Vol 1 Miolo 05 ing soctip - ind.millenniumbcp.ptind.millenniumbcp.pt/.../RelatorioContas/Annual_Rep2005_I_3.pdf · Vol_1_Miolo_05_ing_soctip 21/06/2006 ... to 4,771 million euros

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European BankingOverseas Banking

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Business Areas Abroad

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European Banking

The European Banking business area is primarily composed of operations in the priority markets of Poland and Greece, where the Group is present through Bank Millennium and Novabank,respectively.The Group also runs operations in Turkey, which in spite of not having the status of “domestic market”, provide an attractive option in terms of growth, given the expectations of European integration and economic convergence in the long term. Banque BCP, directed at Customers of Portuguese origin resident in France and Luxembourg, signed a partnershipagreement with Caisse Nationale des Caisses d’Épargne, which involved the sale of a majority stake in Banque BCP.

The net contribution from European Banking totalled 51.1 million euros in 2005, which favourablycompares with a loss of 17.2 million euros in 2004. Higher income, in particular higher net interestincome and commissions, and operating costs control, led to a significant increase of return on allocated capital to 9.6% and improvement in the cost-to-income ratio to 80.1% in 2005.

2005 2004 Change

Net interest income 149.1 86.6 72.2%

Other income (net) 209.2 176.2 18.7%

358.3 262.8 36.3%

Operating costs 286.9 270.0 6.2%

Provisions 6.5 1.4 -

Contribution before income taxes 64.9 (8.6) -

Income taxes and minority interests 13.8 8.6 60.5%

Contribution (net) 51.1 (17.2) -

Profit and loss account (1) Millions of euros, except percentages

2005 2004 Change

Allocated capital 530.4 563.6 -5.9%

Return on allocated capital 9.6% -3.1% -

Risk weighted assets 4,985 4,003 24.5%

Cost-to-income ratio 80.1% 102.7% -

Loans to customers 4,771 3,021 57.9%

Total customers’ funds 7,248 5,493 32.0%

Summary of indicators (1) Millions of euros, except percentages

(1) Excluding Banque BCP (France and Luxembourg).

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Business volumes grew significantly from previous year levels, benefiting mainly from continuousinnovation of product and service offering in Poland and Greece. Loans to customers grew 57.9%to 4,771 million euros at the end of December 2005 and total customers’ funds rose 32.0% to 7,248 million euros in 2005.

European Banking

Customers’ funds +32%

Loans +58%

Strong reduction of cost-to-income(from 102.7% to 80.1%)

Customers’ Funds +24%

Loans +49%

ROE– Bank Millennium 14-16% (2007)– NovaBank 15% (2007)

Highlights 2005 Goals 2006

Evolution of Bank Millennium and NovaBank

Poland

Bank Millennium is a universal bank directed at medium and high net worth individuals,with a specialized approach to medium companies and small businesses segments.

The Polish economy grew by around 3.5% in 2005, slightly below the growth rate of the previousyear.The unemployment rate remained high, having registered a small improvement in the secondquarter, while inflation rate remained below 2%, allowing a sharp decrease in short term interestrates (about 200 basis points). Strong economic growth, on the one hand, and the decrease in interest rates, on the other hand, contributed towards dynamic capital markets.

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1998

One year marketassessmentand competitivereview

Partnership withInteramerican

2001 2002 2003 2004 2005

BCP launchesMillenniumin Poland –22 branchesopened on thesame day

1999

Millennium with+100 branchesin 35 cities

BCP acquiresa 15% stakein BBG –226 branches,4,600 employees

Creationof specializednetworks –Millennium Biznesand Prestige

Starts operationsopening45 brancheson September21 (worldwiderecord)

Gains brandawareness above95%

92 branches

+175 thousandcustomers

BCP’ stakeincreasesto 50%

New segmentedBUs

Centralizationof risk decisions

Launches privateand businessbanking withinnovativeconcepts

New brand name

Centralizationof back office

New IT platform

Integrates branchnetworks BBG,Millennium

Sale of non-coreassets

Achievesbreakevenin 4Q 04

109 branches


122 branches


Announcesnetworkexpansion plan

First profitable fullyear, 217 mn netprofits, 292 mnoperating income

338 branches


Announces branchexpansion plan

Achieves2365 mn operatingincome, 2141 mnnet profit

20052000 2002 2003 20041999

Bank Millennium

NovaBank

Figures presented according to IFRS


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Due to the decrease in interest rates, competition in the banking sector remained fierce,significantly affecting the intermediation margin.Total credit saw sustained growth, stimulated by the expansion of mortgage loans.The growth rate of deposits almost doubled when comparedto the previous year, with a strong contribution from corporate deposits. In 2005, the consolidationprocess of the banking sector began, with the announced merger between the second and thirdPolish banks.

The evolution of Bank Millennium’s activity was based on the three pillars that support its mediumterm strategy: to increase in scale and improve the profitability of the retail business, throughorganic growth; to improve sales and the offer to the corporate sector, in order to improve results;and exploit economies of scope and operating synergies with Millennium bcp, with the objective of capitalizing on the benefits of belonging to a multi-domestic financial group. Following a previousperiod devoted to commercial and operational reorganization, as well as the reinforcement of its balance sheet, Bank Millennium prepared itself to grow and improve performance in 2005,confirming its capacity to achieve the main goals established for the year under review.

The profitability and efficiency of Bank Millennium improved significantly, performing in line with the financial targets set until the end of 2007.The maintenance of strict cost control and theimprovement in asset quality also contributed towards a positive performance during the year.The main business indicators improved significantly in 2005, especially in the core areas,resulting in the reinforcement of Bank Millennium’s competitive positioning.The recognition of the Millennium brand also improved significantly as a result of frequent and systematiccommunication actions.

In the retail business, the activity of Bank Millennium focused on increasing commercial efficiencythrough the industrialization of sales, the continuation of the acquisition of market power in mortgage credit, the launch of a similar business for credit cards and developing a specialstrategy to target Customers with significant financial assets. Growth in mutual funds was alsodefined as a priority, seeking to promote the convergence of Bank Millennium’s market share in this area towards its natural value. In the corporate area, Bank Millennium sought to increaseincome by exploring its current Customer base through the sale of products with added value,as well as by accelerating the acquisition of new Customers. Considerable efforts were undertaken to maintain a strong market share in equipment leasing.

The year under review was characterized by the successful implementation of the concept of retailsales industrialization, whose main objective was to significantly improve the cross-selling ratios.Several campaigns were undertaken with the objective of placing specific products directed attarget Customers, using the sales potential of the branches, complemented by telesales. As a resultof these efforts, the cross-selling ratio increased from 2.4 to about 2.7 products per Customer in2005. Consequently, Bank Millennium reinforced the loyalty of its Customers and, at the same time,increased commissions, in a context of narrowing net interest margin.These results, obtained in a period when the number of Customers rose dramatically, benefited from the offer’s fine-tuning,with the launch of innovative and attractive products, as well as the increased awareness of the Millenium brand.


20052004 20052004 20052004 20052004

160

620

68

124

80

156

1,840

2,480

Strong loan growthfuelled by mortgages

New mortgagedisbursements

1 million

Total netloans portfolio

1 million

Consumer loan fuelledby credit cards

Number ofcredit cards

million

Consumer loans(gross)1 million

+290%

10.8% marketshare in

new production

+35%

+82%+86%

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Bank Millennium continued to pay special attention to mortgage credit.The increase in branches’productivity and in the number of complementary distribution channels, including centresspecialised in mortgage loans and a network of agents, the competitiveness of the solutions offeredand numerous targeted marketing actions contributed towards the remarkable increase of the newproduction, which projected Bank Millennium to the third position in the ranking of Polish banks,with a market share exceeding 10%, which is clearly above its natural market share. At the sametime, significant improvements were introduced with the objective of automating back-officeprocesses, allowing for an improvement in operational efficiency and service quality.

The card business underwent a review of its offer. Stimulating characteristics of card use wereintroduced and there was an increase in the penetration of the current Customer base. Capitalizingon the sales industrialization programme, Bank Millennium doubled the number of credit cards in 2005. A specific business model was also developed to sell credit cards to non-Bank MillenniumCustomers, based on complementary distribution channels, including co-branded cards. As a result,the “Visa Economic” card was considered, according to the newspaper “Rzeczpospolita”, the bestcredit card in Poland.

Bank Millennium also devoted attention to the business model for the affluent segment. Innovativeproducts with high margins and a system of renewed incentives were introduced. Additionally,the transfer of savings deposits to mutual funds was promoted.The significant commercial efforts,including intensive training of the sales force, the introduction of new funds, namely funds of foreignfunds, as well as the improvement in the performance of funds, contributed towards the increase in the balance of mutual funds which represented 16.4% of individual liabilities. Bank Millenniumgrew significantly, more than doubling its market share in this segment.

2005: Excellent commercial performance in “strategic segments”

Poland: Excelling in loans to individuals

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The development of electronic channels continued to be a priority in 2005.With regards to the Internet, significant efforts were undertaken to proceed with the upgrade of the platform’sstability and of the services available.With regards to content, short-term deposit auctions werelaunched and the SMS notification service was introduced. At the end of the year, the number of registered users exceeded 295 thousand and the number of transfers carried out over the Internet represented more than 65% of total transfers. In 2005, Bank Millennium was awardedthe prize “Best Consumer Internet Bank in Poland” by “Global Finance”.

In the Companies segment, the activity of Bank Millennium was guided by two main objectives:increase of income generated by the existing Customer base through the sale of high added valueproducts (hedging instruments, cash management solutions and trade finance products);and the expansion of the Customer base, supported by the creation of a team specialised in the acquisition of new Customers.The “Millennium Biznes” business area, directed at small and medium-sized companies, was classified in the first three positions, by Forbes, as the “Best Bank for Companies” in terms of offer. Leasing remained a strategic priority of the Companies segment.As a result of the improved cooperation between BEL Leasing and the networks of BankMillennium, the proportion of new production originated by the Bank increased to about 40%, allowing a strong position in the sector to be maintained.

In 2005, Bank Millenniums’ consolidated Net Income reached a maximum level of 567.1 millionzlotys, more than doubling the value registered in 2004, benefiting from the significant contributionof the core business areas and of the sale of the stake in PZU.The increase in commissions and the control of operating costs, which were reduced when compared to 2004, contributedtowards the significant improvement in the levels of profitability and efficiency.The decrease in provisioning was due to the improvement in asset quality, reflecting the impact of a conservativecredit concession policy and of the efforts in recovering overdue loans. In spite of the significantincrease in credit, resulting from the increase in mortgage loans, the Group still presented a comfortable situation in terms of liquidity and solvency. In April 2005, the rating agency Moody’supgraded the rating of Bank Millennium’s long term deposits from “A3” to “A2” and changed the financial strength outlook to positive.This decision was based on the progressive operationalintegration with Millennium bcp as well as on organic growth, supported by a strong capital base,innovative products, aggressive market strategy, increase in potential sales, improvement of riskmanagement and favourable economic climate. As a result of the excellent performance in 2005,the shares of Bank Millennium registered an excellent performance in 2005, outperforming the General Index of the Warsaw Stock Exchange and of the banks listed on the Warsaw Stock Exchange.


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Given the growth opportunities in several business areas, stemming from the still reducedpenetration of bank products in Poland relative to other European countries, Bank Millennium will pursue its organic expansion strategy, so as to reach the defined objectives.

Bank Millennium: Leader in innovation and efficiency

“Best Consumer Internet Bank in Poland” by the international Global Finance Magazine

“Best Bank offering custody services” from the Global Custodian Magazine

“Best credit card” for Millennium Visa Economic card by Rzeczpospolita and Forbes Magazine

“Business Friendly Bank” from the Polish Chamber of Commerce and Forbes Magazine,Warsaw Institute of Banking and the Polish-American Small Business Advisory Foundation

Leading positions in numerous rankings of mortgage products by independent financial advisors (Expander, Open Finance)

Consumer loan offer (“MilleKredyt Winter”) ranked 1st by Businessweekand 2nd by Wprost magazines

Expansion of Bank Millennium’s network

Branch closures

327

14

44

43

40

16

456

Financial centre

Retail + Prestige/SME

Retail

Mortgage shops

Target network

Retail network expansion planNumber of retail branches

Investment plan (accumulated)1 million

Impact in market shareBasis points

Current

30

2006

110

2007

190

2008

2008

41

2007

34

2006

16

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Greece

Millennium bcp is present in the Greek banking market through NovaBank, a universal banklaunched in 2000, with an initial exclusive focus on the financial retail business, but which expandedits activity from 2003 onwards to the private banking and business banking segments. NovaBankcelebrated five years of activity in 2005, having registered high business volume growth rates – loans to customers exceeded 2 billion euros, and mortgage loans exceeded 1 billion euros – alsoconfirming the break even point reached in the fourth quarter of 2004.These results reflect the success of a pioneering strategy that combines products, high quality services,state-of-the-art technology and qualified human resources.

The economic environment of Greece in 2005 was marked by strong activity dynamics with real GDP growth standing at about 3.6%, surpassing the euro area’s average, in spite of therestrictive stance of budgetary policy and the end of the investments related with the OlympicGames.The strong expansion of private consumption, supported by credit growth and real wages, should continue to support strong GDP growth in 2006.

Competition in the Greek banking sector remained very intense in 2005, with the bigger players basing their strategy on strong advertising campaigns and on aggressive pricing. Loans to customers expanded by around 20% in 2005, more than doubling the growth of customers’funds, in line with the dynamics of mortgage credit, which benefited from low interest rates and from the anticipation of housing acquisition, given the increase in the real estate transactions tax starting from 2006 onwards.The expansion of business volumes and the continuation of the measures of cost rationalization contributed to the improvement in profitability of the Greek banking sector.

NovaBank focused on organic growth in 2005, expanding its Customer base and increasingbusiness volumes at a high rate in all the key business areas – retail banking, business banking,private banking and “bancassurance”, supported by an innovative strategy of satisfaction of Customers’ needs, with dedicated and distinct branches for each market segment.At the end of 2005, NovaBank had a total of 122 branches (102 retail branches, 17 companies and business units and 3 private banking centres).

2005 was a very positive year for retail banking, the core area of NovaBank operations, with all established objectives having been reached at the beginning of the year.The expansion of mortgage credit remained the main strategic focus, with NovaBank increasing its share of newproduction to about 4%.The Bank also reinforced its position in terms of leadership in financialinnovation, with the launch of solutions such as “Enoiko Telos” (rent, never again), a campaignoffering mortgage loan solutions with reduced monthly installments and the “NovaPromio”,a product inspired in the “Frequent Customer” solution, aggregating several advantages for Customers that, as compensation for a small monthly fee, maintain a regular relationship with NovaBank.


The retail network was expanded with the opening of 7 branches in carefully selectedmetropolitan areas (Volos, Larissa, Livadia, Kozani, Corfu), as well as in Athens and Salonica, reachinga total of 102 branches.The introduction of new IT applications – operating systems, informationmanagement and sales oriented – demonstrate the ongoing investment in the use of the mostadvanced technologies.

The business banking area, which was launched in 2003, has become, in only two and a half years,a reference in the Greek market, for its credibility, professionalism, flexibility and excellence of service to the Customer.This network operates with 17 business units in all of Greece,operated by Employees with a high level of training, specialised in meeting the needs of businessCustomers.

The private bankers network of Novabank, in its second year of activity, was the first privatebanking institution to adopt an open architecture strategy in Greece.The objective of the networkis to provide an exclusive, personalised and professional service for high net worth individuals,through global asset management solutions, with dedicated private bankers, at prestigious locationsin Athens and Salonica. Novabank’s private bankers network registered an impressive growth ratein 2005, doubling the number of Customers, assets under management and revenues. Based on the knowledge of the local market, international know-how and competitive pricing, theproposal of products of the private banking network reinforces the notion that Customers “havethe right to higher returns on their investment”.

The “bancassurance” area, developed by Novabank in partnership with Interamerican, member of the Eureko Group, was further consolidated, with intensified sales efforts and development of an innovative offer of products, focusing on the segments of Life, Health, Auto and Lifeassociated with Real Estate credit, creating synergies between the two companies.

2005: Excellent commercial performance in “strategic segments”

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2003

207

2004

310

2005

511

Mortgage disbursement1 million

Business loans1 million

Loans to customers1 million

2004

328

2003

126

2005

637

2003

790

2004

1,400

2005

2,190

4.7% newproduction

market share

+125%

+66%


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NovaBank won, for the fifth year running, the Gold Prize in the “Teleperfomance CRM Gran Prix2005” annual competition, in the category of “Biggest Call Centre”, having come first in thiscategory with a classification of 94.1% for its Call Centre services (the average for the Greekbanking sector was 64.0%).The consecutive distinction of Novabank is an exemplary proof of the high quality service provided through the Bank’s remote channels and of the commitment of the Bank towards Customer satisfaction. In 2005, Novabank developed its bilingual site, providinga well-structured user-friendly portal.

Prepared for the future: Leaders in innovation and efficiency

Innovative products and services Lean infrastructureEmployees/branch, 2005

20.3

8.7

Increased “agility”

Less vulnerableto changes inmarket conditions

Top 5average

NovaBank

2.3x

“One signature concept”First player to provide full access to all banking channels with onesignature (Branch, Call Centre, Internet, ATMs and VideoConference)

“Project 5”A package of products and services with preferential terms inorder to celebrate NovaBank’s five year success

“Frequent Customer”A package of products and services offered at a better pricecovering all banking needs

“The end of Rent”Innovative mortgage solutions. “Are you still paying rent for yourhouse?”

“Extra Cash”Consumer loan with a cash refund

Considering that human resources are its most valuable assets, Novabank continued to invest in its human capital in 2005.The success achieved in all hiring processes, promotions and jobrotations, specific hiring, and the human resources planning processes followed strict criteria.Training and development activities covered an extensive spectrum, so as to ensure Employees’satisfaction, the commitment and loyalty towards the organisation and, at the same time, creatingvalue for the Bank.

NovaBank celebrated its fifth anniversary in September 2005, conducting several product and communication campaigns, highlighted by the festive decoration of the branches and centralservices, with a strong focus on Employee participation. Current and potential Customers wereinvited to celebrate the anniversary together with the Bank, benefiting from innovative productsand preferential subscription conditions.This effort was aligned with Novabank’s global strategy

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of providing products and services “one step ahead of the market”, and to permanently positionitself as the “Bank that Customers always prefer”.

NovaBank closed its 2005 accounts with earnings before taxes of 5.4 million euros (3.5 millioneuros after taxes), which represents a significant improvement compared to the losses registered in 2004. Net income, including non-recurring items, totalled 16.9 million euros.

The prospects for 2006 are promising, based on the strategy for expansion of the branch network(the opening of 35 branches in the largest Greek cities), on the continuation of organic growth and focus on cross selling. ROE in a recurring base should lie between 7 and 9% in 2006,which compares with 2.3% in 2005, gradually converging with the best Group practices in retail banking.

Turkey

BankEuropa, set up in 2003, was the first Turkish bank to be exclusively directed at a specificsegment of Customers: affluent individuals. Since its incorporation, BankEuropa has a network of 12 branches, located in the three main cities of Turkey (10 in Istanbul, Ancara and Izmirna),providing several remote access channels (ATMs, call centre and Internet banking). BankEuropabases its value proposition on the offering of a personalised, high quality service, through especiallydesigned branches, experienced employees with adequate training and specific products and services to satisfy the needs of the target market.

The announcement of the beginning of negotiations for the integration of Turkey into the EuropeanUnion had very positive, immediate repercussions on the Turkish economy, namely capital inflowsand greater macroeconomic stability. GDP growth rate stood at 5.5% in 2005, thanks to dynamicprivate consumption and exports, while the inflation rate also fell considerably.The optimism of economic agents contributed to the increase in mortgage loans.The weight of mortgage loanson GDP rose to 2.4% (in contrast to 0.6% in 2004) and points towards an enormous growthpotential in the near future.

The main results obtained by BankEuropa in 2005 are the increase in the number of Customers of around 73% compared to 2004 and the expansion of mortage credit and assets undermanagement. BankEuropa registered a remarkable increase in credit, which almost quadrupled,

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Expansion of NovaBank’s network

Aggressive geographical expansion plan,leading the branch network to double in 3 years

Total branches Employees/branch

2005 2008 (F)2005 2008 (F)

250

122

8.7

7.4

Branch openings to focus on still underbankedareas outside main urban centres

Required investment of total 14.0 euro millionin 2006, 18.3 million euros in 2007and 19.8 million euros in 2008


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and reinforced its pioneering role in terms of financial innovation. One year following the introduction of the open architecture platform (access to mutual funds of several financialinstitutions), BankEuropa conquered the second position in the allocation of mutual funds perbranch.The offer was expanded with the additional commercialization of 43 mutual funds availablethrough Internet banking, providing complete information regarding the characteristics of each fund.

The promotion of BankEuropa has been based on advertising campaigns focused on its valueproposition.The Bank benefited from its good reputation in the market and the vast interest of the press. BankEuropa enjoys good coverage from the most important media and has become a reference for journalists, especially in the areas of mortgage credit and mutual funds.

The trade finance business recently launched by BankEuropa continues to serve domestic and international Customers of Portugal, Greece and Poland.The Bank has progressively supported the businesses and investments of Customers in countries where the Group has operations, gearing synergies between existing platforms.

The new system of mortgage loans and alternative banking products are the main priorities for 2006.The focus on cost management and commission generation, in combination with effortsto increase market share are the main challenges for the Bank.The expansion plan for 2006includes opening 6 new branches and the expansion of the trade finance business. It is theintention of BankEuropa to continue to attract new Customers and consolidate the relationshipwith existing Customers.

France and Luxembourg

The activity of Millennium bcp in France and in Luxembourg has been developed by Banque BCP,a bank directed primarily at retail activity, focusing on the segment of Customers of Portugueseorigin. In August 2005, Millennium bcp announced the celebration of a partnership agreement with Caisse Nationale des Caisses d'Epargne, involving an acquisition by this French financialinstitution of a stake corresponding to 80.1% of the share capital of Banque BCP (France and Luxembourg).This transaction was concluded in January 2006.

The activity strategy of Banque BCP in France has continued to be based on the objective of increasing the average number of products held by Customers and reinforcing the degree of penetration in the segment of Portuguese and luso-descendants resident in France (individuals,professionals and small and medium companies) and in other ethnic markets with social-economiccharacteristics similar to those of Portuguese emigration, for whom the personalised relationsmodel of Banque BCP and the geographic coverage provided by the 63 branches grant prospectsof value creation and of new business development.

A decisive factor in the strategy of Banque BCP is the acquisition of new Customers in the influence areas of each branch.To facilitate that moment, a new simplified account-openingprogramme was developed (for individuals and companies) through which the creation of a new Customer and the opening of the account are carried out in only three screens whichrequire filling in a small number of fields. Shortcuts were also created to permit, once the accounthas been opened in the system, to directly access the opening of savings accounts, requests for cheque books or banking cards and subscribing to insurance, among others.


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The sale of insurance is the fundamental pillar of the cross-selling strategy of Banque BCP, used as a gearing device to increase the level of Customer involvement. In that context, in 2005,the “Preciso” insurance was launched, with similar characteristics as those of the star product withthe same designation of Millennium bcp: a personal accidents insurance, managed by ImpérioFrance, which offers beneficiaries the guarantee of an immediate capital payment and a monthlyincome for 5 years in case of accidental death of the insured.

With the purpose of improving the value proposition of Banque BCP in the companies segment,a partnership was established with a state organization.The objective is to stimulate companyfinancing, in this case, in the form of leasing. New insurance products, managed by Axa, are nowalso available: “Assurance Crédit”, insurance to cover the client risk of the company; "SantéPrevoyance Collective", the Group’s health insurance; "Épargne Retraite Salariale", capitalisationinsurance in which companies can deposit the compulsory stakes of their employees in the profitof the financial year ; "Épargne Retraite Collective", savings for retirement pension supplements;"Garantie Responsabilité Décennale", insurance that covers the liabilities of building constructorsand property developers for the first 10 years of life of new real estate property.

To improve the value proposition of the Bank for the retailers segment, a protocol was signed with a manufacturer of EPT – electronic payment terminals - and with a company responsible for the distribution and maintenance of this equipment, with the objective of increasing the loyaltyof Customers, collect the cash-flows of their activity and sell associated other products, such as treasury facilities, leasing or insurance.

The strategic positioning of Banque BCP in Luxembourg has focused on the offer of products and services directed at the Portuguese community, both at the local level (mortgage loans,personal credit, cards, other services) and in Portugal (accounts, banking cards, transfers, financialapplications). Banque BCP in Luxembourg continues to be the reference bank for the Portuguesecommunity, with a market share of transfers to Portugal estimated to be about 60%.The improvedimage of the branches and the greater dynamics of commercial teams, as a result of the focus on technology and efforts made in the technical and behavioural training of Employees, have alsocontributed towards the consolidation of this image.

Included in the annual marketing plan of 2005, a new mortgage loan campaign was launched –“BCP Eurologement” – with a redesigned product, better adjusted to the Bank’s customers andwith renewed and appealing external communication.The offer of bancassurance products, resultingfrom the partnership of the insurance company AXA, has gained increased importance, withcommissions rising by about 92% and the savings insurance portfolio reaching 10 million euros.


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Overseas Banking

The Overseas Banking business area includes the Group’s activity in non-European markets,encompassing countries where important communities of Portuguese origin live, such as in the United States and Canada, where the Bank focuses on a market approach that involvesthe adoption of a community bank model; and it also includes countries with historical, cultural and economic ties with Portugal, such as Mozambique and Angola. In these countries, the Bank’soperations assume a universal character, seeking to serve the financial needs of the local population with innovative and distinctive value propositions.

2005 2004 Change

Net interest income 58.0 51.1 13.5%

Other income (net) 47.4 37.5 26.3%

105.4 88.6 18.9%

Operating costs 72.1 67.0 7.5%

Provisions 5.9 6.0 -1.2%

Contribution before income taxes 27.4 15.6 75.7%

Income taxes and minority interests 4.1 0.7 -

Contribution (net) 23.3 14.9 56.8%

Profit and loss account (1) Millions of euros, except percentages

2005 2004 Change

Allocated capital 71.3 70.9 0.6%

Return on allocated capital 32.7% 20.9% -

Risk weighted assets 970 717 35.2%

Cost-to-income ratio 68.4% 75.7% -

Loans to customers 897 616 45.6%

Total customers’ funds 1,421 1,087 30.7%

Summary of indicators (1) Millions of euros, except percentages

The Overseas Banking net contribution rose 56.8%, from 14.9 million euros in 2004 to 23.3 millioneuros in 2005, mainly influenced by the increase in Angola’s net contribution.The increase in net interest income and in other income more than offset higher operating costs and provisioning requirements, and resulted in the improvement of the cost-to-income ratio to 68.4% (75.7% in 2004).

Business volumes showed a favourable evolution, driven by the growth in bcpbank (US). Loans to customers and customers’ funds increased 45.6% and 30.7% respectively.

(1) Excluding Banco Comercial de Macau.

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America

United States and CanadaMillennium bcp’s presence in North America (United States and Canada) is ensured by bcpbank,a global bank directed at serving the Portuguese community and luso-descendants living in someNorth-American States (East Coast) and Canada (metropolitan area of Toronto). At the same time,bcpbank has been widening its Customer base to include North-American citizens and the rapidlygrowing Brazilian community.

In 2005, bcpbank continued its geographical expansion within the United States, with the openingof branches in New Jersey, Massachusetts and New York. bcpbank has also reinforced its team with new commercial agents and maintained a wide offer of products and services, as well as of innovative and highly convenient automatic distribution channels. Besides broadening its geographic scope, bcpbank’s strategy has focused on attracting new Customers, intensifyingcross-selling activities and promoting increased brand recognition, this last effort being supportedby several successful campaigns.

With its relationship package, bcpbank has provided Customers with a combination of services,aimed at strengthening relationships. An internal campaign was also developed to attract newCustomers through an incentive scheme directed at Employees, branches and Customers.Thefocus on small businesses through the promotion of the “bcpaccess” line, which not only offersdedicated products but also provides automatic distribution channels, and a new cash managementteam, should also be mentioned.

The “Caixa Aqui” service, launched in 2005, consists of a remittance service offer for Brazilianimmigrants, which substantiates the partnership established with Caixa Económica Federal do Brasil.This initiative has also contributed to an increase in the Customer base as well as commissions.

Having achieved break-even in 2005, bcpbank is committed to opening new branches in New York,New Jersey and Massachusetts.The Bank will continue to promote growth in deposit and creditoperations, to diversify its mix and control costs, by gearing its organisational structure andoperating resources.

The Bank’s presence near Portuguese communities in Canada was reinforced by a new commercialdynamic. Apart from being the only Bank in the market capable of providing financial services in Canada and in Portugal, bcpbank has also managed to attract Customers from othercommunities.The Bank reinforced its presence within the community of “Portuguese memory”,having attained an 80% market share for remittance operations to Portugal, with total transfersamounting to 130 million dollars.

Overseas Banking


Loans +46%


Loans +34%

Highlights 2005 Goals 2006

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A new product offer for individual Customers and businesses, launched in 2005, also contributed to an increase in the Customer base. Cross selling also rose, with the Bank focusing on a consolidation of commercial relations with its Customers. On a functional level, the Bank promoted several initiativesthat led to process rationalisation and resulted in increased commercial and operational agility.

A 20% increase in deposits and loans was registered by bcpbank Canada. Credit growth was largelyachieved through the launch of a powerful campaign in mortgage loans. Similarly to what hadalready occurred in 2004, intermediation margins narrowed further, with interest rates reachinghistoric lows.This trend had a direct impact on the operating account, although this was more thanoffset for by the increase in bank commissions and operating cost reduction.

Sustained growth in business volumes, as well as cost rationalisation, should contribute to animprovement in profitability in 2006, year in which the Bank’s main targets involve attracting new Customers and increase relations with existing Customers.

Africa

MozambiqueMillennium bcp has been present in Mozambique since 1995 through the Banco Internacional de Moçambique (BIM), a universal bank that offers specialised products and services and clearlyholds market leadership.

BIM’s activity has been characterised by renewed focus on business expansion, by exploring newsegments, as well as on a considerable increase of the Customer base, seeking to safeguard netinterest income, the growth of other income and the containment of operating costs. BIM’s TotalNet Assets increased by 19%, Net Credit increased by 39% and Customers’ funds rose by 23%.Net Income went up by 47%, with ROA having reached 2.0% and ROE having exceeded 23%.Thecost-to-income ratio evolved favourably to 69.6%. Asset quality improved in 2005, with a decreasein overdue loans to 3.7%, with a corresponding degree of Provision coverage of approximately350%.The solvency ratio was 10.6%.

The year of 2005 was also marked by the reorganisation of the financial Group, with the merger by incorporation of BIM Investimento, BIM Leasing and Crédicar into BIM motivated by efficiencygains, and the sale of the stake in NovoBanco, following the maturing of this micro-credit institution.An agreement for the acquisition of a major stake in Seguradora Internacional de Moçambique wasalso celebrated, within the scope of a natural reinforcement of the Bancassurance business strategy.

BIM presents significant competitive advantages, such as the increased capillarity of its distributionnetwork and its innovative and leadership ability, which allows the institution to be a pioneer in business lines of high potential, such as consumer credit and mortgage loans. Examples of innovative products and services launched in 2005 are “Crédito Condução Fácil”, a financing lineassociated to a protocol established with driving schools, the “Flamingo”VISA credit card, aninitiative carried out in partnership with Linhas Aéreas de Moçambique, the largest Mozambicanairline, internet banking for individual Customers and the mobile phone recharge service via SMS.

The Investment Banking segment pursued its activities within an environment of recession regardingthe financial services and capital markets, continuing to compete in the credit generation andsyndication market with larger institutions from South Africa, Mozambique’s neighbouring country.The Investment Banking segment continued to support BIM in its relations with larger corporateCustomers.


The leasing business integrated the auto long term renting business (ALD) and continues to demonstrate high potential, representing significant advantages for the Group in terms of risk coverage. Its evolution continued to be very positive, although conditioned by changes to the applicable financial legislation, which imposed strict restrictions to financing operations in foreign currency.

The BIM Group insurance area also recorded an increase in business volumes, which, together withthe operational reorganisation of back office services, resulted in a marked expansion of thepremiums charged and in the corresponding annulment of the respective provisions, resulting in a much higher net income when compared to the previous year.

The leading role that BIM continues to undertake reflects itself in the fact that the institutionremains the unequivocal banking market leader in Mozambique: at the end of 2005, BIM’s marketshare was of approximately 40% in terms of credit and customers’ funds. BIM will continue to undertake a relevant role in the Mozambican banking market, as a result of its dimension,projection and innovative ability.The growing importance of the banking sector in the economy,the reinforcement of geographic coverage and individual credit expansion are the greatestchallenges and, simultaneously, the greatest opportunities.

AngolaMillennium bcp’s operation in Angola went through an important transformation in 2005. On theone hand, a request to convert the Branch into an Angolan Bank, which will adopt the designationof Banco Millennium Angola, was submitted to the Angolan Authorities; on the other hand, thecommercial network was expanded, for the first time since 1993, with the opening of two newbranches in Luanda. Expansion and modernisation works were also started at the main branch.The Branch registered a very positive performance in activity and results, having achieved all the targets defined for 2005. A marked expansion of the economy and an increase in Customeractivity, particularly in the commerce, construction and import sectors, contributed to this success.

After considering consolidation effects, the Branch presented a net contribution of 7.3 millioneuros, which represents a 10.8% increase compared to 2004, sustained by a growth of 59% in operating results, whose impact was dimmed by an increase in taxes. It is also noteworthy the increase in assets (47%) and credit (71%), and an equally positive evolution of portfolio quality.

Asia

MacaoMillennium bcp has had a presence in the Special Administrative Region of Macao since 1995,through Banco Comercial de Macau, a universal banking operation whose origins date back to the opening of the Banco Português do Atlântico branch and which is mostly directed at retailactivities, having established important relations with institutional companies and Customers, andfocusing on a global market approach centred on direct communication and insurance cross-selling.

After the necessary authorisations were obtained, the process of sale of the stakes correspondingto 100% of Banco Comercial de Macau, S.A., 96% of Companhia de Seguros de Macau, S.A.R.L.and 100% of Companhia de Seguros de Macau Vida S.A.R.L. to the Dah Sing Group, for a totalamount of 1,719 million MOP (approximately 179 million euros), was concluded on the December19, 2005.This amount will still be subject to final adjustment, according to changes in BCM’s and CSM’s equity between December 31, 2004 and September 30, 2005. After these operationsare concluded, Millennium bcp’s presence will continue to be ensured by its Macao Branch.

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Banking Services

Within the scope of implementation of a new organisational and strategic coordination model,the Group was structured into six business areas and two service areas (Banking Services andCorporate Area), directed by executive coordination committees composed of Board membersand Senior Management members responsible for the main integrated units.

The Banking Services area consists of units whose functions include: credit analysis, operations’processing (credit granting, treasury operational management, security operations), thedevelopment and management of IT and telecommunications systems, physical and logical security,administrative and real estate management, purchases and other support units for business areaactivity. By supporting and sustaining business areas’ activity, in Portugal and other countries,the Banking Services area contributes in a sustainable way to cost reductions and service qualityimprovement, guaranteeing a degree of innovation that is compatible with the Group’s competitiveaspirations.

The Group’s strategy for Banking Services area is based on four main guidelines:

1. Reinforcement of alignment with Internal CustomersProper alignment of the Banking Service areas with Millennium bcp’s strategic objectives is essentialto global efficiency and effectiveness. In fact, guaranteeing the Bank’s functioning with lower costsand better service levels, achieved through a constant effort of innovation, will lead to improvedlevels of competitiveness. Examples of this are the initiatives aimed at improving the processes ofmortgage loans’ analysis and granting, which contribute to a reinforcement of the Bank’s leadershipin this business area.The review of the approval, and priority-setting processes of IT developmentactivities are also a good example.They reflect the increasing weight of the logic of business needs,and compliance with corresponding decisions.

This alignment concern of Banking Services areas with the Bank’s main strategic objectives is selectively extended to operations in other markets, with the aim of exploiting synergies and ensuring a more articulate management.Therefore, guidelines for architecture and InformationTechnology (IT) systems and processes were approved; at the same time, external operationsstarted to benefit, in a more systematic way, from competences and methods developed within the Portuguese and other markets. Other examples are physical and logical security and the negotiation and purchase process, where the corresponding Divisions have an adjustedintervention to the needs and specific characteristics of each operation of other markets.

2. Increase in internal process reengineering ability, aiming productivity improvementProcess reengineering is a multiplying factor for IT investment effects, when these investments are undertaken in a coordinated way and the adaptation of productive solutions is not an isolatedprocess, but a permanent and continuous effort.With this in mind, the Operating TransformationDivision was created, started its activity in 2005, and is currently working on strategically relevantprocesses.

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3. Capturing synergies through service outsourcingFollowing initiatives of previous years – mainframe infrastructure outsourcing in Portugal, in 2003 – the synergy capturing strategy continued through centralisation of the IT structures from severalcountries in a single data centre and simultaneous outsourcing of this service.This project wasdeveloped, negotiated and contracted in 2005 and is expected to be implemented in 2006.

4. Improvement in performance evaluation mechanismsThe Performance and Incentives Indicator System was improved under this guideline.Within a strategic framework aimed at achieving production at the lowest costs and with better servicelevels, the objectives of this System are: to contribute towards an alignment between internaloperation characteristics and business needs, to allow setting targets for each unit, in line withMillennium bcp priorities, and to establish a basis for targets’ evaluation of each unit’s contributionto global results.This system emphasises indicators aimed at cost reduction, service levelimprovement or stabilisation and productivity and quality reinforcement, aiming both internalimprovement and to emulate best practices.

As a result of the strategy adopted and the commitment undertaken, it was possible to improvethe efficiency and the effectiveness of Banking Systems in Portugal.This resulted in global activitylevels in line with those registered in the previous period, but achieved with a smaller number of permanent staff (-10%), lower resort to Third Party Supplies and Services (-5%) and a similarinvestment effort to what was registered in the previous year. IT Costs/Total Income and BankingService Costs/Total Assets ratios relative to activity in Portugal registered a favourable evolution.This improvement trend is expected to continue in 2006, as a result of the initiatives undertaken in 2005 and other initiatives already scheduled.

Banking Services

The effort for costs’ reduction in 2005,

with simultaneous improvement

of servicing, will go on in 2006

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Credit

The Credit Division activity focused, in 2005, on credit risk proactive management, with a resulting improvement in productivity and effectiveness, which contributed to the consolidation of an internal culture of efficient risk control, in coordination with the several business units.

Since 2005, the Credit Division centralises the overdraft payment decisions relative to the Retail segment of the Retail Network, which was a responsibility previously allocated to branches.This transfer of responsibility resulted in gains both in terms of operations’ quality and costs,which started to be based on automatic decision applications, enabling allocation of larger time-slots for commercial activity at branches. Responsibility for the management of overdrafts was also transferred to the Credit Division.The process of Employee credit analysis, as well as micro-credit activities, initiated in 2005, were also allocated to this Division, which translated into additional internal efficiency gains.

The broadening of the scope of the Credit Division incremented the elaboration of preventiveaction plans in 2005, following the attribution of alert levels to Customers with overdue loans.Approximately 500 thousand credit operations were analysed. Improvements were also achieved in the information management system for the follow-up of different segment portfolios and creditquality evolution control, which enabled a particular focus on risk management and associatedprovisions.The use of automatic decision models in Retail, central attribution and renewal of creditlines and limits, mortgage loans and credit card limits for non-Customers led, within a context of growing demand, to a stabilisation in the number of credit operations prepared by analysts.This way, it was possible to accommodate a significant increase in mortgage loans and factoringoperations, which was reflected in important productivity gains.

Initiatives were launched within the scope of the Credit Process Reengineering Project, with the goal of increasing productivity. Improvements were introduced to Millennium bcp’s credit riskmanagement platform, as well as attempts to align analysis and decision operational structures,in order to ensure a global vision of Customer credit exposure. In addition, development of the new credit workflow was concluded and its implementation was initiated and should be concluded in the first semester of 2006. An optimisation of the individual Customer evaluation behavioural model (TRIAD) was also carried out, yielding positive results in terms of decision quality.

All initiatives developed resulted in immediate improvements in credit analysis quality and productivity. A proactive approach towards risk allowed the achievement of the assumed target of annual gross provision reduction, outperforming international benchmarks.

Operations

The Operations Division, formed from the merger of eight Bank Divisions and associatedcompanies with an operating profile, has the mission of supporting all commercial networks and branches in Portugal and the objective of capitalising upon operating specialisation, promotingthe improvement of control and segregation of functions processes and increasing productivity and service levels.The Operations Division includes very diversified activities, from contractingprocesses and real estate credit portfolio management, management and control of collaterals,

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issuing of bank guarantees and current account contracts, to current account opening and closingcontrol and collection and transportation of money and valuable items.

The creation of an Operations Division has translated into more effective process reengineering,especially in what concerns increased automation and control of account opening and rental safemanagement processes, complaints and card fraud treatment, implementation of new types of restrictions in the securities’ support software and new improvements in the mortgage creditworkflow.

Securities

The Securities Division ensured high levels of service and operational risk control in 2005.Worthyof mention are clearing services relative to Euronext market securities and custody, setllementservices in these and other international markets, as well as a significant increase in incomepayments and reimbursements. This led to a higher number of commissions charged and to therecognition of the Group’s role as General Clearing Member as provider of clearing and setllementservices to Trading Member Firms.

The Securities Division scope was enriched with the implementation of new abilities for tradingoperations in Euronext Paris and Euronext Amsterdam, which had impacts both on clearing andsetllement. In terms of regulated international markets, security transactions in 15 different marketsbecame available to the Retail Network and automatic channels, whereas Institutional Customerswere able to carry out security transactions in 50 different markets. 2005 was also marked by thestart of operations at the PEX market, where Millennium bcp investmento has a relevant role. Alsonoteworthy was the growth in operations involving foreign mutual funds, which Millennium bcpalready has available, on a multi-domestic basis, to Customers of the several Group banks,and to the high volume of assets under custody (over 105 billion euros).

Information Technology

The activity of the Information Technology (IT) area followed a continuous and consistentoutsourcing policy, in coordination with the multi-domestic dimension of Millennium bcp’s strategyand with management model improvements concerning the software development component.The IT area’s objective is to provide increasingly better levels of service at increasingly smaller costs.According to the strategy outlined, and following the good results achieved so far by theoutsourcing contract for IT infrastructure management signed with IBM in 2003, it was decided to widen the scope of this model to those environments generally designated as middleware,which predominantly use UNIX technology. Credit workflows and support to treasury and brokerage activities are examples of business solutions supported by this technology.

An outsourcing and concentration project, of multi-domestic character (GITI – Global ITInfrastructure) was also initiated, which included a tender involving IT area Employees from theGreek and Polish operations; it concluded that centralisation in Portugal of most systems installedlocally was advantageous. After a wide market survey for outsourcing of the aforementionedservices and Wintel servers in Portugal was carried out, IBM was selected to supply these services,concentrating its action in a single data centre.This agreement came into effect in January of 2006and is valid for a period of 10 years. It includes UNIX and iSeries (core systems for the operations

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10 year outsourcingprogram worth2150 million, creating25% savings

Consolidated mainframeinfrastructure in Portugal(with outsourcing to IBM)

IT infrastructure convergingto centralisation

Existing centralisation effortswere driven by the existenceof common applications(e.g. Kondor, OPICS)

Avoid duplicate ITorganization in alllocations; more flexibleand cost-effective solution

Portugal194 IT productionemployees

2 data centres

Central systemsoutsourced to IBM

Majority of distributedsystems still managedin-house

Poland73 IT infrastructureemployees

2 data centres

All IT infrastructuremanaged in-house

Greece and Turkey35 IT productionemployees

1 data centre

All IT infrastructuremanaged in-house

Synergies of integrated Group IT infrastructure

of Bank Millennium and NovaBank) systems, as well as the Wintel system for operations inPortugal, Poland and Greece.

The underlying goals associated with these initiatives are IT cost reductions in the three domesticoperations and promotion of a more efficient and effective IT organisation, which will result in anincreased re-use of technological development processes and a more adequate time-to-market for Millennium bcp.

Following the strategic focus on the development of direct access channels for clients, the firststage of a medium-term evolution program, namely concerning Internet and Call Centre platforms,was concluded. It aimed at adding flexibility to authentication procedures and reinforcing security,monitoring and control.

A “Separation Project” was implemented during the year of 2005, following the sale of insurancearea’s assets.This project, which resulted from the decision to sell Seguros e Pensões, involved a separation of teams, applications and infrastructures, having been successfully carried out,according to the objectives proposed, expected deadlines and costs.

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Operating Transformation

The Operating Transformation Division was created in 2005 with the aim of reinforcing the focuson an operating excellence culture.The mission of this Division is to support a critical andcomprehensive vision of Millennium bcp’s cost base, with the objective of reinventing the paradigmof banking activity in the essence of its business processes. Starting from a deep understanding of the breakdown and nature of operating costs for each business activity, and based on innovativemethodologies, the Operating Transformation Direction is capable of intervening in businessprocesses, in total coordination with business areas and the remaining organisational units of Banking Services.

The competences of the Operating Transformation Division encompass identification of critical areasfor improvement and design and implementation support to feasible transformation initiatives.This new approach resulted in a significant increase in business process effectiveness, responding to and surpassing Customer expectations and reducing operating costs in a sustainable way.

Physical Security

Millennium bcp’s strategy and policy regarding physical security is based on three fundamentalpillars: reinforcement of a security culture, launch of a training and awareness programcommunicated through internal channels (intranet and television) and execution of simulations and drills in Group buildings; study of new technologies applied to security; and carrying out visitsand audits to installations, also understood as on-site awareness improvement actions.

Information Systems Security

Regarding information systems security, Millennium bcp continued to follow a strategy in line withthe best international practices, of which the main information security ISO 17799/27001 standardis an example.The main highlights were the initiatives aimed at increasing security awareness,involving Customers and Employees, use of “strong authentication” for information system access,and creation of secure access mechanisms to Millennium bcp sites.

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Financial HighlightsFinancial ReviewMain impacts of the transition to the IFRSon Shareholders Equity and on Net Income forthe year ended December 31, 2004Risk Management

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Millions of euros, except percentages

Change2005 2004 2005 / 2004

(1) Values for 2004 exclude amounts related to companies sold or in the process of being sold.

(2) Excluding amounts related to the disposal of assets, early retirements, loans impairments and other (including IAS adjustments).

(3) Dividends from equity instruments, Net commissions, Net income arising from tradingactivity, Other net operating income, and Equityaccounted earnings.

(4) Staff costs (excluding early retirments), Otheradministrative costs and Depreciation (excludingnon-recurrent).

(5) Calculated according to the rule 16/2004 fromthe Bank of Portugal. Includes Net interestincome, Dividends from equity instruments, Netcommissions, Net gains from trading activity, Equityaccounted earnings and Other net operatingincome, excluding non-recurrent income.

(6) Calculated according to the rule 16/2004 fromthe Bank of Portugal, excluding non-recurrent.

Financial Highlights

Balance sheet at December 31Total assets 76,849.6 71,320.4 7.8%Loans and advances to customers (net) (1) 52,909.1 48,843.4 8.3%Total customers' funds (1) 56,363.2 51,561.6 9.3%Shareholders' equity and Subordinated debt 7,207.6 6,990.4 3.1%

Statement of incomeNet interest income 1,407.7 1,271.6 10.7%Other income (net) (3) 1,119.7 1,244.2 -10.0%Operating costs (4) 1,654.7 1,720.8 -3.8%Impairment

For loans (net of recoveries) 27.7 121.6 -77.2%Other impairments and provisions 57.2 86.4 -33.8%

Income taxes 130.1 53.0 145.5%Minority interests 47.4 5.6 741.9%Net income (excluding non-recurrent) (2) 610.2 528.2 15.5%Net income from non-recurrent operations 143.3 78.3 83.1%Net income attributable to the Bank 753.5 606.5 24.2%

Net operating revenues (5) 2,527.3 2,362.9 7.0%Cash-flow 1,248.5 1,131.4 10.3%

Average number of shares outstanding (in thousands) 3,258,153 3,256,109Basic net earnings per share (euros) 0.22 0.18 Diluted net earnings per share (euros) 0.20 0.16

ProfitabilityReturn on average shareholders' equity (ROE) 24.1% 24.0%Income before taxes and minority interests / Average shareholders' equity (6) 23.6% 23.7%Net operating revenues / Net average assets (6) 3.4% 3.1%Return on average total assets (ROA) 1.0% 0.8%Income before taxes and minority interests / Average net assets (6) 1.2% 0.9%Net Interest Margin 2.2% 2.2%Other income / Net operating revenues (6) 44.3% 46.2%

EficiencyOperating costs / Net operating revenues (6) 65.5% 72.8%Operating costs / Net operating revenues -Activity in Portugal(5) 62.8% 68.5%Staff costs / Net operating revenues (6) 37.7% 41.1%

SolvencySolvency ratio – Bank of Portugal

Tier one 7.4% 8.1%Total 12.9% 11.9%

Loan quality (1)Loans to customers (Gross) 54,253.5 50,097.2 8.3%Past due loans 503.6 430.0 17.1%Impairment for loans 1,344.4 1,253.8 7.2%Loans overdue by more than 90 days / Total loans 0.8% 0.8%Non performing loans / Total loans (6) 1.1% 1.1%Non performing loans (net) / Total loans (net) (6) -1.4% -1.4%Total impaiment / Loans overdue by more than 90 days 302% 325%Total provisions / Total loans overdue 267% 292%

OtherBranches

Portugal 909 1,008 -9.8%Foreign activity 642 632 1.6%

EmployeesPortugal 11,510 12,487 -7.8%Foreign activity 8,138 8,079 0.7%


Financial Review

From January 1, 2005 European listed companies have been required to report according to IFRS.Banco Comercial Português’ consolidated financial reports for 2005 and 2004 were preparedaccording to these new standards. BCP’s financial statements were prepared in compliance withRegulation (EC) 1606/2002, of July 19th and in accordance with the reporting statements defined by the Bank of Portugal (Notice n.º1/2005), following the adoption by the Portuguese legal systemof the European Commission Directive 2003/51/EC from June 18th of the European Parliament and Council.

Following the announcements, in August 2005, regarding the negotiations for the sale of theshareholdings in the subsidiaries Interbanco and Banque BCP (France and Luxembourg), andaccording to IFRS 5, at 31 December 2005 these subsidiaries were registered as follows: totalassets and liabilities booked by the Group were registered in two separate lines of the balancesheet, while total costs and revenues booked by the Group were registered in the respective lineof the income statement. Until the sale is concluded the Group will register financial changes in the subsidiaries’ balance sheets in reserves and results.

For comparative purposes, BCP’s consolidated financial reports for 2004 were adjusted to reflectIFRS.The principles mentioned above were also followed in this period to register the subsidiariesas mentioned above, for the subsequent analysis.

Millennium bcp's business in 2005 was marked by out-performance of the main strategic goalsdefined within the scope of the Millennium Programme for 2005.The strict discipline implementedin capital management and the policy directed at increasing the focus on the core businesses led to measures to divest assets considered non-strategic and to selective allocation of capital to thevarious business areas.The targets defined for Portugal, Greece and Poland, the priority domesticmarkets, were also met, with an increase of the profitability of operations on the Portuguesemarket and growth of business on the Greek and Polish markets.

The new business model introduced in 2005 complemented the initiatives established within thescope of the Millennium Programme, driving the performance of commercial activity throughoutthe year under review, through the development of a number of measures designed to improvecustomer satisfaction and loyalty and directed at ongoing innovation of the products and servicesprovided to the Group's customers.

Balance sheet indicators performed well, and Millennium bcp continues to occupy an outstandingposition within the domestic banking system. Consolidated assets stood at Euro 76,850 million at the end of December 2005, compared to Euro 71,320 million on the same date of the previousyear. Millennium bcp retained the leadership in extending credit within the Portuguese financialsystem, with loans and advances to customers standing at Euro 52,909 million as at December 31, 2005 (Euro 48,843 million as at December 31, 2004), providing an estimated market share of 25% at the end of 2005.Total customers’ funds (customer deposits, debt securities, assets undermanagement and capitalisation insurance) increased from Euro 51,562 million as at December 31,2004, to Euro 56,363 million in 2005, driven by the sharp growth of deposits, which provided an estimated market share of 23% for Millennium bcp in 2005.

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Consolidated net income increased to Euro 753.5 million in 2005, up 24.2% from 2004,determining the increase of return on equity to 24.1% (24.0% in 2004). Return on assets stood at 1.0% in 2005, compared with 0.8% in 2004.

The profitability indicators in Portugal performed well, with the various business areasoutperforming the targets defined for 2005, despite the unfavourable performance of the economyand the ongoing historically low interest rates.The strong performance of traditional bankingrevenues, in particular net interest income and commissions, on a par with cost control in 2005,driven by the implementation of measures designed to improve operating efficiency and torationalise processes, contributed to the good performance of net income. Additionally, net incomewas boosted by the growth of operations in international business, particularly in the prioritymarkets of Poland and Greece, driven by the increase of their contribution to consolidated profits.NovaBank presented a profit for the first time, exceeding the expectations established in the initialbusiness plan, generating a recurrent net income of Euro 3.5 million in 2005. Bank Millennium alsohad a good performance during 2005, returning a sharp growth of the business; which determinedan increase of recurrent net income from Euro 25.5 million in 2004 to Euro 51.7 million in 2005(+102%).

Strict management of capital prompted stronger solvency ratios in 2005, benefiting at one and the same time from the Bank's capacity to generate profits and from controlled assumption of risks. Pursuing its policy of focusing on its core businesses, Millennium bcp sold several non-coreholdings during 2005, namely in Crédilar, Friends Provident, Banca Intesa and Banco Comercial de Macau, and it also reduced its holding in EDP.

Additionally, also in line with the same policy, the holdings in NovaBank and in Banco deInvestimento Imobiliário were increased to 100%, providing their management with greater agilityand flexibility.

Proceeding the policy designed to optimise asset risks, Millennium bcp undertook a securitisationoperation during June 2005, involving mortgage loans sourced by the Bank in the sum of Euro1,500 million, allowing long-term funds to be obtained under good price conditions.

Subsequent to the conversion of the Mandatorily Convertible Securities “Capital BCP 2005” onDecember 30, 2005, Banco Comercial Português increased its share capital to Euro 3,588,331,338,involving, in accordance with the terms and conditions of the conversion rules, the issue of330,930,511 new shares bearing the same rights as the other ordinary BCP shares.This conversion,finalised by public registration dated January 3, 2006, has no impact on the Bank's own funds sincethe Mandatorily Convertible Securities were already considered as share capital instruments.

As a result of these measures and taking advantage of the increase of net income, the solvencyratio improved from 11.9% as at December 31, 2004, to 12.9% on the same date of 2005, with the "Core Tier I" ratio standing at comfortable level of 5.3% in 2005.

Net IncomeMillions of euros, except percentages

��

606.5

753.5

24.0% 24.1%

20052004

ROE

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Profitability Analysis

Net IncomeMillennium bcp's consolidated net income amounted to Euro 753.5 million in 2005 compared to Euro 606.5 million in the previous year. On a comparable basis, net income totalled Euro 610.2million in 2005, an increase of 15.5% in relation to the sum of Euro 528.2 million seen in 2004.The strategy of deepening the focus on core businesses benefited the performance of net income,driving revenues associated with traditional banking activities, particularly net interest income andcommissions, while allowing greater efficiency and a consequent reduction of operating costs.The bigger contribution to net income by operations abroad during 2005, which accounted forabout 10% of consolidated net income (excluding operations of a non-recurrent nature), providedthe Group with greater geographic diversification generating profits, reflecting the strategy pursued to develop a multi-domestic institution. Operations in Greece and in Poland returned significantgrowth of recurrent profits, determined by the sharp growth of business in the respective marketsreflecting the successful implementation of the Group's strategy for these priority markets.

Net income generated in 2004 and 2005 reflects the booking of non-recurrent operations that,having a relevant impact in the Group's net income, has been dealt with separately in this review.In 2004 the results of this nature, which taken together were positive, totalled Euro 78.3 millionand included gains obtained on the sale of a consumer credit portfolio by Bank Millennium,of a holding in Banco Sabadell, of the holding in the PZU insurance company and of insurancecompanies. In parallel, extraordinary provisions and depreciation charged by Bank Millennium, costsof early retirements and adjustments made within the scope of the conversion to the IAS/IFRSwere booked as non-recurrent costs in 2004. During 2005, the amount determined as profit on non-recurrent operations totalled Euro 143.3 million.This is connected with the booking ofgains obtained on the sale of the holdings in Friends Provident, in EDP, in Banca Intesa, of the wholeof the share capital of Banco Comercial de Macau, the gain obtained on the fixing of the finalsettlement price of the holding in insurance company PZU, the gain obtained on the sale of SeguroDirecto, on a par with the one-off charge of the credit-risk impairment, the booking of a loss on the sale of the holding in ONI, costs related with early retirements and with the project to acquire the majority of the share capital of Banca Comerciala Romana.

The quarterly analysis of results as a percentage of average assets shows the main factors thatinfluenced the growth of return on assets to 1.0% in 2005 (0.8% in 2004), namely the increase of the weight of net interest income and of commissions, the reduction of the weight of netincome arising from trading activity, of other net operating income and of credit-risk impairments.The increase of net interest income as a percentage of average assets from 1.65% in 2004 to 1.87% in 2005, was chiefly determined a higher turnover generated through a more dynamiccommercial activity in 2005, since, despite the effective management of pricing mechanisms, thecontinuation of interest rates at historically low levels in 2005 restricted revenues obtained throughthe price effect.Taking advantage of cross-selling opportunities and suiting the financial productsand services to the profile of the Group's customer base were determinant to the increase

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of net commissions as a percentage of average net assets, up from 0.80% in 2004 to 0.87% in 2005. Careful selection of credit extended and strict policies in monitoring the risks of the loanportfolio led to an improvement of the loan portfolio risk profile, allowing a reduction of requirements for loan-loss provisions, as seen in the reduction of the weight of creditimpairment as a proportion of average net assets to 0.04% in 2005 (0.16% in 2004).

Annualised figures as a percentage of total average assets

Net interest income 1.65% 1.91% 1.90% 1.82% 1.85% 1.87%

Other income:

Dividends from equity instruments 0.04% 0.06% 0.23% 0.00% 0.02% 0.08%

Net commissions 0.80% 0.84% 0.87% 0.83% 0.95% 0.87%

Net income arising from trading activity 0.46% 0.40% 0.30% 0.32% 0.29% 0.33%

Other net operating income 0.24% 0.13% 0.14% 0.20% 0.21% 0.17%

Equity accounted earnings 0.08% 0.05% 0.05% 0.04% 0.00% 0.04%

1.62% 1.48% 1.59% 1.39% 1.47% 1.49%

Operating costs:

Staff costs 1.26% 1.24% 1.30% 1.26% 1.25% 1.26%

Other administrative costs 0.76% 0.76% 0.76% 0.73% 0.76% 0.75%

Depreciation 0.21% 0.20% 0.18% 0.17% 0.16% 0.18%

2.23% 2.20% 2.24% 2.16% 2.17% 2.19%

Impairment

For loans (net of recoveries) 0.16% 0.09% 0.08% 0.12% -0.14% 0.04%

Other assets impairment and provisions 0.11% 0.08% 0.04% 0.07% 0.11% 0.08%

Income before income taxes 0.77% 1.02% 1.13% 0.86% 1.18% 1.05%

Income taxes 0.07% 0.20% 0.17% 0.13% 0.19% 0.17%

Income after income taxes 0.70% 0.82% 0.96% 0.73% 0.99% 0.88%

Minority interests 0.01% 0.04% 0.08% 0.07% 0.07% 0.06%

Net income (recurrent) 0.69% 0.78% 0.88% 0.66% 0.92% 0.82%

Non recurrent income 0.10% 0.00% 0.00% 0.60% 0.14% 0.18%

Net income attributable to the Bank (ROA) 0.79% 0.78% 0.88% 1.26% 1.06% 1.00%

2004 1st quarter 2nd quarter 3rd quarter 4th quarter Total

2005

Quarterly Income Analysis

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Net Interest IncomeMillennium bcp's consolidated net interest income grew by 10.7% to Euro 1,407.7 million in 2005compared to Euro 1,271.6 million in 2004, driven by the increased turnover resulting from moredynamic commercial activity, notwithstanding the adverse macroeconomic in Portugal.Thecontinuation of low interest rates throughout 2005 and the narrowing of spreads caused by sharpcompetition in those segments of better risk profile, had an unfavourable effect on the net interestmargin which stood at 2.19% in 2005 (2.21% in 2004).The rise in net interest margin in thebusiness abroad, the weight of which as a proportion of consolidated net interest incomeamounted to 19.5%, resulted mainly from the growth achieved in Poland and in Greece.Thefavourable impact of turnover on net interest income was also influenced by the simultaneousincrease of interest-earning assets, particularly in loans and advances to customers as a result of the growth of mortgage loans, and by the rise of interest-bearing liabilities, particularly depositsand debt securities.

Analysis of the average consolidated balance sheet reveals the growth of turnover with customers,reflected in a 3.9% increase of the average balance of loans and advances to customers, up fromEuro 48,628.4 million in 2004 to Euro 50,506.3 million in 2005, in a 12.0% increase of the averagebalance of amounts owed to customers, up from Euro 29,645.8 million in 2004 to Euro 33,210.1million in 2005, and in the growth of debt securities, up from Euro 16,646.5 million in 2004 to Euro 17,845.3 million in 2005.The contribution made by business abroad influenced thisperformance, as a result of the growth seen in Greece and in Poland in customer funds taken and in credit extended, mortgage loans in particular, which returned sharp growth in both thesemarkets driven by the offer of innovative, diversified financial services.

Net Interest IncomeMillions of euros, except percentages

��

2.21% 2.19%

20052004

Net interest margin

1,271.6

1,407.7


Interest Earning AssetsDeposits in banks 7,276.2 4.66% 3,991.9 6.78%Securities 3,340.8 5.98% 2,336.9 7.37%Loans and advances to customers 50,506.3 4.82% 48,628.4 4.65%

61,123.3 4.86% 54,957.2 4.92%Assets held for sale 3,076.9 3.65% 2,665.0 3.37%

Interest Earning Assets 64,200.2 4.80% 57,622.2 4.85%Non interest earning assets held for sale 175.0 189.1Other non interest earning assets (2) 10,957.4 19,219.0

Total Assets 75,332.6 77,030.3

Interest Bearing LiabilitiesAmounts owed to credit institutions 10,186.5 4.74% 9,679.7 4.42%Amounts owed to customers 33,210.1 1.72% 29,645.8 1.50%Debt securities 17,845.3 2.35% 16,646,5 2.63%Subordinated debt 3,703.0 4.30% 3,919.8 4.53%

64,944.9 2.52% 59,891.8 2.48%Liabilities associated with assets held for sale 2,883.5 1.44% 2,536.0 1.45%

Interest bearing liabilities 67,828.4 2.47% 62,427.8 2.44%Non interest bearing liabilities associated with assets held for sale 368.4 318.0Other non interest bearing liabilities (2) 3,164.8 11,332.3Shareholders’ equity and minority interests 3,971.0 2,952.2

Total Liabilities, Shareholders’ equity and Minority interests 75,332.6 77,030.3

Net Interest Margin (1) 2.19% 2.21%

Average balance Yield Average balance Yield

2005 2004

Consolidated Average Balances

(1) Net interest income as a percentage of average interest earning assets.(2) Reduction related with insurance companies sold in January 2005.

141


The breakdown of the factors determinant to the variation of net interest income shows thepositive impact of the volume effect, amounting to Euro 187.3 million, partially offset by theunfavourable rate effect in respect of the evolution of net interest income, which amounted toEuro -46.4 million in 2005.

Millions of euros

Interest Earning AssetsDeposits in banks 222.6 (84.5) (69.5) 68.6Securities 74.0 (32.5) (13.9) 27.6Loans and advances to customers 87.4 79.4 3.0 169.8

303.5 (33.7) (3.8) 266.0Assets held for sale 13.9 7.4 1.2 22.5Interest Earning Assets 319.1 (27.5) (3.1) 288.5

Interest Bearing LiabilitiesAmounts owed to credit institutions 22.4 31.8 1.7 55.9Amounts owed to customers 53.4 66.6 8.0 128.0Debt securities 31.5 (46.1) (3.3) (17.9)Subordinated debt (9.8) (9.1) 0.5 (18.4)

125.5 20.5 1.7 147.7Liabilities associated with assets held for sale 5.0 (0.3) 0.0 4.7Interest Bearing Liabilities 131.8 18.9 1.7 152.4

Net Interest Income 187.3 (46.4) (4.8) 136.1

Volume Rate Rate/Volume mix Net change

2005 vs 2004

Factors Influencing Net Interest Income

Other IncomeOther income generated by Millennium bcp includes returns on capital instruments, netcommissions, net profit from trading activities, equity accounted earnings, other net operatingincome, and also non-recurrent profits mainly related with gains on the sale of financial holdingsand with adjustments carried out within the scope of the conversion to the IFRS. Other incomefell from Euro 1,657.2 million in 2004 to Euro 1,609.2 million in 2005. On a comparable basis,other net income stood at Euro 1,119.7 million in 2005 (Euro 1,244.2 million in 2004), influencedby lower net profits from trading activities and by smaller other net operating income,notwithstanding the increase of net commissions.The performance of other net income reflectsthe priority given to the Millennium bcp strategy of focusing on its core businesses, leading to a greater relative weight of income associated with commercial banking, particularly the increasedweight of net commissions.142

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Returns on capital instruments, which include dividends received from investments in securitiesavailable for sale, increased 92.6% from Euro 30.5 million in 2004 to Euro 58.8 million in 2005,driven by the larger dividends received in 2005 in respect of EDP, Eureko, Banco Sabadell andBanca Intesa (Euro 50.3 million, compared to the figure of Euro 28.4 million in 2004).

The excellence of the customer service that characterises Millennium bcp, seen in the ongoingimprovement of the offer of financial products and services and in the presentation to customersof innovative services designed for the business segment at which they are directed, contributed to an improvement of the customer satisfaction indices and to an increase of the cross-sellingindicators.

Net commissions stood at Euro 658.7 million in 2005, a growth of 6.9% compared to the figure of Euro 616.4 million seen in the previous year, determined by the positive contributions ofcommissions on cards, up from Euro 144.0 million in 2004 to Euro 152.7 million in 2005 (+6.0%)and by operations on securities, up from Euro 76.8 million in 2004 to Euro 103.2 million in 2005(+34.3%), driven by the excellent performance of brokerage commissions, a business in whichMillennium bcp has retained its outstanding leadership in the online business. Commissions onbusiness abroad increased 17.4%, accounting for 20.0% of consolidated commissions, chiefly drivenby the growing diversity of products and services in Greece and in Poland.

2005 2004 Change

Dividends from equity instruments 58.8 30.5 92.6%

Net commissions 658.7 616.4 6.9%

Net income arising from trading activity 246.6 357.7 -31.1%

Other net operating income 128.6 180.3 -28.7%

Equity accounted earnings 27.0 59.3 -54.5%

1,119.7 1,244.2 -10.0%

Non-recurrent income 489.5 413.0 18.5%

Total 1,609.2 1,657.2 -2.9%

Other Net Income Millions of euros, except percentages

2005 2004 Change

Cards 152.7 144.0 6.0%

Securities 103.2 76.8 34.3%

Asset management 81.5 84.5 -3.5%

Credit operations 178.3 174.0 2.5%

Other comissions 143.0 137.1 4.4%

658.7 616.4 6.9%

of which:

Portugal 527.2 504.4 4.5%

Foreign activity 131.5 112.0 17.4%

Net Commissions Millions of euros, except percentages

Net CommssionsMillions of euros, except percentages

��

26.1% 26.1%

20052004

Net commissions // Net operating revenues

616.4658.7

143


Net profit from trading activities (includes “Net gains arising from trading and hedging activities”and “Net gains arising from available for sale financial assets” rose to Euro 601.1 million in 2005,compared to Euro 320.2 million in 2004. Excluding non-recurrent results, net profit from tradingactivities decreased to Euro 246.6 million (Euro 357.7 million in 2004).The profits on financialoperations include the effect of the suspension of hedging accounting in 2004 and itsimplementation in 2005, which determined the reduction of volatility of profits generated and the limitation of the amount of profits when compared with those booked in 2004. Non-recurrentprofits in 2004 include gross gains on the sale of a consumer credit portfolio by Bank Millennium(Euro 30.0 million) and of the holding in Banco Sabadell (Euro 85.3 million), as well as theadjustments made within the scope of the IFRS. During 2005, also of non-recurrent nature, gainswere booked on the sale of the holding in Friends Provident and of part of the holding in EDP,on the sale of the holding in Banca Intesa, and on the sale of Seguro Directo, totalling Euro 185.4million, as was a cost of Euro 7.1 million incurred by the Bank within the scope of the projectdesigned to acquire a majority stake in Banca Comerciala Romana. During 2005, a gain was alsobooked in the sum of Euro 176.1 million, arising on the fixing of the final settlement price of the10% holding in Polish insurance company PZU sold in 2004.

2005 2004 Change

Foreign exchange activity 91.2 37.5 143.5%

Trading and other activities 155.4 320.2 -51.5%

246.6 357.7 -31.1%

Non-recurrent income 354.5 (37.6)

Total 601.1 320.1 87.8%

Recurrent income:

Portugal 98.4 221.7 -55.6%


Net Income Arising from Trading Activity and from Available for Sale Financial Assets Millions of euros, except percentages

Other net operating income (includes “Other net operating income”, Other net income from nonbanking activities”, and “Net income from the sale of subsidiaries and other assets”) stood at Euro263.6 million in 2005 compared to Euro 264.4 million in 2004.This heading includes revenueslinked to the provision of services and fees obtained by the commercial networks on theplacement of the insurance products marketed by Millenniumbcp Fortis, a company in which the BCP Group has a 49% holding, whereas, a year earlier, it held 100% of the insurancecompanies.The non recurrent profits booked in 2004 include the gain on the sale of a holding in Polish insurance company PZU in the sum of Euro 84.1 million. In 2005, non-recurrent profitsinclude a gain of Euro 50.8 million on the sale of Crédilar to Credibom, a gain of Euro 122.6million on the sale of the whole of the share capital of Banco Comercial de Macau, and also a loss on the sale of the holding in ONI (Euro 38.3 million).

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Net Income From Trading(excluding non-recurrent)

��


15.1%

9.8%

20052004

Net income arising fromtrading activity / Netoperating revenues

357.7

246.6


2005 2004 Change

Other net operating income

Income from services and fees 122.1 138.2 -11.7%

Reimbursement of expenses 22.6 22.8 -0.7%

Other (16.1) 19.3

128.6 180.3 -28.7%

Non-recurrent income 135.0 84.1 60.6%

Total 263.6 264.4 -0.3%

Recurrent income:

Portugal 104.6 180.9 -42.2%

Foreign activity 24.0 (0.6)

Other Net Operating Income (*) Millions of euros, except percentages

* Includes "Other operating income", "Other net income from non banking activities" and "Net income from the sale of subsidiaries and other assets"

145

The decrease of profits generated by the equity method (includes “Equity accounted earnings”and “Income arising from non current assets held for sale”) from Euro 425.8 million to Euro 27.0million between the end of 2004 and of 2005 reflects the profits on the insurance business thatwere booked. During the current year these were generated by the 49% stake in MillenniumbcpFortis, whereas in 2004 they included the appropriation of the whole of the profits of the insurancecompanies that were sold in the meantime. Non-recurrent results in 2004 include a gain obtainedon the sale of the insurance companies (Euro 366.5 million).

2005 2004 Change

Millenniumbcp Fortis 21.8 – –

Seguros e Pensões – 42.2 –

Other 5.2 17.1 -69.2%

27.0 59.3 -54.5%

Gains on the sale of insurance companies – 366.5 –

27.0 425.8 -93.7%

Equity Accounted Earnings and Income Arising from Non Current Assets Held for Sale Millions of euros, except percentages


ImpairmentAllocations for credit-risk impairment losses (net of amounts recovered) stood at Euro 113.5million in 2005, compared with the sum of Euro 134.3 million in 2004, despite the one-off,case-by-case increase in the sum of Euro 85.8 million set aside during 2005. On a comparablebasis, allocations for credit impairment losses (net of amounts recovered and write-backs) fell fromEuro 121.6 million in 2004 to Euro 27.7 million in 2005.The improvement of the portfolio riskprofile was brought about by effective management in the evaluation and monitoring of the loanportfolio, reflected in the improvement of the loan-loss indicators and in the consequent reductionof provision requirements. Additionally, the measures taken to increase the Group's profitabilitywithin the scope of the Millennium Programme, which included implementation of a number of measures designed to reduce provision requirements to 75 b.p. (allocations for creditimpairment losses as a percentage of total loans and advances), continued to be implemented,bringing this figure down to 48 b.p. (compared with 84 b.p. in 2004).

Loans recovered continued at a high level, standing at Euro 233.8 million in 2005 compared to Euro 255.6 million in 2004, reflecting the results of the efforts directed at this activity.Cover of loans past due for impairment fell from 291.6% in 2004 to 266.9% in 2005, reflecting the continuation of a prudent provision policy and the suiting of impairment levels to the economicvaluation of the risks incurred.

Millions of euros,

Balance on 1 January 1,277.2 16.5 1,293.7 1,271.5 110.9 1,382.4

Transfers 5.6 2.4 8.0 238.3 (85.6) 152.7

Charges (net of write-back) 351.9 (4.7) 347.2 392.4 (2.5) 389.9

Loans charged-off (300.7) (0.1) (300.8) (649.4) (8.7) (658.1)

Exchange rate differences 10.4 - 10.4 24.4 2.4 26.8

Balance on 31 December 1,344.4 14.1 1,358.5 1,277.2 16.5 1,293.7

Customers CIs Total Customers Cls Total

2005 2004

Impairment for Credit Risk

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Allocations for impairment losses for other assets and other provisions amounted to Euro 57.2 million in 2005, compared with Euro 86.4 million in 2004.This performance was the result of the process of re-evaluation of the Group's assets and represents that part of assets received as payment in kind not entirely covered by guarantees.

The write-off of loans and advances to customers by use of impairment stood at Euro 300.7 million in 2005, comparing favourably with the higher amount booked in 2004 (Euro 649.4 million), reflecting the effect of the improvement of loan portfolio quality.Those sectors that made a greater contribution to write-offs during 2005 includedconstruction, textiles and commerce, as well as consumer credit.

Operating CostsMillennium bcp's operating costs (including staff costs, other administrative costs and depreciation)performed well, down to Euro 1,908.2 million in 2005 (Euro 2,009.5 million in 2004).

Non-recurrent costs under staff costs include those amounts assigned to early retirements thatoccurred in 2004 and 2005, totalling Euro 240.1 million and Euro 235.5 million respectively, underadministrative costs, costs incurred within the scope of the project to acquire a majority holding in Banca Comerciala Romana (Euro 12.6 million), and, under depreciation for the year, theextraordinary depreciation charged by Bank Millennium (Euro 48.6 million in 2004 and Euro 5.4million in 2005).

On a comparable basis, operating costs fell to Euro 1,654.7 million in 2005 (Euro 1,720.8 million in 2004), as a result of the ongoing effort directed at reducing costs and at achieving greateroperating efficiency.The launch of a number of measures designed to obtain greater flexibility and agility in the organisation structure, accompanied by strict monitoring of the budget and of the performance of the organizational units led to effective control of operating costs during the year under review.

The performance of operating costs in the business in Portugal benefited from the greater effortdirected at ensuring and adequate structure and means, which determined a reduction, on a likebasis, to Euro 1,222.9 million in 2005 (7.0% less than the previous year), reflected in theimprovement of the cost-to-income ratio to 62.8% (68.5% in 2004). At a consolidated level, thecost-to-income ratio improved from 72.8% in 2004 to 65.5% in 2005, taking advantage additionallyof synergies generated in operations carried out in the three priority markets (Portugal, Greeceand Poland).

Operating CostsMillions of euros, except percentages

��

68.5%

62.8%

20052004

Operating costs / Netoperating revenues(Portugal Activity)

2,009.51,908.2

147


The reduction of staff costs on a comparable basis from Euro 971.9 million in 2004 to Euro 952.0 million in 2005 was chiefly determined by the staff downsizing measures that have been implemented since 2003.The impact of these measures reflects the reduction of the staffcarried out in Portugal, down from 12,487 employees in 2004 to 11,510 in 2005.The evolution of staff costs in the business abroad, up from Euro 185.0 million in 2004 to Euro 208.2 million in2005, was influenced by the impact of the rise of the zloty exchange rate and by the increase of thestaff required to enlarge the business in Greece and in Poland. It should also be mentioned that costsinherent in early retirements amounted Euro 235.5 million in 2005 and to Euro 240.1 million in 2004.

Other administrative costs fell, on a comparable basis, from Euro 585.4 million in 2004 to Euro 568.4 million in 2005, reflecting a succession of measures implemented in recent years with a view to achieving, at one of the same time, greater operating efficiency, commercial efficacy andcustomer service quality.The main measures include centralisation and concentration of functionsassociated with information technologies, marketing and communication, recourse to outsourcing,optimisation of commercial premises, including a reduction of the number of branches in Portugal to 909 in 2005 (1,008 in 2004), and the redesign of processes involving the implementation ofinnovative solutions directed at cost rationalisation. Costs that showed greater reductions include cost of studies and consultancy, leases and rents, insurance, maintenance and repairs.

2005 2004 Change

Staff costs

Portugal 743.8 786.9 -5.5%


952.0 971.9 -2.0%

Early retirements 235.5 240.1 -1.9%

1,187.5 1,212.0 -2.0%

Other administrative costs

Portugal 395.1 426.9 -7.5%


568.4 585.4 -2.9%

Non-recurrent 12.6 –

581.0 585.4 -0.8%

Depreciation

Portugal 84.0 101.8 -17.5%

Foreign activity 50.3 61.7 -18.6%

134.3 163.5 -17.9%

Non-recurrent 5.4 48.6 -88.7%

139.7 212.1 -34.1%

Total

Portugal 1,222.9 1,315.6 -7.0%


1,654.7 1,720.8 -3.8%

Non-recurrent 253.5 288.7 -12.2%

1,908.2 2,009.5 -5.0%

Operating Costs Millions of euros, except percentages

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Depreciation charges for the year fell to Euro 134.3 million in 2005 (Euro 163.5 million the previousyear, on comparable basis), reflecting the careful policy of selection of investments made by the Group.Total investments made by the Group amounted to Euro 64.5 million in 2005, allocatedprimarily to investments in IT, which accounted for about 36% of the total figure, compared to Euro83.6 million in 2004.

Income TaxConsolidated income tax amounted to Euro 97.4 million in 2005, compared to the sum of Euro 66.9 million in 2004.The amount booked under taxes in 2005 includes the sum of Euro 72.9 million in respect of current tax and a sum of deferred tax amounting to Euro 24.5 million.The real tax rate is lower than the marginal rate owing to the booking of dividends received from companies in which the Group has minority holdings, to theappropriation using the equity method of profits net of taxes originated at Millenniumbcp Fortis,to the gains on the sale of the holdings in Banco Comercial de Macau and in Banca Intesa,and to the lower tax rate on profits booked on some Group companies headquartered abroad.

Minority InterestsMinority interests include that part attributable to third parties of the profits not entirely accruingto the Group, and are linked to the holdings in Bank Millennium, in Banco Internacional deMoçambique, in Banco de Investimento Imobiliário wholly owned as from the last quarter of 2005,in NovaBank (booked only during the first quarter in 2005, since as from that date NovaBankcame to be wholly owned by BCP) and in Interbanco. Minority interests amounted to Euro 87.0 million in 2005, compared to Euro 25.1 million in 2004, largely influenced by the greatercontributions made by Bank Millennium, whose profits increased significantly, and by NovaBank,which in 2004 still returned a loss.The figure determined under minority interests also reflects the impact of non-recurrent results referred to earlier in this review.

Balance Sheet AnalysisThe new model of organizational management and executive co-ordination implemented during2005 included the definition of missions, commercial goals and operating programmes for the new business areas, based on benchmarks and best practices of the industry in Europe, whichcontributed to more dynamic commercial activity and to the growth of the main business variables.Constant monitoring of customer satisfaction indicators led to the conclusion that there was a sustained improvement throughout 2005, driving commercial opportunities and an increase of the cross-selling indicators.This good commercial performance was achieved through acombination of differing growth rates in the three main domestic markets, with emphasis on the increase of the competitive position in Poland and in Greece, which offset the more moderategrowth seen on the Portuguese market.

Consolidated assets amounted to Euro 76,849.6 million in 2005 compared to Euro 71,320.4 millionin 2004, providing Millennium bcp with an estimated market share of 21% at the end of 2005.

Total AssetsMillions of euros

��

2004

71,320.4

2005

76,849.6

Available funds and loans to CIs

Loans and advances to customers

Securities and investments

Tangible and intangible assets

Other

149


Loans and Advances to Customers (Gross)Millions of euros

��

2005 2004 Change

Monetary applications

and loans to credit institutions 8,165.7 7,193.9 13.5%

Loans and advances to customers 52,909.1 48,843.4 8.3%

Financial assets held for sale and for trading 6,977.2 6,150.3 13.4%

Tangible and intangible assets 1,219.1 1,629.0 -25.2%

Other assets 7,578.5 7,503.8 1.0%

Total 76,849.6 71,320.4 7.8%

Total Assets Millions of euros, except percentages

The strategic priority of strict discipline in management of the capital base shown in the increaseof Millennium bcp's own funds in 2005, resulted from the efficient allocation of capital to thevarious business areas, from the reduction of exposure to non-strategic assets and from theincrease of profitability during the year under review. In this connection, the second quarter of 2005 involved a mortgage loan securitisation operation known as “Magellan Mortgages No.3”in the sum of Euro 1,500 million, a part of the strategy to optimise current risks, which allowedadditional funds to be obtained under good pricing conditions.The improvement of the Group'scapital adequacy indicators was reflected in the increase of the consolidated solvency ratio from11.9% in 2004 to 12.9% in 2005, calculated in accordance with Bank of Portugal rules, and in the Core Tier I which stood at 5.3%.

Loans and Advances to CustomersLoans and advances to customers (gross) amounted to Euro 54,253.5 million as at December 31,2005, representing, on a comparable basis, an increase of 8.3% over the figure of Euro 50,097.2 millionat the end of 2004, driven by the increase of mortgage loans, the growth rate of which is expected to have outperformed that of the industry.The significant increase of the weight of mortgage loans as a proportion of the total portfolio to 36.3% contributed to the ongoing improvement of theGroup's loan portfolio risk profile.The strong performance of mortgage loans was achieved in the three priority markets: in terms of market shares there was a consolidation of the business in Portugal, with an estimated market share of 24.4% in terms of new production, a significantstrengthening of the position of Bank Millennium in Poland allowing it to rank third in this market,while new production by NovaBank (Greece) put it among the leading players of the Greek market.The launch of innovative, flexible products suited to the needs and profile of the customers of each of these markets, against a background of expected interest-rate increases, opened up the way to a dynamic commercial approach and to success in the placement of these products.The performanceof loans and advances to companies reflects the policy of careful selection of operations in the light of the risk and return, and the pursuit of objectives of reducing exposure to high concentrations,particularly with regard to the international business of corporate customers, and of improving thereturn on capital allocated to this business.

2004

50,097.2

2005

Mortgage

Consumer

54,253.5

Services

Commerce

Construction

Other international activities

Other

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Credits related with assets sold or undergoing sale include sums associated with Banco Comercial de Macau, Banque BCP (France and Luxembourg) and Interbanco.

In June 2005, Bank undertook a mortgage loan securitisation operation in the sum of Euro 1,500 million, in which, in keeping with SIC 12, there was no call for derecognition of the assets, the balance remaining in the balance sheet.

The policy of prudence in extending credit pursued by Millennium bcp, seen in the thoroughselection of credit extended and in the ongoing improvement of risk evaluation and managementprocesses, allowed the growth of lending business and, at the same time, a reduction of the provisions set aside during the year under review.

Loan portfolio quality continued to provide good indicators, with the ratio of past-due loans as a percentage of total loan portfolio standing at 0.9% in 2005 (0.9% in 2004). On comparable basis,past due loans rose from Euro 430.0 million in 2004 to Euro 503.6 million in 2005.The ratio of credit past due for more than 90 days as a percentage of total loans stood at 0.8% in 2005,the same as in 2004. Non-performing loans, calculated in accordance with Bank of PortugalCircular Letter 99/03 of November 5, stood at 1.1% of the total loan portfolio at the end ofDecember 2005 (1.1% in 2004), with the respective credit impairment cover standing at 216.3% in 2005.

2005 2004 Change

Individuals

Mortgage loans 19,694.0 15,913.9 23.8%

Consumer credit 3,747.2 3,647.2 2.7%

23,441.2 19,561.1 19.8%

Companies

Services 9,572.8 9,310.6 2.8%

Commerce 4,524.7 4,256.0 6.3%

Contruction 5,587.5 5,424.2 3.0%

Other international activities 3,008.9 3,515.5 -14.4%

Other 8,118.4 8,029.8 1.1%

30,812,3 30,536.1 0.9%

Loans (Gross) 54,253.5 50,097.2 8.3%

Provisions (1,344.4) (1,253.8) 7.2%

Loans associated with assets

sold or in the process to be sold – 2,026.5

Total 52,909.1 50,869.9 4.0%

Loans and Advances to Customers Millions of euros, except percentages

Credit QualityMillions of euros, except percentages

��

2004 2005

Loans more than 90 days overdue

325.4%

301.8%

385.3

445.5

0.8% 0.8%

Loans more than 90 days overdue / Total Loans

Coverage Ratio

151


Total Customers’ FundsTotal customers’ funds at Millennium bcp increased, on a like basis, from Euro 51,561.6 million in December 2004 to Euro 56,363.2 million at the end of 2005, driven by a strong growth of balance sheet funds and of off-balance sheet funds.The performance of customer funds was determined, simultaneously, by the growth of the business both in Portugal and abroad.The consolidation of estimated market shares in Poland and in Greece once again demonstrates the success of Millennium bcp's strategy and the importance of these operations within the Group.

The growth of customers’ funds carried in the balance sheet was chiefly determined by the good performance of customers’ deposits, up from Euro 31,650.5 million in 2004 to Euro 34,395.4 million in 2005, benefiting from the contribution of business abroad (+27.5% compared to 2004), particularly the increase of business in Poland and in Greece.

The sharp growth of off-balance sheet customers’ funds reflects the good performance of capitalisation insurance (+22.5% compared to 2004), driven by an attractive, innovative offer of savings products, particularly retirement savings plans and unit-link products.The growth of assets under management was influenced by the performance of investment funds, reflecting the reinforcement of Millennium bcp's leadership of the Portuguese investment funds market,achieving a market share of 20.9% in 2005, and the significant growth in Poland.

Funds related with assets sold or undergoing sale include sums associated with Banco Comercialde Macau, Banque BCP (France and Luxembourg) and Interbanco.


IndividualsMortgage loans 58.2 189.9 0.3% 326.5%Consumer credit 69.3 127.4 1.9% 183.7%

127.5 317.3 0.5% 248.8%Companies

Services 68.6 258.9 0.7% 377.5%Commerce 63.6 207.4 1.4% 326.0%Construction 130.8 172.5 2.3% 131.8%Other international activities 8.4 40.9 0.3% 489.2%Ohter 104.7 347.4 1.3% 331.7%

376.1 1,027.1 1.2% 273.1%Total 503.6 1,344.4 0.9% 266.9%

Past due Impairment Past due Coverageloans for loan loans ratio

losses /Total loans

Past due loans and Impairments as at 31 December 2005

Balance Sheet Customers` FundsMillions of euros

��

2004

37,231.3

2005

39,346.9

Securities

Deposits and Certificatesof deposit

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The cover of non-performing loans by credit impairment amounted to 266.9% in 2005, comparedto 291.6% in 2004, in line with the policy of maintaining adequate credit-risk cover.The cover ofnon-performing loans to individuals stood at 248.8%, with the respective weight of past-due loansas a proportion of total loans and advances standing at 0.5%.


Loans and Amounts Owed to Credit InstitutionsMillennium bcp's net financing requirements (amounts owed to credit institutions less amountsowed by credit institutions) stood at Euro 4,355.1 million in 2005, roughly at the level seen in 2004 (Euro 4,062.9 million). During 2005 business was fundamentally financed through the increase of customer funds.

Securities Portfolio

Millennium bcp's consolidated securities portfolio amounted to Euro 6,977.2 million as atDecember 31, 2005, accounting for 9.1% of total assets in 2005, compared with the figures of Euro 6,175.2 million and 8.7% respectively at the end of the previous year.

At the end of 2005 the securities portfolio essentially comprised fixed-income securities thataccounted for 67.8% of the total portfolio (68% in 2004). In keeping with the goal of reducingexposure to risk and in step with the movements seen on the capital market, the Group increasedthe amount of bonds issued by foreign public issuers, offsetting the reduction of bonds of otherforeign issuers.The evolution of floating-rate securities, the total weight of which in the portfoliofell to 17.4%, was caused by the reduction of assets available for sale, particularly the reduction of the holding in EDP, and by the sale of the whole of the holdings in Banca Intesa and FriendsProvident.The figure for trading derivatives was determined by the revaluation of theseinstruments, seen likewise on the liabilities side under financial liabilities held for trading.

2004

14,348.3

2005

17,016.2

Capitalisation insurance

Assets under management

Off Balance Sheet Customers’ FundsMillions of euros

��

153

Total Customers` Funds

2005 2004 Change

Balance sheet customers' funds

Deposits 34,395.5 31,650.5 8.7%

Securities 4,951.5 5,562.8 -11.0%

39,347.0 37,213.3 5.7%

Off balance sheet customers' funds

Assets under management 8,968.7 7,779.2 15.3%

Capitalisation insurance 8,047.5 6,569.1 22.5%

17,016.2 14,348.3 18.6%

Subtotal 56,363.2 51,561.6 9.3%

Of which: activity in Portugal 47,694.2 44,981.7 6.0%

Of which: foreign activity 8,669.0 6,579.9 31.7%

Customers's funds related to assets

sold or in the process of sale – 1,742.3

Total 56,363.2 53,303.9 5.7%



SolvencyMillennium bcp's solvency ratio, calculated in accordance with Bank of Portugal rules, stood at 12.9% in 2005, comparing favourably with the figure of 11.9% in 2004. Improvement of the solvency indicators reflects the progress seen in meeting the strategic priorities defined by Millennium bcp with a view to efficient capital management, particularly the strengthening of the profitability indicators in the core operations, reflecting the Group's ability to generateprofits and the greater efficiency in the allocation of capital to the various business areas.Contribution to the good performance of the solvency indicators was also made by thereduction of exposure to operations considered not strategic, particularly the sale of BancoComercial de Macau and the lesser allocation of capital to the non-financial investment portfolioas a result of the sale of the holdings in Friends Provident, Banca Intesa and EDP,notwithstanding the negative impact linked to the acquisition of the remaining 50% of the sharecapital of NovaBank and 30.1% of Banco de Investimento Imobiliário.

The solvency indicators also benefited from efficient risk management, involving sharp growth of mortgage loans that determined the increased weight of assets having a lower risk profile.Bank undertook a mortgage loan securitisation operation known as “Magellan No.3” that led to an increase of the solvency indicators under quite favourable price conditions.

Solvency Ratio

2004

11.9%

2005

12.9%

8.1%7.4%

Tier Two

Tier One

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��

2005 2004Amount % in Amount % in Change

total total

Fixed income securities

Bonds issued by Government and public entities

Portuguese issuers 519.5 7.4% 393.2 6.4% 32.1%

Foreign issuers 1,688.6 24.2% 1,409.4 22.8% 19.8%

Bonds issued by other entities

Portuguese issuers 487.8 7.0% 293.4 4.8% 66.3%

Foreign issuers 542.4 7.8% 1,048.1 17.0% -48.2%

Treasury bills and other Government bonds 884.4 12.7% 646.7 10.4% 36.7%

Commercial paper 607.7 8.7% 365.4 5.9% 66.3%

Other fixed income securities – 41.3 0.6%

4,730.4 67.8% 4,197.5 67.9% 12.7%

Variable income securities

Shares

Portuguese 643.6 9.2% 659.7 10.7% -2.4%

Foreign 223.2 3.2% 829.3 13.4% -73.1%

Investment fund units 351.7 5.0% 175.5 2.8%

Other variable income securities – 5.2 0.1%

1,218.5 17.4% 1,669.7 27.0% -27.0%

Impairment for overdue securities (5.7) (8.1)

Trading derivatives 1,034.0 14.8% 316.1 5.1%

Total 6,977.2 100.0% 6,175.2 100.0% 13.0%

Securities Portfolio as at December 31, 2005 Millions of euros, except percentages


(*) Solvency Ratio = Own funds / (Requirements of own funds x 12.5).

2005 2004

Risk weighted assets

Cash and due from banks 1,206.0 1,018.8

Loans and advances to customers 37,575.2 35,881.1

Securities (shares and bonds) 3,062.1 1,150.6

Investments 850.6 2,107.5

Other assets 2,467.6 3,996.1

Total (1) 45,161.5 44,154.1

Risk weighted contra accounts

Guarantees 4,296.2 3,918.3

Other 2,598.9 2,313.8

Total (2) 6,895.1 6,232.1

(General provisions for loan losses) (3) 4.6 756.5

Risk weighted assets and contra accounts

(4) = (1+2-3) 52,052.0 49,629.7

Requirements of own funds

Risk weighted assets and contra accounts x 8% 4,188.0 3,970.5

Trading portfolio 27.4 24.4

Securitisation 118.3 222.0

Total (5) 4,333.7 4,216.9

Own funds

Tier one 4,010.9 4,244.9

of which: Preference shares 1,116.7 1,191.8

Tier two 3,289.1 2,735.3

(Interests in financial institutions

and deductible surpluses) (323.3) (730.6)

Total (6) 6,976.7 6,249.6

Solvency Ratio (Bank of Portugal)(*) 12.9% 11.9%

Tier One 7.4% 8.1%

Core Tier I 5.3% 5.8%

Tier Two 5.5% 3.8%

Solvency Ratio Millions of euros, except percentages

155


Total Non-Adjustments Recurrent recurrent

Net Income 2004 (Local rules) 513

IFRS Adjustments

Loan portfolio impairment 24 24

Valuation of investments (42) (42)

Effective interest rate (9) (9)

Hedge accounting (77) (77)

Intangible assets (9) (9)

Bonus and variable remuneration (64) (24) (40)

Preference Shares 16 16

Deferred tax assets 21 21

Other adjustments (4) (4)

Sale of insurance activity 366 366

Sale of 4.08% stake in Sabadell 85 85

Retirement pensions and other post retirement benefits (214) 19 (233)

Total IFRS Adjustments 93 34 59

Net Income 2004 (IFRS) 606

Impact of the IFRS on Net Income Millions of euros

156

The application of IFRS, starting from January 1st, 2005, requires transition adjustments resultingfrom the change to the new accounting rules. Equity and net income for the year ended atDecember 31, 2004, previously released according to the local GAAP, were adjusted to complywith the IFRS.

Main Impacts of the Transition tothe IFRS on Shareholders Equityand on Net Income for the yearended December 31, 2004

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The principles underlying the main impacts on Millennium bcp from the adjustments that havebeen made are detailed hereunder:

Retirement pensions and other employee benefitsWithin the scope of the adoption of IAS 19, the Group has come to recognise liabilities for the healthbenefits of its current employees and pensioners, benefits attributable to the spouse and descendantson death prior to retirement, length-of-service bonuses and death benefits.The transition adjustmentalso includes recognition of restructuring costs resulting from early retirement, which in accordancewith local rules were deferred over a period of 10 years.

In accordance with IFRS 1 Standards, the Group opted to recalculate its liabilities and respectiveactuarial differences as from the date of constitution of the Pension Fund, recording an increase of deferred actuarial losses, which was taken to shareholders' equity. In the light of IAS 19, all actuarialgains or losses in excess of 10% of the value of the liabilities ("corridor") are now written down overan average period of 20 years (local GAAP: 10 years), corresponding to the average useful lifeestimated for current employees up to their retirement date.The increase of the period ofamortisation of actuarial losses will lead to a reduction of the annual cost of Pensions in the Statementof Income.

Bonuses and Variable RemunerationIn accordance with local rules, bonuses and variable remuneration were recorded in the year followingthat to which they referred. In accordance with IAS 19 bonuses and other variable compensation arerecognised as a cost of the year to which they relate.As a result of this policy, employee bonusesdistributed during 2004 were adjusted, with a contra-entry under retained earnings as at January 1,2004. In accordance with IFRS 2, costs associated with employees’ stock option plans are recognised inthe Income Statement over the period between the grant date and the date of exercise of the option.

31 Dec. 04 1 Jan. 04

Shareholders' Equity (Local rules) 4,000 3,185

IFRS Adjustments

Retirement pensions and other post retirement benefits (626) (412)

Loan portfolio impairment (DCF) (141) (165)

Valuation of investments (277) (259)

Effective interest rate (16) (6)

Hedge accounting (41) 37

Intangible assets (53) (45)

Financing of treasury shares (54) (57)

Interim dividends (98)

Bonus and variable remuneration (115) (66)

Other adjustments (30) (14)

Deferred tax assets 561 552

Preference Shares 500

(390) (435)

Shareholders' Equity IFRS (*) 3,610 2,750

Impact of IFRS on Equity and reserves Millions of euros

(*) Includes minority interests

157


Fair value of InvestmentsIn accordance with the IFRS, investment securities are now valued at fair value, the differencebetween fair value and cost being taken to reserves.The investment portfolio now includesholdings in companies in which the Group does not exercise control or significant influence.

The differences resulting from valuation of investment portfolio at fair value have been recordedwith a contra-entry under fair-value reserves and retained earnings (impairment). Of the negativeimpacts, attention is drawn to EDP, ONI, Intesa and Friends Provident, and of the positive impactsto Eureko and Banco Sabadell.

Impairment of the loan portfolioIn accordance with the measurement criteria defined by IAS 39, the loan portfolio has come to bevalued at amortised cost and is subject to impairment tests. Compared with the policy followed bythe Group under local rules, adoption of IAS 39 has not introduced substantial changes to themethod of evaluation of the economic risk inherent in the loan portfolio or the impairment criteriaused.Therefore, the increase of loan-loss provisions recorded with a contra-entry under transitionreserves was essentially the result of the effect of introduction of the discounted cash flow methodin calculating the impairment.

Effective interest rate / Accrual of commissionsWithin the scope of the conversion of the financial statements to IFRS, the Group, as from January 1, 2004, has considered the interest on its financial assets and liabilities on the basis of application of the effective rate, in accordance with the eligibility criteria established by IAS 18.The impacts that have been determined are of little significance and refer essentially to medium-and long-term loan operations, mortgage loans and current-account overdrafts.

Derecognition of assets / SPE ConsolidationUnder SIC 12, those entities classified as “Special Purpose Entities” (SPE), particularly vehicles set up within the scope of securitisation operations, in which the Group exercises "control" or in whichthe respective risks are "substantially attributable" to it, are now consolidated.The most significantimpact on the consolidated financial statements caused by the adoption of this criterion is reflectedin the increase in the balance sheet of assets and liabilities related with securitisation operations.

Financing of Treasury SharesFor those Group customers classified as SPEs with impairment, which hold shares and othersecurities issued by the Group that are financed by the Group, an adjustment to the respectiveissues has been calculated in the light of IAS 32/39, which has been recorded with a contra-entryunder Equity - Own securities on the transition date.

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Gains or losses on the sale of assets – Financial holdingsIn accordance with local rules, gains generated by the Group during 2004 on the sale of the whole of the companies engaged in insurance business involved in distribution through the non-bankingchannel, of 51% of the companies engaged in bancassurance business, and of 4.08% of the share capitalof Banco Sabadell, were recorded with a contra-entry under reserves, since at the time of acquisitionof these companies the respective goodwill was also debited with a contra-entry under reserves.In accordance with IFRS, the said gains have been recorded with a contra-entry in the Statement of Income for 2004.

Deferred taxesIn accordance with IAS 12, Group now recognises deferred tax assets, considering reasonableexpectation of future taxable income. Starting January 1, 2005, the year's charge for income tax will include the effect of recognition of deferred taxes booked as and when the temporarydifferences that gave rise of them materialise.

Hedging accountingIn accordance with IAS 39, hedging accounting may be applied only if it can be expected that there will be a highly effective hedging relationship between the variation of the value of the financial instrument and compensation resulting from the respective hedging operation.The test of effectiveness is undertaken at the initial moment of the hedging relation and during the life of the operation.The ineffective part of the hedging relation is recorded in the Statementof Income.The impact on the Statement of Income is essentially due to fluctuation of the value of the financial instruments (derivatives) that were not classified as hedging accounting. As fromJanuary 1, 2005, the Bank has prospectively adopted the hedging accounting requirements, and it is not therefore to be expected that there will be any material volatility of future results.

Interim dividendIn accordance with the IFRS, the interim dividend distributed by the Group in 2004 was recorded,with reference to December 31, 2004, with a contra-entry under own funds.This differencecompared with local rules did not generate any impact on the Statement of Income.

Preference SharesPreference shares with no obligation of reimbursement (in cash or other financial asset) in whichthe dividends are declared on a discretionary and not cumulative basis, are classified as sharecapital.The new criterion has a positive impact on own funds and on net income for the year.

159


Risk Management

The Group's risk-management policy is designed to ensure adequate relationship at all timesbetween its own funds and the business it carries on, and also to evaluate the risk/return profile by business line.

In this connection, monitoring and control of the main types of financial risk – credit, market,liquidity and operational – to which the Group's business is subject are of particular importance.

Main Types of Risk

Credit – Credit risk is associated with the degree of uncertainty of the expected returns as a result of the inability either of the borrower (and the guarantor, if any) or of the issuer of a security or of the counterparty to an agreement to fulfil their obligations.

Market – Market risk reflects the potential loss inherent in a given portfolio as a result of changes in rates (interest and exchange) and/or in the prices of the various financialinstruments that make up the portfolio, considering both the correlations that exist betweenthem and the respective volatility.

Liquidity – Liquidity risk reflects the Group's inability to meet its obligations at maturity withoutincurring in significant losses resulting from the deterioration of the financing conditions (financingrisk) and/or from the sale of its assets at less than market value (market liquidity risk).

Operational – Operational risk is understood to be the potential loss resulting from failures or inadequacies in internal procedures, persons or systems, and also the potential losses resultingfrom external events.

Internal OrganisationThe Board of Directors of Banco Comercial Português is charged with defining the general riskmanagement and control management principles, approving the respective management policy and creating within the organisation a structure provided with the resources appropriate to theirimplementation, including identification, evaluation and preparation of proposed measuresconcerning every aspect of these risks – credit, market, liquidity and operational.

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Responsibility for implementation of these risk policies has been concentrated on a structuretransverse to all Group entities and fully independent of the areas originating the risks - the RiskOffice.

Within the scope of its duties, the Risk Office is charged with defining concepts and withdeveloping, implementing and controlling the application of a set of methods and metrics that willensure proper assessment of the risks incurred, providing the technological support best suited to the analysis, both at consolidated level and at the level of each business line.

The Risk Office is also responsible for supporting the working of the Risk Sub-committees: Credit,Market and Liquidity, Operational and Pension Fund Monitoring.

All the sub-committees are chaired by a member of the Board of Directors and a Risk Officemanager acts as secretary. Managers of the main areas involved in the risk decision andmanagement processes of the various Group companies have a seat on these sub-committees.

The actions of every entity included in Banco Comercial Português consolidation perimeter are governed by principles defined and decisions taken centrally by the Risk Sub-committees.

Risk Commitee Risk ManagementAreas

Risk Office

Board ofDirectorsRisk Policy Risk Policy

Risk Policy

Riskmanagementand control

at overall level

Day-to-daymanagementby risk type,subordinatedto theestablishedlimits

Risk management and control principles,internal organisation and fixing risk limits

Development and implementation of the policy,assessment of methodologies, systems of limitsand reporting of the various types of risks

MethodologiesProcessesSystemsLimitsReporting

161


The Commercial, Markets and Structural areas deal with transactions carried on with entitiesforeign to the Group, including contracts with customers (Commercial), transactions resulting fromoperating on the financial markets (Markets) and operations of corporative scope (Structural), suchas, issues of share capital and subordinated debt and operations involving financial holdings.

The Credit Portfolio Management and Asset and Liability Management Areas deal respectively withthe macro-management of credit and market risks arising from the activity of the three other areas(Commercial, Markets and Structural).

In principle, the Commercial and Structural areas do not manage risks.Therefore, risks originatedwithin the scope of their business are transferred, through internal transactions carried out at market prices, to the risk-management areas (CPM and ALM) and come to form part of their own portfolios. Consequently they are eligible for the purpose of evaluation and control of the respective risk limits.

The Markets areas act, simultaneously, as trading areas (own portfolio) and as executors of decisions taken by the Risk Sub-committees having, in the latter case, responsibility forcontracting market operations designed to match the overall risk levels with the approvedguidelines.

Under these conditions, the credit and market risks are concentrated in three areas:

Markets – includes the market-risk positions (interest rate, exchange rate and liquidity) resultingfrom trading activity and liquidity management;

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Risk Evaluation and Management ModelThe risk evaluation and monitoring model is based on the existence of five areas that havedistinctive roles in the risk management process – Commercial, Structural, Markets, Asset andLiability Management (ALM) and Credit Portfolio Management (CPM).

Risktransferprocess

CommercialCommercial activity

CPMCredit Portfolio

Management

StructuralStructural activity

ALMAssets and Liabilities

Management

MarketsTrading & risk-hedging order activity

Customers

ShareholdersSuppliers

Other

FinancialMarkets

Ris

k tr

ansf

ers

Risk transfer

Internalcover

Risk ManagementAreas

RiskAreas


ALM – includes the market-risk positions resulting from the internal transfer of risks originated in the Commercial and Structural areas, net of hedging decisions and of the risk positions assumedat the level of the Asset and Liability Management Committee (ALCO);

CPM – covers the credit-risk positions originated in the other areas – Commercial, Structural and Markets, net of the respective hedging decisions.

Risk Evaluation

Credit Risk Credit-risk evaluation is based on models that, in the case of customers of the Retail segment, areessentially of behavioural nature and, in the case of corporate customers and economic groups,combine economic and financial information with data of a qualitative nature, such as managementquality and the organisation of the company, its position in the marketplace and its futureprospects.

The degree of risk of most individual customers and of the self-employed is assessed using theTRIAD model.This is a credit-decision support system that automatically pre-assigns credit limitsand degrees of risk to every customer on the basis of their financial history.This system allows,at one and the same time, a high quality service level, reflected in simple, fast loan approvals, and in strict monitoring of the loan portfolio quality.

In this way, customers are submitted to internal rating processes, the credit decision beingentrusted to committees whose composition and duties are defined in specific regulations.In accordance with the internal rating system, each customer is assigned a certain risk degree in keeping with the following scale:

Meaning ApplicationDegree of Risk

Customers of excellent financial strength.Default is very unlikely to occur.

Customers of above-average financial strength.Capacity for timely repayment is very strong.

Customers with good repayment capacity andabove-average financial strength.

Average financial strength and repayment capacityis satisfactory.

Repayment capacity still acceptable. Some vulnerability to adverse market conditions or to a less favourable economic background.

Customers with high default probability.

Customers in a fragile economic and financial situation. Default is very likely.

A

B

C1

C2

C3

D

E

Negligible Credit Risk

Low Credit Risk

Medium-Low Credit Risk

Medium Credit Risk

Acceptable Credit Risk, though

greater than the average risk

High Credit Risk

Excessive Credit Risk

163


The power of these rating systems to discriminate is shown by tests performed on the respectivedefault probabilities, in line with the Basel II criteria, covering evaluation of the respective volatilitiesand of the risk of migration between the various degrees of risk.

Complementing the rating models, there is a preventive control system designed to ensure earlydetection of cases of default.The system is based on a set of Warning Signals, leading, in the light of their frequency, seriousness and correlation, to the assignment of Risk Classifications and to thedefinition of mandatory Plans of Action, aimed at minimising default.

All the instruments are reviewed periodically to ensure their predictive capacity.

As at December 31, 2005, the breakdown of the business loan portfolio in Portugal, in accordancewith the Basel II credit classes, illustrated in the graph diagram.

As at December 31, 2005, the breakdown of the balance of loans and advances to customersrelated to the business in Portugal by degree of risk, in accordance with the ratings systemsdescribed earlier, reflects a low-risk portfolio both for the customers of the Retail segment and for companies.

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A

B

C1

C2

C3

D

E

NonClassified

0%5%15%20%25%30% 40%30%20%10%0%10%

Breakdown of Credit by Degree of Risk (Portugal)��

Individuals and Entrepreuners Corporate

Breakdown of the Loan Portfolio(Risk weighted assets)

��

8%Retail

(other)

1%Sovereign

Retail9%

21%Mortgage

24%Corporate

8%Banks

29%Companies

With regard to the breakdown of credit in respect of the business carried on by Millennium bcp in Portugal, there is clearly greater concentration (35%) in the rung of loans of more than Euro 5 million, determined by the high weight of this type of loans as a proportion of all loansgranted to companies (60%), and in the rungs of loans between Euro 50,000 and Euro 250,000,


> 5,000

2,500 – 5,000

1,000 – 2,500

500 – 1,000

250 – 500

100 – 250

50 – 100

25 – 50

10 – 25

<10

40% 0%10%20%30% 10%0% 20% 30% 40% 50% 60% 70%

Breakdown of Credit by Amount (Portugal)��

Individuals and Entrepreuners Corporate

reflecting the high concentration of loans granted to individuals and to entrepreneurs, which includethe greater part of the mortgage loans. At the end of 2005, of total loans and advances to individualsand to entrepreneurs, 65% involved operations of between Euro 50,000 and Euro 250,000.

Thousands of euros

On the other hand, credit-risk management is also supported by risk-mitigation techniques such as collateral, guarantees or credit derivatives that offer the required degree of protection foroperations or portfolios selected on the basis of a set of principles and criteria, of adequate pricingof operations and of greater efficiency in credit recovery procedures designed to minimise losses in the event of default.

Market Risks

The Group uses the Value at Risk (VaR) concept as the main measure to assess exposure to market risks.

VaR calculation is undertaken considering the breakdown of the positions by geographic marketarea, currency and nature of the risks (interest-rate, currency and equity). It is calculated both on an individual basis for each responsibility centre involved in the process of taking market risks and on a consolidated basis considering the effect of existing diversification between the various portfolios.

165


Risk limits have been established for every area of intervention on the market.

Evaluation of the suitability of the VaR model to the nature of the risks involved in the portfolios in question is undertaken by means of a daily backtesting process that compares the VaR indicatorswith the actual results.The results of this process during 2005 show the adequacy of the model to assess the risks incurred.

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VaR – Market Areas (Trading activity)

2005 Statistics

VaR(1) End 2005 Average Maximum Minimum End 2004

Aggregate Values (2) 6,319 6,610 10,728 4,059 6,509

Interest-rate risk 6,304 6,623 10,749 3,936 6,589

Exchange rate risk 88 327 2,286 79 199

Equity risk 522 678 1,684 49 105

Diversification Effect 596 1,018 3,991 5 383

Thousands of euros

(1) 10-day holding period and 99% confidence level.(2) Consolidated values of the positions assumed by the Lisbon (includes New York and Macao), Poland (BankMillennium), Greece (NovaBank) and Turkey (BankEuropa) Treasuries.

Evolution of the VaR indicators

The VaR is used as a measure of appraisal both of the risks incurred by the market areas (tradingportfolio) and of the risks covered by the ALM portfolio, which includes the positions decidedwithin the scope of the Asset and Liability Management Committee (ALCO) and also for the internal hedging positions of the risks associated with transactions originated within the scopeof the structural area, as previously defined.

8,000

4,000

Jul. 2

005

Jan.

200

5

12,000

0

-4,000

-8,000

-12,000

Feb.

200

5

Mar

. 200

5

Apr

. 200

5

May

. 200

5

Jun.

200

5

Aug

. 200

5

Sep.

200

5

Oct

. 200

5

Nov

. 200

5

Dec

. 200

5

Markets Total Return Markets Total VaR

VaR – BackTest / Markets Total�� Thousands of euros


(1) 10-day holding period and 99% confidence level.(2) Consolidated values of the positions assumed by the Lisbon (includes New York and Macao), poland (BankMillennium), Greece (NovaBank) and Turkey (BankEuropa) Treasuries.

VaR – ALM Areas

2005 StatisticsVaR(1) End 2005 Average Maximum Minimum End 2004

Aggregate Values (2) 22,535 15,656 42,553 9,183 43,910

Interest-rate risk 22,535 15,653 42,553 9,183 43,910

Exchange rate risk 4 100 623 0 0

Equity risk 4 4 554 0 0

Diversification Effect 8 100 1,177 0 0

Thousands of euros

The VaR indicators referred to above generally reflect the low exposure to market risks,Euro 6.6 million on average, as a result of the conservative profile of the trading areas and also the effect of the diversification between the various portfolios.

Analysis by type of risk, in turn, shows that the positions mainly involve interest-rate instruments,while the exchange rate risk and the equity risk involve rather insignificant amounts.

The VaR of the ALM portfolio showed an average value of Euro 15.7 million, influenced by internaloperations that reflect risk positions assumed by the ALCO, taking into account the nature of the operations and the conditions and evolution prospects of the investment market.

To complement the VaR methodology other risk indicators are used to monitor and limit positionsin instruments in which the market risks cannot be correctly valued by the VaR methodologyadopted (parametric approximation), such as exposure to the optionality risk.The portfolio ofopen positions in this type of instrument is residual in the Bank's risk positions taken as a whole.

Evaluation of the interest-rate risk arising from transactions contracted outside the scope of operations on financial markets is determined through an interests-rate risk sensitivity analysisprocess, which is performed on a monthly basis for the whole of the operations included in theGroup's consolidated balance sheet.

The process of interest-rate risk sensitivity analysis is based on information of the financial natureregarding contracts existing at the date of analysis, available through the information systems.Thesedata are modelled considering future cash flows expected for each contract, in accordance with the respective repricing dates.

Aggregation, for each currency analysed, of all the cash flows expected for each time intervalallows determination of the respective interests-rate gaps by repricing maturities.

167


Comparison between the present value of the interests-rate mismatch discounted at marketinterest rates and the discounted value of these same cash flows simulating a parallel shift of themarket interest-rate curve of +100 b.p. reflects the estimated change of the book value caused by a parallel 1% variation of market interest rates.

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Interest-rate Mismatch by Repricing Period (Commercial & Structural Areas)

Risk <3 3-6 6-12 1-2 2-3 3-5 5-7 >7Areas Total months months months years years years years years

Commercial 34,451 -18,877 -9,268 39,796 15,208 8,203 7,299 -3,792 -4,117

Structural 236,527 4,077 -3,129 21,834 7,795 21,348 16,497 92,218 75,887

Oper. Hedging -279,684 8,136 -1,993 -45,481 -23,371 -30,471 -25,679 -89,145 -71,681

Mismatch -8,706 -6,664 -14,391 16,148 -367 -920 -1,883 -719 89

Thousands of euros

The analysis of the interest-rate risk sensitivity analysis thus calculated, referred to December 31,2005, shows amounts Euro+ 131 million and Euro+ 3 million for those currencies in which the Group has more significant positions, euros and dollars, respectively.

Based on the results of this sensitivity analysis, operations are carried out with the market eachmonth with a view to cancelling the risk positions, at each repricing maturity, associated with the portfolio of operations belonging to the Commercial and Structural areas.

Those risk positions that are not subject to market hedging are transferred via internal operationsto the market areas (risk positions with maturities of less than 1 year) and to the ALM area (riskpositions of more than 1 year). From then on the positions form an integral part of the respectiveportfolios that are valued daily on the basis of the VaR methodology.

Liquidity riskThe growth of the loan portfolio seen in recent years, particularly with regard to the mortgage loancomponent, has been considerably greater than the growth of customer funds taken, with theconsequent impact on the liquidity position of the Group.

Under these conditions, a significant part of the asset portfolio is now financed by recourse to othersources of funding, particularly securitisation operations, issues under the Euro Medium Term Notes(EMTN) programme and medium- and long-term financing operations undertaken with financialinstitutions.

Recourse to new sources of funding, with longer maturities, on a par with the changing of the customer funds structure, with an increase of the relative weight of structured products, they too issued with longer maturities, has allowed the balance of the Group's liquidity position to be maintained.

Management of the Group's liquidity is centralised in Lisbon.This means that both the financingneeds and any surplus funds generated by the subsidiaries are managed by means of operations


realised with the Bank, contributing to a more efficient management of the Group's financingrequirements on a consolidated basis.

Assessment of the Group's liquidity risk is undertaken by means of regulatory indicators stipulated by the supervisory authorities and by means of internal indicators for which exposure limits have alsobeen determined.

The evolution of the Group's liquidity situation for short-term time horizons (up to 3 months) is undertaken on a daily basis using two internally defined indicators, immediate liquidity and quarterlyliquidity, which measure the maximum fund-taking requirements that can occur on a single day,considering the cash-flow projections for periods of 3 days and 3 months, respectively.

In parallel with this analysis, the evolution of the Group's liquidity position is regularly determined,on a monthly basis, identifying all the factors justifying the variations that occur, this analysis beingsubmitted to the Market and Liquidity Risks Sub-committee.

Calculation of the liquidity indicator instituted by the Bank of Portugal, returned a figure of 96%,on a consolidated basis as at December 31, 2005, which compares with a figure of 103% as at December 31, 2004.

Operational RiskManagement of the operational risk is for its very characteristics decentralised across the entirestructure of the institution.The various parties involved must comply with the main activities of the management process: identification, evaluation, control and mitigation.

Millennium bcp has adopted a number of principles and best practices that ensure efficientmanagement of the operational risk, particularly through definition and documentation of theseprinciples and through implementation of the respective control mechanisms.This includessegregation of functions, responsibility lines and respective authorisations, assignment of exposurelimits, codes of practice and of conduct, key indicators, controls at information technology level,contingency plans, physical and logical accesses, reconciliation activities, reports of exceptions and in-house training on processes, products and systems.

Within the scope of the definition of contingency plans, a team has been set up dedicated to theconstruction of a Business Continuity Plan allowing situations of crisis to be confronted in a planned manner, ensuring that business will be back on stream within the established,acceptable time frame.

The working rules and characteristics of the internal control system are duly documented and divulged to allow access by all employees.

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Without prejudice to the responsibilities of the entire structure in the management of theoperational risk, the Risk Office has a department devoted solely to monitoring the operationalrisk. Its mission is to strengthen the Group's capabilities with a view to adopting in time the mostadvanced methodologies proposed by Basel II as far as Operational Risk is concerned.

In this connection, several initiatives have been launched to strengthen the culture and the ability to manage these risks. Self Risk Assessment was finalised as a part of a vaster programme directedat the improvement of the internal control system in keeping with Bank of PortugalRecommendations and with the practices enshrined in Section 404 of the Sarbanes-Oxley Actframework.

Basel II

Millenniumbcp has been developing a number of internal initiatives tending towardsimplementation of the Basel II proposals.

The end of the first quarter of 2005 saw the conclusion of a project to assess readiness to accommodate the Basel II requirements better throughout the entire perimeter of the Group's business.

This exercise provided an integrated overview of the present situation of several aspects:organisation, policies and procedures, models and information technologies, the aim being to determine whether any gaps existed with regard to the Basel requirements and to the degreeof approach to best practices in risk management.

A road map for the implementation of Basel II was established on the basis of the conclusions.Currently under way are several activities involving various areas of the organisation and the Boardof Directors has advised the Bank of Portugal of the intention of adopting the Basel II approachesas follows:

Credit Risk – at the Group companies in Portugal and at Bank Millennium in Poland and NovaBank in Greece, application of the advanced method of internal notations (“IRB Advanced”) and, taking into account the costs inherent in implementing this solution and the materiality of the risks involved, the standard method at the other entities.

Operational Risk – application of the standard method at all Group companies. In thisconnection and to accommodate the implementation of the management systems in non-core operations, the intention is that they adopt the basic method on a transitional basis.

With regard to the operational risk this intention does not exclude advancing in time to the AMA(Advanced Method Approach), although this would require significant additional effort in terms 170

Ann

ual R

epor

t 20

05


SP01 Definitions & Principles SP10

Information

technologies

SP11

Calculation

process

SP12

Approval

process

Credit Risk Market Risk Operational Risk Pillar I

SP02 LGD/EAD

SP03 Scoring models

SP04 Securitisations

SP08 Capital adequacy assessment tool Pillar II

SP09 Disclosure Policies Pillar III

SP05 Market Risk

SP06 Holdings

SP07 Operational risk

of modelling the Group's operational and business processes, introduction of consistent processself-assessment methodologies and implementation of systems and procedures to recoup realisedlosses.

The approach followed in implementing Basel II is based on the creation of several sub-projectsdrawn up in accordance with the specific objectives in each area of intervention, in the light of thesaid assessment exercise.The sub-projects of the Basel II Project are shown in the following table:

As a result of the established regulatory framework, the conclusion of the Project is scheduled forDecember 2007, ensuring full compliance with the selected approaches.

Participation in the Quantitative Impact Study (QIS 5)

During the last quarter of the year the Group was involved in replying to the 5th QuantitativeImpact Study.This involvement was seen as a unique opportunity to perform a preliminaryassessment of the degree of readiness of the developments that had been undertaken, particularlyof the IT platform supporting the calculation of the capital requirements. Of the results achievedthe focus is on the degree of implementation of the Basel II by the Group as well as confirmationof the expected benefits of the selected approaches.

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Documents

Vol 1 Miolo 05 ing soctip - ind.millenniumbcp.ptind.millenniumbcp.pt/.../RelatorioContas/Annual_Rep2005_I_3.pdf · Vol_1_Miolo_05_ing_soctip 21/06/2006 ... to 4,771 million euros