ESPÍRITO SANTO FINANCIAL GROUP SA CONSOLIDATED FINANCIAL ...web3.cmvm.pt/sdi2004/emitentes/docs/PC18570.pdf · ESPÍRITO SANTO FINANCIAL GROUP SA, LUXEMBOURG Report of the Réviseur

ESPÍRITO SANTO FINANCIAL GROUP SA

CONSOLIDATED FINANCIAL STATEMENTS

AS AT 31 DECEMBER 2007

ESPÍRITO SANTO FINANCIAL GROUP SA, LUXEMBOURG

Report of the Réviseur d'Entreprises F-1Consolidated Income Statement for the years ended 31 December 2007 and 2006 F-2Consolidated Balance sheet as at 31 December 2007 and 2006 F-3Statement of changes in Consolidated Equity for the years ended 31 December 2007 and 2006 F-4Consolidated Cash Flow Statement for the years ended 31 December 2007 and 2006 F-5Notes to the Consolidated Financial Statements as at 31 December 2007 and 2006 F-6

F-1


REPORT OF THE REVISEUR D’ENTREPRISES

To the Shareholders of Espírito Santo Financial Group S.A. 231, Val des Bons Malades L-2121 Luxembourg

Report on the consolidated financial statements

We have audited the accompanying consolidated financial statements of Espírito Santo Financial Group S.A., which comprise the consolidated balance sheet as at December 31, 2007 and the consolidated income statement, consolidated statement of changes in equity and consolidated cash flow statement for the year then ended, and a summary of significant accounting policies and other explanatory notes.

Board of Directors’ responsibility for the consolidated financial statements

The Board of Directors is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with International Financial Reporting Standards as adopted by the European Union. This responsibility includes: designing, implementing and maintaining internal control relevant to the preparation and fair presentation of consolidated financial statements that are free from material misstatement, whether due to fraud or error; selecting and applying appropriate accounting policies; and making accounting estimates that are reasonable in the circumstances.

Responsibility of the Réviseur d’Entreprises

Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit in accordance with International Standards on Auditing as adopted by the Institut des Réviseurs d’Entreprises. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance whether the consolidated financial statements are free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the judgement of the Réviseur d’Entreprises, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the Réviseur d’Entreprises considers internal control relevant to the entity’s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by the Board of Directors, as well as evaluating the overall presentation of the consolidated financial statements.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

Opinion

In our opinion, the consolidated financial statements give a true and fair view of the consolidated financial position of Espírito Santo Financial Group S.A., as of December 31, 2007, and of its financial performance and its consolidated cash flows for the year then ended in accordance with International Financial Reporting Standards as adopted by the European Union.

Report on other legal and regulatory requirements

The consolidated management report, which is the responsibility of the Board of Directors, is consistent with the consolidated financial statements.

Luxembourg, May 8, 2008 KPMG Audit S.à r.l. Réviseurs d’Entreprises E. Dollé

ESPIRITO SANTO FINANCIAL GROUP SA

F-2

The following notes form an integral part of these consolidated financial statements


F-3



F-4


F-5

Notes 31.12.2007 31.12.2006

Cash flows from operating activitiesInterest and similar income received 3 391 622 2 673 502Interest expense and similar charges paid (2 410 395) (1 768 765)Fees and commission received 793 805 701 692Fees and commission paid ( 149 360) ( 112 100)Insurance premiums 341 861 559 736Claims paid ( 236 686) ( 455 703)Medical services income 140 865 71 347 Medical services expenses ( 122 671) ( 39 202)Recoveries on loans previously written off 34 857 22 753Cash payments to employees and suppliers (1 025 954) ( 809 812)

Net cash from operating profits before changes in operating assets and liabilities 757 944 843 448

Deposits with central banks ( 312 008) ( 2 888)Financial assets at fair value through profit and loss 718 548 (1 047 084)Loans and advances to banks ( 589 888) (1 521 969)Deposits from banks 1 549 264 713 275Loans and advances to customers (7 754 225) (4 166 067)Due to customers 1 257 895 1 764 142Derivatives for risk management purposes ( 11 968) 96 348Other operational assets and liabilities ( 669 719) ( 150 125)

Net cash from operating activities before income tax (5 054 157) (3 470 920)

Income taxes paid ( 91 813) ( 125 617)

Net cash from operating activities (5 145 970) (3 596 537)

Cash flows from investing activitiesPurchase of subsidiaries and associates ( 82 152) ( 253 309)Sale of subsidiaries and associates 47 419 751 591Dividends received 82 219 52 944Purchase of financial assets available for sale (15 381 006) (6 174 826)Sale of financial assets available for sale 14 244 219 5 091 050Held-to-maturity investments 125 042 ( 57 680)Insurance investment contracts 15 784 47 437Purchase of tangible and intangible assets ( 415 973) ( 180 136)Sale of tangible and intangible assets 27 318 28 524

Net cash from investing activities (1 337 130) ( 694 405)

Cash flows from financing activitiesDebt securities issued 10 608 996 6 372 065Debt securities paid (4 122 690) (2 654 437)Subordinated debt issued 23 720 - Subordinated debt paid ( 129 700) ( 62 364)Issue of preference shares 395 514 - Minority interest on capital increase of subsidiaries - 935 463Dividend paid on ordinary shares ( 182 070) ( 115 454)Dividend paid on preference shares ( 33 480) ( 33 480)

Net cash from financing activities 6 560 290 4 441 793

Effect of exchange rate changes on cash and cash equivalents ( 14 293) ( 39 308)

Net increase in cash and cash equivalents 62 897 111 543

Cash and cash equivalents at the beginning of the year 1 089 626 1 003 361 Cash and cash equivalents at the end of the year 1 152 523 1 089 626 Cash (lost) / provided on change in the scope of consolidation - ( 25 278)

62 897 111 543

Cash and cash equivalents includes:Cash 19 283 747 312 601 Deposits with banks 20 868 776 777 025

Total 1 152 523 1 089 626


CONSOLIDATED CASH FLOW STATEMENTFOR THE YEARS ENDED 31 DECEMBER 2007 AND 2006

(in thousands of euro)



Notes to the consolidated financial statements 31 December 2007 F-6

ESPÍRITO SANTO FINANCIAL GROUP S.A.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

AS AT 31 DECEMBER 2007 AND 2006 (Amounts expressed in thousands of euro, except when indicated)

NOTE 1 - ACTIVITY AND GROUP STRUCTURE

The Espírito Santo Financial Group S.A. (ESFG) is a limited liability company headquartered in Luxembourg,

incorporated under Luxembourg law on 28 November 1984, and is the holding company of the banking and financial

activities of the Espírito Santo Group located in Portugal, Europe and around the world. The main shareholder of

ESFG, Espírito Santo International S.A. (ESI), is a limited liability company headquartered in Luxembourg, and is the

holding company of the Espírito Santo Group interests. The non financial activities of ESI, including agriculture,

hotels, real estate and other activities are managed by Espírito Santo Resources Ltd., a company headquartered in

Bahamas.

Through its subsidiaries, the Group (ESFG and its subsidiaries) engages in a broad range of financial activities

primarily through Banco Espírito Santo, S.A. and its insurance companies: Companhia de Seguros Tranquilidade, S.A.

and T-Vida, Companhia de Seguros, S.A.. Its operations abroad complement its Portuguese activities.

ESFG is listed on the Luxembourg, London and Lisbon Stock Exchanges.



The following table describes the main activity of each of the Group’s subsidiaries and associates as at 31 December

2007 and 31 December 2006: Subsidiaries

Activity Location

Advancecare - Gestão de Serviços de Saúde, S.A. Managed care Portugal 51.1% 51.1% 51.1% 51.1%Banco Espírito Santo Angola, SARL Commercial banking Angola 80.0% 23.3% 80.0% 23.3%Banco Espírito Santo de Investimento, S.A. Investment banking Portugal 100.0% 29.2% 100.0% 29.2%Banco Espírito Santo do Oriente, S.A. Commercial banking Macau 99.8% 29.1% 99.8% 29.1%Banco Espírito Santo dos Açores, S.A. Commercial banking Azores Island 57.5% 16.8% 57.5% 16.8%Banco Espírito Santo North America Capital Corporation Financing vehicle USA 100.0% 29.2% 100.0% 29.2%Banco Espírito Santo, S.A. (a) Commercial banking Portugal 42.4% 29.2% 42.4% 29.2%Banco Espírito Santo, S.A. (Espanha) Commercial banking Spain - - 100.0% 29.2%Bank Espírito Santo International, Ltd. Commercial banking Cayman Islands 100.0% 29.2% 100.0% 29.2%Banque Espírito Santo et de la Vénétie, S.A. Commercial banking France 82.0% 53.7% 82.0% 53.7%Banque Privée Espírito Santo, S.A. Assets management Switzerland 100.0% 100.0% 100.0% 100.0%BES Activos Financeiros, Ltda Assets management Brazil 100.0% 23.3% 100.0% 22.1%BES Beteiligungs, GmbH Commercial banking Cayman Islands 100.0% 29.2% 100.0% 29.2%BES Finance, Ltd. Financing vehicle Cayman Islands 100.0% 29.2% 100.0% 29.2%BES Investimento do Brasil, S.A. Investment banking Brazil 80.0% 23.3% 80.0% 23.3%BES Securities do Brasil, S.A. Brokerage house Brazil 80.0% 18.7% 100.0% 22.1%BESLeasing e Factoring - Instituição Financeira de Crédito, S.A. Leasing and factoring Portugal 90.0% 26.7% 90.0% 26.7%BESPAR, SGPS, S.A. Holding company Portugal 67.4% 67.4% 67.4% 67.4%BEST - Banco Electrónico de Serviço Total, S.A. Internet banking Portugal 66.0% 19.2% 66.0% 19.2%BIC International Bank Ltd. Commercial banking Cayman Islands 100.0% 29.2% 100.0% 29.2%Capital Mais - Assessoria Financeira, S.A. Advisory services Portugal 100.0% 29.8% 100.0% 29.8%CÊNTIMO, SGPS, S.A. Custodian company Portugal 100.0% 29.2% 100.0% 29.2%CENTUM-Sociedade Gestora de Participações Sociais, S.A. Holding company Portugal - - 100.0% 100.0%COMINVEST - Sociedade de Gestão e Investimento Imobiliário S.A. (a) Real-estate Portugal 49.0% 14.3% 49.0% 31.3%Concordia - Espirito Santo Investment Services provider Poland 75.0% 21.9% 49.0% 13.5%ES Bankers (Dubai) Limited Commercial banking Dubai 100.0% 100.0% - -ES Financial Services, Inc. Portfolio Management USA 100.0% 42.6% 100.0% 42.6%ES Tech Ventures, S.G.P.S., S.A. Holding company Portugal 100.0% 29.2% 100.0% 29.2%ES Ventures - Sociedade de Capital de Risco, S.A. Venture capital Portugal 100.0% 29.2% 100.0% 29.2%ES Recuperação de Crédito, ACE Debt collection Portugal 100.0% 29.2% 100.0% 29.2%ESAF - Alternative Assets Management Ltd Holding company Unied Kingdown 100.0% 29.5% - -ESAF - Espírito Santo Activos Financeiros, S.G.P.S., S.A. Holding company Portugal 90.0% 29.8% 90.0% 29.8%ESAF - Espírito Santo Participações Internacionais SGPS, S.A. Holding company Portugal (Madeira) 100.0% 29.8% 100.0% 29.8%ESAF - International Distributors Associates, Ltd. Distribution company British Virgin Islands 100.0% 29.8% 100.0% 29.8%ESFG International Ltd Financing vehicle Cayman Islands 100.0% 100.0% - -ESFG Overseas Ltd. Financing vehicle Cayman Islands 100.0% 100.0% 100.0% 100.0%ESGEST - Esp. Santo Gestão Instalações, Aprov. e Com., S.A. Technical services Portugal 100.0% 29.2% 100.0% 29.2%Espírito Santo Activos Financeiros, S.A. Advisory services Spain 100.0% 29.5% 100.0% 29.5%Espírito Santo Bank (Panama), S.A. Commercial banking Panama 66.7% 66.7% 66.7% 66.7%Espírito Santo Bank, Inc. Commercial banking USA 98.5% 28.7% 98.5% 28.7%Espírito Santo Capital - Sociedade de Capital de Risco, S.A. Venture capital Portugal 100.0% 29.2% 100.0% 29.2%Espírito Santo Concessões, SGPS, S.A. Holding company Portugal 60.0% 17.5% 60.0% 17.5%Espírito Santo Contact Center, Gestão de Call Centers, S.A. Call center services Portugal 97.1% 42.8% 97.1% 42.8%Espírito Santo Data S.G.P.S., S.A. Computer services Portugal 100.0% 29.2% 76.1% 41.3%Espírito Santo do Oriente - Estudos Fin. e Mercado Capitais S.A. Consulting Macau 90.0% 26.2% 89.8% 26.2%Espírito Santo e Comercial de Lisboa Inc. Representation office USA 100.0% 29.2% 100.0% 29.2%Espírito Santo Financial (Portugal), SGPS, S.A. Holding company Portugal 100.0% 100.0% 100.0% 100.0%Espírito Santo Financial Consultants, S.A. Portfolio Management Portugal 100.0% 29.2% 100.0% 29.2%Espírito Santo Financière, S.A. Holding company Luxembourg 100.0% 100.0% 100.0% 100.0%Espírito Santo Fundo de Pensões, S.A. Asset management - Pensions funds Portugal 100.0% 29.8% 100.0% 29.8%Espírito Santo Fundos de Investimentos Imobiliários, S.A. Asset management - Real Estate funds Portugal 100.0% 29.8% 100.0% 29.8%Espírito Santo Fundos de Investimentos Mobiliários, S.A. Asset management - Mutual funds Portugal 100.0% 29.8% 100.0% 29.8%Espírito Santo Gestão de Patrimónios, S.A. Portfolio Management Portugal 100.0% 29.8% 100.0% 29.8%Espírito Santo Gestión, S.A. S.G.I.I.C. Insurance broker Spain 100.0% 29.2% 100.0% 29.2%Espírito Santo Informatica, ACE Computer services Portugal 84.9% 24.8% 100.0% 39.1%Espírito Santo International Management, S.A. Asset management - Mutual funds Luxembourg 99.8% 29.7% 99.8% 29.7%Espírito Santo Investimentos, Ltda Investment banking Brazil 100.0% 29.2% 100.0% 29.2%Espírito Santo Investments PLC Brokerage house Irland 100.0% 29.2% 100.0% 29.2%Espírito Santo Pensiones, S.G.F.P., S.A. Assets management - Pensions funds Spain 100.0% 29.5% 100.0% 29.5%Espírito Santo Prestação de Serviços, ACE 2 Services provider Portugal 100.0% 29.2% 100.0% 29.2%Espírito Santo Representações, Ltda Representation office Brazil 100.0% 29.2% 100.0% 29.2%Espírito Santo Saúde SGPS, S.A. (a) Holding company Portugal 49.9% 42.8% 49.9% 42.8%Espírito Santo Servicios, S.L. Insurance Spain 100.0% 29.2% 100.0% 29.2%Espírito Santo, PLC Non-bank finance company Irland 100.0% 29.2% 100.0% 29.2%ESSI Comunicações, SGPS, S.A. Holding company Portugal 100.0% 29.2% 100.0% 29.2%ESSI Investimentos, SGPS, S.A. Holding company Portugal 100.0% 29.2% 100.0% 29.2%ESSI, SGPS, S.A. Holding company Portugal 100.0% 29.2% 100.0% 29.2%Esumédica - Prestação de Cuidados Médicos, S.A. Health care Portugal 100.0% 82.4% 100.0% 82.4%Fiduprivate - Sociedade de Serviços, Cons.e Adm. Empresas, S.A. Consulting Portugal 99.8% 82.2% 99.8% 82.2%Fin Solutia - Consultoria de Gestão de créditos, S.A. (a) Credit recovery Portugal 49.5% 14.4% - -Financière Mandel SCA (a) Project finance France 45.0% 22.8% - -Gespar S/C, Ltda Holding company Brazil 100.0% 29.2% 100.0% 29.2%Jampur - Trading International, Lda Support services Portugal 100.0% 29.2% 100.0% 29.2%KeySpace Hungary Kft Real-estate Hungaria 51.0% 51.0% - -Kutaya Support services Madeira 100.0% 29.2% 100.0% 29.2%LOCAUMAT - Locaumat, S.A. Leasing France 50.0% 26.8% 100.0% 53.7%

31.12.200631.12.2007

Voting interest

Economic interest

Voting interest

Economic interest



Activity Location

Atlantic Ventures Corporation Holding company USA 58.8% 10.1% - -Clínica Parque dos Poetas, S.A. Medical services Portugal 100.0% 42.8% 100.0% 42.8%Cliria - Hospital Privado de Aveiro, S.A. Medical services Portugal 90.6% 38.8% 90.6% 38.8%Companhia Agricola Penha Garcia, S.A. Tourism Portugal 100.0% 42.8% 100.0% 42.8%Companhia das Águas da Fonte Santa de Monfortinho, S.A. Tourism Portugal 97.9% 41.9% 97.9% 41.9%Controlled Sport (Portugal) - Turismo, Cinegética e Agricultura, S.A. Tourism Portugal 97.1% 41.6% 97.1% 41.6%Empresa de Águas do Vimeiro, S.A. Tourism Portugal 100.0% 42.8% 100.0% 42.8%Empresa Hotel Astória de Monfortinho, S.A. Tourism Portugal 99.2% 42.5% 99.2% 42.5%ES Saúde - Residência com Serviços Sénior, S.A. Medical services Portugal 100.0% 42.8% 100.0% 42.8%Espírito Santo - Unidades de Saúde e de Apoio à Terceira Idade, S.A. Medical services Portugal 100.0% 42.8% 100.0% 42.8%Espírito Santo Health & Spa Portugal, SGPS, S.A. Holding company Portugal 100.0% 42.8% 100.0% 42.8%Espírito Santo Representaciones, S.A. Representation office Uruguay 100.0% 28.7% 100.0% 28.7%FI Multimercado Treasury Investment funds Brazil 100.0% 23.3% 100.0% 23.3%Fundo de Capital de Risco - Ventures II Venture capital fund Portugal 58.8% 17.1% 95.2% 27.8%Fundo FCR PME / BES Venture capital fund Portugal 57.1% 16.6% 57.1% 16.7%Hospital da Arrabida - Gaia, S.A. Medical services Portugal 100.0% 42.8% 100.0% 42.8%Hospital da Luz, S.A. Medical services Portugal 100.0% 42.8% 100.0% 42.8%Hospital Residência do Mar, S.A. Medical services Portugal 100.0% 42.8% 100.0% 42.8%HOSPOR - Hospitais Portugueses, S.A. Medical services Portugal 100.0% 42.8% 100.0% 42.8%Instituto de Radiologia Dr. Idálio de Oliveira - Centro de Radiologia Médica, S.A. Medical services Portugal 100.0% 42.8% 100.0% 42.8%Monfortur - Monfortinho Turismo, S.A. Tourism Portugal 100.0% 42.8% 100.0% 42.8%Morumbi Capital Holding company Brazil 100.0% 27.6% 100.0% 29.2%Morumbi Capital, S.A. Investment fund Cayman Islands 100.0% 27.6% 100.0% 29.2%Omnium Lyonnais de Participations Industrielles, S.A. Investment company France 99.9% 53.6% 99.9% 53.6%Parsuni - Sociedade Unipessoal, SGPS Holding company Portugal 100.0% 29.2% 100.0% 29.2%PARTRAN SGPS, S.A. Holding company Portugal 100.0% 100.0% 100.0% 100.0%Praça do Marquês - Serviços Auxiliares, SA Real-estate Portugal 100.0% 29.2% - -Quinta dos Cónegos- Sociedade Imobiliária, S.A. Real-estate Portugal 100.0% 42.2% 99.9% 42.2%RML - Residência Medicalizada de Loures, SGPS, S.A. Medical services Portugal 75.0% 32.1% 75.0% 32.1%ROPSOH - Unidades de Saúde, S.A. Services provider Portugal - - 100.0% 42.8%SCI BOURDONNAIS 42 - Société Civile Immobilière Real-estate France 95.0% 95.0% 95.0% 95.0%SES Iberia, S.A. Asset management Spain 50.0% 13.8% 50.0% 13.8%SLMB - Société Lyonnaise de Marchands de Biens Real-estate France 99.8% 53.6% 99.8% 53.6%Sociedade Agrícola Vale Feitoso, Lda Tourism Portugal 100.0% 42.6% 75.0% 31.2%Société Civile Immobilière du 45 Avenue Georges Mandel Real-estate France 100.0% 48.2% 100.0% 48.2%Surgicare - Unidades de Saúde, S.A. Medical services Portugal 99.6% 42.6% 92.5% 39.6%Tagide Properties, Inc. Real-estate USA 100.0% 28.7% 100.0% 28.7%TRANQUILIDADE - Companhia de Seguros Tranquilidade, S.A. Insurance Portugal 100.0% 100.0% 100.0% 100.0%T-VIDA, Companhia de Seguros, S.A. Insurance Portugal 100.0% 100.0% 100.0% 100.0%Vila Lusitano - Unidades de Saúde, S.A. Medical services Portugal 100.0% 42.8% 100.0% 42.8%

31.12.200631.12.2007

Voting interest

Economic interest

Voting interest

Economic interest

Associates

Activity Location

Água Mais Food and beverage Portugal - - 30.0% 5.0%Apolo Films, S.L. Entertainment Spain 25.1% 7.3% 25.1% 7.2%BES, Companhia de Seguros, S.A. Insurance Portugal 50.0% 32.3% 50.0% 32.3%BES-Vida, Companhia de Seguros, S.A. Insurance Portugal 50.0% 14.6% 50.0% 14.6%BIO-GENESIS Holding company Brazil 34.0% 5.8% - -BRB Internacional, S.A. Entertainment Spain 24.9% 7.3% 24.9% 7.2%Carlua, SGPS, S.A. Holding company Portugal 32.1% 5.3% 32.1% 5.3%Coporgest Holding company Portugal 25.0% 7.3% 25.0% 7.0%Coreworks-Proj. Circuito Sist. Elect., S.A. Holding company Portugal 40.0% 6.9% - -DECOMED, SGPS Holding company Portugal 21.3% 3.5% 21.0% 3.5%ENKROTT S.A. Water management and treatment Portugal 30.0% 5.0% 30.0% 5.0%ESEGUR - Empresa de Segurança, S.A. Security Portugal 44.0% 12.8% 34.0% 9.9%Espírito Santo International Asset Management Ltd. Advisory services Cayman Islands 49.0% 14.6% 49.0% 14.6%Europ Assistance - Comp. Portuguesa Seguros Assistência, S.A. Insurance Portugal 47.0% 30.7% 47.0% 30.7%Fomentinvest, SGPS, S.A. (c) Holding company Portugal 20.0% 5.8% 20.0% 5.8%Fundo Espírito Santo IBERIA I Venture capital fund Portugal 38.7% 11.3% 38.7% 11.3%Fundo Espírito Santo Infrastructure I Investment funds Portugal 50.0% 13.8% - -Genomed Medical services Portugal 35.0% 13.3% 24.0% 10.3%Global Active - Gestão Part. Soc., SGPS, SA Holding company Portugal 25.0% 4.3% - -HLC - Centrais de Cogeração, S.A. Services provider Portugal 24.5% 6.8% 24.5% 6.8%HME Gestão Hospitalar, S.A. Medical services Portugal 50.0% 21.4% 50.0% 21.4%Inova Europe, Spa Services provider Luxembourg 20.0% 3.4% - -Inovamais - Serv. Cons. Inovação Technológica, S.A. (b) Services provider Portugal 86.6% 22.8% - -Invent SAS Services provider France 20.0% 3.4% - -LOCARENT - Companhia Portuguesa de Aluguer de Viaturas, S.A. Consumer finance Portugal 45.0% 13.1% 45.0% 13.1%OBLOG Consulting S.A. (b) Software development Portugal 66.6% 19.4% 66.7% 27.6%Outsystems, S.A. IT Services Portugal 27.3% 4.7% - -Prosport - Com. Desportivas, S.A. Sporting goods trading Spain 25.0% 7.3% 25.0% 7.2%RODI 2, S.A. Industry Portugal 35.4% 7.4% 35.4% 7.2%SAGEFI - Société Antillaise de Gestion Financière, S.A. Consumer credit France 38.8% 20.8% 38.8% 20.8%SGPICE Soc. de Serviços de Gestão Management of internet portals Portugal 33.3% 9.7% 33.3% 9.7%SOPRATTUTTO CAFÉ 2, S.A. Distribution company Portugal - - 44.8% 7.5%SOPRATTUTTO CAFÉ, S.A. Distribution company Portugal 44.8% 7.5% 44.8% 7.5%Sotancro, S.A. ( b ) Glass packaging Portugal - - 49.0% 13.5%Sousacamp, SGPS, S.A. Holding company Portugal 39.1% 6.7% - -Synergy Industry and Technology S.A. (c) Holding company Spain 15.0% 4.4% - -

31.12.200631.12.2007

Voting interest

Economic interest

Voting interest

Economic interest

(a) Although the Group’s voting interest is less than 50%, these companies are fully consolidated, as the Group controls its activities. (b) Although the Group’s voting interest is more than 50%, these companies’ activities are not controlled by the Group, but the Group exercises a

significant influence over them. (c) Although the Group’s voting interest is less than 20%, the Group exercises a significant influence over these companies.



Additionally and in applying SIC 12 as described in Note 2.2, the Group consolidation scope includes the following special purpose entities:

The main changes in ESFG structure that occurred during 2007 are highlighted as follows:

- Subsidiaries

• On 1 April Banco Espírito Santo, S.A. (Espanha) was merged into BES and subsequently became the Spanish

Branch of the Bank. No impact on the financial statements of the Group occurred from this merger.

• In May 2007, the Group acquired an additional 23.9% of Espírito Santo Data, SGPS, S.A. thus gaining full

control over this entity, which was already fully consolidated in 2006.

• In November 2007, BES acquired 100% of the share capital of Praça do Marquês – Serviços Auxiliares, S.A..

As at 31 December, 2007 the total assets of this company amounted to euro 74.1 million and refer mainly to a

building for Banco Espírito Santo S.A. own use. The building is classified under property and equipment in

the consolidated financial statements of the Group.

• During 2007, the Group sold in the market 9 529 638 shares of Banco Espírito Santo, S.A. generating a gain

of approximately euro 26.0 million and acquired 10 127 014 shares of this fully consolidated subsidiary,

generating a goodwill of approximately euro 30.7 million (see Note 31).

• Liquidation of Centum held 100% by the Company. No impact on the consolidated financial statements of the

Group arose from the liquidation.

• During 2007, the Group set-up a bank in Dubai, with a share capital in the amount of USD 30 million.



- Associates (see Note 32)

• In March 2007, the Group acquired an additional 10% of ESEGUR – Empresa de Segurança, S.A., thus

increasing its participation in this entity to 44%. The total net income of this entity attributable to the Group

amounts approximately to euro 1.5 million.

• In June 2007, the Group acquired 15% of share capital of Synergy Industry and Technology, S.A.. The total

net income of this entity attributable to the Group amounts approximately to euro 1.3 million.

• In August 2007, the Group sold its stake in Sotancro, S.A..

• In September 2007, the Group sold its stake in Água Mais.

• In November 2007, the Group sold its stake in Sopratutto Cafés 2, S.A..

In June 2006, ESFG announced the conclusion of the reorganisation of the shareholding positions in its insurance subsidiaries in Portugal, involving the following transactions:

• Acquisition for euro 28.2 million, by ESFG of the remaining 33.3% of Partran, the sub-holding company

which holds 100% of Companhia de Seguros Tranquilidade, from Predica (a subsidiary of Crédit Agricole).

• Sale, by Companhia de Seguros Tranquilidade, of 25% of Companhia de Seguros Tranquilidade Vida to

Banco Espírito Santo, S.A. (BES), for euro 237.5 million and sale by Bespar of 65.5% of Companhia de

Seguros Tranquilidade Vida to BES (25.0%) and to Crédit Agricole (40.5%), for euro 622.3 million. As a

result, (i) BES acquired 50% of this insurance company, which subsequently changed its name to BES-Vida,

Companhia de Seguros, S.A. (BES-Vida) and (ii) ESFG reduced its economic interest in BES-Vida from

60.8% to 14.6%. Crédit Agricole, having the other 50% stake has the management control of the company.

Therefore, from 30 June 2006, the date of this transaction, BES-Vida is included in the consolidated financial

statements of ESFG under the equity method.

• Sale by BES of 15% of Espírito Santo Companhia de Seguros, S.A. to Crédit Agricole for euro 12.0 million.

In 30 June 2006, this company, that changed its name to BES Companhia de Seguros, S.A. (BES Seguros),

became 25% held by BES, 25% by Companhia de Seguros Tranquilidade and 50% by Crédit Agricole. This

resulted in ESFG having reduced its economic interest in BES Seguros from 52% in December 2005 to

32.3% in June 2006. Crédit Agricole has the management control of the company. Therefore, from 30 June

2006, the date of this transaction, BES Seguros is included in the consolidated financial statements of ESFG

under the equity method.

• In the first half of 2006 the Group reduced its voting interest in BES from 49.1% in December 2005 to 41.7%

in June 2006. This reduction was the result of (i) the capital increase of BES, in which ESFG has not

participated proportionally to the percentage held and of (ii) the sale, by BES-Vida, of its direct participation

in BES. As a consequence, the economic interest in BES reduced from 32.9% in December 2005 to 29.2% in

June 2006.



As at 31 December 2007 and 2006, gains on disposal of investments in subsidiaries and associates as described above,

are as follows:

31.12.2007Net of minority

interest 31.12.2006Net of minority

interest

Tranquilidade-Vida - - 248 090 160 535 BES 25 974 25 974 106 775 90 267 Other 4 568 5 104 18 448 ( 82)

30 542 31 078 373 313 250 720

(in thousands of euro)(in thousands of euro)



NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES

2.1. Basis of preparation and statement of compliance

In accordance with Regulation (EC) no. 1606/2002 of 19 July 2002 from the European Council and Parliament,

Espírito Santo Financial Group S.A. (“ESFG” or “the Company”) is required to prepare its consolidated financial

statements in accordance with International Financial Reporting Standards (“IFRS”) as adopted for use in the

European Union (“EU”).

IFRS comprise accounting standards issued by the International Accounting Standards Board (“IASB”) and its

predecessor body as well as interpretations issued by the International Financial Reporting Interpretations Committee

(“IFRIC”) and its predecessor body.

These consolidated financial statements for the year ended 31 December 2007 were prepared in accordance with the

IFRS effective and adopted for use in the EU until 31 December 2007. The accounting policies used by the Group in

the preparation of its consolidated financial statements as at 31 December 2007 are consistent with the ones used in the

preparation of the consolidated financial statements as at 31 December 2006.

In the preparation of the consolidated financial statements as at 31 December 2007, the Group adopted IFRS 7 -

Financial Instruments – Disclosures and IAS 1 (revised) – Presentation of Financial Statements – Capital Disclosures.

These standards, which are mandatory from 1 January 2007, impacted the type and amount of disclosures made in

these financial statements, but had no impact on the reported profits or on the financial position of the Group. In

accordance with the transitional requirements of the standards, the Group has provided full comparative information.

Additionally, the Group adopted in 2007 the IFRIC 8 – Scope of IFRS 2, IFRIC 9 – Reassessment of Embedded

Derivatives and IFRIC 10 – Interim Financial Reporting and Impairment. The adoption of these interpretations had no

impact in the consolidated financial statements of the Group.

These consolidated financial statements are expressed in thousands of euro, except when indicated, and have been

prepared under the historical cost convention, except for the assets and liabilities accounted at fair value, namely,

derivative contracts, financial assets, investment properties and financial liabilities at fair value through profit or loss,

available-for-sale financial assets, and recognised assets and liabilities that are hedged, in a fair value hedge, in respect

of the risk that is being hedged.

The preparation of financial statements in conformity with IFRS requires the application of judgment and the use of

estimates and assumptions by management that affects the process of applying the Group’s accounting policies and the

reported amounts of income, expenses, assets and liabilities. Actual results in the future may differ from those

reported. The areas involving a higher degree of judgement or complexity, or areas where assumptions and estimates

are significant to the consolidated financial statements are disclosed in Note 3.



These financial statements were approved in the Board of Directors meeting held on 17 April 2008. These financial

statements are subject to the shareholders approval on the General Assembly, to be held on 31 May 2008.

2.2. Basis of consolidation

These consolidated financial statements comprise the financial statements of Espírito Santo Financial Group S.A. and

its subsidiaries (“the Group”), and the results attributable to the Group from its associates.

These accounting policies have been consistently applied by the Group companies, during all the years covered by the

consolidated financial statements.

Subsidiaries

Subsidiaries are entities over which the Group exercises control. Control is presumed to exist when the Group owns

more than one half of the voting rights. Additionally, control also exists when the Group has the power, directly or

indirectly, to govern the financial and operating policies of the entity, so as to obtain benefits from its activities, even if

its shareholding is less than 50%. Subsidiaries are fully consolidated from the date on which control is transferred to

the Group until the date that control ceases.

Accumulated losses of a subsidiary attributable to minority interest, which exceed the equity of the subsidiary

attributable to the minority interest, is attributed to the Group and is taken to the income statement when incurred. If

the subsidiary subsequently reports profits, these are recognised by the Group until the losses attributable to the

minority interest, previously recognised have been recovered.

When an interest in a subsidiary is disposed of, the difference between the proceeds from the disposal and the carrying

amount of the Group’s interest in the subsidiary net assets plus the carrying amount of goodwill related to subsidiary is

recognised in the income statement as a gain or loss on disposal.

A dilution occurs when the Group’s interest in a subsidiary decreases without the Group having disposed of any of its

shares in the subsidiary (for example, in the case the Group does not participate proportionally in a share issue of a

subsidiary). Gains or losses on dilution are accounted for by the Group in the income statement.

Associates

Associates are entities over which the Group has significant influence over the company’s financial and operating

policies but not its control. Generally when the Group owns more than 20% of the voting rights it is presumed that it

has significant influence. However, even if the Group owns less than 20% of the voting rights, it can have significant

influence through the participation in the policy-making processes of the associated entity or the representation in its



executive board of directors. Investments in associates are accounted for by the equity method of accounting from the

date on which significant influence is transferred to the Group until the date that significant influence ceases.

If the Group’s share of losses of an associate equals or exceeds its interest in the associate, including any long-term

interest, the Group discontinues the application of the equity method, except when it has a legal or constructive

obligation of covering those losses or has made payments on behalf of the associate.

Special purpose entities (“SPE”)

The Group consolidates certain special purpose entities (“SPE”), specifically created 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, independently of the percentage of the equity held.

The evaluation of the existence of control is made based on the criteria established by SIC 12 – Consolidation –

Special Purpose Entities, which can be summarised as follows:

• In substance, the activities of the SPE are being conducted in accordance with the specific needs of the Group’s

business, so that the Group obtains the benefits from these activities;

• In substance the Group has the decision-making powers to obtain the majority of the benefits from the activities of

the SPE;

• In substance, the Group has rights to obtain the majority of the benefits of the SPE, and therefore may be exposed to

the inherent risks of its activities;

• In substance, the Group retains the majority of residual or ownership risks related to the SPE so as to obtain the

benefits from its activities.

Goodwill

Goodwill resulting from business combinations that occurred until 1 January 2004 was offset against reserves,

according to the option granted by IFRS 1, adopted by the Group on the date of transition to the IFRS.

From 1 January 2004, the purchase method of accounting is used by the Group to account for the acquisition of

subsidiaries and associates. The cost of acquisition is measured as the fair value, determined at the acquisition date, of

the assets and equity instruments given and liabilities incurred or assumed plus any costs directly attributable to the

acquisition.

Goodwill represents the difference between the cost of acquisition and the fair value of the Group’s share of

identifiable net assets acquired.



In accordance with IFRS 3 – Business Combinations, goodwill is recognised as an asset at its cost and is not

amortised. Goodwill relating to the acquisition of associates is included in the book value of the investment in those

associates determined using the equity method. Negative goodwill is recognised directly in the income statement in the

period the business combination occurs.

The recoverable amount of the goodwill recognised as an asset is reviewed annually, regardless of whether there is any

indication of impairment. Impairment losses are recognised directly in the income statement.

Acquisition of minority interest

The goodwill resulting from the acquisition of minority interest in a subsidiary represents the difference between the

acquisition cost of the additional investment in the subsidiary and the book value, at acquisition date, of the net assets

acquired, as recognised in the consolidated accounts.

Foreign currency translation

The financial statements of each of the Group entities are prepared using their functional currency which is defined as

the currency of the primary economic environment in which that entity operates. The consolidated financial statements

are prepared in euro, which is ESFG’s functional and presentation currency.

The financial statements of each of the Group entities that have a functional currency different from the euro are

translated into euro as follows:

• Assets and liabilities are translated into the functional currency using the exchange rate prevailing at the balance

sheet date;

• Income and expenses are translated into the functional currency at rates approximating the rates ruling at the dates of

the transactions;

• The exchange differences resulting from the translation of the equity at the beginning of the year using the exchange

rates at the beginning of the year and at the consolidated balance sheet date are accounted for against reserves net of

deferred taxes. The exchange differences arising from the translation of income and expenses at the rates ruling at

the dates of the transactions and at the balance sheet date are accounted for against reserves. When the entity is sold

such exchange differences are recognised in the income statement as a part of the gain or loss on sale.



Balances and transactions eliminated in consolidation

Inter-company balances and transactions, including any unrealised gains and losses on transactions between Group

companies, are eliminated in preparing the consolidated financial statements, unless 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 associates are eliminated to the extent of the Group’s

interest in the associates. Unrealised losses are also eliminated unless the transaction provides evidence of an

impairment loss.

2.3. Foreign currency transactions

Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the

dates of the transactions. Monetary assets and liabilities denominated in foreign currencies are translated to euro at the

foreign exchange rates ruling at the balance sheet date. Foreign exchange differences arising on translation are

recognised in the income statement.

Non-monetary assets and liabilities that are measured in terms of historical cost in a foreign currency are translated

using the exchange rate at the date of the transaction. Non-monetary assets and liabilities denominated in foreign

currencies that are stated at fair value are translated to 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 available-for-sale, which are accounted for in equity.

2.4. Derivative financial instruments and hedge accounting

Derivatives are initially recognised at fair value on the date on which a derivative contract is entered into (trade date).

Subsequent to initial recognition, the fair value of derivative financial instruments is re-measured on a regular basis

and the resulting gains or losses on re-measurement are recognised directly in the income statement, except for

derivatives designated as hedging instruments. The recognition of the resulting gains or losses of the derivatives

designated as hedging instruments depends on the nature of the risk being hedged and of the hedge model used.

Fair values are obtained from quoted market prices, in active markets, if available or are determined using valuation

techniques, including discounted cash flow models and options pricing models, as appropriate.

Derivatives for risk management purposes include hedging derivatives and derivatives used to manage the risk of

certain financial assets and financial liabilities designated at fair value through profit or loss.



Hedge accounting

• Classification criteria

Hedge accounting is used for derivative financial instruments designated as hedging instruments, provided the

following criteria are met:

(i) At the inception of the hedge, the hedge relationship is identified and documented, including the

identification of the hedged item and of the hedging instrument and the evaluation of the effectiveness of the

hedge;

(ii) The hedge is expected to be highly effective, both at the inception of the hedge and on an ongoing basis;

(iii) The effectiveness of the hedge can be reliably measured, both at the inception of the hedge and on an ongoing

basis;

(iv) For cash flows hedges, the cash flows are highly probable of occurring.

• Fair value hedge

In a fair value hedge, the book 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 that are attributable to the risks 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

being hedged.

If the hedge no longer meets the criteria for hedge accounting, the derivative financial instrument is transferred to the

trading portfolio and the hedge accounting is discontinued prospectively. The cumulative adjustment to the carrying

amount of a hedged item for which the effective interest rate method is used is amortised to the income statement over

the period to maturity.

• Cash flow hedge

When a derivative financial instrument is designated as a hedge of the variability in highly probable future cash flows,

the effective portion of changes in the fair value of the hedging derivatives is recognised in equity. Amounts

accumulated in equity are recycled to the income statement in the periods in which the hedged item will affect the

income statement. The gain or loss relating to the ineffective portion is recognised immediately in the income

statement.

When a hedging instrument expires or is sold, or when a hedge no longer meets the criteria for hedge accounting, any

cumulative gain or loss recognised in equity at that time is recognised in the income statement when the hedged

transaction also affects the income statement. When a hedged transaction is no longer expected to occur, the



cumulative gain or loss reported in equity is recognised immediately in the income statement and the hedging

instrument is reclassified for the trading portfolio.

During the years covered by these financial statements, the Group did not have any transactions classified as cash flow

hedge.

Embedded derivatives

Derivatives that are embedded in other financial instruments are treated as separate derivatives when their economic

characteristics and risks are not closely related to those of the host contract and the host contract is not carried at fair

value through profit or loss. These embedded derivatives are measured at fair value with changes in fair value

recognised in the income statement.

2.5. Loans and advances to customers

Loans and advances to customers include loans and advances originated by the Group, which are not intended to be

sold in the short term. Loans and advances to customers are recognised when cash is advanced to borrowers.

Loans and advances to customers are derecognised from the balance sheet when (i) the contractual rights to receive

their cash flows have expired, (ii) the Group has transferred substantially all risks and rewards of ownership or (iii)

although retaining some but not substantially all of the risks and rewards of ownership, the Group has transferred the

control over the assets.

Loans and advances to customers are initially recorded at fair value plus transaction costs and are subsequently

measured at amortised cost, using the effective interest rate method, less impairment losses.

In accordance with the documented strategy for risk management, the Group contracts derivative financial instruments

to manage certain risks of a portion of the loan portfolio, without applying, however, the provisions of hedge

accounting as mentioned in Note 2.4. These loans are measured at fair value through profit or loss, in order to

eliminate a measurement inconsistency resulting from measuring loans and derivatives for risk management purposes

on different basis (accounting mismatch). This procedure is in accordance with the accounting policy for classification,

recognition and measurement of financial assets at fair value through profit or loss, as described in Note 2.6.

Impairment

The Group assesses, at each balance sheet date, whether there is objective evidence of impairment within its loan

portfolio. 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 the impairment losses decreases.



A loan or a loan portfolio, defined as a group of loans with similar credit risk characteristics, is impaired when:

(i) there is objective evidence of impairment as a result of one or more events that occurred after its initial recognition

and (ii) that event (or events) has an impact on the estimated future cash flows of the loan or of the loan portfolio, that

can be reliably estimated.

The Group first assesses whether objective evidence of impairment exists individually for each loan. In this assessment

the Group uses the information that feeds the credit risk models implemented and takes in consideration the following

factors:

• the aggregate exposure to the customer and the existence of non-performing loans;

• the viability of the customer’s business model and its capability to trade successfully and to generate

sufficient cash flow to service their debt obligations;

• the extent of other creditors’ commitments ranking ahead of the Group;

• the existence, nature and estimated realisable value of collaterals;

• the exposure of the customer within the financial sector;

• the amount and timing of expected recoveries.

When loans have been individually assessed and no evidence of loss has been identified, these loans are grouped

together on the basis of similar credit risk characteristics for the purpose of evaluating the impairment on a portfolio

basis (collective assessment). Loans that are assessed individually and found to be impaired are not included in a

collective assessment for impairment.

If an impairment loss is identified on an individual basis, the amount of the impairment loss to be recognised is

calculated as the difference between the book value of the loan and the present value of the expected future cash flows

(considering the recovery period), discounted at the original effective interest rate. The carrying amount of impaired

loans is reduced through the use of an allowance account. If a loan has a variable interest rate, the discount rate for

measuring the impairment loss is the current effective interest rate determined under the contract rules.

The changes in the recognised impairment losses attributable to the unwinding of discount are recognised as interest

and similar income.

The calculation of the present value of the estimated future cash flows of a collateralised loan reflects the cash flows

that may result from foreclosure less costs for obtaining and selling the collateral.

For the purposes of a collective evaluation of impairment, loans are grouped on the basis of similar credit risk

characteristics, taking in consideration the Group’s credit risk management process. Future cash flows in a group of

loans that are collectively evaluated for impairment are estimated on the basis of the contractual cash flows of the

loans in the Group and historical loss experience. The methodology and assumptions used for estimating future cash

flows are reviewed regularly by the Group with the purpose of reducing any differences between loss estimates and

actual loss experience.



When a loan is considered by the Group as uncollectible and an impairment loss of 100% was recognised, it is written

off against the related allowance for loan impairment. Subsequent recoveries of amounts previously written off

decrease the amount of the loan impairment loss recognised in the income statement.

2.6. Other financial assets

Classification

The Group classifies its other financial assets at initial recognition in the following categories:

• Financial assets at fair value through profit or loss

This category includes: (i) financial assets held for trading, which are those acquired principally for the purpose of

selling in the short term and (ii) financial assets that are designated at fair value through profit or loss at inception.

The Group classifies, at inception, certain financial assets at fair value through profit or loss when:

• Such financial assets are managed, measured and their performance evaluated on a fair value basis;

• Such financial assets are being hedged (on an economical basis), in order to eliminate an accounting

mismatch; or

• Such financial assets contain an embedded derivative.

• Held-to-maturity investments

Held-to-maturity investments are non-derivative financial assets with fixed or determinable payments and fixed

maturities that the Group’s management has the positive intention and ability to hold until its maturity and that are not

classified, at inception, as at fair value through profit or loss or as available-for-sale.

• Available-for-sale financial assets

Available-for-sale financial assets are non-derivative financial assets (i) intended to be held for an indefinite period of

time, (ii) designated as available-for-sale at initial recognition or (iii) that are not classified in the other categories

referred to above.

Initial recognition, measurement and derecognition

Purchases and sales of: (i) financial assets at fair value through profit or loss, (ii) held-to-maturity investments and (iii)

available-for-sale financial assets are recognised on trade date – the date on which the Group commits to purchase or

sell the asset.

Financial assets are initially recognised at fair value plus transaction costs except for financial assets at fair value

through profit or loss, in which case these transaction costs are directly recognised in the income statement.



Financial assets are derecognised when (i) the contractual rights to receive their cash flows have expired, (ii) the

Group has transferred substantially all risks and rewards of ownership or (iii) although retaining some but not

substantially all of the risks and rewards of ownership, the Group has transferred the control over the assets.

Subsequent measurement

Financial assets at fair value through profit or loss are subsequently carried at fair value and gains and losses arising

from changes in their fair value are included in the income statement in the period in which they arise.

Available-for-sale financial assets are also subsequently carried at fair value. However, gains and losses arising from

changes in their fair value are recognised directly in equity, until the financial assets are derecognised or impaired, at

which time the cumulative gain or loss previously recognised in equity is recognised in the income statement. Foreign

exchange differences arising from equity investments classified as available-for-sale are also recognised in equity,

while foreign exchange differences arising from debt investments are recognised in the income statement. Interest,

calculated using the effective interest method and dividends are recognised in the income statement.

Held-to-maturity investments are carried at amortised cost using the effective interest method, net of any impairment

losses recognised.

The fair values of quoted investments in active markets are based on current bid prices. For unlisted securities the

Group establishes fair value by using (i) valuation techniques, including the use of recent arm’s length transactions,

discounted cash flow analysis and option pricing models and (ii) valuation assumptions based on market information.

Financial instruments whose fair value cannot be reliably measured are carried at cost.

Reclassifications between categories

In accordance with IAS 39, the Group does not reclassify, after initial recognition, a financial instrument between

categories, except in the rare cases in which reclassifications are allowed under this accounting standard.

Impairment

The Group assesses periodically whether there is objective evidence that a financial asset or group of financial assets is

impaired. If there is objective evidence of impairment, the recoverable amount of the asset is determined and

impairment losses are recognised through the income statement.

A financial asset or a group of financial assets is impaired if there is objective evidence of impairment as a result of

one or more events that occurred after their initial recognition, such as: (i) for listed securities, a significant or

prolonged decline in the fair value of the security below its cost, and (ii) for unlisted securities, when that event (or



events) has an impact on the estimated future cash flows of the financial asset or group of financial assets that can be

reliably estimated.

For held-to-maturity investments, the amount of the impairment loss is measured as the difference between the asset’s

carrying amount and the present value of estimated future cash flows (considering the recovery period) discounted at

the financial asset’s original effective interest rate. The carrying amount of the impaired assets is reduced through the

use of an allowance account. If a held-to-maturity investment has a variable interest rate, the discount rate for

measuring any impairment loss is the current effective interest rate determined under the contract. For held-to-maturity

investments if, in a subsequent period, the amount of the impairment loss decreases and the decrease can be related

objectively to an event occurring after the impairment loss was recognised, the previously recognised impairment loss

is reversed through the income statement.

If there is objective evidence that an impairment loss on available-for-sale financial assets has been incurred, the

cumulative loss recognised in equity – measured as the difference between the acquisition cost and the current fair

value, less any impairment loss on that financial asset previously recognised in the income statement – is taken to the

income statement. If, in a subsequent period, the amount of the impairment loss decreases, the previously recognised

impairment loss is reversed through the income statement up to the acquisition cost if the increase is objectively

related to an event occurring after the impairment loss was recognised, except in relation to equity instruments, in

which case the reversal is recognised in equity.

2.7. Sale and repurchase agreements

Securities sold subject to repurchase agreements (‘repos’) at a fixed price or at the sales price plus a lender’s return are

not derecognised. The corresponding liability is included in amounts due to banks or to customers, as appropriate. The

difference between sale and repurchase price is treated as interest and accrued over the life of the agreements using the

effective interest method.

Securities purchased under agreements to resell (‘reverse repos’) at a fixed price or at the purchase price plus a

lender’s return, being the purchase price paid are not recognised but recorded as loans and advances to banks or

customers, as appropriate. The difference between purchase and resale price is treated as interest and accrued over the

life of the agreements using the effective interest method.

Securities lent under lending agreements are not derecognised being classified and measured in accordance with the

accounting policy described in Note 2.6. Securities borrowed under borrowing agreements are not recognised in the

balance sheet.



2.8. Financial liabilities

An instrument is classified as a financial liability when it contains a contractual obligation to transfer cash or another

financial asset, independently from its legal form.

Non-derivatives financial liabilities include deposits from banks and due to customers, loans, debt securities,

subordinated debt and short sales. Preference shares issued are considered to be financial liabilities when the Group

assumes the obligation of reimbursement and/or to pay dividends.

The financial liabilities are recognised (i) initially at fair value less transaction costs and (ii) subsequently at amortised

cost, using the effective interest method, except for short sales and financial liabilities designated at fair value through

profit or loss, which are measured at fair value.

The Group designates, at inception, certain financial liabilities as at fair value through profit or loss when:

• Such financial liabilities are being hedged ( on an economical basis), in order to eliminate an accounting

mismatch; or

• Such financial liabilities contain embedded derivatives.

The fair value of quoted financial liabilities is based on the current price. In the absence of a quoted price, the Group

establishes the fair value by using valuation techniques based on market information, including the own credit risk of

the issuer.

If the Group repurchases debt issued, it is derecognised from the balance sheet and the difference between the carrying

amount of the liability and its acquisition cost is recognised in the income statement.

2.9. Equity instruments

An instrument is classified as an equity instrument when it does not contain a contractual obligation to deliver cash or

another financial asset, independently from its legal form, being a contract that evidences a residual interest in the

assets of an entity after deducting all of its liabilities.

Transaction costs directly attributable to the issue of equity instruments are recognised under equity as a deduction

from the proceeds. Amounts paid or received related to acquisitions or sales of equity instruments are recognised in

equity, net of transaction costs.

Distributions to holders of an equity instrument are debited directly to equity as dividends, when declared.



Preference shares issued are considered as equity instruments if the Group has no contractual obligation to redeem and

if dividends, non cumulative, are paid only if and when declared by the Group.

2.10. Compound financial instruments

Non-derivative financial instruments that contain both a liability and an equity component (e.g. convertible bonds and

bonds issued with warrants) are classified as compound financial instruments. For these instruments to be considered

as compound financial instruments, the number of shares to be issued upon conversion is determined at the date of

issue and does not vary with changes in their fair value. The liability component corresponds to the present value of

the future interest and principal payments, discounted at the market rate of interest applicable to similar liabilities that

do not have a conversion option. The equity component corresponds to the difference between the proceeds of the

issue and the amount attributed to the liability. The interest expense recognised in the income statement is calculated

using the effective interest method.

2.11. Offsetting financial instruments

Financial assets and liabilities are offset and the net amount reported in the balance sheet when there is a legally

enforceable right to offset the recognised amounts and there is an intention to settle on a net basis, or realise the asset

and settle the liability simultaneously.

2.12. Assets acquired in exchange for loans

Assets acquired in exchange for loans are initially reported in ‘Other assets’ and are initially recognised at the lower of

their fair values less costs to sell and the carrying amount of the loans.

Subsequently, those assets are measured at the lower of their carrying amount and the corresponding fair values less

costs to sell and are not depreciated. Any subsequent write-down of the acquired assets to fair value is recorded in the

income statement.

The value of assets acquired in exchange for loans is periodically reviewed by the Group.

When these assets are available for immediate disposal, in accordance with IFRS 5, they are classified as Non-current

assets held for sale and booked in accordance with the accounting policy described in note 2.27.



2.13. Property and equipment

Property and equipment are stated at deemed cost less accumulated depreciation and impairment losses. At the

transition date to IFRS, 1 January 2004, the Group elected to consider as deemed cost, the revalue amount of property

and equipment as determined in accordance with previous accounting policies of the Group, which was broadly similar

to depreciated cost measured under IFRS, adjusted to reflect changes in a specific price index. The value includes

expenditure that is directly attributable to the acquisition of the items. In what concerns the insurance activity, the

Group decided to consider as deemed cost of its buildings for own use the respective fair value at transition date.

Subsequent costs are included in the asset’s carrying amount or are recognised as a separate asset, as appropriate, only

when it is probable that future economic benefits associated with the item will flow to the Group. All other repairs and

maintenance are charged to the income statement during the year in which they are incurred.

Land is not depreciated. Depreciation on other assets is calculated using the straight-line method over their estimated

useful lives, as follows:

Number of yearsBuildings 35 to 50Improvements in leasehold property 10Computer equipment 4 to 5Furniture 4 to 10Fixtures 5 to 12Security equipment 4 to 10Office equipment 4 to 10Motor vehicles 4Other equipment 5

When there is an indication that an asset may be impaired, IAS 36 requires that its recoverable amount is estimated

and an impairment loss recognised when the net book value of the asset exceeds its recoverable amount. Impairment

losses are recognised in the income statement.

The recoverable amount is determined as the greater of its net selling price and value in use which is based on the net

present value of future cash flows arising from the continuing use and ultimate disposal of the asset.

Buildings related to discontinued branches are classified under non-current assets held for sale when they are available

for immediate sale in accordance with the accounting policy described in Note 2.27.

2.14. Investment properties

The Group classifies as investment property the property held to earn rentals or for capital appreciation or both.

Investment property is recognised initially at cost, including transaction costs that are directly attributable

expenditures, and subsequently at their fair value. Changes in the fair value determined at each balance sheet date are

recognised in the income statement. Investment property is not amortised.

Subsequent expenditure is capitalised only when it is probable that it will give rise to future economic benefits in

excess of the originally assessed standard of performance of the asset.



2.15. Intangible assets

The costs incurred with the acquisition, production and development of software are capitalised, as well as the costs

incurred to acquire and bring to use the specific software. These costs are amortised on the basis of their expected

useful lives, which is usually between three to six years.

Costs that are directly associated with the development of identifiable specific software applications by the Group, and

that will probably generate economic benefits beyond one year, are recognised as intangible assets. These costs include

employee costs from the Group companies specialised in IT directly associated with the development of the referred

software.

All remaining costs associated with IT services are recognised as an expense as incurred.

2.16. Leases

The Group classifies its lease agreements as finance leases or operating leases taking into consideration the substance

of the transaction rather than its legal form, in accordance with IAS 17 – Leases. A lease is classified as a finance lease

if it transfers substantially all the risks and rewards incidental to ownership. All other leases are classified as operating

leases.

Operating leases

Payments made under operating leases are charged to the income statement in the period to which they relate.

Finance leases

• As lessee

Finance lease contracts are recorded at inception date, both under assets and liabilities, at the cost of the asset leased,

which is equal to the present value of outstanding lease instalments. Instalments comprise (i) an interest charge, which

is recognised in the income statement and (ii) the amortisation of principal, which is deducted from liabilities.

Financial charges are recognised as costs over the lease period, in order to produce a constant periodic rate of interest

on the remaining balance of liability for each period.

• As lessor

Assets leased out are recorded in the balance sheet as loans granted, for the amount equal to the net investment made

in the leased assets. Interest included in instalments charged to customers is recorded as interest income, while

amortisation of principal, also included in the instalments, is deducted from the amount of the loans granted. The

recognition of the interest reflects a constant periodic rate of return on the lessor's net outstanding investment.



2.17. Employee benefits

Pensions

To cover the liabilities assumed by the Group within the framework stipulated by the ACT "Acordo Colectivo de

Trabalho" for the banking sector in Portugal and by the CCT “Contrato Colectivo de Trabalho” for the insurance

sector in Portugal, pension funds designed to cover retirement benefits on account of age, including widows and

orphans benefits and disability were set up for the entire work force.

Additionally, in 1998, the Group decided to set up autonomous open-end pension funds to cover complementary

pension benefits for employees and pensioners.

The funds are managed by ESAF – Espírito Santo Fundos de Pensões, S.A., a Group’s subsidiary.

The pension plans of the Group are classified as defined benefit plans, since the criteria to determine the pension

benefit to be received by employees on retirement are predefined and usually depend on factors such as age, years of

service and level of salary.

In the light of IFRS 1, the Group decided to adopt, at transition date (1 January 2004), IAS 19 retrospectively and has

recalculated the pension and other post-retirement benefits obligations and the corresponding actuarial gains and losses

to be deferred in accordance with the corridor method allowed by this accounting standard.

The liability with pensions is calculated annually by the Group, at the balance sheet date for each plan individually,

using the projected unit credit method, and reviewed by qualified independent actuaries. The discount rate used in this

calculation is determined by reference to interest rates of high-quality corporate bonds that are denominated in the

currency in which the benefits will be paid and that have terms to maturity approximating to the terms of the related

pension liabilities.

Actuarial gains and losses determined annually and resulting from (i) the differences between financial and actuarial

assumptions used and real values obtained and (ii) changes in the actuarial assumptions are recognised as an asset or

liability and are recognised in the income statement using the corridor method.

This method establishes that the actuarial gains and losses accumulated at the beginning of the year that exceed the

greater of 10% of the pension liabilities or the fair value of the plan assets, as at the beginning of the year, are charged

to the income statement over a period that cannot exceed the average of the remaining working lives of the employees

participating in the plan. The Group has determined on the basis of the above criteria to amortise the actuarial gains

and losses that fall outside the corridor during a 15 year period. The actuarial gains and losses accumulated at the

beginning of the year that are within the corridor are not recognised in the income statement.



Annually the Group recognises as a cost in the income statement a net total amount of (i) the service cost, (ii) the

interest cost, (iii) the expected return on plan assets, (iv) a portion of the net cumulative actuarial gains and losses

determined using the corridor method, and (v) the effect of curtailment losses related with early retirements, which

includes the early amortisation of the respective actuarial gains and losses.

The effect of the early retirements corresponds to the increase in pension liabilities due to retirements before the

normal age of retirement, which is 65 years.

ESFG and its subsidiaries make payments to the fund in order to maintain its solvency and to comply with the

following minimum levels: (i) the liability with pensioners shall be totally funded at the end of each year, and (ii) the

liability related to past services cost with employees in service shall be funded at a minimum level of 95%.

The Group assesses at each reporting date and for each plan separately, the recoverability of any recognized asset in

relation to the defined benefit pension plans, based on the expectation of reductions in future contributions to the

funds.

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 to its beneficiaries services and/or contributions on medical assistance expenses, diagnostics,

medicines, hospital confinement and surgical operations, in accordance with its financing availability and internal

regulations.

The annual contribution of the Group to SAMS amounts to 6.5% of the total annual remuneration of employees,

including, among others, the holiday and Christmas subsidy.

The measurement and recognition of the Group’s liability with post-retirement healthcare benefits is similar to the

measurement and recognition of the pension liability described above.

Long term service benefits

In accordance with the ACT "Acordo Colectivo de Trabalho" for the banking sector, BES Group has assumed the

commitment to pay to current employees that achieve 15, 25 or 30 years of service within the Group, long term service

premiums corresponding, respectively, to 1, 2 or 3 months of their effective monthly remuneration earned at the date

the premiums are paid.

At the date of early retirement or disability, employees have the right to a premium proportional to what they would

earn if they remained in service until the next payment date.



These long term service benefits are accounted for by the Group in accordance with IAS 19 as other long-term

employee benefits.

The liability with long term service premiums is calculated annually, at the balance sheet date, by the Group using the

projected unit credit method. The actuarial assumptions used are based on the expectations about future salary

increases and mortality tables. The discount rate used in this calculation is determined by reference to interest rates of

high-quality corporate bonds that are denominated in the currency in which the benefits will be paid and that have

terms to maturity approximating to the terms of the related liabilities.

Annually, the increase in the liability for long term service premiums, including actuarial gains and losses and past

service costs is charged to the income statement.

Share based payments – Share based incentive scheme (SIBA)

BES and its subsidiaries established a share based payment scheme (SIBA) that allows its employees to acquire BES

shares with deferred settlement financed by it. The employees have to hold the shares for a minimum of two to four

years after which they can sell the shares in the market and repay the debt. However, the employees have, after the

referred period, the option to sell the shares back to BES at acquisition cost.

The shares held by the employees under this scheme are accounted for as treasury stock of BES.

Each option under the scheme, corresponding to an equity-settled share based payment, is fair valued on grant date and

is recognised as an expense, with a corresponding increase in equity, over the vesting period. Annually the amount

recognised as an expense is adjusted to reflect the actual number of options that vest.

The equity instruments granted are not remeasured for subsequent changes in their fair value.

Share based payments – Stock option plan

The stock option plan allows certain employees to acquire ESFG shares. In practice, however, the Company has settled

these options in cash. During the years covered by these consolidated financial statements, the option granted under

this plan have already vested.

Considering the terms and conditions of this plan, including ESFG informal practices of settling the options granted to

employees in cash, they are accounted for, in accordance with IFRS 2, as cash-settled share based payment

arrangements, being recognised as liabilities by their fair value determined at each balance sheet date, using an option

pricing model. Changes in fair value are recognised in the income statement.



Bonus to employee and to the Board of Directors

In accordance with IAS 19 – Bonuses to employees, the bonus payment to employees and to the Board of Directors are

recognised in the income statement in the year to which they relate.

2.18. Income tax

Income tax for the period comprises current tax and deferred tax. Income tax is recognised in the income statement

except to the extent that it relates to items recognised directly in equity, in which case it is recognised in equity.

Income tax recognised directly in equity relating to fair value re-measurement of available-for-sale financial assets and

cash flow hedges is subsequently recognised in the income statement when gains or losses giving rise to the income

tax are also recognised in the income statement.

Current tax is the tax expected to be paid on the taxable profit for the year, calculated using tax rates enacted or

substantively enacted at the balance sheet date at each jurisdiction.

Deferred tax is provided using the balance sheet liability method, providing for temporary differences between the

carrying amounts 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 any jurisdiction and that are

expected to apply when the related deferred income tax asset is realised or the deferred income tax liability is settled.

Deferred tax liabilities are recognised for all taxable temporary differences except for goodwill not deductible for tax

purposes, differences arising on initial recognition of assets and liabilities that affect neither accounting nor taxable

profit and differences relating to investments in subsidiaries to the extent that probably they will not reverse in the

foreseeable future. Deferred tax assets are recognised to the extent it is probable that future taxable profits will be

available against which deductible temporary differences can be deducted.

2.19. Provisions

Provisions are recognised when: (i) the Group has present legal or constructive obligation, (ii) it is probable that

settlement will be required in the future and (iii) a reliable estimate of the obligation can be made.

Restructuring provisions are recognised when the Group has approved a detailed and formal restructuring plan and

such restructuring either has commenced or has been announced publicly.

A provision for onerous contracts is recognised when the expected benefits to be derived by the Group from a contract

are lower than the unavoidable costs of meeting its obligation under the contract. The provision is measured at the



present value of the lower of the expected cost of terminating the contract and the expected net costs of continuing

with the contract.

2.20. Interest income and expense

Interest income and expense are recognised in the income statement under interest and similar income and interest

expense and similar charges for all non-derivative financial instruments measured at amortised cost and for the

available-for-sale financial assets, using the effective interest method. Interest income arising from non-derivative

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, respectively.

The effective interest rate is the rate that exactly discounts estimated future cash payments or receipts through the

expected life of the financial instrument or, when appropriate, a shorter period to the net carrying amount of the

financial asset or financial liability. The effective interest rate is calculated at inception and it is not subsequently

revised.

When calculating the effective interest rate, the Group estimates cash flows considering all contractual terms of the

financial instrument (for example, prepayment options) but does not consider future credit losses. The calculation

includes all fees and commissions paid or received that are an integral part of the effective interest rate, transaction

costs and all other premiums or discounts.

In the case of financial assets or groups of similar financial assets for which an impairment loss was recognised,

interest income is calculated using the interest rate used to measure the impairment loss.

For derivative financial instruments, except for (i) those classified as hedging instruments of interest rate risk and (ii)

those used to manage the risk of certain financial assets and financial liabilities designated at fair value through profit

or loss, in order to eliminate an accounting mismatch, the interest component of the changes in their fair value is not

separated out and is classified under net gains/(losses) from financial assets and financial liabilities at fair value

through profit or loss. The interest component of the changes in the fair value of hedging derivatives of interest rate

risk and of derivatives used to manage the risk of certain financial assets and financial liabilities designated at fair

value through profit or loss, in order to eliminate an accounting mismatch, is recognised under interest and similar

income or interest expense and similar charges.



2.21. Fee and commission income

Fees and commissions are recognised as follows:

• Fees and commissions that are earned on the execution of a significant act, as loan syndication fees, are

recognised as income when the significant act has been completed;

• Fees and commissions earned over the period in which the services are provided are recognised as income in the

period 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 method.

2.22. Dividend income

Dividend income is recognised when the right to receive payment is established.

2.23. Fiduciary activities

Assets held in the scope of the fiduciary activity are not recognised in the consolidated financial statements of the

Group. Fee and commissions arising from this activity are recognised in the income statement in the period to which

they relate.

2.24. Insurance contracts

The Group issues contracts that contain insurance risk, financial risk or a combination of both insurance and financial

risk. A contract, under which the Group accepts significant insurance risk from another party, by agreeing to

compensate that party on the occurrence of a specified uncertain future event, is classified as an insurance contract.

A contract issued by the Group without significant insurance risk, but on which financial risk is transferred with

discretionary participating features is classified as investment contract recognised and measured in accordance with the

accounting policies applicable to insurance contracts. A contract issued by the Group that transfers only financial risk,

without discretionary participating features, is classified as an investment contract and accounted for as a financial

instrument.

The financial assets held by the Group to cover the liabilities arising under insurance and investment contracts are

classified and accounted for in the same way as other Group financial assets.



Insurance contracts and investment contracts with discretionary participating features are recognised and measured as

follows:

Premiums

Gross written premiums are recognised for as income in the period to which they respect, in accordance with the

accrual accounting principle.

Reinsurance premiums ceded are accounted for as expense in the period to which they respect in the same way as

gross written premiums.

Unearned premium reserve

The reserve for unearned gross written premiums and reinsurance ceded premiums reflects the part of the written

premiums before the end of the year for which the risk period continues after the year end. This reserve is calculated

using the pro-rata temporis method applied to each contract in force.

Acquisition costs

Acquisition costs that are directly or indirectly related to the selling of insurance and investment contracts with

discretionary participating features are capitalized and deferred through the life of the contracts. Deferred acquisition

costs are subject to recoverability testing at the time of the insurance policy or investment contract is issued and

subject to impairment test (liability adequacy test) at each reporting date.

Claims reserves

Claims outstanding reflects the estimated total outstanding liability for reported claims and for incurred but not

reported claims (IBNR). Reserves for both reported and not reported claims are estimated by management based on

experience and available data using statistical methods. Additionally, claims reserve also includes an estimation related

with future costs with claims settlement (“expense reserve”).

The mathematical reserves relating to obligations to pay life pensions resulting from workmen’s compensation claims

is calculated by using actuarial assumptions, with reference to recognised actuarial methods and current labour

legislation.

Claims reserves are not discounted, except life pensions arising from workmen’s compensation claims.

Unexpired risk reserve

The reserve for unexpired risks represents the amount by which expected claims and administrative expenses likely to

arise after the end of the financial year, from contracts concluded before that date, exceeds the unearned premiums



reserve, any expected future premiums expected to be written under those contracts and from premiums renewed on

January next year.

Life assurance reserve

The life assurance reserve reflects the present value of the Group's future obligations arising from life policies

(insurance contracts and investment contracts with discretionary participating features) written and is calculated in

accordance with recognised actuarial methods within the scope of applicable legislation.

Reserve for bonus and rebates

The reserve for bonus and rebates corresponds to the amounts attributed to policyholders or beneficiaries of insurance

or investment contracts, in the form of profit participation, which have not yet been specifically allocated and included

in the life assurance reserve.

Liability adequacy test

At each reporting date, the Group performs a liability adequacy test to the insurance and investment contracts with

discretionary participating features liabilities. The assessment of the liabilities is performed using the best estimate of

future cash flows under each contract, discounted at a risk free rate. The liability adequacy test is performed product

by product or aggregate basis when contracts are subject to broadly similar risks and managed as a single portfolio.

Any deficiency determined, if exists, is recognised directly through income.

Shadow accounting

In accordance with IFRS 4, the unrealised gains and losses on the assets covering liabilities arising out from insurance

and investment contracts with discretionary participating features are attributable to policyholders, to the extent that it

is expected that policyholders will participate on those unrealised gains and losses when they became realised in

accordance with the terms of the contracts and applicable legislation, by recording those amounts under liabilities.

2.25. Segment reporting

A business segment is a group of assets and operations engaged in providing products or services that are subject to

risks and returns that are different from those of other business segments.

A geographical segment is engaged in providing products or services within a particular economic environment that

are subject to risks and return that are different from those of segments operating in other economic environments.

Inter-segment pricing is determined on an arms length basis.



2.26. Earnings per share

Basic earnings per share is calculated by dividing net income available to ordinary shareholders by the weighted

average number of ordinary shares outstanding during the year, excluding the average number of ordinary shares

purchased by the Group and held as treasury stock.

For the diluted earnings per share, the weighted average number of ordinary shares outstanding is adjusted to assume

conversion of all dilutive potential ordinary shares, such as convertible debt and share options granted to employees.

Potential or contingent share issuances are treated as dilutive when their conversion to shares would decrease net

earnings per share.

2.27. Non-current assets held for sale

Non-current assets or disposal groups (group of assets to be disposed of together and related liabilities that include at

least a non-current asset) are classified as held for sale when (i) their carrying amounts will be recovered principally

through sale (including those acquired exclusively with a view to its subsequent disposal), (ii) the assets or disposal

groups are available for immediate sale and (iii) its sale is highly probable.

Immediately before classification as held for sale, the measurement of the non-current assets or all 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 measured at the lower of their carrying amount or fair value less costs to sell, determined annually

in accordance with the applicable IFRS.

2.28. Cash and cash equivalents

For the purposes of the cash flow statement, cash and cash equivalents comprise balances with less than three months’

maturity from the inception date, including cash and deposits with banks.

Cash and cash equivalents exclude restricted balances with central banks.

2.29. Standards and interpretations not yet adopted

In Note 51, are included the recent standards and interpretations not yet adopted by the Group.



NOTE 3 - CRITICAL ACCOUNTING ESTIMATES AND JUDGEMENTS IN APPLYING

ACCOUNTING POLICIES

IFRS set forth a range of accounting treatments and require management to apply judgment and make estimates in

deciding which treatment is most appropriate. The most significant of these accounting policies are discussed in this

section in order to improve understanding of how their application affects the Group’s reported results and related

disclosure. A broader description of the accounting policies employed by the Group is shown in Note 2 to the

Consolidated Financial Statements.

Because in many cases there are other alternatives to the accounting treatment chosen by management, the Group’s

reported results would differ if a different treatment were chosen. Management believes that the choices made by it are

appropriate and that the financial statements present the Group’s financial position and results fairly in all material

respects.

3.1. Impairment of available-for-sale financial assets

The Group determines that available-for-sale financial assets are impaired when there has been a significant or

prolonged decline in the fair value below its cost. This determination of what is significant or prolonged requires

judgement. In making this judgement, the Group evaluates among other factors, the normal volatility in share price.

In addition, valuations are generally obtained through market quotation or valuation models that may require

assumptions or judgment in making estimates of fair value.

Alternative methodologies and the use of different assumptions and estimates could result in a higher level of

impairment losses recognised with a consequent impact in the income statement of the Group.

3.2. Fair value of derivatives

Fair values are based on listed market prices if available; otherwise fair value is determined either by dealer price

quotations (both for that transaction or for similar instruments traded) or by pricing models, based on net present value

of estimated future cash flows which take into account market conditions for the underlying instruments, time value,

yield curve and volatility factors. These pricing models may require assumptions or judgments in estimating fair

values.

Consequently, the use of a different model or of different assumptions or judgments in applying a particular model

may have produced different financial results from the ones reported.



3.3. Impairment losses on loans and advances

The Group reviews its loan portfolios to assess impairment on a regular basis, as described in Note 2.5.

The evaluation process in determining whether an impairment loss should be recorded in the income statement is

subject to numerous estimates and judgments. The frequency of default, risk ratings, loss recovery rates and the

estimation of both the amount and timing of future cash flows, among other factors, are considered in making this

evaluation.

Alternative methodologies and the use of different assumptions and estimates could result in a different level of

impairment losses with a consequent impact in the income statement of the Group.

3.4. Securitisations and special purpose entities

The Group sponsors the formation of special purpose entities (SPEs) primarily for asset securitisation transactions and

for liquidity purposes.

The Group does not consolidate SPEs that it does not control. As it can sometimes be difficult to determine whether

the Group does control an SPE, it makes judgements about its exposure to the risks and rewards, as well as about its

ability to make operational decisions for the SPE in question (see Note 2.2).

The determination of the SPEs that needs to be consolidated by the Group requires the use of estimates and

assumptions in determining the respective expected residual gains and losses and which party retains the majority of

such residual gains and losses. Different estimates and assumptions could lead the Group to a different scope of

consolidation with a direct impact in net income.

3.5. Held-to-maturity investments

The Group follows the guidance of IAS 39 on classifying non-derivative financial assets with fixed or determinable

payments and fixed maturity as held-to-maturity. This classification requires significant judgement.

In making this judgement, the Group evaluates its intention and ability to hold such investments to maturity. If the

Group fails to keep these investments to maturity other than for the specific circumstances – for example, selling an

insignificant amount close to maturity – it will be required to reclassify the entire class as available-for-sale. The

investments would therefore be measured at fair value instead of amortised cost.



The use of different assumptions and estimates would result in the determination a different fair value of this portfolio

with a corresponding entry in the fair value reserve in the Group’s equity.

3.6. Income taxes

The Group is subject to income taxes in numerous jurisdictions. Significant interpretations and estimates are required

in determining the worldwide amount for income taxes. There are many transactions and calculations for which the

ultimate tax determination is uncertain during the ordinary course of business.

Different interpretations and estimates would result in a different level of income taxes, current and deferred,

recognised in the year.

The Tax Authorities are entitled to review the Portuguese Group entities determination of annual taxable earnings, for

a period of four years or six years in case there are tax losses brought forward. The determination of annual tax

earnings by other Group entities (located outside Portugal) can also be subject to similar reviews by their respective

tax authorities. Hence, it is possible that some additional taxes may be assessed, mainly as a result of differences in

interpretation of the tax law. However, the Board of Directors of the Company and those of its subsidiaries, are

confident that the level of provisions recognised in the financial statements as at 31 December 2007 are adequate to

cover the risk associated with additional tax assessments.

3.7. Pension and other employees’ benefits

Determining pension liabilities requires the use of assumptions and estimates, including the use of actuarial

projections, estimated returns on investment, and other factors that could impact the cost and liability of the pension

plan.

Changes in these assumptions could materially affect these values.

3.8. Insurance and investment contracts liabilities

Insurance and investment contracts liabilities represent liabilities for future insurance policy benefits. Insurance

reserves for traditional life insurance, annuities, and workmen’s compensation policies have been calculated based

upon mortality, morbidity, persistency and interest rate assumptions applicable to those coverage. The assumptions

used reflect the Groups’ and market experience and may be revised if it is determined that future experience will differ

substantially from that previously assumed. Insurance and investment contracts liabilities include: (i) unearned

premiums reserve, (ii) life mathematical reserve, (iii) reserve for bonus and rebates, (iv) unexpired risk reserve, (v)



liability adequacy test and (vi) claims reserves. Claims reserve includes estimated provisions for both reported and

unreported claims incurred and related expenses.

When claims are made by or against policyholders, any amounts that the Group pays or expects to pay are recorded as

losses. The Group establishes reserves for payment of losses for claims that arise from its insurance and investment

contracts.

In determining their insurance reserves and investment contracts liabilities, the Group’s insurance companies perform

a continuing review of their overall positions, their reserving techniques and their reinsurance coverage. The reserves

are also reviewed periodically by qualified actuaries.

The Group maintains property and casualty loss reserves to cover the estimated ultimate unpaid liability for losses with

respect to both reported and not reported claims incurred as of the end of each accounting year.

Claims reserves do not represent an exact calculation of liability, but instead represent estimates, generally using

actuarial valuations/techniques. These reserve estimates are expectations of what the ultimate settlement of claims is

likely to cost based on an assessment of facts and circumstances then known, a review of historical settlement patterns,

estimates of trends in claims severity, frequency, legal theories of liability and other factors. Variables in the reserve

estimation process can be affected by both internal and external events, such as changes in claims handling procedures,

economic inflation, legal trends and legislative changes. Many of these items are not directly quantifiable, particularly

on a prospective basis. Additionally, there may be significant reporting lags between the occurrence of the insured

event and the time it is actually reported to the insurer. Reserve estimates are continually reviewed in a regular

ongoing process as historical loss experience develops and additional claims are reported and settled.



NOTE 4 - SEGMENT REPORTING

ESFG Group is structured in accordance with the following business areas:

(i) Corporate and retail banking - relates to operations made with corporates (loans, project finance, guarantees,

among others) and includes transactions with individuals, namely loans and advances and deposits;

(ii) Investment banking – includes the investment banking activity, namely mergers and acquisitions advice, debt

issues arrangements, studies and analysis;

(iii) Asset management – includes the fund management and asset management activities;

(iv) Leasing and factoring– includes leasing and factoring operations, as well as the activity of issuing and

management of debit and credit cards;

(v) Life insurance – includes the insurance activity within the scope of the life insurance business, namely saving

and investments contracts and risk contracts;

(vi) Non-life insurance – includes the insurance activity within the scope of the non-life insurance business,

namely motor, accident and health and fire and hazards;

(vii) Health-care – includes the medical services business and the managed care for health insurance activity;

(viii) Other – includes the remaining segments that individually represent less than 10% of total assets or profit for

the year and that combined do not represent more than 25% of those items.


F-41

The primary segments reporting are presented as follows:

Domestic activity (1) Foreign activity (2)

Corporate Corporate

and retail Investment Asset Leasing and Other Total and retail Investment Asset Other Total

banking banking Management factoring banking banking Management

Interest and similar income 3 664 372 139 377 2 195 202 426 17 878 21 273 520 3 129 4 051 170 1 024 599 125 656 6 793 51 110 1 208 158 (1 739 626) 3 519 702

Interest expense and similar charges 2 928 888 118 127 - 164 104 852 259 15 568 16 071 3 243 869 830 343 115 926 419 83 797 1 030 485 (1 739 626) 2 534 728

Net interest income 735 484 21 250 2 195 38 322 17 026 21 014 ( 15 048) ( 12 942) 807 301 194 256 9 730 6 374 ( 32 687) 177 673 - 984 974

Dividend income 45 963 1 123 - - 130 606 - 2 853 50 675 55 - 43 494 592 - 51 267

Fee and commission income 434 884 71 850 70 034 6 581 297 - 11 142 1 306 596 094 103 938 52 630 62 225 1 061 219 854 ( 53 619) 762 329

Fee and commission expense ( 68 320) ( 9 811) ( 33 419) ( 1 792) ( 380) ( 2 179) ( 3) ( 528) ( 116 432) ( 19 677) ( 7 456) ( 13 138) ( 1 634) ( 41 905) 51 790 ( 106 547)

Net (losses) / gains from financial assets and financial

liabilities at fair value through profit or loss 94 056 ( 5 281) - 44 4 976 1 783 283 ( 3 187) 92 674 ( 2 754) ( 9 231) - 6 565 ( 5 420) ( 144) 87 110

Net gains from available-for-sale financial assets 176 409 7 597 - 3 ( 737) 5 192 - 979 189 443 270 47 227 - 2 536 50 033 - 239 476

Net gains from foreign exchange differences ( 19 055) ( 15 100) ( 9) ( 4) - ( 33) 18 ( 1 412) ( 35 595) 27 230 40 077 ( 241) ( 2 128) 64 938 - 29 343

Net gains from the sale of other financial assets 169 2 373 - 1 - 510 - - 3 053 630 - 1 16 647 240 3 940

Insurance earned premiums net of reinsurance - - - - 57 662 314 018 - - 371 680 - - - - - ( 11 536) 360 144

Other operating income 79 459 6 861 2 039 7 636 643 8 544 149 068 19 590 273 840 13 745 - 96 1 378 15 219 ( 57 460) 231 599

Operating income 1 479 049 80 862 40 840 50 791 79 617 349 455 145 460 6 659 2 232 733 317 693 132 977 55 360 ( 24 399) 481 631 ( 70 729) 2 643 635

(External operating income) 1 413 869 91 979 68 595 111 458 74 932 339 328 145 460 ( 792) 2 244 829 252 249 132 977 60 351 ( 46 771) 398 806 - 2 643 635

(Inter segment operating income) ( 65 180) 11 117 27 755 60 667 ( 4 685) ( 10 127) - ( 7 451) 12 096 ( 65 444) - 4 991 ( 22 372) ( 82 825) 70 729 -

Staff costs 362 602 27 337 7 945 4 891 1 370 41 472 48 259 10 180 504 056 72 775 29 256 20 328 5 779 128 138 ( 1 295) 630 899

General and administrative expenses 321 956 15 992 5 283 8 798 3 941 28 977 6 823 12 958 404 728 58 689 12 208 10 515 5 979 87 391 ( 65 883) 426 236

Claims incurred net of reinsurance - - - - 52 259 198 438 - - 250 697 - - - - - ( 3 130) 247 567

Change on the technical reserves net of reinsurance - - - - 9 627 3 019 - - 12 646 - - - - - - 12 646

Insurance commissions - - - - 1 894 32 366 - - 34 260 - - - - - - 34 260

Depreciations and amortisation 55 298 1 097 338 902 7 8 652 19 850 554 86 698 10 840 1 220 2 039 381 14 480 - 101 178

Provisions net of reversals 26 032 1 624 ( 526) - - 262 536 - 27 928 ( 135) - 1 018 - 883 - 28 811

Loans impairment net of reversals and recoveries 137 721 ( 899) - 13 110 - - - - 149 932 33 178 346 - - 33 524 - 183 456

Impairment on other financial assets net of reversals 14 467 ( 502) - 236 - - - 3 986 18 187 29 - - - 29 - 18 216

Impairment on other assets net of reversals 6 331 - ( 8) ( 238) 579 643 1 893 - 9 200 ( 465) - - - ( 465) - 8 735

Other operating expenses 59 318 3 332 1 263 1 808 764 12 223 107 246 3 423 189 377 12 982 5 052 245 1 151 19 430 ( 421) 208 386

Operating expenses 983 725 47 981 14 295 29 507 70 441 326 052 184 607 31 101 1 687 709 187 893 48 082 34 145 13 290 283 410 ( 70 729) 1 900 390

Gains from the sale of investments in subsidiaries and associates - - - - - ( 543) - 5 124 4 581 - - - 25 961 25 961 - 30 542

Share of profit of associates - - - - 26 108 2 930 ( 122) 3 514 32 430 - - - - - - 32 430

Profit before income tax 495 324 32 881 26 545 21 284 35 284 25 790 ( 39 269) ( 15 804) 582 035 129 800 84 895 21 215 ( 11 728) 224 182 - 806 217

Income tax

Current tax 58 750 ( 21 358) 7 336 8 244 1 392 1 652 1 635 4 126 61 777 10 182 24 812 5 234 1 095 41 323 - 103 100

Deferred tax 24 806 29 304 17 ( 1 983) 913 2 079 ( 4 022) ( 10 182) 40 932 8 745 - 230 - 8 975 - 49 907

Profit for the year after tax and before minority interest 411 768 24 935 19 192 15 023 32 979 22 059 ( 36 882) ( 9 748) 479 326 110 873 60 083 15 751 ( 12 823) 173 884 - 653 210

Attributable to minority interest 448 348

Profit for the year attributable to the equity holders of the Company 204 862

31.12.2007

Intercompany TOTAL

(in thousands of euros)

Life insurance

Non-life insurance Health care

(1) Domestic activity, represents the Groups activities in Portugal. (2) Foreign activity, represents the Groups activity outside Portugal.




Corporate Corporate



Other informations

Total assets 79 735 543 3 252 663 85 296 3 967 247 590 420 820 172 550 070 601 503 89 602 914 19 826 867 2 243 146 238 389 1 762 646 24 071 048 ( 42 366 231) 71 307 731

Investment in associates - - - - 136 426 16 750 89 64 397 217 662 - - - 2 921 2 921 - 220 583

Liabilities 76 021 309 3 072 567 21 466 3 885 633 430 068 740 559 390 033 981 311 85 542 946 19 230 293 2 009 317 161 235 1 269 710 22 670 555 ( 42 366 231) 65 847 270

Capital expenditure (property and equipment) 117 206 2 116 510 208 11 3 429 46 673 1 237 171 390 18 716 - 903 137 19 756 - 191 146

Capital expenditure (intangible assets) 62 943 744 544 336 - 8 459 383 1 836 75 245 12 541 - 794 - 13 335 - 88 580

(1) Domestic represents the activity of the Group in Portugal

(2) Foreign represents the activity of the Group outside Portugal

Life insurance



31.12.2007

TOTALIntercompany

(1) Domestic activity represents the activity of the Groups in Portugal. (2) Foreign activity represents the Groups activity outside Portugal.



31.12.2006


Corporate Corporate



Interest and similar income 2 822 302 74 563 1 025 140 897 102 461 16 355 330 8 096 3 166 029 807 134 108 501 3 578 37 249 956 462 (1 338 049) 2 784 442

Interest expense and similar charges 2 161 849 48 916 9 100 744 15 438 176 8 783 24 118 2 360 033 665 026 105 957 133 68 166 839 282 (1 338 049) 1 861 266

Net interest income 660 453 25 647 1 016 40 153 87 023 16 179 ( 8 453) ( 16 022) 805 996 142 108 2 544 3 445 ( 30 917) 117 180 - 923 176

Dividend income 40 379 1 845 - - 11 348 3 612 - ( 717) 56 467 ( 392) 31 669 ( 3 831) ( 3 523) - 52 944

Fee and commission income 394 823 49 995 57 104 15 563 3 365 - 10 116 230 531 196 87 490 56 530 44 941 1 215 190 176 ( 50 922) 670 450

Fee and commission expense ( 51 912) ( 3 987) ( 25 451) ( 1 325) ( 1 459) ( 455) ( 3) ( 922) ( 85 514) ( 21 067) ( 5 368) ( 2 192) ( 1 075) ( 29 702) 31 959 ( 83 257)

Net (losses) / gains from financial assets and financial

liabilities at fair value through profit or loss 5 314 20 595 - 59 ( 24 985) ( 2 104) - ( 9 544) ( 10 665) 8 699 ( 31 968) - ( 18 541) ( 41 810) - ( 52 475)

Net gains from available-for-sale financial assets 102 822 3 294 - - 18 907 4 507 - 43 156 172 686 15 261 ( 8) ( 2 179) 741 13 815 - 186 501

Net gains from foreign exchange differences ( 7 179) ( 2 978) 1 ( 15) ( 9 952) ( 50) 21 ( 2 658) ( 22 810) 24 778 51 335 ( 142) ( 166) 75 805 - 52 995

Net gains from the sale of other financial assets 3 737 814 1 7 ( 83) 822 - 11 982 17 280 2 649 ( 423) - ( 2) 2 224 2 19 506

Insurance earned premiums net of reinsurance - - - - 231 838 339 569 - - 571 407 - - - - - ( 17 205) 554 202

Other operating income 101 747 20 370 687 8 243 3 091 11 809 75 096 15 199 236 242 10 099 3 507 16 1 860 15 482 ( 108 174) 143 550

Operating income 1 250 184 115 595 33 358 62 685 319 093 373 889 76 777 40 704 2 272 285 269 625 76 180 44 558 ( 50 716) 339 647 ( 144 340) 2 467 592

(External operating income) 1 116 827 126 660 56 171 106 499 303 278 354 983 78 865 46 972 2 190 255 222 612 76 180 42 953 ( 64 408) 277 337 - 2 467 592

(Inter segment operating income) ( 133 357) 11 065 22 813 43 814 ( 15 815) ( 18 906) 2 088 6 268 ( 82 030) ( 47 013) - ( 1 605) ( 13 692) ( 62 310) 144 340 -

Staff costs 353 515 22 605 7 391 5 766 3 113 51 295 24 849 8 464 476 998 71 482 23 897 16 640 8 098 120 117 ( 958) 596 157

General and administrative expenses 346 920 13 071 4 460 12 966 8 480 39 801 7 488 7 218 440 404 49 174 12 461 7 762 7 083 76 480 ( 121 043) 395 841

Claims incurred net of reinsurance - - - - 335 596 213 550 - - 549 146 - - - - - ( 3 335) 545 811

Change on the technical reserves net of reinsurance - - - - ( 70 973) 1 189 - - ( 69 784) - - - - - ( 5 262) ( 75 046)

Insurance commissions - - - - 13 508 29 209 - - 42 717 - - - - - ( 13 874) 28 843

Depreciations and amortisation 56 089 1 154 283 1 192 583 9 215 8 035 881 77 432 9 278 1 103 1 845 406 12 632 - 90 064

Provisions net of reversals 46 968 ( 575) 734 467 - 348 424 ( 500) 47 866 4 993 - - - 4 993 - 52 859

Loans impairment net of reversals and recoveries 124 721 2 029 - 12 770 - - - - 139 520 19 197 4 003 - - 23 200 - 162 720

Impairment on other financial assets net of reversals 5 850 1 431 - - ( 891) 758 - 93 7 241 ( 277) - ( 2 296) - ( 2 573) - 4 668

Impairment on other assets net of reversals 1 841 - 4 246 ( 243) 2 635 438 - 4 921 ( 44) - - - ( 44) - 4 877

Other operating expenses 9 115 18 379 1 801 4 986 3 3 868 43 151 6 941 88 244 7 002 12 583 - 1 591 21 176 132 109 552

Operating expenses 945 019 58 094 14 673 38 393 289 176 351 868 84 385 23 097 1 804 705 160 805 54 047 23 951 17 178 255 981 ( 144 340) 1 916 346

Gains from the sale of investments in subsidiaries and associates ( 9 793) 1 963 - - ( 21 374) ( 4 515) - 404 300 370 581 316 - - 2 416 2 732 - 373 313

Share of profit of associates 3 250 974 - - - - ( 29) 603 4 798 3 283 - 1 488 - 4 771 - 9 569

Profit before income tax 298 622 60 438 18 685 24 292 8 543 17 506 ( 7 637) 422 510 842 959 112 419 22 133 22 095 ( 65 478) 91 169 - 934 128

Income tax

Current tax 16 387 31 604 6 291 9 032 16 386 30 871 696 9 398 120 665 13 474 5 986 5 324 129 24 913 - 145 578

Deferred tax 60 659 ( 16 909) 21 ( 1 269) 523 11 920 ( 1 919) 2 763 55 789 3 983 ( 882) 21 - 3 122 - 58 911

Profit for the year after tax and before minority interest 221 576 45 743 12 373 16 529 ( 8 366) ( 25 285) ( 6 414) 410 349 666 505 94 962 17 029 16 750 ( 65 607) 63 134 - 729 639

Attributable to minority interest 425 950

Profit for the year attributable to the equity holders of the Company 303 689

Life insurance



Intercompany TOTAL

(1) Domestic activity represents the activity of the Group in Portugal. (2) Foreign activity represents the Group activity outside Portugal.



31.12.2006


Corporate Corporate



Other informations

Total assets 73 303 167 2 702 636 59 788 3 217 431 427 195 730 046 503 284 758 793 81 702 340 15 715 493 1 896 508 221 081 1 332 431 19 165 513 ( 38 995 887) 61 871 966

Investment in associates 4 977 39 019 - - - ( 175 524) 128 278 319 146 919 35 513 - 1 036 32 221 68 770 - 215 689

Liabilities 69 875 153 2 446 268 21 972 3 140 177 407 044 742 214 305 567 1 069 688 78 008 083 15 174 870 1 853 595 148 725 1 211 603 18 388 793 ( 38 995 887) 57 400 989

Capital expenditure (property and equipment) 43 916 1 401 210 511 80 4 805 69 260 333 120 516 20 573 - 260 285 21 118 - 141 634

Capital expenditure (intangible assets) 24 489 3 025 361 895 81 2 969 13 752 296 45 868 855 - 3 349 174 4 378 - 50 246


TOTALIntercompanyLife insurance


(1) Domestic activity represents the activity of the Group in Portugal. (2) Foreign activity represents the Group activity outside Portugal.



The secondary segment information is prepared in accordance with the geographical distribution of the Group’s business units, as follows: 31.12.2007

USA

Profit for the year after tax and before minority interest 450 624 15 165 28 368 44 350 5 663 21 228 1 928 18 569 32 224 ( 462) 33 542 288 1 723 653 210 Attributable to the minority interest 448 348 Profit for the year 204 862 Total Assets 55 346 542 5 732 288 1 152 615 3 711 852 175 140 698 333 1 505 628 418 455 1 045 003 21 060 1 275 326 65 734 159 755 71 307 731 Capital expenditure (property and equipment) 171 390 6 372 303 - 842 51 24 7 - 238 11 914 - 5 191 146

Capital expenditure (intangible assets) 75 245 4 743 121 - 776 - 3 - - - 7 690 - 2 88 580

31.12.2006

USA

Profit for the year after tax and before minority interest 667 868 11 630 23 967 39 077 3 713 ( 61 918) 980 16 598 5 812 - 20 287 50 1 575 729 639 Attributable to the minority interest 425 950 Profit for the year 303 689 Total Assets 47 600 496 4 598 278 1 102 175 4 525 914 190 211 722 005 1 429 768 385 493 632 436 - 528 700 61 036 95 454 61 871 966 Capital expenditure (property and equipment) 120 516 4 604 242 165 260 95 591 36 - - 14 919 179 27 141 634

Capital expenditure (intangible assets) 45 868 498 249 - 3 349 174 108 - - - - - - 50 246

BrazilPortugal Spain France UK Switzerland

Portugal SwitzerlandSpain France UK


Macao

Macao

Panama

Panama Brazil

Cape Verde

Cape Verde

Luxembourg Angola


Luxembourg TotalAngola

Dubai

Dubai

Total


F-46

NOTE 5 - NET INTEREST INCOME

This balance is analysed as follows:

Interest and similar incomeInterest from loans and advances 2 363 416 6 776 2 370 192 1 728 788 1 519 1 730 307 Interest from loans and deposits with banks 347 116 1 315 348 431 182 036 - 182 036 Interest from financial assets at fair value through profit or loss - 415 154 415 154 - 505 137 505 137 Interest from available-for-sale financial assets 197 579 - 197 579 173 511 - 173 511 Interest from derivatives for risk management purposes - 122 765 122 765 - 106 232 106 232 Other interest and similar income 65 581 - 65 581 87 219 - 87 219

2 973 692 546 010 3 519 702 2 171 554 612 888 2 784 442

Interest expense and similar charges Interest from debt securities 930 537 209 918 1 140 455 589 299 100 191 689 490 Interest from amounts due to customers 523 410 4 836 528 246 371 941 2 554 374 495 Interest from deposits from central banks and other banks 471 768 - 471 768 325 711 375 326 086 Interest from subordinated debt 124 916 10 895 135 811 128 631 11 843 140 474 Interest from derivatives for risk management purposes - 219 607 219 607 - 290 820 290 820 Interest from investments contracts 852 - 852 13 732 - 13 732 Other interest expenses and similar charges 37 989 - 37 989 26 169 - 26 169

2 089 472 445 256 2 534 728 1 455 483 405 783 1 861 266

884 220 100 754 984 974 716 071 207 105 923 176

31.12.2007 31.12.2006

Total Total

Assets / Liabilities at amortised cost and available-for-sale financial assets

Assets / Liabilities at amortised cost and available-for-sale financial assets

Assets / Liabilities at fair value

through profit or loss

Assets / Liabilities at fair value

through profit or loss


Interest from loans and advances includes an amount of euro 13 101 thousands (31 December 2006: euro 10 861

thousands) related to the unwind of discount regarding the impairment losses of loans and advances to customers that

are overdue (see Note 25).

Interest from derivatives for risk management purposes includes, in accordance with the accounting policy described

in Note 2.20, interest from hedging derivatives and from derivatives used to manage the risk of certain financial assets

and financial liabilities designated at fair value through profit or loss in accordance with the accounting policies

described in Notes 2.5, 2.6 and 2.8.



NOTE 6 - NET FEE AND COMMISSION INCOME


31.12.2007 31.12.2006

Fee and commission incomeFrom banking services rendered to third parties 494 691 434 677From guarantees granted 67 797 63 671From transactions with securities 65 829 49 411From commitments assumed to third parties 19 642 14 891Other fee and commission income 114 370 107 800

762 329 670 450

Fee and commission expenseFrom banking services rendered by third parties 62 982 53 678From transactions with securities 14 495 4 449From guarantees received 251 390Other fee and commission expense 28 819 24 740

106 547 83 257

655 782 587 193




NOTE 7 - NET GAINS/ (LOSSES) FROM FINANCIAL ASSETS AND FINANCIAL LIABILITIES AT

FAIR VALUE THROUGH PROFIT OR LOSS

This balance is analysed as follows: 31.12.2007 31.12.2006

Gains Losses Total Gains Losses Total

Trading assets and liabilitiesSecurities

Bonds and other fixed income securitiesIssued by government and public entities 85 536 ( 113 465) ( 27 929) 104 991 ( 74 384) 30 607 Issued by other entities 9 244 ( 5 990) 3 254 5 630 ( 1 401) 4 229

Shares 103 131 ( 86 265) 16 866 104 469 ( 65 102) 39 367

Other variable income securities 29 257 ( 24 613) 4 644 25 283 ( 6 820) 18 463

227 168 ( 230 333) ( 3 165) 240 373 ( 147 707) 92 666 Derivative financial instruments

Exchange rate contracts 1 023 254 (1 177 099) ( 153 845) 574 619 ( 585 982) ( 11 363)Interest rate contracts 6 576 866 (6 512 081) 64 785 2 838 075 (2 978 745) ( 140 670)Equity/Index contracts 1 424 736 (1 334 338) 90 398 1 158 598 (1 187 780) ( 29 182)Credit default contracts 155 214 ( 145 420) 9 794 88 644 ( 88 611) 33 Other 149 364 ( 196 932) ( 47 568) 1 255 173 (1 221 398) 33 775

9 329 434 (9 365 870) ( 36 436) 5 915 109 (6 062 516) ( 147 407)

9 556 602 (9 596 203) ( 39 601) 6 155 482 (6 210 223) ( 54 741)

Financial assets and liabilities at fair valuethrough profit or loss

SecuritiesBonds and other fixed income securities

Issued by government and public entities - - - 13 978 ( 23 766) ( 9 788)Issued by other entities 316 959 ( 239 923) 77 036 204 773 ( 293 646) ( 88 873)

Shares 32 003 ( 906) 31 097 53 965 ( 30 215) 23 750

Other variable income securities 477 ( 111) 366 10 324 ( 21 382) ( 11 058)

Other - - - 12 927 ( 187) 12 740

349 439 ( 240 940) 108 499 295 967 ( 369 196) ( 73 229)Financial assets (1)

Loans and advances to banks 49 - 49 - - - Loans and advances to customers 626 ( 953) ( 327) - ( 4 309) ( 4 309)

675 ( 953) ( 278) - ( 4 309) ( 4 309)Financial liabilities (1)

Deposits from banks 13 033 - 13 033 117 - 117 Due to customers 1 544 ( 2 364) ( 820) 439 ( 4 865) ( 4 426)Debt securities issued 44 909 ( 51 911) ( 7 002) 52 470 ( 7 192) 45 278 Subordinated debt 13 279 - 13 279 38 942 ( 107) 38 835

72 765 ( 54 275) 18 490 91 968 ( 12 164) 79 804

422 879 ( 296 168) 126 711 387 935 ( 385 669) 2 266

9 979 481 (9 892 371) 87 110 6 543 417 (6 595 892) ( 52 475)

(1) include the fair value change of hedged assets and liabilities and of assets and liabilities at fair value through profit or loss


As at 31 December 2007, this balance includes a positive effect of euro 9 421 thousands related to the change in fair

value of financial liabilities designated at fair value through profit or loss, attributable to the Group’s credit risk

component (31 December 2006: negative effect of euro 2 026 thousands). These financial liabilities are designated at

fair value through profit or loss in accordance with the accounting policy described in Note 2.8, and the respective fair

value is determined based on third party quotations or using valuation techniques based on observable market data.



The balance derivative financial instruments (interest rate contracts) includes an amount of approximately euro 15.5

million related to gains on derivative financial instruments arising from the consolidation of special purpose entities, in

accordance with SIC 12, that were sold during 2007 (31 December 2006: gains of euro 26.8 million).

NOTE 8 - NET GAINS FROM AVAILABLE-FOR-SALE FINANCIAL ASSETS

This caption is analysed as follows: 31.12.2007


Bonds and other fixed income securitiesIssued by government and public entities 3 284 ( 45) 3 239 2 766 ( 5 458) ( 2 692)Issued by other entities 9 998 ( 40 238) ( 30 240) 107 656 ( 21 223) 86 433

Shares 269 472 ( 7 274) 262 198 97 513 ( 9 734) 87 779

Other variable income securities 4 887 ( 608) 4 279 17 535 ( 2 554) 14 981

287 641 ( 48 165) 239 476 225 470 ( 38 969) 186 501

31.12.2006


During 2007, the Group sold (i) 7.2 million ordinary shares of Bradesco having obtained a gain of euro 85.5 million

(euro 24.9 million net of minority interest); (ii) 64.3 million ordinary shares of EDP having obtained a gain of euro

41.6 million (euro 12.1 million net of minority interest) and (iii) 6.9 million shares of Portugal Telecom having

obtained a gain of euro 12.8 million (euro 3.7 million net of minority interest).

During 2006, the Group sold to the Groups’ pension fund (i) 2 million shares of Bradesco, (ii) 3 million shares of

Bradespar (Bradesco Group holding for non financial activities), (iii) 0.4 million shares of Banque Marocaine du

Commerce Extérieur and (iv) part of the residual Note resulting from the securitization of mortgage loans Lusitano

Mortgages no. 5, with a nominal value of euro 3.2 million. These operations generated gains in the amount of euro 35

million, euro 43.1 million, euro 17.9 million and euro 9.2 million, respectively.

During 2006, the Group sold the residual Note resulting from the securitization of mortgage loans, Lusitano Mortgages

no. 5, with a nominal value of euro 3.8 million, obtaining a gain of euro 10.5 million.



NOTE 9 - NET GAINS FROM FOREIGN EXCHANGE DIFFERENCES

This caption is analysed as follows:



Foreign exchange translation 557 838 (528 495) 29 343 998 624 (945 629) 52 995

557 838 (528 495) 29 343 998 624 (945 629) 52 995

31.12.2007 31.12.2006

This balance includes the exchange differences arising on translating monetary assets and liabilities at the exchange

rates ruling at the balance sheet date in accordance with the accounting policy described in Note 2.3.



NOTE 10 - INSURANCE EARNED PREMIUMS, NET OF REINSURANCE

The insurance earned premiums, net of reinsurance, can be analysed as follows:

31.12.2007 31.12.2006

Gross premiums written 410 527 616 002Reinsurance premiums ceded ( 50 147) ( 64 364)

Net premiums written 360 380 551 638

Change in the provision for unearned premiums, net of reinsurance ( 236) 2 564

Earned premiums, net of reinsurance 360 144 554 202


The direct insurance written and earned premiums are analysed as follows:

Written Earned Written Earned premiums premiums premiums premiums

Life 59 683 59 683 241 266 241 266 Non -life:

Direct BusinessAccident and health 93 383 92 213 98 727 98 918 Fire and hazards 55 619 55 028 65 445 65 101 Motor 171 383 173 196 181 834 183 532 Maritime, airline and transportation 8 572 8 635 8 281 8 142 Third party liability 9 834 9 160 8 333 8 377 Credit and surety ship 123 195 433 511 Other 11 524 11 076 11 599 11 526

Total 410 121 409 186 615 918 617 373

Reinsurance accepted 406 366 84 66

410 527 409 552 616 002 617 439


31.12.2007 31.12.2006

The main variation of this caption occurred in the year relates to the fact that the 2006 figures includes the insurance

earned premium from BES – Vida and BES – Seguros, which were consolidated on a line by line basis, up to 30 June

2006 (see Note 1).



The reinsurance written premiums are analysed as follows:

Written Earned Written Earned premiums premiums premiums premiums

Life 2 021 2 021 9 428 9 428 Non -life:

Direct BusinessAccident and Health 9 437 9 653 16 562 16 389 Fire and hazards 19 119 18 904 18 650 18 439 Motor 2 406 2 406 3 498 3 498 Maritime, airline and transportation 5 173 5 066 4 577 4 487 Third party liability 1 279 1 114 955 1 027 Credit and surety ship 77 138 367 438 Other 10 306 9 792 10 242 9 462

Total 49 818 49 094 64 279 63 168

Reinsurance accepted 329 314 85 69

50 147 49 408 64 364 63 237


31.12.2007 31.12.2006

Gross written premiums from life insurance business are analysed as follows:

31.12.2007 31.12.2006

Annuities 1 740 5 750 Risk contracts 15 963 50 589 Saving contracts with profit sharing 41 980 184 927

59 683 241 266


In accordance with IFRS 4, the contracts issued by the Group for which there is only a transfer of financial risk, with

no discretionary participating features, are classified as investment contracts and accounted for as financial liabilities.



NOTE 11 - OTHER OPERATING INCOME AND EXPENSES


31.12.2007 31.12.2006

Other operating income arising from:

Medical services business 147 662 71 347Insurance business 9 147 11 733IT related business 4 921 6 137Call center business 7 610 5 029Other 62 259 49 304

231 599 143 550

Other operating expenses arising from:

Costs with the early redemption of convertible bonds (see Note 37) - 1 299Direct and indirect taxes 19 053 12 077Contributions to the depositors guarantee fund 3 190 4 124Membership and donations 6 154 4 326Medical services business 107 198 39 202Insurance business 5 853 3 421Other 66 938 45 103

208 386 109 552

23 213 33 998


Medical services business operating income and expenses relate to the health care business provided by Espírito Santo

Saúde SGPS, S.A. and its subsidiaries (see Note 1). The increase in 2007 is due to the opening of a new hospital that

was under construction in 2006.

NOTE 12 - STAFF COSTS


31.12.2007 31.12.2006

Wages and salaries Remuneration 447 092 396 042 Long term service benefits (see Note 13) 1 360 2 947Pension costs (see Note 13) 54 188 81 906Other mandatory social charges 59 966 53 883Health-care benefits (SAMS) 20 679 18 506Other costs 47 614 42 873

630 899 596 157




The reduction on pension costs for the year ended 31 December 2007, when compared to the year ended 31 December

2006 is mainly explained by the reduction in the amortisations of actuarial losses as a result of the fund’s performance,

with an impact on the annual depreciation of approximately euro 23.2 million (see Note 13).

The health-care benefits – SAMS include the amount of euro 9 959 thousand (31 December 2006: euro 9 780

thousand) related to the health care net periodic benefit cost, which was determined based on the actuarial valuation

(see Note 13).

Included in other costs is the amount of euro 1 402 thousand (31 December 2006: euro 2 454 thousand) related with

the ‘‘Stock Based Incentive Scheme’’ (SIBA), in accordance with the accounting policy described in Note 2.17. The

details of this scheme are analysed in Note 13.

Also included in other costs, is the amount of euro 4 204 thousands (31 December 2006: euro 7 390 thousands) related

to the stock options plan, in accordance with accounting policy described in Note 2.17 (see Note 13).

The salaries and other benefits attributed to the key management personnel of Group are analysed follows:

(in thousand of euros)

Board of Directors

Audit Committee

Other key management

personnelTotal

31 December 2007Salaries and other short terms benefits 2 528 679 19 184 22 391 Pension costs and health-care benefits (SAMS) 54 - 1 125 1 179 Long term service benefits - - 46 46 Stock-option 4 204 - - 4 204 Bonus 2 579 - 14 951 17 530

9 365 679 35 306 45 350

31 December 2006Salaries and other short terms benefits 2 213 640 15 515 18 368 Pension costs and health-care benefits (SAMS) 379 - 847 1 226 Long term service benefits - - 119 119 Stock-option 7 390 - - 7 390 Bonus 2 041 - 11 554 13 595

12 023 640 28 035 40 698

Key management personnel includes ESFG Board and Audit Committee members, board members of ESFG

subsidiaries and ESFG senior management.

As at 31 December 2007 and 2006, the loans granted by the Group to key management personnel amounted to euro

16 575 thousand and euro 8 620 thousand, respectively.



As at 31 December 2007 and 2006, the number of employees of the Group is analysed as follows:

31.12.2007 31.12.2006

Banking sector employees 6 787 6 095Financial sector subsidiaries employees 2 400 1 951Insurance sector employees 829 884Employed by other companies essencially providing services to customers outside the Group 2 595 2 605

12 611 11 535

By Professional category, the number of employees of the Group is analysed as follows:

31.12.2007 31.12.2006

Senior management 890 805Management 1 180 1 460Specific functions 5 052 4 011Administrative functions and others 5 489 5 259

12 611 11 535

NOTE 13 - EMPLOYEE BENEFITS

Pension and health-care benefits

As described in Note 2.17, the Group’s companies operate defined pension and health-care plans for their employees

and their dependants under which the benefits vest on the earlier of retirement, death or incapacity.

The actuarial valuation of pension and health-care benefits for the Group companies is performed annually, with latest

valuation performed as at 31 December 2007.



As at 31 December 2007 and 2006, the main assumptions considered in the actuarial valuation, to determine the

defined benefit obligation of pension and health-care benefits for the Group employees are as follows:

31.12.2007 31.12.2006 31.12.2007 31.12.2006Financial assumptionsSalaries increase rate 3.5%- 4%(*) 3%- 3.75%(*) 3.25% 2.75%Pensions increase rate 1.25 % - 4%(*) 0.75 % - 3.75% (*) 2.25% 1.75%Expected return of plan assets 6% - 5.7%(*) 5.8% - 5.15%(*) 5.25% 4.75%Discount rate 5.25% 4.75% 5.25% 4.75%Technical rate 3.00% 3.00% - -

Demographic assumptionsMortality tableMen GKF 95 GKF 95 TV 73/77 (adjusted) TV 73/77 (adjusted)Women GKF 95 GKF 95 TV 88/90 TV 88/90

Actuarial method

(*) Pension fund of Board of Directors

Insurance sector Banking sector

Project Unit Credit Method

In accordance with the accounting policy described in Note 2.17, the discount rate used to calculate the actuarial

present value of the pensions and health care defined benefits, is determined at the balance sheet date by reference to

interest rates of high-quality corporate bonds.

The contributions to SAMS as at 31 December 2007 and 2006 corresponded to 6.5% of total wages. The percentage of

contribution is established by SAMS, and no changes are expected for 2008.

The number of persons covered by the plan is as follows:

31.12.2007 31.12.2006

Employees 6 684 6 598Pensioners and widows 5 733 5 683

12 417 12 281



As at 31 December 2007 and 2006, the amounts recognised in the balance sheet are determined as follows:

Pension Health-care Total Pension Health-care Totalplans plans plans plans

Assets/ (liabilities) recognised in the balance sheetDefined benefit obligation as at 31 December

Pensioners (1 418 194) ( 81 456) (1 499 650) (1 386 970) ( 108 231) (1 495 201)Employees ( 604 164) ( 29 764) ( 633 928) ( 557 729) ( 2 166) ( 559 895)

(2 022 358) ( 111 220) (2 133 578) (1 944 699) ( 110 397) (2 055 096)Fair value of plan assets as at 31 December 2 282 421 480 2 282 901 2 076 233 477 2 076 710

(Un)/overfunded liabilities 260 063 ( 110 740) 149 323 131 534 ( 109 920) 21 614 Unrecognised net actuarial losses as at 31 December 316 229 22 896 339 125 450 740 26 452 477 192

Assets/(liabilities) recognised in the balance sheet as at 31 December 576 292 ( 87 844) 488 448 582 274 ( 83 468) 498 806

31.12.2007 31.12.2006


Asset / (liabilities) recognised in the balance sheet as at 31 December 2007 and 2006 are included under Other assets

(see Note 34) and Other liabilities (see Note 42), respectively.

Additionally, for the insurance entities of the Group, Tranquilidade and Esumédica have transferred part of their

liabilities to BES Vida, through the acquisition of the life insurance policies. The number of pensioners covered by

these policies is 483 (31 December 2006: 489), and the total liability amounts to euro 16.4 million (31 December 2006:

euro 17.6 million).

In accordance with accounting policy described in Note 2.17 and following the requirements of IAS 19 – Employees

benefits, the Group assesses at each balance sheet date and for each plan separately, the recoverability of the recognised

assets in relation to the defined benefit pension plans based on the expectation of reductions in future contributions to

the funds.

The changes in the defined benefit obligation can be analysed as follows:

Pension Health-care Total Pension Health-care Totalplans plans plans plans

Defined benefit obligation as at 1 January 1 944 699 110 397 2 055 096 1 874 195 118 147 1 992 342 Service cost 31 481 1 997 33 478 30 283 2 128 32 411 Interest cost 89 653 5 113 94 766 86 179 5 444 91 623 Plan participants' contribution 2 826 1 2 827 3 073 - 3 073 Actuarial gains / (losses)

- changes in actuarial assumptions ( 6 462) ( 199) ( 6 661) - - - - experience adjustments 42 875 ( 1 863) 41 012 3 728 ( 11 693) ( 7 965)

Benefits paid by the fund ( 99 632) - ( 99 632) ( 99 262) - ( 99 262)Benefits paid by the Group ( 1 324) ( 5 630) ( 6 954) ( 178) ( 5 585) ( 5 763)Curtailment losses related to early retirements 22 158 1 440 23 598 50 101 1 984 52 085 Other ( 3 916) ( 36) ( 3 952) ( 3 420) ( 28) ( 3 448)

Defined benefit obligation as at 31 December 2 022 358 111 220 2 133 578 1 944 699 110 397 2 055 096


31.12.2007 31.12.2006

As at 31 December 2007, the increase of 1% in the contributions to SAMS would imply an increase in liabilities of euro

17.0 million (31 December 2006: euro 16.9 million) and an increase in costs (service cost and interest cost) of euro 1.2

million (31 December 2006: euro 1.1 million).



From the total amount of curtailment losses related to early retirements occurred during 2006, the amounts of euro

37 039 thousand related to pensions and euro 1 851 thousand related to health-care benefits were recognised as a charge

off of the restructuring provision.

The change in the fair value of the plan assets in 2007 and 2006 is analysed as follows:

Pension fund assets are analysed as follows:

31.12.2007 31.12.2006

Shares and other variable income securities 48% 48%Other variable income securities 11% 29%Fixed income securities 12% 9%Real estate 17% 9%Other 12% 5%

100% 100%

The real estate assets rented to the Group and securities issued by Group companies which are part of the pension fund

assets are analysed as follows:

31.12.2007 31.12.2006

Shares and other variable income securities 51 972 65 360Fixed income securities - 254Real estate 124 986 123 299

176 958 188 913


The shares held by the pension fund, as at 31 December 2007 are 3.5 million shares of BES (31 December 2006: 4.7

million shares of BES and 60 thousand shares of Sotancro).

The transactions between the Group and the pension fund held during 2006 are referred in Note 47. No transactions

took place during 2007.



The changes in the unrecognised net actuarial losses in 2007 and 2006 are analysed as follows:

Pension Health care Total Pension Health care Totalplans benefits plans benefits

Unrecognised net actuarial losses as at 1 January 450 740 26 452 477 192 641 391 41 226 682 617 Actuarial (gains) and losses

- changes in actuarial assumptions ( 6 462) ( 199) ( 6 661) - - - - experience adjustments ( 113 914) ( 1 859) ( 115 773) ( 139 227) ( 11 693) ( 150 920)

Amortisation of the year ( 11 540) ( 1 077) ( 12 617) ( 33 876) ( 1 968) ( 35 844)Additional amortisation (curtailment) ( 2 118) ( 357) ( 2 475) ( 17 029) ( 1 113) ( 18 142)Other ( 477) ( 64) ( 541) ( 519) - ( 519)

Unrecognised net actuarial losses as at 31 December 316 229 22 896 339 125 450 740 26 452 477 192

Of which:- Within the corridor 227 623 10 950 238 573 207 623 11 040 218 663 - Outside corridor 88 606 11 946 100 552 243 117 15 412 258 529

31.12.2007 31.12.2006


From the amount of the additional amortisation (curtailment) resulting from early retirements occurred during 2006, the

amounts of euro 14 366 thousand related to pensions and euro 1 006 thousand related to health-care benefits were

recognised as a charge off in the restructuring provision (see Note 39).

The changes in (un)/over funded liabilities during 2007 and 2006 are analysed as follows:


(Un)/over funded liabilities as at 1 January 131 534 ( 109 920) 21 614 ( 7 608) ( 118 147) ( 125 755)

Actuarial (gains) / losses on defined benefit obligation ( 36 413) 2 062 ( 34 351) ( 3 728) 11 693 7 965 Actuarial (gains) / losses on plans assets 156 789 ( 4) 156 785 142 955 - 142 955 Charges for the year

- Service cost ( 31 481) ( 1 997) ( 33 478) ( 30 283) ( 2 128) ( 32 411)- Interest cost ( 89 653) ( 5 113) ( 94 766) ( 86 179) ( 5 444) ( 91 623)- Expected return on plan assets 102 762 25 102 787 84 157 - 84 157 - Curtailment losses related to early retirements ( 22 158) ( 1 440) ( 23 598) ( 50 101) ( 1 984) ( 52 085)- Other ( 502) ( 3) ( 505) 353 28 381

Contributions of the year and pensions paid by the Group 49 185 5 650 54 835 81 968 6 062 88 030

(Un)/over funded liabilities as at 31 December 260 063 ( 110 740) 149 323 131 534 ( 109 920) 21 614


31.12.2007 31.12.2006

The net benefit cost can be analysed as follows:


Service cost 31 481 1 997 33 478 30 283 2 128 32 411 Interest cost 89 653 5 113 94 766 86 179 5 444 91 623 Expected return on plan assets ( 102 762) ( 25) ( 102 787) ( 84 157) - ( 84 157)Amortisation of the unrecognised net loss 11 540 1 077 12 617 33 876 1 968 35 844 Curtailment losses related to early retirements 24 276 1 797 26 073 15 725 240 15 965

Net benefit cost 54 188 9 959 64 147 81 906 9 780 91 686


31.12.2007 31.12.2006

The curtailment losses related to early retirements include the effect of the additional amortisation.



The changes in the assets/ (liabilities) recognised in the balance sheet can be analysed as follows:


As at 1 January 582 274 ( 83 468) 498 806 633 783 ( 76 921) 556 862 Net benefit cost ( 54 188) ( 9 959) ( 64 147) ( 81 906) ( 9 780) ( 91 686)Charge-off of provisions - - - ( 51 405) ( 2 857) ( 54 262)Contributions of the year and pensions paid by the Group 49 185 5 650 54 835 81 790 6 062 87 852 Other ( 979) ( 67) ( 1 046) 12 28 40

As at 31 December 576 292 ( 87 844) 488 448 582 274 ( 83 468) 498 806

31.12.2007 31.12.2006


Historical information regarding pension plan is as follows:

Health care plans are covered by liabilities recognised in the balance sheet.

SIBA

During 2000, BES Group established a ‘‘Stock Based Incentive Scheme’’ (SIBA). This incentive scheme consists on

the sale to BES Group employees of one or more blocks of BES ordinary shares with deferred settlement for a period

that can vary between two to four years. During this period the employees are required to hold the shares, after which

they are allowed to sell the shares in the market or, alternatively, have the option to sell them back to BES at

acquisition cost.



The main characteristics of each plan are presented as follows:

Plan maturity (expected)

Number of shares at the grant date

Average strike price

(euro)

Number of shares as at 31 December

2007 (1)Coverage by

shares

Plan 20011st block Expired (May-06) 1 358 149 11.51 - - 2nd block Expired (May-07) 3 169 016 11.51 - -

Plan 20021st block Expired (Apr-07) 755 408 12.02 - - 2nd block Apr-08 1 762 619 12.02 294 861 100%

Plan 20031st block May-08 480 576 14.00 105 270 100%2nd block May-09 1 121 343 14.00 1 102 008 100%

Plan 20041st block (2) Dec-07 541 599 13.54 594 465 100%2nd block Dec-10 1 270 175 13.54 1 387 658 100%

(1) Includes shares attributed under the incorporation of shares premium as a result of the capital increase in 2006.(2) The 1st block plan of 2004 matured in the first day of January 2008.

The changes in the number of underlying shares to the outstanding plans during 2007 and 2006 were as follows:

Number of shares

Average price (euro)

Number of shares

Average price (euro)

Balance as at 1 January 5 667 612 11.24 7 617 500 12.63Share capital increase (1) - - 850 504 - Shares sold (2) (2 183 350) 10 (2 800 392) 11.61

Balance as at 31 December 3 484 262 11.89 5 667 612 11.24

31.12.2006

(2) Includes shares sold in the market, after the exercise of the option of sell back to BES at acquisition cost and those thatwere effectively transferred to employees at the maturity of the plans.

(1) Shares attributed under the incorporation of share premiums

31.12.2007



The assumptions used in the initial valuation of each plan were the following:

Plan 2004 Plan 2003 Plan 2002 Plan 2001 Plan 2000

Maturity1st block 24 months 24 months Expired Expired Expired2nd block 60 months 60 months 60 months Expired Expired

Volatility 12% 12% 12% 12% 12%Risk free interest rate

1st block 3.04% 2.63% 2.70% 4.38% 4.71%2nd block 3.22% 3.52% 3.56% 5.01% 5.05%

Dividend yield 2.90% 2.90% 2.90% 2.90% 2.90%

Fair value at the grant date (thousands of euro) 2 305 2 137 2 830 6 530 3 056

The total costs recognised related to the plan are as follows:

31.12.2007 31.12.2006

Total costs of the plans (see Note 12) 1 402 2 454


Stock options plan

At 4 April 1999, the Company established a stock-option plan that entitles key management personnel to purchase

ESFG shares. At 16 September 1999, a further grant on similar terms has been offered. In accordance with these plans,

options are exercisable at an exercise price determined based on the market price of the shares at grant date.

As at 31 December 2007 and 2006, all options under the plans have already vested.

Considering the terms and conditions of the plans and ESFG’s informal practices of settling the options granted to

employees in cash, they are accounted for as cash-settled share-based payment arrangement, in accordance with the

accounting policy described in Note 2.17. Therefore, the fair value of these options, determined at each balance sheet

date, is recognised as a liability under other liabilities.



The number and weighted average exercise prices of share options are as follows:

Outstanding as at 1 January 15.92 1 520 000 15.92 1 805 000 Cancelled during the year 15.92 - 15.92 ( 220 000)Exercised during the year 15.92 (1 340 000) 15.92 ( 65 000)

Outstanding as at 31 December 15.92 180 000 15.92 1 520 000

Exercisable as at 31 December 15.92 180 000 15.92 1 520 000

31.12.2007 31.12.2006

Weighted average exercise price

(in USD)

Number ofoptions

Weighted average exercise price

(in USD)

Number ofoptions

The options outstanding at 31 December 2007 have an exercise price of USD 15.91670 and a weighted average

contractual life of approximately 1 year.

The fair value of the outstanding options determined as at 31 December 2007 amounted to euro 2 370 thousands

(31 December 2006: euro 22 015 thousands) which is recognised under Other liabilities (see Note 42). During 2007,

the Company recognised a cost related with the stock options plan amounting to euro 4 204 thousands (31 December

2006: euro 7 390 thousands) (see Note 12).

The assumptions used in the valuation of the outstanding options were the following:

31.12.2007 31.12.2006

Volatility 24% 15%Strike price (in USD) 15.9167 15.9167Strike price (converted to EUR) 10.8122 12.0856Maturity 30.11.2008 30.11.2008Dividend yield 1.90% 2.87%Interest rate 5.00% 4.70%Spot price (in EUR) 24.00 25.10

Long term service benefits

As referred in Note 2.17, for employees that achieve certain years of service, the Group pays long term service

premiums, calculated based on the effective monthly remuneration earned at the date the premiums are paid. At the

date of early retirement or disability, employees have the right to a premium proportional to that they would earn if

they remained in service until the next payment date.



As at 31 December 2007 and 2006, the Group’s liability and costs incurred related to long term service benefits can be

analysed as follows:

31.12.2007 31.12.2006

(in thousand of euro)

Liabilities as at 1 January 23 627 22 553

Costs of the year recognised as staff costs (see Note 12) 1 360 2 947 Benefits paid ( 1 362) ( 1 873)

Liabilities as at 31 December 23 625 23 627

The actuarial assumptions used in the calculation of the liabilities are those presented for the calculation of pensions

(when applicable). The liabilities as at 31 December 2007 and 2006 are recognised under Other liabilities (see Note

42).

NOTE 14 - GENERAL AND ADMINISTRATIVE EXPENSES


31.12.2007 31.12.2006

Rental costs 62 091 58 550Communication costs 41 095 39 692Travelling and representation costs 31 265 27 923Advertising costs 49 137 48 904Maintenance and related services 19 595 19 960Insurance 6 724 7 342Specialised services

IT services 50 056 48 686Professional services 9 447 11 514Temporary manpower 9 226 8 254Electronic payment system 11 886 12 447Legal fees 11 131 6 420Consultants and external auditors 29 807 23 111Other specialised services 32 599 31 545

Water, energy & combustible 8 658 8 011Current consumption material 7 097 6 991Transports 10 054 7 422Other costs 36 368 29 069

426 236 395 841


The balance Other specialised services includes, among others, costs with security, information services, databases and

temporary employees.



NOTE 15 - CLAIMS INCURRED, NET OF REINSURANCE

Claims incurred, net of reinsurance are analysed as follows:

31.12.2007 31.12.2006

Claims incurred for the life business 52 259 335 596 Claims incurred for the non-life business 195 308 210 215

247 567 545 811


Concerning the life business, the claims incurred, net of reinsurance are analysed as follows:

31.12.2007 31.12.2006

Claims paid Gross amount 54 604 331 137 Reinsurance share ( 741) ( 1 061)

53 863 330 076

Change in claims outstanding reserve Gross amount ( 1 690) 5 646 Reinsurance share 86 ( 126)

( 1 604) 5 520

52 259 335 596


The main variation of this caption occurred in the year relates to the fact that the 2006 figures includes the claims

incurred, net of reinsurance from BES – Vida and BES – Seguros, which were consolidated on a line by line basis up

to 30 June 2006.



Concerning the non-life business, the claims incurred, net of reinsurance are analysed as follows:

31.12.2007 31.12.2006

Claims paid Gross amount 187 262 205 313 Reinsurance share ( 12 502) ( 13 627)

174 760 191 686

Change in claims outstanding reserve Gross amount 19 380 16 806 Reinsurance share 1 168 1 723

20 548 18 529

195 308 210 215


The gross amount of claims paid and change in claims reserve for the non-life business are as follows:

Claims paidChange in

claims reserve Total Claims paid Change in

claims reserve Total

Direct businessAccident and health 49 688 3 960 53 648 57 024 6 050 63 074 Fire and other hazards 22 141 ( 1 584) 20 557 25 879 910 26 789 Motor 107 506 15 652 123 158 112 047 12 895 124 942 Maritime, airline and transportation 4 483 341 4 824 6 597 ( 331) 6 266 Third party liability 2 778 568 3 346 2 796 ( 1 903) 893 Credit and suretyship 299 156 455 688 ( 454) 234 Other 359 281 640 279 ( 363) ( 84)

Reinsurance accepted 8 6 14 3 2 5

187 262 19 380 206 642 205 313 16 806 222 119

31.12.2007 31.12.2006




NOTE 16 - CHANGE ON THE TECHNICAL RESERVES, NET OF REINSURANCE

The change on the technical reserves net, of reinsurance is analysed as follows:

31.12.2007 31.12.2006

Life business 9 627 ( 76 235)Non-life business 3 019 1 189

12 646 ( 75 046)


Concerning the life business, the changes on the technical reserves are analysed as follows:

31.12.2007 31.12.2006

Change in life assurance reserve Gross amount 8 933 ( 73 492) Reinsurance share ( 38) ( 3 859)

8 895 ( 77 351)

Reserve for bonus and rebates Gross amount 1 193 4 079 Reinsurance share ( 461) ( 2 963)

732 1 116

9 627 ( 76 235)


The main variation of this caption occurred in the year relates to the fact that the 2006 figures includes the changes of

the technical reserves from BES – Vida and BES – Seguros, which were consolidated on a line by line basis up to 30

June 2006.

Concerning the non-life business, the changes on the technical reserves are analysed as follows:

31.12.2007 31.12.2006

Change in non life insurance reserve Change in unexpired risk reserve 2 749 1 279 Others 270 ( 90)

3 019 1 189




NOTE 17 - INSURANCE COMMISSIONS

The insurance commissions are analysed as follows:

31.12.2007 31.12.2006

Direct insurance commissions Acquisition commissions and other costs 43 596 42 229 Change in deferred acquisition costs ( 895) ( 655) Collection commissions 2 251 2 248Reinsurance commissions (10 692) (14 979)

34 260 28 843


NOTE 18 - EARNINGS PER SHARE

Basic earnings per share

Basic earnings per share, following the accounting policy described in Note 2.26, is calculated by dividing the profit

attributable to equity holders of the Company by the weighted average number of ordinary shares outstanding during

the year.

31.12.2007 31.12.2006(in thousands of euro)

Profit attributable to the equity holders of the Company 204 862 303 689 Weighted average number of ordinary shares outstanding (thousands) 57 855 57 384

Basic earnings per share attributable to the equity holders of the Company (in euro) 3.54 5.29

Diluted earnings per share

The diluted earnings per share is calculated considering the profit attributable to the equity holders of the Company

and the weighted average number of ordinary shares outstanding and is adjusted for the effects of all dilutive potential

ordinary shares.

31.12.2007 31.12.2006(in thousands of euro)

Profit attributable to the equity holders of the Company 204 862 303 689 Weighted average number of ordinary and potential shares outstanding (thousands) 57 997 58 104

Diluted earnings per share attributable to the equity holders of the Company (in euro) 3.53 5.23



The weighted average number of ordinary and potential shares outstanding used to calculate the dilutive earnings per

share considers the effect of the stock-option plan (see Note 13) and of the warrants issued (see Note 43).

NOTE 19 - CASH AND DEPOSITS AT CENTRAL BANKS

As at 31 December 2007 and 2006, this balance is analysed as follows:

31.12.2007 31.12.2006

Cash 283 747 312 601

Deposits at central banksBank of Portugal 984 887 711 847Other central banks 110 826 71 854

1 095 713 783 701

1 379 460 1 096 302


The deposits at the Bank of Portugal correspond to mandatory deposits intended to satisfy legal minimum cash

requirements. According to the European Central Bank Regulation (CE) no. 2818/98, of 1 December 1998, minimum

cash requirements kept as deposits with the Bank of Portugal earn interest, and correspond to 2% of deposits and debt

certificates maturing in less than 2 years, excluding deposits and debt certificates of institutions subject to the

European System of Central Banks’ minimum reserves requirements. As at 31 December 2007, these deposits have

earned interest at an average rate of 3.94% (31 December 2006: 2.79%).



NOTE 20 - DEPOSITS WITH BANKS


31.12.2007 31.12.2006

Deposits with banks in PortugalUncollected cheques 378 824 430 619Repayable on demand 209 590 95 751Other 630 37 613

589 044 563 983

Deposits with banks abroadUncollected cheques 1 570 4 019Repayable on demand 146 840 111 424Other 131 322 97 599

279 732 213 042

868 776 777 025


Uncollected cheques in Portugal and abroad were sent for collection during the first working days following the

reference dates.

Other deposits with banks, in Portugal and abroad, matures within 3 months.

Deposits with banks includes the amount of euro 140 834 thousands (31 December 2006: euro 94 179 thousands)

related to deposits held by securitisation vehicles consolidated by the Group and that collateralise the debt issued in the

scope of the respective securitisation transactions (see Note 48).



NOTE 21 - FINANCIAL ASSETS AND LIABILITIES HELD FOR TRADING


31.12.2007 31.12.2006

Financial assets held for tradingSecurities

Bonds and other fixed income securitiesIssued by government and public entities 1 366 296 1 538 485Issued by other entities 153 937 157 882

Shares 183 860 263 612Other securities 712 601 991 793

2 416 694 2 951 772

DerivativesDerivative financial instruments with positive fair value 1 467 619 1 259 494

3 884 313 4 211 266

Financial liabilities held for tradingDerivatives

Derivative financial instruments with negative fair value 1 324 228 1 386 011

1 324 228 1 386 011


The analysis of the securities held for trading by the period to maturity, is as follows:

31.12.2007 31.12.2006

Up to 3 months 413 165 358 9033 to 12 months 351 206 610 9181 to 5 years 409 018 454 825More than 5 years 581 078 502 412Undetermined 662 227 1 024 714

2 416 694 2 951 772


In accordance with the accounting policy described in Note 2.6, securities held for trading are those which are bought

to be traded in the short-term, regardless of their maturity.



Regarding listed or unlisted securities, the balance financial assets held for trading, is as follows:

Listed Unlisted Total Listed Unlisted Total

Bonds and other fixed income securitiesIssued by government and public entities 1 366 296 - 1 366 296 1 343 863 194 622 1 538 485Issued by other entities 145 419 8 518 153 937 137 842 20 040 157 882

Shares 183 860 - 183 860 263 612 - 263 612Other variable income securities 12 152 700 449 712 601 - 991 793 991 793

1 707 727 708 967 2 416 694 1 745 317 1 206 455 2 951 772

31.12.2007 31.12.2006


The balance of derivative financial instruments as at 31 December 2007 and 2006, is analysed as follows:

Assets Liabilities Assets Liabilities

Exchange rate contractsForward - buy 11 779 165 15 181 980 - sell 11 897 733 15 286 212Currency Swaps - buy 380 254 1 304 889 - sell 361 906 1 320 835Currency Interest Rate Swaps - buy 1 657 950 187 592 176 210 5 711 174 301 408 283 604 - sell 1 660 293 - - 5 704 527 - - Currency Options 4 170 682 57 980 89 482 3 785 013 9 283 21 968

31 907 983 363 274 519 965 48 294 630 486 239 525 689

Interest rate contractsForward Rate Agreements 5 353 657 1 444 342 2 080 897 112 126Interest Rate Swaps 40 387 925 625 749 424 887 23 274 464 585 754 458 012Swaption - Interest Rate Options 2 360 536 3 814 2 104 2 348 648 13 519 11 220Interest Rate Caps & Floors 7 361 058 34 672 30 824 3 843 982 12 238 13 284Interest Rate Futures 100 000 - - 3 540 889 788 4 673Bonds Options 30 000 665 558 84 686 161 - Future Options 5 451 986 - 189 9 985 103 - -

61 045 162 666 344 458 904 45 158 669 612 572 487 315

Equity/index contractsEquity / Index Swaps 1 835 258 191 300 21 404 4 519 022 51 635 19 862Equity / Index Options 5 030 269 226 835 309 119 4 471 905 92 968 335 813Equity / Index Futures - - - 1 331 085 - -

6 865 527 418 135 330 523 10 322 012 144 603 355 675

Credit default contractsCredit Default Swaps 1 608 191 19 866 14 836 1 518 632 16 080 17 332

101 426 863 1 467 619 1 324 228 105 293 943 1 259 494 1 386 011

166 112 208 142

2 210 4 589 9 436 11 975

115 492 249 684

31.12.2007

Notional Fair value


31.12.2006

Notional Fair value

As at 31 December 2007 the fair value of derivative financial instruments included the amount of euro 2.8 million (31

December 2006: euro 5.3 million) related to the fair value of the embedded derivatives, as described in Note 2.4.



As at 31 December 2007 and 2006, the analysis of trading derivatives by the period to maturity is as follows:

Notional Fair value Notional Fair value

Up to 3 months 26 690 254 ( 99 458) 38 482 549 ( 52 550)From 3 to 12 months 21 460 003 3 776 16 831 219 ( 53 136)From 1 to 5 years 31 046 064 310 908 23 536 128 ( 64 641)More than 5 years 22 230 542 ( 71 835) 26 444 047 43 810

101 426 863 143 391 105 293 943 ( 126 517)


31.12.2007 31.12.2006

NOTE 22 - FINANCIAL ASSETS AT FAIR VALUE THROUGH PROFIT OR LOSS


31.12.2007 31.12.2006

Bonds and other fixed income securitiesIssued by other entities 1 268 780 1 775 080

Shares 192 360 176 134

Other variable income securities 4 096 2 366

Book value 1 465 236 1 953 580


In light of IAS 39, the Group designated these financial assets at fair value through profit or loss, in accordance with

the documented risk management and investment strategy, considering that these financial assets (i) are managed and

evaluated on a fair value basis and/or (ii) have embedded derivatives.

This caption, as at 31 December 2006, includes securities in the amount of euro 575 621 thousand, which were sold by

the Group but not derecognised, as the Group has retained substantially all risks and rewards of ownership through

total return swaps. The proceeds from this sale were booked in the balance Deposits from banks.



As at 31 December 2007 and 2006, the analysis of the financial assets at fair value through profit or loss by the period

to maturity is as follows:

31.12.2007 31.12.2006

Up to 3 months 461 228 228 766From 3 to 12 months 113 332 194 544From 1 to 5 years 192 658 905 178More than 5 years 502 153 448 724Undetermined 195 865 176 368

1 465 236 1 953 580


Regarding listed or unlisted securities, the balance financial assets at fair value through profit or loss, is as follows:


Bonds and other fixed income securitiesIssued by other entities 454 505 814 275 1 268 780 209 655 1 565 425 1 775 080

Shares 192 360 - 192 360 176 134 - 176 134Other variable income securities 4 096 - 4 096 2 366 - 2 366

650 961 814 275 1 465 236 388 155 1 565 425 1 953 580

31.12.2007 31.12.2006


NOTE 23 - AVAILABLE-FOR-SALE FINANCIAL ASSETS


Positive Negative Impairment

Bonds and other fixed income securitiesIssue by government and public entities 423 884 1 473 ( 3 692) ( 594) 421 071Issue by others entities 3 169 770 4 538 ( 4 802) ( 9 093) 3 160 413

Shares 1 210 462 690 377 ( 3 394) ( 47 369) 1 850 076 Other securities 322 853 10 159 ( 618) ( 4 392) 328 002

Balance as at 31 December 2006 5 126 969 706 547 ( 12 506) ( 61 448) 5 759 562

Bonds and other fixed income securitiesIssue by government and public entities 876 784 924 ( 3 453) ( 29) 874 226Issue by others entities 3 341 400 27 539 ( 83 801) ( 9 332) 3 275 806

Shares 1 360 146 992 591 ( 17 082) ( 43 163) 2 292 492 Other securities 468 110 9 755 ( 3 977) ( 14 562) 459 326

Balance as at 31 December 2007 6 046 440 1 030 809 ( 108 313) ( 67 086) 6 901 850

(1) Acquisition cost relating to shares and other variable income securities and amortised cost relating to debt securities.

Fair value reserve


Cost (1) Book value



The balance Available-for-sale financial assets includes the amount of euro 711 451 thousands of securities pledged as

collateral by the Group (31 December 2006: euro 558 689 thousands) (see Note 45).

The changes occurred in impairment losses of available-for-sale financial assets are presented as follows:

31.12.2007 31.12.2006

Balance as at 1 January 61 448 164 279Change in the scope of consolidation - ( 97 872)Charge for the year 20 194 9 050Charge off ( 11 838) ( 8 256)Write back for the year ( 1 484) ( 4 475)Exchange differences and other ( 1 234) ( 1 278)

Balance as at 31 December 67 086 61 448


As at 31 December 2007 and 2006, the analysis of available-for-sale assets by the period to maturity is as follows:

31.12.2007 31.12.2006

Up to 3 months 717 873 289 506 From 3 to 12 months 392 865 250 249 From 1 to 5 years 1 548 085 1 515 619 More than 5 years 1 503 583 1 568 326 Undetermined 2 739 444 2 135 862

6 901 850 5 759 562


The main contributions to the fair value reserve, as at 31 December 2007 and 2006, can be analysed as follows:

Positive Negative

Banco Bradesco 286 047 661 695 - - 947 742Portugal Telecom 291 914 76 010 - - 367 924EDP 263 801 70 497 - - 334 298Banque Marocaine du Commerce Extérieur 2 480 8 589 - ( 682) 10 387Bradespar 6 215 22 029 - - 28 244

850 457 838 820 - ( 682) 1 688 595

(1) Acquisition cost relating to shares and other variable income securities and amortised cost relating to debt securities.

31.12.2007

Fair value reserve


Impairment Cost (1) Book value



Positive Negative

Banco Bradesco 202 057 496 097 - - 698 154Portugal Telecom 340 074 66 331 - - 406 405EDP 218 670 67 986 - - 286 656Banque Marocaine du Commerce Extérieur 2 480 2 774 - ( 682) 4 572Bradespar 3 577 8 345 - - 11 922

766 858 641 533 - ( 682) 1 407 709(1) Acquisition cost relating to shares and other variable income securities and amortised cost relating to debt securities.


31.12.2006

Cost (1) Fair value reserve

Impairment Book value

On 7 November 2007, Portugal Telecom (PT) concluded the spin-off of its 58.43% interest in PT Multimédia (PTM),

each shareholder having been allocated 0.176067 PTM shares for each PT share held. Following this transaction, the

Group received 9 444 819 PTM shares, which were accounted for based on their respective fair value determined at

the date of the spin-off, in the amount of 86.7 million, as an appropriation of the book value of the underlying PT

shares as at that date.

Additionally, the acquisition cost of PT shares and the respective accumulated fair value reserve, before the spin-off,

were split between PT shares held and the new PTM shares received, proportionally to their respective fair values

determined at the date of the spin-off. As a result, following this transaction the Group allocated to the PTM shares

received a fair value reserve in the amount of euro 10.4 million and did not recognise any gain or loss in the

consolidated income statement.

Regarding listed or unlisted securities, the balance available-for-sale financial assets, is as follows:


SecuritiesBonds and other fixed income securities

Issue by government and public entities 157 226 717 000 874 226 169 040 252 031 421 071 Issue by others entities 1 097 864 2 177 942 3 275 806 1 316 797 1 843 616 3 160 413

Shares 2 059 222 233 270 2 292 492 1 637 173 212 903 1 850 076

Other variable income securities 128 700 330 626 459 326 78 555 249 447 328 002

3 443 012 3 458 838 6 901 850 3 201 565 2 557 997 5 759 562

31.12.2007 31.12.2006




NOTE 24 - LOANS AND ADVANCES TO BANKS


31.12.2007 31.12.2006

Loans and advances to banks in PortugalInter-bank money market 1 269 865 425 723Deposits 83 369 55 608Loans 67 719 52 143Short term advances 345 042 25Other loans and advances 1 445 1 404

1 767 440 534 903

Loans and advances to banks abroadDeposits 2 837 259 2 461 518Loans 125 432 102 931Short term deposits 1 137 238 2 026 383Sales with repurchase agreement 1 607 120 1 777 725Other loans and advances 32 575 6 002

5 739 624 6 374 559

Overdue loans and interest 398 398

7 507 462 6 909 860Impairment losses ( 1 602) ( 2 752)

7 505 860 6 907 108


The main loans and advances to banks in Portugal, as at 31 December 2007, bear interest at an annual average interest

rate of 4.47% (31 December 2006: 3.46%). Loans and advances to banks abroad bear interest at international market

rates where the Group operates.

As at 31 December 2007, this balance includes euro 559 687 thousands of loans and advances to banks at fair value

through profit or loss (see Note 27).



As at 31 December 2007 and 2006, the analysis of loans and advances to banks by the period to maturity is as follows:

31.12.2007 31.12.2006

Up to 3 months 7 183 464 6 337 8123 to 12 months 88 123 383 9241 to 5 years 102 630 103 292More than 5 years 132 847 84 434Undetermined 398 398

7 507 462 6 909 860

(in thousands euro)

The changes occurred in impairment losses of loans and advances to banks are presented as follows:

31.12.2007 31.12.2006

Balance as at 1 January 2 752 2 956

Charge for the year 1 757 2 084Write back for the year ( 2 251) ( 1 991)Exchange differences and others ( 656) ( 297)





NOTE 25 - LOANS AND ADVANCES TO CUSTOMERS


31.12.2007 31.12.2006

Domestic loansCorporate

Loans 9 763 342 8 185 323Commercial lines of credits 5 655 418 6 551 451Finance leases 2 829 881 2 254 375Discounted bills 1 114 157 1 200 807Factoring 1 156 111 977 934Other loans 245 152 453 399Overdrafts 51 666 79 320

RetailMortgage loans 9 547 084 7 918 960Consumer and other loans 2 332 310 2 005 751

32 695 121 29 627 320

Foreign loansCorporate

Loans 7 660 509 4 211 066Commercial lines of credits 1 520 636 1 208 129Other loans 1 238 425 668 699Discounted bills 169 398 124 244Finance leases 288 123 178 774Overdrafts 141 923 60 347

RetailMortgage loans 529 488 519 968Consumer and other loans 410 838 339 728

11 959 340 7 310 955

Overdue loans and interestUp to 3 months 74 790 74 184From 3 months to 1 year 135 577 140 189From 1 to 3 years 236 244 202 469More than 3 years 125 937 119 073

572 548 535 915

45 227 009 37 474 190

Impairment losses (1 035 364) ( 912 024)

44 191 645 36 562 166


As at 31 December 2007, the balance loans and advances to customers includes an amount of euro 2 903.4 million

(31 December 2006: euro 786.6 million) related to securitised loans following the consolidation of the securitisation



entities (see Note 48), according to the accounting policy described in Note 2.2. The liabilities related to these

securitisations are booked under Debt securities issued (see Notes 37 and 48).

As at 31 December 2007, this caption includes euro 163 726 thousands of loans at fair value through profit or loss (see

Note 27).

As at 31 December 2007, loans and advances include euro 66 236 thousands of restructured loans (31 December 2006:

euro 47 743 thousands). These loans correspond, in accordance with the definition of the Bank of Portugal, to loans

previously overdue, which through a restructuring process are considered as performing loans.

As at 31 December 2007 and 2006, the analysis of loans and advances to customers by the period to maturity is as

follows:

31.12.2007 31.12.2006

Up to 3 months 7 776 183 7 327 407 3 to 12 months 6 050 104 5 313 141 1 to 5 years 8 941 236 7 379 889 More than 5 years 21 886 938 16 917 838 Undetermined 572 548 535 915

45 227 009 37 474 190


The changes occurred in the provision for impaired loans and advances to customers are analysed as follows:

31.12.2007 31.12.2006


Charge of the year 267 018 251 394 Charge off ( 82 611) ( 138 676)Amounts recovered during the year previously charged-off 34 857 22 753 Write back of the year ( 83 562) ( 88 674)Unwind of discount ( 13 101) ( 10 861)Exchange differences and others 739 2 036

Balance as at 31 December 1 035 364 912 024


Amounts recovered during the year relate to loans previously written-off that were recovered during the year.

The unwind of discount represents the interest on overdue loans, recognised as interest and similar income, as

impairment losses are calculated using the discounted cash flows method.



As at 31 December 2007 and 2006, loans and advances to costumers and impairment losses can be analysed as

follows:

Gross amountImpairment on an individual

basisGross amount

Impairment on a portfolio

basisGross amount Impairment Net amount

Loans to corporate 3 283 164 398 599 28 892 249 344 738 32 175 413 743 337 31 432 076Loans to retail - Mortgage 871 399 152 696 9 270 893 24 799 10 142 292 177 495 9 964 797Loans to retail - Others 252 055 68 933 2 657 249 45 599 2 909 304 114 532 2 794 772

Total 4 406 618 620 228 40 820 391 415 136 45 227 009 1 035 364 44 191 645


31.12.2007

Loans with impairment losses calculated on an individual basis

Loans with impairment losses calculated on a portfolio basis Total

Gross amountImpairment on an individual

basisGross amount

Impairment on a portfolio

basisGross amount Impairment Net amount

Loans to corporate 2 250 020 335 619 24 275 309 342 782 26 525 329 678 401 25 846 928Loans to retail - Mortgage 740 104 112 798 7 761 153 19 390 8 501 257 132 188 8 369 069Loans to retail - Others 204 455 63 058 2 243 149 38 377 2 447 604 101 435 2 346 169

Total 3 194 579 511 475 34 279 611 400 549 37 474 190 912 024 36 562 166


31.12.2006

Loans with impairment losses calculated on an individual basis

Loans with impairment losses calculated on a portfolio basis Total

Interest income on impaired loans recognised during 2007, in the amount of euro 239.3 million (2006: euro 176.3

million) includes the unwind of discount related to overdue loans and the interest income related to the impaired loans

that are not overdue.

Loans and advances to customers by interest rate type are analysed as follows:

31.12.2007 31.12.2006

Variable interest rate 3 766 385 33 192 234 Fixed interest rate 41 460 624 4 281 956

45 227 009 37 474 190


The fair value of loans and advances to customers is presented in Note 49.

During 2007, the average interest rate was approximately 5.83% (31 December 2006: 5.01%).



The analysis of finance leases by the period to maturity is as follows:

31.12.2007 31.12.2006

Gross investment in finance leases, receivable:Up to 1 year 572 483 503 693 From 1 to 5 years 2 058 919 1 252 844 More than 5 years 1 172 297 1 266 535

3 803 699 3 023 072

Unearned future finance income on finance leases:Up to 1 year 117 264 86 951 From 1 to 5 years 278 854 174 483 More than 5 years 289 577 328 489

685 695 589 923

Net investment in finance leases:Up to 1 year 455 219 416 742 From 1 to 5 years 1 780 065 1 078 361 More than 5 years 882 720 938 046

3 118 004 2 433 149


NOTE 26 - HELD-TO-MATURITY INVESTMENTS

The balance of held-to-maturity investments, can be analysed as follows:

31.12.2007 31.12.2006

Bonds and other fixed income securitiesIssued by government and public entities 394 935 591 947Issued by other entities 40 444 34 290

435 379 626 237




As at 31 December 2007 and 2006, the analysis of held-to-maturity investments by the period to maturity is as

follows:

31.12.2007 31.12.2006

Up to 3 months 19 981 50 653 3 to 12 months 19 836 69 772 1 to 5 years 369 286 497 049 More than 5 years 26 276 8 763

435 379 626 237


The fair value of held to maturity investments is presented in Note 49.

NOTE 27 - DERIVATIVES FOR RISK MANAGEMENT PURPOSES

As at 31 December 2007 and 2006, derivatives for risk management purposes can be analysed as follows:

31.12.2007 31.12.2006

Derivatives for risk management purposes with positive fair value (assets) 211 890 199 704Derivatives for risk management purposes with negative fair value (liabilities) ( 286 940) ( 262 957)

( 75 050) ( 63 253)


The balance Derivatives for risk management purposes includes hedging derivatives and derivatives contracted with

the purpose of managing the risk of certain financial assets and financial liabilities designated at fair value through

profit or loss and that were not classified as hedging derivatives.

Derivatives for risk management purposes as at 31 December 2007, in the net amount of euro 75 050 thousands (net

liabilities) includes (i) euro 42 689 thousands of net liabilities related to hedging derivatives (31 December 2006: euro

60 156 thousands of net liabilities) and (ii) euro 32 361 thousand of net liabilities related to derivatives used to manage

the risk of certain financial assets and financial liabilities designated at fair value through profit or loss and that were

not classified as hedging derivatives (31 December 2006: euro 3 097 thousand of net liabilities).



Hedging derivatives

As at 31 December 2007 and 2006, the fair value hedge relationships present the following features:

Derivative Hedged item Hedged risk Notional

Currency Interest Rate Swap Subordinated debt Interest rate and FX 181 895 ( 22 678) ( 11 995) 22 455 12 621 Currency Interest Rate Swap Debt securities issued Interest rate and FX 18 777 60 ( 63) 265 ( 32)Currency Interest Rate Swap Deposits from banks Interest rate and FX 407 405 ( 4 841) ( 4 191) 4 633 4 191 Interest Rate Swap Loans and advances to customers Interest rate 91 993 1 210 969 ( 767) ( 953)Interest Rate Swap Subordinated debt Interest rate 20 000 ( 864) ( 593) 802 658 Interest Rate Swap Debt securities issued Interest rate 2 564 460 ( 15 405) 46 205 30 690 ( 41 027)Interest Rate Swap Due to customers Interest rate 307 859 1 057 ( 1 580) 1 286 395 Interest Rate Swap Deposits from banks Interest rate 128 000 ( 1 228) ( 9 130) 2 601 8 842

3 720 389 ( 42 689) 19 622 61 965 ( 15 305)

(1) Attributable to the hedged risk(2) Includes accrued interest

Changes in the fair value of the derivative in the

year (2)

Accumulated changes in fair

value of thehedged item (1)

Changes in the fair value of the hedged item in the year(1)

31.12.2007


Fair value of derivative (2)

Derivative Hedged item Hedged risk Notional

Currency Interest Rate Swaps Deposits from banks Interest rate and FX 429 596 2 248 1 060 448 ( 1 181)Currency Interest Rate Swaps Subordinated debt Interest rate and FX 191 168 ( 8 053) ( 33 657) 8 027 38 942 Currency Interest Rate Swaps Debt securities issued Interest rate and FX 18 192 54 ( 376) 276 270 Currency Interest Rate Swaps Debt securities issued Interest rate and FX 35 854 - - - - Interest Rate Swap Loans and advances to customers Interest rate 245 884 ( 1 244) 3 778 428 ( 4 309)Interest Rate Swap Deposits from banks Interest rate 150 019 11 659 3 355 ( 5 663) ( 3 684)Interest Rate Swap Loans and advances to customers Interest rate - - 93 - ( 107)Interest Rate Swap Debt securities issued Interest rate 1 857 948 ( 64 623) ( 50 026) 68 910 46 262

2 928 661 ( 59 959) ( 75 773) 72 426 76 193

(1) Attributable to the hedged risk(2) Includes accrued interest


31.12.2006

Changes in the fair value of the derivative in the

year (2)


value of thehedged item (1)

Changes in the fair value of the hedged item in the year(1)

Fair value of derivative (2)

Changes in the fair value of the hedged items and of the respective hedging derivatives are recognised in the income

statement under net gains / (losses) from financial assets and financial liabilities at fair value through profit or loss.

As at 31 December 2007, the ineffectiveness of the fair value hedge operations amounted to euro 4.3 million

(31 December 2006: euro 0.4 million) and was recognised in the income statement. ESFG Group evaluates on an

ongoing basis the effectiveness of the hedges.

Other derivatives for risk management purposes

Other derivatives for risk management purposes includes derivatives held to hedge financial assets and financial

liabilities at fair value through profit or loss as described in accounting policy 2.5, 2.6 and 2.8 and that the Group did

not classify as hedging derivatives.



Book value of assets and liabilities at fair value through profit or loss can be analysed as follows:

31.12.2007


AssetsCurrency Swap Loans ans advances to banks 561 051 3 716 ( 198) 49 49 559 687 561 051 Interest Rate Swap Bonds 185 000 319 467 ( 1 805) 1 098 187 545 189 350 Interest Rate Swap Loans and advances to clients 122 000 511 511 626 626 163 726 162 668

Liabilities

Equity Swap Due to customers 18 969 ( 192) ( 27) 29 29 18 897 14 575 Index Swap Debt securities issued 185 800 13 827 4 474 ( 12 432) ( 1 898) 195 903 181 223 Index Swap Due to customers 82 702 ( 429) 172 ( 180) ( 275) 82 407 66 204 Interest Rate Swap Debt securities issued 1 186 741 ( 49 099) ( 33 613) 49 078 35 955 905 223 969 483 Interest Rate Swap Due to customers 90 862 ( 1 014) 961 952 ( 969) 90 041 90 325

2 433 125 ( 32 361) ( 27 253) 36 317 34 615 2 203 429 2 234 879

(1) Corresponds to the minimum guaranted amount to be reimbursed at maturity

Changes in the fair value in

the year


value

Financial Assets / Liabilities economically hedgedDerivative

Assets / Liabilities economically hedgedDerivative


the year

Carrying amount

Redemption amount at maturity (1)

Notional Fair Value

31.12.2006


LiabilitiesInterest Rate Swap Debt securities issued 778 023 ( 13 870) ( 13 870) ( 1 734) ( 1 734) 764 328 775 658 Index Swap Debt securities issued 99 962 7 591 7 591 ( 5 319) ( 5 319) 92 238 85 583 Index Option Debt securities issued 7 400 ( 708) ( 708) ( 139) ( 139) 7 538 7 248 Index Swap Due to customers 56 339 ( 435) ( 435) 439 439 55 899 47 710 Equity Swap Debt securities issued 117 276 4 844 4 844 5 938 5 938 123 214 117 276 FX Swaps Deposits from banks 387 114 ( 519) ( 519) 117 117 386 997 387 114

1 446 114 ( 3 097) ( 3 097) ( 698) ( 698) 1 430 214 1 420 589

(1) Corresponds to the minimum guaranted amount to be reimbursed at maturity

Carrying amount

Derivative Financial Assets / Liabilities economically hedged

Derivative Assets / Liabilities economically hedged

Notional Fair ValueChanges in the

fair value in the year

Fair ValueRedemption amount at maturity (1)


the year

As at 31 December 2007, the fair value of the financial liabilities at fair value through profit or loss, includes a positive

cumulative effect of euro 7 395 thousands (31 December 2006: negative cumulative effect of euro 2 026 thousands)

attributable to the Group’s own credit risk. The change in fair value attributable to the Group’s own credit risk resulted

in the recognition, in 2007, of a profit amounting to euro 9 421 thousands (31 December 2006: loss amounting to euro

2 026 thousands).



As at 31 December 2007 and 2006, the analysis of Derivatives for risk management purposes by the period to maturity

is as follows:

Notional Fair value Notional Fair value

Up to 3 months 886 563 9 381 666 912 6 630 3 to 12 months 1 460 489 8 863 603 836 1 178 1 to 5 years 1 889 030 ( 3 317) 1 962 202 2 280 More than 5 years 1 917 432 ( 89 977) 1 141 825 ( 73 341)

6 153 514 ( 75 050) 4 374 775 ( 63 253)


31.12.2007 31.12.2006

NOTE 28 - NON-CURRENT ASSETS AND LIABILITIES HELD FOR SALE

As at 31 December 2007, this balance is analysed as follows:

Assets Liabilities

Assets and liabilities of subsidiaries acquired exclusively for resale purpose 235 993 233 189

Property held for sale 49 499 - Impairment losses ( 6 084) -

43 415 -

279 408 233 189

31.12.2007

(in thousands in euro)

The amounts presented refer to (i) investments in companies controlled by the Group, which have been acquired

exclusively with the purpose of being sold in the short term, and (ii) assets acquired in exchange for loans and

discontinued branches available for immediate sale.

During December 2007, BES Investimento acquired 80% of the share capital of Pebble Hydro – Empresa de

Consultoria, Investimento e Serviços, having the remaining 20% been acquired by EDP – Energias de Portugal. It is

planned that the BESI interest in this company will be sold to EDP – Energias de Portugal during 2008. As this

acquisition took place at the year end, it had no effect on the consolidated net income.

Property held for sale includes (i) assets acquired in exchange for loans following the accounting policy described in

Note 2.12 and (ii) discontinued branches. These assets are classified as held for sale following a transfer from Other

assets when the conditions required by IFRS 5 are achieved including the availability of the property for immediate

sale.



The changes occurred in impairment losses of property held for sale are presented as follows:

31.12.2007


Balance as at 1 January -

Charge for the year 2 605Charge off ( 2 017)Write back for the year ( 45)Transfers (a) 5 541

Balance as at 31 December 6 084

(a) Represents the transfer from Other assets of impairment losses related to property which qualify for recognition asnon current assets held for sale, in accordance with the accounting policy described in Note 2.12.



NOTE 29 - PROPERTY AND EQUIPMENT

As at 31 December 2007 and 2006 this balance is analysed as follows:

31.12.2007 31.12.2006

PropertyLand and buildings 749 985 568 802 Improvements in leasehold property 200 834 184 298 Other 6 678 8 062

957 497 761 162

EquipmentComputer equipment 286 178 271 963 Furniture 114 145 131 118 Fixtures 107 659 89 019 Security equipment 25 149 20 808 Office equipment 41 189 39 031 Medical equipment 77 022 17 573 Motor vehicles 8 332 7 507 Other 33 909 30 415

693 583 607 434

Other 10 964 7 541

1 662 044 1 376 137

Work in progressLand and buildings 16 430 11 887 Improvement in leasehold property 41 882 7 646 Equipment 19 021 14 223 Other 3 185 129 542

80 518 163 298

Accumulated depreciation ( 796 664) ( 755 269)Impairment losses ( 3 928) ( 2 840)

( 800 592) ( 758 109)

941 970 781 326


In accordance with the accounting policy described in Note 2.13, the Group concluded that there was an indication of

impairment in relation to certain property and equipment. Therefore it has performed impairment tests for these assets

and concluded that an accumulated impairment loss of euro 3 928 thousands should be recognised (31 December

2006: euro 2 840 thousands).



The movement in this balance was as follows: Work in

Property Equipment Other progress Total

Acquisition costsBalance as at 1 January 2006 659 835 562 615 6 898 84 026 1 313 374

Change in the scope of consolidation 74 406 19 437 1 924 20 692 116 459 Acquisitions 11 638 32 563 598 96 835 141 634 Disposals ( 5 590) ( 22 310) - ( 145) ( 28 045)Transfers (a) 22 173 17 166 16 ( 38 267) 1 088 Exchange differences and other ( 1 300) ( 2 037) ( 1 895) 157 ( 5 075)

Balance as at 31 December 2006 761 162 607 434 7 541 163 298 1 539 435

Change in the scope of consolidation (b) 73 509 - - - 73 509 Acquisitions 53 198 55 036 4 901 78 011 191 146 Disposals ( 22 020) ( 24 633) - - ( 46 653)Transfers (c) 90 251 57 980 10 ( 161 224) ( 12 983)Exchange differences and other 1 397 ( 2 234) ( 1 488) 433 ( 1 892)

Balance as at 31 December 2007 957 497 693 583 10 964 80 518 1 742 562

DepreciationBalance as at 1 January 2006 223 924 467 234 3 059 - 694 217

Change in the scope of consolidation 14 177 16 255 1 060 - 31 492 Depreciation 20 377 32 746 512 - 53 635 Disposals ( 4 839) ( 15 107) 156 - ( 19 790)Transfers (a) ( 1 090) 512 ( 1 383) - ( 1 961)Exchange differences and other ( 196) ( 1 806) ( 322) - ( 2 324)

Balance as at 31 December 2006 252 353 499 834 3 082 - 755 269

Depreciation 24 726 42 785 553 - 68 064 Disposals ( 4 327) ( 23 348) - - ( 27 675)Transfers (c) ( 3 915) 3 397 - - ( 518)Exchange differences and other 2 152 101 ( 729) - 1 524

Balance as at 31 December 2007 270 989 522 769 2 906 - 796 664

ImpairmentBalance as at 1 January 2006 1 302 - - - 1 302

Impairment losses 1 796 - - - 1 796 Exchange differences and other (258) - - - ( 258)

Balance as at 31 December 2006 2 840 - - - 2 840

Impairment losses 2 792 - - 530 3 322 Write-back for the year ( 1 930) - - - ( 1 930)Write-off for the year ( 304) - - - ( 304)

Balance as at 31 December 2007 3 398 - - 530 3 928

Net balance as at 31 December 2007 683 110 170 814 8 058 79 988 941 970



(a) Includes the amount of euro 7 459 thousands related to the acquisition costs ( property and equipment) and euro 1 961 thousands of accumulateddepreciations transferred to the balance Other assets, referring to discontinued branches.(b) Refers to the consolidation for the first time in 2007 of Praça do Marquês.

(c) Includes (i) the amount of euro 13 576 thousands related to the acquisition costs (property and equipment) and euro 3 207 thousands ofaccumulated depreciations transferred to the balance Other assets, referring to discontinued branches and (ii) the amount of euro 3 561 thousandsrelated to the acquisition costs (property and equipment) and euro 937 thousands of accumulated depreciations transferred to investment properties.



NOTE 30 - INVESTMENT PROPERTIES

Investment properties are analysed as follows:

31.12.2007 31.12.2006

Insurance activity 82 904 80 923Real estate activity 6 352 5 054

89 256 85 977


The movement in investment properties for the years ended 31 December 2007 and 2006 can be analysed as follows:

Total

Net balance as at 1 January 2006 161 803 4 935 166 738 Change in the scope of consolidation ( 69 495) - ( 69 495)Acquisitions 537 1 282 1 819 Disposals ( 18 036) ( 1 060) ( 19 096)Unrealised gains / (losses) 6 114 ( 103) 6 011

Net balance as at 31 December 2006 80 923 5 054 85 977 Acquisitions 365 4 896 5 261 Disposals ( 2 081) ( 1 977) ( 4 058)Transfers 3 697 ( 1 621) 2 076

Net balance as at 31 December 2007 82 904 6 352 89 256


Insurance activity

Real estate activity

The change in 2006 in the scope of consolidation relates to the restructuring of the Group investments in the insurance

business, as explained in Note 1.



NOTE 31 - INTANGIBLE ASSETS

As at 31 December 2007 and 2006 this balance is analysed as follows:

31.12.2007 31.12.2006

Goodwill 212 607 181 158

Internally developedSoftware 13 324 7 890

Acquired to third partiesSoftware 476 378 446 754 Other 1 608 38 547

477 986 485 301

Work in progress 33 419 21 168

737 336 695 517 Accumulated amortisation ( 425 095) ( 429 564)

312 241 265 953


Goodwill, recognised in accordance with the accounting policy described in Note 2.2, is analysed as follows:

31.12.2007 31.12.2006


HOSPOR 89 943 89 943PARTRAN 61 123 61 123BES 49 484 18 793BESPAR 5 960 5 960Other 6 097 5 339

212 607 181 158

In accordance with the accounting policy described in Note 2.2, the goodwill is subject to impairment tests annually or

whenever there is an indication of impairment. These tests were performed for the preparation of the annual accounts

as at 31 December 2007 and 2006 and no impairment losses were identified.

The balance of internally developed software includes the costs incurred by the Group in the development and

implementation of software applications that will generate economic benefits in the future (see Note 2.15).



The movement in this balance was as follows:

Goodwill Software Other Total

Acquisition costsBalance as at 1 January 2006 92 188 445 609 44 693 19 930 602 420

Change in the scope of consolidation - ( 14 285) ( 1 140) 3 037 ( 12 388)Acquisitions:

Internally developed - 5 820 - - 5 820 Acquired to third parties 88 986 6 840 1 912 22 111 119 849

Disposals ( 16) ( 11 782) ( 1 872) ( 805) ( 14 475)Transfers - 21 327 ( 8 829) ( 21 045) ( 8 547)Exchange differences and other - 1 115 3 783 ( 2 060) 2 838

Balance as at 31 December 2006 181 158 454 644 38 547 21 168 695 517

Acquisitions:Internally developed - 91 - 6 042 6 133 Acquired to third parties 31 144 16 758 210 31 603 79 715

Disposals - ( 3 489) ( 33 880) ( 1 550) ( 38 919)Transfers - 18 382 383 ( 22 919) ( 4 154)Exchange differences and other 305 3 316 ( 3 652) ( 925) ( 956)

Balance as at 31 December 2007 212 607 489 702 1 608 33 419 737 336

AmortisationBalance as at 1 January 2006 - 363 691 58 198 - 421 889

Change in the scope of consolidation - ( 13 537) ( 19 584) 20 048 ( 13 073)DAmortisation - 35 649 780 - 36 429 ADisposals - ( 12 596) ( 1 549) - ( 14 145)TTransfers - 23 863 ( 5 536) ( 18 327) - Exchange differences and other - 138 47 ( 1 721) ( 1 536)

Balance as at 31 December 2006 - 397 208 32 356 - 429 564

Amortisation - 32 854 260 - 33 114 DDisposals - ( 3 406) ( 31 473) - ( 34 879)ATransfers - ( 3 230) ( 392) - ( 3 622)Exchange differences and other - 315 603 - 918

Balance as at 31 December 2007 - 423 741 1 354 - 425 095

Net balance as at 31 December 2007 212 607 65 961 254 33 419 312 241



Work in progress

During 2007, the Group through ESFG acquired 10.5 million BES shares, generating an additional goodwill of

approximately euro 30.7 million.

As referred to in Note 1, in the first semester of 2006, the Group acquired the remaining 33.3% of Partran from which

resulted a goodwill of euro 61.2 million. Additionally, during 2006, the Group through ESFG, acquired an additional

shareholding in BES which generated a goodwill of approximately euro 18.8 million.

At the end of December 2006, the Group acquired Espírito Santo Health & Spa SGPS, S.A., to be its sub-holding in

the businesses of Health & Leisure Spa, a subsidiary of ES Saúde. Due to the fact that this transaction occurred near

the year-end, it was accounted for on a provisional basis in accordance with IFRS 3. During 2007, the Company



completed the process of determining the fair values of identifiable assets, liabilities and contingent liabilities and

concluded that no goodwill should be recognised.

NOTE 32 - INVESTMENTS IN ASSOCIATES

The financial information concerning associates is presented in the following table:

31.12.2007 31.12.2006 31.12.2007 31.12.2006 31.12.2007 31.12.2006 31.12.2007 31.12.2006 31.12.2007 31.12.2006 31.12.2007 31.12.2006

BES VIDA 7 647 855 6 842 137 7 375 001 6 512 521 272 854 329 616 822 964 879 725 52 218 115 048 124 476 124 476

BES SEGUROS 108 662 88 919 84 207 64 784 24 455 24 136 61 862 60 455 4 723 4 425 7 501 7 501

LOCARENT 291 074 216 036 286 903 215 972 4 171 64 72 839 44 910 1 107 ( 940) 2 517 2 517

ESEGUR 41 466 42 203 31 552 33 486 9 914 8 717 62 369 53 426 3 609 2 800 9 634 2 134

EUROP ASSISTANCE 31 401 29 164 21 778 20 168 9 623 8 996 26 046 24 631 1 211 1 082 2 344 2 344

FUNDO ES IBERIA 26 430 26 332 1 938 616 24 492 25 716 26 12 ( 1 262) ( 766) 10 496 10 496

CARLUA 21 039 19 652 19 389 17 908 1 650 1 744 19 278 31 479 239 339 1 250 1 250

FOMENTINVEST 11 866 9 151 2 144 1 673 9 722 7 478 2 139 4 301 1 543 2 743 1 000 1 000

BRB INTERNACIONAL 11 756 5 590 10 213 2 945 1 543 2 645 59 4 654 ( 1 002) 405 10 033 10 033 SGPICE 2 577 2 934 10 614 9 694 ( 8 037) ( 6 760) 6 255 12 216 ( 612) ( 1 245) 2 667 2 667 CONCORDIA (a) - 1 065 - 32 - 1 033 - 502 - ( 355) - 996 APOLOFILMS 810 671 30 40 780 631 14 245 ( 19) ( 165) 791 791 BIOGENESIS 4 681 - - - 4 697 - - - ( 16) - 6 670 - SYNERGIE 522 049 - - - 80 862 - 121 756 - 4 389 - 10 848 - RODI 2 36 659 - - - 15 448 - - - ( 225) - 1 240 1 240 Others - - - - - - - - - - 28 105 15 774

219 572 183 219


Assets Liabilities Equity Income Profit / (Loss) for the year Acquisition cost

a) Investments fully consolidated from 2007.

Share of profit of associates

31.12.2007 31.12.2006 31.12.2007 31.12.2006 31.12.2007 31.12.2006


BES VIDA 50.00% 50.00% 136 427 164 808 26 108 6 148

BES SEGUROS 50.00% 50.00% 12 228 12 068 2 361 696

LOCARENT 45.00% 45.00% 1 998 7 497 ( 445)

ESEGUR 44.00% 34.00% 11 206 2 964 1 468 952

EUROP ASSISTANCE 47.00% 47.00% 4 523 4 228 569 798

FUNDO ES IBERIA 38.69% 38.69% 9 811 10 027 ( 488) ( 278)

CARLUA 32.10% 18.34% 530 560 ( 30) ( 11)

FOMENTINVEST 20.00% 20.00% 1 945 1 496 449 549

BRB INTERNACIONAL 24.93% 24.93% 386 661 ( 274) 205 SGPICE 33.33% 33.33% - - - - CONCORDIA (a) - 49.00% - 506 - ( 230)APOLOFILMS 25.00% 25.00% 194 157 37 ( 27)BIOGENESIS 34.00% - 6 670 - - - SYNERGIE 15.00% - 3 842 - 1 281 - RODI 2 35.40% - 5 560 1 240 ( 168) - Others - - 25 263 16 967 620 1 212

220 583 215 689 32 430 9 569

Book valueVoting interest

a) Investments fully consolidated method from 2007.



The movement in this balance was as follows:

31.12.2007 31.12.2006

Balance as at 1 January 215 689 21 158Change in the scope of consolidation - 139 870Disposals ( 10 534) ( 3 532)Acquisitions 43 378 23 123Share of profit of associates 32 430 9 569Fair value reserve from investments in associates (a) ( 33 214) 11 890Dividends received ( 24 285) ( 2 330)Exchange differences and other ( 2 881) 15 941



(a) Mainly attributable to the change in BES Vida fair value reserve

In 2006 the change in the scope of consolidation represents the impact of BES-Vida and BES Seguros, which from 30

June 2006, and further to the sale of respectively 40.5% and 50% of the voting rights, were included in the

consolidated financial statements under the equity method applicable to associates.

NOTE 33 - TECHNICAL RESERVES

The direct insurance and reinsurance ceded technical reserves are analysed as follows:

Direct Reinsurance Direct Reinsurance insurance ceded Total insurance ceded Total

Unearned premiums reserve 118 232 13 352 104 880 117 256 12 612 104 644Life mathematical reserve 349 105 276 348 829 340 382 239 340 143Claims outstanding reserve 537 465 34 789 502 676 519 775 36 043 483 732Unexpired risks reserve 7 250 - 7 250 4 501 - 4 501Reserve for bonus and rebates 3 421 275 3 146 4 260 512 3 748

1 015 473 48 692 966 781 986 174 49 406 936 768

31.12.2007 31.12.2006

( in thousands of euro)



The life mathematical reserve is analysed as follows:


Annuities 96 935 - 96 935 50 216 - 50 216Life 252 170 276 251 894 290 166 239 289 927

349 105 276 348 829 340 382 239 340 143

31.12.2007 31.12.2006


In accordance with IFRS 4, the contracts issued by the Group for which there is only a transfer of financial risk, with

no discretionary profit sharing, are classified as investment contracts and accounted for as financial liabilities.

The claims outstanding reserve by line of business is analysed as follows:


Life 9 166 116 9 050 10 856 202 10 654 Workers compensation (mathematical reserve) 129 676 27 129 649 131 071 27 131 044 Workers compensation (not related to life pensions) 49 962 - 49 962 45 604 2 45 602 Accidents and health 12 580 396 12 184 11 345 586 10 759 Fire and other hazards 27 705 7 915 19 790 29 282 8 176 21 106 Motor 281 562 14 459 267 103 266 261 15 419 250 842 Maritime, airline and transportation 6 710 3 539 3 171 6 360 3 371 2 989 Third parties liabilities 17 728 7 772 9 956 17 143 8 016 9 127 Credit and suretyship 1 628 41 1 587 1 385 60 1 325 Other 748 524 224 468 184 284

537 465 34 789 502 676 519 775 36 043 483 732

31.12.2007 31.12.2006


The claims outstanding reserve represents unsettled claims occurred before the balance sheet date and includes an

estimated provision in the amount of euro 25 270 thousands (31 December 2006: euro 27 004 thousands), for claims

incurred before 31 December 2007, but not reported (IBNR).

Included in the amount of claims outstanding for workers’ compensation is euro 129 676 thousands (31 December

2006: euro 131 071 thousands), relating to the mathematical reserve for workers’ compensation.

The mathematical reserve for workers’ compensation includes an amount of euro 1 304 thousand (31 December 2006:

euro 6 547 thousands) as a result of the liability adequacy test (see Note 50).

Additionally, mathematical reserve for workers’ compensation also includes an accrual related to the present value of

the future contributions to Workers Compensation Fund (FAT) in the amount of euro 6 554 thousands (31 December

2006: euro 6 859 thousands).

The claims outstanding reserve also includes an estimation of future costs related with the settlement of pending

claims (expense reserve), both-declared and non-declared, in the amount of euro 7 306 thousands (31 December 2006:

euro 5 975 thousands).



The movements on the claims outstanding reserve of direct insurance business are analysed as follows:

31.12.2007 31.12.2006

Balance as at 1 January 519 775 565 329 Change in the scope of consolidation - ( 72 240)Plus incurred claims

Current year 289 271 590 620 Prior years ( 14 760) ( 15 775)

Less paid related toCurrent year ( 136 443) ( 412 709)Prior years ( 120 378) ( 135 450)



The reserve for bonus and rebates corresponds to the amounts attributed to policyholders or beneficiaries of insurance

and investment contracts with profit sharing, in the form of profit participation, which have not yet been specifically

allocated and included in the life mathematical reserve.

The movement in the reserve for bonus and rebates for the years ended 31 December 2007 and 2006 is as follows:

31.12.2007 31.12.2006

Balance as at 1 January 4 260 23 724 Change in the scope of consolidation - ( 19 788)Amounts paid ( 2 302) ( 90)Estimated attributable amounts 1 463 414



As at 31 December 2006, life mathematical reserve includes an amount of euro 128 thousand as a result of the

Liability adequacy test. This test was performed based on the best estimate assumptions (see Note 50).



NOTE 34 - OTHER ASSETS

As at 31 December 2007 and 2006, the balance Other assets is analysed as follows:

31.12.2007 31.12.2006


Deposits placed with option contracts 208 910 176 707 Deposits placed with futures contracts 128 695 103 646 Recoverable government subsidies on mortgage loans 52 742 46 897 Collateral deposits placed 126 295 51 593 Loans to companies in which the Group has a minority interest 134 482 105 901 Public sector 46 012 53 802 Debtors from the banking business 131 090 131 979 Debtors from the insurance business 24 883 21 642 Debtors from medical services business 50 086 46 927 Sundry debtors 4 268 2 066

907 463 741 160 Impairment losses on debtors ( 18 403) ( 14 158)

889 060 727 002

Debtors arising out of direct insurance operations 55 849 53 856 Debtors arising out of reinsurance operations 36 475 20 519

92 324 74 375 Impairment losses on debtors arising out of direct insurance and of reinsurance operations ( 9 154) ( 11 169)

83 170 63 206

Other assetsGold, other precious metals, precious coins and other liquid assets 13 682 36 247 Other assets 79 950 54 912

93 632 91 159

Accrued income 97 010 79 976

Prepayments and deferred costs 114 149 89 281

Deferred acquisition costs 23 673 22 990

Other sundry assetsForeign exchange transactions pending settlement 5 016 19 495 Stock exchange transactions pending settlement 412 072 398 672 Other transactions pending settlement 105 760 92 589

522 848 510 756

Assets acquired in exchange for loans 100 633 119 713 Impairment losses on assets acquired in exchange from loans ( 8 951) ( 10 721)

91 682 108 992

Assets recognised on pensions (see Note 13) 576 292 582 274

2 491 516 2 275 636



As at 31 December 2007, the balance prepayments and deferred costs includes the amount of euro 79 823 thousands

(31 December 2006: euro 54 024 thousands) related to the difference between the nominal amount of loans granted to

Group’s employees under the collective labour agreement for the banking sector (ACT) and their respective fair value

at grant date, calculated in accordance with IAS 39. This amount is charged to the income statement over the lower

period between the (i) remaining maturity of the loan granted, and the (ii) estimated remaining service life of the

employee.

Stock exchange transactions pending settlement represent transactions with securities made near year-end, which were

settled in the first days of the subsequent year.

Deferred acquisition costs relates to the insurance business and can be analysed as follows:

31.12.2007 31.12.2006

Life insurance business 214 271 Non-life insurance business 23 459 22 719

23 673 22 990


The movements on the deferred acquisition costs for the non-life business are analysed as follows:

31.12.2007 31.12.2006

Deferred acquisition costs as at 1 January 22 719 24 666 Change in the scope of consolidation - ( 1 292)Acquisition costs of the year 23 459 22 719 Acquisition costs amortisation ( 22 719) ( 23 374)

Deferred acquisition costs as at 31 December 23 459 22 719


The balance of impairment losses is presented as follows:

31.12.2007 31.12.2006

Debtors 18 403 14 158 Debtors arising out of direct insurance and reinsurance operations 9 154 11 169 Assets recovered from non-performing loans 8 951 10 721

36 508 36 048




Changes in the balance impairment losses are presented as follows:

31.12.2007 31.12.2006

Balance as at 1 January 36 048 31 406 Change in the scope of consolidation - 919 Charge of the year 12 048 10 390 Write back of the year ( 7 265) ( 7 051)Charge off ( 1 571) ( 702)Transfers ( 5 541) - Exchange differences and other 2 789 1 086



NOTE 35 - DEPOSITS FROM BANKS

The balance deposits from banks is analysed as follows:

31.12.2007 31.12.2006

DomesticLoans 1 401 768 1 020 531Inter-bank Money Market 37 814 132 439Deposits 117 828 175 858Short terms funds 37 353 13 810Repurchase agreements 1 571 1 352Other funds 49 616 22 877

1 645 950 1 366 867

InternationalDeposits 2 974 020 2 467 188Loans 2 254 272 2 435 835Short terms funds 241 811 88 923Repurchase agreements 497 507 516 700Other funds 109 868 128 085

6 077 478 5 636 731

7 723 428 7 003 598


As at 31 December 2006, this balance includes the amount of euro 386 997 thousands related to deposits recognised

on the balance sheet at fair value through profit or loss (see Note 27). The Group’s option to designate these financial

liabilities at fair value through profit or loss, under IAS 39, follows the Group’s documented risk management

strategy, in accordance with the accounting policy described in Note 2.8.



As at 31 December 2006, the balance Deposits in international banks – loans includes the amount of euro 575 621

thousands related to the liabilities incurred with the sale of securities which were not derecognised, as the Group

retained substantially all risks and rewards of ownership through total return swaps (see Note 22).

The analysis of deposits from banks by the period to maturity is as follows:

31.12.2007 31.12.2006

Up to 3 months 3 784 039 2 815 0223 to 12 months 1 065 807 2 182 3761 to 5 years 1 955 761 1 768 576More than 5 years 917 821 237 624

7 723 428 7 003 598





NOTE 36 - DUE TO CUSTOMERS

The balance due to customers is analysed as follows:

31.12.2007 31.12.2006

Repayable on demandDemand deposits 9 667 037 9 694 490

Time depositsTime deposits 9 251 237 7 903 047Notice deposits 28 466 16 574Other 42 267 16 449

9 321 970 7 936 070

Savings accountsPensioners 121 998 182 535Emigrants 4 080 5 717Other 1 912 976 1 956 739

2 039 054 2 144 991

Other fundsAssets sold under repurchase agreement 1 426 814 1 452 259Other 1 066 726 1 029 325

2 493 540 2 481 584

23 521 601 22 257 135


This balance includes the amount of euro 191 345 thousands (31 December 2006: 55 899 thousands) of deposits

recognised in the balance sheet at fair value through profit or loss (see Note 27). The Group’s option to designate these

financial liabilities at fair value through profit or loss, under IAS 39, follows the Group’s documented risk

management strategy, in accordance with the accounting policy described in Note 2.8.

The analysis of the amounts due to customers by the period to maturity is as follows:

31.12.2007 31.12.2006

Repayable on demand 9 667 037 9 694 490

With agreed maturity:Up to 3 months 9 470 832 9 217 5891 to 12 months 2 357 869 2 449 3401 to 5 years 628 147 714 215More than 5 years 1 397 716 181 501

23 521 601 22 257 135





NOTE 37 - DEBT SECURITIES ISSUED

The balance of debt securities issued is analysed as follows:

31.12.2007 31.12.2006

Debt securitiesEuro Medium Term Notes 11 029 443 8 980 124Cash bonds 5 886 804 4 639 525Certificates of deposits 6 314 298 5 165 392Debt bonds issued 508 227 503 051Others 1 471 133 709 433

25 209 905 19 997 525


On 15 November 2005, ESFG issued the euro 500 000 000 Fixed Rate Step-Up Notes due 2025 with 10 000 warrants.

Each of these Notes, will bear interest at the rate of 3.55% until 15 November 2010 and 5.05% from then on. Each

warrant entitles the holder to subscribe euro 50 000 to acquire fully paid up shares of Euro 10.0 each of ESFG at an

initial exercise price of euro 24.50 per share. The rights under the warrants are exercisable from and including 26

December 2005 up to the close of business on 8 November 2025. With effect from 15 November 2006, the notes and

warrants may be detached or be traded separately. Unless previous redeemed, or repurchased and cancelled, the Notes

will be redeemed at their principal amount on 15 November 2025.

In the light of IAS 32, the warrants issued correspond to an equity instrument and therefore are recognised in equity

and the Notes correspond to a debt instrument and are recognised as a liability.

The value attributable to the warrants upon the initial recognition was calculated by deducting, at inception, the fair

value of the Notes from the par value of the instrument as a whole, the fair value attributable to the Notes being

calculated as the present value of the contractual future cash flows discounted at a rate of interest, determined at

inception, based on comparable Notes providing substantially the same cash flows, on the same terms, but without the

detachable warrants. On this basis, the Group recognised in equity the amount of euro 118 570 thousands related to the

warrants and an amount of euro 381 430 thousands as a liability, corresponding to the respective fair value at the date

of issue.

After its initial recognition, the liability will accrue interest at an effective interest rate of 6.7%, which was the rate

used to fair value the liability at the inception.

During the year ended 31 December 2007, the Group has issued debt securities amounting to euro 9 492.7 million

(31 December 2006: 6 372 million), and euro 4 122.7 million (31 December 2006: 2 654.4 million) were reimbursed.



The analysis of debt securities issued by the period to maturity is as follows:

31.12.2007 31.12.2006

Up to 3 months 6 048 769 3 915 5341 to 12 months 4 113 059 3 340 9861 to 5 years 9 106 037 8 624 444More than 5 years 5 942 040 4 116 561

25 209 905 19 997 525


During 2007, the average interest rate was 4.90% (31 December 2006: 4.41%).



The main characteristics of debt securities outstanding are presented as follows:





This balance includes debt securities outstanding recognised in the balance sheet at fair value through profit or loss, in

the amount of approximately euro 1 110 126 thousands (31 December 2006: 987 318 thousands) (see Note 27).



NOTE 38 - INVESTMENT CONTRACTS

As at 31 December 2007 and 2006, the liabilities arising from investment contracts are analysed as follows:

31.12.2007 31.12.2006

Fixed rate investment contracts 31 039 31 035Investment contracts in which the financial risk is borne by the policyholder 33 034 16 402

64 073 47 437


In accordance with IFRS 4, the insurance contracts issued by the Group for which there is only a transfer of financial

risk, with no discretionary participating features, are classified as investment contracts.

The movement in the liabilities arising out from the investment contracts with fixed rate is analysed as follows:

31.12.2007 31.12.2006

Balance as at 1 January 31 035 436 119 Change in the scope of consolidation - ( 405 400)Benefits paid ( 1 354) ( 263)Technical interest charged 1 358 579



The movement in the liabilities arising out from the investment contracts in which the financial risk is borne by the

policyholder is analysed as follows:

31.12.2007 31.12.2006

Balance as at 1 January 16 402 1 480 046 Change in the scope of consolidation - (1 468 095)Deposits received 18 661 4 921 Benefits paid ( 2 628) ( 750)Technical interest charged 852 280 Technical result ( 253) -





NOTE 39 - PROVISIONS

As at 31 December 2007 and 2006, the balance of provisions presents the following movements:

Restructuring Otherprovisions provisions Total


Balance as at 1 January 2006 49 662 116 022 165 684

Charge of the year 10 810 47 580 58 390Charge off ( 58 786) ( 5 067) ( 63 853)Write back of the year - ( 5 531) ( 5 531)Change in the scope of consolidation - ( 954) ( 954)Exchange differences and other - ( 2 447) ( 2 447)

Balance as at 31 December 2006 1 686 149 603 151 289

Charge of the year 23 437 12 720 36 157Charge off ( 848) ( 7 644) ( 8 492)Write back of the year ( 74) ( 7 272) ( 7 346)Exchange differences and other - ( 12 183) ( 12 183)

Balance as at 31 December 2007 24 201 135 224 159 425

From the restructuring provision related to the merger of Banco Internacional de Crédito, S.A. with Banco Espírito

Santo, S.A., set up in 2005 in the amount of euro 49.7 million, euro 49.6 million were charged off during the year ended

31 December 2006 and euro 0.1 million during the year ended 31 December 2007.

In May 2006, Crediflash – Sociedade Financeira para Aquisições a Crédito, S.A. was merged into Banco Espírito

Santo, S.A. and it was prepared and approved a restructuring plan, under which was set up a provision in the amount of

euro 10.8 million for the costs associated with the restructuring. As at 31 December 2007, this provision amounts to

euro 1.4 million.

In April 2007, following the merger of BESSA and its subsequent change into a branch of BES, a provision in the

amount of euro 23.4 million was established for the costs associated to this project. As at 31 December 2007, this

provision amounts to euro 22.8 million.



Other provisions amounting to euro 135 224 thousands as at 31 December 2007 (31 December 2006: euro 149 603

thousands) are intended to cover litigations and other contingencies related to the Group’s activities, the more relevant

being as follows:

• Contingencies in connection with the exchange, during 2000, of Banco Boavista Interatlântico shares for

Bradesco shares. The Group has provisions in the amount of approximately euro 38.6 million (31 December 2006:

euro 25.9 million) to cover these contingencies;

• Contingencies in connection with legal processes established following the bankruptcy of clients which might

imply losses for the Group. Provisions in the amount of euro 7.5 million as at 31 December 2007 (31 December

2006: euro 9.8 million) were established to cover these losses;

• Contingencies for ongoing tax processes. To cover these contingencies, the Group maintains provisions of

approximately euro 52.4 million (31 December 2006: euro 51.4 million);

• The remaining balance of approximately euro 36.7 million (31 December 2006: euro 62.5 million), is

intended to cover potential losses in connection with frauds, robbery and on-going judicial cases.



NOTE 40 - INCOME TAX

The Group determined its current income tax liability for 2007 on the basis of a nominal rate of 26.5% (2006: 27.5%),

applicable to the activities undertaken in Portugal that represent a significant portion of its consolidated activities. This

is the nominal rate that is in force at the balance sheet date.

The deferred tax for 2007 and 2006 was determined based on the tax rate of 26.5%, as this tax rate was substantively

enacted, or substantially enacted, at the balance sheet date.

The Portuguese Tax Authorities are entitled to review the annual tax return of the Group subsidiaries domiciled in

Portugal for a period of four years or six years in case there are tax losses brought forward. Hence, it is possible that

some additional taxes may be assessed, mainly as a result of differences in interpretation of the tax law. However, the

Board of Directors of the Group subsidiaries domiciled in Portugal are confident that there will be no further material

tax assessments within the context of the financial statements.

The deferred tax assets and liabilities recognised in the balance sheet in 2007 and 2006 can be analysed as follows:

Assets Liabilities Net31.12.2007 31.12.2006 31.12.2007 31.12.2006 31.12.2007 31.12.2006


Derivative financial instruments 9 667 34 601 ( 73 654) ( 50 402) ( 63 987) ( 15 801)Available-for-sale financial assets 15 140 2 975 ( 271 789) ( 182 228) ( 256 649) ( 179 253)Loans and advances to customers 108 599 68 213 ( 51) ( 75) 108 548 68 138 Property and equipment 1 078 3 504 ( 16 893) ( 16 901) ( 15 815) ( 13 397)Intangible assets 14 871 1 051 - - 14 871 1 051 Investments in subsidiaries and associates 2 361 - ( 28 923) ( 22 648) ( 26 562) ( 22 648)Provisions 25 250 30 367 ( 8 001) ( 3 629) 17 249 26 738 Technical reserves 1 503 2 665 ( 34) ( 34) 1 469 2 631 Pensions 16 111 1 210 ( 40 970) ( 50 308) ( 24 859) ( 49 098)Health care - SAMS 21 812 21 263 - - 21 812 21 263 Long term service benefits 6 470 6 585 - - 6 470 6 585 Other 7 226 1 699 ( 4 027) ( 2 656) 3 199 ( 957)Tax credits resulting from double tax treaties - 19 958 - - - 19 958 Tax losses brought forward 6 112 45 803 - - 6 112 45 803 Deferred tax asset / (liability) 236 200 239 894 ( 444 342) ( 328 881) ( 208 142) ( 88 987)

Deferred tax assets/liabilities offset ( 177 012) ( 149 237) 177 012 149 237 - -

Deferred tax asset / (liability), net (1) 59 188 90 657 ( 267 330) ( 179 644) ( 208 142) ( 88 987)

(1) netted by Group entity



The changes in net deferred taxes were recognised as follows:

31.12.2007 31.12.2006


Balance as at 1 January (Assets / (Liabilities)) ( 88 987) 37 945

Change in the scope of consolidation - ( 33 144)Recognised in the income statement ( 49 907) ( 58 911)Recognised in fair value reserve ( 75 629) ( 42 710)Recognised in other reserves 7 771 5 343 Exchange differences and other ( 1 390) 2 490

Balance as at 31 December (Assets / (Liabilities)) ( 208 142) ( 88 987)

The current and deferred taxes recognised in the income statement and reserves, during 2007 and 2006 is analysed in

the following table. The amounts presented do not consider the effect of minority interest.

31.12.2007 31.12.2006Recognised in (profit) /loss

Recognised in reserves

Recognised in (profit) /loss

Recognised in reserves


Derivative financial instruments 48 169 - 20 885 - Available-for-sale financial assets 1 449 75 629 ( 5 836) 42 845 Loans and advances to customers ( 40 410) - ( 10 791) - Property and equipment 237 - ( 4 241) - Intangible assets ( 12 550) - 4 046 - Investments in subsidiaries and associates 3 914 - 12 267 - Provisions 8 423 - ( 5 338) - Technical reserves 2 464 - 34 - Pensions ( 19 226) ( 5 013) ( 10 738) ( 157)Health care - SAMS ( 549) - ( 809) - Long term service benefits ( 945) - 925 - Exchange differences and other ( 718) ( 2 758) 7 466 ( 5 321)Tax credits resulting from double tax treaties 19 958 - ( 1 246) - Tax losses brought forward 39 691 - 52 287 -

Deferred taxes 49 907 67 858 58 911 37 367

Current taxes 103 100 5 720 145 578 -

153 007 73 578 204 489 37 367

The current tax recognised in reserves includes euro 5 013 thousands related to pensions and euro 372 thousands

related to the share based payments scheme.

The change in the tax rate occurred during 2006, from 27.5% to 26.5%, resulting from the approval of local tax law,

had a negative impact in results and a positive impact in reserves, in 2006, in the amount of euro 3 615 thousand and

euro 7 639 thousand, respectively. These amounts for 2006 are included in the table presented above.



The reconciliation of the income tax rate can be analysed as follows:

31.12.2007 31.12.2006

% Amount % Amount

Profit before minority interest and taxes 806 217 934 128

Statutory tax rate 26.5% 27.5%Income tax calculated based on the statutory tax rate 213 648 256 885

Differences on the subsidiaries statutory tax rates -1.1% ( 8 717) -0.9% ( 8 672)Tax-exempt dividends -2.3% ( 18 425) -1.0% ( 9 717)Tax-exempt profits (off shore) -5.7% ( 46 175) -2.1% ( 19 295)Tax-exempt gains -1.5% ( 12 467) -4.3% ( 40 041)Tax benefits -0.1% ( 553) 0.3% 2 709 Tax on capital gains obtained abroad 0.0% - 1.5% 14 000 Changes in estimates 0.7% 5 787 -0.8% ( 7 089)Changes in tax rates 0.0% - 0.4% 3 615 Unrecognised deferred tax assets related to

tax losses generated in the year 2.7% 21 525 0.3% 2 451 Tax credits resulting from double tax treaties 0.0% ( 163) 0.2% 2 280 Non-taxable share of profit in associates -1.1% ( 8 594) -0.3% ( 2 962)Non deductible costs 0.6% 5 008 1.3% 12 268 Other 0.3% 2 133 -0.2% ( 1 943)

19.0% 153 007 21.9% 204 489


Unrecognised deferred tax assets related to tax losses generated in the year represent the tax effect on tax losses

generated by subsidiaries, in relation to which there is no expectation of future taxable profits against which the losses

can be used.



NOTE 41 - SUBORDINATED DEBT

The balance subordinated debt is analysed as follows:

31.12.2007 31.12.2006

Cash bonds 886 815 969 374 Loans 169 576 193 493 Perpetual bonds 1 048 155 1 086 681 Preference shares 281 211 278 640

2 385 757 2 528 188


The main features of the subordinated debt are presented as follows:

(in thousands of euro)31.12.2007

Issuer DesignationIssue date Amount issued Carrying

amount Interest rate Maturity

BES (Cayman branch) Subordinated loans 2005 213 068 159 319 3.95% 2015BES Finance Subordinated bonds 1999 43 022 34 269 7.80% 2009BES Finance Subordinated bonds 2000 300 000 316 135 6.63% 2010BES Finance Subordinated bonds 2001 400 000 413 901 6.25% 2011BES Finance Subordinated perpetual bonds 2002 500 000 518 126 6.63% 2012 a)BES Finance Subordinated perpetual bonds 2004 500 000 515 528 4.50% 2015 a)Besleasing e Factoring Subordinated bonds 2001 7 000 7 066 5.39% 2011Besleasing e Factoring Subordinated bonds 2004 25 000 25 291 5.36% 2014 b)Besleasing e Factoring Subordinated perpetual bonds 2005 15 000 14 501 6.41% 2015 a)BESI Subordinated bonds 2003 10 000 9 149 5.50% 2033BESI Subordinated bonds 2005 60 000 59 810 3.20% 2015BESI Subordinated bonds 2007 21 134 21 194 1.30% 2014BESV Subordinated loans 2002 9 669 10 257 6.00% -ESFG OVERSEAS Preference shares 1998 127 823 127 823 6.80% 2008ESFG OVERSEAS Preference shares 1998 153 388 153 388 c) 2008

2 385 104 2 385 757

a) Call option dateb) In 2009 a call option can be exercisedc) Libor 3 months + 1.7% In June 1998, ESFG Overseas, a subsidiary for which the voting rights are fully held by ESFG, issued the following

preference shares:

• Euro 127 823 thousands of Non-cumulative Guaranteed Preference Shares, with a preferred dividend

corresponding to the annual interest rate of 6.8% over its nominal value, paid annually on 30 June each year,

beginning on 30 June 1999;

• Euro 153 388 thousands of Floating Rate Non-cumulative Guaranteed Preference Shares, with a preferred

dividend paid quarterly on 31 March, 30 June, 30 September and 31 December each year, corresponding to the

application over its nominal value of 3 months Libor for the euro, plus 1.7%.



During the year ended 31 December 2007, the Group issued subordinated debt securities in the amount of euro 21.1

million (during 2006 the Group did not issue any subordinated debt), and reimbursed euro 129.7 million (31 December

2006: euro 62.4 million).

NOTE 42 - OTHER LIABILITIES

As at 31 December 2007 and 2006, the balance Other liabilities is analysed as follows:

31.12.2007 31.12.2006

CreditorsPublic sector 56 159 38 322Creditors arising out from future contracts 48 527 28 334Sundry debtors

Healthcare benefits (see Note 13) 87 844 83 468Stock-option plan (see Note 13) 2 370 22 015Creditors from transactions with securities 204 522 138 665Suppliers 108 971 87 071Creditors from factoring 13 244 7 425Other sundry creditors 187 516 218 440Creditors from the medical business 27 578 43 051Creditors from the insurance business 9 460 10 930

Creditors arising out of direct insurance operations 22 255 24 033Creditors arising out of reinsurance operations 12 126 16 834

780 572 718 588

Accrued expensesLong term service benefits (see Note 13) 23 625 23 627Other accrued expenses 177 086 173 134

200 711 196 761

Deferred income 19 466 32 023

Other sundry liabilitiesStock exchange transactions pending settlement 466 435 377 675Foreign exchange transactions pending settlement 27 306 22 436Other transactions pending settlement 178 399 132 346

672 140 532 457

1 672 889 1 479 829


The stock exchange transactions pending settlement refer to transactions with securities on behalf of third parties,

recorded on trade date and pending settlement, in accordance with the accounting policy described in Note 2.8.



NOTE 43 - SHARE CAPITAL, SHARE PREMIUM, OTHER EQUITY INSTRUMENTS, FAIR VALUE

RESERVES AND OTHER RESERVES AND RETAINED EARNINGS

Share capital and share premium

As at 31 December 2007, the authorised share capital of Espírito Santo Financial Group, S.A., was represented by 100

million shares with a face value of euro 10 each, from which 57 854 916 shares held by different shareholders were

subscribed and fully paid as described below:

31.12.2007 31.12.2006

Espírito Santo International S.A. 36.08% 36.35%Espírito Santo Irmãos, Sociedade Gestora de Participações Sociais, S.A. 12.95% 12.95%Other 50.97% 50.70%

100.00% 100.00%

% Share capital

As at 22 May 2006, an amount of euro 24.1 million of the euro 200 million 4.75% convertible bonds due 2006 were

converted into shares (see Note 37). This conversion was made at euro 21.2809 and resulted into the issuance of

1 130 861 new shares at euro 10 nominal value and gave rise to a share premium in the amount of euro 12.8 million.

Preference shares

On June 2007, ESFG International Limited (“issuer”), a fully owned subsidiary of ESFG, issued euro 400 million

series A non-cumulative guaranteed step-up preferred securities. These securities, with a face value of euro 50

thousands per security, are listed on the Luxembourg stock exchange.

These preferred securities pay non-cumulative preferred dividends, when, as and if declared by the Board of Directors

of ESFG International Limited, annually in arrear on 6 June in each year commencing on 6 June 2008 up to and

including 6 June 2017 at an annual rate of 5.753% p.a. of the respective face value. Thereafter, the preferred dividends

will be payable, when, as and if declared by the Board of Directors of ESFG International Limited, quarterly in arrears

on 6 March, 6 June, 6 September and 6 December each year, commencing on 6 September 2017 at a rate of 2.130%

above the 3 months Euribor.

The preferred securities are perpetual securities and have no fixed redemption date. However, these securities may be

redeemed, at the option of ESFG International Limited, in whole but not in part, on 6 June 2017 or on any preferred

distribution payment date falling thereafter. Such redemption is subject to the authorization of ESFG and the

Supervisor Authority.



ESFG unconditionally guarantees, on a subordinated basis, the payment of distributions on the preferred securities

when, as and if declared by the Board of Directors of the issuer, and payments on liquidation of the issuer or on

redemption. By virtue of the scope of the guarantee the rights of the holders of these preference securities against

ESFG are equivalent to those which such holders would have had if they had instead held preference shares issued

directly by ESFG whose terms are identical to the terms of the preferred securities and the guarantee taken together.

Considering the features of these preferred securities, they were considered, following IAS 32, as equity instruments of

the Group. On that basis, the total proceeds from the issue, net of expenses incurred, totalling approximately euro

395.5 million, was taken to equity. Additionally, and in accordance with the accounting policy described in Note 2.9,

preferred dividends will be recorded as a deduction to equity when declared.

Other equity instruments

As at 31 December 2007 and 2006, other equity instruments relate to the equity component of the warrants issued by

ESFG as described in Note 37, in the amount of euro 118 570 thousands, net of issue costs amounting of euro 3 399

thousands.

Following the reimbursement and the conversion in 2006 of the convertible bonds as referred to in Note 37, the equity

component recognised in previous years, in the amount of euro 3 188 thousands, was reclassified within equity to

share premium for euro 247 thousands and to other reserves and retained earnings for euro 2 941 thousands.

Legal reserve

Under the Luxembourg law, a minimum of 5% of the profit for the year must be transferred to the legal reserve until

this reserve equals 10% of the issued share capital. This reserve is not available for distribution.

Fair value reserve

The fair value reserve represents the amount of the unrealised gains and losses arising from securities classified into

the available for sale securities category, net of impairment losses recognised in the income statement in the previous

years. The amount of this reserve is shown net of deferred taxes.



During years ended 31 December 2007 and 2006, the fair value reserve, the other reserves and retained earnings, net of

minority interest, can be analysed as follows:

Other reserves and retained earnings

Balance as at 1 January 2006 199 589 ( 51 648) 147 941 25 273 1 497 ( 694 068) ( 667 298)

Transfer to reserves - - - 390 - 59 332 59 722 Dividends on ordinary shares - - - - - ( 5 250) ( 5 250)Dividends on preference shares - - - - - ( 9 721) ( 9 721)Costs related to subsidiaries' capital increase - - - - - ( 3 243) ( 3 243)Conversion and redemption of convertible bonds - - - - - 2 941 2 941 Changes in fair value 13 532 ( 10 469) 3 063 - - - - Exchange differences - - - - ( 4 590) - ( 4 590)Effect of SIBA scheme - - - - - 8 358 8 358

Balance as at 31 December 2006 213 121 ( 62 117) 151 004 25 663 ( 3 093) ( 641 651) ( 619 081)

Transfer to reserves - - - 2 247 - 301 442 303 689 Dividends on ordinary shares - - - - - ( 32 977) ( 32 977)Dividends on preference shares - - - - - ( 9 763) ( 9 763)Changes in fair value 32 071 ( 13 304) 18 767 - - - - Exchange differences - - - - ( 4 047) - ( 4 047)Effect of SIBA scheme - - - - - 728 728

Balance as at 31 December 2007 245 192 ( 75 421) 169 771 27 910 ( 7 140) ( 382 221) ( 361 451)

Total other reserves and

retained earnings


Exchange differences

Fair value reserve

Other reserves and retained

earnings

Deferred tax reserves

Available-for-sale financial

assets

Total fair value reserve Legal reserve

As at 31 December 2007 and 2006, the fair value reserve is analysed as follows:

31.12.2007 31.12.2006

Cost (1) of available-for-sale financial assets 6 046 440 5 126 969 Accumulated impairment recognised ( 67 086) ( 61 448)

Cost (1) of available-for-sale financial assets, net of impairment 5 979 354 5 065 521

Fair value of available-for-sale financial assets 6 901 850 5 759 562

Net unrealised gains recognised in the fair value reserve 922 496 694 041

Deferred taxes ( 253 072) ( 177 443)Net unrealised gains from associates recognised in the fair value reserve ( 11 432) 7 130

Fair value reserve 657 992 523 728 Minority interest ( 488 221) ( 372 724)

169 771 151 004

(1) acquisition cost relating to shares and other variable income securities and amortised cost relating to debt securities.




The movement in the fair value reserve, net of deferred taxes and minority interest, in the years ended 31 December

2007 and 2006 is analysed as follows:

31.12.2007 31.12.2006

Balance as at 1 January 151 004 147 941 Change in the scope of consolidation - ( 8 445)Changes in fair value 93 099 59 297 Disposals during the year ( 66 813) ( 38 903)Impairment recognised during the year 5 785 1 583 Deferred taxes recognised in reserves during the year ( 13 304) ( 10 469)



Changes in the scope of consolidation in 2006 refer to the restructuring of the insurance business, as referred to in

Note 1.



NOTE 44 - MINORITY INTEREST

As at 31 December 2007 and 31 December 2006, minority interest can be analysed as follows:

31.12.2007 31.12.2006

Balance sheetIncome

statement Balance sheetIncome

statement

BES Group 2 972 549 457 114 2 536 874 306 776 Preference shares issued by BES Finance 600 000 - 600 000 - ES Saúde 72 899 ( 22 067) 93 843 ( 4 204)Bespar 398 143 ( 1 704) 408 061 101 118 Other 60 798 15 005 49 211 22 260

4 104 389 448 348 3 687 989 425 950


Preference shares issued by BES Finance correspond to 450 thousand non-voting preference shares, which were issued

and listed in the Luxembourg stock exchange in July 2003. In March 2004, 150 thousand preference shares were

additionally issued forming a single series with the existing preference shares. The face value of these shares is euro

1 000 and are fully booked under minority interest. The total issue (euro 600 000 thousands) is wholly, but not

partially, redeemable at its face value at the option of the issuer, as at 2 July 2014, subject to prior approvals of BES

and the Bank of Portugal.

These preference shares pay an annual non-cumulative preferred dividend, if and when declared by the Board of

Directors of BES Finance, corresponding to an annual rate of 5.58% p.a. on the nominal value. This dividend is paid

on 2 July of each year, beginning 2 July 2004 and ending 2 July 2014. If BES Finance does not redeem these

preference shares on 2 July 2014, the applicable rate will be 3 months Euribor plus 2.65% p.a., with payments on 2

January, 2 April, 2 July and 2 October of each year, if declared by the Board of Directors of BES Finance.

These shares are subordinated to any BES liability, and are “pari passu” in relation to any preference shares that may

come to be issued by the Bank. BES unconditionally guarantees dividends if previously declared by the Board of

Directors of BES Finance and principal repayments related to either of the above mentioned issues.

Considering the features of these preference shares, they were considered, in accordance with IAS 32, as equity

instruments of BES Group being classified as minority interest at ESGF level. On that basis, and in accordance with

the accounting policy described in Note 2.9, the dividends related with these preference shares are recorded as a

deduction to equity when declared.



The movement in minority interest in the years ended 31 December 2007 and 2006 can be analysed as follows:

31.12.2007 31.12.2006

Minority interest as at 1 January 3 687 989 2 228 974 Repurchase of preference shares - 13 315 Changes in the scope of consolidation (1) 17 381 6 810 Increase in share capital of subsidiaries - 1 030 414 Dividends paid ( 157 574) ( 115 063)Dividends paid on preference shares ( 23 717) ( 23 759)Effect of SIBA scheme 17 561 27 454 Changes in fair value reserve 115 497 103 545 Exchange differences and other ( 1 096) ( 9 651)Profit for the year 448 348 425 950

Minority interest as at 31 December 4 104 389 3 687 989


(1) the changes in the scope of consolidation relate to the consolidation of Venture Fund (decrease in participation in 2007) and Concordia (see Note 32), this last entity being fully consolidated from 2007.

NOTE 45 - OFF-BALANCE SHEET ITEMS

As at 31 December 2007 and 2006 and the off-balance sheet items, excluding the financial derivative instruments, can

be analysed as follows:

31.12.2007 31.12.2006

Contingent liabilitiesGuarantees granted 5 631 668 5 014 129Assets given as guarantees 711 451 558 689Open documentary credits 1 082 172 789 451Other 103 121 123 356

7 528 412 6 485 625

CommitmentsRevocable commitments 27 587 481 23 296 421Irrevocable commitments 4 045 936 2 202 803

31 633 417 25 499 224




Guarantees and standby letters of credit are banking operations that do not imply any out-flow by the Group.

Documentary credits are irrevocable commitments, by the Group, in the name of its clients, to pay or order to pay a

certain amount to a supplier of goods or services, within a determined term, against the exhibition of the expedition

documentation of the goods or service provided. The condition of irrevocable consists of the fact that the terms

initially agreed can only be changed or cancelled with the agreement of all parties.

Revocable and irrevocable commitments represent contractual agreements to extend credit to Group’s customers (eg.

unused credit lines). These agreements are, generally, contracted for fixed periods of time or with other expiration

requisites, and usually require the payment of a commission. Substantially, all credit commitments require that clients

maintain certain conditions verified at the time when the credit was granted.

Despite the characteristics of these contingent liabilities and commitments, these operations require a previous

rigorous risk assessment of the client and its business, like any other commercial operation. When necessary, the

Group require that these operations are collateralised. As it is expected that the majority of these operations will

mature without any use of funds, these amounts do not represent necessarily future out-flows.

As at 31 December 2007, the caption assets given as a guarantee include:

• Securities pledged as collateral to the Bank of Portugal for the use of the money transfer system (Sistema de

Pagamento de Grandes Transacções) in the amount of euro 156 987 thousands (31 December 2006: euro 156

584 thousands);

• Securities pledged as collateral to the Portuguese Securities Market Commission (CMVM) in the scope of the

Investors Indemnity System (Sistema de Indemnização aos Investidores) in the amount of euro 53 209

thousands (31 December 2006: euro 51 293 thousands);

• Securities pledged as collateral to the Deposits Guarantee Fund (Fundo de Garantia de Depósitos) in the

amount of euro 62 408 thousands (31 December 2006: euro 61 814 thousands);

• Securities pledged as collateral to the European Investment Bank in the amount of euro 287 000 thousands

(31 December 2006: euro 287 000 thousands).

The above mentioned securities pledged as collateral are classified as available-for-sale financial assets and can be

executed in case the Group does not fulfil its obligations under the terms of the contracts.



Additionally, the off-balance sheet items related to banking services provided are as follows:

31.12.2007 31.12.2006

Securities and other items held for safekeeping on behalf of customers 67 905 088 59 339 734 Assets for collection on behalf of clients 249 453 503 532 Securitised loans under management (servicing) 4 228 346 4 793 720 Discretionary portfolio management 4 844 388 3 587 209

77 227 275 68 224 195


NOTE 46 - ASSETS UNDER MANAGEMENT

In accordance with the legislation in force, the fund management companies and the depositary bank are jointly liable

before the participants of the funds for the nonfulfillment of the obligations assumed under the terms of the Law and

the management regulations of the funds.

As at 31 December 2007 and 2006, the amount of the investment funds managed by the Group is analysed as follows:

31.12.2007 31.12.2006

Securities investment funds 4 966 403 5 540 393Real estate investment funds 1 288 683 1 468 761Pension funds 2 800 088 2 608 495Others 9 330 399 8 019 790

18 385 573 17 637 439




NOTE 47 - RELATED PARTIES TRANSACTIONS

As at 31 December 2007 and 2006, the total amount of the assets and liabilities of the Group with associates or related

companies, is as follows: 31.12.2007 31.12.2006

Assets Liabilities Guarantees Income Expenses Assets Liabilities Guarantees Income Expenses

ESI S.A. 311 949 2 - 18 900 43 342 931 3 460 - 20 888 4 ESR LTD 146 445 4 393 - 8 457 72 165 686 4 792 - 7 572 46 DIRECTORS 16 575 - - - - 8 620 - - - - PORTUGALIA - - - - - 107 025 791 7 836 457 - ES INDUSTRIAL 118 032 1 - 6 271 - 108 463 1 - 3 831 - ES HEALTH 104 730 - - 5 213 - 84 339 - - 4 674 - ESCOM 124 550 245 - 115 - 106 659 290 - 128 - EUROAMERICAN 2 714 1 - 72 - 81 - - 389 - ES IRMAOS - 5 - - - - 7 - - - MARINOTEIS 27 870 436 4 1 - 18 370 411 4 1 - ES TOURISM 27 110 - 412 14 1 503 612 - 22 - HERDADE - - - 58 - 2 013 - - 84 - EUROP ASSISTANCE 68 1 787 7 9 68 12 1 926 13 ( 1 282) 70 GESTAR - - - - 14 - 374 - 1 30 ESPH 204 273 128 - 11 778 3 165 188 567 - 5 640 - GES FINANCE LTD - 7 679 - 839 - - 74 - 770 - ESEGUR 532 259 1 887 1 655 620 7 243 243 2 749 786 414 ESR (P) - 65 - - 723 - 170 - - 758 MULTIPESSOAL 131 17 - 288 334 30 - - 152 277 OBLOG Consulting, S.A. - 605 - - 187 - 1 247 - - 168 TOP ATLANTICO - 18 - - 463 - 1 - - 466 BES SEGUROS 239 7 725 - 10 484 36 - - - - - BES VIDA - Companhia de Seguros, S.A. 58 490 181 855 8 39 086 4 957 14 454 445 508 - 2 633 1 468 Others 153 519 21 494 10 371 8 485 7 227 154 026 15 890 7 828 4 943 4 037

1 270 144 226 825 12 277 112 123 14 761 1 286 643 476 364 18 430 51 689 7 738


Balances and transactions with the above referred entities relate mainly to loans and advances and deposits in the

scope of the banking activity of the Group.

Following the definition of related party established by IAS 24, related parties to ESFG include associates, pension

funds, Board members and entities controlled or significantly influenced by any of these individuals.

During the years ended 31 December 2007 and 2006, and excluding the payment of dividends, no additional

transactions with related parties were undertaken between the Group and its shareholders.

During 2006, the Group sold to the Groups pension fund (i) euro 2 million shares of Bradesco, (ii) euro 3 million

shares of Bradespar (Bradesco Group Holding to non financing activities), (iii) euro 0.4 million shares from Banque

Marocaine du Commerce Extérieur, (iv) part of the residual interest of the mortgage securitization operation (Lusitano

Mortgages No 5), with the nominal amount of euro 3.2 million. These operations generated gains in the amount of

euro 35 million, euro 43.1 million, euro 17.9 million and euro 9.2 million, respectively, which net of minority interest

amounts to euro 10.2 million, euro 12.5 million, euro 5.2 million and euro 2.7 million, respectively.



NOTE 48 - SECURITISATION TRANSACTIONS

As at 31 December 2007, the outstanding securitisation transactions performed by the Group were as follows:

Designation Initial date Original amount Current amount

Lusitano Global CDO No. 1 plc August 2001 1 144 300 128 693 Domestic bonds and eurobonds

Lusitano Mortgages No. 1 plc December 2002 1 000 000 594 142 Mortgage loans (subsidised regime)

Lusitano Mortgages No. 2 plc November 2003 1 000 000 602 546 Mortgage loans (subsidised and general regime)

Lusitano Mortgages No. 3 plc November 2004 1 200 000 847 163 Mortgage loans (general regime)

Lusitano Mortgages No. 4 plc September 2005 1 200 000 950 719 Mortgage loans (general regime)

Lusitano Mortgages No. 5 plc September 2006 1 400 000 1 233 776 Mortgage loans (general regime)

Lusitano SME No. 1 plc October 2006 862 607 800 740 Loans to small and medium entities

Lusitano Mortgages No. 6 plc July 2007 1 122 000 1 037 383 Mortgage loans (general regime)

Lusitano Project Finance No. 1 plc December 2007 1 079 100 1 060 239 Project Loans Finance

Asset securitised




The main features of these transactions, as at 31 December 2007, can be analysed as follows:

Designation Fitch Moody's S&P

Lusitano Global CDO No.1 plc Class A1 350 000 - - December 2015 - - - Class A2 623 800 - - December 2015 AAA Aaa AAAClass B 42 300 9 997 - December 2015 AAA Aa1 AAClass C 25 200 25 200 15 300 December 2015 AA A1 A+Class D 103 000 103 000 25 900 December 2015 - - -

Lusitano Mortgages No.1 plc Class A 915 000 505 975 - December 2035 AAA Aaa AAAClass B 32 500 32 500 - December 2035 AA Aa3 AAClass C 25 000 25 000 - December 2035 A A2 AClass D 22 500 22 500 - December 2035 BBB Baa2 BBBClass E 5 000 5 000 - December 2035 BB Ba1 BBClass F 10 000 10 000 - December 2035 - - -

Lusitano Mortgages No.2 plc Class A 920 000 537 175 8 229 December 2036 AAA Aaa AAAClass B 30 000 30 000 - December 2046 AA Aa3 AAClass C 28 000 28 000 - December 2046 A A3 AClass D 16 000 16 000 - December 2046 BBB Baa3 BBBClass E 6 000 6 000 - December 2046 BBB- Ba1 BBClass F 9 000 9 000 - December 2046 - - -

Lusitano Mortgages No.3 plc Class A 1 140 000 779 944 - December 2047 AAA Aaa AAAClass B 27 000 27 000 - December 2047 AA Aa2 AAClass C 18 600 18 600 - December 2047 A A2 AClass D 14 400 14 400 - December 2047 BBB Baa2 BBBClass E 10 800 10 800 - December 2047 - - -

Lusitano Mortgages No.4 plc Class A 1 134 000 897 426 5 540 December 2048 AAA Aaa AAAClass B 22 800 22 800 - December 2048 AA Aa2 AAClass C 19 200 19 200 - December 2048 A+ A1 A+Class D 24 000 24 000 - December 2048 BBB+ Baa1 BBB+Class E 10 200 10 200 - December 2048 - - -

Lusitano Mortgages No.5 plc Class A 1 323 000 1 156 773 - December 2059 AAA Aaa AAAClass B 26 600 26 600 - December 2059 AA Aa2 AAClass C 22 400 22 400 - December 2059 A+ A1 A+Class D 28 000 28 000 - December 2059 BBB+ Baa1 BBB+Class E 11 900 11 900 - December 2059 - - -

Lusitano SME No.1 plc Class A 759 525 759 525 - December 2028 AAA - AAAClass B 40 974 40 974 - December 2028 AA - AAClass C 34 073 34 073 - December 2028 A+ - A+Class D 28 035 28 035 28 035 December 2028 BBB+ - BBB+Class E 8 626 8 626 8 626 December 2028 - - -

Lusitano Mortgages No.6 plc Class A 943 250 892 749 - March 2060 AAA - AAAClass B 65 450 65 450 - March 2060 AA - AAClass C 41 800 41 800 - March 2060 A+ - A+Class D 17 600 17 600 - March 2060 BBB - BBBClass E 31 900 31 900 - March 2060 BB - BBClass F 22 000 22 000 22 000 March 2060 - - -

Lusitano Project Finance No.1 plc Class A 890 256 890 256 890 256 December 2037 AAA - AAAClass B 35 610 35 610 35 610 December 2037 AA - AAClass C 39 926 39 926 39 926 December 2037 A+ - A+Class D 23 741 23 741 23 741 December 2037 BBB - BBBClass E 11 871 11 871 11 871 December 2037 BB - BBClass F 77 696 77 696 77 696 December 2037 - - -

Maturity date

RatingsSecurities

held by ESFG (par

value)


Notes issuedIssued amount

(par value)Current amount

(par value)

As permitted by IFRS 1, the Group has applied the derecognition requirements of IAS 39 for the transactions entered

into after 1 January 2004. Therefore, the assets derecognised until that date, in accordance with the previous

accounting policies of the Group, were not restated in the balance sheet.



The assets sold in the securitization transactions Lusitano Mortgages No.3, Lusitano Mortgages No. 4 and Lusitano

Mortgages No. 5, performed after 1 January 2004, were derecognised considering that the Group has transferred

substantially all the risks and rewards of ownership.

In accordance with SIC 12, the Group fully consolidates Lusitano SME No. 1 plc and Lusitano Mortgages No 6, plc,

and Lusitano Project Finance No. 1 plc, as it retains the majority of the risks and rewards associated with the activity

of these SPE. Therefore, the respective assets and liabilities are included in the consolidated balance sheet of the

Group. The other securitization vehicles are not included in the consolidated financial statements of the Group as it has

not retained the majority of the risks and rewards of ownership.

The aggregated balance sheet of Lusitano SME No. 1 plc and Lusitano Mortgages No 6, plc, and Lusitano Project

Finance No. 1 plc, as at 31 December 2007 and 2006, are as follows:

31.12.2007 31.12.2006

AssetsDeposits with banks 140 834 94 179 Financial assets held for trading 16 048 - Loans and advances to customers 2 903 355 786 600 Other assets 5 710 -

3 065 947 880 779

LiabilitiesFinancial liabilities held for trading 1 225 - Debt securities issued 3 082 893 887 739 Other liabilities 112 540

3 084 230 888 279

EquityRetained earnings ( 7 500) - Loss for the year ( 10 783) ( 7 500)

( 18 283) ( 7 500)

3 065 947 880 779


Debt securities issued recognised in the consolidated financial statements of the Group can be analysed in Note 37.

The liabilities are secured by the above referred assets, which are included in the consolidated accounts under Note 20

and Note 25, respectively.



NOTE 49 - FAIR VALUE OF FINANCIAL ASSETS AND LIABILITIES

The fair value of financial assets and liabilities, for the Group, is analysed as follows:

Trading Designated at fair value

Held to maturity

Loans and investments

Availablefor-sale

Other at amortised

cost

Carrying Value Fair value

31 December 2007

Cash and deposits at central banks - - - 1 379 460 - - 1 379 460 1 379 460 Deposits with banks - - - 868 776 - - 868 776 868 776 Financial assets held for trading 3 884 313 - - - - - 3 884 313 3 884 313 Financial assets as at fair value through profit or loss - 1 465 236 - - - - 1 465 236 1 465 236 Available-for-sale financial assets - - - - 6 901 850 - 6 901 850 6 901 850 Loans and advances to banks - - - 7 505 860 - - 7 505 860 7 505 860 Loans and advances to customers - - - 44 191 645 - - 44 191 645 44 492 457 Held to maturity investments - - 435 379 - - - 435 379 429 435 Hedging derivatives (assets) 211 890 - - - - - 211 890 211 890

Financial assets 4 096 203 1 465 236 435 379 53 945 741 6 901 850 - 66 844 409 67 139 277

Deposits from central banks - - - - - 1 887 622 1 887 622 1 887 622 Financial liabilities held for trading 1 324 228 - - - - - 1 324 228 1 324 228 Deposits from banks - - - - - 7 723 428 7 723 428 7 723 428 Due to customers - - - - - 23 521 601 23 521 601 23 521 601 Debt securities issued - - - - - 25 209 905 25 209 905 24 764 764 Hedging derivatives (liabilities) 286 941 - - - - - 286 941 286 941 Subordinated debt - - - - - 2 385 757 2 385 757 2 359 541

Financial liabilities 1 611 169 - - - - 60 728 313 62 339 482 61 868 125

31 December 2006

Cash and deposits at central banks - - - 1 096 302 - - 1 096 302 1 096 302 Deposits with banks - - - 777 025 - - 777 025 777 025 Financial assets held for trading 4 232 317 - - - - - 4 232 317 4 232 317 Financial assets as at fair value through profit or loss - 1 953 580 - - - - 1 953 580 1 953 580 Available-for-sale financial assets - - - - 5 759 562 - 5 759 562 5 759 562 Loans and advances to banks - - - 6 907 108 - - 6 907 108 6 907 108 Loans and advances to customers - - - 36 562 166 - - 36 562 166 37 096 622 Held to maturity investments - - 626 237 - - - 626 237 628 101 Hedging derivatives (assets) 178 653 - - - - - 178 653 178 653

Financial assets 4 410 970 1 953 580 626 237 45 342 601 5 759 562 - 58 092 950 58 629 270

Deposits from central banks - - - - - 1 043 175 1 043 175 1 043 175 Financial liabilities held for trading 1 410 159 - - - - - 1 410 159 1 410 159 Deposits from banks - - - - - 7 003 598 7 003 598 7 003 598 Due to customers - - - - - 22 257 135 22 257 135 22 257 135 Debt securities issued - - - - - 19 997 525 19 997 525 20 273 351 Hedging derivatives (liabilities) 238 809 - - - - - 238 809 238 809 Subordinated debt - - - - - 2 528 188 2 528 188 2 534 068

Financial liabilities 1 648 968 - - - - 52 829 621 54 478 589 54 760 295


The methods and assumptions used in estimating the fair values of financial assets and liabilities reflected in the table

above are analysed as follows:

Cash and deposits at central banks, Deposits with banks and Loans and advances to banks

Considering the short term nature of these financial instruments, carrying value is a reasonable estimate of their fair

value.

Loans and advances to customers

The fair value of loans and advances to customers is estimated based on the discount of the expected future cash flows

of capital and interest, assuming that the instalments are paid on the dates that have been contractually defined. The



expected future cash flows of loans with similar credit risk characteristics are estimated collectively. The discount

rates used by the Group are current interest rates used in loans with similar characteristics.

Held-to-maturity investments

The fair values of these financial instruments are based on market prices, when available. For unlisted securities the

fair value is estimated by discounting the expected future cash-flows.

Deposits from central banks and Deposits from banks

Considering the short term nature of these financial instruments, carrying value is a reasonable estimate of their fair

value.

Due to customers

The fair value of these financial instruments is estimated based on the discount of the expected future cash flows of

capital and interest, assuming that the instalments are paid on the dates that have been contractually defined. The

discount rates used by the Group are the current interest rates used in instruments with similar characteristics.

Considering that the applicable interest rates to these instruments are floating interest rates and that the period to

maturity is substantially less than one year, there are no quantifiable differences in their fair value.

Debt securities issued and Subordinated debt

For the instruments where the Group adopts the hedge accounting or fair value option, the fair value is already

reflected in the financial statements. For the remaining instruments, the fair value is based on market prices, when

available. When not available, the Group estimates its fair value by discounting the expected future cash-flows.



NOTE 50 - RISK MANAGEMENT

A qualitative outlook of the risk management at the Group is presented below:

Risk control and risk management provides a support to management, being one of the strategic vectors supporting the

Group’s balanced development.

At the banking subsidiaries in Portugal, risk management is organised into two broad areas – the Global Risk

Department and the Company Monitoring and Credit Recovery Department – having the following objectives:

• to identify, quantify and monitor the different types of risk, progressively applying uniform and consistent

principles and methodologies to all the Group’s entities;

• to help achieve the Group’s value creation objectives by fine-tuning tools to support the structuring of transactions

and by developing internal techniques of performance assessment and core capital optimisation;

• to assume a proactive attitude in the management of events of significant delay or definitive non performance of

contractual obligations.

Credit risk

Credit risk represents the potential financial loss arising from the failure of a borrower or counterparty to honor its

contractual obligation. Credit risk is essentially present in traditional banking products – loans, guarantees granted and

contingent liabilities – and in trading products – swaps, forwards and options (counterparty risk).

Credit portfolio management is an ongoing process that requires the interaction between the various teams responsible

for the risk management during the consecutive stages of the credit process. This approach is complemented by the

continuous introduction of improvements in the methodologies, in the risk assessment and control tools, as well as in

procedures and decision circuits.

The risk profile of ESFG Group’s credit portfolios is analysed on a regular basis by the Risk Committee. In these

meetings the Committee monitors and analyses the risk profile of ESFG Group and respective business units under

four major perspectives: evolution of credit exposures, monitoring of credit losses, capital allocation and consumption

and control of risk adjusted return.



The analysis of the risk exposure by sector of activity, as at 31 December 2007 and 2006, can be analysed as follows:

Financial guarantees issued

Grossamount

Impairment losses

Grossamount

Impairment losses

Grossamount

Impairment losses

Grossamount

Impairment losses

Grossamount

Impairment losses

Agriculture 501 661 ( 12 360) 1 052 - - - - - - - 47 202 Mining 241 823 ( 3 649) 8 781 - 543 - 37 018 - - - 13 172 Food, beverage and tobacco 678 244 ( 18 899) 3 437 - - - 63 368 ( 48) - - 132 201 Textiles 380 019 ( 38 428) 1 435 - - - 24 484 ( 2 238) - - 34 554 Shoes 76 665 ( 6 720) 127 - - - 501 ( 499) - - 3 310 Wood and cork 166 716 ( 11 156) 308 - - - - - - - 8 994 Printing and publishing 221 892 ( 7 103) 6 876 - - - 33 043 ( 10) - - 38 212 Refining and oil 115 156 ( 871) - - 345 - 1 564 ( 10) - - 4 031 Chemicals and rubber 531 766 ( 6 018) 1 400 - - - 35 772 ( 5) - - 38 383 Non-metalic minerals 295 945 ( 9 889) 221 - - - 10 041 - - - 48 059 Metalic products 463 779 ( 15 189) 316 - - - 8 365 - - - 67 549 Production of machinery,

equipment and electric devices 412 981 ( 7 533) 411 - - - 7 762 ( 1 356) - - 154 594 Production of transport material 355 909 ( 6 210) 1 050 - - - 87 691 - - - 100 631 Other transforming industries 295 975 ( 8 283) 2 876 - 898 - 12 593 ( 72) - - 25 693 Electricity, gas and water 862 487 ( 7 609) 57 396 - 49 186 - 352 970 - - - 370 675 Construction 5 534 939 ( 128 726) 18 472 - - - 28 712 ( 1 691) - - 1 508 463 Wholesale and retail 2 895 010 ( 126 666) 13 114 - - - 59 330 ( 852) - - 435 635 Tourism 802 701 ( 18 022) 2 250 - - - 8 783 ( 171) - - 88 710 Transports and communications 1 973 564 ( 43 826) 130 421 - - - 793 516 ( 3) 40 444 - 712 421 Financial activities 2 058 576 ( 24 819) 2 084 925 - 1 168 610 - 2 307 870 ( 14 075) - - 330 589 Real estate activities 5 294 233 ( 95 474) 6 519 - - - 127 451 ( 591) - - 497 082 Services provided to companies 4 019 089 ( 54 369) 11 410 - 143 916 - 988 759 ( 23 810) 394 935 - 599 251 Public services 736 175 ( 11 265) 1 366 949 - - - 874 226 - - - 34 750 Non-profit organisations 2 111 111 ( 52 839) 89 753 - 92 102 - 753 560 ( 19 487) - - 160 887 Mortgage loans 10 143 215 ( 181 985) 192 - - - - - - - - Consumer loans 2 749 351 ( 109 033) - - - - - - - - 92 014 Other 1 308 027 ( 28 423) 74 622 - 9 636 - 351 558 ( 2 168) - - 204 075

TOTAL 45 227 009 (1 035 364) 3 884 313 - 1 465 236 - 6 968 937 ( 67 086) 435 379 - 5 751 137

31.12.2007

Held to maturity investmentsLoans and advances to customers Securities held for tradingFinancial assets at fair value through

profit or loss Available-for-sale financial assets


Financial guarantees issued

Grossamount

Impairment losses

Grossamount

Impairment losses

Grossamount

Impairment losses

Grossamount

Impairment losses

Grossamount

Impairment losses

Agriculture 366 285 ( 12 609) - - - - 4 065 - - - 46 121 Mining 146 818 ( 3 313) 9 689 - 1 246 - 110 035 - - - 8 445 Food, beverage and tobacco 409 267 ( 14 167) 883 - 6 260 - 29 578 ( 34) - - 108 009 Textiles 393 839 ( 22 730) - - - - 26 079 ( 3 422) - - 47 739 Shoes 76 670 ( 5 312) - - - - 499 ( 499) - - 5 080 Wood and cork 156 399 ( 11 531) - - - - - - - - 11 182 Printing and publishing 189 699 ( 6 723) 13 449 - 10 566 - 18 015 - - - 34 043 Refining and oil 75 077 ( 1 510) 3 147 - - - - - - - 252 134 Chemicals and rubber 480 294 ( 5 755) - - 2 - 5 555 ( 68) - - 45 003 Non-metalic minerals 228 129 ( 8 726) 727 - - - 14 401 ( 469) - - 43 698 Metalic products 400 796 ( 10 703) 116 - - - 5 926 ( 6) 762 - 41 789 Production of machinery,

equipment and electric devices 201 757 ( 6 412) - - 5 256 - 20 055 ( 1 445) - - 121 852 Production of transport material 225 358 ( 3 557) 1 430 - - - 91 267 - - - 80 778 Other transforming industries 248 512 ( 10 207) 1 975 - - - 22 380 ( 72) - - 21 669 Electricity, gas and water 614 055 ( 8 433) 20 451 - 8 209 - 351 551 - - - 303 255 Construction 5 032 955 ( 117 100) 1 409 - 3 039 - 34 575 ( 1 691) - - 1 182 082 Wholesale and retail 2 776 677 ( 108 770) 200 - - - 128 220 ( 633) 777 - 469 239 Tourism 672 535 ( 16 422) 14 - - - 1 682 ( 171) - - 91 657 Transports and communications 1 842 283 ( 43 527) 54 788 - 76 831 - 873 827 ( 3) - - 618 214 Financial activities 1 412 740 ( 23 359) 1 211 988 - 1 425 934 - 2 216 560 ( 20 878) 35 344 - 126 018 Real estate activities 4 523 393 ( 82 204) 101 - - - 1 502 ( 387) - - 400 053 Services provided to companies 2 685 031 ( 62 087) 20 321 - 175 894 - 952 766 ( 18 090) - - 600 923 Public services 903 756 ( 14 047) 1 538 485 - - - 416 128 ( 594) 589 354 - 41 317 Non-profit organisations 1 907 053 ( 47 155) 7 367 - 131 139 - 424 463 ( 10 989) - - 154 287 Mortgage loans 8 501 257 ( 137 443) - - - - - - - - - Consumer loans 2 338 979 ( 106 383) - - - - - - - - 63 520 Other 664 576 ( 21 839) 65 232 - 109 204 - 71 881 ( 1 997) - - 96 022

TOTAL 37 474 190 ( 912 024) 2 951 772 - 1 953 580 - 5 821 010 ( 61 448) 626 237 - 5 014 129

31.12.2006

Loans and advances to customers Securities held for tradingFinancial assets at fair value through

profit or loss Available-for-sale financial assets Held to maturity investments


Market risk

Market risk is the possible loss resulting from an adverse change in the value of a financial instrument due to

fluctuations in interest rates, foreign exchange rates or share prices.



The market risk management is integrated with the balance sheet management through the Asset and Liability

Committee (ALCO). This committee is responsible for defining policies for the structuring and composition of the

balance sheet, and for the control of exposures to interest rate, foreign exchange and liquidity risk.

The main measure of market risk is the assessment of potential losses under adverse market conditions, for which the

Value at Risk (VaR) valuation criteria is used. Group's VaR model uses the Monte Carlo simulation, based on a

confidence level of 99% and an investment period of 10 days. Volatilities and correlations are historical, based on an

observation period of one year. As a complement to VaR, stress testing has been developed, allowing to evaluate the

impact of potential losses higher than the ones considered by VaR.

December Average Maximum Minimum December Average Maximum Minimum

Exchange risk 11 13 17 10 15 16 23 12 Interest rate risk 4 8 6 6 5 14 22 6 Shares 21 9 16 2 14 7 6 9 Commodity 2 3 3 3 - - - - Diversification effect ( 14) ( 13) ( 13) ( 7) ( 10) ( 11) ( 16) ( 8)

24 20 29 14 24 26 35 19

(in million of euro)

31/12/2007 31/12/2006

As at 31 December 2007, the Group has a VaR of euro 24 million, for its trading positions and no significant changes

occurred in comparison to 31 December 2006.

Interest rate risk

Following the recommendations of Basel II (Pilar 2) and Instructions n.19/2005, of the Bank of Portugal, ESFG Group

calculates its exposure to interest rate risk based on the methodology of the Bank of International Settlement (BIS)

which requires the classification of non- trading balances and off-balance positions by repricing intervals.

Base amount (1) Up to 3 months 3 to 6 months 6 months to 1

year1 to 5 years

More than 5 years

Base amount (1) Up to 3 months 3 to 6 months 6 months to 1

year1 to 5 years

More than 5 years

AssetsNon-trading debt instruments (2) 59 821 41 430 12 337 2 839 2 128 1 087 50 649 36 477 9 189 2 252 2 182 549 Off balance sheet 3 603 445 486 222 1 228 1 222 1 993 114 95 15 1 346 423

Total 63 424 41 875 12 823 3 061 3 356 2 309 52 642 36 591 9 284 2 267 3 528 972

LiabilitiesNon-trading debt instruments (2) 60 778 46 324 4 377 1 851 3 986 4 240 52 857 39 020 3 570 1 144 4 391 4 732 Off balance sheet 3 697 1 842 1 648 37 105 65 2 108 1 059 1 019 - 15 15

Total 64 475 48 166 6 025 1 888 4 091 4 305 54 965 40 079 4 589 1 144 4 406 4 747

GAP (Assets - Liabilities) ( 1 051) ( 6 291) 6 798 1 173 ( 735) ( 1 996) ( 2 323) ( 3 488) 4 695 1 123 ( 878) ( 3 775)

(1) Corresponding to nominal amount in relation to debt instruments and notional amount in relation to derivatives(2) Corresponding to financial assets and financial liabilities sensitive to interest rate risk.

31.12.2007 31.12.2006




The sensitivity of ESFG Group to interest rate risk, measured in accordance with Instruction no. 19/2005 of the Bank

of Portugal, which requires the calculation of the impact of a parallel shift of 200 basis points in the interest rate curve,

can be analysed as follows:

31.12.2007 31.12.2006

Accumulated impact in equity:Increase of 200 basis points 235 536 Decrease of 200 basis points ( 235) ( 536)


In addition, the model used to monitor the sensitivity of BES Group to interest rate risk is based on the duration model,

and consider parallel and non parallel scenarios.

Similar increase of 100

bp

Similar decrease of 100

bp

Increase of 50 bp after 1 year

Decrease of 50 bp after 1 year

Similar increase of 100

bp

Similar decrease of 100

bp

Increase of 50 bp after 1 year

Decrease of 50 bp after 1 year

At 31 December 108 ( 108) 70 ( 70) 250 ( 250) 138 ( 138)Average of the period 169 ( 169) 98 ( 98) 218 ( 218) 124 ( 124)Maximum for the period 255 ( 255) 138 ( 138) 250 ( 250) 138 ( 138)Minimum for the period 108 ( 108) 70 ( 70) 192 ( 192) 112 ( 112)


31.12.2007 31.12.2006

The following table presents the average balances, interest and interest rates in relation to the Group’s major assets and

liabilities categories, for the years ended 31 December 2007 and 2006.

Average balance of the year

Interest of the period

Average interest rate

Average balance of the year

Interest of the period

Average interest rate

Monetary assets 8 066 238 352 838 4.37% 5 793 119 222 010 3.83%Loans and advances to customers 41 105 324 2 370 192 5.77% 35 221 745 1 730 307 4.91%Securities 7 528 022 539 076 7.16% 6 954 992 515 136 7.41%

Financial Assets 56 699 584 3 262 106 5.75% 47 969 856 2 467 453 5.38%

Monetary liabilities 9 063 349 471 768 5.21% 8 130 205 326 086 4.01%Due to consumers 19 922 205 528 246 2.65% 18 751 409 374 495 2.00%Other 25 841 122 1 277 118 4.94% 15 721 991 843 696 5.37%Differencial resources 1 108 318 - 0.00% 837 979 - 0.00%

Financial Liabilities 55 934 994 2 277 132 4.07% 43 441 584 1 544 277 3.79%

Financial Net 984 974 1.68% 923 176 1.59%


31/12/2007 31/12/2006



Foreign Exchange risk

In relation to foreign exchange risk, the breakdown of assets and liabilities, by currency, as at 31 December 2007 and

2006, is analysed as follows:

31.12.2007

Euros US DollarsSterling Pounds

JapaneseYens

Brazilian Reals

Other foreign

currenciesTotal

Assets by currency

Cash and deposits at central banks 1 235 882 76 630 2 738 20 2 419 61 771 1 379 460 Deposits with banks 790 816 50 447 10 846 2 169 2 634 11 864 868 776 Financial assets held for trading 2 535 309 297 802 130 136 11 748 876 705 32 613 3 884 313 Financial assets at fair value through profit or loss 883 563 562 459 15 253 - 3 744 217 1 465 236 Available-for-sale financial assets 4 704 205 736 035 31 699 2 222 1 255 596 172 093 6 901 850 Loans and advances to banks 2 186 604 3 568 523 1 159 858 69 849 80 520 946 7 505 860 Loans and advances to customers 40 269 052 2 341 103 1 213 433 10 369 26 709 330 979 44 191 645 Held to maturity investments 8 021 409 270 - - - 18 088 435 379 Hedging derivatives 73 408 19 895 65 357 46 758 - 6 472 211 890 Investments in associates 219 547 1 036 - - - - 220 583 Other non-financial assets 2 405 079 778 921 281 734 695 21 432 754 878 4 242 739

Total assets 55 311 486 8 842 121 2 911 054 143 830 2 189 319 1 909 921 71 307 731

Liabilities by currency

Deposits from central banks 1 478 127 237 467 171 044 - - 984 1 887 622 Financial liabilities held for trading 813 206 319 709 155 720 2 963 14 339 18 291 1 324 228 Deposits from banks 2 504 767 3 500 178 1 192 917 244 330 928 194 394 7 723 428 Due to customers 20 683 668 1 972 661 611 527 9 400 - 244 345 23 521 601 Debt securities issued 22 033 012 2 513 016 76 592 - 439 164 148 121 25 209 905 Hedging derivatives 279 113 5 221 - - - 2 607 286 941 Subordinated debt 2 170 214 34 909 - 159 440 21 194 - 2 385 757 Other non-financial liabilities 1 326 846 137 403 835 550 44 430 115 685 1 047 874 3 507 788

Total liabilities 51 288 953 8 720 564 3 043 350 216 477 921 310 1 656 616 65 847 270


31.12.2006

Euros US DollarsSterling Pounds

JapaneseYens

Brazilian Reals

Other foreign

currenciesTotal

Assets

Cash and deposits at central banks 996 628 90 870 3 460 18 901 4 425 1 096 302 Deposits with banks 689 247 45 210 4 080 30 778 1 456 6 254 777 025 Financial assets held for trading 2 946 578 486 604 112 886 19 508 627 120 18 570 4 211 266 Financial assets at fair value through profit or loss 1 532 074 404 232 17 274 - - - 1 953 580 Available-for-sale financial assets 4 135 349 668 915 10 532 2 465 907 793 34 508 5 759 562 Loans and advances to banks 2 665 657 3 194 580 630 665 61 252 22 519 332 435 6 907 108 Loans and advances to customers 33 713 010 1 670 590 1 130 153 10 310 - 38 103 36 562 166 Held to maturity investments 8 021 598 762 - - - 19 454 626 237 Derivatives for risk management purposes 54 202 8 465 65 551 63 997 - 7 489 199 704 Investments in associates 214 653 1 036 - - - - 215 689 Other non-financial assets 797 973 1 416 441 1 284 755 17 707 20 240 26 211 3 563 327

Total assets 47 753 392 8 585 705 3 259 356 206 035 1 580 029 487 449 61 871 966

Liabilities

Deposits from central banks 125 891 811 657 104 745 - - 882 1 043 175 Financial liabilities held for trading 959 756 290 485 85 496 4 424 10 011 35 839 1 386 011 Deposits from banks 3 094 824 2 733 129 763 802 83 207 219 344 109 292 7 003 598 Due to customers 19 287 632 1 827 310 717 216 43 352 317 952 63 673 22 257 135 Debt securities issued 15 917 313 2 148 824 1 894 446 - - 36 942 19 997 525 Derivatives for risk management purposes 251 267 8 609 - - - 3 081 262 957 Subordinated debt 2 268 364 76 469 - 183 355 - - 2 528 188 Other non-financial liabilities 2 153 594 429 655 93 641 ( 176 672) 34 131 388 051 2 922 400

Total liabilities 44 058 641 8 326 138 3 659 346 137 666 581 438 637 760 57 400 989




Liquidity risk

Liquidity risk derives from the potential incapacity to fund assets while satisfying commitments on due dates and from

potential difficulties in liquidating positions in portfolio without incurring in excessive losses.

Liquidity management is centralized at the Financial Department. The purpose of liquidity management is to maintain

adequate liquidity levels to meet short, medium and long term funding needs. The overall exposure to liquidity risk is

assessed through reports that identify negative mismatches allowing their hedging on a permanent and dynamic basis.

Liquidity risk is analysed under a two-fold perspective, i.e., it considers both the internal perspective and the

regulatory perspective, which is calculated in accordance with Bank of Portugal rules.

31.12.2006

Treasury GAP (million of euro) (1) ( 2 061) ( 514)Treasury GAP / Net assets (%) 3.13% 0.90%Liquidity ratio (%) (2) 91 97

(1) Treasury gap - immediate liquidity and short term interbank loans deducted to interbank debt up to one year. Considering the financing needs, the treasury gap indicates liquidity levels over what the Group needs.

(2) Liquidity ratio calculated in accordance with the instruction no 1/2000 of Bank of Portugal.

31.12.2007

Operational risk

Operational risk represents the risk of losses resulting from failures in internal procedures, people behaviors,

information systems and external events.

To manage operational risk, it was developed and implemented a system that standardizes, systematizes and regulates

the frequency of actions with an objective of identification, monitoring, controlling and mitigation of risk. The system

is supported at organizational level by a unit within the Global Risk Department, exclusively dedicated to this task,

and by representatives designated by each of the relevant departments and subsidiaries.



Capital Management and Solvency Ratio Capital management main goals are (i) to allow adequate growth of activities through the creation of enough capital to

support the increase of assets, (ii) fulfillment of the minimum requirements defined by the supervision authorities in

terms of capital adequacy and (iii) to ensure the fulfillment of the Groups strategic goals in capital adequacy matters.

The definition of the strategy in terms of capital adequacy is made by the Executive Commission and is integrated in

the global goals of the Group.

The capital metrics are incorporated in the main management control instruments, and its monitoring is made in a

permanent way, which allows a quick response in order to fulfil the defined goals.

In prudential matters, the Group is subject to Bank of Portugal supervision that, under the capital adequacy Directive

from the CE, establishes the rules to be attended by the institutions under its supervision. These rules determine a

minimum solvency ratio in relation to the requirements of the assumed risks that institutions have to fulfil.

The capital elements of ESFG Group are divided into: Basic Own Funds, Complementary Own Funds and Deductions,

as follows:

• Basic Own Funds (BOF): This category includes the share capital, the eligible reserves, the retained earnings of

the year, minority interest and preference shares, and is deducted by the book value of goodwill, intangible assets

and actuarial losses. Additionally, in 2007, 50% of the book value of equity investments in banking and insurance

entities, exceeding 10% of the respective share capital, is also deducted.

• Complementary Own Funds (COF): Essentially incorporates the subordinated eligible debt and 45% of the

positive fair value reserve and is deducted by 50% of the book value of equity investments in banking and

insurance entities.

• Deductions (D): Refers mainly to the amortisation for regulatory purposes, of assets acquired in exchange for

loans.

Additionally, there are several rules that limit the capital basis of the Bank. The prudential rules determine that the

COF cannot exceed the BOF. Also, some components of the COF (Lower Tier II) cannot exceed 50% of the BOF.

In the new capital accord implementation process, Basel II, the Group established the goal to use the approach of

internally based models (Internal Rates Based Method – IRB – to credit risk and Standardized Approach – TSA- to

operational risk).

In April 2007, Bank of Portugal issued Regulation 4/2007, which changed the rules to determine capital requirements.

This notice changed the treatment of the equity investments in banking and insurance entities that began to be



deducted in 50% to the BOF and 50% to the COF. Previously, these investments were included in the deductions made

to the total capital requirements.

The impact on regulatory capital of adopting IFRS in January 2005 is being recognised on a strait line basis (in

accordance with Regulation n. 2/2005, n. 4/2005 and n. 12/2005 from Bank of Portugal):

• Until 2012 – in what relates to the changes in the mortality tables (31 December 2007, euro 70 million still to

incorporate);

• Until 2011 - in what relates to the recognition of post employment health-care benefits (31 December 2007, euro

49 million still to incorporate);

• Until 2009 - in what relates to the impact of pensions (31 December 2007, euro 33 million still to incorporate);

• Until 2007 – regarding the remaining situations (totally incorporated on 31 December 2007).

As at 2007 and 2006, the main movements occurred in Basic Own Funds (Tier I) are as follows:

31.12.2007 31.12.2006


Share capital increase - 24 Minority interest increase 215 1 042 Retained profit for the year 167 284 Changes on actuarial losses 157 212 Goodwill 46 ( 169)Recognition of the impact of adopting IFRS ( 122) ( 215)Variation on preference shares recognized as Tier I ( 76) 250 Investments in banking and insurance entities ( 154) - Other effects ( 157) 91


(in millions of euro)



The capital adequacy of ESFG Group as at 31 December 2007 and 31 December 2006 is presented as follows:

31.12.2007 31.12.2006

A - Capital Requirements

Share Capital, Issue Premium and Treasury stock 832 832 Net Income, Legal and statutory Reserves, and Retained earnings ( 194) ( 333)Elegible minority Interests in applicable legislation 2 825 2 610 Intangible Assets, actuarial losses and Goodwill ( 243) ( 216)

A1 - Basic own funds excluding preference shares (Core Tier I) (A1) 3 220 2 893

Preference Shares up to the Tier 1 limit 805 881 Deductions of investments in Financial institutions, insurance companies and others ( 175) -

A2 - Basic own funds (Tier I) (A2) 3 850 3 774

Preference Shares above the Tier 1 limit 472 - Positive Fair Value Reserves and Others (45%) 443 308 Eligible Subordinated Debt 1 834 1 992 Deductions of investments in Financial institutions, insurance companies and others ( 175) ( 15)

Complementary own funds (Tier II) 2 574 2 285

Deductions ( 642) ( 1 006)

Elegible own funds (A3) 5 782 5 053

B - Similar Risk Assets

Calculated according Notice 1/93 (Credit Portfolio) 50 106 42 804 Calculated according Notice 7/96 (Trading Portfolio) 4 434 3 297

Similar Risk Assets Total (B) 54 540 46 101

C - Prudential Ratios

Core Tier 1 (A1 / B) 5.9% 6.3%Tier 1 (A2 / B) 7.1% 8.2%

Solvency Ratio (A3 / B) 10.6% 11.0%


Eligible own funds include euro 281.2 million preference shares issued by ESFG Overseas (See Note 41), which are

redeemable at the option of the issuer, in whole or in part, on any distribution date falling in or after June 2008. It is

the intention of the issuer to redeem those preference shares in June 2008 and therefore eligible own funds decrease

accordingly.

Insurance risk

Insurance risk – inherent risk related to the selling of insurance contracts, underwriting policy, pricing, reserving,

claims management and reinsurance arrangements.

Pricing is based on actuarial methodologies, revised on a regular basis in order to ensure a rigorous underwriting

policy and risk acceptance.

Underwriting policy is monitored centrally.



The technical reserves, specially the claims reserves, are monitored on a monthly basis. The adequacy of the insurance

liabilities is reviewed on a regular basis. New valuation models for both direct and reinsurance reserves are being

developed internally by the Group’s Insurance companies based on stochastic methodologies.

The table below reflects the claims reserves development, excluding pensioners arising out from workers

compensation claims:

2000 2001 2002 2003 2004 2005 2006 2007

Initial estimate of claims liabilities 276 399 299 101 302 579 305 512 328 733 363 800 375 014 398 894

Cumulative paymentsOne year later 106 206 105 824 108 328 106 724 91 174 105 504 100 096 - Two years later 147 272 157 869 162 811 149 681 141 526 157 627Three year later 185 976 197 820 194 772 185 956 176 790Four years later 215 921 222 164 223 751 213 367Five year later 234 821 246 876 245 653Six years later 252 471 264 938Seven years later 267 296

Re-estimated claims liabilitiesOne year later 277 599 303 180 313 397 327 363 338 836 354 407 366 449Two years later 283 207 306 243 325 422 334 297 334 918 356 147Three year later 283 966 314 450 331 367 332 408 333 196Four years later 303 872 317 872 331 221 331 075Five year later 306 526 318 261 329 943Six years later 306 563 318 259Seven years later 306 112

Cumulative surplus/(deficit) ( 29 713) ( 19 158) ( 27 364) ( 25 563) ( 4 463) 7 653 8 565 -

Longevity risk covers the uncertainty in the ultimate loss due to policyholders living longer than expected and can

arise for example, in annuity portfolios within the life insurance and workmen’s compensation portfolios within non-

life insurance.

Longevity risk is managed through pricing, underwriting policy and by regularly reviewing the mortality tables used

for pricing and establishing reserves. Where longevity is found to be improving faster than assumed in the mortality

tables additional reserves are established and mortality tables are updated.

Any adjustments resulting from changes in reserves estimates are reflected in current results of operations. However,

because the establishment of claims reserves is an inherently uncertain process, there can be no assurance that ultimate

losses will not exceed existing claims reserves, and this risk is covered by the additional solvency capital.



Regarding life line of business, the main actuarial assumptions defined in each contract, are as follows:

Mortality table Technical rate

Retirement saving plan and SavingsUntil December 1997 GKM 80 4%From January 1998 until June 1999 GKM 80 3.25%From 1 July 1999 until February 2003 GKM 80 2.25% and 3%From 1 March 2003 until December 2003 GKM 80 2.75%

Life insuranceAnnuities

Until June. 2002 TV 73/77 4%From 1 July 2002 until December 2003 TV 73/77 3%From 1 January 2004 until September 2006 GKF 95 3%After 1 September 2006 GKF 95 3%

Other life insurance TV 73/77 4%

Death insuranceUntil December 2004 GKM 80 4%

EndowmentUntil December 2004 GKM 80 4%After 1 January 2005 GKM 80 3.25%

After 1 January 2004 GKM 80 2.75% and 2.25%

After 1 January 2005 GKM 80 4%

For liability adequacy test purposes of the life business the mortality assumptions are based on best estimates derived

from portfolio analysis. Future cash flows are evaluated and discounted at risk free rate.

The main mortality assumptions are as follows:

Mortality Table

Annuities GRM 95Savings and other contracts 40% GKM 80

For liability adequacy test purposes, the main actuarial assumptions used in the calculation of the present value of

Workmen’s Compensation mathematical reserves are the follows:

Mortality table GKF 80Discount rate 4.66%Management fees 3%



The maximum risk exposure per event after reinsurance and after deductibles per segment and product line is

summarised below:

Lines of business Type of reinsurance Range of cover Net retention

Life Mortgage Quota share + surplus 1 000 75Life Group Surplus 1 000 75Life Individual Loans Surplus 1 000 75Life - Catastrophe XOL 10 000 1 000Personal accident XOL 14 700 300Workmens compensation XOL 39 500 500Motor (third party liability) XOL 49 250 750Motor (own damages) XOL 4 250 750Bonds Quota parte 400 20%Bonds (fidelity) Quota parte 200 20%Engineering Quota share + surplus 13 750 1 250Fire Surplus 25 000 1 000Fire (simple risks) Surplus 20 000 1 000Fire - Catastrophe XOL 160 000 10 000Fire XOL 8 000 2 000General third party liability XOL 4 850 150Marine hull Surplus 3 800 200Marine hull - fleets Surplus 5 700 300Marine cargo Surplus 3 450 150Marine cargo and hull XOL 1 560 390Health Quota share - 75%Assistance Quota share - -


NOTE 51 - RECENTLY ISSUED PRONOUNCEMENTS

The new standards and interpretations that have been issued, but that are not yet effective and that the Group has not

yet applied, can be analysed as follows:

IFRS 2 (amendment) – Share-based payments: vesting conditions

The International Accounting Standards Board (IASB) issued in January 2008 an amendment to IFRS 2, which will be

effective from 1 January 2009.

The objective of the amendment to IFRS 2 was to clarify that (i) vesting conditions are service conditions and

performance conditions only and that (ii) all cancellations, whether by the entity or by other parties, should receive the

same accounting treatment.

The Group does not expect any material impact from the adoption of this standard.



IFRS 3 (revised) – Business combinations and IAS 27 (amendment) Consolidated and Separate Financial

Statements

The International Accounting Standards Board (IASB) issued in January 2008, IFRS 3 (revised) Business

Combination and an amendment to IAS 27 Consolidated and Separate Financial Statements.

The main changes the revised IFRS 3 and amended IAS 27 will make to existing requirements or practice relate to (i)

partial acquisitions, whereby non-controlling interests (previously named minority interest) can be measured either at

fair value (implying full goodwill recognition against non-controlling interests) or at their proportionate interest in the

fair value of the net identifiable assets acquired (which is the original IFRS 3 requirement); (ii) step acquisitions

whereby, upon acquisition of a subsidiary and in determining the resulting goodwill, any investment in the business

held before the acquisition is measured at fair value against the profit and loss account; (iii) acquisition-related costs,

which must generally, be recognised as expenses (rather than included in goodwill); (iv) contingent consideration

which must be recognised and measured at fair value at the acquisition date, subsequent changes in fair value being

recognised in profit or loss (rather than by adjusting goodwill); and (v) changes in a parent’s ownership interest in a

subsidiary that do not result in the loss of control which are required to be accounted for as equity transactions.

Additionally, IAS 27 was amended to require that an entity attributes a share of the accumulated loss of a subsidiary to

the non-controlling interests, even if this results in the non-controlling interests having a deficit balance, and to specify

that, upon losing control of a subsidiary, an entity measures any non-controlling interest retained in the former

subsidiary at its fair value, determined at the date the control is lost.

The IFRS 3 (revised) and the amendment to IAS 27 will be effective from 1 July 2009. The Group is evaluating the

impact of adopting both rules.

IFRS 8 – Operating Segments

The International Accounting Standards Board (IASB) has issued on 30 November 2006 the IFRS 8 Operational

segments, which was endorsed by the European Commission on 21 November 2007.

The IFRS 8 Operational segments sets out requirements for disclosures of information about an entity’s operating

segments. This standard specifies how an entity should disclose its information in the annual financial statements and,

as a consequential amendment to IAS 34 Interim Financial Reporting, regarding the information to be disclosed in the

interim financial reporting. Each entity should also provide a description of the segmental information disclosed

namely profit or loss and of segment assets, as well as a brief description of how the segmental information is

produced.

This IFRS is mandatory applicable for periods beginning on 1 January 2009.



The Group is evaluating the impact of adopting this standard.

IAS 1 (amended) – Presentation of Financial Statements

The International Accounting Standards Board (IASB) has issued in September 2007, IAS 1 (amendment) Presentation

of Financial Statements, which is applicable from 1 January 2009.

IAS 1 (amended) requires financial information to be presented in the financial statements based on the nature of the

underlying transactions and introduces the statement of ‘comprehensive income’.

The Board’s objectives in this project are to present information in ways that improve the ability of investors,

creditors, and other financial statement users to distinguish between transactions with shareholders, in their capacity as

shareholders (e.g. dividends, treasury shares), and transactions with third parties, which will be summarised in a

statement of ‘comprehensive income’.

IAS 1 (amended) will impact the way the financial statements are presented. The Group is at the moment analysing the

extent of the necessary modifications to the current presentation of its consolidated financial statements.

IAS 23 (amendment) – Borrowing costs

The International Accounting Standards Board (IASB) has issued in March 2007 an amendment to IAS 23 Borrowing

costs, which is applicable from 1 January 2009.

This standard requires the capitalization of borrowing costs that are directly attributable to the acquisition, production

or construction of a qualifying asset, as part of the cost of that asset. As a result, the option to recognise such

borrowing costs as an expense in the period which they arise was eliminated.

A qualifying asset is an asset that necessarily takes a substantial period of time to get ready for its intended use or sale.

The Group does not expect any material impact from the adoption of the amended IAS 23.

Amendment to IAS 32 Financial Instruments: Presentation – Puttable financial instruments and obligations

arising on liquidation

International Accounting Standards Board (IASB) issued, in February 2008, an amendment to IAS 32 Financial

Instruments: Presentation - Puttable financial instruments and obligations arising on liquidation effective from 1

January 2009.



This amendment addresses the balance sheet classification of puttable financial instruments and obligations arising

only on liquidation. Under the current requirements of IAS 32, if an issuer can be required to pay cash or another

financial asset in return for redeeming or repurchasing a financial instrument, the instrument is classified as a financial

liability. As a result of the amendments, some financial instruments that currently meet the definition of a financial

liability will be classified as equity because they represent the last residual interest in the net assets of the entity.

The Board also amended IAS 1 Presentation of Financial Statements to add new disclosure requirements relating to

puttable instruments and obligations arising on liquidation.

The Group does not expect any material impact from the adoption of this amendment.



IFRIC 11 – IFRS 2 – Group and Treasury Share transactions

The International Financial Reporting Interpretations Committee (IFRIC) has issued on 2 November 2006 an

Interpretation – IFRIC 11 – IFRS 2 Group and Treasury Share Transactions.

IFRIC 11 clarifies in what conditions a share based payment with treasury shares or shares of another group company

should be classified in the subsidiaries financial statements as an equity settled or cash settled share based payment.

This IFRIC is mandatory and applicable for the Group for annual periods beginning on or after 1 January 2008.

The Group is evaluating the impact of adopting this interpretation on the financial statements of its subsidiaries.

IFRIC 12 – Service Concession Arrangements

The IFRIC 12 Service Concession Arrangements will be effective from 1 January 2008.

The IFRIC 12 applies to public-to-private service concession arrangements. This interpretation will be applicable only

when a) the grantor controls or regulates what services the operator must provide and b) the grantor controls any

significant residual interest in the infrastructure at the end of the term of the arrangement.

The Group does not expect any impact from the adoption of this interpretation.

IFRIC 13 – Customer Loyalty Programmes

The IFRIC 13 Customer Loyalty Programmes was issued on 28 June 2007 and will be effective from 1 July 2008. As a

result, it will only be relevant for the Group from 1 January 2009.

This interpretation addresses how companies, that grant their customers loyalty award credits (often called ‘points’)

when buying goods or services, should account for their obligation to provide free or discounted goods or services if

and when the customers redeem the points.

The Group is evaluating the impact of adopting this interpretation in the financial statements.

IFRIC 14 – IAS 19 – The limit on a defined benefit asset, minimum funding requirements and their interpretation

IFRIC 14 – IAS 19 – The limit on a defined benefit asset, minimum funding requirements and their interpretation is

applicable for annual periods beginning on or after 1 January 2008.



This interpretation addresses how entities should determine the limit placed by paragraph 58 of IAS 19 Employee

Benefits on the amount of a surplus in a pension plan they can recognise as an asset and discusses how a minimum

funding requirement affects that limit.

The Group is evaluating the impact of adopting this interpretation on the consolidated financial statements.

NOTE 52 - SUBSEQUENT EVENTS

Tranquilidade has been recently authorized by the Portuguese insurance authorities to launch a direct channel

operation. This operation, denominated LOGO, started its activities in early 2008.

At January 2008, BES Investimento acquired, through is associate ESSI Sociedade Gestora de Participações Sociais,

S.A., 6.96% of the share capital and voting rights in the British company Evolution Group Plc listed in the London

Stock Exchange, through an investment of approximately euro 35.5 million.

Banco Espírito Santo and Espírito Santo Financial Group established an agreement for the acquisition of 5% of the

share capital of SAXO Bank A/S, 2.5% each, amounting to euro 63 million in total. This investment includes an option

for the acquisition of an additional 5% of the capital. The agreement includes a strategic partnership between Banco

BEST and SAXO BANK for, among other initiatives, integrated assets management and the joint approach to foreign

markets and development of the already existing partnership with Banco BEST in Portugal.

On 14 January 2008, BES Group issued 25 000 covered bonds in the amount of euro 1 250 million due within three

years.

In February 2008, the Group issued 10 000 exchangeable bonds into Banco Bradesco ordinary shares, in the amount of

USD 1 000 million due within three years.

In March 2008, ESFG entered into an agreement with PT Comunicações, SA (“PTC”) for the acquisition of the 34.0%

of the share capital of BEST – Banco Electrónico de Serviço Total, SA (“BEST”) for a global amount of euro 16.0

milion. With this acquisition the Group will gain the full control of BEST.

The acquisition is conditional on approval by the Bank of Portugal which must be received by 30 August 2008 if the

transaction is to be completed.

Documents

ESPÍRITO SANTO FINANCIAL GROUP SA CONSOLIDATED FINANCIAL ...web3.cmvm.pt/sdi2004/emitentes/docs/PC18570.pdf · ESPÍRITO SANTO FINANCIAL GROUP SA, LUXEMBOURG Report of the Réviseur