I would like to take this opportunity to thank all our stakeholders, and particularly to everyone working in our bank, for their continued support, dedication to, and confidence in novobanco. As we embark on another year, I want to reaffirm our dedication to earning and preserving the trust of all our stakeholders. Their ongoing support inspires us to strive for even greater achievements in the future. Mark Bourke, CEO 13 Annual Report 2023 | novobancoManagement Report Sustainability Report Financial Statements Annex €3.5bn loans origination €28.1bn deposits €25.5bn gross loan book 14 Annual Report 2023 | novobanco MANAGEMENT REPORT 16 16 28 36 36 43 51 60 60 63 68 75 77 78 78 80 84 84 85 90 93 101 102 105 105 106 106 109 111 111 1 WHO WE ARE 1.1 novobanco 1.2 Organisation 2 OUR STRATEGY 2.1 Business & Regulatory Environment 2.2 Strategic Pillars 2.3 Risk Management 3 OUR PERFORMANCE 3.1 Highlights 3.2 novobanco Group (Consolidated) 3.3 Business Segments 3.4 novobanco Separate 3.5 Relevant Facts from the Activity and Subsequent Events 4 CAPITAL AND LIQUIDITY 4.1 Capital Ratios 4.2 Liquidity and Funding 5 CORPORATE GOVERNANCE 5.1 Shareholder Structure 5.2 Corporate Bodies: Composition and Functioning 5.3 Control Manuals 5.4 Main Policies 5.5 Credit to Members of the Corporate Bodies 5.6 Remuneration of the Members of the Corporate Bodies and Identified Staff 5.7 Securities Held by Members of the Management and Supervisory Bodies 5.8 Non-Material Indirect Investment in Novo Banco 6 CONSOLIDATED FINANCIAL STATEMENTS AND FINAL NOTES 6.1 Consolidated Financial Statements 6.2 Separate Financial Statements 6.3 Final Notes 6.4 Note of Recognition 112 7 ANNEX – ALTERNATIVE PERFORMANCE MEASURES 15 1 WHO WE ARE 1.1 novobanco Novo Banco, S.A. (novobanco or “bank”), together with its subsidiaries and affiliates, which form the Novo Banco Group (group or novobanco Group), conducts its main activity in the Portuguese banking sector, in the corporate and retail segments, as well as in asset management. It also has interests in companies working in venture capital, real estate and leasing. With one of the most robust capital ratios, the bank has been strengthening its market share in customer deposits and resources, which stand at more than 34.9 billion euros, while guaranteeing the financing of the national economy, with support for families and companies, in more than 25.5 billion euros of credit granted. Novobanco is the 4th largest bank operating in the national market, with 1.6 million customers, assets of 43.5 billion euros and a 9.8% market share. Operating through an omnichannel relationship model, novobanco offers a complete and convenient banking experience to its customers, including secure digital channels, complemented by the recent and innovative proximity distribution model, with more than 290 branches and 20 corporate centres covering the entire national territory. With the aim of contributing towards the sustainable development of the Portuguese economy, families and businesses throughout all stages of life, novobanco draws on the professional experience of 4 209 professionals and strategic partners. 16 Management ReportSustainability ReportFinancial StatementsAnnex Mission To be the trusted bank, supporting families and companies, throughout their lifetime. Values We put our Clients First We put ourselves in our clients’ shoes to engage and support their needs, wants, dreams and desires, and we invest in our people so they can deliver excellence. We embrace Ethics & Inclusion We act ethically at all times and do the right thing. We always respect one another and encourage people to be their true selves. We act with Trust & Transparency We are open and honest with one another - giving clear sight of decisions, the reasons for decisions, when we succeed, and when we fail. We strive for Simplicity every day We seek simplicity to bring clarity and efficiency to complex situations. We Collaborate with each other We work together seamlessly for shared success and take pride in our team work. 17 Annual Report 2023 | novobancoThe Mission and Values guide and underpin everything novobanco does. It enables novobanco to build long-term value, invest in growth, focus on delivering a social dividend with a positive contribution to society and drive sustainable yields for shareholders. A team of committed professionals… 4209 employees of novobanco Group 19 years average seniority 169k training hours (+3.3%) to supporting families, and driving Portuguese companies to innovate, reinvent, export… 1.6 million clients >45% of new clients vs 2022 66.6% of active digital clients (+5pp) and to turning difficulties into great opportunities… €25.5bn Loans granted €3.5bn Loans origination €28.1bn Deposits to give back to community. €476k in donations and patronage 103 works of art lent to 40 museums across the country €369mn of green investment originated in 2023 18 Management ReportSustainability ReportFinancial StatementsAnnex Novobanco’s resilience lays the foundations for a new stage of commercial transformation and solid financial performance. Novobanco’s successful recovery & restructuring journey novobanco continues to grow, exceeds expectations and strengthens its position as a trusted bank, committed to supporting families and businesses throughout their lives. RESTRUCTURE 2017-2020 Sale of Novo Banco to Lone Star (2017) Deep operational and balance sheet restructuring Exit from all international operations Completion of balance sheet clean-up TRANSFORM 2021-2022 Return to profitability with 8 profitable quarters Targeted growth in core business Significant investment in transformation Normalised cost of risk <50 bps achieved Strengthening capital position: CET1 FL 13.1% RE-LAUNCH 2023 and beyond Substantial top-line growth Outstanding capital generation (~500bps) in 2023 Best in class levels of efficiency and profitability Deep Balance Sheet Restructuring 2017 2020 2023 32.2 2.5 9.9 4.4 0.6 0.5 473 358 290 NPL Ratio1 (%) RE Exposure (bn€) Branches (#) Reached Comfortable CET1 & Profitability 2020 2022 2023 18.2 743 561 13.1 9.5 (1 329) CET1 FL (%) Net Income (mn€) Significant RoTE2 Improvement (%) ~14% underlying RoTE 19.0 20.4 6.2 2021 2022 2023 (1) NPL ratio defined as the ratio between total non-performing loans and gross customer loans; (2) Tangible equity based on period average, excludes CCA calls accounted as a receivable but not yet received, and excluded in Capital ratios. 19 Annual Report 2023 | novobanco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’s 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. CORPORATE: a historical know-how in the sector RETAIL: a partner for households, with a wide range of products INVESTMENT SOLUTIONS SHORT-TERM SOLUTIONS ACCOUNTS, CARDS & PAYMENTS HOUSING LOANS Medium and long-term credit solutions. Leasing and renting. Guaranteed credit line with EIB/ EIF and BPF, with competitive conditions. EU Funds financing solution. SECTOR-SPECIFIC EXPERTISE Specialized sectoral teams, providing tailored solutions that meet the specific needs of each Client and sector. Specialized teams in EU Funds (RRP and PT2030), factoring, confirming, leasing and trade finance. Factoring and Confirming. Current account and overdrafts. IFAP credit lines. EU Funds short-term credit line to anticipate incentives. Accounts bundled for different needs; fully online opening. Acquisition & maintenance works. Strong authentication system; functionalities incl: contactless, virtual cards, MB Way (...) Online loan submission. Special conditions for young and non-resident. EXPORTS AND IMPORTS Documentary credit and remittances. External financing. International factoring. Forfaiting. SAVINGS AND INVESTMENT Deposits & retirement accounts. Investment Funds, Unit linked, structured deposits. Discretionary mgmt & advisory. INSURANCE Life Protection. Health and Property & Casuality. Special solutions for self employed workers. PAYMENTS AND CASH MANAGEMENT Collection: direct debits; POS, digital payments gateway. Payments and transfers. NB Express Cash to simplify cash management. EMPLOYEE BENEFITS Meal cards and credit cards. Car solutions, with leasing and renting tailored to Customers. Accidents at work and multi-risk insurance. SMALL BUSINESS Special small business accounts. Cash and payments management solutions. Multi-risk business insurance. CONSUMER FINANCE Online simulation and submission. Credit insurance option with unemployment and life coverage. POS lending partnership “Heypay”. Highlights: Main offerings of products and services. 20 Management ReportSustainability ReportFinancial StatementsAnnex CORPORATE Corporate segments includes SME’s and large corporates, supported by Large Corporate business centers and 20 business centres c. 1.6 MILLION CLIENTS 54% 60% 70% Loans to corporates of exporting SMEs in Portugal are novobanco’s clients of large corporates are novobanco’s clients MARKET SHARES Mortgage Loans 9.1% (stable vs 2022) Total Loans 10.5% (stable vs 2022) Deposits 9.7% (+0,4pp vs 2022) Global Market share 9.8% (+0,2pp vs 2022) Corporate Loans 14.3% (-0,2pp vs 2022) Trade Finance 20.1% (+1,5pp vs 2022) Data as of November 2023; Sources: novobanco with data from Portuguese Central Bank, APS, APFIPP. 21 Annual Report 2023 | novobancoIn addition to novobanco’s branches, corporate and business centres, its business model is supported by the following subsidiaries: 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 (2.47%). The regional operations of novobanco dos Açores align with the Group’s culture and mission of being the trusted bank that supports Azorean families and companies throughout their lives. Its strategy is based on decisive competitive advantages, such as economic and financial strength, combined with a culture of client service for the benefit of the population of the Azores, supported by an extensive experience in the local market and a strong tradition of close relationship with customers. The first phase of the physical network renovation project was completed in 2023, and the second phase began with the reopening of six branches, including the head office, and a novobanco dos Açores space. This new business model, allows novobanco dos Açores to assert itself as a more contemporary and functional bank, focused on the customer, fundamentally changing the dynamics of banking in the region. The revamping of the branch network will continue in 2024, covering the remaining branches, with a total investment of around €5M. Making a decisive commitment in the dematerialization of processes, with implementation already in the last month of the year, to better meet the needs of the Azorean community, and in offering the services and products of novobanco dos Açores, through an interconnection of all channels and, from any channel, with total convenience. Novobanco dos Açores maintains the important strategic objective of becoming a reference entity and partner in ESG in the Azores, thus contributing to the promotion of sustainable investment practices and the acceleration of the transition process to a carbon-neutral economy. To this end, novobanco dos Açores, in line with the novobanco Group, is developing a sustainability strategy with a special focus and priority given to the integration of climate risk into the business and risk management model. For detailed information on novobanco dos Açores, please visit: www.novobancodosacores.pt 22 Management ReportSustainability ReportFinancial StatementsAnnex 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 and stands 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. 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. 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. 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 different support tools, monitor market indicators and manage their portfolio - buy and sell, monitor returns -, perform multiple operations and fulfil general duties, such as updating personal data. Banco Best’s strong bet on innovation and dynamic management of a wide network of national and For detailed information on the activity of Banco Best, please visit: www.bancobest.pt GNB Gestão de Ativos is one of the country’s most experienced management companies, and the quality of the management of its products and services has been recognised over the years at both national and international levels. GNB Gestão de Ativos offers financial products and services, including several types of funds - mutual funds, real estate funds and pension funds - as well as discretionary and portfolio management services. As of December 2023, GNB Gestão de Ativos had €7.7 billion in assets under management in Portugal and Luxembourg. For detailed information on the activities of GNB Gestão de Ativos, please visit: www.gnbga.pt 23 Annual Report 2023 | novobanco 1.1.2 Main Events 2023 Conclusion of Project Crow - Restructuring Funds Novo Banco, S.A. informs that the conclusion of Project Crow is expected to have a positive impact of 2.9 million euro in 2022 income before tax. JANUARY 10 FEBRUARY 13 DG Comp notification Novo Banco, SA announces the notification by Directorate General for Competition (“DG Comp”), to the Minister of Finance, of the successful completion of novobanco’s Restructuring Period. MARCH 9 2022 Results and Group activity Novobanco announces Net income of €560.8mn. Strong strategic focus delivering a sustainable growth of business with increased revenues and capital generation. MARCH 22 Governing Bodies Novo Banco, S.A. informs the market and the public in general that, subject to the approval of the competent regulatory authorities (fit and proper), the General Shareholders’ Meeting approved today the appointment of Evgeniy Kazarez as a member of the General and Supervisory Board for the current mandate term (2021-2024). FEBRUARY 1 New Chief Financial Officer Novo Banco, S.A. informs that the General and Supervisory Board approved today, subject to Fit & Proper, Benjamin Dickgiesser as a new member of the Executive Board of Directors for the current mandate term until 2025, becoming the next Chief Financial Officer (“CFO”). FEBRUARY 24 Governing Bodies Novo Banco, S.A. informs that Benjamin Dickgiesser has resigned as member of the General and Supervisory Board. MARCH 22 Share capital increase Novo Banco, SA informs that, following the General Shareholders Meeting held today, it was decided to increase its share capital arising from the conversion of the conversion rights relating to 2018 and 2019 fiscal years. The conversion rights were issued under the special regime applicable to deferred tax assets approved by Law No. 61/2014, of 26 August, as amended. MARCH 29 DBRS rating upgrade APRIL 19 Novo Banco, SA informs that DBRS Ratings GmbH (“DBRS Morningstar”) upgraded novobanco’s Long-Term Issuer ratings to BB (low) from B (high). The Trend on all ratings remains at Stable. Multi-notch rating upgrade by Moody’s Novo Banco, SA informs that Moody’s Investors Service (“Moody’s”) upgraded novobanco’s senior unsecured debt and senior unsecured medium-term note (MTN) programme by 3 notches from B3 to Ba3. The outlook on the long-term deposit and senior unsecured debt ratings remains positive. APRIL 28 1Q 2023 results and Group activity Novobanco announces Net income of €148.4mn (1Q22: €142.7mn; +4% YoY), with the continued execution of its strategy delivering sustainable growth of the business, increased revenues and capital generation. MAY 24 Issuance of subordinated debt MAY 31 Novo Banco, SA informs that it has today launched a 10.5NC5.5 Tier 2 bond in the amount of € 500 million, with maturity on 1 December 2033 and an early redemption option by the bank at the end of 5 years. The notes were subscribed at 100% price and have an annual interest rate of 9.875% in the first 5 years, and 5 years mid-swaps plus a margin thereafter. Results of the Tier 2 tender offer Novo Banco, SA informs that it has today launched a 10.5NC5.5 Tier 2 bond in the amount of € 500 million, with maturity on 1 December 2033 and an early redemption option by the bank at the end of 5 years. The notes were subscribed at 100% price and have an annual interest rate of 9.875% in the first 5 years, and 5 years mid-swaps plus a margin thereafter. Early redemption option of its Tier 2 JUNE 19 JUNE 1 Novo Banco, SA informs that it has today launched a 10.5NC5.5 Tier 2 bond in the amount of € 500 million, with maturity on 1 December 2033 and an early redemption option by the bank at the end of 5 years. The notes were subscribed at 100% price and have an annual interest rate of 9.875% in the first 5 years, and 5 years mid-swaps plus a margin thereafter. Early redemption option of its Senior Preferred Notes due 2024 Novo Banco, SA informs that, following the authorization received from the Single Resolution Board, it has taken the decision to exercise the early redemption option of its €300,000,000 3.500% Fixed/Floating Rate Callable Senior Preferred Notes due 2024 (ISIN: PTNOBIOM0014). 24 Management ReportSustainability ReportFinancial StatementsAnnex Notification by Banco de Portugal of its MREL requirements Novo Banco, S.A. informs that it has been notified by the Bank of Portugal of its Minimum Requirement for own funds and Eligible Liabilities (“MREL”) requirements, on a consolidated basis, as determined by the Single Resolution Board. JUNE 22 JUNE 27 Governing Bodies Novo Banco, S.A. informs that Monika Wildner has joined the current mandate of the General and Supervisory Board of novobanco, as an independent member. 1H 2023 Results and Group activity JULY 30 JULY 28 Novobanco announces Net income of €373.2mn (1Q23: €148.4mn; 2Q23: €224.8mn), demonstrating growth momentum of both business and revenues, as well as strong capital generation. OCTOBER 1 Governing Bodies Novo Banco, S.A. informs that Benjamin Dickgiesser has joined the Executive Board of Directors of novobanco for the current mandate 2022-2025 as Chief Financial Officer. NOVEMBER 17 2023 EU-Wide Stress Test Results Novo Banco, S.A. informs that it was subject to the 2023 EU-wide stress test conducted by the European Central Bank (ECB). The bank notes the announcements made by the ECB on the EU-wide stress test and the outcomes of this exercise. NOVEMBER 7 Governing Bodies Novo Banco, S.A. informs that Evgeniy Kazarez has joined the General Supervisory Board of novobanco for the current mandate 2021-2024. Banco de Portugal release on residential real estate capital buffer NOVEMBER 22 Novo Banco S.A. informs that it has been notified by the Bank of Portugal regarding the decision to implement a sectoral systemic risk reserve. The implementation of this reserve aims to increase the resilience of institutions to the materialisation of potential systemic risk in the residential real estate market in Portugal. Multi-notch rating upgrade by Moody’s Novo Banco, SA informs that Moody’s upgraded novobanco’s long-term deposit and senior unsecured debt ratings by 2 notches, to Baa2 from Ba1 and to Ba1 from Ba3, respectively. The outlook on the long-term deposit and senior unsecured debt ratings remains positive. NOVEMBER 22 NOVEMBER 22 Upgrade of Covered Bonds to Aaa by Moody’s Novo Banco, SA informs that Moody’s upgraded the rating of novobanco’s Mortgage Covered Bonds by 2 notches to Aaa, from Aa2. NOVEMBER 30 Bank of Portugal announcement on Other Systemically Important Institutions Novo Banco, S.A. informs s that it has been notified by the Bank of Portugal of its decision to identify the bank as Other Systemically Important Institution (“O-SII”), previously only at LSF Nani level. DECEMBER 13 Multi-notch rating upgrade by DBRS Morningstar Novo Banco, S.A. informs that DBRS Morningstar upgraded novobanco’s Long-Term Deposits and Long-Term Issuer Ratings by 2 notches, to BBB (low) from BB, and to BB (high) from BB (low), respectively. The bank’s Intrinsic Assessment has also been upgraded to BB (high), with the trend on all credit ratings remaining Stable. 9M 2023 Results and Group activity Novobanco announces a Net income of €638.5mn (1Q23: €148.4mn; 2Q23: €224.8mn; 3Q23: €265.3mn), backed by a solid domestic and simple business model, delivering increased profitability from top line performance, together with contained costs as a result of efficiency measures implemented in recent years. DECEMBER 4 Minimum own funds requirements for 2024 Novo Banco, S.A. informs that it has been notified by the European Central Bank of its minimum prudential requirements applicable in 2024. The requirements to be observed are based on the results of the Supervisory Review and Evaluation Process (“SREP”), and calculated relative to the Total Risk Weighted Assets (“RWA”). DECEMBER 14 Governing Bodies Novo Banco, S.A. informs that Donald Quintin has ceased today his duties as a member of the General and Supervisory Board. 25 Annual Report 2023 | novobancoManagement Report Sustainability Report Financial Statements Annex 1.1.3 Awards & Recognitions NOVOBANCO IS “BANK OF THE YEAR - PORTUGAL 2023”, BY THE BANKER (FINANCIAL TIMES) Novobanco was awarded as “Bank of the Year in Portugal” by The Banker, a renowned publication within the Financial Times Group. This is a recognition of novobanco’s unwavering dedication to its customers, consistently anticipating their needs and providing innovative, efficient, and transparent banking products and services, based on high ethical standards and integrity. NOVOBANCO’S SYNTHETIC SECURITIZATION HAS BEEN AWARDED “TRANSACTION OF THE YEAR” BY SCI Novobanco pioneered Portugal’s first balance sheet synthetic securitisation referencing corporate exposures executed on an unfunded basis – a groundbreaking transaction, recognized by SCI SRT awards. This operation marked our return to the synthetic securitization markets after an extended absence. NOVOBANCO AWARDED AS RETAIL INNOVATION LEADER IN PORTUGAL, BY THE INTERNATIONAL BANKER MAGAZINE Novobanco is recognised by The International Banker magazine as the best bank in Portugal in the Retail Innovation category. This award distinguishes novobanco’s commitment to providing its customers with an experience of excellence in the sector, investing in a comprehensive transformation strategy that encompasses the branch network and digital presence. INSTITUTIONAL CAMPAIGN “NOW IS OUR TIME.” WINS “SILVER” CATEGORY AT THE EFFICACY AWARDS Novobanco is the winner of the “Silver Award” in the “Financial Services and Insurance” category of the 2023 Efficacy Awards, with the institutional case study/advertisement “Now is our time”. The campaign marked a new phase for novobanco, signaling the end of the bank’s restructuring period, presenting itself as an institution with sustainable profitability, no strings attached, free to operate in the Portuguese market. NOVOBANCO ELECTED FOR THE FIFTH YEAR RUNNING BEST TRADE FINANCE PROVIDER IN PORTUGAL Novobanco has once again been voted the best bank for Trade Finance in Portugal by the international magazine “Global Finance”. Based on a number of benchmarks, such as transaction volume, customer service and innovation, the editors of this prestigious magazine, as well as sector analysts, company managers and IT specialists, selected the best service providers in the area of Trade Finance in more than 100 countries and regions around the world. 26 Annual Report 2023 | novobanco NOVOBANCO ELECTED BEST DISTRIBUTOR PORTUGAL AT THE SRP EUROPE AWARDS 2023 Novobanco has once again been awarded the “Best Distributor, Portugal” prize by SRP (Structured Retail Products), part of the Delinian Group Company, thus seeing both the solidity and consistency of its Structured Products offer and the work that has been carried out in this area over the last few years recognised on an international level. NOVOBANCO ELECTED “BEST ENGAGEMENT AND COMMUNICATION” AT THE WELLBEING AWARDS 2023 Novobanco was recognized in the first edition of the Wellbeing Awards, an initiative of Workwell, a pioneering company in the development of corporate wellbeing programmes, and AGIS, the Association for Healthcare Innovation and Management, is officially supported by Aon, a personal services company in risk, retirement, health and people. NOVOBANCO SHORTLISTED FOR THE FINOVATE AWARDS 2023 Novobanco was once again shortlisted for the final stage of the Finovate Awards 2023, the fintech industry innovation awards, in the “Best Data Management Solution” category, with a solution that allows its customers to update their data conveniently and independently, choosing the channel that suits them best. NOVOBANCO RECEIVES AN HONORABLE MENTION IN THE CATEGORY “BEST USER/CUSTOMER EXPERIENCE INITIATIVE”, AT THE BANKING TECH AWARDS Novobanco received an honorable mention in the 2023 edition of the BANKING TECH AWARDS, in the category of “Best User/Customer Experience Initiative”. This was the fourth time that novobanco was named a finalist in these awards. All awards are the sole responsibility of the awarding organisations. 27 1.2 Organization 1.2.1 Governance Model Novobanco ‘s management relies on a governance model that is unique and distinct when compared with systemic banks within the Portuguese financial sector. As of 18 October 2017, under the new shareholder structure, the bank changed its governance model to comprise a General and Supervisory Board (GSB) and an Executive Board of Directors (EBD), in line with international best practices. The governance model was designed to ensure monitoring of the bank’s activity and the fulfilling of its strategic objectives: MONITORING COMMITTEE Capital, Assets and Liabilities Committee (CALCO) Risk Committee Sub-Committee Risk Model Sub-Committee Operational Risk Sub-Committee Non-Performing Assets (NPA) Statutory Auditor GENERAL SHAREHOLDERS MEETING EXECUTIVE BOARD OF DIRECTORS Company Secretary Compliance and Product Committee Internal Control System Committee Transformation Committee Credit Committee Investment and Costs Committee Enlarged Impairment Committee GENERAL AND SUPERVISORY BOARD Risk Committee Financial Affairs (Audit) Committee Remuneration Committee Nomination Committee Compliance Committee 28 Management ReportSustainability ReportFinancial StatementsAnnex and its internal regulations, including the supervision of all matters related to risk management, compliance and internal audit, as well as approval on relevant matters for novobanco. 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. The GSB is responsible for regularly monitoring, advising, and supervising the bank’s management and the group entities, as well as for supervising EBD activities with regard to compliance with the relevant regulatory requirements. The GSB meets on a monthly basis, and its Chairman maintains regular communication and dialogue with the CEO. GSB’s activity 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’ responsibilities and powers are attributed by general law, the Articles of Association 1.2.2 Corporate Bodies On 31 December 2023, the composition of the Group’s corporate and statutory bodies was as follows: BOARD OF THE GENERAL MEETING Chairman: Fernando Augusto de Sousa Ferreira Pinto 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) 29 Annual Report 2023 | novobancoGENERAL AND SUPERVISORY BOARD (GSB) GSB Committees ) 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 e m a N Byron James Macbean Haynes • Karl-Gerhard Eick • • • • • Kambiz Nourbakhsh Mark Andrew Coker John Ryan Herbert Robert Alan Sherman Carla Antunes da Silva • William Henry Newton • • Monika Wildner Evgeniy Kazarez 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 06-06-2018 31-12-2024 29-04-2021 31-12-2024 21-06-2023 31-12-2024 07-11-2023 31-12-2024 F / M M M M M M M F M F M s r i a f f A l i a c n a n F i • C • k s R i • • • C • e c n a i l p m o C • • C • n o i t a n m o N i • C • • n o i t a r e n u m e R C • • The Board is composed by 10 members, 7 of which are independent, showing diversity in several dimensions1: Gender Female 2 Age <40 1 >60 3 ]40-50] 2 8 Male 4 ]50-60] 30 Nationality Portugal Germany 1 1 USA 2 2 Austria United Kingdom 4 Management ReportSustainability ReportFinancial StatementsAnnex EXECUTIVE BOARD OF DIRECTORS (EBD) A Board currently composed by 7 members diverse in several dimensions, including age2 and nationality: e m a N n o i t c n u F Mark Bourke Chief Executive Officer Appointed as CEO of novobanco in 2022, after holding the position of CFO for 3 years. 20+ years of experience as senior executive in financial institutions, namely as CEO in IFG Group and as CFO in AIB. t n e m t n o p p a i t s 1 f o e t a D F / M t n e m t n o p p A i e t a d y r i p x e M 04-03-2019 31-12-2025 Benjamin Dickgiesser Chief Financial Officer Appointed as CFO of novobanco in 2023; Previously member of novobanco’s GSB since 2017. +15 years of experience in financial markets, worked in FIG IBD at Citigroup and at Lone Star (MD for Hudson Advisors Portugal) with non-executive board roles at novobanco and IKB Deutsche Industriebank. M 01-10-2023 31-12-2025 Luís Ribeiro Andrés Baltar Chief Commercial Officer (Retalho) Chief Commercial Officer (Empresas) Luísa Soares Da Silva Chief Legal, Compliance & Sustainability Officer Appointed as CCOR in 2018. 25+ years of experience in the commercial area with novobanco, having previously assumed leadership for SMEs. M 18-09-2018 31-12-2025 Appointed as CCOC in 2020. 20+ years of experience in Corporate Banking at Barclays (was Head of Corporate Banking in Europe) and novobanco. M 01-12-2020 31-12-2025 Appointed as CLCO in 2017. Prior to joining novobanco, Luisa accumulated 25+ years of experience in Law, especially in the areas of banking and finance, insurance, compliance, and capital markets. F 18-10-2017 31-12-2025 Carlos Brandão Chief Risk Officer Appointed as CRO in 2022. Solid experience in risk management, both within and outside novobanco, as he was Risk Director in Santander Totta and Barclays. M 25-08-2022 31-12-2025 Rui Fontes Chief Credit Officer Appointed as CCO in 2022. Deep institutional knowledge of novobanco2 and 20+ years of experience in risk management. M 18-10-2017 31-12-2025 Gender Age Nationality Female 1 ]35-40] 1 ]55-60] 3 6 Male (1) (2) As of 31 December 2023 Portugal 4 3 ]50-55] 31 Spain 1 1 Germany 1 Ireland Annual Report 2023 | novobanco Novobanco has a Selection and Assessment Policy for Management and Supervisory Bodies and Key Function Holders, the purpose of which is to ensure that the members of these Bodies and Key Function Holders are suitable, at all times, to carry out their duties and, therefore, meet the necessary suitability requirements, as set out in the Policy and in the applicable legal and regulatory framework. With regard to the collective assessment of the Management and Supervisory Bodies (“Bodies” or “Corporate Bodies”), as collegiate bodies it is important to assess and ensure that their composition meets diversity criteria, namely in terms of the qualifications and professional backgrounds, gender, age and geographical origin of their members. This diversity - considered here in its various dimensions - and its practical application will be ensured by the strategy defined by novobanco and the implementation of the measures defined for this purpose, thus guaranteeing that regulatory requirements and expectations in this area are met. The primary objective is to ensure a diversity of perspectives and experiences that fosters the sharing of opinions and their independence, allowing for sound and balanced decision-making by the members of these corporate bodies and the gradual increase of the under-represented gender in the corporate bodies concerned. This Policy is complemented by the Succession Planning Policy, which incorporates the principles of diversity in the development of succession plans, and by the Non- Discrimination and Gender Equality Policy. The above policies can be consulted on novobanco’s institutional website at www.novobanco.pt With regard to gender diversity in the composition of the General and Supervisory Board and the Executive Board of Diretors, and in compliance with the relevant legal requirements, the Selection and Assessment Policy for Management and Supervisory Bodies and Key Function Holders has set a target of at least 20% of the under-represented gender at the next renewal of the mandate of these bodies. At the date of this report, the target has been reached with regard to the composition of the Supervisory Board in the current term of office (10 members, 2 of whom are women) and will be exceeded if the new female member of the General and Supervisory Board, whose fit and proper process has been submitted in 2023 and whose appointment will be the subject of a resolution at the next General Meeting, receives authorisation from the competent authorities to take up her duties. With regard to the composition of the Executive Board of Directors, this target has not yet been achieved. However, with reference to 2022, globally we note that the overall gender diversity at GSB and EBD level has positively increased from 12.5% to 17.6% and will exceed the 20% target when the fit & proper authorization is granted, and upon the appointment to GSB of the new member of female gender, which demonstrates novobanco’s strong commitment to achieving the targets it has set in this area. Considering the objective defined in the Policy, and to make gender diversity an increasingly fundamental element of the bank’s culture, the Gender Equality Plan was approved by novobanco in March 2023, establishing a set of measures and indicators that reflect: (i) senior management’s commitment to apply diversity and equality criteria at the level of novobanco and the Group, (ii) the definition of management indicators (“KPIs”) to regularly assess the alignment with the defined strategy, (iii) the implementation of processes for recruiting new employees and setting and reviewing salary conditions that take into account diversity criteria and promote 32 Management ReportSustainability ReportFinancial StatementsAnnex equal pay; (iv) career development and promotion plans that foster gender diversity across the Bank. Moreover, novobanco has incorporated into its governance model, especially at the level of the Nomination Committee, processes for monitoring compliance with the Gender Equality Plan and the individual measures set out therein. With the firm resolve of achieving the representation objectives set out in the Policy, the following indicators have also been defined: • at senior management level (Board of Directors and Coordinating Managers) novobanco exceeded the 25% target set in the Gender Equality Plan for 2023, having reached 27.3% of women in these positions. • positive evolution in gender pay gap - equal pay indicators (equal pay for equal work), from 5.7% to 5.3% in 2023, surpassing the 5.4% target set in the Gender Equality Plan. • positive evolution in the unadjusted pay gap indicators (men’s salaries vs. women’s salaries), from 18.3% to 17.7% in 2023, surpassing the 17.8% target set in the Gender Equality Plan. • in addition, the percentage of women in management positions has increased from 36.6% to 39.1% year- on-year, which reflects novobanco’s global efforts to strengthen women’s leadership.1 Women in senior management: EBD and Coordinating Managers (%) 25 27.3 Target 2023 2023 Equal pay indicator (%) 5.7 5.4 5.3 2022 Target 2023 2023 Overall gender diversity: GSB + EBD (%) Undajusted pay gap indicator (%) 12.5 17.6* 18.3 17.8 17.7 2022 2023 * Will overcome 20% with the new member of GSB. 2022 Target 2023 2023 (1) These indicators relate to novobanco and do not include data from other Group companies. 33 Annual Report 2023 | novobancoWomen in management positions (%) 36.6 39.1 2022 2023 The Gender Equality Plan also includes a set of initiatives, defined and adapted in accordance with the Strategic Plan in the People and Culture Pillar, which contribute to the continuous improvement of the above indicators. The achievement of the Gender Equality Plan’s objectives ensures that the conditions are in place to meet or exceed the target set in the policy at GSB level, and to achieve it at EBD level in the next mandate. With regard to the targets and indicators defined in the Gender Equality Plan, these have been met or exceeded at the novobanco level, with the novobanco Group’s figures being close to those of the bank. The issue of gender equality, equal opportunities and inclusion remains a strategic priority on the novobanco Group’s agenda, and the bank has developed a specific plan to reduce inequalities. This plan is being implemented with the firm intention of consolidating the foundations for long-term sustainability, with measures that promote inclusion and equality and a priority focus on decision-making and management positions. Employees 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 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, to contribute to their full development and allow them to fully unlock their potential and maintain high levels of motivation. 4209 employees (+119 vs 2022) 46 average age (stable vs 2022) 19 average seniority (stable vs 2022) 54% Female/ 46% Male (stable vs 2022) 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. 34 Management ReportSustainability ReportFinancial StatementsAnnex (This page was left in blank intentionally) 35 Annual Report 2023 | novobanco2 OUR STRATEGY 2.1 Business & Regulatory Environment 2.1.1 Macroeconomic Environment The global economy and financial markets faced several headwinds in 2023, namely: (i) the ongoing war in Ukraine; (ii) early in the year, the collapse of medium- sized regional American banks as a result of their excessive exposure to interest rate risk, breeding fears of financial instability; (iii) persistently high inflation during most of the year, particularly in services and food; (iv) the sharp increase in benchmark interest rates by the major central banks, making financing conditions more restrictive; and (vi) a new war between Israel and Hamas, fuelling tensions in the Middle East and triggering concerns about the potential spread of the conflict throughout the region. At the same time, the cooling of global demand for goods and the deceleration in international trade flows led to a contraction in manufacturing activity across the main economic areas. Notwithstanding these adverse factors, activity turned out to be better than expected, with the global economy growing by 3,1% in 2023, after expanding by 3.5% in 2022. In the major economies, consumers benefited from excess savings accumulated during the pandemic, low unemployment and fiscal support for income and expenditure. The services sector, in particular, benefited from the resilience of private consumption. In the US, GDP rose 2.5% in the full year (2.1% in 2022), driven by the favourable performance of household consumption and non-residential investment. The Euro Area, which was relatively more penalised by the contraction in manufacturing, the cooling of international trade in goods and the impact of rising interest rates, saw annual GDP growth fall from 3.4% in 2022 to 0.5% in 2023 - albeit above initial expectations of a stagnation. Quarter-on-quarter, activity dipped by 0.1% in the 3rd quarter and posted 0% growth in the 4th quarter. In China, GDP expanded by 5.2% in 2023 (+3% in 2022), buoyed by the removal of most Covid-19 restrictions and selective monetary and fiscal policy stimuli. However, the Chinese economy’s performance remained constrained by problems in the real estate sector and a still cautious stance on the part of consumers. Unemployment rates remained low in the US (up from 3.4% to 3.7% of the labour force) as well as in the Euro 36 Management ReportSustainability ReportFinancial StatementsAnnex Area (down from 6.7% to 6.4%). Many companies continued to report labour shortages and difficulties in filling vacancies. In this context, wages continued to rise in both nominal and real terms, albeit slightly decelerating compared to the previous year (nominal YoY increases of 5.2% in the US, in December, and 4.7% in the Eurozone, in the third quarter). The relatively good performance of the global economy in 2023 was further shored up by the steep drop in energy prices, lowering production costs for companies and bolstering household purchasing power. Despite rising briefly above USD 95/barrel in the 3rd quarter, mainly due to the expectation of further production cuts by OPEC+, the price of oil (Brent) fell by 17% in average annual terms, closing the year at 77$/barrel. In Europe, the price of natural gas slumped by 68.8% in average annual terms, closing the year at €32.4 MW/h. In this context, year-on-year inflation fell from 6.5% to 3.4% in the US and from 9.2% to 2.9% in the Euro Area. Besides the fall in energy prices, this trend was also driven by the gradual normalisation of supply chains, the cooling of consumer demand for goods and companies’ lower pricing power. Core inflation proved resilient in the first part of the year, mainly sustained by the services component, but eventually receded more noticeably in the last quarter. In the Euro Area, prices excluding energy and food slowed from 5.2% to 3.4% YoY. In the US, core inflation fell from 5.7% to 3.9% YoY. The persistence of inflation until 3Q23, and in particular of core inflation, led the major central banks to reaffirm the need to raise policy rates to levels deemed “sufficiently restrictive”. The US Federal Reserve raised the fed funds target rate in four 25 bps moves, to 5.25%- 5.5%, and then halted the cycle of hikes in July. The ECB raised its key interest rates by a cumulative total of 200 bps, with the last move taking place in September, thus bringing the main refinancing rate to 4.5% and the deposit facility rate to 4%. In July 2023, the Euro Area monetary authority wrapped up its asset purchases 37 Annual Report 2023 | novobancounder the Asset Purchase Programme and reiterated its commitment to gradually scale back asset purchases under the PEPP during 2024. In this context, the 3-month Euribor rose from 2.162% in January to an annual peak of 4.002% in November, after which it fell back to 3.909% by the end of the year. The 12-month Euribor rose from 3.316% at the beginning of January to an annual high of 4.228% at the end of September, before falling to 3.513% at the end of the year. The Euribor’s fall in the final months of 2023 was the reaction to the ECB’s signalling of the end of the monetary policy tightening cycle after the September meeting, also reflecting the market’s expectation of further cuts in key rates in 2024, due to lower inflation and signs of slower activity or stagnation in the Euro Area. In the US, falling inflation and expectations of subdued growth led the Federal Reserve’s monetary policy committee to project cumulative cuts of 75 basis points in its key interest rate in 2024. However, with the market anticipating a more substantial monetary policy easing, yields on government bonds experienced sharp declines in the latter part of the year. After rising from 3.875% to very close to 5% in October, the yield on the 10-year Treasury slid back to 3.879% at the end of the year. Albeit with fluctuations, the 10-year Bund yield rose from 2.571% to an annual high of close to 3% in October, after which it mirrored the Treasury’s trend and fell back to 2.024% at the end of the year. The resilience of economic activity, lower inflation in the context of a soft landing and the anticipation of lower interest rates bolstered the stock market and contributed to keeping credit spreads in check. In the US, the S&P 500 and Nasdaq stock indices surged by 24.2% and 43.4%, respectively, with the technology sector experiencing additional gains fuelled by favourable expectations regarding advancements in artificial intelligence. In Europe, the Euro Stoxx and DAX were up by 12.7% and 20.3%. The euro rose by 3.3% against the dollar, to €/$ 1.1064. Portuguese Economy In Portugal, GDP rose 2.3% in 2023, slowing down from 6.8% in 2022, but surpassing initial expectations as well as the Eurozone average. Economic activity was particularly strong at the start of the year, growing by 1.5% QoQ and 2.5% YoY in 1Q23. This performance benefited from the resilience of private consumption and, even more, by the strong contribution of net external demand, notably the vigour of services exports, and in particular those associated with tourism. A cooling trend in economic activity followed, reflecting less favourable base effects, the impact of rising interest rates on domestic demand and the slowdown in external demand. GDP recorded quarterly changes of 0.1% in 2Q23 and -0.2% in 3Q23, respectively, or 2.6% and 1.9% YoY. Growth increased again in 4Q23, to 0.8% QoQ and 2.2% YoY. In 2023 private consumption grew by 1% in real terms, after expanding by 5.6% in 2022. The main negative contributions to consumption came from fuel and non- food items (including durable goods), although spending on services also slowed down in the second half of the year. The slowdown in private consumption partly reflected less favourable base effects (growth in 2022 had been magnified by the 2021 pandemic restrictions). In addition, household spending in 2023 was constrained by continued price increases and the rise in interest rates. The average annual inflation rate fell from 7.8% to 4.3% in 2023, which is still relatively high. On a year-on-year basis, price growth slowed from 8.4% to 1.4% between January and December (averaging 6.1% in the first half and 2.6% in the second half of the year). This mainly reflected the fall in energy prices (annual average of -9% in 2023, after 23.7% in 2022) and the application of zero VAT to some basic goods, which contributed to the slowdown in unprocessed food prices, from 12.2% to 9.5%. 38 Management ReportSustainability ReportFinancial StatementsAnnex The implicit interest rate in mortgage loan contracts under the general regime rose from 1.885% to 4.583% between December 2022 and December 2023, causing the corresponding average monthly instalment to increase from €304 to €414 (or from €536 to €651 for contracts signed in the previous 3 months, in this case falling slightly towards the end of the year). On the other hand, household consumption found support in a relatively favourable labour market, in the use of excess savings accumulated during the pandemic and in fiscal support measures. The average annual rate of unemployment showed modest growth, rising from 6.1% to 6.5% of the labour force, with unemployment only increasing towards the end of the year. The strong performance of the services sector (especially tourism) contributed to the resilience of the labour market. The percentage of companies reporting labour shortages as a constraint on activity remained high in construction and increased in services and manufacturing. In this context, wages remained under upward pressure, contributing to nominal growth in household disposable income of 6.2%, down from a record 8.2% in 2022. The household savings rate fell from 6.5% to 5.8% of disposable income between the 4th quarter of 2022 and the 2nd quarter of 2023, then recovered in the second half of the year to 6.6%, on the back of a more cautious consumer behaviour. As elsewhere in the Euro Area, the pursuit of higher returns amid a climate of rising interest rates caused bank deposits in Portugal to shrink at the start of the year, as investors favoured alternative savings instruments, particularly saving certificates (certificados de aforro). This movement slowed down considerably in the second half of the year. Except for the transport equipment component, which benefited from the strong performance of tourism, investment in fixed assets experienced subdued growth. This was due to the tightening of financing conditions for businesses and households, to a more uncertain outlook, and to the still low execution rate of the Recovery and Resilience Plan’s funds. Overall, capital expenditure growth retreated from 3% to 0.9% in real terms. Weaker private sector investment intentions resulted in YoY falls in the flow of new mortgage loans and loans to non-financial corporations. Non-performing loan ratios remained contained in all segments, reflecting the context of low unemployment and of rising disposable income for both companies and households, as well as the macroprudential measures in force since 2018. In the 3rd quarter of 2023, the NPL ratio stood at 2.9% of total loans, down from 3.6% a year earlier. The real estate sector maintained a robust pace of activity in 2023, although showing some signs of deceleration. After increasing by 8.7% in the first two quarters of the year, house prices rose by 7.6% YoY in the 3rd quarter, with QoQ growth slowing from 3.1% to 1.8%. The number of transactions rose by 1.9% in the quarter, but fell by 18.9% YoY, in this case mainly due to the contribution of the domestic segment. Reflecting the expansion of economic activity and the observation of surpluses in both public and external accounts, most rating agencies upgraded Portugal’s sovereign rating in 2023. DBRS raised its rating in July, from A(low) to A; Fitch upgraded its rating in September, from BBB+ to A-; and Moody’s raised it in November, from Baa2 to A3, even if, in the same month, the Portuguese Prime Minister formally handed in his resignation to the President of the Republic, leading to the fall of the government and the scheduling of early elections for March 2024. S&P maintained its rating at BBB+, but improved the outlook from stable to positive. The spread of the Portuguese 10-year Treasury Bond yield to the German benchmark narrowed from 102 bps to 63 bps in the full year. 39 Annual Report 2023 | novobancoon private consumption, should contribute to this slowdown. Exports of services are also expected to subside. The decline in GDP growth should be mitigated by lower inflation, by the impact of fiscal support measures (e.g., pension increases), by a recovery in exports of goods following the decline in 2023, and by the increase in investment, especially in public projects, linked with the faster pace of execution of the Recovery and Resilience Plan (RRP) funds. Average annual inflation is projected to fall in 2024 to around 2.3%, while the unemployment rate should rise to around 7.2% of the labour force (annual average), mainly due to the slowdown in services activity. Companies’ efforts to retain employees may help alleviate this impact. In the real estate market, there should be a moderation in transaction volumes and a deceleration in prices, in line with the more subdued demand. Supply constraints are likely to remain a relevant factor, preventing a sharp correction in prices. The persistence of surpluses in the external and public accounts should contribute to a benign assessment of the sovereign rating. The main risks include the continuation of resilient inflation and restrictive financial conditions beyond expectations, the possibility of a global recession, a climate of instability and uncertainty following the March elections, delays in the execution of the RRP and a higher-than-expected increase in unemployment. Outlook for 2024 2024 should see a slight slowdown in global activity, with GDP growth receding to around 1.5% in the US and remaining below 1% in the Euro Area. Contributing to this soft-landing scenario are the lagged impacts of restrictive monetary policies and the shrinking of household excess savings. These factors should be mitigated by the fall in inflation and key interest rates, as well as by the increase in investment related to energy and digital transition programmes. The unemployment rate is expected to rise only moderately in the US and the Eurozone. Inflation should continue to fall in 2024, approaching the 2% target by the end of the year. In this context, the major central banks are anticipated to initiate a new cycle of policy interest rate cuts starting from the end of the second quarter. Cumulative cuts of 100-125 basis points in the case of the US Federal Reserve and around 75-100 basis points in the case of the ECB are anticipated. The main downside risks include the potential for inflation to persist at higher levels than anticipated, requiring the continuation of restrictive monetary policies and exacerbating the adverse impacts on demand and unemployment. The year 2024 will also be marked by various (geo)political events and risks, with possible impacts on the economy. These include the US presidential elections and, critically, the continuation of the war in Ukraine and the risk of the Israel-Hamas war escalating into a wider conflict in the Middle East, with adverse impacts on supply chains and the price of commodities. The main upside risks for the global economy include the possibility of faster than expected falls in inflation and key interest rates, as well as an early end to the conflicts in Ukraine and the Middle East. In Portugal, annual GDP growth is expected to retreat to just over 1%, still higher than the Euro Area average. The lagged effects of the ECB’s restrictive monetary policy and a slight rise in unemployment, with an impact 40 Management ReportSustainability ReportFinancial StatementsAnnex limitation on the use of internal models (output floor), as well as the increase in credit risk calculation weights. Reference should also be made to the EU Reform of the bank crisis management and deposit insurance framework (“CMDI”), which aims to strengthen depositor protection (by extending the application of the legal regime to public entities) in situations of crisis or financial instability. Of the various developments in the field of ESG, we highlight the EC proposal for measures in the area of sustainable and transition finance, which, by broadening the scope of the taxonomy, will allow a wider range of investments to be considered sustainable. In addition, the creation of a single European access point to publicly available information relevant to financial services, capital markets and sustainability, will contribute to better informed investment decisions. In terms of digital transformation, there have been developments on the digital euro and a proposal for a regulation is already on the table. The conclusions of the Copenhagen Economics study on the effects of the digital euro on financial stability and the need for the ECB to ensure measures to mitigate its negative impact on the banking sector were also published. Finally, a note on the developments under PSD3 and the publication of the PSR proposal in June 2023, to which most of the PSD2 will be transferred. 2024 should see the start of a phase of in-depth analysis of the two new Directives on consumer credit and financial services agreements concluded at a distance ((EU) 2023/2225 and (EU) 2023/2673, respectively), which member states must transpose and publish by 2025. Annual GDP growth1 (%) 6.8 3.4 EA PT vs 1.8% in Mar/23 2.3 PT 0.5 EA 2022 2023 Inflation (%) below 2023E Euro Area average of 5.4% 7.8 4.3 1.4 2017 2022 2023E 2.1.2 Regulatory Environment Amidst a challenging socio-economic context, 2023 was marked by a series of regulatory initiatives at European level aimed at strengthening the resilience of the banking sector, reinforcing the commitment to climate transition, and pursuing digital transformation and technological evolution. These included the publication of the final proposals to amend the Capital Requirements Directive and the Capital Requirements Regulation (CRD VI and CRR III), with a view to increasing the comparability of banks’ capital ratios. Of particular note is the introduction of a (1) Source: Bank of Portugal; 2023E PT expectaction from BdP as of Dec/23; European average – ECB (Dec/23). 41 Annual Report 2023 | novobancoManagement Report Sustainability Report Financial Statements Annex New ESG measures Digital Euro Regulation Proposal Publication of Copenhagen Economics Study PSD3 and PSR proposals CMDI EU Regulation (EU) 2023/2859 European single access point CRD VI and CRR: package approved by European Council and Parliament preparatory bodies Directive 2023/2225 On consumer credit Directive 2023/2673 Financial services contracts concluded at a distance 2023 April June September October November December 2024 New asset management regime Regulation 4/2023 Means of compliance with issuers’ information obligations Package of measures for mortgage loans Regulation 7/2023 Regulates the asset management regime (entry into force in January 2024) PT In Portugal 56/2023 and 24/2023, Decree Law 91/2023 and 20-B/2023 and BdP Instruction 24/2023). In terms of interactions promoted by the CMVM, Regulation 4/2023 regulates the formats and means to be used by securities issuers to fulfil information disclosure duties. In addition, Regulation 7/2023, which will come into force in January 2024, regulates the new Asset Management Regime, published in April 2023. In 2023, significant initiatives were implemented to assist Portuguese families in mitigating the impact of rising interest rates on permanent home loan agreements. These measures aimed to alleviate financial burdens by securing fixed loan instalments for a two-year period, increasing temporary interest subsidies, subject to specific criteria, and imposing restrictions on commissions charged by financial institutions (Laws 42 Annual Report 2023 | novobanco 2.2 Strategic Pillars Following the launch of its new brand and the presentation of its new strategic plan (“Fazer Futuro”) in 2021, novobanco has been implementing various initiatives and programmes that support it and, above all, contribute to the fulfilment of its main objectives. The results achieved, both in the financial statements and in the significant strengthening of the bank’s solvency reflect this fulfilment, despite the challenges of the macroeconomic context. In 2023, novobanco continued to grow consistently and exceed expectations, reinforcing its position as a solid and independent domestic bank, while maintaining its commitment to supporting families and businesses throughout their lifetime. 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 focused on each of its customers, providing them a simple and efficient experience, supported by a qualified and close team, thus contributing to an organisation with robust and sustainable results. novobanco’s strategic plan is structured around four pillars: STRATEGY PILLARS 1 CUSTOMER-CENTRIC BANK 2 SIMPLE AND EFFICIENT OPERATIONS 3 DEVELOPING PEOPLE AND CULTURE 4 DEVELOPING SUSTAINABLE PERFORMANCE Reflecting evolving customer expectations through distinctive value propositions. Simplifying the banking experience, through superior usage of technology and data. Attracting and developing a team of skilled and fulfilled professionals that actively live the bank’s values. Delivering sustainable returns through disciplined risk, capital and funding management. Leveraging digital and omnichannel approach as drivers of service and proximity. Improving internal processes to upgrade productivity and efficiency. Developing a dynamic collaborative culture in an environment adapted to the new ways of working. Strengthening the integration of ESG across business to support sustainable growth and key stakeholders. SDG ALIGNMENT 43 This strategy is designed to maximise the social impact of novobanco’s activities. In this regard, the strategic pillars align with the Sustainable Development Goals (SDGs), prioritised following the last materiality assessment. 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 OMNICHANNEL FACE TO FACE HUMAN REMOTE DIGITAL Branches & Corporate Centers Contact Hub ROLE Smaller network of multi-format and modular branches; Promote retail and commercial collaboration via shared spaces. ROLE Simple servicing, client remote support to self-served channels and inside sales/redirection to other channels. PoS ROLE Collect payments and expand functionalities to enable value-added services. Partners ROLE Network of partners to promote and expand client acquisition capabilities. Remote RM & Mobile AC ROLE Increase remote servicing to mass to industrialize relationship and to affluent to steer to lower cost-to-serve channels. A/VTMs ROLE Increase speed, convenience & cost-effectiveness in cash & equivalent transactions at the branch. Phygital Solutions Web and Mobile ROLE Enhancing the customer experience through contract formalization solutions and information sharing, in both face-to-face and remote scenarios, cementing the relationship of transparency and closeness with customers and the bank’s omnichannel strategy. ROLE Speed and convenience for simple servicing and sales, capture traffic and cross-fertilize other channels. 44 Management ReportSustainability ReportFinancial StatementsAnnex NEW CHANNELS, SERVICES AND A PERSONALISED CUSTOMER EXPERIENCE ALLOWED A RAPID RISE IN DIGITAL… 2020 DIGITAL ACCOUNT OPENING-VIDEOCALL Launch of the video call account opening solution. ONLINE CREDIT FOR BUSINESS 1st integrated and 100% digital credit solution for business. HOMEBUYING From simulation to deed. Simple, quick & more transparent. Ecologically sustainable. APP SMARTER Adaptable, customizable, inclusive & predictive (based on data science). FINANCIAL AGGREGATOR Business Financial advisor. Analytic & predictive. INVESTMENT FUNDS Subscription of third-party funds through digital channels extended. Morningstar app solution made available to customers. 2021 2022 2023 LIFE INSURANCE PERSONAL LOANS PERSONAL LOANS Simulation and subscription of life insurance on digital channels is made available. New subscription solution on digital channels with simulation comparison feature. NEW WEBSITE HOMEBUYING More customization, SEO and new features. API for credit intermediaries: reduced instalment offer. Launch of online store for non-financial products. CLIENT INFORMATION UPDATE INSURANCE New simulation feature for home insurance with option to save simulations. Client information update via CMD. E2E subscription Home insurance. PHYGITAL PHYGITAL Available across the retail network, with -40% operations coverage, saving +13 tons of paper in 2021. NOVOBANCO ONLINE CORPORATE A new online service to simplify and support the day-to-day financial management of companies. Increased product depth. New remote signing solutions. INVESTMENT SOLUTIONS New online Investor Profile Questionnaire. Increased off balance offer on digital Channels. CREDIT CARDS New online request. Increased limit request. Pin by SMS. DIGITAL CHANNELS App: New wallet features, savings widgets and budgeting, recurring ops. Online Empresas: new dashboards and functionalities (factoring, confirming). CLIENT INFORMATION UPDATE ID card photo upload on digital channels. 45 Improved underwriting process. INVESTMENTS Extension of the offer available online. Improvements to the Investor Profile Questionnaire (QPI). Online opening of the Financial Investment Contract, integrated in the investment fund subscription process (CIF). NON-LIFE INSURANCE OFFER Simulation of Car and Health Insurance in digital channels, with subscription through the call centre or branches. ONLINE OPENING ACCOUNT Improvements in the process. NOVOBANCO APP New app for corporate clients. Google Pay / Apple Pay. Enhanced security in online shopping payments with 3D Secure. New authentication model for push notification even more fluid. NOVOBANCO ONLINE CORPORATE Improvements and new features in the confirming dashboard. Factoring and Confirming Reports. Participation Management with simplified membership (consultation only). PHYGITAL Increased product depth. Extension to the corporate segment. Enlargement to novobanco Açores. Annual Report 2023 | novobanco…UNLOCKING CURRENT AND FUTURE POTENTIAL: Digital Sales INSURANCE +107% YoY CREDIT CARDS +122% YoY PERSONAL LOANS +27% YoY 8% of segment sales 5% of segment sales 20% of segment sales +3pp YoY +1pp YoY +5pp YoY Digitally active clients (%) 62 (+5pp vs 2022) 67 2022 2023 Self-service transactions (%) 84 94 >70 Retail segment Small Businesses segment Corporate segment 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 2023, novobanco also set emission reduction targets by 2030, aligned with the goals of the Paris Agreement, in the most relevant segments of its credit portfolio, as described in the Sustainability Report. With this in mind, novobanco aims to be the banking partner of choice for its clients when it comes to adapting to climate change. In the corporate segment, this means the provision of financing solutions and access to specialist partners to help our customers plan and finance the investment requirements of the transition challenge. To this end, novobanco has established a green financing policy with ambitious medium-term targets (over €2 bn in the next 3 years). 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. The bank launched specific products to meet the changing demands of the energy transition, such as green mortgages, personal loans for the installation of renewable energy solutions at home and special loan conditions for electric and hybrid vehicles. 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 46 Management ReportSustainability ReportFinancial StatementsAnnex 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. Finally, novobanco aims to maximise its positive impact on society - promoting a social responsibility agenda, acting on issues such as financial inclusion, financial literacy, the dissemination of ESG knowledge, sponsoring research into sustainability and driving multiple inclusion initiatives in the most fragile segments of the Portuguese society. More information on products with an ESG impact is available in the Sustainability Report - 3.3) Our Customers. New Distribution Network (# branches) (91% of branches) 240 265 116 2021 2022 2023 Evolution of number of clients (# in thousands) (>45% client acquisition growth) 1 482 1 583 2022 2023 Client satisfaction (Nov-23) Deposits Market share (%; Nov-23) Mortgage Loans 82% (+3pp vs Dec-22) Account opening 90% (flat vs Dec-22) (+0,4pp YoY) 9.3 9.7 2022 2023 Personal Loans 93% (flat vs Dec-22) 47 Annual Report 2023 | novobancoManagement Report Sustainability Report Financial Statements Annex 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 far-reaching 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 models that support decision-making and, naturally, the regulatory commitments and requirements to which the banking sector is subject. Cost to Income Ratio1 (%) Reported Recurring 49 44 33 30 2022 2023 Average Business Volume per Employee2 (€k) +1% 12 583 12 704 Employees3 (#) 4 090 4 209 2022 2023 To increase efficiency and improve its environmental footprint, the bank has set ambitious targets to reduce its own greenhouse gas emissions (-28% by 2024 compared to 2021), to reduce the consumption of resources and to reduce, recycle and recover waste (-30% by 2024 compared to 2021 for paper consumption). Novobanco is keen to ensure that its sustainability standards are met throughout its supply chain and has established guidelines and a monitoring framework to ensure compliance by its suppliers. 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 culture that values diversity and champions equity, including gender equality, and relies on the diversified profiles and paths of its people; (1) Defined as Operating Cost divided by Commercial Banking Income; Commercial Banking Income being equal to Net Interest Margin plus Fees and Commissions; (2) Considers average stock of Net Customer Loans and Deposits, divided by average number employees in the period; (3) End of period data. 48 • 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; • A workplace that fosters and promotes employee well-being and health, building a strong sense of employee engagement; • A culture of continued self-improvement and expertise, by promoting employee training programs in key topics, including sustainability. The experience of values and an organisational culture that translates and permanently reinforces these characteristics. Staff Turnover (%) (+1.3pp) 6.3 5.0 2022 2023 ESG training hours (thousands; cumulative) 70.6 (+21k) 96.9 2022 2023 Gender Pay Gap1 (%) 5.7 (-0.3pp) 5.4 2022 2023 (1) Equal Pay indicator (equal pay for equal work). At novobanco stand-alone level this KPI stands at 5,3%. More information is available in the Management Report – 1.2.2 Organizational Structure, 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 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. 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 49 Annual Report 2023 | novobanco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 internal models. 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. Green investment (€mn) CO2 Emissions (scope 1 e 2) Eletricity from green certification: 343 369 -2% emissions 2022 2023 2022 2023 77% 2023 TARGETS EXCEEDED AND ACHIEVING INVESTMENT GRADE RATING EARLIER THAN EXPECTED 2023 Guidance1 2023 Achievements CET 1 FL 10.1% 13.1% 18.2% Net Interest Margin > 2.5%2 2.75% 19.0% 20.4% Cost to Income ~ 35% 33.3% RoTE 6.2% Cost of Risk ~ 50 pb 48 pb NPL Ratio3 < 4.5% 4.4% (w/ 84% coverage) Profit Before Tax4 €700mn €754mn Capital Generation > 400 pb +500 bp (CET1: 18,2%) 2021 2022 2023 Rating Actions Moody’s (December 2023) Ba1 (Positive Outlook) Senior Unsecured Debt +7 notches in 2 years Fitch (February 2024) BBB- (Stable Outlook) Senior Debt Investment Grade (1) Considers upward revision of 2023 guidance presented with 1H23 and 9M23 accounts; (2) Considers average Deposits Facility Rate of 3.3% vs previous 2.7%; (3) NPL actual calculated as non-performing loans by gross customer loans; (4) PBT deducted by Special Tax on Banks. 50 Management ReportSustainability ReportFinancial StatementsAnnex 2.3 Risk Management Main Risks and Uncertainties in 2024 In 2023, novobanco delivered positive financial results. These results reflect the adoption of a prudent strategy in the conduct of its business, taking into account the difficult macroeconomic environment, particularly in terms of rising interest rates and financial market volatility, as a result of armed conflicts in Eastern Europe and the Middle East and the collapse of banking institutions in Europe and the United States, as well as the challenges associated with digital transformation, with the consequent increase of operational risk. In 2024, the activity of novobanco and the banking sector in general will be affected by a combination of different risks and uncertainties, of which the following stand out: i. Legal and regulatory risks The dynamic regulatory environment of the financial sector in its various areas is quite a challenging task for institutions to comply with new legal and regulatory requirements in a timely manner and to adapt their internal procedures accordingly. In this context, the following points deserve special attention due to their growing importance: • The integration of environmental, social and governance (ESG) objectives/criteria into business operations and the related disclosure requirements: taking into account the current context of integration of ESG factors into the prudential and behavioural rules applicable to banking activities and the aim of institutions to achieve their sustainable finance objectives, namely by complying with highly complex disclosure requirements, as well as the ongoing impasse over the approval by the European Union of the Directive on Corporate Due Diligence in Sustainability Matters - which, if not adopted, will mean the loss of a fundamental pillar of the European Union’s ESG/sustainability plan, which is anchored on the Taxonomy-CSRD-CSDDD triangle - institutions have continued to navigate a landscape marked by uncertainty regarding the speed of transition process towards a sustainable economy, and therefore the rules they must follow. It is therefore anticipated that the regulatory agenda of supervisors will remain particularly intense in this area, which will require an effort on the part of institutions to assess their resilience to different scenarios of climate change and energy transition, to take the necessary measures to mitigate any risks that may be identified in this context, and to reposition their strategies to promote ESG objectives. • The reinforcement of the legal and regulatory framework for the prevention, detection and combat of financial crime, namely through the AML package, which includes the European Union’s ongoing review of Directive 2015/849, the regulatory requirements for due diligence, the implementation of robust transactional analysis models, Decree- Law no. 109/2021, among others, the application of restrictive measures resulting from sanctions and embargoes, with the consequent impact on the Bank’s internal processes. On the other hand, the new European AML/CFT Supervisory Authority (AMLA) will require close monitoring; • The Bank’s capital requirements (SREP), the various On-Site Inspections (OSIs) conducted by the European Central Bank (ECB), the stress tests on Liquidity Risk, the Minimum Requirement for Own Funds and Eligible Liabilities (MREL), as well as those anticipated in the area of cybersecurity, and the various guidelines of the European Banking Authority (EBA) and the ECB on these matters. 51 Annual Report 2023 | novobancoii. Digital Transformation Risks Technological innovation and digitalisation initiatives have become a priority for the banking sector, both for the benefits they bring to customer service (customer experience) and for the benefits they bring to internal efficiency processes. While the benefits of digitalisation are undeniable, it also poses significant risks to banks, such as an increase in cyber-attacks (boosted, for example, by current geopolitical tensions), the inappropriate collection of personal data and fraud perpetrated through digital channels. As a result, banks will have to maintain operational resilience plans that allow them to anticipate these situations as far as possible, which in turn means constantly monitoring technological developments with the aim of increasing protection capabilities and mitigating cybersecurity risks. In addition, 2023 saw a fast rise in the commercialisation of products based on artificial intelligence, and this trend is expected to continue in 2024. Although it is extremely difficult to predict all of its implications, this could lead to significant opportunities for efficiency gains and more sophisticated marketing strategies. It is thus expected that in 2024 this digital transformation risk will not only persist, but that it may even be exacerbated given the many technological development initiatives underway. Of particular relevance is the new European legislative framework - the Digital Operational Resilience Act (DORA) - which aims to help strengthen the digital operational resilience of entities operating in the financial sector by requiring them to develop and maintain robust ICT to prevent and mitigate cyber threats in the financial sector that seek to exploit vulnerabilities in computer systems. This framework will be applicable in 2025 and will be complemented by the existing EBA guidelines (EBA/GL/2019/04), which will certainly be updated and will require institutions to make additional efforts in 2024 to adapt their internal processes and procedures. iii. Outsourcing Risks Linked to the technological innovation processes mentioned in the previous point, we should also highlight the growing importance of outsourcing services or functions to third parties, which is expected to continue throughout 2024 and which will naturally pose challenges for institutions, particularly in terms of compliance with legal and regulatory frameworks, reporting obligations, monitoring and assessing the risk of outsourced services/functions, and adapting to the expectations already conveyed by the European Central Bank in its supervisory activity plan for 2024-2026. iv. Geopolitical and market risks • At a global level, there are still concerns that the geopolitical fragmentation caused by the current conflicts in the Middle East and Eastern Europe could have an even more negative impact on trade, technology and people flows, leading to market uncertainty and volatility; • The national macroeconomic situation and the impact of the outcome of the Portuguese parliamentary elections in March 2024; 52 Management ReportSustainability ReportFinancial StatementsAnnex • The remaining factors linked to the various types of risk described in this chapter. In short, the risks anticipated for 2024 will be significant, given the context of uncertainty resulting from the increase of geopolitical tensions, a slowdown in economic activity and the prospect of interest rates remaining at higher levels, to which novobanco is obviously not immune. 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. • Delays in the implementation of the Recovery and Resilience Plan and the resulting impact on the economy; • Uncertainty about the impact of persistently high interest rates and inflation on monetary policy in the Eurozone, potentially exacerbating the risk of higher-than-expected unemployment and generating instability in the commercial real estate sector; • The potential impact on the global economy of the presidential election in the United States of America; • The credit risk arising from the increase in financing costs and the deterioration of the macroeconomic situation are factors that could lead to the materialisation of this risk for both companies and individuals. v. Other Risks • The Non-Performing Assets (NPAs) portfolio and the implementation of the NPA plan, particularly as regards real estate owned (REO); • Reputational, legal and compliance risks, especially when leading to litigation, either arising from the Group’s current activity or from legacy issues; • Risks arising from the activities of novobanco and the Group’s entities; • Broadly, the increase in regulatory reporting requirements, resulting in greater demands in terms of data collection, data quality verification and the safeguarding of data under personal data protection legislation. 53 Annual Report 2023 | novobancoRisk Management Framework The Risk Culture at novobanco Group 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. 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. 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. 1. GOVERNANCE Risk management and control committees; Definition of Policies and roles and responsibilities. 2. RISK APPETITE STATEMENT Definition of the level of risk that the Group is willing to take on. 3. RISK CULTURE Risk culture embedded at the verious levels of the organisation making all employees accountable for risk management and control. 4. RISK CATEGORIES Shared holistic vision of the Credit, Market, Liquidity and Operational Risk classes as well as of emerging risks. 5. RISK TOOLS Stress testing, limits policy, model validation, quantification and evaluation methodologies. 6. 3 LINES OF DEFENCE The pillar for effective and seamless risk management at the various levels of the Group. 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. 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 54 Management ReportSustainability ReportFinancial StatementsAnnex 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. 3 LINES OF DEFENCE PRINCIPLE 1st 2nd 3rd line of defence line of defence line of defence NOVO BANCO GROUP Business Areas Global Risk Department Compliance Department Internal Audit Department FUNCTION Maximise return Control LIMITATION Takes risk according to Risk Appetite Does not take risk • Accurate and timely identification of risks; MISSION • 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. 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: i. credit risk, which includes default, counterparty and concentration risk; ii. liquidity risk; 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. 55 Annual Report 2023 | novobanco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. The Head of novobanco Group’s Risk Management Function is the Head of the GRD, who reports to the Chief Risk Officer, a member of the Executive Board of Directors. 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. The Risk Appetite framework defines: CONTINUOUS MONITORING OF RISK EXPOSURES Monitoring of risk exposure in a accordance with the Governance in force. IDENTIFICATION OF MATERIAL RISKS Annual risks identification process at Group level and of each materially relevant subsidiary. ROLES AND RESPONSIBILITIES IN RISK MANAGEMENT Risk Policies defining the roles and responsibilities of each stakeholder in risk management, in compliance of the 3 lines of defence principle. DEFINITION OF RISK APPETITE STATEMENTS A Risk Appetite statement and respective limits to be complied with by the organisation are defined for each material risk. 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. 56 Management ReportSustainability ReportFinancial StatementsAnnex Robust and efficient risk management is also the result of prospective analysis and ongoing monitoring of risk exposures, creating a specific risk tolerance framework that allows the 1st Line of Defence to perform its activities as risk-taker and relevant participant in risk management. The Risk Appetite Statement (RAS) and Risk Appetite Limits (RAL) defined and approved by the General and Supervisory Board and the Executive Board of Directors cover financial and non-financial risks, the various business lines and regulatory limits. The definition of these limits is the responsibility of the Risk Management Function, which liaises with the other relevant stakeholders in the management and control of specific risk exposures. The Market Discipline Report provides further details on RAS and RAL. Risk appetite is monitored by the Risk Committee of the Executive Board of Directors and General and Supervisory Board. Risk management and control is also supported by various specialised committees. Detailed information on the committees that support the Risk Management Framework is described in section 5.2. Corporate Bodies: Composition and Functioning. The definition of Risk Appetite statements for the Group’s relevant exposures and their monitoring through risk limits are fundamental aspects of risk management and control. By linking them to the main strategic metrics, the risk limits are divided into three levels (according to their materiality), and subject to a specific escalation process, namely for the metrics with the highest materiality, that involves timely communication to the General and Supervisory Board and reporting to the Executive Board of Directors, as a guarantor of effective supervision of risk appetite monitoring. The General and Supervisory Board monitors and ensures the effectiveness of the management conducted by the risk function, its action plan and budget, as well as its reports and relations with external auditors and supervisory authorities. It also monitors the current and future global risk appetite, the risk strategy in place, and the effectiveness of novobanco Group’s risk management system and internal control system. Moreover, it is responsible for giving prior consent to the Executive Board of Directors’ proposals on various matters, namely the definition of the Risk Appetite Framework, the Risk Appetite Statements and the corresponding limits. The Executive Board of Directors is responsible for approving the Risk Framework, the Risk Policies and the related methodologies and procedures for identifying, assessing, monitoring and controlling risks. The identification and assessment of the risks to which the Group is exposed must take into account the established business strategy and planning. Strategic planning, capital adequacy and resolution exercises are therefore carried out with the active participation of the Risk Management Function. 57 Annual Report 2023 | novobancoMANAGEMENT RISK APPETITE FOCUS IN 2024 Determine the size of the liquidity pool available at any given time and plan for stable sources of funding over the medium and long term. Liquidity • Solid liquidity position; • Funding of medium- and long-term assets through stable liabilities; • Withstanding liquidity stresses for a minimum period of 12 months; • Compliance at all times with the limits imposed by the legislation in force. • Maintaining and evolving the risk monitoring and management processes, ensuring the timely detection of shifts in the risk profile and the Bank’s alignment with the established risk appetite; • Developing and maintaining internal models and stress testing exercises (Stresstesting Framework) that allow liquidity risk to be measured and controlled: • To be continuously updated on the regulatory framework. • Risk appetite with stable origination criteria. Credit • Use of internal risk identification, assessment and quantification system; • Internal processes for rating and scoring allocation by type of portfolio; • Definition of Risk Appetite by portfolio; • Credit powers that force the escalation of riskier operations; • Ongoing monitoring in specialised fora. GRD expert team centralises the management and control of the group’s market and interest rate and credit spread risk on the banking book (IRRBB/CSRBB), in line with the regulations and risk good practices. • Monitoring of net interest income, market investments and balance sheet interest rate risk through predefined risk appetite rules. Market and IRRBB • Contribution to strengthen the Bank’s operational capacity to manage credit exposures in a context of persistently high interest rates, high inflation, instability in the energy and commodity markets, and disruptions in the distribution chains. Focus on the early identification of financial deterioration indicators and definition of strategies for timely intervention with viable debtors requiring support measures to maintain their debt service capabilities; • Reinforcement of remote service models and creation and development of automated credit assessment and decision tools; • Strengthening the continuous monitoring processes of the various credit portfolios and reinforcing the EWS framework with the inclusion of new indicators. • Processes for ongoing monitoring of market and IRRBB/CSRBB risks within the boundaries of the established risk appetite, allowing to assess the impact of changes in market factors, such as volatility and interest rates; • Development and maintenance of internal models and stress testing exercises (stresstesting framework) to measure and control market and IRRBB/CSRBB risks, as well as calculation of economic capital within the ICAAP exercise, calculation of market shock impacts within the EBA Stresstesting exercise and regulatory capital reporting (alternative standard approach), within the Fundamental Review of the Trading Book (FRTB); • Keeping updated at all times with regard to the regulatory framework, and in particular the new EBA guidelines on IRRBB/CSRBB. 58 Management ReportSustainability ReportFinancial StatementsAnnex MANAGEMENT RISK APPETITE FOCUS IN 2024 • Definition of Non-Financial Risk Management and Control Framework and Specific Policies; • Compliance function and Information Security Office with a relevant role in the definition of other specific risk policies. • The risk appetite encompasses the various categories of risk and reflects the infeasibility of eliminating it from a cost-benefit perspective; • Risk appetite aligned with novobanco Group’s high ethical and conduct standards, which implies zero tolerance for inadequate conduct. Non Financial • Reinforcement of compliance with the risk appetite defined for the whole Group; • Reinforcement of a culture of risk, particularly in the first line of defence, to ensure the alignment of actions and decisions with the risk strategy and appetite across the various levels of the organisation, promoting a more robust control of risk; • Continuous strengthening of the Fraud Risk framework in light of the increased sophistication of fraud typologies, in particular cyber and technology risk, by enhancing fraud events prevention mechanisms; • Updating of the identification and assessment methodologies for-non financial risks, to include ESG risk; • Keeping continuously updated on the regulatory framework. ESG Undertaken through the joint approach of specialised teams from the GRD and GESC, which define the guidelines to be followed for any new business and for monitoring existing positions, in order to measure and mitigate novobanco Group’s exposure, in particular to transition and physical risks. In addition, it is supported by methodologies to assess and monitor the risk factors, which, consistently with the applicable regulations, permit to monitor the evolution of the risk profile of balance sheet positions. • Application of exclusion policies • Application of the criteria established by the and minimum safeguards, namely for activities with higher ESG (environmental, social and governance) risk; • Definition of global goals and guidelines to steer new credit production according to ESG assessment criteria; • Implementation of global risk assessment methodologies, at the level of the credit portfolio, to identify and monitor the evolution of the main ESG risks on the balance sheet; • Creation of a KRI dashboard integrated into novobanco Group’s Risk Appetite. EU Taxonomy Climate Policy Relevant Sectors (CPRS) and greenhouse gas emitting sectors to characterise the Bank’s portfolios; • Mapping of the physical risk of properties owned by novobanco or given as loan collateral; • Increased integration between ESG risk methodologies and business planning and execution, namely regarding the implementation of risk classification methodologies (Scorings / Ratings & Taxonomy) and respective guidance on credit risk decision and monitoring; • Maintaining and improving ESC scorings and ratings. More information in chapter 3.2) ESG Risks of the Sustainability Report 59 Annual Report 2023 | novobanco3 OUR PERFORMANCE 3.1 Highlights CONSISTENT STRATEGY DELIVERING INCREASED PROFITABILITY CONTINUED STRONG CAPITAL GENERATION • Net income of €743.1mn (2022: €560.8mn), • FL CET1 ratio increased by ~500bps YoY to 18.2%, reflecting a solid domestic business model aligned with our customers’ expectations and the efficiency measures implemented in recent years. • In 2023, NIM reached 2.75% (2022: 1.47%), above 2023 guidance (> 2.5%). NII totalled €1,142.6mn (2022: €625.5mn), as a result of the favorable interest rate environment, and of the prudent management of interest rates on assets and the cost of financing. • Fees totaled €296.1mn, increasing 0.9% YoY (2022: €293.3mn), with the impact from regulatory changes that reduced commissions charged on certain products, partially offsetting the overall strong underlying trend. • Commercial Cost to Income ratio of 33% (2022: 49%), beating guidance of ~35%. The ratio reflects the Commercial Banking Income performance (+56.6%) versus Operating Costs (+6.9%), which were driven by continued investment in the business and inflationary pressures. beating the already revised capital generation guidance of >400bps. Total Capital ratio increased by ~560bps to 21.0% (+165bps QoQ), which also benefited from the net increase of the Tier 2 by €100mn, following the issuance of the new €500mn 10.5NC5.5 Tier 2. • Strong capital generation with tangible shareholder’s equity increasing €894mn to €4,126mn (+27.7% YoY). A RESILIENT BUSINESS MODEL WITH MARKET SHARE MOMENTUM • Net Customers loans at €24.5bn (stable YTD), with €3.5bn YTD origination partially offset by increased amortization and supported by new client acquisition. The bank has increased its footprint in the Portuguese market with global market share at 9.8% (Nov/23; +0.2pp YTD). • Cost of risk was 48bps (2022: 44bps), for credit and • Non-performing loans (NPL) present a reduction of corporate securities (including management overlays), consistent with 2023 guidance of ~50bps. 17.7% YoY to €1,133mn. Net NPL ratio stood at 0.7% (Dec/22: 1.3%) and the NPL ratio at 4.4% (Dec/22: 60 Management ReportSustainability ReportFinancial StatementsAnnex 5.4%; in-line with guidance of <4.5%), with a coverage level of 84.3% (Dec/22: 77.5%). in 2023; and v) stable funding, along with adequate liquidity. In Nov/23, and for the third consecutive time, novobanco has received a multi-notch rating upgrade from Moody’s, achieving a remarkable 5-notch rating increase within a 7-month period, moving senior unsecured debt rating to Ba1 from B3, while maintaining a “Positive Outlook”. • Total customer funds of €34.9bn (Dec/22: €34.8bn; flat YoY), with customer deposits at €28.1bn. This performance is reflected in the growth of novobanco deposit market share to 9.7% in Nov/23 (Dec/22: 9.3%). Loan to Deposits ratio is 81.2% (Dec/22: 83.3%). As of Dec/23, novobanco had a net ECB funding position of -€4.2bn, post the reimbursement of €5.4bn from TLTRO III, and a Liquidity buffer of €13.6bn as of Dec/23 (-€0.1bn YTD). Liquidity Coverage Ratio (LCR) stood at 163% (vs. 210% in 2022) and Net Stable Funding Ratio increased to 118% (vs. 113% in 2022). A REMARKABLE TURNAROUND, ACHIEVING AN INVESTMENT GRADE RATING In Feb/24, Fitch assigned a ‘BBB-’ LT rating to novobanco’s senior preferred debt. The Investment Grade rating reflects i) the turnaround of the bank’s business model; ii) a significant improvement in asset quality; iii) levels of profitability that compare favorably to peers; iv) significantly improvement of capital buffers 61 Annual Report 2023 | novobancoMain Highlights Activity (€mn) Net Assets Customer Loans (gross) Customer Deposits Equity Solvency Common EquityTier I / Risk Weighted Assets Tier I / Risk Weighted Assets Total Capital / Risk Weighted Assets Leverage Ratio Liquidity (€mn) European Central Bank Funding (3) Eligible Assets for Repo Operations (ECB and others), net of haircut (Total Credit - Credit Provision) / Customer Deposits (2) Liquidity Coverage Ratio (LCR) Net Stable Funding Ratio (NSFR) Asset Quality Overdue Loans > 90 days / Customer Loans (gross) Non-Performing Loans (NPL) / Customer Loans Credit Provision / Overdue Loans > 90 days Credit Provision / Customer Loans (gross) Cost of Risk (basis points) (1) Profitability Net Income for the Period (mn€) Income before Taxes and Non-controlling interests / Average Net Assets (2) Banking Income / Average Net Assets (2) Income before Taxes and Non-controlling interests / Average Equity (2) Return on Tangible Equity (RoTE) Efficiency Operating Costs / Banking Income (2) Operating Costs / Commercial Banking Income Staff Costs / Banking Income (2) Employees (No.) Branch Network (No.) (1) Includes credit, securities and initial fair value; (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. 62 31-Dec-23 31-Dec-22 43 501 25 489 28 140 4 422 18.2% 18.2% 21.0% 7.9% -4 246 14 217 81% 163% 118% 1.3% 4.4% 45 995 25 617 28 412 3 512 13.1% 13.1% 15.4% 5.8% 385 16 917 83% 210% 113% 1.2% 5.4% 282.4% 336.0% 3.7% 48 743.1 1.7% 3.3% 21.2% 20.4% 33.2% 33.3% 17.5% 4 209 290 4.2% 44 560.8 1.2% 2.5% 17.8% 19.0% 39.8% 48.8% 20.7% 4 090 292 Management ReportSustainability ReportFinancial StatementsAnnex 3.2 Novo Banco Group (Consolidated) 3.2.1 Results In 2023, novobanco Group presents a result of €743.1mn (+€182.2mn YoY). This reflects the improvement in banking income (+€315.9mn; +28.0%) and operating costs (+€30.8mn; +6.9%; +6.2% excluding items of exceptional nature) and a level of provisioning in-line with expectations. Income Statement (mn€) Net Interest Income + Fees and Commissions = Commercial Banking Income + Capital Markets Results + Other Operating Results = Banking Income - Operating Costs = Net Operating Income - Net Impairments and Provisions Credit Securities Other Assets and Contingencies = Income before Taxes - Corporate Income Tax - Special Tax on Banks = Income after Taxes - Non-Controlling Interests = Net Income for the period % 82.7% 0.9% 56.6% -38.5% ... 28.0% 6.9% 42.1% 56.3% ... -51.8% ... 39.3% ... 3.4% 27.7% -79.6% 32.5% 31-Dec-23 31-Dec-22 Change absolute 517.1 2.8 519.9 -9.2 -194.7 315.9 30.8 285.1 62.6 74.9 -35.1 22.8 222.5 59.1 1.1 162.3 -20.0 182.2 1 142.6 296.1 1 438.7 14.7 -11.2 625.5 293.3 918.8 24.0 183.6 1 442.3 1 126.3 448.4 678.0 111.2 34.5 67.6 9.0 566.8 -53.3 34.1 585.9 25.1 560.8 479.2 963.1 173.8 109.4 32.6 31.9 789.3 5.8 35.3 748.2 5.1 743.1 63 Annual Report 2023 | novobancoNET INTEREST INCOME Net Interest Income was €1,142.6mn (+€517.1mn YoY), as a result, on the one hand, of the favorable interest rate environment and, on the other, of the prudent management of interest rates on assets and the cost of financing. The rate on assets increased by 237bps, from 1.79% in 2022 to 4.16%, driven mainly by loans to customers rate which increased to 4.70% (+239bps YoY). The average balance of interest earning assets was €41.0bn (vs €41.9bn in Dec/22). The average balance of customer deposits increased to €29.0bn, with a remuneration rate of 0.82% (2022: 0.17%), and the balance of money market funding was €7.3bn, with a rate of 3.23% (2022: -0.09%). The favourable progression of assets interest rates (4.16%; 2022: 1.79%), more than offset the increase in liabilities interest rates (1.40%; 2022: 0.31%), with the financial margin increasing to 2.75% in the year (vs 2022: 1.47%). Net Interest Income (NII) and Net Interest Margin (NIM) (mn€) 2023 2022 Average Balance Average Rate Income / Costs Average Balance Average Rate Income / Costs Interest Earning Assets 41 046 4.16% 1 731.8 41 914 1.79% 761.3 595.4 135.9 86.4 48.5 -10.0 92.7 Customer Loans Mortgage Loans Consumer Loans and Others 1 486 7.00% 25 571 4.70% 1 219.8 25 424 2.31% 10 033 3.85% 391.2 105.5 9 836 1 430 1.36% 5.96% Corporate Lending 14 052 5.08% 723.1 14 158 2.60% 373.2 Money Market Placements 4 536 3.12% 143.3 6 308 0.20% 12.7 Securities and Other Assets 10 938 3.32% 368.7 10 181 1.48% 153.3 Interest Earning Assets And Other 41 046 4.16% 1 731.8 41 914 1.79% 761.3 Interest Bearing Liabilities 37 649 1.53% 582.4 40 230 0.32% 131.2 Customer Deposits 28 982 0.82% 242.0 28 322 0.17% Money Market Funding Other Liabilities Other Non-Interest Bearing Liabilities 7 265 1 402 3 397 3.23% 238.2 10 455 -0.09% 7.19% 102.2 - 0.0 1 452 1 684 6.30% - - Interest Bearing Liabilities And Other 41 046 1.40% 582.4 41 914 0.31% 131.2 NIM / NII (without stage 3 impairment adjustment) Stage 3 impairment NIM / NII 2.76% 1 149.4 1.48% 630.1 -6.8 -4.7 2.75% 1 142.6 1.47% 625.5 FEES AND COMMISSIONS Fees and commissions were €296.1mn (stable YoY), with fees’ overall strong underlying trend partially offset by impact from regulatory changes in commissions on loans. Payments Management increased by 9.6% YoY (+€12.2mn), from higher volume of transactions, increased clients base, new pricing implemented for customer accounts and POS usage. 64 Management ReportSustainability ReportFinancial StatementsAnnex Fees and Commissions (mn€) 31-Dec-23 31-Dec-22 Change absolute Payments Management 139.4 127.2 Commissions on Loans, Guarantees and Similar Asset Management and Bancassurance Advising, Servicing and Other Fees and Commissions Total 77.8 62.4 16.6 86.6 66.1 13.5 296.1 293.3 12.2 -8.8 -3.7 3.1 2.8 % 9.6% -10.2% -5.6% 22.8% 0.9% CAPITAL MARKETS AND OTHER OPERATING RESULTS The results of capital markets were positive at €14.7mm, including a net loss of €12mn from losses on the sale of part of the securities portfolio, offset by one-off gains on forex and hedging. The fair value reserves of the securities portfolio increased by €37.9mn during 2023. Other operating results totalled -€11.2mn (-€194.7mn YoY), which included in 2022 a gain of €148.6mn from the sale of real estate assets (headquarters building and portfolio of logistics properties). Other operating results in 2023 include the extraordinary cost of irrevocable commitment payment of Deposit Guarantee Fund (€56.1mn), the annual contribution to the Single Resolution Fund (€15.0mn) and to the National Resolution Fund (€7.1mn), gains from credit recovery (€30.3mn) and real estate disposal (€35.6mn). OPERATING COSTS Operating costs increased 6.9% YoY (+€30.8mn), reflecting the continued strategic investment in digital transformation, optimization and simplification of the organization and, on the other hand, the effects of inflation. Staff costs were €252.7mn (+€19.0mn; +8.1%), general administrative expenses totalled €182.9mn (+€20.7mn; +12.8%) and depreciation rose to €43.6mn (-€8.9mn; -17.0%). Excluding items of exceptional nature, costs totalled €430.8mn, representing an increase of 6.2% compared to the same period last year. Commercial Cost to Income stood at 33.3% (2022: 48.8%), equivalent to 29.9% excluding items of exceptional nature (2022: 44.1%). Operating Costs (mn€) Staff Costs General and Administrative Costs Depreciation Operating Costs Total 31-Dec-23 31-Dec-22 Change absolute 252.7 182.9 43.6 479.2 233.7 162.2 52.5 448.4 19.0 20.7 - 8.9 30.8 % 8.1% 12.8% -17.0% 6.9% As of 31 December 2023, novobanco Group had 4,209 employees (Dec/22: 4,090; +119 YTD) and the number of branches at 290 (Dec/22: 292), of which more than 265 already aligned with the new distribution model and 236 equipped with VTM (Virtual Teller Machine). 65 Annual Report 2023 | novobancoNET IMPAIRMENTS AND PROVISIONS In 2023, novobanco Group recorded net impairments and provisions amounting to €173.8mn, showing an increase compared to previous year (+€62.6mn; +56.3%). The cost of risk was 48bps for loans impairments and corporate bonds (2022: 44bps), consistent with 2023 guidance, despite management overlays built-in. Net Impairments and Provisions (mn€) 31-Dec-23 31-Dec-22 Customer Loans Securities Other Assets and Contingencies 109.4 32.6 31.9 34.5 67.6 9.0 Net Impairments and Provisions Total 173.8 111.2 Change absolute 74.9 -35.1 22.8 62.6 % ... -51.8% ... 56.3% 3.2.2 Balance Sheet and Activity CUSTOMER LOANS As a Portuguese universal bank, novobanco mission is to be the trusted bank, which supports families and companies throughout their lives, through a robust and disciplined loan granting policy. This support has been across all sectors and all companies, with a special focus on exporting SMEs and companies that incorporate innovation in their products, services or production systems, increasingly following a sustainability guideline (ESG). Customer Loans (mn€) Loans to corporate customers Loans to Individuals Residential Mortgage Other Loans Customer Loans (gross) Customer Loans Provisions Customer Loans (net) 31-Dec-23 31-Dec-22 13 819 11 669 10 058 1 611 25 489 955 24 534 14 244 11 373 9 978 1 395 25 617 1 066 24 551 YTD Change absolute - 425 296 80 216 - 129 - 112 - 17 % -3.0% 2.6% 0.8% 15.5% -0.5% -10.5% -0.1% Loans to customers (gross) totaled €25.5bn (-0.5% YTD), of which corporate customers represented 54% (Dec/22: 56%), Residential Mortgage 40% (Dec/22: 39%) and other loans to individuals 6%. In 2023, loan origination totaled €3.5bn (2022: €3.9bn), of which 48% corporate, 40% mortgage and 12% consumer and others. 66 Management ReportSustainability ReportFinancial StatementsAnnex The asset quality indicators of December 2023, and comparison with previous year, are presented below: Asset Quality and Coverage Ratios (mn€) 31-Dec-23 31-Dec-22 Overdue Loans > 90 days Non-Performing Loans (NPL) Overdue Loans > 90 days / Customer Loans (gross) Non-Performing Loans (NPL) Ratio1 Credit provisions / Customer Loans 338 1 133 1.3% 4.4% 3.7% 317 1 376 1.2% 5.4% 4.2% YtD Change absolute 21 - 244 % 6.5% -17.7% 0.1 p.p. -0.9 p.p. -0.4 p.p. Coverage of Overdue Loans > 90 days 282.4% 336.0% -53.6 p.p. Coverage of Non-Performing Loans1 Net Non-Performing Loans1 84.3% 0.7% 77.5% 1.3% 6.8 p.p. -0.5 p.p. (1) Excludes Deposits and Loans and advances to Banks. Non-performing loans (NPL) present a reduction of 17.7% YoY to €1,133mn. Net NPL ratio stood at 0.7% (Dec/22: 1.3%) and the NPL ratio at 4.4% (Dec/22: 5.4%), with a coverage level of 84.3%. As of December 2023, novobanco exposure to Real Estate decreased 15% to €460.1mn, representing 1.1% of novobanco total assets. The YoY decrease reflects the disposals throughout the year, with gains (€35.6mn) held in Other Operating Results. SECURITIES The securities portfolio, which is the main source of assets eligible for funding operations with the European Central Bank (ECB), amounted to around €9.3bn as of 31 December 2023, representing 21.4% of assets, of which 85% was accounted at amortised cost with unrealised marked to market losses of €105mn (net of hedges and taxes). Securities portfolio (mn€) Portuguese sovereign debt Other sovereign debt Bonds Other Securities portfolio Total (net of impairment) 31-Dec-23 31-Dec-22 YTD Change absolute 981 5 151 4 126 387 - 130 - 891 - 276 - 56 relative -13.3% -17.3% -6.7% -14.5% 10 646 -1 353 -12.7% 851 4 260 3 850 331 9 292 67 Annual Report 2023 | novobancoFUNDING Total customer funds of €34.9bn (Dec/22: €34.8bn), of which deposits represent 80.7%. As of Dec/23, Customer deposits totalled €28.1bn (Dec/22: €28.4bn), with performance being reflected in the growth of novobanco’s deposit market share to 9.7% in Nov/23 (Dec/22: 9.3%). Total Funds (mn€) Deposits Other Customer Funds(1) Debt Securities Subordinated Debt Sub -Total Off-Balance Sheet Funds Total Funds 31-Dec-23 31-Dec-22 YTD change absolute 28 140 1 844 606 502 31 092 3 770 34 862 28 412 866 1 169 416 30 862 3 933 34 795 - 272 978 - 563 86 230 - 162 67 % -1.0% ... -48.1% 20,7% 0.7% -4.1% 0.2% (1) Includes checks and pending payment instructions, Repos and other funds. 3.3 Business Segments 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, among others. When evaluating performance by business area, the Group considers the following Operating Segments: (1) Retail, which essentially includes the activity of private and small business clients; (2) Corporate, which includes the activity of other companies and institutions; and (3) Support Function. 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. RETAIL Corresponds to all the activity developed with private customers and small businesses, along with the fully consolidated operating subsidiaries novobanco Açores, BEST and GNBGA. 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. 68 Management ReportSustainability ReportFinancial StatementsAnnex CORPORATE SUPPORT FUNCTIONS Includes the activities developed 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. 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, including Treasury and Real Estate assets. Dec-23 Dec-22 l i a t e R e g n a h C . s b A d n a s E M S e t a r o p r o c e g n a h C . s b A s n o i t c n u F t r o p p u S e g n a h C . s b A l a t o T e g n a h C . s b A l i a t e R d n a s E M S e t a r o p r o c s n o i t c n u F t r o p p u S l a t o T 845 395 643 213 -49 -88 1 439 520 450 430 39 919 € million Commercial Banking Income Banking Income 847 379 681 232 -86 -295 1 442 315 468 449 209 1126 Operating Costs 318 32 99 8 62 -9 479 31 286 91 71 448 Net Operating Income Net Impairments and Provisions Income before Taxes 528 347 582 223 -148 -286 963 285 181 358 138 678 54 44 90 3 30 16 174 63 10 87 14 111 474 303 492 220 -177 -301 789 222 171 272 124 567 Total Assets 14 614 302 13 942 578 14 945 -3 375 43 500 (2 495) 14 312 13 364 18 319 45 995 Customer Loans (net) 13 425 260 11 092 (293) 17 16 24 534 (17) 13 164 11 385 1 24 551 Net Interest margin 3.02% 1.82 p.p 3.89% 1.36 p.p -0.40% -0.67 p.p 2.75% 1.28 p.p 1.20% 2.53% 0.27% 1.47% Commercial Cost to Income 37.7% -25.9 p.p 15.4% -5.7 p.p - - 33.3% -15.5 p.p 63.6% 21.1% - 48.8% In 2022, the results of the Support functions include €148.6mn of gains from the sale of real estate assets and from the sale of headquarters building accounted as Other operating results. In 2023, Support functions include the extraordinary cost of irrevocable commitment payment of Deposit Guarantee Fund (€56.1mn). 69 Annual Report 2023 | novobanco RETAIL BANKING Since 2021, novobanco’s Retail segment has 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 and balancing between the convenience of the digital channels and the importance of face-to-face service to clients. Currently, more than 265 branches operate under the new distribution model and 236 have a VTM (Virtual Teller Machine; +46 vs Dec/22), which offers advanced transaction management solutions and stands out as a tool towards branch efficiency and customer satisfaction. New clients acquisition continues to evolve positively (more than +45% vs 2022), supported by initiatives such as (i) wage domiciliation; (ii) client loyalty program aimed at strengthening and deepening the commercial relationship; and (iii) cross segment program, which covers around 300,000 employees in more than 25,000 companies, who have a protocol with Novobanco. This programme gives employees of such companies access to preferential conditions for some of the bank’s products and services. As part of the ongoing digital transformation, a Contact Hub, that leverages virtual assistants and AI to efficiently manage remote contacts, has been deployed, enhancing customer experience by responding promptly and routing clients to the right channels. The customer-first approach was also extended to debit and credit cards, with features like card tokenization, the introduction of Google Pay and Apple Pay digital wallets, making global payments convenient, and new app features were deployed. Furthermore, on the sustainability front, commercial initiatives included using 100% recycled and biodegradable PVC cards, as well as recycling expired cards for urban furniture, reducing environmental impact, and offering a broader range of financial products, like the 18.25 account, which ensures zero CO2 emissions. As of December, Loans to Customers (net) totalled €13.4bn (+2% YTD; including small business loans), mainly as the result of solid mortgage origination (+€1.4bn; +14% YoY) following the successful strategy of partnerships with Credit Intermediaries, which represent the bank’s largest channel of distribution of this product. As of November, novobanco’s mortgage market share was 9.1% (flat YTD). In the period, the customer base of the small business increased by 13%, with work accident insurance, multi-risk insurance and service accounts increasing by 28%, 28% and 14%, respectively. The Net Interest Margin increased to 3.02% (+182 bps YoY), which together with higher volumes and commercial activity resulted in €845mn of Commercial Banking Income (+88% YoY). Operating costs increased by 11% YoY, to €318mn, leading to a Commercial Cost to Income ratio of 37.7% in the period. All in all, the Retail segment had an Income before Tax of €474mn (2022: €171mn) driven by the commercial performance and a favourable interest rates environment. CORPORATE BANKING Positioning as a customer-centric bank offering a distinctive experience, novobanco has two hubs dedicated to large corporate customers (Oporto and Lisbon) and 20 business centres distributed throughout the country, with specialised teams dedicated to the medium-sized companies’ segment. On the top of the physical hubs, there is a new online corporate bank aiming to simplify the day-to-day of corporate customers and enhanced functionalities, such a as in short-term loans and treasury management. Strong digital engagement among Corporate Customers, with about 80% actively using digital channels, leading to a 0.8p.p. increase in the satisfaction index for website user experience. Novobanco continued to strengthen its commitment to Portuguese companies, to which it provided a set of solutions for investment and working capital needs, with significant growth in short-term loans, especially through factoring and confirming, driving annual increases of 8% in cumulative invoicing undertaken and a market share of 11% in factoring. This underpinned the continued growth of the corporate customer base, with high levels of penetration as in the Portuguese SMEs (55%) and large companies (70%), are novobanco customers. The bank thus occupies a leading position in 70 Management ReportSustainability ReportFinancial StatementsAnnex terms of support provided to the Portuguese companies, with market shares of 14.3% in loans (Dec-22: 14.5%) and 13.9% of deposits from Non-financial Companies (+1.7pp YTD), reflecting companies’ confidence in novobanco. Novobanco maintains a strong presence in the exports sector, with a wide range of products and specialised advice for international trade, being about 60% of national exports made by novobanco clients. The know- how in this segment is reflected in a 20.1% market share (+1.5pp YTD) and by being, for the 6th consecutive year, elected the best Trade Finance bank in Portugal by Global Finance. With regards to Payments Solutions, the simplification and innovation was reflected in a POS (point of sale) market share to 15.9%. As a result of the commercial strategy in place, as of December 2023, Loans to Customers (net) totalled €11.1bn (-2.6% YoY). Reflecting the interest rates environment, in the period, Net Interest Margin increased to 3.89% (+136bps YoY), which resulted in Commercial Banking Income of €643mn (+50% YoY). Operating costs increased 9% to €99mn. All in all, Income before Tax totalled €492mn (+81% YoY; +€220mn). 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 66.6% by Dec/23 (+5pp YoY; the number of digital customers increased by 15% YoY) and annual growth of 25% in the number of active mobile customers (56% of customers are mobile vs 48% in Dec/22). In 2023, more than 70% of the operations in the individual client’s segment were carried out in self- service mode, this figure increased to 84% and 94% in the small businesses and medium-large companies’ segments, respectively. In turn, this underpinned an increase in the share of digital sales of Insurance (+107% YTD; 8% of segment sales; +3pp YoY), Credit Cards (+122% YTD; 5% of sales; +1pp YoY) and Personal Loans (+27% YTD; 8% of segment sales; +3pp YoY). Active digital clients penetration rate Mobile Total 47.3% 34.0% 53.3% 43.1% 25.6% 61.9% 55.9% 66.6% Dec. 18 Dec. 20 Dec. 22 Dec. 23 Customer Toutchpoints (Individual Clients) Mobile Online ATM Branch 3% 41% 22% 34% 2018 1% 29% 15% 55% 2020 1% 24% 10% 65% 1% 20% 8% 71% 2022 2023 In the period, 79% of individual clients’ contacts with novobanco were made through the digital channels (+4 pp YoY). 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 30%. 71 Annual Report 2023 | novobancoNOVOBANCO DOS AÇORES In 2023, novobanco dos Açores continued its activity, paying special attention to close relationships with its Customers, seeking to support the needs of Azorean society from all walks of life, in order to contribute to its prosperity. As a result of the activity carried out and the proximity maintained to the market, novobanco dos Açores acquired, in 2023, another 1,505 new customers. Net Interrest Income (€mn) Customer Loans (€mn) Evolution of Deposits (€mn) + 127.9% + 3.6% + 3.1% 352.1 364.7 453.2 467.3 10.6 4.6 2022 2023 2022 2023 2022 2023 The net income of novobanco dos Açores in 2023 registered a positive value of €10.6mn, which represents an increase of 127.9% compared to 2022. The results of novobanco dos Açores’ activity show a substantial increase when compared to 2022, mostly explained by the strong growth in net interest income, which reached 2.9% in December 2023 and contributed to a 132.0% increase in the bank’s financial result. In 2023, novobanco dos Açores’ assets increased by €28.8mn (+4.5%) to €663mn, as well as customer loans (net) which increased by €12.6mn (+3.6%) to €364.7mn. In December 2023, overdue loans totalled €4.7mn, which translates into a non-performing loan ratio of just 1.2%. In December 2023, the overall amount of customer deposits amounted to €467.3mn, an increase of 3.1% compared to the same period of the previous year. BANCO BEST - BANCO ELECTRÓNICO DE SERVIÇO TOTAL, S.A. In 2023, the increase in the general level of market interest rates allowed for a more profitable management of Best’s available liquidity, resulting in an increase in net interest income of +217% compared to the previous year. This strong increase was reflected in an increase in banking product of +67%, which combined with the reduction in operating costs due to an active policy of controlling operating costs (-3% compared to the previous year), allowed the strong increase in pre-tax income to €10.4mn. The ratio of non-performing loans to loans granted is a very favourable figure of 0.3%, justified by a prudent risk policy based on the granting of credit collateralised by financial assets. Banco Best closed 2023 with a positive net result of €7.6mn (+€5.9mn vs 2022). The digital marketing strategy to attract customers in the different channels resulted in the capture of more than 5,600 customers, a growth 16% higher than in 2022 and with 41% of accounts being opened by videoconference or Digital Mobile Key. The internal survey carried out on Customer satisfaction in 2023 revealed that 90% of respondents are satisfied or very satisfied with Best and a consumer association elected, for the second consecutive year, Banco Best as the best bank to invest in. DIGITAL CHANNELS (APP AND WEBSITE) App – English version: important improvement in the experience of foreign customers. App – traveler’s area: where Customers find a series of features to help them plan and manage their trips. App – shopping cart: through which Customers enjoy a shopping experience similar to an online 72 Management ReportSustainability ReportFinancial StatementsAnnex store. This feature, along with the integration of QR Codes on the website to buy in the app, constitute an unprecedented e-Commerce offer in the Portuguese market. App – new homepage: highlighting the platform’s key tools, offering greater visibility, facilitating access, maintaining personalization and allowing each user to adjust the entry according to their individual preferences. Website – financial therapy: a new approach to financial literacy through a concept explainer, with the aim of fostering and boosting knowledge on investment topics and instruments. OFFER Launch of a global offer of new savings accounts, as well as the reinforcement of the existing offer, and a new PPR with Gamalife, a solution with guaranteed capital and remuneration Reinforcement of the offer of protection insurance with the inclusion of Liberty Seguros - Home, Auto and Personal Accidents, in the alternatives available to optimize the insurance portfolio and with the new Extra Health Insurance of Victoria Seguros, which allows to complement the amount of coverage of any health insurance. Best’s partnership with the largest national insurance broker – MDS – thus has more than 14 insurers in the offer of insurance to its customers. Redesign of the investment advisory service, in order to make it more focused on high-value Clients, providing them with truly personalized investment solutions, while ensuring an improvement in the efficiency and effectiveness of the service. New investment themes and strategies for portfolio diversification: commodities, food & agriculture, and precious metals. SUSTAINABILITY In November 2023, digital channels ensured 99.2% of the bank’s operations, maintaining the focus on articulating personal contact and digital execution. Reinforcement of the Margin Plus Account with the offer of funds that follow investment criteria based on sustainability objectives. Promotion of saving habits through goals, by which it is possible to define something you want to achieve and start saving small amounts monthly. Promotion of financial literacy through the Financial Therapy project, which provides an explainer of concepts about investment instruments on desktop and mobile. Dissemination of its product and service activities on social networks, as well as promotion of ESG principles. GNB GESTÃO DE ATIVOS The Asset Management Company concluded the merger process of its companies and GNB Fundos Mobiliários incorporated GNB Gestão de Ativos SGPS, GNB Gestão de Patrimónios and GNB Real Estate, and by changing its business model in Luxembourg, which culminated in the closure of its branch in that geography. These changes aimed to simplify decision-making processes, optimize strategic planning and approach different market segments. The incorporating company is now called: GNB – Asset Management, Collective Investment Schemes Management Company, S.A., having maintained its stake in the pension funds management company and expanded the scope of its activities. In addition, a project was completed whose purpose is to develop an investment process of excellence in relation to the inclusion of sustainability factors and which will result in the expansion of the offer of ESG products. 73 Annual Report 2023 | novobancoIn terms of activity, the return to a high interest rate environment strongly conditioned the evolution of the asset management segment. In this context, government debt instruments, such as saving certificates and deposits offered by financial institutions, ended up being preferred by investors. GNB Gestão de Ativos took advantage of this context to launch two funds, in March and June, with a maturity of about 3 years, with annual distribution and which were well received by investors. In 2023, GNB Gestão de Ativos was once again recognized through several awards and distinctions: • Refinitiv Lipper Fund Awards 2023 distinguished the NB Euro Bond, for the 12th consecutive year, with the award for Best Euro Bond Fund marketed in Europe for 3, 5 and 10 years; • NB Euro Bond and the Multireforma Capital Garantido Pension Fund were distinguished by the Best Funds Awards of Jornal de Negócios/APFIPP in the categories of Best Other Bond Funds and Best Pension Fund with Risk 3; • GNB Momentum Sustentável received the award for Best Investment Fund Portugal awarded by Euronext Lisbon. In terms of activity, GNB Gestão de Ativos continues to provide a diversified offer of value-added products and services aimed at the complete satisfaction of the different financial needs of its customers. In the securities funds segment, the Management Company offers bond funds, including the widely awarded NB Bonds Europe fund (€99mn of assets under management), and NB Eurobond (€150mn of assets under management), equity funds, such as NB Momentum Sustainable (€160mn of assets under management) and mixed funds, which include the NB Conservative, NB Balanced and NB Dynamic profile funds (€69mn of assets under management). In terms of the offer of retirement solutions, the Multireforma family of open pension funds stands out (4 funds totaling €328mn), 14 closed-end pension funds associated with corporate plans and 2 retirement savings products. The management company also offers a portfolio management service that includes discretionary management to more than 800 clients. In the Real Estate segment, the firm manages open- ended real estate funds, closed-end real estate funds and real estate portfolios. Total assets under management at the end of 2023 were €7.7bn, which corresponds to a growth of 3.5% in the year (adjusted for the deconsolidation of the Luxembourg funds). Assets under management (December 2023) Real Estate Funds 10% Real Estate 11% 7.7mM€ 50% Asset Management Pension Funds 29% 74 Management ReportSustainability ReportFinancial StatementsAnnex 3.4 Novo Banco Separate 3.4.1 Results In the 2023 financial year, novobanco posted a positive result of €800.7mn, which compares with the 2022 result of €453.8mn. Commercial Banking Income amounted to €1,382.6mn (+54.5% compared to Dec/22), mainly supported by the increase in net interest income (+77.1%). Capital Market Results were positive at €87.8mn, compared to a negative result of €20.2mn in the same period of the previous year. Operating Costs totalled €453.8mn, an increase compared to the previous year (+7.1%), influenced by inflation and continued investment in simplifying the organisation. Operating income was positive at €977.3mn, and impairments and provisions amounted to €146.8mn. 31-Dec-23 31-Dec-22 Change absolute Income Statement (mn€) Net Interest Income + Fees and Commissions = Commercial Banking Income + Capital Markets Results + Other Operating Results = Banking Income - Operating Costs = Net Operating Income - Net Impairments and Provisions Credit Securities Other Assets and Contingencies = Income before Taxes - Corporate Income Tax - Special Tax on Banks = Income after Taxes = Net Income for the period 482.1 5.5 487.6 108.0 -101.0 494.6 30.1 464.5 62.8 72.6 -34.3 24.6 % 77.1% 2.0% 54.5% ... ... 52.8% 7.1% 90.6% 74.9% ... -51.2% ... 401.6 93.6% 53.7 1.1 346.8 346.8 92.0% 3.3% 76.4% 76.4% 625.0 270.0 895.0 -20.2 61.7 936.5 423.7 512.8 83.9 36.9 66.9 -19.8 428.9 -58.3 33.4 453.8 453.8 1 107.1 275.5 1 382.6 87.8 -39.4 1 431.1 453.8 977.3 146.8 109.4 32.6 4.7 830.5 -4.7 34.5 800.7 800.7 75 Annual Report 2023 | novobanco3.4.2 Activity In 2023, novobanco developed its activity under the same guidelines referred for novobanco Group. Activity Evolution (mn€) Assets Customer Loans (gross) Loans to Individuals Residential Mortgage Other Loans Loans to corporate customers On Balance Sheet Funds Deposits Other Customer Funds(1) Debt Securities Subordinated Debt 31-Dec-23 31-Dec-22 Change absolute 43 146 23 999 10 350 8 836 1 513 13 650 30 279 27 366 1 827 584 502 45 464 -2 318 24 013 9 918 8 632 1 286 14 095 29 982 27 570 855 1 141 416 - 13 432 204 227 - 445 296 - 204 972 - 557 86 % -5.1% -0.1% 4.4% 2.4% 17.7% -3.2% 1.0% -0.7% ... -48.8% 20.7% (1) Includes checks and pending payment instructions, Repos and other funds. On December 31, 2023, deposits totalled €27.4bn, a decrease of -€0.2bn compared to Dec/22 (€27.6bn). This reduction is mainly due to the transfer to Saving Certificates in the first quarter of 2023, the trend of which was reversed during the second quarter, when there was an increase in customer deposits driven by SME customers and stabilisation of retail deposit outflows. Loans to customers (gross) totalled €23,999mn (stable compared to Dec/2022) reflecting novobanco’s commitment to Portuguese companies and the domestic market, reinforcing treasury support products, provision of support lines with financial guarantee by the Portuguese Development Bank, financing lines with EIF/EIB guarantee to support liquidity and investment of companies, financing lines for specific economic sectors, among others. Asset Quality and Coverage Ratios (mn€) 31-Dec-23 31-Dec-22 Overdue Loans > 90 days Non-Performing Loans (NPL)(1) Overdue Loans > 90 days / Customer Loans (gross) Non-Performing Loans (NPL) Ratio(1) Credit provisions / Customer Loans 337 1 107 1.4% 4.6% 3.9% 326 1 356 1.4% 5.6% 4.4% Change absolute 11 - 249 % 3.3% -18.3% 0.0 p.p. 1.0 p.p. -0.5 p.p. Coverage of Overdue Loans > 90 days 277.7% 324.3% -46.6 p.p. Coverage of Non-Performing Loans(1) 84.6% 78.0% 6.5 p.p. (1) Excludes Deposits and Loans and advances to Banks and Customer Loans. 76 Management ReportSustainability ReportFinancial StatementsAnnex In 2023, 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 reduction of the NPL ratio to 4.6% (2022: 5.6%). In December, NPL coverage ratio stood at 84.6% (+6.5 p.p. compared to Dec/22). 3.5 Relevant Facts from the Activity and Subsequent Events Relevant Facts of 2023 are mentioned in chapter 1.1.3 Main Events of the Management Report. Subsequent events: FEBRUARY 1, 2024 FEBRUARY 28, 2024 Novo Banco, S.A. informs of Investment Grade rating by Fitch. Novo Banco S.A. informs about issuance of Senior Preferred debt Novobanco issued a Senior Preferred debt in the amount of €500 million, maturing on 8 March 2028, with an option for early repayment on 8 March 2027. The notes were subscribed at 99.782% price and have an annual coupon of 4.25% in the first 3 years, resetting to 3-month Euribor plus a margin of 130bps thereafter. The notes are expected to be rated Ba1 by Moodys and BBB- by Fitch. Fitch Ratings Ltd (“Fitch”) has assigned novobanco an Investment Grade rating with a Long-Term Issuer Default Rating (IDR) of ‘BBB-’ with a Stable Outlook. Fitch has also assigned a Viability Rating (VR) of ‘bbb-’. FEBRUARY 21, 2024 Novo Banco, S.A. informs about issuance of European Covered Bonds (Premium) Novobanco informs that it has launched a premium European Covered Bond (“the notes”) in the amount of € 500 million, with maturity on 1 March 2027 (soft bullet). The notes, expected to be rated Aaa by Moodys, have an annual interest rate of 3.25%, equivalent to 3 years mid-swaps plus 45 bps. 77 Annual Report 2023 | novobanco4 OUR CAPITAL AND LIQUIDITY 4.1 Capital Ratios In the period, the CET 1 fully loaded ratio increased by around 500bp compared to December 2022 to 18.2%, while the solvency ratio rose by around 560bp to 21.0% (Dec/22: 13.1% and 15.4% respectively). This performance shows the capital-generating capacity of novobanco’s business model and the discipline in capital allocation. The solvency ratio was also influenced by the net increase of €100mn in Tier 2 instruments after the issuance of the new €500mn Subordinated Bond maturing in 2033. Capital Ratios (CRD IV/CRR) (mn€) Risk Weighted Assets Own Funds Common Equity Tier 1 Tier 1 Total Own Funds Common Equity Tier 1 Ratio Tier 1 Ratio Solvency Ratio Leverage Ratio (A) (B) (C) (D) (B/A) (C/A) (D/A) 31-Dec-23 (fully loaded) 31-Dec-22 (fully loaded) 20 399 21 233 3 703 3 705 4 280 18.2% 18.2% 21.0% 7.9% 2 787 2 789 3 279 13.1% 13.1% 15.4% 5.8% 78 Management ReportSustainability ReportFinancial StatementsAnnex Annual Report 2023 | novobanco The calculation of regulatory capital does not include the amounts unpaid by the Resolution Fund under the Contingent Capital Agreement. Novobanco considers the unpaid amounts in respect. Novobanco considers the amounts not paid by the Resolution Fund for the years 2020 and 2021 under the Contingent Capitalization Agreement (CCA) as due, having triggered the contractual mechanisms at its disposal to ensure their receipt. None of these amounts have yet been paid by the Resolution Fund and, as such, are not considered in the calculation of regulatory capital. In 2023, in the context of the European Central Bank’s approval of the exemption from the obligation to be approved as a financial holding company, novobanco was the entity designated to ensure the Group’s compliance with prudential requirements on a consolidated basis under Article 21-A, paragraph 4, of Directive 2013/36/EU and Article 35-D of the RGICSF. CET 1 (fully loaded1; %) +97 bps +103 bps 13.1 9.5 +165 bps 18.2 +140 bps +c.500bps YTD RE buffer2 0.3 O-SII3 0.5 CCB 2.6 P2R4 1.6 P1 4.5 14.3 15.4 21.0 +c.560bps YTD Total Capital (fully loaded1; %) RE buffer2 0.3 O-SII3 0.5 CCB 2.0 P2R4 2.9 P1 8.0 Required CET 1 2024 Dec-22 1Q23 2Q23 3Q23 4Q23 Dec-23 Required Total Capital 2024 Dec-22 Dec-235 (1) The inclusion of positive results depends on an authorization from the ECB; (2) Starting on 1-Oct-24, capital requirements will include a buffer on exposures secured by residential real estate, expected to be ~30bps; (3) Phased regime for the introduction of a 0.5% O-SII reserve as a percentage of RWAs will start on 1-Jul-24 with 50% of the reserve (0.25% of RWAs), and 100% of the reserve starting on 1st July 2025 (0.50% of RWAs); (4) P2R in 2024 is 2.85%, which represents a decrease of 15bps; (5) Total capital ratio also benefited from +€100mn Tier 2 upsize 79 4.2 Liquidity and Funding HIGHLIGHTS • Stable funding structure, relying mainly on customer deposits. • Wholesale and interbank funding were also important in 2023, allowing the bank to replace TLTRO III funding and maintaining liquidity position (including liquidity ratios and liquidity buffer) above internal risk appetite limits. 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 diversification of the 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. The funding policy of Group novobanco 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, which have proven to be quite stable throughout the years. 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, 80 Management ReportSustainability ReportFinancial StatementsAnnex 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. FUNDING STRUCTURE AND LIQUIDITY IN 2023 Novobanco’s customer deposits at the end of 2023 totalled €28.1bn (€28.4bn bn in 2022), decreasing by €0.3bn YoY. During the year, after a €0.9bn decrease in the first quarter mainly due to higher yielding savings product from the government, customer deposits recovered and remained mostly stable throughout the year. At the end of 2023, customer deposits remained the bank’s main funding source, accounting for 65% of its funding structure (62% at the end of 2022), of which 74% were deposits from the retail segment. Deposits ECB and Interbank Funding Debt Securities Other Liabilities Equity Funding Structure (€bn) 46.0 43.5 28.2% 9.7% 1.6% 3.0% 3.5% 28.1% 5.7% 1.1% 4.2% 4.4% 2022 2023 The loan portfolio (gross) decreased by €0.1bn to €25.5bn as of December 2023 (Dec/22: €25.6bn), and the commercial activity, including customer business- related securities, was therefore neutral in terms of liquidity as of year-end 2023. Still in terms of asset evolution, in 2023, the securities portfolio decreased by €1.4bn, to €9.4bn, resulting mainly from redemptions and sales occurred during the last quarter of the 2023 in the amortised cost treasury portfolio. Nevertheless, novobanco’s security portfolio remained substantially (approximately 70%) composed of high-quality liquid assets (“HQLAs”), and among these more than 75% are sovereign debt securities. Customer Deposits (€bn) Loan Book Evolution (Gross) (€bn) 28.4 27.5 28.2 28.1 28.1 25.6 25.7 25.8 25.7 25.5 Dec/22 Mar/23 Jun/23 Sep/23 Dec/23 Dec/22 Mar/23 Jun/23 Sep/23 Dec/23 81 Annual Report 2023 | novobanco Other Bonds Other Sovereign Debt Portuguese Sovereign Debt Securities Portfolio (€bn) 10.9 0.4% 4.1% 5.4% 1% 9.3 0.3% 3.85% 4.26% 0.85% 2022 2023 Regarding market funding, during the second quarter of 2023 the bank returned to the capital markets issuing a new €500mn Tier 2 bond, with maturity in December 2033 and 6-month par-call option starting on June 2028. The new Tier 2 bond was intended as a replacement of an existing €400mn Tier 2 issued by the Bank back in July 2018, which would start losing regulatory value from 23 July 2023 onwards, the call date. The positive market backdrop allowed novobanco upsize its Tier 2 debt to €500mn and reduce the cost, as the spread of the new bond was 150bps lower that the spread of the existing Tier 2 - a strong evidence of the bank’s successful trajectory over the past years. The transaction was accretive in terms of liquidity, capital and MREL. Additionally, during the second and third quarter of 2023 the bank redeemed €1.0bn of market funding, €700mn through the early redemption on the existing Tier 2 bond (€400mn) and the senior preferred bond due 2024 (€300mn) and €275mn which reach final maturity in September 2023. In December 2023, a senior private placement of €100mn was also extended by 2-years a 5.5%. Finally, still in terms of market funding, novobanco continued its strategy of replacement of the TLTRO III funding lines, further increasing its repo interbank funding, which by the end of 2023 increased by €2.6bn to €5.2bn (Dec/22: €2.6bn). Benefitting from the increase in own funds and issuance during the year, Minimum Requirement for own funds and Eligible Liabilities (MREL) as a percentage of Total Risk Exposure Amount (TREA) reached 24.7% as of 31 December 2023 (preliminary figures), above the linear progression of MREL requirements: MREL REQUIREMENTS: (BdP notification of June 2023; %) TREA1 Combined Buffer O-SII (LSF Nani) Total LRE3 Jan/22 14.64% 2.52% 0.50% Jan/26 23.47% n.a.2 n.a.2 17.66% 23.47% + Buffers 5.91% 5.91% (1) TREA - Total Risk Exposure Amount; Jan-26 requirement as announced on June 2023; (2) As of Jan-26 applicable requirement; (3) LRE - Total Leverage Exposure. On 31 December 2023, gross funding from the ECB amounted to €1.2bn, of which €1bn correspond to the final tranche of TLTRO III which will mature in December 2024, representing a decrease of €5.1bn YoY (Dec/2022: €6.3bn). Also as of 31 December 2023, deposits at the ECB totalled €5.4bn (Dec/22: €5.9bn; -€0.5bn YoY), while net funding from the ECB (funding taken from the ECB minus deposits with the European Central Banks) went from €0.4bn on 31 December 2022 to -€4.2nn in 31 December 2023, turning to a net lending position. 82 Management ReportSustainability ReportFinancial StatementsAnnex Liquidity Ratios (%) NSFR 113 116 118 LCR1 210 147 163 Dec-22 Jun-23 Dec-23 Reduction reflecting the planned TLTRO III reimbursement ECB Funding (€bn) Gross Funding 6.3 Cash at ECB -5.9 TLTRO III reimbursements: Dec-24: €1.0bn 1.7 -2.9 1.2 -5.4 Dec-22 Jun-23 Dec-23 Net Funding €0.4bn -€1.2bn -€4.2bn Liquidity Buffer2 (€bn) Including: retained covered bonds 6.4 5.4 8.8 (7.0) Cash & Deposits in Central Banks HQLA Other ECB eligible assets Use of Collateral -€0.1bn YTD 13,6 HQLA 67% Non-HQLA 33% Liquidity Buffer Highest quality: government bonds and cash & deposits in central banks Cash 57% 36% Level 1 7% Level 2 (1) LCR stands for Liquidity Coverage Ratio; NSFR stands for Net Stable Funding Ratio; (2) HQLA ECB eligible includes ECB’s valuation haircut; HQLA Non ECB eligible include regulatory valuation haircut. On 31 December 2023, the eligible assets portfolio available for use as collateral with the European Central Bank stood at €14.2bn, a €2.7bn decrease versus 31 December 2022, mainly due to the reduction of the securities portfolio. The available amount of eligible assets for rediscount with the ECB totalled €7.3bn (net of haircuts), an increase of €0.3bn 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 €13.6bn, mostly composed of high-quality liquid assets. As a result, in December 2023, novobanco maintained (i) the liquidity ratios above the regulatory levels, with LCR standing at 163% (Dec/22: 210%), and the NSFR at 118% (Dec/22: 113%). 83 Annual Report 2023 | novobanco5 CORPORATE GOVERNANCE 5.1 Shareholder Structure 5.1.1 Qualified holdings in novobanco’s share capital 5.1.2 Equity holders with special rights There are no shareholders with special rights. 5.1.3 Restrictions on voting rights Pursuant to Decision SA.49275 (2017/N) of the European Commission taken in the context of approving the sale of a 75% shareholding in Novo Banco SA under European Union rules on state aid, the shareholder Resolution Fund must refrain from exercising its non-economic rights, such as the right to vote. The share capital of Novo Banco SA is €6,567,843,862.91 (six billions, five hundred and sixty-seven million, eight hundred and forty-three thousand, eight hundred and sixty-two euros and ninety-one cents) divided into 11,130,841,957 (eleven billion, one hundred and thirty million, eight hundred and forty-one thousand, nine hundred and fifty-six) nominative and dematerialised shares with no nominal value, fully subscribed and paid up. Qualified holdings in Novo Banco SA’s share capital as at the date of this report: Shareholder Number of shares % of share capital Nani Holdings S.à.r.l 4 8 348 131 468 75.00% Resolution Fund 1 451 868 529 13.04% Directorate General for the Treasury and Finance 1 330 841 960 11.96% (4) On 19 December 2023, Nani Holdings S.G.P.S., S.A. changed its registered office to the Grand Duchy of Luxembourg as well as its legal form to a Luxembourg limited liability company (société à responsabilité limitée). 84 Management ReportSustainability ReportFinancial StatementsAnnex 5.2 Corporate Bodies: Composition and Functioning 5.2.2 Amendments to the Articles of Association Changes to Novo Banco SA’s Articles of Association are the responsibility of the General Shareholders Meeting. In March 2023, Article 4 (Share Capital and Shares) of Novo Banco SA’s Articles of Association was amended as follows: “The share capital of Novo Banco SA is €6,567,843,862.91 (six billion, five hundred and sixty-seven million, eight hundred and forty-three thousand, eight hundred and sixty-two euros and ninety-one cents) divided into 11,130,841,957 (eleven billion, one hundred and thirty million, eight hundred and forty-one thousand, nine hundred and fifty-six) nominative and dematerialised shares with no nominal value, fully subscribed and paid up” 5.2.1 Composition and functioning of the management and supervisory 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 General Shareholders Meeting, the General and Supervisory Board (GSB), the Executive Board of Directors (EBD), the Monitoring Committee, the Statutory Auditor, and the Company Secretary. The members of the corporate bodies are elected for four- year term of office, 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 General Meeting, the General and Supervisory Board, and the Monitoring Committee are elected by the General Shareholders Meeting. The General Shareholders 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 Secretary and the Alternate Secretary are appointed by the Executive Board of Directors, upon consultation with the General and Supervisory Board. 85 Annual Report 2023 | novobanco5.2.3 General and Supervisory Board5 (CGS) The General and Supervisory Board is the supervisory body of novobanco and its members are elected by the General Shareholders Meeting. In October 2020, the General Shareholders Meeting of novobanco appointed the General and Supervisory Board for the 2021-2024 four-year period, which, by reference to the date of this Report, is composed of 10 (ten) members, 7 (seven) of whom are independent. ) 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 e m a N Byron James Macbean Haynes • Karl-Gerhard Eick • Kambiz Nourbakhsh • Mark Andrew Coker • John Ryan Herbert • Robert Alan Sherman • Carla Antunes da Silva • William Henry Newton • Monika Wildner t s 1 f o e t a D e t a d n a m t n e r r u c f o d n E e t a d n a m 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 21-06-2023 31-12-2024 t n e d n e p e d n I • • • • • • • F / M M M M M M M F M F • Evgeniy Kazarez M 07-11-2023 31-12-2024 The General and Supervisory Board meets monthly, or whenever necessary, and has the functions entrusted by law, the Bank’s Articles of Association and its internal regulation, including the ultimate and overall responsibility for supervising the bank and implementing governance systems that ensure effective and prudent management, supervising all matters relating to risk management, compliance and internal audit. Its main function is to regularly advise and supervise the Executive Board of Directors in the management of the bank and the companies of the novobanco Group, particularly regarding compliance with regulatory requirements relating to banking activity. Additionally, the General and Supervisory Board has specific powers to elect the members of the Executive Board of Directors and responsibilities for approving certain matters established in the Articles of Association, namely with regard to 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, disposals 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 thresholds. 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: Financial Affairs (Audit) Committee, Risk Committee, Compliance Committee, Nomination Committee, and Remuneration Committee, which have their own legally established powers and responsibilities and others delegated by the General and Supervisory Board. These Committees are composed of at least 3 (three) members of the GSB, the majority of whom must be independent, including its Chairman. The members of the Executive Board of Directors that are responsible for the areas covered by the activities of these Committees can participate in their meetings. (5) Changes occurred during 2023: • Upon conclusion of the Fit & Proper process by the competent regulatory authorities, Monika Wildner joined the GSB as an independent member on 21 June 2023. • On 24 February 2023, Benjamin Friedrich Dickgiesser presented his resignation as a member of the GSB and, on 1 October 2023, took up the role of CFO and member of the Executive Board of Directors. • Evgeniy Kazarez joined the GSB as a non-independent member on 7 November 2023 following the authorisation obtained from the competent regulatory authorities under the Fit & Proper process. • Donald John Quintin presented his resignation as a member of the GSB on 14 December 2023. • On 22 December 2023, the Fit & Proper process was submitted for a new independent member to join the GSB for the current term of office, being the performance of functions subject to authorisation from the competent regulatory authorities and approval by novobanco’s General Shareholders Meeting 86 Management ReportSustainability ReportFinancial StatementsAnnex The committees work in close collaboration with each other and coordinate their activities, maintaining a fluid and ongoing dialogue with the GSB, to which they report on their activity and decisions taken. As at 31 December 2023 the Committees of the GSB had the following composition: included in the prudential consolidation perimeter, the accounting policies and reporting processes, and monitoring the statutory auditor’s activity. In particular, it has the powers and duties set out in Article 441(1) (f) to (o) by virtue of Article 444(2) of the Portuguese Companies Code. GSB Committees ) C ( n a m r i a h C • n a m r i a h C - e c V i • t n e d n e p e d n I • • • • • • • r e b m e M e m a N Byron James Macbean Haynes Karl-Gerhard Eick • Kambiz Nourbakhsh • Mark Andrew Coker • • John Ryan Herbert Robert Alan Sherman • Carla Antunes da Silva • William Henry Newton • Monika Wildner* • Evgeniy Kazarez** s r i a f f A l i a c n a n F i • C • k s R i • • • C • e c n a i l p m o C • • C • n o i t a n m o N i • C • • n o i t a r e n u m e R C • • * Member since 21 June 2023; ** Member since 7 November 2023. In general terms, and among others that may be delegated to them by the GSB, the Committees have the following powers and responsibilities: Risk Committee The Risk Committee advises and supports the GSB in monitoring the bank’s current and future global risk appetite and risk strategy, supervising the implementation by the bank’s senior management of the risk prevention model, as well as the effectiveness of the internal control system and risk management system of the bank and the financial companies included its prudential consolidation perimeter. The Committee also has the powers and duties laid down by law, the applicable regulations and its internal regulation, which include, among others, supervising the implementation of capital and liquidity management strategies, assessing and approving materially relevant lending operations, and monitoring compliance with credit and risk policies. Compliance Committee The Compliance Committee advises and supports the GSB, including with regard to the bank’s financial subsidiaries, in monitoring the bank’s compliance and anti-money laundering and terrorist financing matters, including, but not limited to, compliance by the bank (including its employees and corporate bodies) with legal and regulatory requirements as well as its relevant policies and processes related to those matters, and its policies on business conduct and ethics, conflicts of interest, related-party transactions, market abuse, anti-bribery and anti-corruption, as well as in monitoring compliance risk. Financial Affairs (Audit) Committee Nomination Committee The Financial Affairs (Audit) Committee advises and supports the GSB in the fulfilment of its responsibilities with regard to overseeing the effectiveness of the bank’s internal control, risk management and internal audit systems, monitoring and supervising the financial performance of the bank and other financial entities The Nomination Committee supports the GSB in overseeing the Executive Board of Directors in its role of ensuring that appointment policies are consistent and well-integrated in the bank and its financial subsidiaries, namely by identifying and recommending candidates to fill positions on the GSB and Executive Board of Directors 87 Annual Report 2023 | novobanco and key function holder positions, setting objectives for the promotion of the under-represented gender as well as ensuring the means to achieve them, drawing up and monitoring succession plans, reviewing the selection and evaluation policy for members of the Management and Supervisory Bodies and Key Function Holders and monitoring its application, annually assessing the knowledge, skills and experience of each member of the GSB and Executive Board of Directors, among other duties assigned to it under the terms of the law, applicable regulations and its internal regulation. Remuneration Committee The Remuneration Committee advises and supports the GSB in defining and establishing appropriate, consistent and well-integrated remuneration structures for the bank, including its financial subsidiaries, in monitoring and implementing remuneration policies, and in defining variable remuneration on the basis of established criteria, taking into account the long-term interests of shareholders, investors and relevant stakeholders. The company documents and main regulations can be accessed at www.novobanco.pt > novobanco Group >> About novobanco > Governance > Company Documents: https://www.novobanco.pt/english/about-novobanco/ governance/company-documents 5.2.4 Executive Board of Directors (EBD) The Executive Board of Directors (EBD) is the corporate body responsible for managing the bank. Under the terms of the law and the Articles of Association, and respecting the powers of the other corporate bodies, it is responsible for defining the bank’s and the Group’s general policies and strategic objectives, in compliance with banking standards and good practices. The EBD meets whenever necessary and at least once a week. The EBD has no powers to resolve on capital increases, or on the issuance of securities convertible into shares or securities granting subscription rights, such decisions being the exclusive responsibility of the General Shareholders Meeting and requiring the prior opinion of the GSB. The members of the EBD are appointed by the General and Supervisory Board, which is also responsible for appointing 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”)6 • Benjamin Friedrich Dickgiesser Chief Financial Officer (“CFO”) • 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 & Sustainability Officer (“CLCSO”) • Carlos Jorge Ferreira Brandão Chief Risk Officer (“CRO”) • Rui Miguel Dias Ribeiro Fontes Chief Credit Officer (“CCO”) During 2023, the composition of novobanco’s Board of Directors changed, with Benjamin Friedrich Dickgiesser taking up office as Chief Financial Officer (“CFO”) of novobanco from 1 October 2023. Committees of the Executive Board of Directors Under the terms of its internal regulation, the EBD may approve the establishment of Committees to oversee certain specific matters of the bank’s activity, define and approve their powers and duties, appoint their members, and establish their rules of procedure. In this context, the EBD has established Committees to deal with specific matters or areas of activity, with powers delegated by the EBD to take decisions in accordance with the defined rules, and Sub-Committees established under the Committees, with powers delegated by the respective Committee, with participants who may or may not be different from those of the respective Committees, without prejudice to other internal discussion forums of an advisory and/or monitoring nature on specific topics. As at 31 December 2023 the Committees of the EBD had the following composition: (6) Mark Bourke acted as interim CFO from 30 December 2023 until 1 October 2023, in addition to his position as CEO. 88 Management ReportSustainability ReportFinancial StatementsAnnex COMMITTEE MAIN RESPONSIBILITIES COMPOSITION Capital, Assets and Liabilities Committee Responsible for the definition of balance sheet management policies (capital, pricing, interest rate, liquidity) and for monitoring their impact at novobanco Group level. The Committee also monitors crisis indicators (early warning indicators) with regard to the Recovery Plan, as well as liquidity, proposing mitigation measures, and if necessary, triggering the recovery plan and/or the liquidity contingency plan. CHAIRMAN Benjamin Friedrich Dickgiesser (CFO) MEMBERS: Mark Bourke (CEO), Rui Fontes (CCO), Carlos Brandão (CRO), Andrés Baltar (CCOC), Luís Ribeiro (CCOR) Risk Committee Responsible for issuing an opinion on, approving, under delegation of powers from the Executive Board of Directors, and monitoring novobanco Group’s policies and risk levels. In this context, it is responsible for monitoring the evolution of novobanco Group’s integrated risk profile, and for analysing and proposing methodologies, policies, procedures and instruments to assess all types of risk, namely credit, market, liquidity, IRRBB, non-financial, and ESG. CHAIRMAN Carlos Manuel Ferreira Brandão (CRO) MEMBERS: Mark Bourke (CEO), Benjamin Dickgiesser (CFO), Rui Fontes (CCO), Andrés Baltar (CCOC), Luís Ribeiro (CCOR), Luísa Soares da Silva (CLCSO) Credit Committee Responsible for deciding the main credit operations in which the novobanco Group participates, based on the risk policies defined by and implemented in novobanco Group. CHAIRMAN Rui Miguel Dias Ribeiro Fontes (CCO) MEMBERS: Carlos Brandão (CRO), Andrés Baltar (CCOC) 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, Risk Committee, Operational Risk Subcommittee and Compliance and Product Committee. This committee is responsible, among others, for the overall monitoring of internal control deficiencies, analysing the control environment quality indicators and proposing improvements, and monitoring Quality Assurance activities. Compliance and Product Committee Responsible for the approval, from a compliance perspective, of products and services to be produced and/or distributed by the Bank, issuing an opinion on all of them as part of the product “sign-off” process, as well as monitoring issues relating to compliance control, regulatory control and the promotion of the fulfilment of legal obligations, among others. Transformation Committee The Transformation Committee is responsible for developing novobanco’ strategic objectives for digital transformation, efficiency and simplification of operations. CHAIRMAN Carlos Manuel Ferreira Brandão (CRO) MEMBERS: Mark Bourke (CEO), Benjamin Dickgiesser (CFO), Luísa Soares da Silva (CLCSO) CHAIRWOMAN Luísa Soares da Silva (CLCSO) MEMBERS: Mark Bourke (CEO), Carlos Brandão (CRO), Andrés Baltar (CCOC), Luís Ribeiro (CCOR) CHAIRMAN Mark George Bourke (CEO) MEMBERS: Benjamin Dickgiesser (CFO), Carlos Brandão (CRO), Andrés Baltar (CCOC), Luís Ribeiro (CCOR), Rui Fontes (CCO), Luísa Soares da Silva (CLCSO) Investment and Costs Committee Extended Impairment Committee Responsible for approving the execution of expenses, within the limits of the powers conferred upon it. Its objectives include the definition of an annual expenditure plan and the revision of the acquisitions strategy. CHAIRMAN Benjamin Friedrich Dickgiesser (CFO) Responsible for defining the amount of impairment to be allocated to each Client taking into account novobanco’s exposure to the client or group of clients. CHAIRMAN Carlos Manuel Ferreira Brandão (CRO) MEMBERS: Benjamin Dickgiesser (CFO), Rui Fontes (CCO), Andrés Baltar (CCOC) The EBD has also established three (3) Sub-Committees – the Non-Performing Assets (NPA) Sub-committee, the Model Risk Extended Sub-committee and the Operational Risk Sub-committee – and various Steering Committees, such as for the areas of Retail, Corporate, Human Capital, IT and Data, Investment and Activity Monitoring, and Sustainability (ESG). Novobanco did not set up an autonomous risk committee in matters of corporate governance, being this matter monitored directly by the GSB and the EBD, within the scope of their respective responsibilities, and with support from the relevant departments. 89 Annual Report 2023 | novobanco5.2.5 Monitoring Committee 5.2.6 Statutory Auditor The Statutory Auditor and Alternate Statutory Auditor are elected and removed by the General Shareholders Meeting, under a proposal of the GSB, on a proposal from the Financial Affairs (Audit) Committee, and they have the powers and responsibilities provided for in the law. The Monitoring Committee is a statutory advisory body ruled by the Articles of Association and arising from the Contingent Capital Agreement (CCA). It is composed of three members elected by the General Shareholders Meeting, one of whom acts 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 responsibilities to discuss and issue (non-binding) opinions on any matters 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 the meetings of the GSB. 5.3 Control Manuals 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 Institution’s management and supervisory bodies and employees, who perform their duties in accordance with internal policies and standards of ethics, integrity and professionalism, and with the responsibilities assigned to the structural units and all business areas, 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 has ultimate and overall responsibility for the institution, and defines, supervises and is accountable for the implementation of an adequate Internal Control System with a clear organisational structure and 90 Management ReportSustainability ReportFinancial StatementsAnnex independent risk management, compliance and audit functions. For its part, the GSB is responsible, among other duties listed in the bank’s Articles of Association, for ensuring that the EBD establishes and maintains adequate, independent and effective internal control, in compliance with the law, regulations and internal policies. 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 the Annual Self-Assessment Report itself. 3 LINES OF DEFENCE MODEL novobanco Group’s Internal Control System is consistently implemented across all the financial entities of the Group over which it exercises management control, without prejudice to additional requirements of host territories and specificities of the functions involved in the System. The Internal Control System is supported by the 3 lines of defence model, which clearly defines the levels of intervention and responsibility in risk management and control implementation to ensure the overall adequacy and effectiveness of internal control across the organisation. GENERAL PRINCIPLES GENERAL AND SUPERVISORY BOARD In order to effectively achieve the defined objectives, novobanco Group’s Internal Control System (ICS) is based on the following principles: EXECUTIVE BOARD OF DIRECTORS INTERNAL CONTROL SYSTEM • An appropriate control environment that reflects the importance attached by NBG to the Internal Control System, whose organisation is supported by a three lines of defence model that defines the levels of responsibility in terms of governance and risk management for the different functions that make up each line, including permanent, independent and effective internal control functions; a robust risk management system designed to identify, assess, monitor and control all risks that may affect the strategy, risk appetite and objectives of the novobanco Group (as detailed in section 4.3 - Risk Management); • Efficient information and communication system that ensures the timely collection, processing and exchange of relevant, reliable, complete, comprehensive and consistent information to enable 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 allowing to strengthen the ICS, and triggering corrective action. Under novobanco Group’s Internal Control System, policies, processes, procedures, systems and controls 3rd LINE OF DEFENCE Assessment of the adequacy and effectivness of control Audit function 2nd LINE OF DEFENCE Risk and Control Monitoring Control function (Risk and Compliance) Other functions 1st LINE OF DEFENCE Risk Management Business function E x t e r n a l A u d i t e r s R e g u a t o r s l The 1st line of defence is held by the organisational units that assume and manage the risk of their activities, of the IT processes and systems they sponsor, and of the outsourced activities under their responsibility, on a daily basis and within pre-established limits set by the EBD. These units are responsible for the identification, assessment and control of risks in the activities under their responsibility, on an ongoing basis. It is up to them to protect the institution against 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 keep the bank within its risk limits by controlling, measuring and monitoring risks and reporting any deviations from the applicable risk policies. This line of defence 91 Annual Report 2023 | novobanco comprises the “Risk Management” and “Compliance” Control Functions, the first performed by the Global Risk Department and the latter by the Compliance Department, 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, monitors 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 relevant external authorities, where applicable. The 3rd line of defence is held by the Internal Audit Department, and its mission is to make an independent and risk-based assessment of the adequacy and effectiveness of the entity’s organisational culture and its governance and internal control systems. To ensure its necessary independence, the internal audit function: • reports functionally to the Financial Affairs (Audit) Committee of the GSB and administratively (i.e., daily operations) to the Chief Executive Officer (CEO); • 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 notified to 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 acts as an additional line of defence, given its duties, which are essentially to supervise the accounts, including the internal control report; • the Supervision Authorities (European Central Bank and Bank of 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, namely through detailed assessments and regular interaction with the EBD and senior management; (ii) they 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 control 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 from 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 staff (both in the bank and in its branches and subsidiaries); • Remuneration: the remuneration of employees in control functions is not linked to the results of the activities they supervise and control, nor does it otherwise compromise 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 supervisory functions supervise and liaise with the supervisory functions of its branches and subsidiaries. 92 Management ReportSustainability ReportFinancial StatementsAnnex 5.4 Main policies For novobanco Group, the legal framework that regulates its activities is decisive for its actions, but so is the assumption of a framework of values, principles and good practices that steer its actions and define the standards that shape the manner in which the Group does business and carries out its activities. For this reason, the existence and application of the Code of Conduct, the Conflicts of Interest Policy, the Whistleblowing Policy and the Anti-Bribery and Corruption Policy are of particular importance throughout the novobanco Group. Additionally, but no less important, the scrutiny and transparency requirements of the Related-Party Transactions Policy, the strict application of the Law and Policies on the Prevention, Detection and Combat of Financial Crime, the care and transparency towards clients and investors derived from the Investor Protection and Market Transparency Policies, and the 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 attaches to a culture of compliance. The novobanco Group’s commitment focuses on the prevention, detection, reporting and management of situations involving risks of conduct or irregular conduct, based on principles of integrity, honesty, diligence, competence, transparency and fairness. Code of Conduct novobanco Group’s Code of Conduct, which entered into force in 2015, applies to the members of the GSB and EBD, to the employees of novobanco and to the novobanco Group entities, and also to all third parties which have signed up to the Code at the bank’s request. The Code of Conduct promotes a set of rules and good practices to be observed by employees in their relationship with clients and with the bank itself and aims to make everyone aware of the ethical and professional principles and standards that should guide their actions and the need and importance to follow them, respecting the interests of shareholders, employees and customers. The Code of Conduct is available at novobanco’s website, in Portuguese and English, at novobanco> About novobanco > Governance > Compliance https://www.novobanco.pt/english/about-novobanco/ governance/compliance The Compliance Department, in coordination with the Human Resources Department, is responsible for monitoring the application of the Code of Conduct at novobanco and clarifying its content and application to employees. In 2023, the Group sanctioned 7 (seven) employees for failure to comply with internal rules in the performance of their duties, namely: 2 (two) dismissals without any indemnity or compensation; 1 (one) sanction of days’ suspension without pay and loss of seniority; and 4 (four) written reprimands. Conflicts of Interest Policy The Conflicts of Interest Policy establishes the rules for identifying, managing and monitoring potential conflicts of interest in the various activities of novobanco and the novobanco Group, as well as its corporate bodies and employees and, to the extent possible, its suppliers and subcontractors. It ensures compliance with the applicable legal and regulatory provisions, and seeks to ensure that the Group, the bank and its agents identify, assess and, where appropriate, mitigate, or at least abstain from, any potential conflict of interest situation. The Conflicts of Interest Policy is available at novobanco’s website, in Portuguese and English, at novobanco> About novobanco > Governance > Compliance > Related-Party Transactions Policy. https://www.novobanco.pt/english/about-novobanco/ 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 93 Annual Report 2023 | novobancoensuring that the bank complies with the applicable legal provisions and regulations, namely 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 (“RGICSF”). In this context, the control system implemented identifies the parties involved in transactions contracted with the bank, in strict compliance with the applicable legislation. The process of identification, analysis and validation is described in the 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, proposals for related-party transactions must be submitted for analysis and opinion to the Global Risk Department and the Compliance Department and to the opinion of the Compliance Committee of the GSB, for subsequent approval by the EBD and subsequent ratification by the GSB (or in accordance with the rules of the GSB). The Related-Party Transactions Policy is available at novobanco’s website, in Portuguese and English, at novobanco > About novobanco > Governance > Compliance. https://www.novobanco.pt/english/about-novobanco/ governance/compliance During 2023, 16 (sixteen) credit transactions, provision of services and other contracts with related parties were approved, in which the credit transactions, including extensions and renewals of limits, with persons and entities that were related parties of novobanco on 31 December 2023, totalled €470.2 million. Article 85 of the RGICSF states that credit institutions may not grant credit in any form or by any means, including the provision of guarantees, to members of their management or supervisory bodies, to members of their families, or to companies or other legal entities directly or indirectly controlled by them. However, Article 85(8) allows credit to be granted to companies or other legal entities, other than those referred to in paragraph 1, of which they are managers or in which they hold qualifying holdings. In this context, the Compliance Department issued favourable opinions on 4 credit transactions under Article 85(8) of the RGICSF, which subsequently received the favourable opinion and consent of the Compliance Committee of the GSB, the approval of the Executive Board of Directors, and finally, ratification by the GSB. In addition, under Article 109 of the RGICSF, lending to qualifying shareholders, or entities directly or indirectly controlled or in a group relationship with them is allowed, subject to certain limits. During 2023 novobanco did not conclude any credit transactions with qualifying shareholders under this legal provision. Whistleblowing Policy novobanco remains firmly committed to promoting a culture of compliance, which includes the communication and reporting of improper conduct and behaviour that violates the law, 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, service providers or any third parties, and aims to preserve the bank’s reputation, effectively protect its assets and those of its clients, and prevent or detect early irregularities at an early stage. This Policy also aims to ensure compliance with the provisions of the RGICSF, Bank of Portugal Notice No. 3/2020, the Portuguese Securities Code, Law No. 83/2017 of 18 August establishing measures to combat money laundering and terrorist financing (the “LBCFT”), and Law no. 93/2021 of 20 December establishing the general regime for the protection of whistleblowers, in its current version. Whistleblowing communications are submitted through the following channels: • Reports of irregularities from employees and members of the corporate bodies are submitted through the “Somos novobanco” intranet platform. • Other reports of irregularities will be submitted through the following channels, at the choice of the whistleblower: a. Letter addressed to the Compliance Officer at Avenida da Liberdade, 195, 10th floor, 1250-142 Lisbon; b. Form available at www.novobanco.pt; c. E-mail to: irregularidades@novobanco.pt; d. Orally, in a meeting scheduled through the above channels. 94 Management ReportSustainability ReportFinancial StatementsAnnex 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. In 2023, 10 (ten) reports of irregularities were received, of which 7 (seven) had been analysed by 31 December 2023 and 2 (two) were found to be substantiated. The Whistleblowing Policy is available at novobanco’s website, in Portuguese and English, at novobanco > About novobanco > Governance > Compliance > whistleblowing Policy. https://www.novobanco.pt/english/about-novobanco/ governance/compliance Bribery and corruption Policy Bribery and corruption are among the greatest challenges facing modern societies, and preventing, detecting and combating them requires the combined efforts of all sectors of society, including the banking sector, which has an important role to play in promoting a culture of public integrity. Preventing, detecting and combating bribery and corruption has become 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 Corruption Policy, approved by the Compliance Committee of the GSB and the EBD, aims to prevent and mitigate the risk of bribery and corruption and related practices, reaffirming novobanco’s commitment to building a more integrity-driven society. In 2023, and to ensure the exercise of its activity in accordance with legal frameworks, always with the underlying goal of combating corruption, the novobanco Group made approximately 570 communications to judicial entities, also collaborating with over 1.3 thousand responses to these entities. The Anti-Bribery and Anti-Corruption Policy is available at novobanco’s website, in Portuguese and English, at About novobanco > Governance > Compliance > Anti- bribery and Anti-corruption Policy. https://www.novobanco.pt/english/about-novobanco/ governance/compliance Policy on the Prevention of Money Laundering and Terrorism Financing A bank’s ability to prevent, detect and combat activities that may constitute money laundering derives directly from its knowledge of its counterparties and their transactions. The novobanco Group, through its Compliance Department, has a line of action that creates the conditions for the bank to prevent, detect and combat, through the implementation of appropriate policies, procedures and controls, the possibility of the bank and the novobanco Group being used as a vehicle for money laundering or terrorist financing activities, bearing in mind the significant prevalence of these risks in the financial system. Aware of the challenge posed by this control and preventive action, the novobanco Group maintains an ongoing reassessment of the risks it incurs due to its business, operations and geographic areas of operation, endeavouring to identify weaknesses and areas of greater exposure, in order to ensure it has in place adequate methods to control and mitigate risks of money laundering or terrorist financing. The ability to prevent and, if possible, detect and combat 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 a contract or changing the ownership of an existing contract through what is known as KYC (know your customer), i.e., verifiable identification of owners, agents and beneficial owners; • monitoring contract transactions - KYT (Know Your Transactions), namely spotting unusual situations, either beforehand or by contacting the client after the situation was detected; • analysis of counterparty risk in investment and divestment transactions, and of transaction and source of funds circuits, under the terms of the Law. 95 Annual Report 2023 | novobancoTo that end, novobanco Group, using IT tools with recognised results at international level that complement the experience of its human capital, has created and developed assessment models that ensure that enhanced scrutiny is applied where it is most needed. In order to comply with its regulatory obligations, novobanco Group conducts training sessions on the prevention of money laundering and terrorist financing for all its employees (commercial and central structures, including senior management and members of management and supervisory bodies). Training can be remote or face-to-face, the latter being mainly aimed at new employees, to provide them with the skills to work with the control functions to mitigate the risks associated with the performance of their duties. In 2023, novobanco maintained its training in the prevention of money laundering and terrorist financing, providing 12,968 hours of online training (including 1,107 hours of training for senior managers). Training is a fundamental tool for employees to correctly identify potential money laundering and terrorist financing situations, and is also critical to the proper fulfilment of the bank’s legal and regulatory obligations. The prevention of money laundering and terrorist financing is one of the foundations of trust in the financial system and will continue to deserve special and ongoing operational and strategic attention. The bank’s Policies on the Prevention of Money Laundering and Terrorist Financing are available at novobanco’s website, in Portuguese and English, at About novobanco > Governance > Compliance > Policies on the Prevention of Money Laundering and Terrorist Financing. https://www.novobanco.pt/english/about-novobanco/ governance/compliance Policy on the Investor Protection and Market Transparen Directive on Markets in Financial Instruments no. 2014/65/EU, of 15 May 2014 (“MiFID II), and related regulations, which came into force in January 2018, aim to reinforce investor protection and increase the transparency and quality of the financial market operation and services provided, covering all persons and entities operating in the markets in financial instruments. In addition, national legislation on financial intermediation activities (in particular the Portuguese Securities Code) and insurance mediation (in particular Law 7/2019 of 16 January) provides the basic reference framework for fair and transparent action by operators in the financial markets and, as such, for the novobanco Group. Given the international trend towards strengthening the obligations of financial intermediaries in terms of transparency, lawfulness, completeness of information, due diligence and investor protection, and to address the changes in the rules on the marketing of financial instruments, novobanco has adopted the best practices in terms of product and service governance, ensuring the prior assessment and subsequent monitoring of its offer, with the Compliance Department having broad responsibilities in this area. In compliance with the legal framework, novobanco has approved its standards and policies arising from these regulations and discloses them in a dedicated area of its website, at novobanco > Investimento > Temas úteis > Informação ao Investidor. https://www.novobanco.pt/particulares/investimento/ informacao-investidor The most relevant aspects of these standards and policies are summarised below: Recording and registration of communications. novobanco is obliged to keep recordings and registers of all communications with Clients and potential Clients regarding all services, activities and operations it carries 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 afforded 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 suitability. In order to ensure the suitability of the financial instruments or investment services offered by novobanco to the client’s investment profile, novobanco 96 Management ReportSustainability ReportFinancial StatementsAnnex asks its Clients and potential Clients to complete investor profile questionnaires in order to obtain a more complete and detailed understanding of, among other things, their experience and knowledge in investment matters, their financial situation, their investment objectives (including their capacity to bear losses) and their risk tolerance. This sharing of information and knowledge permits to assess whether a given investment product or service is suitable to the specific situation of the investor client. Safeguard of Customer Assets. The Portuguese Securities Code stipulates that the financial intermediary must adopt procedures and take measures to ensure that, in all the transactions it carries out, as well as in the accounting and transaction records, a clear distinction is made between the assets belonging to it and those belonging to each of its clients, so that the opening of insolvency proceedings, the reorganisation of the company or the reorganisation of the financial intermediary does not affect the transactions carried out by the financial intermediary on behalf of its clients. The financial intermediary may not, in its own interest or in the interest of third parties, use its clients’ financial instruments or exercise the rights attached to them without the consent of the holders. 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 include the screening of new offers, incentive schemes, internal campaigns and advertising of products and services, as well as the monitoring of existing offers. Remuneration Policies for the Management and Supervisory Bodies and Staff Members Novobanco’s Remuneration Policies were drawn up in accordance with the legislation in force at the time, in particular with the Legal Framework, Notice No 3/2020 of Banco de Portugal and the EBA Guidelines 2021/04 on sound Remuneration Policies and other related legislation, reflect the guiding principles of meritocracy and transparency and take into account (i) the objectives, long-term strategy and interests, (ii) the corporate nature and structure, (iii) the corporate culture and values, (iv) the risk strategy and culture (including environmental, social and governance risk factors), (v) the long-term interests of shareholders; and (vi) the avoidance of conflicts of interest and the bank’s failure to assume excessive risks. Pursuant to and for the purposes of the Legal Framework, Notice No 3/2020 of Banco de Portugal, and in order to comply with the disclosure duties relating to the remuneration policies set out therein, the Remuneration Committee carried out an annual assessment of the implementation of the remuneration policies and remuneration practices and processes. The Remuneration Committee did not identify any deficiencies, during the period under review. The Remuneration Committee and the relevant departments for this exercise (e.g. Human Capital, Legal Affairs, Compliance and Risk) reviewed the remuneration policies of the Management and Supervisory Bodies and of the Employees, ensuring full alignment of the established practices with the applicable regulatory requirements. As a result of this assessment, slight adjustments were made to the Remuneration Policies, namely the elimination of the chapter on the limitations of remuneration resulting from the commitments made by the State Portuguese to the European Commission, in the context of the State aid granted (State Aid no. SA.49275 (2017 / N)) and the inclusion of the deferral rule in situations where the variable component of remuneration is particularly high. The Regulation on Remuneration Units has also been revised to ensure consistency and alignment with the Remuneration Policies. The Remuneration Committee understands that the Remuneration Policies are appropriate to novobanco’s current situation and considers 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 these incentives, are in line with the long-term objectives of the institution and the various stakeholders. The report prepared by the Remuneration Committee shall be submitted to the General and Supervisory Board, the General Shareholders’ Meeting and the 97 Annual Report 2023 | novobanco Executive Board of Directors, which shall ensure the implementation of any measures identified. The following rules must be observed in the process of awarding variable remuneration: i) Description of the Remuneration Policy of the Management and Supervisory Bodies Competencies for Policy Approval. The approval of the Remuneration Policy of the Management and Supervisory Bodies is the responsibility of the General Shareholders’ Meeting, upon proposal of the Remuneration Committee of the General and Supervisory Board, which is also among other responsibilities responsible for: • Prepare decisions on the remuneration to be awarded to the members of the Executive Board of Directors, as well as the definition of their KPIs; • Define and approve the budget for the total variable remuneration of employees, based on the bank’s results, both in financial terms and in terms of their sustainability; • Verify that existing remuneration policies are up-to- date and, if necessary, propose appropriate changes; • Assess the mechanisms and systems put in place to ensure that remuneration systems are consistent with sound and effective risk management and assess the criteria used to define remuneration and risk adjustments (Clawback or Malus). General and Supervisory Board. Only the independent members of the General and Supervisory Board receive remuneration from novobanco, approved by the General Shareholders’ Meeting, which has only a fixed component and is paid 12 times a year. Executive Board of Directors. The remuneration of the Executive Board of Directors has a fixed component and a variable component. Fixed compensation is established according to the complexity, level of responsibility and skills required for the role, and is paid 14 times a year. The variable component of remuneration is discretionary and is based on an individual and collective assessment of performance, taking into account quantitative and qualitative criteria. These criteria shall be defined and evaluated by the Remuneration Committee and communicated to the members of the Executive Board of Directors in due course. • It may only be allocated if it does not jeopardise the bank’s ability to maintain a sound capital base, the bank has achieved a positive operational performance and provided that the allocation (and its disbursement, including deferred instalments) is consistent with sound and effective risk management practices; • It may not exceed 100% of the fixed annual remuneration, and the approval of a higher ratio, and up to a maximum limit of 200%, is subject to the approval of the General Shareholders’ Meeting; • It is deferred over a period of 5 years from the reference year, with 50% being paid in the year of allocation and the remaining 50% being acquired and paid on a pro rata basis in the four years following the allocation. In situations where the variable component of the remuneration exceeds one million euros, the amount to be deferred will be 60%, paid pro rata in the four years following the award; • 50% of the variable remuneration amounts awarded will be in the form of “Remuneration Units”, whose terms and conditions of attribution, acquisition and payment are defined in the Remuneration Units Regulations. The value of each Remuneration Unit is determined by the Remuneration Committee, in accordance with the bank’s financial indicators, prior to the settlement of any of these deferred amounts. Apart from any commitment agreed in the contracting process in the form of a signature bonus, no other type of variable remuneration can be guaranteed. All amounts paid or deferred, regardless of whether they constitute acquired rights, are subject to the application of risk-based adjustment mechanisms, i.e. Clawback and/or Malus. With regard to other benefits, such as Health Insurance or Mobile Phone, the bank’s internal policies defined for this purpose apply. ii) Description of the Remuneration Policy for Employees Competencies for Policy Approval. The approval of the Employee Remuneration Policy is the responsibility of the Executive Board of Directors, on a proposal from the Remuneration Committee. 98 Management ReportSustainability ReportFinancial StatementsAnnex Identified Collaborators Selection of Identified Collaborators. The bank’s Employee Remuneration Policy foresees the regime applicable to employees who have or may have a significant impact on novobanco’s risk profile, and are classified as Identified Employees, in accordance with the provisions of the Policy. The list of Identified Employees is reviewed annually and reported at the same frequency to Banco de Portugal, pursuant to Instruction No 18/2020 of Banco de Portugal. Compensation Components. Fixed remuneration should reflect the competence, experience and responsibility inherent in the role performed, and should not be dependent on performance. The allocation of variable remuneration to the Identified Employees, as well as its amount, depends on the decision of the Remuneration Committee and the Executive Board of Directors. If there is a variable remuneration, it is calculated according to an individual and collective performance evaluation, and must consider the following principles: • 50% of the Variable Remuneration assigned will be in the form of “Remuneration Units”, whose terms and conditions of attribution, acquisition and payment are defined in the Remuneration Units Regulations. The value of each Remuneration Unit is determined by the Remuneration Committee, in accordance with the bank’s financial indicators, prior to the settlement of any deferred amount; • Retention Plans for Identified Employees may be defined, which may result in a variable remuneration exceeding 100% of the fixed annual remuneration, subject to the approval of the General Shareholders’ Meeting and the conditions contained in the respective regulations; • Apart from any commitments agreed in the hiring process in the form of a signature bonus or retention bonus under a retention program, no other form of variable remuneration is guaranteed; • All amounts of variable remuneration paid or deferred, regardless of whether they constitute vested rights, are subject to the risk, Clawback and/or Malus adjustment mechanisms, as described in the Remuneration Policy. Performance should be evaluated considering quantitative and qualitative criteria and through financial and non-financial variables: iii) Disclosure of Remuneration Refer to point 5.6 Remuneration of the Members of the Corporate Bodies and Identified Staff. • The period of performance evaluation and attribution of variable remuneration must be multi-year, which implies that a substantial part of the amount awarded is deferred to take into account economic cycles, risk management and promote the retention of Identified Employees; • The variable remuneration must be deferred over a period of 5 years, assuming a payment of 60% in the year of the assignment, with the remaining 40% acquired and paid on a pro rata basis in the four years following the assignment; • The variable remuneration of the Identified Employees may be excluded from deferral if the amount of the variable remuneration to be awarded is less than €50,000 and represents less than one third of the employee’s total annual remuneration; • The amount of the variable remuneration may not exceed 100% of the fixed annual remuneration, and the approval of a higher ratio, and up to a limit of 200%, is subject to the approval of the General Shareholders’ Meeting; Policy for Selection and Assessment of the Management and Supervisory Bodies and Key Function Holders novobanco has a Policy for the Selection and Evaluation of Management and Supervisory Bodies and Key Function Holders (“Selection and Evaluation Policy”), thus complying with the existing legal and regulatory framework and ensuring the application of the standards required in terms of internal governance for significant financial institutions. This Selection and Evaluation Policy was approved by the Nomination Committee of the General and Supervisory Board, the General and Supervisory Board, the Executive Board of Directors and the General Shareholders’ Meeting. The Selection and Evaluation Policy aims to ensure that the holders of Administration, Supervision and Essential Functions positions (namely the holders of Risk, Audit, Compliance, Branch Directors, General Directors of 99 Annual Report 2023 | novobancoThe Policy applies to the selection, appointment, and assessment of novobanco’s 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, scope and complexity of novobanco and its financial subsidiaries’ activity and the responsibilities inherent to the specific tasks to be performed. To achieve its purpose, the Policy defines the assessment criteria, stipulates an obligation to monitor the Statutory Auditor’s activity and establishes the internal responsibilities and the procedures that must be followed in this regard. In addition, the policy sets out the criteria and procedures to be followed when engaging the Statutory Auditor to perform non-audit services and defines which services are permitted and which are prohibited. The activity of novobanco’ Statutory Auditor in 2022 was assessed in 2023, in accordance with this Policy. branches and other directors that the bank identifies as having functions that involve the assumption of risks, currently those responsible for Treasury, Marketing and Prevention of Money Laundering) meet all the adequacy criteria, either at the time of their appointment or during their term of office or performance of duties. This adequacy essentially translates into the ability to constantly ensure the sound and prudent management of the institution, taking into account the safeguarding of the financial system and the interests of customers, depositors, investors, creditors and other interested parties, with the following requirements being assessed: i) experience; (ii) reputation; (iii) absence of conflicts of interest and independence; iv) availability, v) collective adequacy, and (vi) adherence to the bank’s ethical standards. Policy for the Selection and Evaluation of Novo Banco’ Statutory Auditor and the Contracting of Non-prohibited Non-audit services novobanco approved in 2018 and revised in 2023 its Policy for the Selection and Evaluation of Novo Banco’ Statutory Auditor and the Contracting of Non-prohibited Non-audit services, in compliance of the applicable regulations. This Policy was reviewed and approved by the GSB’s Financial Affairs (Audit) Committee, the General and Supervisory Board and novobanco’s General Shareholders Meeting. 100 Management ReportSustainability ReportFinancial StatementsAnnex 5.5 Credit to Members of the Corporate Bodies At 31 December 2023 the outstanding amount of loans granted to persons and entities falling under the provisions of article 85 of the RGICSF is presented below: Name Position Amount (in euros) Members of the Corporate Bodies at 31 December 2023 Executive Board of Directors Luís Miguel Alves Ribeiro Closely related persons Member of the Executive Board of Directors Carlos Jorge Ferreira Brandão Member of the Executive Board of Directors General and Supervisory Board Carla Alexandra Severino Antunes da Silva Member of the General and Supervisory Board Closely related persons 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. novobanco dos AÇORES SIBS - SGPS SA UNICRE - Instituição Financeira de Crédito S.A. 121 669.15 72 950.71 241 352.68 508.88 137 721 811.85 12 294 560.00 9 375 000.00 15 000 000 The amount of credit granted to a person closely related to a member of the Executive Board of Directors refers to a mortgage loan. The amount owed by Carlos Jorge Ferreira Brandão relates to types of consumer credit contracted prior to his appointment. The amount of credit granted to persons closely related to a member of the General and Supervisory Board concerns to 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 the credit to entities in which members of the Executive Board of Directors hold 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 article 109 (7) of the RGICSF, as at 31 December 2023 there were no outstanding loans to direct or indirect holders of qualifying holdings. 101 Annual Report 2023 | novobanco 5.6 Remuneration of the Members of the Corporate Bodies and Identified Staff i) Corporate Bodies a. Total Remuneration earned in 2023 Fixed and Variable Remuneration earned in 2023 Role Salary Other post- Employment benefits4 Other Allowances5 Variable Remuneration 20226 Total Paid Executive Board of Directors 2 545 147 35 838 252 500 810 000 3 643 484 Mark Georges Bourke CEO Benjamin Dickgiesser 1 Member EBD 600 000 125 147 - - 210 000 195 000 1 005 000 42 500 - 167 647 Luis Miguel Alves Ribeiro Member EBD 375 000 21 089 Andres Baltar Gracia Member EBD 375 000 Luisa Marta Santos Soares da Silva Amaro de Matos Member EBD 375 000 Carlos Jorge Ferreira Brandão Member EBD 320 000 - - - Rui Miguel Dias Ribeiro Fontes Member EBD 375 000 14 749 General and Supervisory Board 1 297 500 Byron James Macbean Haynes Chairman GSB 468 000 Karl - Gerhard Eick Vice-Chairman GSB 328 000 Kambiz Nourbakhsh Member GSB Mark Andrew Coker Member GSB John Ryan Herbert Member GSB Robert Alan Sherman Member GSB - - 102 000 102 000 Carla Alexandra Severino Antunes da Silva Member GSB 81 000 Willian Henry Newton Member GSB 176 000 Monika Wildner 2 Member GSB 40 500 Evgeniy Kazarez 3 Member GSB - - - - - - - - - - - - - - - - - - - - - - - - - - - - 147 500 543 588 130 000 505 000 132 500 507 500 72 500 392 500 132 500 522 249 - - - - - - - - - - - 1 297 500 468 000 328 000 - - 102 000 102 000 81 000 176 000 40 500 - (1) Member of EBD since October 2023. In addittion to the remuneration in the table above, a sign-on bonus of 150.000€ was paid. (2) Member of GSB since July 2023. In the period from January to June, she received 40.500€ under a consultancy agreement. (3) Member of GSB since November 2023. (4) Annual Contribution for the Defined Contribution Scheme was reinstated in 2023. A total contribution of 66.678€ was made to the elegible EBD members regarding previous years. (5) Other Allowances (expat and healthcare). (6) 50% of 2022 Variable Remuneration Award. 102 Management ReportSustainability ReportFinancial StatementsAnnex and based on the Bank’s financial position, the Remuneration Committee evaluated the Remuneration Units at 1€ each, and no event was identified that justified the application of any risk adjustment mechanisms. In 2023, there were no amounts paid to the members of the Corporate Bodies of novobanco by other group companies. Following the termination of the Restructuring Period by the European Commission in the context of the State Aid granted following the sale process of novobanco, remuneration limitations of the members of the Management and Supervisory Bodies were no longer applicable, which resulted in additional payments to existing EBD and GSB members in 2023 of 382.948€ of previously deferred salaries and other allowances and 2.663.167€ of previously awarded, deferred and vested variable remuneration. Prior to making these payments b. 2023 Variable Remuneration For the year 2023, the Remuneration Committee awarded Variable Remuneration to the Executive Board of Director members as follows: 2023 Variable Remuneration Role Total Awarded Total in Cash Total in Remunerations Units Total Deferred Remuneration pending2 Executive Board of Directors 1 877 647 938 824 938 824 2 362 816 Mark Georges Bourke CEO 390 000 195 000 195 000 565 000 Benjamin Dickgiesser Member EBD 82 647 41 324 41 324 41 324 Luis Miguel Alves Ribeiro Member EBD 305 000 152 500 152 500 406 667 Andres Baltar Gracia Member EBD 275 000 137 500 137 500 347 500 Luisa Marta Santos Soares da Silva Amaro de Matos Member EBD 275 000 137 500 137 500 375 833 Carlos Jorge Ferreira Brandão1 Member EBD 275 000 137 500 137 500 246 492 Rui Miguel Dias Ribeiro Fontes Member EBD 275 000 137 500 137 500 380 000 (1) Includes 75.000€ awarded in September 2023 in advance of the 2023 Bonus award. (2) Variable Remuneration deferred from awards of 2020, 2021, 2022 and 2023. As stated in the Remuneration Policy for Management and Supervisory Bodies, Variable Remuneration awards are limited to 100% of Annual Fixed Remuneration of each EBD member with 50% of the award in cash and 50% of the award in Remuneration Units. According to the Remuneration Policy, 50% of awarded Variable Remuneration is deferred over a period of 5 years (2024- 2028). 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. These amounts are also subject to risk adjustment mechanisms (Malus and Clawback). 103 Annual Report 2023 | novobancoPlans for the attribution of shares or stock options. Nothing to report. Other benefits and compensation and non-cash benefits. Nothing to report. Compensation paid or due to former members of the Executive Board of Directors in relation to early contract termination in the reporting year. Nothing to report. 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 55 employees was classified as Identified Staff and the table below indicates their Fixed and Variable Remuneration awarded for 2023, of which 50% is awarded in cash and 50% in remuneration units. # Identified Staff Total Comercial Control Functions Support 55 7 4 44 Fixed and Variable Remuneration earned in 2023 Salary Other post- Employment benefits 1 Variable Remuneration 2022 2 Total Paid 7 718 517 231 608 2 240 046 10 190 170 918 683 660 894 59 285 2 499 303 407 173 451 1 281 375 836 844 6 138 940 169 824 1 763 188 8 071 951 (1) Annual Contribution for the Defined Contribution Scheme was reinstated in 2023. A total contribution of 384.925€ was made to the elegible Identified Staff regarding previous years. (2) 2022 Variable Remuneration awarded that was not deferred. The 2023 Variable Remuneration will be paid and subject to deferral in accordance with the Remuneration Policy. These amounts may be subject to future adjustments in accordance with the conditions set out in the Remuneration Policy. Regarding the deferral exception included in the Remuneration Policy for Staff, it applies to a total of 23 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. # Identified Staff Total Comercial Control Functions Support 2023 Variable Remuneration Total Awarded Total in Cash Total in Remunerations Units Total Deferred Remuneration pending 1 55 7 4 44 4 442 547 2 221 273 2 221 273 3 496 212 573 842 327 000 286 921 163 500 286 921 163 500 501 665 274 349 3 541 705 1 770 853 1 770 853 2 720 198 (1) Variable Remuneration deferred from awards of 2021, 2022 and 2023. 104 Management ReportSustainability ReportFinancial StatementsAnnex Regarding deferred payments in 2023, a total of 1.616.218€ have been paid to Identified Staff from variable remuneration awards of previous years. During 2023, three members of Identified Staff in 2022 have left the Bank and received severance payments of a total of 1.000.000€. 5.7 Securities Held by Members of the Management and Supervisory Bodies As at 31 December 2023 and in financial year 2023, the members of the Corporate 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 members of the Corporate Bodies. 5.8 Non-Material Indirect Investment in novobanco All current members of the EBD and certain members of the GSB acquired, using their own funds, shares 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 stake of significantly 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 as a percentage of the share capital, and also for each individual concerned. Non-material indirect investments in novobanco have been disclosed in previous annual financial statements of novobanco and reported to the relevant supervisory authorities and to the Chief Compliance Officer of novobanco. In addition, certain staff members also had the opportunity to make a non- material indirect investment in novobanco using their own funds, under the same terms referred to above. 105 Annual Report 2023 | novobanco6 CONSOLIDATED FINANCIAL STATEMENTS AND FINAL NOTES 6.1 Consolidated Financial Statements 106 Management ReportSustainability ReportFinancial StatementsAnnex NOVO BANCO, S.A. CONSOLIDATED INCOME STATEMENT AS AT 31 DECEMBER 2023 AND 2022 (thousands of Euros) Interest Income Interest Expenses Net Interest Income Dividend income Fees and commissions income Fees and commissions expenses Gains or losses on derecognition of financial assets and liabilities not measured at fair value through profit or loss 31.12.2023 31.12.2022 1 955 662 834 679 ( 813 078) ( 209 204) 1 142 584 625 475 2 133 5 035 339 061 337 335 ( 44 746) ( 47 155) ( 58 055) ( 88 255) Gains or losses on financial assets and liabilities held for trading 4 418 149 212 Gains or losses on financial assets mandatorily at fair value through profit or loss 26 633 ( 40 493) Gains or losses on financial assets and liabilities designated at fair value through profit and loss Gains or losses from hedge accounting Exchange differences Gains or losses on derecognition of non-financial assets Other operating income Other operating expenses Operating Income Administrative expenses Staff expenses Other administrative expenses Cash contributions to resolution funds and deposit guarantee schemes Depreciation Provisions or reversal of provisions Commitments and guarantees given Other provisions Impairment or reversal of impairment on financial assets not measured at fair value through profit or loss Impairment or reversal of impairment of investment in subsidiaries, joint ventures and associates Impairment or reversal of impairment on non-financial assets Share of the profit or loss of investments in subsidiaries, joint ventures and associates accounted for using the equity method Profit or loss before tax from continuing operations Tax expense or income related to profit or loss from continuing operations Current tax Deferred tax Profit or loss after tax from continuing operations Profit or loss from discontinued operations Profit or loss for the period Attributable to Shareholders of the parent Attributable to non-controlling interests 79 32 112 24 369 27 901 116 ( 1 713) 6 789 83 289 106 231 214 005 ( 124 054) ( 118 357) 1 478 666 1 125 283 ( 435 577) ( 395 870) ( 252 704) ( 233 707) ( 182 873) ( 162 163) ( 78 481) ( 43 588) ( 45 699) ( 41 155) ( 52 493) ( 39 245) 628 2 685 ( 46 327) ( 41 930) ( 141 893) ( 101 882) 7 406 6 351 7 215 21 546 8 375 8 354 754 400 532 913 ( 5 769) 53 301 ( 15 134) ( 10 048) 9 365 63 349 748 631 586 214 ( 412) ( 270) 748 219 585 944 743 088 560 842 5 131 25 102 748 219 585 944 O Contabilista Certificado O Conselho de Administração Executivo 107 Annual Report 2023 | novobancoNOVO BANCO, S.A. CONSOLIDATED BALANCE SHEET AS AT 31 DECEMBER 2023 AND 2022 (thousands of Euros) ASSETS 31.12.2023 31.12.2022 Cash, cash balances at central banks and other demand deposits 5 867 189 6 599 078 Financial assets held for trading Financial assets mandatorily at fair value through profit or loss Financial assets designated at fair value through profit or loss Financial assets at fair value through other comprehensive income Financial assets at amortised cost Securities Loans and advances to banks Loans and advances to customers Derivatives – Hedge accounting Fair value changes of the hedged items in portfolio hedge of interest rate risk Investments in subsidiaries, joint ventures and associates Tangible assets Tangible fixed assets Investment properties Intangible assets Tax assets Current Tax Assets Deferred Tax Assets Other assets Non-current assets and disposal groups classified as held for sale Total Assets LIABILITIES Financial liabilities held for trading Financial liabilities measured at amortised cost Deposits from central banks and other banks (of which: repos) Due to customers (of which: repos) Debt securities issued, Subordinated debt and liabilities associated to transferred assets Other financial liabilities Derivatives – Hedge accounting Fair value changes of the hedged items in portfolio hedge of interest rate risk Provisions Tax liabilities Current Tax liabilities Deferred Tax liabilities Other liabilities Liabilities included in disposal groups classified as held for sale Total Liabilities EQUITY Capital Accumulated other comprehensive income Retained earnings Other reserves Profit or loss attributable to Shareholders of the parent Minority interests (Non-controlling interests) Total Equity Total Liabilities And Equity O Contabilista Certificado 108 436 148 264 912 - 171 810 313 702 13 838 523 2 331 099 32 452 537 32 559 148 7 870 536 47 940 7 964 664 43 548 24 534 061 24 550 936 683 063 ( 83 498) 59 511 757 549 363 754 393 795 86 748 931 036 29 376 901 660 1 117 258 89 814 562 845 ( 165 144) 119 744 798 831 299 264 499 567 69 832 956 000 32 570 923 430 1 618 484 59 587 43 500 790 45 995 029 100 639 99 386 37 330 355 40 987 177 5 745 326 3 867 053 9 705 154 2 150 824 29 984 273 29 277 858 1 366 382 1 107 585 493 171 124 729 62 049 430 829 10 808 10 808 - 1 005 846 13 107 450 906 1 628 897 375 268 119 578 - 413 432 8 427 7 582 845 839 919 15 492 39 078 362 42 483 411 6 567 844 (1 070 125) (8 577 074) 6 736 004 743 088 22 691 6 304 661 (1 234 573) (8 577 074) 6 439 418 560 842 18 344 4 422 428 3 511 618 43 500 790 45 995 029 O Conselho de Administração Executivo Management ReportSustainability ReportFinancial StatementsAnnex 6.2 Separate Financial Statements NOVO BANCO, S.A. CONSOLIDATED INCOME STATEMENT AS AT 31 DECEMBER 2023 AND 2022 (thousands of Euros) Interest Income Interest Expenses Net Interest Income Dividend income Fees and commissions income Fees and commissions expenses Gains or losses on 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 mandatorily at fair value through profit or loss Gains or losses from hedge accounting Exchange differences Gains or losses on derecognition of non-financial assets Other operating income Other operating expenses Operating Income Administrative expenses Staff expenses Other administrative expenses Cash contributions to resolution funds and deposit guarantee schemes Depreciation Provisions or reversal of provisions Commitments and guarantees given Other provisions Impairment or reversal of impairment on financial assets not measured at fair value through profit or loss Impairment or reversal of impairment of investment in subsidiaries, joint ventures and associates Impairment or reversal of impairment on non-financial assets Profit or loss before tax from continuing operations Tax expense or income related to profit or loss from continuing operations Current tax Deferred tax Profit or loss after tax from continuing operations Profit or loss from discontinued operations Profit or loss for the period 31.12.2023 31.12.2022 1 940 462 838 291 ( 833 352) ( 213 295) 1 107 110 624 996 32 444 306 859 ( 37 563) 17 452 302 126 ( 39 816) ( 58 055) ( 88 444) 3 144 71 766 31 468 23 989 27 608 45 120 146 715 ( 95 948) ( 535) 7 305 82 159 56 579 ( 78 681) ( 68 778) 1 475 209 943 811 ( 407 920) ( 369 730) ( 234 729) ( 216 821) ( 173 191) ( 152 909) ( 77 528) ( 45 878) ( 23 305) ( 40 717) ( 53 961) ( 10 894) 434 2 555 ( 23 739) ( 13 449) ( 142 022) ( 103 265) 12 216 6 353 16 166 14 081 797 125 395 491 4 656 ( 5 386) 10 042 58 339 ( 4 611) 62 950 801 781 453 830 ( 1 121) - 800 660 453 830 O Contabilista Certificado O Conselho de Administração Executivo 109 Annual Report 2023 | novobancoNOVO BANCO, S.A. CONSOLIDATED BALANCE SHEET AS AT 31 DECEMBER 2023 AND 2022 (thousands of Euros) ASSETS Cash, cash balances at central banks and other demand deposits Financial assets held for trading Financial assets mandatorily at fair value through profit or loss Financial assets designated at fair value through profit or loss Financial assets at fair value through other comprehensive income Financial assets at amortised cost Securities Loans and advances to banks Loans and advances to customers Derivatives – Hedge accounting Fair value changes of the hedged items in portfolio hedge of interest rate risk Investments in subsidiaries, joint ventures and associates Tangible assets Tangible fixed assets Intangible assets Tax assets Current Tax Assets Deferred Tax Assets Other assets Non-current assets and disposal groups classified as held for sale Total Assets LIABILITIES Financial liabilities held for trading Financial liabilities measured at amortised cost Deposits from central banks and other banks (of which: repos) Due to customers (of which: repos) Debt securities issued, Subordinated debt and liabilities associated to transferred assets Other financial liabilities Derivatives – Hedge accounting Fair value changes of the hedged items in portfolio hedge of interest rate risk Provisions Tax liabilities Current Tax liabilities Other liabilities Total Liabilities EQUITY Capital Accumulated other comprehensive income Retained earnings Other reserves Profit or loss attributable to Shareholders of the parent Total Equity Total Liabilities And Equity O Contabilista Certificado 110 31.12.2023 31.12.2022 5 742 599 436 345 1 434 690 - 6 387 295 170 847 1 537 670 13 741 446 2 183 034 31 389 894 31 500 944 8 200 570 125 817 8 400 233 145 464 23 063 507 22 955 247 683 074 ( 83 763) 263 675 300 242 300 242 86 427 923 641 26 260 897 381 1 211 512 16 482 562 886 ( 164 388) 251 457 258 963 258 963 69 640 947 500 30 298 917 202 1 713 116 45 071 43 146 264 45 464 048 100 607 37 392 300 6 623 884 3 867 053 99 317 40 904 697 10 506 509 2 150 824 29 193 007 28 425 223 1 366 382 1 085 659 489 750 124 957 62 049 420 543 4 191 4 191 450 906 1 601 454 371 511 120 612 - 423 190 4 505 4 505 1 012 395 844 779 39 117 042 42 397 100 6 567 844 ( 993 658) (8 577 074) 6 231 450 800 660 6 304 661 (1 155 271) (8 577 074) 6 040 802 453 830 4 029 222 3 066 948 43 146 264 45 464 048 O Conselho de Administração Executivo Management ReportSustainability ReportFinancial StatementsAnnex 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. the separate and consolidated financial statements of novobanco, for the year ended on 31 December 2023 were prepared in accordance with the International Financial Reporting Standards (IFRS) as adopted in the European Union; ii. to the best of their knowledge the financial statements referred to in (i) provide a true and fair view of the assets and liabilities, equity and earnings of novobanco and of novobanco Group, in accordance with the referred standards; iii. the management report describes accurately the evolution of the businesses, the performance and the financial position of novobanco and of novobanco Group in 2023 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 29 February, 2024. 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, 29 February, 2024 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 2023, in the amount of €800 659 999.51, be allocated as follows: €80 065 999.95 to the Legal reserve, pursuant to article 97 of the Legal Framework of Credit Institutions and Financial Companies, and €720 593 999.56 to Other reserves and retained earnings, to cover losses from previous years. EXECUTIVE BOARD OF DIRECTORS Mark George Bourke Benjamin Dickgiesser 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 111 Annual Report 2023 | novobanco7 ANNEX – 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: 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: 112 Management ReportSustainability ReportFinancial StatementsAnnex OFFICIAL INCOME STATEMENT (thousands of Euros) e m o c n I t s e r e t n I t e N i i s n o s s m m o C d n a s e e F o i r á c n a B o t u d o r P l i a c r e m o C 4 8 5 2 4 1 1 3 0 1 6 9 2 7 8 6 8 3 4 1 Interest Income 1 955 662 1 955 662 Interest Expenses ( 813 078) ( 813 078) Net Interest Income Dividend income 1 142 584 2 133 Fee and comission income 339 061 339 061 Fee and comission expenses ( 44 746) ( 44 746) MANAGEMENT INCOME STATEMENT i e v i t a r t s n m d A d n a i l a r e n e G s t s o C ) 3 7 8 2 8 1 ( e m o c n I g n i t a r e p O t e N 3 0 1 3 6 9 i n o i t a c e r p e D ) 8 8 5 3 4 ( o i r á c n a B o t u d o r P 8 6 2 2 4 4 1 s o v i t a r e p O s o t s u C ) 5 6 1 9 7 4 ( s t s o C f f a t S ) 4 0 7 2 5 2 ( s t l u s e R g n i t a r e p O r e h t O ) 6 5 1 1 1 ( s t l u s e R t e k r a M 7 3 7 4 1 2 133 i i s n o s v o r P s e c n e g n i t n o C i t n e m a p m i I s e i t i r u c e S d n a s t e s s A r e h t O t n e m r i a p m I t i d e r C i s n o s v o r P i d n a s t n e m r i a p m I t e N ) 5 3 8 3 7 1 ( ) 9 8 3 9 0 1 ( ) 6 6 5 2 3 ( ) 0 8 8 1 3 ( e d s e t n a o d a t l u s e R s o t s o p m I 8 6 2 9 8 7 s e x a T ) 9 6 7 5 ( s k n a B n o x a T l i a c e p S ) 0 8 2 5 3 ( Gains or losses on 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 mandatorily at fair value through profit or loss Gains or losses on financial assets and liabilities designated at fair value through profit and loss Gains or losses from hedge accounting Exchange differences Gains or losses on derecognition of non- financial assets ( 58 055) ( 64 593) 6 538 4 418 26 633 79 32 112 24 369 27 901 4 418 26 633 79 32 112 24 369 27 901 Other operating income 106 231 1 788 566 103 877 Other operating expenses Operating Income Administrative expenses Staff expenses Other administrative expenses Contributions to resolution funds and deposit guarantee schemes Depreciation Provisions or reversal of provisions Commitments and guarantees given Other provisions Impairment or reversal of impairment on financial assets not measured at fair value through profit or loss Impairment or reversal of impairment of investment in subsidiaries, joint ventures and associates Impairment or reversal of impairment on non- financial assets Share of the profit or loss of investments in subsidiaries, joint ventures and associates accounted for using the equity method Profit or loss before tax from continuing operations Tax expense or income related to profit or loss from continuing operations Current tax Deferred tax Profit or loss after tax from continuing operations ( 124 054) 1 478 666 - ( 252 704) ( 182 873) ( 78 481) ( 43 588) - 628 ( 46 327) ( 141 893) 7 406 6 351 7 215 754 400 - ( 15 134) 9 365 748 631 ( 10 980) ( 77 794) ( 35 280) ( 252 704) ( 182 873) ( 43 588) ( 78 481) 7 215 628 ( 46 327) ( 109 389) ( 32 566) 62 7 406 6 351 ( 15 134) 9 365 Profit or loss from discontinued operations ( 412) ( 412) Profit or loss for the period 748 219 Attributable to Shareholders of the parent 743 088 Attributable to non-controlling interests 5 131 748 219 113 Annual Report 2023 | novobanco II – Alternative performance measures Information on the Alternative Performance Measures (definition, calculation method and scope). INCOME STATEMENT Designation Definition / Usage Calculation Basis Conciliation with the Financial Statements7 Fees and Commissions Indicator of results of financial activity directly related to services provided to clients. Indicator of historical financial performance. Commercial banking income Indicator of the results of commercial activity most directly related to customers. Indicator of historical financial performance. 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 other diverse results, not directly related to activity with customers and markets. Indicator of historical financial performance. 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. Indicator of historical financial performance. 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. Banking Income Financial activity results indicator. Indicator of historical financial performance. Net interest income + Fees and commissions + Capital markets results + Other operating results. Operating costs Operational result Indicator of structural costs that support commercial activity and whose analysis allows to assess the trajectory of progression of costs. Indicator of historical 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. Indicator of historical financial performance. Provisions, net of replacement / Impairments Indicator of net reinforcements of impairments made in the year. Indicator of historical financial performance. (7) IS: Income Statement Item; BS: Balance Sheet Item 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 + Impairment or reversal of impairment of non-financial assets. (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 reversal of impairment of non-assets financial. 114 Management ReportSustainability ReportFinancial StatementsAnnex BALANCE SHEET/LIQUIDITY Designation Definition Calculation Basis Conciliation with the Financial Statements8 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 Customer deposits Instruction No 16/2004 of Banco de Portugal Net financing from the ECB 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. Indicator of the asset’s financing capacity. 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. Set of amounts entered in the following general ledges accounting items: [#400 - #34120 + #52020 + #53100] (BS): Securities held for trading and Securities portfolio. (BS): Customer resources. Indicator that reflects the net amount that was obtained from the ECB to finance the activity. Historical financial performance indicator. Difference between the amount of financing obtained from the ECB and investments in the ECB. (BS): Applications at the ECB and Resources from the ECB. Customer funds Indicator of the asset’s financing capacity. Historical financial performance indicator. Deposits + Other customer funds + Debt securities placed on customers. (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. Liquidity gap Indicator that allows assessing the need / excess liquidity accumulated up to 1 year, in each cumulative scale of residual maturity. Historical financial performance indicator. Difference between [(Net assets - volatile liabilities)] Loans to Deposit Ratio Instruction No 16/2004 of Banco de Portugal Indicator of the relationship between the financing of the activity and the funds raised from customers. Historical financial performance indicator. Ratio between [(total credit - accumulated impairment for credit) and deposits customer] (BS): Net customer loans and customer deposits. (8) IS: Income Statement Item; BS: Balance Sheet Item 115 Annual Report 2023 | novobancoASSET QUALITY AND COVERAGE RATIOS Designation Definition Calculation Basis Overdue loans ratio Loans quality indicator, showing the proportion of the gross loan portfolio that is in default. Indicator of historical financial performance. Ratio between overdue loans and total loans. Ratio of loans overdue for more than 90 days Loans quality indicator, reflects the proportion of the gross loan portfolio that has been in default for more than 90 days. Indicator of historical financial performance. Ratio between loans overdue for more than 90 days and total loans. Non-performing loans ratio Loans portfolio quality indicator, reflects the proportion of the gross loans portfolio that are in a non-performing situation. Indicator of historical financial performance. Forborne ratio Instruction No 32/2013 of Banco de Portugal Loans quality indicator, reflects the proportion of the gross loan portfolio that was restructured. Indicator of historical financial performance. Ratio between the total balance of loans agreements with customers 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. Conciliation with the Financial Statements9 (BS): Overdue loans, that is, loans with installments of capital and interest in default and loans to customers, gross. (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. (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. Indicator of historical financial performance. 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. Indicator of historical financial performance. 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. Non-performing loans coverage Indicator of the capacity to absorb potential losses related to non- performing loans default. Indicator of historical financial performance. 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 Indicator of the ability to absorb potential losses related to the customer loan portfolio. Indicator of historical financial performance. Ratio between balance sheet loan impairments and gross loans to customers. (BS): Provisions for loans and gross loans to customers. Cost of Risk Measure of the cost recognised in the year to cover the risk default in the customer loans book and corporate bonds. 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. (9) IS: Income Statement Item; BS: Balance Sheet Item 116 Management ReportSustainability ReportFinancial StatementsAnnex EFFICIENCY AND PROFITABILITY RATIO Designation Definition Calculation Basis Conciliation with the Financial Statements10 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. Efficiency I Instruction No 16/2004 of 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. Efficiency II Instruction No 16/2004 of Banco de Portugal 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. Cost to Income 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. Profitability Instruction No 16/2004 of Banco de Portuga 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 operating costs and banking income. Ratio between banking income and average net assets. 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. Return on Tangible Equity (RoTE) Expresses the return (in %) generated by tangible equity over the period and provides information on the efficiency with which capital is used to generate results. Ratio between net income and average equity, excluding intangible assets and the amount receivable from the contingent capitalization agreement (CCA). (10) IS: Income Statement Item; BS: Balance Sheet Item 117 (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. (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. (IS): Results attributable to the parent company’s shareholders. (BS): Equity; the calculation of average equity includes, besides the values at the ends of the period under review, the values recorded in each of the months within the considered interval. Intangible assets and the amount receivable from the CCA are excluded. Annual Report 2023 | novobancoManagement Report Sustainability Report Financial Statements Annex €713.2mn of green investment 39% of women in management positions -36.8% of CO2 emissions (scope 1 and 2 vs 2021) 118 Annual Report 2023 | novobanco SUSTAINABILITY REPORT 1. 2023 ESG HIGHLIGHTS 1.1 Messages from the executive management 1.2 Highlights 1.3 Our ESG journey 2. SUSTAINABILITY STRATEGY 2.1 Stakeholders Engagement 2.2 Materiality Analysus and ESG Approach 2.3 Our Strategic Pillars 2.4 Risks and Opportunities 2.5 novobanco's Path towards Transition 2.6 novobanco's Commitments 2.7 Our Performance 2.8 Our Partners 3. CUSTOMER AND SOCIETY CENTRIC BANK 3.1 Supporting our Corporate Clients' ESG Transition and Journey 3.2 Sustainability for our Retail Clients 3.3 Asset Management 3.4 The Customer's Voice 3.5 Wellbeing, Inclusion and Financial Security 3.6 Social Welfare 3.7 Cultural Patronage 4. SIMPLE AND EFFICIENT OPERATIONS 4.1 Environmental Footprint 4.2 Suppliers 4.3 Cybersecurity and Data Privacy 5. DEVELOPMENT OF PEOPLE AND CULTURE 5.1 The People and Culture strategic pillar 5.2 Talent Development 5.3 Value proposition for employees 5.4 Volunteer Programme 6. DEVELOPING SUSTAINABLE PERFORMANCE 6.1 Sustainability governance 6.2 ESG Risks 7. ESG PERFORMANCE INDICATORS 7.1 Environmental Indicators 7.2 Social Indicators 7.3 Governance Indicators 8. ABOUT THIS REPORT 8.1 Methodological Notes 8.2 GRI Table 8.3 Independent Limited Assurance Report 120 126 140 164 176 196 242 256 119 1 2023 ESG HIGHLIGHTS 1.1 Messages from the executive management 120 Management ReportSustainability ReportFinancial StatementsAnnex Sustainability and the management of ESG risks and opportunities is a core strategic priority for novobanco, and in 2023 we consolidated our goal of being an ESG champion in the Portuguese financial services by continuing to deliver significant progress. I was particularly pleased with the success of our ESG literacy initiatives, specially aimed at supporting Portuguese SMEs understand, discuss, and share experiences, best practices and challenges surrounding their sustainability journeys. Sustainable finance has a pivotal role to play in achieving national and European climate goals and, for novobanco, enabling our customers to lower their carbon footprint is a priority that can only be achieved through major investment in energy transition and climate action. Having invested 369M€ in green financing in 2023, novobanco surpassed its 2024 green financing targets more than one year ahead of the commitment. We’ve renewed and reinforced our commitment, with a target of 2B€ in Green investments for the next 3 years. This reflects our focus on giving customers more choice and making their transition journey easier. Going forward we will continue to contribute to accelerate the pace of the required transition – identifying new ways of doing business and ensuring speed to market in supporting our customers with products and services. In our own operations, we have similarly already well surpassed the Scope 1 and 2 GHG emissions’ reduction targets set for 2024 and remain confident we will meet our 50% reduction target before the committed date of 2030. Amplifying our positive social impact in the communities we serve is also a key concern in the way we do business, both through our people agenda and through our client and community programs, promoting social well-being initiatives and financial and digital literacy programs. In 2023 we launched and executed several key initiatives of our “Developing People and Culture” strategic pillar, advancing employee value proposition, talent development and culture & values programs that are key to empowering a diverse team and deliver on our equity and inclusion commitments. Our female representation in management roles as risen 2,5 p.p. to 38,7% in 2023, from 2022. Mark Bourke Chief Executive Officer 121 Annual Report 2023 | novobancoIn 2023, we strengthened our contribution to making the Portuguese financial market and its ecosystem more sustainable, deepening the integration of ESG concerns and principles into our different business areas. Not only have we far exceeded our green investment and scope 1 and 2 GHG emissions reduction targets, but we have strengthened ESG governance, impact monitoring, and training and awareness for our colleagues and customers. the diversity of its team as a strategic lever, the new novobanco campus, to be inaugurated in 2024, was developed with strict well-being criteria for our people. The financial well-being of the communities we serve has remained a priority area of action, not only through an inclusive financial offer that guarantees a fair value exchange with the customer, but also through financial support and volunteering initiatives for social causes in the community. In 2023, we focused our work, first and foremost, on supporting our clients' transition journeys, through sustainable financing solutions and incorporating ESG risks and opportunities into the offer of products and services. We have also prioritized the evolution of our risk management systems and frameworks to enable the integration of ESG risks structurally into the business. At the same time, incorporating social criteria into the way we run our business was also a priority in 2023. In addition to the initiatives of the people and culture strategic pillar, which have allowed significant advances in the promotion of an organizational culture that has Luísa Soares da Silva Chief Legal, Compliance & Sustainability Officer 122 Management ReportSustainability ReportFinancial StatementsAnnex 1.2 Highlights 2023 was both a year of continuity and reinforcement of the measures and programmes already underway, and a year of transformation: • Continued focus on developing the ESG risk management framework, strengthening of the product and service offering to support client transition and implementing measures to minimise the footprint of our own operations; • Designing and launching the bank’s strategic cultural transformation programme, rewriting novobanco's mission and values, reviewing ESG strategic priorities and strengthening the bank's transition plan. Main highlights in 2023 1 CUSTOMER-CENTRIC BANK 2 SIMPLE AND EFFICIENT OPERATIONS EFICIENTES 3 DEVELOPING PEOPLE AND CULTURE €369m investment in green projects, an yoy increase of +7%. Significant improvement in the customer recommendation index, with an increase of 17 points in the NPS (Net Promoter Score) vs. 2022. €500,000 investment in the community, including support for projects aimed at the integration and empowerment of young people and adults. Reinforcement of the offer of investment products with ESG considerations or objectives (Art. 8 or 9, SFDR): €814M invested by clients in December 2023. The footprint of novobanco's own operations continues to shrink: -3% vs. 2022, with a cumulative reduction of 37% vs. 2021. Maintenance of a policy of open- ended employment contracts, with 96% of employees on permanent contracts. 4.4 tons of PVC saved by issuing bank cards made of recycled PVC and sending 1.7 tonnes of bank cards for recycling. Increase in the share of electric or hybrid vehicles in the car fleet to 25% (+22 p.p. vs. 2022). Integration of sustainability assessment into the supplier selection process: 76% of suppliers with sustainability assessment. 0.3 p.p. reduction in gender pay gap vs. 2022, to 5.4%. €828,4 thousand in social benefits for active and retired employees. Reinforcement of 5+ programme to promote staff health and wellbeing, involving 1,870 employees in more than 50 initiatives in 2023. 4 DEVELOPING SUSTAINABLE PERFORMANCE Increase in the proportion of women in management positions to 39%, a 2 p.p. increase vs. 2022. Management team focus on ESG issues: we held 11 ESG steering meetings and completed 43 strategic initiatives under the ESG programme. 21,000 hours of ESG training delivered to all employees in 2023. Increased inclusion of ESG criteria in the performance assessment model for the management team and the various departments. +7% green Investment 76% suppliers with Sustainability score +17pts NPS of Retail clients* 39% women in management positions -3% GHG Emissions scope 1 & 2 21 th hours ESG training *Source: BASEF Banca 2023 / Marktest. Period from September to December 2023 versus September to December 2022 109 Report and Accounts 2023 | novobanco 123 Annual Report 2023 | novobanco1.3 Our ESG journey 2020 2021 2022 2023 Distribution of ESG/ ECO structured products, promoting investment with environmental and social concerns. Inauguration of the 1st "new distribution model" branch, remodeled taking into account social and environmental concerns. Launch of the ESG Program with multidisciplinary workgroups, redesigning the bank's ESG strategy. Commitment to reducing greenhouse gas emissions in own operations by 50% by 2030 and achieving up to 100% of electricity consumption from renewable sources by 2024. Establishment of Sustainability Steering to accelerate implementation of priority ESG initiatives. Disclosure of targets for the promotion of gender equality in senior management positions. ECO Residential Mortgage offer, with preferential conditions to high energy efficiency homes. Publication of Sustainability Policy. Association of the support to social, cultural and environmental causes to the bundle account offer Launch of Car Loans with bonus on the acquisition of hybrid/ electric vehicles. Creation of ESG Office and reinforcement of governance of ESG topics and environmental and climate risks. Reinforcement of Exclusions and Safeguards Principles in the financing of industry sectors and projects with negative environmental and social impact. Launch of 2022 Sustainability Credit Line to support companies in the transition to a more sustainable and low-carbon economy. Launch of questionnaire on sustainability preferences to assess and incorporate customer preferences into their investment portfolio. Reformulation of sustainability scoring for suppliers. Organisation of ESG Talks, a cycle of conferences dedicated to ESG issues. Participation in the climate stress tests carried out by the European Central Bank. Setting the first financed emissions (scope 3) reduction targets for three industry sectors (Power Generation, Cement Manufacturing and Commercial Mortgages), a key element of the Bank's transition plan. Strengthening of multi-annual green investment targets, more than tripling the annual commitment Revision of the ESG strategic priorities based on the double materiality matrix resulting from stakeholder consultation. Strengthening of ESG risk assessment, monitoring and information gathering processes at client, transaction and collateral’s level. Publication of the first Task Force on Climate-Related Financial Disclosures (TCFD) Report . Organisation of second edition of the ESG Talks, a cycle of conferences dedicated to ESG issues. Organisation of Sustainability Programme for SMEs’ cycle of conferences, podcasts and webinars to promote ESG literacy in SMEs. Strengthening of Green Financing/Investment Classification Policy. Launch of new Sustainability page on the novobanco website, improving communication tools with stakeholders. 124 Management ReportSustainability ReportFinancial StatementsAnnex 2024 will be a year of continuity and consolidation of the various initiatives already underway, leading to an increasing integration of ESG factors into the Bank's way of doing business. Hence, with regard to climate and environmental risks, we plan to i) obtain validation from the Science-Based Targets initiative (SBTi) for the financed GHG emission reduction commitments we have submitted; ii) expand the definition of financed emission reduction targets to new sectors with significant transition challenges; iii) strengthen the methodologies and broaden the integration and application of ESG risk criteria in customers’ credit risk assessment; iv) expand the range of products and services offered to better address the different transition challenges faced by corporate and individual clients. With regard to novobanco's social impact on the communities it serves, we plan to: i) conclude the implementation of the cultural transformation programme launched in 2023; ii) inaugurate the new campus for the Group's central services, following best practices in terms of employee well-being and the building’s energy efficiency; iii) strengthen initiatives to promote inclusion, diversity and gender equality in the workforce, and iv) strengthen initiatives to empower companies and individuals through financial, digital or sustainability literacy programmes. 125 Annual Report 2023 | novobanco2 SUSTAINABILITY STRATEGY 2.1 Stakeholders Engagement To build and maintain a constant relationship with stakeholders and integrate their concerns andexpectations, the bank offers a wide range of communication channels. Defining novobanco Group business strategy is intrinsically linked to a collaborative and proactive approach with all its stakeholders, with a special focus on the seven main ones: customers, employees, regulators, investors, suppliers, media, and the community. The group also regularly assesses the materiality of ESG themes. novobanco's mission is to be the trusted banking partner that supports families and companies throughout their lifetime. Given the emphasis placed on the customer and society, relying solely on a financial perspective to identify the most material topics for the bank would be insufficient for novobanco. Aware of the role it plays in the fight against climate change, novobanco has taken steps towards 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 the development of an inclusive and fair society. novobanco's current strategy integrates its ambitions in all these dimensions, and therefore its ESG vision permeates all the pillars of the bank's business model, namely: (i) its relationship with clients and society, in the context of supporting the transition and promoting socio-economic development; (ii) on the environmental and social efficiency of its own operations; (iii) on its practices concerning the development, inclusion and promotion of the wellbeing of all its employees; and (iv) in a sustainability strategy that fosters an effective governance model and the proper economic integration of all risks, including climate and environmental risks. 126 Management ReportSustainability ReportFinancial StatementsAnnex 2 EMPLOYEES SUPPLIERS Contacts established through a specific website (Grupo novobanco Supplier Portal), coordinating the exchange of information via e-mail, telephone and in person. MEDIA Information provided in-person, by phone and online; Press conferences; Quarterly results presentation; Sharing of specialized knowledge through social networks and media (radio, newspapers, televisions). COMMUNITY Continuous in-person, telephone and online dialogue with Associations, Private Social Solidarity Institutions, social and environmental NGOs; Corporate Social Responsibility Initiatives; Participation in conferences; Social networks (novobanco Cultura, novobanco Facebook and Linkedin). Request for in-person feedback via questionnaires and meetings; Intranet (Somos novobanco, Yammer and Human Resources Portal); Thematics Mailboxes Email (including CEO Office and "Ask the Chairman" address"); HCD manager for active and retired employees; Human Resources Business Partner; Executive leadership visits to the commercial network; Whistleblower line; Workshops and Lectures; Annual Meeting and other thematic meetings, workshops, clarification sessions and webinars; Workers Committee, Union Secretariat and Information and Consultation Procedure. CLIENTS Request by phone, online and in person; Formal system for filing complaints; Branch Network, Corporate Centres and Regional Divisions; Social networks (novobanco Cultura, novobanco; Facebook and Linkedin); Events, such as novobanco Summit. REGULATORS Provision of mandatory and voluntary information; Request for feedback by phone, online and in person; Investor Relations team; Regular meetings with investors; Quarterly results presentation, Investors website. 127 Annual Report 2023 | novobanco2.2 Materiality Analysis and ESG Approach In 2023, novobanco updated its materiality matrix, with the aim of bringing it closer to the concept of dual materiality to come into force in fiscal year 2024 resulting from the new obligations of the Corporate Sustainability Reporting Directive. The identification and prioritisation of issues and impacts on the organisation was based on a process that included trend analysis and consultation with the stakeholder groups identified through questionnaires and discussion workshops. Given that the business strategy of the novobanco Group is inextricably linked to a collaborative and proactive approach to all its stakeholders, an extensive stakeholder consultation exercise was carried out for the new materiality analysis. Based on this process, 13 issues of greater relevance to novobanco were identified from a double materiality perspective, which we have aggregated into three typologies: Environmental (E), Social (S) and Governance (G). To this end, relevant stakeholders for novobanco were considered as 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. 128 Management ReportSustainability ReportFinancial StatementsAnnex 2023 Materiality Matrix E2 G4 G1 G2 E1 S3 G6 G7 S2 G8 G3 G5 S1 E S G IMPACT IN NOVOBANCO VALUE CREATION CAPACITY Cybersecurity, privacy and information protection S1 Human Capital Ethics, conduct, transparency and compliance S2 Diversity, equity and inclusion Anti-corruption, bribery and money laundering S3 Respect for human rights O C N A B O V O N F O T C A P M I G1 G2 G3 G4 Corporate Governance G5 G6 Risk management (including ESG) Customer satisfaction and experience G7 Economic performance G8 Innovation, research and technology E1 E2 Sustainable products and services Sustainable finance and investing 129 Annual Report 2023 | novobanco In light of this analysis and the identification of the most material issues for novobanco, an additional weighting was considered for the selection of Sustainable Development Goals (SDGs) that the bank should adopt as priorities in order to define its operating strategy, as per the analysis presented. Cross-referencing of the 2023 Materiality Matrix and the SDGs G1 Cybersecurity, privacy and info protection G2 Ethics, conduct, transparency and compliance G3 Anti-corruption, bribery and money laundering G4 Corporate Governance G5 Risk management (including ESG) G6 Customer satisfaction & experience G7 Economic performance G8 Innovation, research and technology S1 Human Capital S2 Diversity, equity and inclusion S3 Respect for human rights E1 Sustainable products and services E2 Sustainable finance and investing SDG targets relevance 130 Management ReportSustainability ReportFinancial StatementsAnnex Annual Report 2023 | novobanco novobanco cross-referenced its priority material issues with each of the SDG’s targets, to identify the relative relevance of each SDG to be bank. This analysis allowed novobanco to check, within each SDG, what specific target were linked to its priority issues (for instance – how the “Diversity, Equity and Inclusion” key topic related with targets within Quality Education, Economic Growth and Stronger Institutions). Most relevant targets in SDGs Ensure inclusive and equitable quality education and promote lifelong learning opportunities for all 4.3 Ensure equal access for all women and men to affordable and quality technical, vocational and tertiary education, including university. 4.4 Substantially increase the number (…) who have relevant skills, including technical and vocational skills, for employment, decent jobs and entrepreneurship. Ensure access to affordable, reliable, sustainable and modern energy for all 7.2 By 2030, increase substantially the share of renewable energy in the global energy mix. 7.3 By 2030, double the global rate of improvement in energy efficiency. Promote sustained, inclusive and sustainable economic growth, full & productive employment and decent work for all 8.2 (…) higher economic productivity through diversification, technological upgrading and innovation (…) 8.5 achieve full (…) employment and decent work for all women and men, (…) and equal pay (…) 8.0 (…) encourage and expand access to banking, insurance and financial services for all. Reduce Inequality within and among countries 10.2 (…) promote the social, economic and political inclusion of all, irrespective of age, sex, disability, race, ethnicity, origin, religion or economic or other status. 10.5 Improve the regulation and monitoring of global financial markets and institutions and strengthen the implementation of such regulations Take urgent action to combat climate change and its impacts 13.1 Strengthen resilience and adaptive capacity to climate -related hazards and natural disasters in all countries. 13.2 Integrate climate change measures into national policies, strategies and planning. Promote peaceful and inclusive societies for sustainable development, provide access to justice for all and build effective, accountable and inclusive institutions at all levels 16.4 reduce illicit financial and arms flows, (…) recovery of stolen assets and combat all forms of organized crime. 16.5 Substantially reduce corruption and bribery in all their forms. 16.6 Develop effective, accountable and transparent institutions at all levels. 131 Management Report Sustainability Report Financial Statements Annex 2.3 Our Strategic Pillars novobanco's strategic approach is based on four pillars that underpin its competitive positioning. As part of the new materiality analysis, the integration between the bank's strategy and its actions at the environmental, social and governance levels was reinforced. Each of the bank's strategic pillars is aligned with its ESG vision and priority SDGs; • To elevate the bank's customer-centric approach through differentiated value propositions, leveraging a digital and omnichannel approach and reinforcing its role in supporting its customers' energy transition needs; • To provide simple and efficient operations that enhance the banking experience and ensure a more sustainable environmental and social footprint; • To develop people and culture, attracting and actively nurturing a team of skilled professionals who stand as a reference for our bank's core values, including its goals of inclusion, diversity and enhancement of the wellbeing of all employees. • To ensure sustainable performance in terms of risk management and deeper integration of ESG components, including climate and environmental risk, into the business. STRATEGIC PILLARS CUSTOMER-CENTRIC BANK SIMPLE AND EFFICIENT OPERATIONS DEVELOPMENT OF PEOPLE AND CULTURE DEVELOPING SUSTAINABLE PERFORMANCE Support our clients transition and maximize positive impact on society and environment Improve efficiency, enable own transition, ensure systems readiness for ESG Strengthen capabilities, inclusiveness, diversity and the engagement of our people Build a robust ESG governance & risk management framework • To improve the environmental efficiency of novobanco's operations. • To promote diversity and a culture of inclusiveness among novobanco's employees. • To implement the bank's future ESG management operating model, building a robust governance model • To reinforce employee learning and development actions. • To promote initiatives to reinforce employee culture, engagement and wellbeing • To continue to implement the ESG risk management structure, namely in climate and environmental risk management, and its application to critical processes such as credit and customer onboarding • To reduce scope 1 and 2 own emissions (and scope 3, excluding financed emissions, whose objectives are set under the "Customer-centric bank" pillar). • To strengthen suppliers' ESG performance. • To adapt IT and information management systems to ESG requirements. • To develop an energy transition- linked business strategy in the Corporate and Retail segments, namely by enhancing green investment policies and targets, as well as products and services. • To implement and monitor plans to reduce scope 3 financed GHG emissions through sector-specific targets to reduce emissions intensity, in line with the Paris Agreement targets. • To continue to develop the ESG offering in the investment and financial advisory strategy for clients. To promote stakeholder engagement and the Bank's corporate social responsibility strategy. 132 2.4 Risks and Opportunities S Short-term Medium-term Long term To ensure the robustness of the current strategy, an analysis was carried out of the main risks and opportunities associated with climate and environmental risks, in the field of physical and transition risks. This permitted to identify mitigation measures, which are integrated into the bank's priority and strategic objectives and action plans, as referenced below. FIELD NATURE RISKS FOR NOVOBANCO MITIGATION MEASURES PHYSICAL Acute typology S Business disruption for clients and counterparties due to damage to production assets or limitations in the value chain. To reinforce methodologies for assessing physical risks, managing covenants and financing conditions. Potential devaluation of collaterals on loans granted by the Bank. To reinforce novobanco's business continuity and operational contingency plan. Possible costs arising from damage to the Bank's physical assets, including business disruption. Pillar 2 - Simple and efficient operations. Pillar 4 – Achieving sustainable performance. TRANSITION Chronic typology S Policies and legal framework S Technology S Market S Possible increased absenteeism among the Bank's employees. Decrease in productivity and/or increase in operational and production costs in exposed sectors, impacting the financial performance of customers and counterparties or projects financed by the Bank. To ensure the regular collection of information from companies and counterparties to calculate climate and environmental risks. To integrate climate and environmental risk assessment into lending and pricing decision processes. Pillar 4 – Achieving sustainable performance. Changes to the governance and organisational model to ensure a dedicated monitoring of ESG issues. To reinforce novobanco’s governance model to ensure monitoring of ESG issues. Increased interaction with companies and counterparties, for a better insight into their transition and business adjustment challenges. Development of products and services with structuring conditions and rationale aligned with our customers’ transition needs. To ensure the regular collection of information from companies and counterparties to calculate climate and environmental risks. To reinforce novobanco’s portfolio of products and services to support the transition needs of its customers. Pillar 1 – Customer-centric bank. Pillar 4 – Achieving sustainable performance. Inability of the Bank’s corporate clients and counterparties to adapt, due to limited investment capacity or restricted access to financing. To ensure the regular collection of information from companies and counterparties in order to understand their challenges and prepare the most suitable commercial offer. Unavailability of the most suitable technologies (at a reasonable cost) required to meet the new standards of business operations. Business transformation and conversion costs, with an impact on the financial performance of customers and counterparties. To develop partnerships with organisations in order to enhance the bank’s range of solutions to support its customers. Pillar 1 – Customer-centric bank. Pillar 4 – Achieving sustainable performance. Changes in supply and demand for ESG-oriented banking products and services, with an impact on the Bank’s commercial competitiveness. To ensure the regular collection of information from companies and counterparties in order to understand their challenges and prepare the most suitable commercial offer. General increase in market prices of technology and production factors with an impact on the competitiveness and financial performance of companies. Limitations on the growth of companies and sectors exhibiting greater misalignment with efficiency and decarbonisation standards, resulting in reduced demand for their goods and services. To develop partnerships with organisations in order to enhance the bank’s range of solutions to support its customers. To develop plans to ensure the bank’s response to climate risks, particularly when it comes to reducing financed GHG emissions. Pillar 1 – Customer-centric bank. Pillar 4 - Achieving sustainable performance. Reputational Risk of failing to meet stakeholders' expectations regarding the Bank's performance on critical climate change issues. To ensure a rigorous methodology and robust monitoring of financed GHG emission mitigation plans. S Constraints on investors’ and stakeholders’ perception of the Bank's brand image. The Bank's involvement in instances of non-compliance with new ESG requirements, with an impact on its image and reputation. Association of the Bank with clients, counterparties, suppliers and other third parties with sensitive ESG profiles. To ensure rigour in communication with the market. To implement controls against potential ESG risks in the selection and monitoring of suppliers. To ensure the inclusion of reputational risk analysis in ESG risk assessments. Pillar 1 - Customer-centric bank. Pillar 4 - Achieving sustainable performance. Economic wellbeing and Social rights Risk of some economic sectors losing competitiveness as a result of the transition. To develop solutions and products to support the transition of the economic sectors with the greatest impact. Risk of employee skills becoming inadequate as a result of transition changes. Risk of loss of social rights associated with the deterioration of the competitiveness of certain economic sectors or regions. To ensure recurrent risk analysis by economic sector to identify and proactively manage exposures in the sectors with the greatest impact. To provide in-house training on ESG issues and support the retraining of employees impacted by the transition. To ensure the inclusion of reputational and social risk analysis in ESG risk assessments. Pillar 1 - Customer-centric bank Pillar 3 – Developing people and culture Pillar 4 - Achieving sustainable performance 133 Annual Report 2023 | novobanco In addition to climate and environmental risks, social and governance risks were also analysed: Financial inclusion and wellbeing: • Increased risk of default in case of reduction of the purchasing power of the communities served, and consequently of clients’ purchasing power. - Promoting financial inclusion and literacy initiatives, as well as providing products and services tailored to diverse customer needs, makes it possible to contribute to economic and social progress and thereby to mitigate the risk of loss of profitability. • Risk of inability to meet employee needs in terms of i) flexible working models, ii) value proposition for employees, iii) culture of diversity and inclusion, including gender equality issues. - Loss of talent and reduced levels of employee engagement, thus increasing the risk of lower productivity and business profitability, the difficulty of defining succession plans and spreading knowledge and expertise, as well as reducing the ability to attract new business and new clients. • Increased reputational and operational risk due to non-compliance with international principles and agreements on human and labour rights throughout the value chain, comprising clients, suppliers or other bank partners. - The definition and implementation of models to analyse, assess and monitor the social risks and the performance of clients and suppliers makes it possible to mitigate these risks and their impact on novobanco’s reputation and activity. Good governance and responsible management • The ability to seamlessly adapt the business to an ever-changing market and competitive environment is only possible with a robust governance model capable of incorporating long-term objectives, resolving conflicts of interest, ensuring data security and adequately managing the risks of corruption, bribery, money laundering and terrorist financing. The incorporation of environmental, climate and ESG issues into the Bank's strategy creates a number of opportunities that novobanco is intent on exploiting, in line with our Shaping the Future strategy: Brand and Reputation: Strengthening novobanco's position alongside companies (Pillar 1) S • Strengthening our position as "Bank for businesses" by accompanying, challenging and supporting corporate clients in their energy transition and reinforcing our relationship as a partner of these clients. • Setting the bank apart from its competitors through the quality, rigour and innovation of its approach to ESG. Commercial offer: Offering the best solutions for companies (Pillar 1) S • Development of financial products and services to support the transition - structured finance catering to the needs of clients and meeting robust technical criteria. • Implementation of external partnerships to strengthen the offer and deliver a comprehensive solution to our clients. Commercial positioning: Communicating and interacting with the clients (Pillar 1) S • Promoting information and awareness actions among customers - conferences, events. • Adapting the engagement models - from large to small companies. • Establishing partnerships and programmes with business and sector partners, reinforcing proximity to corporate clients. 134 Management ReportSustainability ReportFinancial StatementsAnnex Investment offer: Reinforcing the investment offer (Pillar 1) 2.5 novobanco's Path towards Transition • Adoption of investment policies that integrate climate risk management considerations. • Implementation of ESG classification matrix for transactions. • Establishment of controls and procedures aligned with regulatory requirements in the design and provision of sustainable investment products. Efficiency of operations: Improving the sustainability and efficiency of operations (Pillars 2 and 3) • Moving to new, energy-efficient premises (novobanco campus). • Strengthening resource-use efficiency (in the use of paper, water, electricity, other consumables). • Promoting the efficiency of business travel to reduce energy costs. • Improving the carbon footprint of novobanco's employees through green solutions in terms of transport and services on novobanco's premises, and increasing the green fleet integration. Resilience: Promoting the resilience of our processes and people (Pillars 2, 3 and 4) novobanco wants to play an active role in supporting the energy transition of the Portuguese economy and society. The bank has therefore undertaken an extensive exercise to define greenhouse gas emission reduction targets that are compatible with the Paris Agreement. The bank thus commits to aligning its financing and investment portfolio for a reduction of the resulting carbon footprint, developing a business strategy aimed at enabling effective credit and investment orientation to achieve the objectives to which we have committed ourselves. Key actions will focus in particular on the most GHG-intensive sectors to which the bank has the largest credit exposure, and to this end we intend to: • Strengthen dialogue with clients, particularly in the most affected sectors, and increase collection of ESG data (e.g. GHG emissions from their operations, Energy Performance Certificates (EPCs) for collateral, Transition Plans, decarbonisation commitments); • Promote green finance by increasing the range of products and external partnerships that can help our clients achieve energy transition; • Develop differentiated pricing models; • Continue to develop monitoring tools to enable effective portfolio orientation; • Implementing assessment and acceptance models for • Continue to promote ESG literacy within the suppliers and other third parties. Portuguese business community. • Developing new routines and information reports to monitor climate risk. • Training our employees to foster a mature management of climate risks. • Strengthening staff involvement and commitment to the energy transition path through in-house initiatives to spread novobanco's commitments and raise environmental awareness. 135 Annual Report 2023 | novobancoIn October 2019, novobanco signed the SBTi - Business Ambition for 1.5ºC commitment to limit the global temperature increase to 1.5ºC above pre-industrial levels. With this commitment, novobanco submitted its objectives in a transition/decarbonisation plan for its portfolio, which is currently being validated by SBTi. The following sectoral commitments, applicable to exposures to large corporates and to medium and long-term financing or investments, stand out: - Electricity generation: novobanco commits to reducing GHG emissions of the electricity generation sector in its corporate financing and investment portfolio by 74% per KWh until 2030, compared to the baseline year of 2021. The scope considered was the Long and Medium-Term exposure to Large companies in 2021 with CAE codes (classification of economic activity) related to electricity generation: 35111, 35112, 35113. - Cement Manufacturing novobanco commits to reducing GHG emissions of the cement sector in its corporate financing and investment portfolio by 23% per ton of cement until 2030, compared to the baseline year of 2021. The scope considered was the Long and Medium-Term exposure to Large companies in 2021 with CAE code 23510, related to electricity generation. - Commercial Mortgages novobanco commits to reducing GHG emissions of the commercial mortgages sector in its corporate financing and investment portfolio by 68% per sqm until 2030, compared to the baseline year of 2021. For this analysis the bank reviewed real estate collaterals for financing and real estate investments where the property is used for commercial purposes, such as retail, hotels, offices, industrial purposes or large rental properties, where the building owner or investor sells or rents the property to tenants for income. GHG EMISSIONS SCOPE METRIC / METHODOLOGY TARGET 2030 Power Generation (Loan tape, Project Finance, Own portfolio) Relative reduction (SBTi1.5, PCAF, Energy SDA) -74% tonCO2eq/MWh Cement (Loan tape, Own portfolio) Relative reduction (SBTi1.5, PCAF, Cement SDA) -23% tonCO2eq/ton cimento CRE (Loan tape) Relative reduction (SBTi1.5, PCAF, RE SDA) -68% tonCO2eq/m² 2.6 novobanco's Commitments Based on this integrated vision of the ESG policy and the pillars for strategic action, novobanco proposes to review its current commitments and set new targets for its environmental, social and governance performance for 2026 and 2030. 136 Management ReportSustainability ReportFinancial StatementsAnnex Annual Report 2023 | novobanco Customer-centric bank Under this pillar, novobanco intends to continue strengthening the centrality of the customer in its operations. To this end, the bank has set itself two objectives: to increase its green investment ambitions from a three-year target of €600 million, which has already been more than achieved, to a total green investment commitment of €2,000 million by 2026. In terms of its offer of investment products, novobanco also commits to integrate more than 60% of products with ESG characteristics, in accordance with Articles 8 or 9 of the SFDR. Simple and efficient operations Under this pillar, novobanco commits to ensuring the simplicity and efficiency of its operations. In terms of the environment, this means increasing the target for reducing its own emissions (scope 1 and 2) from 28% by 2024 to 50% by 2030, compared to the same baseline year of 2021. To achieve this, the bank also commits to ensuring that by 2026 all electricity used in its premises comes from renewable sources. Development of people and culture novobanco wants to ensure the development of its most important asset, its people, by guaranteeing a robust and inclusive organisational culture. To this end, the bank is committed to continuing the planned reduction of the gender pay gap by function (equal pay indicator), bringing it to below 5% by 2026. In terms of employee engagement, novobanco aims to achieve a positive response rate of at least 65%. Developing sustainable performance novobanco aims to achieve sustainable performance for all its stakeholders. To this end, the bank is committed to reducing the intensity of greenhouse gas emissions in its main climate-impacting activities, in line with the objectives of the Paris Agreement. It also intends to ensure the representation of women in management positions within the Bank, with the aim of achieving 40% female representation in management positions by 2026. novobanco commitments 1 CUSTOMER-CENTRIC BANK 2 SIMPLE AND EFFICIENT OPERATIONS 3 DEVELOPING PEOPLE AND CULTURE 4 DEVELOPING SUSTAINABLE PERFORMANCE Green production Own emissions (Scopes 1 and 2) Equal pay1 Target 2026 2.000 MEUR by 2026 Target 2030 -50% vs 2021 Target 2024 200 MEUR p/a até 2024 369 Target 2024 -28% vs 2021 -36% Target 2026 Below 5% Target 2024 Below 5% GHG emissions reduction targets Target 2030 100% Target by sector2 5,3% NEW Produtos de investimento com características ESG Renewables share Employee engagement Women in management5 Target 2026 60% of invest. products3 Target 2026 100%4 Target 2024 60% 63% NEW Target 2026 At least 65% Target 2024 65% Target 2026 At least 40% 57% NEW Current target achieved xx% Performance in 2023 1) Equal pay gap calculated per function. 2) Power generation; Cement; CRE. 3) % of investment products (investment funds, financial insurances, structured notes or deposits) with ESG characteristics/ concerns – Art.8 and 9. 4) Net renewables share of 100% by 2026 (Azores, Madeira, Group facilities and branches with no direct contract need to be addressed). 5) Previously Sr Leadership . 137 Management Report Sustainability Report Financial Statements Annex 2.7 Our Performance In the past, novobanco presented a social dividend plan based on 15 indicators, for which it set targets until 2024. resulting from the new double materiality exercise carried out this year. In 2023, as a result of the review of its strategic priorities, the bank revised and redefined new indicators and targets for 2026 and 2030, focusing its attention on 8 indicators that it considers to be the key indicators for monitoring progress in the strategic areas. However, novobanco intends to continue to ensure visibility for its performance in all 15 indicators for which targets for 2024 were set. The table below shows the Bank's results for these indicators at the end of 2023, with the indicators aligned with the priority SDGs, and the strategic alignment Regarding 2023, we highlight the following facts: (i) the Bank has already exceeded the green investment target of €600 million set for 2024 (€713 million at the end of 2023); (ii) significant improvement in the NPS indicator compared to 2021 - 17 pts at year-end (annual average 3.8 pts, as per the dividend); and (iii) the bank has already exceeded the target for reducing its own emissions compared to 2021 (-36% compared to an initially planned reduction target of -28% by 2024). 1 CUSTOMER-CENTRIC BANK 2 SIMPLE AND EFFICIENT OPERATIONS 3 DEVELOPING PEOPLE AND CULTURE 4 DEVELOPING SUSTAINABLE PERFORMANCE Support our clients transition and maximize positive impact on society and environment Improve efficiency, enable own transition, ensure systems readiness for ESG Strengthen capabilities, inclusiveness, diversity and the engagement of our people Build a robust ESG governance & risk management framework €713M €600M of Green investment vs 20211 63% 60% of investment products with ESG characteristics2 3,8 10 3 4 in client NPS indicator vs 20213 partners. to promote people with disabilities employment4 Results Target -36% -28% +11% -30% 76% 90% of tCO2 emissions from own operations vs 20205 of tonnes of paper consumption vs 20216 of suppliers with sustainability score7 27,3% 30% 94.403 96.861 €0M €0M of women in senior leadership positions13 ESG training hours to employees of financing to excluded sectors14 5,3% 5,0% 47% 40% 57% 65% +792 9.594 -5% +3% in gender pay gap8 employees benefitting from social well being program9 in employee engagement level vs 202110 growth in hours of employ. voluntary service vs 202111 Employ. with psychosocial risk assessment as healthy12 1. Origination of own portfolio financing of or investment in companies primarily engaged in activities eligible to the European Taxonomy, and origination of own portfolio financing or investment where the funds used by the borrower or projects are directed towards economic activities eligible to the European Taxonomy or at investments in energy transition or the transition of the company's business model towards green activities; 2. Mutual Funds, Financial Insurance and Structured Products; 3. Net Promoter Score calculated for Individual Clients - BASEF; 4. Number of organisations with active partnerships with the Bank; 5. Scope 1 and 2 Greenhouse Gas Emissions; 6. Reduction of photocopy paper consumption through the implementation of the Phygital programme in the commercial network (started in 2019) and the dematerialisation of processes in the central services; 7. Suppliers with a continuous relationship with novobanco and annual turnover of over 10 thousand euros; 8. Gender pay gap weighted by the representativeness of each Function (equal pay); 9. Percentage of employees who attended at least 2 programme initiatives to promote a balance between personal and professional life, mental and physical health, a healthy style, etc per year.; 10. Assessment of the level of employee involvement through the Pulse survey (average % of employee involvement); 11. Promotion of voluntary service actions in strategic areas of social impact of the Bank. Each employee is entitled to 1 day's leave per year for voluntary work; 12. Annual psychosocial risk assessment study of novobanco's employee base; 13. First-line senior leadership and Executive Board of Directors; 14. Economic sectors not financed by novobanco: Arms, Prostitution, Pornography, Coal (mining and energy production) and Trade in wildlife and endangered species. 138 Annual Report 2023 | novobanco 2.8 Our Partners SIGNATORY ASSOCIATE 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. MEMBERS Non-profit association that brings together and represents more than 90 leading companies in Portugal, which are actively committed to the transition to sustainability. Organisations for Equality Forum, created in 2013, comprises 69 organisations committed to reinforcing and highlighting their organisational culture of social responsibility, incorporating, in their strategies and management models, the principles of equality between women and men at work. 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 level in the transformation and search for solutions for sustainable growth. 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. Association that promotes a corporate culture that places the mental health of employees as a strategic priority for companies in Portugal, through raising awareness and training their leaders. SUBSCRIBER 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. 139 3 CUSTOMER AND SOCIETY CENTRIC BANK 140 Management ReportSustainability ReportFinancial StatementsAnnex novobanco's day-to-day activities are focused on responding in an exemplary manner to the needs of its customers at all moments of their lives, and this purpose is the first pillar of its strategy. novobanco is aware that financial institutions play a key role when addressing their customers’ needs on a daily basis. And because customers are not all the same, the Bank takes a differentiated approach that aims to deliver the best experience and the most appropriate products and services to each of them, thus reinforcing the trust they have placed in the Bank. In the current context, three issues deserved particular attention from novobanco in 2023: i) supporting customers in their transition to a low-carbon economy; ii) supporting customers with high levels of debt; and iii) providing savings solutions for all types of budgets. In addition to its role with its customers, novobanco also actively contributes to the development of the community in which it operates, through its own investments or through partnerships with social economy or environmental organisations. “Being aware of the environmental and social impacts of our financial products and services is one of our commitments. That´s why we evaluate the business opportunities in line with client´s expectations” 3.1 Supporting our Corporate Clients' ESG Transition and Journey With the firm resolve of contributing to the promotion of sustainable investment practices in the country and accelerating the transition to a carbon-neutral economy by 2050, novobanco Group offers its clients sustainable financial solutions that comply with ESG policies and principles, and its products not only follow environmental criteria, supporting clients in their transition to acarbon-neutral economy, but also social and governance criteria. 3.1.1 Sustainability in our Offer for Corporate and Commercial clients novobanco plays a leading role in supporting the Portuguese economy, with a large market share and a specialised sectoral and functional offer (for more information see chapter 3.3 of the Management Report). Supporting its customers in their energy transition and sustainability journey is an integral part of this specialised sectoral and functional approach. To this end, novobanco has invested heavily in understanding and assessing the challenges of the climate and energy transition for Portuguese companies, in order to: • Enhance and adjust the offer of products and services to the specific transition or conversion needs of each company; and • Identify the potential impact of these challenges on each company's finances. “Paying attention to climate change is no longer just a commitment. We act and reinforce our offer to be our client´s partner in a low carbon economy.” 141 Annual Report 2023 | novobancoIn this context, the Bank has bolstered its offer with environmental criteria aimed at the corporate segment. SUSTAINABILITY LINE DECARBONISATION AND THE CIRCULAR ECONOMY LINE LINE FOR IMPROVING TOURISM OFFER This line aims to support companies in their energy transition to a low-carbon economy and/or Taxonomy-eligible companies under Regulation (EU) 2020/852 of the European Parliament and of the Council. Line promoted by Turismo de Portugal, this line aims to encourage investment in low- density regions, and its eligibility criteria are also aligned with ESG objectives, namely energy efficiency, water management and accessibility. This line aims to facilitate access to funding for the implementation of sustainable projects. Eligible investments include, among others: i) modern and efficient equipment; ii) 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 iii) implementation of monitoring, control and action devices that optimise the conditions of use, energy consumption and raw material consumption. €26.7m €3.2m €746.2th 1.20% of the total offer 0.03% of the total offer SME Advisory Services Green Investment novobanco also offers its corporate customers an advisory service to support them in the energy transition process. To this end, it has established ESG partnerships with a number of companies specialising in different areas, such as the diagnosis and calculation of carbon footprints, the definition of sustainability strategies, decarbonisation solutions, certification projects, among others. “We stand with our clients in their transition to a more sustainable economy, wich is why we provide a range of financial products and services especially aimed at structuring and carrying out the necessary investments.” Cumulative green investment since 2021 reached €713m, surpassing the established target and thus proving right the strong bet made in this area. The concept of "Green Investment" is based on demanding criteria where the purpose of the financing or the activities involved are checked against the European Taxonomy. novobanco considers "Green Investment" (as defined in the Green Financing and Investment Classification Policy, available at www. novobanco.pt/sustainability/sustainable-business/ our-approach - and presented in Chapter 6 of this report) as financing of or investment in companies or projects that: 142 Management ReportSustainability ReportFinancial StatementsAnnex Annual Report 2023 | novobanco • Operate in one or more of the eight sectors of activity (NACE codes for classification of economic activity) whose alignment with the European taxonomy is by default very high due to the characteristics of their main activity; • Where the use of proceeds of the specific operation to be financed or invested in is aligned with the European Taxonomy objectives (Project Finance operations, Green or Sustainability Bonds/Loans, • Commercial Paper and Sustainability-Linked Bonds/ Loans. Where the eligibility of the activity and the contribution of the financing to the client's energy transition in accordance with the Taxonomy criteria is checked; • Financing of real estate with level A energy certificate or BREEAM excellent or LEED gold. Production of Green Financing/Investment in 2023 by sector of activity (%) Agriculture, forestry Waste treatment Others 71 7 Real State 17 32 Transport and Storage 18 18 Industry Renewable energy Green Investment (M€)/year 344 369 71 2021 2022 2023 Value for 2022 has been recalculated Social Sector Financing Line Within the framework of the social economy, novobanco, in partnership with Banco Português de Fomento, also offers a Social Sector Financing Line designed to support the funding needs of social economy entities - private social solidarity institutions or similar non-profit organisations - either as support to investment or to working capital. Credit Recovery Strategy In line with its culture, novobanco fosters and maintains a close relationship with its corporate clients, being a partner even in times of greatest difficulty and when the resolution of possible credit difficulties is necessary. Recovery solutions and strategies are based on several indicators, namely customer cooperation, financial viability, guarantees and sustainability of the solution to be proposed to the customer, always in strict compliance with the laws and regulations in force, based on high ethical standards, cordiality and rigorous analysis of the financial situation of the companies under management. 143 3.1.2 Business Community Awareness and Capacity Building 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 and strategy that improve social and financial wellbeing, responsible growth, job creation, people capacity-building and respect for the environment. In 2023, in order to strengthen its position as a reference financial partner for Portuguese SMEs, as well as a promoter of economic, environmental and social sustainability, novobanco signed two protocols with the Nova School of Business and Economics (Nova SBE): • novobanco Chair in ESG - a chair that will focus on research and training in the field of finance, with a strong emphasis on ESG issues, including research on the impact of sustainable investment on reducing pollution. • Founding member of the Voice Leadership Programme - a programme that aims to modernise and make Portuguese SMEs more competitive by empowering their decision-makers. By 2026, this programme will equip managers and decision-makers from around 5,000 companies with management tools and routines to improve their competitiveness and future growth, combining innovative theoretical and practical management training with personalised mentoring. This partnership underlines novobanco's commitment to addressing the challenges facing business, from sustainability and environmental responsibility to leadership and innovation. Two other programmes in the area of sustainability also deserve a note: 1. "Sustainability for SMEs", a programme launched in 2023 in partnership with the Portuguese Chamber of Commerce and Industry (CCIP), which aims to raise awareness among companies about sustainability. With media partners TSF and Dinheiro Vivo, the programme began with the broadcast of 9 radio programmes interviewing experts on various sustainability topics, and two webinars to support the transformation of SMEs: "Sustainability for SMEs - what you really need to know" and "Learn about the benefits of sustainable finance". WHAT YOU CAN LEARN ABOUT SUSTAINABILITY ON THE RADIO 1. Is ESG the same as sustainability? 2. What is energy transition in an SME and what support and funding is available? 3. Can sustainability change the way SMEs interact with banks? 4. What are the main challenges of new working models in SME management? 5. What is greenwashing? 6. Taxonomy! What does it mean? How can you help SMEs to redirect their investments? 7. How can sustainability be leveraged in the company's value chain? 8. What are the easiest ways to reduce your company's CO2 emissions? 9. 9elationship between large companies and SME suppliers 144 Management ReportSustainability ReportFinancial StatementsAnnex 1. 2. Second 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 consisted of four conferences that addressed the key issues in the ESG universe through presentations, reflections, panel discussions and other interventions. All the conferences were attended by renowned entrepreneurs, political decision-makers and academics. ESG Talks 2023 Conference Themes HOW DOES ESG AFFECT MY BUSINESS? CLIMATE CHANGE, BUSINESS RISK AND SUSTAINABLE FINANCE NEW WAYS OF ORGANISING WORK, EQUALITY AND INCLUSION The criteria used to assess the social, environmental and governance impact of companies and how these affect the business of SMEs. The increased risk of climate change to companies' businesses and how this can be addressed through the options available for energy transition. How to design an equality and inclusion strategy in companies, the challenges of the 4-day week and whether diversity is good for business. CORPORATE GOVERNANCE, SUSTAINABILITY AND GREENWASHING The importance of a company's organisational structure having a robust governance for professional business management. Photos: Marco Borga Photos: José Carvalho 145 Annual Report 2023 | novobanco3.2 Sustainability for our Retail Clients Recognising the need to accelerate efforts to achieve carbon neutrality by 2050, the Group aims to be close to its clients, by responding to their financing needs, by reinforcing its offer of green or transition financing, and by enabling them to invest with sustainability objectives, through the provision of investment products and services with ESG criteria. NOVOBANCO ECO RESIDENTIAL MORTGAGE LOANS Offer with an environmental bias that allows customers to benefit from a bonus on the spread when purchasing a property with an A+, A and B energy certification. Achieved in 2023: €51.9m 359 Clients 1.1% of total mortgage loans production in the year FINANCING PERSONAL LOANS - HYBRID AND ELECTRIC VEHICLES Car loans (new and used) for the purchase of green mobility vehicles (plug-in, electric hybrids and non-electric hybrids), with a 1% bonus under the Personal Credit Line pricing strategy. €3.4th 9.9% of total car loans production RENEWABLE ENERGY LOANS Offer with an environmental bias that allows customers to purchase any renewable energy generation product at a more attractive rate. 18.25 AND 26.31 CARBON NEUTRAL ACCOUNTS We neutralise CO2 emissions, even those resulting from usage by our clients of, among others, computers, ATM enquiries, and cards. The neutralisation of these accounts is equivalent to: • CO₂ emissions resulting from 2549 round-trip journeys by medium-sized car, from Lisbon to Porto. • CO₂ emissions equivalent to the consumption of 683 barrels of oil; • Enough gas to fill 59 hot air balloons; • CO₂ emissions resulting from the average electricity consumption of 457 Portuguese families The first fully carbon neutral bank account in Portugal - (e) mission neutral certified®. Adapted to the needs of young people and designed to have a lower environmental impact, these accounts have low carbon emissions because they are online and because their emissions are neutralised, according to the PAS 2050:2008 methodology, which analyses the life cycle of products and services. The emissions that cannot be avoided are neutralised through the support provided to Tamil Nadu, a project to install a photovoltaic solar farm to replace energy produced by coal-fired power stations. This project not only reduces carbon emissions, but also brings social and economic benefits to local communities, creating 285 jobs for people in villages near the solar farm. 167.6 thousand novobanco accounts – €256.5m 12% of total service accounts of individuals and small businesses with in novobanco 4.3 thousand accounts novobanco do Açores – €5.9m 16% % of total service accounts of individuals and small businesses with in novobanco dos Açores. 146 Management ReportSustainability ReportFinancial StatementsAnnex ESG Factors in the Investment Advisory Service The advisory model offered by novobanco to its individual clients has been enriched with the new ESG and sustainability dimensions, based on the revised asset selection model, including, in addition to ESG risk analysis, an analysis of the investment exclusions or safeguards of each fund. These new attributes are therefore taken into account when researching the most appropriate financial products for each client, in order to meet the preferences expressed in 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 The novobanco Group has continued to market ESG and ECO structured products to its clients. These product's remuneration is linked to the share performance of companies that stand out for their ability to lead social and governance change subject to environmental and social criteria, or to financial assets that aggregate shares of companies with the same characteristics (e.g. ETFs, indices, etc.). The criteria for the selection of the assets to be included in these products are subject to a valuation model based on quantitative and qualitative data. The analysis is based on publicly available information, combined with the company's strategy and its inclusion in ESG indices. PERFORMANCE 2023 – novobanco PERFORMANCE 2023 – novobanco dos Açores €12.9m subscribed in 2023 in ESG/ ECO products, out of a cumulative total of €45.5m on customers’ portfolios at the end of 2023. €411th invested in 2023 in ESG/ ECO products, out of a cumulative total of €1m on customers’ portfolios at the end of 2023. 20% of the total portfolio of structured products 61% of the total portfolio of structured products 147 Annual Report 2023 | novobancoESG Funds In 2023 the Group offered more than 1.500 ESG funds with investment made by its clients. In line with the European Sustainable Finance Directive, the Group classifies these funds into two categories: • Article 9 SFDR (Sustainable Finance Disclosure Regulation) - funds whose objective is sustainable investment with environmental, social and governance considerations. • Article 8 SFRD (Sustainable Finance Disclosure Regulation) - funds that invest in companies with environmental, social and governance considerations; In 2023, clients' investments in these funds had the following performance: PERFORMANCE 2023 ARTICLE 8 ARTICLE 9 novobanco 77 funds with an investment of €431.4m 5 funds with an investment of €10.4m 36% of the total portfolio of distributed funds 1% of the total portfolio of distributed funds BANCO BEST 1375 funds with an investment of €351.2m 91 funds with an investment of €18.1m 60% of the total portfolio of distributed funds 3% of the total portfolio of distributed funds 43 ETF with an investment of €2.9m 3 ETF with an investment of €20th novobanco dos AÇORES 1 fund with an investment of €52.9th - 4% of the total portfolio of distributed funds 148 Management ReportSustainability ReportFinancial StatementsAnnex Financial Inclusion The adaptation of products to the needs of customers also involves the integration of social concerns. novobanco adjusts its products to the new realities of customers, focusing on savings, which are tailored to each family's budget. Micro Saving Based on this positioning, the Bank offers a package of Micro Saving solutions comprising three products: SAVINGS DESCRIPTION PERFORMANCE 2023 PLANNED SAVING MICRO SAVING novobanco APP TARGETED SAVINGS BEST BANK APP TARGETED SAVINGS 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. €91.4m in savings 19.9 thousand subscribing clients Allows any client to start saving money by small amounts through the rounding up of debits of day-to-day expenses (such as residential mortgage loan instalments or personal loan repayments, insurance premiums, or direct debits), which are transferred to a saving account. €7.3m 39.0 thousand subscriber clients 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. €33.0m 24.0 thousand subscriber clients €286.5th 186 clients In 2023, the micro-savings of novobanco's clients totalled €131.6m. 149 Annual Report 2023 | novobanco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 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 13,500 Minimum Banking Services Accounts. 150 Management ReportSustainability ReportFinancial StatementsAnnex Support to Families Re-PVC (recycled PVC) cards In 2023, novobanco began to gradually replace all traditional PVC bank cards with re-PVC cards, which are made from recycled plastic from regionally collected industrial waste. Recycled PVC (re-PVC) cards contribute to the conservation of natural resources, as they avoid the production of new PVC and reduce the amount of PVC deposited in landfills. With this initiative, novobanco avoided the production of more than 880,000 plastic cards in 2023, or 4.4 tonnes of traditional PVC. For a future with less environmental impact, novobanco continued to recycle its expired bank cards for future use in the manufacture of street furniture. In 2023, 1.7 tonnes of credit and debit cards were sent for recycling and reused in the production of street furniture, thus promoting the circular economy. More information about recycling in chapter 4 of this Report. In a year marked by a sharp rise in interest rates, the number of customers in financial difficulty and at risk of defaulting on their loan agreements increased. For novobanco, supporting its clients also means developing measures to prevent and regularise situations of late payment on loans and designing an action plan for the risk of default, focusing on finding, together with the clients, the most appropriate solutions for these situations. In order to regularise default situations, customers are offered a range of options, both short and medium term, which include different strategies and approaches, from the implementation of payment agreements to the renegotiation of debts. From the first warning signs of financial difficulties, customers can use the Bank's face-to-face, digital and telephone channels to clarify their doubts and ask for the Bank's help. Customers with loans at risk of defaulting or who are in arrears with their instalments can also obtain additional information on the rules applying to defaults on loan agreements at the bank's customer portal (http:// clientebancario.bportugal.pt), at the "Todos Contam" portal (www.todoscontam.pt), as well as free advice and monitoring from RACE (www.consumidor.gov.pt). novobanco also maintains a communication channel with the Portuguese Association for the Defence of Consumers (Associação Portuguesa de Defesa do Consumidores - DECO) to receive requests for assistance from the bank's customers. 151 Annual Report 2023 | novobanco3.3 Asset Management Responsible investment recognises the importance of environmental, social and governance factors for investment success and long-term stability. Under this premise, the novobanco Group offers ESG investment funds not only through GNBGA but also through entities outside the Group, which are diversified both geographically and in terms of investment strategies. Through GNBGA, the Group offers three funds with ESG criteria. These funds promote sustainability characteristics and are classified under article 8 of the SFDR regulation. Considering the scope and growing importance that the market as a whole, i.e., clients, banks, management companies and regulators, afford to the issue of sustainability, GNB Gestão de Ativos intends to continue expanding its range of products that promote sustainability criteria in 2024. NOVOBANCO SUSTAINABLE MOMENTUM FUND OPEN PENSION FUND MULTIREFORMA PPR PENSION FUNDE VINTAGE SUSTAINABLE With a diversified portfolio of assets of companies that adopt the best practices in terms of ESG criteria, the fund aims at consistent long-term value increase based on the three pillars of Sustainability. At least 75% of the fund's direct investment component must be invested in companies with an Eikon ESG rating above 50 points (rating B- or higher) and the Fund may not invest directly in companies with an Eikon ESG rating below 10 points. The Fund will invest at least 85% of its net asset value in shares and other securities convertible into shares or giving the right to subscribe shares. With a diversified portfolio of assets of companies that adopt the best practices in terms of ESG criteria, the fund aims at consistent long-term value increase based on the three pillars of Sustainability. At least 75% of the fund's direct investment component must be invested in companies with an Eikon ESG rating above 50 points (rating B- or higher) and the Fund may not invest directly in companies with an Eikon ESG rating below 10 points. The Fund will invest more than 75% of its assets in shares of companies listed on regulated markets and in equities collective investment undertakings (including ETFs), with a benchmark (direct or indirect) investment allocation of 100% in equities. With a diversified portfolio of assets of companies that adopt the best practices in terms of ESG criteria, the fund aims at consistent long-term value increase based on the three pillars of Sustainability. At least 75% of the fund's direct investment component must be invested in companies with an Eikon ESG rating above 50 points (rating B- or higher) and the Fund may not invest directly in companies with an Eikon ESG rating below 10 points. The Fund may invest a maximum of 15% of its assets in shares of companies listed on regulated markets, with a benchmark of 7.5%, and a minimum of 50% of its assets in bonds, with a benchmark of 55% for fixed-rate bonds and 37.5% for variable-rate bonds. The Fund's assets are worth €160.5m. The Fund represented 21.9% of all the Securities Funds domiciled in Portugal managed by GNB Gestão de Ativos. At year-end the Fund's assets were worth €15.0m. At year-end the Fund's assets were worth €59.4m. The Fund represented 3.7% of all the Open-end Pension Funds managed by GNB Gestão de Ativos. The Fund represented 14.5% of all the Open-end Pension Funds managed by GNB Gestão de Ativos Portugal. 152 Management ReportSustainability ReportFinancial StatementsAnnex 3.4 The Customer's Voice To deliver the best experience to its clients, the Voice of the Customer Diagnostic model is based on several pillars that aim to bring the voice of the customer into the organisation, enabling a better understanding of customer needs and satisfaction throughout the customer lifecycle and identifying opportunities for improvement. Voice of the Client (VoC) Diagnostic Model 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. SERVICE QUALITY EXTERNAL SURVEYS Experience monitoring surveys of customers with the service provided in all commercial structures of the bank and all the segments. In 2023 we will start installing feedback from customers 24 hours after visiting a branch. Benchmark NPS* monthly monitoring of private customers (BASEF Banca and CSI developed by Marktest) and from clients company (Financial Services Barometer developed by DATA E). MOMENTS OF TRUTH RELATIONAL STUDY Continuous monitoring of customer experience, immediately following key moments in the banking relationship, aiming to identify opportunities for improvement that meet customer expectations and needs Survey carried out with all private clients with the aim of measuring their loyalty based on all the experiences lived throughout its life cycle. The results identified key drivers of satisfaction and their root causes, enabling prioritized improvement actions. DIGITAL CHANNELS Study of customer satisfaction with digital channels across various dimensions (available features, ease of use, security, and visual appeal) and a comparison with competitors. In 2023 the bank implemented real-time customer feedback collection on its digital channels and website. QUALITY INDICATOR Quality Indicator for commercial areas which reflects the quality of service and other elements that impact the customer experience. MYSTERY CLIENT Customized program with the aim of identify service weaknesses and need for training. Performed annually depending on the critical themes and needs of the time. AD HOC SURVEYS Specific studies using different methodologies, depending on the themes critics of the moment. IMPROVEMENT Sharing the information resulting from the VoC Model with the bank's commercial structures and improvement teams, allowing trigger a set of actions that aim to improve customers’ experience with the bank in its various aspects. * NPS (Net Promoter Score) - Loyalty metric, based on the probability of the customer recommending the bank to friends and family/business partners based on the experiences they have had during their customer lifecycle. 153 Annual Report 2023 | novobancoThe bank collected approximately 62,900 satisfaction questionnaire responses from individual and corporate clients in 2023, representing a 19% increase compared to 2022. One of the main pillars of the bank strategic positioning is to be a bank that focuses on its customers and their needs, constantly seeking to understand their needs at the different stages of their lives, actively listening to what they have to say through the various channels available, and thus continuing to offer a range of products and services that best meet their expectations. To this end, the Bank created the Customer Experience and Satisfaction Office, which represents the voice of the customer inside the novobanco Group and ensures the strategic alignment of the entire organisation to design the best service experience and customer satisfaction for the profitable growth of the business. The individual clients segment continues on its path of innovation, progressively developing and promoting the omni-channel capabilities of 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. Retail Clients Around 59.2 questionnaires were returned in 2023 in the retail clients segment. Approximately 85.2% of novobanco's clients and 93.1% of novobanco dos Açores’ clients are very satisfied with the quality of the service provided, up by 2.2 p.p. and 1.6 p.p., respectively, on the 2022 results. In 2023 novobanco also collected the opinion of more than 5.3 thousand clients about their experience in the main moments of truth in their relationship with the bank, namely account opening, mortgage loans, and personal loans. 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, the novobanco Group has been reshaping its offer in order to strengthen it and increasingly respond to environmental, social and ethical considerations. The Net Promoter Score (an index that calculates the intention to recommend the Bank) stood at 17 points in December 2023 (average of the last 4 months), an improvement of 17 points compared to the last 4 months of 2022*. This improvement follows a year of frankly positive financial results, recognised by the market not only in terms of the significant improvement in novobanco's credit rating, but also through the "Bank of the Year in Portugal" award from The Banker, a prestigious publication of the Financial Times Group. This award recognises novobanco's unparalleled commitment to its customers, consistently anticipating their needs and providing innovative, efficient and transparent banking products and services, based on high standards of ethics and integrity. The Net Promoter Score in Corporate segment stands at 45 points in 2023, an improvement of 7 points on 2022*. Very Satisfied Clients I Retail Banking (%) novobanco dos Açores novobanco 92.5 87.0 90.9 84.8 93.1 85.2 2021 2022 2023 Moments of truth I satisfaction with the process (%) 2021 92.7 93.1 86.8 81.0 79.5 83.6 2021 2023 92.2 92.8 92.9 Account openning Mortage Loans Personal Loans 154 Management ReportSustainability ReportFinancial StatementsAnnex Corporate Clients 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. In 2023, corporate banking collected approximately 1.7 thousand replies to customer service satisfaction surveys. The results show that 92.6% of medium-sized corporate clients and 87.1% of large corporate clients are very satisfied with the service, representing increases of 7.3 p.p. for Medium-Sized Companies and 4.5 p.p. for Large Companies compared to 2022. Very satisfied clients I Companies (%) Large companies SMEs 89.9 84.4 87.7 88.9 92.2 92.6 2021 2022 2023 Channels for submitting complaints The Net Promoter Score in Corporate segment stands at 45 points in 2023, an improvement of 7 points on 2022*. The segment's frankly positive evolution shows that the bank's actions are aligned with its needs. Customer experience is at the centre of our omni-channel banking strategy. We place great emphasis on continuously improving our customer satisfaction framework, bringing the Voice of the Customer into the organisation. Through this continuous system of learning and improving our customers' journeys, we aim to stand among the market leaders in both CSAT (% of very satisfied customers) and relational NPS. 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 novobanco dos Açores, the complaints index in 2023 was 0.38 and 0.15 per thousand active customers, respectively, in line with these figures in 2022. * Source: BASEF Banca 2023 / Marktest. Period from September to December 2023 versus September to December 2022 for companies with a turnover greater than 5 M euros Online Direct line Branches and Corporate Centers E-mail Online forms By letter 155 Annual Report 2023 | novobanco3.5 Wellbeing, Inclusion and Financial Security Ensuring the development of financial skills and contributing to a generation of informed consumers with greater capacity for analysis and decision-making, as well as providing access to financial services in a safe and simple way, are the premises on which the Bank bases its operations. With a focus on the wellbeing of the population and the stability of the financial system, the Bank's performance is thus based on three pillars: SECURITY Protecting customers and fighting cybercrime ACCESSIBILITY Making the banking system simpler and more accessible FINANCIAL AND DIGITAL LITERACY Increasing financial and digital knowledge Security Digital banking has enabled greater and faster access to financial services and products. The bank's customers are increasingly using the novobanco website and app for their financial transactions, which translates into 1.5 M access per day. To manage its customers' daily financial life, novobanco ensures that the bank is always available, convenient and secure. To this end, it provides both its customers and its employees with a wide range of tools and information to make online banking safe and secure at all times. This accessibility requires a high level of information security, which is why the Group operates in accordance with best market practices and in compliance with legal and regulatory requirements to ensure privacy and the correct processing of personal data. To this end, it has developed a set of internal procedures and regulations, as well as a detailed Privacy Policy on the processing of personal data, which is available on its website, in order to guarantee the confidentiality, integrity and availability of information. Information security means confidentiality, integrity, availability and authenticity. WE ARE ALWAYS VIGILANT WE USE STATE-OF-THE-ART TECHNOLOGY WE HAVE DOUBLE SECURITY AND DISPOSABLE CODES 24 hours a day to monitor all transactions and identify suspicious activity. We use SHA256RSA SSL technology to encrypt information/communications. Online banking and credit card transactions have exclusive guarantees to protect you from fraud, giving you peace of mind. 156 Management ReportSustainability ReportFinancial StatementsAnnex Accessibility Accessibility, or the lack of it, is perhaps one of the main factors leading to social and financial exclusion. In order to be always present, the Bank has taken every step to ensure that its customers can access financial services when digital is not an option. To this end, and for those who find it more difficult to get around, as part of its social welfare programme and with the aim of developing a set of practices aimed at building a more inclusive society, the Bank has restructured the branches of its New Distribution Model (NDM) network and equipped them with ramps and stair lifts wherever possible. The majority of the NDM's branch network is accessible to people with reduced mobility. To ensure financial inclusion and accessibility to financial services for all its customers, the bank has 299 branches, 51 of which are located in sparsely populated areas “Preventing, detecting, and responding to new cyber threats are the goals that underlie the increased attention and strengthening of our technical controls.” Financial and Digital Literacy In order to respond to the rapid digitalisation of society and the need to develop financial literacy, novobanco's priority is not only to guarantee a complete and innovative offer of digital financial services, but also to promote and educate for the correct use of these channels in everyday financial management. With a particular focus on customers and the people who use digital channels to interact with financial services on a daily basis, novobanco continued its financial education programme based on two pillars: Digital Literacy and Savings and Personal Finance. The aim of novobanco is not only to promote greater financial stability, but also to make the financial system simpler and easier to understand. “We help make the banking system more accessible. Online financial transactions are simple, safe and easy.” DIGITAL LITERACY DIGITAL WELLBEING FINANCIAL LITERACY WELLBEING BASED ON FINANCIAL HEALTH Digital security is one of our priorities, and to improve the digital skills of people using financial services on a daily basis, we developed a digital literacy programme with the Portuguese Banking Association (APB) and its members. This programme enabled 600 participants to acquire basic digital skills from a user perspective, contributing to the safe use of digital channels. At the same time, we share basic rules for the safe use of our digital channels. Balancing and planning your personal finances depends not only on your income and savings, but also on how you organise your personal budget. To help customers make informed key decisions for the present and the future, we have prepared a series of tips and simplified financial concepts to make it easier to manage personal finances. 157 Annual Report 2023 | novobancoWith the aim of improving people's digital literacy, the Bank joined the Financial Education Project - Digital Literacy Programme of the Portuguese Banking Association (APB). "All you need to know about online banking". With this programme, the Bank aims to: • Develop a set of basic digital skills from a user perspective • Raise awareness to the importance of adopting more informed and safer financial behaviours • Help train the target audience to use digital channels • Promote higher levels of Digital and Financial Literacy in Portugal In 2023, the Bank once again joined forces with the Portuguese Banking Association (APB), this time with the financial education project "O Banco da Minha Escola" (At my School Bench), which aims to create more informed generations capable of making informed decisions in the future. This initiative, which includes members of the APB, involves schools from the north to the south of the country and is aimed at students in the 3rd cycle and secondary education schools during the 2023/2024 school year. It is estimated that the APB and the employees of its 14 member banks will organise around 200 sessions in more than 50 schools, reaching more than 3,800 students. novobanco employees organise financial education sessions at the General Serpa Pinto Primary School in Cinfães, the Padre José Augusto da Fonseca School Group in Aguiar da Beira and the Miramar School in Mafra. TOPICS COVERED IN THE SESSIONS 1st term Planning and Managing the Family Budget Understanding what income and expenditure are, how to make a budget and how to manage a budget balance. 2nd Term Financial System - Banking Products and Services Gaining a deeper understanding of how the financial system works and learning about some basic banking products such as loans, deposits, payments and insurance. 3rd Term Online Security Identifying the different types of online fraud and adopting the most appropriate and safe behaviours to prevent them. Braille Vision Also in the context of integration, novobanco supports Visão Braille, published under a non-profit social responsibility and solidarity project and distributed free of charge by the TIN (Trust In News) Group. Issued monthly and containing a selection of articles, this magazine provides access to information for blind people who, despite all the technological innovations that have facilitated access to information, still prefer paper. 158 Management ReportSustainability ReportFinancial StatementsAnnex 3.6 Social Welfare 3.6.1 Diversity, Equity and Inclusion To be integrated into society is to be part of it and to work towards developing initiatives that contribute to overcoming social, emotional, and cultural deficiencies, regardless of their cause. novobanco's contribution to the social wellbeing of the community in which it operates, aiming to reduce inequalities and respond to new opportunities for progress, is an integral part of the challenge undertaken by the bank in its corporate social responsibility strategy. In line with its sustainable approach aimed at supporting the creation of solutions for important issues in the community where it operates, in 2023 the novobanco Group donated 475 thousand euros to various organisations, broken down as follows: Supporting organisations working in areas such as the promotion of diversity, equality and inclusion (DEI), combating poverty and social exclusion, among others, is the aim of novobanco's positive social impact programme. This approach is developed through various actions and initiatives, often involving the bank's employees. Bank 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. In 2023, this initiative was continued with the campaign "For everyone, sustainability is our cause", in which the package accounts (100% and Conta 360º) are associated with a cause from the Bank’s corporate social responsibility programme, following on from two projects already supported in 2021/2022. Donations by area (%) Trainning 17 Social wellbeing 30 32 Human Relief Environment 4 17 Arts & Culture Donation by motivation (%) Charitable gift 43 Commercial Initiative 22 35 Community Investment 159 Annual Report 2023 | novobancoBECAUSE OF EVERYONE, SUSTAINABILITY IS OUR CAUSE SEMEAR ACADEMY WHAT CAN AN IMAGE TELL US ECOETHICS PROJECT Together with SEMEAR Academy, we support the training and professional integration of 14 young people with intellectual and developmental disabilities and in socio-economic need, who otherwise would not be able to afford the tuition fees of the social integration programme. Together with MEF (Photographic Expression Movement), we support and accompany the lives of 60 young people in 3 educational centres during their school career. The "What can an image tell us” Project aims to demonstrate the impact that the analysis of photo and video images can have on the development of young people's personalities, in a context of imprisonment. Together with AMI, we support the Ecoethics project, which aims to rehabilitate and replant areas severely affected by forest fires, in particular in the Leiria pine forest. novobanco joined this project with a donation for the planting of 5,000 trees, with the help of customers and employees. Leaders Gang Project As a partner of Mentes Empreendedoras (Entrepreneurial Minds), the bank supports the Leaders Gang project, which aims to develop essential life skills in young adults and provides real moments of training and inspiration. The 2023 pilot, supported by novobanco, involved 100 young people, of whom 65% were women and 18% came from rural and sometimes disadvantaged social and economic backgrounds. The participants organised and led three workshops for secondary school students in 43 municipalities and met seven inspiring leaders, including Catarina Furtado, Admiral Gouveia e Melo, Carlos Moreira da Silva and others. They also took part in a Bootcamp involving formative and inspiring experiences. In addition, they visited novobanco, where they had the opportunity to learn about the professional development of one of its executive directors and several managers, as well as to ask questions and share their visions, ideas and fears. The programme ended with a visit to the European Parliament, where they were welcomed by five Portuguese MEPs. LEADERS GANG Participants testimonials The project is a talent and skills accelerator, aiming to celebrate and promote the social mobility of young people who have excelled throughout secondary school. "The programme has shown me that I can achieve all my goals... "It has made me more confident when speaking in public and dealing with an audience. These are skills that will help me in my professional future". "I have learned to listen and understand other ways of thinking." "I realised that I had to step out of my comfort zone. It gave me the push to venture out." 160 Management ReportSustainability ReportFinancial StatementsAnnex APCEF Associação para a Educação, Cultura e Formação Associação Cais – Reflex Photography Award The partnership established with APCEF (Association for Education, Culture, and Training) supports the awarding of scholarships to children from the S. José de Beja School in Beja and the Laura Vicuña School in Vendas Novas, both areas of low population density and low income, who would otherwise not be able to continue their education. In 2023, through the 16th edition of the REFLEX - CAIS | novobanco Photography Award, novobanco continued its long-standing partnership with Associação CAIS, an association that promotes the social integration of people experiencing poverty and/or social exclusion, through capacity-building methodologies to facilitate their approach to or return to the labour market. This year's theme, "Water, the source of life", aims to spotlight the importance of this natural resource and to raise awareness to it, namely among the new generations. The aim is to use photography to help bring about a significant change in behaviours, particularly among political decision-makers, economic operators and civil society in general, and to raise citizens' awareness to the important challenge of preserving this resource. This year's edition saw a doubling in the number of participants, reflecting the growing concern for the environment, especially regarding water. In an initiative that aims to awaken consciences and have a positive impact on society, creativity, art and culture are the main tools of this project, which aims to highlight the value of photography as an artistic expression of excellence in Portugal and to raise awareness through images linked to socially relevant issues. Humanitarian Relief The earthquakes in Turkey, Syria and Morocco, and the floods in Libya, which have left millions homeless and displaced and claimed many victims, once again brought humanitarian aid to the fore. The Bank could not remain indifferent to these events and made donations to the organisations helping the victims: the Unicef Emergency Fund, the Red Cross, AMI and Care. Quality of Life Action As a patron of the Salvador Association, an IPSS working in the field of motor disabilities, the bank once again joined the project to promote the social inclusion of people with motor disabilities. The Bank focused its support on the training and employment category, reinforcing its work in the area of diversity, equality and inclusion. The 16th edition, with a budget of 130,000 euros, supported 28 people with reduced mobility. Christmas Action 2023 - This year we chose Acreditar Christmas celebrations at the novobanco Group begin with the usual selection of a solidarity initiative by its employees. This year's chosen cause was Acreditar's new home in Lisbon, which has just been expanded from 12 to 32 rooms, thus tripling the number of families that it can accommodate free of charge. These families come from far away with their children for cancer treatment in Lisbon. Donations from staff and the Bank have made it possible to purchase more equipment than originally planned. This year, for the first time, the Christmas campaign had an external aspect: the bank's followers on social media were able to contribute through their reactions. For every "like", the Bank donated €1. This was another action in favour of equal opportunities and inclusion. 161 Annual Report 2023 | novobanco3.7 Cultural Patronage novobanco Cultura brings together, under a single concept, all its Collections and its mission reflects a commitment to preserving, promoting and sharing our relevant cultural and artistic heritage. This facilitates access to the diverse collections for artistic communities, students, researchers, and the general public, both domestically and internationally. novobanco Photography Collection Numismatics Collection The collection comprises around 1,000 works by over 300 artists from 38 countries, encompassing renowned figures from both the national and international art scene. Recognized as one of the world's most significant photography collections, it is also highly awarded and stands out prominently within the global art landscape, ranking among the top 80 corporate collections worldwide. One of the largest and most complete numismatic collections in Portugal. Comprising 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, the collection traces, through money, our development as a people, culture and nation over a period of more than 2,000 years. The collection's works are frequently featured in national and international exhibitions. Notably, in 2023, the "Horizonte Y Limite. Visions of Paisaje" exhibition in Spain showcased contemporary photography from novobanco, furthering its international promotion. novobanco Paintings Collection Made up of Portuguese and European paintings from the 16th to the 20th centuries, 100 works from this collection are on permanent display in 39 museums across the country, representing important moments in the history of European art over six centuries. Library of Humanistic Studies It contains approximately 1,100 Old Books, including 8 incunabula, 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 Lisbon University (FLUL). 162 Management ReportSustainability ReportFinancial StatementsAnnex (This page was left in blank intentionally) 163 Annual Report 2023 | novobanco4 SIMPLE AND EFFICIENT OPERATIONS One of novobanco's strategic pillars is the aim of ensuring simple and efficient operations for its clients, providing a better banking experience and ensuring ever greater sustainability in its environmental and social footprint. The bank intends to continue strengthening these objectives, having set new, even more ambitious targets for reducing emissions and adopting renewable energy solutions in all locations where they are available. To this end, as already mentioned, the bank has made several commitments in the past, such as to significantly reduce its own emissions by 2024 (-28% vs 2021), a target which has already been exceeded (-36% emissions in 2023 vs 2021). 164 Management ReportSustainability ReportFinancial StatementsAnnex 4.1 Environmental Footprint Climate change is one of the greatest challenges of our time, 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: REDUCTION OF INDIRECT IMPACT ON THE ENVIRONMENT REDUCTION OF DIRECT IMPACT ON THE ENVIRONMENT AWARENESS-RAISING AND TRAINING FOR EMPLOYEES Resulting from financing granted and investments made: Resulting from its own operations within the scope of its activity: • Financing to Companies • Financing to Individuals Staff Investment Products with • environmental criteria • Other • CO2 emissions • Electricity Consumption • Paper Consumption • Water Consumption • Other resources • Consumption of resources at work. • ESG training to support the clients in their journey towards sustainability The National Roadmap for Carbon Neutrality and compliance with the Paris objectives call for a profound transformation of business models. The novobanco Group's operations directly impact 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. 165 Annual Report 2023 | novobancoPaper Despite the dematerialisation of a significant part of the business processes and the adoption of the digital signature to formalise acts in the commercial network, which contributed to further a "paperless" culture and environment, there was a significant increase in the consumption of paper in 2023, of +16.6%, or 24.6 tonnes more than in 2022. The novobanco Group carried out a detailed analysis to understand the causes of this significant increase in consumption and to reverse the negative trend observed in 2023: • A significant increase in commercial and operational activity - Strong growth in the opening of new accounts and saving products: despite the fact that the process is already fairly digitalised, there are still cases that require it and clients who prefer to sign paper documents (more common among older clients); - A sharp increase in the formalisation of credit operations, both for retail and corporate clients. - Requests for instalment support: the increase in requests for instalment support resulted in more documents being printed to respond to these requests; - Paper-consuming execution of deeds at the branches. • Return of employees to face-to-face work - In the central services the impact is significant, with face-to-face work having increased by 25.8 p.p. compared to 2022. novobanco has already launched a new campaign to raise awareness to the need to reduce paper consumption, recalling behaviours and habits that help achieve this goal, and will continue to invest in programmes to dematerialise internal processes, and in the digitalisation and phygitalisation of customer relations, giving priority, whenever possible and appropriate to customer preferences, to formalising documents by digital means. Paper consumption (ton) 155.2 148.2 172.8 • New regulatory requirements 2021 2022 2023 - Change in spacing and font size in documents for delivery to individual clients, resulting in an increase in the number of printed sheets (Law No. 32/2021); - Increased issuance of duplicates of documents at the customer's request (Law No. 24/2023 prohibited the charging of commissions for duplicate requests, which led to an increase in customer requests). 166 Management ReportSustainability ReportFinancial StatementsAnnex Electricity consumption (kwh M) 16.30 13.18 13.82 2021 2022 2023 Electricity Following the decision taken by the novobanco Group (novobanco, GNBGA and Banco Best) in November 2021 to use green energy (from renewable sources) in its facilities, which is currently available in around 77% of the facilities, some additional measures were implemented in 2023 to reduce consumption. The teleworking scheme adopted since the beginning of the pandemic contributed significantly to reducing electricity consumption, but the return of staff from central services in 2023 led to a slight increase in consumption. A number of other measures were implemented in 2023 to reduce electricity consumption: Commercial Network - with the consolidation of interventions under the New Distribution Model and in the number of branches, control of lighting, ventilation and air conditioning was increased. With modern new equipment in place, the process of preventive maintenance and monitoring and control of anomalies and alarms was optimised. The timer for the installed presence/movement sensors was also regulated, and the air conditioning set points and external signage hours of operation were adjusted. Central Buildings - the policy of timed operation, both in terms of the lighting schedule - between 6am and 10pm, depending on the functional/departmental area - and in terms of the operating hours of the ventilation and air conditioning system, which is programmed to operate only on working days between 7am and 9pm, was maintained. In addition, incandescent lamps continued to be replaced by LED technology. 167 Annual Report 2023 | novobancoCO2 Emissions The goal set for 2030 is to reduce Scope 1 and 2 CO2 emissions by 50%, an ambitious commitment for which the Bank will continue to make efforts to achieve reductions in different types of consumption. These targets have already led to an improvement in the composition of novobanco’s fleet in 2023, with electric and hybrid vehicles rising from 3% of the total fleet at the start of the year to 25% at the end of the year. To this end, in 2022, the novobanco Group defined a new Vehicle Policy to regulate and standardise fleet management, clarifying eligibility rules and responsibilities for using 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 approved vehicles. The improvement in the composition of novobanco’s fleet is the main factor in the reduction of Scope 1 emissions. novobanco's home office policy and the improvement of green mobility solutions for staff have prevented an increase in Scope 3 CO2 emissions during the return to normality following the pandemic. The increase in Scope 2 CO2 emissions is temporary and mainly due to the fact that for some of novobanco's premises it has not yet been possible to find solid and permanent green energy solutions. Environmental Indicators C02 Emissions* (ton) 2023 2022 2021 23 vs 22 Direct emissions (Scope 1) 3 675.3 4 158.1 4 696.1 -11.6% Indirect emissions (Scope 2)** 1 146.3 811.3 2 937.5 41.3% Indirect emissions (Scope 3)*** 4 234.4 6 103.6 4 184.2 -30.6% C1 - Goods and services purchased C4 – Business Travel (plane) 91.5 520.8 81.6 357.4 87.2 149.4 12.1% 45.7% C5 – Emissions from employees’ home/ work daily trips 3 608.9 5 650,5 3 909.8 -36.1% C7 – Waste generated in operations 13.2 14.1 3.9 Indirect Emissions (Scope 3 - Financed Emissions) 2 592 458.0 1 699 109.0 -6.4% 52.6% Total (Scopes 1, 2 and 3) Excludes indirect emissions financed 9 056.0 11 072.0 11 817.8 -18.2% Total (Scopes 1, 2 and 3) per employee 2.2 2.7 2.7 -20.5 *See methodological notes. **Scope 2 is calculated under 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. **** Includes financed emissions in the credit portfolio and in PCAF-based investments. 168 Management ReportSustainability ReportFinancial StatementsAnnex Recycling and Circular Economy novobanco is aware that waste management is an essential process for the environment, bearing directly on the conservation of natural resources. In this context, it has continued its recycling processes, especially of expired or unused bank cards, paper, cardboard, batteries and toners. The amount of paper and cardboard sent for recycling has increased significantly compared to 2022 (+59% and +19% respectively), due not only to the increase in paper used in current activities, but also to the preparation of central services for the move to the new campus, which required a significant reduction in the existing paper archive that was no longer needed. In 2022, the Bank started the process of recycling its bank cards. The card treatment process involves the collection and destruction of clients’ 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 2023 the Bank sent to Extruplás approximately 1.7 tonnes of bank cards for recycling, thus giving a new life to plastic. CIRCULAR ECONOMY PAPER BANK CARDS CARDBOARD 157.4 tonnes of paper made it possible to create new products, avoiding the extraction of more resources from nature. 1.7 tonnes of cards sent for recycling, giving plastic a new lease of life in the production of street furniture. 61.8 tonnes of cardboard reused in the production of new corrugated cardboard boxes or cardboard packaging. 169 Annual Report 2023 | novobancoIn 2023, novobanco began to gradually replace all the old bank cards in PVC by re-PVC cards, which are made from recycled plastic from regionally collected industrial waste More information on the re-PVC cards can be found in Chapter 3 of this report. As part of the Bank's move to its new headquarters, which will take place in the second half of 2024, a pilot of the new working model has already been launched. The employees of the pilot department were given the chance to buy the old office furniture at a symbolic price, and the money raised was donated to charities of their choice. This reduced the environmental impact of destroying this material and encouraged its reuse for private use. To reduce its direct impact on the environment, the Group also continued its practice of not using single- use plastics, providing its employees with alternatives made from paper, recyclable wood or other compostable materials. Water Despite the return of staff to the central buildings, the Group maintained a downward trend in water consumption, which was reduced by 12.2%, to 8m3 per employee. This reduction resulted from the installation of new equipment in the branches under the New Distribution Model (NMD), namely flow reducers and dual flush cisterns. Water consumption (m m³) 41.4 39.9 35.0 2021 2022 2023 We send expired bank cards for recycling to be used in the production of urban furniture. We stopped providing single-use disposable plastic cups, packaging, cutlery and straws, using instead paper cups and cutlery made from recycled and/or biodegradable materials. 170 Management ReportSustainability ReportFinancial StatementsAnnex 4.2 Suppliers The novobanco Group recognises the importance of sustainable business management covering the entire value chain, with suppliers playing an essential role in its ESG journey. The Group has therefore set in place a set of tools that ensure that the relationship with this group of stakeholders is based on environmental, social and governance criteria. As a major buyer in the market, the novobanco Group has adopted a relationship model with its suppliers based on commitments to good practices and internationally recognised principles, recognising the importance of the economic, environmental and social impact generated by this group of stakeholders. The model is structured around two main 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 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: - Impartiality: Equal treatment, without privileges or favouritism, and seeking to avoid conflicts of interest; - Transparency: Adequate reporting of information; - Quality and Efficiency: Selection of the best suppliers based on quality and efficiency standards. novobanco Group's suppliers are invited to subscribe to these principles, undertaking to adopt rigorous behaviour, especially with regard to the environment, employment conditions and ethics. In this context, the Supplier Relationship Principles, which were revised and strengthened in 2022 with the introduction of novobanco Group's Sustainability Policy, remain in force, with the expectation that all suppliers will follow and act in accordance with the guidance provided 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, any current or potential supplier may present itself and register in the Supplier Portal (https://fornecedores.novobanco.pt). In 2023 there were 3.2 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. At 31 December 2023, the degree of coverage of suppliers with annual invoicing above €10 thousand and with registration completed or in the process of registration (pre-registered) was 94%. 171 Annual Report 2023 | novobancoMain industry sectors of novobanco Group’s suppliers (%) IT services Consulting and auditing Electronic payment system Communications and dispatch Maintenance and repairs Legal expenses Advertising and publications Other 2023 25.2% 23.9% 8.1% 4.9% 4.4% 5.5% 3.2% 24.9% For a more rigorous selection of this group of stakeholders and based on the information provided, the novobanco Group calculates the “sustainability scoring”, which takes into account ethical, labour, hygiene and safety at work, and environmental aspects. New certifications (ISO 45001, ISO 2700, ISO 50001) and aspects related to suppliers' sustainability and environmental policies also contribute to the calculation of this "sustainability score". This scoring is included in the assessment of suppliers in market consultation processes. Additionally, this scoring is also 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. As at 31 December 2023, suppliers that had completed their registration and sustainability assessment in the Supplier Portal represented around €206 million, or 76% of the amount invoiced to the novobanco Group, with the following industry sectors standing out: In 2023, 12.9% of the Group's registered suppliers had a score of Excellent. The decrease compared to the previous year (-4.8p.p.) is explained by the introduction of new criteria in the calculation of the "sustainability score", which made the evaluation stricter and more robust. All in all, around 80% of the suppliers have a positive score (fair, good or excellent). Sustainability scoring (%) 33.3 24.5 24.8 Excellent Good Acceptable To improve Bad 33.3 33.0 33.6 33.2 17.7 14.2 3.2 11.7 12.9 4.3 14.9 5.4 2021 2022 2023 172 Management ReportSustainability ReportFinancial StatementsAnnex In 2023, the Bank concluded 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 the branch network into spaces where the financial experience becomes more than a simple visit to the bank. At the end of the year novobanco had 247 fully revamped branches, in which: • National products were privileged, with the large majority of suppliers contracted being Portuguese companies with 100% national capital; • The suppliers selected were those that could attest that they developed their business based on sustainability criteria, proven by environmental certifications, and which presented sustainability scores of good or 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 2023, the payment period was 20 days, compared to 29 days in 2022. The majority (92.1%) of novobanco Group's suppliers is Portuguese. The group's five largest foreign suppliers are from the United States, Spain, Belgium and Germany. In 2023, the Bank adhered to the Code of Ethics of APCADEC - Associação Portuguesa de Compras e Aprovisionamento (Portuguese Purchasing and Procurement Association), a member of IFPSM - International Federation of Purchasing and Supply Management (www.ifpsm.org), which summarises the values and behaviours that the association aims to promote among its members, their organisations and the entire purchasing community in Portugal. This Code of Ethics bolsters the professionalism and transparency of our business structure, leading to a reduction in the financial, operational and reputational risks of organisations, and among them the Bank. 173 Annual Report 2023 | novobanco4.3 Cybersecurity and Data Privacy The Information Security Policy follows the principles set out in the European Banking Authority (EBA) guidelines and is aligned with the main international security standards and frameworks (e.g. ISO27000 series, NIST CSF, CIS Critical Security Controls). With the aim of reinforcing the fundamental role played by all employees in the prevention of cybersecurity risks, in 2023 the annual mandatory training covered various topics that can be applied in both professional and personal contexts, thus contributing to greater overall security and resilience in the cyberspace. In 2023, novobanco strengthened its means of detecting and responding to cybercrime with the aim of reducing fraud rates, particularly in digital channels, and contributing to a safer cyberspace. novobanco has also taken out insurance to cover cyber risks in the event of a cyber-incident. At novobanco, the privacy and protection of the personal data of its clients and other data subjects are fundamental. To this end, we guarantee the following principles in the management of personal data: In order to increase customer awareness of digital channels, online security awareness campaigns have been carried out. novobanco maintains permanent security and fraud alerts on its digital channels. Security systems and processes are subject to regular audits and risk assessments in order to strengthen controls and increase resilience in a logic of continuous improvement. novobanco's Security Operating Centre (SOC) operates on a continuous 24x7x365 basis. novobanco Group's information systems are regularly tested by companies specialising in cybersecurity. novobanco also uses cybersecurity rating tools to evaluate its suppliers and business-critical partners. novobanco has been a member of the national computer security incident response network (CSIRT) for several years, and regularly takes part in cyber-incident crisis management exercises involving public and private organisations. • Lawfulness: personal data is processed to the extent that at least one of the conditions laid down for lawful processing is met: (i) when consent is given by the data subject, (ii) within the framework of the contractual relationship, (iii) for the fulfilment of legal obligations, and (iv) in pursuit of the legitimate interest of novobanco or a third party; • Minimisation and limitation of storage: only personal data that is suitable for the purposes of processing will be processed, and only kept for the time necessary for those purposes; • Transparency: data subjects will be informed in a transparent manner about the main characteristics and measures of personal data protection, namely the processing purposes and possible transmission to third parties; • Need for access: only employees, collaborators and partners whose duties require it will have access to the personal data processed by novobanco 174 Management ReportSustainability ReportFinancial StatementsAnnex novobanco is committed to respecting the fundamental principles of personal data protection and complying with the legislation applicable to the processing of personal data. For this reason, novobanco has implemented several technical and organisational measures to ensure an adequate level of protection of personal data, based on international best practices, which include a set of principles that are fundamental to all areas of information security, such as confidentiality, integrity, availability, authenticity, non-repudiation and privacy. novobanco has a privacy policy, available at www. novobanco.pt, and a document with detailed information on the use and protection of personal data, the reason for processing it, the rights of the data subjects and how they can exercise these rights with novobanco. Throughout 2023, novobanco carried out various awareness-raising and training activities for its employees in the area of personal data protection 175 Annual Report 2023 | novobanco5 DEVELOPMENT OF PEOPLE AND CULTURE The novobanco Group knows that taking care of its business also means taking care of its employees and that is why it promotes a relationship based on a strategy of equal opportunities, with a focus on performance and continuous improvement 176 Management ReportSustainability ReportFinancial StatementsAnnex 5.1 The People and Culture strategic pillar The development of its employees and fostering an inclusive and collaborative culture is one of the four pillars of novobanco's strategy. This pillar is based on three main priorities - developing a values-based inclusive culture, developing a value proposition for the employees, and developing talent. Each of the priorities of this strategic pillar is aimed at retaining and attracting the best and fostering an inclusive culture that allows employees to reach their full potential. The novobanco Group is aware that good results come from an organisational culture that promotes and values diversity as a strategic lever for transformation, innovation and growth. By fostering an inclusive environment, the novobanco Group enables its employees to reach their full potential, which is why the "People and Culture" pillar is one of the cornerstones of the Bank's strategic plan, which is based on sound governance policies and guiding principles. In order to implement its human capital strategy, the bank has sought to follow best practices in its decision-making process, focusing not only on results, but also involving a fair process based on strong employee motivation to achieve results. To this end, it endeavours to understand the needs and difficulties of employees throughout their life cycle and to meet their expectations in order to contribute to their full development, enable them to reach their full potential and maintain their motivation. Women 54.2% 45.8% Men 4209 employees 1926 Men 2283 Women 177 Annual Report 2023 | novobanco  5.1.1 Culture and Values Journey of cultural transformation: mission, values and behaviour Once the restructuring phase was over, novobanco embarked in a phase of cultural transformation in which it aims to create an inclusive culture where all employees can learn, grow and realise their potential. In this context of cultural transformation, novobanco has developed a project with a multidisciplinary team, deployed in three phases: 1. Assessment of the current cultural state and dissemination of the strategy 2. Defining the future and drawing up a detailed plan to achieve it 3. Implementation and presentation of the Mission and Values, involving the entire organisation For novobanco, listening to all voices is essential to creating and maintaining a culture that is inclusive and open to dialogue. All employees have something to say and all contributions are important in moving the organisation forward. In 2023, novobanco reinforced its openness to dialogue and its internal culture of transparency with the "Your VOICE Counts" concept, which encourages all employees to feel comfortable expressing their opinions freely or reporting inappropriate behaviour. To this end, the channels for promoting a culture of ethics have been renewed and participation can be anonymous or identified: • whispli platform, to safely report inappropriate behaviour and situations or activities that are not in line with novobanco's guiding values • "Your voice counts" form, to give voice to suggestions for improvement, ideas or comments from employees, with the aim of improving communication and collaboration between teams, projects or processes 178 Management ReportSustainability ReportFinancial StatementsAnnex novobanco's mission: "To be the trusted bank that supports families and businesses throughout their lives" is aimed at building a lasting relationship of trust. novobanco affirmed its mission and values through an internal campaign with the message "It's now", in which employees voluntarily participated as protagonists and which was launched at a hybrid event attended by over 3,000 employees. • Promoting Simplicity every day: We seek simplicity as a way of ensuring clarity and efficiency when dealing with complex situations. • Cooperating with each other: We work together harmoniously for collective success and take pride in our teamwork. Mission novobanco's mission and values have been developed by actively listening to its employees, guiding their decisions and behaviour on a daily basis, and ensuring sustainable growth and positive performance. Values • Putting customers first: We are dedicated to supporting their needs, wills, dreams and desires and we invest in our people so that they put excellence into everything they do. • Embracing Ethics and Inclusion: We always act ethically and do the right thing. We always respect each other and encourage everyone to be themselves. • Acting with Trust and Transparency: We are open and honest. We give a clear view of decisions, the reasons for those decisions, either when we succeed or when we fail. 179 Annual Report 2023 | novobanco5.1.2 How we convey the message During 2023, novobanco continued to invest in its communication through live events broadcast via Teams, or in hybrid format, holding Quarterly Fora, which permit to reach all the bank's employees, at the same time, and anywhere in the country. The Quarterly Fora are events organised by the Board of Directors and, in particular, by the CEO, at which the bank's strategy is shared, periodic results are presented, relevant strategic projects are discussed and employees have the opportunity to participate and have their questions answered, thus reinforcing transparency, clarity and two-way communication and bringing management closer to all employees. To help convey the message and the culture and values of novobanco, a meeting was organised in a hybrid format which was attended by more than 3,000 employees, and a network of employees - Shapers - was also created to promote and influence the bank's cultural transformation. The Shapers come from different parts of the Bank, are of different ages and levels of seniority, but have one thing in common: they embrace change and have a mobilising spirit. Using a visual, dynamic, participatory and informal methodology (Learning Map), they are committed to telling the story of novobanco, explaining the reasons for this cultural change and novobanco's strategy for the future, based on its mission and values. In 2023, during the soft launch phase, 54 sessions were held by 53 shapers, involving 567 employees. The objective for 2024 is to involve all the employees of the novobanco Group in this dynamic, with the expectation that all the Bank's employees will be covered by the end of March 2024. With the aim of simplifying and optimising processes and tasks, saving time, and obtaining gains and better results, novobanco is relaunching an internal area for sharing knowledge and experience - the "Knowing Well, Doing Well" team meetings. Informal 30-minute sessions, open to all employees of the bank, creating moments for teams to come together and find synergies in the sharing of knowledge. 180 Management ReportSustainability ReportFinancial StatementsAnnex Annual Report 2023 | novobanco 5.1.3 How we measure An Engagement Survey - Pulse, one of the Bank's main tools for analysing the organisational climate, is carried out every six months. The participation rate at novobanco was around 86% and the favourability rate for employee engagement was 57%, in line with the figure observed in 2022. At novobanco dos Açores, the favourability rate for employee engagement increased by 5 p.p. compared to the survey conducted in September 2022, reflecting the results of the various initiatives developed in different areas, which have made employees feel that novobanco dos Açores is their second home. At Banco Best the favourability rate for employee engagement was 65%, up by 4 p.p. on the results of the survey conducted in September 2022. Engagement Survey (%) 23 31 46 19 28 53 Favourable % Neutral % Unfavourable 9 30 61 15 29 56 18 26 56 11 19 70 16 27 57 Would I stay at novobanco even if they offered me the same salary and/or benefits at 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 181 5.2 Talent Development 5.2.1 Attracting and retaining talent Attracting and retaining talent continues to be one of our major challenges. Several initiatives have been put in place to promote the personal and professional development of all potential and current employees, from when they are spotted and captured in the market to their retention as employees of novobanco. To this end, the following 4-step model has been implemented: 1. CAPTURING TALENT Responding to the Bank's need to recruit and rejuvenate its staff, while providing young students with new skills to enrich their CVs and expand their network of contacts: • Talent attracts talent: in 2023, several young graduates were recruited for a 9-month professional internship programme, spread across different departments. In November 2023, 9 of these young people were integrated into the bank's workforce. • novobanco UP: a programme for young university students with the duration of one month. In the 2023 edition, held between July and September, a total of 84 participants attended this programme, taking the opportunity to have an approach to active life and paid professional experience during the summer holidays. 2. INTERNAL MOBILITY Stimulating 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 2023, 23 employees changed roles, thus enabling and contributing to the development of a more motivating work environment that promotes talent retention. 3. PERFORMANCE ASSESSMENT Assessing the performance of the employees through a cross-cutting system (“My Portal”), which includes a personal development programme where each employee can define his or her objectives for continuous improvement in the performance of their functions. The Performance Assessment is conducted annually and focuses on two sides: objectives and skills, which are linked to a set of observable behaviours. Performance assessment is an important tool for aligning organisational strategy with team and individual performance, supporting constructive and ongoing feedback between each employee and their line manager. • "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. 182 Management ReportSustainability ReportFinancial StatementsAnnex 4.TRAINING Promoting continuous development to ensure the necessary skills to achieve the objectives that the Group has set out to reach. We provide 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. Employee development justifies increasing the investment in their continuous training. This ensures the acquisition and updating of the necessary skills to achieve the best professional performance. In order to ensure adequate training, the Group organised a total of 169,400 hours of training, or 40.3 hours per employee, in the following areas of knowledge: • Leadership Training Programme - As part of its Leadership Academy, novobanco continued to invest in a 50-hour leadership programme for all its 1st and 2nd lines (more than 200 managers participated). 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. • ESG Training - In 2023, due to the strategic importance of the topic, it was decided to renew the investment in ESG-related training for all the Group's employees. This training initiative focused on the importance of this issue in transforming business models across the economy through the incorporation of ESG criteria, with a particular focus on the financial sector, which is subject to a strict regulatory framework. • 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 focused mainly on the Markets in Financial Instruments Directive, the Insurance and Reinsurance Distribution Act, the Mortgage Credit Marketing Directive, the Prevention of Money Laundering and Terrorist Financing, Conflicts of Interest, Related Parties, Pari & Persi (Action Plan for Default Risk & Out-of-Court Procedure for the Regularisation of Defaults) and Information Security. 183 Annual Report 2023 | novobanco5.2.2 Gender Equality, Equal Opportunities and Inclusion 5.2.2 Gender Equality, Equal Opportunities and Inclusion The issue of gender equality, equal opportunities and inclusion remains a strategic priority on the novobanco Group's agenda, and the bank has developed a specific plan to reduce inequalities. The Group continues to consolidate the foundations for long-term sustainability, taking measures to promote inclusion and equality, with a priority focus on decision-making and management positions. Gender parity is a reality at novobanco Group, with women representing 54.2% of the workforce. There is a positive trend in the representation of women in management, with the number of women in managerial positions increasing from 36.2% in 2022 to 38.7% in 2023, but there is still a need to strengthen the gender balance in top management, where representation has increased to 17.6%, but is still below the 20% target set in the Selection Policy for Management and Supervisory Bodies. With regard to the indicator that assesses the representation of the under-represented gender in Board of Directors and first line senior leadership positions, the share of women is 27.3%. There were also positive developments in the equal pay indicator (equal pay for equal work), which fell to 5.4%, in line with the target, and in the unadjusted pay gap indicator, which fell to 18%. novobanco maintains an active participation in the community, namely taking part in the iGen Forum for Gender Equality and the UN Global Compact, and is developing a gender strategy for 2024. Diversity in the novobanco Group is also revealed by the integration in its workforce of employees with a level of disability of more than 60%, as provided in Law no. 4/2019. The bank's internship programme already includes a quota for people with disabilities. This action is part of other social wellbeing and diversity initiatives, including the Salvador Association's Quality of Life Award and support for Visão Braile magazine, both of which are supported by the bank. More information can be found in Chapter 7 (Social Indicators) and Chapter 3 (Social wellbeing) of this report. Under-respresented gender (%) How we embrace equal opportunities and gender equality 36.2 25.5 5.9 2021 36.2 27.5 5.7 2022 38.7 27.3 5.4 2023 Senior Leadership and leadership Under represented gender in board of directors and 1st line senior leadership (includes subsidiaries)* Equal pay indicator *Scope of the Novobanco Group includes: Boar of Directors of novobanco Group companies (novobanco + novobanco dos Açores Banco Best GNBGA) + novobanco first line senior management. Defining a policy of non- discrimination, gender equality and equal opportunities Definition of gender equality and gender pay gap reduction targets Convergence towards balanced gender distribution in senior management Implementing practices to reconcile personal, family and professional life Hiring the under- represented gender 184 Management ReportSustainability ReportFinancial StatementsAnnex This new model also brings with it new working routines. - Trips to the office take on a new meaning, bringing teams closer to each other and to the culture of novobanco. Individual, more demanding and concentrated tasks are left for non-face-to-face work, always guaranteeing the confidentiality of information. - Team meetings also serve a purpose. Their timing, nature, participants and ideal frequency are now well defined, as are their objectives, which must be clear and pre-defined. - And finally, new tools and suitable spaces that guarantee the same level of exposure, participation and involvement for everyone, whether they are physically present or work remotely. Aware of the need for these new tools, as well as the need to simplify processes and streamline the activities of its employees, novobanco has launched a series of initiatives to provide its constantly evolving services with greater online freedom and flexibility for day-to-day tasks: i) replacement of landlines with mobile phones, with improved data packages for all employees; ii) allocation of new headsets with better communication and usage conditions for daily use; iii) replacement of laptops and provision of new, more advanced and higher capacity monitors to ensure quality of work for employees; iv) meeting rooms equipped with new audiovisual systems to enable hybrid meetings and increase team productivity. 5.2.3 New Working Methods and Tools In anticipation of the move to the new headquarters on novobanco Campus, the Bank established a new working culture in 2023, based on a hybrid working model and team agreements that allow the implementation of new ways of working: + COLLABORATIVE - encouraging social interaction among People and teams, discussion of ideas and co- creation. Encouraging greater proximity to management. + FLEXIBLE - making interpersonal relationships, workspaces and clothing even more informal. And encouraging people to work where it's most convenient. + SUSTAINABLE - encouraging more sustainable and ecological behaviour, with a positive impact on the Community. + FOCUSED ON PEOPLE'S WELLBEING - giving them more freedom and confidence and helping them to balance their personal and professional lives. These new ways of working, implemented in the central teams, are based on: - a hybrid and flexible working model that aims to promote a balance between face-to-face and remote work, while guaranteeing the importance of interaction between teams in a face-to-face environment through a minimum presence in the office of 8 days per month. - the ability to make entry and exit times more flexible within the context of the team, or on the adoption of an interspersed schedule of face-to-face and non-face-to- face work. - and also on the flexibility of the workplace, which no longer necessarily has to be the employee's home, but can be another location agreed between the employee and the bank. 185 Annual Report 2023 | novobanco5.2.4 Innovation and Ideas Lab The Talent and Innovation Laboratory returned in 2023 with a new edition (LTI 2.0), as a token of novobanco's commitment to innovation. LTI 2.0 seeks innovative responses to specific challenges. • Silver Economy Ecosystem: how can novobanco help senior clients make smarter decisions, going beyond financial services to create an ecosystem of partnerships to better serve them? • Payments: how can novobanco create new forms of payment with differentiated user experiences? What value-added services can it offer customers, using information about payments? • Embedded finance: how can novobanco distribute its financial services through non-financial partners? how can it embed its services in other digital journeys and take advantage of the subscription economy? • Micro and SME ecosystem: how can novobanco create a truly integrated and digital experience for our corporate clients? what complementary services can novobanco add to meet the overall needs of micro businesses? • +1 Open challenge: beyond all the proposed challenges, how is novobanco preparing for the future and for a new reality in financial services? how does it turn new regulatory requirements, such as on ESG, into opportunities? In 2023, LTI 2.0 had 113 applications, of which 66 with ideas. 68 employees were involved in developing the ideas since Pitch Day, and 3 ideas went through the proof-of-concept phase and are currently in the pilot phase at novobanco. 186 Management ReportSustainability ReportFinancial StatementsAnnex 1.PHYSICAL WELLBEING Promoted through occupational safety, preventive medicine, curative medicine, novobanco's food services, physical exercise and literacy activities that enable Employees to make informed and responsible choices. Employees, both active and retired, have three canteens at their disposal where they can have low-cost, nutritionally balanced meals for lunch, with nutritional information (nutritional traffic lights) provided for each dish (3 to 4 options). As well as providing lunch, the aim was to encourage employees to make healthier food choices. Awareness-raising activities and food workshops are also held in these privileged dining areas. In 2023, allergen information was added to the menus. Information on the presence of the most common food allergens is thus clearly and visibly displayed on all food products. With this information, employees can make appropriate and informed choices. 5.3 Value proposition for employees 5.3.1 Reconciling personal and professional life and focus on wellbeing Each one of novobanco's employees is an essential element in creating sustainable value for the bank and the community. novobanco thus actively seeks to improve the wellbeing of its employees on a day-to-day basis and has a specific area dedicated to this: the Wellbeing and Employee Experience area. Wellbeing is understood as a set of areas that, depending on the individual and the context in which they live, represent a state of complete physical, mental and social wellbeing. In order to provide the best employee experience and achieve this objective, novobanco develops and promotes innovative initiatives, measures and projects aimed at achieving the best levels of wellbeing, from a holistic perspective that goes far beyond the "professional" experience, promoting a complete and balanced experience in the different aspects of life. This value proposition also includes a range of benefits that contribute to boost life quality in a broader sense. These benefits include various measures to promote reconciliation of work, personal and family life, social responsibility, financial balance, healthy lifestyle, promotion of knowledge and socialisation. In defining its wellbeing policy, novobanco adopted the eight dimensions detailed below, which it considers to be the closest to the socio-demographic characteristics of its human capital and the most appropriate for reconciling personal and professional contexts: 187 Annual Report 2023 | novobanco In 2023, a total of €702,148 was allocated to support the education of children (Early Childhood, Children and Young People with Special Needs or Disabilities, and Scholarships) of 745 employees. The amount of support for children and young people with disabilities or special needs was also increased this year, by €120/employee/year. From a socio-economic point of view, 2023 was a particularly difficult year, marked by the continued rise in interest rates, rising inflation, social instability and the war scenario in Europe. In this context, and with a view to promoting the financial wellbeing of its staff, novobanco maintained the support measures introduced at the end of 2022 to mitigate the impact on family budgets: • 410 employees benefited from an extension up to the age of 75 of the repayment period for mortgage loans under the CHPP-ACT (permanent mortage loan under the collective wage agreement) scheme (maximum tenor of 45 years). • 305 employees transferred their permanent home loans (HPP) from the general scheme to the CHPP- ACT (maximum amount €50,000), benefiting from the subsidised rate, for a total amount of €7.6 million. • 148 employees requested their Christmas bonus to be brought forward, starting from January 2023. 2. MENTAL WELLBEING Provided through free psychiatric and psychological consultations, as well as a strong investment in mental health literacy and tools to support prevention and the promotion of healthy habits in both personal and professional contexts. One of the tools provided was the Basic Mental Health Kit, an online mini-course that brings together the essential information to look after your own mental health and that of those around you. 3. EMOTIONAL WELLBEING Promoted through the teaching, practice and dissemination of good practice such as mindfulness and self-care. 4. SOCIAL WELLBEING Promoted through events/experiences aimed at socialising and developing skills in this area. The novobanco volunteer programme also promotes this dimension of well-being. 5. FINANCIAL WELLBEING Evident in the benefits that novobanco provides to its employees, whether in the form of specific banking services and credit solutions, or in the form of support for children's education and for coping with adverse contexts (such as the rise in inflation and interest rates this year). Education support for children of active employees Support for retirees Special conditions on bank commercial offer Specific support to fight inflation and increase of interest rates Christmas hamper Christmas presents for employees and their children and dependent stepchildren 188 Management ReportSustainability ReportFinancial StatementsAnnex 7. INTELLECTUAL WELLBEING Promoting initiatives aimed at the intellectual development of staff, namely through novobanco's Wellbeing Programme, the 5+ Programme, which focuses on the personal sphere, and the Academy, which focuses on providing technical and behavioural skills in the professional sphere. The Bank also actively promotes Culture across various fields, such as Art, Photography and Museums, and offers its staff access to these on favourable terms. 8. PROFESSIONAL WELLBEING Developed through human resources practices based on flexible ways of working suited to the different functions and tasks, fostering the most appropriate working environment for each employee, and healthy working relationships that drive professional success. A new offer of individual credit solutions for employees was also launched, with more favourable conditions adapted to the associated purposes: • Standard Line: for the purchase of a car, home improvements, purchase of goods and equipment for current use and other goods of a non-sumptuary nature. • Green Line: for the purchase of electric cars and bicycles, solar panels and other environmental purposes. • Care Line: intended for health and education expenses of the employee's household. • Social Line: applicable only to situations of financial difficulty/expenses of an unforeseen and unavoidable nature. 6. FAMILY WELLBEING fostered through the work-life balance programme, which includes the following measures: To improve the work-life balance, in 2023 the Bank granted an additional 1 day's leave in recognition of the team effort to implement the Bank's restructuring plan and 2 days' leave during the Christmas period, for a total of 28 days' leave (including 25 days' leave provided for in the - Collective Wage Agreement - ACT). Work and life balance measures Leave on special dates (Employee's birthday; birthday of children; 1st day of school of children) Purchase of vacation days Early Friday or Late Monday Takeaway meals 189 Annual Report 2023 | novobanco5+ Programme 5+, novobanco's wellbeing programme, was launched on 22 June 2022, and was consolidated in 2023. Promoting the health and wellbeing of employees is the mission of this programme, which focuses on 5 objectives: The 5+ programme includes several initiatives designed for the enjoyment of the employees, which can be dedicated to a "central theme" to be developed during the year, or specific themes for each month of the year. These initiatives offer employees moments of relaxation, the opportunity to deepen their knowledge with specialists, or simply to get to know different realities, new themes and activities that can lead to experiences and/or the adoption of behaviours that promote wellbeing in its various dimensions. The theme of the month is the subject of a monthly lecture - Lecture 5+ - broadcast live for everyone in the Bank and delivered by an expert in the field. This session is usually moderated by a member of the Human Capital department, and, to make it a better experience, everyone can participate by asking questions of the expert speaker. Tips on the topic of the month (5+ Tips) are published every month in the form of suggestions or recommendations. The aim of these quick-read tips is to provide practical information certified by experts in the matters in question that foster the adoption of healthy behaviours and the capacity for self-care. The 5+ Experiences are workshops, webinars, ateliers, awareness-raising activities of a practical and educational nature in different areas of extra- professional life: Food, Health, Physical Activity, Family and Home, Culture and Leisure, Emotional Management, Socialising, among others. This programme also develops and launches 5+ Measures, consisting of actions of an organisational nature, which seek to promote a healthier and more productive working environment and improve interpersonal relations between all functional and hierarchical levels of the organisation. Self-care, Prevention, Change, Work-Life Balance, the (new) challenges of Nutrition, Socialisation and Mental Health were some of the monthly themes developed in the 5+ programme in 2023. 5+ programme + physical wellbeing + mental health + wellbeing + balance + happiness Some figures for the 5+ programme in 2023 80 experiences (webinars / workshops / screenings) 10 5+ talks 52 5+ tips 5,578 participations 1,870 employees involved 190 Management ReportSustainability ReportFinancial StatementsAnnex Annual Report 2023 | novobanco novobanco's work in this area was recognised with the award for "Best Engagement and Communication" at the Wellbeing Awards 2023. This initiative, which recognises cases of excellence in the field of health and wellbeing in organisations intended to care for and value their human capital, has reinforced novobanco's positioning, which focuses on promoting the holistic well-being of employees through ongoing internal programmes and initiatives. 191 5.3.2 novobanco Campus More than just a new office, the novobanco Campus will be the Group's new headquarters and a space for the future. Since 2021, novobanco has been preparing for this change, which represents the way it wants to position itself in the market and among its stakeholders. It has been designed to meet the needs and expectations of all employees, with workspaces that combine technology, innovation and design with new ways of working. THE NOVOBANCO CAMPUS SERVES THREE MAIN OBJECTIVES: 1. To be a more flexible space • based on hybrid working models, • with different work areas, • with more efficient and collaborative technological means and tools, • where the dress code is more suited to everyday work. 192 Management ReportSustainability ReportFinancial StatementsAnnex This change is also taking place alongside novobanco's employees. A network of 80 ambassadors has been set up to encourage change in their teams, and communicate and gather the feedback needed to make decisions. It's a network of employees who give their teams a voice and take part in joint discussions where they share ideas, opinions and questions from their colleagues. The Campus ambassadors are much more than the face of this period of transition and growth in the Bank; they are the voice of our teams. 2. To be a more collaborative space • a horizontal structure that promotes informal meetings, • in an open space concept with no physical barriers to promote transparency, • with different collaborative spaces that meet the need for privacy, confidentiality and collaboration. 3. To be a more sustainable space • reborn from an existing structure, • with green areas, less pollution and outdoor activities, • where the aim is to adopt more efficient and cost- effective paperless and/or with no printing work processes, • where the spaces, furniture, ergonomic equipment and support services are designed for the comfort of employees and mobility conditions are aligned with environmental concerns. ~55000m2 novobanco campus dimensions 1730 workplaces 102 meeting rooms ~1600 daily users 1000 parking places ~650 collaborative work spaces ~1400 daily meals ~100 charging posts 193 Annual Report 2023 | novobanco5.4 Volunteer Programme The Volunteer Programme aims to develop and encourage the involvement of employees in community support actions that contribute to addressing socio- economic and environmental issues in the community. All the employees who wish to take part in these activities are given one day off per year, which can be divided into two periods (1/2 day for each activity), 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 team work. Through the actions developed under this programme, initiated in 2022, the Bank strengthened the sense of belonging of its employees, consequently increasing their wellbeing. A total of 406 hours were worked in 2023 in the various voluntary service activities, grouped into 4 sets: REFORESTATION OF THE LEIRIA PINE FOREST FOOD BANKS AGAINST HUNGER DONATED GOODS BANK ENTRAJUDA Through its 100% and 360° accounts, novobanco supported AMI's Ecoethics project, which rehabilitates and reforests areas severely affected by forest fires. It brought together customers and employees in Pinhal de Leiria, planting 5 thousand trees. The employees participated in Food Banks Against Hunger in Faro, Lisbon, Porto and Viseu, supporting a solidarity ecosystem that distributes 2 million meals a day to private social solidarity institutions across the country. The employees sorted and organised non-food items received by the Donated Goods Bank to be distributed to social organisations, and through these, to help people in need. The employees participated in the CONHECER project, a knowledge programme on the correct distribution of goods and services donated, designed for the institutions supported by Entrajuda and the Food Banks, helping them to help the most needy. 194 Management ReportSustainability ReportFinancial StatementsAnnex (This page was left in blank intentionally) 195 Annual Report 2023 | novobanco6 DEVELOPING SUSTAINABLE PERFORMANCE 196 Management ReportSustainability ReportFinancial StatementsAnnex 6.1. Sustainability governance To the novobanco Group it is essential to conduct its activity with the firm resolve to give 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. 6.1.1 Governance Model An effective governance structure is fundamental to ensure the good execution of the strategy. Climate-related issues are managed by novobanco in line with our Sustainability Governance Model, which establishes clearly defined roles for the identification and analysis of the associated risks and opportunities and guarantees an effective response to climate challenges. The 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, which comprises the following bodies: • Executive Board of Directors The Executive Board of Directors (EBD) takes direct responsibility for managing climate risks, actively engaging in strategy formulation and action planning. Oversight of these activities is provided by the General and Supervisory Board (GSB). • The Sustainability Steering, created in 2021, prepares the background for effective management decision-making on sustainability-related issues. The Sustainability Steering brings together the various companies of the novobanco Group and the departments responsible for integrating ESG into the bank's various activities, being supported by a dedicated team that coordinates novobanco Group's ESG approach, by the ESG Office and by the Global Risk Department. This Steering 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 its meetings on a quarterly basis. In 2023, the ESG Steering met 11 times during the year to ensure that ESG issues were integrated across all business lines and activities. Given the high pace of transformation in all matters of Sustainability, ESG and Climate and Environmental Risks, this monthly forum promotes efficient decision-making and the preparation of management and supervisory decisions on all sustainability-related issues, thus adding the environmental, social and governance element to the traditional economic dimension, to ensure: • The definition of the strategy, positioning and action plans related to sustainability issues and their alignment with the action plans of the group's different operations and business areas; SUSTAINABILITY STEERING • The integration of ESG issues in all business lines and activities, with delegated decision-making and approval powers on matters included in the ESG and Climate and Environmental risk implementation plans; • The monitoring of the development and implementation of the action plan and initiatives defined; • The coordination of the teams appointed to support the implementation of the ESG action plan; • The assessment of the initiatives' impact and main indicators' performance against the defined ambition; • The coordination of the liaison with all relevant stakeholders and the reporting on performance through the different internal and external communication channels. 197 Annual Report 2023 | novobanco • ESG Office - Structure dedicated exclusively to the ESG issues of the novobanco Group, whose mission is to promote the integration of sustainability principles into the Group's organisation, strategy and activities. At the same time, it supports the Bank's business and risk management, collaborating both in the development of commercial products and initiatives and in the development of risk methodologies and controls. The ESG Office is responsible for overall coordination of the Bank's ESG strategy, including the implementation of various internal initiatives. It also provides guidance to the management and supervisory bodies on all ESG-related matters. The Risk Management Function (Global Risk Department) is responsible for the overall risk processes, which include risk monitoring and assessment, as well as the development of the policies, methodologies and data required for this purpose. We have also created a PMO - the ESG Project Management Team - to support the ESG Office and all the departments and teams involved in the transformation phase of the strategic plan, with the aim of increasing the capacity and pace of delivery during the transformation period and broadening the organisational commitment. The governance and organisational model for integrating ESG issues into the business and managing climate, environmental, social and governance risks is cross-functional within the organisation and based on two fundamental principles: • To identify all existing or planned activities that are affected or changed by the ESG programme; • To formally establish an operating model leveraged on the existing structures, with roles and responsibilities allocated to the different Group structures across their ESG journey. GENERAL SUPERVISORY BOARD Supervises strategy, positioning and plans for the Global Sustainability Framework. EXECUTIVE BOARD OF DIRECTORS Involved in decision-making processes related to the implementation of the Global Sustainability framework. SUSTAINABILITY STEERING RISK COMMITTEE OTHER COMMITTEES Defines strategy. positioning and guidelines, discusses and approves matters related to the ESG and C&E risks, monitors risks and implementation plan. Discusses and approves risk management framework, policies, monitoring metrics and analysis. Product and services offer, Data requirements and architecture, among others. ESG OFFICE RISK MANAGEMENT FUNCTION OTHER FUNCTIONS Coordinates strategy, positioning and implementation plans to integrate ESG principles in the bank's organization and activity. Develops C&E risks assessment and management frameworks and methodologies. Marketing, Operational, Data, ... ESG PMO Supports ESG Office and remaining Teams in accelerating transformation. BLOCK LEADERS & TEAMS Implement ESG and C&E risks related initiatives. D R A O B T N E M E G A N A M 198 Management ReportSustainability ReportFinancial StatementsAnnex 6.1.2 Our ESG Policies Compliance with the ESG strategy and objectives defined by the novobanco Group can be achieved through business management based on behaviours that everyone values, believes in and practices. Therefore, the ESG commitments are underpinned by various policies and principles that define the Group's culture and describe the principles and steps to achieve the defined purposes. In 2023, we highlight the publication of two new policies focusing on financing: Green Financing and Investment Classification Policy One of novobanco's commitments to sustainability is "green" financing and investment, which involves the financing of our customers' transition. To achieve a sustainable performance, it is necessary to increasingly embed ESG into the business. This is why direct and active support to clients in their energy transition and their journey towards low-carbon and more sustainable business models is a strategic priority. Financing and investments intended to support business activities that contribute to environmental sustainability and the Sustainable Development Goals, and which contribute significantly to at least one of the objectives of the European Taxonomy, namely climate change mitigation or adaptation, are considered eligible for classification as green financing by novobanco. These are some of the activities that may be concerned in this respect: ACTIVITY DESCRIPTION SDG's AGRICULTURE, FORESTRY, FISHERIES AND LIVESTOCK • Sustainable agriculture • Forestry and nature conservation • Sustainable Livestock and Aquaculture ENERGY • Production of energy from renewable sources • Energy production through cogeneration • Renewable energy storage and distribution WATER, WASTE TREATMENT • Sustainable waste management and recycling • Sustainable water supply and sanitation INDUSTRY REAL ESTATE • Manufacture of renewable energy technologies • Products and services that enable energy savings in industrial processes • Manufacture of energy efficient equipment for buildings • Construction, acquisition of green buildings • Improvement works to green buildings • Sustainable equipment, such as energy efficient heating and air conditioning TRANSPORTATION • Sustainable land transport • Sustainable water transport • Sustainable transport infrastructures INFORMATION AND COMMUNICATION TECHNOLOGIES OTHER CLIMATE CHANGE MITIGATION AND ADAPTATION ACTIVITIES • Solutions to reduce CO2 emissions • Energy saving technology and software • Reduction, prevention and sequestration of CO2 emissions • Biodiversity projects 199 Annual Report 2023 | novobancoThese are summarised below: B) FINANCING TO INDIVIDUALS A) FINANCING TO COMPANIES • Residential Mortgage Loans • "Green Corridor" for commercial transactions considered to be aligned with the European Taxonomy Transactions for which it is not necessary to define the specific purpose of the financing, with companies whose activity is classified in the CAE (Classification of Economic Activities) or BICS (Bloomberg Industry Classification System), such activity, according to an internal analysis, being strongly aligned with the European Taxonomy. Mortgage loans for the acquisition, construction or renovation of properties that have obtained (or will obtain through the construction or renovation project) an energy certification level of B or higher, will be considered. • Personal loans Car loans for the purchase of electric or hybrid vehicles are considered, as are personal loans for the purchase of renewable energy generation equipment. • Financing with a specific purpose Transactions in the form of Project Finance, Green Bonds/Loans, and Sustainability Bonds will be considered. Their conditions are assessed on a case- by-case basis, based on the collection of technical information supporting the transaction, namely Green or Sustainability Bond Frameworks and Second Party Opinions (SPO). The analysis of the information (concerning with the product and with the credit) and the decision to consider a loan as green is independent of the origination/ business area. The model and criteria for classifying green financing and investments at novobanco are approved by EBD . The Sustainability Steering also monitors the amount of new green operations on a monthly basis (and other information like price). • Financing with no specific purpose Operations in the form of Commercial Paper, Sustainability-Linked Bonds (SLB) and Sustainability- Linked Loans (SLL) of companies or projects whose activity can be considered sustainable according to the European Taxonomy will be considered. If the financing does not have one of the above classifications, but the company is mature on ESG and aligned with the European Taxonomy, the financing or a percentage of it will be considered green, and its conditions are assessed on a case-by-case basis, based on the collection of technical information supporting the transaction • Real Estate Financing Financing operations for the construction, renovation or acquisition of real estate that has obtained (or will obtain through the construction or renovation project) an energy certification level of A or higher, will be considered. Internationally recognised BREEAM and LEED classifications will also be taken into account, as they ensure compatibility with at least energy certification level A. Financing Principles – Exclusions and minimum safeguards Considering sustainable development to be a fundamental element in sound economic management, as set out in the Group's Sustainability Policy, and intending to develop its activities in accordance with the taxonomy defined by the European Union for the financial sector and in alignment with the principles of the United Nations (UN) Global Compact, the Universal Declaration of Human Rights, the Organisation for Economic Cooperation and Development (OECD) Guidelines for Multinational Enterprises and the main International Labour Organisation (ILO) Conventions, novobanco, in its financing and investment activity, excludes and imposes conditions on certain sectors and projects. Exclusions and limits are set out in the internal Risk Appetite and Credit Risk policies. 200 Management ReportSustainability ReportFinancial StatementsAnnex • Production and marketing of chemical products and substances: Restrictions on customers and production projects for dangerous chemical substances restricted by national legislation and international conventions. • Crude oil and gas extraction: Restrictions on operations arising from oil and gas extraction projects or project extensions under the following conditions: - Extraction from unconventional sources; - Located in World Heritage Sites and IUCN (International Union for Conservation of Nature) Category I to IV Protected Areas. • Production of nuclear energy: Restrictions on operations and projects related to nuclear energy production that do not comply with the Convention on Nuclear Safety; • Extraction of metals and minerals with high environmental and social impacts: Restrictions on operations or projects related to the extraction, processing and marketing of minerals: - Extraction in conflict-affected and high-risk areas; - Rough diamonds from producing countries that are involved in conflict and do not have a Kimberley certification (licence to import and export rough diamonds); • Timber harvesting and marketing: Restrictions on operations or projects for the extraction and marketing of timber from tropical and native forests that have a negative impact on the environment: - Illegally harvested timber; - Timber from forests converted to plantations or non-forestry uses; - Timber from forests where high conservation values are threatened by deforestation; - Forest-sourced products of categories considered unacceptable by the Forest Stewardship Council (FSC). These policies aim to: • Promote ethical and transparent business conduct aimed at long-term value creation; • Integrate environmental, social and governance principles into the business, based on the definition of material issues and SDGs identified through stakeholder consultation; • Apply the commitments made by integrating them into the marketing of its financial products or corporate bonds as sustainable investments. We consider the following to be excluded from financing: • Companies that in any way carry out their activities using behaviours rejected by the novobanco Group or that do not comply with the Fundamental Principles and Rights at Work established by the International Labour Organisation and the International Bill of Human Rights, including forced labour, child labour or any form of inhuman treatment or threat thereof. • Coal mining and energy production projects; • Projects for the production or sale of arms and ammunition (unless related to national defence); • Production or marketing of chemical, nuclear, and biological weapons or weapons of mass destruction; • Activities related to prostitution or whose business model is based on pornography; • Projects for the extraction of and international trade in wild species of threatened or endangered exotic fauna and flora; • Any piracy-related activity. To mitigate adverse environmental and social consequences stemming indirectly from its operations and to actively foster a sustainable economy, the novobanco Group commits to conditioning its financing and investments. Specifically, projects within sectors prone to significant negative impacts will undergo thorough evaluation to assess potential repercussions, as follows: • Production and commercialization of military equipment: Restrictions on the production and sale of military equipment to companies and countries with controversial or autocratic political regimes and limited by national legislation and international conventions; 201 Annual Report 2023 | novobanco FINANCING PRINCIPLES – SECTORS AND ACTIVITIES_EXCLUSIONS AND MINIMUM SAFEGUARDS GREEN FINANCING AND INVESTMENT CLASSIFICATION POLICY OF NOVOBANCO Principles that establish that the bank does not finance or invest in companies that comply with the ILO Principles and Rights, the sectors and activities that are excluded from financing (excluded from the Risk Appetite and Credit Risk Policies). https://www.novobanco.pt/content/dam/ novobancopublicsites/sustentabilidade/Financing%20 Principles_Sectors%20and%20activities_ exclusions%20and%20minimum%20safeguards%20. pdf.coredownload.inline.pdf Principles that establish classification for funding and investments that are intended to support commercial activities that contribute significantly to at least one of the objectives of the European Taxonomy. https://www.novobanco.pt/content/dam/novobanco- publicsites/docs/pdfs/sustentabilidade/Green%20Fi- nancing%20and%20Investment%20Classification%20 Policy_novobanco.pdf.coredownload.inline.pdf SUSTAINABILITY POLICY Guiding principles of the Group's ESG actions and commitments to integrate sustainability into the business model. https://www.novobanco.pt/content/dam/novobanco- publicsites/sustentabilidade/docs/SUSTAINABILITY%20 POLICY%202022.pdf.coredownload.inline.pdf CODE OF CONDUCT Principles that steer the Group's activity, promoting ethical conduct, respect for and compliance with all applicable laws and regulations, supported by transparent relationships with all stakeholders. https://www.novobanco.pt/content/dam/novoban- copublicsites/sustentabilidade/docs/Code%20of%20 Conduct.pdf.coredownload.inline.pdf NON-DISCRIMINATION AND GENDER EQUALITY POLICY Principles of non-discrimination and promotion of equality, namely prohibiting discriminatory practices on the grounds of gender, race, colour, creed, socio-economic conditions or sexual orientation. https://www.novobanco.pt/content/dam/novoban- copublicsites/sustentabilidade/docs/pol%20de%20 igualdade%20de%20oportunidades%20UK.pdf. coredownload.inline.pdf GUIDING PRINCIPLES OF THE VOLUNTEER PROGRAMME Establish preferential areas for action aligned with the sustainability strategy, with conditions to stimulate participation in the programme. https://www.novobanco.pt/content/dam/novobanco- publicsites/sustentabilidade/docs/Voluntariado%20 novobanco%20site%20uk.pdf.coredownload.inline.pdf REMUNERATION POLICY OF NOVOBANCO EMPLOYEES https://www.novobanco.pt/content/dam/novobanco- publicsites/sustentabilidade/docs/Remuneration%20 Policy%20for%20Staff%20Members.pdf.coredownload. inline.pdf ANTI-BRIBERY AND ANTI-CORRUPTION POLICY https://www.novobanco.pt/content/dam/novobanco- publicsites/docs/pdfs/compliance/ingles/Politica%20 PSC_site_ENG.pdf.coredownload.inline.pdf REMUNERATION POLICY OF THE MANAGEMENT AND SUPERVISORY BODIES https://www.novobanco.pt/content/dam/novobanco- publicsites/sustentabilidade/docs/Remuneration%20 Policy%20for%20Management%20and%20Superviso- ry%20Bodies.pdf.coredownload.inline.pdf CONFLICTS OF INTEREST POLICY https://www.novobanco.pt/content/dam/novoban- copublicsites/docs/pdfs/compliance/PCI_NB_ENG.pdf. coredownload.inline.pdf SUPPLIER RELATIONSHIP PRINCIPLES Establish the minimum requirements, set not only to suppliers but also to the Group, with regard to business practices, health and safety at work, ethics and environmental management. https://www.novobanco.pt/content/dam/novoban- copublicsites/sustentabilidade/docs/Principios%20 Relacionamento%20com%20Fornecedores_ENG.pdf. coredownload.inline.pdf HUMAN RIGHTS POLICY Principles of respect for human rights and procedures to deal with any transgression of these rights. https://www.novobanco.pt/content/dam/novobanco- publicsites/sustentabilidade/docs/Pol%20Direitos%20 Humanos%20UK.pdf.coredownload.inline.pdf ENVIRONMENTAL STATEMENT https://www.novobanco.pt/content/dam/novo- bancopublicsites/docs/pdfs/sustentabilidade/ declara%C3%A7%C3%A3o%20impacto%20ambien- tal%20uk.pdf.coredownload.inline.pdf STATEMENT OF POSITIVE SOCIAL IMPACT Commitments to environmental and social sustainability, which go beyond legal obligations and embody the positive impact sought by the Group in its relationship with all stakeholders. https://www.novobanco.pt/content/dam/novo- bancopublicsites/docs/pdfs/sustentabilidade/ Declara%C3%A7%C3%A3o%20Impacto%20so- cial%20positivo%20uk.pdf.coredownload.inline.pdf WHISTLEBLOWING POLICY https://www.novobanco.pt/content/dam/novobanco- publicsites/docs/pdfs/compliance/ingles/Whistleblow- ing%20Policy.pdf.coredownload.inline.pdf POLICY ON HANDLING COMPLAINTS https://www.novobanco.pt/content/dam/novobanco- publicsites/docs/pdfs/compliance/Pol%C3%ADtica%20 Tratamento%20de%20Reclama%C3%A7%C3%B5es. pdf.coredownload.inline.pdf RELATED-PARTY TRANSACTIONS POLICY https://www.novobanco.pt/content/dam/novoban- copublicsites/docs/pdfs/compliance/ingles/PTPR_ NB_24052021_VF%20Eng.pdf.coredownload.inline.pdf For more information on ESG policies please see: Novobanco > Sustainability > Our aproach and policies Novobanco > About novobanco > Governance > Company Documents 202 Management ReportSustainability ReportFinancial StatementsAnnex 6.2. ESG Risks 6.2.1 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, embodied in the ESG policies and principles that guide the bank's activities, but also in the commitments it has made, in which novobanco discloses its sustainability objectives and main practices, with emphasis on: a) reducing direct or financed GEE emissions, in line with the global objectives of the Paris Agreement; b) increasing the use of "sustainable finance" instruments, namely through its commercial offer and investment policies, channelling direct financial support for the transition of the Portuguese economy; and c) properly managing the risks of the climate transition by systematically identifying and controlling its main drivers; • 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 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&E); • Implementation of enhanced ESG risk management procedures adjusted to novobanco Group's activity, including: a) assessment and quantification of the materiality of these risks; b) routines for global monitoring of exposure to ESG risks; c) integration of specific controls for ESG risk factors into the business, steering risk exposure origination and monitoring - including the processes required to operationalise the European Taxonomy for sustainable activities; and d) implementation of risk assessment practices, using sensitivity analysis or scenarisation methodologies. 203 Annual Report 2023 | novobanco6.2.3 Strategy of alignment with the Paris Agreement objectives The 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: • 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 production to guide commercial and financial action, supported by a stronger structuring of green or sustainability-related products (including 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; • Setting sectoral targets based on the SBTI methodology. In this way, the novobanco Group has set itself the goal of gradually aligning its balance sheet with the general carbon emission reduction targets while at the same time limiting its exposure to transition risk. 6.2.2 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 novobanco Group's internal taxonomy, focusing on the climate change component (and respective impacts on the traditional risk categories). The following risk components are assessed: • 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, wellbeing 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 community development. • 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, inasmuch as internal factors are already 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). 204 Management ReportSustainability ReportFinancial StatementsAnnex 6.2.4 Application of the European Taxonomy for Sustainable Activities The novobanco Group recognises the centrality of the European Taxonomy for the integration of sustainability objectives into its business and, simultaneously, for improving the assessment and management of its clients' transition risk factors. Hence the risk management and control approaches are steered by the global aim of ensuring alignment with the Taxonomy criteria, promoting consistency between internal management procedures and the regulatory and prudential framework for sustainable banking activity. EU Taxonomy Information Disclosure Principles The EU taxonomy is a system for classifying activities that make a substantial contribution to the environment and sustainability. Article 3 of the EU Taxonomy Regulation 2020/852 sets out the criteria that an economic activity must meet in order to be considered environmentally sustainable. These criteria include: a) making a substantial contribution to one or more of the EU's six environmental objectives; b) without causing significant harm (DNSH - Do No Significant Harm) to the EU's other five environmental objectives, and c) simultaneously complying with minimum social and governance safeguards, and complying with the technical selection criteria for the EU's environmental objectives. novobanco has been developing its internal procedures for the purposes of complying with the obligations, application and reporting, of the Taxonomy criteria, which include: • Collection of information, throughout the credit granting processes, on the characteristics of customers, their activities and the guarantees received; • Participation in national solutions with the aim of increasing the effectiveness of data collection with the quality and detail required for the purposes of the Taxonomy Regulation; • Conducting internal analyses and applying methodologies that allow, on the one hand, to achieve the classification of sustainable and, on the other hand, to allow the Bank's management to monitor (on a monthly basis) the (sustainable) performance of customers and the guarantees received. For this purpose, the provisions of that Regulation, its Delegated Acts and subsequent interpretations published by the European Commission (and/or Platform on Sustainable Finance) are taken into account, and all currently regulated environmental objectives are: - climate change mitigation; - climate change adaptation; - sustainable use and protection of water and marine resources; - transition to a circular economy; - pollution prevention and control; - protection and restoration of biodiversity and ecosystems. In the following sections, novobanco Group complies with the disclosure obligations of the Taxonomy Regulation, based on the requirements of the Delegated Act - which complements Article 8 of the Taxonomy Regulation - Delegated Act 2021/2178, consolidated version on 1 January 2024. The preparation of the taxonomy reports we present is based on the prudential perimeter of novobanco Group, which complies with the reporting for supervisory purposes of financial institutions, as defined in Regulation (EU) No. 575/2013 of the European Parliament and of the Council and Commission Implementing Regulation (EU) 2021/451 (FINREP). In addition, the preparation and disclosure of information is based on the Delegated Act supplementing Article 8 of the Taxonomy Regulation (Delegated Act 2021/2178, consolidated version as of 1 January 2024). 205 Annual Report 2023 | novobanco Substantial contribution to EU environmental objectives novobanco supports a range of activities that make a substantial contribution to the EU's environmental objectives, namely by financing large companies that are subject to the Non-Financial Reporting Directive (NFRD) and already public presented their information in line with the taxonomy. The bank also contributes to this alignment by financing energy-efficient housing (aquisition or renovation) and low-carbon emission cars that meet the applicable criteria in terms of their contribution to climate change mitigation or adaptation. DNSH - Do No Significant Harm Counterparties with economically sustainable activities cannot significantly harm any of the six objectives (DNSH criterion). Fulfilment of this requirement is assessed on the basis of the taxonomy reports published by the companies themselves. In the case of car financing, the limited data available on the recyclability of vehicles and their performance in terms of air and noise emissions does not allow an analysis of the alignment for this segment. Minimum Social Safeguards A requirement in the assessment of the environmental sustainability of economic activities is compliance with the minimum safeguards set out in Article 18 of the EU Taxonomy Regulation (Regulation EU 2020/852. The purpose of the minimum safeguards established in the EU Taxonomy Regulation is that economic activities defined as and considered sustainable must a) respect human rights, including labour rights, b) not engage in corrupt practices and not commit tax offences. novobanco includes a specific clause in its loan agreements with companies whereby these undertake to conduct their business and carry out their activities in accordance with sound and prudent management criteria and in compliance with the laws, regulations and standards applicable to their sector of activity, including the Fundamental Principles and Rights at Work established by the International Labour Organisation and the International Bill of Human Rights, without resorting to forced or child labour or any form of inhuman treatment or threat thereof. With regard to mortgages and car loans, and taking into account the guidelines for assessing the alignment of these activities, compliance with the minimum social safeguards depends on information from third parties, namely the producers and/or suppliers of the products and/or services contracted by the direct counterparty; in this sense, and in the absence of the necessary information, it is not possible to confirm compliance with these criteria and, consequently, the alignment of the activities with the Taxonomy Regulation. 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 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 the evolution trend of novobanco Group's balance sheet and portfolios; • Definition of an internal concept of 'green investment', which is used to validate the technical conditions (of the operation and/or of the customer's activity) based on European Taxonomy criteria in order to determine the eligibility of the new business in terms of compliance with the minimum annual green production values (which already guide commercial action); • Consideration of the objectives and criteria of the European Taxonomy in the design of new products and financing solutions; 206 Management ReportSustainability ReportFinancial StatementsAnnex the EPC, namely in older credit operations (i.e., carried out at a stage when the mechanisms for the collection and digital characterization of EPCs were not yet implemented). Taxonomy KPIs Total Green Assets Ratio (GAR) = Taxonomy-aligned activities as a percentage of total assets. The numerator includes financial assets of financial and non-financial companies subject to non-financial reporting requirements (NFRD). The denominator includes the same exposures as the numerator plus other asset classes required by the Taxonomy Regulation (exposures to companies not covered by the NFRD, sovereign debt, central banks and the trading book). The following tables are presented in accordance with Annex VI and Annex XII of the Delegated Acts: • Definition of operational requirements for the implementation of the Taxonomy in lending and investment processes, including: a) establishment of client and transaction segmentation principles, to enhance the definition of the information to be collected; b) controls on the information provided by the 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 rely on information collected from customers; • 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 adoption of any expected developments regarding the European Taxonomy. Data Limitations Public information or information provided directly by counterparties is required to assess the alignment and eligibility of activities to the taxonomy. However, due to the limited number of companies required to disclose non-financial information, the amount of information available is limited and that which is available mainly relates to data prior to the reference date of this report (2023). The alignment ratios used are based on publicly disclosed information from counterparties, provided by an external information provider. At the same time, the lack of robust evidence to verify the alignment of loans with specific purposes, and in particular to validate the DNSH (do no significant harm) criteria and minimum social safeguards, makes it impossible to fully verify the alignment of the relevant loans with the Taxonomy. In terms of the energy certification of real estate collateral, i.e. the Energy Performance Certificates (EPC), the Bank has several initiatives underway to obtain 207 Annual Report 2023 | novobanco0. Summary of KPIs to be disclosed by credit institutions under Article 8 of the Taxonomy Regulation (mn€) Main KPI Green asset ratio (GAR) stock - Turnover Total environmentally sustainable assets**** KPI Turnover KPI CAPEX % coverage (over total assets) *** 155 0.39% 0.44% 0.35% Total environmentally sustainable activities KPI Turnover KPI CAPEX % coverage (over total assets)*** 15 3 0.10% 0.10% 0.10% 0.83% 5.50% Additional KPIs GAR (flow) Trading book* Financial guarantees Assets under management Fees and commissions income** * For credit institutions that do not comply with the conditions laid down in Article 94(1) of the CRR or the conditions laid down in Article 325a(1) of the CRR; ** Fee and commission income from services other than lending and asset management; *** % of assets covered by the KPI in relation to the bank's total assets; **** Total environmentally sustainable assets KPI based on CAPEX is 177Mn€. 208 Management ReportSustainability ReportFinancial StatementsAnnex 1. |Assets for the calculation of the GAR (Green Asset Ratio) based on Turnover Climate Change Mitigation (CCM) Of which towards taxonomy relevant sectors (Taxonomy-eligible) Climate Change Adaptation (CCA) Of which towards taxonomy relevant sectors (Taxonomy-eligible) Total gross carrying amount Of which environmentally sustainable (Taxonomy-aligned) Of which environmentally sustainable (Taxonomy-aligned) TOTAL (CCM + CCA) Of which towards taxonomy relevant sectors (Taxonomy-eligible) Of which environmentally sustainable (Taxonomy-aligned) g n i l b a n e i h c h w f O 150 150 150 150 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 150 150 110 40 150 150 110 40 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 d e s i l i a c e p s l a n o i t i s n a r t i h c h w f O i h c h w f O i g n d n e l g n i l b a n e 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 5 5 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 5 5 0 5 0 0 0 0 0 0 0 0 0 0 1 1 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 1 1 1 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 d e s i l i a c e p s i h c h w f O 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 i g n d n e l i h c h w f O 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 i h c h w f O 150 150 150 150 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 150 150 110 40 150 150 110 40 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 (mn€) GAR - Covered assets in both numerator and denominator Loans and advances, debt securities and equity instruments not HfT eligible for GAR calculation Financial corporations Credit institutions Loans and advances Debt securities, including UoP Equity instruments Other financial corporations of which investment firms Loans and advances Debt securities, including UoP Equity instruments of which management companies Loans and advances Debt securities, including UoP Equity instruments of which insurance undertakings Loans and advances Debt securities, including UoP Equity instruments Non-financial corporations NFCs subject to NFRD disclosure obligations Loans and advances Debt securities, including UoP Equity instruments Households of which loans collateralised by residential immovable property of which building renovation loans of which motor vehicle loans Local governments financing Housing financing Other local government financing Collateral obtained by taking possession: residential and commercial immovable properties Other assets excluded from the numerator for GAR calculation (covered in the denominator) Non-financial corporations SMEs and NFCs (other than SMEs) not subject to NFRD disclosure obligations Loans and advances of which loans collateralised by commercial immovable property of which building renovation loans Debt securities Equity instruments Non-EU country counterparties not subject to NFRD disclosure obligations Loans and advances Debt securities Equity instruments Derivatives On demand interbank loans Cash and cash-related assets 21 161 21 161 2 921 420 24 393 3 2 501 0 0 0 0 0 0 0 0 0 0 0 0 1 748 1 748 1 025 722 1 11 669 9 939 0 58 4 722 0 4 722 101 17 479 14 033 13 145 12 212 2 630 0 870 63 888 192 696 0 600 314 179 l / a n o i t i s n a r t n o i t a t p a d a i h c h w f O i h c h w f O i g n d n e l d e s i l i a c e p s g n i l b a n e 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 5 5 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 5 5 0 5 0 0 0 0 0 0 0 0 0 0 1 1 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 1 1 1 0 0 0 0 0 0 0 0 0 0 0 Other assets (e.g. Goodwill, commodities etc.) 2 353 Total GAR assets 38 640 150 150 0 5 1 0 0 0 0 150 150 0 5 1 Other assets not covered for GAR calculation Sovereigns Central banks exposure Trading book Total assets Off-balance sheet exposures - Corporates subject to NFRD disclosure obligations Financial guarantees Assets under management Of which debt securities Of which equity instruments 6 182 372 5 375 436 44 822 150 150 348 3 770 0 0 3 0 0 0 3 0 0 0 0 0 0 0 0 5 0 0 0 0 1 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 150 150 3 0 0 0 3 0 0 0 0 0 0 0 0 5 0 0 0 0 1 0 0 0 0 209 Annual Report 2023 | novobanco 1. |Assets for the calculation of the GAR (Green Asset Ratio) based on CAPEX Climate Change Mitigation (CCM) Of which towards taxonomy relevant sectors (Taxonomy-eligible) Climate Change Adaptation (CCA) Of which towards taxonomy relevant sectors (Taxonomy-eligible) Total gross carrying amount Of which environmentally sustainable (Taxonomy-aligned) Of which environmentally sustainable (Taxonomy-aligned) TOTAL (CCM + CCA) Of which towards taxonomy relevant sectors (Taxonomy-eligible) Of which environmentally sustainable (Taxonomy-aligned) g n i l b a n e i h c h w f O 171 171 171 171 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 171 171 166 171 171 166 5 0 0 0 0 0 0 0 0 0 0 5 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 l / a n o i t i s n a r t n o i t a t p a d a i h c h w f O i h c h w f O i g n d n e l d e s i l i a c e p s g n i l b a n e 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 d e s i l i a c e p s l a n o i t i s n a r t i h c h w f O i h c h w f O i g n d n e l g n i l b a n e 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 d e s i l i a c e p s i h c h w f O 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 i g n d n e l i h c h w f O 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 i h c h w f O 171 171 171 171 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 171 171 166 171 171 166 5 0 0 0 0 0 0 0 0 0 0 5 0 0 0 0 0 0 0 0 0 0 (mn€) GAR - Covered assets in both numerator and denominator Loans and advances, debt securities and equity instruments not HfT eligible for GAR calculation Financial corporations Credit institutions Loans and advances Debt securities, including UoP Equity instruments Other financial corporations of which investment firms Loans and advances Debt securities, including UoP Equity instruments of which management companies Loans and advances Debt securities, including UoP Equity instruments of which insurance undertakings Loans and advances Debt securities, including UoP Equity instruments Non-financial corporations NFCs subject to NFRD disclosure obligations Loans and advances Debt securities, including UoP Equity instruments Households of which loans collateralised by residential immovable property of which building renovation loans of which motor vehicle loans Local governments financing Housing financing Other local government financing Collateral obtained by taking possession: residential and commercial immovable properties Other assets excluded from the numerator for GAR calculation (covered in the denominator) Non-financial corporations SMEs and NFCs (other than SMEs) not subject to NFRD disclosure obligations Loans and advances of which loans collateralised by commercial immovable property of which building renovation loans Debt securities Equity instruments Non-EU country counterparties not subject to NFRD disclosure obligations Loans and advances Debt securities Equity instruments Derivatives On demand interbank loans Cash and cash-related assets 21 161 21 161 2 921 420 24 393 3 2 501 0 0 0 0 0 0 0 0 0 0 0 0 1 748 1 748 1 025 722 1 11 669 9 939 0 58 4 722 0 4 722 101 17 479 14 033 13 145 12 212 2 630 0 870 63 888 192 696 0 600 314 179 Other assets (e.g. Goodwill, commodities etc.) 2 353 Total GAR assets 38 640 171 171 0 0 0 0 0 0 0 171 171 0 0 0 Other assets not covered for GAR calculation Sovereigns Central banks exposure Trading book Total assets Off-balance sheet exposures - Corporates subject to NFRD disclosure obligations Financial guarantees Assets under management Of which debt securities Of which equity instruments 6 182 372 5 375 436 44 822 171 171 348 3 770 0 0 19 19 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 171 171 19 19 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 210 Management ReportSustainability ReportFinancial StatementsAnnex Climate Change Mitigation (CCM) Climate Change Adaptation (CCA) TOTAL (CCM + CCA) Non-Financial corporates (Subject to NFRD) SMEs and other NFC not subject to NFRD Non-Financial corporates (Subject to NFRD) SMEs and other NFC not subject to NFRD Non-Financial corporates (Subject to NFRD) SMEs and other NFC not subject to NFRD Gross carrying amount Gross carrying amount Gross carrying amount Gross carrying amount Gross carrying amount Gross carrying amount y l l a t n e m n o r i v n e h c h w i f O y l l a t n e m n o r i v n e h c h w i f O l ) A C C ( e b a n a t s u s i R U E n M 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 ) l M C C ( e b a n a t s u s i R U E n M 15 7 41 8 13 104 15 68 2 5 20 8 108 1 120 0 20 218 4 77 20 10 27 1 45 19 5 48 y l l a t n e m n o r i v n e h c h w i f O l ) A C C ( e b a n a t s u s i R U E n M 15 7 41 8 13 104 15 68 2 5 20 8 y l l a t n e m n o r i v n e h c h w i f O y l l a t n e m n o r i v n e h c h w i f O ) A C C + M C C ( e b a n a t s u s l i R U E n M ) A C C + M C C ( e b a n a t s u s i l 4 0 3 0 0 0 4 3 0 1 0 1 108 106 1 120 0 1 0 0 20 11 218 4 77 20 10 27 1 45 19 5 48 0 0 0 1 3 0 0 4 1 5 0 2. GAR by sector, based on Turnover Breakdown by sector - NACE 4 digits level (code and label) y l l a t n e m n o r i v n e h c h w i f O ) l M C C ( e b a n a t s u s i R U E n M 4 0 3 0 0 0 4 3 0 1 0 1 0729 - Mining and preparation of other non-ferrous metal ores 1629 - Manufacture of other products of wood; manufacture of articles of straw and plaiting materials; cork industry 1711 - Manufacture of pulp 1712 - Manufacture of paper and paperboard (excluding corrugated) 1721 - Manufacture of corrugated paper and paperboard and of containers of paper and paperboard R U E n M 15 7 41 8 13 1920 - Manufacture of refined petroleum products and fuels briquettes 104 2211 - Manufacture of rubber tyres and tubes; retreading and rebuilding of rubber tyres 2351 - Manufacture of cement 2711 - Manufacture of pulp 2892 - Manufacture of machinery for mining, quarrying and construction 2910 - Manufacture of motor vehicles 3020 - Manufacture of railway locomotives and rolling stock 15 68 2 5 20 8 3511 - Production of electricity 3514 - Trade of electricity 4110 - Development of building projects 4120 - Construction of residential and non-residential buildings 108 106 1 120 0 1 0 0 4222 - Construction of networks for transmission and distribution of electricity and telecommunications networks 20 11 4299 - Construction of other civil engineering projects n.e.c. 218 4676 - Wholesale of other intermediate products 4711 - Retail sale in non-specialised stores with food, beverages or tobacco predominating 5020 - Sea and coastal freight water transport 5320 - Other postal and courier activities 5920 - Sound recording and music publishing activities 6499 - Other financial services activities n. e, except insurance and pension funds 6820 - Renting of own or leased real estate 7010 - Activities of head offices 7112 - Engineering activities and related technical consultancy 9609 - Other personal service activities n.e.c. 4 77 20 10 27 1 45 19 5 48 0 0 0 1 3 0 0 4 1 5 0 211 Annual Report 2023 | novobanco 2. GAR by sector, based on CAPEX Breakdown by sector - NACE 4 digits level (code and label) Climate Change Mitigation (CCM) Climate Change Adaptation (CCA) TOTAL (CCM + CCA) Non-Financial corporates (Subject to NFRD) SMEs and other NFC not subject to NFRD Non-Financial corporates (Subject to NFRD) SMEs and other NFC not subject to NFRD Non-Financial corporates (Subject to NFRD) SMEs and other NFC not subject to NFRD Gross carrying amount Gross carrying amount Gross carrying amount Gross carrying amount Gross carrying amount Gross carrying amount y l l a t n e m n o r i v n e h c h w i f O y l l a t n e m n o r i v n e h c h w i f O R U E n M ) l M C C ( e b a n a t s u s i 1 21 25 8 y l l a t n e m n o r i v n e h c h w i f O ) A C C + M C C ( e b a n a t s u s i l y l l a t n e m n o r i v n e h c h w i f O l ) A C C ( e b a n a t s u s i R U E n M 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 ) l M C C ( e b a n a t s u s i R U E n M 7 41 74 50 103 1 120 0 1 218 4 4 4 29 11 11 19 70 5 18 17 y l l a t n e m n o r i v n e h c h w i f O l ) A C C ( e b a n a t s u s i R U E n M 7 41 74 50 y l l a t n e m n o r i v n e h c h w i f O R U E n M ) A C C + M C C ( e b a n a t s u s i l 1 21 25 8 103 99 1 120 0 1 218 4 4 4 29 11 11 19 70 5 18 17 1 0 0 1 0 0 0 0 1 2 0 2 1 5 3 1 1629 - Manufacture of other products of wood; manufacture of articles of straw and plaiting materials; cork industry 1711 - Manufacture of pulp 1920 - Manufacture of refined petroleum products and fuels brique 2351 - Manufacture of cement R U E n M 7 41 74 50 3511 - Production of electricity 103 99 3514 - Trade of electricity 4110 - Development of building projects 4120 - Construction of residential and non-residential buildings 4222 - Construction of networks for transmission and distribution of electricity and telecommunications networks 4299 - Construction of other civil engineering projects n.e.c. 4511 - Sale of cars and light motor vehicles 4649 - Wholesale of other household goods 4676 - Wholesale of other intermediate products 4711 - Retail sale in non-specialised stores with food, beverages or tobacco predominating 6020 - Television activities 6820 - Renting of own or leased real estate 7010 - Activities of head offices 7022 - Other business and management consultancy activities 7112 - Engineering activities and related technical consultancy 8211 - Combined office administrative service activities 8299 - Other business support service activities n.e.c. 1 120 0 1 218 4 4 4 29 11 11 19 70 5 18 17 1 0 0 1 0 0 0 0 1 2 0 2 1 5 3 1 212 Management ReportSustainability ReportFinancial StatementsAnnex 3. GAR KPI stock based on Turnover 2023 Climate Change Mitigation (CCM) Climate Change Adaptation (CCA) TOTAL (CCM + CCA) Proportion of total covered assets funding taxonomy relevant sectors (Taxonomy-eligible) Proportion of total covered assets funding taxonomy relevant sectors (Taxonomy-aligned) Proportion of total covered assets funding taxonomy relevant sectors (Taxonomy-eligible) Proportion of total covered assets funding taxonomy relevant sectors (Taxonomy-aligned) Proportion of total covered assets funding taxonomy relevant sectors (Taxonomy-eligible) Proportion of total covered assets funding taxonomy relevant sectors (Taxonomy-aligned) Proportion of total assets covered % (compared to total covered assets in the denominator) GAR - Covered assets in both numerator and denominator Loans and advances, debt securities and equity instruments not HfT eligible for GAR calculation d e s i l i a c e p s h c h w i f O l a n o i t i s n a r t i h c h w f O i g n d n e l g n i l b a n e h c h w i d e s i l i a c e p s h c h w i f O f O i g n d n e l g n i l b a n e h c h w i d e s i l i a c e p s h c h w i f O f O g n i l b a n e h c h w i f O l a n o i t i s n a r t i h c h w f O i g n d n e l 0.7% 0.7% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.7% 0.7% 0.0% 0.0% 0.0% 54.8% Financial corporations 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% Credit institutions 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% Loans and advances 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% Debt securities, including UoP 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% Equity instruments 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% Other financial corporations 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% of which investment firms 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% Loans and advances 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% Debt securities, including UoP 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% Equity instruments 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% of which management companies 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% Loans and advances 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% Debt securities, including UoP 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% Equity instruments 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% of which insurance undertakings 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% Loans and advances 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% Debt securities, including UoP 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% Equity instruments 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% Non-financial corporations 8.6% 8.6% 0.0% 0.3% 0.1% 0.0% 0.0% 0.0% 0.0% 8.6% 8.6% 0.0% 0.3% 0.1% 7.6% 1.1% 0.1% 1.0% 0.0% 6.5% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 4.5% NFCs subject to NFRD disclosure obligations 8.6% 8.6% 0.0% 0.3% 0.1% 0.0% 0.0% 0.0% 0.0% 8.6% 8.6% 0.0% 0.3% 0.1% 4.5% Loans and advances 10.7% 10.7% 0.0% 0.0% 0.1% 0.0% 0.0% 0.0% 0.0% 10.7% 10.7% 0.0% 0.0% 0.1% Debt securities, including UoP 5.5% 5.5% 0.0% 0.7% 0.0% 0.0% 0.0% 0.0% 0.0% 5.5% 5.5% 0.0% 0.7% 0.0% Equity instruments 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 2.7% 1.9% 0.0% Households 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 30.2% of which loans collateralised by residential immovable property 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 25.7% of which building renovation loans 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% of which motor vehicle loans 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.2% Local governments financing 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 12.2% Housing financing 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% Other local government financing 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 12.2% Collateral obtained by taking possession: residential and commercial immovable properties 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.3% Total GAR assets 0.4% 0.4% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.4% 0.4% 0.0% 0.0% 0.0% 54.8% 213 Annual Report 2023 | novobanco 3. GAR KPI stock, based on CAPEX 2023 Climate Change Mitigation (CCM) Climate Change Adaptation (CCA) TOTAL (CCM + CCA) Proportion of total covered assets funding taxonomy relevant sectors (Taxonomy-eligible) Proportion of total covered assets funding taxonomy relevant sectors (Taxonomy-aligned) Proportion of total covered assets funding taxonomy relevant sectors (Taxonomy-eligible) Proportion of total covered assets funding taxonomy relevant sectors (Taxonomy-aligned) Proportion of total covered assets funding taxonomy relevant sectors (Taxonomy-eligible) Proportion of total covered assets funding taxonomy relevant sectors (Taxonomy-aligned) Proportion of total assets covered % (compared to total covered assets in the denominator) GAR - Covered assets in both numerator and denominator Loans and advances, debt securities and equity instruments not HfT eligible for GAR calculation d e s i l i a c e p s h c h w i f O l a n o i t i s n a r t i h c h w f O i g n d n e l g n i l b a n e h c h w i d e s i l i a c e p s h c h w i f O f O g n i l b a n e h c h w i d e s i l i a c e p s h c h w i f O f O l a n o i t i s n a r t i h c h w f O i g n d n e l i g n d n e l g n i l b a n e h c h w i f O 0.8% 0.8% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.8% 0.8% 0.0% 0.0% 0.0% 54.8% Financial corporations 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% Credit institutions 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% Loans and advances 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% Debt securities, including UoP 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% Equity instruments 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% Other financial corporations 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% of which investment firms 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% Loans and advances 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% Debt securities, including UoP 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% Equity instruments 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% of which management companies 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% Loans and advances 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% Debt securities, including UoP 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% Equity instruments 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% of which insurance undertakings 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% Loans and advances 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% Debt securities, including UoP 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% Equity instruments 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% Non-financial corporations 9.8% 9.8% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 9.8% 9.8% 0.0% 0.0% 0.0% 7.6% 1.1% 0.1% 1.0% 0.0% 6.5% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 4.5% NFCs subject to NFRD disclosure obligations 9.8% 9.8% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 9.8% 9.8% 0.0% 0.0% 0.0% 4.5% Loans and advances 16.2% 16.2% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 16.2% 16.2% 0.0% 0.0% 0.0% Debt securities, including UoP 0.7% 0.7% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.7% 0.7% 0.0% 0.0% 0.0% Equity instruments 4.0% 4.0% 0.0% 0.0% 0.0% 0.0% 0.0% 4.0% 4.0% 0.0% 0.0% 2.7% 1.9% 0.0% Households 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 30.2% of which loans collateralised by residential immovable property 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 25.7% of which building renovation loans 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% of which motor vehicle loans 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.2% Local governments financing 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 12.2% Housing financing 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% Other local government financing 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 12.2% Collateral obtained by taking possession: residential and commercial immovable properties 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.3% Total GAR assets 0.4% 0.4% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.4% 0.4% 0.0% 0.0% 0.0% 54.8% 214 Management ReportSustainability ReportFinancial StatementsAnnex 4. GAR KPI flow, based on Turnover 2023 Climate Change Mitigation (CCM) Climate Change Adaptation (CCA) TOTAL (CCM + CCA) Proportion of total covered assets funding taxonomy relevant sectors (Taxonomy-eligible) Proportion of total covered assets funding taxonomy relevant sectors (Taxonomy-aligned) Proportion of total covered assets funding taxonomy relevant sectors (Taxonomy-eligible) Proportion of total covered assets funding taxonomy relevant sectors (Taxonomy-aligned) Proportion of total covered assets funding taxonomy relevant sectors (Taxonomy-eligible) Proportion of total covered assets funding taxonomy relevant sectors (Taxonomy-aligned) Proportion of total new assets covered % (compared to flow of total eligible assets) GAR - Covered assets in both numerator and denominator Loans and advances, debt securities and equity instruments not HfT eligible for GAR calculation d e s i l i a c e p s h c h w i f O l a n o i t i s n a r t i h c h w f O i g n d n e l g n i l b a n e h c h w i d e s i l i a c e p s h c h w i f O f O i g n d n e l g n i l b a n e h c h w i d e s i l i a c e p s h c h w i f O f O g n i l b a n e h c h w i f O l a n o i t i s n a r t i h c h w f O i g n d n e l 9.6% 9.6% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 9.6% 9.6% 0.0% 0.0% 0.0% 0.1% Financial corporations 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% Credit institutions 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% Loans and advances 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% Debt securities, including UoP 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% Equity instruments 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% Other financial corporations 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% of which investment firms 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% Loans and advances 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% Debt securities, including UoP 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% Equity instruments 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% of which management companies 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% Loans and advances 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% Debt securities, including UoP 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% Equity instruments 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% of which insurance undertakings 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% Loans and advances 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% Debt securities, including UoP 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% Equity instruments 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% Non-financial corporations 9.6% 9.6% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 9.6% 9.6% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.1% NFCs subject to NFRD disclosure obligations 9.6% 9.6% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 9.6% 9.6% 0.0% 0.0% 0.0% 0.1% Loans and advances 9.5% 9.5% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 9.5% 9.5% 0.0% 0.0% 0.0% 0.1% Debt securities, including UoP 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% Equity instruments 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% Households 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% of which loans collateralised by residential immovable property 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% of which building renovation loans 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% of which motor vehicle loans 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% Local governments financing 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% Housing financing 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% Other local government financing 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% Collateral obtained by taking possession: residential and commercial immovable properties 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% Total GAR assets 0.1% 0.1% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.1% 0.1% 0.0% 0.0% 0.0% 0.1% 215 Annual Report 2023 | novobanco 4. GAR KPI flow, based on CAPEX 2023 Climate Change Mitigation (CCM) Climate Change Adaptation (CCA) TOTAL (CCM + CCA) Proportion of total covered assets funding taxonomy relevant sectors (Taxonomy-eligible) Proportion of total covered assets funding taxonomy relevant sectors (Taxonomy-aligned) Proportion of total covered assets funding taxonomy relevant sectors (Taxonomy-eligible) Proportion of total covered assets funding taxonomy relevant sectors (Taxonomy-aligned) Proportion of total covered assets funding taxonomy relevant sectors (Taxonomy-eligible) Proportion of total covered assets funding taxonomy relevant sectors (Taxonomy-aligned) Proportion of total new assets covered % (compared to flow of total eligible assets) GAR - Covered assets in both numerator and denominator Loans and advances, debt securities and equity instruments not HfT eligible for GAR calculation d e s i l i a c e p s h c h w i f O l a n o i t i s n a r t i h c h w f O i g n d n e l g n i l b a n e h c h w i d e s i l i a c e p s h c h w i f O f O i g n d n e l g n i l b a n e h c h w i d e s i l i a c e p s h c h w i f O f O g n i l b a n e h c h w i f O l a n o i t i s n a r t i h c h w f O i g n d n e l 9.4% 9.4% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 9.4% 9.4% 0.0% 0.0% 0.0% 0.1% Financial corporations 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% Credit institutions 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% Loans and advances 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% Debt securities, including UoP 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% Equity instruments 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% Other financial corporations 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% of which investment firms 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% Loans and advances 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% Debt securities, including UoP 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% Equity instruments 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% of which management companies 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% Loans and advances 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% Debt securities, including UoP 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% Equity instruments 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% of which insurance undertakings 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% Loans and advances 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% Debt securities, including UoP 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% Equity instruments 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% Non-financial corporations 9.4% 9.4% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 9.4% 9.4% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.1% NFCs subject to NFRD disclosure obligations 9.4% 9.4% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 9.4% 9.4% 0.0% 0.0% 0.0% 0.1% Loans and advances 9.4% 9.4% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 9.4% 9.4% 0.0% 0.0% 0.0% 0.1% Debt securities, including UoP 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% Equity instruments 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% Households 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% of which loans collateralised by residential immovable property 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% of which building renovation loans 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% of which motor vehicle loans 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% Local governments financing 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% Housing financing 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% Other local government financing 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% Collateral obtained by taking possession: residential and commercial immovable properties 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% Total GAR assets 0.1% 0.1% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.1% 0.1% 0.0% 0.0% 0.0% 0.1% 216 Management ReportSustainability ReportFinancial StatementsAnnex 5. KPI off-balance sheet exposures based on Turnover 2023 Climate Change Mitigation (CCM) Climate Change Adaptation (CCA) TOTAL (CCM + CCA) Proportion of total covered assets funding taxonomy relevant sectors (Taxonomy-eligible) Proportion of total covered assets funding taxonomy relevant sectors (Taxonomy-aligned) Proportion of total covered assets funding taxonomy relevant sectors (Taxonomy-eligible) Proportion of total covered assets funding taxonomy relevant sectors (Taxonomy-aligned) Proportion of total covered assets funding taxonomy relevant sectors (Taxonomy-eligible) Proportion of total covered assets funding taxonomy relevant sectors (Taxonomy-aligned) % (compared to total eligible off-balance sheet assets) Financial guarantees (FinGuar KPI) Assets under management (AuM KPI) d e s i l i a c e p s h c h w i f O l a n o i t i s n a r t i h c h w f O i g n d n e l g n i l b a n e h c h w i d e s i l i a c e p s h c h w i f O f O i g n d n e l g n i l b a n e h c h w i d e s i l i a c e p s h c h w i f O f O l a n o i t i s n a r t i h c h w f O i g n d n e l g n i l b a n e h c h w i f O 0.85% 0.82% 0.00% 0.00% 0.06% 0.00% 0.00% 0.00% 0.00% 0.85% 0.82% 0.00% 0.00% 0.06% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 5. KPI off-balance sheet exposures based on CAPEX 2023 Climate Change Mitigation (CCM) Climate Change Adaptation (CCA) TOTAL (CCM + CCA) Proportion of total covered assets funding taxonomy relevant sectors (Taxonomy-eligible) Proportion of total covered assets funding taxonomy relevant sectors (Taxonomy-eligible) Proportion of total covered assets funding taxonomy relevant sectors (Taxonomy-eligible) Proportion of total covered assets funding taxonomy relevant sectors (Taxonomy-aligned) Proportion of total covered assets funding taxonomy relevant sectors (Taxonomy-aligned) Proportion of total covered assets funding taxonomy relevant sectors (Taxonomy-aligned) % (compared to total eligible off-balance sheet assets) Financial guarantees (FinGuar KPI) Assets under management (AuM KPI) d e s i l i a c e p s h c h w i f O i g n d n e l l a n o i t i s n a r t h c h w i g n i l b a n e h c h w i d e s i l i a c e p s h c h w i f O f O f O g n i l b a n e h c h w i d e s i l i a c e p s h c h w i f O f O l a n o i t i s n a r t h c h w i g n i l b a n e h c h w i f O f O i g n d n e l i g n d n e l 5.50% 5.50% 0.00% 0.01% 0.01% 0.00% 0.00% 0.00% 0.00% 5.50% 5.50% 0.00% 0.01% 0.01% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 217 Annual Report 2023 | novobanco Disclosures according to Annex XII - nuclear energy and fossil-gas related activities 1. Nuclear energy and fossil-gas related activities NUCLEAR ENERGY RELATED ACTIVITIES 1 2 3 4 5 6 The undertaking carries out, funds or has exposures to research, development, demonstration and deployment of innovative electricity generation facilities that produce energy from nuclear processes with minimal waste from the fuel cycle. The undertaking carries out, funds or has exposures to construction and safe operation of new nuclear installations to produce electricity or process heat, including for the purposes of district heating or industrial processes such as hydrogen production, as well as their safety upgrades, using best available technologies. The undertaking carries out, funds or has exposures to safe operation of existing nuclear installations that produce electricity or process heat, including for the purposes of district heating or industrial processes such as hydrogen production from nuclear energy, as well as their safety upgrades. FOSSIL GAS RELATED ACTIVITIES The undertaking carries out, funds or has exposures to construction or operation of electricity generation facilities that produce electricity using fossil gaseous fuels. The undertaking carries out, funds or has exposures to construction, refurbishment, and operation of combined heat/cool and power generation facilities using fossil gaseous fuels. The undertaking carries out, funds or has exposures to construction, refurbishment and operation of heat generation facilities that produce heat/cool using fossil gaseous fuels. No No Yes* Yes** Yes** No * Based on residual exposure to companies that, despite having related activity, have not reported, to date, alignment and eligibility ratios. ** The figures underlying this entry refer solely to the only company that has disclosed the ratios publicly. 218 Management ReportSustainability ReportFinancial StatementsAnnex 2. Economic activities aligned with the Taxonomy (denominator) based on Turnover. Row Economic activities based on KPI Turnover (mn€) Amount and proportion of Taxonomy-aligned economic activity referred to in Section 4.26 of Annexes I and II to Delegated Regulation 2021/2139 in the denominator of the applicable KPI. Amount and proportion of Taxonomy-aligned economic activity referred to in Section 4.27 of Annexes I and II to Delegated Regulation 2021/2139 in the denominator of the applicable KPI. Amount and proportion of Taxonomy-aligned economic activity referred to in Section 4.28 of Annexes I and II to Delegated Regulation 2021/2139 in the denominator of the applicable KPI. Amount and proportion of Taxonomy-aligned economic activity referred to in Section 4.29 of Annexes I and II to Delegated Regulation 2021/2139 in the denominator of the applicable KPI. Amount and proportion of Taxonomy-aligned economic activity referred to in Section 4.30 of Annexes I and II to Delegated Regulation 2021/2139 in the denominator of the applicable KPI. Amount and proportion of Taxonomy-aligned economic activity referred to in Section 4.31 of Annexes I and II to Delegated Regulation 2021/2139 in the denominator of the applicable KPI. Amount and proportion of other Taxonomy-aligned economic activities not referred to in rows 1 to 6 above in the denominator of the applicable KPI. Amount and proportion (the information is to be presented in monetary amounts and as percentages) CCM + CCA Climate change mitigation (CCM) Climate change adaptation (CCA) Amount % Amount % Amount % 0.0 0.0% 0.0 0.0% 0.0 0.0% 0.0 0.0% 0.0 0.0% 0.0 0.0% 0.0 0.0% 0.0 0.0% 0.0 0.0% 0.0 0.0% 0.0 0.0% 0.0 0.0% 0.0 0.0% 0.0 0.0% 0.0 0.0% 0.0 0.0% 0.0 0.0% 0.0 0.0% 149.6 100.0% 149.6 100.0% 0.0 0.0% Total green asset ratio, Turnover 149.6 0.4% 149.6 0.4% 0.0 0.0% 2. Taxonomy-aligned economic activities (denominator) based on CAPEX. Row Economic activities based on KPI CAPEX (mn€) Amount and proportion of Taxonomy-aligned economic activity referred to in Section 4.26 of Annexes I and II to Delegated Regulation 2021/2139 in the denominator of the applicable KPI. Amount and proportion of Taxonomy-aligned economic activity referred to in Section 4.27 of Annexes I and II to Delegated Regulation 2021/2139 in the denominator of the applicable KPI. Amount and proportion of Taxonomy-aligned economic activity referred to in Section 4.28 of Annexes I and II to Delegated Regulation 2021/2139 in the denominator of the applicable KPI. Amount and proportion of Taxonomy-aligned economic activity referred to in Section 4.29 of Annexes I and II to Delegated Regulation 2021/2139 in the denominator of the applicable KPI. Amount and proportion of Taxonomy-aligned economic activity referred to in Section 4.30 of Annexes I and II to Delegated Regulation 2021/2139 in the denominator of the applicable KPI. Amount and proportion of Taxonomy-aligned economic activity referred to in Section 4.31 of Annexes I and II to Delegated Regulation 2021/2139 in the denominator of the applicable KPI. Amount and proportion of other Taxonomy-aligned economic activities not referred to in rows 1 to 6 above in the denominator of the applicable KPI. Amount and proportion (the information is to be presented in monetary amounts and as percentages) CCM + CCA Climate change mitigation (CCM) Climate change adaptation (CCA) Amount % Amount % Amount % 0.0 0.0% 0.0 0.0% 0.0 0.0% 0.0 0.0% 0.0 0.0% 0.0 0.0% 0.0 0.0% 0.0 0.0% 0.0 0.0% 0.0 0.0% 0.0 0.0% 0.0 0.0% 0.0 0.0% 0.0 0.0% 0.0 0.0% 0.0 0.0% 0.0 0.0% 0.0 0.0% 170.9 100.0% 170.9 100.0% 0.0 0.0% Total green asset ratio, CAPEX. 170.9 0.4% 170.9 0.4% 0.0 0.0% 219 1 2 3 4 5 6 7 8 1 2 3 4 5 6 7 8 Annual Report 2023 | novobanco3. Economic activities aligned with the Taxonomy (numerator) based on Turnover. Row Economic activities based on KPI Turnover (mn€) 1 2 3 4 5 6 7 8 Amount and proportion of Taxonomy-aligned economic activity referred to in Section 4.26 of Annexes I and II to Delegated Regulation 2021/2139 in the numerator of the applicable KPI. Amount and proportion of Taxonomy-aligned economic activity referred to in Section 4.27 of Annexes I and II to Delegated Regulation 2021/2139 in the numerator of the applicable KPI. Amount and proportion of Taxonomy-aligned economic activity referred to in Section 4.28 of Annexes I and II to Delegated Regulation 2021/2139 in the numerator of the applicable KP. Amount and proportion of Taxonomy-aligned economic activity referred to in Section 4.29 of Annexes I and II to Delegated Regulation 2021/2139 in the numerator of the applicable KPI. Amount and proportion of Taxonomy-aligned economic activity referred to in Section 4.30 of Annexes I and II to Delegated Regulation 2021/2139 in the numerator of the applicable KPI. Amount and proportion of Taxonomy-aligned economic activity referred to in Section 4.31 of Annexes I and II to Delegated Regulation 2021/2139 in the numerator of the applicable KPI. Amount and proportion of other Taxonomy-aligned economic activities not referred to in rows 1 to 6 above in the numerator of the applicable KPI. Total amount and proportion of Taxonomy-aligned economic activities in the numerator of the total green asset ratio based on turnover. Amount and proportion (the information is to be presented in monetary amounts and as percentages) CCM + CCA Climate change mitigation (CCM) Climate change adaptation (CCA) Amount % Amount % Amount % 0.0 0.0% 0.0 0.0% 0.0 0.0% 0.0 0.0% 0.0 0.0% 0.0 0.0% 0.0 0.0% 0.0 0.0% 0.0 0.0% 0.0 0.0% 0.0 0.0% 0.0 0.0% 0.0 0.0% 0.0 0.0% 0.0 0.0% 0.0 0.0% 0.0 0.0% 0.0 0.0% 149.6 100.0% 149.6 100.0% 0.0 100.0% 149.6 100.0% 149.6 100.0% 0.0 0.0% 3. Taxonomy-aligned economic activities (numerator) based on CAPEX Amount and proportion (the information is to be presented in monetary amounts and as percentages) CCM + CCA Climate change mitigation (CCM) Climate change adaptation (CCA) Amount % Amount % Amount % 0.0 0.0% 0.0 0.0% 0.0 0.0% 0.0 0.0% 0.0 0.0% 0.0 0.0% 0.0 0.0% 0.0 0.0% 0.0 0.0% 0.0 0.0% 0.0 0.0% 0.0 0.0% 0.0 0.0% 0.0 0.0% 0.0 0.0% 0.0 0.0% 0.0 0.0% 0.0 0.0% 170.9 100.0% 170.9 100.0% 0.0 0.0% 170.9 100.0% 170.9 100.0% 0.0 0.0% Row Economic activities based on KPI CAPEX (mn€) 1 2 3 4 5 6 7 8 Amount and proportion of Taxonomy-aligned economic activity referred to in Section 4.26 of Annexes I and II to Delegated Regulation 2021/2139 in the numerator of the applicable KPI. Amount and proportion of Taxonomy-aligned economic activity referred to in Section 4.27 of Annexes I and II to Delegated Regulation 2021/2139 in the numerator of the applicable KPI. Amount and proportion of Taxonomy-aligned economic activity referred to in Section 4.28 of Annexes I and II to Delegated Regulation 2021/2139 in the numerator of the applicable KPI. Amount and proportion of Taxonomy-aligned economic activity referred to in Section 4.29 of Annexes I and II to Delegated Regulation 2021/2139 in the numerator of the applicable KPI. Amount and proportion of Taxonomy-aligned economic activity referred to in Section 4.30 of Annexes I and II to Delegated Regulation 2021/2139 in the numerator of the applicable KPI. Amount and proportion of Taxonomy-aligned economic activity referred to in Section 4.31 of Annexes I and II to Delegated Regulation 2021/2139 in the numerator of the applicable KPI. Amount and proportion of other Taxonomy-aligned economic activities not referred to in rows 1 to 6 above in the numerator of the applicable KPI. Total amount and proportion of Taxonomy-aligned economic activities in the numerator of the total green asset ratio based on CAPEX. 220 Management ReportSustainability ReportFinancial StatementsAnnex 4. Economic activities that are eligible, but not aligned with the Taxonomy - Turnover. Row Economic activities based on KPI Turnover (mn€) 1 2 3 4 5 6 7 8 Amount and proportion of Taxonomy-eligible but not Taxonomy-aligned economic activity referred to in Section 4.26 of Annexes I and II to Delegated Regulation 2021/2139 in the denominator of the applicable KPI. Amount and proportion of Taxonomy-eligible but not Taxonomy-aligned economic activity referred to in Section 4.27 of Annexes I and II to Delegated Regulation 2021/2139 in the denominator of the applicable KPI. Amount and proportion of Taxonomy-eligible but not Taxonomy-aligned economic activity referred to in Section 4.28 of Annexes I and II to Delegated Regulation 2021/2139 in the denominator of the applicable KPI. Amount and proportion of Taxonomy-eligible but not Taxonomy-aligned economic activity referred to in Section 4.29 of Annexes I and II to Delegated Regulation 2021/2139 in the denominator of the applicable KPI. Amount and proportion of Taxonomy-eligible but not Taxonomy-aligned economic activity referred to in Section 4.30 of Annexes I and II to Delegated Regulation 2021/2139 in the denominator of the applicable KPI. Amount and proportion of Taxonomy-eligible but not Taxonomy-aligned economic activity referred to in Section 4.31 of Annexes I and II to Delegated Regulation 2021/2139 in the denominator of the applicable KPI. Amount and proportion of other Taxonomy-eligible but not Taxonomy-aligned economic activities not referred to in rows 1 to 6 above in the denominator of the applicable KPI. Total amount and proportion of Taxonomy-eligible but not Taxonomy-aligned economic activities in the denominator of the eligible ratio based on turnover. Amount and proportion (the information is to be presented in monetary amounts and as percentages) CCM + CCA Climate change mitigation (CCM) Climate change adaptation (CCA) Amount % Amount % Amount % 0.0 0.0% 0.0 0.0 0.0 0.0% 0.0 0.0% 0.0 0.0 0.0 0.0% 0.0 0.0% 0.0 0.0 0.0 0.0% 0.2 0.1% 0.2 0,0 0.0 0.0% 0.0 0.0% 0.0 0.0 0.0 0.0% 0.0 0.0% 0.0 0.0 0.0 0.0% 149.6 99.9% 149.6 99.9% 0.0 0.0% 149.8 100.0% 149.8 100.0% 0.0 0.0% 4. Economic activities eligible but not aligned with the Taxonomy - CAPEX Row Economic activities based on KPI CAPEX (mn€) 1 2 3 4 5 6 7 8 Amount and proportion of Taxonomy-eligible but not Taxonomy-aligned economic activity referred to in Section 4.26 of Annexes I and II to Delegated Regulation 2021/2139 in the denominator of the applicable KPI. Amount and proportion of Taxonomy-eligible but not Taxonomy-aligned economic activity referred to in Section 4.27 of Annexes I and II to Delegated Regulation 2021/2139 in the denominator of the applicable KPI. Amount and proportion of Taxonomy-eligible but not Taxonomy-aligned economic activity referred to in Section 4.28 of Annexes I and II to Delegated Regulation 2021/2139 in the denominator of the applicable KPI. Amount and proportion of Taxonomy-eligible but not Taxonomy-aligned economic activity referred to in Section 4.29 of Annexes I and II to Delegated Regulation 2021/2139 in the denominator of the applicable KPI. Amount and proportion of Taxonomy-eligible but not Taxonomy-aligned economic activity referred to in Section 4.30 of Annexes I and II to Delegated Regulation 2021/2139 in the denominator of the applicable KPI. Amount and proportion of Taxonomy-eligible but not Taxonomy-aligned economic activity referred to in Section 4.31 of Annexes I and II to Delegated Regulation 2021/2139 in the denominator of the applicable KPI. Amount and proportion of other Taxonomy-eligible but not Taxonomy-aligned economic activities not referred to in rows 1 to 6 above in the denominator of the applicable KPI. Total amount and proportion of Taxonomy-eligible but not Taxonomy-aligned economic activities in the denominator of the eligible ratio based on CAPEX. 221 Amount and proportion (the information is to be presented in monetary amounts and as percentages) CCM + CCA Climate change mitigation (CCM) Climate change adaptation (CCA) Amount % Amount % Amount % 0.0 0.0% 0.0 0.0 0.0 0.0% 0.0 0.0% 0.0 0.0 0.0 0.0% 0.0 0.0% 0.0 0.0 0.0 0.0% 0.0 0.0% 0.0 0.0 0.0 0.0% 0.0 0.0% 0.0 0.0 0.0 0.0% 0.0 0.0% 0.0 0.0 0.0 0.0% 170.9 100.0% 170.9 100% 0.0 0.0% 170.9 100.0% 170.9 100.0% 0.0 0.0% Annual Report 2023 | novobanco1 2 3 4 5 6 7 8 1 2 3 4 5 6 7 8 Amount % 0.0 0.0% 0.0 0.0% 0.0 0.0% 1.2 0.0% 0.0 0.0% 0.0 0.0% Amount % 0.0 0.0% 0.0 0.0% 0.0 0.0% 1.3 0.0% 0.0 0.0% 0.0 0.0% 5. Economic activities not eligible with the Taxonomy based on Turnover. Row Economic activities based on KPI Turnover (mn€) Amount and proportion of economic activity referred to in row 1 of Template 1 that is Taxonomy-non-eligible in accordance with Section 4.26 of Annexes I and II to Delegated Regulation 2021/2139 in the denominator of the applicable KPI. Amount and proportion of economic activity referred to in row 2 of Template 1 that is Taxonomy-non-eligible in accordance with Section 4.27 of Annexes I and II to Delegated Regulation 2021/2139 in the denominator of the applicable KPI. Amount and proportion of economic activity referred to in row 3 of Template 1 that is Taxonomy-non-eligible in accordance with Section 4.28 of Annexes I and II to Delegated Regulation 2021/2139 in the denominator of the applicable KPI. Amount and proportion of economic activity referred to in row 4 of Template 1 that is Taxonomy-non-eligible in accordance with Section 4.29 of Annexes I and II to Delegated Regulation 2021/2139 in the denominator of the applicable KPI. Amount and proportion of economic activity referred to in row 5 of Template 1 that is Taxonomy-non-eligible in accordance with Section 4.30 of Annexes I and II to Delegated Regulation 2021/2139 in the denominator of the applicable KPI. Amount and proportion of economic activity referred to in row 6 of Template 1 that is Taxonomy-non-eligible in accordance with Section 4.31 of Annexes I and II to Delegated Regulation 2021/2139 in the denominator of the applicable KPI. Amount and proportion of other Taxonomy-non-eligible economic activities not referred to in rows 1 to 6 above in the denominator of the applicable KPI. 38 483.7 100.0% Total amount and proportion of Taxonomy-non-eligible economic activities in the denominator of the applicable KPI (non-eligible ratio turnover). 38 484.8 99.6% 5. Non-eligible economic activities with CAPEX-based Taxonomy. Row Economic activities based on KPI CAPEX (mn€) Amount and proportion of economic activity referred to in row 1 of Template 1 that is Taxonomy-non-eligible in accordance with Section 4.26 of Annexes I and II to Delegated Regulation 2021/2139 in the denominator of the applicable KPI. Amount and proportion of economic activity referred to in row 2 of Template 1 that is Taxonomy-non-eligible in accordance with Section 4.27 of Annexes I and II to Delegated Regulation 2021/2139 in the denominator of the applicable KPI. Amount and proportion of economic activity referred to in row 3 of Template 1 that is Taxonomy-non-eligible in accordance with Section 4.28 of Annexes I and II to Delegated Regulation 2021/2139 in the denominator of the applicable KPI. Amount and proportion of economic activity referred to in row 4 of Template 1 that is Taxonomy-non-eligible in accordance with Section 4.29 of Annexes I and II to Delegated Regulation 2021/2139 in the denominator of the applicable KPI. Amount and proportion of economic activity referred to in row 5 of Template 1 that is Taxonomy-non-eligible in accordance with Section 4.30 of Annexes I and II to Delegated Regulation 2021/2139 in the denominator of the applicable KPI. Amount and proportion of economic activity referred to in row 6 of Template 1 that is Taxonomy-non-eligible in accordance with Section 4.31 of Annexes I and II to Delegated Regulation 2021/2139 in the denominator of the applicable KPI. Amount and proportion of other Taxonomy-non-eligible economic activities not referred to in rows 1 to 6 above in the denominator of the applicable KPI. 38 467.5 100.0% Total amount and proportion of Taxonomy-non-eligible economic activities in the denominator of the applicable KPI (non-eligible ratio turnover). 38 468.8 99.6% 222 Management ReportSustainability ReportFinancial StatementsAnnex Voluntary disclosures under Regulation (EU) 2020/852 As described in the previous sections, novobanco used only actual information, published by its counterparties, for the purposes of determining the level of alignment of its financing and investments with the Taxonomy criteria. Nevertheless, it is considered that exposure to the mortgage portfolio may, on a voluntary basis, have a representation of its potential alignment with the European Taxonomy using the best available (and real) information relating to novobanco's real estate collateral (and for which the Bank collects, records and maintains its information). In these terms, and for better transparency in the provision of information to the market, novobanco has determined the following potential alignment of its mortgage portfolio: Million Euros Retail exposures Of which, mortgages Eligible exposure Aligned exposure Not Elegible 31 december 2023 11,669 million € 9,939 million € 3,625 million € (36.5%) 45 million € (0.4%) 6,314 million € (63.5%) The potential alignment values presented above allow us to increase novobanco's consolidated GAR% (presented in the previous sections) by 0.12% (i.e., corresponding to a potential GAR% of 0.52% in the case of the Turnover view, and potential GAR% of 0.56% in the case of CAPEX). To calculate the above estimate, the following methodology was used: • Verification of substantial contribution: the substantial contribution to the objective of climate change mitigation was measured based on the year of construction of the building and its EPC level (according to the technical criteria of activity 7.7). For buildings constructed before 31 December 2020, only those with an EPC higher than A (inclusive) were considered; For buildings built after this date, it was not possible to guarantee their alignment, given the information needs inherent to the fulfilment of the technical criteria of activity 7.1. 223 • Verification of DNSH criteria: Compliance with the DNSH criteria for climate change adaptation has been assessed on the basis of an assessment of the exposure of immovable collateral to physical climate risks, selected from those covered in the risk matrix in Section 2 of Appendix A to the Taxonomy Regulation. This analysis only considered the exposure of collateral to acute physical risks (specifically, fires, floods and landslides), if relevant in the respective territory; Chronic risks were not considered as their impact on the integrity of real estate collateral is neither direct nor immediate, and it is not possible to conclude on the materiality of these risks for this type of infrastructure. The alignment estimate was informed by the risk level of each collateral, i.e., properties with a high or severe exposure to at least one of the risks considered, were excluded (classified as non-aligned). 6.2.5 Assessment of Climate Materiality 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 following these reporting recommendations will make climate information 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 we integrated this approach in the report rather than in a separate document. Annual Report 2023 | novobancoIn the table below we briefly disclose our approach on the four TCFD theme areas: governance, strategy, risk management, and metrics and targets. THEME AREA NOVOBANCO APPROACH (summary) STATED IN THE DOCUMENT GOVERNANCE novobanco's governance around climate-related risks and opportunities. Climate-related issues are managed in accordance with the Sustainability Governance model, led directly by the Executive Board of Directors and overseen by the General and Supervisory Board. Every month we hold a Sustainability Steering, with the participation of Executive Board members and multidisciplinary teams, responsible for coordinating the ESG approach at novobanco. a. Describe management's oversight of climate-related risks and opportunities. b. Describe management's role in assessing and managing climate-related risks and Chapter 6.1 Chapters 6.1; 6.2.3; 6.2.5 opportunities. STRATEGY To analyse the actual and potential impacts of climate- related risks and opportunities on novobanco’s business, strategy and financial planning novobanco develops its activities with the firm objective of making a positive contribution to the entire ecosystem in which it operates. Based on the Sustainability Policy, novobanco assumes a clear position of developing a sustainable business that wants to contribute to the transition to a low-carbon economy. To this end, we have subscribed to the "Business Ambition for 1.5ºC" initiative, which aims to define scientific targets for reducing novobanco's GHG emissions. We 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 SBTI Platform is in the process of assessing the Science Based Targets submission for commitments to reduce the portfolio's carbon footprint. The Sustainability Governance model allows novobanco to integrate physical and transition climate risks into its risk management models, as well as to leverage opportunities associated with climate change. a. Describe the climate-related risks and opportunities the organisation has identified Chapter 6.2.5.1 over the short, medium and long term. b. Describe the impact of climate-related risks and opportunities on the organisation’s Chapter 6.2.5.1 businesses, strategy and financial planning. c. Describe the resilience of the Organisation’s strategy, taking into consideration Chapter 6.2.5.1.2 different climate-related scenarios, including a 2°C or lower scenario. RISK MANAGEMENT The processes used by novobanco to identify, assess and manage climate-related risks The Bank has been gradually incorporating environmental and climate risks into its business model in order 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. a. Describe the organisation’s processes for identifying and assessing climate-related Chapter 6.2.5.1.3 risks . b. Describe the organisation’s processes for managing climate-related risks. c. Describe how processes for identifying, assessing, and managing climate-related risks Chapter 6.2.5.1.4 Chapter 6.2.5.1.4 are integrated into the organisation’s overall risk management. METRICS AND TARGETS Metrics and targets used to assess and manage relevant climate-related risks and opportunities A set of climate-related metrics and targets established in novobanco's ESG strategy are defined and are disclosed. 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. The metrics and progress made are disclosed on a semi-annual basis. a. Disclose the metrics used by the organisation to assess climate-related risks and Chapters 2.4; 2.5.; 2.6 opportunities in line with its strategy and risk management process. b. Disclose GHG emissions (Scopes 1, 2, and 3) and the related risks. c. Describe the targets used by the organisation to manage climate-related risks and opportunities and performance against targets. Chapters 4.1; 6.2.5.1.3 Chapters 2.4; 2.6; 2.7; 6.2.5.2.4 224 Management ReportSustainability ReportFinancial StatementsAnnex 6.2.5.1 Climate-Related Risks Climate change, which can have significant impacts on business models and the economy as a whole, is one of the greatest threats currently faced by society. When considering the impact of climate on the activities of financial institutions, a dual materiality perspective is commonly adopted: a) on the one hand, there are impacts arising from a financial and indirect logic - in other words, the materialisation of climate-related risks in the performance of our clients and counterparties; and b) on the other hand, there are environmental and social impacts that arise directly from the Bank's activities. novobanco has a dedicated strategy for its approach to environmental and social materiality, which is presented in section 2 of this report. Climate risks in financial materiality The risks stemming from climate change mainly encompass physical risks, such as extreme weather phenomena (storms, droughts, floods), and transition risks, which arise from the effort to adapt economic activities to more circular models with lower carbon footprints. Generally speaking, these risks affect financial institutions primarily through their impact on the activity of their clients and counterparties: physical risks can cause damage to companies' production assets, disruption of operations or even loss of revenue due to disruption of supply chains. Transition risks can affect the value of financial assets directly (e.g., assets related to fossil fuel energy) or indirectly, through the effort and cost of the adaptation required from companies. At the same time, climate change-related opportunities can be relevant. For instance, supporting the transition of companies or the development of infrastructures that are more resilient to physical risks can give rise to new products and services or even lead to increased turnover. While we know we are only at the beginning of this journey, we aim to support our clients in managing their own climate-related risks and opportunities by providing them sustainable financial solutions and the necessary guidance on the path to a low-carbon and more circular economy. Annual Report 2023 | novobanco novobanco seeks to understand and manage climate-related risks and opportunities through their identification and the assessment of their impact on its loan and investment portfolio. From a strategic discussion perspective, the bank adopts a systematic vision (as shown in the table below and described in the next section) of climate risks, which allows discussing their implications for business strategy and planning the best response to them. On the other hand, we have adopted a more granular approach to the management and control of these risks, using more detailed definitions (e.g., internal taxonomy) that allow for a comprehensive assessment of climate risk factors in the other financial and non-financial risk categories. TYPOLOGIES OF PHYSICAL RISK HORIZON Acute risks Caused by one-off events such as droughts, floods and storms. Chronic risks Risks caused by gradual changes in climate patterns such as rising temperature and sea levels, increased pressure on water resources, loss of biodiversity, or changes in land use. S S TYPOLOGIES OF TRANSITION RISK HORIZON Public policy, legislation and regulation The bank's obligation to integrate sustainability criteria into its products and services faces mounting pressure from regulatory requirements. Technological The need to incorporate new technologies into production processes may affect competitiveness and production costs. Market Shifts in supply and demand for products and services as the effects of climate change become increasingly mainstream. Reputational Perception by clients, stakeholders and society at large of the Bank's approach to ESG factors and their integration into the business. S S S S S Short-term Medium-term Long-term 225 Strategic analysis of main climate risks The table below describes how we analysed the main climate risks in terms of their potential impact on the Bank's strategy, business and activity, and the most significant measures we have adopted (or are in the process of adopting) in order to prevent or mitigate the risks and challenges identified. RISKS POTENTIAL IMPACT ON THE BANK'S STRATEGY AND BUSINESS OUR MITIGATION MEASURES Physical risks • Possible costs arising from damage to the Bank's physical • Business continuity planning that ensures an adequate Acute typology assets, including business disruption. • Possible increased absenteeism of the Bank's employees. • Business disruption for clients and counterparties due to damage to production assets or limitations in the value chain • Potential devaluation of collaterals on loans granted by the Bank. assessment of physical risks to the Bank's main assets and activities and the establishment of the necessary contingency measures. • Based on the reinforcement of physical risk assessment and quantification methodologies: a) adoption of a collateral acceptance policy that encompasses additional or differentiated requirements for formalising insurance policies on received collateral; and b) establishment of covenants and conditions for acceptance of financing that allow the inclusion of aspects pertaining to the continuity of the businesses being financed. Physical risks Chronic typology • Decrease in productivity and/or increase in operational and production costs in exposed sectors, impacting the financial performance of customers and counterparties or projects financed by the Bank. • Development of risk assessment methodologies, including strengthening contact/engagement with clients (and gathering information on their activity and projects). • Integration of climate risk assessment into loan and pricing decision processes. Transition risks Policies and legal framework • Limitations on the development of business strategies, • Changes to the governance and organisational model to increase in the Bank's compliance costs (or process inefficiency costs) as a result of inadequate implementation of legal and regulatory requirements, especially those of a prudential nature. • Increased operating costs for exposed sectors and companies. • Inability to invest (due to restrictions on access to financing) with an impact on the commercial activity of companies/ counterparties. ensure a dedicated monitoring of ESG issues. • Increased interaction with companies and counterparties, for a better insight into their transition and business adjustment challenges. • Development of products and services with structuring conditions and rationale aligned with our customers' transition needs. 226 Management ReportSustainability ReportFinancial StatementsAnnex RISKS POTENTIAL IMPACT ON THE BANK'S STRATEGY AND BUSINESS OUR MITIGATION MEASURES Transition risks Technology • Inability of the Bank's corporate clients and counterparties to adapt, due to limited investment capacity or restricted access to financing. • Increased interaction with companies and counterparties, for a better insight into their transition and business adjustment challenges. • Unavailability of the most suitable technologies (at a • Development of products and services with structuring reasonable cost) necessary to meet the new standards of business operations. conditions and rationale aligned with our customers' transition needs. • Business transformation and conversion costs, with an impact on the financial performance of customers and counterparties. • Establishment of partnerships that allow keeping abreast of market developments and offerings of solutions/ technology. Transition risks Market • Changes in supply and demand for ESG-oriented banking products and services, with an impact on the Bank's commercial competitiveness. • Promotion of awareness initiatives for the Bank's customers and counterparties, encouraging them to proactively address transition challenges. • General increase in market prices of technology and production factors with an impact on the competitiveness and financial performance of companies. • Development of risk assessment methodologies, including strengthening contact/engagement with clients (and gathering information on their activity and projects). • Limitations on the growth of companies and sectors exhibiting greater misalignment with efficiency and decarbonisation standards, resulting in reduced demand for their goods and services • Increased interaction with companies and counterparties, for a better insight into their transition and business adjustment challenges. • Development of products and services with structuring conditions and rationale aligned with our customers' transition needs. Transition risks • Risk of failing to meet stakeholders' expectations regarding the • Development, implementation and ongoing monitoring of a Bank's performance on critical climate change issues. Reputational • Constraints on investors’ and stakeholders’ perception of the Bank's brand image. • The Bank's involvement in instances of non-compliance with new ESG requirements, with an impact on its image and reputation. strategic ESG plan aimed at enhancing the Bank's readiness to effectively respond to the challenges posed by climate risks. • Adoption of conservative policies and criteria to ensure the highest level of rigour and compliance in the Bank's decisions and results. • Rigorous communication with the market. • Association of the Bank with clients, counterparties, suppliers • Implementation of supplier selection and monitoring controls. and other third parties with sensitive ESG profiles • Reputational risks identification and assessment exercise. 227 Annual Report 2023 | novobanco6.2.5.2 Risk identification and assessment • Social risks: relate to social rights and the general ESG risks represent the potential negative impacts deriving from the current or future effects of possible ESG risk factors implicit in clients and counterparties or in the Bank's assets and liabilities. The impacts of ESG risks are usually transmitted through ´traditional’ financial and non-financial risk categories. The integration of ESG risks within the taxonomy means that this category of risk, consistently with the other risks, is subject to processes of identification and materiality assessment. Once the materiality of these risks has been established, the standard formal management and monitoring processes are applied. The internal taxonomy comprises the following components where ESG risk factors are described as follows: • Climate and environmental risks: the main component of ESG risk, it concerns the quality and functioning of the environment and natural systems, including factors relating to climate change, biodiversity, pollution and waste management. wellbeing and interests of society and communities, and include factors such as equality, health, inclusion, labour relations, health and safety at work, human capital and communities’ development. • Governance risks: relate 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 as to its impacts on the other risk categories, with a particular focus on a) factors with an external origin; and b) climate and environmental-related factors. The internal impacts of risk factors are largely recognised and controlled under the risk management framework already established for the other risk categories: e.g., factors relating to the Bank's governance risks are managed under novobanco's governance and internal control model and compliance management, and the impacts of physical risk factors on the Bank's activity and facilities are managed under the business continuity management framework. OUR ESG RISK TAXONOMY Transition risk factors Physical risk factors Factors associated with the challenges, and respective impacts, resulting from the transition to a low GHG emission economy, including the effort required to change the energy mix (i.e., change to renewable sources) and the adoption of more circular business models. Factors arising from the physical manifestation of climate change and environmental degradation, analysed under two categories: a) acute - which result from climatic and meteorological events with immediate negative impacts; or b) chronic - which are determined by gradual changes in climatic and meteorological conditions, leading to progressive ecosystem degradation. Biodiversity factors Factors that relate to the quality and normal functioning of natural systems, including climatic factors, loss of biodiversity (impact rationale) or consumption of physical and energy resources (dependency rationale). Social risk factors Factors that relate to the basic components of wellbeing, security and the evolution of society and the economy. Governance factors Factors pertaining to the good governance of institutions and companies, which should ensure good management and control principles, including recognition of ESG challenges. Greenwashing factors These factors cross-cut all the other risk factors, and are related to the possible misalignment between the announced and the actual objectives and purpose of a given counterparty, issuer or instrument, with regard to ESG issues. Climate and environmental risks Other environmental risks Other ESG risks 228 Management ReportSustainability ReportFinancial StatementsAnnex 6.2.5.2.1 Climate Scenarios novobanco recognises that the characteristics of climate and environmental risks advise that their assessment, management, and monitoring take into consideration the potential scenarios for the evolution of their factors and the timeframe for their materialisation. The impact dynamics of transition and physical risk factors is dependent on the success of the implementation of policies and legislative proposals currently under execution (or still under discussion): for example, their success may lead to higher transition risk (due to economic activity adaptation or conversion efforts) and lower physical risk (through the ability to control the increase in global temperature). Scenarios serve as a reference point for risk approaches by providing insights into the evolution of climate change and the associated impacts. In other words, depending on the scenario being considered, different assumptions are considered for climate risk management strategies, methodologies, and procedures. Therefore, at the proposal of novobanco's sustainability and risk management functions, the bank adopts annual scenarios (along with the corresponding timelines) for the evolution of climate risk. These scenarios encompass the following: • The design of the scenario (e.g., the main variables and underpinning narrative); and • Each scenario's probability of occurrence. Acknowledging that our understanding, assessment, and management of climate risks are still in their early stages, in 2023 we embraced the scenarios outlined by the NGFS. These scenarios were attributed equal value, assuming an equal probability of occurrence for each, as indicated in the matrix presented further down. Each of the represented scenarios is further elaborated through complementary scenarios that expand their narratives, where novobanco considered: • Orderly transition - net-zero 2050 scenario: global warming is limited at up to 1.5º C through stringent climate policies, allowing to reach net-zero status in 2050. • Disorderly transition - disorderly scenario: Nationally Determined Contributions (NDCs) are maintained until 2030 and transition efforts are accelerated from them onwards. The level of global warming stays at 2°C. • Warmer world – current policies: this scenario simulates the greatest impacts from physical risks, assuming that only currently known policies are implemented. Based on the chosen scenarios, novobanco assesses different timeframes for the materialisation of risks, in a forward-looking perspective: by utilising projections of risk variables and metrics outlined in the scenarios, the bank assesses the evolving dynamics of risks over time. The year 2030 was selected as the reference year for the assessment of the materiality of the risks. The year 2030 was selected for the materiality assessment for the following reasons: • It is a public policy milestone at European level; • It provides a sufficiently long time horizon to assess the manifestation of risks but is still close enough to determine management measures with predictable effects and, to that extent, normally included in the Bank's planning and management processes; and • The year 2030 will be the timeframe considered for the establishment of plans and metrics for the Bank's balance sheet alignment/ transition. Use of climate scenarios by type of risk As far as possible, the assessment of ESG risks (and in particular of climate and environmental risks), adopts a forward-looking approach that acknowledges the dynamic nature of risk factors and consequently the varying resulting risk assessments. In the identification and assessment of the materiality of risks, novobanco considers climate scenarios for the components of a) transition risk; b) phisical risk and c) social risk. The Transition Risk assessment is underpinned by a sectoral approach that takes into account the expected impact of carbon prices, energy price volatility and technology investments - driven by energy transition efforts - on the profit margin of companies in each sector. The transition score covers a total of 79 sectors across agriculture, extractive industries, manufacturing and services, and considers the expected impact of upcoming carbon, energy and investment costs on a company's profit margin - the climate shock - taking into account the following component risk factors: 229 Annual Report 2023 | novobanco• Portfolio GHG intensity - carbon shock: The carbon shock component represents the carbon price cost based on the Scope 1 GHG emission-intensity of the activities covered by the ETS, namely electricity and heat production, energy-intensive industrial sectors including oil refineries, steel, iron, aluminium, metals, cement, lime, glass, ceramics, pulp, paper, cardboard, acids and bulk organic chemicals production, and the aviation sector; it reflects the portfolio's GHG intensity risk. • Portfolio energy intensity - energy shock: The energy shock component represents the cost of energy prices based on the intensity of energy consumption (by type of energy: electricity, coal, natural gas, crude oil and oil derivatives); it reflects the portfolio’s energy intensity risk. • Green investments in the portfolio - investment shock: The investment shock component represents the cost of green investments (CAPEX) based on the total distance to the Taxonomy requirements; it reflects the risk of portfolio misalignment with the Taxonomy. The Physical Risk model is based on the integration of 4 components: • Risk, Exposure, Vulnerabilities and Future Scenarios. The Risk component represents the intensity and/or frequency of each climatic hazard in a specific location, and was calculated for seven different types: Floods (river, urban and coastal), Extreme Heat, Landslides, Earthquake, Tsunami, Water Scarcity and Wildfires. • The Exposure component represents the location of the client's headquarters, specifically its municipality; • The Vulnerability component represents the inherent susceptibility of a specific location and sectoral land use (agroforestry, industry, urban areas and tourism) to the consequences of a climate hazard; • The Future Scenarios component represents how the Exposure may change according to three different climate scenarios for 2050 (NetZero 2050, Delayed Transition and Current Policies). The methodology for social risk places a strong emphasis on labour-related issues and is divided into six main topics, namely: • Freedom of association - the right of individuals to join or form groups, including trade unions and organisations, without interference or coercion. It allows people to collectively pursue common interests and protect their rights. RISK COMPONENTS SCENARISATION MATRIX - TIMEFRAMES CONSIDERED AND MAIN VARIABLES ASSESSED 2025 2030 2035 2040 2045 2050 2025 2030 2035 2040 2045 2050 2025 2030 2035 2040 2045 2050 2025 2030 2035 2040 2045 2050 2025 2030 2035 2040 2045 2050 2025 2030 2035 2040 2045 2050 Point- in-time (hist.) Evolution of GHG emissions, carbon prices, green CAPEX estimates. Point- in-time (hist.) Time and space evolution of each risk factor (e.g. floods, forest fires, drought and extreme heat). Point- in-time (hist.) No scenarisation - point-in-time assessment based on exposure characteristics at the reference date. Point- in-time (hist.) No scenarisation - point-in-time assessment based on exposure characteristics at the reference date. Point- in-time (hist.) No scenarisation - point-in-time assessment based on exposure characteristics at the reference date. Pontual (hist. No scenarisation - point-in-time assessment based on exposure characteristics at the reference date. Transition Physical Biodiversity Social Governance Greenwashing 230 Management ReportSustainability ReportFinancial StatementsAnnex • Forced labour - any work or service that is not • To justify, in a qualitative manner, the material (or performed voluntarily and is required of an individual under threat of violence or punishment. • Discrimination - unfair or prejudicial treatment of individuals or groups based on certain characteristics such as race, gender, age, religion, disability or other factors. • Child labour - the employment of children below the minimum age for employment as defined in the ILO Minimum Age Convention, 1973 (No. 138) and the ILO Worst Forms of Child Labour Convention, 1999 (No. 182). • Occupational Health and Safety - the necessary processes and measures to address workers’ safety and health. • Armed Conflicts - conflicts divided into six types of events (battles, explosions/remote violence, violence against civilians, riots, protests and strategic developments). 6.2.5.2.2 Risks materiality novobanco conducts its risk identification and assessment exercise on an annual basis. In this exercise, all the relevant risks for banking activity are analysed and their materiality is assessed through specific methodologies (considering the probability of occurrence and the significance of their impacts), with the following objectives: • To determine the relationship/integration rationale between ESG risks and the Bank's other risk categories; immaterial) impact of ESG risk factors, informing, for example, the ICAAP; and • To identify which risk categories and factors should be specifically managed and controlled in the framework of risk appetite and strategy. Those risks which prove to be material are subsequently subject to formal quantification, management/control and regular monitoring procedures. ESG risks are integrated in this exercise through recognition that their factors impact 'traditional' risk categories, using the following approach: • Matrices of ESG risk factors and metrics: the metrics are based on the components and factors previously described, and, whenever possible, adjusted according to business area and/or portfolio. The metrics permit to make an objective assessment of the relevance of the Bank's exposure and, when applicable, to determine the scenario for the respective risk factor. • Cross-cutting mapping of ESG risk factors and metrics for traditional risk categories: ESG risks are recognised as having the potential to materialise through the impact (or increase in risk) revealed in financial and non-financial risk categories. • Risk materiality assessment scale, integrated into the (traditional) risk categories, to rank the potential for materialisation (present and long-term) of the risk factors. This integration can be visualised in the table to the right, where ESG risk factors are correlated with traditional risk categories. DESCRIPTION OF TRADITIONAL RISK CATEGORY Credit risk Losses of capital (or remuneration) on banking book operations due the inability of a counterparty to meet its obligations. Includes sovereign and concentration risks. Liquidity and funding risk Interest rate risk on the banking book Market risk Losses arising from the Bank's present or future inability to settle its liabilities as they mature. Losses in the Bank's financial results or economic value due to unfavourable changes in market interest rates. Impacts from fluctuations in market prices or prices of factors that influence the valuation of instruments measured at fair value (e.g. credit spread, interest rate, exchange rate). Operational risk Financial impacts resulting from inadequacy or failures in processes, information systems or human conduct. Includes compliance, reputational and information systems risks. Pension fund risk Impacts resulting from the revaluation of Pension Fund's assets or liabilities that lead to liabilities exceeding the value of assets. Strategy risk Current or future impacts arising from changes in the Bank's strategy or restraints on its execution, or related to adverse impacts of business decisions. 231 Annual Report 2023 | novobanco Materiality assessment results novobanco conducted for the first time a comprehensive assessment of the materiality of the impact of ESG risks on its risk profile and activity with reference date of 31 December 2022. This exercise, reviewed in 2023 and whose results are summarised here, now incorporates risk management and control methodologies. For instance, the materiality assessment for credit risk within the credit segmentation model (ESG) determines the prioritisation of customers for information gathering and additional risk analysis. Due to the impact of transition and physical risk factors, ESG risks particularly affect credit and strategy risk: The adaptation effort of some industry sectors to which the Bank is exposed is reckoned to be particularly significant in the medium and long term, impacting the creditworthiness of these companies. On the other hand, the impact of physical risks on companies' activities (impact on business continuity) may be relevant due to the lack of mitigation measures. For the same reasons and given the weight of the most exposed sectors in the Bank's results, it was concluded that ESG risks have a relevant impact on strategy risk. CATEGORIES MAIN RISK FACTORS AND METRICS MAIN MITIGATION MEASURES ASSESSMENT Credit risk • GHG emissions intensity, carbon prices. • Insurance policies/collateral coverage • Energy intensity, energy costs. • Green CAPEX financial effort. • Disruption in value chains (social risk) . • Physical risk in real estate collateral and (location) of business activity. • Energy performance of real estate collateral. • Country risk variables (physical, transition, social & governance). • Sectoral approaches and policies • Sectoral diversification Liquidity and funding risk Interest rate risk on the banking book Market risk • Profile of main counterparties (physical risk, reputational risk). • Limited exposure to financial counterparties, • Location of depositors (physical risk). • Employment sectors of depositors (transition risk). namely insurance sector entities. • Geographical diversification of depositors. • Approach similar to that adopted for liquidity risk, including • Limited exposure to financial counterparties. assessment of possible impacts on contingent lines/ commitments. • Geographical diversification of depositors. • Replication of the analyses for credit risk. • Risk profile of issuer and counterparties. • Reputational profile of main counterparties . • Limited exposure to ESG-labelled • Robustness of ESG-labelled instruments - greenwashing risk. instruments. Operational risk • Location of the Bank's main facilities - physical risk • ESG profile (reputational rationale) of novobanco's main suppliers and counterparties. • Risk profile of issuers and counterparties. • Limited exposure to ESG-labelled instruments. • Low weight of real estate assets. Pension fund risk Strategy risk • Replication of market risk analysis. • Perfil de risco dos emitentes e contrapartes. • Energy performance of real estate assets. • Limitada exposição a instrumentos com • Location of real estate assets. etiqueta ESG. • Baixo peso de ativos imobiliários. • Level of income (e.g. net interest income and fees and • Management controls and regular commissions) dependent on sectors exposed to high transition risks. streamlining of the Bank's business plans and budget. • New products and approach to clients (transition finance). 232 Management ReportSustainability ReportFinancial StatementsAnnex 6.2.5.2.3 Analysis of Risks Transition risk and financed emissions novobanco acknowledges the direct correlation between the GHG emissions level of its counterparties and their transition risk: all else being equal, companies with higher GHG emission intensity tend to have greater adaptation or transition needs. Hence, without disregarding other methodologies for assessing transition risk, we monitor the emissions from the portfolio of companies that we finance (i.e., our scope 3 emissions, category 15 - investments). Whenever feasible, we try to obtain information reported by our clients. Where not available, we adopt estimation-based approaches. The methodology we employ for measuring emissions is based on the "Partnership for Carbon Accounting Financials" (PCAF) global standard for the accounting and disclosure of GHG emissions financed through loans and investments. To calculate emissions, we apply an allocation factor to the GHG emission values of counterparties (actual or estimated) in order to determine the share that novobanco must report due to its financing of the company's activity. In summary: novobanco GHG emissions = company GHG emissions x allocation factor. We have adopted the following PCAF data quality hierarchy to calculate the emissions of our counterparties (scopes 1, 2, 3, where available): • Score 2: counterparty emissions calculated on the basis of emissions reported by the counterparties, incorporating financial information obtained from the IES (Simplified Business Information) and the companies' annual reports. • Score 4: this score incorporates financial information from the companies, to which sectoral carbon intensity ratios (tCO2/M€ revenues) are subsequently applied at the level of the company's Economic Activity Class (80 sectoral divisions applied). • Score 5: lowest data quality level, with sectoral carbon intensity ratios applied at the level of the company's Economic Activity Class (80 sectoral divisions applied). We estimate that our emissions related to loans to companies amounted in 2023 to 2.6 million tonnes of CO2 equivalent, covering approximately 99.8% of novobanco's corporate loans portfolio (exposure value, excluding financial activities and public administration). The carbon intensity of novobanco's financing portfolio is therefore around 199/tCO2 e per million euros financed. Both the total emissions financed and the carbon intensity of novobanco's corporate loans portfolio have therefore increased significantly. More than 85% of this increase can be explained by the increase in scope 3 real information available and the remainder by the significant increase in scope 1 emissions related to an exposure that was previously based on sector averages (PCAF score 4 or 5) and is now based on real data (PCAF score 2). Financed emissions (loan portfolio) 2023 2022 Oustanding amount in scope (mn €) 13 052 13 014 Total emissions S1 (tCO2) 1 521 809 1 393 901 Total emissions S2 (tCO2) 148 275 155 125 Total emissions S3 (tCO2) 922 372 150 083 Total emissions (tCO2) 2 592 456 1699 109 Carbon Intensity (tCO2/M€) 199 131 It was only possible to use real emissions information reported by companies for 6% of the loan portfolio analysed (scope 1). However, the real emissions data reported represent 43% of the total emissions financed, which can be explained by the concentration in larger companies and in sectors that are particularly relevant for climate policy. Notwithstanding the foregoing, novobanco recognises the significant improvement in the availability and quality of GHG emissions information reported by companies and believes that this improvement will continue to accelerate in the coming years, not only as a result of legal and/or regulatory reporting requirements applicable to an increasing number of companies, but above all as a result of the development and evolution of transition plans and monitoring practices by an increasing number of companies operating in the market. 233 Annual Report 2023 | novobanco novobanco thus reinforces its commitment to the ongoing monitoring and disclosure of data on the emissions it finances, as well as to the continuous improvement of the quality and comprehensiveness of the data collected, which is essential for further analysis and monitoring of impacts, and for expanding the implementation plans of its own transition plan and strategy. The portfolio's financed emissions are heavily concentrated in three carbon-intensive sectors, which account for 80% of total emissions but only 32% of the portfolio's outstanding amount: • C - Manufacturing; • H - Transportation and storage; and • E - Water collection, treatment and distribution, sanitation and waste management. Transition risk additional methodologies As a complement to the analysis of GHG emissions, we use additional classifications of our corporate loan book and monitor KRIs in our Sustainability Steering, namely: - the Climate Policy Relevant Sectors (CPRS) is used by novobanco to better assess and monitor transition risk, focusing on sectors negatively affected or on which the impact is uncertain. This methodology takes into account the following factors: direct and indirect contribution to GHG emissions (such as the production and distribution of fossil fuels or renewable energy); relevance for climate policy (such as the cost structure sensitivity to regulatory or tax changes based on GHG emissions); and importance in the energy value chain (production, use, consumption). Taking into account the sectors with "negative" and "uncertain" impact and the classification of sectors included in the "Annual Report on the Banking Sector's Exposure to Climate Risk" (July 2023, BP), the exposure of novobanco's loan and investment portfolio to these CPRS sectors in December 2023 was 47% (better than the average for the banking sector in 2021 of 59%, as per this report, having declined from 48% in December 2022. Breakdown of sectoral contribution to carbon footprint (loan portfolio) 2022 2023 Other Technical Activities Mining and quarrying Human health and social Accommodation and food activities Electricity, gas, water Construction Wholesale and retail Agriculture, forestry and fishing Water collection , treatment Transportation and storage Manufacturing industry 2.6 M tCo2e Loan portfolio financed emissions (tCo2e), 2023 +53% Var. 22/23 199 Carbon intensity (tCo2e) per €1 million +52% Var. 22/23 0% 10% 20% 30% 40% 50% (1) Calculation based on a best effort approach, excluding companies in the sectors "Financial and insurance activities" and "Public administration and defence; Obligatory Social Security”. 234 Management ReportSustainability ReportFinancial StatementsAnnex We analyse the bank's exposure to CPRS on a monthly basis in terms of both this exposure’s share of the volume of loans and investments, and its share of income from the loan component. - Carbon-intensive sectors - we analyse the loan and investment portfolios’ percentage of exposure to these sectors and its evolution. In December 2023 this percentage was 11% (considering the loan and investment portfolios’ exposure to "high" and "very high" intensity sectors). - Exposure to sectors excluded from the benchmarks aligned with the Paris Agreement - we analyse the loan and investment portfolios’ percentage of exposure to these sectors and its evolution. In December 2023 this percentage was 11% (considering the loan and investment portfolios’ exposure to "high" and "very high" intensity sectors). Transition risk in real estate collateral As the economy transitions to a low carbon economy, market policies and trends may indirectly impact the financial value of real estate - demand for properties with lower energy efficiency levels may diminish and these may also become less competitive due to the development of more energy-efficient alternatives (to which the legislative changes under discussion contribute). Therefore, the transition risk is also assessed with regard to the real estate collateral on the Bank's credit operations. The energy classification of properties will also affect the alignment of novobanco's loan portfolio with its commitments to reduce its carbon footprint. During 2023, the Bank made a strong effort to collect and register the energy certification levels of its real estate collateral. Currently, 36% of the collateral is registered based on the actual level of energy certification, and if we consider residential properties with loans granted after 2013, this coverage rises to 55%, and for commercial properties to 46%. In terms of actual EPC data, 34% of properties currently have a B- or higher certification. We have introduced new procedures for lending against property, requiring customers to provide an energy performance certificate. Exposure by sector (loan portfolio) Distribution by GHG emissions intensity 56% 25% 8% 6% 4% Low Medium High Very High Other Other B - Mining and quarrying S - Other services E - Water collecttion, treatment A - Agriculture, forestry and fishing Q - Human health and social D - Electricity, gas, water M - Technical activities I - Accomodation and food activities H - Transports and storage F - Construction G - Wholesale and retail C - Industry 0% 5% 10% 15% 20% 25% 30% 235 Annual Report 2023 | novobancoVarious computer developments are also underway that will permit to generate information on the energy performance of properties financed in the past. At present, it is mandatory to obtain the energy certificate for new loans secured by property. It is worth noting that novobanco proactively manages the energy efficiency of collaterals and has long offered financing solutions with favourable terms for properties with better energy performance levels. Assessment of physical risks In addition to transition risk, novobanco also devotes special attention to monitoring physical risks. To this end, the Bank uses methodologies based on the classification of risks by geographical location, following regulatory recommendations. The methodology used to calculate the results reported here is based on public information - ThinkHazard! - which is prepared by an initiative led by the World Bank. Of the various physical risk typologies available, we use those with the greatest impact on the structure of the properties financed, i.e., a) floods, b) fire, and c) landslides, as shown by the colours in the maps below. The maps are used individually, to showcase a specific risk typology, or together, for a global understanding of the exposure to risk. It should be noted that this is a conservative approach, insofar as a district's classification represents the most severe classification within its municipalities. Property collateral by energy class % of number of properties (residential class) 2023,2022 A B C D E F G 2023 2022 7% 6% 22% 20% 46% 47% 19% 22% 4% 2% 1% 3% 1% 1% 236 Management ReportSustainability ReportFinancial StatementsAnnex Exposure to physical risks The exposure to physical risks results from the aggregate assessment of the typologies of a) floods; b) fires; and c) landslides. The risk level is depicted by the colour of the district, while novobanco’s risk exposure is indicated as the percentage of concentration of real estate collateral (residential and commercial). This concentration is measured by the number of properties serving as real estate collateral as of 31 December 2023. Overall, the following results are to be considered: Due to demographic factors, financed real estate tends to concentrate in major urban areas, which, given the nature of the national territory, are predominantly situated along the coast, and therefore exposed to specific risks such as flooding and landslides. Fire risks are more pronounced in the central and interior areas of the country, where there is no significant concentration of properties financed by the Bank. The assessment presented here takes a conservative approach by representing a district's level of risk based on the most severe classification among its municipalities. Nevertheless, the exposure to physical risks may be relevant, given the characteristics of the national territory. The Bank's insurance policies and requirements therefore play an important role in protecting the value of collaterals. Concentration of real estate collaterals % of number of properties High Medium Low Residual Concentration level of the Bank’s lending <5% <10% <15% <20% <25% ≥25% V. do Castelo < 5% Braga < 10% Vila Real < 5% Bragança < 5% < 20% Porto Viseu < 5% Aveiro < 10% Guarda < 5% Castelo Branco < 5% Portalegre < 5% Portalegre Coimbra < 5% Leiria < 5% Santarém < 5% Lisboa 25% > 5% Açores Madeira Aggregate risk classification: flood, fire and landslide < 5% Setúbal < 15% Évora < 5% Beja < 5% Faro < 5% Maps of physical risk in Portugal – external information High Medium Low Residual Risk of flood1 Risk of fire Risk of landslide 1 Urban, river and coastal flood 237 Annual Report 2023 | novobanco4.2.5.2.4 Integration of Risks Our transition finance model Our climate risk management strategy assumes that we will maintain business and lending relationships with sectors and companies facing relevant transition challenges. novobanco has consistently shown a leading role in supporting the Portuguese business community. Therefore, our approach is centred on providing direct support to facilitate our clients' transition. To this end, we consider it essential to know and assess the challenges that climate and energy transition will pose to the companies we finance. On the basis of this assessment, we intend to: a) strengthen our offer of products and services by adapting them to the specific transition or conversion needs of each company; b) Identify the potential impact of these challenges on each company's finances; c) partner with specialists in the different areas of sustainability that can help our clients make the necessary investments to integrate sustainability into their strategy. We anticipate that the companies that better prepare for their transition will demonstrate enhanced capabilities for operational and financial performance. This should be acknowledged in terms of their access to financing and the associated conditions. novobanco intends to reward this reduction in uncertainty and better performance through the access conditions to finance, and has already introduced price advantages for some products linked to sustainability. Conversely, the identification of ESG challenges that are not compatible with the evaluation of the viability and financial capability of the company and the Bank's clients, may lead to decisions to restrict financing or to increase prices. In this way, novobanco embraces a balance sheet transition/ alignment strategy based on the transition trend observed among its customers, which will be promoted, whenever possible, by the offer of products and services. Methodologies for balance sheet alignment As part of its strategic planning, novobanco has been developing methodologies since the end of 2021 that will allow it to set objectives to progressively align its balance sheet. Firstly, we recognised the need for methodologies that would provide us with an encompassing view of climate and ESG risks within our portfolios, such as through the scoring model. Next, we proceeded with the development of methodologies that would allow us to conduct an effective risk assessment based on information collected from our clients and the specific characteristics of each company (including its performance and strategic planning) - the ESG corridor. Finally, the implementation of this approach should allow us to identify priority clients and operations for our transition finance model: that is, clients with good financial capability and viability but facing, now or in the future, relevant transition challenges. The implementation of these components follows the structure outlined below, which is driven by: a) the alignment targets to be adopted (such as emissions or other factors pertaining to risk reduction or mitigation); b) sectoral financing policies and strategies; and c) the Bank's strategic priorities (commercial and internal organisation). Alignment guidelines, requirements and targets ESG Scoring Sectoral policies Business leads ESG-adjusted segmentation matrix Exemption corridor ESG corridor ESG covenants Design of products & services novobanco transition plan First phase of developments (2022-2023): ESG scoring, segmentation model and design of ESG risk assessment methodologies (v.g., ratings). 3 2 0 2 - 1 2 0 2 4 2 0 2 In this phase, an ESG risk scoring assessment was conducted for all customers in the non-financial corporate segment, providing a comprehensive overview of the portfolio's overall risk profile. Subsequently, the segmentation criteria were revised to facilitate the operationalisation of the different methodologies, including initiating customer contacts for risk assessment purposes. In the final phase (2023 and 2024), the methodologies operate at a regular pace, enabling the assessment of customers and operations, with the results being incorporated into the decision-making processes related to risk and/or pricing. 238 Management ReportSustainability ReportFinancial StatementsAnnex The integrated operation of the model Monitoring of climate risks The ESG segmentation matrix is calibrated based on balance sheet alignment objectives and risk appetite - all corporate clients are subject to ESG scoring, The Bank has made progress in integrating ESG risk assessment and quantification into credit management: a) ESG scoring ratings; b) ESG information collected from clients; c) minimum safeguards in place for financing. During 2023, novobanco revised the action plan for integrating ESG risk into loan granting, with the aim of prioritising the integration of ESG risk assessment into credit risk assessment for the most important transactions and in sectors with the highest ESG risk ("high" and "severe" risk according to our sectoral ESG scoring), guaranteeing the inclusion of an ESG risk assessment in the credit analysis of all transactions that meet these criteria. The analyst's assessment will be supported by sector guidelines and client ESG data (public data and consultation with clients, where appropriate) and will be implemented in the first half of 2024. novobanco is also accelerating the collection of data for disclosure and portfolio risk management purposes, in order to maximise coverage of the largest exposures in the sectors most exposed to ESG risk ("high" and "severe" risk). This data collection effort will leverage publicly available data as well as client engagement, and should allow for an increase in the weight of real data in the 2024 disclosures and upcoming stress tests. It should also be noted that the Portuguese banking ecosystem is seeking to create a common platform for collecting ESG risk data from commercial clients. The platform is due to be launched in 2024 and should allow banks to significantly speed up data collection, both for risk management and for credit decisions. This platform should be highly beneficial to our data collection efforts and we intend to gradually integrate it into our C&E risk analysis and disclosure processes as an alternative to novobanco's proprietary questionnaires. novobanco designed its Risk Appetite and Credit Risk strategy based on a medium and long-term perspective, while ensuring that short-term effects are anticipated and mitigated. This strategy and the indicators that support it are incorporated in the Bank's RAF-RAS. The analysis of the main climate risks related metrics is reported on a monthly basis to novobanco's management bodies. KRIs that monitor various risk indices are also presented on a monthly basis in the Sustainability Steering, such as: • Exposure to climate-sensitive sectors; • Exposure to the most carbon-intensive sectors, • Exposures collateralised by residential and commercial properties with the worst energy performance certificates (EPC); • Production of green finance and investments; • Alignment with the taxonomy. It should also be said that both the risk strategy and the risk appetite serve as guidance for the Bank's incentives system and remuneration policies, ensuring alignment with key risk metrics and corresponding objectives. Currently, the remuneration policy of novobanco's management body includes assessment metrics for the Bank's ESG performance. MONTHLY MONITORING Green production (financing, investment) No exposure to excluded sectors Operations with Minimum Safeguards Exposure to taxonomy eligibility Exposure to climate-exposed sectors Sectoral exposure by carbon intensity Exposure to physical risk 239 Annual Report 2023 | novobanco6.2.6 Our next goals in climate and environmental risk management Our ESG strategy includes the following key activities by thematic area: A) Business Strategy Strategic guidelines: • To understand the short, medium and long term impact of climate and environmental risks on the business environment in which we operate, so that we can make informed, consistent and strategic decisions; • To strengthen the integration of climate and environmental risks affecting the business environment in the short, medium or long term. Challenges ahead: • To strengthen the application of the policy on exclusions and minimum safeguards for financing and investment in certain sectors and activities, transposed to the risk appetite policy, and establish robust control and implementation processes; • To enhance the integration of climate and environmental KRIs within the risk appetite policy (RAF/RAS); • To continue to develop appropriate key risk indicators and to set appropriate limits to effectively manage climate and environmental risks; • To ensure effective monitoring of exposures and responses to climate and environmental risks; • To collect data and assess the Bank's portfolio in light of the taxonomy. C) Risk management Challenges ahead: • To assess and monitor the business environment in which we operate, particularly in terms of products and services, and strengthen the Bank's offer tailored to support our client's journey towards climate transition; Strategic guidelines: • To incorporate climate and environmental risks into risk management, with the objective of monitoring and mitigating these risks over a sufficiently long timeframe; • To identify the risks arising from climate change and environmental degradation in key industry sectors, geographic areas and related products and services, reinforcing our sectoral policies; • To define and monitor key performance indicators (KPIs) at the level of business lines (cascading down); • To determine which climate and environmental risks affect business strategy in the short, medium and long term, e.g., using scenario analyses and stress testing. B) Risk governance and risk appetite Strategic guidelines: • To consider climate and environmental risks when developing the business strategy and objectives; • To improve the climate risk management model; • To define the Appetite for climate risk. • To continuously monitor the effect of climate change and environmental factors on current market exposures. Challenges ahead: • To further enhance our risk materiality assessment, adopting a holistic and well-documented approach to evaluate the impact of climate and environmental risks on the existing risk categories; • To implement an enhanced approach to risk identification/assessment and to the development of risk methodologies, including methodological definitions and customer ESG scoring results (segmentation model); • To strengthen mitigation measures for C&E risks; • To adopt a strategic approach to measure and mitigate climate and environmental risks in accordance with the risk appetite strategy, and accordingly adapt policies and procedures, risk limits and risk control. 240 Management ReportSustainability ReportFinancial StatementsAnnex F) Quantification methodologies and stress testing Strategic guidelines: • To enhance stress testing approaches; • To develop methodologies for quantifying climate risks. Challenges ahead: • To develop stress testing models focusing on climate risks; • To improve methodologies for quantifying climate risks as the depth of historical data increases. D) Management of credit risk Strategic guidelines: • To consider climate and environmental risks at all stages of the credit granting process and portfolio risk monitoring. Challenges ahead: • Full integration of C&E risks into the financing origination framework; • This phase corresponds to the development of risk methodologies that will provide the foundation for adjusting integration procedures and the decision- making framework to incorporate climate and environmental risks; • To define and apply sectoral guidelines to credit origination processes enabling a more detailed ESG risk analysis of larger loans; • To design methodologies to provide integrated assessment of client/transaction risk profile and EU Taxonomy rating (alignment); • To consider climate-related risks in the assessment of collateral and in particular of real estate collateral. E) Management of operational risk Strategic guidelines: • To consider the possible adverse impacts of climatic and environmental events on business continuity and also on reputational risks; Challenges ahead: • To assess the impact of physical risks on all operations, including the ability to recover quickly and continue to provide services; • To ensure that remuneration policies and practices encourage behaviour aligned with our climate and environmental approach (risk), as well as with the voluntary commitments undertaken by the institution; • To preemptively identify future sources of climate- related risks and/or litigation related to its own activities, to undertake an assessment of these risks and to adopt mitigation measures for the risks identified. 241 Annual Report 2023 | novobanco7 ESG PERFORMANCE INDICATORS 242 Management ReportSustainability ReportFinancial StatementsAnnex 7.1 Environmental Indicators Environmental Indicators - Materials consumed White paper Internal use (tonnes) Paper for Internal use (Kg/employee) IT and electronic consumables 2023 2022 2021 23 vs 22 172.8 41.1 148.2 36.2 155.2 37.0 16.6% 13.3% Toner (units)1 2 482.0 2 856.0 - -13.1% Environmental Indicators - Energy Electricity Electricity consumption (kWh) 13 822 891.5 13 183 802.0 16 296 473.1 Total electricity consumption (GJ) 49 762.4 47 461.7 58 667.3 Electricity consumption (kWh/employee) 3 284.1 3 223.4 3 886.6 Diesel Generator diesel consumption (litres)2 Generator diesel consumption (GJ)2 4 549.5 164.0 3 610.8 130.2 504.2 18.2 Vehicles diesel consumption (litros) 1 352 296.1 1 563 746.0 1 620 056.6 Vehicles diesel consumption (GJ) 48 617.7 56 219.8 58 244.3 Gasoline Vehicles gasoline consumption (litres) Vehicles gasoline consumption (GJ) 35 035.3 1 148.5 1 680.0 55.1 840.0 27.5 Total energy consumption (GJ) 99 962.7 103 866.8 116 957.3 Total energy consumption per employee (GJ) 23.7 25.4 27.9 4.8% 4.8% 1.9% 26.0% 26.0% -13.5% -13.5% 1 985.4% 1 985.4% -3.8% -6.5% Trips Number of vehicles Number of flights 958 1 275 922 783 957 517 3.9% 62.8% 1) The value of 2022 toners has been recalculated due to new ordering procedures.The value of 2022 toners has been recalculated due to new ordering procedures. 2) Diesel consumption is an estimate based on the number of hours generators were operating novobanco, Banco Best and GNBGA 243 Annual Report 2023 | novobanco Environmental Indicators - Emissions (tCO2e)* 2023 2022 2021 23 vs 22 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) 3 675.3 3 583.6 12.8 78.9 1 146.3 1 146.3 4 158.1 3 999.2 10.2 148.7 811.3 811.3 4 696.1 4 311.8 1.3 382.9 2 937.5 -11.6% -10.4% 25.5% -46.9% 41.3% 2 937.5 41.3% 1 534.8 2 013.3 2 386.5 -23.8% Total (Scopes 1 and 2) 4 821.6 4 969.4 7 633.6 -3.0% Indirect emissions (Scope 3) 4 234.4 6 102.6 4 184.2 -30.6% Emissions from Employees’ business trips, including flights Emissions from employees’ home/ work daily trips*** Emissions over the life cycle of the paper consumed Emissions from the paper recycling process Emissions from water consumption Emissions from wastewater treatment 520.8 357.4 149.4 3 608.9 82.2 3.7 9.3 9.5 5 649.5 3 909.8 71.0 3.2 10.6 10.8 76.6 3.9 11.0 - Total (Scopes 1, 2 and 3) 9 056.0 11 072.0 11 817.8 45.7% -36.1% 15.8% 15.6% -12.3% -12.4% -18.2% Total (Scopes 1, 2 and 3) per employee 2.2 2.7 2.8 -20.5% Financed Emissions 2 592 458.0 1 699 109.0 Total (Scopes 1, 2 and 3 with financed emissions) 2 609 423.7 1 720 441.6 - - 52.6% 51.7% **See methodological notes **Scope 2 calculation by location-based method since 2018 only. The Total (S1+S2) was calculated using the Market-Based approach *** Scope novobanco 244 Management ReportSustainability ReportFinancial StatementsAnnex Environmental Indicators Water consumption 2023 2022 2021 23 vs 22 Water consumption from public supply network (m3) 35 010.2 39 870.2 41 355.1 -12.2% Water consumption per employee (m3/employee 8.3 9.8 9.9 -15.1% Environmental Indicators Waste management Paper sent for recycling (tonnes) Cardboard sent for recycling (tonnes) Other papers Plastic Bank Cards sent for recycling (tons) Toner sent for recycling (units) 2023 2022 2021 23 vs 22 157.4 61.8 4.1 1.7 na 99.0 51.9 - 1.4 117.4 66.3 - 0 2 950 5 944 59.0% 19.1% - 21.4% - 245 Annual Report 2023 | novobanco7.2 Social Indicators Employees Total Men (#) Men (%) Women (#) Women (%) 2023 4 209 1 926 45.8% 2 283 54.2% 2022 4 090 1 880 46.0% 2 210 54.0% 2021 23 vs 22 4 193 1 944 46.4% 2 249 53.6% 2.9% 2.4% -0,2 p.p. 3.3% 2 p.p. Employment contract Total permanent workforce Men (#) Men (%) Women (#) Women (%) Total Fixed-term Employees Men (#) Men (%) Women (#) Women (%) 2022 4 026 1 857 46.1% 2 169 53.9% 64 23 35.9% 41 64.1% 2021 23 vs 22 4 153 1 929 46.4% 2 224 53.6% 40 15 37.5% 25 62.5% 0.5% 0.1% -0.2 p.p. 0.9% 0.2 p.p. 154.7% 195.7% 5.8 p.p. 131.7% -5.8 p.p. 2023 4 046 1 858 45.9% 2 188 54.1% 163 68 41.7% 95 58.3% 246 Management ReportSustainability ReportFinancial StatementsAnnex Trainees and independent professionals* 2023 2022 2021 23 vs 22 Trainees Men (#) Women (#) Temporary work Men (#) Women (#) Provision of service Men (#) Women (#) Total (#) 10 5 5 13 5 8 1 1 0 24 10 4 6 42 10 32 2 0 2 54 14 5 9 30 7 23 4 2 2 48 0.0% 25.0% -16.7% -69.0% -50.0% -75.0% -50.0% 100.0% - -55.6% * 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. Employess Academic Qualifications University Education Men (#) Men (%) Women (#) Women (%) High school/Basic Education Men (#) Men (%) Women (#) Women (%) 2023 2022 2021 23 vs 22 3 117 1 356 33.2% 1 761 43.1% 973 524 12.8% 449 11.0% 3 100 1 357 32.4% 1 743 41.6% 1 093 587 14.0% 506 12.1% 4.1% 4.3% 0.4 p.p. 4.0% 0.4. p.p. -0.9% -2.3% -0.6 p.p. 0.7% -0.3 p.p. 3 245 1 414 33.6% 1 831 43.5% 964 512 12.2% 452 10.7% 247 Annual Report 2023 | novobancoEmployee distribution by gender and professional category 2023 2022 2021 23 vs 22 Senior leadership Total Men (#) Men (%) Women (#) Women (%) < 30 years old 30 to 50 years old > 50 years old Leadership Total Men (#) Men (%) Women (#) Women (%) < 30 years old 30 to 50 years old > 50 years old Technical Total Men (#) Men (%) Women (#) Women (%) < 30 years old 30 to 50 years old > 50 years old Administrative Total Men (#) Men (%) Women (#) Women (%) < 30 years old 30 to 50 years old > 50 years old Assistance Total Men (#) Men (%) Women (#) Women (%) < 30 years old 30 to 50 years old > 50 years old 481 295 7.0% 186 4.4% 1 242 238 373 205 4.9% 168 4.0% 0 244 129 2 265 1 003 23.8% 1 262 30.0% 145 1 456 664 1 083 416 9.9% 667 15.8% 143 562 378 7 7 481 307 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 7 472 301 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% 0.2% 0.2% 0 - 0 4 3 0 - 0 4 4 0 - 0 4 3 248 0.0% -3.9% -0.5 p.p. 6.9% 1 p.p. 0.0% -8.7% 10.7% -3.9% -6.0% -0.4 p.p. -1.2% -0.2 p.p. - -10.3% 11.2% 4.4% 5.0% 0.5 p.p. 3.9% 0.3 p.p. 43.6% -4.5% 21.8% 3.7% 5.9% 0.3 p.p. 2.5% -0.1 p.p. 70.2% -12.1% 17.8% 0.0% 0.0% - - - - 0.00% 0.0% Management ReportSustainability ReportFinancial StatementsAnnex Annual Report 2023 | novobanco 2023 2022 2021 23 vs 22 A D A D 326 207 159 262 155 171 180 121 25 109 98 48 83 76 77 82 83 68 8 141 121 49 85 128 A 66 39 27 27 34 5 D 455 254 201 68 156 231 2021 6.2% 3.5% 2.7% 1.1% 2.3% 2.8% A D 105.0% -21.0% 101.3% -22.7% 108.5% -19.0% 116.9% -2.0% 77.9% -2.4% 212.5% -40.6% 23 vs 22 1.3 p.p. 0.5 p.p. 0.8 p.p. 1.1 p.p. 0.6 p.p. -0.4 p.p. Staff turnover (%) 2023 20222 6.3% 3.1% 3.2% 2.7% 2.4% 1.2% 5.0% 2.6% 2.4% 1.6% 1.8% 1.6% 2023 2022 2021 23 vs 22 A D R A D R E S R 370 277 3.3% 218 314 6.4% 168 126 1.5% 92 155 3.0% 202 151 1.8% 126 159 3.4% 211 102 1.2% 124 132 27 97 78 1.1% 0.9% 84 10 88 97 2.6% 2.2% 129 1.7% - - - - - - - - 69.7% -11.8% -3.1 p.p. 82.6% -18.7% -1.5 p.p. 60.3% -5.0% -1.6 p.p. 70.2% 15.9% -1.4 p.p. 57.1% 0.0% -1.1 p.p. 170.0% -39.5% - 0.8 p.p. 249 Admissions and departures Total Gender Men Women < 30 years old 30 to 50 years old > 50 years old A - Admissions; D - Departures Total Gender Men Women Age bracket < 30 years old 30 to 50 years old > 50 years old Staff turnover including trainnees, temporary work and provision of services (%) Total Gender Men Women Age bracket < 30 years old 30 to 50 years old > 50 years old A - Admissions; D - Departures Performance evaluation 2023 2022 2021 23 vs 22 M F T M F T M F T M F T Employees (#) 1 671 1 966 3 637 1 884 2 173 4 057 2 074 2 318 4 392 -11.3% -9.5% -10.4% Senior Leadership (#) Senior Leadership (%) Leadership (#) Leadership (%) Technical (#) Technical (%) 261 160 421 286 166 452 294 168 462 -8.7% -3.6% -6.9% 85.0 92.0 _ - - - - - - - - - 200 163 363 254 199 453 285 220 505 -21.3% -18.1% -19.9% 91,7 95.9 - - - - - - - - - - 864 1 104 1 968 860 1 041 1 901 951 1 152 2 103 0.5% 6.1% 3.5% 90.5 90.9 - - - - - - - - - - Administrative (#) 339 539 878 476 767 1 243 536 778 1 314 -28.8% -29.7% -29.4% Administrative (%) 86.3 82.8 Assistance (#) Assistance (%) 7 100 0 - - 7 - - 8 - - 0 - - 8 - - 8 - - 0 - - 8 - - -12.5% - - - - - -12.5% - 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; T - Total Promotion Function change (#) Merit (#) Total (#) 2023 303 1 038 1 341 2022 283 1 002 1 285 2021 23 vs 22 251 811 1 062 7.1% 3.6% 4.4% 250 Management ReportSustainability ReportFinancial StatementsAnnex Training hours / employee Total Gender Men Women 77 610.3 91 822.9 Professional category Senior Leadership 19 568.4 Men Women Leadership Men Women Technical Men Women Administrative Men Women Assistance Men Women T - Total; A - Average 11 856.9 7 711.5 16 099.7 9 087.7 7 012.0 77 498.1 33 917.4 43 580.7 56 238.1 22 719.3 33 518.8 29.0 29.0 0.0 2023 2022 2021 23 vs 22 T A T A T A T A 169 433.2 40.3 164 052.3 40.1 179 294.0 42.8 3.3% 0.4% 40.3 40.2 40.7 40.2 41.5 43.2 44.3 41.7 34.2 33.8 34.5 51.9 54,6 50.3 4.1 4.1 0.0 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 41.2 44.2 19.9 19.4 20.7 21.5 21.2 22.0 48.1 48.3 47.9 50.9 52.7 49.8 79 999.0 99 295.0 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 3.0% 3.6% 7.1% -1.4% 0.5% 0.2% 7.1% 2.5% 23.4% 15.5% -12.0% -8.4% -11.7% -6.1% -12.3% -11.4% -2.3% -6.3% -0.8% -5.5% -3.3% -6,9% 16.7% 12.4% 20.6% 14.0% 14.2% 11.4% 52.6% 53.4% 52.6% 53.4% - - Parental Leave 2023 2022 2021 22 vs 21 Employees who took parental leave 63.0 83.0 58.0 107.0 M F M F 62.0 55.0 58.0 58.0 M 39 39 F 88 50 M F 8.62% -22.4% 6.90% -5.2% 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 - - 51 103 36 80  -  - Return to work rate 98.4% 66.3% 100% 54.2% 100.00% 56.8% -1.6 p.p. 12.1 p.p. Retention rate after 12 months of work M - Men; F - Femal - - 87.9% 96.3% 92.3% 90.0% - - 251 Annual Report 2023 | novobancoHealth Services 2023 2022 2021 23 vs 22 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) 3 210 7 104 - 1 396 467 2 493 7 038 583 1 057 457 3 007 7 597 11 952 928 383 28.8% 0.9% - 32.1% 2.2% 2 400.0 4 337.0 6 772.0 -44.7% 2 920 1 016 2 645 354 2 091 659 1 875 510 2 408 724 2 674 186 39.6% 54.2% 41.1% -30.6% 252 Management ReportSustainability ReportFinancial StatementsAnnex Health and Safety Indicators 2023 2022 2021 23 vs 22 Work related accidents Men Women Occupational diseases Men Women Deaths Men Women Accident rate Men Women Lost day rate Men Women Absenteeism rate Men Women Health and safety trainning Health training hours (#) 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 (#) 27 10 17 - - - 0 0 0 3.8% 3.0% 4.6% 0.0% 0.0% 0,0% 3.2% 2.3% 3.9% 29.0 520.5 2 938.0 3 487.5 107 2 150 1 0 0 6 - - - - 31.0% -63.6% 88.8% - - - - - - 1.1 p.p. 0.2 p.p. - - 0.1 p.p. 0.0 p.p. -0.3 p.p. -0.3 p.p. -0.3 p.p. -78.3% -69.6% 10.8% -38.0% -7.9% 18.8% -9.5% -100.0% - 100.0% 27.3% - -33.33% -13% -7.9% 38 4 34 9 3 6 0 0 0 5.0% 1.1% 8.3% 0.1% 0.0% 0.1% 2.4% 1.6% 3.1% 29 11 18 - - - 0 0 0 3.9% 3.2% 4.6% 0.1% 0.1% 0.1% 2.7% 1.9% 3.4% 836.0 1 341.0 6 665.0 8 842.0 3 844.0 4 409.0 6 013.0 14 266.0 178 16 168 2 0 0 11 3 15 184 164 164 19 152 0 0 144 14 - 10 161 151 253 Annual Report 2023 | novobancoAssociativism Employees covered by Collective Bargaining Agreements (#) Employees covered by Collective Bargaining Agreements (%) Unionized employees (#) Unionized employees (%) 2023 4 113 97.7% 3 931 93.4% 2022 3 964 96.5% 3 786 92.6% 2021 23 vs 22 4 032 96.2% 3 901 93.0% 3.8% 1.2 p.p. 3.8% 0.8 p.p. 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 €) Support to retired employees (thousand €) Expenses with senior residences, day-care centres, home, support, medicines and other basic necessities (#) Support for active and retired employees (thousand €) Christmas gift (#) Christmas gift (thousand €) Under the ACT (Collective wage agreement) (thousand €) 2023 702.2 280 380.5 360 218.1 105 103.6 126.2 66 828.4 3 032 121.8 2022 706.5 367 423.4 268 196.5 94 86.6 87.7 67 794.2 3 160 126.4 30 782.9 17 904.8 33 645.2 Residential mortgage loans (thousand €) 22 653.1 16 345.2 31 611.9 Acquisition of consumer goods (thousand €) Social support In portofolio 2 129.8 6 000.0 1 559.6 2 033.4 0.0 0.0 100.0% 274 141.5 257 487.2 271 856.0 Residential mortgage loans (thousand €) 265 530.0 247 930.6 260 419.1 Acquisition of consumer goods (thousand €) 8 611.5 9 556.6 11 436.9 254 2021 705.9 398 454.4 224 164.1 91 87.4 124.7 23 vs 22 -0.6% -23.7% -10.1% 34.3% 11.0% 11.7% 19.6% 43.9% 68 -1,5% 830.6 3 171 126.8 4,3% -4.1% -3.6% 71.9% 38.6% 36.6% 6.5% 7.1% -9.9% Management ReportSustainability ReportFinancial StatementsAnnex Employees with disability more than 60% (Law No. 4/2019) Senior leadsership (#) Leadsership (#) Technical (#) Adminsitative (#) Assistance (#) Total (#) 2023 2022 2021 23 vs 22 M 3 4 21 17 1 46 F 6 3 44 22 0 75 T 9 7 65 39 1 121 M 3 4 16 14 1 38 F 5 4 42 22 0 73 T 8 8 58 36 1 111 T - - - - - - T -12.5% -12.5% -12.5% -8.3% 0% 159 7.3 Governance Indicators Gender Equality (under-represented gender) Board of Directors and 1st line Sennior Leadership (underrepresented gender) Senior leadership and leadership Equal pay indicator Ratio of women's total remuneration to men's total remuneration per employee category Senior leadsership Leadsership Technical Adminsitative Assistance Total 2023 2022 2021 23 vs 22 27.3% 38.7% 5.4% 0.87 0.96 0.90 0.92 - 0.81 27.5% 36.2% 5.7% 0.90 0.97 0.90 0.91 - 0.81  25.5% -0.2 p.p. 36.7% 5.9% 2.5 p.p. -0.3 p.p. 0.88 0.97 0.90 0.90 - 0.76 -0.03 p.p. -0.01 p.p. 0.00 p.p. 0.01 p.p. - 0.00 p.p. Scope of the Novobanco Group includes: Board of Directores of the Group's companies (novobanco + novobanco dos Açores Banco Best GNBGA) + senior leadership of novobanco Suppliers that endorsed novobanco Group’s relationship principles and have a sustainability scoring (%) 2023 2022 2021 23 vs 22 75.7% 61.1% 52.0% 14.6 p.p. 255 Annual Report 2023 | novobanco 8 ABOUT THIS REPORT The 2023 Sustainability Report complements and details the information contained in the 2023 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: sustentabilidade@novobanco.pt 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 288 and 289. 256 Management ReportSustainability ReportFinancial StatementsAnnex 8.1 Methodological Notes Social Staff Turnover New hires rate Accident Rate Absenteeism Rate Retention Rate Return to Work Rate Average training hours per gender Average training hours per professional category Branches located in low density areas Senior leadership Leadership Technical Administrative Assistance ((Number of admissions + departures)/2) / total employees) and ((Number of entries + exits / 2) total employees)2 with interns, temporary work and Service Provision New hires in 2022/total number of employees in 2023 Number of accidents at work/Hours worked*1000000 Number of absences (without maternity / paternity leave)/Possible working hours*100 Total number of employees retained in 12 months after returning to work fol- lowing parental leave/Number of employees who returned from parental leave in the previous year * 100, by gender 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. 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 Number of branches located in the 165 low-density municipalities identified by Deliberation 55/2015 of the Interministerial Commission for Coordination, Portugal 2020 Department and team management and coordination, with responsibilities and activities at the most strategic level, directly linked with top management. Function that operates at the level of planning, managing, supervising, and monitoring the business objectives. Defines and monitors the execution of an annual budget and decides over measures to mitigate deviations. Defines and delegates objectives to lower levels and monitors their achievement. Works in the planning, coordination and execution of the team's daily activities and projects. Guarantees the implementation of decisions made by management. Manages work teams and ensures good and efficient interpersonal relationships. Operationalizes technical knowledge in an area of expertise. Has a breadth of knowledge about their area of professional activity and adjacent functional activities. Supervises activities of a more technical and operational nature, as well as verifying the correct execution of related tasks performed by others. Performs tasks related to the Bank's general business hours. Processes and archives information, respecting archive rules and procedures. Completes and checks documentation to support the Bank's operational and daily activities, as well as assisting and directing, by telephone or in person, internal and external people to the company, depending on the type of information or service required. Participates in the preparation of daily tasks of a very operational nature, carrying out the necessary activities, under guidance. Performs routine operations and checks the general condition of facilities and equipment, ensuring their maintenance and conservation. 257 Annual Report 2023 | novobancoEnvironment Water Electricity Generators diesel Energia PCI diesel (road) PCI petrol (road) Density of diesel (generators) Density of diesel (generators) 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 and remaining suppliers. 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) When calculating emissions from energy consumption, the following formula was used: Emission = Consumption X * Emission factor (FE)X It also includes the following emission factors and parameters used to calculate Greenhouse Gas (GHG) emissions: - Diesel (generators): 0.078 ton CO2eq/GJ • Light car, gasoline, engine capacity < 1,400 cm3 - 0.164 kg CO2e/km (Source: APA – NIR 2023) • Light car, gasoline, engine capacity ≥ 1,400 and < 2,000 cm3 - 0.195 kg CO2e/km (Source: APA – NIR 2023) • Light car, gasoline, engine capacity ≥ 2000 cm3 - 0.228 kg CO2e/km (Source: APA – NIR 2023) • Light car, diesel, engine capacity < 2,000 cm3 - 0.172 kg CO2e/km (Source: APA – NIR 2023) • Light car, diesel, engine capacity ≥ 2,000 cm3 - 0.172 kg CO2e/km (Source: APA – NIR 2023) • Hybrid Car - 0.142 kg CO2e/km (Source: APA – NIR 2023) When calculating emissions from energy consumption, the following formula was used: Emission = Consumption X * Emission factor (FE)X It also includes the following emission factors and parameters used in calculating GHG emissions: • Mainland electricity production – market based method - 0.217 kg CO2e/ kWh (Source: 2023 supply mix – EDP Business Customers) • Mainland electricity production – location based method - 0.137 kg CO2e/ kWh (Source: APREN, energy mix 2022) • Electricity production on the island of Madeira – location and market method - 0.518 kg CO2e/kWh (Source: EE Madeira 2022) • Electricity production on the island of the Azores – location and market method - 0.446 kg CO2e/kWh (Source: EDA, Report and Accounts 2022) 258 Management ReportSustainability ReportFinancial StatementsAnnex Environment CO2 Emissions Scope 3 The calculation includes emissions resulting from the movements ofemployees at work, Home/Work/Home (CTC) travel, using the following formula: Emission = Trip (km) It also includes the following emission factors and parameters used when calculating GHG emissions: • Diesel Car - 0.210 kg CO2e/km (Source: APA - NIR 2021) • Gasoline car - 0.208 kg CO2e/km (Source: APA - NIR 2021) • LPG car - 0.193 kg CO2e/km (Source: APA - NIR 2021) • Hybrid Car - 0.144 kg CO2e/km (Source: APA - NIR 2021) • Electric car - 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) • Metropolitan - 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 (gasoline) - 0.132 kg CO2e/km (Source: APA - NIR 2021) • Motorcycle (electric) - 0.012 kg CO2e/km (Consumption of 9 kW/100 km) (Source: APREN 2021) • Motorcycle (diesel) – 0.134 kg CO2e/km (Source: APA - NIR 2021) • Airplane Emission = Travel (Km) X * FEX * Take-off Factor * RFI2 • It also includes the following emission factors and parameters used when calculating GHG emissions: • Airplane, Domestic Flight FE CO2 - 0.17147 kg CO2e/km (Source: GHG Protocol: Emission Factors from Cross-Sector Tools 2017) • Airplane, Short Course Flight FE CO2 - 0.09700 kg CO2e/km (Source: GHG Protocol: Emission Factors from Cross-Sector Tools 2017) • Airplane, Long Haul Flight FE CO2 - 0.11319 kg CO2e/km (Source: GHG Protocol: Emission Factors from Cross-Sector Tools 2017) • Airplane, Domestic Flight FE CH4 - 0.0001 kg CO2e/km (Source: DEFRA 2021) • Airplane, Short Course Flight FE CH4 - 0.00001 kg CO2e/km (Source: DEFRA 2021) • Airplane, Long Haul Flight FE CH4 - 0.00001 kg CO2e/km (Source: DEFRA 2021) • Airplane, Domestic Flight FE N2O - 0.00122 kg CO2e/km (Source: DEFRA 2021) • Airplane, Short Course Flight FE N2O - 0.00076 kg CO2e/km (Source: DEFRA 2021) • Airplane, Long Haul Flight FE N2O - 0.00096 kg CO2e/km (Source: DEFRA 2021) • Takeoff Factor - 109% (Source: DEFRA/IPCC 1999) • RFI - 1.9% (Source: DEFRA/IPCC 1999 It also includes the following emission factors and parameters used in thecalculation of GHG emissions from wastewater treatment: 0.0019 kgCH4/per day (the day corresponded to 8 hours and were considered the days of in-person work of employees in 2021), with the following factors: • Global Warming Potential (GWP)/(GWP) CO2 – 1 • GWP (GWP) CH4 – 28 • GWP (GWP) N2O - 265 It also includes the following emission factors for calculating emissions associated with paper consumption, treatment of paper sent to recycling and water consumption: • Paper life cycle - 0.3 t CO2e/t paper consumed (Source: CEPI - Key Statistics 2020) • 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 APA – Agência Portuguesa do Ambiente (Portuguese Environment Agency) 259 Annual Report 2023 | novobancoGovernance Remuneration Ratio Sustainability Scoring Clients Customer service Global satisfaction Confidence Net Promoter Score Very Satisfied Clients Complaint rate per 1000 active clients Branches located in low density areas Ratio of 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% 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 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 260 Management ReportSustainability ReportFinancial StatementsAnnex 8.2 GRI Table SR – Sustainability Report MG- Mangement Report FD – Financial Demonstrations novobanco Group novobanco Group (novobanco, novobanco dos Açores, Banco Best e GNBGA novobanco DECLARATION OF USE novobanco reported in accordance with the GRI Standards for the period from January 1 to December 31, 2023 VERSION GRI: Foundation 2021 GRI STANDARDS APPLICABLE SECTORS N.A. on the date of publication of this Report GRI 2: GENERAL DISCLOSURES 2021 Page in the Report SDG GC Principles Omissions Scope 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 – pages 25-126;132. The 2023 Sustainability Report covers the novobanco Group – novobanco, novobanco dos Açores, Banco Best and GNBGA. MR – pages 16-23; 28-34; 68-75. FS – page 298, note 1. The 2023 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. 2-3 Reporting period, frequency and contact point Reporting period: 1 January to 31 December 2023 2-4 Restatements of information Frequency: yearly Sustainability points of contacts: sustentabilidade@novobanco.pt The 2023 Sustainability Report covers the novobanco Group scope (novobanco, novobanco dos Açores, Banco Best and novobanco Gestão de Ativos Group). Significant changes occurred during the period covered by the report: Benjamin Dickgiesser joined the Executive Board of Directors (“CAE”) of novobanco in the current mandate (2022-2025), in the role of Chief Financial Officer. Appointment of Evgeniy Kazarez as Board Member General and Supervision (“CGS”) for the current term (2021-2024). 261 Annual Report 2023 | novobancoGRI 2: GENERAL DISCLOSURES 2021 Page in the Report SDG GC Principles Omissions Scope Increase in the Bank's share capital to the amount of 6 567 843 862.91 Euros. Nani Holdings S.G.P.S., S.A – 75.00% Fundo de Resolução (Resolution Fund) – 13.04% Directorate General for the Treasury and Finance – 11.96% SR – pages 124-125. MR – pages 124-125. 2-5 External assurance SR – pages 288-289. ACTIVITIES, VALUE CHAIN AND OTHER BUSINESS RELATIONSHIPS 2-6 Activities, value chain and other business relationships SR – pages 123; 140- 152; 171- 173;177-191; 203-207;225-230; MR – pages 19; 20-25;68-73 FS – page 298, note 1 Sustainability website> Sustainable Business The 2023 Sustainability Report covers the novobanco Group scope (novobanco, novobanco dos Açores, Banco Best and novobanco Gestão de Ativos Group). 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 24 (11 men and 13 women) in 2023 it represent 0,56% of the group's total workforce. Links Labor Trainees Temporary workers Service providers Total M W Variation 2023/2022 5 5 1 5 8 0 0% -69.0% -50.0% 11 13 -55.6% 262 Management ReportSustainability ReportFinancial StatementsAnnex GRI 2: GENERAL DISCLOSURES 2021 Page in the Report SDG GC Principles Omissions Scope 2-7 Employees 2-8 Workers who are not employees GOVERNANCE OF THE ORGANIZATION 2-9 Governance structure and composition 2-10 Nomination and selection of the highest governance body 2-11 Chair of the highest governance body 2-12 Role of the highest governance body in overseeing the management of impacts Please see note 2-4. SR – pages 121; 176-195;246-255. SR – pages 121; 176-195;246-255. MR – pages 48-49. SR – pages 247; 249. 8 8 6 6 5, 16 5, 16 16 16 SR – pages 197-199. MR – pages 84-111; 28-32. Novobanco Group website > About novobanco > Governance SR – pages 127-130. MR – pages 2-30, 75-96. Novobanco Group website > About novobanco > Company Documents > Articles of association SR – pages 197-199. MR – pages 28-32; 84-111. Novobanco Group website > About novobanco > Company Documents > articles of association 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 and 2030. 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. 263 Annual Report 2023 | novobancoGRI 2: GENERAL DISCLOSURES 2021 Page in the Report SDG GC Principles Omissions Scope 2-13 Delegation of responsibility for managing impacts 2-14 Role of the highest governance body in sustainability reporting 2-15 Conflicts of interest 2-16 Communication of critical concerns 2-17 Collective knowledge of the highest governance body 2-18 Evaluation of the performance of the highest governance body 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 197-199. MR – pages 28-32; 84-111. Novobanco Group website >About novobanco > Governance 16 Board Of Directors, Committees, Sustainability Steering. SR – pages 197-199. MR – pages 28-32; 84-111. Novobanco Group website > About novobanco > Governance The Annual Report and the Sustainability Report are approved by the Executive Board of Directors and the General and Supervisory Board. SR – pages 197-199. MR – pages 28-32; 84-111. Novobanco Group website > About novobanco > Governance > Conflict of interests policy SR – pages 197-199. MR – pages 28-32; 84-111. Novobanco Group website > About novobanco > Governance > Whistleblowing Policy SR – pages 197-199. MR – pages 28-32; 84-111. Novobanco Group website > About novobanco > Governance 16 4 The performance evaluation of CAE members was carried out annually considering the performance and defined objectives. The attribution of annual variable remuneration is defined based on compliance with financial and non-financial, individual and key performance indicators (KPI).corporate, agreed with each member of the Executive Board of Directors. 264 Management ReportSustainability ReportFinancial StatementsAnnex GRI 2: GENERAL DISCLOSURES 2021 Page in the Report SDG GC Principles Omissions Scope 2-19 Remuneration policies 2-20 Process to determine remuneration 2-21 Annual total compensation ratio KPIs are definitions based on a combination of the Bank's overall financial performance, areas of member's individual responsibility (including the development of employees reportingdirect and the compliance with ESG factors). For more information consult Remuneration Policy for Management and Supervisory Bodies available on the institutional website, Novobanco Group > About Us > Governance > Corporate Documents and Main Regulations SR – pages 197-199. MR – pages 27-30, 75-96. SR – pages 127-130. MR – pages 27-30; 89-92. Novobanco Group website > About novobanco > Governance > Company documents SR – pages 197-199. AR – pages 28-32; 99-105. Novobanco Group website > About novobanco > Governance > Company documents Median annual total compensation for all employees (excluding the highest-paid individual); €42 447,60 CEO total annual remuneration: € 990 000,00 Change in CEO remuneration: 155.7% Ratio of the CEO total annual compensation to the median annual total compensation for all employees (excluding the highest-paid individual) 23.32 In 2023 and within the scope of the Collective Bargaining Agreement, there was a salary increase of 4.50%. Average Remuneration: 6.2% STRATEGY, POLICIES AND PRACTICES 2-22 Statement on sustainable development strategy AR – CEO Talk com Mark Bourke pages 3-9. SR – pages 121-123. 265 Annual Report 2023 | novobancoPage in the Report SDG GC Principles Omissions Scope 16 10 16 10 16 10 16 10 16 8 GRI 2: GENERAL DISCLOSURES 2021 2-23 Policy commitments 2-24 Embedding policy commitments 2-25 Processes to remediate negative impacts SR – pages 171-178; 180;185; 204-206. MR – 93-100. novobanco Group website > About novobanco > Company Documents SR – pages 171-178; 180;185; 204-206. MR – 93-100. novobanco Group website > About novobanco > Company Documents SR – pages 171-177; 180;185, 204-206. MR – pages 93-100. 2-26 Mechanisms for seeking advice and raising concerns SR – pages 126,178. MR – page 94. 2-27 Compliance with laws and regulations 2-28 Membership associations STAKEHOLDER ENGAGEMENT During 2023, the Group will notwas aware of cases of non-compliance with laws and regulations SR – pages 139; 144; 157-162; 173. Sustainability website > Sustainable business > Our approach and policies 2-29 Approach to stakeholder engagement SR – 113;115;139;144-145, 157-163; 171;173. 2-30 Collective bargaining agreements SR – page 254. 4 266 Management ReportSustainability ReportFinancial StatementsAnnex GRI 3: DISCLOSURES ON MATERIAL TOPICS 2023 3-1 Process to determine material topics Page in the Report SDG GC Principles Omissions Scope SR – pages 128-131. 3-2 List of material topics SR – pages 128-131. ECONOMIC INDICATORS TOPIC: ECONOMIC PERFORMANCE 3-3 Explanation of the material topic and its Boundary The Strategic Plan defined for the 2024-2026 three-year period aims to provide the novobanco Group with the necessary conditions to fulfill its mission of being the trusted bank that supports families and companies throughout their lives. This mission guides and underpins everything that novobanco does and allows it to build long-term value, invest for growth, focused on delivering a social dividend with a positive contribution to society and driving sustainable returns for shareholders. novobanco's business model is based on 2 segments of commercial banking: companies and individuals. In both, it seeks to anticipate and respond to the needs of its customers, offering innovative, effective and transparent banking products and services, based on high ethical and integrity standards, and based on quality and satisfaction assessment mechanisms. novobanco's strategic approach is based on four pillars, which support its competitive positioning. During the current year, integration was reinforced between the bank's strategy and its actions in terms of environmental, social and governance strengthening actions. Each of the bank's strategic pillars is aligned with its ESG vision and priority SDGs; • Elevate the bank's customer-centric approach, with differentiated value propositions, leveraging a digital and omnichannel approach. reinforcing its role in supporting the needs arising from the energy transition of its customers; • Provide simple and efficient operations, which improve the banking experience, and ensure a more sustainable environmental and social footprint; • Develop people and culture, attracting and actively cultivating a team of qualified professionals who are a reference to our bank's fundamental values, including the objectives of inclusion, diversity and strengthening the well-being of all employees. • Ensure sustainable performance, in terms of risk management and strengthening the integration of ESG components into the business, including climate and environmental risk. The Group monitors indicators defined within the scope of the strategic plan associated with this topic on a monthly basis. 267 Annual Report 2023 | novobancoGRI 3: DISCLOSURES ON MATERIAL TOPICS 2023 Page in the Report SDG GC Principles Omissions Scope 201-1 Direct economic value generated and distributed Banking Income: €1 438.7M MR – page 63. Banking Income: €1 438.7M MR – page 63. General and administrative expenses: €182.9 million MR - Page 65. Staff Costs: €252.7 million MR - page 65. Payments to providers of Capital - Shareholders - There was no distribution of dividends Taxes: €15.1M million FS – page 373, note 28 Community Investments: €0,474 million in donations SR – pages 159-161. Economic Value Distributed: €451.1M Economic Value Retained €987.6M 2, 5, 8, 9 201-2 Financial implications and other risks and opportunities due to climate change SR – pages 141-16; 223-241. MR – pages 51-59. 13 201-3 Defined benefit plan obligations and other retirement plans 201-4 Financial assistance received from governance TOPIC: MARKET PRESENCE 3-3 Explanation of the material topic and its Boundary SR – pages 156-162;176-195;252. FS – page 388, note 35. See Indicator 3-3 Aspect: Economic Performance of this table. Additionally, novobanco has participated over the years in several sustainable financing initiatives in partnership with its competitors. In 2019 he 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. Integrated into 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 is part of several working groups that aim to create methodologies and tools to respond to sustainability challenges for both individuals and companies. The Bank monitors indicators associated with this topic and reports them in the Report & Accounts, on the institutional website and in the Sustainability Report. 268 Management ReportSustainability ReportFinancial StatementsAnnex GRI 3: DISCLOSURES ON MATERIAL TOPICS 2023 Page in the Report SDG GC Principles Omissions Scope 202-1 Ratios of standard entry level wage by gender compared to local minimum wage 202-2 Proportion of senior management hired from the local community TOPIC: INDIRECT ECONOMIC IMPACTS 3-3 Explanation of the material topic and its Boundary 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 1.51 times higher than the national minimum wage). 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 – pages 30-31. 5, 7, 8 6 8 6 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 141-152. MR – pages 68-73. 203-2 Evaluation of the management approach SR – pages 128-131: 140-155. MR – pages 6-43; 68-73. 2, 5, 7, 9, 11 1, 2, 3, 8, 10, 17 269 Annual Report 2023 | novobancoGRI 3: DISCLOSURES ON MATERIAL TOPICS 2023 TOPIC: PROCUREMENT PRACTICES 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 205-1 Total number and percentage of operations assessed for risks related to corruption Page in the Report SDG GC Principles Omissions Scope 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 – pages 128-131; 139-140; 171-173;241. 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 92.1% of the expenses refer to national suppliers vs 7.9% of international suppliers. SR – pages 171-177;255. 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. The 2023 Sustainability Report covers the novobanco Group – novobanco, novobanco dos Açores, Banco Best and GNBGA. Financial crime management Communications to judicial entities Answers to requests from judicial entities Total number of reported cases of corruption and related offenses (Decree-Law 109-E/2021) 571 1349 0 MR – page 95. 270 16 10 Management ReportSustainability ReportFinancial StatementsAnnex GRI 3: DISCLOSURES ON MATERIAL TOPICS 2023 Page in the Report SDG GC Principles Omissions Scope 205-2 Total number and percentage of employees trained in the organization's anti-corruption policies and practices 205-3 Medidas tomadas em resposta a casos de corrupção 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 MR – page 95. Please see indicator 2-27. 16 10 The group carries out its activity in strict compliance with the law and regulations applicable to its activity and in accordance with a set of standards, principles and values, in an ethical manner, respecting and responding to all stakeholders. With this purpose, it guides and sustains its operations, which allows it to build long-term value, invest for growth, focused on delivering a dividend with a positive contribution to society and driving a sustainable return for shareholders. There is no record of any legal action regarding anti-competitive behaviour and violations of anti-trust and monopoly legislation involving the Bank in 2023. 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 sustainability website> Sustainable business>Our approach and policies 301-1 Materials used by weight or volume SR – pages 123; 164-170 ; 243;245. 8, 12 7, 8 271 Annual Report 2023 | novobancoGRI 3: DISCLOSURES ON MATERIAL TOPICS 2023 Page in the Report SDG GC Principles Omissions Scope TOPIC: ENERGY WATER AND CO2 EMISSIONS 3-3 Explanation of the material topic and its Boundary 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 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 Sustainability website> Sustainable website>We are taking care of the environment 302-1 Energy consumption within the organisation SR – pages 167;243. 302-3 Energy intensity SR – pages 167;243. 302-4 Reduction of energy consumption SR – pages 167;243. 302-5 Reductions in energy requirements of products and services SR – pages pages 167;243. 303-3 Water catchment SR – page 245. 305-1 Direct (Scope 1) GHG emissions SR –pages 168;244. 7,8 8 8,9 8,9 7,8 7,8 12 13 7,8 12 13 7,8 12 13 7,8 12 13 7 3 12 13 14 15 272 Management ReportSustainability ReportFinancial StatementsAnnex GRI 3: DISCLOSURES ON MATERIAL TOPICS 2023 Page in the Report SDG GC Principles Omissions Scope 305-2 Energy indirect (Scope 2) GHG emissions RS –páginas 168;244. 305-3 Energy indirect (Scope 3) GHG emissions SR –pages 168;244. 305-4 GHG emissions intensity SR –pages 168;244. 305-5 Reduction of GHG emissions SR –pages 168;244. 305-6 Emissions of ozone-depleting substances (ODS) 305-7 Nitrogen oxides (NOx), sulphur oxides (SOx), and other significant air emissions 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. 3 12 13 14 15 3 12 13 14 15 13 14 15 13 14 15 7,8 7,8 8 8,9 3 12 7,8 3 12 14 15 7,8 273 Annual Report 2023 | novobancoGRI 3: DISCLOSURES ON MATERIAL TOPICS 2023 Page in the Report SDG GC Principles Omissions Scope TOPIC: SUPPLIERS ENVIRONMENTAL ASSESSMENT 3-3 Explanation of the material topic and its Boundary 308-1 New suppliers that were screened using environmental criteria 308-2 Negative environmental impacts in the supply chain and actions taken TOPIC: EMPLOYMENT 3-3 Explanation of the material topic and its Boundary The novobanco Group has over the years promoted several initiatives to ensure a judicious selection of its suppliers, based on the information provided. The 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 – pages 171-173. SR – pages 171-173. 8 8 The Development of Culture and People is one of the strategic pillars of the novobanco Group. Over the years, the Group has promoted several initiatives that allow the development of programs that guarantee human capital management aimed at attracting and retaining talent, using the diversity of its employee base and a culture of inclusion and equal opportunities as levers. growth and value generation strategies, rejuvenating teams and developing the potential of the most experienced employees, using methodologies and programs that aim to enhance individual development and contribute to the balance between professional and personal life, as well as creating a circle of knowledge and sharing. The information regarding employees reported in this report has the same scope as the Report and Accounts, that is, it includes permanent employees, fixed-term contracts and seconded employees. Employees with other employment contracts – interns, temporary workers and service providers totaling 24 (11 men and 13 women) in 2023) represent only 0.56% of the Group's total employees. The novobanco Group monitors indicators pertaining to this topic and reports the results in its Sustainability Report and institutional website. Links Labor Trainees Temporary workers Service providers Total M 5 5 1 W 5 8 0 11 13 Variation 203/2022 0% -69.0% -50.0% -55.6% 274 Management ReportSustainability ReportFinancial StatementsAnnex GRI 3: DISCLOSURES ON MATERIAL TOPICS 2023 Page in the Report SDG GC Principles Omissions Scope 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 SR – page 249. 5 8 6 The novobanco Group informs its employees of any relevant facts pertaining to their career 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. 401-3 Total number of employees that were entitled to parental leave, by gender and return to work and retention rates of employees that took parental leave, by gender TOPIC: LABOUR/MANAGEMENT RELATIONS 3-3 Explanation of the material topic and its Boundary Trainees and temporary workers do not have access to all the benefits granted to other employees, with the exception of health insurance, special conditions on housing and individual credit and other benefits that are included in the Collective Labor Agreement. SR – page 251. 8 6 8 6 The Development of Culture and People is one of the strategic pillars of the novobanco Group. Over the years, the Group has promoted several initiatives that allow the development of programs that guarantee human capital management aimed at attracting and retaining talent, rejuvenating teams and developing the potential of more experienced employees, using methodologies and programs that aim to individual appreciation and the contribution to the balance between professional and personal life, as well as the creation of a circle of knowledge and sharing. The Group monitors indicators associated with this topic and reports them in the Sustainability Report and institutional website. 275 Annual Report 2023 | novobancoGRI 3: DISCLOSURES ON MATERIAL TOPICS 2023 Page in the Report SDG GC Principles Omissions Scope 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. 403-2 Types of injury and rates of injury, occupational diseases, lost days, and absenteeism, and number of work-related fatalities by gender The novobanco Group informs its employees of any relevant facts pertaining to their career 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. 5 3 The physical, mental and social well-being of employees is essential for the Group, and is ensured through a health and well-being policy based on eight lines of action: 1. Physical Well-Being 2. Mental Wellbeing 3. Emotional Well-being 4. Social Welfare 5. Financial Wellbeing 6. Family Wellbeing 7. Intellectual Well-being 8. Professional Wellbeing The novobanco Group monitors indicators associated with this topic and reports them in the Sustainability Report and Sustainability website > Sustainable business > Employees. 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. SR – page 253. 8 8 276 Management ReportSustainability ReportFinancial StatementsAnnex Page in the Report SDG GC Principles Omissions Scope GRI 3: DISCLOSURES ON MATERIAL TOPICS 2023 403-3 Workers with high incidence or high risk of diseases related to their occupation 403-4 Health and safety topics covered in formal agreements with trade unions The novobanco Group is not aware of a high incidence or high risk of work-related diseases amongst its employees. SR - pages 150-152;172. 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 253. 403-9 Work accidents SR – page 253. 403-10 Professional diseases SR – page 253. TOPIC: TRAINING AND EDUCATION 3-3 Explanation of the material topic and its Boundary 404-1 Average hours of training that the organisation’s employees have undertaken during the reporting period, by gender and employee category 404-2 Programmes for upgrading employee skills and transitionassistance programmes 404-3 Percentage of employees receiving regular performance and career development reviews 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 182-183;251. SR – pages 182-183;251. SR – pages 182-183;250. 277 8 8 8 8 4, 5, 8 8 5, 8 6 6 Annual Report 2023 | novobancoGRI 3: DISCLOSURES ON MATERIAL TOPICS 2023 Page in the Report SDG GC Principles Omissions Scope 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). 405-2 Ratio of basic salary and remuneration of women to men for each employee category TOPIC: NON-DISCRIMINATION 3-3 Explanation of the material topic and its Boundary 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 - 184;254-255. MR – pages 30-31. SR – 248. SR – page 254. 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). Novobanco has promoted several initiatives over the years that aim to reduce negative impacts in terms of discrimination through its strategic pillar People and Culture Development, which is integrated into its Social Dividend model. Over the years, novobanco has promoted several initiatives in its Responsible Banking program that aim to monitor and create a fairer and more gender-equal Bank, having, for this purpose, defined concrete objectives until 2024. 5, 8 5, 8, 10 6 6 406-1 Total number of incidents of discrimination and corrective actions taken, In 2023 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, 10 6 278 Management ReportSustainability ReportFinancial StatementsAnnex GRI 3: DISCLOSURES ON MATERIAL TOPICS 2023 TOPIC: FREEDOM OF ASSOCIATION AND COLLECTIVE BARGAINING 3-3 Explanation of the material topic and its Boundary Page in the Report SDG GC Principles Omissions Scope 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; • the Core Conventions of the International Labour Organization (ILO). 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 and Sustainability website 408-1 409-1 Operations and suppliers at significant risk for incidents of child labour During 2023 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 Within the scope of the Strategic Pillar “Development of Culture and People”, the Group has promoted several initiatives on this topic over the years. The Group operates in full compliance with current legislation, has a Human Rights policy and a Code of Conduct, by which all employees are governed, and on which it carries out periodic training for employees, and conducts its activity in accordance with the principles of ethics, inclusion, trust and transparency. The Group monitors indicators associated with this topic and reports them in the Sustainability Report. 279 Annual Report 2023 | novobancoGRI 3: DISCLOSURES ON MATERIAL TOPICS 2023 Page in the Report SDG GC Principles Omissions Scope 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 412-1 Total number and percentage of operations that have been subject to human rights reviews or impact assessments 412-2 Employee training on human rights policies or procedures 412-3 Significant investment agreements and contracts that include human rights clauses or that underwent human rights screening 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 The Development of Culture and People is one of the strategic pillars of the novobanco Group . 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 Sustainability website. Not applicable 1 1 2 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 suppliers (100%). The certification of suppliers requires answering mandatory response questions concerning human rights policies and practices. 280 Management ReportSustainability ReportFinancial StatementsAnnex GRI 3: DISCLOSURES ON MATERIAL TOPICS 2023 Page in the Report SDG GC Principles Omissions Scope The Bank visits all its material suppliers to check their supply capabilities and their compliance with the requirements of the Principles for Suppliers. In 2023 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. novobanco Group has over the years promoted several initiatives under its Corporate Social Responsibility programme, which aims to contribute 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 Sustainability website > Sustainable attitude. SR – pages 157-162 The novobanco Group is not aware of any operations having negative impacts on local communities. 1, 2 2 1 1 281 TOPIC: LOCAL COMMUNITIES 3-3 Explanation of the material topic and its Boundary 413-1 Operations with local community engagement, impact assessments, and development programmes 413-2 Operações com impactes Operations with significant actual and potential negative impacts on local communities Annual Report 2023 | novobancoGRI 3: DISCLOSURES ON MATERIAL TOPICS 2023 TOPIC: SUPPLIERS SOCIAL ASSESSMENT 3-3 Explanation of the material topic and its Boundary Page in the Report SDG GC Principles Omissions Scope Within the scope of the strategic pillar “Simple and Efficient Operations”, the novobanco Group aims to ensure the integration of ESG criteria also upstream in its value chain, increasingly integrating ESG criteria and concerns in the selection and management of the relationship with its suppliers, also acting as a model for the national business fabric. The Group has been promoting several 414-1 New suppliers that were screened using social criteria SR – pages 171-173. In 2023 novobanco was not aware of any negative impacts at this level. 5, 16 5, 16 2 2 414-2 Negative social impacts in the supply chain and actions taken TOPIC: PUBLIC POLICY 3-3 Explanation of the material topic and its Boundary 415-1 Political contributions TOPIC: CUSTOMER HEALTH AND SAFETY 3-3 Explanation of the material topic and its Boundary The novobanco Group manages its activity in full compliance with the legislation in force. 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 Within the scope of the Customer-Centric Bank strategic pillar, as well as the Simple and Efficient Operations pillar, the Group ensures throughout its activity that the highest levels of attention and investment are maintained in the themes underlying customer security, including their safety. physical security, the security of the operations that are carried out, as well as the safeguarding of your personal data and that of other data subjects. The novobanco Group monitors indicators associated with this topic and reports them in the Sustainability Report. 282 Management ReportSustainability ReportFinancial StatementsAnnex GRI 3: DISCLOSURES ON MATERIAL TOPICS 2023 416-1 Assessment of the health and safety impacts of product and service categories Page in the Report SDG GC Principles Omissions Scope 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. Maximum attention is paid to security and customer experience in the development of your remote customer interaction platforms, as well as all your IT systems.More information may be found in Indicator 418-1. 416-2 Total number of incidents of non-compliance concerning the health and safety impacts of products and services In 2023, there were no sanctions and/ or fines imposed on novobanco Group in connection to the General Data Protection Regulation (GDPR). 5, 16 2 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. Customer-Centered Banking is one of the Group's strategic pillars. In this context, over the years, it has promoted several initiatives to provide clear and transparent information about its products and services to its customers. The design of products, including their labeling and nomenclature, follows a careful and robust internal approval process with the participation of risk, compliance and legal functions, among others, which is enshrined in internal standards and which takes ethical concerns into account , transparency and customer protection. External communication of products is subject to prior approval by the competent supervisory entity. The Group monitors indicators associated with this topic and reports them in the Sustainability Report and Sustainability website > Sustainable business > Sustainable offer. 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. 12, 16 283 Annual Report 2023 | novobancoGRI 3: DISCLOSURES ON MATERIAL TOPICS 2023 Page in the Report SDG GC Principles Omissions Scope 417-2 Total number of incidents of non-compliance with regulations and/or voluntary codes concerning product and service information and labelling, by type of result In 2023 no incidents of non-compliance with voluntary procedures and voluntary codes concerning product and service information or labelling of novobanco Group were identified. 16 417-3 Total number of incidents of non-compliance with regulations and/or voluntary codes concerning marketing communications, including advertising, promotion, and sponsorship, by type of result TOPIC: CUSTOMER PRIVACY 3-3 Explanation of the material topic and its Boundary 418-1 Total number of substantiated complaints received concerning breaches of customer privacy In 2023 no incidents of non-compliance with voluntary procedures and voluntary codes on marketing communications, including advertising, promotion, and sponsorship by novobanco Group, were identified. Within the scope of the “Customer-Centered Banking” strategic pillar, the Group’s priority is to ensure the privacy of all its customers’ data. In this context, it develops the necessary and appropriate initiatives to carry out the activity in accordance with best market practices and legal and regulatory requirements. The Bank ensures the confidentiality, integrity and availability of information. The novobanco Group monitors indicators associated with this topic and reports them in the Sustainability Report. The Group received 2 complaints, originating from the National Data Protection Commission (CNPD) and no direct complaints from customers, there is, however, no additional information about their status. 12 284 Management ReportSustainability ReportFinancial StatementsAnnex GRI 3: DISCLOSURES ON MATERIAL TOPICS 2023 FINANCIAL SUPPLEMENT INDICATORS TOPIC: SOCIOECONOMIC COMPLIANCE 3-3 Explanation of the material topic and its Boundary Page in the Report SDG GC Principles Omissions Scope Customer-Centered Banking is one of the Group's strategic pillars. In this context, it has reinforced its customer experience monitoring model with the aim of offering the best experience to its customers. Knowledge of their expectations throughout their life cycle, close monitoring of market trends and a strong commitment to innovation allow us to identify opportunities for improvement, based on a robust customer experience monitoring model based on several pillars of action. It has also reinforced its offer and services based on environmental and social criteria. The Group monitors indicators associated with this topic and reports them in the Sustainability Report and Sustainability website > Sustainable business > Suppliers. Management Approach 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/invest- ees/business partners regarding environmental and social risks and opportunities SR – pages 171-173;199. MR – pages 93-100. SR – pages 126-137. 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. SR – pages 123-133;139; 144-145;137;156-162;173. 10 10 16 10 10 285 Annual Report 2023 | novobancoGRI 3: DISCLOSURES ON MATERIAL TOPICS 2023 Page in the Report SDG GC Principles Omissions Scope FS6 Percentage of the portfolio for business lines by specific region, size (e.g., micro/SME/ large) and by sector FS7 Monetary value of products and services designed to deliver a specific social benefit for each business line broken down by purpose FS8 Monetary value of products and services designed to deliver a specific social benefit for each business line broken down by purpose TOPIC: AUDIT FS9 Coverage and frequency of audits to assess implementation of environmental and social policies and risk assessment procedures 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 1, 8, 9 1, 8, 9. 10, 11 10 10 10 SR – pages 141-151. MR – pages 68-75;200-201. SR – pages 141-151. MR – pages 68-75;200-201. SR – pages 141-151. MR – pages 68-75;200-201. 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. SR – pages 145;174;177-196; 200-201. SR – pages 145;174;177-196; 200-201;208-242. 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. 286 Management ReportSustainability ReportFinancial StatementsAnnex GRI 3: DISCLOSURES ON MATERIAL TOPICS 2023 Page in the Report SDG GC Principles Omissions Scope 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 TOPIC: LABELLING OF PRODUCTS AND SERVICES FS15 Policies for the fair design and sale of financial products and services FS16 Initiatives to enhance financial literacy by type of beneficiary 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 – pages 123;157. 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 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 156-158. Customer-centric banking is one of the Strategic Pillars of the novobanco Group. In this context, all financial products and services are formulated in compliance with the requirements imposed by legislation, regulatory guidelines and the institution's policies, namely the standard for design, approval, distribution and monitoring of products, already referred to in indicator 417-1 of this table. The novobanco Group regularly reports to its respective regulators evidence that proves respect and agreement with external and internal policies and conduct. The internal and external audit of the group's procedures verifies the compliance of the procedures with the requirements formulated by the Bank of Portugal and the Insurance Institute of Portugal. SR – pages 156-158. 1, 10 1, 10 10 1,8, 10 287 Annual Report 2023 | novobancoManagement Report Sustainability Report Financial Statements Annex 8.3 Independent Limited Assurance Report 288 Annual Report 2023 | novobanco 289 Management Report Sustainability Report Financial Statements Annex 122 Annual Report 2023 | novobanco CONSOLIDATED FINANCIAL STATEMENTS OF NOVOBANCO GROUP 123 Management Report Sustainability Report Consolidated Financial Statements Annex novobanco GROUP CONSOLIDATED INCOME STATEMENT FOR THE YEARS ENDED 31 DECEMBER 2023 AND 2022 Interest Income Interest Expenses Net Interest Income Dividend income Fees and comission income Fees and comission expenses Gains or losses on 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 mandatorily at fair value through profit or loss Gains or losses on financial assets and liabilities designated at fair value through profit and loss Gains or losses from hedge accounting Exchange differences Gains or losses on derecognition of non-financial assets Other operating income Other operating expenses Operating Income Administrative expenses Staff expenses Other administrative expenses Contributions to resolution funds and deposit guarantee Depreciation Provisions or reversal of provisions Commitments and guarantees given Other provisions Impairment or reversal of impairment on financial assets not measured at fair value through profit or loss Impairment or reversal of impairment of investment in subsidiaries, joint ventures and associates Impairment or reversal of impairment on non-financial assets Share of the profit or loss of investments in subsidiaries, joint ventures and associates accounted for using the equity method Profit or loss before tax from continuing operations Tax expense or income related to profit or loss from continuing operations Current tax Deferred tax Profit or loss after tax from continuing operations Profit or loss before tax from discontinued operations Profit or loss for the year Attributable to Shareholders of the parent Attributable to non-controlling interests Weighted average number of ordinary shares outstanding (thousands) Basic earnings per share (in Euros) Diluted earnings per share (in Euros) Basic earnings per share of continuing activities (in Euros) Diluted earnings per share of continuing activities (in Euros) Notes 10 10 12 11 11 12 12 12 12 12 12 13 14 14 15 17 18 25, 27 19 19 19 19 24 30 35 (in thousands of Euros) 2023 1 955 662 ( 813 078) 1 142 584 2 133 339 061 ( 44 746) ( 58 055) 4 418 26 633 79 32 112 24 369 27 901 106 231 ( 124 054) 1 478 666 ( 435 577) ( 252 704) ( 182 873) ( 78 481) ( 43 588) ( 45 699) 628 ( 46 327) ( 141 893) 7 406 6 351 7 215 754 400 ( 5 769) ( 15 134) 9 365 748 631 ( 412) 748 219 743 088 5 131 748 219 2022 834 679 ( 209 204) 625 475 5 035 337 335 ( 47 155) ( 88 255) 149 212 ( 40 493) 116 ( 1 713) 6 789 83 289 214 005 ( 118 357) 1 125 283 ( 395 870) ( 233 707) ( 162 163) ( 41 155) ( 52 493) ( 39 245) 2 685 ( 41 930) ( 101 882) 21 546 8 375 8 354 532 913 53 301 ( 10 048) 63 349 586 214 ( 270) 585 944 560 842 25 102 585 944 10 948 426 0,07 0,07 10 034 965 0,06 0,06 0,07 0,07 0,06 0,06 The accompanying explanatory notes are an integral part of these consolidated financial statements 292 Annual Report 2023 | novobanco novobanco GROUP CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME FOR THE YEARS ENDED 31 DECEMBER 2023 AND 2022 Net profit / (loss) for the exercise Other comprehensive income/(loss) Items that will not be reclassified to results Actuarial gains / (losses) on defined benefit plans Other comprehensive income from associates accounted for using the equity method Fair value changes of equity instruments measured at fair value through other comprehensive income Items that may be reclassified to results Foreign exchange differences Cash flow hedging Financial assets at fair value through other comprehensive income Total other comprehensive income/(loss) for the exercise Attributable to non-controlling interest Attributable to Shareholders of the Parent a) See Statement of Changes in the Consolidated Equity Notes a) a) a) a) a) The accompanying explanatory notes are an integral part of these consolidated financial statements 2023 748 219 ( 51 592) ( 27 294) ( 583) ( 23 715) 216 040 ( 45) 192 974 23 111 912 667 5 131 907 536 (in thousands of Euros) 2022 585 944 116 903 101 726 332 14 845 ( 305 988) ( 892) ( 100 418) ( 204 678) 396 859 25 102 371 757 293 Management Report Sustainability Report Consolidated Financial Statements Annex novobanco GROUP CONSOLIDATED BALANCE SHEET AS AT 31 DECEMBER 2023 AND 2022 Assets Cash, cash balances at central banks and other demand deposits Financial assets held for trading Financial assets mandatorily at fair value through profit or loss Financial assets at fair value through profit or loss Financial assets at fair value through other comprehensive income Financial assets at amortised cost Securities Loans and advances to banks Loans and advances to customers Derivatives – Hedge accounting Fair value changes of the hedged items in portfolio hedge of interest rate risk Investments in subsidiaries, joint ventures and associates Tangible assets Tangible fixed assets Investment properties Intangible assets Tax assets Current Tax Assets Deferred Tax Assets Other assets Non-current assets and disposal groups classified as held for sale Liabilities Financial liabilities held for trading Financial liabilities measured at amortised cost Deposits from banks (of which, Repurchase Agreement) Due to customers (of which, Repurchase Agreement) Debt securities issued, Subordinated debt and liabilities associated to transferred assets Other financial liabilities Derivatives – Hedge accounting Fair value changes of the hedged items in portfolio hedge of interest rate risk Provisions Tax liabilities Current Tax liabilities Deferred Tax Liabilities Other liabilities Liabilities included in disposal groups classified as held for sale Equity Capital Accumulated other comprehensive income Retained earnings Other reserves Profit or loss attributable to Shareholders of the parent Minority interests (Non-controlling interests) Total Liabilities and Equity Notes 2023 20 21 22 22 22 22 23 23 24 25 26 27 28 29 30 21 31 23 23 32 28 33 30 34 35 35 35 35 43 500 790 5 867 189 436 148 264 912 - 838 523 32 452 537 7 870 536 47 940 24 534 061 683 063 ( 83 498) 59 511 757 549 363 754 393 795 86 748 931 036 29 376 901 660 1 117 258 89 814 39 078 362 100 639 37 330 355 5 745 326 3 867 053 29 984 273 1 366 382 1 107 585 493 171 124 729 62 049 430 829 10 808 10 808 - 1 005 846 13 107 4 422 428 6 567 844 (1 070 125) (8 577 074) 6 736 004 743 088 22 691 43 500 790 (in thousands of Euros) 2022 45 995 029 6 599 078 171 810 313 702 13 2 331 099 32 559 148 7 964 664 43 548 24 550 936 562 845 ( 165 144) 119 744 798 831 299 264 499 567 69 832 956 000 32 570 923 430 1 618 484 59 587 42 483 411 99 386 40 987 177 9 705 154 2 150 824 29 277 858 450 906 1 628 897 375 268 119 578 - 413 432 8 427 7 582 845 839 919 15 492 3 511 618 6 304 661 (1 234 573) (8 577 074) 6 439 418 560 842 18 344 45 995 029 The accompanying explanatory notes are an integral part of these consolidated financial statements 294 Annual Report 2023 | novobanco novobanco GROUP CONSOLIDATED STATEMENT OF CHANGES IN EQUITY FOR THE YEARS ENDED 31 DECEMBER 2023 AND 2022 Notes Capital Other Comprehensive Income Retained earnings Other reserves Net profit/(loss) for the exercise attributable to shareholders of the Bank Non-controlling interests (in thousands of Euros) Other Comprehensive Income Other Total 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 34 249 754 Other Increase / (Decrease) in Equity Appropriation to retained earnings of net profit / (loss) of the previous year Other movements Total comprehensive income for the exercise Changes in fair value, net of tax Foreign exchange differences, net of tax Remeasurement of defined benefit plans, net of tax Other comprehensive income appropriated from affiliates Reserves of impairment of securities at fair value through OCI Reserves of sales of securities at fair value through OCI 35 16 35 35 Cash flow hedge reserves Net income of the exercise Balance as at 31 December 2022 Other increase / (Decrease) in Equity Appropriation to retained earnings of net profit / (loss) of the previous year Other movements Total comprehensive income for the year Changes in fair value, net of tax Foreign exchange differences, net of tax Remeasurement of defined benefit plans, net of tax Other comprehensive income appropriated from affiliates Reserves of impairment of securities at fair value through OCI Reserves of sales of securities at fair value through OCI 35 16 35 35 Cash flow hedge reserves Net income of the exercise Balance as at 31 December 2023 6 304 661 ( 1 234 573) ( 8 577 074) 6 439 418 560 842 ( 10 199) 28 543 3 511 618 - 1 - 1 - ( 249 754) - ( 214) 187 798 ( 184 504) - 184 504 ( 214) 3 294 - - - - - - - - ( 37 793) - ( 37 793) ( 34 712) - ( 34 712) ( 189 085) ( 185 616) ( 892) 101 726 332 ( 3 052) ( 1 165) ( 100 418) - - - - - - - - - - - - - - - - - - - 560 842 25 102 - - - - - - - - - - - - - - 560 842 25 102 - - - - - - - - - 396 859 ( 185 616) ( 892) 101 726 332 ( 3 052) ( 1 165) ( 100 418) 585 944 - - - - 164 448 283 614 ( 45) ( 27 294) ( 583) ( 421) ( 283 797) 192 974 - - - - - - - - - - - - - - ( 263 183) - 559 769 ( 560 842) 560 842 ( 560 842) ( 1 073) - - - - - - ( 784) - ( 784) - - - - - - - - - 743 088 5 131 - - - - - - - - - - - - - - 743 088 5 131 - - - - - - - - - - ( 1 857) - ( 1 857) 912 667 283 614 ( 45) ( 27 294) ( 583) ( 421) ( 283 797) 192 974 748 219 - - - - - - - - - - - - - - - - - - - - - - - - 6 567 844 ( 1 070 125) ( 8 577 074) 6 736 004 743 088 ( 5 068) 27 759 4 422 428 Capital increase by incorporation of special reserve for deferred taxes 34 263 183 The accompanying explanatory notes are an integral part of these consolidated financial statements 295 Management Report Sustainability Report Consolidated Financial Statements Annex novobanco GROUP CONSOLIDATED CASH FLOW STATEMENT FOR THE YEARS ENDED 31 DECEMBER 2023 AND 2022 Cash flows from operating activities Interest received Interest paid Fees and commissions received Fees and commissions paid Recoveries on loans previously written off Contributions to the pension fund Contributions to resolution funds and deposit guarantee Cash payments to employees and suppliers Changes in operating assets and liabilities: Deposits with / from Central Banks Financial assets mandatorily at fair value through profit or loss Financial assets designated at fair value through profit or loss Financial assets at fair value through other comprehensive income Financial assets at amortised cost Debt securities Loans and advances to banks Loans and advances to customers Financial liabilities at amortised cost Deposits from banks Due to customers Derivatives - Hedge accounting Other operating assets and liabilities Net cash from operating activities before corporate income tax Corporate income taxes paid Net cash from operating activities Cash flows from investing activities Sale of investments in subsidiaries and associated companies Dividends received Acquisition of investment properties Sale of investment properties Acquisition of tangible fixed assets Sale of tangible fixed assets Acquisition of intangible assets Sale of intangible assets Net cash from investing activities Cash flows from financing activities Issuance of bonds and other securitized liabilities Repayment of bonds and other liabilities Issue of subordinated debt Reimbursement of subordinated debt Net cash from financing activities Notes 2023 1 145 231 1 995 630 ( 696 029) 339 061 ( 44 764) 32 512 - ( 78 481) ( 402 698) (5 228 153) 140 610 ( 226 476) 1 831 667 219 383 259 862 ( 4 157) ( 36 322) 1 865 439 1 226 408 639 031 ( 415 258) 383 202 ( 284 355) ( 33 035) ( 317 390) - 2 133 ( 611) 183 309 ( 88 091) 980 ( 30 345) - 67 375 - ( 582 980) 500 000 ( 400 000) ( 482 980) (in thousands of Euros) 2022 577 845 862 685 ( 211 860) 337 335 ( 47 155) 40 423 ( 249) ( 41 155) ( 362 179) (1 702 869) 361 790 146 801 4 463 594 (6 738 365) (5 831 051) 7 342 ( 914 656) 2 343 653 635 597 1 708 056 ( 53 738) 960 322 359 033 ( 44 800) 314 233 ( 1 560) 5 035 ( 16 464) 367 213 ( 137 533) 107 261 ( 25 306) 4 298 650 106 000 ( 14 285) - - 91 715 Net changes in cash and cash equivalents ( 732 995) 704 598 Cash and cash equivalents at the beginning of the period Net changes in cash and cash equivalents Cash and cash equivalents at the end of the period Cash and cash equivalents include: Cash Deposits with Central Banks (of which, Restricted balances) Deposits with banks Total 6 311 181 ( 732 995) 5 578 186 179 229 5 374 612 ( 289 003) 313 348 5 578 186 20 20 20 5 606 583 704 598 6 311 181 182 895 5 942 498 ( 287 897) 473 685 6 311 181 The accompanying explanatory notes are an integral part of these consolidated financial statements 296 Annual Report 2023 | novobanco (This page was left in blank intentionally) 297 Management Report Sustainability Report Consolidated Financial Statements Annex novobanco Group Explanatory notes to the consolidated financial statements as of December 31, 2023 (Amounts expressed in thousands of euros, except where indicated) Note 1 - Activity and Structure of the Group 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 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. As at 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. 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. On December 19, 2023, the company became Nani Holdings S.à.r.l, with its headquarters at Rue des Mérovingiens 7A, Bertrange, Luxembourg. 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 290 branches in Portugal and abroad (31 December 2022: 292 branches), including branch in Luxembourg, and two representative offices: one in Switzerland and one in Spain (31 December 2022: 2 representative offices in Switzerland). 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 1 The references made to the RGICSF refer to the version in force on the date of the resolution measure. The current version of the RGICSF has undergone changes, notably in article 145 by virtue of Law 23-A 2015, of March 26, which came into effect the day after its publication. 298 Annual Report 2023 | novobanco NOVO BANCO, SA 2014 - Portugal Novo Banco dos Açores, SA (novobanco Açores) 2002 2002 Portugal Year incorporated Year acquired Registered office Activity Banking Banking Share- holding % Consolidation method 57,53% Full consolidation BEST - Banco Electrónico de Serviço Total, SA (BEST) 2001 2001 Portugal electronic banking 100,00% Full consolidation NB África, SGPS, SA 2009 2009 Portugal Management of social participations 100,00% Full consolidation GNB - Gestão de Ativos, SGOIC, S.A. (GNB GA) GNB - Sociedade Gestora de Fundos de Pensões, SA GNB - International Management, SA 1987 1989 1995 1987 Portugal Management of social participations 100,00% Full consolidation 1989 Portugal Investment fund management 100,00% Full consolidation 1995 Luxemburgo Investment fund management 100,00% Full consolidation ES Tech Ventures, S.G.P.S., SA (ESTV) 2000 2000 Portugal Management of social participations 100,00% Full consolidation Yunit Serviços, SA 2000 2000 Portugal Internet portal management 33,33% equity method NB Finance, Ltd. (NB FINANCE) 2015 2015 Ilhas Caimão Issuance and placement of securities 100,00% Full consolidation GNB Concessões, SGPS, SA (GNB CONCESSÕES) 2002 2003 Portugal Management of social participations 100,00% Full consolidation Espírito Santo Representações, Ltda. (ESREP) 1996 1996 Brasil Representation services 99,99% Full consolidation Aroleri, SLU Righthour, SA Fundo de Gestão de Património Imobiliário - FUNGEPI - Novo Banco ImoInvestimento – Fundo Especial de Investimento Imobiliário Fechado 2021 2013 1997 2012 2021 Espanha Real estate promotion 100,00% Full consolidation 2013 Portugal Service provision 100,00% Full consolidation 2012 Portugal Real Estate Investment Fund 100,00% Full consolidation 2012 Portugal Real Estate Investment Fund 100,00% Full consolidation Prediloc Capital – Fundo Especial de Investimento Imobiliário Fechado 2006 2012 Portugal Real Estate Investment Fund 100,00% Full consolidation Imogestão – Fundo de Investimento Imobiliário Fechado 2006 2013 Portugal Real Estate Investment Fund 100,00% Full consolidation NB Património - Fundo de Investimento Imobiliário Aberto 1992 2014 Portugal Real Estate Investment Fund 96,34% Full consolidation NB Arrendamento - Fundo de Investimento Imobiliário Fechado para Arrendamento Habitacional 2009 2012 Portugal Real Estate Investment Fund 100,00% Full consolidation Fimes Oriente - Fundo de Investimento Imobiliário Fechado 2004 2012 Portugal Real Estate Investment Fund 100,00% Full consolidation Fundo de Investimento Imobiliário Fechado Amoreiras 2006 2015 Portugal Real Estate Investment Fund 95,24% Full consolidation NB Branches - Fundo Especial de Investimento Imobiliário Fechado 2006 2019 Portugal Real Estate Investment Fund 100,00% Full consolidation JCN - IP - Investimentos Imobiliários e Participações, SA Greenwoods Ecoresorts empreendimentos imobiliários, SA Herdade da Boina - Sociedade Imobiliária Benagil - Promoção Imobiliária, SA 1995 2012 1999 1970 2012 Portugal Real estate promotion 100,00% Full consolidation 2012 Portugal Real estate promotion 100,00% Full consolidation 2012 Portugal Real estate promotion 100,00% Full consolidation 2012 Portugal Real estate promotion 100,00% Full consolidation Promofundo - Fundo Especial de Investimento Imobiliário Fechado 2008 2018 Portugal Real Estate Investment Fund 100,00% Full consolidation Locarent - Companhia Portuguesa de Aluguer de Viaturas, SA (LOCARENT) 2003 2003 Portugal Renting 50,00% b) equity method UNICRE - Instituição Financeira de Crédito, SA Edenred Portugal, SA Multipessoal Recursos Humanos - SGPS, S.A Lusitano Mortgages No.6 plc c) Lusitano Mortgages No.7 plc c) 1974 1984 1993 2010 Portugal Credit finance company 17,5% a) equity method 2013 Portugal Provision of various services 50,00% b) equity method 1993 Portugal Management of social participations 22,52% equity method 2007 2007 Irlanda Special Purpose Entity 100% Full consolidation 2008 2008 Irlanda Special Purpose Entity 100% Full consolidation a) 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 by the equity method due to the respective decomposition of voting rights not giving control to novobanco c) Entities established under securitization operations, recorded in the consolidated financial statements in accordance with the Group's ongoing involvement in these operations, determined based on the percentage held of equity pieces of the respective vehicles (see Note 39) During 2023, the main changes in novobanco Group’s structure were as follows: • • • • • • In March 2023, Novobanco's branch in Spain was closed; In June 2023, the FCR NB Capital Growth Fund was liquidated, with the assets and liabilities of this Fund being transferred to novobanco; In June 2023, the merger of Fungepi II into Fungepi was carried out; In October 2023, novobanco redeemed Fungepi participation units, worth 66,280 thousand euros; In December 2023, the Invesfundo VII, Febagri, and Imalgarve were liquidated; In December 2023, as part of the internal reorganization of the GNB GA subgroup, GNB – Gestão de Ativos, SGPS, GNB Real Estate – SGOIC and GNB – Sociedade Gestora de Patrimónios were merged by incorporation into GNB Fundos Mobiliários. SGOIC, the latter having changed its corporate name to GNB – Gestão de Ativos, SGOIC, S.A.. 299 Management Report Sustainability Report Consolidated Financial Statements Annex The most significant changes in the Novobanco Group structure during the fiscal year 2022 were as follows: • • • • • • • • • • • • • • In January 2022, the NB Pension Fund redeemed participation units in Fungere, changing the Novobanco Group's stake to 98.22%. In March 2022, Novobanco redeemed 12,688,194 participation units from Fungere, amounting to 15,051 thousand euros, changing the Group's stake to 97.87%. In September 2022, Fungere was merged into Fungepi. After this merger, Novobanco redeemed participation units from Fungepi amounting to 39,964 thousand euros; In February 2022, the Five Stars Fund changed its name to NB Branches and increased its capital by 43 million euros in November 2022; In March 2022, the stake held in Autodril was sold, with a negative impact of 591 thousand euros; In May 2022, the FCR PME NB Fund proceeded with the capital reimbursement, with Novobanco receiving 3,174 thousand euros; In June 2022, Novobanco redeemed participation units in the Imogestão Fund, amounting to 38,000 thousand euros; In August 2022, the Imoinvestmento Fund sold the companies Várzea da Lagoa and Quinta D. Manuel I, for 2,592 thousand euros and 1,107 thousand euros, respectively. These sales generated a capital gain of 88 thousand euros for the Novobanco Group; In September 2022, Novobanco redeemed participation units from Fungepi II worth 4,068 thousand euros; In September 2022, the Novobanco Pension Fund redeemed all the participation units it held in NB Património, with Novobanco now holding 96.24% of the Fund; In September 2022, Fundes was liquidated; In December 2022, Quinta da Ribeira, Novimove, and NB Logistics Real Estate Funds, as well as the FCR PME NB were liquidated. The latter sold all the stakes it held (M N Ramos Ferreira, Epedal, Cristalmax, Nexxpro, and Ach Brito) during the fiscal year 2022; In December 2022, the stake in Ribagolfe was sold, with a positive impact of 270 thousand euros; In December 2022, the stake in the Arrábida Fund was sold, with a positive impact of 999 thousand euros; In December 2022, the stake in Herdade da Vargem Fresca VI was sold, with a positive impact of 136 thousand euros; In December 2022, Espírito Santo International Management was liquidated. 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 2023 and 2022, the movements relating to acquisitions, sales and other investments and repayments in subsidiary and associated companies are detailed as follows: Aquisition Value Acquisitions Others investments (a) 2023 Total Sale Value (thousands of Euros) Reductions Others Refunds (a) Total More / (losses) in sales / settlements - - - - - - - - - 135 135 135 135 - - - - - - - - - - - - 135 135 - - - - - - - - - ( 133 675) ( 133 675) - - ( 12 412) ( 12 412) ( 25 150) ( 25 150) ( 3 847) ( 3 847) ( 11 764) ( 11 764) ( 14 222) ( 14 222) ( 66 280) ( 66 280) ( 133 675) ( 133 675) - - - - - - - - - Subsidiaries companies Benagil Febagri Imoinvestimento FCR NB Growth Imalgarve Invesfundo VII Fungepi a) Increases / decreases in capital, supplementary provisions, supplies, financial instrument exchange operations and company formations 300 Annual Report 2023 | novobanco Acquisitions Others investments (a) Acqusition value 2022 Reductions (thousands de euros) Total Sale Value Others Refunds (a) Total Gains/ (losses) in sales/ settlements - - - - - - - - - - - - - - - - - - - 43 000 43 000 32 373 ( 100 258) ( 67 885) - - - - - - - - - - - - - - - - - - - - 43 000 43 000 - - - - - - - - - - - - 504 - 504 - - ( 15 051) ( 15 051) ( 3 174) ( 3 174) 2 592 1 107 - - 2 592 1 107 - - ( 4 068) ( 4 068) ( 39 965) ( 39 965) 20 057 500 - - 7 613 7 506 1 709 2 790 2 667 340 - - 20 057 500 ( 38 000) ( 38 000) - - - - - - - - 7 613 7 506 1 709 2 790 2 667 340 902 ( 591) - - 66 22 - - 999 136 - - 270 67 67 - - - 43 000 43 000 39 879 ( 100 258) ( 60 379) 969 Subsidiaries companies Autodril Fungere FCR PME NB Várzea da Lagoa Quinta D. Manuel I Fungepi II Fungepi Arrábida H. Vargem Fresca VI Imogestão NB Branches Ribagolfe Associated companies Epedal Nexxpro Cristalmax M N Ramos Ferreira a) Increases / decreases in capital, supplementary provisions, supplies, financial instrument exchange operations and company formations The subsidiaries classified under IFRS 5 as non-current assets held for sale and discontinued operations, are detailed in Note 30. Note 2 – Basis of Presentation The consolidated financial statements of novobanco are presented as of 31 December 2023, 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 2022. 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 2023 were approved at the Executive Board of Directors’ meeting held on 29 February 2024 and will be submitted to the General Assembly of Shareholders, which has the power to justifiably decide to change them. However, it is Executive Board of Directors conviction that these consolidated financial statements will be approved without changes. 301 Management Report Sustainability Report Consolidated Financial Statements Annex 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, 2023, 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 2023, 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 effect in the financial year The following standards, interpretations, amendments and revisions endorsed by the European Union are mandatorily applied for the first time in the financial year beginning on January 1, 2023: Standard / Interpretation Description IFRS 17 – Insurance Contracts IFRS 17 replaces IFRS 4 and 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 warranties and some financial instruments with discretionary participation features. In general terms, IFRS 17 provides a more useful and more consistent accounting model for insurance contracts. Contrasting with 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. Amendments to IFRS 17 – Insurance Contracts – Initial application of IFRS 17 and IFRS 9 – Comparative information This amendment to IFRS 17 pertains to the presentation of comparative information of financial assets upon the initial application of IFRS 17. Amendments to IAS 1 - Disclosure of Accounting Policies The amendment 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 upon the initial application of IFRS 17. The 'overlay' allows all financial assets, including those held in relation to activities not related to contracts 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 upon the initial application of IFRS 9. These changes aim to assist an entity in disclosing 'material' accounting policies, previously referred to as 'significant' policies. However, due to the absence of this concept in IFRS standards, it was decided to replace it with the concept of "materiality", a concept already known by the users of financial statements. When assessing the materiality of accounting policies, the entity must consider not only the size of the transactions but also other events or conditions and their nature. Amendments to IAS 8 - Definition of Accounting Estimates The amendment aims to clarify the distinction between changes in accounting estimates, changes in accounting policies, and the correction of errors. Additionally, it clarifies how an entity uses measurement techniques and inputs to develop accounting estimates. Amendments to IAS 12 - Deferred tax related to assets and liabilities arising from a single transaction IAS 12 now requires an entity to recognise deferred tax when its initial recognition gives rise to equal amounts of taxable temporary differences and deductible temporary differences. However, it is a matter of professional judgment whether such deductions are attributable to the liability that is recognised in the financial statements or to the related asset. This fact is particularly important in determining the existence of temporary differences in the initial 302 Annual Report 2023 | novobanco recognition of the asset or liability, insofar as the initial recognition exception is not applicable to transactions that originated equal taxable and deductible temporary differences. Among the applicable transactions are the registration of (i) assets under right of use and lease liabilities; (ii) provisions for dismantling, restoration, or similar liabilities, and the corresponding amounts recognised as part of the cost of the related asset, when at the date of initial recognition they do not apply for tax purposes. This amendment is retrospectively applicable. These changes arise in the context of implementing the Global Anti-Base Erosion ("Globe") rules of the OECD, which may have significant impacts on the determination of deferred taxes that are difficult to estimate as of the date of issuance of these changes. These changes introduce a temporary exception to the accounting for deferred taxes arising from the application of the OECD's second pillar model rules, and additionally establish new specific disclosure requirements for affected entities. Amendments to IAS 12 - International Tax Reform - Second Pillar Model Rules These standards and changes had no material impact on the Group's financial statements. Note 6 - Principles 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 recognises the resulting gain or loss in the income statement upon determining the respective goodwill. When a partial sale occurs, 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. 303 Management Report Sustainability Report Consolidated Financial Statements Annex 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 added to the acquisition amount. 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. 304 Annual Report 2023 | novobanco 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, the period the business combination occurs. 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. 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 is determined by assessing each cash-generating unit (or group of cash-generating units) to which the goodwill refers. When a cash- generating unit has a recoverable value that is less than its carrying amount, an impairment loss is recognised. Impairment losses related to goodwill from subsidiaries 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. The non-controlling component of Open Real Estate Funds controlled by the Group is recorded under Other Liabilities in the consolidated accounts. 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. Note 7 – Material information about the accounting policy 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 Transactions conducted in foreign currency are converted into euros at the exchange rate effective on the date of the transaction. 305 Management Report Sustainability Report Consolidated Financial Statements Annex Monetary assets and liabilities expressed in foreign currency are converted to euros using the exchange rate effective on the balance sheet date. The exchange differences resulting from this conversion are recognised in profits and are presented in the income statement. Non-monetary assets and liabilities denominated in foreign currency and valued at historical cost are converted to euros using the exchange rate applied on the transaction date. Those that are valued at fair value use the exchange rate in effect on the date the fair value was determined. The resulting exchange differences are recognised in profits except for differences related to shares classified as financial assets at fair value through other comprehensive income, which are recorded in comprehensive income and presented on the comprehensive income statement. In the case of effective cash flow hedging relationships or net investments in foreign operations, the exchange differences of the effective component 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 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. 306 Annual Report 2023 | novobanco 7.4. Financial instruments - Classification and initial measurement 7.4.1. Date of recognition Financial assets and liabilities, with the exception of loans and advances to customers and amounts owed to customers, are initially recognised on the trade date, that is, the date on which the Group becomes party to the contractual provisions of the instrument. This includes regular trades, that is, purchases or sales of financial assets that require delivery of assets within the time period generally established by regulation or convention in the market. Loans and advances to customers are recognised when funds are transferred to the customers' accounts. The Group recognises amounts owed to customers when funds are transferred to the Group. 7.4.2. Initial recognition of financial instruments The classification of financial instruments upon initial recognition depends on their contractual terms and the business model for managing the instruments, as described in note 7.6. Financial instruments are initially measured at their fair value plus or minus transaction costs (as defined in Note 7.5), except in the case of financial assets and liabilities measured at fair value through results, for which transaction costs are directly recognised in results. Amounts receivable from customers are measured at the transaction price. When the fair value of financial instruments upon initial recognition differs from the transaction price, the Group recognises Day 1 profits, as described below. 7.4.3. Day one profit When the transaction price of the instrument differs from the fair value at origin and the fair value is based on a valuation technique using only data observable in market transactions, the Group recognises the difference between the transaction price and the fair value in net trading income. In cases where the fair value is based on models for which some of the data are not observable, the difference between the transaction price and fair value is deferred and only recognised in the result when the data become observable, or when the instrument is derecognized. The Group recognises in results the earnings from the intermediation margin (day one profit), mainly generated in the intermediation of derivative and foreign exchange financial products, since the fair value of these instruments, on the date of their initial recognition and subsequently, is determined only based on variables observable in the market and reflects the Group's access to the wholesale financial market. 7.4.4. Measurement categories of financial assets and liabilities The Group classifies all of its financial assets based on the business model for managing the assets and the contractual terms of the asset, measured at: • Amortised cost, as explained in note 7.6.1; • • • Mandatory measured at fair value through profit or loss, as explained in note 7.6.4. Fair value through other comprehensive income, as explained in notes 7.6.1, 7.6.2 and 7.6.3; Fair value through profit or loss, as explained in note 7.6.4. The Group classifies and measures its trading derivatives portfolio in the trading portfolio, as explained in Note 7.6.5. The Group may designate financial instruments in this portfolio, if this eliminates or significantly reduces measurement or recognition inconsistencies, as explained in Note 7.6.6. Financial liabilities are measured at amortised cost, except for loan commitments and financial guarantees or trading portfolio liabilities which are measured at fair value. 7.5. Fair value of financial assets and liabilities The fair value of quoted financial assets is determined based on the closing quote (bid-price), the price of the last transaction executed, or the value of the last known quote (bid). In the absence of a quote, the Group estimates the fair value using (i) valuation methodologies, such as using prices from recent transactions, similar and carried out in market conditions, discounted cash flow techniques and custom option valuation models to reflect the peculiarities and circumstances of the instrument and (ii) valuation assumptions based on market information. For assets included in level 3 of the fair value hierarchy whose quotation is provided by a third party using unobservable market parameters, the Group proceeds, when applicable, to a detailed analysis of the historical performance and liquidity of these assets. Following this analysis, as well as additional internal or external evaluations, adjustments may be made to the provided quotation to determine the fair value of these assets. 307 Management Report Sustainability Report Consolidated Financial Statements Annex Following is a brief description of the type of assets and liabilities included in each level of the hierarchy and the corresponding method of valuation: Quoted market prices (level 1) This category includes Financial Instruments with quotations available in official markets and those for which there are entities that regularly disclose transaction prices for these instruments traded in liquid markets. Priority in the prices used is given to those observed in official markets, in cases where there is more than one official market the option falls on the main market where these financial instruments are traded. The Group considers the prices disclosed by independent entities as market prices, assuming as an assumption that they act in their own economic interest and that such prices are representative of the active market, always using, where possible, prices provided by more than one entity (for a particular asset and/or liability). In the revaluation process of Financial Instruments, the Group analyses the different prices in order to select the one that appears most representative for the instrument under analysis. Additionally, prices from recent transactions on similar financial instruments are used as inputs, where they exist, and are subsequently compared with those provided by the aforementioned entities in order to better substantiate the Group's choice for a given price. This category includes, among others, the following financial instruments: (i) Derivatives traded on an organised market; (ii) Shares quoted on a stock exchange; (iii) Open investment funds quoted on a stock exchange; (iv) Closed investment funds whose subjacent assets are solely financial instruments listed on a stock exchange; (v) Bonds with observable market valuations; (vi) Financial instruments with market offer even if not available from normal information sources (e.g. securities trading based on the recovery rate). Valuation models based on observable market parameters / prices (level 2) In this category, financial instruments valued using internal models are considered, particularly models of discounted cash flows and option valuations, which involve the use of estimates and require judgements that vary according to the complexity of the products being valued. Nevertheless, the Group uses variables provided by the market as inputs in its models, such as interest rate curves, credit spreads, volatility and indices on quotes. It also includes instruments whose valuation is obtained through quotes disclosed by independent entities, but whose markets have lower liquidity. Additionally, the Group also uses as observable market variables those resulting from transactions on similar instruments and that are observed with a certain recurrence in the market. This category includes, among others, the following financial instruments: (i) Bonds without observable valuations in the market valued using observable market inputs; and (ii) Derivatives (OTC) over-the-counter market valued with observable market inputs; and (iii) Unlisted shares valued with internal models using observable market inputs Valuation models based on unobservable market parameters (level 3) This level includes valuations determined using internal valuation models or quotes provided by third parties, but whose parameters used are not observable in the market. The bases and assumptions for calculating fair value are in accordance with the principles of IFRS 13. In this category, among others, the following financial instruments are included: (i) Debt securities valued using inputs not observable in the market; (ii) Unquoted shares; (iii) Closed real estate funds; (iv) Hedge Funds; (v) Private equities; (vi) Restructuring Funds; and (vii) Derivatives (OTC) over-the-counter with prices provided by third parties. 308 Annual Report 2023 | novobanco 7.6. Financial Assets and Liabilities The Group classifies financial assets at the time of their acquisition based on the considered business model and the characteristics of the contractual cash flows of these assets. 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 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. 7.6.1. Financial assets at amortised cost For a financial asset to be classified and measured at amortised cost or at fair value through other comprehensive income, it is required that: (i) the contractual clauses must give rise to cash flows that correspond only to payments of principal and interest on the amount owed (SPPI – Solely Payments of Principal and Interest). For the purposes of the SPPI test, the principal is the fair value of the financial asset at the time of initial recognition. Contractual flows that are SPPI are consistent with a basic loan agreement. Initial contractual clauses that introduce exposure to risks or volatility of contractual cash flows that are not related to a basic loan agreement, such as exposure to changes in equity prices or commodity prices, do not give rise to contractual cash flows that are only repayments relating to principal and interest calculated on the amount of principal owed. In these cases, financial assets must be measured at fair value mandatorily through profit or loss; (ii) The business model of the financial asset is to receive only the contractual cash flows until maturity (asset at amortised cost). The evaluation of the financial asset's business models is crucial for its classification. The Group determines the business models by groups of financial assets according to how they are managed to achieve a certain business objective. The Group's business models determine whether cash flows will be generated through the receipt of only contractual cash flows, the sale of financial assets or both. At the initial recognition of a financial asset, the Group determines whether it forms part of an existing business model or whether it reflects a new business model. The Group reassesses its business models in each reporting period, in order to determine whether changes have occurred in the business models since the last reporting period. The above requirements do not apply to lease receivables, which meet the criteria set out in IFRS 16 - Leases. Financial assets that are subsequently measured at amortised cost are subject to impairment calculation, as explained in note 7.12. Financial assets at amortised cost are initially recorded at acquisition value, subsequently they are measured at amortised cost based on the effective interest rate. The interest, calculated at the effective interest rate, is recognized in the income statement. 7.6.2. Debt instruments with fair value changes in other comprehensive income The Group classifies debt instruments with fair value changes in other comprehensive income when the following conditions are met: • • The financial asset is held within a business model which objective is achieved through the receipt of contractual cash flows and the sale of financial assets; and The contractual terms of the financial asset give rise, on specified dates, to cash flows that are solely principal repayments and interest payments on the amount of capital owed. 309 Management Report Sustainability Report Consolidated Financial Statements Annex Debt instruments thus classified are subsequently measured at fair value, with gains and losses arising from changes in fair value recognised in other comprehensive income until the assets are derecognised, at which point the accumulated amount of potential gains and losses recorded in reserves is transferred to profit or loss under the heading of gains or losses on financial assets and liabilities measured at fair value through profit or loss. Interest income and foreign exchange gains and losses are recognised in profit or loss in the same way as for financial assets measured at amortised cost as explained in Note 7.2. The expected credit loss calculation is explained in Note 7.12. 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. 7.6.3. Equity instruments with fair value changes in other comprehensive income initial recognition, the Group After in other irrevocably classifies financial equity comprehensive income when they are classified as equity instruments according to IAS 32 and are not held for trading. This designation is determined on a case-by-case basis. instruments with variations Profits and losses on these financial instruments are never recycled to results. Dividends are recognized in profit or loss as dividend income when the right to payment has been established, except when the Group benefits from such income as a recovery of part of the cost of the instrument, in which case these gains are recorded in other comprehensive income. Equity instruments with fair value changes in other comprehensive income are not subject to impairment. 7.6.4. Financial assets recorded at fair value through profit or loss An asset recorded at fair value through profit or loss has the following characteristics: • • • the contractual cash flows are not SPPI (mandatory at fair value through profit or loss); and/or it is held in a business model that does not aim solely to obtain 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 the application of the fair value option. 7.6.5. Assets and Liabilities Held for Trading The Group classifies financial assets or financial liabilities as held for trading when they have been acquired or issued mainly for the purpose of making a short-term profit through trading activities or are part of a portfolio of jointly managed financial assets for which there is recent evidence of realization of short-term profits. Assets and liabilities held for trading are recorded and evaluated on the balance sheet at fair value. Changes in fair value are recognized in financial operations results. Interest income or expense and dividends are recorded in the same line item according to the terms of the contract or when the right to payment has been established. Included in this portfolio are debt securities, shares, short positions, and loans to customers that have been primarily acquired for the purpose of sale or repurchase in the short term. 7.6.6. Derivative Financial Instruments and Hedge Accounting Classification The Group classifies its derivatives portfolio into (i) hedging derivatives and (ii) trading derivatives, which include, in addition to the derivatives contracted for the purpose of making profits, the derivatives contracted for the purpose of economically hedging certain assets and liabilities designated at fair value through profit or loss, but which have not been classified as hedging (fair value option). Recognition and Measurement Derivative financial instruments are recognized on their trading date (trade date), at their fair value. Subsequently, the fair value of derivative financial instruments is reassessed on a regular basis, with the gains or losses resulting from such revaluation recorded directly in the results of the year, except for hedging derivatives. The recognition of fair value changes of hedging derivatives depends on the nature of the risk covered and the hedging model used. Derivatives traded on organized markets, namely futures and some options contracts, are recorded as trading and are revalued at the expense of results. Margin accounts are recorded in Other assets and Other liabilities (see Notes 29 and 33) and include the minimum collateral required for open positions. 310 Annual Report 2023 | novobanco The fair value of other derivative financial instruments corresponds to their market value, when available, or is determined based on valuation techniques including discounted cash flow models and option valuation models, as appropriate. Hedge Accounting • Classification Criteria The derivative financial instruments used for hedging purposes can be classified for accounting purposes as hedging instruments as long as they cumulatively fulfill the following conditions: (i) The hedging instruments and the hedged items are eligible for hedging; (ii) At the date of the commencement of the transaction, the hedging relationship is identified and formally documented, including the identification of the hedged item, the hedging instrument, the nature of the hedged risk, and the evaluation of hedge effectiveness; (iii) There is an economic relationship between the hedged item and the hedging instrument; (iv) The effect of the credit risk does not dominate the changes in value that result from this economic relationship; (v) The effectiveness of the hedge can be reliably measured both at the inception of the transaction and throughout its life. In cases where the Group uses macro hedging, the accounting is carried out according to IAS 39, using the option provided for in IFRS 9, with the Group performing prospective tests at the start date of the hedging relationship, where applicable, and retrospective tests used to confirm, at 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 item in the portion attributed to the hedged risk. Any identified ineffectiveness is recognized in results as it occurs, in gains or losses of hedge accounting. In the specific case of fair value hedging of interest rate risk for the deposit portfolio, the IAS 39 carve-out exception was adopted for the application of macro hedging to core deposits. The use of derivatives is in line with the Group's risk management strategy and objectives. • Fair Value Hedging In a fair value hedging operation of an asset or liability, the balance sheet value of that asset or liability is adjusted to reflect changes in its fair value attributable to the covered risk. Changes in the fair value of the hedging derivatives are recognized in results, along with changes in the fair value of the hedged assets or liabilities, attributable to the hedged risk. In cases where the hedged item is an equity instrument designated at fair value through other comprehensive income, changes in the fair value of the hedging instruments are also recognized in other comprehensive income. If the hedge no longer meets the effectiveness requirement, but the risk management objective remains, the Group may adjust the hedge to meet eligibility criteria (rebalancing). If the hedge no longer meets the criteria required for hedge accounting (if the hedging instrument expires, is sold, has terminated or is exercised, without having been replaced according to the entity’s documented risk management objective), the derivative financial instrument is transferred to the trading portfolio, and hedge accounting is discontinued prospectively. If the hedged asset or liability corresponds to a fixed-income instrument, the revaluation adjustment is amortized in results until maturity by the effective interest rate method. • Cash Flow Hedge In a hedge operation of the exposure to variability of highly probable future cash flows (cash flow hedge), the effective portion of changes in the fair value of the hedging derivative is recognized in the cash flow hedge reserve. The value of this reserve is transferred to the results in the periods in which the expected cash flows of the hedged item affect results. The ineffective portion of the hedge is recorded in results. When a hedging instrument expires or is sold, or when the hedge no longer meets the criteria required for hedge accounting, the changes in the fair value of the derivative accumulated in reserves are recognized in results when the hedged operation also affects results. If it is foreseeable that the hedged operation will not be carried out, the amounts still recorded in equity are immediately recognized in results, and the hedging instrument is transferred to the trading portfolio. 311 Management Report Sustainability Report Consolidated Financial Statements Annex Embedded Derivatives If a hybrid contract includes a base contract that is a financial asset within the scope of IFRS 9, the Group classifies the whole contract according to the policy referred to in Note 7.5. If a hybrid contract includes a base contract that is not an asset under IFRS 9, an embedded derivative must be separated from the base contract and accounted for as a derivative under this Standard if, and only if: (i) The economic characteristics and risks of the embedded derivative are not closely related to the economic characteristics and risks of the base contract; (ii) A separate instrument with the same terms as the embedded derivative would meet the definition of a derivative; and (iii) The hybrid contract is not measured at fair value with changes in fair value recognized in the income (i.e., a derivative embedded in a financial liability at fair value through income is not separated). These embedded derivatives are recorded at fair value with changes recognized in the income statement. 7.6.7. Financial Liabilities An instrument is classified as a financial liability when there is a contractual obligation for its settlement to be made by the delivery of cash or another financial asset, regardless of its legal form. Financial liabilities are derecognized when the underlying obligation is settled, expires, or is canceled. Non-derivative financial liabilities include resources from credit institutions and clients, loans, liabilities represented by securities, other subordinated liabilities, and short sales. These financial liabilities are recorded (i) initially at their fair value minus the transaction costs incurred and (ii) subsequently at amortized cost, based on the effective interest method, with the exception of short sales and financial liabilities designated at fair value through profit or loss, which are recorded at fair value. The Group designates certain financial liabilities at fair value through profit or loss at their initial recognition when: • such a designation eliminates or significantly reduces a measurement or recognition inconsistency that would otherwise arise; • the financial liability is part of a group of financial assets or liabilities or both, which is managed and assessed on a fair value basis, according to the Group's risk management or investment strategy; or • such financial liabilities contain embedded derivatives, and IFRS 9 allows the entire hybrid contract to be designated at fair value through profit or loss. Reclassifications are not allowed between liability categories. The structured products issued by the Group – with the exception of the structured products in which the embedded derivatives were bifurcated and recorded separately and revalued at fair value – always fall under one of the above situations and follow the valuation method of financial liabilities at fair value through profit or loss. 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 in the revaluation are recognized in results except for changes resulting from the change in the Group's own risk, the “Debt Valuation Adjustment” (DVA), which is recognized in other comprehensive income. The new bank Group does not register any gain associated with its own credit risk. The gains or losses resulting from the revaluation of liabilities at fair value are recorded in results. However, the fair value change attributable to changes in credit risk is recognized in other comprehensive income. At the time of derecognition of the liability, the value recorded in other comprehensive income related to changes in credit risk is not transferred to results. 312 Annual Report 2023 | novobanco 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. 7.6.8. Financial guarantees and performance guarantees Financial Guarantees Financial guarantees are considered to be contracts that require the issuer to make payments to compensate the holder for losses incurred from defaults on the contractual terms of debt instruments, namely the payment of the respective capital and/or interest. Issued financial guarantees are initially recognized at their fair value. Subsequently, these guarantees are measured at the greater of (i) the fair value initially recognized and (ii) the amount of any obligation arising from the guarantee contract, measured at the balance sheet date. Any variation in the value of the obligation associated with issued financial guarantees is recognized in results. Financial guarantees issued by the Group usually have a defined maturity and a periodic fee charged in advance, which varies depending on counterparty risk, amount and contract period. On this basis, the fair value of the guarantees on the date of initial recognition is approximately equivalent to the value of the initial commission received, considering that the agreed conditions are market-based. Thus, the value recognized at the date of contracting equals the amount of the initial commission received, which is recognized in results in the period to which it refers. Subsequent commissions are recognized in results in the period to which they refer. Performance Guarantees Performance guarantees are contracts that result in compensation of a party if the if there is non-compliance with the defined contractual obligation. Performance guarantees are initially recognized at fair value, which is normally evidenced by the value of commissions received during the contract's duration. If the defined contractual obligation is not fulfilled, the Group has the right of recourse against the main debtor of the guarantee, with the amounts recognized in Loans to customers after payment of compensation to the beneficiary of the guarantee. As the right of return is embedded in the performance guarantee, and therefore part of the same unit of account, the Group understands that it does not assume insurance risk, but only financial (credit) risk on the main debtor, and, in this sense, treats these guarantees as financial instruments. 7.7. Reclassification of Financial Assets and 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. 7.8. Modification of Financial Assets and Liabilities The activity of commercial renegotiation of financial assets is one of the tools that the Group has available and that it regularly uses in the management and recovery of these instruments. Therefore, the Group understands that the assessment to determine whether these renegotiations result in the derecognition of financial assets should be exceptional and case-by-case, taking into account the identification of the operations in question by professional judgment and the materiality of the same. In these situations, the Group carries out an assessment to determine whether 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 derecognize a loan to a customer, the Group considers, among others, the following factors: • Change in the currency of the loan; • Introduction of a capital feature; • Change in the counterparty; • The modification is such that the instrument does not pass the SPPI test. If the modification does not result in substantially different cash flows, as defined below, it will 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 a loss for impairment has not yet been recorded. The Group's accounting policy regarding past due loans is presented in Note 7.10. 313 Management Report Sustainability Report Consolidated Financial Statements Annex When the modification of the terms of an existing financial liability is not classified as substantial and therefore does not result in derecognition, the amortized cost of the financial liability is recalculated by calculating the present value of the estimated future contractual cash flows that are discounted based on the original effective interest rate of the financial liability. Any resulting difference is recognized immediately in the result. The Group accounts for the substantial modification of the terms of an existing liability or part thereof as an extinction of the original financial liability and the recognition of a new liability. It is assumed that the terms are substantially different if the present value of the cash flows according to the new terms, including any fee 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 balance sheet value of the original liability and the value of the new liability is recorded in income statement. 7.9. Derecognition Financial assets are derecognized from the balance sheet when (i) the Group's contractual rights to their respective cash flows have expired, (ii) the Group has transferred substantially all the risks and benefits associated with their holding, or (iii) notwithstanding that the Group has retained some, but not substantially all the risks and benefits associated with their holding, control over the assets has been transferred. When a transaction measured at fair value through other comprehensive income is derecognized, the previously recognized accumulated gain or loss in other comprehensive income is reclassified to results. Specifically, for equity instruments, the previously recognized accumulated gain or loss in other equity is not reclassified to results, being transferred between equity items. Specifically for customer loans, at the time of sale the difference between the sale price and the balance sheet value should be 100% provisioned, with the derecognition of the sold credit being made by counterpart of the funds/assets received and consequent use of balance sheet impairment. 7.10. Forborne modified loans In the context of credit recovery, the Group makes modifications to the original terms of contracts in response to the borrower's financial difficulties, rather than taking possession or otherwise demanding the collection of collateral. The Group considers a loan to be restructured when such modifications occur as a result of the customer’s current or expected financial difficulties, and the Group would not have agreed to them if the borrower were financially sound. Indicators of financial difficulty include contractual defaults or other warning signs identified by the Global Risk Department. Changes may involve extending payment agreements and/or agreeing to new loan conditions. If the modifications are substantial, the loan is derecognized, as explained in Note 7.8. Once the terms have been renegotiated without resulting in derecognition of the loan, any reduction in the recoverable amount is measured using the original effective interest rate calculated before the modification of the terms. Additionally, the Group reassesses whether there has been a significant increase in credit risk, as demonstrated in Note 42, 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 classified as a Stage 3 restructured asset with impairment. Once an asset has been classified as restructured, it will remain restructured for a minimum period of 24 months. For the loan to cease being reclassified in this category, the customer must comply with the following criteria: • All its financing must be considered performing; • The two-year curing period has occurred and the loan is now considered performing; • Regular payments of more than an insignificant amount of capital or interest have been made for at least half the curing period; • The customer has no contract that is more than 30 days overdue. 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. 7.11. Offseting of Financial Instruments Financial assets and liabilities are presented on the balance sheet at their net value when there is an enforceable legal right to offset the recognized amounts and there is an intention to settle them at their net value or realize the asset and settle the liability simultaneously. The enforceable legal right cannot be contingent on future events and must be enforceable during the normal course of the Group Novobanco's business as well as in the event of default, bankruptcy or insolvency of the Group or the counterparty. 314 Annual Report 2023 | novobanco 7.12. Impairment of Financial Assets Impairment principles The Group recognizes impairment for expected credit losses for the following debt instruments: • Loans and Advances to Customers; • Financial and performance guarantees; • Import Documentary Credit; • Confirmed Export Documentary Credit; • Undrawn loan commitments; • Money Market exposures; • Securities Portfolio. Equity instruments are not subject to impairment according to IFRS 9. Debt instruments classified in amortized cost or fair value through other comprehensive income are considered within the scope of impairment calculations. Identified impairment losses are recorded against results and are subsequently reversed by results if, in a subsequent period, the amount of the estimated loss decreases. Impairment is based on expected credit losses for 12 months provided there is no significant deterioration in credit risk since origination. In the event of a significant increase in credit risk since origination, expected credit losses consider the remaining life of the asset, that is, they consider the remaining maturity of this asset. Expected credit losses for 12 months represent the portion of expected credit losses up to the maturity of the asset resulting from default events on an instrument occurring within the 12 months following the balance sheet date. Expected credit losses can be calculated individually or collectively, depending on the nature of the underlying portfolio of financial instruments. The Group has established a policy to assess, at the end of each reporting period, whether the credit risk of a financial instrument has increased significantly since initial recognition, considering the change in the risk of default that occurs over the remaining life of the financial asset. Based on the above process, the Group aggregates exposures by stage as described below: • Stage 1: includes all exposures without any indication of significant credit risk deterioration and without active default status. For these exposures, impairment is recognized as a 12-month expected loss; • Stage 2: includes all exposures where at least one indication of significant credit risk deterioration was identified. For these exposures, impairment is recognized at the current value of expected losses accrued until maturity. This universe also includes exposures in the quarantine period, that is, exposures that have recently ceased to have (1) indications of significant credit risk deterioration and/or (2) default classification; • Stage 3: includes all exposures classified as default - according to the internal definition of the Group which is aligned with the regulatory definition. This definition includes, cumulatively: • Exposures with substantial default for more than 90 consecutive days; or • Exposures that, not having a substantial default for more than 90 consecutive days, are classified as "Unlikely to pay". Financial assets purchased or originated with impairment (POCI), that is, for which impairment was identified at initial recognition, can be classified in stage 2 or stage 3. 315 Management Report Sustainability Report Consolidated Financial Statements Annex The calculation of collective impairment For the determination 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 that are applied in the context of the impairment calculation. For the purposes of determining collective impairment, the risk factors considered in each risk segment must reflect, in accordance with IFRS regulation, prospective information. Additionally, the impairment calculation must also reflect the consideration of multiple scenarios, with the final impairment resulting from the sum of the amounts determined 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 within a certain time period. The default can only occur at a certain point in the period evaluated, if the credit line has not previously been derecognized and is still on the balance sheet; • Severity (LGD) - this risk factor is an estimate of the loss that arises if the default happens at a certain moment. It is based on the difference between contractual cash flows and those that the Group estimates to receive, including the execution of collaterals or other contractual changes that become an integral part of the loan and do not meet the criteria to be recognized separately. • Exposure – it represents the notional amount of exposure on the reporting date and this amount is considered for the purposes of the basis of incidence for the calculation of collective impairment. In the case of off-balance sheet exposures, a credit conversion factor (CCF) is applied to the notional amount of the exposure. This factor represents the probability of off-balance sheet exposures converting 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 capital and interest repayment schedule, 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 applies to productive exposures that show no active indication of significant credit risk deterioration compared to origination. Impairment represents the expected loss resulting from default events on a financial instrument that may occur within a term of 12 months after the balance sheet date. Risk factors - PD and LGD – consider the 12-month horizon and are applied to the value of the exposure. This calculation is carried out by the scenario, since each considered scenario has specific risk factors - PD and LGD; • Stage 2: this calculation applies to productive exposures that show an indication of a significant increase in credit risk since origination. Impairment represents the current value of the sum of expected losses until the maturity of the exposure. Expected losses are calculated on the projected exposure at each moment of the debt amortization, according to the exposure amortization plan, and these expected losses are discounted at the original effective rate of the contract to obtain their current value, as of the reporting date. As mentioned above, this determination is done by scenario since different risk factors are considered for each scenario; • Stage 3: this calculation applies to non-productive exposures, where impairment corresponds to the difference between the amount outstanding and the current value of the expected recoveries for this exposure, given its characteristics. To determine the current value of the expected recoveries, the original effective rate of the contract is also used; • As previously mentioned, POCI are financial assets originated or purchased with impairment at initial recognition. Exposures in this situation cannot be classified in stage 1; • Irrevocable commitments and letters of credit: as previously mentioned, given the off-balance sheet nature of irrevocable commitments, the Group estimates on these contracts the respective amount that it expects to be converted into an on-balance sheet amount (credit). In this way, the estimated conversion factor for this type of exposure is applied to its notional value and the respective result is taken into account as the basis for incidence for the calculation of collective impairment; 316 Annual Report 2023 | novobanco • For credit cards and revolving lines that include an irrevocable commitment, the impairment is calculated and deducted from the asset. For irrevocable commitments and letters of credit, the impairment is recognized in Provisions in liabilities. Impairment for debt instruments measured at fair value through other comprehensive income does not reduce the balance sheet value of these financial assets, which remains at fair value. In this way, an amount equal to the provision that would arise if the assets were measured at amortized cost is recognized in other comprehensive income as an accumulated reduction in recoverable value, with a corresponding debit to the result. The accumulated loss recognized in other comprehensive income is recycled to results upon derecognition of the assets. Process of analysis of individual impairment The Individual Credit Analysis comprises a staging analysis and an analysis of quantification of individual impairment. The staging analysis is carried out for borrowers previously classified in stage 1 and stage 2 and aims to assess the adequacy of the stage assigned with additional information obtained on an individual basis. The analysis of quantification of individual impairment aims to determine the most appropriate impairment rate for each credit customer, regardless of the amount resulting from the Collective Impairment Model. Customers who have been targeted for Individual Analysis, but for whom an objective impairment loss has not been considered, are once again included in the Collective Impairment Model. The Individual Analysis of selected customers is carried out based on information provided by the Commercial Structures regarding the classification of the customer/Group, historical and forecast cash flows (when available) and existing collateral. 7.13. Valuation of collateral and financial guarantees 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 indexes. 7.14. 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 aims to sell all properties received in lieu of payment or through the execution of guarantees immediately, during 2016 the Group changed the classification of these properties from Non-current assets held for sale to Other assets (and to Investment properties, in the case of assets held by investment funds or leased properties), due to their stay in the portfolio being longer than 12 months. However, the accounting method did not change, and they are initially recognized at the lower of their fair value less expected sale costs and the balance of the granted credit object of recovery. Subsequently, these assets are measured at the lower of the initial recognition value and fair value less sales costs and are not amortized. For the properties registered in the balance sheet of Novo Banco and the other credit institutions that make up the Group's consolidation perimeter, the immediate sale value is considered as its fair value. For properties held by investment funds, in accordance with Law no. 16/2015, of February 24, its fair value is considered as the simple arithmetic average of two appraisals performed by independent experts, determined in accordance with the best price that could be obtained if it were put up for sale, under normal market conditions, at the time of the appraisals, which is reviewed with a minimum annual periodicity or, in the case of open collective investment organisms, with the redemption frequency if less than that, and whenever there are acquisitions or sales or significant changes in the value of the property. The market value of the properties for which a purchase and sale promise contract has been signed corresponds to the value of this contract. 317 Management Report Sustainability Report Consolidated Financial Statements Annex The valuations of real estate received for credit recovery are performed using one of the following methodologies, applied according to the specific situation of the asset: (i) The Market Method (ii) The Market Method references transaction values of similar properties comparable to the property being studied obtained through market prospecting in the area. Income Method This method aims to estimate the value of the property from the capitalization of its net income, updated for the present time, using the discounted cash flow method. (iii) Cost Method The Cost Method aims to reflect the amount currently required to replace the asset in present conditions, breaking down the property value into its fundamental components: Value of Urban Land and Urbanity; Construction Value; and Value of Indirect Costs. 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. 318 Annual Report 2023 | novobanco 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 30. 7.15. Investment properties The Group classifies as investment properties those properties held for rental or capital appreciation or both. Investment properties are initially recognized at acquisition cost, including directly related transaction costs, and subsequently at their fair value. Changes in fair value determined at each balance sheet date are recognized in results, in the headings of Other operating income or Other operating expenses, based on periodic evaluations carried out by independent entities specialized in this type of service. Investment properties are not subject to amortization. Given that these are assets whose fair value level in the IFRS 13 hierarchy corresponds mostly to level 3, the subjectivity of some assumptions used in evaluations, and the fact that there are external indications with alternative values, the Group conducts internal analysis on the assumptions used in the evaluations of these assets which may imply additional adjustments to their fair value, supported by additional internal or external evaluations. Transfers to and from the heading Investment properties can occur whenever there is a change in the use of the property. When transferring investment properties to own-use properties, the estimated cost, for accounting recognition, is the fair value at the date of the change of use. If an own-use property is classified as an investment property, the Group records this asset in accordance with the policy applicable to own-use properties, until the date of its transfer to investment properties and at fair value subsequently, with the difference in valuation determined at the date of transfer recognized in revaluation reserves. If a property is transferred from Other assets to Investment properties, any difference between the fair value of the asset on that date and the previously recorded amount is recognized as a result of the year. Subsequent related expenditures are capitalized when it is likely that the Group will obtain future economic benefits in excess of the level of performance initially estimated. The capital gains and losses determined on the disposal of investment properties resulting from the difference between the realization value and the carrying amount are recognized in results for the year under the headings of Other operating income or Other operating expenses. All costs and income generated with investment properties are also recognized in the results for the year under the headings of Other operating income or Other operating expenses, in addition to the changes in fair value previously mentioned. The Investment Properties recorded result only from non-banking activities (Investment Funds and Real Estate Companies). 7.16. Write-offs A write-off is defined as the derecognition of a financial asset from the Group's balance sheet, which should only occur when cumulatively: (i) The due date of the part of the loan to be written off (total or partial) would have been required, i.e. the loans must be registered (total or partial) in overdue credit. Exceptions to this requirement are (i) debt restructurings/forgiveness carried out within the scope of extrajudicial agreements, PER and Insolvencies, in which part of the loan may remain alive and the remainder of the debt may be written off by judicial/extrajudicial decision and (ii) situations in which despite the contract not being overdue in its entirety, the Group believes it is facing a scenario of total or partial loss; (ii) Collection efforts considered adequate would have been developed (and relevant and adequate evidence gathered); (iii) The expectations of loan recovery are very low, and it is necessary that the amount to be written off (whether it is a total or partial write-off of the debt) is fully covered by impairment and under the management of the central credit recovery application. It is necessary to ensure that the value to be written off the asset is fully covered by impairment (constituted at least in the month prior to the write-off). 319 Management Report Sustainability Report Consolidated Financial Statements Annex Subsequent payments received after the write-off must be recognised as subsequent write-off recoveries at other operating income. 7.17. Cash and Cash Equivalents For the purposes of the cash flow statement, cash and its equivalents include the amounts recorded in the balance sheet with a maturity of less than three months from the date of acquisition/contract, and whose risk of value variation is immaterial, including cash, cash balances at central banks and other sight deposits. Cash and cash equivalents exclude mandatory deposits made with Central Banks. 7.18. Assets sold with repurchase agreements, securities loaned and short sales Securities sold with a repurchase agreement (repos) at a fixed price or at a price that equals the sale price plus an interest inherent in the term of the operation are not derecognized from the balance sheet. The corresponding liability is accounted for in amounts payable to other credit institutions or customers, as appropriate. The difference between the sale price and the repurchase price is treated as an interest and is deferred during the life of the agreement, through the effective rate method. Securities purchased with a resale agreement (reverse repos) at a fixed price or a price that equals the purchase price plus an interest inherent in the term of the operation are not recognized in the balance sheet, with the purchase price being recorded as loans to other credit institutions or customers, as appropriate. The difference between the purchase price and the resale price is treated as an interest and is deferred during the life of the agreement, through the effective rate method. Securities transferred through loan agreements are not derecognized from the balance sheet, being classified and valued in accordance with the accounting policy referred to in Note 7.10. Securities received through loan agreements are not recognized in the balance sheet. Short sales represent securities sold that are not part of the Group's assets. They are recorded as a financial trading liability at the fair value of the assets that are to be returned under the resale agreement. The gains and losses resulting from the change in their fair value are directly recognized in results in the line of Gains or losses on financial assets and liabilities held for trading. 7.19. Property, plant and equipment The Group's tangible fixed assets are valued at cost less accumulated depreciation and impairment losses. The cost includes expenses that are directly attributable to the acquisition of the goods. Subsequent costs for tangible fixed assets are recognized only if they are likely to result in future economic benefits for the Group. All maintenance and repair expenses are recognized as cost, in accordance with the accrual basis principle. Land is not depreciated. Depreciation of tangible fixed assets is calculated using the straight-line method, at the following depreciation rates that reflect the expected useful life of the goods: 320 Annual Report 2023 | novobanco Own-use properties Improvements in rented buildings Computer equipment Furniture and fixtures Interior installations Security equipment Machines and tools Transportation material Other equipment Number of years 35 a 50 10 4 a 5 4 a 10 5 a 10 4 a 10 4 a 10 4 5 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 should be recognized whenever the net value of an asset exceeds its recoverable amount. Impairment losses are recognized in the income statement and are reversed in subsequent reporting periods when the reasons that led to their initial recognition cease to exist. For this purpose, the new depreciated amount will not exceed the one that would have been accounted for if no impairment losses had been attributed to the asset, considering the depreciations that it would have suffered. The recoverable amount is determined as the lower one between its fair value less the costs of sale and its value in use, and this is calculated based on the current value of estimated future cash flows expected to be obtained from the continued use of the asset and its disposal at the end of its lifespan. On the date of derecognition of a tangible asset, the gain or loss calculated by the difference between the fair value less the costs of sale and the book net value is recognized in results in the heading Other operating income or Other operating expenses. 7.20. Leases Lease definition The Group evaluates whether a contract is or contains a lease based on the definition of a lease, which focuses on the right to use an identified asset for a certain period of time, in exchange for a fee. As lessee As a lessee, the Group rents various assets, including real estate, vehicles, and computer equipment. The Group recognizes an asset for the right to use the leased asset and a lease liability for the obligation to pay rents. The Group does not recognize right-of-use assets and lease liabilities for short-term leases, whose lease term is 12 months or less, and leases of low-value assets (e.g. computer equipment), with a new value less than 5 thousand euros. The Group recognizes lease payments associated with these leases as expenses on a straight-line basis over the lease term, under "Other administrative expenses - Rents and leases". The Group presents right-of-use assets that do not fit the definition of investment property in "tangible fixed assets", in the same line of items where it presents the underlying assets of the same nature that it owns. Right-of-use assets that fit the definition of investment property are presented as investment property. These assets are measured at cost less accumulated depreciation and impairment, and are amortized on a straight-line basis over the lesser of the lease term or the life of the asset. The cost corresponds to the value of the recognized lease liability, incurred direct costs, and less any incentive received for the lease. The Group presents lease liabilities in "Other liabilities" in the financial position statement. The lease liability is determined by the present value of the rents to be paid during the lease term. Rents include fixed amounts, variable amounts that depend on an interest rate, amounts to be paid regarding 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 a rate are recognized as a cost in the period to which they relate. During the lease period, the lease liability increases by the interest count and decreases by the rent payment. The value of the lease liability is changed if the lease terms change (such as the term or the value of the index) or if the assessment of the exercise of the purchase option of the asset changes. 321 Management Report Sustainability Report Consolidated Financial Statements Annex As lessor Finance leases Operations in which the risks and benefits inherent to the ownership of an asset are substantially transferred to the lessee are classified as finance leases. Lease finance contracts are recorded in the balance sheet as credits granted for the equivalent value of the net investment made in the leased assets, along with any estimated unguaranteed residual value. Interest included in the rents charged to customers is recorded as income while capital amortizations, also included in the rents, are deducted from the value of credit granted to customers. The recognition of interests reflects a constant periodic return rate on the remaining net investment of the lessor. Operating leases All lease operations that do not fit the definition of finance lease are classified as operating leases. Receipts related to these contracts are recognized on a straight-line basis over the lease term and recorded in "Other operating income." 7.21. 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. Exceptionally, these may be extended whenever it is verified that the useful life of the asset is demonstrably longer. Costs directly related to the development of computer applications, from which it is expected to generate future economic benefits beyond one year, are recognized and recorded as intangible assets. All remaining costs associated with information technology services are recognised as an expense as incurred. 7.22. Impairment of Non-Financial Assets The Group assesses at each reporting date whether there is an indication of an asset may be impaired. If any such 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’s or cash-generating unit’s 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 Group bases its impairment calculation on detailed 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 beyond the fifth year (perpetuity). Impairment losses of continuing operations are recognized in the income statement in expense categories consistent with the function of the impaired asset, except for assets previously revalued with other comprehensive income. For such assets, the impairment is recognized 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 recognized impairment losses no longer exist or have decreased. If such indication exists, the Group estimates the asset’s or cash-generating unit’s recoverable amount. An impairment loss earlier recognized 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 recognized. 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 recognized for the asset in prior years. Such reversal is recognized in the statement of 322 Annual Report 2023 | novobanco profit or loss unless the asset is carried at revalued amount, in which case the reversal is treated as a revaluation increase. The Group assesses where climate risks may have a significant impact, such as the introduction of emission 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 measurement of the recoverable amount. These assumptions have been included in the cash flow forecasts in the assessment of use values. Intangible assets with indefinite lives are annually subjected to impairment testing at the cash-generating unit level, as appropriate, and when circumstances indicate the carrying value may be impaired. 7.23. Employee Benefits Pensions Resulting from the signing of the Collective Labor Agreement (ACT) and subsequent changes resulting from the 3 tripartite agreements, as referred to in Note 16, pension funds and other mechanisms have been established in order to ensure the coverage of responsibilities assumed for old-age pensions, disability, survival and also for medical care. The coverage of responsibilities is ensured, for the majority of the Group's companies, through pension funds managed by GNB - Sociedade Gestora de Fundos de Pensões, SA, a subsidiary of the Group. The pension plans existing in the Group correspond to defined benefit plans, because they define the criteria for determining the value of the pension that an employee will receive during retirement, usually depending on one or more factors such as age, years of service and remuneration. 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 fund to ensure its solvency, with the minimum levels set by the Bank of Portugal as follows: (i) full financing at the end of each year of actuarial responsibilities for pensions in payment and (ii) financing at a minimum level of 95% of the actuarial value of past service responsibilities of active personnel. The Group assesses the recoverability of any excess of the fund in relation to pension liabilities, based on the expectation of reduction in future necessary contributions. 323 Management Report Sustainability Report Consolidated Financial Statements Annex 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. 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. 7.24. 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. 324 Annual Report 2023 | novobanco 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. 7.25. Contingent Assets Contingent assets are not recognized in the financial statements but are disclosed when it is probable that there will be a future economic inflow of resources. 7.26. 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 taxes Current tax is the tax expected to be paid on the taxable profit for the year, calculated using tax rules and tax rates enacted or substantively enacted in each jurisdiction 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 taxes Deferred tax is calculated on timing differences arising between the carrying book values of assets and liabilities for financial reporting purposes and their respective tax base and is calculated using the tax rates enacted or substantively enacted at the balance sheet date in each jurisdiction and that are expected to apply when the timing differences are reversed. Deferred tax liabilities are 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. 325 Management Report Sustainability Report Consolidated Financial Statements Annex 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 2023. 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. DAC6 The obligation to report to the Tax and Customs Authority ("AT") internal or cross-border mechanisms of tax relevance has emerged in the context of Law no. 26/2020, of July 21 ("Law no. 26/2020"), which transposes Council Directive (EU) 2018/822 of May 25, 2018 ("DAC6") into Portuguese law. The DAC6 aims to discourage the use of potentially aggressive tax planning mechanisms by imposing reporting obligations to the Tax Authorities of the different Member States of the European Union. In addition, it aims to provide tax administrations and national legislators with information that will help combat aggressive tax planning. Novobanco, with the collaboration of tax consultants, has implemented measures that allow for the identification of operations subject to reporting to tax authorities. These measures focus mainly on a primary analysis conducted by business areas and a second-line analysis conducted by novobanco's tax area. The Bank's own operations are analyzed by novobanco's tax area and validated by the Compliance Department. BEPS - Pilar II In October 2021, as part of the Erosion of the Tax Base and Profit Shifting project ("BEPS 2.0 - Base Erosion and Profit Shifting 2.0") of the Organization for Economic Cooperation and Development ("OECD"), about 137 members of the OECD/G20, representing 90% of the world's GDP, reached an agreement for a reform of the international tax system, through which a general framework for a commonly designated "Pillar II" global minimum tax regime was approved. In this regard, Pillar II of BEPS 2.0, enshrined in Council Directive (EU) 2022/2523 of December 15, 2022, established a global minimum tax level of 15% for major multinational companies and large domestic groups, which could result in the payment of an additional tax. 326 Annual Report 2023 | novobanco Novobanco has been identifying the potential impacts associated with the implementation of Pillar II rules, having found that it should meet the eligibility criteria for the application of the Pillar II rules, namely by presenting consolidated annual incomes exceeding 750 million euros in two out of the last four financial years. However, both the Directive and the preliminary draft establish an exclusion rule for the application of the Income Inclusion Rule ("IIR") and the Undertaxed Payments Rule ("UTPR") for large national groups and multinational enterprise groups in the initial stage of international activity. Notwithstanding, that special rule stipulates that the additional tax due is zero in the reference jurisdiction for large national groups and multinational enterprise groups that are in an initial stage of their international activity, which implies (in the case of multinational enterprise groups) that, in each tax year: (i) they include constituent entities located in no more than six jurisdictions and (ii) the sum of the net book value of tangible assets of all their constituent entities, excluding those located in the reference jurisdiction, does not exceed 50 million euros. Additionally, said standard provides for the possibility of applying the exclusion rule for five years after the start of the first fiscal year in which the group comes under the Pillar II rules. However, it must be ascertained annually whether the above requirements are met. In this regard, according to the analysis carried out, Novobanco Group should meet the requirements for the application of the exclusion rule for multinational enterprise groups in the initial stage of their international activity, not foreseeing material impacts during the period when such exclusion rule is applied. 7.27. Recently issued accounting standards and interpretations The recently issued accounting standards and interpretations, which have not yet come into force and which the Group has not yet applied in the preparation of its financial statements, can be analyzed as follows: Standards, interpretations, amendments and revisions that come into force in future exercises The following standards, interpretations, amendments and revisions, with mandatory application in future exercises, had been adopted ("endorsed") by the European Union as of the approval date of these financial statements: Standard / Interpretation Amendments to IAS 1 - Presentation of Financial Statements - Classification of Current and Non- Current Liabilities Applicable in the European Union for exercises beginning in or after 1-jan-2024 Amendments to IFRS 16 - Leasing liabilities in sale and leaseback transactions 1-jan-2024 Description This amendment aims to clarify the classification of liabilities as current or non- current balances based on 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 evaluation should determine whether a right exists but should not consider whether the entity will or will not exercise such right), or by events occurring after the reporting date, such as non-compliance with a "covenant". However, if the right to defer settlement for at least twelve months is subject to the fulfilment of certain conditions after the balance sheet date, these criteria do not affect the right to defer settlement whose purpose is to classify a liability as current or non-current. This amendment also includes a new definition of "settlement" of a liability and is retroactively applicable. This amendment to IFRS 16 introduces guidance regarding the subsequent measurement of leasing liabilities, related to sale and leaseback transactions ("sale & leaseback") that qualify as "sale" according to the principles of IFRS 15, with greater impact when some or all of the lease payments are variable lease payments that do not depend on an index or a rate. When subsequently measuring leasing liabilities, the seller-lessees should determine the "lease payments" and "revised lease payments" in such a way that they do not recognize gains/(losses) in relation to the right of use they retain. This amendment is retroactively applicable. 327 Management Report Sustainability Report Consolidated Financial Statements Annex The Group has not proceeded with the early application of any of these standards in the financial statements for the fiscal year ended December 31, 2023. No significant impacts are estimated on the financial statements 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, had not been adopted ("endorsed") by the European Union as of the approval date of these financial statements: Standard / Interpretation Amendments to IAS 7 and IFRS 7 - Disclosures: Supplier Financing Arrangements Amendments to IAS 21 - The Effects of Changes in Foreign Exchange Rates: Lack of Exchangeability Description These amendments to IAS 7 Statement of Cash Flows and IFRS 7 Financial Instruments: Disclosures, aim to clarify the characteristics of a supplier financing arrangement and introduce additional disclosure requirements when such arrangements exist. The disclosure requirements are intended to help users of the financial statements understand the effects of supplier financing arrangements on the entity's liabilities, cash flows and liquidity risk exposure. The amendments take effect in the period beginning on or after January 1, 2024. Early adoption is permitted, however it should be disclosed. . This amendment aims to clarify how to assess the exchangeability of a currency, and how the exchange rate should be determined when it is not exchangeable for a long period. The amendment specifies that a currency should be considered exchangeable when an entity is able to obtain the other currency within a period that allows for normal administrative management, and through an exchange mechanism or market in which an exchange transaction creates enforceable rights and obligations. If a currency cannot be exchanged for another currency, an entity should estimate the exchange rate on the measurement date of the transaction. The goal will be to determine the exchange rate that would be applicable, on the measurement date, for a similar transaction between market participants. The amendments also state that an entity may use an observable exchange rate without making any adjustments. The amendments take effect in the period beginning on or after January 1, 2025. Early adoption is permitted, however the transition requirements applied must be disclosed. These standards have not yet been adopted ("endorsed") by the European Union and, as such, have not been applied by the Group for the year ended on December 31, 2023. No significant impacts are estimated on the financial statements 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: • 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; • Significant increase on the credit risk: as mentioned on the Note 7.12 – Other financial assets investments in credit institutions, customer loans and securities, the determination of the transfer of an asset from stage 1 to 328 Annual Report 2023 | novobanco 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; • 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; • Definition of groups of financial assets with similar credit risk characteristics: when the expected credit losses are measured through collective model, the financial instruments are aggregated based on the same risk characteristics. The Group monitors the credit risk characteristics in order to assure the correct reclassification of the assets, in cases of changes on the credit risk characteristics; • Models and assumptions: The Group uses several models and assumptions on the measurement of the expected credit losses. The judgement is applied on the identification of the more appropriate model for each type of asset as well as in the determination of the assumptions used in these models, including the assumptions related 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 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 40. 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 28. 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. 329 Management Report Sustainability Report Consolidated Financial Statements Annex 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. 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. 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. 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 7.14 and 7.15. 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. 330 Annual Report 2023 | novobanco 8.8. Lease Contract 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 years. The Group applies judgment in assessing whether it is reasonably right to exercise the renewal option. That is, it considers all the relevant factors that create an economic incentive for renewal. 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 2023, the Group has novobanco as its main operating unit - with 272 branches in Portugal (31 December 2022: 273 branches), with branches in Luxembourg and 2 representation offices – with novobanco Açores (12 branches), Banco BEST (5 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: Retail This Segment includes retail banking with individual customers and small businesses developed on a national territory based on the branch distribution network, investment centers and other channels. The financial information of the segment relates to, among other products and services, home loans, consumer credit, small business financing, deposits, insurance products for individuals and companies, account and payment means management and the placement services of investment funds, retirement plans and other savings products and services, including the buying and selling of securities and their custody. Corporate This segment includes activities with medium and large companies, through a commercial structure dedicated to this segment made up of 20 Business Centers. It also includes business with domestic and foreign institutional investors. The Group holds a significant presence in this segment, as a result of its know-how in supporting the development of the national business fabric, focused on companies of good risk, with an innovative nature and export orientation. Corporate Structure and Support Units This area does not correspond to an operational segment in the true sense of the concept, it is an aggregation of transversal corporate structures, which ensure the basic functions of global management of the Group, such as those related to the Administration and Supervision bodies, Treasury, Compliance, Planning, Accounting, Risk Control, Communication, Internal Audit, Human Resources, among others. Strategic decisions with cross-sectional impact throughout the Group are recognized in this segment. 331 Management Report Sustainability Report Consolidated Financial Statements Annex 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 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”. 332 Annual Report 2023 | novobanco 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 of 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: Net interest income Net fees and comissions Commercial banking income Other operating results (excluding banking sector contribution and solidarity additional) Contributions to resolution and deposit guarantee funds Operating expenses Provisions / Impairment Net gains / (losses) from investments in subsidiaries, joint ventures and associated companies registered by the equity method Profits or losses from continuing operational units before taxes and interests that are not controlling (excluding banking sector contribution and solidarity additional) 2023 (in thousands of Euros) Retail SMEs and corporate Support functions 648 466 196 355 844 821 2 012 - 318 415 54 137 - 550 156 92 544 642 700 37 983 - 98 980 89 995 - ( 56 038) 5 416 ( 50 622) 37 052 78 481 61 770 29 703 7 215 Total 1 142 584 294 315 1 436 899 77 047 78 481 479 165 173 835 7 215 474 281 491 708 ( 176 309) 789 680 Banking sector contribution and solidarity additional - - 35 280 35 280 Profit / (loss) from continued operations before taxes and non-controlling interests 474 281 491 708 ( 211 589) 754 400 Expenses or revenues with taxes Profit / (loss) of discontinued operations Net Profit / (loss) for the period attributable to non-controlling interests Net Profit / (loss) for the period attributable to Shareholders of the parent Intersegment operating income (1) Total Net Assets Loans to customers Total Liabilities Investments in associated companies Investments in tangible fixed assets Investments in intangible assets Investments in investment properties Investments in other assets - real estate properties (1) Intersegment operating income refers essentially to interest (net interest income) 1 395 - 4 488 468 398 21 704 14 613 687 13 424 547 21 239 578 - 4 632 168 - 134 150 - - 491 558 ( 52 673) 13 941 951 11 092 049 7 542 180 - 280 - - - 4 224 ( 412) 643 ( 216 868) 38 483 5 769 ( 412) 5 131 743 088 7 514 14 945 152 43 500 790 17 465 10 296 604 59 511 83 164 30 195 611 8 898 24 534 061 39 078 362 59 511 88 076 30 363 611 9 032 333 Management Report Sustainability Report Consolidated Financial Statements Annex Net interest income Net fees and comissions Commercial banking income Other operating results (excluding banking sector contribution and solidarity additional) Contributions to resolution and deposit guarantee funds Operating expenses Provisions / Impairment Net gains / (losses) from investments in subsidiaries, joint ventures and associated companies registered by the equity method Profits or losses from continuing operational units before taxes and interests that are not controlling (excluding banking sector contribution and solidarity additional) 2022 (in thousands of Euros) Retail SMEs and corporate Support functions Total 247 868 202 434 450 302 17 501 - 286 483 10 420 - 338 274 88 316 426 590 63 957 - 90 722 86 739 - 39 333 ( 570) 38 763 625 475 290 180 915 655 162 302 243 760 41 155 71 158 14 047 8 354 41 155 448 363 111 206 8 354 170 900 313 086 83 059 567 045 Banking sector contribution and solidarity additional 722 - 33 410 34 132 Profit / (loss) from continued operations before taxes and non-controlling interests 170 178 313 086 49 649 532 913 Expenses or revenues with taxes Profit / (loss) of discontinued operations Net Profit / (loss) for the period attributable to non-controlling interests Net Profit / (loss) for the period attributable to Shareholders of the parent Intersegment operating income (1) Total Net Assets Loans to customers Total Liabilities Investments in associated companies Investments in tangible fixed assets Investments in intangible assets Investments in investment properties Investments in other assets - real estate properties (1) Intersegment operating income refers essentially to interest (net interest income) 2 450 - 1 941 165 787 4 232 14 311 696 13 164 282 21 287 734 - 615 146 - 758 956 - 23 161 288 969 36 871 ( 56 707) ( 270) - 106 086 ( 34 077) ( 53 301) ( 270) 25 102 560 842 7 026 13 363 952 18 319 381 45 995 029 11 385 481 7 842 800 - - - - 829 1 191 13 352 877 119 744 136 918 25 160 16 464 15 587 24 550 954 42 483 411 119 744 137 533 25 306 16 464 17 174 The geographical information of the different business units of the Group is as follows: Net profit / (loss) for the period attributable to Shareholders of the parent (of which: rel. to discontinued units) Total income Intersegment operating income Net assets (of which: rel. to discontinued units) Investments in associated companies Investments in tangible fixed assets Investments in intangible assets Investments in investment properties Investments in other assets - real estate properties Profits / (losses) of continuing operating units before taxes and non- controlling interests Turnover (a) (b) Number of employees (a) Public subvencions received (a) (a) Financial information presented according to art. 2 of DL no. 157/2014 Portugal Spain 2023 Luxembourg Brazil Other Total (in thousands of Euros) 706 173 ( 1 218) 6 275 487 60 187 40 455 077 83 501 59 511 87 796 30 363 611 9 032 440 - 677 - 5 655 36 854 - 277 488 ( 52 673) 3 033 036 - - - - - - - - 280 - - - ( 379) 806 806 - 1 987 1 987 - - - - - 717 485 440 36 854 ( 379) 2 283 202 677 182 825 806 4 113 - 3 - 13 - - - - - - - 5 035 4 326 - - - - - - - 3 - 743 088 ( 412) 6 554 458 7 514 43 500 790 89 814 59 511 88 076 30 363 611 9 032 754 400 2 467 510 4 132 - (b) Turnover corresponds to the sum of the following items in the consolidated operating account: interest income, dividend income, fee and commission income, gains or losses on derecognition of financial assets and liabilities not measured at fair value through profit or loss on financial assets and liabilities held for trading, gains or losses on financial assets mandatorily at fair value through profit or loss, gains or losses on financial assets and liabilities carried at fair value through profit or loss hedge accounting losses, exchange differences, gains or losses on derecognition of non- financial assets, other operating operating income and proportion of profits or losses on investments in subsidiaries, joint ventures and associates accounted for under the equity method. 334 Annual Report 2023 | novobanco Net profit / (loss) for the period attributable to Shareholders of the parent (of which: rel. to discontinued units) Total income Intersegment operating income Net assets (of which: rel. to discontinued units) Investments in associated companies Investments in tangible fixed assets Investments in intangible assets Investments in other assets - real estate properties Profits / (losses) of continuing operating units before taxes and non-controlling interests Turnover (a) (b) Number of employees (a) Public subvencions received (a) (a) Financial information presented according to art. 2 of DL no. 157/2014 Portugal Spain Luxembourg Brazil Other Total 2022 (in thousands of Euros) 533 282 ( 270) 6 933 076 ( 29 845) 43 490 936 51 650 119 744 137 533 25 306 16 345 ( 5 568) - 30 893 - 463 226 885 - 47 959 36 871 2 448 197 - - - - 829 - - - - - 494 784 ( 5 568) 41 462 1 406 239 4 071 - 352 6 - 97 712 10 - 2 235 - 2 235 - 2 747 2 747 - - - - 2 235 2 235 - - - - - - 5 190 5 190 - - - - - - 3 - 560 842 ( 270) 7 162 659 7 026 45 995 029 59 587 119 744 137 533 25 306 17 174 532 913 1 506 538 4 090 - (b) Turnover corresponds to the sum of the following items in the consolidated operating account: interest income, dividend income, fee and commission income, gains or losses on derecognition of financial assets and liabilities not measured at fair value through profit or loss on financial assets and liabilities held for trading, gains or losses on financial assets mandatorily at fair value through profit or loss, gains or losses on financial assets and liabilities carried at fair value through profit or loss hedge accounting losses, exchange differences, gains or losses on derecognition of non-financial assets, other operating operating income and proportion of profits or losses on investments in subsidiaries, joint ventures and associates accounted for under the equity method. 335 Management Report Sustainability Report Consolidated Financial Statements Annex Note 10 – Net Interest Income The breakdown of this caption as of 31 December 2023 and 2022 is as follows: Interest Income Amortised cost (*) Interest from loans and advances (of which, financial leasing operations) (of which, repurchase agreement) Interest from deposits with and loans and advances to banks (of which, repurchase agreement) Interest from securities Other interest and similar income From assets / liabilities at fair value through other comprehensive income (*) Interest from securities Income/expenses from negative interest rates (*) Interest from deposits with and loans and advances to banks Interest from derivatives Fair value through profit or loss Interest from loans and advances Interest from securities Interest from derivatives Interest Expenses Amortised cost (*) Interest on debt securities issued Interest on amounts due to customers (of which, repurchase agreement) Interest on deposits from Central Banks and other banks (of which, repurchase agreement) Interest on subordinated liabilities Other interest and similar expenses From negative interest rates (*) Interest on deposits from Central Banks and other banks Interest on derivatives Other interest and similar expenses From assets / liabilities at fair value through profit or loss Interest on derivatives *Calculated by the effective interest method (thousands of Euros) 2023 2022 1 955 662 834 679 1 595 275 735 159 1 224 643 596 394 35 550 30 046 8 - 143 547 24 958 47 160 217 259 112 981 9 826 40 253 40 253 1 862 9 1 853 826 38 850 38 850 40 142 38 413 1 729 318 272 20 528 611 10 763 18 1 453 306 898 19 057 813 078 209 204 595 494 167 604 57 420 208 104 33 880 272 119 116 938 44 779 13 072 305 222 83 - 217 279 217 279 58 520 45 050 3 397 22 268 4 859 34 178 7 588 19 737 12 306 6 850 581 21 863 21 863 1 142 584 625 475 Average rates of financial assets and liabilities The table below presents the average interest rates for the major categories of the Group's financial assets and liabilities, as of December 31, 2023 and 2022, as well as their respective average balances and the interest of the fiscal year: 336 Annual Report 2023 | novobanco 2023 2022 (in thousands of Euros) Average balance for the year Year interest Average interest rate Average balance for the year Year interest Average interest rate Money market - assets Loans to customers Securities and others Differential applications 4 536 215 143 325 25 571 497 1 213 069 10 938 065 368 603 - - Financial and Differential assets 41 045 777 1 724 997 Money market - liabilities 7 265 138 238 230 Due to customers Debt issued and others Differential liabilities 28 981 803 241 984 1 402 137 102 199 3,12% 4,68% 3,32% - 4,15% 3,23% 0,82% 7,19% 6 308 062 12 654 25 424 392 590 751 10 181 113 153 284 - - 41 913 567 756 689 10 455 407 ( 19 542) 28 321 910 48 466 1 452 268 92 698 3 396 699 - - 1 683 982 9 592 Financial and Differential liabilities 41 045 777 582 413 Net interest margin 1 142 584 1,40% 2,75% 41 913 567 131 214 625 475 Note 11 – Fee and Commission Income and Fee and Commission Expenses The breakdown of this caption is as follows: 0,20% 2,29% 1,48% - 1,78% -0,18% 0,17% 6,30% - 0,31% 1,47% Fees and commissions income From banking services Cards Means of Payment Asset Management Credit Operations From guarantees provided From transaction of securities From commitments to third parties Bancassurance Other fee and commission income Fees and commissions expenses (in thousands of Euros) 2023 2022 339 061 337 335 248 624 46 884 115 328 35 715 50 697 31 054 11 867 6 871 29 356 11 289 44 746 250 119 42 336 109 290 38 256 60 237 32 202 10 968 6 601 30 294 7 151 47 155 With banking services rendered by third parties De ativos financeiros obrigatoriamente contabilizados pelo justo valor através dos resultados 30 902 15 026 28 212 13 513 9 438 9 319 Cards Means of Payment Asset Management Credit Operations With guarantees received With transaction of securities Other fee and commission income Ações 2 723 2 488 2 657 1 313 5 277 9 944 3 950 1 903 5 147 9 203 294 315 290 180 Euronext NV Visa Inc CL C 337 Outros Unidades de participação Explorer III B Ações ESA ENERGIA-AM SIBS SGPS RAMADA INV. Outros De ativos financeiros contabilizados pelo justo valor através de outro rendimento integral 31.12.2022 31.12.2021 102 - 98 4 164 164 2 561 238 1 866 2 455 2 826 2 162 1 801 226 135 7 604 7 604 1 330 - 785 275 270 11 096 Management Report Sustainability Report Consolidated Financial Statements Annex Note 12 – Results of financial operations The breakdown of this caption is as follows: Dividend income From financial assets mandatorily measured at fair value through profit or loss Shares Participation units From financial assets measured at fair value through other comprehensive income Shares (in thousands of Euros) 2023 2 133 185 77 108 1 948 1 948 2022 5 035 1 276 113 1 164 3 759 3 759 Gains or losses on financial assets and liabilities not measured at fair value through profit or loss ( 58 055) ( 88 255) From financial assets at fair value through other comprehensive income Bonds and other fixed income securities - Issued by government and public entities Bonds and other fixed income securities - Issued by other entities From financial assets and liabilities at amortized cost 5 090 5 090 ( 82 802) ( 30 768) - ( 52 034) ( 63 145) ( 5 453) Bonds and other fixed income securities - Issued by government and public entities ( 387) 2 Bonds and other fixed income securities - Issued by other entities ( 69 296) ( 6 496) Loans to customers Gains or losses on financial assets and liabilities held for trading Bonds and other fixed income securities - Issued by government and public entities Bonds and other fixed income securities - Issued by other entities Financial Derivatives Foreign exchange rate contracts Interest rate contracts Equity / Index contracts Credit default contracts Other 6 538 4 418 205 106 4 107 ( 1 302) 938 4 306 ( 2) 167 1 041 149 212 ( 23 620) 39 172 793 5 385 163 685 1 216 187 2 320 Gains or losses on financial assets mandatorily measured at fair value through profit or loss 26 633 ( 40 493) Bonds and other fixed income securities - Issued by other entities Shares Other variable income securities Loans to customers Gains or losses on financial assets and liabilities designated at fair value through profit and loss Other variable income securities Gains or losses from hedge accounting Fair value changes of hedging instruments Foreign exchange rate contracts Fair value changes of hedging item attributable to hedged risk Foreign exchange revaluation 13 329 1 280 6 639 5 385 79 79 ( 408) 14 074 ( 22 962) ( 31 197) 116 116 32 112 ( 1 713) ( 153 359) 439 936 185 471 ( 441 649) 24 369 31 689 6 789 30 691 As of December 31, 2023, profits from the intermediation margin (day one profit) recognized in the results, are essentially related to foreign exchange operations, amounted to approximately 3,684 thousand euros (December 31, 2022: 3,693 thousand euros). 338 Annual Report 2023 | novobanco Gains or losses from hedge accounting Gains or losses from hedge accounting include fair value variations of the hedging instrument (derivative) and fair value variations of the hedged item attributable to the hedged risk. In the event that hedging operations are prematurely terminated, a compensation payment/receipt may occur, which is recorded in Other operating expenses/Other operating income. On December 31, 2023, there were no compensations (December 31, 2022: 89 thousand euros). Note 13 – Gains or Losses on Derecognition of Non-Financial Assets The breakdown of this caption is as follows: Real estate properties Equipment Others (in thousands of Euros) 2023 27 343 526 31 27 901 2022 86 516 ( 5 790) 2 563 83 289 The caption of gains or losses on derecognition of non-financial assets - real estate includes, as of December 31, 2022, the gain of 66,797 thousand euros from the sale of the novobanco headquarters building, as detailed in note 25. Note 14 – Other Operating Income and Other Operating Expenses The breakdown of this caption is as follows: Other operating income Gains / (losses) on recoveries of loans Non-recurring advisory services Income of Funds and real estate companies Gains on repurchase of Group debt securities (see Note 31) Gains on investment properties revaluation (see Note 26) Other income Other operating expenses Losses on repurchase of Group debt securities (see Note 31) Direct and indirect taxes Contribution on the banking sector Solidarity additional Membership fees and donations Expenses of Funds and real estate companies Charges to supervisory entities Losses on investments properties revaluation (see Note 26) Other expenses Other operating income / (expenses) (in thousands of Euros) 2023 2022 106 231 214 005 32 512 331 19 470 - 45 091 8 827 40 423 334 35 461 13 118 433 19 341 ( 124 054) ( 118 357) ( 1 432) ( 4 727) - ( 5 275) ( 29 853) ( 28 881) ( 5 427) ( 1 460) ( 7 639) ( 2 228) ( 5 251) ( 2 490) ( 7 465) ( 2 254) ( 28 565) ( 27 300) ( 42 723) ( 17 823) ( 39 441) 95 648 As at 31 December 2023, there was no receipt related to compensation for interruption of hedge operations, included in other income (December 31, 2022: 89 thousand euros) (see Note 12). 339 Management Report Sustainability Report Consolidated Financial Statements Annex Note 15 – Staff Expenses The breakdown of this caption is as follows: Wages and salaries Remuneration Long-term service / Career bonuses (see Note 16) Mandatory social charges Costs with post-employment benefits (see Note 16) Other costs (thousands of Euros) 2022 179 909 179 905 4 47 216 301 6 281 2023 192 712 191 465 1 247 49 632 316 10 044 252 704 233 707 The provisions and costs related to the restructuring process are presented in Note 32. As of 31 December 2023 and 2022, the number of Novobanco Group employees breaks down as follows: novobanco Employees Employees of the Group's subsidiaries Total employees of the Group By professional category, the number of Novobanco Group employees breakdowns as follows: Senior management functions Middle management positions Specific positions Administrative and other functions Note 16 – Employee Benefits 2023 3 939 270 4 209 2023 481 373 2 265 1 090 4 209 2022 3 817 273 4 090 2022 481 388 2 170 1 051 4 090 Pension and health-care benefits As mentioned in accounting policy 7.23, 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 340 Annual Report 2023 | novobanco 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). 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), and the amount of 8.8 million euros of net liabilities of the value of the fund's assets related to the undivided part is recorded under the heading Provisions of the Group's liabilities. 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 2023, the amount of Euro 629 thousand was recorded in Personnel Costs related to the defined contribution plan (31 December 2022: Euro 548 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 341 Management Report Sustainability Report Consolidated Financial Statements Annex 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. The responsibilities and coverage levels of the Group, calculated according to the accounting policy defined in Note 7.23 - Employee Benefits, reportable as of December 31, 2023 and 2022, are analysed as follows: 342 Liabilitities Liabilitities in the beginning of the exercise Current service cost Interest cost Plan participants' contribution Contributions from other entities Actuarial (gains) / losses in the period: - Changes in financial assumptions - Experience adjustments (gains) / losses Pensions paid by the fund / transfers and one-off bonuses Early retirement Foreign exchange differences and other Liabilities at end of exercise Of which: Pensioners Assets Pension Funds Fair value of fund assets at beginning of exercise Net return from the fund - Share of the net interest on the assets - Return on assets excluding net interest Group contributions Plan participants’ contributions Pensions paid by the fund / transfers and one-off bonuses Foreign exchange differences and other Fair value of fund assets at the end of the exercise Assets / (liabilities) recognized in the balance sheet (see notes 29 and 33) In the beggining of the exercise Cost of the exercise Actuarial (gains) / losses recognized in other comprehensive income Contributions made in the exercise Other In the end of the exercise Annual Report 2023 | novobanco (thousands of Euros) 2023 2022 1 418 647 1 929 188 116 54 974 2 700 214 ( 26) 25 469 2 601 206 103 329 ( 527 073) 93 981 52 113 ( 88 597) ( 81 459) 11 444 2 19 473 ( 1 845) 1 596 810 1 418 647 1 195 361 401 449 1 075 292 343 355 1 478 263 1 907 928 222 774 ( 348 984) 53 494 23 153 169 280 ( 372 137) - 2 700 ( 88 597) 374 249 2 601 ( 81 459) ( 2 072) 1 615 514 1 478 263 59 616 ( 1 797) ( 27 294) - ( 11 821) 18 704 ( 21 260) ( 2 617) 101 726 249 ( 18 482) 59 616 Accumulated actuarial losses recognized in other comprehensive income Accumulated actuarial losses recognized in other comprehensive income at the beginning of the exercise 697 326 799 052 Actuarial (gains) / losses in the period: - Changes in assumptions - Financial assumptions - Plan assets return (excluding net interest) Period's amortization Other 103 329 ( 527 073) ( 75 299) 424 250 ( 545) 1 097 Accumulated actuarial losses recognized in other comprehensive income at the end of the exercise 724 811 697 326 Participants in Pension Plan Assets Retirees and survivors Participants under the clausule 98 12 311 4 143 7 074 1 094 12 108 3 958 7 066 1 084 343 Management Report Sustainability Report Consolidated Financial Statements Annex The pension funds’ assets can be analysed as follows: Equity instruments Debt instruments Investment funds Structured debt Real estate properties Cash and cash equivalents 2023 2022 (in thousands of Euros) Quoted Unquoted Total Quoted Unquoted Total - 125 736 125 736 - 63 411 63 411 1 034 102 - 1 034 102 127 841 56 200 184 041 20 - - - 20 228 483 228 483 43 132 43 132 947 801 155 923 60 - - - 947 801 55 794 211 717 15 75 181 960 181 960 73 299 73 299 Total 1 161 963 453 551 1 615 514 1 103 784 374 479 1 478 263 The assets of the pension funds used by the Group or representing securities issued by entities of the Group are detailed as follows: Cash and cash equivalents Real estate Total (in thousands of Euros) 2023 2022 21 408 39 965 63 802 39 056 61 373 102 858 The main actuarial assumptions used in the calculation of pension and health benefit liabilities are the same and are presented as follows: Actuarial Assumptions Projected rate of return on plan assets Discount rate Pension increase rate Salary increase rate Mortality table men Mortality table women 2023 2022 Assumptions Actual Assumptions Actual 3,45% 3,45% 0,75% 1,00% 15,87% - 4,36% 5,71% TV 88/90 TV 88/90-3 years 4,00% 4,00% 0,75% 1,00% -18,92% - 1,41% 2,54% TV 88/90 TV 88/90-3 years Disability decrements are not considered in the calculation of liabilities. The determination of the discount rate as of December 31, 2023 and 2022 was based on: (i) the evolution in the main indexes related to high quality corporate bonds and (ii) the duration of the liabilities. As of December 31, 2023 and 2022, the sensitivity analysis to a variation of 0.25% in the rate of assumptions used and a year in the mortality table results in the following variations in the present value of the liabilities for past services: 344 Annual Report 2023 | novobanco Assumptions Change in the amount of liabilities due to the change: (in thousands of Euros) 2023 2022 of +0.25% in the rate used of -0.25% in the rate used of +0.25% in the rate used of -0.25% in the rate used ( 47 893) 9 665 47 559 50 439 ( 9 349) ( 45 481) ( 41 764) 6 893 44 420 43 959 ( 6 658) ( 42 463) +1 year -1 year +1 year -1 year Discount rate Salary increase rate Pension increase rate Mortality table ( 49 967) 49 683 ( 41 178) 40 787 The costs of retirement pensions and health benefits for the years as of December 31, 2023 and 2022 may be applied as follows: Current service cost (a) Net interest Early retirements (a) Post-employment benefits costs (a) recorded in Staff expenses (see Note 15) (in thousand of Euros) 2023 116 1 481 200 1 797 2022 ( 26) 2 316 327 2 617 In 2023, the value of early retirements was 11.4 million euros (December 31, 2022: 19.4 million euros), of which 11.2 million euros fall within the Group's restructuring process (December 31, 2022: 19.1 million euros) and, as such, were recognised in counterparty to the use of the provision for restructuring (see Note 32). The average duration of the defined benefit plan liabilities is approximately 13 years (December 31, 2022: approximately 13 years). Career Bonus As of December 31, 2023, the liabilities assumed by the Group amount to 6,602 thousand euros, corresponding to the past service liabilities of the career premium, as described in Note 7.23 - Employee Benefits (December 31, 2022: 5,621 thousand euros) (see Note 33). As of December 31, 2023, a cost of 1,247 thousand euros was recorded for career premiums (December 31, 2022: 4 thousand euros) (see Note 15). Note 17 - Other Administrative Expenses The breakdown of this caption is as follows: 345 Management Report Sustainability Report Consolidated Financial Statements Annex Rentals Advertising Communication Maintenance and repairs expenses Travelling and representation Transportation of valuables Insurance IT services Independent work Temporary work Electronic payment systems Legal costs Consultancy and audit fees Water, energy and fuel Consumables Other costs (in thousands of Euros) 2023 4 909 6 055 10 616 7 735 2 652 2 889 5 056 2022 4 250 5 513 11 600 8 206 2 211 2 711 6 190 46 372 43 983 2 616 716 15 089 7 777 42 435 1 521 1 683 2 470 1 284 12 395 6 781 28 066 2 826 1 586 24 752 22 091 182 873 162 163 The 'Other costs' item includes, among others, specialised services for security and surveillance, information, training costs and various external supplies. The 'Rents and leases' item includes, as of December 31, 2023 an amount of 683 thousand euros related to short-term operating lease contracts (December 31, 2022: 704 thousand euros), as described in note 7.20. The fees billed during the exercises 2023 and 2022 by the Official Accounting Reviewers' Society, in accordance with the provisions of art. 508-F in the Commercial Companies Code, are detailed as follows: Statutory audit of annual accounts Other reliability assurance services Total value of billable services Note 18 - Contributions to Resolution and Deposit Guarantee Schemes As of 31 December 2023 and 2022, this caption is analysed as follows: Contribution to the Single Resolution Fund Contribution to the National Resolution Fund Contribution to the Deposit Guarantee Fund (milhares de euros) 2023 1 689 2 005 3 694 2022 1 445 1 264 2 709 (In thousands of Euros) 2023 14 977 7 101 56 403 78 481 2022 24 492 16 364 299 41 155 As part of the annual periodic contributions to the Deposit Guarantee Fund (DGF), Novobanco and the other Banks of the Group have assumed irrevocable commitments, under the terms of paragraph 4 of article 161 of the General Regime of Credit Institutions and Financial Companies ("RGICSF"), relating to part of these contributions, with the commitment to make the respective payment when the DGF requested it. At the end of 2023, and at the indication of this institution, the Group proceeded to pay the total value of the commitments assumed, amounting to 56,147 thousand euros, having recognised this amount as a cost of the year. 346 Annual Report 2023 | novobanco Additionally, the Group has irrevocable commitments amounting to 20,143 thousand euros related with contributions to the Single Resolution Fund, resulting from the option to make part of the annual contributions through a collateral deposit. Note 19 – Impairment Provisions or reversal of provisions (see Note 32) Provisions for guarantees and commitments Other provisions Impairment or reversal of impairment on financial assets not measured at fair value through profit or loss (see Note 22) Securities at fair value through other comprehensive income Securities at amortised cost Loans and advances to banks Loans and advances to customers Impairment or reversal of impairment of investment in subsidiaries, joint ventures and associates (see Note 24) Impairment or reversal of impairment on non-financial assets Non-current assets and disposal groups classified as held for sale (see Note 30) Tangible fixed assets (see Note 25) Intangible fixed assets (see Note 27) Other assets (see Note 29) (in thousands of Euros) 2023 2022 Total Total 45 699 ( 628) 46 327 39 245 ( 2 685) 41 930 141 893 101 882 ( 394) ( 433) 32 960 68 067 ( 62) 109 389 ( 287) 34 535 ( 7 406) ( 21 546) ( 6 351) ( 8 375) 14 486 ( 996) 18 ( 664) ( 1 776) - ( 19 859) ( 5 935) 173 835 111 206 Note 20 - Cash, Cash Balances at Central Banks and Other Demand Deposits This caption as of December 31, 2023 and 2022 is analysed as follows: Cash Demand deposits with Central Banks Bank of Portugal Other Central Banks Deposits in other domestic credit institutions Repayable on demand Uncollected checks Deposits with banks abroad Repayable on demand Other deposits (in thousands of Euros) 2023 2022 179 229 182 895 5 374 612 5 942 498 5 365 346 5 936 637 9 266 5 861 89 559 222 866 9 167 62 900 80 392 159 966 223 789 250 819 193 526 213 506 30 263 37 313 5 867 189 6 599 078 347 Management Report Sustainability Report Consolidated Financial Statements Annex The item Demand Deposits at the Bank of Portugal includes mandatory deposits in the amount of 289.0 million euros (December 31, 2022: 287.9 million euros) aimed at satisfying the legal requirements for the establishment of minimum cash availabilities. In accordance with Regulation (CE) No. 1358/2011 of the European Central Bank of December 14, 2011, the mandatory minimum availabilities in demand deposits at the Bank of Portugal are remunerated and correspond to 1% of deposits and debt securities with a term of less than 2 years, excluding from these the deposits of institutions subject to the minimum reserve regime of the European System of Central Banks. On December 31, 2023, the average interest rate for these deposits was null, and on December 31, 2022, it was 2%. The fulfilment of the mandatory minimum availabilities, for a given observation period, is determined based on the average value of deposit balances with the Bank of Portugal during that period. The balance of the account with the Bank of Portugal on December 31, 2023 was included in the observation period from December 20, 2023 to January 30, 2024. Cheques to be collected from credit institutions in the country and abroad were sent for collection on the first business days following the reference dates. Note 21 - Financial Assets and Liabilities Held for Trading This item as of December 31, 2023 and 2022 is analysed as follows: Financial assets held for trading Bonds and other fixed income securities - Issued by government and public entities Derivatives held for trading with positive fair value Financial liabilities held for trading Derivatives held for trading with negative fair value Securities held for trading The details of securities held for trading by fair value hierarchy are presented in Note 40. Derivatives Derivatives as of December 31, 2023 and 2022 are analysed as follows: (thousands of Euros) 2023 2022 436 148 318 528 171 810 36 428 117 620 135 382 100 639 100 639 99 386 99 386 348 Annual Report 2023 | novobanco 2023 2022 Notional Fair value Notional Fair value Buy Sell Asset Liability Buy Sell Asset Liability (thousands of Euros) TRADING DERIVATIVES Exchange rate contracts 117 620 100 639 11 227 11 413 135 382 99 386 23 141 22 069 Forward 484 603 484 586 7 848 8 215 664 046 662 467 13 976 13 326 Currency Swaps Currency Options Interest rate contracts 692 915 692 574 86 152 76 649 2 161 1 218 1 980 715 504 713 759 2 559 2 137 1 218 293 418 293 419 6 606 6 606 101 085 83 897 103 673 74 413 Interest Rate Swaps 3 040 734 3 040 734 90 160 73 772 3 071 249 3 071 249 98 468 70 120 Swaption - Interest Rate Options - - - - - - - - Interest Rate Caps & Floors 337 730 414 502 10 925 10 125 142 992 233 310 5 205 4 293 Equity / Index contracts 4 345 4 393 8 279 2 695 Equity / Index Options 266 706 266 706 4 345 4 393 423 960 423 956 8 279 2 695 Contracts on risk of default Credit Default Swaps - 45 249 Commodities Contracts Commodities Swaps 29 082 29 082 - - 963 963 104 104 832 - - 832 15 759 15 759 - - - - 289 289 209 209 a) Derivatives traded on organised markets, whose market value is settled daily against the margin account (see Notes 29 and 33) In the fiscal year 2023, the Group recognised a gain of 228 thousand euros related to the CVA of derivative instruments (December 31, 2022: loss of 1,820 thousand euros). The method of determining the CVA is explained in note 40. Note 22 - Financial Assets Mandatorily Measured at Fair Value Through Profit or Loss, at Fair Value Through Other Comprehensive Income and at Amortised Cost These items as of December 31, 2023 and 2022 are analysed as follows: 2023 (thousands of Euros) Mandatorily at fair value through profit and loss Fair value through profit and loss Fair value through other comprehensive income Amortised cost1 Fair value changes 2 Total 838 523 7 870 536 47 940 - - 24 534 061 ( 83 498) 24 450 563 838 523 32 452 537 ( 83 498) 33 472 474 - - 8 973 971 47 940 Securities Loans and advances to banks Loans and advances to customers 264 912 - - 264 912 - - - - 1 Includes fair value adjustments resulting from micro-hedging of interest rate risk (see Note 23) 2 Fair value changes of the elements covered by the interest rate hedge portfolio (see Note 23) 349 Management Report Sustainability Report Consolidated Financial Statements Annex 2022 (thousands of Euros) Mandatorily at fair value through profit and loss Fair value through profit and loss Fair value through other comprehensive income Amortised cost1 Fair value changes 2 Total - - 10 609 460 43 548 Securities 313 684 13 2 331 099 7 964 664 Loans and advances to banks Loans and advances to customers - 18 - - - - 43 548 24 550 936 ( 165 144) 24 385 810 313 702 13 2 331 099 32 559 148 ( 165 144) 35 038 818 1 Includes fair value adjustments resulting from micro-hedging of interest rate risk (see Note 23) 2 Fair value changes of the elements covered by the interest rate hedge portfolio (see Note 23) 22.1. Securities The detail of the Securities portfolio as of December 31, 2023 and 2022 is detailed as follows: Securities mandatorily measured at fair value through profit or loss Bonds and other fixed income securities - From other issuers Shares Other securities with variable income Securities at fair value through results Bonds and other fixed income securities - From other issuers Securities at fair value through other comprehensive income Bonds and other fixed income securities - From public issuers Bonds and other fixed income securities - From other issuers Shares Securities at amortised cost Bonds and other fixed income securities - From public issuers Bonds and other fixed income securities - From other issuers Impairment (thousands of Euros) 2023 2022 264 912 313 684 11 418 142 282 13 473 141 119 111 212 159 092 - - 13 13 838 523 2 331 099 371 675 1 764 578 389 194 479 406 77 654 87 115 7 870 536 7 964 664 4 421 480 4 423 089 3 773 368 3 833 106 ( 324 312) ( 291 531) 8 973 971 10 609 460 On December 29, 2022, the Crow Project was completed, entered into 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), relating to the process of sale of the units of participation held by these banks in the restructuring Funds. From this operation resulted: (i) the transfer of the units of participation held in the FRT, together with the assets directly and indirectly held by the fund to the buyer; (ii) the transfer of shares in the 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 the FLIT; and (iv) certain assets indirectly held by the FLIT and FRT were transferred to the Sellers. As a result of this operation, in fiscal year 2022 Novobanco received, net of costs, 224 million euros, proceeded to the derecognition of 267 million euros of units of participation and acquired assets registered as non-current assets in the amount of 48 million euros, with a positive impact on results of 4.8 million euros. The remaining participations in restructuring funds remaining on the Group's balance sheet are accounted for in shares and other variable income securities mandatorily accounted for at fair value through profit or loss, according to the accounting policy described in Note 7.6.4, based on net book value reported by the Management Companies, adjusted relative to information, analyses or independent valuations considered necessary to determine its fair value, responding to guidelines from the Central Bank of Europe. Being "level 3" assets according to the IFRS 13 fair value hierarchy (quotes provided by third parties whose parameters used are mostly not observable in the market), the detail of the valuation methodology is described in Note 40. 350 Annual Report 2023 | novobanco During this year, the Bank decided, on an exceptional basis, to fully sell a portfolio of supranational debt recorded at amortized cost whose yield was significantly below those observed in the market, within the scope of interest rate risk management, and in line with the Bank's strategy of protecting financial margin in a scenario of falling interest rates as early as 2024. Given the exceptionality and non-repeatable nature of the operation, we understand that it is part of the adopted business model. This portfolio consisted of eighteen securities with a duration of around 5 years (not considering call options), which represented around 9.4% (in nominal value) of the total securities portfolio recorded at amortized cost. With this operation, the Bank recognized a loss in the line Gains or losses of financial assets and liabilities not measured at fair value of 70,982 thousand euros in the 2023 financial year, which corresponds to the realization of potential losses on these securities, for the benefit of gains in future margin. The detail of the securities at fair value through other comprehensive income as of December 31, 2023 and 2022 is as follows: Cost (1) Fair value reserve Positive Negative Fair value reserve transferred to Results (2) (thousands of Euros) Book value Impairment reserves 378 488 1 757 ( 9 332) 762 371 675 70 492 307 996 10 1 747 ( 8 722) ( 610) - 61 780 762 309 895 ( 49) ( 28) ( 21) 421 252 775 ( 27 052) ( 5 781) 389 194 ( 190) Bonds and other fixed income securities - From public issuers Residents Non residents Bonds and other fixed income securities - From other issuers Shares 147 220 42 517 ( 112 083) Other securities with variable income 3 - ( 3) - - 77 654 - - - Balance as at 31 December 2023 (1) Acquisition 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 23) 946 963 45 049 ( 148 470) ( 5 019) 838 523 ( 239) Cost (1) Fair value reserve Positive Negative Fair value reserve transferred to Results (2) Book value Impairment reserves (thousands of Euros) Bonds and other fixed income securities - From public issuers 1 783 420 321 ( 19 163) Residents Non residents 349 818 1 433 602 10 311 ( 13 271) ( 5 892) - - - 1 764 578 ( 453) 336 557 1 428 021 ( 115) ( 338) Bonds and other fixed income securities - From other issuers 541 022 - ( 49 628) ( 11 988) 479 406 ( 207) Shares 445 229 41 222 ( 399 336) Other securities with variable income 3 - ( 3) - - 87 115 - - - Balance as at 31 December 2022 (1) Acquisition 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 23) 2 769 674 41 543 ( 468 130) ( 11 988) 2 331 099 ( 660) During the fiscal year 2023, the Group sold 1,243.4 million euros of financial instruments classified at fair value through other comprehensive income (December 31, 2022: 5,921.9 million euros), with a gain of 5.1 million euros (December 31, 2022: loss of 82.8 million euros), recorded in results, from the sale of debt instruments and a loss of 283.8 million euros that were transferred from revaluation reserves to sales-associated reserves (December 31, 2022: loss of 1.2 million euros), from the sale of capital instruments. 351 Management Report Sustainability Report Consolidated Financial Statements Annex The transfers between stages occurred in the portfolio of securities at fair value through other comprehensive income and amortised cost during the exercises 2023 and 2022 are presented as follows: 2023 (thousands of Euros) Transfers between Stage 1 and 2 Transfers between Stage 2 and 3 Transfers between Stage 1 and 3 To Stage 2 from Stage 1 To Stage 1 from Stage 2 To Stage 3 from Stage 2 To Stage 2 from Stage 3 To Stage 3 from Stage 1 To Stage 1 from Stage 3 Bonds and other fixed income securities - Capitals From other issuers 86 586 86 586 25 549 25 549 29 648 29 648 - - - - - - 2022 (thousands of Euros) Transfers between Stage 1 and 2 Transfers between Stage 2 and 3 Transfers between Stage 1 and 3 To Stage 2 from Stage 1 To Stage 1 from Stage 2 To Stage 3 from Stage 2 To Stage 2 from Stage 3 To Stage 3 from Stage 1 To Stage 1 from Stage 3 Bonds and other fixed income securities - Capitals From other issuers 18 523 18 523 1 405 1 405 - - - - 29 263 29 263 - - The movements occurred in the impairment reserves in the securities at fair value through other comprehensive income are presented as follows: Balance as at 31 December 2021 Transfers to stage 3 Increases due to changes in credit risk Decreases due to changes in credit risk Write-off Other movements Balance as at 31 December 2022 Increases due to changes in credit risk Decreases due to changes in credit risk Write-off Other movements Balance as at 31 December 2023 Impairment movement of securities at fair value through other comprehensive income Stage 1 Stage 2 Stage 3 Total (thousands of Euros) 3 716 ( 20) 2 339 ( 2 752) ( 2 654) 30 659 416 ( 810) ( 22) ( 5) 238 - - - - - - - - - - - - 20 - ( 20) - 1 1 - - - - 1 3 716 - 2 339 ( 2 772) ( 2 654) 31 660 416 ( 810) ( 22) ( 5) 239 The movements occurred in the impairment losses in the securities at amortised cost are presented as follows: 352 Annual Report 2023 | novobanco Impairment movement of securities at amortised cost Stage 1 Stage 2 Stage 3 Total (thousands of Euros) 5 471 76 ( 61) ( 6 357) 15 463 38 283 203 243 246 997 ( 76) 61 - - - 6 357 - - - 173 771 1 687 706 1 876 940 ( 9 262) ( 208 666) ( 1 590 945) ( 1 808 873) ( 41) 58 5 347 1 883 ( 1 784) - - ( 25 237) ( 25 278) 1 687 1 745 3 373 282 811 291 531 ( 1 883) 1 784 - - - ( 1 654) 1 654 - - - 8 913 11 020 1 631 947 1 651 880 ( 12 248) ( 9 201) ( 1 597 471) ( 1 618 920) ( 153) 1 749 3 707 ( 23) ( 3 402) ( 5) 1 655 ( 181) 2 14 320 591 324 312 Balance as at 31 December 2021 Transfers to stage 1 Transfers to stage 2 Transfers to stage 3 Increases due to changes in credit risk Decreases due to changes in credit risk Write-off Other movements Balance as at 31 December 2022 Transfers to stage 1 Transfers to stage 2 Transfers to stage 3 Increases due to changes in credit risk Decreases due to changes in credit risk Write-off Other movements Balance as at 31 December 2023 In accordance with the accounting policy described in Note 7.12, the Group regularly assesses whether there is objective evidence of impairment in its portfolio of financial assets at fair value through other comprehensive income following the judgement criteria described in Note 8.1. The detail of the securities portfolio by fair value hierarchy is presented in Note 40. The securities in the portfolio given as collateral by the Group are analysed in Note 36. 22.2. Loans and advances to Banks The detail of Loans and advances to Banks as of December 31, 2023 and 2022 is detailed as follows: Loans and advances to banks in Portugal Deposits Loans Loans and advances to banks abroad Deposits Impairment losses All loans and advances to Banks are accounted under amortised cost portfolio. Changes in impairment losses on loans and advances to banks are presented as follows: (Thousands of Euros) 2023 2022 44 938 39 232 24 761 20 177 3 716 3 716 48 654 ( 714) 47 940 4 39 228 5 096 5 096 44 328 ( 780) 43 548 353 Management Report Sustainability Report Consolidated Financial Statements Annex Balance as at 31 December 2021 Increases due to changes in credit risk Decreases due to changes in credit risk Other movements Balance as at 31 December 2022 Increases due to changes in credit risk Decreases due to changes in credit risk Other movements Balance as at 31 December 2023 22.3. Loans and advances to customers Loans and advances to Banks Stage 1 Stage 2 Stage 3 Total (thousands Euros) 217 371 ( 413) 25 200 302 474 391 ( 636) ( 75) 154 517 ( 446) ( 435) 51 107 ( 56) 180 422 - - 4 426 - - 1 427 1 113 762 ( 1 049) ( 46) 780 819 ( 881) ( 4) 714 The detail of the Loans and advance to customers as of December 31, 2023 and 2022 is detailed as follows: Loans and advances – Corporate Current account loans Loans Discounted bills Factoring Overdrafts Financial leases Other loans and advances Loans and advances – Individuals Residential Mortgage loans Consumer credit and other loans Overdue loans and advances and interests Under 90 days Over 90 days Impairment losses Fair value adjustments of interest rate hedges (See Note 23) Corporate – Loans Individual - Mortgage loans (thousands of Euros) 2023 2022 13 494 029 13 949 104 1 388 599 1 171 800 10 523 888 11 116 414 73 167 87 371 817 655 700 708 13 674 46 709 656 291 796 661 20 755 29 441 11 629 113 11 337 636 10 050 449 9 966 380 1 578 664 1 371 256 365 444 330 606 27 461 13 267 337 983 317 339 25 488 586 25 617 346 ( 954 525) (1 066 392) 24 534 061 24 550 954 ( 83 498) ( 165 144) - ( 16 805) ( 83 498) ( 148 339) 24 450 563 24 385 810 As of December 31, 2023, there are operations mandatorily registered at fair value through profit or loss, with a nominal value of 13,090 thousand euros and a fair value of 0 thousand euros (December 31, 2022: 31,197 thousand euros and 18 thousand euros, respectively), the impact of which was recorded in the line Gains or losses on financial assets mandatorily accounted at fair value through profit or loss on the income statement (see Note 12). As of December 31, 2023, the value of customer loans (net of impairment) includes the amount of 1,008.7 million euros (December 31, 2022: 1,127.6 million euros), related to securitization operations that, according to the accounting policy mentioned in Note 6, are consolidated by the Group (See Notes 1 and 39). The liabilities associated with these securitisation operations were recognised as Liabilities represented by securities (see Note 31). 354 Annual Report 2023 | novobanco As of December 31, 2023, the item customer loans includes 7,442.1 million euros of mortgage credit related to the issuance of mortgage bonds (December 31, 2022: 6,078.4 million euros) (see Note 31). As of December 31, 2023, the value of interest and fees recorded in the balance sheet for credit operations amounts to 97,082 thousand euros (December 31, 2022: 37,310 thousand euros). The movements occurred in the capital amounts of credit are presented as follows: Balance at 31 December 2021 New production Scheduled refunds Unscheduled refunds Write off Other movements Balance at 31 December 2022 New production Scheduled refunds Unscheduled refunds Write off Other movements Movement in loans and advances to customers Corporate loans Mortgage loans Other loans to Individuals Total (thousand of Euros) 13 714 025 1 791 033 ( 1 515 841) ( 706 394) ( 133 479) 1 095 132 14 244 477 2 290 752 ( 1 852 664) ( 1 131 526) ( 133 479) 401 850 9 812 013 1 241 684 ( 259 060) ( 703 526) ( 52 200) ( 61 189) 9 977 722 1 429 897 ( 304 718) ( 885 942) ( 52 200) ( 106 728) 1 406 415 246 522 ( 126 299) ( 61 167) ( 31 051) ( 39 273) 1 395 147 433 695 ( 163 119) ( 184 498) ( 31 051) 160 971 24 932 453 3 279 239 ( 1 901 199) ( 1 471 087) ( 216 730) 994 671 25 617 346 4 154 344 ( 2 320 501) ( 2 201 966) ( 216 730) 456 093 Balance at 31 December 2023 13 819 410 10 058 031 1 611 145 25 488 586 The transfers between stages that occurred in credit during the exercises 2023 and 2022 are presented as follows: 2023 (thousands of Euros) Transfers between Stage 1 and 2 Transfers between Stage 2 and 3 Transfers between Stage 1 and 3 To Stage 2 from Stage 1 To Stage 1 from Stage 2 To Stage 3 from Stage 2 To Stage 2 from Stage 3 To Stage 3 from Stage 1 To Stage 1 from Stage 3 Loans - Capitals Corporate loans 924 486 738 400 172 165 104 580 Loans to individuals 509 329 281 917 53 510 30 955 1 433 815 1 020 317 225 675 135 535 70 868 25 747 96 615 314 5 603 5 917 355 Management Report Sustainability Report Consolidated Financial Statements Annex 2022 (thousands of Euros) Transfers between Stage 1 and 2 Transfers between Stage 2 and 3 Transfers between Stage 1 and 3 To Stage 2 from Stage 1 To Stage 1 from Stage 2 To Stage 3 from Stage 2 To Stage 2 from Stage 3 To Stage 3 from Stage 1 To Stage 1 from Stage 3 Loans - Capitals Corporate Loans Loans to individuals 555 353 393 129 514 595 317 341 81 989 35 718 948 482 831 936 117 707 40 423 41 354 81 777 29 605 8 668 38 273 2 250 22 856 25 106 The movements occurred in the impairment losses of credit are presented as follows: Impairment movements of loans and advances to customers Stage 1 Stage 2 Stage 3 Total (thousands of Euros) Decreases due to changes in credit risk ( 94 166) ( 41 063) ( 45 050) ( 180 279) Balance as at 31 December 2021 Transfers to stage 1 Transfers to stage 2 Transfers to stage 3 Financial assets derecognised Increases due to changes in credit risk Write-off Other movements Balance as at 31 December 2022 Transfers to stage 1 Transfers to stage 2 Transfers to stage 3 Financial assets derecognised 322 194 862 148 1 247 917 ( 73 627) - ( 19 094) 47 974 ( 28 880) ( 18 699) 18 948 - ( 26 847) ( 26 851) 64 166 130 905 214 814 63 575 73 627 ( 249) ( 4) 19 743 - ( 38) ( 198 740) ( 198 778) 18 842 62 274 ( 300) ( 8 973) 9 569 300 607 703 511 1 066 392 145 919 ( 145 918) ( 1) ( 48 035) 86 820 ( 38 785) ( 379) ( 123) ( 34 291) 34 670 ( 188) ( 75 114) ( 75 425) - - - - - - Increases due to changes in credit risk 12 485 171 190 128 336 312 011 Decreases due to changes in credit risk ( 114 471) ( 39 941) ( 48 210) ( 202 622) Write-off Other movements ( 31) ( 155 306) ( 155 337) 5 740 ( 3 618) 7 384 9 506 Balance as at 31 December 2023 63 410 334 630 556 485 954 525 The distribution of credit by type of rate is as follows: Fixed rate Variable rate The lease loans, by residual terms, is presented as follows: (thousands of Euros) 2023 2022 3 494 865 2 802 871 21 910 223 22 649 331 25 405 088 25 452 202 356 Gross investment in finance leases receivable Up to 1 year 1 to 5 years More than 5 years Interest due from finance leases Up to 1 year 1 to 5 years More than 5 years Capital due Up to 1 year 1 to 5 years More than 5 years Impairment Annual Report 2023 | novobanco (thousands of Euros) 2023 2022 768 608 228 441 418 850 121 317 100 061 31 620 52 892 15 549 668 547 196 821 365 958 105 768 915 702 216 621 496 962 202 119 97 481 26 238 54 097 17 146 818 221 190 383 442 865 184 973 ( 66 291) ( 84 922) 602 256 733 299 As of December 31, 2023 and 2022, the detail of the gross exposure value of credit and individually and collectively assessed impairment, by segment was as follows: Individual Evaluation(1) Collective Evaluation(2) Total Exposure Impairment Impairment Exposure Impairment Exposure Impairment 2023 (thousands of Euros) Corporate 871 878 419 296 12 947 533 343 662 13 819 411 762 958 Stage 1 Stage 2 Stage 3 - - - - 10 243 033 42 688 10 243 033 42 688 2 651 010 272 035 2 651 010 272 035 871 878 419 296 53 490 28 939 925 368 448 235 Mortgage loans 274 120 9 974 259 Stage 1 Stage 2 Stage 3 - - - - 274 120 9 102 417 775 655 96 187 Other Credit to Individuals 52 005 49 058 1 559 139 Stage 1 Stage 2 Stage 3 - - - - 1 178 276 321 709 52 005 49 058 59 154 71 121 3 896 37 565 29 660 71 268 13 879 27 422 29 967 Total (1) Loans whose final impairment has been determined and approved by the Impairment Committee (2) Loans whose final impairment has been determined in accordance with the calculation rules of the collective impairment model 24 480 931 468 474 486 051 924 157 9 974 533 9 102 417 775 655 71 241 3 896 37 565 96 461 29 780 1 611 144 120 326 1 178 276 321 709 111 159 13 879 27 422 79 025 25 405 088 954 525 357 Management Report Sustainability Report Consolidated Financial Statements Annex Individual Evaluation(1) Collective Evaluation(2) Total Exposure Impairment Impairment Exposure Exposure Impairment 2022 (thousands of Euros) Corporate 1 093 692 542 602 13 133 980 333 908 14 227 672 876 510 Stage 1 Stage 2 Stage 3 - 1 587 - 10 187 063 43 504 392 2 898 148 260 974 1 092 105 542 210 48 769 Mortgage loans 3 626 395 9 825 757 Stage 1 Stage 2 Stage 3 Other Credit to Individuals Stage 1 Stage 2 Stage 3 - - 3 626 80 441 - - - - 395 8 939 605 781 080 105 072 74 467 1 314 706 - - 1 090 919 177 390 46 397 80 441 74 467 Total (1) Loans whose final impairment has been determined and approved by the Impairment Committee (2) Loans whose final impairment has been determined in accordance with the calculation rules of the collective impairment model 24 274 443 1 177 759 448 928 617 464 29 430 54 440 3 595 20 958 29 887 60 580 14 912 18 448 27 220 10 187 063 2 899 735 1 140 874 9 829 383 8 939 605 781 080 108 698 43 504 261 366 571 640 54 835 3 595 20 958 30 282 1 395 147 135 047 1 090 919 177 390 126 838 14 912 18 448 101 687 25 452 202 1 066 392 In the case of credits analysed by the Impairment Committee for which the impairment determined automatically by the Impairment Model was not changed, they are included and presented in the "Collective assessment". As of December 31, 2023 and 2022, the detail of the gross exposure value of credit and individually and collectively assessed impairment, by geography was as follows: 2023 (thousand of Euros) Individual evaluation* Collective Evaluation** Total Exposure Impairment Exposure Impairment Exposure Impairment 799 080 406 166 20 575 238 437 184 21 374 318 843 350 - - - - - - - - - - 1 101 455 432 690 391 402 243 967 337 211 15 191 6 314 3 669 2 482 1 418 1 101 455 432 690 391 402 243 967 337 211 15 191 6 314 3 669 2 482 1 418 125 077 62 308 1 398 968 19 793 1 524 045 82 101 924 157 468 474 24 480 931 486 051 25 405 088 954 525 Portugal Spain United Kingdom France Switzerland Luxembourg Others Total * Credits whose impairment results from individual analysis (defined and approved by the Impairment Committee) ** Credits whose impairment was evaluated collectively and determined automatically by the Impairment Model. As of December 31, 2023 and 2022, the detail of the gross exposure value of credit and impairment constituted by segment was as follows: 358 Corporate Mortgage loans Annual Report 2023 | novobanco Segment Performing Delay > 30 days Total Performing or Delay < 30 days (thousand of Euros) 2023 Non-Performing Days late <= 90 days > 90 days Total Total Gross Value 24 171 609 100 827 24 272 436 648 744 483 908 1 132 652 25 405 088 12 859 810 34 569 12 894 379 547 879 377 153 925 032 13 819 411 Other loans to Individuals 1 486 648 11 690 1 498 338 9 825 151 54 568 9 879 719 46 948 53 917 47 866 58 889 94 814 9 974 533 112 806 1 611 144 Impairment Corporate Mortgage loans Other Loans to Individuals 392 487 314 329 44 741 33 417 5 556 730 2 729 2 097 398 043 293 640 262 842 556 482 954 525 315 059 237 750 210 149 447 899 762 958 47 470 35 514 11 954 43 936 11 817 40 876 23 771 84 812 71 241 120 326 Net Value 23 779 122 95 271 23 874 393 355 104 221 066 576 170 24 450 563 Segment Performing Delay > 30 days Total Performing or Delay < 30 days (thousand of Euros) 2022 Non-Performing Days late <= 90 days > 90 days Total Total Gross Value 23 998 856 76 954 24 075 810 834 125 542 267 1 376 392 25 452 202 Corporate Mortgage Loans Other loansto Individuals Impairment Corporate Mortgage loans Other loans to Individuals 13 053 682 33 134 13 086 816 724 413 416 443 1 140 856 14 227 672 9 689 291 35 682 9 724 973 1 264 021 55 744 53 968 48 666 104 410 9 829 383 77 158 131 126 1 395 147 1 255 883 329 627 274 903 27 858 26 866 8 138 7 100 3 632 1 881 1 587 336 727 381 142 348 523 729 665 1 066 392 278 535 324 410 273 565 597 975 29 739 28 453 13 308 43 424 11 788 63 170 25 096 106 594 876 510 54 835 135 047 Net Value 23 669 229 69 854 23 739 083 452 983 193 744 646 727 24 385 810 As of December 31, 2023 and 2022, the detail of the credit portfolio by segment and by reference year was as follows: 359 2004 and previous 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 Total 2004 and previous 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 Total Management Report Sustainability Report Consolidated Financial Statements Annex Corporate Mortgage Other Loans to Individuals Total 2023 (thousand of Euros) Reference year Number of operations Amount Impairment Number of operations Amount Impairment Number of operations Amount Impairment Number of operations Amount Impairment 861 106 251 696 8 094 50 883 854 736 9 750 220 535 53 430 3 534 1 132 524 1 159 862 21 378 749 863 1 165 1 081 833 873 1 573 1 274 1 910 2 231 3 975 5 155 25 788 7 145 6 902 251 529 1 543 16 453 7 329 104 772 9 880 11 593 479 751 2 986 19 595 7 263 178 320 29 798 17 124 714 002 4 739 28 748 11 007 315 201 11 073 11 439 504 010 3 177 21 880 10 309 282 362 602 336 24 104 284 646 8 970 32 051 591 786 13 228 47 037 903 329 35 139 34 400 829 520 14 586 107 798 10 453 7 199 340 525 2 371 15 629 17 827 9 273 23 661 466 150 22 097 104 891 13 570 6 897 354 314 2 561 23 967 20 904 1 090 74 858 8 294 3 468 154 708 820 27 431 14 607 1 409 136 269 24 948 1 674 62 978 589 32 797 12 060 262 964 35 300 2 133 101 765 1 108 29 628 10 783 131 331 29 270 1 411 73 298 584 28 260 13 469 604 339 415 569 837 31 737 480 109 16 735 31 989 244 173 9 453 35 880 211 307 25 952 33 334 375 512 36 977 30 945 218 098 30 691 433 904 55 972 2 237 127 748 580 32 062 26 591 14 764 36 209 588 243 71 316 351 925 39 052 4 668 288 543 1 619 46 239 49 972 20 818 53 138 690 440 61 489 484 885 33 148 7 094 511 638 3 142 48 376 47 271 5 759 59 445 1 043 794 42 049 787 112 64 961 7 968 674 503 2 894 56 608 71 534 4 177 69 731 1 533 149 72 032 7 594 1 237 808 98 414 8 199 738 314 3 761 64 944 122 530 8 128 80 737 2 098 652 110 303 9 763 1 381 935 40 676 6 138 581 242 3 307 44 573 112 278 5 024 60 474 2 075 455 49 007 7 051 1 641 874 24 129 7 058 759 030 4 330 66 233 185 841 9 675 80 342 2 586 745 38 134 10 939 3 307 172 115 057 8 980 1 105 734 4 074 102 987 323 930 16 834 122 906 4 736 836 135 965 16 235 2 498 908 103 724 10 204 1 296 165 17 306 150 644 492 209 17 994 177 083 4 287 282 139 024 936 869 13 819 411 762 958 183 269 9 974 533 71 241 1 077 589 1 611 144 120 326 2 197 727 25 405 088 954 525 Corporate Mortgage Other loans to Individuals Total 2022 (thousand of Euros) Reference year Number of operations Amount Impairment Number of operations Amount Impairment Number of operations Amount Impairment Number of operations Amount Impairment 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 31 474 3 122 153 885 31 646 7 553 12 611 285 777 538 293 2 126 3 735 206 228 41 288 18 686 803 616 5 964 349 863 14 284 12 704 570 092 717 890 1 129 1 031 761 818 867 1 057 1 422 1 426 2 048 2 778 4 922 133 985 13 975 119 542 15 204 98 217 14 951 161 198 30 331 324 476 208 148 57 217 52 871 503 622 74 436 464 764 53 392 661 124 46 925 6 237 1 035 429 82 184 8 594 1 811 417 149 236 8 133 7 666 3 974 2 118 2 547 1 608 2 483 5 133 7 897 9 037 9 290 390 247 408 947 177 536 76 338 4 103 2 582 3 112 955 803 116 007 1 342 83 848 145 657 331 037 595 054 790 378 869 666 658 739 1 477 3 115 3 541 3 412 9 649 11 937 18 474 17 723 10 428 16 191 18 495 23 971 22 980 20 653 23 505 37 488 41 169 50 261 56 631 6 746 7 053 9 560 7 470 16 487 20 681 13 517 12 122 11 558 17 850 236 325 561 263 17 919 323 997 5 484 25 438 699 231 35 706 38 289 1 019 404 47 813 31 458 927 425 18 650 8 835 19 322 540 719 25 392 603 279 418 580 768 24 675 549 170 23 336 289 270 27 146 249 658 18 919 16 185 31 552 26 949 452 041 59 139 23 687 309 846 54 297 55 135 38 538 28 036 704 414 113 713 61 110 19 313 45 399 856 911 66 104 100 228 167 640 247 761 6 137 5 409 10 116 6 205 8 744 74 182 56 177 91 134 53 988 1 322 282 65 535 1 926 035 74 515 2 848 723 162 764 55 274 2 725 166 67 693 70 232 3 226 351 50 619 415 431 14 952 103 249 5 280 061 97 055 10 301 1 910 110 58 482 6 879 668 607 3 006 38 094 146 449 7 477 2 152 348 38 054 15 028 3 700 255 80 631 7 574 9 119 826 242 1 164 375 3 821 1 472 55 181 79 102 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 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 time of granting the credit, being revaluated periodically. The gross value of the credits and the respective fair value of the collaterals, limited to the value of the associated credit, is presented below: 360 Annual Report 2023 | novobanco 2023 2022 (thousand of Euros) Amount of loans Impairment Net Value Fair value of collateral Amount of loans Impairment Net Value Fair value of collateral 9 974 533 ( 71 241) 9 903 292 9 963 237 9 829 383 ( 54 835) 9 774 548 9 726 694 8 686 828 ( 3 317) 8 683 511 8 770 123 8 636 253 ( 3 391) 8 632 862 8 636 253 347 969 67 620 ( 103) ( 476) 347 866 341 448 67 144 - 221 446 81 906 ( 74) ( 130) 221 372 213 902 81 776 - ( 19 470) 693 727 713 197 46 859 15 599 ( 940) ( 17 155) 91 484 ( 24 411) 2 792 2 185 ( 997) ( 4 372) 45 919 ( 1 556) 67 073 1 795 ( 2 187) 712 156 45 759 - 91 114 2 637 - 752 170 ( 18 919) 733 251 750 649 22 138 6 772 ( 722) ( 1 317) 21 416 5 455 20 561 - 105 800 ( 28 744) 77 056 105 296 33 ( 12) 2 865 ( 1 526) 21 1 339 33 - 9 491 509 ( 47 198) 9 444 311 9 573 393 9 494 223 ( 51 054) 9 443 169 9 492 198 397 620 ( 2 040) 395 580 389 844 243 617 ( 808) 242 809 234 496 Mortgage loans Stage 1 Mortgages Pledges Not collateralized Stage 2 Mortgages Pledges Not collateralized Stage 3 Mortgages Pledges Not collateralized Total Mortgages Pledges Not collateralized 85 404 ( 22 003) 63 401 - 91 543 ( 2 973) 88 570 - Other Loans to individuals 1 611 144 ( 120 326) 1 490 818 582 074 1 395 147 ( 135 047) 1 260 100 448 673 Stage 1 Mortgages Pledges 304 186 139 185 ( 195) ( 850) 303 991 303 940 138 335 136 637 248 227 134 587 ( 345) ( 1 171) 247 882 247 789 133 416 131 725 Not collateralized 734 905 ( 12 834) 722 071 - 708 105 ( 13 396) 694 709 - Stage 2 Mortgages Pledges 111 574 11 686 ( 3 329) 108 245 ( 783) Not collateralized 198 449 ( 23 310) Stage 3 Mortgages Pledges 7 289 ( 2 574) 39 082 ( 36 940) Not collateralized 64 788 ( 39 511) 25 277 10 903 175 139 4 715 2 142 111 342 11 520 44 899 5 145 ( 1 118) ( 243) 43 781 4 902 - 127 346 ( 17 087) 110 259 6 780 11 855 - 6 529 67 318 ( 2 521) ( 62 162) 52 991 ( 37 004) 4 008 5 156 15 987 44 543 4 930 - 5 975 13 711 - Total Mortgages Pledges 423 049 ( 6 098) 416 951 422 062 299 655 ( 3 984) 295 671 298 307 189 953 ( 38 573) 151 380 160 012 207 050 ( 63 576) 143 474 150 366 Not collateralized 998 142 ( 75 655) 922 487 - 888 442 ( 67 487) 820 955 - Corporate loans Stage 1 Mortgages Pledges 13 819 411 ( 762 958) 13 056 453 4 625 416 14 227 672 ( 876 510) 13 351 162 4 160 524 2 630 228 ( 11 226) 2 619 002 2 448 230 2 075 009 ( 12 988) 2 062 021 1 857 873 1 703 697 ( 5 305) 1 698 392 791 694 1 704 798 ( 5 945) 1 698 853 713 852 Not collateralized 5 909 108 ( 26 157) 5 882 951 - 6 407 256 ( 24 571) 6 382 685 - Stage 2 Mortgages Pledges 837 045 ( 75 561) 761 484 741 278 901 315 ( 89 074) 812 241 811 303 540 518 ( 75 003) 465 515 238 995 585 543 ( 93 760) 491 783 305 654 Not collateralized 1 273 447 ( 121 471) 1 151 976 - 1 412 877 ( 78 532) 1 334 345 - Stage 3 Mortgages Pledges 374 053 ( 152 507) 221 546 332 916 467 644 ( 225 737) 241 907 372 476 152 614 ( 80 923) 71 691 72 303 192 799 ( 84 122) 108 677 99 366 Not collateralized 398 701 ( 214 805) 183 896 - 480 431 ( 261 781) 218 650 - Total Mortgages Pledges 3 841 326 ( 239 294) 3 602 032 3 522 424 3 443 968 ( 327 799) 3 116 169 3 041 652 2 396 829 ( 161 231) 2 235 598 1 102 992 2 483 140 ( 183 827) 2 299 313 1 118 872 Not collateralized 7 581 256 ( 362 433) 7 218 823 - 8 300 564 ( 364 884) 7 935 680 - Total 25 405 088 ( 954 525) 24 450 563 15 170 727 25 452 202 ( 1 066 392) 24 385 810 14 335 891 361 Management Report Sustainability Report Consolidated Financial Statements Annex 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, with this value not being impacted by collaterals with a fair value higher than the credit to which they are associated. The detail of the collaterals – mortgages is presented as follows: 2023 (thousand of Euros) Collateral ranges a) Mortgage loans Other loans to individuals Corporate loans Total Number Amount Number Amount Number Amount Number Amount less than 0.5M€ 175 442 9 168 900 10 644 403 242 8 988 453 606 195 074 10 025 748 greater than 0.5M€ and less than 1.0M€ 448 283 743 greater than 1.0M€ and less than 5.0M€ 80 120 750 greater than 5.0M€ and less than 10.0M€ greater than 10.0M€ and less than 20.0M€ greater than 20.0M€ and less than 50.0M€ greater than 50M€ - - - - - - - - 18 5 - - - - 10 460 8 360 - - - - 2 320 237 508 6 006 737 310 1 354 685 934 1 474 717 152 4 128 476 884 1 609 214 030 2 786 6 091 1 354 1 474 4 128 1 609 531 711 866 420 685 934 717 152 476 884 214 030 175 970 9 573 393 10 667 422 062 25 879 3 522 424 212 516 13 517 879 a) The allocation by intervals was carried out based on the total value of collateral per credit contract. 2022 (thousand of Euros) Collateral ranges a) Mortgage loans Other loans to individuals Corporate loans Total Number Amount Number Amount Number Amount Number Amount less than 0.5M€ 187 451 9 170 509 6 846 281 122 19 163 466 692 213 460 9 918 323 greater than 0.5M€ and less than 1.0M€ 367 228 517 greater than 1.0M€ and less than 5.0M€ 65 93 172 greater than 5.0M€ and less than 10.0M€ greater than 10.0M€ and less than 20.0M€ greater than 20.0M€ and less than 50.0M€ greater than 50M€ - - - - - - - - 13 4 - - - - 8 659 8 526 - - - - 2 393 241 638 9 833 722 959 1 904 539 832 2 773 9 902 1 904 478 814 824 657 539 832 134 399 451 134 399 451 5 717 401 813 1 567 269 267 5 717 1 567 401 813 269 267 187 883 9 492 198 6 863 298 307 40 711 3 041 652 235 457 12 832 157 a) The allocation by intervals was carried out based on the total value of collateral per credit contract. The values of collaterals - mortgages, presented above, represent the maximum coverage value of the covered assets, that is, they compete up 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 taken into account, in accordance with internal rules and procedures. Relevant collateral is essentially the following: • Real estate, where the value considered is the corresponding to the last available assessment; • Financial pledges, where the value considered corresponds to the quotation of the last day of the month, if it is a listed security, or the value of the pledge, if it is cash. Accepting collateral as security for credit operations refers to the need to define and implement techniques to mitigate the risks to which said collateral is exposed. Thus, and as an approach to this matter, the Group has established a set of procedures applicable to collateral (particularly financial and real estate), which cover, among others, the volatility of the collateral value, its liquidity and an indication of the recovery rates associated with each type of collateral. The internal credit power rules thus have a specific chapter on this point, "Acceptance of collateral - techniques to mitigate the risks to which collateral is exposed, namely liquidity and volatility risks". 362 Annual Report 2023 | novobanco The revaluation process of real estate is carried out by appraisers registered with the CMVM, based on the valuation methods described in Note 8.6. Restructured Credit The Group proceeds to the identification and marking of restructured credit contracts due to the customer's financial difficulties whenever there are changes to the terms and conditions of a contract in which the customer 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 in favour of the client, such as extension of term, introduction of grace periods, reduction of rate or partial debt forgiveness; (ii) there is the contracting of a new credit operation to settle the existing debt (total or partial); or (iii) the new terms of the contract are more favourable than those applied to other clients with the same risk profile. Unmarking of a restructured credit due to the customer's financial difficulties can only occur after a minimum period of two years from the date of restructuring, provided that the following conditions are cumulatively verified: regular payment of principal and interest; (i) (ii) the customer has no matured principal or interest; and (iii) there has been no debt restructuring mechanisms by the client during this period. The values of credit restructured due to the client's financial difficulties on December 31, 2023 and 2022 are the following: Corporate Loans Mortgage Loans Other Loans to Individuals Total (thousand of Euros) 2023 2022 1 052 727 177 851 57 273 1 179 166 184 859 82 298 1 287 851 1 446 323 Loans marked as restructured due to financial difficulties include loans that are currently performing, classified in stage 2, and that are in the curing period. The detail of the restructuring measures applied to restructured credits on December 31, 2023 and 2022 is presented below: Performing 2023 Non Performing (thousand of Euros) Total Issue Number of operations Exposure Impairment Number of operations Exposure Impairment Number of operations Exposure Impairment Forgiveness of capital or interest Assets received for partial credit settlement Interest capitalization 39 22 15 9 441 1 027 5 010 471 164 824 52 7 73 130 46 122 6 450 5 184 91 29 82 571 46 593 7 477 5 348 112 48 582 32 057 127 53 592 32 881 New credit for total or partial settlement of existing debt 1 158 191 527 15 457 577 134 001 69 788 1 735 325 528 85 245 Extension of repayment term 1 399 225 266 35 487 444 253 541 107 043 1 843 478 807 142 530 Introduction of grace period for capital or interest 913 138 625 13 303 116 38 770 21 040 1 029 177 395 34 343 Reduction of interest rates Change of lease payment plan 414 105 13 554 69 762 4 571 Change in the periodicity of interest payments 6 1 840 87 63 3 22 966 5 829 388 9 186 2 533 243 501 92 728 13 757 168 19 383 2 992 9 2 228 Others Total 459 257 790 500 3 471 1 429 40 593 289 7 549 2 681 1 718 48 142 5 500 696 645 71 783 1 750 591 206 295 877 7 250 1 287 851 367 660 363 Management Report Sustainability Report Consolidated Financial Statements Annex Performing 2022 Non Performing (thousand of Euros) Total Issue Number of operations Exposure Impairment Number of operations Exposure Impairment Number of operations Exposure Impairment Forgiveness of capital or interest Assets received for partial credit settlement Interest capitalization 41 23 16 13 990 1 068 4 965 901 164 923 64 100 870 57 886 105 114 860 58 787 8 87 146 129 31 1 214 293 52 218 29 659 103 57 183 30 582 New credit for total or partial settlement of existing debt 1 056 192 245 14 193 528 179 421 80 151 1 584 371 666 94 344 Extension of repayment term 1 374 262 543 50 340 635 236 658 150 998 2 009 499 201 201 338 Introduction of grace period for capital or interest 818 115 453 6 867 172 71 851 27 533 990 187 304 34 400 Reduction of interest rates 482 40 604 461 Change of lease payment plan 120 16 763 1 639 Change in the periodicity of interest payments 6 2 014 1 513 52 391 207 1 323 40 62 3 76 768 29 642 522 117 372 30 103 12 183 6 139 182 28 946 674 198 9 2 688 7 778 405 431 13 498 5 343 1 944 65 889 6 666 5 449 702 036 77 018 2 030 744 287 387 678 7 479 1 446 323 464 696 Others Total The movement of restructured credits during the exercises 2023 and 2022 was as follows: Opening balance Restructured loans in the period Reclassified loans to "normal" Written off loans Others Closing balance (thousand of Euros) 2023 2022 1 446 323 1 561 788 444 618 374 775 ( 62 023) ( 38 668) ( 108 249) ( 127 276) ( 432 818) ( 324 296) 1 287 851 1 446 323 Note 23 – Derivatives - Hedge Accounting and Fair Value Variation of Hedged Items As of December 31, 2023, and 2022, the fair value of hedging derivatives on the balance sheet is analysed as follows: Hedging derivatives Assets Liabilities Fair value component of the assets and liabilities hedged for interest rate risk Financial assets at amortised cost Securities Loans and advances to customers Financial assets at fair value through other comprehensive income Securities (*) Financial Liabilities Due to customers * Amount recorded in fair value reserves transferred to results (thousand of Euros) 2023 2022 558 334 683 063 443 267 562 845 ( 124 729) ( 119 578) ( 86 052) ( 395 677) ( 143 082) ( 383 689) ( 59 584) ( 218 545) ( 83 498) ( 165 144) ( 5 019) ( 5 019) 62 049 62 049 ( 11 988) ( 11 988) - - The fair value changes associated with the above-described assets and liabilities and their respective derivatives are recorded in the financial year's results under the Gains or losses from hedge accounting line (see Note 12). 364 Annual Report 2023 | novobanco The Group proceeds with the calculation of the "Credit Valuation Adjustment" (CVA) for derivative instruments according to the methodology described in Note 40 - Fair value of financial assets and liabilities. Fair value hedging The fair value hedge operations on December 31, 2023, and 2022 can be analysed as follows: Derivative Hedged item Hedged risk Notional 2023 (thousand of Euros) Fair value of derivatives (2) Change in fair value of derivative in period Fair value component of hedged item (1) Change in fair value component of hedged item in period (1) Interest Rate Swap Securities at amortized cost Interest rate 3 572 250 256 814 ( 153 096) ( 59 584) 158 961 Interest Rate Swap/ CIRS Loans and advances to customers Interest rate and exchange rate 1 733 053 96 273 ( 75 240) ( 83 498) 81 590 Interest Rate Swap Securities at fair value through other comprehensive income Interest rate 130 000 12 480 ( 6 537) ( 5 019) 6 969 Interest Rate Swap Due to customers Interest rate 1 500 000 56 920 59 482 62 049 ( 62 049) 6 935 303 422 487 ( 175 391) ( 86 052) 185 471 1) Attributable to the covered risk. The component of the securities at the amortized cost is recorded together with the balance sheet value of the securities (2) Includes accrued interest Derivative Hedged item Hedged risk Notional 2022 (thousand of Euros) Fair value of derivatives (2) Change in fair value of derivative in period Fair value component of hedged item (1) Change in fair value component of hedged item in period (1) Interest Rate Swap Securities at amortized cost Interest rate 2 278 250 359 089 214 274 ( 218 545) ( 215 410) Interest Rate Swap/ CIRS Loans and advances to customers Interest rate and exchange rate 1 650 352 166 110 192 999 ( 165 144) ( 198 940) Interest Rate Swap Securities at fair value through other comprehensive income Interest rate 100 000 19 140 27 272 ( 11 988) ( 27 299) 4 478 602 544 339 434 545 ( 395 677) ( 441 649) 1) Attributable to the covered risk. The component of the securities at the amortized cost is recorded together with the balance sheet value of the securities (2) Includes accrued interest As of December 31, 2023, the ineffective portion of fair value hedge operations, which resulted in a gain of 10.1 million euros, was recorded by offsetting the results (December 31, 2022: cost of 7.1 million euros). The Group periodically carries out effectiveness tests of existing hedge relationships. Cash flow hedging Hedged item Asset book value Notional Derivative book value Cash flow hedge reserve 2023 (thousands of euros) Ineffectiveness value - accounted in net income Loans to individuals 6 732 000 6 732 000 135 847 6 732 000 6 732 000 135 847 92 557 92 557 10 269 10 269 365 Management Report Sustainability Report Consolidated Financial Statements Annex Hedged item Asset book value Notional Derivative book value Cash flow hedge reserve 2022 Loans to individuals 4 732 583 4 732 000 ( 101 072) ( 100 418) 4 732 583 4 732 000 ( 101 072) ( 100 418) Note 24 - Investments in Subsidiaries, Joint Ventures and Associates Investments in subsidiaries, joint ventures and associates are presented as follows: Acquisition cost Economic interest (b) Gross Book Value Impairment Net Book Value (thousands of euros) Ineffectiveness value - accounted in net income ( 881) ( 881) (thousands of Euros) Profit / (losses) attributable to the Group 2023 2022 2023 2022 2023 2022 2023 2022 2023 2022 2023 2022 LOCARENT 2 967 2 967 50,00% 50,00% 24 283 23 231 LINEAS a) EDENRED UNICRE b) Outras - 146 769 - 40,00% - 68 438 4 984 4 984 50,00% 50,00% 3 851 2 932 11 497 11 497 17,50% 17,50% 30 313 31 506 2 119 2 119 21 567 168 336 1 064 1 043 59 511 127 150 - - - - - - - 24 283 23 231 1 814 1 326 ( 7 406) - 61 032 - - - - - 3 851 2 932 1 673 967 30 313 31 506 3 639 4 660 1 064 1 043 89 1 401 ( 7 406) 59 511 119 744 7 215 8 354 a) Reclassified to discontinued operations (See Note 30) b) 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. The financial data related to the most relevant associate companies are presented in the following table: Assets Liabilities Equity Income (thousands of Euros) Profit / (loss) for the exercise 2023 2022 2023 2022 2023 2022 2023 2022 2023 2022 LOCARENT LINEAS a) EDENRED UNICRE b) 339 602 302 057 291 651 256 207 47 951 45 850 37 602 35 080 3 628 2 651 - 165 608 - 77 396 - 88 212 - 52 870 - 51 869 110 315 88 605 96 391 76 520 13 924 12 085 9 310 7 528 3 345 1 934 506 267 452 219 333 049 272 185 173 218 180 034 188 696 206 048 20 796 26 631 Note: Data adjusted for consolidation purposes a) Reclassified to discontinued operations (See Note 30) b) 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. The movement verified in this line item for the exercises ended December 31, 2023 and 2022 is as follows: Balance at the beginning of the exercise Share of profits / (losses) of associated companies Impairment in associated companies Fair value reserves of investments in associated companies Dividends received Foreign exchange differences and other a) (thousands of Euros) 2022 2023 119 744 94 590 7 215 7 406 270 ( 15 299) ( 59 825) 8 353 21 546 332 ( 4 679) ( 398) Balance at the end of the exercise a) As at 31 December 2023, includes 59,190 thousand euros relating to the reclassification of Lineas for discontinued operations 59 511 119 744 366 The movements in impairment losses for investments in associates are presented as follows: Annual Report 2023 | novobanco (thousands of Euros) 2022 41 751 ( 9 939) ( 21 546) ( 2 860) 7 406 2023 7 406 - ( 7 406) - - (thousand of Euros) 2023 2022 276 994 261 231 191 116 85 878 227 463 126 440 25 928 51 497 13 604 9 360 583 51 84 626 61 982 22 644 63 067 9 493 53 282 47 245 175 117 86 114 236 555 118 739 34 571 56 890 17 471 8 215 583 86 70 656 58 898 11 758 62 130 32 004 29 827 22 277 652 150 ( 10 449) 630 572 ( 11 445) ( 277 947) ( 319 863) 363 754 299 264 Balance at the beginning of the exercise Write-off Reversals Foreign exchange differences Balance at the end of the exercise Note 25 – Property, Plant and Equipment This line item on December 31, 2023, and 2022 is analyzed as follows: Real estate properties For own use Improvement in leasehold properties Equipment Computer equipment Fixtures Furniture Security equipment Transport equipment Right of use assets Other Assets under right of use Real estate properties Equipment Work in progress Improvements in leasehold properties Real estate properties Equipment Others Accumulated impairment Accumulated depreciation The movement in this line item was as follows: 367 Management Report Sustainability Report Consolidated Financial Statements Annex - - - (thousand of Euros) Real Estate Properties Equipment Right of Use Assets Work in Progress Total Acquisition Cost Balance at 31 December 2021 Acquisitions Disposals/write-offs (b) Transfers (a) Foreign exchange differences and other Balance at 31 December 2022 Acquisitions Disposals/write-offs Transfers Foreign exchange differences and other 366 788 249 762 42 414 24 138 65 812 19 699 ( 37 050) ( 14 855) ( 146 117) ( 1 848) ( 6) ( 310) 15 261 231 236 555 4 250 15 197 ( 42 056) ( 24 291) 45 145 8 424 ( 1) 3 - - 70 656 20 815 ( 6 844) - ( 1) 11 185 51 282 ( 15) ( 322) - 62 130 47 814 - ( 46 870) ( 7) 693 547 137 533 ( 198 037) ( 2 480) 9 630 572 88 076 ( 73 191) ( 1 726) 8 419 Balance at 31 December 2023 276 994 227 463 84 626 63 067 652 150 Depreciation Balance at 31 December 2021 Depreciation Disposals/write-offs (b) Transfers (a) Foreign exchange differences and other Balance at 31 December 2022 Depreciation Disposals/write-offs Transfers Foreign exchange differences and other 204 112 208 392 5 348 13 045 ( 107 935) ( 36 589) ( 771) 2 106 ( 309) 86 102 860 184 625 6 006 12 811 ( 42 061) ( 24 287) ( 879) 1 038 ( 1) 197 Balance at 31 December 2023 66 964 173 345 Impairment Balance at 31 December 2021 Impairment loss Reversal of impairment losses Balance at 31 December 2022 Reversal of impairment losses Balance at 31 December 2023 13 221 46 ( 1 822) 11 445 ( 996) 10 449 - - - - - - 28 877 10 639 ( 7 138) - - 32 378 11 343 ( 5 868) - ( 215) 37 638 - - - - - - - - - - - - - - - - - - - 441 381 29 032 ( 151 662) ( 1 080) 2 192 319 863 30 160 ( 72 216) ( 880) 1 020 277 947 13 221 46 ( 1 822) 11 445 ( 996) 10 449 Net book value at 31 December 2023 Net book value at 31 December 2022 199 581 146 926 54 118 51 930 46 988 38 278 63 067 62 130 363 754 299 264 (a) includes 3,471 thousand euros of fixed assets (real estate and equipment) and 1,650 thousand euros of accumulated depreciation sums for discontinued counters that have been transferred at net value to the appropriate balance sheet items. (c) Includes 106,395 thousand euros of fixed assets (real estate and equipment) and 68,164 thousand euros of accumulated depreciation stemming from the Head Office building that was sold in 2022. In September 2022, the sale of the headquarters building was finalized for the amount of 112.2 million euros, the gross book value was 106.4 million euros (38.2 million euros net of accumulated depreciations) resulting in a capital gain of 67 million euros, net of costs related to the sale process. Until the completion of the construction of the new headquarters, the Bank will continue to use the building, having signed a lease agreement for this purpose. Real Estate in progress in progress include the value of 46,848 euros relating to the construction project of the new building for the Bank's headquarters. Construction is expected to be completed and use of this asset will begin in 2024. 368 Note 26 - Investment Properties The movement in the investment properties line item is presented as follows: Balance at the beginning of the exercise Acquisitions Disposals Improvements Changes in fair value Other Balance at the end of the exercise Annual Report 2023 | novobanco (thousands of Euros) 2023 2022 499 567 625 187 611 16 464 ( 115 049) ( 242 068) 2 707 16 526 ( 10 567) 10 139 91 133 ( 1 288) 393 795 499 567 According to the accounting policy described in Note 7.15, the carrying value of investment properties corresponds to their fair value as determined by a registered and independent appraiser with recognized professional qualifications and experience in the respective category and location of the property. For determining the fair value of these assets, generally accepted criteria and methodologies are used, including analyses by the income method and the market method, corresponding to level 3 of the fair value hierarchy (see Note 40). Investment properties are a group of assets held by Real Estate Funds and Companies and include commercial properties leased to third parties to generate income or properties for capital appreciation. Most of the rental contracts do not have a specific term, allowing the tenant to cancel them at any time. However, for a small portion of these commercial properties leased to third parties, there is a non-cancellation clause of approximately 10 years initially. Subsequent rents are negotiated with the tenant. During 2023, the increase in the fair value of investment properties, amounting to 16.5 million euros (December 31, 2022: increase of 91.1 million euros) (see Note 14), and the rents registered in the lease of investment properties, amounting to 14.4 million euros (December 31, 2022: 17.1 million euros), are recorded in Other operating income and expenses. Note 27 - Intangible Assets This line item on December 31, 2023, and 2022 is analysed as follows: 369 Management Report Sustainability Report Consolidated Financial Statements Annex Net Goodwill Goodwill Impairment losses Other intangible assets Internally developed Software - Automatic data processing system Other Acquired from third parties Software - Automatic data processing system Work in progress Impairment losses Accumulated amortization The movement in this item was as follows: (thousands of Euros) 2022 - 13 907 ( 13 907) 69 832 69 512 69 511 1 374 108 374 108 31 986 - 2023 - 13 907 ( 13 907) 86 748 69 512 69 511 1 412 162 412 162 18 140 ( 18) ( 413 048) ( 405 774) 86 748 69 832 370 Annual Report 2023 | novobanco Goodwill Software Work in progress Total (thousands of Euros) 13 907 456 870 13 455 484 232 - - - - 6 560 18 746 ( 20 030) 216 4 ( 216) 1 25 306 ( 20 030) - 5 13 907 443 620 31 986 489 513 - - - 663 ( 6 155) 43 546 - - - - - - - - 13 907 13 907 - 13 907 402 339 23 461 ( 20 026) 405 774 13 428 ( 6 155) 1 413 048 - - 18 18 29 700 - ( 43 546) 18 140 - - - - - - - - - - - - - - 68 608 37 846 18 140 31 986 30 363 ( 6 155) - 513 721 402 339 23 461 ( 20 026) 405 774 13 428 ( 6 155) 1 413 048 13 907 13 907 18 13 925 86 748 69 832 Acquisition cost Balance as at 31 December 2021 Acquisitions Acquired from third parties Disposals / write-offs Transfers Exchange variation and other movements Balance as at 31 December 2022 Acquisitions Acquired from third parties Disposals / write-offs Transfers Amortizations Balance as at 31 December 2021 Amortization for the period Disposals / write-offs Balance as at 31 December 2022 Amortization for the period Disposals / write-offs Exchange variation and other movements Balance as at 31 December 2023 Impairment Balance as at 31 December 2021 Balance as at 31 December 2022 Impairment losses Balance as at 31 December 2023 Net balance at 31 December 2023 Net balance at 31 December 2022 Balance as at 31 December 2023 13 907 481 674 Goodwill is recorded in accordance with the accounting policy described in Note 6, and is analysed as follows: Subsidiaries Righthour GNB Concessões Impairment losses Righthour GNB Concessões 371 (thousands of Euros) 2022 13 907 13 526 381 (13 907) (13 526) ( 381) - 2023 13 907 13 526 381 (13 907) (13 526) ( 381) - Management Report Sustainability Report Consolidated Financial Statements Annex Note 28 – Taxes The tax assets and liabilities recognized in the balance sheet on December 31, 2023, and 2022 can be analyzed as follows: Current tax Corporate tax recoverable Other Deferred tax 2023 (thousands of Euros) 2022 Assets Liabilities Assets Liabilities 29 376 4 327 25 049 901 660 931 036 10 808 10 657 151 - 10 808 32 570 1 793 30 777 923 430 956 000 7 582 7 248 334 845 8 427 The deferred tax assets and liabilities recognized in balance as of December 31, 2023 and 2022 are detailed as follows: Assets Liabilities Net 2023 2022 2023 2022 2023 2022 (thousands of Euros) Financial instruments 96 519 94 830 ( 53 817) ( 14 637) 42 702 80 193 Credit impairment (not covered by the special regime) Credit impairment (covered by the special regime) 280 414 331 523 296 986 295 310 - - - - 280 414 331 523 296 986 295 310 Other tangible assets Provisions Pensions Longevity premiums Others Reportable tax losses - - ( 14) ( 76) ( 14) ( 76) 102 239 100 914 44 932 51 049 85 810 20 991 133 506 63 506 - - - - - - - - ( 845) - 102 239 100 914 44 932 51 049 85 810 20 146 133 506 63 506 Deferred tax asset / (liability) 955 491 938 143 ( 53 831) ( 15 558) 901 660 922 585 Asset / liability set-off for deferred tax purposes ( 53 831) ( 14 713) 53 831 14 713 - - Net Deferred tax asset / (liability) 901 660 923 430 - ( 845) 901 660 922 585 As of December 31, 2023, the deferred tax related to the majority of temporary differences was calculated based on an aggregate rate of 31%, resulting from the sum of the general IRC rate (21%), the Municipal Tax rate of 1.5% and an average State Tax rate of 8.5%. On September 4, 2019, Law No. 98/2019 was published, which amended the IRC Code in terms of the tax treatment of impairments of credit institutions, creating rules applicable to impairment losses recorded in the tax periods that began prior to January 1, 2019, which are not yet fiscally accepted. This law established a period of adaptation for the aforementioned tax regime, which allows taxpayers in the five tax periods starting on or after January 1, 2019, to continue applying the tax regime in force before the publication of this law, except if they exercise "opt in" by the end of October of each tax period of the adaptation regime. Therefore, as of December 31, 2023, the Group continued to apply the Regulatory Decree No. 13/2018, of December 28, which aims to extend, for tax purposes, the tax framework resulting from Notice No. 3/95 of the Bank of Portugal. As of December 31, 2023, and 2022, the Novobanco Group maintains registered deferred tax assets associated with impairments not fiscally accepted for credit operations, which have already been deducted from the asset, taking into account the expectation that they will contribute to the formation of taxable profit in the tax periods in which the conditions required for their tax deductibility are met. As of December 31, 2023, the amounts maintained by the Novobanco Group referring to this situation amount to about 55 million euros (December 31, 2022: 57 million euros). 372 The movements in the balance sheet's deferred tax items had the following counterparts: Balance at the beginning of the exercise Recognised in net income Recognised in Fair value reserves Conversion of Deferred taxes into Tax credits Foreign exchange differences and other Annual Report 2023 | novobanco (thousands of Euros) 2022 2023 922 585 741 204 9 365 ( 38 658) 7 746 622 63 349 81 804 33 640 2 588 Balance at the end of the exercise (Assets / (Liabilities)) 901 660 922 585 The tax recognized in profits and reserves for the exercises ended in 2023 and 2022 had the following origins: Financial instruments Impairment losses on loans and advances to customers Other tangible assets Provisions Pensions Others Tax losses carried forward Deferred taxes Current taxes Total tax recognised (income) / (expense) 2023 2022 (thousands of Euros) Recognised in net income Recognised in reserves Recognised in net income Recognised in reserves ( 1 330) 57 179 ( 62) ( 1 320) 6 053 115 ( 70 000) ( 9 365) 15 134 5 769 38 658 - - - - - - 38 658 - 15 777 13 170 ( 7 953) ( 18 673) ( 2 048) ( 867) ( 62 755) ( 63 349) 10 048 ( 81 804) - - - - - - ( 81 804) - 38 658 ( 53 301) ( 81 804) The reconciliation of the tax rate, regarding the amount recognized in results, can be analysed as follows: 373 Management Report Sustainability Report Consolidated Financial Statements Annex Income before tax Tax rate of novobanco Income tax calculated based on the tax rate of novobanco Tax-exempt dividends Impairment on investments in subsidiaries or associated companies subject to Participation Exemption Rate differential on the generation / reversal of timing differences Profits / losses in units with a more favorable tax regime Taxes of Bank Branches and tax withheld abroad Impairments and provisions for loans Impairment and fair value adjustments on securities Provisions for other risks, costs and contingencies Employees long term benefits Deferred tax assets not recognized under tax losses for the exercise Contribution and Solidarity additional contribution over the Banking Sector Deferred taxes on tax losses from previous years Capital gains/losses on asset sales Other Total income recognised (thousands of Euros) 2023 2022 % Amount % Amount 753 988 532 643 21,0 158 337 (0,9) ( 6 502) 0,1 0,6 464 4 526 (0,9) ( 6 899) 0,0 5,5 (0,4) (1,0) 0,5 - 1,0 147 41 215 ( 2 665) ( 7 306) 4 070 - 7 409 (9,3) ( 69 755) (11,6) ( 87 449) (4,0) ( 29 823) 21,0 (0,2) (0,7) 2,2 (1,2) 0,2 (4,2) 1,6 (2,0) (0,4) 7,7 1,3 (11,8) (19,1) (4,4) 0,8 5 769 (10,0) 111 855 ( 1 248) ( 3 525) 11 949 ( 6 518) 956 ( 22 476) 8 648 ( 10 519) ( 2 163) 40 811 7 168 ( 62 755) ( 101 924) ( 23 560) ( 53 301) Recoverability analysis of deferred tax assets Deferred tax assets are recognized to the extent that it is probable that taxable profits will be available against which deductible temporary differences can be used. The Group assessed the recoverability of its deferred taxes on the balance sheet based on the expectation of future taxable profits until 2028, considering that 5 years is a reasonable period for projecting future results. The recovery of deferred tax assets covered by the Special Regime applicable to Deferred Tax Assets is not dependent on the generation of future taxable profits. The evaluation of the recoverability of deferred tax assets is done annually. As of December 31, 2023, the exercise was carried out based on the average of the provisional version of the medium-term plan ("MTP") prepared for the 2024- 2026 period and a stress scenario exercise, preliminarily appreciated by the General Supervisory Board in December 2023 and which, after including the final 2023 accounts, will be definitively approved. In evaluating the expected generation of future taxable results in Portugal for the purposes of the recovery exercise above, the following effects were taken into account: • In addition to detailed estimates until 2026, pre-tax results from 2026 are maintained; • Interest rate benchmarks aligned with the macroeconomic outlook for the three-year period 2024-2026 and the ECB's monetary policy decisions; • Evolution of the commercial banking product based on the expected evolution of interest rate references, combined with the prospect of growth in commercial volumes, as well as the development of new projects in terms of commission generated with means of payment and asset management; • 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 and, generally, the simplification and increase in efficiency of processes, in particular the focus on the component digital; It is line with the evolution of the Bank's activity and supported by • Provisions for credit macroeconomic projections, taking into account in particular the effort made in recent years in provisioning the credit portfolio and the progressive convergence towards gradually normalized risk costs. impairments in 374 Annual Report 2023 | novobanco Depending on the analysis mentioned above, as of December 31, 2023, the Group has recognised deferred tax assets associated with tax losses in the balance sheet in the amount of 133 million euros (31 December 2022: 63 million euros). Based on the above analysis, the amount of unrecognized deferred taxes related to tax losses, by year of expiry, is as follows: No expiry date With expiry date 2025 2026 2029 2032 31.12.2023 (thousands of Euros) 31.12.2022 921 359 439 651 92 332 135 422 170 236 41 661 933 178 478 545 91 728 135 508 170 236 81 073 1 361 010 1 411 723 Additionally, the Group became aware of the tax authority's position regarding adjustments arising from the application of fair value to units in real estate investment funds and venture capital. These adjustments resulting from the application of the fair value model to units in real estate investment funds and venture capital funds do not contribute to the formation of taxable profit in the tax period in which they are recognized in the accounts, only having tax relevance at the time of their realisation, namely in the transmission of units or liquidation of funds. The total amount of deferred tax assets relating to these temporary differences, not recognized in the balance sheet, as of December 31, 2023 amounts to 176 million euros (December 31, 2022: 229 million euros). Special Regime applicable to deferred tax assets In 2014, novoBanco and certain Group entities joined the special regime applicable to deferred tax assets, after approval by the Shareholders' General Meeting. The Special Regime applicable to deferred tax assets, approved by Law No. 61/2014, of August 26, covers deferred tax assets that resulted from the non-deduction of expenses and negative asset variations related to impairment losses on credits and post-employment or long-term worker benefits. The amendments to the above-mentioned regime, introduced by Law No. 23/2016, of August 19, limited the temporal application of the above-mentioned expenses and negative asset changes, accounted for in tax periods that start on or after January 1, 2016, as well as the deferred taxes associated with them. Thus, the deferred taxes covered by this special regime correspond only to the expenses and negative asset changes determined until December 31, 2015. The deferred tax assets covered by the above-mentioned regime are convertible into tax credits when the taxpayer registers a negative net result in the respective tax period, or in case of liquidation by voluntary dissolution or insolvency declared by court judgment. Upon conversion into a tax credit (which is not due to liquidation or insolvency), a special reserve should be created by the value of the respective tax credit increased by 10%. The exercise of conversion rights results in an increase in the taxpayer's capital by incorporating the special reserve and issuing new ordinary shares. This special reserve cannot be distributed. Following the determination of a negative net result in the 2020 financial year, the converted deferred tax assets, taking as a reference the eligible deferred tax assets at the closing date of that financial year, amount to 116,975 thousand euros. This amount has already been validated by the Tax Authorities 375 Management Report Sustainability Report Consolidated Financial Statements Annex As a result of Law No. 61/2014, the amount of deferred tax assets to be converted into tax credits and the creation of the special reserve must be certified by an official auditor and confirmed by the Tax and Customs Authority, within the procedures for reviewing the determination of the taxable amount relating to the relevant tax periods. Note 29 – Other Assets The item of Other Assets as of December 31, 2023, and 2022, is analyzed as follows: Escrow accounts Derivative products Collateral CLEARNET and VISA Collateral deposits relating to reinsurance operations Other collateral deposits b) Recoverable government subsidies on mortgage loans Public sector Contingent Capital Agreement Other debtors Shareholder loans and supplementary capital contributions Sale of non-performing loans Sale of real estate Sale of restructuring funds Others Income receivable Deferred costs Retirement pensions and health benefits (see Note 16) Precious metals, numismatics, medal collection and other liquid assets Real estate properties a) Equipment a) Stock exchange transactions pending settlement Other assets Impairment losses Real estate properties a) Equipment a) Other debtors - Shareholder loans, supplementary capital contributions Other a) Real estate properties and equipment received in settlement of loans and discontinued b) Includes the amount of 4.5 million euros in the escrow account related to the sale of the Headquarter building (thousands of Euros) 2023 221 467 92 648 38 942 61 067 4 551 21 216 222 522 198 180 424 682 64 178 2 170 42 646 20 881 2022 251 225 133 864 41 423 71 387 4 552 18 714 498 349 198 180 328 366 64 178 2 173 710 20 881 294 807 240 424 32 711 14 566 18 704 10 551 114 379 1 795 - 18 124 127 771 13 984 59 616 10 440 237 243 3 013 4 463 122 153 1 298 897 1 873 517 ( 181 639) ( 255 033) ( 48 067) ( 123 008) ( 1 039) ( 68 005) ( 64 528) 1 117 258 ( 2 195) ( 76 968) ( 52 862) 1 618 484 The escrow accounts item includes, among others, the deposits made by the Group as a surety to contract derivative products in an organized market (margin accounts) and over-the-counter market (Credit Support Annex – CSA). The CSAs take the form of a collateral agreement established between two parties that negotiate over-the-counter derivatives among themselves, with the main objective to provide protection against credit risk, establishing a set of rules regarding collateral. Derivative transactions are regulated by the International Swaps and Derivatives Association (ISDA) and have a minimum risk margin that can change according to the parties' ratings. 376 Annual Report 2023 | novobanco The decrease seen during the 2023 fiscal year in the Administrative Public Sector heading includes about 249.8 million euros related to the capital conversion of rights resulting from the Special Regime Applicable to Deferred Tax Assets (on December 31, 2022: 272.9 million euros), as detailed in Note 34. Securities transactions to be regularized reflect transactions conducted with securities, registered on the trade date, as per the accounting policy described in Note 7.6, and awaiting settlement. The item property and equipment refer to assets received by credit recovery and discontinued facilities, for which the Group aims for immediate sale. The Group has implemented a plan aimed at the immediate sale of real estate registered in other assets, continuing to develop all efforts to carry out the established disposal program, highlighted by (i) the existence of a website specifically dedicated to the sale of properties; (ii) the development and participation in real estate events both in the country and abroad; (iii) the signing of protocols with various real estate intermediaries; and (iv) the promotion of regular auctions. Please note that the Group, despite maintaining the intention to sell these properties, regularly requests the Bank of Portugal under Article 114 of RGICSF, the extension of the property holding period acquired in reimbursement of its own credit. During the 2023 fiscal year, there was registered a recovery of impairment of 25.0 million euros for the properties in the portfolio (December 31, 2022: recovery of impairment of 12.8 million euros). Movements occurred in impairment losses are presented as follows: Balance at the beginning of the exercise Dotation for the exercise Write off Write-back for the exercise Foreign exchange differences and other (a) Balance at the end of the exercise (a) In 2022 includes EUR 122,291 thousand of Fungere assets due to the merger in Fungepi. The movements of the properties were as follows: Balance at the beginning of the exercise Additions Disposals Other movements (a) Balance at the end of the exercise (thousands of Euros) 2023 255 033 22 756 ( 54 222) ( 42 615) 2022 575 441 18 458 ( 165 464) ( 24 393) 687 ( 149 009) 181 639 255 033 2023 237 243 9 032 ( 131 146) ( 750) 114 379 (thousands of Euros) 2022 589 390 17 174 ( 194 033) ( 175 288) 237 243 (a) Includes 156,489 thousand euros of Fungere's assets which, with the merger in Fungepi, were transferred to Investment Properties during the financial year 2022. As of December 31, 2023, the value of discontinued facilities included in the Property item amounts to 10,922 thousand euros (December 31, 2022: 9,970 thousand euros), with the Group having recorded an impairment for these assets in the total amount of 3,359 thousand euros (December 31, 2022: 2,954 thousand euros). 377 Management Report Sustainability Report Consolidated Financial Statements Annex Note 30 – Non-current Assets and Groups Held for Sale and Liabilities Included in Groups Held for Sale The detail of Non-current Assets and Liabilities classified as held for sale as of December 31, 2023, and 2022, net of consolidation adjustments, is as follows: Non-current assets and liabilities disposal groups classified as held for sale International Investment Bank, S.A. (former BICV) Banco Well Link (former NB Ásia) Económico FI Greendraive Barrosinha/Compagris Solago Lineas Ijar Leasing Imbassaí Impairment losses Barrosinha/Compagris Económico FI Greendraive Ijar Leasing (thousands of Euros) 2023 2022 Assets Liabilities Net Income Assets Liabilities Net Income 53 627 13 107 ( 412) 68 104 15 492 ( 270) 1 300 - 3 060 - - - - - - 1 300 2 175 3 060 - - - - - - 793 1 213 ( 97) 1 596 2 028 ( 270) 37 436 11 397 - 30 788 5 749 - 59 190 9 051 - - - ( 1 121) 17 387 6 882 - - - 9 051 - - 1 987 497 806 2 747 833 ( 23 003) ( 14 425) ( 3 060) ( 793) ( 4 725) - - - - - - - - - - ( 8 517) - ( 2 196) ( 1 596) ( 4 725) - - - - - - - - - - - - - - - 89 814 13 107 ( 412) 59 587 15 492 ( 270) The impairment movement for Non-current Assets and Liabilities held for sale classified as held for sale is presented as follows: Balance at the beginning of the exercise Charges / (Write-backs) Write-off Foreign exchange differences and other Balance at the end of the exercise (thousands of Euros) 2023 8 517 14 486 - - 23 003 2022 8 475 ( 664) ( 3 837) 4 543 8 517 Compagris, Barrosinha and Solago In December 2022, following the completion of the Restructuring Funds sale process, novobanco acquired 100% of the share capital of Compagris and Barrosinha and 84.16% of Solago's capital. Since the Group plans to sell these assets, they were classified as discontinued operations. In December 2023 the Group proceeded with the disposal of Solago, recognizing a loss of 1.2 million euros. Lineas In December 2023, following the signing of purchase and sale agreement for Lineas, this investment was reclassified from investments in associates to discontinued operations. 378 Annual Report 2023 | novobanco Note 31 – Financial Liabilities at amortised cost This item as of December 31, 2023 and 2022, is analyzed as follows: 2023 2022 (thousands of Euros) Measured at amortised cost Fair value changes * Total Measured at amortised cost Fair value changes * Total Deposits from banks Due to customers Debt securities issued, subordinated debt and liabilities associated to transferred assets Other financial liabilities 5 745 326 - 5 745 326 9 705 154 29 984 273 62 049 30 046 322 29 277 858 1 107 585 493 171 - - 1 107 585 1 628 897 493 171 375 268 37 330 355 62 049 37 392 404 40 987 177 - - - - - 9 705 154 29 277 858 1 628 897 375 268 40 987 177 * Variation in the fair value of the items covered by the interest rate hedging portfolio 31.1. Resources from central Banks and other credit institutions The balance of the item Resources from Central Banks and other credit institutions is composed, as to its nature, as follows: Deposits from Central Banks From the European System of Central Banks Deposits Other funds Deposits from Other credit institutions Domestic Deposits Other funds Foreign Deposits Loans Operations with repurchase agreements Other resources (thousands of Euros) 2023 2022 1 128 807 6 327 198 1 128 807 6 327 198 178 807 950 000 4 616 519 198 6 327 000 3 377 956 173 734 248 879 165 922 209 663 7 812 39 216 4 442 785 3 129 077 131 721 459 328 375 610 479 880 3 867 053 2 150 824 68 401 39 045 5 745 326 9 705 154 As of December 31, 2023, the balance of the item Resources from the European System of Central Banks includes 950 million euros collateralized by the Group's financial assets, within the framework of the third series of extended term refinancing operations of the European Central Bank (TLTRO III), which will mature in December 2024. In 2023, 5.4 billion euros of TLTRO III were repaid. To cope with the maturity of these lines, novobanco adopted, among others, the strategy of exiting TLTRO III through reducing the size of the balance sheet and increasing other stable financing instruments, mainly interbank operations collateralized by retained covered bonds. As a result, medium-term repurchase agreement collateralized financing increased by 2.6 billion euros in 2023, which added to the figure of 2.6 billion euros recorded in 2022 for this type of funding, to mitigate the impact of shortening the term and/or maturity of TLTRO III, totals 5.2 billion euros (including 1.4 billion euros from operations classified under Due to Customers in Note 31.2). 379 Management Report Sustainability Report Consolidated Financial Statements Annex The balance of the repurchase agreement operations item corresponds to securities sale operations with repurchase agreement (repos), recorded according to the accounting policy described in Note 7.18. 31.2. Due to customers The balance of Due to customers is composed, as to its nature, as follows: Demand deposits Corporate and other entities Individuals Time deposits Corporate and other entities Individuals Other funds Repurchase agreement Other Value adjustments for interest rate risk hedging (see Note 23) (thousands of Euros) 2023 2022 10 906 642 13 169 335 5 641 369 7 101 102 5 265 273 6 068 233 17 233 415 15 242 710 6 419 641 5 076 475 10 813 774 10 166 235 1 844 216 865 813 1 366 382 450 906 477 834 414 907 29 984 273 29 277 858 62 049 - 30 046 322 29 277 858 31.3. Debt securities issued, Subordinated Liabilities and Financial Liabilities associated with transferred assets This item breakdowns as follows: Debt securities issued Euro Medium Term Notes (EMTN) Bonds Subordinated debt Euro Medium Term Notes (EMTN) Bonds Financial liabilities associated to transferred assets Asset lending Operations The key features of these liabilities as of December 31, 2023, and 2022, are as follows: (thousands of Euros) 2023 2022 606 085 1 168 874 586 254 563 517 19 831 605 357 501 500 415 572 501 500 - - - - 415 572 44 451 44 451 1 107 585 1 628 897 380 Annual Report 2023 | novobanco Entity ISIN Description Currency Issue date Unit price (€) Maturity Interest rate Market (thousands of Euros) Carrying Book value 2023 2022 Bonds Lusitano Mortgage nº 6 XS0312981649 Lusitano Mortgage nr 6- Classe A Lusitano Mortgage nº 6 XS0312982290 Lusitano Mortgage nr 6- Classe B novobanco novobanco PTNOBIOM0014 NB 3,5% 23/07/23 PTNOBJOM0005 NB 4,25% 09/23 Euro Medium Term Notes novobanco PTNOBKOM0002 NB 5.5% 30/12/24 novobanco Luxemburgo XS0869315241 BES Luxembourg 3.5% 02/01/43 novobanco Luxemburgo XS0877741479 BES Luxembourg 3.5% 23/01/43 novobanco Luxemburgo XS0888530911 novobanco Luxemburgo XS0897950878 BES Luxembourg 3.5% 19/02/2043 BES Luxembourg 3.5% 18/03/2043 novobanco Luxemburgo XS0972653132 BES Luxembourg ZC novobanco Luxemburgo XS1031115014 Banco Esp San Lux ZC 12/02/49 novobanco Luxemburgo XS1034421419 Banco Esp San Lux ZC 19/02/49 novobanco Luxemburgo XS1038896426 Banco Esp San Lux ZC 27/02/51 novobanco Luxemburgo XS1042343308 BES Luxembourg ZC 06/03/2051 novobanco Luxemburgo XS1053939978 BES Luxembourg ZC 03/04/48 novobanco Luxemburgo XS1055501974 BES Luxembourg ZC 09/04/52 novobanco Luxemburgo XS1058257905 BES Luxembourg ZC 16/04/46 NB Finance XS0439764191 EMTN 57 Subordinated debt novobanco novobanco a) Date of the next call option PTNOBFOM0017 NB 06/07/2023 PTNOBLOM0001 NB 9.875% 01/12/33 EUR EUR EUR EUR EUR EUR EUR EUR EUR EUR EUR EUR EUR EUR EUR EUR EUR EUR EUR EUR 2007 2007 2021 2021 0,07 1,00 - - 2022 100,00 2013 2013 2013 2013 2013 2014 2014 2014 2014 2014 2014 2014 2009 2018 2023 1,00 1,00 1,00 1,00 1,00 1,00 1,00 1,00 1,00 1,00 1,00 1,00 1,00 - 100,00 2025 a) Euribor 3m + 0,40% XDUB 18 328 23 989 2035 a) Euribor 3m + 0,60% XDUB 1 503 1 502 2023 2023 2026 2043 2043 2043 2043 2048 2049 2049 2051 2051 2048 2052 2046 2044 2023 2033 Fixed rate 3,5% XDUB Euribor 3M + 4,25% XDUB - - 303 992 275 874 Fixed rate 5,5% XDUB 105 475 99 989 Fixed rate 3,5% Fixed rate 3,5% Fixed rate 3,5% XLUX XLUX XLUX 43 958 43 363 100 110 99 065 65 655 64 774 Fixed rate 3,5% XLUX 48 260 47 641 Zero coupon Zero coupon Zero coupon Zero coupon Zero coupon Zero coupon Zero coupon Zero coupon Zero coupon XLUX XLUX XLUX XLUX XLUX XLUX XLUX XLUX XLUX 37 934 35 711 46 650 43 694 12 977 12 146 17 822 16 672 12 538 11 729 43 072 40 180 41 444 38 891 8 264 7 710 2 095 1 952 8,50% 9,875% XDUB - 415 572 XDUB 501 500 - 1 107 585 1 584 446 The movement occurred in the 2023 and 2022 exercises in liabilities represented by securities, subordinated liabilities and financial liabilities associated with transferred assets was as follows: Responsabilidades representadas por títulos Subordinated Liabilities Euro Medium Term Notes (EMTN) Bonds Total Euro Medium Term Notes (EMTN) Bonds Total (thousands of Euros) Financial liabilities associated to transferred assets Asset lending operations TOTAL Balance as at 31 December 2021 447 453 606 855 1 054 308 Issues Reimbursements Net purchases 100 000 6 000 106 000 - - - ( 500) ( 13 798) ( 14 298) Other movements a) 16 564 6 300 22 864 Balance as at 31 December 2022 563 517 605 357 1 168 874 - - - - - - 415 394 415 394 44 451 1 514 153 - - - - - - 178 178 - - - - 106 000 - ( 14 298) 23 042 415 572 415 572 44 451 1 628 897 Issues Reimbursements Net purchases Other movements - - - 500 000 - 500 000 - ( 575 000) ( 575 000) ( 527) ( 5 677) ( 6 204) - - ( 400 000) - ( 400 000) - - - - 500 000 ( 975 000) ( 6 204) 23 264 ( 4 849) 18 415 1 500 ( 15 572) ( 14 072) ( 44 451) ( 40 108) Balance as at 31 December 2023 586 254 19 831 606 085 501 500 - 501 500 - 1 107 585 a) The other movements include accrued interest on the balance sheet, corrections for hedging operations, corrections of fair value and exchange rate variations. 381 Management Report Sustainability Report Consolidated Financial Statements Annex In terms of medium-term financing, in June 2023, the Bank issued a new Tier 2 bond of 500 million euros, maturing on December 1, 2033, with a purchase option 6 months from June 1, 2028, with the aim of replacing the existing Tier 2 bond with a lower spread by 150bps. Through the public offering, the Bank managed to repurchase 206 million euros of the existing Tier 2. The remaining amount was repaid on the call date, which only occurred on July 6, 2023. The Group did not present any defaults of capital or interest concerning its issued debt in 2023 and 2022 exercises. Under the Mortgage Bonds Issuance Program, whose maximum amount is 10,000 million euros, the Group has proceeded with issues that as of December 31, 2023, total 5,500 million euros (December 31, 2022: 5,500 million euros), with these issues fully repurchased by the Group. The characteristics of the live issues as of December 31, 2023, and 2022, are as follows: Designation Issue date Maturity date NB 2015 SR.1 07/10/2015 07/10/2025 NB 2015 SR.2 07/10/2015 07/10/2024 NB 2015 SR.3 07/10/2015 07/10/2027 NB 2015 SR.4 07/10/2015 07/10/2028 NB 2015 SR.5 22/12/2016 22/12/2028 NB 2019 SR.6 10/12/2019 10/06/2029 NB 2019 SR.7 10/12/2019 10/12/2024 Interest payment Interest Rate Market Quarterly Quarterly Quarterly Quarterly Quarterly Quarterly Quarterly Euribor 3 Months + 0,25% Euribor 3 Months + 0,25% Euribor 3 Months + 0,25% Euribor 3 Months + 0,25% Euribor 3 Months + 0,25% XDUB XDUB XDUB XDUB XDUB Euribor 3 Months + 0,25% XMSM Euribor 3 Months + 0,25% XMSM Rating Moody's DBRS Aaa Aaa Aaa Aaa Aaa Aaa Aaa NR NR NR NR NR NR NR Nominal amount 1 000 000 1 000 000 1 000 000 700 000 500 000 750 000 550 000 5 500 000 (thousand of Euros) Book Value 2023 2022 - - - - - - - - - - - - - - - - These bonds are secured by a set of housing loans and other assets that are segregated as autonomous property in the accounts of the novobanco Group, thus conferring special credit privileges to the holders of these securities over any other creditors. The conditions of these issues fall within Decree-Law No. 59/2006, Notices No. 5, 6 and 8 of 2006 and Instruction No. 13/2006 of the Bank of Portugal. The value of the credits which counter-guarantee these issues amount to 7,442.1 million euros as of December 31, 2023 (December 31, 2022: 6,078.4 million euros) (see Note 22). Note 32 – Provisions As of December 31, 2023, and 2022, the Provisions item presents the following movements: (thousands of Euros) Restructuring provision Provision for guarantees and commitments Other Provisions Total Balance as at 31 December 2021 46 686 92 336 303 812 442 834 Charges / (Write-backs) Write-off Exchange differences and others Balance as at 31 December 2022 Charges / (Write-backs) Write-off Exchange differences and others Balance as at 31 December 2023 1 332 ( 2 685) 40 598 39 245 ( 28 870) - ( 37 618) ( 66 488) - 246 ( 2 405) ( 2 159) 19 148 6 325 ( 18 697) 89 897 304 387 413 432 ( 628) 40 002 45 699 - ( 10 144) ( 28 841) - ( 5 289) 5 828 539 6 776 83 980 340 073 430 829 To meet the financial needs of its customers, the Group assumes various irrevocable commitments and contingent liabilities, which consist of financial guarantees, letters of credit and other credit commitments, which may imply payment by the Group, on behalf of the customers, in the event of specific contractual events. Despite these commitments not being recorded in assets, they carry credit risk and are, therefore, part of the Group's overall risk exposure. 382 Regarding provisions for guarantees and commitments, the provision movement is detailed as follows: Annual Report 2023 | novobanco Balance as at 31 December 2021 Transfers to stage 1 Transfers to stage 2 Transfers to stage 3 Increases due to changes in credit risk Decreases due to changes in credit risk Other movements Balance as at 31 December 2022 Transfers to stage 1 Transfers to stage 2 Transfers to stage 3 Increases due to changes in credit risk Decreases due to changes in credit risk Other movements Balance as at 31 December 2023 (thousands of Euros) Stage 1 Stage 2 Stage 3 Total 8 019 2 255 ( 1 139) ( 13) 2 047 11 148 ( 2 255) 1 255 ( 1 207) 73 169 92 336 - ( 116) 1 220 - - - 2 525 22 308 26 880 ( 4 979) ( 4 154) ( 20 432) ( 29 565) 11 36 199 246 6 201 7 348 76 348 89 897 5 454 ( 5 454) ( 3 782) ( 23) 6 000 4 390 ( 19) 4 768 ( 6 828) ( 3 776) 1 ( 18) ( 608) 42 7 219 ( 8 011) ( 5 272) - - - 17 987 ( 18 615) ( 5 289) 7 023 7 239 69 718 83 980 The transfers between stages that occurred in guarantees and commitments during the exercises of 2023 and 2022 are presented as follows: 2023 Capitals (thousands of Euros) Transfers between Stage 1 and Stage 2 Transfers between Stage 2 Transfers between Stage 1 and Stage 3 and Stage 3 To Stage 2 from Stage 1 To Stage 1 from Stage 2 To Stage 3 from Stage 2 To Stage 2 from Stage 3 To Stage 3 from Stage 1 To Stage 1 from Stage 3 Commitments and financial guarantees given 109 201 217 142 1 756 6 528 410 203 2022 Capitals (thousands of Euros) Transfers between Stage 1 and Stage 2 Transfers between Stage 2 Transfers between Stage 1 and Stage 3 and Stage 3 To Stage 2 from Stage 1 To Stage 1 from Stage 2 To Stage 3 from Stage 2 To Stage 2 from Stage 3 To Stage 3 from Stage 1 To Stage 1 from Stage 3 Commitments and financial guarantees given 44 418 40 470 45 480 2 234 1 775 181 The restructuring provisions were established within the framework of the commitments made to the European Commission arising from the sale and restructuring process of the Group. During the 2022 and 2023 exercises, a net increase of 1.3 million euros and 6.3 million euros was made, respectively, having used 28.9 million euros and 18.7 million euros, respectively. The Other provisions, which amount to 340.1 million euros (December 31, 2022: 304.4 million euros), aim to cover certain identified contingencies, arising from the Group's activity, the most relevant of which are as follows: • Contingencies associated with ongoing processes related to tax matters, for which the Group maintains provisions of 25.1 million euros (December 31, 2022: 27.4 million euros); • Contingencies associated with legal procedures amounting to 8.3 million euros (December 31, 2022: 8.5 million euros); 383 Management Report Sustainability Report Consolidated Financial Statements Annex • Contingencies associated with sales processes in the amount of 7.1 million euros (December 31, 2022: 7.1 million euros); • Contingencies related to the undivided part of the Executive Commission's Pension Plan, in the amount of 8.8 million euros (December 31, 2022: 19.2 million euros), transferred from the headings of net liabilities of the Pension Fund assets' value (see Note 16); • The State Budget Law for 2021 ("LOE 21"), amended the rules of the Property Transfer Tax ("IMT") and the Municipal Property Tax ("IMI"), with the broadening of the incidence scope of the increased IMI and IMT rate, and loss of exemptions, for properties held by taxpayers who are directly or indirectly controlled by an entity subject to a more beneficial tax regime, listed in an order approved by the Minister of Finance. As of this date, the calculation of the application of the increased IMI rates to all properties in the direct and indirect ownership of the novobanco Group amounts to approximately 203.3 million euros as of December 31, 2023 (December 31, 2022: 173.1 million euros); • The remaining value of 60.5 million euros (December 31, 2022: 69.1 million euros), is intended to cover losses arising from the Group's activity, such as fraud, theft and robbery and ongoing legal procedures for contingencies related to asset sale processes, among others. Note 33 – Other liabilities The item Other liabilities as of December 31, 2023, and 2022 is analyzed as follows: Public sector Creditors for supply of goods Margin Accounts Derivative instruments Other creditors Non-controlling interests of open Investment Funds (see Note 35) Career bonuses (see Note 16) Other accrued expenses Deferred income Foreign exchange transactions pending settlement Other transactions to be settled (thousand of Euros) 2023 40 420 74 257 2022 35 034 71 102 562 047 478 750 134 410 16 437 6 602 103 693 1 715 611 115 147 14 417 5 621 83 275 1 950 - 65 654 34 623 1 005 846 839 919 As of December 31, 2023, the item Creditors for supply of goods includes 49,863 thousand euros related to creditors of assets by right of use, under IFRS 16 (December 31, 2022: 44,474 thousand euros), whose maturity terms are presented as follows: Up to 3 months From 3 months to 1 year From 1 to 5 years More than 5 years (thousand of Euros) 2023 179 2 981 18 264 28 439 49 863 2022 262 4 613 15 950 23 649 44 474 384 Annual Report 2023 | novobanco Note 34 – Share Capital 34.1. Ordinary shares As of December 31, 2023, the share capital of the Bank, amounting to 6,567,843,862.91 euros, is represented by 11,130,841,957 registered shares with no par value and is fully subscribed and paid up by the following shareholders (December 31, 2022: share capital of 6,304,660,637.69 euros, is represented by 10,391,043,938 registered shares): Nani Holdings, S.à.r.l. Resolution Fund (1) Directorate General for the Treasury and Finance % Capital 2023 75,00% 13,04% 11,96% 2022 75,00% 19,31% 5,69% 100,00% 100,00% (1) Under the commitments made between the Portuguese State and the European Commission, the Resolution Fund is inhibited from exercising its voting rights. During the 2017 fiscal year and following the acquisition of 75% of the share capital of novobanco by Lone Star, two capital increases were made in the amount of 750 million euros and 250 million euros, in October and December, respectively. In December 2021, a capital increase was made in the amount of 154,907 thousand euros through the conversion of conversion rights (resulting from the Special Regime Applicable to Deferred Tax Assets) for the 2015 fiscal year, which conferred a 1.56% stake of the State in novobanco, and which resulted in the issuance of 154,907,314 new ordinary shares (see Note 35). In November 2022, a capital increase was made in the amount of 249,753 thousand euros through the conversion of conversion rights (resulting from the Special Regime Applicable to Deferred Tax Assets) for the 2016 and 2017 exercises, which conferred an additional 4.13% stake of the State in novobanco, and which resulted in the issuance of 436,136,627 new ordinary shares (see Note 35). In April 2023, a capital increase was carried out in the amount of 263,183 thousand euros through the conversion of conversion rights (resulting from the Special Regime Applicable to Deferred Tax Assets) for the 2018 and 2019 exercises, which conferred a 6.27% stake of the State in novobanco, and which resulted in the issuance of 739,798,019 new ordinary shares (see Note 35). As mentioned in Note 28, novobanco adhered to the Special Regime Applicable to Deferred Tax Assets approved by Law No. 61/2014, of August 26. This regime applies to deferred tax assets resulting from the non-deduction, for Corporate Income Tax purposes, of expenses and negative net worth changes that were recorded up to December 31, 2015 with impairment losses on credits and post-employment benefits or long-term employee benefits. The mentioned regime provides that deferred tax assets may be converted into tax credits when the taxpayer records a negative annual net result. The conversion of eligible deferred tax assets into tax credits is made according to the proportion between the amount of that net result and the total equity at an individual level. The special reserve is established in the same amount as the approved tax credit, increased by 10%. This special reserve is constituted in counterpart of the originating reserve and is intended to be incorporated into the share capital. The conversion rights are securities that give the State the right to demand from novobanco the respective increase of the share capital, through the incorporation of the amount of the special reserve and consequent issuance and free delivery of ordinary shares representing 3.64% of the capital (with reference to the 2020 financial year), which will only dilute, in accordance with the sale contract, the Resolution Fund's participation, if the shareholders do not exercise their potestative right to acquire the conversion rights. 385 Management Report Sustainability Report Consolidated Financial Statements Annex Note 35 – Other Comprehensive Income Accumulated, Retained Earnings, Other Reserves and Non-controlling Interests The other comprehensive accumulated income, retained earnings, and other reserves of the Group are detailed as follows as of December 31, 2023, and 2022: Accumulated other comprehensive income Retained earnings Other reserves 35.1. Accumulated other Comprehensive Income The movements in accumulated other comprehensive income were as follows: (thousands of Euros) 2023 2022 ( 1 070 125) ( 8 577 074) ( 1 234 573) ( 8 577 074) 6 736 004 6 439 418 ( 2 911 195) ( 3 372 229) Accumulated other comprehensive income (thousands of Euros) Impairment reserves Credit risk reserves Sales reserves Fair value reserves Cash flow hedging reserves Balance as at 31 December 2021 3 707 9 214 ( 43 296) ( 201 263) Actuarial deviations Fair value changes, net of taxes Foreign exchange differences - - - Impairment reserves of securities at fair value through other comprehensive income ( 3 052) Reserves of sales of securities at fair value through other comprehensive income Other comprehensive income of associated companies Cash flow hedging Other movements - - - - - - - - - - - - - - - - ( 1 165) - - - - ( 185 616) - - - 332 - - - - - - - - - ( 100 418) - Other variations of other comprehensive income Actuarial deviations (net of taxes) Total ( 14 799) ( 799 052) (1 045 489) - - ( 892) - - - - 1 101 726 - - - - - - - 101 726 ( 185 616) ( 892) ( 3 052) ( 1 165) 332 ( 100 418) 1 Balance as at 31 December 2022 655 9 214 ( 44 461) ( 386 547) ( 100 418) ( 15 690) ( 697 326) (1 234 573) Actuarial deviations Fair value changes, net of taxes Foreign exchange differences Impairment reserves of securities at fair value through other comprehensive income Reserves of sales of securities at fair value through other comprehensive income Other comprehensive income of associated companies Cash flow hedging - - - ( 421) - - - - - - - - - - - - ( 283 797) - - - - - 283 614 - - - ( 583) - - - - - - - 192 974 - - ( 45) - - - - ( 27 294) - - - - - - ( 27 294) 283 614 ( 45) ( 421) ( 283 797) ( 583) 192 974 Balance as at 31 December 2023 234 9 214 ( 328 258) ( 103 516) 92 556 ( 15 735) ( 724 620) (1 070 125) Fair Value Reserves The fair value reserves represent the potential gains and losses relative to the portfolio of financial assets at fair value through other comprehensive income, net of impairment. The value of this reserve is presented net of deferred tax and non-controlling interests. The movement of the fair value reserves net of deferred taxes and impairment reserves can be analyzed as follows: 386 Annual Report 2023 | novobanco 2023 Fair value reserves (thousands of Euros) 2022 Fair value reserves 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 ( 424 998) 38 451 ( 386 547) ( 157 910) ( 43 353) ( 201 263) Changes in fair value Foreign exchange differences Disposals in the exercise Impairment in the exercise Deferred taxes recognized in the exercise in reserves Balance at the end of the exercise 14 384 ( 5 524) 312 830 - - - - - - 14 384 ( 5 524) 312 830 - ( 331 887) 2 006 43 394 19 399 - - - - ( 331 887) 2 006 43 394 19 399 ( 38 659) ( 38 659) - 81 804 81 804 ( 103 308) ( 208) ( 103 516) ( 424 998) 38 451 ( 386 547) The fair value reserve can be explained as follows: Amortised cost of financial assets at fair value through other comprehensive income Market value of financial assets at fair value through other comprehensive income Unrealised gains / (losses) recognized in fair value reserve Fair value reserve transferred to net income (1) Potential gains / (losses) recognized in the fair value reserve Fair value reserves from equity method Non-controlling Interests Total fair value reserve Deferred Taxes Fair value reserve attributable to shareholders of the Bank (1) In the context of fair value hedge operations (see Note 23) The movement in cash flow hedge reserves is presented as follows: Balance at the beginning of the exercise Change in the fair value of the covered item recognized in other comprehensive income Reclassification of other comprehensive income for results Balance at the end of the exercise 35.2. Other reserves and retained earnings (thousands of Euros) 2023 2022 946 963 838 523 2 769 674 2 331 099 ( 108 440) ( 438 575) ( 5 019) ( 11 988) ( 103 421) ( 426 587) 414 ( 301) 997 592 ( 103 308) ( 424 998) ( 208) 38 451 ( 103 516) ( 386 547) (thousands of Euros) 2023 ( 100 418) 2022 - 203 243 ( 101 299) ( 10 269) 881 92 556 ( 100 418) Legal reserve The legal reserve can only be used to cover accumulated losses or to increase capital. Portuguese legislation applicable to the banking sector (Article 97 of Decree-Law No. 298/92, of December 31st) requires that the legal reserve be credited annually with at least 10% of the net profit, up to a (cid:0)limit equal to the value of share capital or the sum of free reserves and retained earnings, whichever is higher. 387 Management Report Sustainability Report Consolidated Financial Statements Annex Special reserve As referred to in Note 28, the special reserve was established as a result of novobanco's adherence to the Special Regime applicable to Deferred Tax Assets approved by Law No. 61/2014, of August 26, which implied the conversion of eligible deferred tax assets into tax credits and the simultaneous constitution of a special reserve. Following the determination of a negative net result for the financial years 2015 to 2020, with reference to the eligible deferred tax assets at the closing dates of these years, as a result of the application of the aforementioned special regime applicable to deferred tax assets, novobanco registered a special reserve, in the same amount as the determined tax credit, increased by 10%, which is broken down as follows:( 2019 (net loss of 2018) 2020 (net loss of 2019) 2021 (net loss of 2020) 2023 - - 128 673 128 673 (thousands of Euros) 2022 146 367 116 817 137 193 400 377 Contingent Capitalization Mechanism Following the conditions agreed upon in the novobanco sale process, a Contingent Capitalization Mechanism was created according to which, if capital ratios fall below a certain level and, cumulatively, losses are registered in a defined portfolio of assets, the Resolution Fund makes a payment equivalent to the lesser value between the recorded losses and the amount necessary to restore the capital ratios to the relevant level, up to a maximum limit of 3,890 million euros (see Note 36 – Contingent liabilities and commitments). The capital corresponds to a pre-defined asset perimeter, with an initial book value (June 2016) of about 7.9 billion euros. As of December 31, 2023, these assets had a net value of 0.9 billion euros, essentially as a result of collections and recoveries and the registration of losses (December 31, 2022: net value of 1.1 billion euros). Given the losses presented by novobanco on December 31, 2020, 2019, 2018, and 2017, the conditions were met for the Resolution Fund to pay 429,013 thousand euros, 1,035,016 thousand euros, 1,149,295 thousand euros, and 791,695 thousand euros in 2021, 2020, 2019, and 2018, respectively. The value related to the Contingent Capitalization Mechanism recorded in 2020, as receivable from the Resolution Fund (598,312 thousand euros), differs from the paid value due to 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 receivable, the Bank deducted, as of 31 December 2023 and 2022, from the regulatory capital calculation (165,442 thousand euros). Additionally, the amount of variable remuneration of the Executive Board of Directors for the 2019 and 2020 exercises was also deducted (3,857 thousand euros). In 2021 a value was recorded as receivable from the Resolution Fund of 209,220 thousand euros related to the Contingent Capitalization Mechanism, accounted for in Other Reserves and which results, at each balance sheet date, from the losses incurred and the regulatory ratios in force at the time of its determination. Consequently, as mentioned above and in line with regulatory guidelines, on December 31, 2023, and 2022, this value was also deducted from the calculation of regulatory capital. Novobanco considers this value as due under the Contingent Capitalization Mechanism, and is triggering the legal and contractual mechanisms at its disposal to ensure its receipt (see Note 36). 388 Annual Report 2023 | novobanco 35.3. Non-controlling Interests The details of the Non-controlling Interests for each subsidiary are as follows: Balance sheet 2023 Income statement - 23 861 - ( 1 170) 22 691 108 4 488 545 ( 10) 5 131 % Non- controlling interests 3,66% 42,47% 4,76% (thousands of Euros) 2022 Balance sheet Income statement - 20 104 21 975 - ( 3 631) 18 344 1 941 332 2 725 25 102 % Non- controlling interests 3,75% 42,47% 4,76% NB Património a) novobanco Açores Amoreiras Other a) Non-controlling interests relating to open real estate investment funds are recorded as Other liabilities (see Note 33) The movement of non-controlling interests can be analyzed as follows: Non-controlling interests at the beginning of the exercise Changes in consolidation perimeter and control percentages Dividends paid Changes in fair value reserves Others Net profit / (loss) for the exercise Non-controlling interests at the end of the exercise (thousands of Euros) 2023 18 344 2 469 ( 2 891) 674 ( 1 036) 5 131 22 691 2022 31 035 ( 7 935) - ( 1 364) ( 28 494) 25 102 18 344 Note 36 – Contingent Liabilities and Commitments In addition to derivative financial instruments, as of December 31, 2023, and 2022, the following off-balance-sheet balances existed: Contingent liabilities Guarantees and endorsements Financial assets pledged as collateral Open documentary credits Others Commitments Revocable commitments Irrevocable commitments (thousands of Euros) 2023 2022 11 107 879 14 469 198 2 354 035 2 269 796 8 456 619 11 949 619 187 024 110 201 169 410 80 373 5 983 312 5 965 223 5 328 531 5 405 228 654 781 559 995 The guarantees and endorsements made are banking operations that do not result in a mobilization of funds by the Group. 389 Management Report Sustainability Report Consolidated Financial Statements Annex As of December 31, 2023, the item financial assets given as collateral includes: • The Market value of financial assets at the European Central Bank collateral pool, to be used as collateral to obtain funding in the context of liquidity lending operations, amounting to 7.9 billion euros (December 31, 2022:11.2 billion euros), of which 2.1 billion euros is encumbered (December 31, 2022: 9.3 billion euros); • Securities given as collateral to the Securities Market Commission, in the context of the Investor Compensation System, amounting to 10.5 million euros (December 31, 2022: 8.0 million euros); • Securities given as collateral to the Deposit Guarantee Fund amounting to 65.6 million euros as of December 31, 2022. As of December 31, 2023, following the full payment of the commitments assumed to the Deposit Guarantee Fund, as mentioned in Note 18, there are no securities given as collateral; • Securities given as collateral to the European Investment Bank amounting to 468.5 million euros (December 31, 2022: 648.1 million euros); • Securities delivered as collateral in the context of derivatives trading with a central counterparty amounting to 74.0 million euros (December 31, 2022: 110.0 million euros); • Deposits provided as collateral to guarantee the responsibilities assumed by issuing guarantees in the amount of 18.9 million euros (31 December 2022: 29.7 million euros). These financial assets given as collateral are recorded in various asset categories on the Group's balance sheet and can be executed in case of non-compliance with the contractual obligations assumed by the Group, under the terms and conditions of the contracts signed. The increase in the value of securities given as collateral to the European Investment Bank is due to an increase in collateral due to a change in the minimum value requirements. Documentary credits are irrevocable commitments of the Group, on behalf of its customers, to pay / order the payment of a fixed amount to the supplier of a given commodity or service, within a stipulated period of time, against the presentation of documents referring to the shipment of the goods or provision of the service. The irrevocable condition consists of the fact that its cancellation or alteration is not viable without the express agreement of all parties involved. The commitments, revocable and irrevocable, represent contractual agreements to provide credit to the Group's clients (e.g. unused credit lines) which, generally, are contracted for fixed terms or with other expiration requirements and usually require the payment of a fee. Substantially all credit commitments in force require that clients maintain certain requirements verified at the time of their contracting. Despite the particularities of these contingent liabilities and commitments, the assessment of these operations obeys the same basic principles of any other commercial operation, namely the solvency of both the client and the business that underlies them, with the Group requiring that these operations be properly collateralized when necessary. Since it is expected that most of them will expire without having been used, the amounts indicated do not necessarily represent future cash needs. Additionally, the responsibilities evidenced in off-balance-sheet accounts related to the provision of banking services are as follows: Deposit and custody of securities and other items Amounts received for subsequent collection Securitized loans under management (servicing) Other responsibilities related with banking services (thousands of Euros) 2023 2022 35 067 578 30 936 968 192 196 206 387 469 370 932 756 544 136 372 762 36 661 900 32 060 253 Under the terms of the resolution measure applied to BES by the decision of the Bank of Portugal on August 3, 2014 (item 1., paragraph b), subparagraph (vii) of Annex 2), as amended by the decision of the Bank of Portugal of August 11, 2014, part of the "excluded liabilities" of transfer to Novobanco include "any obligations, guarantees, liabilities, or 390 Annual Report 2023 | novobanco contingencies assumed in the marketing, financial intermediation, and distribution of debt instruments issued by entities that are part of the Espírito Santo Group (...)". Under the above item and subparagraph and subpoint (v), also part of the excluded liabilities are "any liabilities or contingencies, namely those resulting from fraud or violation of regulatory, penal, or administrative provisions". On December 29, 2015, the Bank of Portugal adopted a new decision on "Clarification and transmission of responsibilities and contingencies defined as excluded liabilities in subparagraphs (v) to (vii) of paragraph (b) of item 1 of Annex 2 to the Decision of the Bank of Portugal of August 3, 2014 (20:00), as amended by the Decision of the Bank of Portugal of August 11, 2014 (17:00)". In terms of this decision, the 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 relating to preferred shares issued by vehicle companies established by BES and sold by BES; b. All credits, compensations, and expenses related to real estate assets that were transferred to Novobanco; c. All compensations related to breach of contracts (purchase and sale of real estate assets and others) signed and concluded before 8p.m. on August 3, 2014; d. All compensations related to life insurance contracts in which the insurer was BES - Companhia de Seguros de Vida, S.A.; e. All credits and compensations related to the alleged annulment of certain loan contract clauses in which BES was the lender; f. All compensations and credits resulting from the annulment of operations carried out by BES as a provider of financial and investment services; and g. Any responsibility that is the subject of any of the processes described in Annex I to that deliberation. (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 2023 (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 37 million U.S. Dollars and 335 million U.S. Dollars, 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 391 Management Report Sustainability Report Consolidated Financial Statements Annex respective authors of 96 milion U.S. Dollars and 871 million U.S. Dollars, 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 2023 (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. 36.1. Relevant litigation For the purposes of contingent liabilities, and notwithstanding the information contained in these notes to the accounts, particularly regarding the compliance of the provisions policy with the resolution measure and subsequent decisions by the Bank of Portugal (and criteria for the apportioning of responsibilities and contingencies arising therefrom), the following lawsuits should be identified, the effects or impacts on the financial statements of Group Novobanco being, at present date, unable to determine or quantify: (i) Lawsuit filed by Partran, SGPS, S.A., the Insolvent Estate of Espírito Santo Financial Group, S.A. and the Insolvent Estate of Espírito Santo Financial (Portugal), S.A. against Novobanco and Calm Eagle Holdings, S.A.R.L. in which it is sought the declaration of nullity of the pledge constituted over the shares of Companhia de Seguros Tranquilidade, S.A. and, alternatively, the annulment of the pledge or the declaration of its inefficacy, in which only appears as plaintiff the Insolvent Estate of ESF (Portugal) following the withdrawal of the others; (ii) Lawsuits filed following the signing of the contract for the purchase and sale of the share capital of Novobanco, signed between the Resolution Fund and Lone Star on March 31, 2017, related to the conditions of the sale, notably the administrative action filed by Banco Comercial Português, S.A. against the Resolution Fund, of which Novobanco is not part and, within the framework of which, according to the public disclosure of privileged information made by BCP on the CMVM website on September 1, 2017, it is requested the legal appreciation of the contingent capitalization obligation assumed by the Resolution Fund within the framework of the Contingent Capitalization Mechanism. With respect to the amount requested from the Resolution Fund, for the 2020 financial year, divergences remain between novobanco and the Resolution Fund, regarding (i) the provision for discontinued operations in Spain and (ii) valuation of participation units, which are the subject of ongoing arbitration. novobanco considers these amounts (165 million euros) as due under the Contingent Capitalization Mechanism and has initiated an arbitration action to claim payment of these amounts. There is also another disagreement regarding the application, by novobanco, at the end of 2020, of the dynamic option of the IFRS 9 transitional regime, which is also under consideration in the same arbitration action. Additionally, the Resolution Fund did not pay the amount requested for the 2021 financial year. novobanco considers the amounts claimed and not paid as due under the Contingent Capitalization Mechanism, having triggered the legal and contractual mechanisms at its disposal in order to ensure the receipt of the same, which are recorded as amounts receivable and are subject to favorable arbitration decisions. 392 Annual Report 2023 | novobanco 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 2023, the Group's periodic contribution amounted to 7,101 thousand euros (31 December 2022: 16,364 thousand euros). 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 4,900 million euros, of which 365 million euros corresponded to its own financial resources. A loan from a banking syndicate was also granted to the Resolution Fund, in the amount of 635 million euros, with the participation of each credit institution being weighted according to several factors, including the respective size. The remaining amount (3,900 million euros) 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 150 million euros, 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 2,255 million euros, which aimed at covering future contingencies, financed at 489 million euros by the Resolution Fund and 1,766 million euros 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 750 million euros, which was followed by a new a capital contribution of 250 million euros, 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: 393 Management Report Sustainability Report Consolidated Financial Statements Annex • 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 3,890 million euros; • 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 37 – Disintermediation According to the current legislation, the managing companies, together with the depositary bank, are jointly liable to the fund's participants for non-compliance with the obligations undertaken under the law and the rules of the managed funds. As of December 31, 2023, and 2022, the value of disintermediated resources managed by the Group's companies is analyzed as follows: Investment funds Real estate investment funds Pension funds Discretionary management (thousands of Euros) 2023 2022 732 604 1 095 611 41 147 40 124 2 320 443 2 180 753 676 152 616 060 3 770 346 3 932 547 The values included in these items are valued at fair value determined on the balance sheet date. Note 38 –Related Parties Balances and Transaction 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). 394 Annual Report 2023 | novobanco During 2023, the following transactions were carried out with the Related Parties identified on December 31, 2023 (credit and other transactions): (i) Credit Operations: Entities / Individuals Category Operation Amount (euros) APB - Associação Portuguesa de Bancos Entities for which there is a relationship of economic interdependence Credit Card Limits (raise) 1 500 EDENRED - Portugal S.A. Entities for which there is a relationship of economic interdependence Members of theExecutive Board of Directors and Supervisory bodies and related persons Members of theExecutive Board of Directors and Supervisory bodies and related persons (1.) Direct Debits Limits (RCE) (renewal) 1 000 000 Credit Card Limits (renewal) Credit Card Limits (raise) Credit Card Limits (renewal) 24 000 22 500 10 000 Current-Account Loan Account (renewal) 2 500 000 LOCARENT - Companhia Portuguesa Aluguer Viaturas S.A. Entities for which there is a relationship of economic interdependence Entity dominated by members of the Administration / Supervision Trading Room Operations (RCE) 3 000 000 Direct Debits Limits (RCE) (renewal) 4 000 000 NACIONAL CONTA – Contabilidade, Consultadoria e Administração, Lda. Entity dominated by members of the Administration / Supervision Novobanco dos Açores Novo Banco Group (BEST, NB Açores e NB Finance) Entities for which there is a relationship of economic interdependence Entity dominated by members of the Administration / Supervision Entities for which there is a relationship of economic interdependence Entity dominated by members of the Administration / Supervision Leasing (renewal with changes) 68 250 000 Commercial Paper (renewal with change) 25 000 000 Current-Account Loan Account (renewal) 100 000 Credit Card Limits (renewal) 1 000 Extension of the maturity of the Senior Debt Securities (non-preferential) of novobanco dos Açores until Dec/2026 5 000 000 • Interbank Limits (Trading Room Operations) • Commercial Limits 317 900 000 Pedro Santos Reis Persons or entities whose relationship with the institution potentially influences their management Housing Credit 360 000 Unicre - Cartão Internacional de Crédito S.A. Entities for which there is a relationship of economic interdependence Entity dominated by members of the Administration / Supervision 1. Notice 3/2020, artº33 - 3 b) and Notice 3/2020, artº33 - 3 c) (ii) Services rendered and other signed contracts: Current-Account Loan Account 15 000 000 Entities / Individuals Category Operation BEST Banco Electrónico de Serviço Total SA Entities for which there is a relationship of economic interdependence Lease Agreement Novobanco dos Açores Entities for which there is a relationship of economic interdependence Entity dominated by members of the Administration / Supervision Amendment to the Distribution Agreement NANI Holdings S.à R.L. / LSF NANI Investments S.à R.L. Shareholder and/or Entities related to the Shareholder Service Providing Contract Amount (euros) na na na 395 Management Report Sustainability Report Consolidated Financial Statements Annex The Group's balance sheet balances with related parties as of December 31, 2023 and 2022, as well as the respective recognized costs and revenues, are summarized as follows: Shareholders NANI HOLDINGS FUNDO DE RESOLUÇÃO Associated companies LINEAS LOCARENT ESEGUR UNICRE MULTIPESSOAL EDENRED YUNIT Other HUDSON ADVISORS PORTUGAL NACIONAL CONTA LDA 2023 (thousands of Euros) 2022 Assets Liabilities Guarantees Income Expenses Assets Liabilities Guarantees Income Expenses 198 180 - 106 129 271 198 180 105 858 - - - 416 416 - 155 123 114 112 335 4 322 - 137 886 - 15 220 2 010 3 027 1 987 - 29 32 7 109 036 - 241 - 241 1 4 - 4 - - - - 43 - - 273 1 641 - 62 2 638 - - - - - - - - 7 101 - 7 101 4 789 15 3 426 - - - 1 348 - 4 726 4 726 - 198 180 - 198 180 54 253 152 54 101 - - - 389 389 - 179 676 106 222 335 4 614 - 139 286 - 38 365 2 023 3 176 3 218 - 76 35 - - - - 273 - 1 727 - 919 - 2 99 716 62 1 968 - 324 - 324 1 5 - 5 - - - - - - - - 16 364 - 16 364 3 204 - 3 163 - - - 41 - 4 638 4 638 - The value of assets to be received from the Resolution Fund corresponds to the amount of activation of the Contingent Capitalisation Mechanism for the 2021 financial year. The liability corresponds to the value to be delivered to the Resolution Fund resulting from an addendum made in May 2021 to the contract for the Contingent Capitalisation Mechanism. In June 2018, a contract was signed between NANI HOLDINGS, SGPS, S.A. (currently Nani Holdings S.à.r.l.), LSF NANI INVESTMENTS S.à.r.l. and Novobanco, for the provision of support services to the preparation of consolidated information and regulatory reports. The balance sheet assets related to associate companies included in the table above mainly refer to credit granted, supplies, or debt securities acquired in the context of the Group's activity. The liabilities essentially refer to bank deposits taken. The guarantees related to associated companies included in the above table essentially refer to guarantees provided. Transactions with Related Parties were carried out under market conditions (at arm's lenght), in similar terms and conditions when compared to others signed with unrelated parties, and when this has not occurred, such exceptions were justified in terms of the Bank's Policy on Transactions with Related Parties. Every year, novobanco, together with consultants, analyses and prepares the Transfer Pricing Dossier, which contains information that shows that transactions with related parties respect the principle of Full Competition, which is delivered to the Tax and Customs Authority within the legal deadline. All credits granted to related entities are included in the impairment model and are subject to determination of impairment in the same way as commercial credits granted by the Group. The assets applied with related entities accrue interest at rates varying between 0% and 9.60% (the rates indicated correspond to the rates applied according to the original currency of the asset). The costs of remuneration and other benefits awarded to the Key Management Personnel of novobanco in 2023 and 2022 are presented as follows: 396 Annual Report 2023 | novobanco Executive Board of Directors 2023 General and Supervisory Board Total Executive Board of Directors (thousands of Euros) 2022 General and Supervisory Board Total Short-term employment benefits 3 557 1 494 5 051 Post-employment benefits Other long-term benefits 2 27 - 3 2 30 3 586 1 497 5 083 3 092 2 197 3 291 1 257 4 349 - 2 38 235 1 295 4 586 In 2023 and 2022, the value of variable remunerations for the Management Bodies amounted to 1,878 thousand and 1,931 thousand euros, respectively, which constitutes remunerations that are not vested rights of the members until after the end of the restructuring period, its payment is subject to deferment and verification of certain conditions. Additionally, in the financial year of 2023, costs of 150 thousand euros were registered as sign-on bonuses resulting from the appointment of a new Executive Director (2022: costs of 260 thousand euros were registered as sign-on bonuses resulting from the appointment of two new Executive Directors and compensation for termination of mandates of two Executive Directors were registered amounting to 460 thousand euros). On December 31, 2023 and 2022, the value of credit granted and deposits of members of novobanco's Key Management Personnel were as follows: Loans granted (i) to members of the Executive Administration Board and their direct relatives was 195 thousand euros (December 31, 2022: 351 thousand euros); and (ii) the members of the General and Supervisory Board and their direct relatives had no credit liabilities (December 31, 2022: no exposure). Deposits (i) of members of the Executive Administration Board and their direct relatives was 2,552 thousand euros (December 31, 2022: 1,138 thousand euros); and (ii) of members of the General and Supervisory Board and their direct relatives was 820 thousand euros (December 31, 2022: 1,544 thousand euros). Note 39 – Securitisation of Assets As at 31 December 2023 and 2022, the outstanding securisation transactions made by the Group were as follows: Issue Start Date Original Amount Current amount 2023 2022 (thousand od Euros) Securitized Asset Lusitano Mortgages No.4 plc September 2005 1 200 000 183 022 214 061 Mortgage Loans (general regime) Lusitano Mortgages No.5 plc September 2006 1 400 000 286 348 330 075 Mortgage Loans (general regime) Lusitano Mortgages No.6 plc July 2007 1 100 000 280 627 317 612 Mortgage Loans (general regime) Lusitano Mortgages No.7 plc September 2008 1 900 000 733 445 817 287 Mortgage Loans (general regime) According to the consolidation rules established in IFRS 10, Lusitano Mortgages No.6 plc and Lusitano Mortgages No. 7 plc have been fully consolidated from the date of their formation (see Note 1). We present below the main impacts of the consolidation of these entities on the Group's accounts: 397 Management Report Sustainability Report Consolidated Financial Statements Annex Cash, cash balances at Central Banks and other demand deposits Customer Loans (net of impairment) Liabilities represented by securities (a) (a) see Note 31 (milhares de euros) 2023 2022 99 666 124 031 1 008 663 1 127 628 19 831 25 491 Additionally, Lusitano Mortgages No. 4 plc and Lusitano Mortgages No. 5 plc are not consolidated as they do not fall within the rules defined by IFRS 10, mainly because the Group's retained interest is residual. The main characteristics of these operations, referring to December 31, 2023 and 2022, can be analysed as follows: Issue Lusitano Mortgages No.4 plc Lusitano Mortgages No.5 plc Lusitano Mortgages No.6 plc Lusitano Mortgages No.7 plc Bonds issued Class A Class B Class C Class D Class E Class A Class B Class C Class D Class E Class A Class B Class C Class D Class E Class F Class A Class B Class C Class D 2023 (thousand of Euros) Initial nominal value Current nominal value Interest held by Group (Nominal value) Interest held by Group (Book value) Maturity date Initial rating of the bonds Current rating of the bonds Fitch Moody's S&P DBRS Fitch Moody's S&P DBRS December 2048 AAA Aaa AAA December 2048 AA Aa2 December 2048 A+ A1 AA A+ - - - AA- Aa2 A- A1 AA+ AA+ BB+ Baa3 AA December 2048 BBB+ Baa1 BBB- - B+ B2 BB+ 1 134 000 139 110 22 800 9 208 19 200 24 000 10 200 7 754 9 693 5 100 1 323 000 212 384 26 600 17 384 22 400 14 639 28 000 18 299 11 900 5 950 - - - - - - - - - - - - - - - - - - - - December 2048 NA - NA December 2059 AAA Aaa AAA December 2059 AA Aa2 December 2059 A A1 AA A December 2059 BBB+ Baa2 BBB December 2059 N/A - N/A 943 250 116 039 97 882 94 913 March 2060 AAA Aaa AAA 65 450 65 450 63 950 58 568 March 2060 AA Aa3 41 800 41 800 41 800 34 496 March 2060 A A3 AA A 17 600 17 600 17 600 13 356 March 2060 BBB Baa3 BBB - - - - - - - - - - - - - - - - - - - AA+ Aa2 A+ A3 BBB+ Ba1 CCC Caa2 - - AA+ Aa2 AA+ Aa2 BBB A1 AA+ AA+ BBB B - A A A CCC Ba3 BB - - - - - - - - - - - - BB - AAA AAA BBB- - - - - - CC - - - - - - - - - - - D - AA+ AAA AA+ - - - - - 31 900 31 900 31 900 21 291 March 2060 BB 22 000 22 000 22 000 - March 2060 1 425 000 260 940 260 939 247 653 October 2064 294 500 294 500 294 500 260 109 October 2064 180 500 180 500 180 500 65 973 October 2064 57 000 57 000 57 000 - October 2064 - - - - - - - - - - - 398 Annual Report 2023 | novobanco 2022 (thousand of Euros) Issue Bonds issued Initial nominal value Current nominal value Interest held by Group (Nominal value) Interest held by Group (Book value) Maturity date Initial rating of the bonds Current rating of the bonds Fitch Moody' s S&P DBR S Fitch Moody' s S& P DBR S Lusitano Mortgages No.4 plc Lusitano Mortgages No.5 plc Lusitano Mortgages No.6 plc Lusitano Mortgages No.7 plc Class A Class B Class C Class D Class E Class A Class B Class C Class D Class E Class A Class B Class C Class D Class E Class F Class A Class B Class C Class D 1 134 000 163 785 22 800 19 200 24 000 10 200 10 842 9 130 11 412 5 100 1 323 000 245 724 26 600 22 400 28 000 11 900 20 113 16 937 21 172 11 301 - - - - - - - - - - - - - - - - - - - - December 2048 AAA Aaa AAA December 2048 AA Aa2 December 2048 December 2048 December 2048 A+ BBB + NA A1 Baa1 - AA A+ BBB - NA December 2059 AAA Aaa AAA December 2059 AA Aa2 December 2059 December 2059 December 2059 A BBB + N/A A1 Baa2 - AA A BBB N/A 943 250 152 014 128 051 124 100 March 2060 AAA Aaa AAA 65 450 65 450 63 950 55 286 March 2060 AA Aa3 41 800 17 600 31 900 41 800 41 800 31 303 March 2060 A A3 17 600 17 600 12 414 March 2060 BBB Baa3 BBB 31 900 31 900 20 017 March 2060 BB 22 000 22 000 22 000 - March 2060 1 425 000 345 770 345 770 326 254 October 2064 294 500 294 500 294 500 242 031 October 2064 180 500 180 500 180 500 59 141 October 2064 57 000 57 000 57 000 - October 2064 - - - - - AA A BB - AAA AAA BBB - - - - - - - - - - - - - - - - - - - - - - - - - - - - AA- Aa2 A- A2 BB+ Baa3 CCC Caa1 - - A+ Aa2 BBB + B+ Baa2 Ba3 CC Caa3 - - AA+ Aa2 AA Aa2 BB+ A3 CCC B3 CC - - - - - - - - - - - AA+ AA- A- B- - AA+ AA+ BBB B - A- A- A- B D - - - - - - - - - - - - - - - - - AA+ AAA AA+ - - - - - In December 2022, Novobanco entered into a transaction to transfer part of the credit risk of a portfolio of loans to companies worth around one billion euros through a synthetic securitisation, with a maturity date of February 2031 (and the possibility of a call option in September 2025). Given the nature of this operation, there was no derecognition of loans in the balance sheet, and the received guarantee was recorded, which will be updated according to the activation triggers defined in the contract. Note 40 - Fair Value of Financial Assets and Liabilities The governance model for valuing the Group's financial instruments is defined in internal rules, which establish the policies and procedures to be followed in identifying and valuing financial instruments, control procedures, and defining the responsibilities of the participants in this process. 40.1. Assets and liabilities at fair value The fair value of quoted financial assets is determined based on the closing quote (bid-price), the price of the last transaction carried out, or the value of the last known quote (bid). In the absence of a quote, the Group estimates fair value using (i) valuation methodologies, such as using prices for recent transactions, which are similar and carried out under market conditions, techniques for discounted cash flows and customised option valuation models to reflect the peculiarities and circumstances of the instrument, and (ii) valuation assumptions based on market information. For assets included in fair value hierarchy 3, whose quote is provided by a third party using parameters not observable in the market, the Group proceeds, where applicable, to a detailed analysis of the historical performance and liquidity of these assets. This may imply an additional adjustment to their fair value, as well as from additional internal or external evaluations. 399 Management Report Sustainability Report Consolidated Financial Statements Annex The valuation models used by the type of instrument are presented below: Money market operations and loans advance to customers: fair value is determined by the discounted cash flow method, with the future cash flow discounted considering the yield curve of the currency plus the credit risk of the entity that will contractually settle this flow. Commercial paper and loans to customers: their fair value is determined by discounting future cash flows to the yield curve of the currency plus the credit risk of the issuer determined in the programme of the issue. Debt instruments (bonds) with liquidity: the 'Best Price' valuation selection methodology is used based on observations available on Bloomberg, where all available valuations are requested, but only inputs from previously validated sources are considered as input, with the model also considers the exclusion of prices due to age and outliers. Specifically for Portuguese public debt, and resulting from the market-making activity and materiality of the Group's positions, the valuations of the CBBT source are always considered (the CBBT is a composite of valuations prepared by Bloomberg, which considers the average of executable prices and highly liquid). Debt instruments (bonds) with low liquidity: the models considered for the valuation of bonds with low liquidity without observable market valuations are determined considering the information available about the issuer and instrument. The following models can be considered: (i) discounted cash flows - the cash flows are discounted considering the interest rate risk, credit risk of the issuer and any other risks underlying the instrument; or (ii) valuations provided by external counterparts. These are considered in the impossibility of determining the fair value of the instrument. Reliable sources with reputed credibility in the market and impartiality in the valuation of the instruments under analysis are always selected. Convertible bonds: the cash flows are discounted taking into account the interest rate risk, the credit risk of the issuer and any other risks that may be associated with the instrument, plus the net present value (NPV) of the convertibility options embedded in the instrument. Quoted shares and funds: for listed capital products, the quote presented by the respective stock exchange is considered. Unlisted shares: the valuation is carried out through external valuations made to the companies where the shareholding position is held. If there is no justification for requesting an external valuation due to the immateriality of the holding in the balance sheet, the holding is revalued considering the book value of the entity. Unlisted funds: the valuation provided by the fund manager is considered, which takes into account assumptions not observable in the market. In case of capital calls after the reference date of the last valuation provided, the valuation is recalculated considering the capital calls subsequent to the reference date to the value that they have been made, until a new valuation is provided by the manager that incorporates the capital calls made. It should be noted that although the valuations provided by the fund managers are accepted, whenever it applies according to the fund regulations, the Bank requests the legal certification of accounts issued by independent auditors, in order to obtain the necessary additional comfort to the information provided by the manager. In addition, and for the major assets held by real estate investment funds, and according to an annual work plan previously approved by the Executive Administration Board, a challenge process is carried out to the valuations of these assets, which consists of a detailed technical analysis of the key assumptions considered in the valuations. This process may result that new valuations may be necessary and adjusts the fair value of these assets. In the specific case of Restructuring Funds (“Valued Assets”), they were the subject of a detailed valuation carried out during the exercise of 2022 by an independent external international entity (“Valuator”), which hired renowned real estate valuation companies to determine the fair value of real estate assets that represent a significant part of the funds' portfolio. The estimated fair value of the Evaluated Assets requires a multistage approach, taking into consideration the following: (i) the fair value of the assets invested by each fund (the “Underlying Assets”); (ii) the nature of the respective Fund's interest in each of the Underlying Assets; (iii) other assets and liabilities in the Fund's balances; (iv) the nature of novobanco's interest in each of the funds; and (v) the consideration of any applicable discounts or premiums. The fair value of the Underlying Assets was estimated using the three valuation approaches (market, income, and cost), depending, among other things, on the specific nature of each asset, its development status, available information, and the date of the initial investment. The other assets and liabilities on the fund's balance sheet would usually be valued 400 Annual Report 2023 | novobanco using the cost approach, with potential market-based adjustments, and the consideration of discounts and premiums, usually assessed using market data and benchmarks. Underlying Assets are mainly divided into Non-Real Estate Assets and Real Estate Assets (which can, in turn, be subdivided into Hotels and Other Real Estate Assets). For Non-Real Estate Assets, the Valuator 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 valuator used the market approach or the income approach, depending on the status of each asset. In the case of hotels, the main value-determining assumptions considered were the average room rate, occupancy rate, GOP margin, EBITDA margin, Capex needs, and discount rate. Regarding Other Real Estate Assets, the main value determining assumptions were the sale prices, construction costs, timeline (both in development and in sales), and Discount Rates. Each of the assumptions described above, used in the valuation of real estate assets, were determined on an asset-by-asset basis (total of 80 large assets subdivided into a total of more than 500 assets), depending on the status of the asset, historical performance of the asset, location and market competitors. Regarding the information on quantitative indicators underlying the fair value measurements of the Restructuring Funds, the following is presented: Assumption Hotels Real Estate under development Real Estate Shopping Centers Agriculture properties Min Average Max Min Average Max Min Average Max Min Average Max Min Average Max Bedroom average rate (€) 55 197 650 133 177 207 n.a. n.a. n.a. n.a. n.a. n.a. n.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. €/m2 €/Ha n.a. n.a. n.a. n.a. n.a. n.a. 30 n.a. 1 518 3 150 800 2 594 6 750 960 1 085 1 180 n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. 2 800 13 270 20 200 Discount rate 8.5% 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. Valuation methodology Market approach Income approach Market approach Income approach Market approach Income approach Market approach Income approach Market approach Income approach Notes: (i) All the above assumptions were calculated based on the averages of the values considered by external evaluators per valued property (ii) The average presented was calculated at the property-weighted average in the sum of the value of the underlying assets by category presented (iii) Hotel - Includes hotels and aparthotels currently in operation (Hotels in development or project are incorporated in Real Estate in Development together with their respective property) (iv) €/m2 considering the gross construction area In addition, the additional assumptions considered in the fair value measurement of the financial holdings held in the restructuring funds are presented below. Type of Fund Discount based on P/BV observable market data Real estate and Tourism Real estate and Tourism/Other Other 16.6% 15.3% 12.0% Derivative instruments: if they are traded on organized markets, valuations are observable in the market; otherwise, they are valued using standard models with observable market variables, highlighting: • Foreign exchange options: these 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 exchange swaps: these instruments are valued through the front office system, where the cash flows from the fixed leg of the instrument are discounted from the yield curve of the respective currency, and the cash flows from the variable leg are projected considering the forward curve and discounted also considering both the discount factors and forward rates from 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; 401 Management Report Sustainability Report Consolidated Financial Statements Annex • 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 according to the following methodology: (i) Portfolio perspective - the calculation of the CVA results from the application, to the aggregated exposure of each counterparty, of an expected loss and a recovery rate, considering the estimated average duration for each exposure; Individual perspective - it is based on the calculation of the exposure using stochastic methods (Expected Positive Exposure) that translates into the calculation of the expected fair value exposure that each derivative should assume in the remaining lifetime. Subsequently, an expected loss and a recovery rate are applied to the determined exposure. (ii) The Group chooses not to register the "Debt Valuation Adjustment" (DVA), which represents the market value of the Group's own credit risk of a specific negative exposure to a counterparty, reflecting a prudent view of applying this regulation. It should be noted that the potential exposure subject to DVA is controlled monthly and has assumed immaterial values. Investment properties: their fair value is determined based on periodic evaluations carried out by independent entities specializing in this type of service, however, given the subjectivity of some assumptions used in the evaluations, the Group performs internal analyses on the assumptions used which could imply additional adjustments to its fair value, supported by additional internal or external evaluations (see accounting policy in Note 7.15). The market value of the properties for which a purchase and sale promise contract has been signed corresponds to the value of that contract. The validation of the valuation of financial instruments is carried out by an independent area, which validates the models used and the prices attributed. More specifically, this area is responsible for carrying out the independent verification of prices for market price valuations (mark-to-market), for model-based valuations (mark-to-model) it validates the models used and changes to them, whenever they exist. For prices provided by external entities, the validation consists of confirming the use of correct prices. The balance sheet value of the financial assets and liabilities and non-financial assets (investment properties) measured at fair value of the Group is as follows: 402 Annual Report 2023 | novobanco (thousands of Euros) At Fair Value Valuation models based on observable market parameters Valuation models based on unobservable market parameters Quoted market prices (Level 1) (Level 2) (Level 3) Total Fair Value 318 528 117 620 318 528 - - - - - 117 620 11 227 101 085 5 308 - - - - - - 436 148 318 528 117 620 11 227 101 085 5 308 31 December 2023 Financial assets held for trading Securities held for trading - Bonds issued by public entities Derivatives held for trading Exchange rate contracts Interest rate contracts Others Financial assets mandatorily at fair value through profit or loss - securities 18 021 20 913 225 978 264 912 Bonds issued by other entities Shares Other variable income securities 11 368 6 626 50 - - 11 418 135 656 142 282 27 20 863 90 322 111 212 Financial assets at fair value through other comprehensive income 741 384 28 380 68 759 838 523 Bonds issued by public entities Bonds issued by other entities Shares Derivatives - Hedge Accounting - interest rates contracts Investment properties Assets at fair value Financial liabilities held for trading - Derivatives held for trading Exchange rate contracts Interest rate contracts Credit Other Derivatives - Hedge Accounting - Interest rate contracts Liabilities at fair value 371 675 - 368 610 20 584 - - 371 675 389 194 1 099 7 796 68 759 77 654 - - 683 063 - 683 063 - 393 795 393 795 1 077 933 849 976 688 532 2 616 441 - - - - - - - 98 989 11 413 82 247 104 5 225 124 729 223 718 1 650 100 639 - 11 413 1 650 83 897 - - - 104 5 225 124 729 1 650 225 368 403 Management Report Sustainability Report Consolidated Financial Statements Annex (thousands of Euros) At Fair Value Quoted market prices Valuation models based on observable market parameters Valuation models based on unobservable market parameters Total Fair Value (Level 1) (Level 2) (Level 3) 36 428 135 382 36 428 - - - - - 135 382 23 141 103 673 8 568 - - - - - - 171 810 36 428 135 382 23 141 103 673 8 568 31 December 2022 Financial assets held for trading Securities held for trading - Bonds issued by public entities Derivatives held for trading Exchange rate contracts Interest rate contracts Others Financial assets mandatorily at fair value through profit or loss 16 566 21 730 275 406 313 702 Bonds issued by other entities Shares Other variable income securities Loans to customers Financial assets at fair value through profit or loss - Bonds from other issuers 11 045 5 464 50 - 2 378 13 473 135 655 141 119 57 21 680 137 355 159 092 - - - - 18 13 18 13 Financial assets at fair value through other comprehensive income 2 229 304 30 528 71 267 2 331 099 Bonds issued by public entities Bonds issued by other entities Shares Derivatives - Hedge Accounting - interest rates contracts Investment properties Assets at fair value Financial liabilities held for trading - Derivatives held for trading Exchange rate contracts Interest rate contracts Other Derivatives - Hedge Accounting - Interest rate contracts Liabilities at fair value 1 764 578 - 458 913 20 493 - - 1 764 578 479 406 5 813 10 035 71 267 87 115 - - 562 845 - 562 845 - 499 567 499 567 2 282 298 750 485 846 253 3 879 036 - - - - - - 96 780 22 069 71 807 2 904 119 578 216 358 2 606 99 386 - 22 069 2 606 74 413 - - 2 904 119 578 2 606 218 964 The movement of financial assets and liabilities valued using methods with parameters not observable in the market (level 3 of the fair value hierarchy) during the exercises of 2023 and 2022, can be analyzed as follows: 404 Annual Report 2023 | novobanco 2023 Financial assets mandatorily at fair value through profit or loss Securities Loans to customers Financial assets at fair value through profit or loss Financial assets at fair value through other comprehensive income Investment properties Total assets (thousands of Euros) Financial liabilities held for trading Derivatives held for trading Total liabilities Balance as at 31 December 2022 275 388 18 13 71 267 499 567 846 253 2 606 2 606 Acquisitions Maturity Settlements Disposals Changes in fair value Other movements 338 ( 13 189) ( 24 717) - - - - - - - - - 1 086 611 2 035 - ( 9 867) - - ( 13 189) ( 34 584) - ( 131 897) ( 131 897) - - - - - - - - ( 11 842) ( 18) ( 13) 6 273 19 233 13 633 ( 956) ( 956) Balance as at 31 December 2023 225 978 - - - - - - 6 281 6 281 - - 68 759 393 795 688 532 1 650 1 650 2022 Financial assets mandatorily at fair value through profit or loss Securities Loans to customers Financial assets at fair value through profit or loss Financial assets at fair value through other comprehensive income Investment properties Total assets (thousands of Euros) Financial liabilities held for trading Derivatives held for trading Total liabilities Balance as at 31 December 2021 Acquisitions Maturity Settlements Disposals Changes in fair value Other movements 586 450 45 390 ( 177 720) ( 115 754) - ( 62 978) - Balance as at 31 December 2022 275 388 - - - - - 18 - 18 - - - - - 13 - 13 43 224 625 187 1 254 861 1 950 1 950 3 520 16 464 65 374 - ( 762) - - ( 177 720) ( 116 516) - ( 242 068) ( 242 068) - - - - - - - - 25 285 101 237 63 575 656 656 - ( 1 253) ( 1 253) - - 71 267 499 567 846 253 2 606 2 606 In the exercises of 2023 and 2022, there were no significant transfers of value between the different levels of the fair value hierarchy. The potential gains and losses of financial instruments and investment properties classified at level 3 of the fair value hierarchy are recorded in income for the year or revaluation reserves, according to the respective accounting policy of the assets. The amounts determined as of December 31, 2023 and 2022 were as follows: 405 Management Report Sustainability Report Consolidated Financial Statements Annex Recognised in reserves 2023 Recognised in the income statement Total Recognised in reserves (thousands of Euros) 2022 Recognised in the income statement Total Trading derivatives Financial assets mandatorily at fair value through profit or loss - - Financial assets mandatorily at fair value through profit or loss 55 904 955 955 - - - - - ( 655) ( 655) ( 58 545) ( 58 545) 55 904 25 584 - 25 584 Investment properties - 16 526 16 526 - 91 133 91 133 55 904 17 481 73 385 25 584 31 933 57 517 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 the change in the main variables used in their valuation, when applicable: Assets classified under level 3 Valuation Model Variable analysed Carrying book value Unfavorable scenario Favorable scenario Change Impact Change Impact 2023 (millions of Euros) - - - - - - 0,1 0,1 0,1 - 0,1 Financial assets mandatorily at fair value through profit or loss Shares Discounted cash flow model (b) 226,0 135,7 135,7 90,3 Other variable income securities Financial assets at fair value through other comprehensive income Valuation of the management company (adjusted) Valuation of the management company (b) 76,3 (c) 14,0 - - - - - - 68,8 68,8 ( 3,0) ( 3,0) 16,6 ( 3,0) Renewable Energy Tariff Shares Discounted cash flows Total Others (a) 52,2 294,7 - ( 3,0) (a) No sensitivity analysis was carried out for these categories as these include securities of an individually immaterial value. (b) Given that the Restructuring Funds were not revalued in 2023, a sensitivity analysis was also not carried out on them (c) In the specific case of units valued according to the quotation provided by the respective management company, it is not reasonable to analyze the impact of the change in variables underlying the determination of the quotation by that entity 406 Annual Report 2023 | novobanco 2022 (millions of Euros) Assets classified under level 3 Valuation Model Variable analysed Carrying book value Unfavorable scenario Favorable scenario Change Impact Change Impact Financial assets mandatorily at fair value through profit or loss 275,4 ( 2,4) 10,8 Bonds issued by other entities Discounted cash flow model Specific Impairment 2,4 -50% ( 2,4) +50% 10,8 Shares Other variable income securities Valuation of the management company (adjusted) Valuation of the management company (adjusted) Valuation of the management company (adjusted) 135,7 (b) 135,7 137,4 (b) 117,6 (c) 19,8 - - - - - Financial assets at fair value through other comprehensive income Shares Discounted cash flows 71,3 71,3 ( 2,9) ( 2,9) 16,2 ( 2,9) Renewable Energy Tariff Total 346,7 ( 5,3) (a) No sensitivity analysis was carried out for these categories as these include securities of an individually immaterial value. Others (a) 55,1 - - - - - - 0,1 0,1 0,1 - 10,9 (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 about 90% of the underlying assets of the Funds, a variation of +10% and -10% was considered in the fair value of the main real estate assets of each Fund, which leads to an impact of +5.2% and -5.2% in the fair value of the restructuring funds. (c) In the specific case of units valued according to the quotation provided by the respective management company, it is not reasonable to analyze the impact of the change in variables underlying the determination of the quotation by that entity The main parameters used, on December 31, 2023 and 2022, in the valuation models were as follows: Interest Rate Curves The short term rates presented reflect the indicative values practiced in the money market, and for the long term, the values presented represent the quotes for interest rate swaps for the respective terms: 407 Management Report Sustainability Report Consolidated Financial Statements Annex EUR 2023 USD GBP EUR 2022 USD (%) GBP 4,0325 3,8450 3,9090 3,8610 3,6870 3,5130 2,5665 2,4360 2,4420 2,4940 2,5580 2,5150 2,4120 2,3260 5,3650 5,4200 5,5300 5,5000 5,4100 5,0470 4,0319 3,8117 3,7571 3,7541 3,7785 3,7585 3,6768 3,5910 5,0850 5,2900 5,5000 5,3500 5,2750 4,9670 3,9400 3,6544 3,5548 3,5682 3,6300 3,6570 3,6470 3,6403 1,9501 1,8840 2,1320 2,6930 2,9920 3,2910 3,3005 3,2390 3,2020 3,2020 3,1410 2,9310 2,7150 2,5320 4,3650 4,4200 4,7700 5,1500 5,2350 5,1130 4,3010 4,0110 3,8780 3,8220 3,7970 3,7260 3,6170 3,4720 3,5750 3,6500 3,8000 4,3350 4,5250 4,6768 4,6088 4,3280 4,1350 3,9920 3,9377 3,8647 3,7967 3,7257 Overnight 1 month 3 months 6 months 9 months 1 year 3 years 5 years 7 years 10 years 15 years 20 years 25 years 30 years Credit Spreads The credit spreads used by the Group in the evaluation of credit derivatives are disclosed daily by Markit, representing observations comprised of about 85 renowned international financial institutions. The evolution of the main indices, which is considered representative of the behavior of credit spreads in the market throughout the year, is presented next: Index Series 1 year 3 years 5 years 7 years 10 years (basis points) 31 December 2023 CDX USD Main iTraxx Eur Main iTraxx Eur Senior Financial 31 December 2022 CDX USD Main iTraxx Eur Main iTraxx Eur Senior Financial 41 40 40 39 38 38 - 14,64 - - 35,05 - 33,64 33,08 - 56,87 66,40 - 56,70 58,21 67,02 82,02 90,60 99,29 78,74 78,97 - 101,74 106,87 - 98,19 98,68 - 117,73 122,66 - Interest Rate Volatilities The values presented below refer to the implied volatilities (at the money) that served as a basis for the valuation of interest rate options: EUR 99,28 124,23 124,77 121,60 115,66 107,02 2022 USD 23,33 38,10 40,72 39,38 35,95 - (%) GBP 55,24 49,59 47,00 45,73 42,81 - EUR 87,29 110,08 105,67 101,82 97,50 91,56 2023 USD 94,80 125,00 121,30 116,10 108,90 99,00 1 year 3 years 5 years 7 years 10 years 15 years GBP 99,70 142,10 140,10 134,00 124,60 113,10 408 Annual Report 2023 | novobanco Foreign Exchange Rates and Volatilities The following are the exchange rates (European Central Bank) at the balance sheet date and the implied volatilities (at the money) for the main currency pairs, used in the valuation of derivatives: Foreign exchange rate 2023 2022 1 month 3 months 6 months 9 months 1 year Volatility (%) EUR/USD EUR/GBP EUR/CHF EUR/NOK EUR/PLN EUR/RUB USD/BRL a) USD/TRY b) 1,1050 0,8691 0,9260 1,0666 0,8869 0,9847 11,2405 10,5138 4,3395 4,6808 6,98 4,96 6,76 9,81 6,99 117,2010 117,2010 29,28 4,8523 5,2865 29,5503 18,7183 12,71 8,47 6,64 5,14 6,13 9,54 7,04 31,71 13,09 13,41 6,57 5,50 5,99 9,56 7,13 34,65 13,60 17,98 6,54 5,75 5,94 9,60 7,19 36,12 13,95 21,13 6,70 5,95 5,91 9,61 7,24 32,92 14,29 23,43 a) Calculated on the basis of the EUR/USD and EUR/BRL exchange rates b) Calculated on the basis of the EUR/USD and EUR/TRY exchange rates Regarding exchange rates, the Group uses the spot rate observed in the market at the time of valuation in its valuation models. Quotation Indexes The following table summarizes the evolution of the main quotation indices and their volatilities used in the valuations of equity derivatives: DJ Euro Stoxx 50 PSI 20 IBEX 35 FTSE 100 DAX S&P 500 BOVESPA Quotation Historical volatility 2023 2022 % Change 1 month 3 months Implied Volatility 4 522 6 396 10 102 7 733 16 752 4 770 3 794 5 726 8 229 7 452 13 924 3 840 134 185 109 735 19% 12% 23% 4% 20% 24% 22% 13,65 12,29 12,13 10,97 12,94 11,61 15,90 15,89 13,99 17,15 13,37 15,16 13,75 18,48 11,00 - - 9,28 11,03 10,93 19,74 40.2. Assets and liabilities at Amortized Cost 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 amortized cost The fair value of securities recorded at amortized cost is estimated according to the methodologies used to value the securities that are recorded at fair value, as described at the beginning of this Note. Customer loans The fair value of customer loans is estimated based on the updating of expected capital and interest cash flows, assuming that the installments are paid on the dates contractually defined. The future expected cash flows of homogeneous credit portfolios, such as mortgages, are estimated on a portfolio basis. The discount rates used are the current rates practiced for loans with similar characteristics. 409 Management Report Sustainability Report Consolidated Financial Statements Annex Resources from Central Banks and other credit institutions The fair value of resources from central banks and other credit institutions is estimated based on the updating of expected capital and interest cash flows. Due to Customers The fair value of these financial instruments is estimated based on the updating of expected capital and interest cash flows. The discount rate used is the one that reflects the rates practiced for deposits with similar characteristics at the balance sheet date. Considering that the applicable interest rates are renewed for periods of less than one year, there are no materially relevant differences in their fair value. Liabilities represented by securities, Subordinated Liabilities, and Liabilities associated with transferred assets The fair value of these instruments is based on market quotations when available; if not, it is estimated based on the updating of expected future cash flows of capital and interest for these instruments. Other financial liabilities These liabilities are short-term, so the balance value is a reasonable estimate of their fair value. The fair value of financial assets and liabilities recorded on the balance sheet at amortized cost is analyzed as follows, having been estimated based on the main methodologies and assumptions described above: Assets / liabilities recorded at amortised cost Quoted market prices Fair Value Valuation models based on observable market parameters Valuation models based on unobservable market parameters (thousand of Euros) Total fair value (Level 1) (Level 2) (Level 3) 31 December 2023 Cash, cash balances at central bank and other demand deposits 5 867 189 - 5 867 189 - 5 867 189 Financial assets at amortised cost Debt securities Loans and advances to banks Loans and advances to customers Financial assets 7 870 536 6 340 702 47 940 24 534 061 - - 216 753 47 940 1 160 823 7 718 278 - 47 940 - 24 892 480 24 892 480 38 319 726 6 340 702 6 131 882 26 053 303 38 525 887 Financial liabilities measured at amortised cost Deposits from banks Due to customers Debt securities issued, subordinated debt and liabilities associated to transferred assets Other financial liabilities Financial liabilities 5 745 326 29 984 273 - - 1 107 585 1 240 258 493 171 - 5 745 326 - 5 745 326 - - - 29 984 273 29 984 273 12 136 1 252 394 493 171 493 171 37 330 355 1 240 258 5 745 326 30 489 580 37 475 164 410 Annual Report 2023 | novobanco Assets / liabilities recorded at amortised cost Quoted market prices Fair Value Valuation models based on observable market parameters Valuation models based on unobservable market parameters (thousand of Euros) Total fair value (Level 1) (Level 2) (Level 3) 31 December 2022 Cash, cash balances at central bank and other demand deposits 6 599 078 - 6 599 078 - 6 599 078 Financial assets at amortised cost Debt securities Loans and advances to banks Loans and advances to customers Financial assets 7 964 664 6 322 522 43 548 24 550 936 - - 270 317 43 548 1 002 725 7 595 564 - 43 548 - 25 072 152 25 072 152 39 158 226 6 322 522 6 912 943 26 275 167 39 510 632 Financial liabilities measured at amortised cost Deposits from banks Due to customers Debt securities issued, subordinated debt and liabilities associated to transferred assets Other financial liabilities Financial liabilities 9 705 154 29 277 858 - - 1 628 897 1 696 133 375 268 - 9 696 251 - 9 696 251 - - - 29 277 858 29 277 858 68 964 1 765 097 375 268 375 268 40 987 177 1 696 133 9 696 251 29 722 090 41 114 474 Note 41 - Transfer of Assets In the context of the restructuring process of the Portuguese real estate sector, several initiatives were launched to create financial, operational, and management conditions that could revitalize that sector. In this regard, the Government, in close connection with companies and the financial sector, including the former BES, encouraged the integrated creation of societies and specialized funds that, through concentration, aggregation, merger, and management operations, would allow the attainment of the synergies needed for the recovery of the companies. With these objectives in mind, companies (parent companies) were established, with a minority participation of the Originating Bank, which in turn came to hold almost all of the capital of certain subsidiaries (subsidiaries of these parent companies) with the aim of acquiring certain real estate bank loans. A set of operations for the transfer of financial assets (namely customer credit) to those last entities (subsidiaries of the parent companies) was carried out. These entities are responsible for managing the assets received as collateral that, after the transfer of credits, aim to implement a plan to enhance them. Almost all of the financial assets transferred in these operations were derecognized from the Group's balance sheet, as the substantial share of the risks and benefits associated with them, as well as their control, was transferred to the aforementioned third-party entities. The aforementioned acquiring entities have a specific management structure, completely autonomous from the lending banks, which is selected at the time of their constitution and has the main responsibilities of: • defining the purpose of the entity; • manage and exclusively and independently manage the acquired assets, determine the objectives and investment policy and the manner of conduct of the management and business of the entity. The acquiring entities are financed, predominantly, through the issuance of senior capital instruments that are fully subscribed by the parent companies. The value of the capital represented by senior securities equals the fair value of the transferred asset, determined by a negotiation process based on evaluations made by both parties. These securities are remunerated at an interest rate that reflects the risk of the company holding the assets. Additionally, financing can be supplemented by banks subscribing to junior capital instruments by the difference between the book value of the transferred credits and the fair value that was based on the valuation of the senior security. These junior instruments, when subscribed by the Group, will entitle to a contingent positive value, if the value of the transferred assets exceeds the amount of senior installments plus their remuneration, and is usually limited to a maximum of 25% of the total value resulting from senior securities and junior securities issued. 411 Management Report Sustainability Report Consolidated Financial Statements Annex Considering that these junior securities reflect a differential valuation of the transferred assets, based on evaluations made by independent entities and a negotiation process between the parties, they are fully provisioned in the Group's balance sheet. Thus, following the asset transfer operations, the Group subscribed: • capital-senior instruments, representing the capital of the parent companies in which the cash flows that will allow their recovery come from a wide range of assets transferred by the various Banks. These securities are recorded in the portfolios of financial assets necessarily at fair value through the results being evaluated at market, with valuation regularly disclosed by the mentioned companies whose accounts are audited at the end of each year; • junior instruments, issued by the companies that acquire the credits that are being fully provisioned as they reflect the best estimate of the impairment of the transferred financial assets. From these subscriptions by the novobanco Group resulted a clearly minority position in the capital of the mentioned entities. In this context, not having control but remaining with some risk and benefit, the Group novobanco, under the terms of IFRS 9 3.2.7, conducted an analysis of the exposure to variability of risks and benefits in the transferred assets, before and after the operation, concluding that it did not retain a substantial part of the risks and benefits. Additionally, and considering that it also does not have control, it proceeded under the terms of IFRS 9 3.2.6c, (i) to the derecognition of the transferred assets and (ii) to the recognition of the assets received as consideration, as shown in the following table: Amounts at transfer date (thousand of Euros) Amounts of the assets transferred Securities subscribed Net assets transferred Transfer amount Result of the transfer Shares (Senior securities) Junior securities Total Impairment Carrying book value Fundo Recuperação Turismo, FCR 293 187 293 187 - 256 892 34 906 291 798 (34 906) 256 892 FLIT SICAV 336 896 337 981 1 085 325 527 23 247 348 773 (23 247) 325 527 Discovery Portugal Real Estate Fund 227 155 218 609 (8 546) 211 780 - 211 780 - 211 780 Fundo Vallis Construction Sector 98 981 98 981 - 98 349 25 181 123 529 (25 181) 98 349 Fundo Recuperação, FCR 200 019 204 317 4 299 164 078 36 182 200 261 (23 000) 177 261 Fundo Reestruturação Empresarial 73 225 73 225 - Fundo Aquarius 144 830 143 770 (1 060) 103 481 145 435 - - 103 481 145 435 - - 103 481 145 435 1 374 292 1 370 070 ( 4 222) 1 305 541 119 516 1 425 057 ( 106 333) 1 318 724 During 2022, as part of the Crow project, the Group proceeded to sell all the participation units of the Tourism Recovery Fund and the FLIT SICAV, and to partially sell the participation units of the Recovery Fund FCR (see note 13), so as of December 31, 2023, the Group's total exposure in securities related to credit transfer operations amounted to a value of 220.9 million euros (December 31, 2022: 253.2 million euros). The details are as follows: 412 Annual Report 2023 | novobanco 2023 Securities 2022 Securities Participation units subscribed (no.) Book value NAV Unrealised Subscribed Capital Participation units subscribed (no.) Book value NAV FLIT SICAV - - - - 25 000 - - Discovery Portugal Real Estate Fund 259 527 135 655 267 043 3 950 259 527 135 655 269 119 Fundo Recuperação, FCR 171 846 19 172 39 795 5 209 186 602 21 567 51 836 Fundo Reestruturação Empresarial - - - - 80 719 21 798 29 337 Fundo Aquarius 147 148 57 099 152 654 18 502 166 861 74 202 133 629 Fundo Turismo Algarve 47 188 9 000 46 101 944 47 188 9 773 46 232 625 709 220 926 505 593 28 605 765 897 262 995 530 153 (thousand of Euros) Unrealised Subscribed Capital - 3 950 17 569 5 680 20 980 - 48 179 * quote as at 30 June 2023 Note 42 - Risk Management The "Institutional" area of Novo Banco, S.A.'s website presents information for the investor, particularly the Market Discipline Report of Novo Banco, S.A., which aims to comply with the obligation to publicly disclose information as set out in Part VIII of Regulation No. 575/2013 of the European Parliament and the Council of 26 June 2013 (CRR) and the guidelines issued by the EBA, incorporated into the Portuguese regulatory framework through Banco de Portugal's Instruction 5/2018. In cases where the information from this Annual Report supports the information in the Market Discipline Report, this information is identified through references to this Report, systematized in Annex VI of the Market Discipline Report. 42.1. Framework Risk is implicit in banking business and, as such, the novobanco Group is naturally exposed to various categories of risks that arise from external and internal factors, and which emerge depending on the characteristics of the markets in which the Bank operates and the activities it carries out. Therefore, the risk management and control of the novobanco Group is based on the following premises: • Independence from other group units, particularly risk-taking units; • Universality by application throughout novobanco Group; • Integrity of risk culture, through a holistic view and anticipation of its materialization; • 3 Lines of Defense Model, with the aim of adequately detecting, measuring, monitoring, and controlling the materially relevant risks to which novobanco Group is subject. This Model implies that all employees, in their sphere of action, are responsible for managing and controlling risks. 42.2. Governance and Risk management structure Risk Management, being vital for the development of novobanco Group's activity, is centralized in the Risk Management Function, assumed by the Global Risk Department (DRG), which defines in a holistic way the principles of risk management and control, in close coordination with the other 2nd line units of the 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 specialized Committees), which assume the responsibility to supervise, monitor, evaluate and define the Risk Appetite and the control principles implemented. The person responsible for the Risk Management Function of the novobanco Group is the head of the DRG. In order to guarantee greater efficiency in coordination with the DRG, a local Risk Function Manager was appointed for each relevant entity of the novobanco Group. The intervention of the DRG is direct or of coordination in alignment with the units that assume the local Risk Management Function. 413 Management Report Sustainability Report Consolidated Financial Statements Annex Risks identified as relevant and material are quantified through the Internal Capital Adequacy Assessment Process (ICAAP), with the most relevant being: • credit risk that includes default, counterparty and concentration • market risk; • liquidity risk; • information and communication and Security, compliance risk, and reputational risk, and • business risk. We highlight ESG (Environmental, Social and Governance) risk - particularly the subcategories of climate and environmental risk and other environmental risks - as risks of increasing relevance, and whose impact is estimated to be materialized in the medium and long term (that is, over a horizon longer than the other risk categories). ESG risk is part of the Group's risk management framework, in close coordination between the DRG and the ESG Office, which contributes with specific knowledge for the identification of climate and environmental risk factors and social risk factors. Thus, it is formally defined in novobanco's risk taxonomy as exposure to adverse events resulting from inadequacies or failures in procedures, systems or policies related to the environment (adaptation or mitigation of climate change, sustainable use and protection of water or marine resources, transition to a circular economy, waste prevention and recycling, pollution control and protection of ecosystems) and natural resources (Biodiversity), Social (equality, social cohesion, social integration, labor relations) and Governance (adequate management structures, labor relations, employee remuneration and tax obligations compliance). The assessment of the materiality of its impacts is analysed cross-sectionally, as ESG factors are intrinsically present in the other risk categories provided for in the Group's risk taxonomy. In this regard, we highlight the factors that have received greater specialization from the Group, in terms of its risk assessment and control methodologies and their 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 each economic sector's (and each company's) response to the need for transition, different scenarios (and severities of transition risk factors) can be envisioned, 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 can result from factors that arise based on an extreme event - acute risk - or through a medium or long-term factor - chronic risk (for example, the negative effect that global warming, resulting from the continuous increase in temperatures, can have on the productive cycles of some sectors). Physical risks can have as a consequence internal financial impacts (damage to own assets) or external financial impacts (disruption of the productive cycles of customers/counterparts or the impact on the Group's real estate collaterals). Next are the main guidelines for managing the risks identified above: • Credit risk: the management and control of this type of risk are supported by the use of an internal system for identifying, assessing and quantifying risks, as well as internal rating and scoring processes for the portfolios and their continuous monitoring in specific decision-making forums; • Market risk: there is a specialized team that centralizes the management and control of market risk and the Group's balance sheet interest rate risk (IRRBB), aligned with regulation and good risk practices; • Liquidity risk: based on the measurement of liquidity outflows from contractual and contingent positions in normal or in stress situations, the management and control of this risk consists, on the one hand, in determining the size of the liquidity pool available at any given time, and on the other hand in planning, in the medium and long term, stable financing sources; • non-financial risks: the management of this risk is based on the definition of a framework for the management and control of non-financial risks and specific policies; and on the compliance function and the Information Security Office playing a relevant role in the definition of other specific risk policies. 414 Annual Report 2023 | novobanco 42.3. Credit risk Credit risk arises from the possibility of financial loss due to customer or counterparty defaults on contractual obligations established with the Group as part of its credit activity. Credit risk is primarily present in traditional banking products - loans, guarantees, and other contingent liabilities and derivatives. In credit default swaps (CDS), the net exposure between selling and buying protection positions on each entity underlying the operations constitutes credit risk for the novobanco Group. CDSs are recorded at their fair value as per the accounting policy described in Note 7.6.6. Continuous management of credit portfolios is carried out, favouring interaction between the various teams involved in risk management throughout the successive phases of the credit process. This approach is complemented by introducing continuous improvements in both risk assessment and control methodologies and tools, as well as decision- making procedures and circuits. Monitoring the Group's credit risk profile, particularly in terms of the evolution of credit exposures and monitoring of credit losses, is carried out on a regular basis in the Risk Committees of the Executive Board and the General and Supervisory Board. Main events in 2023 exercise During 2023, we highlight below the main events related to impairment, namely: (i) Constitution of impairments for contingencies resulting from adverse market conditions; (ii) (iii) Update of macroeconomic scenarios. Introduction of new triggers to stage 2 related to exposures without a risk rating; Regarding the impairment boosts mentioned in points 1. above, taking into account the current economic context of high interest rates, with the prospect of maintenance during 2024, to face contingencies of these adverse market conditions, a sensitivity analysis was carried out on the corporate and housing portfolio. Therefore, novobanco estimated and accounted for these portfolios, in an appropriate and timely manner, more than 40 million euros in unallocated impairment in addition to the cost of risk observed in its portfolio. Regarding the introduction of new triggers to stage 2, in this case, all exposures with a persistent situation of not having a valid risk rating are now considered in stage 2. The introduction of this measure in the collective impairment calculation model had no impact in 2023 as novobanco had already taken precautions. In relation to point (iii) above, the impact of updating the macroeconomic scenarios underlying novobanco's impairment calculation model was estimated slightly below 30 million euros of impairment, an amount also recorded as unallocated impairment. The climate and environmental risk component The ESG risk materiality analysis seeks to identify the impact that this risk will have on other risks, particularly credit risk, since it is the main risk faced by novobanco. In order to monitor the portfolio's credit risk from an ESG perspective, various metrics (KRI) were created which are monitored on a monthly basis, seeking to analyze the evolution of the portfolio's risk and anticipate any adverse impacts on credit risk resulting from factors associated with climate and environmental risk. From a portfolio perspective, the assessment of credit risk in sectors relevant to climate risk policy is used by the novobanco to prioritize, assess and monitor transition risk, with a focus on negatively affected sectors or those with an uncertain impact. This methodology takes into account the following factors: direct and indirect contribution to GHG emissions (greenhouse gas, such as the production and distribution of fossil fuels or renewable energies), relevance to climate policy (such as the sensitivity of the cost structure to regulatory or fiscal changes based on GHG emissions) and importance in the energy value chain (production, use, consumption). 415 Management Report Sustainability Report Consolidated Financial Statements Annex In this respect, novobanco is developing its transition plan with the aim of reducing its indirect carbon footprint, reducing the risk of its portfolio and contributing to meeting the Paris objectives. In 2023 it took a major step forward, approving targets for reducing financed GHG emissions for 3 business sectors (Electricity Generation, Concrete and Commercial Mortgages). These targets were calculated based on scientific methodologies recommended by sector by the Science Based Targets Initiative (SBTi). In order to allow for a top-down analysis, novobanco has developed an ESG sectoral scoring system that allows for the identification of clients who will be the target of credit risk analysis from an ESG perspective, by prioritizing the sectors with the greatest concerns in terms of climate risk, namely the sectors classified in the ESG scoring with high and severe risk. Novobanco is developing specific guidelines adapted to the risks that each relevant sector faces or will face. To ensure that novobanco has access to its clients' ESG information, new contractual provisions have been introduced in credit agreements regarding the provision of non-financial information by clients, minimum social and governance safeguards, as well as sectoral provisions for sectors subject to minimum financing safeguards, where applicable. For reference, the sectors subject to exclusion or minimum safeguards are described in the novobanco's Financing Principles - Sector/activity exclusions and minimum safeguards. During 2023, special emphasis was also placed on obtaining Energy Performance Certificates (EPC) for real estate guarantees already in the bank's portfolio. For new operations, regardless of the purpose and type of property, the energy certificate is mandatory. Finally, novobanco was selected to take part in the Fit-for-55 Climate Stress Test, a regulatory exercise that seeks to identify the resilience of financial institutions to meet climate objectives. The exercise began in 2023 and will conclude in 2024. This exercise will enable a benchmark to be made between the various institutions and will allow the regulator to identify market best practices. 42.3.1. Exposure to credit risk Next, the information related to the novobanco Group's maximum exposure to credit risk is presented: 416 Annual Report 2023 | novobanco 2023 2022 (thousand of Euros) Gross value Impairment Net Value Gross value Impairment Net Value Deposits with and loans and advances to banks 362 002 ( 714) 361 288 518 014 ( 780) 517 234 Derivatives for trading and fair value option derivatives Securities held for trading Securities at fair value through profit/loss Securities at fair value through profit/loss - mandatory 117 620 318 528 - 11 418 - - - - 117 620 318 528 - 11 418 135 382 36 428 13 13 473 - - - - 135 382 36 428 13 13 473 Securities at fair value through other comprehensive income 760 869 ( 239) 760 630 2 243 984 ( 660) 2 243 324 Securities at amortised cost 8 194 848 ( 324 312) 7 870 536 8 256 195 ( 291 531) 7 964 664 Loans and advances to customers 25 405 088 ( 954 525) 24 450 563 25 452 202 (1 066 392) 24 385 810 Derivatives - hedge accounting 683 063 - 683 063 562 845 - 562 845 Other assets 523 511 ( 132 533) 390 978 551 797 ( 129 830) 421 967 Guarantees and standby letters provided 2 354 035 ( 74 686) 2 279 349 2 397 867 ( 82 547) 2 315 320 Documentary credits 187 024 - 187 024 169 410 - 169 410 Revocable and irrevocable commitments 5 983 312 9 294 5 992 606 6 206 048 7 350 6 213 398 Credit risk associated with the reference entities of credit derivatives - - - - - - 44 901 318 (1 477 715) 43 423 603 46 543 658 (1 564 390) 44 979 268 For financial assets recognized in the Balance Sheet, the maximum exposure to credit risk is represented by the net book value of impairment. For off-balance-sheet items, the maximum exposure of guarantees is the maximum amount the Group would have to pay if the guarantees were executed, and for loan commitments and other irrevocable credit- related commitments, it is the total amount of commitments assumed. Impairment is calculated on a collective or individual basis according to the accounting policy defined in Note 7.12. In cases where the value of collateral, after applying haircuts (differentiated by collateral type), equals or exceeds exposure, individual impairment may be null. Thus, the novobanco Group has no overdue financial assets for which it has not performed an analysis regarding its recovery and subsequent recognition of the respective impairment when verified. 42.3.2. Scenarization in impairment models As prescribed in IFRS 9 regulation, the Group's impairment calculation reflects different macroeconomic evolution expectations, that is, it incorporates multiple scenarios. To incorporate the effects of future macroeconomic behavior on loss estimates, macroeconomic forward-looking estimates are included in some of the risk parameters used for impairment calculation. Accordingly, different possible scenarios are considered, which result in the same number of impairment outcomes. In this context, the process of defining macroeconomic scenarios considers the following principles: • Representative scenarios that capture existing nonlinearities (e.g., a base scenario, a scenario with more favorable macroeconomic prospects, and a scenario with less favorable macroeconomic prospects); • The base scenario is consistent with the inputs used in other exercises in the Group, as it uses the same methodology that the Group uses in internal and regulatory planning exercises for impairment calculation purposes; • Alternative scenarios to the base scenario incorporate a favorable and an adverse scenario; • The correlation between projected variables is realistic with the economic reality (e.g., if GDP is increasing, it is expected that unemployment is decreasing). 417 Management Report Sustainability Report Consolidated Financial Statements Annex The exercise of constructing central and alternative macroeconomic scenarios for the Portuguese economy is based on a combination of econometric forecasts, information on forecasts from other external institutions, and the exercise of subjective expert judgement. In the first component, GDP growth is estimated through estimates for the growth of expenditure components, reaching GDP through the identity GDP = Consumption + Investment + Exports - Imports. The chosen econometric specifications 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 a single forecast (the risk of errors and biases associated with specific methods and variables is minimized). Forecasts for prices (consumption and real estate) and unemployment follow a similar methodology: own forecasts from an estimated model, weighted with forecasts from external institutions, if these are available. In a base scenario, the projections for interest rates start from market expectations (provided by Bloomberg), with possible adjustments according to 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 the behaviour of GDP (expansion and contraction cycles), the reference of EBA recommendations for extreme adverse scenarios, the stylized facts of economic cycles, with regard to expenditure components, prices, unemployment, etc., and estimates. Thus, when revising/updating the scenarios, the respective probabilities are also reviewed. Once the scenarios are updated, the values of the risk parameters are updated for later consideration in the context of the Impairment calculation. The eventual final impairment will result from the sum of the impairment value of each scenario, weighted by its respective probability of execution. Currently, 3 scenarios are considered for the calculation of collective impairment: central, less favourable (or adverse) and more favourable. The considered scenarios and the evolution of the main macroeconomic variables are described in the tables below: 418 Annual Report 2023 | novobanco A – Base Scenario, with a relative weight of 72,5% Unit 2023 2024 2025 2026 PIB Private Consumption Public Expenditure Investment Exports Imports Internal Demand Prices CPI Real Estate (Residential) Real Estate (Commercial) Equity prices (incremental change) Unemployment Euribor (average) 3-months End of the period 6-months End of the period 12-months End of the period Sovereign Yields (average) Bund 10Y End of the period PGB 10Y End of the period PGB 2Y End of the period 10Y PGB-Bund spread Annual average End of the period 10Y-2Y PGB Spread Annual average End of the period Real growth % Real growth % Real growth % Real growth % Real growth % Real growth % Real growth % % % % % % workforce % % % % % % % % % % % % bps bps bps bps 1,4 0,8 1,2 4,7 2,0 3,4 1,6 2,9 0,2 0,1 0,0 6,7 3,58 3,19 3,52 3,11 3,40 3,03 2,81 2,81 3,71 3,78 2,89 2,79 90 97 82 99 2,0 1,3 1,3 5,1 3,9 4,0 2,0 2,2 1,5 0,6 0,0 6,9 3,02 2,85 2,99 2,87 2,97 2,90 2,87 2,92 3,89 4,00 2,92 3,05 103 108 97 95 2,2 1,7 1,4 4,2 6,4 6,3 2,2 2,0 3,3 1,6 0,0 6,8 2,84 2,83 2,87 2,86 2,91 2,92 < 3,04 4,11 4,21 3,18 3,31 113 117 93 90 2,2 1,7 1,4 4,2 6,4 6,3 2,2 2,0 3,3 1,6 0,0 6,8 2,84 2,83 2,87 2,86 2,91 2,92 2,98 3,04 4,11 4,21 3,18 3,31 113 117 93 90 After GDP growth of 6.8% in 2022, the base scenario assumes a slowdown in activity in 2023, to growth of around 2.1%, supported by net external demand, given the strong growth in exports at the beginning of the year (in particular from tourism), and the resilience of private consumption. The decline in GDP growth is explained by the adverse impact on domestic demand of high inflation and rising interest rates. For 2024, it is assumed that GDP growth will decline to 1.4%, with additional lagged impacts from a restrictive monetary policy (increase in debt service), a slight rise in unemployment and a slowdown in exports. The decline in growth is mitigated by the decline in inflation, budgetary support and an acceleration of investment (mainly public investment) within the scope of the Recovery and Resilience Plan. In 2025-26, GDP growth is assumed to converge to trend (annual growth around 2%-2.2%). After reaching a peak of 7.8% in 2022, average annual inflation remains high in 2023, at around 4.6% (mainly with the contribution of services). A more visible slowdown in consumer prices is assumed for 2024-26, towards the 2% target. In any case, persistent inflation in 2022-24 supports the scenario of higher key interest rates. In the base scenario, these reach their peak in the 4th quarter of 2023. The annual average Euribor in months is seen to increase from 0.35% in 2022 to 3.43% in 2023 and to 3.58% in 2024, before to gradually decrease to 2.84% in 2026 (the rate is expected to peak at around 4% in the 4th quarter of 2023). The PGB-Bund spread is expected to remain contained, below or around 100 basis points in 2024 and 2025. 419 Management Report Sustainability Report Consolidated Financial Statements Annex The household savings rate is expected to increase from 6.5% in 2022 to 7.3% in 2025 and 2026, as private consumption slows, following the post-Covid boom and with the effects of higher interest rates and more restrictive financing conditions. The unemployment rate remains contained, at around 6.5%-6.8% of the active population. B – Less favourable / adverse scenario, with a relative weight of 17,5% Unit 2023 2024 2025 2026 PIB Private Consumption Public Expenditure Investment Exports Imports Internal Demand Prices CPI Real Estate (Residential) Real Estate (Commercial) Equity prices (incremental change) Unemployment Euribor (average) 3-months End of the period 6-months End of the period 12-months End of the period Sovereign Yields (average) Bund 10Y End of the period PGB 10Y End of the period PGB 2Y End of the period 10Y PGB-Bund spread Annual average End of the period 10Y-2Y PGB Spread Annual average End of the period Real growth % Real growth % Real growth % Real growth % Real growth % Real growth % Real growth % % % % % % workforce % % % % % % % % % % % % bps bps bps bps -3,2 -3,9 0,1 1,2 -3,2 -0,3 -2,3 4,7 -10,1 -15,2 -50,0 8,9 4,37 3,98 4,66 3,87 4,65 3,75 2,93 2,21 4,31 3,78 3,69 2,99 138 157 62 79 -1,5 -2,6 0,1 1,0 0,4 0,5 -1,4 1,9 -4,8 -6,5 -45,0 13,1 2,96 2,45 2,84 2,33 2,72 2,21 1,98 1,75 3,48 3,17 2,68 2,36 150 142 80 81 1,6 1,4 0,8 3,7 6,3 6,5 1,8 1,8 0,8 0,4 1,6 1,4 0,8 3,7 6,3 6,5 1,8 1,8 0,8 0,4 -35,0 10,6 -35,0 10,6 2,25 2,05 2,15 1,96 2,08 1,94 1,80 1,85 3,08 2,99 2,24 2,11 128 114 85 88 2,25 2,05 2,15 1,96 2,08 1,94 1,80 1,85 3,08 2,99 2,24 2,11 128 114 85 88 The adverse scenario is based on the assumption that inflation will become more persistent than expected. This could be due to an energy shock, with new impacts from the wars in Ukraine and the Middle East. The ECB responds by further increasing policy rates in late 2023 and 2024. This leads to sharply restrictive financial conditions and a recession in 2024-2025. In the Portuguese economy, GDP growth falls by 3.2% in 2024 and 1.5% in 2025, mainly as a result of a significant contraction in private consumption, which is negatively impacted by the increase in interest rates, the fall in purchasing power purchase and a significant increase in unemployment. Private investment by families and non-financial corporations also falls in real terms. However, total investment still increases, as a result of the public component, reflecting the implementation of the Recovery and Resilience Plan funds. It is assumed that net external demand will have a negative contribution to growth (decrease in exports, including services). 420 Annual Report 2023 | novobanco Average annual inflation is expected to remain well above the target in 2024 (around 4.7% in Portugal). But tighter financial conditions, with higher policy and market interest rates, contribute to the recession in 2024-25, which is assumed to be disinflationary in nature. Inflation falls quickly to levels below 2% in 2025-26, leading the ECB to cut key rates in that period, which translates into a fall in market interest rates, to levels below those observed in the base scenario. The unemployment rate rises to 8.9% in 2024 and to 13.1% in 2025. The fall in private consumption and the need to compensate for the erosion caused by inflation result in an increase in the household savings rate, to 9. 9% of disposable income in 2025, above pre-Covid levels. C – More favorable scenario, with a relative weight of 10% Unit 2023 2024 2025 2026 PIB Private Consumption Public Expenditure Investment Exports Imports Internal Demand Prices CPI Real Estate (Residential) Real Estate (Commercial) Equity prices (incremental change) Unemployment Euribor (average) 3-months End of the period 6-months End of the period 12-months End of the period Sovereign Yields (average) Bund 10Y End of the period PGB 10Y End of the period PGB 2Y End of the period 10Y PGB-Bund spread Annual average End of the period 10Y-2Y PGB Spread Annual average End of the period Real growth % Real growth % Real growth % Real growth % Real growth % Real growth % Real growth % % % % % % workforce % % % % % % % % % % % % bps bps bps bps 2,3 1,3 1,2 1,5 4,2 1,3 1,3 4,6 7,5 2,5 2,0 6,4 3,44 3,96 3,70 3,92 3,88 3,77 2,53 2,85 3,33 3,64 2,96 2,99 80 79 37 65 2,1 1,8 1,2 5,5 3,1 4,6 2,4 3,0 1,8 0,6 15,0 6,5 3,83 3,69 3,76 3,60 3,65 3,52 2,87 2,88 3,65 3,66 2,91 2,83 79 78 74 83 2,4 2,4 1,5 6,1 4,7 5,9 3,0 2,4 2,5 0,8 20,0 6,4 3,52 3,35 3,42 3,24 3,33 3,13 3,05 3,21 3,76 3,86 2,92 3,01 72 65 84 85 3,1 3,5 1,4 5,0 6,9 7,7 3,5 2,1 3,7 1,2 25,0 5,9 3,17 2,99 3,11 2,97 3,04 2,95 3,28 3,35 3,91 3,96 3,00 2,99 63 61 91 97 The favorable scenario assumes that the increase in inflation in 2023 proves to be transitory. After recording 4.6%, price growth converges, in the remaining projection horizon, to values close to 2%. This development could be associated with a rapid resolution of conflicts in Ukraine and/or the Middle East and a strong reduction in energy and food prices. Short-term market interest rates decline in 2025-2026 but remain clearly above pre-Covid levels. Long-term interest rates rise throughout the projection horizon, but with the 10-year PGB-Bund spread retreating and evolving at low levels. In this context, it is assumed that economic activity will expand at an above-trend pace for most of the projection horizon and accelerating until 2026. GDP growth benefits from positive investment performance (with the implementation of funds from the PRR), private consumption and exports. Strong external demand and favorable financing conditions support house price growth, albeit in single digits. The unemployment rate is seen falling to close to 5% of the active population. 421 Management Report Sustainability Report Consolidated Financial Statements Annex 42.3.3. Impairment models 42.3.3.1. Individual Credit Analysis The Individual Impairment Analysis aims to determine the most appropriate impairment rate for individually significant clients, regardless of the value resulting from the Collective Impairment Model. The identification of individually significant customers is carried out based on the criteria defined in the standard. The Individual Analysis of individually significant clients is carried out based on the information provided by the Commercial Structures and DRCE (Corporate Credit Recovery Department) regarding the client/Group framework, historical cash flows (wherever possible, at least 3 years) and forecasts (when available) and existing collateral. In the analysis of quantifying impairment on an individual basis, possible scenarios are established for credit recovery, either through the continuity of the client's business, through the giving/execution of collateral or through the sale of the credit, weighted by the respective probability of occurrence. If the analysis results in no specific impairment being necessary, the impairment will be determined by collective analysis, that is, by the collective impairment model. The scheme below illustrates the individual credit analysis to be carried out to conclude on the classification in terms of staging of debtors: Selection Criteria The Group considers as the target of an Individual Analysis process (staging analysis and, when applicable, individual impairment quantification), customers who: • Register exposure in stage 3 and liability equal to or greater than 1 million euros (or equal to or greater than 250 thousand euros if they are DRCE clients); • Are identified by the Committee itself based on another justified criterion (e.g. sector of activity); • • In the past, they have been assigned specific impairment; In the event of any new evidence that may have repercussions on the calculation of impairment, they are proposed for analysis by one of the participants of the Impairment Committee or by another Body/Forum, namely GARC (e.g.: Reclassification in stage 3 within the scope of GARC). The identification of customers targeted for Individual Analysis will be updated monthly, in order to take into account any changes that may occur throughout the year. 422 Annual Report 2023 | novobanco Quantification of Impairment on an Individual Basis The impairment calculation on an individual basis may take into account different recovery strategies, which must include different possible scenarios, weighted by the respective probability of occurrence, and they must include information on past and current events and forecasts of future economic conditions (forward scenarios -looking). It is understood that there are two methods of estimating the amount to be recovered by the Bank: • Going Concern approach (“business continuity” method): estimation of cash flows through the client’s activity; • Gone Concern approach (“cessation of activity” method): presupposes the cessation of the Client’s activity, whereby the recoverable value is determined based on scenarios of execution/granting of guarantees provided, the Client’s liquidation/insolvency and/or of the respective guarantors/guarantors, and/or the sale of credits to third parties. Going Concern This scenario involves a situation of recovery of outstanding amounts through the cash flows generated by the client's business. The going concern scenario is considered to be applicable when: • There is updated and reliable financial information about the debtor so that it is possible to reliably estimate the future cash flows that will be channeled to fulfill the debt service (e.g.: financial information aged less than or equal to 1 year and/or reports audits that do not recurrently present reservations); • The available information suggests that the debtor will have the capacity to generate cash flows from its operational activities. This analysis can be carried out using the following approaches: • • • “Discounted Cash Flow” approach supported by a reliable business plan and adjusted to the expectations of the evolution of the debtor's activity; “Twostep Discounted Cash Flow” - approach supported by a Discounted Cash Flow (Step 1), complemented with a Terminal value (Step 2); “Steady state” in the absence of a reliable business plan, the latest available financial statements may be used, and the Group must make any adjustments it deems necessary to determine the operational cashflow that will be generated to cover debt service. Gone Concern In the gone concern approach, the recovery of amounts owed will be materialized through a scenario of payment in kind and/or the execution of collateral allocated to the credit granted. This approach therefore considers the scenario of cessation of the company's activity and the preparation of estimates of the flows that result from the execution and sale of collateral allocated to credit. The consideration of a scenario of donation or execution of collateral must, in a first phase, take into account the eligibility of the collateral for recovery of the amounts owed, i.e., the verification that the asset meets the necessary conditions to be considered for consideration. effects of calculating the recoverable value (e.g.: registration of mortgages, lack of seizure of assets, among others). By way of example, if another creditor has a preferential mortgage on the collateral that is greater than the recoverable value of the asset, then the Group should not consider any amount recoverable from that collateral. Subsequently, the recoverable value must be determined in accordance with the rules described in Circular Letter no. CC/2018/0000006, particularly with regard to the deadlines for receiving collateral, sales costs, maintenance costs, haircuts to be applied in accordance with the age of the evaluation, among others. 423 Management Report Sustainability Report Consolidated Financial Statements Annex 42.3.3.2. Collective analysis adjustments to the automatic result of the model After processing the calculation of collective impairment and validating the consistency of the results obtained, all situations that may require an adjustment to the calculated impairment value are evaluated. These adjustments are reflected, where possible, directly in the exposures and are assigned a specific validity period. At the end of this period, the necessity for adjustment is re-evaluated and its renewal, alteration and/or extinction are decided. When this is not possible, the determined impairment value is accounted for without being allocated to specific exposures. For this purpose, each amount must have associated the stage and type of credit to which it refers. Considering the temporary nature of the impairment constituted without allocation as a principle, the impairment amounts constituted in this way will, as soon as conditions allow, be fully distributed among the exposures in which their allocation is determined. In terms of governance model, both the adjustments in specific exposures and the impairment amounts constituted in non-allocated form must be validated and supported by an approval from a competent body - the Expanded Impairment Committee. 42.3.4. Credit risk monitoring 42.3.4.1. Internal rating models for corporate, institutional and equity portfolios Regarding rating models for corporate portfolios, different approaches are adopted depending on the size and sector of activity of the clients. Specific models adapted to project finance, acquisition finance, object finance, commodity finance and construction financing operations are also used. A synthesis table is presented below pertaining to the types of risk models adopted in the internal assignment of risk ratings: The Bank's Rating Department has a Rating Model for the following segments: Start-ups; Sole Proprietors (ENIs); Small Businesses; Medium Businesses; Large Businesses; Real Estate and Rental Real Estate; Large Business Holding; Financial Institutions; Municipalities and Institutions; Countries; Project Finance; Object Finance, Commodity and Acquisition Finance; Financial Holding. The segments for which rating assignment models are not available are: • Insurance and Pension Funds; • Churches, political parties and non-profit associations with turnover less than 500,000 euros. Institutions, large companies, Financial Regarding the credit portfolios of Institutions, Local and Regional Administrations and Specialized Loans - namely Project Finance; Object Finance, Commodity and Acquisition Finance - the risk ratings are assigned by the Group novobanco's Rating Desk. This structure consists of 7 multisectoral teams comprising a team leader and several specialized technical analysts. The assignment 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, closely correlated with the sector or sectors of activity in which the customers under analysis operate. With the exception of rating assignment to specialized loans, the methodology used by the Rating Desk 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 participating in the respective economic group. The internal risk ratings are validated daily in a Rating Committee composed of members of the Rating Department's Directorate and the various specialized teams. For the medium business segment, statistical rating models are used, combining financial data with qualitative and behavioural information. The publication of risk ratings, however, requires the execution of a prior validation process that is carried out by a technical team of risk analysts, who also take into account behavioural variables. In addition to rating assignment, these teams also monitor the credit portfolio of novobanco Group clients through the preparation of risk analysis reports, provided for in internal regulations, according to the current responsibilities/rating client binomial, which 424 Annual Report 2023 | novobanco may include specific recommendations on the credit relationship with a particular client, as well as technical opinions 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, behavioral variables of the companies and the partner(s) in the calculation of risk ratings. Scoring models specifically aimed at quantifying the risk of start-ups (companies established less than 2 years ago) and sole proprietors (ENI) are also implemented. These clients, along with small-sized businesses, depending on the exposure value, are included in the regulatory retail portfolios. Finally, for companies in the real estate sector (companies dedicated to real estate promotion and investment activity, in particular small and medium-sized companies), given their specificities, their respective ratings are assigned by a specialized central team, relying on the use of specific models that combine the use of quantitative and technical variables (real estate valuations carried out by specialized offices), as well as qualitative and behavioral variables. As for the risk positions equivalent to equities held by the novobanco Group, directly or indirectly through the holding of investment funds, as well as advances and accessory benefits, all included in the equity risk class for the purpose of calculating risk-weighted assets, are classified in various risk segments according to the characteristics of their issuers or borrowers, following the segmentation criteria presented earlier. These segmentation criteria determine the type of rating model to be applied to the issuers of the stocks (or borrowers of the advances / accessory benefits) and, therefore, to them. 42.3.4.2 - Relationships between internal and external ratings The assignment of internal rating to entities with an assigned external rating is done using the Market Template available in the Rating Calculation application. The Market Template gathers the external ratings that have been assigned to a particular entity by rating agencies Standard & Poor’s (S&P), Moody’s and Fitch. Specifically, the S&P's external rating provision feature - XpressFeed, feeds the External Ratings application daily, which in turn allows the external ratings published by these agencies for a specific entity to be filled in the Market Template. External ratings assigned by Moody’s and Fitch are not automatically obtained, and must be manually entered in the Market Template, after consulting the respective websites. The internal rating results, in the vast majority of cases, from the equivalent S&P external rating and, in rare cases, from the equivalent S&P external rating plus an internal adjustment, which must always be accompanied by explanatory comments drafted by the analyst. Note that the equivalent S&P external rating is obtained by correlating the available external ratings with the rating scales of the aforementioned financial rating agencies. The internal ratings produced by the Market Template and that have had adjustments have to be approved and validated in the Rating Committee. The following table shows the correspondence between the external ratings S&P, Moody’s and Fitch and the equivalent S&P external rating: 425 Management Report Sustainability Report Consolidated Financial Statements Annex S&P AAA AA+ AA AA- A+ A A- fBBB+ BBB BBB- BB+ BB BB- B+ B B- CCC+ CCC CCC- CC SD D Moody's Aaa Aa1 Aa2 Aa3 A1 A2 A3 Baa1 Baa2 Baa3 Ba1 Ba2 Ba3 B1 B2 B3 Caa1 Caa2 Caa3 Ca C Fitch AAA AA+ AA AA- A+ A A- BBB+ BBB BBB- BB+ BB BB- B+ B B- CCC+ CCC CCC- CC C RD/D Equivalent External Rating S&P Rating agreggating classes* 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 * for explanatory notes disclosure information purposes 42.3.4.3 - Internal scoring models for individuals' portfolios Regarding scoring models for individuals' portfolios, the novobanco Group has origination/concession and behavioral scoring models (applied to operations with a seniority greater than 6 months). These models are automatic, based on statistical models developed with information, considering sociodemographic information, loan characteristics, behavioral information and automatic penalties (in case there are warning signs). In the case of behavioral models, information about the rest of the loans of the contract holders is also considered. internal The Group is authorized by the Bank of Portugal to use internal models in calculating regulatory capital requirements for the main individual portfolios: Mortgage and Individual Credit. Additionally, it has origination and behavioral scorings for Credit Card products, Overdrafts and Loan Accounts, which it uses for the purpose of design and monitoring of credit quality although these are not IRB portfolios. 42.3.4.4. Other specific disclosures Forward Looking Models Collective impairment models incorporate forward looking information through macroeconomic models, which estimate the evolution of risk parameters through the evolution of macroeconomic variables. Regarding the PD model, the forward looking adjustment is carried out for the segments of Large and Medium-sized Companies, Small Companies and Start-ups, Home Credit and Other Consumer Credit. For LGD models, there is a specific macroeconomic adjustment for the Housing, Consumer and Corporate Credit segments. 426 Annual Report 2023 | novobanco The aforementioned models are based on the historical series of defaults and, on the other hand by the historical series of the main macroeconomic variables (GDP, inflation, interest rate, unemployment rate and property prices), having been used quarterly historical data since 2010. The definition of the final models depends on the economic sense and their statistical performance. 42.3.5. Delinquency The following table shows the assets that are impaired, overdue but not impaired, and neither overdue nor impaired: Deposits with and loans and advances to banks Securities held for trading Bonds issued by government and other public entities Bonds issued by other entities Securities at fair value through profit/loss Bonds issued by government Bonds issued by other entities Securities at fair value through profit/loss - mandatory Bonds issued by government and other public entities Bonds issued by other entities Securities at fair value through other comprehensive income Bonds issued by government and other public entities Bonds issued by other entities Securities at amortised cost Neither overdue nor impaired 362 002 318 528 318 528 - - - - 11 418 - 11 418 740 285 371 675 368 610 7 754 579 Bonds issued by government and other public entities 4 421 480 Bonds issued by other entities 3 333 099 2023 (thousands of euros) Overdue but not impaired Impaired Total exposure Impairment Net exposure - - - - - - - - - - - - - - - - - - - - - - - - - - 362 002 ( 714) 361 288 318 528 318 528 - - - - 11 418 - 11 418 - - - - - - - - - 318 528 318 528 - - - - 11 418 - 11 418 20 584 760 869 ( 239) 760 630 - 371 675 20 584 389 194 ( 49) ( 190) 371 626 389 004 440 269 8 194 848 ( 324 312) 7 870 536 - 4 421 480 ( 588) 4 420 892 440 269 3 773 368 ( 323 724) 3 449 644 Loans and advances to customers 24 256 771 15 665 1 132 652 25 405 088 ( 954 525) 24 450 563 Deposits with and loans and advances to banks Securities held for trading Bonds issued by government and other public entities Securities at fair value through profit/loss Bonds issued by other entities Securities at fair value through profit/loss - mandatory Bonds issued by other entities Securities at fair value through other comprehensive income Neither overdue nor impaired 518 014 36 428 36 428 13 13 13 473 13 473 2 218 736 Bonds issued by government and other public entities 1 764 578 Bonds issued by other entities Securities at amortised cost 454 158 7 846 101 Bonds issued by government and other public entities 4 610 412 Bonds issued by other entities 3 235 689 2022 (thousands of euros) Overdue but not impaired Impaired Total exposure Impairment Net exposure - - - - - - - - - - - - - - - - - - - - 518 014 36 428 36 428 13 13 13 473 13 473 ( 780) 517 234 - - - - - - 36 428 36 428 13 13 13 473 13 473 25 248 2 243 984 ( 660) 2 243 324 - 1 764 578 25 248 479 406 ( 453) ( 207) 1 764 125 479 199 410 094 8 256 195 ( 291 531) 7 964 664 - 4 610 412 ( 1 722) 4 608 690 410 094 3 645 783 ( 289 809) 3 355 974 Loans and advances to customers 24 070 168 5 625 1 376 409 25 452 202 (1 066 392) 24 385 810 427 Management Report Sustainability Report Consolidated Financial Statements Annex 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. Exposures classified as not impaired refer to (i) all exposures that show no 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 nor specific impairment after individual impairment assessment. The following table presents assets that are impaired or overdue but not impaired, disaggregated by their maturity or age (if they are overdue): 2023 (thousands of euros) Securities Portfolio - debt instruments Deposits with and loans and advances to banks Loans and advances to customers Overdue but not impaired Impaired Overdue but not impaired Impaired Overdue but not impaired Impaired Overdue Up to 3 months From 3 months to 1 year From 1 to 3 years From 3 to 5 years More than 5 years Due Up to 3 months From 3 months to 1 year From 1 to 3 years From 3 to 5 years More than 5 years - - - - - - - - - - - - - 102 968 - - - 1 746 101 222 357 885 13 510 344 284 - 91 - 460 853 - - - - - - - - - - - - - 2022 - - - - - - - - - - - - - 15 665 12 539 1 303 1 073 711 39 - - - - - - 349 779 13 329 122 304 127 565 17 854 68 727 782 873 56 622 112 464 89 705 189 162 334 920 15 665 1 132 652 (thousands of euros) Securities Portfolio - debt instruments Deposits with and loans and advances to banks Loans and advances to customers Overdue but not impaired Impaired Overdue but not impaired Impaired Overdue but not impaired Impaired Overdue Up to 3 months From 3 months to 1 year From 1 to 3 years From 3 to 5 years More than 5 years Due Up to 3 months From 3 months to 1 year From 1 to 3 years From 3 to 5 years More than 5 years - - - - - - - - - - - - - 102 968 - - - 6 696 96 272 332 374 327 619 - - 4 755 - 435 342 - - - - - - - - - - - - - - - - - - - - - - - - - - 5 625 3 258 1 467 824 55 21 - - - - - - 324 981 15 607 102 758 78 713 38 988 88 915 1 051 428 49 933 176 350 228 510 83 834 512 801 5 625 1 376 409 428 Annual Report 2023 | novobanco The following table presents the assets that are impaired or overdue, but not impaired, disaggregated by their respective impairment Stage: 2023 2022 Stage 1 Stage 2 Stage 3 Total Stage 1 Stage 2 Stage 3 Total (thousands of Euros) Deposits with and loans and advances to banks Securities at fair value through other comprehensive income Securities at amortised cost - - - - - - - - 20 584 20 584 440 269 440 269 Loans and advances to customers 11 273 4 392 1 132 652 1 148 317 11 273 4 392 1 593 505 1 609 170 - - - 911 911 - - - - - 25 248 25 248 410 094 410 094 4 714 1 376 409 1 382 034 4 714 1 811 751 1 817 376 Distribution of credit risk by rating level Regarding assets that are neither overdue nor impaired, the distribution by rating level is presented below. For debt instruments, the rating assigned by the Rating Agencies is considered, for customer credit and availabilities and applications in credit institutions, internal rating and scoring models are used, with which a risk rating is assigned, which is reviewed periodically. For the purposes of presenting the information, the ratings have been aggregated into five major risk groups, with "others" including exposures without a rating. Prime +High grade Upper Medium Grade Lower Medium grade (thousand of Euros) Others Total 2023 Non Investment Grade Speculative + Highly speculative Deposits with and loans and advances to banks 3 3 088 6 408 19 830 332 673 362 002 Securities held for trading Bonds issued by government and other public entities Bonds issued by other entities Securities at fair value through results Debt instruments from other public entities Debt instruments - other issuers Securities at fair value through profit/loss - mandatory Bonds issued by government and other public entities Bonds issued by other entities - - - - - - - - - - - - - - - - - - - - - - - - - - - Securities at fair value through other comprehensive income 166 210 257 287 262 421 Bonds issued by government and other public entities 166 210 133 694 71 771 Bonds issued by other entities - 123 593 190 650 - - - - - - - - - - - - 318 528 318 528 318 528 318 528 - - - - 11 418 - 11 418 54 367 - 54 367 - - - - 11 418 - 11 418 740 285 371 675 368 610 Securities at amortised cost 2 270 897 1 833 359 1 577 272 551 373 1 521 678 7 754 579 Bonds issued by government and other public entities 2 236 452 1 375 992 520 538 - 288 498 4 421 480 Bonds issued by other entities 34 445 457 367 1 056 734 551 373 1 233 180 3 333 099 Loans and advances to customers 6 292 784 6 543 851 2 676 788 7 785 787 957 560 24 256 771 429 Management Report Sustainability Report Consolidated Financial Statements Annex Prime +High grade Upper Medium Grade Lower Medium grade (thousand of Euros) Others Total 2022 Non Investment Grade Speculative + Highly speculative Deposits with and loans and advances to banks 3 4 967 41 908 39 031 432 105 518 014 36 428 36 428 - 13 - 13 13 473 - 13 473 2 218 736 1 764 578 Securities held for trading Bonds issued by government and other public entities Bonds issued by other entities Securities at fair value through results Debt instruments from other public entities Debt instruments - other issuers Securities at fair value through profit/loss - mandatory Bonds issued by government and other public entities Bonds issued by other entities - - - - - - - - - - - - - - - - - - - - - - - - - - - Securities at fair value through other comprehensive income 718 692 721 320 729 815 Bonds issued by government and other public entities 704 803 687 433 372 342 Bonds issued by other entities 13 889 33 887 357 473 - - - - - - - - - - - - 36 428 36 428 - 13 - 13 13 473 - 13 473 48 909 - 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 entities 2 252 149 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 customers 6 583 527 6 391 723 2 597 044 7 744 731 753 143 24 070 168 42.3.6. Concentration of credit risk The breakdown by business sectors at December 31, 2023, and 2022 is presented as follows: Loans to customers Gross Value Impairment Securities held for trading Derivatives held for trading and economic hedging Securities at fair value through profit or loss Securities mandatorily at fair value through profit or loss 2023 Derivatives - Hedge accounting Securities at fair value through other comprehensive income Securities at amortized cost Guarantees and endorsements provided Gross Value Impairment Gross Value Impairment Gross Value Impairment (thousand of Euros) Agriculture, Forestry, and Fishing 325 205 ( 6 657) Extractive Industries 57 469 ( 3 269) Food, Beverage and Tobacco Industries 478 545 ( 9 525) Textiles and Clothing Tanneries and Footwear Wood and Cork Paper and Graphic Industries Oil Refining Chemical and Rubber Product Non-Metallic Mineral Products 340 946 ( 11 489) 58 155 ( 1 197) 106 711 ( 819) 86 567 ( 4 216) 15 448 ( 4 747) 331 954 ( 7 431) 210 249 ( 3 305) Basic Metallurgical Industries and metal products 341 000 ( 14 121) Manufacture of Machines, Equipment and Electrical Appliances 182 346 ( 3 380) Manufacture of Transport Materials 156 165 ( 9 988) Other Manufacturing Industries Electricity, Gas and Water 143 745 ( 4 871) 352 627 ( 1 598) Construction and Public Works 1 279 767 ( 127 703) Wholesale and Retail Trade Tourism 1 480 191 ( 49 279) 1 134 499 ( 50 882) Transport and Communications 881 127 ( 29 187) Financial Activities Real Estate Activities 1 015 087 ( 80 028) 1 805 272 ( 140 473) Services Provided to Companies 1 989 561 ( 141 837) - - - - - - - - - - - - - - - - - - - - - - Administration and Public Services 458 559 ( 25 595) 318 528 Other collective service activities 406 725 ( 21 243) 10 058 031 ( 71 241) 1 611 145 ( 120 326) 97 992 ( 10 118) - - - - Mortgage Loans Loans to Individuals Others TOTAL - - 1 084 106 - 256 325 - 116 9 804 384 - - 5 329 14 485 3 714 738 12 088 72 148 4 672 1 359 - - - - 3 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 36 493 ( 18) 212 288 8 363 14 764 19 620 - - - - - ( 7) ( 6) - - - - 13 429 ( 2) - - 184 - - - - - - 12 710 18 032 145 34 582 - - - ( 33) ( 9) - ( 6) ( 21) ( 77) ( 7) ( 49) ( 4) - - - 5 766 18 697 ( 6) ( 5) 7 664 ( 107) 9 518 ( 304) 108 794 ( 304) 33 720 ( 83) 7 103 5 024 42 486 29 181 60 341 258 791 123 274 ( 77) - ( 410) ( 138) ( 11) ( 127) ( 63) 88 643 ( 346) 101 074 20 378 ( 49) ( 78) ( 16) 6 089 ( 2 140) 1 445 ( 115) 9 527 ( 245) 5 066 11 910 ( 17) ( 2) 9 246 ( 383) 13 298 41 467 ( 164) ( 374) 19 816 ( 3 974) 12 410 ( 39) 15 123 ( 2 045) 243 643 ( 243) 35 802 ( 31) 214 382 ( 137 557) 780 992 ( 40 872) 106 859 ( 77) 183 350 ( 3 482) - - 44 871 ( 646) 340 776 740 573 ( 234) ( 579) 428 881 ( 1 416) 184 579 ( 77) 178 027 ( 86 951) 82 207 ( 4 121) 704 318 ( 95 482) 338 845 ( 12 886) 4 438 660 ( 600) 21 098 ( 84) 145 770 ( 959) 40 879 ( 788) - - - - - - - - - - 16 232 ( 291) 264 707 683 063 162 744 - 205 - - - - - - - - - - - - 34 258 86 796 371 675 24 728 - - - 25 405 088 ( 954 525) 318 528 117 620 264 912 683 063 838 523 ( 239) 8 194 848 ( 324 312) 2 354 035 ( 74 686) - - - - - - - - - - - - - - - - - - - - - - - - - - - - 430 Loans to customers Gross Value Impairment Securities held for trading Derivatives held for trading and economic hedging Securities at fair value through profit or loss Securities mandatorily at fair value through profit or loss Derivatives - Hedge accounting Securities at fair value through other comprehensive income Gross Value Impairment 2023 Annual Report 2023 | novobanco (thousand of Euros) Securities at amortized cost Guarantees and endorsements provided Gross Value 5 788 18 445 Impairment ( 15) ( 8) Gross Value 11 893 8 983 113 036 ( 188) 35 923 9 690 5 522 53 959 28 906 61 925 221 901 96 002 48 658 59 963 39 244 ( 9) ( 1) ( 114) ( 139) ( 16) ( 186) ( 105) ( 75) ( 64) ( 65) ( 22) 7 026 1 518 7 563 5 780 2 264 15 775 35 523 34 232 21 848 12 856 18 174 Impairment ( 5 902) ( 361) ( 260) ( 958) ( 117) ( 255) ( 22) - ( 135) ( 174) ( 390) ( 3 559) ( 290) ( 2 452) ( 94) 173 789 ( 2 675) 34 245 229 922 ( 117 563) 841 796 ( 45 720) 89 653 ( 58) 181 761 - - 48 625 228 236 ( 304) 398 424 1 196 010 ( 446) 150 889 151 982 ( 73 610) 90 391 ( 3 301) ( 1 056) ( 1 773) ( 128) ( 3 537) 694 125 ( 93 479) 354 904 ( 10 737) - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 8 616 14 277 19 152 - - - - 13 718 - 14 839 433 - ( 7) ( 9) - - - - ( 2) - ( 5) - - - 6 435 14 533 17 373 124 46 531 29 699 89 798 - - - ( 6) ( 10) - ( 20) ( 92) ( 11) ( 11) 41 511 ( 25) 193 710 311 177 562 845 210 520 - 13 129 - - - - - - 2 378 - - - - - - - - - - 1 764 802 ( 453) 4 610 412 ( 1 722) 21 623 24 849 ( 9) 93 600 ( 663) 38 047 - - 13 889 - - - - - - - - - 50 262 ( 4) 17 804 ( 258) ( 110) ( 958) - - Agriculture, Forestry, and Fishing 336 749 ( 6 673) Extractive Industries 65 487 ( 5 033) Food, Beverage and Tobacco Industries 455 764 ( 11 179) Textiles and Clothing Tanneries and Footwear Wood and Cork Paper and Graphic Industries Oil Refining Chemical and Rubber Product Non-Metallic Mineral Products 407 303 ( 21 411) 71 976 ( 1 253) 136 226 ( 2 493) 95 930 ( 5 905) 16 314 ( 114) 289 130 ( 7 071) 187 993 ( 2 763) Basic Metallurgical Industries and metal products 390 928 ( 16 069) Manufacture of Machines, Equipment and Electrical Appliances 229 425 ( 10 750) Manufacture of Transport Materials 176 541 ( 4 941) Other Manufacturing Industries Electricity, Gas and Water Construction and Public Works Wholesale and Retail Trade Tourism Transport and Communications Financial Activities Real Estate Activities 146 243 ( 4 877) 238 741 ( 3 466) 1 408 447 ( 133 850) 1 491 507 ( 48 880) 1 186 040 ( 84 091) 916 930 ( 28 617) 702 846 ( 65 729) 1 750 110 ( 162 449) Services Provided to Companies 2 272 827 ( 148 975) - - - - - - - - - - - - - - - - - - - - - - Administration and Public Services 421 680 ( 25 288) 36 428 Other collective service activities 429 360 ( 42 418) 9 829 383 ( 54 835) 1 395 147 ( 135 047) 403 175 ( 32 215) - - - - Mortgage Loans Loans to Individuals Others TOTAL 42.4. Market risk - - 4 302 298 - 609 629 1 357 4 145 42 - - 4 916 16 597 7 371 - 7 345 91 076 1 428 98 - 145 - - 19 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) Market Risk generally represents potential losses resulting from an adverse change in the value of a financial instrument as a result of variations in interest rates, exchange rates, stock prices, commodity prices, volatility, and credit spread. Market risk management is integrated with balance sheet management through the CALCO (Capital Asset and Liability Committee) structure established at the highest level of the institution. This body is responsible for defining balance sheet allocation and structuring policies as well as controlling exposure to interest rate, exchange rate, and liquidity risks. In terms of market risk, the main element of risk measurement consists of estimating potential losses under adverse market conditions, for which the Value at Risk (VaR) methodology is used. The novobanco Group uses a VaR using Monte Carlo simulation, with a 99% confidence interval and an investment period of 10 days. Volatilities and correlations are historical based on a one-year observation period. Validation of the suitability of the VaR model is carried out daily through the backtesting process (theoretical and real). Additionally, on a monthly basis, market risk monitoring includes the reporting of additional metrics within the scope of the stress testing framework, namely Stressed VaR (SVaR), historical stress scenarios and sensitivity analyzes to the main risk factors. Additionally, the market risk control framework incorporates a monthly process of monitoring portfolio positions within the scope of controlling the boundary between the trading book and the banking book, as well as independent validation (2nd line of defense) of the valuation of financial instruments at fair value. 431 Management Report Sustainability Report Consolidated Financial Statements Annex 2023 December Annual average Maximum Minimum December (thousand of Euros) 2022 Annual average Maximum Minimum Exchange risk 763 653 1 358 Interest rate risk 1 096 1 752 4 707 Shares and commodities Volatility Credit spread 0 0 21 60 250 312 317 607 2 271 Diversification effect ( 1 058) ( 821) ( 1 989) Total 1 118 2 273 6 910 411 422 0 0 234 ( 95) 972 340 586 0 1 415 1 375 4 379 7 445 47 720 0 348 934 3 2 117 2 386 340 586 - 1 229 ( 444) ( 1 941) ( 7 819) ( 259) 898 8 162 48 787 898 Novobanco Group presents a value at risk (VaR) of 1,118 thousand euros (December 31, 2022: 898 thousand euros) for its trading positions. 42.4.1. Interest rate risk Following the recommendations of the European Banking Authority explained in the set of guidelines published in 2022 (EBA/GL/2022/14, EBA/RTS/2022/09 and EBA/RTS/2022/10) novobanco Group calculates its exposure to risk balance sheet interest rate based on prescribed shocks, classifying notional and interest amounts by repricing or key rate duration brackets, of all asset, liability and off-balance sheet items sensitive to interest rates, which do not belong to the trading portfolio . The calculation of balance sheet interest rate risk is also measured through internal shocks defined by the bank, namely through VaR metrics. In this context, novobanco Group has implemented a stress testing approach to interest rate risk based on three pillars: interest rate shock scenarios, sensitivity analyzes and reverse stress testing. The interest rate risk control framework allows novobanco Group to monitor and measure the impact of different interest rate scenarios, both from an economic value perspective and from a financial margin perspective, changing and adapting its risk profile in in line with the defined risk management strategy. Given the recent scenario of a significant increase in interest rates starting in the second half of 2022, this monitoring and control has become even more relevant, in order to guarantee the protection of economic value and financial margin in the face of interest rate volatility. As a result of novobanco Group's risk profile, with variable rate assets predominating and an essentially fixed rate liability structure, the rise in interest rates translated into a significant increase in financial margin, as a result of the favorable interest rate environment and the careful management of asset interest rates and financing costs. In addition, and taking into account the EBA's new regulatory shock on net interest income, whose regulatory limit is 5% of Tier 1 (on December 31, 2023 this limit was still indicative), the Bank adopted management measures in order to be able to fit the sensitivity of net interest income in a scenario of falling interest rates within the (indicative) limit established. Following the recommendations of Basel II (Pilar 2) and Instruction No. 19/2005, of the Bank of Portugal, 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 items, which do not belong to the trading portfolio, by repricing levels. 432 Annual Report 2023 | novobanco Eligible amounts Up to 3 months 3 to 6 months 6 months to 1 year 1 to 5 years More than 5 years 2023 (thousand of Euros) Assets 21 230 624 5 635 071 3 048 590 5 954 460 4 244 381 Loans to and deposits with banks 5 886 886 5 884 215 - 2 629 42 - Loans and advances to customers 24 796 365 14 376 568 4 804 194 2 853 022 1 888 823 873 757 Securities Other assets Liabilities Deposits from banks Due to customers Debt securities issued Other liabilities 9 251 816 178 059 791 782 178 059 830 877 192 939 4 065 595 3 370 624 - - - - 18 723 202 3 915 699 4 369 915 7 350 962 4 628 883 5 680 440 5 436 226 4 252 14 962 225 000 - 30 126 590 12 487 953 3 859 934 4 274 711 6 449 899 3 054 093 2 209 018 972 613 23 895 775 128 11 418 40 095 ( 736) 80 977 599 651 1 574 790 76 412 - Balance sheet GAP (Assets - Liabilities) 1 124 465 2 507 422 1 719 372 (1 321 325) (1 396 503) ( 384 501) Off-Balance sheet Structural GAP Accumulated GAP 0 (3 437 842) ( 154 125) ( 141 096) 4 051 530 ( 318 467) 1 124 465 ( 930 420) 1 565 247 (1 462 421) 2 655 027 ( 702 968) ( 930 420) 634 827 ( 827 594) 1 827 433 1 124 465 Eligible amounts Up to 3 months 3 to 6 months 6 months to 1 year 1 to 5 years More than 5 years 2022 (thousand of Euros) Assets 21 997 489 5 502 398 5 132 116 4 788 815 5 158 137 Loans to and deposits with banks 6 604 336 6 599 797 0 4 502 18 20 Loans and advances to customers 24 913 126 14 553 860 4 715 044 2 975 173 1 767 460 901 589 Securities Other assets Liabilities Deposits from banks Due to customers Debt securities issued Other liabilities 10 927 447 134 045 709 787 134 045 787 353 2 152 441 3 021 337 4 256 529 - - - - 29 061 277 2 793 033 4 227 676 3 413 575 3 134 049 9 695 523 9 279 092 36 913 89 518 - 290 000 29 460 793 18 739 506 2 743 146 3 828 237 3 286 384 863 520 2 681 999 301 876 791 294 740 803 6 000 6 974 299 964 9 957 99 788 27 402 1 974 371 6 158 Balance sheet GAP (Assets - Liabilities) ( 50 656) (7 063 788) 2 709 364 904 440 1 375 240 2 024 088 Off-Balance sheet Structural GAP Accumulated GAP 1 045 (1 295 901) 1 306 840 ( 590 245) 807 031 ( 226 679) ( 49 611) (8 359 689) 4 016 204 314 194 2 182 271 1 797 409 (8 359 689) (4 343 486) (4 029 291) (1 847 020) ( 49 611) Sensitivity analyses are carried out for the interest rate risk of the banking portfolio based on an approximation to the duration model, with various scenarios of shift of the yield curve being carried out in all interest rate brackets. 433 Management Report Sustainability Report Consolidated Financial Statements Annex 2023 (thousand of Euros) Parallel increase of 200 pb Parallel decrease of 200 pb Short Rate Shock Up Short Rate Shock Down Steepener shock Flattener shock ( 219 057) 147 303 ( 119 451) ( 162 778) 70 207 ( 106 756) 65 416 59 039 7 766 18 799 ( 49 405) ( 63 603) 44 560 209 961 ( 13 794) 135 003 40 358 ( 20 429) ( 380 019) ( 152 580) ( 247 596) 8 691 419 ( 144 031) 2022 (thousand of Euros) Parallel increase of 200 pb Parallel decrease of 200 pb Short Rate Shock Up Short Rate Shock Down Steepener shock Flattener shock ( 361 341) 195 808 ( 241 571) ( 25 294) ( 96 866) ( 106 585) 70 179 195 808 ( 68 229) ( 361 341) ( 263 636) ( 241 571) 131 255 70 159 131 255 43 154 39 850 ( 144 912) 72 455 ( 138 995) 105 417 ( 78 024) 30 496 ( 170 498) As at 31 December Exercise average Exercise maximum Exercise minimum As at 31 December Exercise average Exercise maximum Exercise minimum 42.4.2. Foreign exchange risk Regarding currency risk, the distribution of assets and liabilities, as at December 31, 2023 and 2022 by currency, is analyzed as follows: 2023 2022 Spot Forward Other elements Net exposure Spot Forward Other elements Net exposure (thousand of Euros) UNITED STATES DOLLAR ( 497 127) 506 031 ( 18) ( 635 256) 634 533 91 USD GBP BRL JPY CHF SEK NOK CAD ZAR AUD VEB PLN GREAT BRITISH POUND ( 46 256) 48 788 BRAZILIAN REAL MOP MACAO PATACA JAPANESE YEN SWISS FRANC SWEDISH KRONE 908 109 ( 1 377) ( 1 950) ( 5 000) - - 1 521 4 590 5 795 NORWEGIAN KRONE 48 681 ( 47 178) CANADIAN DOLLAR ( 19 149) 22 060 SOUTH AFRICAN RAND ( 516) 757 AUSTRALIAN DOLLAR 8 407 ( 7 317) VENEZUELAN BOLIVAR 3 - ZLOTY 3 086 ( 2 507) MAD MOROCCAN DIRHAN ( 1 350) 2 064 MXN AOA CVE HKD CZK DZD CNY MEXICAN PESO ANGOLAN KWANZA CAPE VERDEAN ESCUDOS HONG-KONG DOLAR CZECH KORUNA ALGERIAN DINAR 60 ( 13) ( 160) ( 1 273) 225 7 593 YUAN REN-MIN-BI 4 Others ( 7 370) ( 91) - - 1 112 ( 425) - ( 255) 9 545 8 886 2 532 908 109 146 2 640 795 1 503 2 911 241 1 090 3 579 714 ( 31) ( 13) ( 160) ( 161) ( 200) 7 593 ( 251) 2 175 - - - 2 - - - - - - - - - - - - - - - - - ( 48 068) 47 867 866 2 409 ( 2 326) ( 9 289) - - 2 318 9 769 17 593 ( 17 578) 53 291 ( 53 059) ( 16 710) 19 003 ( 10) ( 530) 9 613 ( 9 463) 2 ( 2 995) ( 2 558) ( 6) ( 23) ( 137) ( 706) 6 7 638 333 ( 2 957) - 3 010 2 256 - - - 595 ( 114) - ( 347) 4 057 Note: asset / (liability) ( 512 465) 544 490 ( 16) 32 009 ( 629 290) 642 317 434 ( 632) ( 201) 866 2 409 ( 8) 480 15 232 2 293 ( 540) 150 2 15 ( 302) ( 6) ( 23) ( 137) ( 111) ( 108) 7 638 ( 14) 1 101 13 119 - - - - - - - - - - - - - - - - - - - - 0 91 Annual Report 2023 | novobanco 42.5. Liquidity risk Liquidity risk is the current or future risk that arises from an institution's inability to meet its obligations as they fall due, without incurring substantial losses. Liquidity risk can be subdivided into two types: • Asset liquidity (market liquidity risk) - consists in the impossibility of selling a certain type of asset due to a lack of liquidity in the market, which results in the widening of the bid/offer spread or the application of a haircut to the market value; • Funding (funding liquidity risk) - consists in the impossibility of financing assets in the market and/or refinancing maturing debt, within the desired terms and currency. This impossibility can be reflected through a sharp increase in financing costs or the requirement of 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 should be minimized through appropriate diversification of financing sources and maturities. Banks are subject to liquidity risk inherent in their maturity transformation business (long-term lenders and short-term depositors), making prudent liquidity risk management crucial. As at December 31, 2023, and 2022, the main liquidity indicators is as follows: Gross funding from the ECB Net funding from the ECB (1) Eligible Assets for repo operations (ECB) net of haircut Used collateral Liquidity Buffer(2) Transformation Ratio (3) Liquidity Coverage Ratio (LCR) (4) Net Stable Funding Ratio (NSFR) (4) (thousand of Euros) 2023 1 129 ( 4 246) 2022 6 323 385 14 217 16 917 6 957 13 582 81,2% 163% 118% 9 971 13 736 83,3% 210% 113% (1) Includes ESCB financing and investments; a positive value corresponds to a resource; a negative value corresponds to an investment (2) Corresponds to eligible assets portfolio adding HQLA securities non eligible for ECB, deducted of the used collateral (3) (Total Loans - Accumulated Impairment on Loans)/ Customer Deposits (4) Preliminary The Liquidity Coverage Ratio (LCR) and the Net Stable Funding Ratio (NSFR) are included in regulatory legislation, and the LCR aims to promote the resilience of Banks to short-term liquidity risk, 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 funding for their assets and off-balance sheet operations, for a period of one year. In accordance with current regulatory legislation, the novobanco Group is required to comply with a minimum regulatory limit of 100% in both ratios (LCR and NSFR). In the novobanco Group, liquidity is managed in a centralized manner at the Headquarters for the prudential consolidated group, with analysis and decision-making based on reports that allow not only to identify negative mismatches but to perform dynamic coverage of them. In accordance with the rules of the ITS (Implementing Technical Standards), the calculation of the net contractual deficit and the rebalancing capacity (counterbalancing capacity) is made for the end of 2023 and 2022: 435 Management Report Sustainability Report Consolidated Financial Statements Annex OUTPUT Liabilities from emited transferable securities (if they're not treated as retail deposits) Liabilities from guaranteed lending operations and operations associated to financial markets Behavioral output from deposits Exchange swaps and derivatives Other output Total Output INPUT Total Up to 7 days 7 days to 1 month 1 to 3 months 3 to 6 months 2023 (thousands of Euros) 6 months to 1 year More than 1 year 650 268 7 747 4 593 6 104 479 6 722 624 623 6 939 455 - 1 150 391 526 714 - 2 891 083 2 371 267 29 829 454 541 358 217 829 155 606 113 667 233 746 28 567 248 531 444 10 482 30 744 265 440 85 943 52 548 743 368 1 026 - - 20 143 49 386 86 287 672 813 38 693 989 560 613 1 403 557 953 864 220 232 3 233 485 32 322 238 Secured lending operations and operations associated to financial markets - - - - - - - Behavioral inputs from loans and advances 28 169 581 102 428 58 929 162 573 235 714 471 921 27 138 016 Exchange swaps and derivatives 570 605 9 232 31 410 264 407 83 230 52 108 Own portfolio securities maturing and other entries 9 167 468 80 063 326 086 405 235 242 770 341 604 130 218 7 771 710 Total Input Net contractual deficit 37 907 654 191 723 416 425 832 215 561 714 865 633 35 039 944 ( 786 336) ( 368 890) ( 987 134) ( 121 649) 341 482 (2 367 852) 2 717 707 Accumulated net contractual deficit ( 368 890) (1 356 022) (1 477 671) (1 136 189) (3 504 041) ( 786 335) CAPACITY TO READJUSTMENT Cash Deployable reserves from the central bank Negotiable and non-negotiable assets eligible for the central bank Total Up to 7 days 7 days to 1 month 1 to 3 months 3 to 6 months 6 months to 1 year More than 1 year 179 229 - 5 082 915 6 856 277 - - - - - - - - - - - - 1 095 910 39 532 ( 150 627) 246 919 (8 088 011) Authorized facilities and not utilized received 2 698 448 ( 16 140) ( 71 111) ( 185 312) ( 297 069) 717 916 (2 846 732) Net variation of capacity to adjustment - ( 16 140) 1 024 799 ( 145 780) ( 447 696) 964 835 (10 934 743) Accumulated capacity to readjustment 14 816 869 14 800 729 15 825 528 15 679 748 15 232 052 16 196 887 5 262 144 436 Annual Report 2023 | novobanco OUTPUT Liabilities from emited transferable securities (if they're not treated as retail deposits) Liabilities from guaranteed lending operations and operations associated to financial markets Behavioral output from deposits Exchange swaps and derivatives Other output Total Output INPUT Total Up to 7 days 7 days to 1 month 1 to 3 months 3 to 6 months 2022 (thousands of Euros) 6 months to 1 year More than 1 year 1 480 787 2 247 4 593 10 700 5 986 297 637 1 159 624 10 059 656 57 154 66 513 1 732 249 3 341 048 739 188 4 123 504 30 194 492 573 588 41 352 133 529 149 284 414 200 28 882 540 751 818 623 245 5 224 4 477 52 647 385 288 82 861 65 007 - - 15 824 34 000 160 791 568 944 43 109 997 642 690 165 104 2 261 766 3 595 003 1 550 031 34 895 403 Secured lending operations and operations associated to financial markets - - - - - - - Behavioral inputs from loans and advances 38 461 333 5 838 109 68 447 183 143 273 970 548 609 31 549 055 Exchange swaps and derivatives 753 169 6 049 53 146 386 808 83 515 63 026 160 625 Own portfolio securities maturing and other entries 10 550 649 49 284 163 514 265 079 222 462 2 144 302 7 706 009 Total Input Net contractual deficit 49 765 151 5 893 442 285 107 835 029 579 947 2 755 937 39 415 689 6 655 155 5 250 752 120 003 (1 426 737) (3 015 056) 1 205 906 Accumulated net contractual deficit 5 250 752 5 370 755 3 944 018 928 962 2 134 868 4 520 287 6 655 155 CAPACITY TO READJUSTMENT Cash Total 182 895 Up to 7 days 7 days to 1 month 1 to 3 months 3 to 6 months 6 months to 1 year More than 1 year Deployable reserves from the central bank 5 653 802 (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) Authorized facilities and not utilized received - ( 23 829) ( 77 909) 1 378 676 2 739 531 ( 84 317) (3 932 151) Net variation of capacity to adjustment (5 621 523) ( 15 731) 1 262 328 2 608 241 (2 008 697) (9 798 361) Accumulated capacity to readjustment 13 761 118 8 139 595 8 123 864 9 386 192 11 994 433 9 985 736 187 375 At the end of 2022, there was a net contractual surplus accumulated over one year of 2,135 million euros, having changed on December 31, 2023 to a net contractual deficit accumulated over one year of 3,504 million euros. Despite this variation, the liquidity position remained stable, given that this increase of 5,639 million euros is essentially due to a change in regulatory reporting criteria, given that last year the deposits at the ECB, totaling 5 654 million euros were considered as a cash inflow and this year this item is included in the rebalancing capacity. The counterbalancing capacity for 1 year at the end of 2023 was 16,197 million euros, 6,211 million euros higher than the value recorded at the end of 2022 (9,986 million euros). This increase is essentially due to the change in regulatory criteria referred to in the previous point (+5,083 million euros) and the increase in secured funding, which partially offset the reimbursement of borrowings from the ECB. In order to anticipate possible negative impacts, internal liquidity stress scenarios are created that represent the types of crisis that may occur, based on idiosyncratic scenarios (characterized by a loss of confidence in the Bank) and market scenarios. Despite the repayment of 5,377 million euros in financing to the ECB, the Novobanco Group's liquidity ratios remained at comfortable values, with the average LCR in the 12 months of 2023 being 169%, which compares to 190% in 2022. The NSFR in turn stood at 118% on December 31, 2023, 5pp more than at the end of the previous year, due to the increase in stable financing, essentially resulting from the increase in capital and collateralized financing exceeding 6 months and 1 year. In accordance with current regulatory legislation, the novobanco Group is required to comply with a minimum regulatory limit of 100% in both ratios (LCR and NSFR). 437 Management Report Sustainability Report Consolidated Financial Statements Annex Assets and Liabilities - Tiering by maturity dates As at December 31, 2023, and 2022, the tiering of assets and liabilities by maturity dates is as follows: Financial Assets Financial Assets and Liabilities held for trading Securities Trading derivatives Financial assets mandatorily measured at fair value through profit or loss - securities Financial assets mandatorily measured at fair value through other comprehensive income - securities Up to 3 months From 3 months to one year From one to five years More than five years 2023 (thousands of Euros) Indefinite duration / Past due credit Total 2 601 364 100 834 96 068 4 766 2 498 407 231 721 222 460 9 261 11 332 243 15 805 - 15 805 18 742 630 87 788 - 87 788 696 592 - - - 35 871 236 436 148 318 528 117 620 - 112 50 11 256 253 494 264 912 154 305 87 676 320 907 197 981 77 654 838 523 Financial assets mandatorily measured at amortized cost 2 345 693 2 163 711 10 660 476 18 113 266 365 444 33 648 590 Securities Applications in credit institutions Loans to Customers Derivatives - Hedge Accounting Financial Liabilities Financial Liabilities held for trading Financial liabilities measured at amortised cost Due from central banks Due from other credit institucions (of which: Operations with repurchase agreement) Due to Customers (of which: Operations with repurchase agreement) Liabilities represented by securities Subordinated liabilities Derivatives - Hedge Accounting Notional Trading derivatives Notional Purchase Notional Sale Derivatives - Hedge Accounting Notional Purchase Notional Sale 706 444 24 345 1 614 904 532 21 860 215 6 267 21 853 909 178 807 1 180 249 854 275 20 494 853 813 660 - - 39 2 175 569 2 122 569 1 045 911 1 076 658 53 000 26 500 26 500 439 051 6 001 1 718 659 15 187 10 984 087 8 685 10 974 926 950 000 1 500 343 1 452 461 8 524 583 302 564 - - 476 2 440 569 1 119 863 559 993 559 870 1 320 706 660 353 660 353 4 154 426 15 220 6 490 830 335 005 3 137 444 15 248 3 019 681 - 1 935 927 1 560 317 959 951 250 158 123 803 - 102 515 20 812 846 2 058 376 1 021 440 1 036 936 18 754 470 9 377 235 9 377 235 2 894 927 3 088 15 215 251 332 339 1 142 855 70 439 1 050 717 - - - 66 935 - 482 282 501 500 21 699 11 893 626 4 687 196 2 310 578 2 376 618 7 206 430 3 603 215 3 603 215 - - 365 444 - - - - - - - - - - - - - - - - - - - 8 194 848 48 654 25 405 088 683 063 37 124 601 100 639 36 899 233 1 128 807 4 616 519 3 867 053 30 046 322 1 366 382 606 085 501 500 124 729 37 322 610 9 988 004 4 937 922 5 050 082 27 334 606 13 667 303 13 667 303 438 Annual Report 2023 | novobanco Financial Assets Financial Assets and Liabilities held for trading Securities Trading derivatives Financial assets mandatorily measured at fair value through profit or loss - securities Financial assets measured at fair value through profit or loss - securities Financial assets mandatorily measured at fair value through other comprehensive income - securities 2022 Up to 3 months From 3 months to one year From one to five years More than five years 2 296 820 13 476 - 13 476 3 748 010 16 821 4 911 11 910 9 592 265 33 344 10 055 23 289 20 777 149 108 169 21 462 86 707 Indefinite duration / Past due credit 717 932 - - - - 2 469 11 004 300 211 - - (thousands of Euros) Total 37 132 176 171 810 36 428 135 382 313 684 13 - - - 13 142 588 1 655 714 285 809 159 873 87 115 2 331 099 Financial assets mandatorily measured at amortized cost 2 140 748 2 075 079 9 131 698 20 074 594 330 606 Securities Applications in credit institutions Loans to Customers Derivatives - Hedge Accounting Financial Liabilities Financial Liabilities held for trading Financial liabilities measured at amortised cost Due from central banks Due from other credit institucions (of which: Operations with repurchase agreement) Due to Customers (of which: Operations with repurchase agreement) Liabilities represented by securities Subordinated liabilities Financial liabilities associated with transferred assets Derivatives - Hedge Accounting Notional Trading derivatives Notional Purchase Notional Sale Derivatives - Hedge Accounting Notional Purchase Notional Sale 785 649 320 1 354 779 8 24 372 537 8 144 24 372 534 1 627 198 574 838 123 620 22 170 498 450 906 - - - 3 545 902 666 1 528 511 383 9 936 945 11 063 9 936 365 3 750 000 296 221 - 5 614 270 - 275 874 - - 580 2 832 097 38 365 6 261 236 138 945 5 559 945 18 705 5 501 590 950 000 2 214 958 2 027 204 1 493 090 - 427 970 415 572 - 58 355 4 092 547 4 977 15 977 070 423 509 817 609 61 474 756 969 - 291 939 - - - 465 030 - - 60 640 1 342 255 1 340 594 735 763 735 132 963 226 983 950 2 285 684 2 354 243 3 020 3 020 63 678 63 678 4 629 088 4 629 088 4 514 816 4 514 816 - - 330 606 - 44 451 - 44 451 - - - - - - - 44 451 - - - - - 33 752 725 8 256 195 44 328 25 452 202 562 845 40 731 487 99 386 40 611 909 6 327 198 3 377 956 2 150 824 29 277 858 450 906 1 168 874 415 572 44 451 119 578 5 326 928 5 413 919 9 210 602 9 210 602 42.6. Encumbered and unencumbered assets The following is information on encumbered and unencumbered assets, as defined by Instruction No. 28/2014 from the Bank of Portugal (we underline that this information is prepared in a prudential perspective, the consolidation perimeter of which differs from the consolidation perimeter of the financial statements presented): Assets Equity instruments Debt securities Other assets Assets of the institution 2023 (thousands of Euros) Carrying book value of encumbered assets Fair value of encumbered assets Carrying book value of unencumbered assets Fair value of unencumbered assets - 2 173 152 6 633 169 8 806 321 - 1 048 005 1 048 005 2 173 152 6 788 198 6 788 198 n/a n/a 27 081 452 34 917 655 n/a n/a 439 Management Report Sustainability Report Consolidated Financial Statements Annex Assets Equity instruments Debt securities Other assets Assets of the institution Collateral received Collateral received Equity instruments Debt securities Other collateral received Own debt securities issued other than own covered bonds or ABS Encumbered assets, encumbered collateral received and associated liabilities 2022 (thousands of Euros) Carrying book value of encumbered assets Fair value of encumbered assets Carrying book value of unencumbered assets Fair value of unencumbered assets - 1 475 265 12 019 977 13 495 242 - 1 475 265 n/a n/a 1 203 595 9 001 842 22 515 329 32 720 766 1 203 595 9 001 842 n/a n/a 2023 (thousands of Euros) 2022 Fair value of encumbered collateral received or of own debt securities issued Fair value of collateral received or of own debt securities issued and encumberable Fair value of encumbered collateral received or of own debt securities issued Fair value of collateral received or of own debt securities issued and encumberable - - - - - - - - - - 2023 - - - - - - - - - - (thousands of Euros) 2022 Associated liabilities, contingent liabilities and securities loaned Assets, collateral received and own debt securities issued other than encumbered own covered bonds or ABS Associated liabilities, contingent liabilities and securities loaned Assets, collateral received and own debt securities issued other than encumbered own covered bonds or ABS Carrying book value of the selected financial liabilities 6 803 634 8 806 322 9 968 346 13 495 242 Encumbered assets are primarily represented by loans and securities used in financing operations with the ECB, repo operations, mortgage bond issues, and securitizations. There are also assets given as collateral to cover the Bank's counterparty risk in derivative operations. 440 Annual Report 2023 | novobanco 42.7. Operational risk Operational risk generally refers to the probability of occurrence of events with negative impacts, on results or capital, arising from the inadequacy or deficiency of procedures and information systems, the behavior of people, or triggered by external events, including legal risks. Therefore, operational risk is understood as the sum of the following risks: operational, information systems, compliance, and reputation risks. For operational risk management, a system was developed and implemented aimed at ensuring the standardization, systematization, and recurrence of activities of identification, monitoring, control, and mitigation of this risk. This system is supported by an organizational structure, integrated into the Global Risk Department exclusively dedicated to this task, as well as by Operational Risk Management Representatives appointed by each of the departments, branches, and subsidiaries considered relevant, who are responsible for compliance with the established procedures and the daily management of this risk in their areas of competence. 42.8. Capital Management and Solvency Ratio The main objective of capital management is to ensure compliance with the strategic objectives of the novobanco Group in terms of capital adequacy, complying with and enforcing the rules for calculating risk-weighted assets and own funds and ensuring compliance with the solvency and leverage levels defined by the supervisory authorities, namely by the European Central Bank (ECB) - the entity directly responsible for the supervision of the novobanco Group - and the Bank of Portugal, and the risk appetite set internally for capital metrics. The Executive Board of Directors is responsible for defining the strategy to be adopted in terms of capital management, which is integrated into the global objective definition of the novobanco Group. The capital ratios of the novobanco Group are calculated based on the rules set out in Directive 2013/36/EU and Regulation (EU) No 575/2013 (CRR), which define the criteria for access to credit institutions and investment firms and determine the prudential requirements to be observed by these entities, particularly with regard to the calculation of the aforementioned ratios. The novobanco Group is authorized to use the approach based on the use of internal models in the determination of risk- weighted credit assets (Internal Ratings Based or IRB method). More specifically, the IRB method is applied to the institution, company, and retail risk classes of the novobanco Group. The equity risk class, securitization positions, positions in the form of investment fund shares, and non-credit obligations are always treated by the IRB method regardless of the entities of the novobanco Group in which the respective risk positions are registered. The standard method is used in the calculation of risk-weighted market and operational assets. The regulatory capital elements considered in the determination of solvency ratios are divided into Tier 1 common equity (or Common Equity Tier I or CET I), additional Tier 1 capital (or Additional Tier I) which, when added to CET I, constitutes Tier 1 funds, and Tier 2 funds (or Tier II) which, when added to Tier I, constitute total own funds. The novobanco Group's total own funds consist of CET I elements and Tier II elements. Complementary information on the evolution and composition of the novobanco Group's capital ratios can be found in the Group's Market Discipline Document (point 3. Capital Adequacy) The following table presents a summary of own funds, risk-weighted assets, and capital ratios of novobanco for December 31, 2023 and 2022: 441 Management Report Sustainability Report Consolidated Financial Statements Annex Realised ordinary share capital, issue premiums and own shares Reserves and Retained earnings Net income for the year attributable to shareholders of the Bank Non-controlling interests (minorities) A - Equity (prudential perspective) Net result of the financial year attributable to the Bank's shareholders not eligible Non-controlling interests (minorities) Adjustments of additional valuation Transitional period to IFRS9 Goodwill and other intangibles Insufficiency of provisions given the expected losses Pension fund assets with defined benefits Deferred tax assets and shareholdings in financial companies Other (1) B - Regulatory adjustments to equity C - Own principal funds level 1 - CET I (A+B) Eligible capital instruments for additional Tier I Other eligible instruments for additional Tier 1 D - Additional own funds Level 1 - Additional Tier 1 E - Level 1 own funds - Tier I (C+D) Subordinated liabilities eligible for Tier II Other elements eligible for Tier II Regulatory adjustments to Tier II F - Level 2 own funds - Tier II G - Eligible own funds (E+F) Credit risk Market risk Operational risk H - Risk Weighted Assets Solvability ratio CET I ratio Tier I ratio Solvability ratio Leverage ratio (2) (milhões de euros) 2023 2023 2022 (fully loaded) (3) (phased.in) 6 568 6 568 6 305 ( 2 931) ( 2 931) ( 3 388) 746 23 746 23 556 18 4 406 4 406 3 491 - ( 14) ( 3) - ( 45) - ( 19) ( 215) ( 415) ( 703) 3 703 - 2 2 3 705 497 77 - 574 4 279 18 334 100 1 965 - ( 14) ( 3) 81 ( 45) - - ( 10) ( 4) 126 ( 73) - ( 19) ( 60) ( 215) ( 296) ( 399) ( 614) ( 249) ( 565) 3 792 2 926 - 2 2 - 2 2 3 794 2 928 497 399 77 - 91 - 574 490 4 368 3 418 18 394 19 608 100 78 1 965 1 670 20 399 20 459 21 355 18,2% 18,2% 21,0% 7,9% 18,5% 18,5% 21,4% 8,1% 13,7% 13,7% 16,0% 6,1% (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. (2) The leverage ratio results from dividing Tier 1 by the exposure measure calculated under the CRR. (3) Capital and leverage ratios not considering effects related with transitional period Note 43 – NPL Disclosures Following the recommendations of the European Banking Authority as set out in the document EBA/GL/2018/10, credit institutions with a Non-Performing Loans (NPL) ratio above 5% must publish a set of information related to Non- Performing Exposures (NPE), restructured loans, and assets received in lieu, according to a standardized format, which is presented below (it is underlined that this information is prepared from a prudential perspective, the consolidation perimeter of which differs from the consolidation perimeter of the condensed interim financial statements presented): 43.1. Credit quality of forborne exposures 442 Annual Report 2023 | novobanco Gross carrying amount/nominal amount of exposures with forbearance measures Non-performing forborne Performing forborne Total Of which defaulted Of which subject to impairment Accumulated impairment, accumulated negative changes in fair value due to credit risk and provisions On performing forborne exposures On non- performing forborne exposures (thousand of Euros) Collateral received and financial guarantees received on forborne exposures Of which collateral and financial guarantees received on nonperforming exposures with forbearance measures Loans and advances 696 645 591 206 591 206 591 206 ( 71 783) ( 295 877) 675 078 242 564 Central banks General governments Credit institutions Other financial corporations - - - - - - - - - - - - - 161 999 161 999 161 999 - - - - - - - - - - ( 39 004) 115 356 Non-financial corporations 525 345 365 383 365 383 365 383 ( 68 859) ( 210 602) 383 214 Households Debt securities Loan commitments given 171 300 63 824 63 824 63 824 ( 2 924) ( 46 270) 176 508 - 2 710 - 821 - 821 - 821 - - - - - - - - - 115 356 111 796 15 412 - - Total 699 355 592 027 592 027 592 027 ( 71 783) ( 295 877) 675 078 242 564 43.2. Credit quality of performing and non-performing exposures by days past due Performing exposures Non-performing exposures Gross carrying amount/nominal amount Total Not past due or past due < =30 days Past due > 30 days <=90 days Total Unlikely to pay that are not past due or are past due <=90 days Past due > 90 days <=180 days Past due > 180 days <=1 year Past due > 1 year <= 2 years Past due > 2 years >=5 years Past due > 5 years >=7 years Past due > 7 years Of which defaulted (thousand of Euros) Cash in Central Banks 5 688 156 5 688 156 - - - - - - - - - - Loans and advances 24 379 831 24 279 004 100 827 1 132 652 648 744 75 426 123 341 113 323 99 196 18 835 53 786 1 132 652 Central banks - - - General governments 315 287 314 506 780 Credit institutions 23 896 23 896 - - - - - - - 768 596 743 426 25 170 219 975 193 146 - - - - - - - - - - - - - - - - - - - - - - 7 2 19 449 1 155 6 216 219 975 11 810 496 11 801 877 8 619 705 057 354 733 53 663 95 479 76 821 65 988 16 919 41 452 705 057 Of which SMEs 6 873 599 6 865 242 8 357 541 510 230 375 53 180 67 742 76 044 60 495 13 031 40 643 541 510 Households 11 461 556 11 395 297 66 258 207 620 100 865 21 763 27 855 36 500 13 758 761 6 118 207 620 Debt securities 8 506 408 8 506 408 Central banks - - General governments 4 778 128 4 778 128 Credit institutions 393 321 393 321 Other financial corporations Non-financial corporations 528 111 528 111 2 806 848 2 806 848 - - - - - - Off-balance-sheet exposures 8 219 034 Central banks - General governments 264 576 Credit institutions 539 622 Other financial corporations Non-financial corporations Households 81 750 6 090 705 1 242 381 460 965 357 997 - - - - - - 20 584 91 440 381 357 906 418 374 - - - 7 425 405 688 5 261 - - - - - - - - - - - - - - - - - - - - - - - - 1 746 101 222 460 965 - - - - - - - - - 1 746 18 747 20 584 - 82 475 440 381 418 374 - - - 7 425 405 688 5 261 Total 46 793 429 38 473 568 100 827 2 011 991 1 006 741 75 426 123 341 113 323 99 196 20 581 155 008 2 011 991 443 Other financial corporations Non-financial corporations Management Report Sustainability Report Consolidated Financial Statements Annex Productive and non-productive exposures and respective provisions Gross carrying amount/nominal amount Accumulated impairment, accumulated negative changes in fair value due to credit risk and provisions Performing exposures Non-performing exposures Performing exposures – accumulated impairment and provisions Non-performing exposures – accumulated impairment, accumulated negative changes in fair value due to credit risk and provisions Accumulated partial write-off Total Of which stage 1 Of which stage 2 Total Of which stage 2 Of which stage 3 Total Of which, Stage 1 Of which, Stage 2 Total Of which, Stage 2 Of which, Stage 3 (thousand of Euros) Collateral and financial guarantees received On performing exposures On non- performing exposures Cash in Central Banks 5 688 156 5 688 156 - - Loans and advances 24 379 831 20 626 688 3 753 143 1 132 652 Central banks - - - General governments 315 287 299 791 15 496 Credit institutions 23 896 19 127 4 769 - - - Other financial corporations 768 596 631 701 136 895 219 975 Non-financial corporations 11 810 496 9 311 877 2 498 619 705 057 Of which SMEs 6 873 599 5 404 368 1 469 230 541 510 Households 11 461 556 10 364 192 1 097 364 207 620 - - - - - - - - - - - - - - 1 132 652 ( 398 756) ( 61 577) ( 337 179) ( 556 483) - - - - - - ( 751) ( 495) ( 256) ( 714) ( 556) ( 158) - - - 219 975 ( 21 033) ( 3 492) ( 17 541) ( 57 254) 705 057 ( 293 275) ( 39 037) ( 254 238) ( 390 645) 541 510 ( 104 305) ( 21 833) ( 82 472) ( 293 703) 207 620 ( 82 983) ( 17 997) ( 64 986) ( 108 584) Debt securities 8 506 408 8 442 222 64 186 460 965 112 460 853 ( 5 614) ( 3 847) ( 1 767) ( 318 937) Central banks - - General governments 4 778 128 4 778 128 Credit institutions 393 321 393 321 Other financial corporations 528 111 528 111 - - - - - - - 20 584 - - - - - - - - - ( 636) ( 636) ( 123) ( 123) 20 584 ( 530) ( 530) - - - - - - - - Non-financial corporations 2 806 848 2 742 662 64 186 440 381 112 440 269 ( 4 325) ( 2 558) ( 1 767) ( 318 937) Off-balance-sheet exposures 8 219 034 7 096 903 1 122 131 418 374 Central banks - - - General governments 264 576 264 111 466 Credit institutions 539 622 430 147 109 475 - - - Other financial corporations 81 750 79 046 2 704 7 425 Non-financial corporations 6 090 705 5 236 837 853 868 405 688 Households 1 242 381 1 086 762 155 619 5 261 - - - - - - - 418 374 ( 14 080) ( 6 412) ( 7 668) ( 71 322) - - - - - - ( 18) ( 12) ( 6) ( 644) ( 10) ( 634) - - - 7 425 ( 67) ( 21) ( 46) ( 38) 405 688 ( 8 518) ( 2 048) ( 6 471) ( 71 172) 5 261 ( 4 833) ( 4 322) ( 511) ( 111) Total 46 793 429 41 853 969 4 939 460 2 011 991 112 2 011 879 ( 418 450) ( 71 836) ( 346 614) ( 946 742) - - - - - - - - - - - - - - - - - - - - - - - - - - - ( 556 483) ( 486 931) 15 046 921 422 768 - - - - - ( 4) 30 676 - - - - - ( 57 254) ( 193 603) 171 422 127 937 ( 390 645) ( 204 339) 4 464 391 219 431 ( 293 703) ( 136 822) 3 201 769 167 669 ( 108 584) ( 88 986) 10 380 432 75 401 ( 318 937) - - - - ( 318 937) ( 71 322) - - - ( 38) ( 71 172) ( 111) - - - - - - - - - - - - - - - - - - 193 750 11 044 - 2 804 48 227 9 767 - - - - 122 248 10 983 10 704 61 ( 946 742) ( 486 931) 15 240 672 433 812 Quality of non-performing exposures by geography Gross carrying amount/nominal amount Of which non-performing Total Of which defaulted Of which subject to impairment Accumulated impairment (thousand of Euros) Provisions on off-balance- sheet commitments and financial guarantees given Accumulated negative changes in fair value due to credit risk on non-performing exposures On-balance-sheet exposures 34 479 856 1 593 617 1 593 617 34 468 439 ( 1 279 790) Portugal 24 027 073 1 421 492 1 421 492 24 015 768 ( 1 153 954) Other countries 10 452 783 172 125 172 125 10 452 671 ( 125 836) Off-balance-sheet exposures 8 637 408 418 374 418 374 Portugal 8 266 884 415 935 415 935 Other countries 370 524 2 439 2 439 83 983 82 290 1 693 Total 43 117 264 2 011 991 2 011 991 34 468 439 ( 1 279 790) 83 983 - - - - 444 Annual Report 2023 | novobanco Credit quality of loans and advances by sector of activity Agriculture, forestry and fishing Mining and quarrying Manufacturing Electricity, gas, steam and air conditioning supply Water supply Construction Wholesale and retail trade Transport and storage Total Gross carrying amount Of which non-performing Of which defaulted Of which loans and advances subject to impairment Accumulated impairment 335 094 58 186 3 249 6 189 3 249 335 094 ( 9 595) 6 189 58 186 ( 4 766) 2 582 525 113 710 113 710 2 582 525 ( 100 733) 291 441 182 665 613 98 613 291 441 ( 2 249) 98 182 665 ( 4 296) 1 267 392 77 793 77 793 1 267 392 ( 58 211) 1 560 036 810 411 78 889 28 633 78 889 1 560 036 ( 68 304) 28 633 810 411 ( 42 241) Accommodation and food service activities 1 110 904 77 808 77 808 1 110 904 ( 71 700) Information and communication 155 785 5 901 5 901 155 785 ( 6 867) Financial and insurance activities 385 391 29 663 29 663 385 391 ( 48 949) Real estate activities 1 633 516 161 289 161 289 1 633 516 ( 111 611) Professional, scientific and technical activities Administrative and support service activities Public administration and defence, compulsory social security 1 107 396 339 426 43 011 7 719 43 011 1 107 396 ( 28 865) 7 719 339 426 ( 21 314) 1 593 - - 1 593 Education 52 554 708 708 52 554 ( 16) ( 761) Human health services and social work activities 316 916 32 494 32 494 316 916 ( 24 157) Arts, entertainment and recreation 129 256 23 553 23 553 129 256 ( 18 822) Other services Total 195 066 13 734 13 734 195 066 ( 60 465) 12 515 554 705 057 705 057 12 515 554 ( 683 920) Assessment of collateral - loans and advances (thousand of Euros) Accumulated negative changes in fair value due to credit risk on non-performing exposures - - - - - - - - - - - - - - - - - - - - Performing Non-performing Loans and advances Total - Performing Not overdue or overdue < =30 days Of which past due > 30 days <=90 days Total - Non Performing Unlikely to pay that are not past due or are past due <= 90 days Total past due > 90 days Of which past due >90 days <= 180 days Of which: past due > 180 days <= 1 year Of which: past due > 1 years <= 2 years Of which: past due > 2 years <= 5 years Of which: past due > 5 years £<=7 years Of which: past due > 7 years Of which, past due > 90 days (thousand of Euros) Gross carrying amount Of which secured 25 512 483 24 379 831 100 827 1 132 652 648 744 483 908 75 426 123 341 113 323 99 196 18 835 53 786 17 351 290 16 558 781 60 598 792 509 464 376 328 133 40 636 68 445 76 312 83 068 14 166 45 506 Of which secured with immovable property 14 097 340 13 532 214 58 410 565 126 295 681 269 445 39 196 56 659 43 698 76 564 10 850 42 479 Of which instruments with LTV higher than 60% and lower or equal to 80% 2 270 404 2 083 698 186 706 124 456 62 250 Of which instruments with LTV higher than 80% and lower or equal to 100% 508 942 447 769 61 173 43 994 17 180 Of which instruments with LTV higher than 100% 841 217 633 274 207 943 61 039 146 905 Accumulated impairment for secured assets ( 542 821) ( 206 830) ( 3 261) ( 335 991) ( 175 042) ( 160 949) ( 15 903) ( 28 193) ( 44 760) ( 41 251) ( 6 405) ( 24 436) Collateral Of which value capped at the value of exposure 15 428 309 15 011 097 57 199 417 212 264 773 152 439 14 670 39 476 29 760 39 702 7 761 21 070 Of which immovable property 13 399 886 13 074 293 55 234 325 593 198 369 127 224 14 327 32 727 23 773 34 218 2 336 19 843 Of which value above the cap 38 535 746 37 240 152 77 081 1 295 594 638 233 657 361 46 791 50 229 257 922 82 771 79 023 140 625 Of which immovable property 28 045 182 27 495 182 73 212 550 000 345 999 204 001 32 420 39 747 28 705 54 548 3 190 45 392 Financial guarantees received Accumulated partial write-off 41 381 35 825 59 5 556 4 246 1 310 511 745 54 - - - ( 486 931) ( 1 717) ( 1 717) ( 485 214) ( 4 317) ( 480 898) ( 7 295) ( 477) ( 86 463) ( 46 114) ( 59 107) ( 281 441) 445 Management Report Sustainability Report Consolidated Financial Statements Annex Changes in the stock of non-performing loans and advances Initial stock of non-performing loans and advances Inflows to non-performing portfolios Outflows from non-performing portfolios Outflow to performing portfolio Outflow due to loan repayment, partial or total Outflow due to collateral liquidation Outflow due to taking possession of collateral Outflow due to sale of instruments Outflow due to risk transfer Outflow due to write-off Outflow due to other situations Outflow due to reclassification as held for sale Final stock of non-performing loans and advances Collateral obtained by taking possession and execution processes Property, plant and equipment (PP&E) Other than PP&E Residential immovable property Commercial Immovable property Movable property (auto, shipping, etc.) Equity and debt instruments Other Total (thousand of Euros) Gross carrying amount 1 391 459 411 465 ( 670 273) ( 154 882) ( 188 695) - ( 1 934) ( 144 521) - ( 158 048) ( 18 156) - 1 132 652 (thousand of Euros) Collateral obtained by taking possession Value at initial recognition Accumulated negative changes - 170 960 45 137 55 995 1 795 40 640 27 394 - ( 55 463) ( 11 085) ( 28 353) ( 1 039) ( 8 860) ( 6 127) 170 960 ( 55 463) Collateral obtained by taking possession and execution processes – distribution by age Total collateral obtained by taking possession Foreclosed <=2 years Foreclosed > 2 years <=5 years Foreclosed > 5 years Of which non-current assets held-for-sale (thousand of Euros) Value at initial recognition Accumulated negative changes Value at initial recognition Accumulated negative changes Value at initial recognition Accumulated negative changes Value at initial recognition Accumulated negative changes Value at initial recognition Accumulated negative changes Collateral obtained by taking possession classified as PP&E Collateral obtained by taking possession other than that classified as PP&E - - 170 960 ( 55 463) 6 886 ( 341) 41 828 ( 17 844) 122 247 ( 37 278) Residential immovable property 45 137 ( 11 085) 1 484 ( 60) 7 671 ( 1 398) 35 983 ( 9 628) Commercial immovable property 55 995 ( 28 353) 5 294 ( 219) 4 353 ( 1 266) 46 348 ( 26 867) Movable property (auto, shipping, etc.) 1 795 ( 1 039) 108 ( 62) 846 ( 194) 840 ( 783) Equity and debt instruments 40 640 ( 8 860) 27 394 ( 6 127) - - - - 1 564 ( 8 860) 39 076 27 394 ( 6 127) - - - Other Total 170 960 ( 55 463) 6 886 ( 341) 41 828 ( 17 844) 122 247 ( 37 278) 446 - - - - - - - - - - - - - - Annual Report 2023 | novobanco Note 44 – Provision of Insurance or Reinsurance Mediation Service As of December 31, 2023 and 2022, the remunerations resulting from the provision of insurance or reinsurance mediation service have the following composition: Life Insurance Unit Link and other life commissions Credit protection insurance (life) Traditional Products Non-Life Insurance Personal lines insurance Corporate insurance Credit protection insurance (non-life) Note: the amounts shown are net of accruals (thousands of Euros) 2023 2022 17 065 20 223 945 791 15 329 12 291 10 878 177 1 236 1 795 881 17 547 10 071 8 464 177 1 430 29 356 30 294 The Group does not collect insurance premiums on behalf of Insurers, nor does it move funds related to insurance contracts. Therefore, there are no other assets, liabilities, income, or expenses to report, related to the insurance mediation activity carried out by the Group, in addition to those already disclosed. Note 45 – Subsequent Events • On February 1, 2024, novobanco announced that on that date, Fitch assigned a BBB- rating to novobanco's long- term preferred senior debt. The Investment Grade rating reflects i) the Bank's current business model; ii) a significant improvement in asset quality; iii) profitability levels that compare favorably with peers; iv) significant improvement in capital buffers in 2023; and v) stable financing, along with adequate liquidity; • On February 21, 2024, novobanco announced the issue of Covered Bonds in the amount of 500 million euros, maturing on March 1, 2027 (soft bullet). The expected rating of the issue is Aaa by Moodys. The bonds have an annual interest rate of 3.25%, equivalent to 3-year mid-swaps plus 45bp; • On February 28, 2024, novobanco issued Senior Preferred debt in the amount of 500 million euros, maturing on March 8, 2028 and with an early repayment option on March 8, 2027. The bonds were issued with an annual coupon rate of 4.25%. 447 Management Report Sustainability Report Financial Statements Annex 124 Annual Report 2023 | novobanco SEPARATE FINANCIAL STATEMENTS OF NOVOBANCO 125 Management Report Sustainability Report Separate Financial Statements Annex novobanco SEPARATE INCOME STATEMENT FOR THE YEARS ENDEND 31 DECEMBER 2023 AND 2022 Interest Income Interest Expenses Net Interest Income Dividend income Fee and comission income Fee and comission expenses Gains or losses on 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 non-trading financial assets mandatorily at fair value through profit or loss Gains or losses from hedge accounting Exchange differences Gains or losses on derecognition of non-financial assets Other operating income Other operating expenses Operating Income Administrative expenses Staff expenses Other administrative expenses Cash contributions to resolution funds and deposit guarantee schemes Depreciation Provisions or reversal of provisions Commitments and guarantees given Other provisions Impairment or reversal of impairment on financial assets not measured at fair value through profit or loss Impairment or reversal of impairment of investment in subsidiaries, joint ventures and associates Impairment or reversal of impairment on non-financial assets Profit or loss before tax from continuing operations Tax expense or income related to profit or loss from continuing operations Current tax Deferred tax Profit or loss after tax from continuing operations Profit or loss before tax from discontinued operations Profit or loss for the exercise Weighted average number of ordinary shares in circulation (thousands) Basic earnings per share (in euros) Diluted earnings per share (in euros Basic earnings per share from continuing operations (in euros) Diluted earnings per share from continuing operations (in euros) Notes 8 8 10 9 9 10 10 10 10 10 11 12 12 13 15 16 23, 24 17 17 17 17 25 27 The accompanying explanatory notes are an integral part of these separate financial statements 2023 1 940 462 ( 833 352) 1 107 110 32 444 306 859 ( 37 563) ( 58 055) 3 144 71 766 31 468 23 989 27 608 45 120 ( 78 681) 1 475 209 ( 407 920) ( 234 729) ( 173 191) ( 77 528) ( 45 878) ( 23 305) 434 ( 23 739) (thousands of Euros) 2022 838 291 ( 213 295) 624 996 17 452 302 126 ( 39 816) ( 88 444) 146 715 ( 95 948) ( 535) 7 305 82 159 56 579 ( 68 778) 943 811 ( 369 730) ( 216 821) ( 152 909) ( 40 717) ( 53 961) ( 10 894) 2 555 ( 13 449) ( 142 022) ( 103 265) 12 216 6 353 797 125 4 656 ( 5 386) 10 042 801 781 ( 1 121) 800 660 10 034 965 0,08 0,08 0,08 0,08 16 166 14 081 395 491 58 339 ( 4 611) 62 950 453 830 - 453 830 10 034 965 0,05 0,05 0,05 0,05 450 Annual Report 2023 | novobanco novobanco SEPARATE STATEMENT OF COMPREHENSIVE INCOME FOR THE YEARS ENDED 31 DECEMBER 2023 AND 2022 Net profit / (loss) for the exercise Other comprehensive income / (loss) Items that will not be classified to results Actuarial gains / (losses) on defined benefits plans Fair value changes of equity instruments measured at fair value through other comprehensive income Items that may be reclassified to results Cash flow hedging Financial assets at fair value through other comprehensive income Total other comprehensive income/(loss) for the exercise a) See Statement of Changes in Equity Notes a) a) a) (thousands of Euros) 2023 800 660 2022 453 830 ( 51 531) ( 27 285) ( 24 246) 213 144 192 974 20 170 962 273 110 205 96 485 13 720 ( 296 489) ( 100 418) ( 196 071) 267 546 The accompanying explanatory notes are an integral part of these separate financial statements 451 Management Report Sustainability Report Separate Financial Statements Annex novobanco SEPARATE BALANCE SHEET AS AT 31 DECEMBER 2023 AND 2022 ASSETS Cash, cash balances at central banks and other demand deposits Financial assets held for trading Non-trading financial assets mandatorily at fair value through profit or loss Financial assets designated at fair value through profit or loss Financial assets at fair value through other comprehensive income Financial assets at amortised cost Debt securities Loans and advances Loans and advances Derivatives – Hedge accounting Fair value changes of the hedged items in portfolio hedge of interest rate risk Investments in subsidiaries, joint ventures and associates Tangible assets Other tangible assets Intangible assets Tax assets Current Tax Assets Deferred Tax Assets Other assets Non-current assets and disposal groups classified as held for sale LIABILITIES Financial liabilities held for trading Financial liabilities measured at amortised cost Deposits from banks (Of which, Repurchase Agreement) Due to customers (Of which, Repurchase Agreement) Debt securities issued and Subordinated debt Other financial liabilities Derivatives – Hedge accounting Fair value changes of the hedged items in portfolio hedge of interest rate risk Provisions Tax liabilities Current Tax liabilities Other liabilities EQUITY Capital Accumulated other comprehensive income Retained earnings Other reserves Profit or loss attributable to Owners of the parent TOTAL LIABILITIES AND EQUITY (thousands of Euros) Notes 2023 2022 43 146 264 45 464 048 18 19 20 20 20 20 21 21 22 23 24 25 26 27 19 28 21 21 29 25 30 31 32 32 32 5 742 599 436 345 1 434 690 - 741 446 31 389 894 8 200 570 125 817 23 063 507 683 074 ( 83 763) 263 675 300 242 300 242 86 427 923 641 26 260 897 381 1 211 512 16 482 39 117 042 100 607 37 392 300 6 685 933 3 867 053 29 130 958 1 366 382 1 085 659 489 750 124 957 62 049 420 543 4 191 4 191 1 012 395 4 029 222 6 567 844 ( 993 658) (8 577 074) 6 231 450 800 660 6 387 295 170 847 1 537 670 13 2 183 034 31 500 944 8 400 233 145 464 22 955 247 562 886 ( 164 388) 251 457 258 963 258 963 69 640 947 500 30 298 917 202 1 713 116 45 071 42 397 100 99 317 40 904 697 10 506 509 2 150 824 28 425 223 450 906 1 601 454 371 511 120 612 - 423 190 4 505 4 505 844 779 3 066 948 6 304 661 (1 155 271) (8 577 074) 6 040 802 453 830 43 146 264 45 464 048 The accompanying explanatory notes are an integral part of these separate financial statements 452 Annual Report 2023 | novobanco novobanco SEPARATE STATEMENT OF CHANGES IN EQUITY FOR THE YEARS ENDED 31 DECEMBER 2023 AND 2022 Balance as at 31 December 2021 6 054 907 ( 968 987) ( 8 576 860) 6 064 434 225 908 2 799 402 Notes Share Capital Other Comprehensive Income Retained earnings Other reserves Net profit/(loss) for the year Total (thousands of Euros) Capital increase by incorporation of special reserve for deferred taxes 249 754 Other Increase / (Decrease) in Equity Appropriation to retained earnings of net profit / (loss) of the previous year Other movements Total comprehensive income for the year Changes in fair value, net of tax Remeasurement of defined benefit plans, net of tax Reserves of impairment of securities at fair value through OCI Reserves of sales of securities at fair value through OCI Net profit / (loss) for the year Balance as at 31 December 2022 Other Increase / (Decrease) in Equity Appropriation to retained earnings of net profit / (loss) of the previous year Other movements Total comprehensive income for the year Changes in fair value, net of tax Remeasurement of defined benefit plans, net of tax Reserves of impairment of securities at fair value through OCI Reserves of sales of securities at fair value through OCI Cash flow hedging reserves Net profit / (loss) for the year Balance as at 31 December 2023 - - - - - - - - - 32 14 32 32 - - - - - - - - - - 32 14 32 32 - - - - - ( 249 754) - ( 214) 226 122 ( 225 908) - 225 908 ( 225 908) ( 214) 214 - ( 186 284) ( 178 410) 96 485 ( 3 079) ( 862) ( 100 418) - - - - - - - - - - - - 453 830 - - - - 453 830 - - - - 267 546 ( 178 410) 96 485 ( 3 079) ( 862) 353 412 - - - - 161 613 255 122 ( 27 285) ( 378) ( 258 820) 192 974 - - - - - - - - - - - - ( 263 183) - 453 831 ( 453 830) 453 830 ( 453 830) 1 - - - - - - - - 800 660 - - - - - 800 660 - 1 - 1 962 273 255 122 ( 27 285) ( 378) ( 258 820) 192 974 800 660 6 304 661 ( 1 155 271) ( 8 577 074) 6 040 802 453 830 3 066 948 6 567 844 ( 993 658) ( 8 577 074) 6 231 450 800 660 4 029 222 Capital increase by incorporation of special reserve for deferred taxes 31 263 183 The accompanying explanatory notes are an integral part of these separate financial statements 453 Management Report Sustainability Report Separate Financial Statements Annex novobanco CASH FLOW STATEMENT FOR THE YEARS ENDED ON 2023 AND 2022 Notes Cash flows from operatings activities Interest received Interest paid Fees and commissions received Fees and commissions paid Recoveries on loans previously written off Cash contributions to resolution funds and deposit guarantee schemes Cash payments to employees and suppliers Changes in operating assets and liabilities: Deposits with / from Central Banks Financial assets mandatorily at fair value through profit or loss Financial assets designated at fair value through profit or loss Financial assets at fair value through other comprehensive income Financial assets at amortised cost Securities Loans and advances to banks Loans and advances to customers Financial liabilities at amortised cost Deposits from banks Due to customers Derivatives - Hedge accounting Other operating assets and liabilities Net cash from operating activities before corporate income tax Corporate income taxes paid Net cash from operating activities Cash flows from investing activities Sale of investments in subsidiaries and associated companies Dividends received Acquisition of tangible fixed assets Sale of tangible fixed assets Acquisition of intangible assets Net cash from investing activities Cash flows from financing activities Reimbursement of bonds and other debt securities Issue of subordinated debt Reimbursement of subordinated debt Net cash from financing activities 2023 1 199 892 1 985 442 ( 715 474) 306 859 ( 37 581) 31 994 ( 77 528) ( 293 820) (4 622 226) 225 187 ( 229 596) 1 772 803 153 086 373 792 20 890 ( 241 596) 1 825 336 1 122 185 703 151 ( 415 013) 26 563 ( 63 968) ( 25 709) ( 89 677) - 32 444 ( 82 368) 1 279 ( 30 177) ( 78 822) ( 577 303) 500 000 ( 400 000) ( 477 303) (thousands of Euros) 2022 586 720 855 033 ( 207 797) 302 126 ( 39 816) 39 741 ( 40 717) ( 321 850) (1 702 869) 558 483 146 847 4 535 561 (6 732 655) (5 699 590) 41 890 (1 074 955) 2 121 448 682 009 1 439 439 ( 54 864) 1 171 677 630 348 ( 35 231) 595 117 1 867 17 452 ( 105 881) 107 072 ( 25 160) ( 4 650) 100 000 ( 575) 99 425 Net changes in cash and cash equivalents ( 645 802) 689 892 Cash and cash equivalents at the beginning of the exercise Net changes in cash and cash equivalents Cash and cash equivalents at the end of the exercise Cash and cash equivalents include: Cash Deposits with Central Banks (of which, Restricted balances) Deposits with banks Total 6 099 398 ( 645 802) 5 453 596 171 006 5 374 612 ( 289 003) 196 981 5 453 596 5 409 506 689 892 6 099 398 176 797 5 942 501 ( 287 897) 267 997 6 099 398 18 18 18 The accompanying explanatory notes are an integral part of these separate financial statements 454 Annual Report 2023 | novobanco (This page was left in blank intentionally) 455 Management Report Sustainability Report Separate Financial Statements Annex novobanco Notes to the Separate Financial Statements as of 31 December 2023 (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)) , 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 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. As at 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. 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. On December 19, 2023, the company became Nani Holdings S.à.r.l, with its headquarters at Rue des Mérovingiens 7A, Bertrange, Luxembourg. 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 has a retail network comprising 273 branches in Portugal and abroad (31 December 2022: 274 branches), including branches in Luxembourg, and 2 representative offices, one in Switzerland and one in Spain (31 December 2022: 2 representative offices in Switzerland). Note 2 –Basis of presentation The separate financial statements of novobanco are presented as at 31 December 2023, 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 2022. 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 2023 were approved at the Executive Board of Directors’ meeting held on 29 February 2024 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. 456 Annual Report 2023 | novobanco 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 2023, 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 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 2023, 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 financial year 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 2023: Standards/Interpretation Description IFRS 17 – Insurance Contracts IFRS 17 replaces IFRS 4 and 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 warranties and some financial instruments with discretionary participation features. In general terms, IFRS 17 provides a more useful and more consistent accounting model for insurance contracts. Contrasting with 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. Amendments to IFRS 17 – Insurance Contracts – Initial application of IFRS 17 and IFRS 9 – Comparative information Amendments to IAS 1 - Disclosure of Accounting Policies This amendment to IFRS 17 pertains to the presentation of comparative information of financial assets upon the initial application of IFRS 17. The amendment 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 upon the initial application of IFRS 17. The 'overlay' allows all financial assets, including those held in relation to activities not related to contracts 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 upon the initial application of IFRS 9. These changes aim to assist an entity in disclosing 'material' accounting policies, previously referred to as 'significant' policies. However, due to the absence of this concept in IFRS standards, it was decided to replace it with the concept of "materiality", a concept already known by the users of financial statements. When assessing the materiality of accounting policies, the entity must consider not only the size of the transactions but also other events or conditions and their nature. Amendments to IAS 8 - Definition of Accounting Estimates The amendment aims to clarify the distinction between changes in accounting estimates, changes in accounting policies, and the correction of errors. Additionally, it clarifies how an entity uses measurement techniques and inputs to develop accounting estimates. 457 Management Report Sustainability Report Separate Financial Statements Annex Amendments to IAS 12 - Deferred tax related to assets and liabilities arising from a single transaction Amendments to IAS 12 - International Tax Reform - Second Pillar Model Rules IAS 12 now requires an entity to recognise deferred tax when its initial recognition gives rise to equal amounts of taxable temporary differences and deductible temporary differences. However, it is a matter of professional judgment whether such deductions are attributable to the liability that is recognised in the financial statements or to the related asset. This fact is particularly important in determining the existence of temporary differences in the initial recognition of the asset or liability, insofar as the initial recognition exception is not applicable to transactions that originated equal taxable and deductible temporary differences. Among the applicable transactions are the registration of (i) assets under right of use and lease liabilities; (ii) provisions for dismantling, restoration, or similar liabilities, and the corresponding amounts recognised as part of the cost of the related asset, when at the date of initial recognition they do not apply for tax purposes. This amendment is retrospectively applicable. These changes arise in the context of implementing the Global Anti-Base Erosion ("Globe") rules of the OECD, which may have significant impacts on the determination of deferred taxes that are difficult to estimate as of the date of issuance of these changes. These changes introduce a temporary exception to the accounting for deferred taxes arising from the application of the OECD's second pillar model rules, and additionally establish new specific disclosure requirements for affected entities. These standards and changes had no material impact on the Bank’s financial statements Note 6 –Main Accounting polices 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 comprehensive income. 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/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 458 Annual Report 2023 | novobanco 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). 6.3. Fee and commission income recognition 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. instruments - Classification and initial measurement 6.4.1. 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. 6.4.2. 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 6.6. Financial instruments are initially measured at their fair value (as defined in Note 6.5), 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. 6.4.3. 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). 459 Management Report Sustainability Report Separate Financial Statements Annex 6.4.4. 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 6.6.1; • Fair Value of through Other Comprehensive Income, as explained in Notes 6.6.1, 6.6.2 and 6.6.3; • Fair Value Through Profit or Loss, as set out in Note 6.6.4; • Mandatorily measured at fair value through profit or loss, as set out in Note 6.6.4. The Bank classifies and measures its derivative and trading portfolio at FVPL, as explained in Note 6.6.5. The Bank may designate financial instruments at FVPL, if so doing eliminates or significantly reduces measurement or recognition inconsistencies, as explained in Note 6.6.6. 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. 6.5. 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) Derivatives traded on an organised market; (ii) Shares quoted on a stock exchange; (iii) Open investment funds quoted on a stock exchange; (iv) Closed investment funds whose subjacent assets are solely financial instruments listed on a stock exchange; (v) Bonds with observable market quotes; (vi) Financial instruments with market offers even if these are not available at the normal information sources (e.g., securities traded based on recovery rate). 460 Annual Report 2023 | novobanco Valuation models based on observable market parameters / prices (level 2) In this category, the financial instruments are valued using internal valuation techniques, namely discounted cash flow models and option pricing models which imply the use of estimates and require judgments that vary in accordance with the complexity of the financial instruments. Notwithstanding, the Bank uses as inputs in its models, observable market data such as interest rate curves, credit spreads, volatility and market indexes. This category also includes instruments with dealer price quotations, but which markets have a lower liquidity. Additionally, the Bank also uses as observable market variables, those that result from transactions with similar instruments and that are observed with a certain regularity on the market. This category includes, amongst others, the following financial instruments: (i) Bonds without observable market valuations valued using observable market inputs; and (ii) Derivatives (OTC) over-the-counter valued using observable market inputs; and (iii) 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; (ii) Unquoted shares; (iii) Closed real estate funds; (iv) Hedge funds; (v) Private equities; (vi) Restructuring funds; and (vii) Over the counter (OTC) derivatives with prices provided by third parties. 6.6. 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. 6.6.1. Financial assets at amortised cost 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; 461 Management Report Sustainability Report Separate Financial Statements Annex (ii) The financial asset is held within a business model with the objective to hold financial assets to maturity to collect contractual cash flows (financial assets at amortised cost) or to collect the contractual cash flows until maturity and selling the financial asset (financial assets at fair value through other comprehensive income). The assessment of the business models of the financial asset is fundamental for its classification. The Bank determines the business models by financial asset groups according to how they are managed to achieve a particular business objective. The Bank’s business models determine whether cash flows will be generated by obtaining only contractual cash flows, from selling the financial assets or both. At initial recognition of a financial asset, the Bank determines whether it is part of an existing business model or if it reflects a new business model. The Bank reassesses its business models in each reporting period in order to determine whether there have been changes in business models since the last reporting period. The above requirements do not apply to lease receivables, which meet the criteria defined in IFRS 16 – Leases. Financial assets that are subsequently measured at amortised cost or at fair value through other comprehensive income are subject to impairment calculation, as explained in Note 6.12.. 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. 6.6.2. Debt instruments with fair value changes in other comprehensive income The Bank classifies debt instruments with fair value changes in 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; and • 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 thus classified are subsequently measured at fair value, with gains and losses arising from changes in fair value recognised in other comprehensive income until the assets are derecognised, at which point the accumulated amount of potential gains and losses recorded in reserves is transferred to profit or loss under the heading of gains or losses on financial assets and liabilities measured at fair value through profit or loss. Interest income and foreign exchange gains and losses are recognised in profit or loss in the same way as for financial assets measured at amortised cost as explained in Note 6.2. The expected credit loss calculation is explained in Note 6.12. 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. 6.6.3. 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. 6.6.4. 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 462 Annual Report 2023 | novobanco 6.6.5. 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. 6.6.6. 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 26 and 30) and comprise the minimum collateral mandatory for open positions. The fair value of the remaining derivative financial instruments corresponds to their market value, if available, or is determined using valuation techniques, including discounted cash flow models and options pricing models, as appropriate. Hedge accounting • Classification criteria Derivative financial instruments used for hedging purposes may be classified in the accounts as hedging instruments provided the following criteria are cumulatively met: (i) Hedging instruments and hedged captions are eligible for the hedge relationship; (ii) At the inception of the hedge, the hedge relationship is identified and documented, including identification of the hedged caption and hedging instrument and evaluation of the effectiveness of the hedge; (iii) There is an economic relationship between the hedged caption and the hedging instrument; (iv) The effect of credit risk does not dominate the changes in value that result from this economic relationship; (v) The effectiveness of the hedge can be reliably measured, both at the inception of the hedge and on an ongoing basis. 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 attributed to the hedged risk. Any ineffectiveness found is recognised in the income statement when it occurs in gains or losses of hedge accounting. In the specific case of fair value hedging of interest rate risk for the deposit portfolio, the IAS 39 carve-out exception was adopted for the application of macro hedging to core deposits. The use of derivatives is framed in the Bank’s risk management strategy and objectives. • Fair Value Hedge 463 Management Report Sustainability Report Separate Financial Statements Annex 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 In a hedge operation of the exposure to variability of highly probable future cash flows (cash flow hedge), the effective portion of changes in the fair value of the hedging derivative is recognized in the cash flow hedge reserve. The value of this reserve is transferred to the results in the periods in which the expected cash flows of the hedged item affect results. The ineffective portion of the hedge is recorded in results. When a hedging instrument expires or is sold, or when the hedge no longer meets the criteria required for hedge accounting, the changes in the fair value of the derivative accumulated in reserves are recognized in results when the hedged operation also affects results. If it is foreseeable that the hedged operation will not be carried out, the amounts still recorded in equity are immediately recognized in results, and the hedging instrument is transferred 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 6.5. If a hybrid contract includes a host contract that is not an asset under IFRS 9, an embedded derivative shall be separated from the host contract and accounted for as a derivative under this Standard if, and only if: (i) The economic characteristics and risks of the embedded derivative are not closely related to the economic characteristics and risks of the host contract; (ii) A separate financial instrument with the same terms as the embedded derivative satisfies the definition of a derivative; and (iii) 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 recorded at fair value with changes recognized in income statement. 6.6.7. 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; 464 Annual Report 2023 | novobanco • 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. 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. 6.6.8. 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 compensation of a party if the if there is non-compliance with the defined contractual obligation. Performance guarantees are initially recognized at fair value, which is normally evidenced by the value of commissions received during the contract's duration. If the defined contractual obligation is not fulfilled, the Group has the right of recourse against the main debtor of the guarantee, with the amounts recognized in Loans to customers after payment of compensation to the beneficiary of the guarantee. As the right of return is embedded in the performance guarantee, and therefore part of the same unit of account, the Group understands that it does not assume insurance risk, but only financial (credit) risk on the main debtor, and, in this sense, treats these guarantees as financial instruments. 6.7 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. 465 Management Report Sustainability Report Separate Financial Statements Annex 6.8. 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. In these cases, 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: • Change in loan currency; • Introduction of an equity feature; • 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 6.10. 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 income statement. 6.9. 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. 6.10. 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 6.8. 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 37 and whether the assets should be classified as Stage 3. 466 Annual Report 2023 | novobanco 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. 6.11. 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. 6.12. 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. 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 12m ECL 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 12m ECL 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; 467 Management Report Sustainability Report Separate Financial Statements Annex • 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: • • Exposures that have materially defaulted for more than 90 consecutive days; or 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 applies to productive exposures that show no active indication of significant credit risk deterioration compared to origination. Impairment represents the expected loss resulting from default events on a financial instrument that may occur within a term of 12 months after the balance sheet date. Risk factors - PD and LGD - consider the 12-month horizon and are applied to the value of the exposure. This calculation is carried out by the scenario, since each considered scenario has specific risk factors - PD and LGD; • Stage 2: this calculation applies to productive exposures that show an indication of a significant increase in credit risk since origination. Impairment represents the current value of the sum of expected losses until the maturity of the exposure. Expected losses are calculated on the projected exposure at each moment of the debt amortization, according to the exposure amortization plan, and these expected losses are discounted at the original effective rate of the contract to obtain their current value, as of the reporting date. As mentioned above, this determination is done by scenario since different risk factors are considered for each scenario; • Stage 3: this calculation applies to non-productive exposures, where impairment corresponds to the difference between the amount outstanding and the current value of the expected recoveries for this exposure, given its characteristics. To determine the current value of the 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; 468 Annual Report 2023 | novobanco • 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. 6.13. 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 indexes. 6.14. 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. 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: 469 Management Report Sustainability Report Separate Financial Statements Annex (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. 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. (ii) (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. 6.15. Write-offs Write-off is defined as the derecognition of a financial asset from the Bank’s balance sheet, which should only occur when cumulatively: (i) The total amount of the credit has been demanded, that is, the credit must be fully 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; (ii) All the recovery efforts, considered appropriate, have been developed (and the relevant evidence gathered); (iii) The credit recovery expectations are very low, leading to an extreme scenario of total impairment– 100% impairment. This rule is only applicable for contracts without real estate collateral and if the whole contract is classified as overdue. In all other cases, it is necessary to ensure that the amount to be written off is fully impaired (at least in the month prior to the month of the write-off). Subsequent payments received after the write-off must be recognised as subsequent write-off recoveries at other operating income. 6.16. 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. 470 Annual Report 2023 | novobanco 6.17. 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 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. 6.18. 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: Self-Service Buildings Leasehold improvements IT equipment Furniture and fixtures Interior installations Security equipment Machines and tools Transport equipment Other equipment Number of years 35 to 50 10 4 to 5 4 to 10 5 to 10 4 to 10 4 to 10 4 5 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. 471 Management Report Sustainability Report Separate Financial Statements Annex 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. 6.19. 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 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”. 6.20. 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. Exceptionally, these may be extended whenever it is verified that the useful life of the asset is demonstrably longer. 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. 472 Annual Report 2023 | novobanco All remaining costs associated with information technology services are recognised as an expense as incurred. 6.21. 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. 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. 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. 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. 6.22. 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 by pension funds managed by GNB - Sociedade Gestora de Fundos de Pensões, SA, subsidiary of the novobanco 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. 473 Management Report Sustainability Report Separate Financial Statements Annex 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. 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 staff 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 474 Annual Report 2023 | novobanco 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 Staff 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 6.23. 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. 6.24. 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. 6.25. Income taxes novobanco is subject to the tax regime consigned in the Código do Imposto sobre o Rendimento das Pessoas Coletivas (IRC Code). Corporate income tax comprises current tax and deferred tax. Corporate income tax is recognised in the income statement except to the extent that it relates to 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. 475 Management Report Sustainability Report Separate Financial Statements Annex 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 basis 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 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 2023. 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 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 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 476 Annual Report 2023 | novobanco uncertainty regarding the treatment of income tax, with no material impact on its financial statements resulting from its application. DAC6 The obligation to report to the Tax and Customs Authority ("AT") internal or cross-border mechanisms of tax relevance has emerged in the context of Law no. 26/2020, of July 21 ("Law no. 26/2020"), which transposes Council Directive (EU) 2018/822 of May 25, 2018 ("DAC6") into Portuguese law. The DAC6 aims to discourage the use of potentially aggressive tax planning mechanisms by imposing reporting obligations to the Tax Authorities of the different Member States of the European Union. In addition, it aims to provide tax administrations and national legislators with information that will help combat aggressive tax planning. Novobanco, with the collaboration of tax consultants, has implemented measures that allow for the identification of operations subject to reporting to tax authorities. These measures focus mainly on a primary analysis conducted by business areas and a second-line analysis conducted by Novobanco's tax area. The Bank's own operations are analyzed by Novobanco's tax area and validated by the Compliance Department. BEPS - Pilar II In October 2021, as part of the Erosion of the Tax Base and Profit Shifting project ("BEPS 2.0 - Base Erosion and Profit Shifting 2.0") of the Organization for Economic Cooperation and Development ("OECD"), about 137 members of the OECD/G20, representing 90% of the world's GDP, reached an agreement for a reform of the international tax system, through which a general framework for a commonly designated "Pillar II" global minimum tax regime was approved. In this regard, Pillar II of BEPS 2.0, enshrined in Council Directive (EU) 2022/2523 of December 15, 2022, established a global minimum tax level of 15% for major multinational companies and large domestic groups, which could result in the payment of an additional tax. Novobanco has been identifying the potential impacts associated with the implementation of Pillar II rules, having found that it should meet the eligibility criteria for the application of the Pillar II rules, namely by presenting consolidated annual incomes exceeding 750 million euros in two out of the last four financial years. However, both the Directive and the preliminary draft establish an exclusion rule for the application of the Income Inclusion Rule ("IIR") and the Undertaxed Payments Rule ("UTPR") for large national groups and multinational enterprise groups in the initial stage of international activity. Notwithstanding, that special rule stipulates that the additional tax due is zero in the reference jurisdiction for large national groups and multinational enterprise groups that are in an initial stage of their international activity, which implies (in the case of multinational enterprise groups) that, in each tax year: (i) they include constituent entities located in no more than six jurisdictions and (ii) the sum of the net book value of tangible assets of all their constituent entities, excluding those located in the reference jurisdiction, does not exceed 50 million euros. Additionally, said norm provides for the possibility of applying the exclusion rule for five years after the start of the first fiscal year in which the group comes under the Pillar II rules. However, it must be ascertained annually whether the above requirements are met. In this regard, according to the analysis carried out, Novobanco Group should meet the requirements for the application of the exclusion rule for multinational enterprise groups in the initial stage of their international activity, not foreseeing material impacts during the period when such exclusion rule is applied. 6.26. Recently issued accounting standards and interpretations The recently issued accounting standards and interpretations, which have not yet come into force and which the Group has not yet applied in the preparation of its financial statements, can be analyzed as follows: Standards, interpretations, amendments and revisions that come into force in future fiscal years The following standards, interpretations, amendments and revisions, with mandatory application in future fiscal years, had been adopted ("endorsed") by the European Union as of the approval date of these financial statements Standard/ Interpretation Applicable in the European Union for Description 477 Management Report Sustainability Report Separate Financial Statements Annex fiscal years beginning in or after 1-jan-2024 Amendments to IAS 1 - Presentation of Financial Statements - Classification of Current and Non-Current Liabilities Amendments to IFRS 16 - Leasing liabilities in sale and leaseback transactions 1-jan-2024 This amendment aims to clarify the classification of liabilities as current or non- current balances based on 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 evaluation should determine whether a right exists but should not consider whether the entity will or will not exercise such right), or by events occurring after the reporting date, such as non-compliance with a "covenant". However, if the right to defer settlement for at least twelve months is subject to the fulfilment of certain conditions after the balance sheet date, these criteria do not affect the right to defer settlement whose purpose is to classify a liability as current or non-current. This amendment also includes a new definition of "settlement" of a liability and is retroactively applicable. This amendment to IFRS 16 introduces guidance regarding the subsequent measurement of leasing liabilities, related to sale and leaseback transactions ("sale & leaseback") that qualify as "sale" according to the principles of IFRS 15, with greater impact when some or all of the lease payments are variable lease payments that do not depend on an index or a rate. When subsequently measuring leasing liabilities, the seller-lessees should determine the "lease payments" and "revised lease payments" in such a way that they do not recognize gains/(losses) in relation to the right of use they retain. This amendment is retroactively applicable. The Bank has not proceeded with the early application of any of these standards in the financial statements for the fiscal year ended December 31, 2023. No significant impacts are estimated on the financial statements 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 fiscal years, had not been adopted ("endorsed") by the European Union as of the approval date of these financial statements: Standard/ Interpret Description Amendments to IAS 7 and IFRS 7 - Disclosures: Supplier Financing Arrangements These amendments to IAS 7 Statement of Cash Flows and IFRS 7 Financial Instruments: Disclosures, aim to clarify the characteristics of a supplier financing arrangement and introduce additional disclosure requirements when such arrangements exist. Amendments to IAS 21 - The Effects of Changes in Foreign Exchange Rates: Lack of Exchangeability The disclosure requirements are intended to help users of the financial statements understand the effects of supplier financing arrangements on the entity's liabilities, cash flows and liquidity risk exposure. The amendments take effect in the period beginning on or after January 1, 2024. Early adoption is permitted, however it should be disclosed.. This amendment aims to clarify how to assess the exchangeability of a currency, and how the exchange rate should be determined when it is not exchangeable for a long period. The amendment specifies that a currency should be considered exchangeable when an entity is able to obtain the other currency within a period that allows for normal administrative management, and through an exchange mechanism or market in which an exchange transaction creates enforceable rights and obligations. If a currency cannot be exchanged for another currency, an entity should estimate the exchange rate on the measurement date of the transaction. The goal will be to determine the exchange rate that would be applicable, on the measurement date, for a similar transaction between market participants. The amendments also state that an entity may use an observable exchange rate without making any adjustments. The amendments take effect in the period beginning on or after January 1, 2025. Early adoption is permitted, however the transition requirements applied must be disclosed. 478 Annual Report 2023 | novobanco These standards have not yet been adopted ("endorsed") by the European Union and, as such, have not been applied by the Group for the year ended on December 31, 2023. No significant impacts are estimated on the financial statements as a result of their adoption. Note 7 – 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 Bank are discussed in this Note in order to improve the understanding of how their application affects the reported results of the Bank and its disclosure. 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 reporting 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 Note 6.12 – 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 Bank management, constitutes a significant increase on credit risk; • 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; • Definition of groups of financial assets with similar credit risk characteristics: when the expected credit losses are measured through collective model, the financial instruments are aggregated based on the same risk characteristics. The Group monitors the credit risk characteristics in order to assure the correct reclassification of the assets, in cases of changes on the credit risk characteristics; • Models and assumptions: The 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 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 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. 7.2. 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 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. 479 Management Report Sustainability Report Separate Financial Statements Annex Consequently, the use of a different methodology or different assumptions or judgements in applying a particular model could have produced different financial results, summarised in Note 36. 7.3. 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 25. 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 Bank 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. 7.4. 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. 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. 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 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. 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 7.14 and 7.15. 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. 7.7. Lease Contract 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. 480 Annual Report 2023 | novobanco 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 at 31 December 2023 and 2022 is as follows: (thousands of Euros) 2023 2022 1 940 462 838 291 1 552 253 727 880 1 161 336 576 835 35 550 30 046 8 - 142 196 25 692 47 160 238 945 124 887 9 776 38 129 38 129 466 38 162 38 162 1 862 40 006 9 38 253 1 853 1 753 348 218 32 243 611 40 873 306 734 18 13 053 19 172 833 352 213 295 615 510 171 667 56 449 203 320 33 880 297 969 116 938 44 779 12 993 305 222 83 - 217 537 217 537 58 252 44 224 3 397 27 733 4 859 34 178 7 280 19 707 12 306 6 850 551 21 921 21 921 1 107 110 624 996 Interest Income From assets / liabilities at amortised cost Interest from loans and advances (of which, financial leasing operations) (of which, repurchase agreement) Interest from deposits with and loans and advances to banks (of which, repurchase agreement) Interest from securities Other interest and similar income From assets / liabilities at fair value through other comprehensive income (*) Interest from securities Income/expenses from negative interest rates (*) Interest from deposits with and loans and advances to banks Interest from derivatives Fair value through profit or loss Interest from loans and advances Interest from securities Interest from derivatives Interest Expenses From assets / liabilities at amortised cost (*) Interest on debt securities issued Interest on amounts due to customers (of which, repurchase agreement) Interest on deposits from Central Banks and other banks (of which, repurchase agreement) Interest on subordinated liabilities Other interest and similar expenses Income/expenses from negative interest rates (*) Interest on deposits from Central Banks and other banks Interest on derivatives Other interest and similar expenses From assets / liabilities at fair value through profit or loss Interest on derivatives *Calculated by the effective interest method 481 Management Report Sustainability Report Separate Financial Statements Annex Average rates of financial assets and liabilities The following table presents the average interest rates for the main categories of the Bank's financial assets and liabilities, as at December 31, 2023 and 2022, as well as the respective average balance and interest for the year: (thousands of Euros) 2023 2022 Average balance for the year Year interest Average interest rate Average balance for the year Year interest Average interest rate 40 122 574 1 709 618 4,26% 43 213 580 764 946 4 478 339 141 974 24 034 005 1 149 835 11 610 230 417 809 40 122 574 602 508 8 065 174 264 080 28 212 754 237 200 1 377 123 101 228 3,17% 4,78% 3,60% 1,50% 3,27% 0,84% 7,35% 7 703 743 13 385 23 922 921 571 255 11 586 916 180 306 43 213 580 139 950 11 314 546 ( 13 917) 27 911 300 47 622 1 429 109 106 245 1,77% 0,17% 2,39% 1,56% 0,32% -0,12% 0,17% 7,43% 2 467 523 - - 2 558 625 - - 1 107 110 2,76% 624 996 1,45% Financial assets Monetary assets Loans to customers Securities and others Financial liabilities Monetary Liabilities Due to customers Other resources Differential Liabilities Net Interest margin Note 9 – Fees and Commissions Income and Expenses The breakdown of this caption is as follows: (thousands of Euros) 2023 2022 306 859 302 126 220 544 220 269 45 149 112 759 13 094 49 542 30 717 10 102 6 870 28 138 10 488 37 563 24 823 9 019 13 144 16 2 644 1 313 4 710 6 717 40 697 106 866 13 887 58 819 31 879 8 235 6 599 29 043 6 101 39 816 27 729 9 122 14 645 17 3 945 1 903 4 389 5 795 269 296 262 310 Fees and commissions income From banking services Cards Management of Means of Payment Asset Management Credit operations From guarantees provided From transaction of securities From commitments to third parties Bancassurance Other fee and commission income Fees and commissions expenses With banking services rendered by third parties Cards Management of Means of Payment Asset Management Credit operations With guarantees provided With transaction of securities Other fee and commission income 482 Annual Report 2023 | novobanco (thousands of Euros) 2023 2022 32 444 17 452 176 68 108 1 705 1 705 9 242 107 9 135 3 406 3 406 4 804 Note 10 – Results of Financial Operations The breakdown of this caption is as follows: Dividend income From financial assets at fair value through other comprehensive income Shares Participation units From financial assets at fair value through other comprehensive income Shares Investments in associates accounted for using a method other than the equivalence method 30 563 Gains or losses on financial assets and liabilities not measured at fair value through profit or loss ( 58 055) ( 88 444) From financial assets at fair value through other comprehensive income Bonds and other fixed income securities - issued by government and public entities Bonds and other fixed income securities - issued by other entities From financial assets and liabilities at amortized cost Bonds and other fixed income securities - issued by government and public entities Bonds and other fixed income securities - issued by other entities Credit Gains or losses on financial assets and liabilities held for trading Bonds and other fixed income securities - issued by government and public entities Bonds and other fixed income securities - issued by other entities Financial Derivatives Foreign exchange rate contracts Interest rate contracts Equity / Index contracts Credit default contracts Other Gains or losses on financial assets mandatorily Bonds and other fixed income securities - issued by other entities Shares Other variable yield securities Credit to customers Gains or losses from hedge accounting Fair value changes of hedging instruments Foreign exchange rate contracts Fair value changes of hedging item attributable to hedged risk Foreign exchange revaluation 5 090 5 090 ( 83 194) ( 31 160) - ( 52 034) ( 63 145) ( 5 250) ( 387) 2 ( 69 296) ( 6 293) 6 538 3 144 131 106 2 907 ( 1 136) ( 407) 4 285 ( 2) 167 71 766 37 987 1 111 27 283 5 385 31 468 1 041 146 715 ( 23 620) 39 170 296 5 174 161 650 965 187 2 320 ( 95 948) ( 93 648) 14 119 14 778 ( 31 197) ( 535) ( 152 982) 438 484 184 450 ( 439 019) 23 989 7 305 72 312 ( 30 907) As at December 31, 2023, gains recognized in results from the brokerage margin (day one profit), which are essentially related to foreign exchange transactions, amounted to approximately 3,602 thousand euros (December 31, 2022: 3,597 thousand euros). Gains or losses on hedge accounting Gains or losses on hedge accounting include changes in fair value of the hedging instrument (derivative) and changes in fair value of the hedged caption attributable to the hedged risk. In the case where the hedge operations are interrupted early, here may occur the payment/receipt of compensation, which is recorded in Other operating expenses/ Other operating income. As at December 31, 2023, there were no compensations (December 31, 2022: 89 thousand euros). 483 Management Report Sustainability Report Separate Financial Statements Annex Note 11 – Gain or Losses on Derecognition of Non-Financial Assets The breakdown of this caption is as follows: Real estate properties Equipment Others (thousands of Euros) 2023 26 896 526 185 27 608 2022 85 386 ( 5 790) 2 563 82 159 The caption gains or losses on derecognition of non-financial assets - buildings includes, as at December 31, 2022, the gain of 66,797 thousand euros on the sale of novobanco headquarters building, as detailed in note 23. Note 12 – Other Operating Income and Other Operating Expenses The breakdown of this caption is as follows: Other operating income Gains / (losses) on recoveries of loans Non-recurring advisory services Other income Other operating expenses Losses on the acquisition of debt issued by the Bank (see Note 28) Direct and indirect taxes Contribution to the Banking Sector Additional solidarity Membership subscriptions and donations Charges with Supervisory entities Other expenses Other operating income / (expenses) (thousands of Euros) 2023 45 120 31 994 331 12 795 2022 56 579 39 741 334 16 504 ( 78 681) ( 68 778) ( 1 436) ( 3 610) - ( 2 748) ( 29 207) ( 28 270) ( 5 310) ( 1 404) ( 2 228) ( 5 140) ( 1 643) ( 2 254) ( 35 486) ( 28 723) ( 33 561) ( 12 199) As at December 31, 2023, there are no received amounts related to compensation for interruption of hedge operations, included in other income (December 31, 2023: 89 thousand euros) (see Note 10). Note 13 – Staff Expenses The breakdown of this caption is as follows: Wages and salaries Remuneration Long-term service / Career bonuses (see Note 14) Mandatory social charges Costs with post-employment benefits (see Note 14) Other costs The provisions and costs related to the restructuring process are presented in Note 29. 484 2023 178 588 177 357 1 231 46 493 89 9 559 (thousands of Euros) 2022 166 593 166 593 - 43 972 263 5 993 234 729 216 821 As of 31 December 2023 and 2022, the number of employees of the Bank, considering the staff and the term contracted, presents the following breakdown by professional category: Annual Report 2023 | novobanco Senior management functions Middle Management functions Specific functions Administrative and other functions Note 14 –Employee Benefits 2023 428 353 2 114 1 044 3 939 2022 408 365 2 058 986 3 817 Pension and health-care benefits As mentioned in accounting policy 6.22, 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 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 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, being now responsible for the difference required for the pension guaranteed under the terms of the Collective Labor Agreement. 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 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 485 Management Report Sustainability Report Separate Financial Statements Annex 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). The assets of the undivided part are not allocated to any liabilities of Novobanco or BES until the final decision of the court (under Article 402), with the amount of 8.8 million euros of net liabilities of the fund's assets related to the undivided part being recorded under the Provisions item of novobanco's liabilities. 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 2023, the amount of Euro 617 thousand was recorded in Staff Costs related to the defined contribution plan (31 December 2022: Euro 548 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 after 2011, and who can claim rights to the Pension Fund under Clause 98 of the ACT, were included. The Bank's liabilities and coverage levels, calculated in accordance with the accounting policy defined in Note 6.22 - Employee benefits, reportable as of 31 December 2023 and 2022 are analysed as follows: 486 Annual Report 2023 | novobanco (thousands of Euros) 2023 2022 1 389 421 1 887 967 89 53 833 2 665 209 101 041 93 989 ( 87 198) 11 245 ( 1) - 24 946 2 568 201 ( 515 423) 50 016 ( 80 263) 19 409 - 1 565 293 1 389 421 1 178 544 386 749 1 057 119 332 302 1 441 442 1 865 405 220 558 ( 346 268) 52 813 167 745 2 665 22 654 ( 368 922) 2 568 ( 87 198) ( 80 263) ( 1) - 1 577 466 1 441 442 52 021 ( 1 109) ( 27 285) ( 11 454) 12 173 684 759 101 041 ( 73 756) 712 044 12 047 3 983 6 994 1 070 ( 22 562) ( 2 555) 96 485 ( 19 347) 52 021 781 244 ( 515 423) 418 938 684 759 11 914 3 861 6 993 1 060 Liabilities Liabilities in the beginning of the exercise Current service cost Interest cost Plan participants' contribution Contributions from other entities Actuarial (gains) / losses in the period: - Changes in financial assumptions - Experience adjustments (gains) / losses Pensions paid by the fund / transfers and one-off bonuses Early retirement Foreign exchange differences and other Liabilities at end of exercise Of which: Pensioners Assets Pension Funds Fair value of fund assets at beginning of exercise Net return from the fund - Share of the net interest on the assets - Return on assets excluding net interest Plan participants’ contributions Pensions paid by the fund / transfers and one-off bonuses Foreign exchange differences and other Fund balance at the end of the exercise Assets / (liabilities) recognized in the balance sheet In the beginning of the exercise Cost of the exercise Actuarial (gains) / losses recognized in other comprehensive income Other In the end of the exercise Accumulated actuarial losses recognized in other comprehensive income at the beginning of the period Actuarial (gains) / losses in the period: - Changes in assumptions - Financial assumptions - Plan assets return (excluding net interest) Accumulated actuarial losses recognized in other comprehensive income at the end of the exercise Participants in Pension Plan Assets Retirees and survivors Participants under the Clause 98 487 Management Report Sustainability Report Separate Financial Statements Annex Pension fund assets can be analysed as follows: Equity instruments Debt instruments Investment funds Real estate properties Cash and cash equivalents 2023 2022 (thousands of Euros) Quoted Unquoted Total Quoted Unquoted Total - 125 736 125 736 - 63 411 63 411 1 016 302 - 1 016 302 113 019 51 737 164 756 - - 228 483 228 483 42 189 42 189 933 370 137 105 - - - 933 370 53 434 190 539 181 960 181 960 72 162 72 162 Total 1 129 321 448 145 1 577 466 1 070 475 370 967 1 441 442 Pension fund assets used by the Bank or representative of securities issued by the Bank are detailed as follows: Cash and Cash Equivalents Real estate properties Total (thousands of Euros) 2023 21 408 39 965 61 373 2022 63 802 39 056 102 858 The key actuarial assumptions used to calculate retirement pension and health-care liabilities are identical and are as follows: Actuarial Assumptions Projected rate of return on plan assets Discount rate Pension increase rate Salary increase rate Mortality table men Mortality table women 2023 2022 Assumptions Actual Actual Verified 3,45% 3,45% 0,75% 1,00% 15,87% - 4,36% 5,71% 4,00% 4,00% 0,75% 1,00% -18,92% - 1,41% 2,54% TV 88/90 TV 88/90-3 years TV 88/90 TV 88/90-3 years Disability decreases are not considered in the calculation of the liabilities. The determination of the discount rate as of 31 December 2023 and 2022 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 2023 and 2022, 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: Assumptions Change in the amount of liabilities due to the change: 2023 2022 of +0.25% in the rate used of -0.25% in the rate used of +0.25% in the rate used of -0.25% in the rate used ( 47 335) 9 569 46 928 49 852 ( 9 256) ( 44 874) ( 41 268) 6 809 43 853 43 438 ( 6 577) ( 41 917) +1 year -1 year +1 year -1 year Discount rate Salary increase rate Pension increase rate Mortality table ( 49 394) 49 118 ( 40 699) 40 314 The costs of retirement pensions and health benefits for the exercises ended 31 December 2022 and 2021 can be analysed as follows: 488 Current service cost (a) Net interest Early retirement (a) Post-employment benefit costs (a) recognised in Staff expenses (see Note 14) Annual Report 2023 | novobanco (thousands of Euros) 2023 89 1 020 - 1 109 2022 - 2 292 263 2 555 In 2023, the value of early retirements amounted to Euro 11.2 million (31 December 2022: Euro 19.4 million), which Euro 11.2 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 29). The average duration of the defined benefit plan liabilities is approximately 13 years (as of 31 December 2022: approximately 13 years). Career Bonuses As of 31 December 2023, the liabilities assumed by the Bank amounted to Euro 6,474 thousand, corresponding to the liabilities for past services subjacent to the career bonuses, as described in Note 6.22 – Employee benefits (31 December 2022: Euro 5,506 thousand) (see Note 30). As of December 31, 2023, costs of Euro 1,231 thousand euros were recognized for career premiums (on December 31, 2022, no costs for career premiums were recognized) (see Note 13). Note 15 – Other Administrative Expenses The breakdown of this caption is as follows: Rentals Advertising Communication Maintenance and repairs expenses Travelling and representation Transportation of valuables Insurance IT services Independent work Temporary work Electronic payment systems Legal costs Consultancy and audit fees Water, energy and fuel Consumables Other costs (thousands of Euros) 2023 7 088 5 471 7 836 7 577 2 421 2 663 4 885 2022 5 896 4 884 8 782 7 918 2 050 2 630 5 955 43 563 41 606 2 252 703 13 937 7 392 41 316 1 393 1 570 2 147 1 271 11 359 6 447 26 998 2 712 1 484 23 124 20 770 173 191 152 909 The caption Other costs includes, amongst others, specialized service costs incurred with security and surveillance, information services, training and sundry external supplies. As of December 31, 2023, rental costs include an amount of Euro 683 thousand related to short-term operating lease contracts (December 31, 2022: Euro 704 thousand), as described in note 6.19. The fees invoiced during the exercises 2023 and 2022 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: 489 Management Report Sustainability Report Separate Financial Statements Annex Statutory Audit of annual accounts Other reliability assurance services Total value of billable services (thousands of Euros) 2023 1 500 1 884 3 384 2022 1 326 1 177 2 503 Note 16 - Contributions to resolution funds and deposit guarantee schemes As of 31 December 2023 and 2022, this caption is analysed as follows: Contribution to the Single Resolution Fund Contribution to the National Resolution Fund Contribution to the Deposit Guarantee Fund (thousands of Euros) 2023 14 877 6 947 55 704 77 528 2022 24 416 16 017 284 40 717 In the context of annual periodic contributions to the Deposit Guarantee Fund (DGF), novobanco undertook irrevocable commitments, according to article 161, nº4, of the General Regime of Credit Institutions and Financial Companies ("RGICSF"), related to part of these contributions, with the commitment to make the respective payment when the DGF requested it. At the end of the 2023 financial year, and at the indication of this institution, the Bank proceeded to pay the entire value of the commitments assumed, amounting to 55,462 thousand euros, and recognized this amount as costs of the year. Additionally, the Bank has irrevocable commitments amounting to 20,143 thousand euros related with contributions to the single Resolution Fund, resulting from the option to make part of the annual contributions through a collateral deposit. Note 17 – Impairment As of 31 December 2023 and 2022, this caption is analysed as follows: Provisions net of cancellations (see Note 29) Provisions for guarantees and for commitments Other provisions Impairments or reversal of impairments on financial assets not measured at fair value through profit or loss (see Note 20) Securities at fair value through other comprehensive income Securities at amortized cost Loans and advances to banks Loans and advances to customers Impairments or reversal of impairments for investments in subsidiaries, joint ventures and associates (see Note 22) Impairments or reversal of impairments on non-financial assets Non-current assets held for sale and Discontinued operations (see Note 27) Tangible fixed assets (see Note 23) Other assets (see Note 26) (thousands of Euros) 2023 2022 23 305 10 894 ( 434) ( 2 555) 23 739 13 449 142 022 103 265 ( 352) ( 457) 32 956 67 324 ( 6) ( 471) 109 424 36 869 ( 12 216) ( 16 166) ( 6 353) ( 14 081) 14 425 ( 623) ( 1 014) ( 1 696) ( 19 764) ( 11 762) 146 758 83 912 490 Annual Report 2023 | novobanco Note 18 – Cash, Cash Balances at Central Banks and Other Demand Deposits As of 31 December 2023 and 2022, this caption is analysed as follows: Cash Demand Deposits in central banks Bank of Portugal Other Central Banks Deposits in other domestic credit institutions Repayable on demand Uncollected checks Deposits with banks abroad Repayable on demand (thousands of Euros) 2023 2022 171 006 176 797 5 374 612 5 942 501 5 365 346 5 936 640 9 266 5 861 107 563 179 460 27 720 20 331 79 843 159 129 89 418 88 537 89 418 88 537 5 742 599 6 387 295 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 277.6 million (31 December 2022: Euro 275.7 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 and 2023, the average interest rate on these deposits was 0% and 2.00%, respectively. 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 2023 was included in the observation period running from 20 December 2023 to 30 January 2024. 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 19 – FINANCIAL ASSETS AND LIABILITIES HELD FOR TRADING This item as of December 31, 2023 and 2022 is analysed as follows: Financial assets held for trading Bonds and other fixed income securities - Issued by government and public entities Derivatives held for trading with positive fair value Financial liabilities held for trading Derivatives held for trading with negative fair value Securities held for trading The detail of the securities held for trading by fair value hierarchy is described in Note 36. (thousands of Euros) 2023 2022 436 345 170 847 318 528 36 428 117 817 134 419 100 607 99 317 100 607 99 317 491 Management Report Sustainability Report Separate Financial Statements Annex Derivatives As of 31 December 2023 and 2022, this caption is analysed as follows: 2023 2022 Notional Fair value Notional Fair value Buy Sell Asset Liability Buy Sell Asset Liability (thousands of Euros) Trading derivatives Exchange rate contracts 117 817 100 607 11 441 11 414 134 419 99 317 23 145 22 024 Forward 458 622 458 482 7 738 Currency Swaps 718 899 718 684 2 485 7 903 2 293 618 333 616 911 13 563 12 896 760 315 758 406 2 976 Currency Options 86 152 76 649 1 218 1 218 293 418 293 419 6 606 Interest rate contracts 101 098 83 897 102 729 74 413 Interest Rate Swaps 2 771 025 2 771 025 90 173 73 772 2 766 363 2 766 363 97 524 70 120 Interest Rate Caps & Floors Equity / index contracts 337 730 414 502 10 925 10 125 142 992 233 310 5 205 4 293 4 315 4 360 8 256 Equity / Index Options 265 640 265 640 4 315 4 360 422 894 422 894 8 256 Contracts on risk of default Credit Default Swaps - 45 249 Commodities contracts Commodities Swaps 29 082 29 082 - - 963 963 104 104 832 832 - - 15 759 15 759 - - 289 289 a) Derivatives traded on organized markets, whose market value is settled daily against the margin account (see Note 26) 2 522 6 606 2 671 2 671 - - 209 209 Economic hedge derivatives include instruments intended to manage the risk associated with certain financial assets and liabilities designated at fair value through results, in accordance with the accounting policy described in Notes 6.6.6 and 6.6.7, and which the Bank has not designated for hedge accounting. In the exercise of 2023, the Bank recognised a loss of Euro 228 thousand related to the CVA of derivative instruments (31 December 2022: loss of Euro 1 820 thousand). The way of determining the CVA is explained in Note 36. Note 20 – Financial Assets Mandatorily at Fair Value through Profit or Loss, Designated at Fair Value through Profit or Loss, at Fair Value through Other Comprehensive Income and at Amortised Cost As of 31 December 2023 and 2022, this caption is analysed as follows: 2023 (thousands of Euros) Mandatorily at fair value through profit and loss Fair value through profit and loss Fair value through other comprehensive income Amortised cost1 Fair value changes 2 Total 741 446 8 200 570 125 817 - - 23 063 507 ( 83 763) 22 979 744 741 446 31 389 894 ( 83 763) 33 482 267 - - 10 376 706 125 817 Securities 1 434 690 Loans and advances to banks Loans and advances to customers - - 1 434 690 - - - - 1 Includes fair value adjustments resulting from micro-hedging of interest rate risk (see Note 21) 2 Fair value changes of the elements covered by the interest rate hedge portfolio (see Note 21) 492 Annual Report 2023 | novobanco 2022 (thousands of Euros) Mandatorily at fair value through profit and loss Fair value through profit and loss Fair value through other comprehensive income Amortised cost1 Fair value changes 2 Total - - 12 120 932 145 464 Securities 1 537 652 13 2 183 034 8 400 233 Loans and advances to banks Loans and advances to customers - 18 - - - - 145 464 22 955 247 ( 164 388) 22 790 877 1 Includes fair value adjustments resulting from micro-hedging of interest rate risk (see Note 21) 2 Fair value changes of the elements covered by the interest rate hedge portfolio (see Note 21) 1 537 670 13 2 183 034 31 500 944 ( 164 388) 35 057 273 20.1 Securities As of 31 December 2023 and 31 December 2022, the detail of securities portfolio is as follows: Securities mandatorily accounted for at fair value through profit or loss Bonds and other fixed income securities - From other issuers Shares Other securities with variable income Securities at fair value through profit and loss Bonds and other fixed income securities - From other issuers Securities at fair value through other comprehensive income Bonds and other fixed income securities - From public issuers Bonds and other fixed income securities - From other issuers Shares Securities at amortised cost Bonds and other fixed income securities - From public issuers Bonds and other fixed income securities - From other issuers Impairment (thousands of Euros) 2023 2022 1 434 690 1 537 652 465 211 141 460 433 665 140 442 828 019 963 545 - - 13 13 741 446 2 183 034 285 852 1 629 639 389 194 479 406 66 400 73 989 8 200 570 8 400 233 4 402 729 4 403 137 4 122 185 4 288 663 ( 324 344) ( 291 567) 10 376 706 12 120 932 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 6.6.4, 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 36. During this year, the Bank decided, on an exceptional basis, to fully sell a portfolio of supranational debt recorded at amortized cost whose yield was significantly below those observed in the market, within the scope of interest rate risk management, and in line with the Bank's strategy of protecting financial margin in a scenario of falling interest rates as early 493 Management Report Sustainability Report Separate Financial Statements Annex as 2024. Given the exceptionality and non-repeatable nature of the operation, we understand that it is part of the adopted business model. This portfolio consisted of eighteen securities with a duration of around 5 years (not considering call options), which represented around 9.4% (in nominal value) of the total securities portfolio recorded at amortized cost. With this operation, the Bank recognized a loss in the line Gains or losses of financial assets and liabilities not measured at fair value of 70,982 thousand euros in the 2023 financial year, which corresponds to the realization of potential losses on these securities, for the benefit of gains in future margin. As of 31 December 2023 and 2022, the detail of the fair value securities through other comprehensive income is as follows: Cost (1) Fair value reserve Positive Negative Fair value reserve transferred to Results (2) Balance sheet value Impairment reserves (thousands of Euros) Bonds and other fixed income securities - From public issuers 284 159 1 747 ( 54) Residents Non residents - 284 159 - 1 747 - ( 54) - - - 285 852 - 285 852 ( 21) - ( 21) Bonds and other fixed income securities - From other issuers 420 490 775 ( 27 052) ( 5 019) 389 194 ( 190) Shares 130 095 37 168 ( 100 863) Other securities with variable income 3 - ( 3) - - 66 400 - - - Balance as at 31 December 2023 834 747 39 690 ( 127 972) ( 5 019) 741 446 ( 211) (1) Acquisition 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 21) Cost (1) Fair value reserve Positive Negative Fair value reserve transferred to Results (2) Balance sheet value Impairment reserves (thousands of Euros) Bonds and other fixed income securities - From public issuers Residents Non residents 1 634 375 224 013 1 410 362 311 - 311 ( 5 047) ( 486) ( 4 561) - - - 1 629 639 ( 382) 223 527 1 406 112 ( 52) ( 330) Bonds and other fixed income securities - From other issuers 541 022 - ( 49 628) ( 11 988) 479 406 ( 207) Shares 400 636 34 763 ( 361 410) Other securities with variable income 3 - ( 3) - - 73 989 - - - Balance as at 31 December 2022 2 576 036 35 074 ( 416 088) ( 11 988) 2 183 034 ( 589) (1) Acquisition 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 21) During 2023, the Bank sold Euro 1,1152.9 million of financial instruments classified at fair value through other comprehensive income (31 December 2022: Euro 5,909.2 million), with a gain of Euro 5,1 million (31 December 2022: loss of Euro 83,2 million), recorded in the income statement, from the sale of debt instruments and a loss of Euro 258.8 million that were transferred from revaluation reserves to sales-related reserves (31 December 2022: loss of Euro 0.9 million), from the sale of equity instruments. The transfers between stages that occurred in the portfolio of securities at fair value through other comprehensive income and amortised cost during the 2023 and 2022 financial years are presented as follows: 494 Annual Report 2023 | novobanco Transfers between Stage 1 and 2 Transfers between Stage 2 and 3 Transfers between Stage 1 and 3 2023 (thousands of Euros) Bonds and other fixed income securities – Capitals To Stage 2 from Stage 1 To Stage 1 from Stage 2 To Stage 3 from Stage 2 To Stage 2 from Stage 3 To Stage 3 from Stage 1 To Stage 2 from Stage 1 From other issuers 86 586 25 549 29 648 86 586 25 549 29 648 - - - - - - 2022 (thousands of Euros) Transfers between Stage 1 and 2 Transfers between Stage 2 and 3 Transfers between Stage 1 and 3 To Stage 2 from Stage 1 To Stage 1 from Stage 2 To Stage 3 from Stage 2 To Stage 2 from Stage 3 To Stage 3 from Stage 1 To Stage 2 form Stage 1 18 523 18 523 1 405 1 405 - - - - 5 622 5 622 - - Bonds and other fixed income securities – Capitals From other issuers Movements occurring in impairment reserves in securities at fair value through other comprehensive income are presented as follows: Balance as at 31 December 2021 Transfers to stage 3 Increases due to changes in credit risk Decreases due to changes in credit risk Write off Other movements Balance as at 31 December 2022 Increases due to changes in credit risk Decreases due to changes in credit risk Write off Other movements Balance as at 31 December 2023 (thousands of Euros) Impairment movement of securities at fair value through other comprehensive income Stage 1 Stage 2 Stage 3 Total 3 668 ( 20) 2 278 ( 2 715) ( 2 654) 32 589 390 ( 742) ( 22) ( 4) 211 - - - - - - - - - - - - - 20 - ( 20) - - - - - - - - 3 668 - 2 278 ( 2 735) ( 2 654) 32 589 390 ( 742) ( 22) ( 4) 211 495 Management Report Sustainability Report Separate Financial Statements Annex Changes in impairment losses on amortised cost securities are as follows: Balance as at 31 December 2021 6 246 38 283 203 243 247 772 Impairment movement of securities at amortised cost Stage 1 Stage 2 Stage 3 Total (thousands of Euros) Transfers to stage 1 Transfers to stage 2 Transfers to stage 3 Increases due to changes in credit risk Decreases due to changes in credit risk Write off Other movements Balance as at 31 December 2022 Transfers to stage 1 Transfers to stage 2 Transfers to stage 3 Increases due to changes in credit risk Decreases due to changes in credit risk Write off Other movements Balance as at 31 December 2023 ( 40) 61 5 383 1 883 ( 1 784) 76 ( 61) ( 6 357) 15 451 ( 76) 61 - - - 6 357 - - - 173 771 1 687 706 1 876 928 ( 9 993) ( 208 666) ( 1 590 945) ( 1 809 604) - - ( 25 237) ( 25 277) 1 687 1 748 3 373 282 811 291 567 ( 1 883) 1 784 - - - ( 1 654) 1 654 - - - 8 915 11 020 1 631 947 1 651 882 ( 12 254) ( 9 201) ( 1 597 471) ( 1 618 926) ( 153) 1 650 3 640 ( 23) ( 1 649) ( 5) 1 ( 181) 2 1 767 318 937 324 344 In accordance with the accounting policy mentioned on Note 6.12, 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. The detail of the securities portfolio by fair value hierarchy is presented in Note 36. The securities portfolio pledged by the bank are analysed in Note 33. 20.2 Loans and advances to Banks As of 31 December 2023 and 2022, the applications in Loans and advances to Banks are detailed as follows: Loans and advances to banks in Portugal Deposits Loans Loans and advances to banks abroad Deposits Impairment losses (Thousands of Euros) 2023 2022 123 268 103 091 20 177 3 216 3 216 141 042 101 814 39 228 5 096 5 096 126 484 146 138 ( 667) ( 674) 125 817 145 464 The applications in credit institutions are all recorded in the amortised cost portfolio. The movements that occurred with impairment losses on loans and applications in credit institutions are presented as follows: 496 Annual Report 2023 | novobanco Loans and advances to Banks Stage 1 Stage 2 Stage 3 Total (thousands Euros) 284 167 ( 318) ( 42) 91 84 ( 30) 236 ( 322) 1 60 474 391 ( 711) - 154 ( 84) 30 518 ( 438) - 180 425 - - 4 429 - - - - ( 2) 427 1 183 558 ( 1 029) ( 38) 674 - - 754 ( 760) ( 1) 667 Balance as at 31 December 2021 Increases due to changes in credit risk Decreases due to changes in credit risk Other movements Balance as at 31 December 2022 Transfers to stage 1 Transfers to stage 2 Increases due to changes in credit risk Decreases due to changes in credit risk Other movements Balance as at 31 December 2023 20.3 Loans and advances to customers As of 31 December 2023 and 2022, the detail of loans to customers is presented as follows: Loans and advances - Corporate Current account loans Loans Discounted bills Factoring Overdrafts Financial leases Other loans and advances Loans and advances - Individuals Residential Mortgage loans Consumer credit and other loans Overdue loans and advances and interests Under 90 days Over 90 days Impairment losses Fair value adjustments of interest rate hedges (See Note 21) Corporate - Loans Individual - Residential Mortgage loans (thousands of Euros) 2023 2022 13 323 794 13 788 661 1 337 068 1 127 247 10 407 895 11 002 049 71 736 86 552 816 137 699 780 13 671 46 698 656 298 796 669 20 989 29 666 10 311 600 9 886 021 8 829 426 8 622 198 1 482 174 1 263 823 364 104 338 150 27 108 11 943 336 996 326 207 23 999 498 24 012 832 ( 935 991) (1 057 567) 23 063 507 22 955 265 ( 83 763) ( 164 388) - ( 16 805) ( 83 763) ( 147 583) 22 979 744 22 790 877 As of December 31, 2023, there are transactions mandatorily recorded at fair value through results, with a nominal value of Euro 13,090 thousand and a fair value of Euro 0 thousand (December 31, 2022: 31,197 thousand euros and 18 thousand euros, respectively), the impact of which was recorded in the line Gains or losses with financial assets mandatorily accounted for at fair value through results of the income statement (see Note 10). As of December 31, 2023, the caption of loans to customers includes Euro 7,442.1 million (December 31, 2022: Euro 6,078.4 million) of mortgage credit affecting the issue of mortgage bonds (see Note 28). 497 Management Report Sustainability Report Separate Financial Statements Annex As of December 31, 2023, the value of the interest and fees recorded in the balance sheet related to credit operations amounts to 92,071 thousand euros (December 31, 2022: Euro 36,145 thousand). As of 31 December 2023 and 2022, the transfers between stages that occurred in credit is as follows: Transfers between Stage 1 and 2 2023 Transfers between Stage 2 and 3 Transfers between Stage 1 and 3 (thousands of Euros) To Stage 2 from Stage 1 To Stage 1 from Stage 2 To Stage 3 from Stage 2 To Stage 2 from Stage 3 To Stage 3 from Stage 1 To Stage 2 from Stage 1 Loans – Capitals Corporate loans 914 537 725 009 171 692 104 562 Loans to individuals 467 522 248 122 49 455 26 866 1 382 059 973 131 221 147 131 428 70 630 24 685 95 315 314 4 434 4 748 (thousands of Euros) Transfers between Stage 1 and 2 Transfers between Stage 2 and 3 Transfers between Stage 1 and 3 To Stage 2 from Stage 1 To Stage 1 from Stage 2 To Stage 3 from Stage 2 To Stage 2 from Stage 3 To Stage 3 from Stage 1 To Stage 2 from Stage 1 2022 Loans – Capitals Corporate loans 548 205 510 364 Loans to individuals 386 142 306 701 81 931 35 570 40 297 40 507 29 605 8 638 934 347 817 065 117 501 80 804 38 243 2 250 22 636 24 886 Changes in credit impairment losses are presented as follows: Impairment movements of loans and advances to customers Stage 1 Stage 2 Stage 3 Total (thousands of Euros) Balance as at 31 December 2021 62 056 317 271 856 430 1 235 757 Transfers to stage 1 Transfers to stage 2 Transfers to stage 3 72 212 ( 72 212) - ( 18 735) 47 083 ( 28 348) ( 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) Write off Other movements - ( 38) ( 197 122) ( 197 160) 16 853 ( 786) ( 7 115) 8 952 Balance as at 31 December 2022 61 024 296 696 699 847 1 057 567 Transfers to stage 1 Transfers to stage 2 Transfers to stage 3 Financial assets derecognised 143 939 ( 143 939) - ( 46 756) 85 304 ( 38 548) ( 33 502) 33 685 ( 183) ( 123) ( 188) ( 75 114) ( 75 425) - - - Increases due to changes in credit risk 11 891 167 453 124 784 304 128 Decreases due to changes in credit risk ( 110 032) ( 39 202) ( 45 470) ( 194 704) Write off Other movements - ( 31) ( 154 738) ( 154 769) 2 366 ( 2 376) ( 796) ( 806) Balance as at 31 December 2023 62 126 330 215 543 650 935 991 Loans to customers distribution by type of rate is as follows 498 Fixed rate Variable rate An analysis of finance lease loans, by residual maturity period, is presented as follows: Gross investment in finance leases receivable Up to 1 year 1 to 5 years More than 5 years Interest due from finance leases Up to 1 year 1 to 5 years More than 5 years Capital due Up to 1 year 1 to 5 years More than 5 years Impairment Annual Report 2023 | novobanco (thousand of Euros) 2023 2022 3 407 936 2 710 318 20 507 799 21 138 126 23 915 735 23 848 444 (thousand of Euros) 2023 2022 768 608 915 702 228 441 216 621 418 850 496 962 121 317 202 119 100 061 31 620 52 892 15 549 97 481 26 238 54 097 17 146 668 547 818 221 196 821 190 383 365 958 442 865 105 768 184 973 ( 66 291) ( 84 922) 602 256 733 299 As of December 31, 2023 and 2022, the detail of the gross credit exposure value and impairment assessed individually and collectively, by segment, was as follows: 2023 (thousands of Euros) Segment Individual Evaluation(1) Collective Evaluation (2) Total Exposure Impairment Exposure Impairment Exposure Impairment Corporate 861 977 412 884 12 787 971 341 207 13 649 948 754 091 Stage 1 Stage 2 Stage 3 - - - - 10 125 185 2 610 902 42 852 10 125 185 42 852 270 423 2 610 902 270 423 861 977 412 884 51 884 27 932 913 861 440 816 Mortgage loans 274 120 8 752 072 63 443 8 752 346 63 563 Stage 1 Stage 2 Stage 3 - - - - 7 985 953 682 770 3 467 7 985 953 35 209 682 770 274 120 83 349 24 767 83 623 3 467 35 209 24 887 Other Credit to Individuals 52 005 49 058 1 461 436 69 279 1 513 441 118 337 Stage 1 Stage 2 Stage 3 - - - - 1 091 116 312 597 14 590 1 091 116 26 970 312 597 52 005 49 058 57 723 27 719 109 728 14 590 26 970 76 777 Total 914 256 462 062 23 001 479 473 929 23 915 735 935 991 (1) Loans whose final impairment has been determined and approved by the Impairment Committee (2) Loans whose final impairment was determined in accordance with the calculation rules of the collective impairment model 499 Management Report Sustainability Report Separate Financial Statements Annex Segment Individual Evaluation(1) Collective Evaluation (2) Total Exposure Impairment Exposure Impairment Exposure Impairment 1 095 291 549 032 12 983 009 330 599 14 078 300 879 631 2022 (thousands of Euros) - 1 587 - 10 082 118 43 347 10 082 118 392 2 854 536 259 527 2 856 123 1 093 704 548 640 46 355 27 725 1 140 059 Mortgage loans 3 443 385 8 480 691 44 504 8 484 134 43 347 259 919 576 365 44 889 3 213 18 826 22 850 - - 3 443 80 441 - - - - 7 714 906 679 096 385 86 689 3 213 7 714 906 18 826 22 465 679 096 90 132 74 467 1 205 569 58 580 1 286 010 133 047 - - 987 539 173 264 44 766 14 462 18 134 25 984 987 539 173 264 125 207 14 462 18 134 100 451 80 441 74 467 1 179 175 623 884 22 669 269 433 683 23 848 444 1 057 567 Corporate Stage 1 Stage 2 Stage 3 Stage 1 Stage 2 Stage 3 Other Credit to Individuals Stage 1 Stage 2 Stage 3 Total (1) Loans whose final impairment has been determined and approved by the Impairment Committee (2) Loans whose final impairment was determined in accordance with the calculation rules of the collective impairment model In the case of credits analysed by the Impairment Committee for which the impairment determined automatically by the Impairment Model was not changed, they are included and presented in the "Collective Assessment”. As of December 31, 2023 and 2022, the detail of the gross credit exposure value and impairment assessed individually and collectively, by geography, was as follows: 2023 (thousand of Euros) Country Individual evaluation* Collective Evaluation** Total Portugal Spain United Kingdom France Switzerland Luxembourg Others Total Exposure Impairment Exposure Impairment Exposure Impairment 789 180 399 754 19 140 526 424 999 19 929 706 824 753 - - - - - - - - - - 1 099 284 424 101 385 583 234 451 334 695 15 187 6 292 3 626 2 418 1 383 1 099 284 424 101 385 583 234 451 334 695 15 187 6 292 3 626 2 418 1 383 125 077 62 308 1 382 839 20 025 1 507 916 82 333 914 257 462 062 23 001 479 473 930 23 915 736 935 992 * Credits whose impairment results from individual analysis (defined and approved by the Impairment Committee) ** Credits whose impairment was evaluated collectively and determined automatically by the Impairment Model. 2022 (thousand of Euros) Country Individual evaluation* Collective Evaluation** Total Portugal Spain United Kingdom France Switzerland Luxembourg Others Total Exposure Impairment Exposure Impairment Exposure Impairment 1 091 599 570 194 19 319 288 381 306 20 410 887 951 500 2 - - - - 1 - - - - 943 137 380 798 360 053 237 023 280 338 12 445 13 933 4 258 2 167 1 973 943 139 380 798 360 053 237 023 280 338 87 574 53 689 1 148 632 17 601 1 236 206 12 446 13 933 4 258 2 167 1 973 71 290 1 179 175 623 884 22 669 269 433 683 23 848 444 1 057 567 * Credits whose impairment results from individual analysis (defined and approved by the Impairment Committee) ** Credits whose impairment was evaluated collectively and determined automatically by the Impairment Model. 500 Annual Report 2023 | novobanco As of December 31, 2023 and 2022, the detail of the gross credit exposure value and impairment by segment was as follows: Segment Perfoming With Delay > 30 days Total Performing or with Delay < 30 days (thousands of Euros) 2023 Non-Perfoming Days late <= 90 days > 90 days Total Total Gross Value Corporate 22 713 779 94 744 22 808 523 632 481 474 731 1 107 212 23 915 735 12 701 866 34 221 12 736 087 538 009 375 852 913 861 13 649 948 Mortgage Loans 8 620 185 48 928 8 669 113 40 727 42 506 83 233 8 752 346 Other loans to Individuals 1 391 728 11 595 1 403 323 53 745 56 373 110 118 1 513 441 Impairment Corporate 387 086 5 255 392 341 284 475 259 175 543 650 935 991 312 566 709 313 275 230 434 210 382 440 816 754 091 Mortgage Loans Other loans to Individuals 40 700 33 820 2 466 2 080 43 166 35 900 10 204 10 193 20 397 43 837 38 600 82 437 63 563 118 337 Net Value 22 326 693 89 489 22 416 182 348 006 215 556 563 562 22 979 744 Segment Performing or With Delay < 30 days Performing With Delay > 30 days Total 2022 Non-Performing Days late <= 90 days > 90 days (thousand of Euros) Total of Credit Total Gross Value Corporate 22 423 330 69 734 22 493 064 814 923 540 457 1 355 380 23 848 444 12 906 116 32 143 12 938 259 714 541 425 500 1 140 041 14 078 300 Mortgage Loans 8 367 083 29 490 8 396 573 46 635 40 926 87 561 8 484 134 Other loans to Individuals Impairment Corporate Mortgage Loans Other loans to Individuals 1 150 131 351 119 299 681 23 506 27 932 8 101 6 782 3 585 1 617 1 580 1 158 232 53 747 74 031 127 778 1 286 010 357 901 372 302 327 364 699 666 1 057 567 303 266 318 183 258 182 576 365 25 123 29 512 10 845 8 921 19 766 43 274 60 261 103 535 879 631 44 889 133 047 Net Value 22 072 211 62 952 22 135 163 442 621 213 093 655 714 22 790 877 As of December 31, 2023 and 2022, the detail of the credit portfolio by segment and by reference year was as follows: 501 Management Report Sustainability Report Separate Financial Statements Annex Corporate Mortgage Other Loans to Individuals Total Number of operations Amount Impairment Number of operations Amount Impairment Number of operations Amount Impairment Number of operations Amount Impairment 2023 (thousands of Euros) 3 870 268 211 9 863 45 544 676 845 8 202 1 024 738 61 502 2 377 1 074 152 1 006 558 20 442 653 21 592 7 029 4 105 139 297 1 061 15 649 6 781 717 96 083 7 629 5 995 226 840 1 466 18 605 6 411 922 167 897 29 533 9 049 342 107 2 342 27 719 9 458 986 310 485 10 889 8 631 368 690 2 016 20 719 9 712 258 287 432 315 20 407 167 670 8 348 25 317 329 334 9 382 37 690 519 462 32 307 30 336 688 887 13 220 815 107 450 10 444 6 641 310 392 2 260 14 721 16 739 9 168 22 177 434 581 21 872 836 103 616 15 136 6 474 329 400 2 466 22 230 18 925 1 071 74 602 8 287 3 329 147 677 1 371 135 766 24 773 1 624 61 201 794 562 1 501 260 143 35 122 2 072 99 546 1 081 27 639 9 113 1 178 120 403 28 819 1 374 71 625 1 825 423 201 51 185 2 168 124 210 583 561 24 788 12 747 315 322 29 540 451 941 17 917 29 188 235 026 9 403 30 927 10 653 400 33 922 207 620 25 735 26 772 8 196 498 622 31 212 368 802 36 701 29 324 200 224 30 024 30 876 23 409 14 752 34 869 570 820 66 498 2 138 347 782 38 943 4 577 283 108 1 616 45 235 44 819 20 767 51 950 675 709 61 326 3 842 476 168 32 939 6 956 501 783 3 122 47 209 37 902 5 718 100 343 1 015 853 41 779 4 962 779 567 64 798 7 762 660 931 2 870 55 222 65 923 4 133 67 946 1 506 421 71 801 7 363 1 222 815 98 181 8 049 727 546 3 743 63 278 114 668 7 994 78 690 2 065 029 109 918 9 363 1 361 378 40 517 5 954 567 666 3 254 42 970 94 219 4 889 58 287 2 023 263 48 660 6 779 1 621 416 23 937 6 867 741 982 4 301 64 336 174 835 9 507 77 982 2 538 233 37 745 10 732 3 276 316 114 536 8 796 1 089 910 4 020 100 946 315 221 16 686 120 474 4 681 447 135 242 15 896 2 475 057 101 531 10 046 1 281 590 17 243 148 443 472 208 18 897 174 385 4 228 855 137 671 76 820 13 649 948 754 091 156 013 8 752 346 63 563 1 853 022 1 513 441 118 337 2 128 191 23 915 735 935 991 Corporate Mortgage Other Loans to Individuals Total Number of operations Amount Impairment Number of operations Amount Impairment Number of operations Amount Impairment Number of operations Amount Impairment 2022 (thousands of Euros) 3 627 227 417 31 575 52 397 787 292 6 745 698 312 10 982 ( 173) 754 336 1 025 691 38 147 621 26 979 2 914 4 520 159 082 1 077 9 163 6 341 242 14 304 192 402 4 233 733 147 139 31 412 6 552 255 933 1 719 11 333 6 491 260 18 618 409 563 33 391 866 194 270 40 847 9 981 389 134 3 375 17 891 8 467 930 343 977 14 122 9 695 421 363 2 819 17 016 6 983 399 274 28 738 591 871 44 621 27 641 772 323 17 215 740 133 329 12 768 7 532 356 920 2 479 9 919 15 327 9 765 18 191 505 576 25 012 781 127 631 26 623 7 197 380 456 2 685 15 158 18 510 375 23 136 526 597 29 683 846 98 075 14 913 3 825 169 886 888 17 214 11 834 298 21 885 279 795 16 099 1 024 158 404 29 806 2 063 74 162 785 23 003 10 125 1 362 322 549 58 136 2 480 113 585 1 318 21 984 9 324 455 564 642 26 090 242 691 31 046 25 826 445 458 60 018 22 718 297 854 53 557 1 331 204 112 52 263 1 566 81 895 1 962 492 473 67 776 2 412 141 877 652 727 19 821 11 847 22 760 50 177 40 867 27 134 684 527 109 370 2 680 459 603 50 837 5 029 323 792 1 470 36 742 53 456 21 727 44 451 836 851 74 034 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 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 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 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 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 14 671 3 666 821 78 307 8 940 1 149 918 1 464 77 519 403 380 16 707 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 Reference year 2004 and previous 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 Total Reference year 2004 and previous 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 Total The values presented include, in addition to all new operations for the reference year, renewals, interventions, and restructurings of operations originated in previous years, including the period prior to the establishment of novobanco. 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 time of granting the credit and is periodically re-evaluated. The following is the gross value of credits and their respective fair value of collaterals, limited to the value of the associated credit: 502 Annual Report 2023 | novobanco 2023 (thousands of Euros) 2022 Loan Value Impairment Net Value Fair value of collateral Loan Value Impairment Net Value Fair value of collateral 8 752 346 ( 63 563) 8 688 783 8 753 664 8 484 134 ( 44 889) 8 439 245 8 383 312 7 603 115 ( 2 908) 7 600 207 7 695 522 7 429 201 ( 3 017) 7 426 184 7 429 201 323 439 59 399 ( 93) ( 466) 323 346 317 885 58 933 - 210 610 75 095 ( 71) ( 125) 210 539 203 912 74 970 - 622 063 ( 17 304) 604 759 621 258 644 671 ( 16 762) 627 909 643 353 38 945 21 762 ( 788) ( 17 117) 38 157 4 645 38 039 - 21 188 13 237 ( 699) ( 1 365) 20 489 11 872 19 797 - 79 262 ( 20 467) 58 795 78 926 87 312 ( 22 346) 64 966 87 016 2 189 2 172 ( 796) ( 3 624) 1 393 ( 1 452) 2 034 - 33 2 787 ( 12) ( 492) 21 2 295 33 - 8 304 440 ( 40 679) 8 263 761 8 395 706 8 161 184 ( 42 125) 8 119 059 8 159 570 364 573 ( 1 677) 362 896 357 958 231 831 ( 782) 231 049 223 742 Mortgage loans Stage 1 Mortgages Pledges Not collateralized Stage 2 Mortgages Pledges Not collateralized Stage 3 Mortgages Pledges Not collateralized Total Mortgages Pledges Not collateralized 83 333 ( 21 207) 62 126 - 91 119 ( 1 982) 89 137 - Other Loans to individuals 1 513 441 ( 118 337) 1 395 104 536 474 1 286 010 ( 133 047) 1 152 963 399 870 Stage 1 Mortgages Pledges 297 223 101 516 ( 190) ( 743) 297 033 297 049 100 773 100 629 241 787 91 867 ( 330) ( 1 081) 241 457 241 434 90 786 91 047 Not collateralized 692 377 ( 13 657) 678 720 - 653 885 ( 13 051) 640 834 - Stage 2 Mortgages Pledges 109 566 ( 3 274) 106 292 109 338 11 490 ( 783) 10 707 11 324 44 122 4 821 ( 1 109) ( 239) 43 013 4 582 Not collateralized 191 541 ( 22 913) 168 628 - 124 321 ( 16 786) 107 535 Stage 3 Mortgages Pledges 6 935 ( 2 243) 38 776 ( 36 641) 4 692 2 135 6 545 11 589 5 994 ( 2 035) 66 953 ( 61 799) 3 959 5 154 Not collateralized 64 017 ( 37 893) 26 124 - 52 260 ( 36 617) 15 643 43 769 4 630 - 5 562 13 428 - Total Mortgages Pledges 413 724 ( 5 707) 408 017 412 932 291 903 ( 3 474) 288 429 290 765 151 782 ( 38 167) 113 615 123 542 163 641 ( 63 119) 100 522 109 105 Not collateralized 947 935 ( 74 463) 873 472 - 830 466 ( 66 454) 764 012 - Corporate loans Stage 1 Mortgages Pledges 13 649 948 ( 754 091) 12 895 857 4 563 562 14 078 300 ( 879 631) 13 198 669 4 100 011 2 607 201 ( 11 136) 2 596 065 2 432 250 2 053 125 ( 12 881) 2 040 244 1 839 860 1 680 498 ( 5 183) 1 675 315 769 949 1 691 145 ( 5 851) 1 685 294 701 387 Not collateralized 5 837 486 ( 26 533) 5 810 953 - 6 337 848 ( 24 615) 6 313 233 - Stage 2 Mortgages Pledges 829 829 ( 75 018) 754 811 734 720 890 069 ( 88 368) 801 701 800 854 530 063 ( 74 841) 455 222 229 090 573 690 ( 93 599) 480 091 294 167 Not collateralized 1 251 010 ( 120 564) 1 130 446 - 1 392 364 ( 77 952) 1 314 412 - Stage 3 Mortgages Pledges 365 360 ( 147 620) 217 740 327 322 457 887 ( 220 793) 237 094 366 273 149 078 ( 78 345) 70 733 70 231 190 047 ( 82 518) 107 529 97 470 Not collateralized 399 423 ( 214 851) 184 572 - 492 125 ( 273 054) 219 071 - Total Mortgages Pledges 3 802 390 ( 233 774) 3 568 616 3 494 292 3 401 081 ( 322 042) 3 079 039 3 006 987 2 359 639 ( 158 369) 2 201 270 1 069 270 2 454 882 ( 181 968) 2 272 914 1 093 024 Not collateralized 7 487 919 ( 361 948) 7 125 971 - 8 222 337 ( 375 621) 7 846 716 - Total 23 915 735 ( 935 991) 22 979 744 13 853 700 23 848 444 ( 1 057 567) 22 790 877 12 883 193 503 Management Report Sustainability Report Separate Financial Statements Annex The difference between the credit value and the fair value of the collateral represents the total credit exposure that exceeds the value of the collateral; this value is not impacted by collaterals with a fair value higher than the credit they are associated with. The detail of the collaterals - mortgages is presented as follows: 2023 (thousands of Euros) Collateral ranges a) Mortgage loans Other loans to individuals Corporate loans Total Number Amount Number Amount Number Amount Number Amount less than 0.5M€ 148 382 7 991 213 10 408 394 112 8 718 435 465 167 508 8 820 790 greater than 0.5M€ and less than 1.0M€ greater than 1.0M€ and less than 5.0M€ greater than 5.0M€ and less than 10.0M€ greater than 10.0M€ and less than 20.0M€ greater than 20.0M€ and less than 50.0M€ greater than 50M€ 448 283 743 18 10 460 2 307 233 075 2 773 527 278 80 120 750 5 8 360 5 980 731 752 6 065 860 862 - - - - - - - - - - - - - - - - 1 354 685 934 1 354 685 934 1 474 717 152 1 474 717 152 4 128 476 884 4 128 476 884 1 609 214 030 1 609 214 030 148 910 8 395 706 10 431 412 932 25 570 3 494 292 184 911 12 302 930 a) The allocation by intervals was carried out based on the total value of collateral per credit contract. 2022 (thousands of Euros) Collateral ranges a) Mortgage loans Other loans to individuals Corporate loans Total Number Amount Number Amount Number Amount Number Amount less than 0.5M€ 157 859 7 837 881 6 635 273 580 18 414 440 729 182 908 8 552 190 greater than 0.5M€ and less than 1.0M€ greater than 1.0M€ and less than 5.0M€ greater than 5.0M€ and less than 10.0M€ greater than 10.0M€ and less than 20.0M€ greater than 20.0M€ and less than 50.0M€ greater than 50M€ 367 228 517 65 93 172 - - - - - - - - 13 4 - - - - 8 659 2 364 238 296 2 744 475 472 8 526 9 816 717 599 9 885 819 297 - - - - 1 904 539 832 1 904 539 832 134 399 451 134 399 451 5 717 401 813 5 717 401 813 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 carried out based on the total value of collateral per credit contract. The collaterals values - mortgages, presented above, represent the maximum coverage value of the covered assets, that is, their contribution up to the gross value of the individual credits covered. In assessing the risk of an operation or set of operations, the elements of credit risk mitigation associated with them are taken into account, in accordance with internal rules and procedures. The relevant collaterals are essentially the following: • Real estate, where the value considered corresponds to the last available appraisal; • Financial pledges, where the value considered corresponds to the quotation on the last day of the month, in the case of a listed security, or the value of the pledge, in the case of being cash. The acceptance of collaterals as a guarantee for credit operations refers to the need to define and implement techniques to mitigate the risks to which these collaterals are exposed. Thus, as an approach to this matter, the Group has stipulated a set of procedures applicable to collaterals (particularly 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. 504 Annual Report 2023 | novobanco The internal norms of credit powers thus have a specific chapter on this point, "Acceptance of collaterals - techniques for mitigating the risks to which collaterals are exposed, namely liquidity and volatility risks.". The process of re-evaluating real estate is carried out by appraisers registered with the CMVM, based on the evaluation methods described in Note 7.6. Restructured credit The Bank identifies and marks restructured credit contracts due to financial difficulties of the client whenever there are changes to the terms and conditions of a contract in which the client has defaulted, i.e., it is foreseeable that they will default, on a financial obligation. It is considered that there is a change in the terms and conditions of the contract when: (i) there are contractual changes that benefit the client, such as extension of the deadline, introduction of grace periods, rate reduction or partial debt forgiveness; (ii) there is a new credit operation contracted to settle the existing debt (total or partial). or (iii) the new terms of the contract are more favorable than those applied to other clients with the same risk profile. The remarking of a credit restructured due to financial difficulties of the client can only occur after a minimum period of two years from the date of restructuring, provided that the following conditions are cumulatively met: (i) regular payment of principal and interest; (ii) the client has no due principal or interest; and (iii) there have been no debt restructuring mechanisms by the client during that period. As of 31 December 2023 and 2022, the values of credit restructured due to the client's financial difficulties is as follows: Corporate Loans Mortgage Loans Other Loans to Individuals Total (thousands of Euros) 2023 2022 1 044 134 1 180 626 157 699 56 308 162 891 81 378 1 258 141 1 424 895 Loans marked as restructured due to financial difficulties include loans that are currently performing, classified in stage 2, and that are in the curing period for deselection. The detail of the restructuring measures applied to the restructured credits as of 31 December 2023 and 2022 is analysed as follows: 505 Management Report Sustainability Report Separate Financial Statements Annex 2023 (thousands of Euros) Issue Performing Non - Performing Total Number of operations Exposure Impairment Number of operations Expossure Impairment Number of operations Exposure Impairment Forgiveness of capital or interest Assets received for partial credit settlement Interest capitalization New credit for total or partial settlement of existing debt 39 22 15 9 441 1 027 471 164 49 67 406 41 693 88 76 847 42 164 6 3 780 3 044 28 4 807 3 208 5 010 824 112 48 582 32 057 127 53 592 32 881 1 112 191 072 15 436 557 131 945 69 422 1 669 323 017 84 858 Extension of repayment term 1 390 225 031 35 481 438 254 671 108 304 1 828 479 702 143 785 Introduction of grace period for capital or interest 903 138 141 13 300 113 38 607 20 906 1 016 176 748 34 206 Reduction of interest rates 414 69 762 4 571 85 22 888 9 130 499 92 650 13 701 Change of lease payment plan 103 13 509 458 61 5 797 2 522 164 19 306 2 980 Change in the periodicity of interest payments Others Total 5 1 837 1 408 21 936 257 478 3 388 243 8 2 225 500 281 7 311 2 459 1 689 29 247 2 937 5 411 676 766 71 440 1 705 581 375 289 780 7 116 1 258 141 361 220 Measure Performing Non - Performing Total Number of operations Exposure Impairment Number of operations Exposure Impairment Number of operations Exposure Impairment 2022 (thousands of Euros) Forgiveness of capital or interest 41 13 990 Assets received for partial credit settlement Interest capitalization 23 16 1 068 901 164 61 95 035 53 859 102 109 025 54 760 8 146 129 31 1 214 293 4 965 923 87 52 218 29 659 103 57 183 30 582 New credit for total or partial settlement of existing debt 1 028 191 512 14 132 506 177 111 79 690 1 534 368 623 93 822 Extension of repayment term 1 366 262 295 50 333 631 246 792 162 833 1 997 509 087 213 166 Introduction of grace period for capital or interest 809 114 982 6 864 169 71 619 27 336 978 186 601 34 200 Reduction of interest rates 481 40 574 461 Change of lease payment plan 118 16 714 1 637 Change in the periodicity of interest payments 5 2 011 207 39 59 3 76 714 29 588 520 117 288 30 049 9 389 4 517 177 26 103 6 154 674 198 8 2 685 405 Others Total 1 491 34 137 1 035 423 12 949 4 814 1 914 47 086 5 849 5 378 682 248 76 657 1 986 742 647 392 623 7 364 1 424 895 469 280 Note 21 – Derivatives – Hedge Accounting and Fair Value Changes of the Hedged Captions As of 31 December 2023, and 2022, the fair value of the hedging derivatives in the balance sheet is analyzed as follows: Hedging derivatives Assets Liabilities Fair value component of the assets and liabilities hedged for interest rate risk Financial assets at amortised cost Securities Loans and advances to customers Financial assets at fair value through other comprehensive income Securities (*) Financial Liabilities Due to customers * Amount recorded in fair value reserves transferred to results 506 (milhares de euros) 2023 2022 558 117 442 274 683 074 562 886 ( 124 957) ( 120 612) ( 86 317) ( 394 921) ( 143 347) ( 382 933) ( 59 584) ( 218 545) ( 83 763) ( 164 388) ( 5 019) ( 5 019) 62 049 62 049 ( 11 988) ( 11 988) - - Annual Report 2023 | novobanco 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 10). The Bank calculates the “Credit Valuation Adjustment” (CVA) for derivative instruments in accordance with the methodology described in Note 36 - Financial assets and liabilities held for trading. Fair value hedging As of 31 December 2023 and 2022, fair value hedging operations may be analysed as follows: 2023 (thousands of euros) Derivative Hedged item Hedged risk Notional Fair value of derivatives (1) Change in fair value of derivative in period Fair value component of hedged item(2) Change in fair value component of hedged item in period (2) Interest Rate Swap/CIRS Loans and advances to customers Interest rate and exchange rate 1 737 884 96 055 ( 74 442) ( 83 763) Interest Rate Swap Securities at amortized cost Interest rate 3 572 250 256 814 ( 153 096) ( 59 584) Interest Rate Swap Securities at fair value through other comprehensive income Interest rate 130 000 12 480 ( 6 537) ( 5 019) Interest Rate Swap Due to customers Interest rate 1 500 000 56 921 59 482 62 049 6 940 134 422 270 ( 174 593) ( 86 317) 80 569 158 961 6 969 ( 62 049) 184 450 (1) Includes accrued interest (2) Attributable to the hedged risk Derivative Hedged item Hedged risk Notional 2022 (thousands of euros) Fair value of derivatives (1) Change in fair value of derivative in period Fair value component of hedged item(2) Change in fair value component of hedged item in period (2) Interest Rate Swap/CIRS Loans and advances to customers Interest Rate Swap Securities at amortized cost Interest Rate Swap Securities at fair value through other comprehensive income Interest rate and exchange rate Interest rate 1 659 552 165 117 191 565 ( 164 388) ( 196 310) 2 728 250 359 089 214 274 ( 218 545) ( 215 410) Interest rate 100 000 19 140 27 272 ( 11 988) ( 27 298) 4 487 802 543 346 433 111 ( 394 921) ( 439 018) (1) Includes accrued interest (2) Attributable to the hedged risk As of December 31, 2023, the ineffective part of the fair value hedging operations, which resulted in a gain of 9.9 million euros, was recorded by offsetting income (31 December 2022: cost of 5.9 million euros). The Bank periodically conducts tests of the effectiveness of existing hedging relationships. Cash flow hedging As of 31 December 2023 and 2022, the cash flow hedging operations can be analysed as follows: Covered asset Asset book value Notional Derivate book value 2023 (thousands of euros) Cash flow hedge reserve Ineffectiveness value - recorded in results Loans to customers 6 732 000 6 732 000 135 847 92 557 6 732 000 6 732 000 135 847 92 557 10 269 10 269 507 Management Report Sustainability Report Separate Financial Statements Annex 2022 Covered asset Asset book value Notional Derivate book value (thousands of euros) Cash flow hedge reserve Ineffectiveness value - recorded in results Loans to customers 4 732 583 4 732 000 ( 101 072) ( 100 418) 4 732 583 4 732 000 ( 101 072) ( 100 418) ( 881) ( 881) Note 22 – Investments in Subsidiaries, Joint Ventures and Associates Investments in subsidiaries, joint ventures and associates are presented as follows: 2023 2022 (thousands of Euros) Nº of shares Direct participation in capital Nominal value (euros) Acquisition Cost Impairment Net Book value Nº of shares Direct participation of capital Nominal value (euros) Acquisition Cost Impairment Net Book value novobanco dos Açores 2 144 404 57,53% 5,00 10 308 NB Finance 100 000 100,00% 1,00 1 700 - - 10 308 2 144 404 57,53% 5,00 10 308 1 700 100 000 100,00% 1,00 1 700 - - 10 308 1 700 BEST 62 999 800 100,00% 1,00 100 418 ( 13 453) 86 965 62 999 700 100,00% 1,00 100 418 ( 20 755) 79 663 ES Tech Ventures 71 500 000 100,00% 1,00 71 500 ( 44 558) 26 942 71 500 000 100,00% 1,00 71 500 ( 44 559) 26 941 GNB GA 2 350 000 100,00% 5,00 86 720 GNB Concessões 942 306 98,97% 5,00 20 602 - - 86 720 2 350 000 100,00% 5,00 86 720 - 86 720 20 602 942 306 98,96% 5,00 20 602 ( 4 915) 15 687 ES Representações 49 995 99,99% 0,18 9 ( 9) - 49 995 99,99% 0,18 9 ( 9) - Locarent NB África Unicre 525 000 50,00% 5,00 2 967 - 2 967 525 000 50,00% 5,00 2 967 - 2 967 13 300 000 100,00% 5,00 66 500 ( 55 514) 10 986 13 300 000 100,00% 5,00 66 500 ( 55 514) 10 986 350 029 17,50% 5,00 11 497 Edenred Portugal 101 477 601 50,00% 0,01 4 984 - - 11 497 350 029 17,50% 5,00 11 497 4 984 101 477 601 50,00% 0,01 4 984 - - 11 497 4 984 Multipessoal 20 000 22,52% 5,00 100 ( 100) Aroleri Righthour 3 500 100,00% 1,00 10 000 100,00% 1,00 4 - - - - 4 - 20 000 22,52% 5,00 100 ( 100) 3 500 100,00% 1,00 - - - 4 - - - - 4 - 377 309 ( 113 634) 263 675 377 309 ( 125 852) 251 457 The changes in impairment losses for investments in associates are presented as follows: Balance at the beginning of the exercise Increases Decreases Foreign exchange differences Balance at the end of the exercise (thousands of Euros) 2023 2022 125 852 146 478 - ( 12 216) ( 2) 3 255 ( 19 421) ( 4 460) 113 634 125 852 508 Note 23 – Property, Plant and Equipment This caption as of 31 December 2023 and 2022 is analysed as follows: Real estate properties For own use Improvements in leasehold properties Equipment Computer equipment Fixtures Furniture Security equipment Office equipment Transport equipment Other Assets under right of use Real estate properties Equipment Work in progress Improvements in leasehold properties Real estate properties Equipment Others Accumulated impairment Accumulated depreciation The changes in this caption were as follows: Annual Report 2023 | novobanco (thousands of Euros) 2023 2022 160 215 164 915 68 898 91 317 209 208 120 883 18 686 47 256 13 047 8 724 562 50 134 083 112 905 21 178 54 971 7 831 46 854 41 245 558 477 ( 9 361) 79 501 85 414 219 365 113 428 27 503 53 173 16 915 7 702 562 82 122 133 111 518 10 615 57 177 31 376 25 508 16 277 563 590 ( 10 375) ( 248 874) ( 294 252) 300 242 258 963 509 Management Report Sustainability Report Separate Financial Statements Annex Acquisition cost Balance at 31 December 2021 Acquisitions Disposals / write-offs (a) Transfers (b) Foreign exchange differences and other movements Balance at 31 December 2022 Acquisitions Disposals / write-offs (c) Transfers (d) Foreign exchange differences and other movements Real estate properties Equipment Right-of-Use Assets Work in progress Total (thousand of Euros) 299 602 232 349 116 041 11 483 23 811 19 526 ( 145 389) ( 36 693) ( 13 434) ( 781) - ( 101) ( 1) - - 164 915 219 365 122 133 2 504 14 146 21 047 6 452 51 061 ( 15) ( 322) 1 57 177 44 671 654 444 105 881 ( 195 531) ( 1 204) - 563 590 82 368 ( 52 349) ( 24 288) ( 9 097) - ( 85 734) 45 145 - ( 1) ( 14) - - ( 46 870) ( 7) ( 1 726) (21) Balance at 31 December 2023 160 215 209 208 134 083 54 971 558 477 Depreciation Balance at 31 December 2021 Depreciation Disposals / write-offs (a) Transfers (b) Foreign exchange differences and other movements Balance at 31 December 2022 Depreciation Disposals / write-offs (c) Transfers (d) Foreign exchange differences and other movements 180 880 192 397 4 307 12 386 37 677 14 230 ( 107 557) ( 36 242) ( 5 546) ( 390) 2 125 ( 101) 86 79 365 168 526 4 748 12 415 ( 45 819) ( 24 284) ( 879) 840 ( 1) 117 - - 46 361 15 307 ( 7 822) - - Balance at 31 December 2023 38 255 156 773 53 846 Impairment Balance at 31 December 2021 Reversion of impairment losses Balance at 31 December 2022 Reversion of impairment losses Balance at 31 December 2023 12 071 ( 1 696) 10 375 ( 1 014) 9 361 - - - - - - - - - - - - - - - - - - - - - - - - - - 410 954 30 923 ( 149 345) ( 491) 2 211 294 252 32 470 ( 77 925) ( 880) 957 248 874 12 071 ( 1 696) 10 375 ( 1 014) 9 361 Net book value at 31 December 2023 Net book value at 31 December 2022 112 599 75 175 52 435 50 839 80 237 75 772 54 971 57 177 300 242 258 963 (a) Includes 106 395 thousand of euros of fixed assets (real estate and equipment) and 68 164 thousands of euros of accumulated depreciation referring to the Headquarters Building that was sold in 2022 b) Includes 1 203 thousand of euros of fixed assets (real estate and equipment) and 490 thousands of euros of accumulated depreciation referring to discontinued counters that were transferred at net value to the appropriate balance sheet items.' (c) Includes 10 293 thousand of euros of fixed assets (real estate and equipment) and 3 748 thousands of euros accumulated depreciation relating to assets sold to the entity NB Branches. (d) Includes 1.726 thousand of euros of fixed assets (real estate and equipment and 880 thousands of euros accumulated depreciation relating to discontinued branches which were transferred to the appropriate balance sheet items at net value. In 2022 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 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. 510 Note 24 –Intangible Assets This caption as of 31 December 2023 and 2022, is analysed as follows: Internally developed Software - Automatic data processing system Acquired from third parties Software - Automatic data processing system Work in progress Accumulated amortization Annual Report 2023 | novobanco (thousands of Euros) 2022 65 373 65 373 2023 65 373 65 373 404 407 366 444 404 407 366 444 17 958 31 881 ( 401 311) ( 394 058) 86 427 69 640 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 6.20). The changes in this caption were as follows: Acquisition cost Balance as at 31 December 2021 Acquisitions Acquired from third parties Disposals/Write-offs Transfers Foreign exchange differences and other Balance as at 31 December 2022 Acquisitions Acquired from third parties Disposals/Write-offs Transfers Balance as at 31 December 2023 Amortizations Balance as at 31 December 2021 Amortization for the period Disposals/Write-offs Foreign exchange differences and other Balance as at 31 December 2022 Amortization for the period Disposals/Write-offs Balance as at 31 December 2023 Net balance at 31 December 2023 Net balance at 31 December 2022 Automatic data processing system (thousands of Euros) Work in progress Total 445 152 13 410 458 562 6 474 18 686 25 160 ( 20 026) - ( 20 026) 216 1 ( 216) 1 - 2 431 817 31 881 463 698 572 ( 6 155) 43 546 29 623 - ( 43 546) 30 195 ( 6 155) - 469 780 17 958 487 738 391 047 23 038 ( 20 026) ( 1) 394 058 13 408 ( 6 155) 401 311 - - - - - - - - 391 047 23 038 ( 20 026) ( 1) 394 058 13 408 ( 6 155) 401 311 68 469 37 759 17 958 31 881 86 427 69 640 511 Management Report Sustainability Report Separate Financial Statements Annex Note 25 – Taxes The deferred tax assets and liabilities recognised in the balance sheet as of 31 December 2023 and 2022 may be analysed as follow: Current tax Corporate tax recoverable Others Deferred tax 2023 (thousands of Euros) 2022 Assets Liabilities Assets Liabilities 26 260 1 260 25 000 897 381 923 641 4 191 4 044 147 - 4 191 30 298 - 30 298 917 202 947 500 4 505 4 174 331 - 4 505 The deferred tax assets and liabilities recognised in the balance sheet as of 31 December 2023 and 2022 are as follows: Assets Liabilities Net 2023 2022 2023 2022 2023 2022 (thousands of Euros) Financial instruments 94 166 91 249 (52 508) (13 369) 41 658 77 880 Credit impairment (not covered by the special regime) 279 514 330 072 Credit impairment (covered by the special regime) 296 818 295 119 - - - - 279 514 330 072 296 818 295 119 Other tangible assets - - ( 14) ( 76) ( 14) ( 76) Provisions Pensions Reportable tax losses 101 819 100 583 44 586 50 624 133 000 63 000 - - - - - - 101 819 100 583 44 586 50 624 133 000 63 000 Deferred tax asset / (liability) 949 903 930 647 ( 52 522) ( 13 445) 897 381 917 202 Asset / liability set-off for deferred tax purposes ( 52 522) ( 13 445) 52 522 13 445 - - Net Deferred tax asset / (liability) 897 381 917 202 - - 897 381 917 202 As of 31 December 2023, the deferred tax related to temporary differences was determined based on an aggregate rate of 31% resulting from the sum of the general IRC rate (21%), the Municipal Surcharge of 1.5% and an average rate of State Surcharge of 8.5%. On 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 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 31 December 2023, 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. As of 31 December 2023 and 2022, 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 2023, the amounts held by novobanco referring to this situation amount to approximately Euro 55 million (31 December 2022: Euro 57 million). The changes occurred in the deferred tax captions are as follows: (milhares de euros) 512 Balance at the beginning of the exercise Recognised in income statement Recognised in Fair value reserves Conversion of Deferred taxes into Tax credits Annual Report 2023 | novobanco 2023 917 202 10 042 ( 37 610) 7 747 2022 741 321 62 950 79 291 33 640 Balance at the end of the exercise (Assets / (Liabilities)) 897 381 917 202 The current and deferred taxes recognised in the income statement and in reserves, in 2023 and 2022, had the following origins: Financial instruments Impairment losses on loans and advances to customers Other tangible assets Provisions Pensions Tax losses carried forward Deferred taxes Current taxes 2023 (thousands of Euros) 2022 Recognised in the income statement Recognised in reserves Recognised in the income statement ( 1 388) 56 606 ( 62) ( 1 236) 6 038 ( 70 000) ( 10 042) 5 386 37 610 - - - - - 37 610 - 15 825 12 759 ( 7 953) ( 18 491) ( 2 090) ( 63 000) ( 62 950) 4 611 Recognised in reserves ( 79 291) - - - - - ( 79 291) - Total tax recognised (income) / (expense) ( 4 656) 37 610 ( 58 339) ( 79 291) The reconciliation of the corporate income tax rate, for the portion recognised in the income statement, may be analysed as follows: Income before tax Tax rate of novobanco Income tax calculated based on the tax rate of novobanco Tax-exempt dividends Impairment on investments in subsidiaries or associated companies not subject to Participation Exemption Branch Tax and Tax Withheld Abroad Rate differential in the generation / reversal of temporary differences Impairments and provisions for credit Impairments and fair value adjustments of securities Provisions for other risks and charges and contingencies Deferred tax asset not recognized on tax loss for the year Employees long term benefits Extraordinary Contribution and Additional Solidarity over the Banking Sector Deferred taxes on tax losses from previous years Capital gains/losses on asset sales Others Total tax recognized (thousands of Euros) 2023 2022 % Value % Value 796 004 395 491 21,0 (0,8) 0,1 0,0 0,6 5,2 (0,3) (0,9) - 0,5 0,9 (8,8) (17,9) (0,0) (0,6) 167 161 ( 6 502) 464 147 4 526 41 215 ( 2 665) ( 7 306) - 4 070 7 249 ( 70 000) ( 142 623) ( 392) 21,0 (0,3) (0,9) 0,2 3,0 (5,7) 2,2 (2,7) 10,3 (0,5) 1,8 (15,9) (25,8) (1,5) 83 053 ( 1 248) ( 3 525) 956 11 949 ( 22 476) 8 648 ( 10 519) 40 811 ( 2 163) 7 016 ( 63 000) ( 101 924) ( 5 917) ( 4 656) (14,8) ( 58 339) 513 Management Report Sustainability Report Separate Financial Statements Annex 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 2028, considering that 5 years is a reasonable period for projecting future results. 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 2023, this exercise was made based on the latest draft version of the business plan (“MTP”) for the period of 2024-2026 and a stress scenario exercise, preliminarily considered by the General Supervisory Board in December 2023 and which, upon inclusion of the end of 2023 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 2026, it is assumed, thereafter an increase in pre-tax results from 2026; • Interest rate benchmarks aligned with macroeconomic outlooks for the 2024-2026 triennium and BCE monetary policy decisions; • Development of the commercial banking product anchored in the expected evolution of the interest rate benchmarks, combined with the prospect of growth in commercial volumes, as well as the development of new projects at the level of commissioning generated with payment methods and asset management; • Maintenance of operating costs, despite the expected increase in inflation, anchored in the specific cost reduction plan and the implementation of a new distribution model and, generally, the simplification and increase in efficiency of the processes, particularly focusing on the digital component; and • Provisions for credit impairments in line with the evolution of the Bank's activity and supported by macroeconomic projections, taking into account the effort made in recent exercises in the provisioning of the credit portfolio and the progressive convergence to gradually normalized risk costs. Depending on the analysis mentioned above, as of 31 December 2023, the Bank has recognized deferred tax assets associated with tax losses in the balance sheet amounting to Euro 133 million (December 31, 2022: Euro 63 million). Additionally, the amount of unrecognized deferred taxes related to tax losses, by year of expiry, is as follows: No expiry period With expiry period 2025 2026 2029 2033 (thousands of Euros) 2023 921 359 439 651 92 332 135 422 170 236 41 661 2022 933 178 478 489 91 728 135 452 170 236 81 073 1 361 010 1 411 667 In addition, regarding adjustments resulting from the application of the fair value model to units of real estate investment funds and venture capital funds, which do not contribute to the formation of taxable profit in the taxation period in which they are recognized for accounting purposes, they only have tax relevance at the time of their realization, particularly in the onerous transfer of participation units or liquidation of the funds. The total amount of deferred tax assets related to these temporary differences, not recognized in the balance sheet, as of 31 December, 2023, amounts to Euro 176 million (31 December, 2022: Euro 229 million). 514 Annual Report 2023 | novobanco 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 in the 2020 fiscal year, the converted deferred tax assets, referring to the eligible deferred tax assets as of the closing date of that fiscal year, amount to 116,975 thousand euros. This amount has already been validated by the Tax and Customs Authority. 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. 515 Management Report Sustainability Report Separate Financial Statements Annex Note 26 – Other Assets As of 31 December 2023 and 2022, the caption other assets is analysed as follows: Escrow accounts Derivative products Collateral CLEARNET and VISA Collateral deposits relating to reinsurance operations Other collateral deposits Recoverable government subsidies on mortgage loans Public sector Contingent Capital Agreement (See Note 32.2) Other debtors (thousands of Euros) 2022 2023 272 713 251 225 177 866 133 864 38 940 51 407 4 499 20 658 206 419 198 180 489 155 41 423 71 387 4 551 18 304 481 198 198 180 440 912 Shareholder loans and supplementary capital contributions 234 211 229 930 Sale of non-performing loans Sale of real estate Sale of restructuring funds Others Income receivable Deferred costs Retirement pensions and health benefits (see Note 14) Precious metals, numismatics, medal collection and other liquid assets Real estate properties a) Equipment a) Stock exchange transactions pending settlement Other assets Impairment losses Real estate properties a) Equipment a) Other debtors - Shareholder loans, supplementary capital contributions Other a) Real estate properties and equipment received in settlement of loans and discontinued 2 170 42 646 20 881 189 247 33 405 13 025 12 173 10 506 2 173 710 20 881 187 218 131 814 13 184 52 021 10 395 102 090 221 097 1 795 - 3 013 4 465 15 687 119 948 1 375 806 1 945 756 ( 164 294) ( 232 640) ( 40 058) ( 112 855) ( 1 039) ( 75 343) ( 47 854) ( 2 195) ( 74 164) ( 43 426) 1 211 512 1 713 116 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 observed during 2023 in the Public Sector Administration item includes approximately Euro 249.8 million related to the conversion into capital of the rights resulting from the Special Regime Applicable to Deferred Tax Assets, as detailed in Note 31 (31 December, 2022: Euro 272.9 million). Operations on securities to be regularized reflect operations carried out with securities, registered on the trade date, which were awaiting settlement, according to the accounting policy described in Note 6.6. The items of properties and equipment refer to assets received for credit recovery and discontinued facilities, for which the Bank aims to sell them immediately. 516 Annual Report 2023 | novobanco 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 2023, an impairment reversal of Euro 23.7 million was recorded for the properties in the portfolio (31 December 2022: charge of Euro 12.9 million). The changes occurred in impairment losses are presented as follows: Balance at the beginning of the exercise Increases Write off Reversals Foreign exchange differences and other Balance at the end of the exercise The changes occurred in the real estate properties were as follows: Balance at the beginning of the exercise Additions Sales Other movements Balance at the end of the exercise 2023 232 640 20 587 ( 51 580) ( 40 351) 2 998 (thousands of Euros) 2022 360 425 16 070 ( 114 484) ( 27 832) ( 1 539) 164 294 232 640 (thousands of Euros) 2022 2023 221 097 357 644 8 898 15 510 ( 127 764) ( 151 092) ( 141) ( 965) 102 090 221 097 As of 31 December 2023, the amount related to discontinued facilities included in the caption Real estate properties amounts to Euro 10,922 thousand (31 December 2022: Euro 9,970 thousand), having the Bank recorded impairment losses for these assets in the total amount of Euro 3,359 thousand (31 December 2022: Euro 2,954thousand). Note 27 – 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 2023 and 2022, is analysed as follows: Non-current Assets/liabilities held for sale Banco Well Link (former NB Asia) Compagris Barrosinha Solago Ijar Leasing Algerie Others Impairment losses Compagris Ijar Leasing Algerie Others 517 (thousands of Euros) 2023 2022 38 992 - 18 437 7 473 - 13 032 50 ( 22 510) ( 14 425) ( 8 035) ( 50) 16 482 53 156 2 175 17 437 7 473 12 875 13 146 50 ( 8 085) - ( 8 035) ( 50) 45 071 Management Report Sustainability Report Separate Financial Statements Annex In March 2023, the stake held in Well Link Bank was sold, since the put options on the position that the Group still held in this financial institution were exercised. Other non-current assets held for sale include shareholdings and respective shareholder loans, which were reclassified to this caption under IFRS 5. The impairment movement for non-current Assets for disposal classified as held for sale is as follow: Balance at the beginning of the exercise Increases / (decreases) for the exercise Write offs Transfers Balance at the end of the exercise (thousands of Euros) 2023 8 085 14 425 - - 22 510 2022 8 085 ( 623) ( 3 837) 4 460 8 085 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. In December 2023, the Bank proceeded to sell Solago, recognizing a capital loss of Euro 1.1 million. Note 28 – Financial Liabilities Measured at Amortised Cost This caption as of 31 December 2023 and 2022 is analysed as follows: 2023 2022 (thousands of euros) Measured at amortised cost Fair value variation * Total Measured at amortised cost Fair value variation * Total Deposits from Banks Due to customers 6 623 884 - 6 623 884 10 506 509 29 193 007 62 049 29 255 056 28 425 223 Debt securities issued, subordinated debt and liabilities associated to transferred assets Other financial liabilities 1 085 659 489 750 - - 1 085 659 1 601 454 489 750 371 511 37 392 300 62 049 37 454 349 40 904 697 * Variation in the fair value of the items covered by the interest rate hedging portfolio - - - - - 10 506 509 28 425 223 1 601 454 371 511 40 904 697 28.1 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: Deposits from Central Banks From the European System of Central Banks Deposits Other funds Deposits from Other credit institutions Domestic Deposits Other funds Foreign Deposits Loans Very short-term funds Operations with repurchase agreements 518 (thousands of Euros) 2023 2022 1 128 807 6 327 198 1 128 807 6 327 198 178 807 198 950 000 6 327 000 5 495 077 4 179 311 1 073 669 1 110 465 1 065 854 1 071 278 7 815 39 187 4 421 408 3 068 846 136 087 375 610 430 487 479 880 3 867 053 2 150 824 42 658 6 623 884 7 655 10 506 509 Annual Report 2023 | novobanco As of December 31, 2023, the balance of the European System of Central Banks Resources item includes 950 million euros collateralized by the Bank's financial assets, as part of the third series of longer-term refinancing operations of the European Central Bank (TLTRO III), which will mature in December 2024. In 2023, Euro 5.4 billion of the TLTRO III were repaid. To deal with the maturity of these lines, Novobanco adopted as an exit strategy from the TLTRO III, among others, the reduction of the balance sheet's size and an increase in other stable financing instruments, mainly interbank operations collateralized by retained covered bonds. As a result, collateralized financing through medium-term repurchase agreements increased by Euro 2.6 billion in 2023, which added to the amount of Euro 2.6 billion recorded in 2022 for this type of financing, to mitigate the impact of shortening the term and/or maturity of the TLTRO III, totals Euro 5.2 billion (including Euro 1.4 billion of operations classified in Due to customers). Repurchase agreements operations corresponds to the sale of securities with purchasing agreement (repos), recorded in accordance with the accounting policy mentioned in Note 6.17. 28.2 Due to customers The balance of Deposits due to costumers is composed, as to its nature, as follows: Demand deposits Companies and other entities Private companies Time deposits Corporate and other entities Private companies Other funds Repurchase agreement Other Value adjustments for hedging interest rate risk * * See Note 21 (thousands of Euros) 2023 2022 10 556 457 12 644 222 5 739 882 7 190 941 4 816 575 5 453 281 16 809 219 14 925 851 6 461 277 5 063 842 10 347 942 9 862 009 1 827 331 855 150 1 366 382 450 906 460 949 404 244 29 193 007 28 425 223 62 049 29 255 056 28 425 223 28.3 Debt Securities issued, Subordinated Debt and Financial liabilities associated to transferred assets This caption breaks down as follows: Debt securities issued Euro Medium Term Notes (EMTN) Bonds Subordinated debt Euro Medium Term Notes (EMTN) Bonds Financial liabilities associated to transferred assets Asset lending operations (thousands of Euros) 2023 2022 584 159 1 141 431 584 159 - 501 500 501 500 - - - 561 565 579 866 415 572 - 415 572 44 451 44 451 1 085 659 1 601 454 The movement occurred in the 2023 and 2022 fiscal years in liabilities represented by securities, subordinated liabilities, and financial liabilities associated with transferred assets was as follows: 519 Management Report Sustainability Report Separate Financial Statements Annex Debt securities issued Subordinated Liabilities Euro Medium Term Notes (EMTN) Bonds Total Euro Medium Term Notes (EMTN) Bonds Total (thousands of Euros) Financial liabilities associated to transferred assets Asset lending operations TOTAL Balance as at 31 December 2021 445 633 573 588 1 019 221 Issues Net purchases Other movements (a) 100 000 ( 500) 16 432 - - 100 000 ( 500) 6 278 22 710 Balance as at 31 December 2022 561 565 579 866 1 141 431 - - - - - 415 394 415 394 44 451 1 479 066 - - - - 178 178 - - - 100 000 ( 500) 22 888 415 572 415 572 44 451 1 601 454 Issues Reimbursements Net purchases - - - - 500 000 - 500 000 ( 575 000) ( 575 000) ( 527) - ( 527) - - ( 400 000) ( 400 000) - - - - - 500 000 ( 975 000) ( 527) Other movements (a) 23 121 ( 4 866) 18 255 1 500 ( 15 572) ( 14 072) ( 44 451) ( 40 268) Balance as at 31 December 2023 a) The other movements include accrued interest on the balance sheet, corrections for hedging operations, corrections of fair value and exchange rate variations. 501 500 584 159 584 159 - - 501 500 The main characteristics of the outstanding issues as of 31 December 2023 and 2022 are as follows: Entity ISIN Description Currency Issue date Unit price (€) Maturity Interest rate Market - 1 085 659 (thousands of Euros) Book value 2023 2022 Bonds novobanco novobanco Euro Medium Term Notes PTNOBIOM0014 NB 3,5% 23/07/23 PTNOBJOM0005 NB 4,25% 09/23 EUR EUR 2021 2021 - - 2023 2023 Taxa Fixa 3,5% XDUB Euribor 3M + 4,25% XDUB - - 303 992 275 874 novobanco PTNOBKOM0002 NB 5.5% 30/12/24 EUR 2022 100,00 2026 Fixed rate 5,5% XDUB 105 475 99 989 novobanco Luxemburgo XS0869315241 BES Luxembourg 3.5% 02/01/43 EUR 2013 1,00 2043 Fixed rate 3,5% XLUX 43 958 43 363 novobanco Luxemburgo XS0877741479 BES Luxembourg 3.5% 23/01/43 EUR 2013 1,00 2043 Fixed rate 3,5% XLUX 100 110 99 065 novobanco Luxemburgo XS0888530911 novobanco Luxemburgo XS0897950878 BES Luxembourg 3.5% 19/02/2043 BES Luxembourg 3.5% 18/03/2043 novobanco Luxemburgo XS0972653132 BES Luxembourg ZC novobanco Luxemburgo XS1031115014 Banco Esp San Lux ZC 12/02/49 novobanco Luxemburgo XS1034421419 Banco Esp San Lux ZC 19/02/49 novobanco Luxemburgo XS1038896426 Banco Esp San Lux ZC 27/02/51 EUR EUR EUR EUR EUR EUR 2013 2013 2013 2014 2014 2014 novobanco Luxemburgo XS1042343308 BES Luxembourg ZC 06/03/2051 EUR 2014 1,00 2043 Fixed rate 3,5% XLUX 65 655 64 774 1,00 2043 Fixed rate 3,5% XLUX 48 260 47 641 1,00 2048 Zero voucher XLUX 37 934 35 711 1,00 2049 Zero voucher XLUX 46 650 43 694 1,00 2049 Zero voucher XLUX 12 977 12 146 1,00 1,00 2051 2051 Zero voucher XLUX 17 822 16 672 Zero voucher XLUX 12 538 11 729 novobanco Luxemburgo XS1053939978 BES Luxembourg ZC 03/04/48 novobanco Luxemburgo XS1055501974 BES Luxembourg ZC 09/04/52 novobanco Luxemburgo XS1058257905 BES Luxembourg ZC 16/04/46 Subordinated debts novobanco novobanco a) Date of the next call option PTNOBFOM0017 NB 06/07/2023 PTNOBLOM0001 NB 9.875% 01/12/33 EUR EUR EUR EUR EUR 2014 2014 2014 1,00 2048 Zero voucher XLUX 43 072 40 180 1,00 2052 Zero voucher XLUX 41 444 38 891 1,00 2046 Zero voucher XLUX 8 264 7 710 2018 - 2023 a) 8,50% XDUB - 415 572 2023 100,00 2033 9,875% XDUB 501 500 - 1 085 659 1 557 003 In terms of medium-term financing, in June 2023, the Bank issued a new Tier 2 bond of Euro 500 million, maturing on 1 December , 2033, with a purchase option 6 months from 1 June, 2028, aiming to replace the existing Tier 2 bond with a spread lower by 150bps. Through the public offer, the Bank managed to repurchase Euro 206 million of the existing Tier 2 bond. The remaining amount was reimbursed on the call date, which only occurred on 6 July, 2023. The Bank didn’t have any defaults on capital or interest regarding its issued debt during the 2023 and 2022. 520 Annual Report 2023 | novobanco Under the Mortgage Bond Issuance Program, which has a maximum amount of Euro 10,000 million, the Bank made issuances totaling Euro 5,500 million (31 December, 2022: Euro 5,500 million), and these issuances were fully repurchased by the Bank. The characteristics of the live issuances as of 31 December, 2023 and 2022 are as follows: Designation Issue date Maturity date Interest payment Interest Rate Market Rating Moody' s DBR S NB 2015 SR.1 07/10/2015 07/10/2025 Quarterly NB 2015 SR.2 07/10/2015 07/10/2024 Quarterly NB 2015 SR.3 07/10/2015 07/10/2027 Quarterly NB 2015 SR.4 07/10/2015 07/10/2028 Quarterly NB 2015 SR.5 22/12/2016 22/12/2028 Quarterly NB 2019 SR.6 10/12/2019 10/06/2029 Quarterly NB 2019 SR.7 10/12/2019 10/12/2024 Quarterly Euribor 3 Months + 0,25% Euribor 3 Months + 0,25% Euribor 3 Months + 0,25% Euribor 3 Months + 0,25% Euribor 3 Months + 0,25% Euribor 3 Months + 0,25% Euribor 3 Months + 0,25% XDUB XDUB XDUB XDUB XDUB Aaa Aaa Aaa Aaa Aaa XMSM Aaa XMSM Aaa NR NR NR NR NR NR NR (thousand of Euros) Balance Value 2023 2022 - - - - - - - - - - - - - - - - Nominal Value 1 000 000 1 000 000 1 000 000 700 000 500 000 750 000 550 000 5 500 000 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 2023, the assets that collateralize these covered debt securities amount to Euro 7,442.1 million (31 December 2022: Euro 6,078.4 million) (see Note 20). Note 29 – Provisions As of 31 December 2023 and 2022, the caption Provisions presents the following changes: Provision for restructuring Provision for guarantees and commitments Other Provisions Total (thousands of Euros) Balance as at 31 December 2021 46 686 91 775 339 709 478 170 Increases / (decreases) 1 332 ( 2 555) 12 117 10 894 Write offs Transfers Exchange differences and others Balance as at 31 December 2022 Increases / (decreases) Write offs Exchange differences and others Balance as at 31 December 2023 ( 28 870) - - 19 148 6 325 ( 18 697) - 6 776 - - 238 ( 37 617) ( 66 487) - 375 - 613 89 458 314 584 423 190 ( 434) - ( 5 291) 83 733 17 414 ( 7 216) 5 252 23 305 ( 25 913) ( 39) 330 034 420 543 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: 521 Management Report Sustainability Report Separate Financial Statements Annex Balance as at 31 December 2021 Transfers to stage 1 Transfers to stage 2 Transfers to stage 3 Increases due to changes in credit risk Stage 1 Stage 2 Stage 3 Total (thousands of Euros) 7 800 2 199 ( 1 115) ( 13) 1 981 10 959 ( 2 199) 1 226 ( 1 203) 2 467 73 016 91 775 - ( 111) 1 216 - - - 22 289 26 737 Decreases due to changes in credit risk ( 4 865) ( 4 079) ( 20 348) ( 29 292) Other movements Balance as at 31 December 2022 Transfers to stage 1 Transfers to stage 2 Transfers to stage 3 Increases due to changes in credit risk Decreases due to changes in credit risk Other movements Balance as at 31 December 2023 3 5 990 5 373 ( 3 684) ( 23) 5 838 ( 6 608) ( 1) 6 885 36 7 207 ( 5 373) 4 292 ( 18) 4 710 ( 3 691) ( 19) 7 108 199 76 261 - ( 608) 41 7 310 ( 7 993) ( 5 271) 69 740 238 89 458 - - - 17 858 ( 18 292) ( 5 291) 83 733 The transfers between stages that occurred in guarantees and commitments are detailed as follows: 2023 (thousands of Euros) Transfers between Stage 1 and Stage 2 Transfers between Stage 2 and Stage 3 Transfers between Stage 1 and Stage 3 To Stage 2 from Stage 1 To Stage 1 from Stage 2 To Stage 3 from Stage 2 To Stage 2 from Stage 3 To Stage 3 from Stage 1 To Stage 1 from Stage 3 Commitments and financial guarantees given 107 570 216 563 1 558 6 528 410 203 2022 (milhares de euros) Transfers between Stage 1 and Stage 2 Transfers between Stage 2 and Stage 3 Transfers between Stage 1 and Stage 3 To Stage 2 from Stage 1 To Stage 1 from Stage 2 To Stage 3 from Stage 2 To Stage 2 from Stage 3 To Stage 3 from Stage 1 To Stage 1 from Stage 3 43 164 40 385 45 450 2 234 1 775 181 Commitments and financial guarantees given As of December 31, 2023, the value of the provision for restructuring in the balance sheet is 6.8 million euros, and during the years 2022 and 2023, a net reinforcement of 1.3 million euros and 6.3 million euros, with 28.9 million euros and 18.7 million euros being used, respectively. Other provisions amounting to Euro 330.0 million (31 December 2022: Euro 314.6 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 21.6 million (31 December 2022: Euro 24.2 million); • Contingencies associated with legal proceedings amounting to Euro 2.8 million (31 December 2022: Euro 4.0 million); • Contingencies associated with sales processes in the amount of Euro 7.1 million (31 December 2022: Euro 7.1 million); 522 Annual Report 2023 | novobanco • Contingencies related to the undivided part of the Executive Committee's pension plan, in the amount of Euro 8.8 million (31 December 2022: Euro 19.2 million), transferred from the liability captions net of the value of the assets of the Pension Fund (see Note 14); • The State Budget Law for 2021 ("LOE 21"), amended the rules of the Property Transfer Tax ("IMT") and the Municipal Property Tax ("IMI"), with the broadening of the incidence scope of the increased IMI and IMT rate, and loss of exemptions, for properties held by taxpayers who are directly or indirectly controlled by an entity subject to a more beneficial tax regime, listed in an order approved by the Minister of Finance. As of this date, the calculation of the application of the increased IMI rates to all properties in the direct and indirect ownership of the novobanco Group amounts to approximately 202.1 million euros as of December 31, 2023 (December 31, 2022: 192.1 million euros); • The remaining amount, of approximately Euro 87.6 million (31 December, 2022: Euro 88.0 million), is intended to cover losses arising from the Bank's activity, such as fraud, theft, and robberies, and ongoing legal proceedings for contingencies related to asset sales processes, among others. Note 30 – Other Liabilities As of 31 December 2023 and 2022, the caption other liabilities are analysed as follows: Public sector Creditors for supply of goods Margin Accounts Derivative instruments Other creditors Career bonuses (see Note 14) Other accrued expenses Deferred income Foreign exchange transactions to be settled Other transactions pending settled (thousands of Euros) 2023 2022 38 883 109 446 562 047 214 782 6 474 95 149 1 065 611 60 846 1 012 395 32 830 105 063 478 750 113 244 5 506 81 501 1 111 - 26 774 844 779 As of December 31, 2023, the caption Suppliers of Goods Payable includes Euro 83,461 thousand related to creditors of assets under the right of use, within the framework of IFRS 16 (31 December, 2022: Euro 82,088 thousand), whose maturity terms are presented as follows: Up to 3 months From 3 months to one year From one to five years More than five years Note 31 – Share Capital 32.1 Ordinary Shares (thousands of Euros) 2023 185 3 216 20 942 59 118 83 461 2022 255 6 016 18 490 57 327 82 088 As of 31 December 2023, the Bank's share capital of Euro 6,567,843,862.91 is represented by 11,130,841,957 registered shares with no par value and is fully subscribed and paid up by the following shareholders (31 December 2022: share capital of Euro 6,304,660,637.69 represented by 10,391,043,938 registered shares): 523 Management Report Sustainability Report Separate Financial Statements Annex Nani Holdings, S.à.r.l Resolution Fund (1) Directorate-General for Treasury and Finance % Capital 2023 75,00% 13,04% 11,96% 2022 75,00% 19,31% 5,69% 100,00% 100,00% (1) Under the commitments made between the Portuguese State and the European Commission, the Resolution Fund is inhibited from exercising its voting rights. 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 32). 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 32). In April 2023, a capital increase was completed amounting to 263,183 thousand euros through the conversion of conversion rights (resulting from the Special Regime Applicable to Deferred Tax Assets) related to the 2018 and 2019 fiscal years, which granted the State an additional 6.27% stake in Novobanco, and from which 739,798,019 new ordinary shares were issued (see Note 32). As mentioned in Note 25, 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 give the State the right to demand from novobanco the respective increase of the share capital, through the incorporation of the amount of the special reserve and consequent issuance and free delivery of ordinary shares representing 3.64% of the capital (with reference to the 2020 financial year), which will only dilute, in accordance with the sale contract, the Resolution Fund's participation, if the shareholders do not exercise their potestative right to acquire the conversion rights. Note 32 – Other Accumulated Comprehensive Income, Retained Earnings and Other Reserves As at 31 December 2023 and 2022, the accumulated other comprehensive income, retained earnings and other reserves present the following detail: Other accumulated comprehensive income Retained earnings Other reserves 524 (thousands of Euros) 2023 2022 ( 993 658) ( 1 155 271) ( 8 577 074) ( 8 577 074) 6 231 450 6 040 802 ( 3 339 282) ( 3 691 543) Annual Report 2023 | novobanco 32.1 Other accumulated comprehensive income The changes in Other accumulated comprehensive income were as follows: Other accumulated comprehensive income (thousands of Euros) Impairment reserves Credit risk reserves Sales reserves Fair value reserves Cash flow hedging reserves Actuarial deviations (net of taxes) Total Balance as at 31 December 2021 3 668 9 214 ( 34 306) ( 166 319) Actuarial deviations Fair value changes, net of taxes - - Impairment reserves of securities at fair value through other comprehensive income ( 3 079) Reserves of sales of securities at fair value through other comprehensive income Cash flow hedging - - - - - - - - - - ( 862) - - ( 178 410) - - - - - - - - ( 100 418) ( 781 244) ( 968 987) 96 485 - - - - 96 485 ( 178 410) ( 3 079) ( 862) ( 100 418) Balance as at 31 December 2022 589 9 214 ( 35 168) ( 344 729) ( 100 418) ( 684 759) (1 155 271) Actuarial deviations Fair value changes, net of taxes Impairment reserves of securities at fair value through other comprehensive income Reserves of sales of securities at fair value through other comprehensive income Cash flow hedging - - ( 378) - - - - - - - - - - ( 258 820) - - 255 122 - - - - - - - 192 974 ( 27 285) - - - - ( 27 285) 255 122 ( 378) ( 258 820) 192 974 Balance as at 31 December 2023 211 9 214 ( 293 988) ( 89 607) 92 556 ( 712 044) ( 993 658) 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. The changes occurred in the fair value reserves, net of deferred taxes and impairment losses may be analysed as follows: 2023 Fair value reserves Financial assets at fair value through other comprehensive income Deferred tax reserves Total fair value reserves (thousands of Euros) 2022 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 ( 381 014) 36 285 ( 344 729) ( 123 313) ( 43 006) ( 166 319) Changes in fair value Foreign exchange differences Disposals in the exercise Deferred taxes recognized in the exercise in reserves 4 599 ( 5 524) 293 657 - - - 4 599 ( 325 981) ( 5 524) 293 657 2 006 66 274 - - - ( 325 981) 2 006 66 274 - ( 37 610) ( 37 610) - 79 291 79 291 Balance at the end of the exercise ( 88 282) ( 1 325) ( 89 607) ( 381 014) 36 285 ( 344 729) The fair value reserves are analysed as follows: 525 Management Report Sustainability Report Separate Financial Statements Annex Amortised cost of financial assets at fair value through other comprehensive income 834 747 2 576 036 Market value of financial assets at fair value through other comprehensive income 741 446 2 183 034 (thousands of Euros) 2023 2022 Unrealised gains / (losses) recognized in fair value reserve Fair value reserve transferred to Results (1) Potential gains / (losses) recognized in the fair value reserve Deferred Taxes Fair value reserve attributable to shareholders of the Bank (1) In the context of fair value hedge operations (see Note 21) The movements in cash flow hedging reserves are presented as follows: Balance at the beginning of the exercise ( 93 301) ( 393 002) ( 5 019) ( 11 988) ( 88 282) ( 381 014) ( 1 325) 36 285 ( 89 607) ( 344 729) (thousands of Euros) 2023 ( 100 418) 2022 - Change in the fair value of the hedged item recognized in other comprehensive income 203 243 ( 101 299) Reclassification from other comprehensive income to results Balance at the end of the exercise ( 10 269) 881 92 556 ( 100 418) 32.2. Others Reserves 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. Special reserve As mentioned in Note 25, 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: 2019 (net loss 2018) 2020 (net loss 2019) 2021 (net loss 2020) Contingent capitalization mechanism (thousands of Euros) 2023 2022 - - 128 673 128 673 146 367 116 817 137 193 400 377 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 33 – Contingent liabilities and commitments). The capital corresponds to a previously defined asset perimeter, with an initial net book value (June 2016) of around Euro 7.9 billion. As of 31 December 2023, these assets had a net value of Euro 0.9 billion, mainly as a result of losses recorded as well as payments and recoveries (31 December 2022: net value of Euro 1.1 billion). 526 Annual Report 2023 | novobanco 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 value related to the Contingent Capitalization Mechanism recorded in 2020, as receivable from the Resolution Fund (598,312 thousand euros), differs from the paid value due to 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 receivable, the Bank deducted, as of 31 December 2023 and 2022, from the regulatory capital calculation (165,442 thousand euros). Additionally, the amount of variable remuneration of the Executive Board of Directors for the 2019 and 2020 exercises was also deducted (3,857 thousand euros). In 2021 a value was recorded as receivable from the Resolution Fund of 209,220 thousand euros related to the Contingent Capitalization Mechanism, accounted for in Other Reserves and which results, at each balance sheet date, from the losses incurred and the regulatory ratios in force at the time of its determination. Consequently, as mentioned above and in line with regulatory guidelines, on December 31, 2023, and 2022, this value was also deducted from the calculation of regulatory capital. Novobanco considers this amount as due under the Contingent Capitalization Mechanism and is triggering the legal and contractual mechanisms at its disposal to ensure its receipt. Note 33 – Contingent Liabilities and Commitments In addition to the derivative financial instruments, the balances relating to off-balance accounts as of 31 December 2023 and 2022 are the following: Contingent liabilities Guarantees and endorsements Financial assets pledged as collateral Open documentary credits Others Commitments Revocable commitments Irrevocable commitments (thousands of Euros) 2023 2022 11 187 432 14 548 395 2 347 433 2 262 092 8 542 774 12 036 520 187 024 169 410 110 201 80 373 5 996 626 5 955 096 5 343 467 5 397 330 653 159 557 766 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 7.9 billion (31 December 2022: Euro 11.2 billion), of which 2.1 billion euros are encumbered (31 December 2022: 9.3 billion euros); Securities pledged as collateral to the Portuguese Securities and Exchange Commission (“Comissão do Mercado de Valores Mobiliários” (CMVM)) in the scope of the Investors Indemnity System (“Sistema de Indemnização aos Investidores”), in the amount of Euro 9.2 million (31 December 2022: Euro 6.8 million); Securities pledged as collateral to the Deposits’ Guarantee Fund (“Fundo de Garantia de Depósitos”), in the amount of Euro 64.6 million as of 31 December 2022. As of December 31, 2023, following the payment of the total amount of commitments assumed to the Deposit Guarantee Fund, as mentioned in Note 16, there are no securities given as collateral; • Securities pledged as collateral to the European Investment Bank, in the amount of Euro 468.5 million (31 December 2022: Euro 578.3 million); 527 Management Report Sustainability Report Separate Financial Statements Annex • Securities delivered as collateral in connection with derivatives trading with a central counterparty in the amount of 74.0 million euro (31 December 2022: 110.0 million); • Deposits provided as collateral to guarantee the responsibilities assumed by issuing guarantees in the amount of 18.9 million euros (31 December 2022: 29.7 million euros). 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: Deposit and custody of securities and other items Amounts received for subsequent collection Securitized loans under management (servicing) Other responsibilities related with banking services (thousand of Euros) 2023 2022 35 162 112 31 031 260 192 382 207 006 1 497 960 1 697 076 824 098 723 197 37 676 552 33 658 539 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” in the of transfer to novobanco commercialization, financial intermediation and distribution of debt instruments issued by entities that are part of the Espírito Santo Group (…) ”. include “any obligations, guarantees, liabilities or contingencies assumed 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 nº1, Annex 2 to the Resolution of Bank of Portugal of 3 August 2014 (20 hours), as amended by the Resolution of Bank of Portugal of 11 August 2014 (17 hours) ”. 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; 528 Annual Report 2023 | 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 2023 (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 resolution. 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 2023 (as well as in the previous financial statements), 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. 529 Management Report Sustainability Report Separate Financial Statements Annex 33.1 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) (ii) Ação judicial intentada pela Partran, SGPS, S.A., Massa Insolvente da Espírito Santo Financial Group, S.A. e Massa Insolvente da Espírito Santo Financial (Portugal), S.A. contra o novobanco e a Calm Eagle Holdings, S.A.R.L. através da qual se pretende a declaração de nulidade do penhor constituído sobre as ações da Companhia de Seguros Tranquilidade, S.A. e, subsidiariamente, a anulação do penhor ou a declaração da sua ineficácia, na qual apenas figura como autora a Massa Insolvente da ESF (Portugal) na sequência da desistência das restantes; Ações judiciais intentadas na sequência da celebração do contrato de compra e venda do capital social do novobanco, assinado entre o Fundo de Resolução e a Lone Star em 31 de março de 2017, relacionadas com as condições da venda, nomeadamente a ação administrativa intentada pelo Banco Comercial Português, S.A. contra o Fundo de Resolução, da qual o novobanco não é parte e, no âmbito da qual, segundo a divulgação pública de informação privilegiada efetuada pelo BCP no site da CMVM em 1 de setembro de 2017, é solicitada a apreciação jurídica da obrigação de capitalização contingente assumida pelo Fundo de Resolução no âmbito do Mecanismo de Capitalização Contingente. With respect to the amount requested from the Resolution Fund, for the 2020 financial year, divergences remain between novobanco and the Resolution Fund, regarding (i) the provision for discontinued operations in Spain and (ii) valuation of participation units, which are the subject of ongoing arbitration. novobanco considers these amounts (165 million euros) as due under the Contingent Capitalization Mechanism and has initiated an arbitration action to claim payment of these amounts. There is also another disagreement regarding the application, by novobanco, at the end of 2020, of the dynamic option of the IFRS 9 transitional regime, which is also under consideration in the same arbitration action. Additionally, the Resolution Fund did not pay the amount requested for the 2021 financial year. novobanco considers the amounts claimed and not paid as due under the Contingent Capitalization Mechanism, having triggered the legal and contractual mechanisms at its disposal in order to ensure the receipt of the same, which are recorded as amounts receivable and are subject to favorable arbitration decisions. 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 2023, the periodic contribution made by the Bank amounted to Euro 6,947 thousand (31 December 2022: Euro 16,017 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 nº 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, 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. 530 Annual Report 2023 | novobanco 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 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 34 – 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). 531 Management Report Sustainability Report Separate Financial Statements Annex During 2023, the following transactions with Related Parties identified on 31 December 2023 (credit and other types) were carried out: (i) Credit Operations Entities / Individuals Justification Operation Amount (euros) APB - Associação Portuguesa de Bancos Entities for which there is a relationship of economic interdependence Credit Card Limits (raise) 1 500 EDENRED - Portugal S.A. Entities for which there is a relationship of economic interdependence Members of the Administration and Supervision bodies and related persons Members of the Administration and Supervision bodies and related persons (1.) LOCARENT - Companhia Portuguesa Aluguer Viaturas S.A. Entities for which there is a relationship of economic interdependence NACIONAL CONTA – Contabilidade, Consultadoria e Administração, Lda. Entity dominated by members of the Administration / Supervision Direct Debits Limits (RCE) (renewal and raise) 1 000 000 Credit Card Limits (renewal) Credit Card Limits (raise) Credit Card Limits (renewal) Current-Account Loan Account (renewal) Trading Room Operations (RCE) Direct Debits Limits (RCE) (renewal) 24 000 22 500 10 000 2 500 000 3 000 000 4 000 000 Leasing (renewal with changes) 68 250 000 Commercial Paper (renewal with change) 25 000 000 Current-Account Loan Account (renewal) Credit Card Limits (renewal) 100 000 1 000 Novo Banco Group (BEST, NB Açores e NB Finance) Entity dominated by members of the Administration / Supervision • Interbank Limits (Trading Room Operations) • Commercial Limits 2 437 100 000 Pedro Santos Reis Persons or entities whose relationship with the institution potentially influences their management Housing Credit 360 000 Unicre - Cartão Internacional de Crédito S.A. Entities for which there is a relationship of economic interdependence Current-Account Loan Account 15 000 000 1. Notice 3/2020, artº33 - 3 b) and Notice 3/2020, artº33 - 3 c) (ii) Services rendered and other signed contracts Entities / Individuals Justification Operation BEST Banco Electrónico de Serviço Total SA Entities for which there is a relationship of economic interdependence Lease Agreement Novobanco dos Açores Entities for which there is a relationship of economic interdependence. Entity dominated by members of Administration / Supervision Amendment to the Distribution Agreement NANI Holdings S.à R.L. / LSF NANI Investments S.à R.L. Shareholder and/or Entities related to the Shareholder Service Contract Amount (euros) na na 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: 532 Annual Report 2023 | novobanco Assets Liabilities Guarantees Income Expenses Assets Liabilities Guarantees Income Expenses 2023 2022 (thousands of Euros) Shareholders 198 180 106 129 NANI HOLDINGS - 271 FUNDO DE RESOLUÇÃO 198 180 105 858 - - - 416 6 947 198 180 54 253 416 - - 152 - 6 947 198 180 54 101 - - - 389 16 017 389 - - 16 017 Subsidiary companies 1 085 533 1 320 006 10 394 18 166 38 356 1 158 034 1 218 195 10 322 19 621 16 001 GNB CONCESSÕES 83 473 51 525 - - GNB GA 3 435 54 422 4 025 3 262 ES TECH VENTURES 46 732 75 073 - - - - - 83 473 39 189 - - 3 552 14 752 4 025 6 303 46 732 74 426 - - - - BEST 5 052 673 245 37 8 208 21 574 2 610 647 221 7 878 5 900 - 37 novobanco AÇORES 130 302 228 807 1 295 4 071 6 793 124 017 216 280 1 295 1 369 2 898 SPE-LM6 SPE-LM7 FCR NB CAPITAL GROWTH NB ÁFRICA FUNGEPI FUNGEPI II FUNGERE IMOINVESTIMENTO PREDILOC IMOGESTÃO ARRABIDA INVESFUNDO VII NB LOGÍSTICA NB PATRIMÓNIO FUNDES AMOREIRAS FIMES ORIENTE NB ARRENDAMENTO NB FINANCE FEBAGRI GREENWOODS HERDADE DA BOINA BENAGIL PROMOFUNDO GREENDRAIVE FIVE STARS AROLERI IMALGARVE RIGHTHOUR 222 877 911 575 842 1 586 - - - - - 8 648 56 463 2 449 - - 675 3 105 561 - - - - - - - - - - - 97 755 387 - 30 811 13 181 1 111 7 171 - 7 474 1 78 1 367 - - - - 2 095 - - - - - - - - - - - - - - - - - - - - - - - - - - - 299 838 - - 56 11 - 20 - 3 - 4 - - - - - - - - - - - - - - - - - 1 050 198 - 28 30 - - 23 - 2 581 - - 96 8 156 - - - - 2 - 243 371 1 915 628 541 3 000 15 015 3 547 7 166 - - - - 338 932 - - 40 180 2 414 44 23 742 35 2 692 - - - - - - - - - - - - - - 5 561 3 938 478 - 980 - - - - - - - - 46 022 387 - 30 671 16 13 551 - - - - - - - 6 445 897 7 067 1 150 7 483 - 21 65 20 - - - - 1 952 71 - - - - 106 - - - - - - - - 446 513 1 - - 1 1 - 1 4 199 1 - 10 - 145 - - - - - - 1 885 - - - 13 20 - 28 - 4 - - - - - - - - - - - - - - - - - 6 526 - 106 - 6 036 4 262 - 7 032 - - - - - - - 1 394 5 817 - 17 986 - - - - - - 4 262 - - - 10 887 - Associated Companies 155 123 92 584 273 4 322 4 316 179 676 95 106 273 4 614 3 190 LINEAS LOCARENT UNICRE MULTIPESSOAL Others Other related entities HUDSON ADVISORS PORTUGAL NACIONAL CONTA LDA - 137 886 15 220 2 010 3 027 1 987 29 32 7 87 509 241 - 241 4 - 4 - - - 273 - - - - - 15 - 3 176 43 3 422 139 286 3 218 1 641 - - - 38 365 2 023 76 35 2 638 879 2 88 601 - - - 4 726 4 726 - 324 - 324 5 - 5 - - - 273 - - - - - - 1 727 3 161 919 - - - 1 968 29 - - - 4 638 4 638 - 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 Capitalization Mechanism contract. 533 Management Report Sustainability Report Separate Financial Statements Annex In June 2018, a contract was signed between NANI HOLDINGS, SGPS, S.A. (currently Nani Holdings S.à.r.l.), LSF NANI INVESTMENTS S.à.r.l. and Novobanco, for the provision of support services to 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. Every year, novobanco, together with consultants, analyses and prepares the Transfer Pricing Dossier, which contains information that shows that transactions with related parties respect the principle of Full Competition, which is delivered to the Tax and Customs Authority within the legal deadline. All the loans granted to related parties are included in the impairment model, being subject to the determination of impairment in the same manner as the commercial loans and advances granted by the Bank in the scope of its activity. All assets placed with related parties earn interest between 0% and 11,94% (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 2023 and 2022, are as follows: 2023 2022 Executive Board of Directors General and Supervisory Board Total Executive Board of Directors General and Supervisory Board Total (thousands of Euros) Short-term employment benefits 3 557 1 494 5 051 3 092 1 257 Post-employment benefits Other long-term benefits 2 27 - 3 2 30 2 197 - 38 3 586 1 497 5 083 3 291 1 295 4 349 2 235 4 586 In 2023 and 2022, the value of variable remunerations for the Management Bodies amounted to 1,878 thousand and 1,931 thousand euros, respectively, which constitutes remunerations that are not vested rights of the members until after the end of the restructuring period, its payment is subject to deferment and verification of certain conditions. Additionally, in the financial year of 2023, costs of 150 thousand euros were registered as sign-on bonuses resulting from the appointment of a new Executive Director (2022: costs of 260 thousand euros were registered as sign-on bonuses resulting from the appointment of two new Executive Directors and compensation for termination of mandates of two Executive Directors were registered amounting to 460 thousand euros). As of 31 December 2023 and 2022, 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 195 thousand (31 December 2022: Euro 351 thousand); and (ii) members of the General and Supervisory Board and their direct relatives had no credit liabilities (31 December 2022: no exposure). Deposits (i) of members of the Executive Board of Directors and their direct relatives was Euro 2,552 thousand (31 December 2021: Euro 1,138 thousand); and (ii) members of the General and Supervisory Board and their direct relatives was Euro 820 thousand (31 December 2022: Euro 1,544 thousand). 534 Annual Report 2023 | novobanco Note 35 –Securitisation of Assets As of 31 December 2023 and 2022, the outstanding securitisation transactions made by the Bank were as follows: Issue Start date Original amount Current amount of credit 2023 2022 (milhares de euros) Asset securitized Lusitano Mortgages No.4 plc September 2005 1 200 000 183 022 Lusitano Mortgages No.5 plc September 2006 1 400 000 286 348 Lusitano Mortgages No.6 plc July 2007 1 100 000 280 627 214 061 Mortgage loans (general regime) 330 075 Mortgage loans (general regime) Mortgage loans (general regime) 317 612 Lusitano Mortgages No.7 plc September 2008 1 900 000 733 445 817 287 Mortgage loans (general regime) The main characteristics of these operations, as of 31 December 2023 and 2022, may be analysed as follows: Issue Bonds issued Initial nominal value Current nominal value 2023 Interest held by Group (Book value) Interest held by Group (Nominal value) Initial rating of the bonds Current rating of the bonds Maturity date Fitch Moody's S&P DBR S Fitch Moody's S& P DBR S Lusitano Mortgages No.4 plc Lusitano Mortgages No.5 plc Lusitano Mortgages No.6 plc Lusitano Mortgages No.7 plc Class A Class B Class C Class D Class E Class A Class B Class C Class D Class E Class A Class B Class C Class D Class E Class F Class A Class B Class C Class D 1 134 000 139 110 22 800 19 200 24 000 10 200 1 323 000 26 600 22 400 28 000 11 900 943 250 65 450 41 800 17 600 31 900 22 000 9 208 7 754 9 693 5 100 212 384 17 384 14 639 18 299 5 950 116 039 65 450 41 800 17 600 31 900 22 000 - - - - - - - - - - 97 882 63 950 41 800 17 600 31 900 - - - - - - - - - - - 94 913 58 568 34 496 13 356 21 291 December 2048 AAA Aaa AAA December 2048 December 2048 December 2048 December 2048 AA A+ BBB + NA Aa2 A1 Baa1 - December 2059 AAA Aaa December 2059 AA Aa2 AA A+ BBB - NA AAA AA December 2059 December 2059 A BBB + Baa2 A1 A December 2059 N/A - March 2060 March 2060 March 2060 AAA AA A Aaa Aa3 A3 BBB N/A AAA AA A 1 425 000 260 940 260 939 247 653 October 2064 294 500 180 500 57 000 294 500 294 500 260 109 October 2064 180 500 180 500 65 973 October 2064 57 000 - - October 2064 March 2060 BBB Baa3 BBB March 2060 BB - March 2060 - - - - - - BB - AAA BBB - - - - - - - - - - - - - - - - - - - - - - - - AAA - - - AA- Aa2 A- A1 BB+ Baa3 B+ - B2 - AA+ Aa2 A+ BBB + A3 Ba1 CCC Caa2 - - AA+ AA+ BBB CCC CC - - - - - Aa2 Aa2 A1 Ba3 - - - - - - AA+ AA+ AA BB+ - AA+ AA+ BBB B - A A A BB D - - - - - - - - - - - - - - - - - AA+ AAA AA+ - - - - - Issue Bonds issued Initial nominal value Current nominal value 2022 Interest held by Group (Book value) Interest held by Group (Nominal value) Maturity date Initial rating of the bonds Current rating of the bonds Fitch Moody's S&P DBR S Fitch Moody's S& P DBR S Lusitano Mortgages No.4 plc Lusitano Mortgages No.5 plc Lusitano Mortgages No.6 plc Lusitano Mortgages No.7 plc Class A Class B Class C Class D Class E Class A Class B Class C Class D Class E Class A Class B Class C Class D Class E Class F Class A Class B Class C Class D 1 134 000 22 800 19 200 24 000 10 200 163 785 10 842 9 130 11 412 5 100 1 323 000 245 724 26 600 22 400 28 000 11 900 943 250 65 450 41 800 17 600 31 900 22 000 20 113 16 937 21 172 11 301 65 450 41 800 17 600 31 900 22 000 - - - - - - - - - - - - - - - - - - - - December 2048 AAA Aaa AAA December 2048 December 2048 December 2048 December 2048 AA A+ BBB + NA Aa2 A1 Baa1 - AA A+ BBB - NA December 2059 AAA Aaa AAA December 2059 December 2059 December 2059 AA A BBB + Aa2 A1 Baa2 December 2059 N/A - - - - - - - - - - - - - - - - - AAA - - - AA- Aa2 A- A2 BB+ Baa3 CCC Caa1 - - A+ Aa2 BBB + B+ CC - AA+ AA BB+ CCC CC - - - - - Baa2 Ba3 Caa3 - Aa2 Aa2 A3 B3 - - - - - - AA+ AA- A- B- - AA+ AA+ BBB B - A- A- A- B D - - - - - - - - - - - - - - - - - AA+ AAA AA+ - - - - - AA A BBB N/A AAA AA A AAA AA A Aaa Aa3 A3 - - - - - - BB - AAA BBB - - - - - - - - 152 014 128 051 124 100 March 2060 63 950 55 286 March 2060 March 2060 41 800 17 600 31 900 - 31 303 12 414 20 017 March 2060 BB - March 2060 March 2060 BBB Baa3 BBB 1 425 000 345 770 345 770 326 254 October 2064 294 500 180 500 57 000 294 500 294 500 242 031 October 2064 180 500 180 500 59 141 October 2064 57 000 - - October 2064 535 Management Report Sustainability Report Separate Financial Statements Annex 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 36 – Fair Value of Financial Assets and Liabilities The governance model of the valuation of the Bank's financial instruments is defined in internal regulations, which establish the policies and procedures to be followed in the identification and valuation of financial instruments, the control procedures, and the definition of the responsibilities of the parties involved in this process. 36.1. Assets and Liabilities at Fair Value 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. Commercial paper and loans to customers: 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. Unlisted 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. 536 Annual Report 2023 | novobanco Unlisted 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: Hotels Real Estate in Development Real Estate Shopping Center Agricultural Properties Min Average Max Min Average Max Min Average Max Min Averag e Max Min Assumption Bedroom average Rate (€) Occupancy Rate % 40% 62% 80% 60% 70% 75% 55 197 650 133 177 207 n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. €/m2 €/Ha Discount Rate n.a. n.a. 8,5 % n.a. n.a. 30 1 518 3 150 800 2 594 6 750 960 1 085 1 180 n.a. n.a. 9,4% 10,1% n.a. 8,0 % n.a. n.a. 12,3% 16,0 % n.a. 4,5 % n.a. n.a. 6,4% 10,0 % n.a. 10,0 % n.a. n.a. 10,3% 10,8 % Averag e Max n.a. n.a. n.a. n.a. 13 270 n.a. n.a. n.a. 20 200 n.a. n.a. n.a. n.a. 2 800 n.a. Valuation Methodology Income Market Income Market Income Market Income Market Income Market Notes: (i) All the above assumptions were calculated based on the average of the values considered by the external evaluators per property assessed. (ii) The average presented was calculated on the property-weighted average in the sum of the value of the underlying assets per category presented. (iii) 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). (iv) €/m2 consider the gross construction area. 537 Management Report Sustainability Report Separate Financial Statements Annex In addition, additional assumptions considered in the fair value measurement of the financial investments held in the restructuring funds are presented below: Fund Typology Discount based on p/BV observed on the market Real Estate and Tourism Real Estate and Tourism / Other Others 16,60% 15,30% 12,00% 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; 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. (ii) 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. The fair value of the financial assets and liabilities and non-financial assets of the Bank measured at fair value is as follows: 538 Annual Report 2023 | novobanco (thousand of Euros) At Fair Value Valuation models based on observable market parameters Valuation models based on unobservable market parameters Quoted market prices (Level 1) (Level 2) (Level 3) Total Fair Value 318 528 117 817 318 528 - - - - - 117 817 11 441 101 098 5 278 - - - - - - 436 345 318 528 117 817 11 441 101 098 5 278 31 December 2023 Securities held for trading Bonds issued by public entities - Bonds issued by other entities Derivatives held for trading Exchange rate contracts Interest rate contracts Others Financial assets mandatorily at fair value through profit or loss - Securities 17 172 20 913 1 396 605 1 434 690 Bonds issued by other entities Shares Other variable income securities 11 368 5 804 50 - 453 793 465 211 135 656 141 460 - 20 863 807 156 828 019 Financial assets at fair value through other comprehensive income 655 561 26 968 58 917 741 446 Bonds issued by public entities Bonds issued by other entities Shares 285 852 - 368 610 20 584 - - 285 852 389 194 1 099 6 384 58 917 66 400 Derivatives - Hedge Accounting - Interest rate contracts - 683 074 - 683 074 Assets at fair value 991 261 848 772 1 455 522 3 295 555 Financial liabilities held for trading – Derivatives Exchange rate contracts Interest rate contracts Loans Others Derivatives - Hedge Accounting Liabilities at fair value - - - - - - - 98 957 11 414 82 247 104 5 192 124 957 223 914 1 650 100 607 - 11 414 1 650 83 897 - - - 104 5 192 124 957 1 650 225 564 539 Management Report Sustainability Report Separate Financial Statements Annex (thousands of Euros) Quoted market prices At Fair Value Valuation models based on observable market parameters Valuation models based on unobservable market parameters (Level 1) (Level 2) (Level 3) Total Fair Value 36 428 134 419 36 428 - - - - - 134 419 23 145 102 729 8 545 - - - - - - 170 847 36 428 134 419 23 145 102 729 8 545 31 December 2022 Financial assets held for trading Bonds issued by public entities Derivatives held for trading Exchange rate contracts Interest rate contracts Other Financial assets mandatorily at fair value through profit or loss - Securities 15 832 21 409 1 500 429 1 537 670 Bonds issued by other entities Shares Other variable income securities Loans Financial assets mandatorily at fair value through profit or loss Bonds issued by other entities 11 045 4 787 50 422 570 433 665 - 135 655 140 442 - - - - 21 359 942 186 963 545 - - - 18 13 13 18 13 13 Financial assets at fair value through other comprehensive income 2 094 365 27 124 61 545 2 183 034 Bonds issued by public entities Bonds issued by other entities Shares 1 629 639 - 458 913 20 493 - - 1 629 639 479 406 5 813 6 631 61 545 73 989 Derivatives - Hedge Accounting - Interest rate contracts - 562 886 - 562 886 Assets at fair value 2 146 625 745 838 1 561 987 4 454 450 Financial liabilities held for trading - Derivatives Exchange rate contracts Interest rate contracts Others Derivatives - Hedge Accounting - Interest rate contracts Liabilities at fair value - - - - - - 96 711 22 024 71 807 2 880 120 612 217 323 2 606 99 317 - 22 024 2 606 74 413 - - 2 880 120 612 2 606 219 929 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 2023 and 2022, can be analysed as follows: Financial assets mandatorily at fair value through profit or loss Securities Credit Financial assets at fair value through profit or loss 2023 Financial assets at fair value through other comprehensive income (thousands of euros) Total assets Financial liabilities held for trading Derivatives held for trading Total liabilities Balance as at 31 December 2022 1 500 411 18 13 61 545 1 561 987 2 606 2 606 Acquisitions Attainment of maturity Settlements Changes in value Balance as at 31 December 2023 92 009 ( 214 463) ( 24 176) 42 824 1 396 605 - - - ( 18) - - - - 1 073 93 082 - ( 214 463) ( 9 818) ( 33 994) - - - - - - ( 13) 6 117 48 910 ( 956) ( 956) - 58 917 1 455 522 1 650 1 650 540 Annual Report 2023 | novobanco Financial assets mandatorily at fair value through profit or loss Securities Credit Financial assets at fair value through profit or loss 2022 Financial assets at fair value through other comprehensive income (thousands of euros) Total assets Financial liabilities held for trading Derivatives held for trading Total liabilities Balance as at 31 December 2021 2 036 378 Acquisitions Attainment of maturity Settlements Changes in value Balance as at 31 December 2022 236 516 ( 533 151) ( 131 465) ( 107 867) 1 500 411 - - - - 18 18 - - - - 13 13 35 725 2 072 103 1 950 1 950 3 477 239 993 - ( 533 151) ( 707) ( 132 172) - - - - - - 23 050 ( 84 786) 656 656 61 545 1 561 987 2 606 2 606 In the exercises 2023 and 2022 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 on 31 December 2023 and 2022 were as follows: Derivatives held for trading Financial assets at fair value through profit or loss Financial assets mandatorily at fair value through profit or loss Financial assets at fair value through other comprehensive income Recognised in reserves 2023 Recognised in the income statement Total Recognised in reserves - - - 955 955 ( 19 100) ( 19 100) 34 223 34 223 - - - (thousands of euros) 2022 Recognised in the income statement Total ( 655) ( 655) - - ( 117 028) ( 117 028) ( 279) - ( 279) 23 350 - 23 350 ( 279) 16 078 15 799 23 350 ( 117 683) ( 94 333) 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: 541 Management Report Sustainability Report Separate Financial Statements Annex Assets classified under level 3 Valuation Model Financial assets mandatorily at fair value through profit or loss 2023 Variable analysed Carrying book value 1 396,6 453,8 (millions of Euros) Unfavourable scenario Favourable scenario Change Impact Change Impact Bonds issued by other entities Shares Discounted cash flow model Discount rate 453,8 (-) 100 bps ( 37,1) (+) 100 bps Valuation of the management company (adjusted) 135,7 (b) 135,7 Other variable income securities Financial assets at fair value through other comprehensive income Valuation of the management company Valuation of the management company (b) (c) 807,2 76,3 730,9 58,9 58,9 ( 37,1) ( 37,1) - - - - - ( 0,6) ( 0,6) 25,7 25,7 25,7 - - - - - 0,3 0,3 0,3 - 26,0 Shares Total Discounted cash flows Renewable Energy Tariff 9,9 ( 0,6) Others (a) 49,1 1 455,5 - ( 37,8) (a) No sensitivity analysis was carried out for these categories as these include securities of an individually immaterial value. (b) Given that the Restructuring Funds were not revalued in 2023, a sensitivity analysis was not carried out on them. (c) In the specific case of units valued according to the quotation provided by the respective management company, it is not reasonable to analyse the impact of the change in variables underlying the determination of the quotation by that entity Assets classified under level 3 Valuation Model Financial assets mandatorily at fair value through profit or loss (millions of Euros) 2022 Variable analysed Carrying book value 1 500,4 422,6 Unfavourable scenario Favourable scenario Change Impact Change Impact ( 43,3) ( 43,3) 54,5 54,5 Bonds issued by other entities Discounted cash flow model Specific Impairment 2,4 -50% ( 2,4) +50% 10,8 Shares Other variable income securities Financial assets at fair value through other comprehensive income Shares Total Discounted cash flow model Discount rate 420,2 (-) 100 bps ( 40,9) (+) 100 bps 43,7 Valuation of the management company (adjusted) Valuation of the management company (adjusted) Valuation of the management company 135,7 (b) 137,7 942,2 (b) 117,6 (c) 824,6 - - - - 61,5 61,5 ( 1,7) ( 1,7) Discounted cash flows Renewable Energy Tariff 9,6 ( 1,7) Others (a) 51,9 1 562,0 - ( 45,0) - - - - 0,1 0,1 0,1 - 54,6 (a) No sensitivity analysis was carried out for these categories as these include securities of an individually immaterial value. (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 about 90% of the underlying assets of the Funds, a variation of +10% and -10% was considered in the fair value of the main real estate assets of each Fund, which leads to an impact of +5.2% and - 5.2% in the fair value of the restructuring funds. (c) In the specific case of units valued according to the quotation provided by the respective management company, it is not reasonable to analyse the impact of the change in variables underlying the determination of the quotation by that entity 542 Annual Report 2023 | novobanco The main parameters used, on 31 December 2023 and 2022, 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: Overnight 1 month 3 months 6 months 9 months 1 year 3 years 5 years 7 years 10 years 15 years 20 years 25 years 30 years EUR 2023 USD GBP EUR 2022 USD GBP 4,0325 3,8450 3,9090 3,8610 3,6870 3,5130 2,5665 2,4360 2,4420 2,4940 2,5580 2,5150 2,4120 2,3260 5,3650 5,4200 5,5300 5,5000 5,4100 5,0470 4,0319 3,8117 3,7571 3,7541 3,7785 3,7585 3,6768 3,5910 5,0850 5,2900 5,5000 5,3500 5,2750 4,9670 3,9400 3,6544 3,5548 3,5682 3,6300 3,6570 3,6470 3,6403 1,9501 1,8840 2,1320 2,6930 2,9920 3,2910 3,3005 3,2390 3,2020 3,2020 3,1410 2,9310 2,7150 2,5320 4,3650 4,4200 4,7700 5,1500 5,2350 5,1130 4,3010 4,0110 3,8780 3,8220 3,7970 3,7260 3,6170 3,4720 3,5750 3,6500 3,8000 4,3350 4,5250 4,6768 4,6088 4,3280 4,1350 3,9920 3,9377 3,8647 3,7967 3,7257 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: Index Serie 1 year 3 years 5 years 7 years 10 years (basis points) 31 december 2023 CDX USD Main iTraxx Eur Main iTraxx Eur Senior Financial 31 de dezembro de 2022 CDX USD Main iTraxx Eur Main iTraxx Eur Senior Financial 41 40 40 39 38 38 - 14,64 - - 35,05 - 33,64 33,08 - 56,87 66,40 - 56,70 58,21 67,02 82,02 90,60 99,29 78,74 78,97 - 101,74 106,87 - 98,19 98,68 - 117,73 122,66 - Interest rate volatility The values presented below represent the implicit volatilities (at the money) used for the valuation of interest rate options: EUR 87,29 110,08 105,67 101,82 97,50 91,56 2023 USD 94,80 125,00 121,30 116,10 108,90 99,00 1 year 3 years 5 years 7 years 10 years 15 years GBP 99,70 142,10 140,10 134,00 124,60 113,10 543 EUR 99,28 124,23 124,77 121,60 115,66 107,02 2022 USD 23,33 38,10 40,72 39,38 35,95 - (%) GBP 55,24 49,59 47,00 45,73 42,81 - Management Report Sustainability Report Separate Financial Statements Annex 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: Foreign exchange rate 2023 2022 1 month 3 months 6 months 9 months 1 year Volatility (%) EUR/USD EUR/GBP EUR/CHF EUR/NOK EUR/PLN EUR/RUB USD/BRL a) USD/TRY b) 1,1050 0,8691 0,9260 11,2405 4,3395 1,0666 0,8869 0,9847 10,5138 4,6808 117,2010 117,2010 4,8523 29,5503 5,2865 18,7183 6,98 4,96 6,76 9,81 6,99 29,28 12,71 8,47 6,64 5,14 6,13 9,54 7,04 31,71 13,09 13,41 6,57 5,50 5,99 9,56 7,13 34,65 13,60 17,98 6,54 5,75 5,94 9,60 7,19 36,12 13,95 21,13 6,70 5,95 5,91 9,61 7,24 32,92 14,29 23,43 a) Calculated based on EUR / USD and EUR / BRL exchange rates. b) Calculated based on EUR / USD and EUR / TRY exchange rates. Regarding foreign exchange rates, the Bank uses in its valuation models the spot rate observed in the market at the moment of the valuation. Quotation indexes The table below presents the evolution of the main market equity indexes and their respective volatilities, used in the valuation of equity derivatives: DJ Euro Stoxx 50 PSI 20 IBEX 35 FTSE 100 DAX S&P 500 BOVESPA Quotation Historical volatility 2023 2022 Change % 1 month 3 months Implied Volatility 4 399 5 920 9 593 7 532 16 148 4 450 3 794 5 726 8 229 7 452 13 924 3 840 118 087 109 735 15,96% 3,39% 16,57% 1,07% 15,98% 15,91% 7,61% 13,65 12,29 12,13 10,97 12,94 11,61 15,90 15,89 13,99 17,15 13,37 15,16 13,75 18,48 11,00 - - 9,28 11,03 10,93 19,74 36.2. Assets and liabilities at Amortized Cost Cash and deposits with Central Banks, Deposits with banks and Loans and advances to credit institutions and Deposits from Central Banks Considering the short-term nature of these financial instruments, their carrying book value is a reasonable estimate of their fair value. Securities at amortised cost The fair value of securities recorded at fair value is estimated according to the methodologies used for the valuation of securities recorded at fair value, as described at the beginning of the current Note. Loans and advances to customers The fair value of loans and advances to customers is estimated based on the discounted expected future cash flows of principal and interest, assuming that the instalments are paid on the dates contractually defined. The expected future cash flows from portfolios of loans with similar credit risk characteristics, such as residential mortgage loans, are estimated collectively on a portfolio basis. The discount rates used by the Bank are the current interest rates used for loans with similar characteristics. 544 Annual Report 2023 | novobanco 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. The fair value of financial assets and liabilities recorded in the balance sheet at amortized cost is analyzed as follows, having been estimated based on the main methodologies and assumptions described below: (thousands of Euros) Assets / liabilities recorded at amortised cost Quoted market prices Fair value Valuation models based on observable market parameters Valuation models based on unobservable market parameters (Level 1) (Level 2) (Level 3) Total fair value 31 December 2023 Cash, cash balances at central bank and other demand deposits 5 742 599 - 5 742 599 - 5 742 599 Financial assets at amortised cost Debt securities Loans and advances to banks Loans and advances to customers Financial assets 8 200 570 6 315 707 228 200 1 515 592 8 059 499 125 817 23 063 507 - - 125 817 - 125 817 - 23 379 919 23 379 919 37 132 493 6 315 707 6 096 616 24 895 511 37 307 834 Financial liabilities measured at amortised cost Deposits from banks Due to customers Debt securities issued, subordinated debt and liabilities associated to transferred assets Other financial liabilities Financial liabilities 6 685 933 29 193 007 - - 1 085 659 1 237 424 489 750 - 6 623 884 - 6 623 884 - - - 29 193 007 29 193 007 - 1 237 424 489 750 489 750 37 454 349 1 237 424 6 623 884 29 682 757 37 544 065 545 Management Report Sustainability Report Separate Financial Statements Annex (thousands of Euros) Assets / liabilities recorded at amortised cost Quoted market prices Fair value Valuation models based on observable market parameters Valuation models based on unobservable market parameters (Stage 1) (Stage 2) (Stage 3) Total fair value 31 December 2022 Cash, cash balances at central bank and other demand deposits 6 387 295 - 6 387 295 - 6 387 295 Financial assets at amortised cost Debt securities Loans and advances to banks Loans and advances to customers Financial assets 8 400 233 6 296 968 145 464 22 955 247 - - 281 254 145 464 1 461 985 8 040 207 - 145 464 - 23 450 103 23 450 103 37 888 239 6 296 968 6 814 013 24 912 088 38 023 069 Financial liabilities measured at amortised cost Deposits from banks Due to customers Debt securities issued, subordinated debt and liabilities associated to transferred assets Other financial liabilities Financial liabilities 10 506 509 28 425 223 - - 1 601 454 1 693 216 371 511 - 10 497 606 - 10 497 606 - - - 28 425 223 28 425 223 44 451 1 737 667 371 511 371 511 40 904 697 1 693 216 10 497 606 28 841 185 41 032 007 Note 37 –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 X of the Market Discipline Report. 37.1 - 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: • Universality by application throughout novobanco; • • • Integrality of the risk culture, through a holistic vision and anticipation of its materialization; Independence from the other units of the group, in particular from the risk-taking units; 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. 37.2 - Governance and risk management structure Risk Management, being vital for the development of novobanco Group's activity, is centralized in the Risk Management Function, assumed by the Global Risk Department (DRG), which defines in a holistic way the principles of risk management and control, in close coordination with the other 2nd line units of the 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. 546 Annual Report 2023 | novobanco The person responsible for the Risk Management Function of the novobanco Group is the head of the DRG. In order to guarantee greater efficiency in coordination with the DRG, a local Risk Function Manager was appointed for each relevant entity of the novobanco Group. The intervention of the DRG is direct or of coordination in alignment 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. • • • Business risk. Liquidity risk. Information and communication and Security, compliance risk, and reputational risk, and We highlight ESG (Environmental, Social and Governance) risk - particularly the subcategories of climate and environmental risk and other environmental risks - as risks of increasing relevance, and whose impact is estimated to be materialized in the medium and long term (that is, over a horizon longer 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 assessment of the materiality of its impacts is analysed cross-sectionally, as ESG factors are intrinsically present in the other risk categories provided for in the Group's risk taxonomy. In this regard, we highlight the factors that have received greater specialization from the Group, in terms of its risk assessment and control methodologies and their 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). Next are the main guidelines for managing 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; non-financial risks: the management of this risk is based on the definition of a framework for the management and control of non-financial risks and specific policies; and on the compliance function and the Information Security Office playing a relevant role in the definition of other specific risk policies. 547 Management Report Sustainability Report Separate Financial Statements Annex 37.3 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 7.6.6. 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. Main events in the fiscal year 2023 During 2023, we highlight below the main events related to impairment, namely: (i) (ii) (iii) Constitution of impairments for contingencies resulting from adverse market conditions; Introduction of new triggers to stage 2 related to exposures without a risk rating; Update of macroeconomic scenarios. Regarding the impairment boosts mentioned in points 1. above, taking into account the current economic context of high interest rates, with the prospect of maintenance during 2024, to face contingencies of these adverse market conditions, a sensitivity analysis was carried out on the corporate and housing portfolio. Therefore, novobanco estimated and accounted for these portfolios, in an appropriate and timely manner, more than 40 million euros in unallocated impairment in addition to the cost of risk observed in its portfolio. Regarding the introduction of new triggers to stage 2, in this case, all exposures with a persistent situation of not having a valid risk rating are now considered in stage 2. The introduction of this measure in the collective impairment calculation model had no impact in 2023 as novobanco had already taken precautions. In relation to point (iii) above, the impact of updating the macroeconomic scenarios underlying novobanco's impairment calculation model was estimated slightly below 30 million euros of impairment, an amount also recorded as unallocated impairment. The climate and environmental risk component The ESG risk materiality analysis seeks to identify the impact that this risk will have on other risks, particularly credit risk, since it is the main risk faced by novobanco. In order to monitor the portfolio's credit risk from an ESG perspective, various metrics (KRI) were created which are monitored on a monthly basis, seeking to analyze the evolution of the portfolio's risk and anticipate any adverse impacts on credit risk resulting from factors associated with climate and environmental risk. From a portfolio perspective, the assessment of credit risk in sectors relevant to climate risk policy is used by the novobanco to prioritize, assess and monitor transition risk, with a focus on negatively affected sectors or those with an uncertain impact. This methodology takes into account the following factors: direct and indirect contribution to GHG emissions (greenhouse gas, such as the production and distribution of fossil fuels or renewable energies), relevance to climate policy (such as the sensitivity of the cost structure to regulatory or fiscal changes based on GHG emissions) and importance in the energy value chain (production, use, consumption). In this respect, novobanco is developing its transition plan with the aim of reducing its indirect carbon footprint, reducing the risk of its portfolio and contributing to meeting the Paris objectives. In 2023 it took a major step forward, approving targets for reducing financed GHG emissions for 3 business sectors (Electricity Generation, Concrete and Commercial Mortgages). These targets were calculated based on scientific methodologies recommended by sector by the Science Based Targets Initiative (SBTi). In order to allow for a top-down analysis, novobanco has developed an ESG sectoral scoring system that allows for the identification of clients who will be the target of credit risk analysis from an ESG perspective, by prioritizing the sectors with the greatest concerns in terms of climate risk, namely the sectors classified in the ESG scoring with high and severe risk. Novobanco is developing specific guidelines adapted to the risks that each relevant sector faces or will face. 548 Annual Report 2023 | novobanco To ensure that novobanco has access to its clients' ESG information, new contractual provisions have been introduced in credit agreements regarding the provision of non-financial information by clients, minimum social and governance safeguards, as well as sectoral provisions for sectors subject to minimum financing safeguards, where applicable. For reference, the sectors subject to exclusion or minimum safeguards are described in the novobanco's Financing Principles - Sector/activity exclusions and minimum safeguards. During 2023, special emphasis was also placed on obtaining Energy Performance Certificates (EPC) for real estate guarantees already in the bank's portfolio. For new operations, regardless of the purpose and type of property, the energy certificate is mandatory. Finally, novobanco was selected to take part in the Fit-for-55 Climate Stress Test, a regulatory exercise that seeks to identify the resilience of financial institutions to meet climate objectives. The exercise began in 2023 and will conclude in 2024. This exercise will enable a benchmark to be made between the various institutions and will allow the regulator to identify market best practices. 37.3.1 - Credit risk exposure novobanco maximum credit risk exposure is analysed as follows: 2023 2022 Gross value Impairment Net Exposure Gross value Impairment Net Exposure (thousands of Euros) Deposits with and loans and advances to banks 323 465 ( 667) 322 798 Derivatives for trading and fair value option derivatives 117 817 Securities held for trading Securities at fair value through profit/loss 318 528 - Securities at fair value through profit/loss - mandatory 465 211 - - - - 117 817 318 528 - 465 211 433 665 414 135 134 419 36 428 13 ( 674) 413 461 - - - - 134 419 36 428 13 433 665 Securities at fair value through other comprehensive income 675 046 ( 211) 674 835 2 109 045 ( 589) 2 108 456 Securities at amortised cost 8 524 914 ( 291 567) 8 233 347 8 691 800 ( 291 567) 8 400 233 Loans and advances to customers 23 915 735 ( 935 991) 22 979 744 23 848 444 (1 057 567) 22 790 877 Derivatives - hedge accounting 683 074 - 683 074 562 886 - 562 886 Other assets 543 218 ( 191 543) 351 675 591 030 ( 117 590) 473 440 Guarantees and standby letters provided 2 347 433 ( 74 665) 2 272 768 2 262 092 ( 82 392) 2 179 700 Documentary credits 187 024 - 187 024 169 410 - 169 410 Revocable and irrevocable commitments 5 996 626 ( 9 068) 5 987 558 5 955 096 ( 7 066) 5 948 030 44 098 091 (1 503 712) 42 594 379 45 208 463 (1 557 445) 43 651 018 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 6.12. 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. 37.3.2 - 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. 549 Management Report Sustainability Report Separate Financial Statements Annex 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: 550 Annual Report 2023 | novobanco A – Base Cenario, with a relative weight of 72,5% Unit 2023 2024 2025 2026 PIB Private Consumption Public Expenditure Investment Exports Imports Internal Demand Prices CPI Real Estate (Residential) Real Estate (Commercial) Equity prices (incremental change) Unemployment Euribor (annual average) 3-months End of the period 6-months End of the period 12-months End of the period Yields Soberanas (average) Bund 10Y End of the period PGB 10Y End of the period PGB 2Y End of the period 10Y PGB-Bund spread Annual average End of the period 10Y-2Y PGB Spread Annual average End of the period Real growth % Real growth % Real growth % Real growth % Real growth % Real growth % Real growth % % % % % % workforce % % % % % % % % % % % % bps bps bps bps 2,1 1,0 1,2 1,5 4,2 1,3 1,1 4,6 6,5 2,2 2,0 6,5 3,43 3,96 3,69 3,92 3,88 3,77 2,53 2,81 3,33 3,64 2,96 2,99 80 83 37 65 1,4 0,8 1,2 4,7 2,0 3,4 1,6 2,9 0,2 0,1 0,0 6,7 3,58 3,19 3,52 3,11 3,40 3,03 2,81 2,81 3,71 3,78 2,89 2,79 90 97 82 99 2,0 1,3 1,3 5,1 3,9 4,0 2,0 2,2 1,5 0,6 0,0 6,9 3,02 2,85 2,99 2,87 2,97 2,90 2,87 2,92 3,89 4,00 2,92 3,05 103 108 97 95 2,2 1,7 1,4 4,2 6,4 6,3 2,2 2,0 3,3 1,6 0,0 6,8 2,84 2,83 2,87 2,86 2,91 2,92 2,98 3,04 4,11 4,21 3,18 3,31 113 117 93 90 After GDP growth of 6.8% in 2022, the base scenario assumes a slowdown in activity in 2023, to growth of around 2.1%, supported by net external demand, given the strong growth in exports at the beginning of the year (in particular from tourism), and the resilience of private consumption. The decline in GDP growth is explained by the adverse impact on domestic demand of high inflation and rising interest rates. For 2024, it is assumed that GDP growth will decline to 1.4%, with additional lagged impacts from a restrictive monetary policy (increase in debt service), a slight rise in unemployment and a slowdown in exports. The decline in growth is mitigated by the decline in inflation, budgetary support and an acceleration of investment (mainly public investment) within the scope of the Recovery and Resilience Plan. In 2025-26, GDP growth is assumed to converge to trend (annual growth around 2%-2.2%). After reaching a peak of 7.8% in 2022, average annual inflation remains high in 2023, at around 4.6% (mainly with the contribution of services). A more visible slowdown in consumer prices is assumed for 2024-26, towards the 2% target. In any case, persistent inflation in 2022-24 supports the scenario of higher key interest rates. In the base scenario, these reach their peak in the 4th quarter of 2023. The annual average Euribor in months is seen to increase from 0.35% in 2022 to 3.43% in 2023 and to 3.58% in 2024, before to gradually decrease to 2.84% in 2026 (the rate is expected to peak at around 4% in the 4th quarter of 2023). The PGB-Bund spread is expected to remain contained, below or around 100 basis points in 2024 and 2025. The household savings rate is expected to increase from 6.5% in 2022 to 7.3% in 2025 and 2026, as private consumption slows, following the post-Covid boom and with the effects of higher interest rates and more restrictive financing conditions. The unemployment rate remains contained, at around 6.5%-6.8% of the active population. 551 Management Report Sustainability Report Separate Financial Statements Annex B – Less favorable / adverse scenario, with a relative weight of 17,5% PIB Private Consumption Public Expenditure Investment Exports Imports Internal Demand Prices CPI Real Estate (Residential) Real Estate (Commercial) Equity prices (incremental change) Unemployment Euribor (annual average ) 3-months End of the period 6-months End of the period 12-months End of the period Yields Soberanas (average) Bund 10Y End of the period PGB 10Y End of the period PGB 2Y End of the period 10Y PGB-Bund spread Annual average End of the period 10Y-2Y PGB Spread Annual average End of the period Unit Real growth % Real growth % Real growth % Real growth % Real growth % Real growth % Real growth % % % % % % workforce % % % % % % % % % % % % bps bps bps bps 2023 2024 2025 2026 2,1 1,0 1,2 1,5 4,1 1,3 1,1 4,9 4,7 1,6 1,5 6,7 3,49 4,56 3,79 5,05 3,99 5,10 2,90 3,65 3,69 4,84 2,86 4,39 80 119 83 45 -3,2 -3,9 0,1 1,2 -3,2 -0,3 -2,3 4,7 -10,1 -15,2 -50,0 8,9 4,37 3,98 4,66 3,87 4,65 3,75 2,93 2,21 4,31 3,78 3,69 2,99 138 157 62 79 -1,5 -2,6 0,1 1,0 0,4 0,5 -1,4 1,9 -4,8 -6,5 -45,0 13,1 2,96 2,45 2,84 2,33 2,72 2,21 1,98 1,75 3,48 3,17 2,68 2,36 150 142 80 81 1,6 1,4 0,8 3,7 6,3 6,5 1,8 1,8 0,8 0,4 -35,0 10,6 2,25 2,05 2,15 1,96 2,08 1,94 1,80 1,85 3,08 2,99 2,24 2,11 128 114 85 88 The adverse scenario is based on the assumption that inflation will become more persistent than expected. This could be due to an energy shock, with new impacts from the wars in Ukraine and the Middle East. The ECB responds by further increasing policy rates in late 2023 and 2024. This leads to sharply restrictive financial conditions and a recession in 2024- 2025. In the Portuguese economy, GDP growth falls by 3.2% in 2024 and 1.5% in 2025, mainly as a result of a significant contraction in private consumption, which is negatively impacted by the increase in interest rates, the fall in purchasing power purchase and a significant increase in unemployment. Private investment by families and non-financial corporations also falls in real terms. However, total investment still increases, as a result of the public component, reflecting the implementation of the Recovery and Resilience Plan funds. It is assumed that net external demand will have a negative contribution to growth (decrease in exports, including services). Average annual inflation is expected to remain well above the target in 2024 (around 4.7% in Portugal). But tighter financial conditions, with higher policy and market interest rates, contribute to the recession in 2024-25, which is assumed to be disinflationary in nature. Inflation falls quickly to levels below 2% in 2025-26, leading the ECB to cut key rates in that period, which translates into a fall in market interest rates, to levels below those observed in the base scenario. 552 Annual Report 2023 | novobanco The unemployment rate rises to 8.9% in 2024 and to 13.1% in 2025. The fall in private consumption and the need to compensate for the erosion caused by inflation result in an increase in the household savings rate, to 9. 9% of disposable income in 2025, above pre-Covid levels. C – Most favorable scenario, with a relative weight of 10% Unit 2023 2024 2025 2026 PIB Private Consumption Public Expenditure Investment Exports Imports Internal Demand Prices CPI Real Estate (Residential) Real Estate (Commercial) Equity prices (incremental change) Real growth % Real growth % Real growth % Real growth % Real growth % Real growth % Real growth % % % % % Unemployment % workforce Euribor (annual average) 3-months End of the period 6-months End of the period 12-months End of the period Yields Soberanas (average) Bund 10Y End of the period PGB 10Y End of the period PGB 2Y End of the period 10Y PGB-Bund spread Annual average End of the period 10Y-2Y PGB Spread Annual average End of the period % % % % % % % % % % % % bps bps bps bps 2,3 1,3 1,2 1,5 4,2 1,3 1,3 4,6 7,5 2,5 2,0 6,4 3,44 3,96 3,70 3,92 3,88 3,77 2,53 2,85 3,33 3,64 2,96 2,99 80 79 37 65 2,1 1,8 1,2 5,5 3,1 4,6 2,4 3,0 1,8 0,6 15,0 6,5 3,83 3,69 3,76 3,60 3,65 3,52 2,87 2,88 3,65 3,66 2,91 2,83 79 78 74 83 2,4 2,4 1,5 6,1 4,7 5,9 3,0 2,4 2,5 0,8 20,0 6,4 3,52 3,35 3,42 3,24 3,33 3,13 3,05 3,21 3,76 3,86 2,92 3,01 72 65 84 85 3,1 3,5 1,4 5,0 6,9 7,7 3,5 2,1 3,7 1,2 25,0 5,9 3,17 2,99 3,11 2,97 3,04 2,95 3,28 3,35 3,91 3,96 3,00 2,99 63 61 91 97 The favorable scenario assumes that the increase in inflation in 2023 proves to be transitory. After recording 4.6%, price growth converges, in the remaining projection horizon, to values close to 2%. This development could be associated with a rapid resolution of conflicts in Ukraine and/or the Middle East and a strong reduction in energy and food prices. Short- term market interest rates decline in 2025-2026 but remain clearly above pre-Covid levels. Long-term interest rates rise throughout the projection horizon, but with the 10-year PGB-Bund spread retreating and evolving at low levels. In this context, it is assumed that economic activity will expand at an above-trend pace for most of the projection horizon and accelerating until 2026. GDP growth benefits from positive investment performance (with the implementation of funds from the PRR), private consumption and exports. Strong external demand and favorable financing conditions support house price growth, albeit in single digits. The unemployment rate is seen falling to close to 5% of the active population. 553 Management Report Sustainability Report Separate Financial Statements Annex 37.3.3. Impairment Models 37.3.3.1. Individual Credit Analysis The Individual Impairment Analysis aims to determine the most appropriate impairment rate for individually significant clients, regardless of the value resulting from the Collective Impairment Model. The identification of individually significant customers is carried out based on the criteria defined in the standard. The Individual Analysis of individually significant clients is carried out based on the information provided by the Commercial Structures and DRCE (Corporate Credit Recovery Department) regarding the client/Group framework, historical cash flows (wherever possible, at least 3 years) and forecasts (when available) and existing collateral. In the analysis of quantifying impairment on an individual basis, possible scenarios are established for credit recovery, either through the continuity of the client's business, through the giving/execution of collateral or through the sale of the credit, weighted by the respective probability of occurrence. If the analysis results in no specific impairment being necessary, the impairment will be determined by collective analysis, that is, by the collective impairment model. 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 The Group considers as the target of an Individual Analysis process (staging analysis and, when applicable, individual impairment quantification), customers who: • Register exposure in stage 3 and liability equal to or greater than 1 million euros (or equal to or greater than 250 thousand euros if they are DRCE clients); • Are identified by the Committee itself based on another justified criterion (e.g. sector of activity); • • In the past, they have been assigned specific impairment; In the event of any new evidence that may have repercussions on the calculation of impairment, they are proposed for analysis by one of the participants of the Impairment Committee or by another Body/Forum, namely GARC (e.g.: Reclassification in stage 3 within the scope of GARC). The identification of customers targeted for Individual Analysis will be updated monthly, in order to take into account any changes that may occur throughout the year. 554 Annual Report 2023 | novobanco Quantification of Impairment on an Individual Basis The impairment calculation on an individual basis may take into account different recovery strategies, which must include different possible scenarios, weighted by the respective probability of occurrence, and they must include information on past and current events and forecasts of future economic conditions (forward scenarios -looking). It is understood that there are two methods of estimating the amount to be recovered by the Bank: • Going Concern approach (“business continuity” method): estimation of cash flows through the client’s activity; • Gone Concern approach (“cessation of activity” method): presupposes the cessation of the Client’s activity, whereby the recoverable value is determined based on scenarios of execution/granting of guarantees provided, the Client’s liquidation/insolvency and/or of the respective guarantors/guarantors, and/or the sale of credits to third parties. Going Concern This scenario involves a situation of recovery of outstanding amounts through the cash flows generated by the client's business. The going concern scenario is considered to be applicable when: • • There is updated and reliable financial information about the debtor so that it is possible to reliably estimate the future cash flows that will be channeled to fulfill the debt service (e.g.: financial information aged less than or equal to 1 year and/or reports audits that do not recurrently present reservations); The available information suggests that the debtor will have the capacity to generate cash flows from its operational activities. This analysis can be carried out using the following approaches: • • • “Discounted Cash Flow” approach supported by a reliable business plan and adjusted to the expectations of the evolution of the debtor's activity; “Twostep Discounted Cash Flow” - approach supported by a Discounted Cash Flow (Step 1), complemented with a Terminal value (Step 2); “Steady state” in the absence of a reliable business plan, the latest available financial statements may be used, and the Group must make any adjustments it deems necessary to determine the operational cashflow that will be generated to cover debt service. Gone Concern In the gone concern approach, the recovery of amounts owed will be materialized through a scenario of payment in kind and/or the execution of collateral allocated to the credit granted. This approach therefore considers the scenario of cessation of the company's activity and the preparation of estimates of the flows that result from the execution and sale of collateral allocated to credit. The consideration of a scenario of donation or execution of collateral must, in a first phase, take into account the eligibility of the collateral for recovery of the amounts owed, i.e., the verification that the asset meets the necessary conditions to be considered for consideration. effects of calculating the recoverable value (e.g.: registration of mortgages, lack of seizure of assets, among others). By way of example, if another creditor has a preferential mortgage on the collateral that is greater than the recoverable value of the asset, then the Group should not consider any amount recoverable from that collateral. Subsequently, the recoverable value must be determined in accordance with the rules described in Circular Letter no. CC/2018/0000006, particularly with regard to the deadlines for receiving collateral, sales costs, maintenance costs, haircuts to be applied in accordance with the age of the evaluation, among others. 37.3.3.2. 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 555 Management Report Sustainability Report Separate Financial Statements Annex 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. 37.3.4. Credit Risk Monitoring 37.3.4.1. Internal rating models for corporate, institutional and equity portfolios 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: The Bank's Rating Department has a Rating Model for the following segments: Start-ups; Individual Business Owners (ENIs); Small Businesses; Medium Businesses; Large Companies; Real Estate and Rental Real Estate; Large Business Holding; Financial Institutions; Municipalities and Institutions; Countries; 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 556 Annual Report 2023 | novobanco 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. As for the risk positions equivalent to equities held by the novobanco, directly or indirectly through the holding of investment funds, as well as advances and accessory benefits, all included in the equity risk class for the purpose of calculating risk-weighted assets, are classified in various risk segments according to the characteristics of their issuers or borrowers, following the segmentation criteria presented earlier. These segmentation criteria determine the type of rating model to be applied to the issuers of the stocks (or borrowers of the advances / accessory benefits) and, therefore, to them. 37.3.4.2 - 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. 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: 557 Management Report Sustainability Report Separate Financial Statements Annex 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 Aaa Aa1 Aa2 Aa3 A1 A2 A3 Baa1 Baa2 Baa3 Ba1 Ba2 Ba3 B1 B2 B3 Caa1 Caa2 Caa3 Ca C External rating equivalent to S&P Aggregation classes of rating* 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 Fitch AAA AA+ AA AA- A+ A A- BBB+ BBB BBB- BB+ BB BB- B+ B B- CCC+ CCC CCC- CC C RD/D * for the purposes of disclosing information in the explanatory notes 37.3.4.3 - 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 Card, Overdraft and Loan Accounts products, which it uses for the purposes of designing and monitoring credit quality, however, not being IRB portfolios. 37.3.4.2. Other specific disclosures Forward Looking Models Collective impairment models incorporate forward looking information through macroeconomic models, which estimate the evolution of risk parameters through the evolution of macroeconomic variables. Regarding the PD model, the forward looking adjustment is carried out for the segments of Large and Medium-sized Companies, Small Companies and Start-ups, Home Credit and Other Consumer Credit. For LGD models, there is a specific macroeconomic adjustment for the Housing, Consumer and Corporate Credit segments. The aforementioned models are based on the historical series of defaults and, on the other hand by the historical series of the main macroeconomic variables (GDP, inflation, interest rate, unemployment rate and property prices), having been used quarterly historical data since 2010. The definition of the final models depends on the economic sense and their statistical performance. 558 Annual Report 2023 | novobanco 37.3.5. Delinquency The table below displays the assets impaired, or overdue but not impaired: Deposits with and loans and advances to banks Securities held for trading Bonds issued by government and other public entities Securities at fair value through profit/loss - mandatory Bonds issued by other entities Securities at fair value through other comprehensive income Bonds issued by government and other public entities Bonds issued by other entities Securities at amortised cost Bonds issued by government and other public entities Bonds issued by other entities Neither overdue or impaired 323 465 318 528 318 528 465 211 465 211 654 462 285 852 368 610 8 084 645 4 402 729 3 681 916 2023 (thousands of Euros) Overdue but not impaired Impaired Total exposurel Impairment Net Exposure - - - - - - - - - - - - - - - - 323 465 318 528 318 528 465 211 465 211 ( 667) 322 798 - - - - 318 528 318 528 465 211 465 211 20 584 675 046 ( 211) 674 835 - 285 852 ( 21) 285 831 20 584 389 194 ( 190) 389 004 440 269 8 524 914 ( 324 344) 8 200 570 - 4 402 729 ( 585) 4 402 144 440 269 4 122 185 ( 323 759) 3 798 426 Loans and advances to customers 22 792 360 16 162 1 107 213 23 915 735 ( 935 991) 22 979 744 Deposits with and loans and advances to banks Securities held for trading Bonds issued by government and other public entities Neither overdue or impaired 414 135 36 428 36 428 Securities at fair value through profit/loss - mandatory 433 665 Bonds issued by other entities Securities at fair value through other comprehensive income Bonds issued by government and other public entities Bonds issued by other entities Securities at amortised cost Bonds issued by government and other public entities Bonds issued by other entities 433 665 2 083 797 1 629 639 454 158 8 281 706 4 590 460 3 691 246 2022 (thousands of Euros) Overdue but not impaired Impaired Total exposurel Impairment Net Exposure - - - - - - - - - - - - - - - - 414 135 36 428 36 428 433 665 433 665 ( 674) 413 461 - - - - 36 428 36 428 433 665 433 665 25 248 2 109 045 ( 589) 2 108 456 - 1 629 639 ( 382) 1 629 257 25 248 479 406 ( 207) 479 199 410 094 8 691 800 ( 291 567) 8 400 233 - 4 590 460 ( 1 714) 4 588 746 410 094 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 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): 559 Management Report Sustainability Report Separate Financial Statements Annex 2023 (thousands of Euros) Securities Portfolio - debt instruments Deposits with and loans and advances to banks Loans and advances to customers Overdue but not impaired Impaired Overdue but not impaired Impaired Overdue but not impaired Impaired - - - - - - - - - - - - - 102 968 - - - 1 746 101 222 357 885 13 510 344 284 - 91 - 460 853 - - - - - - - - - - - - - - - - - - - - - - - - - - 16 162 13 063 1 283 1 071 709 36 - - - - - - 347 942 13 274 121 865 130 683 15 882 66 238 759 271 56 576 109 559 87 260 187 422 318 454 16 162 1 107 213 2022 (thousands of Euros) Securities Portfolio - debt instruments Deposits with and loans and advances to banks Loans and advances to customers Overdue but not impaired Impaired Overdue but not impaired Impaired Overdue but not impaired Impaired - - - - - - - - - - - - - 102 968 - - - 6 696 96 272 332 374 327 619 - - 4 755 - 435 342 - - - - - - - - - - - - - - - - - - - - - - - - - - 5 765 332 385 3 423 1 448 822 53 19 - - - - - - 15 525 102 395 91 577 38 165 84 723 1 023 012 49 932 172 570 225 914 81 317 493 279 5 765 1 355 397 Overdue Up to 3 months From 3 months to 1 year From 1 to 3 years From 3 to 5 years More than 5 years Due Up to 3 months From 3 months to 1 year From 1 to 3 years From 3 to 5 years More than 5 years Overdue Up to 3 months From 3 months to 1 year From 1 to 3 years From 3 to 5 years More than 5 years Due Up to 3 months From 3 months to 1 year From 1 to 3 years From 3 to 5 years More than 5 years The following table shows the assets impaired or overdue but not impaired, broken down by the respective impairment Stage: 2023 2022 Stage 1 Stage 2 Stage 3 Total Stage 1 Stage 2 Stage 3 Total (thousands of Euros) Deposits with and loans and advances to banks Securities at fair value through other comprehensive income Securities at amortised cost - - - - - - - - 20 584 20 584 440 269 440 269 Loans and advances to customers 11 235 4 927 1 107 213 1 123 375 11 235 4 927 1 568 066 1 584 228 - - - - - - - - - - 25 248 25 248 410 094 410 094 - 1 361 162 1 361 162 - 1 796 504 1 796 504 560 Annual Report 2023 | novobanco 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. 2023 (thousands of Euros) Prime +High grade Upper Medium Grade Lower Medium grade Non- Investment Grade Speculative + Highly speculative Others Total Deposits with and loans and advances to banks 2 093 75 234 5 739 20 769 219 630 323 465 Securities held for trading 121 431 114 400 82 697 Bonds issued by government and other public entities 121 431 114 400 82 697 Bonds issued by other entities Securities at fair value through results Debt instruments from other public entities Debt instruments - other issuers Securities at fair value through profit/loss - mandatory Bonds issued by government and other public entities Bonds issued by other entities - - - - - - - - - - - - - - - - - - - - - Securities at fair value through other comprehensive income 145 868 253 586 200 641 Bonds issued by government and other public entities 145 868 129 993 9 991 Bonds issued by other entities - 123 593 190 650 - - - - - - - - - - - - - - - - - - 318 528 318 528 - - - - 465 211 465 211 - - 465 211 465 211 54 367 654 462 - 285 852 54 367 368 610 Securities at amortised cost 2 270 897 1 822 665 1 568 211 551 373 1 871 499 8 084 645 Bonds issued by government and other public entities 2 236 452 1 366 307 517 534 - 282 436 4 402 729 Bonds issued by other entities 34 445 456 358 1 050 677 551 373 1 589 063 3 681 916 Loans and advances to customers 5 610 977 6 013 313 2 541 315 7 704 060 922 695 22 792 360 561 Management Report Sustainability Report Separate Financial Statements Annex 2022 (thousands of Euros) Prime +High grade Upper Medium Grade Lower Medium grade Non Investment Grade Speculative + Highly speculative Others Total Deposits with and loans and advances to banks 625 26 595 57 692 72 881 256 342 414 135 Securities held for trading Bonds issued by government and other public entities Bonds issued by other entities Securities at fair value through results Debt instruments from other public entities Debt instruments - other issuers Securities at fair value through profit/loss - mandatory Bonds issued by government and other public entities Bonds issued by other entities - - - - - - - - - - - - - - - - - - - - - - - - - - - Securities at fair value through other comprehensive income 700 313 717 790 616 785 Bonds issued by government and other public entities 686 424 683 903 259 312 Bonds issued by other entities 13 889 33 887 357 473 - - - - - - - - - - - - 36 428 36 428 36 428 36 428 - 13 - 13 - 13 - 13 433 665 433 665 - - 433 665 433 665 48 909 2 083 797 - 1 629 639 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 entities 2 252 149 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 customers 5 783 346 5 852 343 2 457 978 7 677 338 716 277 22 487 282 37.3.6. Concentration of credit risk The analysis of risk exposure by sector of activity, on 31 December 2022 and 2021, is presented as follows: Loans to customers Securities held for trading Derivatives held for trading Gross Value Impairment Securities at fair value through profit or loss Securities mandatorily at fair value through profit or loss 2023 Derivatives - Hedge accounting Agriculture, Forestry, and Fishing 302 578 ( 6 334) Extractive Industries 57 469 ( 3 269) Food, Beverage and Tobacco Industries 472 014 ( 9 440) Textiles and Clothing Tanneries and Footwear Wood and Cork 332 265 ( 11 408) 58 155 ( 1 197) 106 131 ( 816) Paper and Graphic Industries 86 284 ( 4 214) Oil Refining 15 448 ( 4 747) Chemical and Rubber Product 331 556 ( 7 430) Non-Metallic Mineral Products 208 819 ( 2 705) Basic Metallurgical Industries and metal products 339 892 ( 14 102) Manufacture of Machines, Equipment and Electrical Appliances 182 068 ( 3 360) Manufacture of Transport Materials 156 110 ( 9 988) Other Manufacturing Industries 143 730 ( 4 871) Electricity, Gas and Water 342 545 ( 1 595) Construction and Public Works 1 274 696 ( 127 075) Wholesale and Retail Trade 1 445 291 ( 41 169) Tourism 1 109 052 ( 50 448) Transport and Communications 873 078 ( 29 181) Financial Activities Real Estate Activities 1 014 892 ( 80 027) 1 791 295 ( 140 115) Services Provided to Companies 1 987 456 ( 143 810) - - - - - - - - - - - - - - - - - - - - - - Administration and Public Services 443 232 ( 25 369) 318 528 Other collective service activities 395 004 ( 21 317) Mortgage Loans Loans to Individuals Others TOTAL 8 752 346 ( 63 563) 1 513 441 ( 118 337) 180 888 ( 10 104) - - - - 23 915 735 ( 935 991) 318 528 117 817 - - 1 084 106 - 256 325 - 116 9 804 384 - - 5 329 14 485 3 714 738 12 088 72 345 4 672 1 359 - - - - 3 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - (thousands of Euros) Securities at fair value through other comprehensive income Securities at amortized cost Guarantees and endorsements provided Gross Value Impairment Gross Value Impairment Gross Value Impairment 8 363 14 764 19 620 - - - - - ( 7) ( 6) - - - - 13 429 ( 2) - - 184 - - - 5 766 18 697 ( 6) ( 5) 7 648 9 387 ( 107) ( 280) 107 785 ( 304) 33 717 ( 83) 7 103 5 024 42 486 29 181 60 341 258 791 123 274 ( 77) - ( 410) ( 138) ( 11) ( 127) ( 63) 88 643 ( 346) 6 089 ( 2 140) 1 445 9 527 5 066 11 910 9 246 13 243 41 467 ( 115) ( 245) ( 17) ( 2) ( 383) ( 155) ( 374) 36 493 ( 18) 211 288 - - - 12 710 18 032 145 34 582 - - - ( 33) ( 9) - ( 6) ( 21) ( 77) ( 7) ( 21) ( 4) - - - 100 058 20 378 ( 48) ( 78) ( 16) 19 792 ( 3 974) 12 379 ( 38) 15 123 ( 2 045) 243 643 ( 243) 35 311 ( 25) 214 382 ( 137 557) 778 122 ( 40 992) 104 873 ( 77) 180 231 ( 3 417) - - 44 683 ( 643) 340 776 1 095 420 ( 234) ( 615) 425 074 ( 1 396) 186 374 ( 82) 178 027 ( 86 951) 81 590 ( 4 069) 704 318 ( 95 482) 342 618 ( 12 882) 4 419 909 ( 597) 20 705 ( 84) 144 751 ( 959) 40 889 ( 893) - - - - - - - - - - 15 797 ( 224) 1 434 485 683 074 161 309 - 205 - - - - - - - - - - - - 34 258 76 977 285 852 24 728 - - - 1 434 690 683 074 741 446 ( 211) 8 524 914 ( 324 344) 2 347 433 ( 74 665) 562 Annual Report 2023 | novobanco Loans to customers Gross Value Impairment Securities held for trading Derivatives held for trading Securities at fair value through profit or loss Securities mandatorily at fair value through profit or loss 2022 Derivatives - Hedge accounting Securities at fair value through other comprehensive income Securities at amortized cost Guarantees and endorsements provided Gross Value Impairment Gross Value Impairment Gross Value Impairment (thousands of Euros) Agriculture, Forestry, and Fishing 314 282 ( 6 361) Extractive Industries 65 487 ( 5 033) Food, Beverage and Tobacco Industries 451 857 ( 11 092) Textiles and Clothing Tanneries and Footwear Wood and Cork 399 438 ( 21 326) 71 976 ( 1 253) 135 642 ( 2 490) Paper and Graphic Industries 95 294 ( 5 900) Oil Refining 16 314 ( 114) Chemical and Rubber Product 288 743 ( 7 069) Non-Metallic Mineral Products 186 565 ( 2 412) Basic Metallurgical Industries and metal products 389 416 ( 16 041) Manufacture of Machines, Equipment and Electrical Appliances 229 052 ( 10 721) Manufacture of Transport Materials 176 450 ( 4 941) Other Manufacturing Industries 146 223 ( 4 877) Electricity, Gas and Water 235 377 ( 3 438) Construction and Public Works 1 402 541 ( 133 395) Wholesale and Retail Trade 1 455 117 ( 41 766) Tourism 1 159 301 ( 83 692) Transport and Communications 908 728 ( 28 609) Financial Activities Real Estate Activities 717 583 ( 65 727) 1 736 996 ( 162 024) Services Provided to Companies 2 263 447 ( 161 737) - - - - - - - - - - - - - - - - - - - - - - Administration and Public Services 409 300 ( 25 241) 36 428 Other collective service activities 423 173 ( 42 174) 8 484 134 ( 44 889) 1 286 010 ( 133 047) 399 998 ( 32 198) - - - - - - 4 302 298 - 609 629 1 357 4 145 42 - - 4 916 16 597 7 371 - 7 345 90 113 1 428 98 - 145 - - 19 - - - - - - - - - - - - - - - - - - - - - 13 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 129 - 2 378 - - - - - - - - - - 8 616 14 277 19 152 - - - - 13 718 - 14 839 433 - ( 7) ( 9) - - - - ( 2) - ( 5) - 41 511 ( 25) - - 6 435 14 533 17 373 124 46 531 29 699 80 134 - - - ( 6) ( 10) - ( 20) ( 92) ( 11) ( 11) 5 788 18 445 ( 15) ( 8) 11 878 ( 5 902) 8 851 ( 335) 112 027 ( 188) 35 920 ( 260) 9 690 5 522 53 959 28 906 59 816 221 901 93 571 48 649 191 510 58 643 39 244 ( 9) ( 1) ( 114) ( 139) ( 16) ( 186) ( 105) ( 75) ( 63) ( 65) ( 22) 7 026 ( 958) 1 518 7 563 5 780 2 264 15 775 35 468 ( 117) ( 255) ( 22) - ( 135) ( 165) 34 232 ( 390) 21 824 ( 3 559) 12 813 ( 290) 18 174 ( 2 452) 170 300 ( 2 675) 33 760 ( 88) 229 922 ( 117 563) 709 328 ( 45 840) 87 673 ( 58) 178 985 ( 3 190) - - 48 385 ( 1 027) 228 236 1 639 254 ( 304) ( 492) 394 609 ( 1 762) 152 540 ( 133) 150 030 ( 73 610) 90 041 ( 3 484) 692 736 ( 93 479) 358 605 ( 10 716) 1 629 863 ( 382) 4 403 137 ( 1 714) 21 158 ( 109) 24 849 ( 9) 92 579 ( 662) 38 037 ( 962) - - 13 889 - - - - - - - - - - - 50 262 ( 4) 17 558 ( 241) 1 535 145 562 886 207 058 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) Mortgage Loans Loans to Individuals Others TOTAL 37.4. 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. In terms of market risk, the main element of risk measurement consists of estimating potential losses under adverse market conditions, for which the Value at Risk (VaR) methodology is used. The novobanco Group uses a VaR using Monte Carlo simulation, with a 99% confidence interval and an investment period of 10 days. Volatilities and correlations are historical based on a one-year observation period. Validation of the suitability of the VaR model is carried out daily through the backtesting process (theoretical and real). Additionally, on a monthly basis, market risk monitoring includes the reporting of additional metrics within the scope of the stress testing framework, namely Stressed VaR (SVaR), historical stress scenarios and sensitivity analyzes to the main risk factors. Additionally, the market risk control framework incorporates a monthly process of monitoring portfolio positions within the scope of controlling the boundary between the trading book and the banking book, as well as independent validation (2nd line of defense) of the valuation of financial instruments at fair value. 2023 2022 December Annual average Maximum Minimum December Annual average Maximum Minimum (thousands of Euros) Exchange risk Interest rate risk Shares and commodities Volatility Credit spread 653 1 096 0 0 317 584 1 752 21 60 607 1 348 4 707 250 312 2 271 Diversification effect ( 1 016) ( 780) ( 2 025) Total 1 051 2 244 6 864 356 422 0 0 234 ( 32) 979 328 586 0 1 415 1 299 5 532 0 380 841 4 362 47 720 0 2 117 2 386 328 586 - 1 229 ( 433) ( 1 738) ( 7 766) ( 248) 897 6 314 48 820 897 novobanco has a VaR of Euro 1.051 thousand euros (31 December 2021: 897 thousand euros) 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. 563 Management Report Sustainability Report Separate Financial Statements Annex 37.4.1. Interest Rate Risk Following the recommendations of the European Banking Authority explained in the set of guidelines published in 2022 (EBA/GL/2022/14, EBA/RTS/2022/09 and EBA/RTS/2022/10) novobanco Group calculates its exposure to risk balance sheet interest rate based on prescribed shocks, classifying notional and interest amounts by repricing or key rate duration brackets, of all asset, liability and off-balance sheet items sensitive to interest rates, which do not belong to the trading portfolio . The calculation of balance sheet interest rate risk is also measured through internal shocks defined by the bank, namely through VaR metrics. In this context, novobanco Group has implemented a stress testing approach to interest rate risk based on three pillars: interest rate shock scenarios, sensitivity analyzes and reverse stress testing. The interest rate risk control framework allows novobanco Group to monitor and measure the impact of different interest rate scenarios, both from an economic value perspective and from a financial margin perspective, changing and adapting its risk profile in in line with the defined risk management strategy. Given the recent scenario of a significant increase in interest rates starting in the second half of 2022, this monitoring and control has become even more relevant, in order to guarantee the protection of economic value and financial margin in the face of interest rate volatility. As a result of novobanco Group's risk profile, with variable rate assets predominating and an essentially fixed rate liability structure, the rise in interest rates translated into a significant increase in financial margin, as a result of the favorable interest rate environment and the careful management of asset interest rates and financing costs. In addition, and taking into account the EBA's new regulatory shock on net interest income, whose regulatory limit is 5% of Tier 1 (on December 31, 2023 this limit was still indicative), the Bank adopted management measures in order to be able to fit the sensitivity of net interest income in a scenario of falling interest rates within the (indicative) limit established. Following the recommendations of Basel II (Pilar 2) and Instruction No. 19/2005, of the Bank of Portugal, 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 items, which do not belong to the trading portfolio, by repricing levels. Eligible amounts Up to 3 months 3 to 6 months 6 months to 1 year 1 to 5 years More than 5 years 2023 (thousands of Euros) Loans and advances to banks 5 865 014 5 762 343 100 000 2 629 42 - Loans and advances to customers 23 323 150 13 384 158 4 434 408 2 777 436 1 867 795 859 353 Securities Other assets Total Deposits from banks Due to customers Debt securities issued Other liabilities Total 10 134 098 1 753 679 842 514 182 160 3 995 853 3 359 892 178 059 178 059 - - - - 21 078 239 5 376 922 2 962 225 5 863 690 4 219 245 6 547 035 5 895 702 269 066 147 441 231 689 3 137 29 121 550 12 290 023 3 673 355 4 061 919 6 204 248 2 892 005 2 165 658 - - - 600 000 1 565 658 969 072 774 505 39 489 79 734 75 344 - 18 960 230 3 981 910 4 289 094 7 111 281 4 460 800 Balance sheet GAP (Assets - Liabilities) 697 005 2 118 009 1 395 011 (1 326 870) (1 247 590) ( 241 555) Off-Balance sheet Structural GAP Accumulated GAP - (3 442 043) ( 155 145) ( 140 937) 4 052 806 ( 314 681) 697 005 (1 324 034) 1 239 866 (1 467 807) 2 805 216 ( 556 236) (1 324 034) ( 84 168) (1 551 975) 1 253 241 697 005 (thousands of Euros) 564 Annual Report 2023 | novobanco Eligible amounts Up to 3 months 3 to 6 months 6 months to 1 year 1 to 5 years More than 5 years 2022 Loans and advances to banks 6 530 130 6 425 590 100 000 4 502 18 20 Loans and advances to customers 23 311 653 13 474 715 4 299 392 2 898 241 1 748 925 890 380 Securities Other assets Total Deposits from banks Due to customers Debt securities issued Other liabilities Total 11 863 628 1 813 859 787 465 2 086 492 2 953 975 4 221 837 134 045 134 045 - - - - 21 848 209 5 186 857 4 989 235 4 702 918 5 112 237 10 493 818 9 704 967 325 100 171 592 ( 752) 292 911 28 403 671 18 000 157 2 670 859 3 702 650 3 179 172 850 833 2 640 658 275 000 - 299 964 100 036 1 965 658 787 899 738 146 6 882 9 783 26 990 6 098 28 718 270 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 Structural GAP Accumulated GAP 1 045 (1 300 422) 1 302 320 ( 590 086) 810 306 ( 221 073) ( 485 545) (8 170 484) 3 486 336 215 161 2 207 779 1 775 663 (8 170 484) (4 684 148) (4 468 987) (2 261 208) ( 485 545) Sensitivity analyses are carried out for the interest rate risk of the banking portfolio based on an approximation to the duration model, with various scenarios of shift of the yield curve being carried out in all interest rate brackets. 2023 (thousands of Euros) Parallel increase of 200 pb Parallel decrease of 200 pb Short Rate Shock Up Short Rate Shock Down Steepener shock Flattener shock As at 31 December Exercise average Exercise maximum ( 219 057) ( 162 778) 147 303 ( 119 451) 70 207 ( 106 756) 44 560 209 961 ( 13 794) Exercise minimum ( 380 019) ( 152 580) ( 247 596) 65 416 59 039 135 003 8 691 7 766 18 799 40 358 ( 49 405) ( 63 603) ( 20 429) 419 ( 144 031) 2022 (thousands of Euros) Parallel increase of 200 pb Parallel decrease of 200 pb Short Rate Shock Up Short Rate Shock Down Steepener shock Flattener shock As at 31 December ( 334 517) 200 038 ( 227 249) Exercise average Exercise maximum Exercise minimum ( 17 375) 69 075 2 525 ( 94 998) 205 226 ( 57 198) ( 334 517) ( 235 847) ( 227 249) 123 841 68 433 123 841 35 622 38 128 69 877 98 327 30 932 ( 132 267) ( 118 588) ( 71 234) ( 143 180) 565 Management Report Sustainability Report Separate Financial Statements Annex 37.4.2 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: 2023 2022 Spot Forward Other elements Net exposure Spot Forward Other elements Net exposure (thousand of Euros) UNITED STATES DOLLAR ( 499 111) 506 031 ( 18) GREAT BRITISH POUND ( 46 498) 48 788 USD GBP BRL BRAZILIAN REAL DKK DANISH KRONE JPY CHF SEK JAPANESE YEN SWISS FRANC SWEDISH KRONE 908 ( 7 213) ( 1 385) ( 2 022) ( 5 087) - 7 635 1 521 4 590 5 795 NOK NORWEGIAN KRONE 48 641 ( 47 178) CAD CANADIAN DOLLAR ( 19 853) 22 060 ZAR SOUTH AFRICAN RAND ( 516) 757 AUD AUSTRALIAN DOLLAR 8 309 ( 7 317) VEB VENEZUELAN BOLIVAR MOP MACAO PATACA 3 108 - - MAD MOROCCAN DIRHAN ( 1 350) 2 064 MXN MEXICAN PESO AOA ANGOLAN KWANZA 59 ( 13) ( 91) - PLN CZK DZD CNY POLISH ZLOTY 3 081 ( 2 507) CZECH KORUNA 225 ( 425) ALGERIAN DINAR YUAN REN-MIN-BI OTHER 7 593 ( 8) ( 1 648) - ( 255) 3 022 6 902 2 290 908 422 138 2 568 708 1 463 2 207 241 992 3 108 714 ( 32) ( 13) 574 ( 200) 7 593 ( 263) 1 374 ( 635 627) 634 533 91 ( 1 003) ( 47 219) 46 965 866 ( 3 439) ( 2 357) ( 9 359) - 3 079 2 318 9 769 17 568 ( 17 578) 53 277 ( 53 059) ( 17 250) 19 003 ( 11) ( 530) 9 589 ( 9 463) 2 2 409 - - ( 2 558) 2 256 ( 7) ( 23) ( 2 998) 6 7 638 - - 3 010 ( 114) - 326 ( 347) ( 406) 1 574 - - - - - - - - - - - - - - - - - - - - ( 254) 866 ( 360) ( 39) 410 ( 10) 218 1 753 ( 541) 126 2 2 409 ( 302) ( 7) ( 23) 12 ( 108) 7 638 ( 21) 1 168 - - - 2 - - - - - - - - - - - - - - - - Note: asset / (liability) 37.5. Liquidity Risk ( 515 777) 544 490 ( 16) 28 697 ( 629 573) 641 416 91 11 934 Liquidity risk is the current or future risk that arises from an institution's inability to meet its obligations as they fall due, without incurring substantial losses. Liquidity risk can be subdivided into two types: • Asset liquidity (market liquidity risk) - consists in the impossibility of selling a certain type of asset due to a lack of liquidity in the market, which results in the widening of the bid/offer spread or the application of a haircut to the market value; • Funding (funding liquidity risk) - consists in the impossibility of financing assets in the market and/or refinancing maturing debt, within the desired terms and currency. This impossibility can be reflected through a sharp increase in financing costs or the requirement of 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 should be minimized through appropriate diversification of financing sources and maturities. Banks are subject to liquidity risk inherent in their maturity transformation business (long-term lenders and short-term depositors), making prudent liquidity risk management crucial. As at December 31, 2023, and 2022, the main liquidity indicators is as follows: 566 Gross funding from the ECB Net funding from the ECB (1) Annual Report 2023 | novobanco (thousand of Euros) 2023 1 129 ( 4 246) 2022 6 323 385 Portfolio of Eligible Assets for Repos (ECB and others), net of haircut 14 145 16 848 Used collateral Liquidity Buffer (2) Transformation Ratio (3) Liquidity Coverage Ratio (LCR) (4) Net Stable Funding Ratio (NSFR) (4) 6 947 13 529 84,3% 155% 115% 9 962 13 667 83,3% 202% 105% (1) Includes ESCB financing and investments; a positive value corresponds to a resource; a negative value corresponds to an investment (2) Corresponds to eligible assets portfolio adding HQLA securities non eligible for ECB, deducted of the used collateral (3) (Total Loans - Accumulated Impairment on Loans)/ Customer Deposits (4) Preliminary The Liquidity Coverage Ratio (LCR) and the Net Stable Funding Ratio (NSFR) are included in regulatory legislation, and the LCR aims to promote the resilience of Banks to short-term liquidity risk, 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 funding for their assets and off-balance sheet operations, for a period of one year. In accordance with current regulatory legislation, the novobanco Group is required to comply with a minimum regulatory limit of 100% in both ratios (LCR and NSFR). In the novobanco Group, liquidity is managed in a centralized manner at the Headquarters for the prudential consolidated group, with analysis and decision-making based on reports that allow not only to identify negative mismatches but to perform dynamic coverage of them. In accordance with the rules of the ITS (Implementing Technical Standards), the calculation of the net contractual deficit and the rebalancing capacity (counterbalancing capacity) is made for the end of 2023 and 2022: Total Up to 7 days 7 days to 1 month 1 to 3 months 3 to 6 months 6 months to 1 More than 1 year 2023 (thousands of Euros) OUTPUTS Liabilities from emitted transferable securities (if they're not treated as retail deposits) Liabilities from guaranteed lending operations and operations associated to financial markets 623 639 7 747 4 593 5 842 6 939 455 - 1 150 391 526 714 Behavioural output from deposits 29 699 742 457 933 222 240 532 270 743 368 10 496 30 744 1 026 - - 167 368 265 471 year - - 5 500 599 957 2 891 083 2 371 267 131 309 269 064 28 451 828 85 993 20 143 52 621 49 386 86 945 672 813 38 538 474 477 202 1 407 968 965 395 237 445 3 267 654 32 182 810 - - - - - - - Exchange swaps and derivatives Other output Total Output INPUTS Secured lending operations and operations associated to financial markets Behavioral inputs from loans and advances 26 477 815 75 994 55 218 147 193 216 681 441 741 25 540 988 Exchange swaps and derivatives 571 179 9 239 31 410 264 420 83 267 52 138 130 705 Own portfolio securities maturing and other entries 10 004 315 80 063 321 079 394 041 251 000 356 039 8 602 093 Total Input Net contractual deficit 37 053 309 165 296 407 707 805 654 550 948 849 918 34 273 786 (1 485 165) ( 311 906) (1 000 262) ( 159 741) 313 503 (2 417 736) 2 090 977 Accumulated net contractual deficit - ( 311 906) (1 312 168) (1 471 909) (1 158 406) (3 576 142) (1 485 165) CAPACITY TO READJUSTMENT Total Up to 7 days 7 days to 1 month 1 to 3 months 3 to 6 months 6 months to 1 More than 1 year Cash Deployable reserves from the central bank Negotiable and non-negotiable assets eligible for the central bank 171 006 5 082 915 6 773 777 - - 1 095 910 393 824 ( 150 627) 251 828 (8 364 712) Authorized facilities and not utilized received 2 698 448 ( 16 140) ( 71 111) ( 185 312) ( 297 069) 717 916 (2 846 732) Net variation of capacity to adjustment - ( 16 140) 1 024 799 208 512 ( 447 696) 969 744 (11 211 444) Accumulated capacity to readjustment 14 726 146 14 710 006 15 734 805 15 943 317 15 495 621 16 465 365 5 253 921 (thousands of Euros) 567 Management Report Sustainability Report Separate Financial Statements Annex OUTPUTS Liabilities from emited transferable securities (if they're not treated as retail deposits) Liabilities from guaranteed lending operations and operations associated to financial markets Total Up to 7 days 7 days to 1 month 1 to 3 months 3 to 6 months 6 months to 1 More than 1 year 2022 year 1 426 968 2 247 4 593 10 535 5 486 296 776 1 107 331 10 059 656 57 154 66 513 1 732 249 3 341 048 739 188 4 123 504 Behavioral output from deposits 29 944 525 490 403 45 719 145 209 166 803 416 287 28 680 104 Exchange swaps and derivatives Other output Total Output INPUTS Secured lending operations and operations associated to financial markets 753 198 623 245 5 230 4 477 52 647 384 395 - - 82 939 15 824 65 165 162 822 34 000 568 944 42 807 592 559 511 169 472 2 272 388 3 612 100 1 551 416 34 642 705 - - - - - - - Behavioral inputs from loans and advances 36 105 674 5 817 950 63 286 169 329 252 210 507 323 29 295 576 Exchange swaps and derivatives 753 433 6 056 53 146 385 920 83 582 63 089 161 640 Own portfolio securities maturing and other entries 12 335 751 49 286 167 097 266 806 225 215 2 091 882 9 535 465 Total Input Net contractual deficit 49 194 858 5 873 292 283 529 822 055 561 007 2 662 294 38 992 681 6 387 267 5 313 782 114 057 (1 450 332) (3 051 094) 1 110 878 4 349 976 Accumulated net contractual deficit - 5 313 782 5 427 839 3 977 507 926 413 2 037 291 6 387 267 CAPACITY TO READJUSTMENT Total Up to 7 days 7 days to 1 month 1 to 3 months 3 to 6 months 6 months to 1 More than 1 year Cash 176 797 Deployable reserves from the central bank 5 653 802 (5 653 802) Negotiable and non-negotiable assets eligible for the central bank Authorized facilities and not utilized received Net variation of capacity to adjustment 7 841 356 56 109 62 178 ( 116 348) ( 126 324) (1 918 431) (5 794 060) - - ( 23 829) ( 77 909) 1 378 676 2 739 531 ( 84 317) (3 932 151) (5 621 522) ( 15 731) 1 262 328 2 613 207 (2 002 748) (9 726 211) Accumulated capacity to readjustment 13 671 955 8 050 433 8 034 702 9 297 030 11 910 237 9 907 489 181 278 At the end of 2022, there was a net contractual surplus accumulated over one year of 2,037 million euros, having changed on December 31, 2023 to a net contractual deficit accumulated over one year of 3,576 million euros. Despite this variation, the liquidity position remained stable, given that this increase of 5,613 million euros is essentially due to a change in regulatory reporting criteria, given that last year the deposits at the ECB, totaling 5 654 million euros were considered as a cash inflow and this year this item is included in the rebalancing capacity. The counterbalancing capacity for 1 year at the end of 2023 was 16,465 million euros, 6,558 million euros higher than the value recorded at the end of 2022 (9,907 million euros). This increase is essentially due to the change in regulatory criteria referred to in the previous point (+5,083 million euros) and the increase in secured funding, which partially offset the reimbursement of borrowings from the ECB. In order to anticipate possible negative impacts, internal liquidity stress scenarios are created that represent the types of crisis that may occur, based on idiosyncratic scenarios (characterized by a loss of confidence in the Bank) and market scenarios. 568 Annual Report 2023 | novobanco Assets and Liabilities - Tiering by maturity dates As at December 31, 2023, and 2022, the tiering of assets and liabilities by maturity dates is as follows: 2023 (thousands of Euros) Financial Assets 2 488 249 2 522 643 11 244 108 18 207 705 1 399 983 Financial Assets and Liabilities held for trading Securities Trading derivatives 101 049 96 068 4 981 231 713 222 460 9 253 15 815 - 15 815 87 768 - 87 768 - - - Up to 3 months From 3 months to one year From one to five years More than five years Indefinite duration / Past due credit Total 35 862 688 436 345 318 528 117 817 Financial assets mandatorily measured at fair value through profit or loss - 112 50 465 049 969 479 1 434 690 Financial assets mandatorily measured at fair value through other comprehensive income Securities 126 782 85 400 296 349 166 515 66 400 741 446 126 782 85 400 296 349 166 515 66 400 741 446 Financial assets mandatorily measured at amortized cost 2 259 886 2 190 231 10 596 889 17 156 023 364 104 32 567 133 Securities Loans and advances to banks Credit to Customers Derivatives - Hedge Accounting Financial Liabilities Financial Liabilities held for trading 708 639 5 087 1 546 160 532 434 145 102 165 1 653 921 15 187 4 145 647 16 144 6 435 098 335 005 3 236 483 3 088 13 916 452 332 350 - - 8 524 914 126 484 364 104 23 915 735 683 074 21 857 624 6 264 11 092 558 8 670 3 098 330 15 234 1 141 651 70 439 - - 37 190 163 100 607 - 36 964 599 1 128 807 - 5 495 077 - - 3 867 053 - 29 255 056 1 366 382 - 584 159 - 501 500 - - - 124 957 - 36 790 731 - 9 446 463 4 667 150 - 4 779 313 - 27 344 268 13 672 134 13 672 134 - - - Financial liabilities measured at amortised cost 21 851 321 11 083 412 2 980 581 1 049 285 Due from central banks Due from other credit institutions (of which: Operations with repurchase agreement) Due to Customers (of which: Operations with repurchase agreement) Liabilities represented by securities Subordinated liabilities Financial liabilities associated with transferred assets Derivatives - Hedge Accounting Notional Trading derivatives Notional Purchase Notional Sale 178 807 1 643 753 854 275 20 028 761 813 660 - - - 39 2 173 776 2 120 776 1 045 013 1 075 763 950 000 1 905 618 1 452 461 8 227 794 302 564 - - - 476 2 442 709 1 122 003 561 063 560 940 - 1 943 540 1 560 317 931 566 250 158 105 475 - - 102 515 20 814 116 2 059 646 1 022 075 1 037 571 - 2 166 - 66 935 - 478 684 501 500 - 21 927 11 360 130 4 144 038 2 038 999 2 105 039 Derivatives - Hedge Accounting 53 000 1 320 706 18 754 470 7 216 092 Notional Purchase Notional Sale 26 500 26 500 660 353 660 353 9 377 235 9 377 235 3 608 046 3 608 046 569 Management Report Sustainability Report Separate Financial Statements Annex 2022 (thousands of Euros) Financial Assets Financial Assets and Liabilities held for trading Securities Trading derivatives 1 314 646 13 479 - 13 479 3 694 724 16 816 4 911 11 905 9 499 196 21 116 122 1 516 126 - - - 107 202 21 462 85 740 33 350 10 055 23 295 Up to 3 months From 3 months to one year From one to five years More than five years Indefinite duration / Past due credit Total 37 140 814 170 847 36 428 134 419 Financial assets mandatorily measured at fair value through profit or loss Securities Financial assets measured at fair value through profit or loss Securities Credit to Customers - - - - - - - 18 13 13 2 469 431 196 1 103 987 1 537 652 2 469 - 431 196 - 1 103 987 - 1 537 652 18 - - - - - - 13 13 Financial assets mandatorily measured at fair value through other comprehensive income 142 178 1 588 220 252 293 126 354 73 989 2 183 034 Financial assets mandatorily measured at amortized cost 1 158 981 2 089 292 9 072 122 20 027 837 338 150 32 686 382 Securities Loans and advances to banks Credit to Customers Derivatives - Hedge Accounting Financial Liabilities Financial Liabilities held for trading Financial liabilities measured at amortised cost Due from central banks Due from other credit institutions (of which: Operations with repurchase agreement) Due to Customers (of which: Operations with repurchase agreement) Liabilities represented by securities Subordinated liabilities Financial liabilities associated with transferred assets Derivatives - Hedge Accounting Notional Derivatives held for trading Notional Purchase Notional Sale Derivatives - Hedge Accounting Notional Purchase Notional Sale 37.6. Operational risk 786 798 363 371 820 8 24 131 408 8 098 24 123 307 1 627 198 1 001 089 123 620 21 495 020 - - - - 3 535 014 101 476 1 452 802 383 10 582 744 11 055 10 571 109 3 750 000 669 315 - 5 460 348 - 275 874 415 572 - 580 2 688 889 1 598 251 2 682 849 1 342 255 1 340 594 6 040 3 020 3 020 1 470 895 735 763 735 132 127 356 63 678 63 678 2 830 097 39 322 138 962 5 116 010 18 690 5 038 794 950 000 2 214 958 2 027 204 1 469 855 450 906 403 981 - - 58 526 4 539 891 4 977 6 202 703 15 482 969 423 533 878 502 61 474 755 525 - 293 949 - - - 461 576 - - 61 503 13 683 959 1 947 176 4 639 927 2 285 684 963 226 2 354 243 983 950 9 262 176 9 044 032 4 522 016 4 631 088 4 522 016 4 631 088 11 209 352 - - 338 150 - 44 451 - 8 691 800 146 138 23 848 444 562 886 40 753 115 99 317 44 451 40 533 186 6 327 198 4 179 311 2 150 824 28 425 223 450 906 1 141 431 415 572 44 451 120 612 - - - - - - - 44 451 - - - - - - - - 29 180 451 10 740 847 5 326 928 5 413 919 18 439 604 9 219 802 9 219 802 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. 37.7. 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. 570 Annual Report 2023 | novobanco 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. Supplementary information on the evolution and composition of Novobanco Group's capital ratios can be found in the Group's Market Discipline Document (section 3. Capital Adequacy). The summary of own funds, risk weighted assets and capital ratios capital of novobanco as of 31 December 2023 and 2022 are presented in the following table: 571 Management Report Sustainability Report Separate Financial Statements Annex Realised ordinary share capital, issue premiums and own shares Reserves and Retained earnings Net income for the year attributable to shareholders of the Bank Non-controlling interests (minority) A - Equity (prudential perspective) Net income for the year attributable to non-eligible Bank shareholders Non-controlling interests (minority) Adjustments of additional valuation Transitional period to IFRS9 Intangibles assets Insufficiency of provisions given the expected losses Pension fund assets with defined benefits Deferred tax assets and shareholdings in financial companies Others (1) B - Regulatory adjustments to equity C - Own principal funds level 1 - CET I (A+B) Capital instruments eligible for additional Tier I Other elements eligible for additional Tier I D - Additional own funds Level 1 - Additional Tier 1 E - Level 1 own funds - Tier I (C+D) Subordinated liabilities eligible for Tier II Other elements eligible for Tier II Regulatory adjustments for Tier II F - Level 2 own funds - Tier II G - Eligible own funds (E+F) Credit risk Market risk Operational risk H - Risk Weighted Assets Solvability ratio CET I ratio Tier I ratio Solvability ratio Leverage ratio (2) 2023 (fully loaded)(3) (millions of Euros) 2023 (phase in)) 2022 6 568 ( 3 339) 801 - 4 029 - - ( 4) - ( 34) - ( 12) ( 246) 6 568 6 305 ( 3 339) ( 3 692) 801 454 - - 4 029 3 067 - - ( 4) 79 ( 34) - - - ( 5) 122 ( 70) - ( 12) ( 52) ( 246) ( 332) ( 413) ( 398) ( 248) ( 701) 3 328 - - - 3 328 497 78 - 575 3 903 18 339 100 1 905 20 344 16,4 % 16,4 % 19,2 % 7,2% (C/H) (E/H) (G/H ) ( 615) ( 584) 3 415 2 483 - - - - - - 3 415 2 483 497 78 - 399 91 - 575 490 3 990 2 973 18 406 19 855 100 1 905 77 1 621 20 411 21 553 16,7% 11,5% 16,7% 11,5% 19,5% 13,8% 7,4% 5,2% (1) Includes adjustments to the CCA receivable, reflected in reserves, and not received from the Resolution Fund, as well as the amount relating to the backstop. (2) The leverage ratio results from dividing Tier 1 by the exposure measure calculated under the terms of the CRR. (3) Capital and leverage ratios not considering effects relating to the transitional period 572 Annual Report 2023 | novobanco Note 38 – Provision of Insurance or Reinsurance Mediation Service On 31 December of 2023 and 2022, the compensation arising from the provision of insurance or reinsurance mediation services has the following composition: Life Unit Link and other life commissions Credit protection insurance (life part) Traditional products Non-Life Private Insurance Business Insurance Credit protection insurance (non-life) Note: the amounts shown are net of accruals (thousands of Euros) 2023 2022 16 084 19 152 945 775 14 364 12 054 10 674 177 1 203 1 795 877 16 480 9 891 8 300 177 1 414 28 138 29 043 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 39 –Subsequent Events • On 1 February 2024, Novobanco announced that on that date Fitch had assigned a BBB- rating to Novobanco's long- term preferred senior debt. The Investment Grade rating reflects i) the Bank's current business model; ii) a significant improvement in asset quality; iii) profitability levels that compare favorably with peers; iv) significant improvement in capital buffers in 2023; and v) stable financing, along with adequate liquidity. • On February 21, 2024, novobanco informed about the issuance of Covered Bonds worth 500 million euros, maturing on March 1, 2027 (soft bullet). The expected rating of the issue is Aaa by Moodys. The bonds have an annual interest rate of 3.25%, equivalent to 3-year mid-swaps plus 45bps; • On February 28, 2024, novobanco issued Senior Preferred debt in the amount of 500 million euros, maturing on March 8, 2028 and with an early repayment option on March 8, 2027. The bonds were issued with an annual coupon rate of 4.25%. 573 Management Report Sustainability Report Financial Statements Annex €743mn Net Income 18.2% CET 1 ratio 574 20.4% RoTE Annual Report 2023 | novobanco ANNEX 576 584 592 596 Auditor’s Report on the Consolidated Financial Statements Auditor’s Report on the Separate Financial Statements Evaluation Report Report of the General And Supervisory Board 575 Management Report Sustainability Report Financial Statements Annex 576 Annual Report 2023 | novobanco 577 Management Report Sustainability Report Financial Statements Annex 578 Annual Report 2023 | novobanco 579 Management Report Sustainability Report Financial Statements Annex 580 Annual Report 2023 | novobanco 581 Management Report Sustainability Report Financial Statements Annex 582 Annual Report 2023 | novobanco 583 Management Report Sustainability Report Financial Statements Annex 584 Annual Report 2023 | novobanco 585 Management Report Sustainability Report Financial Statements Annex 586 Annual Report 2023 | novobanco 587 Management Report Sustainability Report Financial Statements Annex 588 Annual Report 2023 | novobanco 589 Management Report Sustainability Report Financial Statements Annex 590 Annual Report 2023 | novobanco 591 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 b) c) and d) of Article 58th of the Notice from Bank of Portugal nº 3/2020 Introduction 1. This evaluation report is presented to comply with b) c) and d) of Article 58th of the Notice from Bank of Portugal nº 3/2020 (the “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, 2022, to November 30, 2023. 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; • promotes a professional conduct prudent and responsible 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 on the Group, both internally as in the 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 organizations 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 an yearly report on the results of that evaluation (the “Report”). 3. It is our responsibility to issue this report as described in b) c) and d) Article 58th of the Notice in order to include in the Report. Activities performed 4. In order 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, we read the minutes of the meetings of the Executive Board of Directors; During these meetings, it was presented to us the situation of the Group, including matters related to the subsidiaries, which allows us to appreciate the internal control in place at Group level; • We met with the managers responsible for the Risk Management, Compliance and Internal Audit functions 592 Management ReportSustainability ReportFinancial StatementsAnnex with responsibility at Group level and reviewed the annual activity reports. Regarding the annual report of the internal audit function, we considered the validation of the classification of deficiencies that was guaranteed for each of the entities of the novobanco group (novobanco, novobanco dos Açores and Best); • We additionally assessed the self-assessment reports of the control functions, evaluated their declaration of independence and inquired about the existence of any fact or circumstance that could affect their independence, namely i) by analyzing the potential impact of the deficiencies identified in each of the functions of control, ii) by ensuring that there are no conflicts of interest; iii) the remuneration policy and rules do not constitute a risk, iv) the skills and preparation of the teams in each control function, v) the unobstructed access to all relevant bodies, or vi) the communication and reporting channels that are implemented .We assessed the audit plan for 2023 and the results of the internal audit actions; • 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 2023 and the Factual Findings Report issued by Ernst & Young – Audit & Associados – SROC, S.A., including the test on the classification of the deficiencies. We appreciated the content of the communication of significant deficiencies of internal control of the Group sent by the external auditor on December 14, 2023; • 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 requested the necessary information that would allow us to ensure the adequacy of the processes and controls implemented by the Group and compliance with the provisions of the internal policies and regulations of the most relevant subsidiaries, for example, “NG0025_2023 – Individual and consolidated financial statements consolidation and reporting rules” and “RG 0003_2022 – Regulation of the risk function of the Novo Banco Group”; • We confirmed that for the most relevant processes, Policies are defined, approved and implemented across the Novobanco Group Entities, with the processes and controls being mostly applied across the board, but with due adaptation when applicable. We interviewed those responsible for the departments to confirm the consistency of the application of procedures for the Group’s most relevant subsidiaries; • We confirmed that the Group has implemented processes and controls that ensure the obtaining of relevant information from subsidiaries for the consolidation process, including accounting information and other information elements; • We met with the supervisory bodies of the most relevant subsidiaries and inquired about the main developments that occurred during the reference period with an impact on the internal control system, the consistency between the internal control systems, about compliance with the body’s activity plan and jointly identified potential concerns and/or deficiencies identified in the existing processes in each entity; • We were aware of the deficiencies identified in each of the subsidiaries as well as their severity and the mitigation plans defined by the responsible departments in order to guarantee their mitigation; • We assessed the coherence between the internal 593 Annual Report 2023 | novobancocontrol systems of the subsidiaries, using the conclusions of contacts with the supervisory bodies of the most relevant subsidiaries, the assessment of the content of the evaluation reports of these same supervisory bodies, in addition to all other procedures carried out and previously described; • The members of the FAAC participated in a training session on the Policy for the Selection, Appointment and Assessment of the Statutory Auditor and the Hiring of Non-Prohibited Distinct Auditing Services. the criteria defined by the Group and the process to classify the deficiencies according to the criteria and assumptions. Given the judgment 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 in other date on the same deficiency could reach different conclusions, and the impact of a deficiency can materialize differently from what was estimated. Inherent limitations 5. The General and Supervisory Board is aware of the inherent limitations of any internal control framework which, irrespectively 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, an appropriate internal control in place regarding the financial and prudential reporting is not on 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 Conclusion As described in the novobanco Group Report, deficiencies were identified and classified as F3 – High and F4 – Severe, which may have an impact on the financial situation, own funds requirements, internal governance, business model or risk management and control of the Group. For each of these deficiencies, a mitigation plan and a proposed implementation calendar were presented to the supervisory body. Considering the importance of the matter in the Group, these deficiencies are being monitored by internal structures, in particular by the control functions and the Executive Board of Directors, and will periodically be subject to analysis of the implementation status by the supervisory body. Considering the activities we performed and findings which are described in paragraph 4 above and except on the eventual impact of the matters described in paragraphs 6 to 7, notwithstanding the ongoing implementation 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 Nov\ ember 30, 2023; • We appreciated positively the completeness status of the defined measures from December 1, 2022, to November 30, 2023, to correct the deficiencies identified in the Report, confirming the effort to 594 Management ReportSustainability ReportFinancial StatementsAnnex implement mitigation measures during the period and the positive evolution recorded in terms of severity; Other matters • We declare that the classification given to the deficiencies classified as level F3 “High” or F4 “Severe” is adequate; • In our opinion, the internal control functions, including the outsourced operational procedures, are performed with adequate quality and we have considered demonstrated its independence; • The financial and prudential reporting processes were, insofar as we could appreciate due to our procedures inherent to our responsibilities, reliable from December 1, 2022, to November 30, 2023; • 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 our procedures inherent to our responsibilities, reliable from December 1, 2022, to November 30, 2023; • The requirements to disclose information to the public resulting from applicable law or regulation and related with the matters described in the Notice were, insofar as we could appreciate due to our procedures inherent to our responsibilities, adequately complied with from December 1, 2022, to November 30, 2023; • The internal control systems of the subsidiaries were, insofar as we could appreciate due to our procedures inherent to 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. 6. This Evaluation Report is prepared and issued solely for 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, cannot be used for any other purpose, or read outside the context of the Report, nor can be presented to third parties without our previous written consent. Lisbon, December 14, 2023 General and Supervisory Board of Novo Banco, S.A. Chairman Member (This report was approved by the General and Supervisory Board at a meeting held on December 14, 2023) 595 Annual Report 2023 | novobancoReport of the General and Supervisory Board and Opinion of the Financial Affairs (Audit) Committee on the Management Report and on the Individual and Consolidated Financial Statements of Novo Banco, S.A. for the year ended 31 December 2023 Pursuant to the mandate the General and Supervisory Board (“GSB”) has 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 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 individual and consolidated financial statements of novobanco, which comprise the individual and consolidated income statement and individual and consolidated statement of comprehensive income, individual and consolidated balance sheet, individual and consolidated statement of changes in equity and individual 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 2023. 1. Report of the General and Supervisory Board for the year 2023 1.1. Composition and scope In accordance with the applicable law, novobanco’s articles of association and best practices at the date of this Annual Report, seven of the ten members who comprise the GSB, including the Chairman, are independent. During 2023 the composition of the GSB has undergone some changes: on 24 February, 2023 Benjamin Friedrich Dickgiesser presented his resignation; upon the conclusion of the fit & proper process, on 21 June, 2023 Monika Wildner has joined the GSB as an independent member; Evgeniy Kazarez joined the GSB as a non-independent member on 7 November, 2023 following the conclusion of fit & proper process; Donald John Quintin presented his resignation as a member on 14 December 2023; and on 22 December 2023, a fit & proper process was submitted for a new independent member to join the GSB for the current term of office (2021 to 2024), whose exercise of functions is subject to authorisation from the competent regulatory authorities and approval by novobanco’s General Shareholders’ Meeting. The GSB has the powers foreseen by law, by the articles of association and by its own regulation, in particular the supervision of the EBD’s management of the Bank and Group companies and the supervision of all matters related to risk management, compliance and internal audit. 596 Management ReportSustainability ReportFinancial StatementsAnnex During 2023, the GSB monitored the activity of the Bank and its most significant financial subsidiaries. The activity of the GSB is directly supported by 5 (five) Committees, some of them mandatory pursuant to applicable law, 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 articles of association of novobanco, and in the GSB regulation. These Committees are chaired and composed by members of the GSB, respecting the legal and regulatory composition requirements, 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 on a monthly basis and whenever is deemed necessary. 1.2. Activity undertaken in 2023 General and Supervisory Board During the year 2023, the GSB held 12 meetings, the several matters discussed, analysed and approved are identified in the agendas prepared for each meeting and are detailed in the respective minutes. These matters included, amongst others, the individual and consolidated financial statements of novobanco for the year ended 31 December 2023 and the consolidated financial statements for the six months period ended 30 June 2023, as well as the financial results for the first and third quarters of 2023, the 2023-2025 Strategic and Medium Term-Plans, the NPA Plan for 2023-2025, the strategy and risk appetite for 2023, the status of Bank rating agencies reviews, 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 strategic review of the Banco Best, the simplification of the GNBGA Group, the closing of the sale of non-performing loans (NPLs) portfolios and related assets (including Project Phoenix), the sale of REO assets, the external communication strategy, the monitoring of the activity of the Internal Audit Department, the approval of the Annual Internal Audit Plan for 2024, the monitoring of the main legal processes involving the Bank, including arbitration processes, the progress of headquarters project in Tagus Park, updates on the implementation of the Human Resources agenda including the People and Culture program and the monitoring of all the activity developed and decisions taken by the GSB Committees. Throughout the year, the GSB was informed about 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 about the regular forecasts (capital and results) for the end of the 2023 financial year and Group’s Impairment Report. In addition, within its responsibility for the oversight of the institution and for the implementation of governance arrangements that ensure effective and prudent management, the GSB has analysed and approved the changes made to the internal policies of novobanco, 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 597 Annual Report 2023 | novobanco Terrorism Financing Prevention Policies, as well as amendments to the Policy for Selection and Evaluation of the novobanco Group Statutory Auditor and Contracting of Non-Prohibited Non-Audit Services, Remuneration Policies for Management, Supervisory Bodies and Staff, Policy for Selection and Evaluation of Novo Banco’ Management and Supervisory Bodies and Key Function Holders, as well as carried out a regular review and approved amendments to the GSB and GSB Committees’ Terms of Reference. With regard to matters relating to the CCA, the GSB regularly monitored all matters relating to the execution of the agreement, including the 2021 capital call, the activity of the Verification Agent and the progress of the arbitration matters in connection with the CCA. The GSB also acknowledged the Monitoring Trustee DG Comp Final Report noting that the Bank complied with all of its viability commitments, including the Restructuring Period, which was formally ended during 2023 by reference to 31 December 2022. On the organizational culture, the GSB followed the results of the Report on Organizational Culture, as well as the measures defined by the EBD to improve the culture within novobanco with the setup of a new project, Strategic Alignment and Cultural Transformation, designed with the support of external parties and monitored the progress and the implementation of such project during 2023. At the end of the 2023 financial year, and within its responsibility for the supervision and oversight over the internal governance and control functions, the GSB concluded its assessment report on the adequacy and effectiveness of the organizational culture in force in the novobanco Group and the governance and internal control framework with reference to the period from 1 December 2022 up to 30 November 2023, assessing the Self-Assessment Reports of the Risk, Audit and Compliance Functions, in accordance with paragraphs b), c) and d) of Article 58 of Notice no. 3/2020 of the Bank of Portugal, in which the GSB recognized the deficiencies detected by the EBD, approved the respective mitigation plans and proposed implementation deadlines for each of them. These deficiencies included 16 classified as F3 - High Risk and 4 classified as F4 - Severe. The GSB, through its Chairman, maintained an open and regular communication channel with the supervisory and regulatory authorities, monitored closely the MREL objectives set by the SRB and approved the operations implemented to achieve these objectives, including a Tier 2 New Insurance, reviewed and approved the ICAAP and ILAAP for 2023, as well as the Liquidity and Capital Plans, closely monitored the evolution of the implementation of the ESG Strategy, including its governance model and approved the ESG Policy, and also monitored the Group’s ECB Stress Test exercise. In the performance of its functions, the GSB was regularly notified on regulatory changes and informed on material correspondence of novobanco. The GSB also approved the 2023 Recovery Plan, the IRB Renovation Strategy and Operational Plan, the AML Annual Report 2023, and accompanied the SREP Supervisory Dialogue 2023. During the year the GSB was updated on major topics and initiatives discussed at the Compliance Committee including transactions with related parties, Bank compliance activities and compliance regulatory matters including Bank inspections, execution of Project Darwin, APIC project and Whispli KPIs. During 2023 the GSB acknowledged the new EBD organizational chart, which reflected the internal organizational changes including the Chief Commercial Officer Retail remit, the appointment of the new Chief Operating Officer (Seamus Murphy) to support novobanco in achieving its strategic objectives of digital transformation, operational efficiency and process simplification, and the appointment of the new CFO Benjamin Friedrich Dickgiesser. The GSB also reviewed and approved the new composition of the GSB Committees following the changes occurred during 2023 and approved its 2024 activity plan. Regarding the actions and initiatives taken by novobanco regarding the challenging macro-economic environment; the contagion effects of increased financial market volatility impact arising from the Russian / Ukraine conflict, and later in the year also 598 Management ReportSustainability ReportFinancial StatementsAnnex from the Middle East conflict; the heightened levels of operational risk including cyber-attacks and outsourcing; and the increased focus on emerging risks like climate and environmental risk, were regularly discussed and assessed by the GSB. In 2023 a Training Programme on IT and cybersecurity was set up to strengthen knowledge on information technology and improve the skills and experience of the members of the corporate bodies. Several training sessions were attended last year by the members of the GSB and EBD. Within the scope and for the purposes of performing its functions and carrying out the analyses and verifications necessary, the GSB requested, and obtained, documentation and clarification of the multiple questions raised, with full collaboration from Banks’ internal structures and internal control functions’ heads and staff. The CEO, CFO and CRO attended GSB meetings as guests and whenever necessary other EBD members or senior staff members were invited to attend for specific agenda items. Financial Affairs (Audit) Committee The Financial Affairs (Audit) Committee held 16 meetings during 2023 and focused its activity on assessing the Bank’s financial statements and the Statutory Auditor’s reports for the 2023 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 IA 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 2023, and the approval of the Internal Audit Plan for 2024 (including the multi-annual plan). Throughout 2023, the Financial Affairs Committee monitored the closing of the sale of Non-Productive Assets, including Project Phoenix and the sale of REOs, the review process with the Rating Agencies, the RaRoc project, on-going M&A and Partnerships projects, as well as the status of the deferred tax assets (“DTAs”) and the capital increases carried out relating to the exercise of 2018 and 2019. During 2023, the Committee also monitored the evolution of novobanco’s capital ratios, as well as the evolution of several other relevant projects, including the new Tier 2 issuance process, 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 2023, the Financial Affairs Committee undertook legal entity reviews of novobanco´s subsidiaries and branches and 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 other additional services provided to novobanco’s Group by that auditor. The meeting agendas included updates on the regulatory aspects of the Bank’s activity, the follow-up of the 2023-2025 Medium-Term Plan (as well as the preparation of the 2024-2026 Medium-Term Plan) and the evaluation process for supervisory purposes (SREP) for 2023. The Committee also followed the IT strategy, Data Governance and Data Quality, complying with BCBS239 principals, which will be reported to ECB and Bank of Portugal, and the 2023 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, including the progress and status of digital transformation. 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 Financial Affairs 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. 599 Annual Report 2023 | novobancoThe members of the Financial Affairs Committee met with the Supervisory Boards (Audit Committees) 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. (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 those Audit Committees. A review of the Policy for selection, appointment and evaluation of the novobanco Group Statutory Auditor and contracting of Non-Prohibited Non- Audit Services was made following a principle of good internal governance of regular update of Bank’s internal regulations. A proposal of review of the policy was submitted, in December 2023, to GSB’s opinion, before its submission for approval by the next General Shareholders’ Meeting. Additionally, since the Financial Affairs Committee is the body involved in the process of selecting and appointing a statutory auditor and contracting non-prohibited services, its members attended a training on the subject and on their responsibilities under the law, performed in November 2023.The Committee members met individually with the Statutory Auditor and the Head of Internal Audit, without the presence of EBD members. Risk Committee The Risk Committee held 14 meetings during 2023. In addition to approving loans to individual customers or groups of associated customers, in accordance with its Regulation, it also assessed and discussed the strategy, risk appetite and limits for 2023, in accordance with the Medium-Term Plan for 2023-2025, the NPA Plan for 2023-2025 and monitored the main initiatives and activities in 2023 relating to the challenging macro- economic environment; the contagion effects of increased financial market volatility impact arising from the Russian / Ukraine conflict, and later in the year also from the Middle East conflict; to the heightened levels of operational risk including cyber-attacks and outsourcing; and the increased focus on emerging risks like climate and environmental risk.. Other topics discussed and reviewed by the Risk Committee included the main monthly risk indicators (credit risk, market risk and operational risk), detailed portfolios, products and sector exposure analyses, non-financial risks, including cyber risks and outsourcing risks and the credit provisions and impairments contained in the financial statements for the 2023 financial year, as well as the approval of the Risk Activity Plan for 2024. The Bank’s non-performing loans portfolio (NPL) was also monitored and compared with the portfolio of similar institutions and with the European Banking Authority (EBA) benchmarks. The risk governance model was also subject to review in 2023. 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), IRRBB (interest rate risk of the banking book) and the review of the risks inherent to the challenging macros-economic environment, the analysis of economic groups with high exposure to impacted 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 analysed throughout the year, including the results of the OSI (On-Site Inspections) carried out in 2023. The Risk Committee approved ICAAP, ILAAP, ECB Stress Tests, the IRB Renovation Strategy and Operational Plan, the RWA Framework, Early Warning System Project and the PMO Credit & Risk Transformation Implementation. The Committee also followed the IT strategy, Data Governance and Data Quality complying with BCBS239 principals, which will be reported to ECB and Bank of Portugal, and the OSI on Digitalisation, on Credit Quality Review (CRE), and on IMI Retail SME. At the end of 2023, the Risk Committee analysed 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. 600 Management ReportSustainability ReportFinancial StatementsAnnex Compliance Committee Nomination Committee The Compliance Committee held 7 meetings during 2023, monitoring and deciding on government, regulatory and legal issues related to the Bank’s Compliance activity and analysing and discussing the Bank’s regulatory compliance matters, including 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 financial crime matters, where the prevention of money laundering, anti-bribery and corruption and market abuse are included, legislation on personal data protection, whistleblowing procedures, other legal and regulatory matters and relevant ongoing projects, such as APIC (updated information on clients), as well as if the activity plan of the Compliance Department was being followed. The Committee also analysed and discussed topics related to transactions with related parties and conflicts of interest, compliance matters relating to subsidiaries and the Luxembourg Branch, including local inspections and audits on AML topics and the remediation plan that encompassed the transfer of legacy accounts from Luxembourg to Lisbon, as well as regularly monitoring of the most relevant fines and sanctions applied to novobanco. During the year, a new Whistle-blowing platform (“Whispli”) was successfully launched across the novobanco Group, as part of the Strategic Alignment and Culture Transformation program and internal processes were revised, enhanced and reinforced. Annual review and amendment of compliance related policies were also completed during the year including, 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. The Compliance Committee regularly monitored the execution of Project Darwin, the enhancement of the Target Operating Model enhancement of financial crime with focus on KYC / KYT and correspondents’ banking. At the end of 2023, the Compliance Committee analysed the assessment of the compliance management activities, in accordance with Bank of Portugal Notice 3/2020, including the Annual Self-Assessment Report (RAA), and approved the Activity Plan of Compliance for 2024. The Nomination Committee held 4 meetings during 2023. The Fit & Proper Officer supported the Nomination Committee on the 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 holders. During 2023, Fit and Proper processes were also submitted to supervisory authorities regarding certain members of the governing bodies of novobanco, as well as for the governing bodies of novobanco dos Açores, Banco BEST and GNB GA and its subsidiaries. During 2023, the Nomination Committee discussed, reviewed and approved the new EBD organizational structure with updated roles and responsibilities as detailed previously. Also updated the Succession Planning coverage of novobanco, informed of the results of the measures defined by the EBD to improve the Bank’s culture with a new project designed with the support of external parties and appointed the new Group Fit & Proper Officer. On gender diversity, an Action Plan with specific targets was approved in March 2023 by GSB following an assessment made in the Nomination Committee and submitted to the supervisory authorities. The implementation of such plan is being monitored by the Nomination Committee and a year-end status was presented and assessed by the GSB. The performance and potential of top management at novobanco was also analysed, together with the HR’s reviews conducted with each of the members of the EBD in respect of each of their departments. The Nomination Committee has assessed and approved the changes on the composition (members) of the General and Supervisory Board, being such approval always subject to the Fit & Proper process conducted by the competent authorities. 601 Annual Report 2023 | novobancoRemuneration Committee The Remuneration Committee held 5 meetings during the year 2023. At these meetings, the Committee monitored the implementation of the remuneration policies concerning the management and supervisory bodies and the staff and adopted a set of decisions related to the variable component of the remuneration for the EBD and Identified Staff for the year 2023. The Remuneration Committee also set and approved the main individual and collective performance indicators for the EBD members for the year 2023, based on the approved budget for that year and approved the 2022’s EBD KPI results. The Remuneration Committee acknowledged and confirmed the List of Identified Staff for year 2023 following a recommendation of the EBD. It also approved the budget for 2023 variable remuneration and the amounts allocated to the Identified Staff and EBD members (subject to the rules in the respective policy). Those functions were performed also with the involvement of the relevant Bank’s internal areas and with the control functions. Annual review and amendment of the remuneration policies for Management and Supervisory Bodies and Staff were also completed during the year. The Remuneration Committee also approved the selection of certain employees under the Shaping the Future Plan for 2023. At the end of 2023, the Remuneration Committee concluded the independent internal analysis foreseen in Notice 3/2020 of Bank of Portugal aimed at verifying compliance of the remuneration, processes and policies in the Bank to be submitted to the Shareholders’ Meeting, the General and Supervisory Board and the Executive Board of Directors. 1.3. Interactions with the Statutory Auditor The GSB and the Financial Affairs (Audit) Committee held several 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, 2023, 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 and adequacy 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 GSB analysed all matters contained in the Auditor’s Reports on the individual and consolidated financial statements issued by the Statutory Auditor for the year ended December 31, 2023, 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; • Restructuring provisions; • Restructuring funds valuation; • Pension funds liabilities valuation; • Measurement of real estate obtained through credit foreclosure; • NPA sale transactions; • Contingency on property tax; • Disclosure of other contingent liabilities; • Contingent Capital mechanism matters; • Financial Disclosure matters; and • Internal control matters, in particular compliance with Notice 3/2020 Bank of Portugal. 602 Management ReportSustainability ReportFinancial StatementsAnnex individual and consolidated financial position of novobanco, its individual and consolidated results of changes in equity and the individual and consolidated cash flows; b. the accounting policies and valuation criteria adopted are appropriate; c. the management report is sufficiently clear as to the evolution of the business and the situation of the Bank and all the subsidiaries included in the consolidation, highlighting the most significant aspects, as well as a description of the main risks and uncertainties that the Bank faces; d. the proposed application of results does not contradict the legal and statutory provisions applicable; and e. 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-H, no. 5 of the Securities Code and other applicable legislation. Therefore, the Financial Affairs (Audit) Committee issues a favourable opinion to: a. the management report as well as the individual and consolidated financial statements for the year of 2023, presented by the Executive Board of Directors, including the proposed application of results submitted by the EBD in its Management Report; b. the Audit Report on the consolidated and individual financial statements of the Bank issued by EY for 2023. 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, 5 March 2024 All these matters were monitored by the GSB and its Committees, which, on these matters, were kept informed by the EBD, by the internal control functions, by the relevant Departments and by the external auditors. In preparation of the accounts of the financial year, the GSB analysed 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 and accounting 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 2023 on 5 March 2024, without qualifications nor emphasis of matter, to which the GSB expresses its agreement. The GSB reviewed the Additional Report to the Supervisory Board issued by the Statutory Auditor on the same date, which corresponds in substance to the matters that have been discussed during the year, and for which they have obtained all the necessary clarifications. 2. Opinion of the Financial Affairs (Audit) Committee on the Management Report and the individual and consolidated financial statements Within the scope of our functions, and in accordance with article 444, number 2, of the Code of Commercial Companies, the GSB verified that: a. the individual and consolidated balance sheet, the individual and consolidated income statement and the individual and consolidated statement of comprehensive income, the demonstration of changes in individual and consolidated equity, the individual and consolidated cash flow statement and the corresponding Annex, allow a proper understanding of the asset, liabilities and the 603 Annual Report 2023 | novobanco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 Affairs (Audit) Committee Karl-Gerhard Eick Vice-Chairman of the General and Supervisory Board and Chairman of the Financial Affairs (Audit) Committee Kambiz Nourbakhsh Member of the General and Supervisory Board and member of the Financial Affairs (Audit) Committee Mark Andrew Coker Member of the General and Supervisory Board John Herbert 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 Monika Helene Wildner Member of the General and Supervisory Board Evgeniy Kazarez Member of the General and Supervisory Board 604 Management ReportSustainability ReportFinancial StatementsAnnex (This page was left in blank intentionally) 605 Annual Report 2023 | novobanco

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