Interest on subordinated liabilities (102) (144) - (144)
Interest on debt securities (615) (505) - (505)
Dividends paid on preference shares (2) - - -
Issue of subordinated liabilities, net of repayments 790 (399) - (399) Issue of debt securities, net of repayments (4,186) (2,936) - (2,936)
Share capital increase 750 - - -
Net cash from financing activities (3,364) (3,984) - (3,984)
Increase (decrease) in cash and cash equivalents (734) (206) (433) (639) Cash and cash equivalents at the beginning of the year 3,690 2,905 - 2,905 Balances derecognized in the process of consolidation relating to "Non-
current assets held for sale" - 565 - 565
Balances reclassified to "Non-current assets held for sale" - (616) 616 - Effects of the exchange rate change on cash and cash equivalents (51) (66) - (66)
Net change of cash and cash equivalents (734) (206) (433) (639)
Consolidated Statements of Changes in Equity for the years ended 31 December 2011 and 2012
(Amounts expressed in € million)
Share Capital Fair value Reserve Other reserves Retained earnings Total Net income
for the year Sub-total
Non- controlling
interests
Total
Balances at 31 December 2011 5,150 (2,078) 1,834 (125) 1,709 (488) 4,292 1,045 5,337
Appropriation of net income for 2011:
Transfer to reserves and retained
earnings — — (172) (316) (488) 488 — — —
Other entries directly recorded in equity
Measurement gain / losses on
available-for-sale financial assets — 1,889 (77) — (77) — 1,812 3 1,815 Recognition of actuarial gains and
losses associated with post-employment benefits (IAS19)
— — (80) — (80) — (80) — (80)
Currency Changes in subsidiaries and
branches — — (62) — (62) — (62) (14) (75)
Others — — (9) — (9) — (9) (9) (19)
Total gains and losses f or the year
recognised in equity — 1,889 (227) — (227) — 1,662 (21) 1,641
Share capital increase 750 — — — — — 750 — 750
Changes in Group perimeter — — — — — — — (57) (57)
Registration of put options to acquire
minority interests – Partang — — (15) — (15) — (15) — (15)
Acquisition of preference shares issued
by Caixa Geral Finance — — — — — — — (1) (1)
Dividends paid on preference shares and
other dividends paid to minority interest — — — — — — — (30) (30) Reclassification between reserves and
retained earnings — — 3 (3) — — — — —
Net income for the year — — — — — (395) (395) 50 (345)
Balances at 31 December 2012 5,900 (190) 1,424 (444) 979 (395) 6,295 985 7,280
Consolidated Statements of Changes in Equity for the years ended 31 December 2012 and 2013
(Amounts expressed in € million)
Share Capital Fair value Reserve Other reserves Retained earnings Total Net income
for the year Sub-total
Non- controlling
interest Total
Balances at 31 December 2012 5,900 (190) 1,424 (444) 979 (395) 6,295 985 7,280
Appropriation of net income for 2012:
Transfer to reserves and retained
earnings — — 284 (679) (395) 395 — — —
Other entries directly recorded in equity:
Measurement gain / losses on available-
for-sale financial assets — 253 (30) — (30) — 222 5 227
Recognition of actuarial gains and losses associated with post-employment benefits (IAS19)
— — (50) — (50) — (50) — (50)
Currency Changes in subsidiaries and
branches — — (103) — (103) — (103) (15) (118)
Other — — 15 — 15 — 15 (2) 13
Total gains and losses for the year
recognised in equity — 253 (168) — (168) — 84 (12) 72
Changes in Group perimeter — — — — — — — 5 5
Registration of put options to acquire
minority interests – Partang — — (6) — (6) — (6) — (6)
Dividends paid on preference shares and
other dividends paid to minority interest — — — — — — — (19) (19)
Reclassification of unrealised gains — — (41) 41 — — — — —
Net income for the year — — — — — (576) (576) 65 (511)
The following table shows certain key ratios for the CGD Group as at 31 December for each of the years set out: As at 31 December 2012 2013 (%) Structural Ratios
Customer loans(1)/customer deposits ... 112.0 103.6 Customer loans(1)/net assets ... 62.4 61.6 Mortgages/customer loans(2) ... 48.9 50.1 Profitability and Efficiency Ratios
Return on equity (before tax)(3) ... (6.5) (9.4) Return on equity (after tax)(3) ... (5.3) (7.1) Return on assets (before tax)(3) ... (0.4) (0.6) Return on assets (after tax)(3) ... (0.3) (0.4) Net operating income(4)/average net assets ... 2.0 1.5 Cost-to-income(4) ... 58.5 81.5 Operating costs based on average net assets ... 1.4 1.4 Employee Costs based on net operating income ... 31.8 46.4 Asset Quality Ratios
Non-performing credit ratio(5) ... 6.4 7.5 Non-performing credit (net) / total credit (net)(5) ... 1.1 1.6 Overdue credit / total credit ... 5.7 6.6 Credit more than 90 days overdue /total credit... 5.3 6.1 Accumulated impairment /overdue credit ... 92.8 91.0 Accumulated impairment /credit more than 90 days overdue ... 100.5 99.9 Capital Ratios
Solvency ratio for the purpose of the Bank of Portugal ... 13.6 13.3 Tier 1 for the purpose of the Bank of Portugal ... 11.2 11.3 (1) Customer loans after impairment.
(2) Customer loans before impairment.
(3) Considering average shareholders' equity and net asset values. (4) Includes income from associated companies.
(5) Indicators calculated in accordance with Bank of Portugal Instruction no. 23/2012.
Recent Developments
In the domestic branch office network, a high priority continued to be an approach based on proximity, further optimising installed potential and improving efficiency, strengthening the complementary nature of person-to-person services with a range of effective, automatic, online channels. This enabled that in a reduction of 56 branches and 7 corporate offices in the domestic network while carrying out improvements in the quality of services.
In the international sphere:
Authorisation was given for the Macau offshore branch to come into operation in February;
New branches opened in France (1), Angola (4), Mozambique (4), Macau (4) and Timor (1);
The Group underwent a profound restructuring process in Spain, by re-dimensioning and reorienting its business model. The Group’s presence in Spain, as Portugal’s main trading partner, is crucial and of major potential in terms of its present business strategy in which the Iberian space is considered the Group’s domestic market.
With these disposals, CGD continues to take significant steps to essentially concentrate on its banking business while simultaneously rationalising and improving the profitability of its activity.
On 24 July 2013, CGD disclosed the following:
Pursuant to the terms of article 248 of the Portuguese Securities Code, CGD informs that the European Commission has announced (IP/13/738), 24 July 2013 that it:
Concluded that CGD's Restructuring Plan (presented in the sequence of the Institution's Recapitalisation in June 2012, and the European Commission's decision on the Recapitalisation on 18 July 2012) respects European State aid rules;
Adopted the decision of approval of CGD's Restructuring Plan;
Closed the investigation process regarding the payment of dividends by Caixa Geral de Depósitos, with the commitment that CGD, within the Restructuring Plan, commits to repay to the Portuguese State an amount equivalent to the dividends paid (€405,415).
The recapitalisation followed the introduction of new capital requirements issued by the EBA (EBA/REC/2011/1), resulting in the need for additional capital of 1.650 million Euros (750 million Euros in share capital and 900 million Euros in Capital Core Tier 1 instruments), which were subscribed, in June 2012, by the Portuguese State as the sole shareholder of CGD Group, and subsequently considered to be State aid by the European Commission.
Restructuring Plan
CGD's Restructuring Plan, which has been approved by the European Commission, ensures the focus of the Institution on its critical role to support Portuguese corporate and household customers, and is based on three main vectors that reinforce the strategic focus:
Deleverage the Group's balance sheet with the sale of the insurance business unit, the sale of the remaining non-strategic holdings and the run-down of noncore assets;
Improve operational efficiency by pursuing with the ongoing effort to reduce operational costs, that has already led to significant savings for the institution, including through reduction of retail branches, headcount optimisation and renegotiation of contracted services;
Restructure the activity and optimise the scale of CGD’s network in Spain. Behavioural measures
CGD's behavioural measures, which are extendable to CGD Group, include:
a) Refrain from making acquisitions of both companies with their own legal structure, and shares in companies or asset bundles that represent a commercial transaction or a branch of an activity, above certain limits. However, this does not apply to several situations, such as acquisitions that belong, in terms of the management of existing obligations of customers in financial difficulty, to a bank’s normal on-going business.
b) Ban on commercial aggressive practices.
c) Reduction of proprietary trading (not client related) to the minimum necessary for the normal treasury function.
d) Refrain from using the granting of the aid or any advantages arising therefrom, for advertising purposes. e) Ban on dividend, coupon and interest payments to holders of preference shares and subordinated debt, in so far as those payments are not owed on the basis of contractual or legal obligations. However, these payments are allowed if it is proved that non-payment would hinder or prevent the repayment of the Core Tier 1 Capital Instruments issued by CGD and subscribed by the Portuguese Government in June 2012. f) Allocate EUR 30 million per year to a fund that will invest in equity of Portuguese SMEs and mid-cap corporate, under the recapitalisation plan set out with the Portuguese State. Any investment exceeding the above referred amount shall be subject to prior approval by the European Commission.
g) Continue the expansion of risk monitoring operations and conduct a commercial policy that is prudent, sound and oriented towards sustainability.
h) Appoint a Monitoring Trustee that will monitor the implementation and execution of the measures of the Restructuring Plan.
i) Refrain from establishing new business units outside the geographic areas in which CGD Group has not previously operated; and
j) Compliance with all regulations and legal requirements on remuneration policies.
The behavioural commitments remain in force until the end of the restructuring period, on December 31, 2017.
In accordance, CGD Groups’ Strategic Plan, has been structured on two key challenges:
1st Challenge: To protect and strengthen CGD Group's financial health (solvency, liquidity and profitability) in response to the needs of the new economic and financial sector framework.
2nd Challenge: To transform CGD, focusing activity on its banking activity, in order to achieve the Group's sustainability and competitiveness on an organisational and business model level.
The first challenge recommends a response to the requirements created by the new economic and financial sector context, even in more adverse scenarios, strengthening the evolution of the Group’s indicators to provide for the Bank's capitalisation with a Core Tier I ratio of 10 per cent. from 2012, generating ROE of 10 per cent. over 5 years, maintaining a stable loans-to- deposits ratio of between 110-120 per cent., considering a scenario of open markets after 2013 and the growing corporate integration of the Group's Business Units based on a management logic, supply and multinational service.
The second challenge aims to prepare and guarantee CGD’s sustainability and competitiveness on an organisational and business model level in light of the paradigm shift in the banking sector, transforming the current banking business model in Portugal and integrating it in terms of offer with the international network, ensuring greater focus on services/transactions which are less reliant on net interest income, a service model more in line with foreseeable market evolution and requirements of key segments – premium customers, non-residents and companies/SMEs working in the tradable goods sectors – and the necessary support based on platforms, processes and HR optimisation in line with the new market requirements.
The main strategic guidelines defined to meet the challenges are:
To take-in savings and diversify liquidity sources, adopting a commercial strategy designed to reduce balance sheet liquidity risk by taking-in balance sheet resources from retail banking activity and diversifying funding sources in international markets;
To continue the balance sheet reduction process through the disposal of non-core assets for achieving a loans-to-deposits ratio in line with the defined objective;
To comply with the solvency ratios objectives, namely with the new Core Tier I; To protect and stimulate revenue generation;
To restructure the corporate model, implementing a new business model enabling the elimination of the impact of capital market volatility in the Bank's profit and loss account and prudential ratios to be adjusted to the new Basel III rules. This new model will consider disinvestment in non-core financial assets and will require the creation of mechanisms for the performance of corporate type functions, namely those connected with strategic, risk and liquidity management;
To optimise all processes related with risk management, particularly greater integration in the management of the Group's real estate and credit oversight and recovery process;
To improve efficiency through the adoption of a programme enabling productivity levels to be improved in a context of the deleveraging and change of the main business determinants, both
on the branch office network and in terms of central services. This will be possible by redesigning processes and identifying key staff for the activity and functions performed by each organic unit. Following these measures, the cost-to-income ratio should be less than 50 per cent.;
To re-examine CGD Group's international presence, considering the imperative need to deleverage the separate and consolidated balance sheets, establishing, to the extent possible, the types of presence more adequate for backing the internationalisation processes of Portuguese companies. Of particular relevance is the restructuring of the Group's operation in Spain with the aim of improving its profitability and efficiency indicators;
To increase endeavours to back exports/internationalisation, with CGD acting as a benchmark operator for exporting companies, increasing its contribution to the country's economic development by strengthening the competitiveness and internationalisation of Portuguese companies, in which special reference should be made to foreign trade operations and the “Iberian Passport” product;
To increase its share of the SME market, with CGD as the bank of first choice of the best SMEs;
To back corporate capitalisation operations and microfinance, with intervention in this area being considered fundamental to ensure the funding of the investments needed to improve corporate competitiveness and reduce financial costs;
To strengthen a multichannel customer relationships strategy. The development of distance banking should enable the physical branch network to be reconfigured, with new locations in more flexible formats. CGD must therefore succeed in achieving greater customer proximity while rationalising costs and improving operational efficiency;
To boost talent management and promote human resources mobility.
Lastly, the strategies and policies defined by the Group aim to meet the following corporate objectives: Liquidity
Loans-to-deposits ratio of less than 120 per cent.;
Use of ECB funding of less than 10 times minimum cash reserves; Convergence of stable funding ratio to 100 per cent.
Solvency Core Tier I ratio:
9 per cent. under EBA rules;
To comply with minimum capital levels for EBA stress tests.
Efficiency
Convergence of net commissions/staff costs ratio to 100 per cent.; Convergence of cost-to-income (Bank of Portugal) to 50 per cent.
CGD plans the activities of the Group’s several business units, taking into account the objectives of its Strategic Mission as defined above. To monitor the performance of the approved activity plan and budget, an information system has been implemented made up of various periodic reports containing indicators on the various areas of activity. The Annual Report contains an annual assessment on the compliance with the defined objectives.