annual 2006 - montepio · 9.5. balance sheet and statement of income by functions 181 9.6....

ANNUALREPORT

2006

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1. GOVERNING BODIES FOR 2007-2009 6

2. LETTER FROM THE CHAIRMAN 10

3. GENERAL INDICATORS 13

4. FRAMEWORK OF ACTIVITIES 15

4.1. International Economy 15

4.2. Portuguese Economy 16

4.3. Monetary and Financial System 17

5. THE MONTEPIO GROUP STRUCTURE 19

6. CREATING VALUE FOR MEMBERS AND STRATEGIC GUIDELINES 21

7. MONTEPIO GERAL – ASSOCIAÇÃO MUTUALISTA 23

7.1. Members and Beneficiaries 257.1.1. The Association Movement 257.1.2. Schemes Subscriptions, Quotizations and Capitals 267.1.3. Benefits Due and Refunded 277.1.4. Improvements to Benefits in Formation and in Progress for Actuary Schemes 277.1.5. Return on Capitalisation Schemes 277.1.6. Perpetual Annuities 27

7.2. Net Return on Assets 287.2.1. Property Portfolio 287.2.2. Loans to Members 297.2.3. Securities Portfolio 29

7.2.4. Financial Interests Portfolio 307.2.4.1. Institutional Financial Interes in Caixa Económica Montepio Geral 307.2.4.2. Other Financial Interests 307.2 5. Available Funds 31

7.3. Membership Activities 32

7.4. Permanent Funds, Own Funds and Reserves 33

7.5. Profits 34

7.6. Proposed Application of the Profit for the Year and Resources to Technical Surpluses and to the General Reserve Fund 357.6.1. Resource to Permanent Funds’ Technical Surpluses and to the General Reserve Fund 357.6.1.1. Permanent Funds of the Respective Schemes 357.6.1.2. General Reserve Fund 357.6.2. Available Funds Balance and General Reserve Fund Income plus Resource of Technical

Surpluses and the General Reserve Fund 367.6.2.1. To the General Reserve Fund 367.6.2.2. To the Permanent Funds of the Respective Schemes 377.6.2.3. To the Own Funds of the Respective Schemes 37

7.7. Proposed Allocation of Benefit Improvements 38

Table of contents

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7.8. Proposed Restitution of General Reserve Fund and Technical Surpluses 38

7.9. Proposed Restitution of Amount Used to Top Up Available Funds 39

7.10. Proposed Allocation of Return on Retirement Capitals Retirement Savingand Collective Schemes 39

7.11. Proposed Distribution of Sum Transferred from Caixa Económica 39

7.12. Proposed Increase in Institutional Financial Interest in Caixa Económica 39

7.13. Proposed Allocation to Fundação Montepio Geral 39

7.14. Balance Sheet and Statement of Income 40

7.15. Statement of Cash-Flows 44

7.16. Notes to the Financial Statements 45

7.17. Auditors’ Report 63

7.18. Internal Audit Board’s Report and Opinion (see 8.21.)8. CAIXA ECONÓMICA MONTEPIO GERAL – INDIVIDUAL 65

8.1. Trend in Main Balance Sheet Items 67

8.2. Commercial Activity 688.2.1. Credit 688.2.1.1. Housing Credit 708.2.1.2. Individual Credit 708.2.1.3. Individual Credit – Revolving 718.2.1.4. Construction Credit 718.2.1.5. Credit by Guarantee Type 728.2.1.6. Credit and Interest Due 728.2.2. External Resources 758.2.2.1. Customer Deposits 768.2.2.2. Disintermediation Resources 768.2.3. International Activity 778.2.4. Insurance 77

8.3 Financial and Investment Activities 788.3.1. Available-for-sale and Held-to-maturity Financial Assets 798.3.2. External Funding 80

8.4. Financial Holdings Portfolio 81

8.5. Property Acquired as Refunding of Own Credit 81

8.6. Distribution Channels and Marketing 828.6.1. Distribution Channels 828.6.2. Range of Products and Services 838.6.3. Promotional Campaigns 848.6.4. The Montepio Brand – a new corporate identity 84

8.7. Risk Management 85

8.8. Human Resources 87

8.9. Technological Resources 88

8.10. Financial Analysis 888.10.1. Equity 888.10.2. Operating Account 898.10.2.1. Average Asset and Liability Interest Rates 908.10.2.2. Financial Intermediation Rate 918.10.2.3. Net Interest Income 918.10.2.4. Profit on Services Provided to Customers 92

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8.10.2.5. Financial Operations Profit 938.10.2.6. Return on Financial Holdings 938.10.2.7. Profit on Sale of Property for Trading 938.10.2.8. Operational Costs 948.10.2.9. Provisions and Impairment 968.10.3. Rate of Return (ROE and ROA) 978.10.4. Efficiency and Operating Indicators 97

8.11. Pensions Fund 97

8.12. Transition to IFRS (International Financial Reporting Standards) 98

8.13. Rating 99

8.14. Capitalisation and Prudential Ratios 99

8.15. Proposed Profit Distribution 100

8.16. Balance Sheet and Statement of Income 1018.16.1. Balance Sheet 1018.16.2. Statement of Income by Nature 1028.16.3. Statement of Income by Functions 103

8.17. Statement of Cash-Flows and Statement of Changes in Equity 104

8.18. Notes to the Individual Financial Statements 106

8.19. Report on the Audit Work (see 9.8.)8.20. Statutory Audit Opinion and Auditors’ Report of Individual Financial Statements 160

8.21. Internal Audit Board’s Report and Opinion 162

8.22. Institution’s Corporate Governance Report 164

9. CAIXA ECONÓMICA MONTEPIO GERAL – CONSOLIDATED 175

9.1. Introduction 177

9.2. Summary of Group Activity 178

9.3. Profit, Efficiency and Profitability 179

9.4. Capitalisation and Prudential Ratios 180

9.5. Balance Sheet and Statement of Income by Functions 181

9.6. Statement of Cash-Flows 183

9.7. Notes to the Consolidated Financial Statements 184

9.8. Report on the Audit Work 238

9.9. Statutory Audit Opinion and Auditors’ Report of Consolidated Financial Statements 240

9.10. Internal Audit Board’s Report and Opinion of Consolidated Financial Statements 242

10. SOCIAL RESPONSIBILITY 243

11. MONTEPIO GERAL GROUP’S FINANCIAL HOLDINGS 247

12. MANAGEMENT 253

13. ACKNOWLEDGEMENT 259

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1. Governing Bodies for 2007-2009

GENERAL MEETING BOARDChairman Member no. 33 151-5 VITOR JOSÉ MELÍCIAS LOPES

Law graduate

1st Secretary Member no. 31 560-9 ANTÓNIO PEDRO DE SÁ ALVES SAMEIRO

Lawyer

2nd Secretary Member no. 45 139-8 ANTÓNIO DIAS SEQUEIRA

Economist

Deputy Member no. 48 385-8 MARIA LEONOR LOUREIRO GONÇALVES DE OLIVEIRA GUIMARÃES

Law graduate

Deputy Member no. 127 945-6 MARIA VITÓRIA DA GRAÇA PINTO GUERRA MOURÃO

Sociologist

BOARD OF DIRECTORSChairman Member no. 29 416-0 JOSÉ DA SILVA LOPES

Economist

Members Member no. 38 670-6 ANTÓNIO TOMÁS CORREIA

Law graduate

Member no. 28 745-2 JOSÉ DE ALMEIDA SERRA

Economist

Member no. 59 784-1 RUI MANUEL SILVA GOMES DO AMARAL

Economist

Member no. 31 399-9 EDUARDO JOSÉ DA SILVA FARINHA

Economist

INTERNAL AUDIT BOARDChairman Member no. 26 952-2 MANUEL JACINTO NUNES

University Professor

Members Member no. 281 904-8 GABRIEL JOSÉ DOS SANTOS FERNANDES

Economist

Member no. 31 269-9 JOSÉ MOREIRA VENÂNCIO

Banking Accountancy and Law graduate

Deputy Member no. 62 268-0 JOÃO MIGUEL LOURENÇO GOMES

Economist

Deputy Member no. 95 534-4 ISILDA DE AIRES NUNES BRANQUINHO

Economist

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GENERAL BOARDMembers Member no. 71 464-0 MARIA MANUELA DA SILVA

Economist

Member no. 29 676-0 MANUEL DA COSTA BRAZ

Retired Army Officer

Member no. 104 943-7 EUGÉNIO ÓSCAR GARCIA ROSA

Economist

Member no. 29 973-8 MANUEL LOPES DA SILVA

Economist

Member no. 32 309-9 VIRGÍLIO MANUEL BOAVISTA LIMA

Economist

Member no. 35 170-2 CARLOS MANUEL MELO GOMES AREAL

Banker

Member no. 47 207-6 MARIA LUCIA RAMOS BICA

Economist

Member no. 31 000-2 ANTÓNIO FERNANDO MENEZES RODRIGUES

Economist

Member no. 49 598-5 JOSÉ JOAQUIM FRAGOSO

Engineer

Member no. 30 813-7 LUIS MANUEL PESSOA MONTEIRO BRANDÃO

Law graduate

Member no. 44 630-3 ALBERTO JOSÉ DOS SANTOS RAMALHEIRA

Economist

Member no. 37 711-3 NORBERTO DA CUNHA JUNQUEIRA FERNANDES FÉLIX PILAR

Economist

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Board of Directors

Eduardo José da Silva Farinha, António Tomás Correia, José da Silva Lopes (Chairman), José de Almeida Serra, Rui Manuel Silva Gomes do Amaral

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2. Letter from the Chairman

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Despite the strong competition in the banking sector, theMontepio Group managed to improve its performance, ata time when the country’s economy has recovered slightlyand real growth in GDP reached 1.3%.

This success was largely due to the steps taken to strengthenthe strategic alignment of the Group’s component partsand the achievement of its expansion and profit goals.

In terms of banking business, for which the MontepioGroup is best known, in 2006 Caixa Económica MontepioGeral (CEMG) recorded a 32.8% increase in profits, whichrose to 60.2 million euros, and led to an improved rate ofreturn on equity (ROE), rising from 6.67% in 2005 to7.75%.

This growth was based on a reduction in credit due, therecouping of the corresponding provisions and selectivebusiness growth, taking into account market restraints, thestate of the economy and the competition, coupled withcareful pricing management in line with the customer riskand the maturity of the operations.

CEMG’s net assets exceeded 15 thousand million euros,which is a 9% increase on the previous year. At the year-end the customer credit portfolio stood at 13.1 thousandmillion euros, a rise of 11.3%, brought about by thefavourable change in House Loans, which grew by 11.7%.Marketing actions made a major contribution to growth.They promoted the improved quality of the services provid-ed, the greater versatility of the services available to eachcustomer and the greater speed with which credit wasgranted, as well as increasing the level of advertising ofMontepio’s products to the general public.

In terms of getting business, special mention must be madeof the 6.6% increase (over 493 million euros) in customerdeposits, together with the issuing of new capitalizationinsurance, the setting up of a new investment fund and thecontinued issuing of structured products.

The emphasis on diversifying its funding sources and onlonger-term resources, make it possible to obtain businessin foreign markets, in particular through bond and debtcertificate issues, which rose by 10.5% totalling 5.2 thousandmillion euros.

Equity, in the main institutional capital held entirely byMontepio Geral - Associação Mutualista, also grew by 131million euros, a 19% increase.

The increased business led to a 14% rise in the FinancialProfit and a 5.2% rise in Banking Revenue, which reached368 million euros.

These improved profits were mostly achieved thanks to thesteps taken to reduce credit due and doubtful debts, thatled to the recouping and cancelling of provisions to thesum of 209 million euros.

The reformulating of business policy and the reorganisingof the branch network continued in 2006. A trade divisionwas set up to handle the business sector. The range offinancial products was broadened by the launch ofstructured products and capitalisation insurance, aimed atattracting savings. At the same time new risk analysis and

management systems were introduced. A Risk Analysisdivision was set up and charged with preparing CaixaEconómica to comply with the new prudential require-ments under Basle II.

Human Resources Management was another area thatreceived special attention. The company pursued a policyof investing heavily in improving skills by means of anambitious training program and the appointment of highlyqualified staff to new posts. The employee incentivescheme was revamped, with the support of outside con-sultants, in order to bring the earnings and performanceevaluation system into line with the strategic aims.

In the final quarter of the year, the Montepio trademarkwas changed and its new corporate identity launched,including a new logo and a new look. The word «Geral»was dropped from the logo and it was shortened to«Montepio». Following the changes to the trademark,logo and look, the signs on the entire branch network andall forms of communication were altered. These steps werecoupled with a strong advertising campaign.

In regard to Montepio Geral - Associação Mutualista(MGAM), which is the Group’s core body, 2006 saw signi-ficant growth in the number of Members, who totalled377,000, which represents an increase of 43,000 Membersas compared to the previous year-end.

This growth allowed for a 174 million euro rise in perma-nent funds and led to MGAM’s total assets expanding byover 10.2% to exceed 2 thousand million euros.

Special emphasis should be given to the changes made in2006 in some important sectors, such as annuities, retire-ment pensions and retirement capital, aimed at matchingthem to new actuarial assumptions and current financialmarket conditions. In this way MGAM achieved greatersustainability and strengthened the minimal earning gua-rantees made to Members.

MGAM’s performance proved, once again, to be appro-priate to the pursuit of a mutual savings bank’s ends, withinthe scope of supplementary social security, social protec-tion and the strengthening of the MGAM’s role as a sociallyresponsible institution.

Substantial progress was made in the elderly persons sup-port services project. Here a specialist company – Residên-cias Montepio, Serviços de Saúde – was set up whichalready provides home support services to the elderly andis overseeing the building of seven residential homes acrossthe country.

The year 2006 was marked by the tragic death of MGAMmanager, João da Costa Pereira, and by the terminal illnessof the Chairman of the General Meeting Board and ex-Chairman of the Board of Directors, António da Costa Leal,who passed away in February 2007. I wish to express theloss felt by myself and the members of the Board ofDirectors at the parting of this great Montepio figure – oneof the greatest in its history. It was thanks to Costa Leal’svision, skills and endeavour that Montepio and CaixaEconómica went from being extremely modest enterprisesto the national institutions they are today.

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We faced these difficult times with courage and determi-nation. Indeed, Montepio’s powers of recovery arerevealed by its longevity: in 2006 we were 166 years old.

Montepio has always shown a remarkable ability to adapt,regenerate and reinvent itself. The results for 2006 areproof of that potential and constitute a platform for build-ing the future. We will make our best endeavours toensure the aggrandisement of the work done so far.

Thus, it is with confidence in the Montepio Group’s future,that I express, in my own name and on behalf of the othermembers of the Board, our thanks to the bodies withwhich we have worked over the last year, namely the Bank

of Portugal, the Ministry of Finance and Public Administra-tion, the Ministry of Labour and Social Security, and theStock Exchange Commission.

A special vote of thanks must be given to Montepio’sMembers and customers for the confidence shown in us,as well as to our employees for their work and the dedica-tion and professionalism they have shown.

Lisbon, March 2007

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(thousands of euros)

INDICATORS 2006 2005 2004

1. ASSOCIAÇÃO MUTUALISTA1.1. SIZENet Assets 2 092 248 1 898 873 1 562 532

Change 10.18% 21.53% 29.51%Equity (Own Funds, Reserves and Profits) 329 155 302 092 334 822Members (Units) 376 950 333 638 291 789Pensioners (Units) 6 292 6 065 5 791CEMG employees seconded to AM (Units) 62 63 60

1.2. PROFITABILITYCash flow for the year 40 768 43 025 35 985Profit for the year 34 925 38 198 31 840Profit for the year/ Average net assets 1.75% 2.21% 2.30%

1.3. LIABILITES COVERFunds and Reserves / Mathematical Provisions and Benefit Improvements 1.17 1.17 1.25

2. CAIXA ECONÓMICA2.1. SIZENet Assets 15 222 888 13 950 993 12 418 904

Change 9.12% 12.34% 2.51%Equity (Capital, Reserves and Profits) 822 175 690 771 652 629Employees – Staff in Portugal (Units) 2 918 2 853 2 863Branches and Other Forms of Representation (Units) 302 303 305

Branches (Units) 295 295 297Representative Offices (Units) 6 6 6Financial branches (Units) 1 2 2

On-demand Deposit Accounts (Units) 1 200 443 1 174 187 1 141 383Chave 24 ATMs (Units) 261 259 257Multibanco ATMs (Units) 643 588 505Automatic Payment Terminals (Units) 6 486 5 863 4 837

2.2. PROFITABILITYCash flow for the year 149 691 149 182 117 636Profit for the year 60 154 45 312 33 043Profit for the year / Average Net Assets (ROA) 0.41% 0.34% 0.27%Profit for the year / Average Equity (ROE) 7.75% 6.67% 5.33%Banking Revenue / Average Net Assets 2.51% 2.65% 2.50%

2.3. CREDIT RISKRatio of Credit Due for over 90 days 1.98% 2.55% 3.07%Ratio of unpaid Credit 2.52% 3.35% 3.71%Ratio of unpaid Credit net of provisions 0.91% 0.88% 1.29%

2.4. PRUDENCE RATIOSSolvency and Market Ratio 10.75% 10.74% 11.44%Adequacy of Base Equity Ratio (Tier 1) 7.28% 6.68% 7.54%Net Fixed Assets Ratio (Fixed Assets / Equity) 13.18% 13.68% 16.01%Total Credit Provisions / Credit and Interest Due 102.60% 113.74% 95.98%Total Credit Provisions / Credit and Interest Due +3 months 116.99% 125.12% 102.02%Pension Fund Value / Past Liabilites 73.93% 70.01% 92.73%

2.5. RATINGS ( Short-term : Long-term)Fitch Ratings F2 : A- F2 : A- F2 : A-Moody’s P-1 : A3 P-1 : A3 P-1 : A3

2.6. EFFICIENCYAverage Net Assets / Average No. of Employees 5 543 4 583 4 321Operating Costs / Average Net Assets 1.49% 1.52% 1.54%Operating Costs + Depreciation / Banking Revenue (cost to income) 62.82% 60.23% 65.85%Staff in Portugal / Branches (Units) 9.89 9.67 9.64Staff Costs / Banking Revenue 38.26% 36.69% 40.91%

3. General indicators

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In 2006 the world economy continued to show signs ofgood health and growth was estimated at 5.1%. It bene-fited from strong international trade, an improved labour

market and favourable movements in the financial mar-kets, in particular share markets.

Unlike in previous years, the expansion in the world econo-my was more balanced in geographical terms, reflecting, inparticular, the good economic performance of most of thecountries in the Euro Zone and the slight downturn in theUSA throughout 2006.

Following strong growth in the 1st quarter of 2006, theAmerican economy slowed until the end of the year, dueto the fall off in house building and the poor performanceof the car market. Nonetheless, American GDP is expectedto record a growth of 3.4%, in annual terms, slightly up onthe 3.2% achieved in 2005.

Japan should record a rise in GDP of 2.8%, due mainly tothe higher levels of private investment and family con-sumption, in the context of an improved labour market.

From among the other Asian countries, mention should bemade of the fine performance of the Indian economy,where growth is expected to be around 8%, and ofChina’s remarkable economic record. Once again the real

change in its GDP is likely to be over 10%, as a result of thestrong growth in exports and investment.

2006 witnessed the economic recovery of the Euro Zone,where GDP is expected to grow by 2.7%, practically twicethat of the previous year (1.4%). This was the result ofvibrant Domestic Demand, in particular Investment, whichshould record growth of 4.3%, in average annual terms.At the same time the increase in world demand, especiallyamong the Asian developing countries and the new EUMember-States, contributed to healthy European exports,a reduction in the unemployment rate and improved con-fidence on the part of the economic agents.

The international economic context was also marked by asharp rise in the price of oil and certain non-energy rawmaterials, mainly in the first half of the year, which led togreater inflationary pressure worldwide and to the centralbanks of the main economies adopting more restrictivemonetary policies.

4. Framework of Activities

4.1. INTERNATIONAL ECONOMY

REAL GDP GROWTH RATES

Sources: IMF, OCDE, EC, BP, U.S. Department of Commerce

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The price of a barrel of Brent rose by around 30%, fromthe start of 2006 to the end of July, as a result of the grow-ing geopolitical tension in the Middle East and the limitedproductive capacity available globally. Yet in the second

half of 2006, petroleum product prices returned to thebeginning of the year levels, due to revised forecasts forworld demand and the improvement in the political situa-tion in the Middle East.

4.2. PORTUGUESE ECONOMY

According to the latest Bank of Portugal estimates, thePortuguese economy should experience a recovery in termsof real growth in GDP in 2006 of about 1.2%.

Nonetheless, although this means the Portuguese econo-my’s growth rate is 0.8 b.p. higher than in 2005, it will still

be lower than the average for the Euro Zone for the fifthyear running and the lowest among the EU-25 countries.

In 2006, Portugal’s economic recovery was based on thepositive trend in net external demand which led to exportgrowth of 9.3%, due to the healthy condition of the worldand European economies, and which exceeded a 4.3%increase in imports.

The strong export drive coupled with moderate growth inimports, due to a slow down in Domestic Demand, result-ed in an improved Balance of Goods and Services and afavourable impact on foreign debt, measured in terms ofthe overall Balance of Current and Capital Payments, whichfell from -8.1% to -7.6% of GDP from 2005 to 2006.

The components of Domestic Demand recorded an un-favourable trend, in particular the 3.1% drop in Investmentacross all sectors (State, Family and Business). Since 2002this component has suffered an accumulative fall ofaround 18%.

A breakdown by sectors shows that Civil Engineering andPublic Works companies business has continued to dropoff and the sector’s Gross Production Value is expected torecord a real fall of 5.7%, in 2006. This loss of businessoccurred in all segments, most notably in the Housing andPublic Works fields where there was a 6% decrease.

Once again the reduction in Public Works was due to publicinvestment restraints, stemming from the need to meet thetargets laid down in the Stability and Growth Program, asshown by the respective 33% and 50% decreases in thevalues of the public tenders announced and awarded.

In the Housing segment the drop in business resulted in a28% fall in the number of homes completed (up to the endof the 3rd quarter of 2006) and the 12% decrease in thenumber of building permits issued for new housing.

Nonetheless, the demand for housing remained firmthroughout 2006 and, according to figures issued by theTreasury Department, the value of new Housing Loan con-tracts rose by 4.5% up to September, while the total valueof Housing Loan granted by banks was up by 16% for theyear. This positive trend in demand for housing impactedmainly on second-hand homes, houses in up-market areasand in major cities. It was brought about by the strongcompetition in the banking sector and the availability ofinnovative Housing Loan products.

In the Trade sector the picture was similar to that of theprevious year, with the Retail Turnover Index rising by2.2% (2.1% in 2005), while Tourism had a very good year,

MAIN MACROECONOMIC INDICATORS – PORTUGALReal growth rates (%), except where indicated

2003 2004 2005 2006 e

GDP -1.1 1.1 0.4 1.2

Private Consumption 0.0 2.3 1.7 1.2

Public Consumption 0.7 1.8 1.9 -0.2

Gross Fixed Capital Formation -10.0 0.0 -2.6 -3.1

Domestic Demand -2.2 1.9 0.6 0.1

Exports 3.7 5.0 1.0 9.3

Imports -0.5 6.9 1.6 4.3

Inflation (HCPI) 3.3 2.5 2.1 3.0

Budgetary Balance (% GDP) * -4.8 -4.7 -6.0 -4.6

Unemployment Rate (Final 4th Qtr.) 6.5 7.1 8.0 8.2

Balance of Current and Capital Payments (% GDP) -4.0 -5.7 -8.1 -7.6

* Excluding temporary measurese – estimate, except HCPI and Unemployment RateSource: INE, BP

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reflected in the 5.6% increase in the number of nightsspent in hotels and the 7.3% rise in Total Travel andTourism Revenue.

Individuals savings rate is expected to stay at similar levelsto 2005, i.e., around 9%, given the forecast increase inPrivate Consumption is similar to the estimated change inAvailable Income.

Despite the economic recovery the rate of unemploymentin the 4th quarter of 2006 was 8.2%, slightly above the8% recorded in the same period in 2005, while TotalEmployment rose by only 0.2%. As regard salaries, the risein average salary per worker is expected to slow, with anincrease estimated at 3% (3.5% in 2005), due to the lowersalary growth in the public sector.

In 2006, the downward trend in prices, that had gone onsince 2001, was reversed and the Harmonised Index ofConsumer Prices recorded growth of 3%, versus 2.1% in2005. This change was associated with the rise in the priceof crude in the first half of the year, together with the

increase in some non-manufactured foodstuff prices, andwas affected by tax measures, in particular the increase inthe standard VAT rate in July 2005 and the rise in thetobacco and alcohol duties.

At the end of 2006 the public sector deficit should be4.6% of GDP, corresponding to a 1.4 percentage pointdrop as compared to 2005, and meeting the target set inthe latest version of the Stability and Growth Program2006-2010. This favourable change in the budget deficitwas mainly due to the increased tax revenues, as a result ofimproved tax collection, and to a lesser degree, by therestraints on public expenditure, which grew by 2.4% in2006 (3.5% in 2005).

The forecasts for 2007 point to continued slow growth inthe Portuguese economy and real growth in GDP of 1.8%.Contrary to 2006, Domestic Demand is expected to drivethat growth, through improved Private Consumption andInvestment, although net Exports are also likely to make apositive contribution to GDP growth.

4.3. MONETARY AND FINANCIAL SYSTEM

In 2006 the European and Portuguese Monetary andFinancial System was marked by the good performance ofthe stock markets, the rise in short-term interest rates andgrowth in the banks’ credit business.

Over the year the high price of petroleum products andsome non-energy raw materials increased inflationary pres-sures worldwide, leading to a rise in prime interest rates onthe part of the major central banks.

In the 1st quarter of 2006, the US Federal Reserve increasedits 100 points base prime interest rate (Fed Funds) to 5.25%.

It stayed at this level until the end of the year, given thesigns of a slowdown in the American economy.

In the Euro Zone, the upturn in inflation, together with thesigns of a stronger European economy and increased li-quidity, led to the ECB increasing its prime rates as well,with the refi rate going from 2.25% in December 2005 to3.5% at the end of 2006.

The Euro Zone money market rates followed this trend,which meant the Euribor 6 months rate rose from 2.64%in December 2005 to 3.85% in December 2006.

CHANGE IN PRIME INTEREST RATES vs. EURIBOR 6M CHANGE IN RATE OF RETURN ON 10-YEAR PUBLIC DEBT BONDS

Sources: Bloomberg, EurostatNote: End of period values

In the bond market the rates of return on public debtbonds followed the trend in short-term interest rates in the1st half of the year. USA 10-year public debt bond yieldsrose by 74 b.p., to 5.25% and those of the Euro Zone by76 b.p., to 4.07%, between December 2005 and June

2006. However, given the prospect of an economic slow-down and price stabilisation in the USA, the 2nd half of theyear saw a reversal of the upward trend in long-term inte-rest rates.

In Portugal, the rate of return on 10-year public debt bondsfollowed the trend seen in the other Euro Zone countries.The differential yield compared to German public debtincreased from +10 b.p., in December 2005, to +17 b.p.,in the same month in 2006.

Within a framework of accelerated growth in the worldeconomy, the stock markets had a favourable performancein 2006, benefiting from the quoted companies improvedprofits and the high level of liquidity in the market, in a set-ting of mergers and acquisitions and attractive shareholderearnings policies. In the USA, the Standard & Poor’s 500Index rose 13.6%, while in the Euro Zone the Euro Stoxx50 Index grew by 15.1%. In Japan the stock market per-formed well but to a lesser extend than in Europe and theUSA, so the Nikkei 225 Index recorded a rise of only 6.9%.

The Portuguese stock market accompanied the world andEuropean trend in 2006 with the PSI-20 Index rising byaround 30%, although this increase was inflated by thetakeover bids for Portugal Telecom and Banco Portuguêsde Investimento.

In 2006, the European currency appreciated vis-à-vis inter-national currencies. Euro appreciated by 10.4% against theJapanese yen and 11.3% against the US dollar, and at theyear-end the respective exchange rates were 155 EUR/JPYand 1.320 EUR/USD.

This appreciation of the euro vis-a-vis the major currenciesled to a rise in short-term interest rates and greater opti-mism among economic agents in relation to Euro Zonegrowth. The appreciation of the European currency, partic-ularly against the US dollar, benefited from the large UStrade deficit and the announcement by the ChineseCentral Bank of its intention to diversify its holdings to thedetriment of the US dollar.

The rise in prime interest rates was reflected in a generalincrease in bank interest rates. On the liabilities side of thebalance sheet, average interest rates for new PersonalAccount Deposits went from 1.99% in December 2005 to3.25% in December 2006, while those for Businesses wentfrom 2.40% to 3.84 % over the same period.

New operations on the assets side of the balance sheet alsosaw an increase in average interest rates, although smallerthan that on the liabilities side. Average rates for newHousing Loans contracts increased from 3.53% to 4.41%,while rates for loans made to Businesses went from 4.76%to 5.67%.

In 2006 the financial market continued to be marked bystrong competition, with the main operators employingaggressive strategies to obtain greater market share andloyalty, which took the form of innovative products andservices, attractive advertising campaigns and aggressivepricing strategies.

In this context, there was positive progress in regard toTotal Credit, which recorded year-on-year growth in10.6% to December 2006 (7.4% in 2005). The mostimportant segment was Personal Credit for Housing andConsumption. Credit for Businesses experienced moremoderate growth of 6.1%, reflecting the drop in businessinvestment.

Personal Account Deposits again recorded low growth in2006, with the final balance increasing by only 4.2%. Thispoor performance has taken place in a context of alterna-tive savings products coming onto the market, such as cap-italisation insurance, investment funds and structuredproducts, which has contributed to a significant increase of37% in Financial Sector Institutions Deposits, which at theend of the year accounted for around 15% of total bank-ing sector deposits in Portugal.

In 2006, the financial sector was also marked by changesin regulations. Special mention must be made of the appli-cation of the Adjusted Accounting Standards (which are abenchmark similar to the International Financial ReportingStandards - IFRS) to accounts of financial institutions whichbenefited from the transitional scheme referred to in pointno. 5 of Bank of Portugal Notice no.1/2005, in line with IAS39 (derivative accounting, calculating fair value of financialinstruments, impairment losses and fixing of periods forcharges) and IAS 19 (calculating pension, benefit, and em-ployment bonus liabilities).

Also worthy of mention is the publication of Decree-Lawno. 59/2006 of 20 March, which amended the rules go-verning Mortgages and of Directive 2006/48 EC of theEuropean Parliament and the Council, of 14 June. The lat-ter relates to access to and pursuit of the business of cred-it institutions and takes into account the provisions cover-ing the minimum equity requirements for CreditInstitutions under Basle II.

Specific consumer protection legislation was also pub-lished, such as Decree-Law no. 240/2006 of 22 December,laying down rules for the rounding up and down ofHousing Loan contract interest rates. The year also saw theannouncement of proposed legislation that will set maxi-mum fees for the partial and total amortization of HousingLoan or its transfer to another institution.

Finally, reference must be made to the passing of the NewBasic Social Security Law, published in 2007 (Law no. 4 / 2007of 16 January), which lays down maximum limits for pen-sions, penalises early retirement, provides for a swiftertransition to the new pensions formula that takes accountof a person’s contributions over their working life, andintroduces a sustainability factor, by associating the valueof the pension to average life expectancy.

18

19

5. The Montepio Groupstructure

20

The Montepio Group is a financial group with a mutualsavings bank structure. Montepio Geral Associação Mutua-lista is the group’s core body, while Caixa Económica Mon-tepio Geral provides fundamental and strategic support tothe group’s development. The Group operates in manyfields including banking, insurance, pension funds, assetmanagement, real estate and health services.

The companies making up the Montepio Group conducttheir business autonomously and their profits contribute tothe provision of Members benefits, thus strengthening theGroup’s associative and mutual identity.

21

The Montepio Group is very different from its competitorssince the companies are owned by a Mutual Associationwhich the general public (and customers) may join, sub-scribing to products, exercising voting rights and benefitingfrom the profits generated by the group companies.

Given the uncertainty currently surrounding the Portu-guese social security system and the steady ageing of thepopulation, the aims of a mutual Group – the granting ofhealth and social security benefits, plus the promoting of abetter quality of life for its Members – are a competitiveedge that can bring about growth and, consequently, theGroup’s sustained development.

These opportunities should allow the Group to broaden itsbase and further its relationship with its Members. Byincreasing its advertising and promoting the good name ofthe Mutual Institution, it will be able to attract newMembers and increase the number of products to whichthey subscribe.

Faced by the growing competition from other operators inthe social security field, such as insurers and pension funds,the challenge is to know how to put across the differentapproach of a mutual association and how to fully satisfyMembers by continuing to meet their expectations as toquality, innovation and the performance of the mutualproducts, by means of an integrated investment and riskmanagement policy that allows for the optimisation ofasset management and the Association’s financial sound-ness.

The main strategic goal for the group companies is to createadded value for the Members, which implies improvingprofitability and the return on the capital invested in eachof them. This aim is clearly expressed in the 3-year StrategicPlan that was updated in the 3rd quarter of 2006, in linewith the normal process of reviewing strategy annually.

When operating in highly competitive markets, it is essen-tial that all the group companies manage to step up theirbusiness and grow, so as to improve and consolidate theirmarket positions. To achieve the desired sustained andprofitable growth, the various bodies within the Groupmust coordinate their strategy both in terms of supply andmarkets, through cross sales, and in terms of policies thatoptimise resources and risk management.

The optimisation of human, material and technologicalresources within the Group provides for synergies, a reduc-

tion in spiralling costs, an increase in operating efficiencyand improved overall performance of all the companies.The supply and market coordination process, alreadyunderway, must be continued so as to take advantage ofthe various customer portfolios (ensuring customers turninto Members) and the distribution channels, in particularthe brokers.

The fierce competition and the banking sector’s high per-formance, efficiency and profitability standards mean thatCEMG in particular must achieve sustained and profitablegrowth in turnover, on the basis of the stated strategy ofimproving overall risk management, adjusting prices to thecustomer’s risk profile, reducing levels of non-performanceand improving service quality so as to retain customers andtheir loyalty.

As regards resource management enhancement, sustainedand profitable growth in turnover must focus on maximis-ing the potential of the customer portfolio and the branchnetwork, as well as developing and diversifying supply andBanking Products. In the future, this will be essential toensure a rate of growth that matches the desired profitabi-lity levels, against a downward trend in the mortgage mar-ket, which is the core of Montepio’s credit business.

Group performance in 2006 revealed the sharp increase inthe number of investors and the capital sums they appliedto mutual shares. In addition Caixa Económica increased itsmarket share, as did the Montepio Group companies intheir various business sectors, especially in terms of creditprovision, investment funds and insurance. The Group’sshare of the customer credit market went from 5.84% inDecember 2005 to 5.88% in December 2006, while inregard to Investment Funds, the 17.3% growth in AssetsManaged, well above the 6.7% growth in the market,meant that market share rose from 1.73% in 2005 to1.91% in 2006. Likewise in the insurance sector, the vita-lity of the Montepio Group’s business contrasted with the3.5% fall in gross premiums issued recorded in the marketgenerally, meant that its life assurance and non-life insu-rance market shares grew respectively from 1.16% and3.12% in 2005 to 1.72% and 3.56% in 2006.

These gains in market share reflect the significant increasein Montepio’s business in 2006, when compared with thatof the various economic sectors, and bear witness to thesuccessful exploitation of the market potential while keep-ing the branch network intact.

6. Creating value for members and strategic

guidelines

22

The globalisation and greater sophistication of the financialmarkets have resulted in increasing demands, in terms ofprudence and internal control requirements and also inregard to the adoption of governance recommendations.In this framework Montepio Group intends to review,amend and design governance systems and rules for theGroup’s various bodies, in order to ensure they meet thebest and most suitable market practices.

Within the Montepio Group the concept of creating addedvalue does not end with increased profitability and greater

financial yield for Members. It is a broader term thatinvolves the creating of added value for the Group’s variousstakeholders, that is to say it covers actions taken to bringabout and contribute to society’s sustainable development.

This standpoint encompasses the Social Responsibilitymeasures that Montepio, given its character, has alwaysundertaken and which, in the current situation, should beefficiently organised on a scale and with the visibility com-patible with Montepio’s importance in Portugal’s SocialEconomic sector.

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7. Montepio GeralAssociação Mutualista

The Mutual ApproachSince its foundation, Montepio has acted as a mutual benefit association andset itself apart from the other institutions in the market. The only one of this kindin the Portuguese banking scene, with its link to social economy, Montepio’sbusiness activities reflect associative, caring and humanitarian values.

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7.1.1. THE ASSOCIATION MOVEMENT

At the year-end the Mutual Benefit Association had a totalof 376 950 Members, which accounts for an annual growth

rate of 13%. Thus the trend of a wider membership basecontinued, as did the number of Members taking outmutualist schemes.

7.1. MEMBERS AND BENEFICIARIES

Caixa Económica’s commercial network continued to playa leading role in the promotion, boosting and distributionof the Mutual Benefit Association schemes.

At the end of 2006, around 38% (34.5% in 2005) of CEMG’sindividual customers were Members. Notwithstanding this

increase, it is clear there is still a long way to go in order toconsolidate the market potential.

At the end of the year, men and women were equallyrepresented among the Members. Their average age roseslightly to 34 years (33 in 2005). A breakdown by ageshows that 37% were under 30, 44% were aged between30 and 50 and the remaining 19% were over 50 years old.

The number of younger Members, who are part of the «TioPelicas» club, grew less than in previous years. On 31December 2006, club members accounted for 8.3%(10.7% in 2005) of total Members.

In addition to other activities, the Mutual Benefit Associa-tion continues to publish and send its quarterly club maga-zine to members, in order to promote mutual values to itsyounger Members in an educational and entertaining way.

The importance of the mutualism response to the needs ofsupplementary welfare for individuals and families, Mon-tepio’s enhanced reputation and the steps taken to pro-mote schemes gave rise to a remarkable increase in asso-ciation business. In addition to reinforcing the associativecomponent, the main goal is to strengthen the relationshipbetween the Member and Montepio for their mutual be-nefit.

NUMBER OF CURRENT FULL MEMBERS

CHANGE IN FULL MEMBERS(units)

ITEM 2006 2005Change

No. %

IN-COMINGAdmittances 61 212 57 596 3 616 6.3

Readmittances 1 028 1 038 -10 -1.0

OUT-GOINGDeath and qualifications 462 427 35 8.2

Assignment of rights, withdrawals and cancellations 18 466 16 358 2 108 12.9

CURRENT MEMBERS 376 950 333 638 43 312 13.0

CLUBE «TIO PELICAS»

ANO 2006 2005 2004 2003

SÓCIOS 31 142 35 584 32 100 27 041

In general terms, the changes in the numbers of Members in 2006 can be summarised as below:

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7.1.2. SCHEMES SUBSCRIPTIONS, QUOTIZATIONS ANDCAPITALS

2006 ended with more than 598 012 subscriptions whichrepresented an annual increase of 18.1% (in 2005 growthwas 21%).

The number of enrolments per Member rose from 1 518 (in2005) to 1 586 (in 2006).

As in the last three years, subscribers to mutual productshave favoured Retirement Capitals, Expenses PaymentGuarantee and Deferred Welfare Capitals with Optionschemes. New subscriptions totalled 125 620 and theabove products accounted for 66 181, 28 838 and 24 933,respectively, that is 95.5% of the total.

The dynamic growth recorded in the Association Move-ment was not, for various reasons, accompanied by similarbehaviour in Membership Proceeds.

The changes that arose in the financial markets and thedesire to ensure the Association’s financial soundnessmeant the terms of some schemes had to be modified,which led to a fall in the Association’s total revenue, com-pared to the previous year. The fall was most significant inCapitalisation Schemes (Retirement Capitals in particular),while the other schemes recorded different behavioursover the year.

The main reasons for this occurrence were linked to the changes made to Retirement Capitals Scheme that called for:

• the suspension of additional payments under Plans B taken out between 1 March 1990 and 31 August 1992 (mini-mum guaranteed rate of 5.5%) and those taken out between 1 September 1992 and 31 October 2003 (minimumguaranteed indexed rate equal to 80% of the annual average for the European Central Bank’s main refinancing opera-tions rates);

• the reduction in the maximum payment limit from 250 000 euros to 100 000 euros, applying to the set of enrol-ments;

• the end of the option of moving from Plan A to Plan B.

TREND IN MEMBERSHIP PROCEEDS (Quotizations and Capitals by Scheme)(thousands of euros)

SCHEMES2006 2005 Change

Value % Value % Value %

1. MEMBERSHIP WELFARE BENEFITS 4 130 1. 62 3 660 1.01 470 12.8

2. INDIVIDUAL SCHEMES 249 766 98.03 356 125 98.49 - 106 359 - 29.9

2.1. Retirement Capitals 180 209 70.73 299 801 82.91 - 119 592 - 39.9

2.2. Retirement Saving 9 782 3.84 2 601 0.72 7 181 276.1

2.3. Other Schemes 59 775 23.46 53 723 14.86 6 052 11.3

Retirement Pensions 6 362 2.50 5 324 1.47 1 038 19.5

R.P. – Quotes Restituion 498 0.20 441 0.12 57 12.9

R.P. – Additional Disability 14 0.01 13 0.00 1 7.7

Disability Pensions 27 0.01 25 0.01 2 8.0

Survival Pensions and Dowries 11 0.00 12 0.00 -1 -8.3

Survival Annuities 54 0.02 55 0.02 -1 -1.8

Welfare Capitals 659 0.26 664 0.18 -5 -0.8

Deferred Welfare Capitals with Option 30 416 11.94 28 177 7.79 2 239 7.9

Forward Welfare Capitals 313 0.12 181 0.05 132 72.9

Welfare Capitals for Younger 4 063 1.59 4 062 1.12 1 0.0

Guarantee Capitals 78 0.03 55 0.02 23 41.8

Deferred Capitals with Additional Cover 12 0.00 12 0.00 0 0.0

Welfare Capitals for Study 574 0.23 682 0.19 -108 -15.8

Temporary Disability Capital 13 0.00 14 0.01 -1 -7.1

Death Grant 19 0.01 19 0.01 0 0.0

Expenses Payment Guarantee 16 657 6.54 13 981 3.87 2 676 19.1

Others 5 0.00 6 0.00 -1 -16.7

3. COLLECTIVE SCHEMES 741 0.29 811 0.22 -70 -8.6

4. CAPITALS TRANSFERRED TO PENSIONS 147 0.06 1 002 0.28 -855 -85.3

4. TOTAL (1) + (2) + (3) + (4) 254 784 100.00 361 598 100.00 - 106 814 - 29.5

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From among Other Schemes, mention should be made ofthe good performance of some of the more representativeitems, such as: Retirement Pensions (+1 038 thousand euros),Deferred Welfare Capitals with Option (+2 239 thousandeuros) and Expenses Payment Guarantee (+2 676 thousandeuros).

7.1.3. BENEFITS DUE AND REFUNDED

The total value of Benefits Due and Refunded over the yearin question was 132 642 thousand euros. That accountedfor a rise of 35 758 thousand euros, that is over 36.9%, ascompared to 2005.

The main explanation for this performance lies with therefunds associated with Retirement Capitals and with thematuring of specific term schemes that involved capitalsums of some significance.

7.1.4. IMPROVEMENTS TO BENEFITS IN FORMATIONAND IN PROGRESS FOR ACTUARY SCHEMES

Pursuant to Article 18 of the Articles of Association, and inline with Article 53 of the Mutualist Code, in 2006,Associação Mutualista (Mutual Benefit Association) pro-posed a benefit improvement rate of 1.5%, in light of thevolume of the Mathematical Reserves for ActuarialSchemes generally, and that rate was approved by theGeneral Meeting. Those schemes that had negative FundAvailable, inadequate Mathematical Reserves and a techni-cal rate of 6% were excluded from the improvement.

In this way some 2.884 million euros were distributed toMembers.

7.1.5. RETURN ON CAPITALISATION SCHEMES

Subscribers to Capitalisation Schemes received an overallannual return of 3.5%, consisting of a guaranteed annualincome (3%) and a share of the annual profits (0.5%).Retirement Capitals subscriptions taken out between1 March 1990 and 31 August 1992 received the guaran-teed annual income of 5.5%.

7.1.6. PERPETUAL ANNUITIES

As a result of adapting to new market conditions, the settingup of Perpetual Annuities was suspended until the new tech-nical basis was approved by the authorities.

Subscriptions to this product were accepted once againfrom October. At the year-end there were 844 annuitiesand 472 annuity holders. During the year 13 new annuitieshad been set up (compared to 19 in 2005).

The annual cost of perpetual annuities rose to 2 806 thou-sand euros, slightly below the previous year’s figure (2 822thousand euros).

BENEFITS DUE AND REFUNDED(thousands of euros)

ITEM2006 2005 Change

Quantity Value Quantity Value Value %

PENSIONS AND ANNUITIES 5 816 5 921 5 580 5 381 540 10.0Subscribed Values 5 816 2 274 5 580 1 917 357 18.6

Grants and Improvements 3 647 3 464 183 5.3

CAPITALS AND SUBSIDIES 14 600 31 870 8 526 21 348 10 522 49.3Subscribed Values 14 600 27 168 8 526 17 290 9 878 57.1

Grants and Improvements 4 702 4 058 644 15.9

REFUNDS 37 058 82 061 28 338 59 832 22 229 37.2

OTHER COSTS 2 152 12 790 1 781 10 323 2 467 23.9

TOTAL 59 626 132 642 44 225 96 884 35 758 36.9

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The average annual rate of return (including extraordinary profit) generated by the assets financial management was4.2%.

There was a general rise among all financial asset catego-ries, with the exception of the return on the institutionalfinancial interest in Caixa Económica, which was due to thetemporary increase in the sums transferred to the PensionsFund. Pursuant to the amendments introduced under Bankof Portugal Regulation no. 4/2005, it was necessary toimplement the Pensions Fund depreciation plan, as a resultof the switch to the Adjusted Accounting Standards(«NCA-Normas de Contabilidade Ajustadas»). In additionto other adjustments, these Standards require account tobe taken of the effects of the increase in liability arising

At the year-end Mutual Benefit Association’s Net Assets totalled 2 092 248 thousand euros.

7.2. NET RETURN ON ASSETS

TREND IN MUTUAL BENEFIT ASSOCIATION’S NET ASSETS(thousands of euros)

ITEMS2006 2005 Change 2006/2005


Property 123 627 5.9 120 045 6.3 3 582 3.0

Securities 571 924 27.3 635 446 33.5 - 63 522 -10.0

Institutional Financial Interest 585 000 28.0 485 000 25.5 100 000 20.6

Other Financial Interests 42 567 2.0 41 779 2.2 788 1.9

Available Funds 743 454 35.5 593 423 31.3 150 031 25.3

Others 25 676 1.3 23 180 1.2 2 496 10.8

TOTAL 2 092 248 100.0 1 898 873 100.0 193 375 10.2

NET RETURN ON MUTUAL BENEFIT ASSOCIATION’S FINANCIAL ASSETS(thousands of euros)

ITEMSAverage Balance Revenue Rate of Return

Value % Value % 2006 2005

Property 120 399 5.9 12 346 14.4 10.25 11.00

Securities 597 961 29.1 34 956 40.7 5.85 4.92

Institutional Financial Interest 561 923 27.4 11 497 13.4 2.05 5.17

Other Financial Interests 42 142 2.1 3 171 3.7 7.52 5.12

Available Funds 703 536 34.3 23 850 27.8 3.39 2.71

Others 26 453 1.2 83 0.0 0.32 0.31

TOTAL 2 052 414 100.0 85 903 100.0 4.19 4.69

from the changes to actuarial assumptions, includinghealth care during retirement, which previously wererecognised at the time of their payment.

7.2.1. PROPERTY PORTFOLIO

Property Portfolio for rental increased and at the year-endhad a gross book value of 165 702 thousand euros,accounting for a 3.8% (6 085 thousand euros) rise versusthe previous year.

BREAKDOWN OF PROPERTY PORTFOLIO(thousands of euros)



Property for Income 144 955 87.5 138 977 87.1 5 978 4.3

Buildings for Own Premises 18 261 11.0 18 173 11.4 88 0.5

Building Land 2 486 1.5 2 467 1.5 19 0.8

TOTAL a) 165 702 100.0 159 617 100.0 6 085 3.8

a) These figures differ from those given in the «Trend in Mutual Benefit Association’s Net Assets» table because they are net of depreciation to the sum of 42 075 thousand euros and 39 572 thousandeuros in 2006 and 2005, respectively.

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Over this period the Property Portfolio produced an incomeof 12 346 thousand euros.

The fall compared to the previous year is explained mainly bythe reduction in capital gains from the sale of properties.

7.2.2. LOANS TO MEMBERS

In 2006 some 639 new contracts for Loans on Mathe-matical Reserves were signed, that is 119 contracts lessthan the previous year. The value of the Credit granted wasalso lower than that of the previous year (1 221 thousandeuros in 2006 against around 1 523 thousand euros in2005). This contributed to the fall in the accumulated loansbalance to 813 thousand euros (969 thousand euros in2005). This type of loan has the peculiarity of having a

maximum term of 18 months and consequently records ahigh degree of rotation.

7.2.3. SECURITIES PORTFOLIO

The accumulated gross book value of Associação Mutua-lista Securities Portfolio at the end of 2006 was 576 454thousand euros, which represented a downward change of9.7% (- 62 265 thousand euros). Over the year the portfo-lio diversified steadily into alternative financial instruments,such as bonds (especially those of foreign companies) andreal estate investment funds, while a number of participa-tion units in foreign and national stock funds were sold, aswas a portion of the fixed rate treasury bills (national andforeign).

Despite the fact that a considerable portion of theSecurities Portfolio to portuguese public debt (44.8%), thetrend towards diversification is clearly visible in 2006 as isa more appropriate return-risk relationship. At the present

time some 90% of the Securities Portfolio is exposed toissuers with investment grade ratings, in particular ratingshigher or equal to single A, which shows that the Portfolio’scredit risk is low.

TREND IN SECURITIES PORTFOLIO BEFORE PROVISIONS(thousands of euros)



Portuguese Public Debt Securities 258 244 44.8 465 419 72.9 -207 175 -44.5

State Secured Bonds 32 0.0 118 0.0 -86 -72.9

Bonds in National Entities 55 493 9.6 39 079 6.1 16 414 42.0

Shares in National Companies 0 0.0 505 0.1 -505 -100.0

Shares in Foreign Companies 12 0.0 12 0.0 0 0.0

Bonds issued by Foreign Companies 216 650 37.6 56 682 8.9 159 968 282.2

Participation Units – Stock Invest. Fund 9 583 1.7 22 060 3.4 -12 477 -56.6

Participation Units – Real Estate Invest. Fund 36 440 6.3 34 844 5.5 1 596 4.6

Participation Units – Foreign Invest. Fund 0 0.0 20 000 3.1 -20 000 -100.0

TOTAL (a) 576 454 100.0 638 719 100.0 -62 265 -9.7

a) These figures differ from those given in the «Trend in Mutual Benefit Assocation’s Net Assets» table because they are net of provisions (respectively 4 531 thousand euros and 3 274 thousand euros in2006 and 2005)

Thus at the year-end the Securities Portfolio had the following structure:

30

In 2006 the net revenue generated by the securities port-folio totalled 34 956 thousand euros (24.7% higher thanin 2005). This result was essentially due to the financial

income from a number of the instruments and the gains onthe sale of certain securities (stock investment funds and,above all, public debt bonds).

TREND IN SECURITIES’ PORTFOLIO INCOME(thousands of euros)



Portuguese Public Debt Securities 23 340 66.8 20 537 73.3 2 803 13.6

Foreign Public Debt Securities -70 -0.2 0 0.0 -70

State Secured Bonds 4 0.0 5 0.0 -1 -26.2

Bonds in National Entities 1 493 4.3 1 036 3.7 457 44.1

Shares in National Companies 239 0.7 16 0.1 223

Shares in Foreign Companies 9 0.0 9 0.0 0 4.1

Bonds issued by Foreign Companies 1 960 5.6 1 490 5.3 470 31.6

Participation Units – Stock Investment Fund 1 266 3.6 2 519 9.0 -1 253 -49.8

Participation Units – Real Estate Investment Fund 2 573 7.4 2 209 7.9 364 16.5

Participation Units – Foreign Investment Fund 4 142 11.8 208 0.7 3 934

TOTAL 34 956 100.0 28 029 100.0 6 927 24.7

7.2.4. FINANCIAL INTERESTS PORTFOLIO

7.2.4.1. Institucional Financial Interest in Caixa Econó-mica Montepio Geral

In line with the proposed submitted at the GeneralMeeting of 30 March 2006, the Institutional FinancialInterest in Caixa Económica was increased 100 millioneuros rising from 485 million euros to 585 million euros.

The sum transferred from Caixa Económica to AssociaçãoMutualista as Net Profit for the Year was 11 597 thousandeuros versus 24 783 thousand euros in 2005.

This decrease is of a transient nature. It arose as a result ofadjustments to the Caixa Económica accounts, brought

about by the adoption of the Adjusted AccountingStandards («NCA-Normas de Contabilidade Ajustadas»).

These adjustments impacted especially, but not exclusively,on the Pensions Fund liabilities relating to employed andretired persons. Pursuant to Bank of Portugal rules apply-ing to banking institutions, that impact did not affect CaixaEconómica’s profits, but they had to be reduced before cal-culating the amount payable to Montepio Geral - Asso-ciação Mutualista as the return on its institutional financialinterest.

7.2.4.2. Other Financial Interests

TREND IN FINANCIAL INTERESTS PORTFOLIO AND INCOME(thousands of euros)


Investment % Income % Investment % Income % Investment % Income %

STRATEGIC 35 008 79.8 2 485 78.4 33 036 76.7 1 391 64.8 1 971 4.6 1 094 50.9MG GESTÃO DE ACTIVOS FINANCEIROS 1 331 3.0 297 9.4 1 331 3.1 271 12.6 0 0.0 26 1.2

FUTURO 1 963 4.5 792 25.0 1 963 4.6 241 11.2 0 0.0 551 25.7

LUSITANIA – VIDA 6 925 15.8 282 8.9 4 954 11.5 247 11.5 1 971 4.6 35 1.6

LUSITANIA – Companhia de Seguros 23 769 54.2 1 113 35.1 23 769 55.2 632 29.4 0 0.0 481 22.4

RESIDÊNCIAS MONTEPIO. Serv. Saúde. SA 1 020 2.3 0.0 1 020 2.4 0 0.0 0 0.0 0 0.0

NON-STRATEGIC 8 868 20.2 686 21.6 10 051 23.3 757 35.2 -1 183 -2.7 - 71 -3.3LEACOCK 242 0.6 50 1.6 242 0.6 770 35.9 0 0.0 - 720 -33.5

SILVIP 308 0.7 386 12.2 308 0.7 187 8.7 0 0.0 199 9.3

BAO – BANCO DA ÁFRICA OCIDENTAL 153 0.3 31 1.0 153 0.4 35 1.6 0 0.0 - 4 -0.2

CAIXA ECONÓNICA CABO VERDE 2 582 5.9 183 5.8 2 582 6.0 183 8.5 0 0.0 0 0.0

BDC – Banco de Desenv. e Comércio 2 943 6.7 0 0.0 2 943 6.8 0 0.0 0 0.0 0 0.0

PREVISÃO 50 0.1 2 0.1 50 0.1 1 0.0 0 0.0 1 0.0

OTHERS 2 590 5.9 33 1.0 3 772 8.8 - 420 -19.6 -1 182 -2.7 453 21.1

TOTAL a) 43 876 100.0 3 171 100.0 43 088 100.0 2 148 100.0 788 1.8 1 023 47.6

a) These values differ from those given in the «Trend in Mutual benefit Association’s Net Assets» table because they are net of provisions to the sum of 1 310 thousand euros in 2006 and 2005.

31

The rate of return on the portfolio (7.52%) was greaterthan that obtained the previous year (5.12%) and pro-duced an accumulated net income of 3 171 thousandeuros (2 148 thousand euros in 2005).

7.2.5. AVAILABLE FUNDS

The amount invested in Available Funds at the year-endwas a little over 700 million euros. Of particular note wasthe increase in time deposits (especially in the form struc-tured deposits) and commercial paper, that is to say, short-term cash investments with returns greater than those ofcurrent accounts, in line with the policy of seeking moreprofitable financial investments.

In terms of profitability, this component recorded an aver-age rate of 3.39% (2.71% in 2005) as a result, on the onehand, of a general rise in financial market interest rates and,on the other, of a review of some of the guaranteed ratesof return on Associação Mutualista deposits formed inCEMG, plus the revenue from negotiable securities trading.

The high amount of available funds is explained by theincreased uncertainty in the capital market which affectednot only shares but also public debt securities and bonds.In the face of these uncertainties and the potential losswhich they could generate, it was decided to hold saferassets, even if they are less profitable, until marketprospects are less risky.

Other Financial Interests Portfolio of the Mutual Benefit Association underwent two significant structural changes in 2006:

• It exercised its rights under the Lusitania Vida share issue, subscribing to shares valued at 1 971 thousand euros;

• It sold its holding in Ímpar – Companhia Caboverdiana de Seguros which gave rise to a loss of 4 thousand euros.

At the end of the year the value of this investment totalled 43 876 thousand euros, which accounts for an annual growthrate of 1.8%.

Liquidity levels remained high due to a combination of circumstances:

• The clear likelihood of a rise in interest rates favoured the maintaining of high liquidity rates (the ECB reference raterose 125 b.p. in 2006, going from 2.25% in January 2006 to 3.50% in December 2006);

• The levelling off of the income curve implied that any investment in the longest section of the curve would not resultin an adequate risk premium (a negative difference between the 10-year swap rate and the 2-year swap rate arose);

• Credit spreads reached an all-time low, making the return on assets with a credit risk unattractive as compared todeposits.

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7.3. MEMBERSHIP ACTIVITIES

COMMEMORATIONS

The 166th anniversary of Montepio Geral – AssociaçãoMutualista was marked by a concert given by the LisbonMetropolitan Orchestra in Lisbon University’s Aula Magnaand was attended by Members, Customers and Employees.

Mention should also be made of the 162th anniversary ofCaixa Económica Montepio Geral which was also celebratedby means of a concert given by the Lisbon MetropolitanOrchestra, in the Auditorium of Lisbon University’s Facultyof Dentistry, enjoyed by Members, Customers and Em-ployees alike.

Other celebrations included the 75th anniversary of thePorto – Aliados Branch and the 40th anniversary of theCastelo Branco – Cadetes de Toledo Branch. Members,Customers, Employees and local VIPs attended concertsgiven by the Lisbon Metropolitan Orchestra.

To mark the 11th year of Montepio’s operations in theAzores, meetings and concerts were held on the islands ofTerceira and São Miguel, to which Members, Customersand Official Bodies were invited. In addition to the medalsgiven to guests to recall the Institution’s presence on theIslands, homage was paid to an individual who has been aMember for 67 years.

AWARDS

Montepio’s Contact Centre received the «Best ServiceProvided in 2006» award in the «Large CRC – CustomerRelationship Centre» category from the PortugueseContact Centres Association («APCC – Associação Portu-guesa de Contact Centres»).

For a second time, Caixa Económica Montepio was award-ed the «Equality is Quality» first prize by the Commission

for Labour and Employment Equality (CITE), in recognitionof the Institution’s equal opportunities policies.

Montepio: Official Bank of the Under-21 European Cham-pionship

A contract was signed with UEFA making Montepio, as thetournament’s official bank, a sponsor of the Under-21European Championship (see point 8.6.3. for more details).

NEW CORPORATE IMAGE

Montepio Geral changed its corporate image and identityin 2006 (see point 8.6.3. for more details).

ELECTION OF GOVERNING BODIES

In order to manage Montepio, both Montepio GeralAssociação Mutualista and Caixa Económica MontepioGeral, the General Meeting of 14 December 2006 electedthe Governing Body Members, named at the beginning ofthis Report, for the period 2007/2009, and they took officeon 9 January 2007.

SUPPLEMENTARY MEMBER BENEFITS

In order to broaden the range of supplementary benefitsavailable to Montepio Geral Members, agreements weresigned in 2006 with 75 institutions across the country, ofwhich 47 were in the Health, Welfare and Social Protectionfield, 25 in the field of Tourism, Consumption and Leisureand another 3 in the Training and Culture area.

The 75 agreements signed in 2006 provided access to over150 stores providing various services under favourableterms for users (discount points).

At the year-end Associação Mutualista had agreements with 454 entities, providing access to a total of 1 245 DiscountPoints throughout the country as follows:

• Health, Welfare and Social Protection – 723 (58.07%)

• Tourism, Consumption and Leisure – 424 (34.06%)

• Training and Culture – 98 (7.87%).

33

Of particular significance was the increase in compulsorymathematical provisions relating to schemes (+ 173 587thousand euros), which aims to safeguard future liabilitiesto Members.

As in the previous year, a test was conducted on actuarialschemes liabilities, based on actuarial assumptions appro-priate to the current situation, both in terms of the popu-lation’s life expectancy and the interest rate adjusted by theliabilities discount. The calculations made showed it was

necessary to make a 72 thousand euro increase in certainschemes and a 3 848 thousand euros reduction in the pro-visions for others. Thus there was an overall increase of 3776 thousand euros.

At the end of the year Mathematical Provisions as a wholeaccounted for around 86% of total Funds and Reserves.The remaining items behaved normally in line with therespective charges to provisions approved by the MembersGeneral Meeting.

7.4. PERMANENT FUNDS, OWM FUNDS AND RESERVES

This item increased again in 2006, recording an annual increase of 10.7%, equal to around 197 621 thousand euros, andclosed the year at 2 052 737 thousand euros.

TREND IN FUNDS AND RESERVES(thousands of euros)


Value %

PERMANENT FUNDS 1 818 917 1 644 534 174 383 10.6MATHEMATICAL PROVISIONS 1 758 507 1 591 222 167 285 10.5

Compulsory Mathematical Reserves 1 587 874 1 414 287 173 587 12.3

For Perpetual Annuities 20 393 21 293 -900 -4.2

Actuarial Mathematical Provisions 55 536 59 312 -3 776 -6.4

Grants and Benefits Improvements 94 704 96 330 -1 626 -1.7

TECHNICAL SURPLUSES 60 410 53 312 7 098 13.3

OWN FUNDS 59 449 51 763 7 686 14.8MEMBERSHIP WELFARE FUND 23 584 20 096 3 488 17.4

SCHOLARSHIP FUND 853 822 31 3.8

EXPENSES PAYMENT GUARANTEE FUND 34 586 30 411 4 175 13.7

MONTEPIO EGITANIENSE CLINICAL SERVICES FUND 426 434 -8 -1.8

TOTAL PERMANENT AND OWN FUNDS 1 878 366 1 696 297 182 069 10.7RESERVES 174 371 158 819 15 552 9.8

TOTAL FUNDS AND RESERVES 2 052 737 1 855 116 197 621 10.7

At the year-end, the rate of cover for Associação Mutua-lista liabilities was 1 167, almost identical to the 2005 fi-gure (1 166). This indicator sets out to measure Associação

Mutualista financial solidity and capacity, in response to itsfuture commitments.

34

The Profit for the Year in 2006 was 34 925 thousand euros.

The key factors of this performance were the following:

• Considerable improvement in almost all forms of Financial Revenue and Gains;

• Positive performance of Extraordinary Revenue and Gains, stemming from the returns on the sale of bonds, invest-ment funds and real estate.

• Fall in the income from association business, due to greater charges associated with the minimum guaranteed returnon capitalisation schemes, as well as additional payments for other schemes, in particular Expenses PaymentGuarantees;

• The rise in Associação Mutualista Administrative Costs;

• The decline in Earnings Transferred from Caixa Económica for the reasons explained elsewhere in this Report.

7.5 PROFITS

ASSOCIAÇÃO MUTUALISTA INCOME STATEMENT(thousands of euros)


Value %

1. REVENUE AND GAINSRevenue relating to Members 349 422 429 137 -79 715 -18.6

Supplementary Revenue 5 4 1 25.0

Operating Subsidies 11 497 24 583 -13 086 -53.2

Financial Revenue and Gains 71 477 57 694 13 783 23.9

Extraordinary Revenue and Gains 12 956 6 143 6 813 110.9

TOTAL 445 357 517 561 -72 204 -14.0

2. COSTS AND LOSSESCosts relating to Memberss 385 963 462 435 -76 472 -16.5

Supplies and Services 3 537 2 169 1 368 63.1

Staff Costs 7 475 7 594 -119 -1.6

Other Operating Costs 758 689 69 10.0

Financial Costs and Losses 5 298 1 385 3 913 282.5

Extraordinary Costs and Losses 1 557 264 1 293 489.8

TOTAL 404 588 474 536 -69 948 -14.7

3. CASH FLOW 40 769 43 025 -2 256 -5.2

4. FIXED ASSETS DEPRECIATION 2 766 2 668 98 3.7

5. DEPRECIATION AND PROVISIONS FOR FINANCIAL INVESTMENTS 3 078 2 159 919 42.5

6. PROFIT FOR THE YEAR (3-4-5) 34 925 38 198 -3 273 -8.6

35Whereas the Profit for the Year, consisting of the MutualSchemes Available Funds Balances and the General ReserveFund income, as set out in annex II to this report, totals34 924 708.76 euros;

Whereas the Permanent Fund Technical Surpluses of therespective Schemes may be used to cover the negativebalance on the Available Funds of some Mutual Schemes,to the sum of 319 286.88 euros;

Whereas the General Reserve Fund may be used to providesupplementary cover for the negative balance on the

Available Funds of some schemes, given that theirPermanent Fund Technical Surpluses have been exhausted,to the sum of 135 590.48 euros;

Whereas the amount available for distribution is the sum ofAssociação Mutualista Profit for the Year plus the aforesaidportions of the Permanent Fund Technical Surpluses andthe General Reserve Fund, which total 35 379 586.12euros.

7.6. PROPOSED APPLICATION OF THE PROFIT FOR THE YEAR AND RESOURCES TOTECHNICAL SURPLUSES AND TO THE GENERAL RESERVE FUND

It is proposed that:

7.6.1. RESOURCE TO PERMANENT FUNDS’ TECHNICAL SURPLUSES AND TO THE GENERAL RESERVE FUND

The following Funds may be used pursuant to Article 59 of the Association’s Articles:

7.6.1.1. Permanent Funds of the Respective Schemes(Euros)

– Technical Surpluses

(The sum needed to cover the annual negative balance of

the Available Fund for the scheme)

Retirement Pensions – 6% 205 793.83

(the sum available in the respective Technical Surpluses

to cover part of the annual negative balance of

the Available Fund for the scheme)

Disability and Retirement Pensions 909.07

Perpetual Annuities for Specified Persons 23 460.15

Survival Annuities 84 703.65

Retirement Capital Pensions – 6% 4 420.18 113 493.05 319 286.88

7.6.1.2. General Reserve Fund:(Euros)

(The remaining sum needed to provide complete cover of the

annual negative balance on the respective Available Fund)

Retirement Pensions (1922 Articles of Association) 882.09

Disability and Retirement Pensions 595.95

Perpetual Annuities for Specified Persons 36 106.56

Survival Annuities 12 908.98

Retirement Capital Pensions – 6% 8 811.53

Perpetual Annuities – 6% 76 285.37 135 590.48

TOTAL (1) 454 877.36

36

7.6.2. AVAILABLE FUNDS BALANCE AND GENERAL RESERVE FUND INCOME PLUS RESOURCE OF TECHNICALSURPLUSES AND THE GENERAL RESERVE FUND

They be distributed in the following manner:

7.6.2.1. To the General Reserve Fund:(Euros)

– Fund Income, pursuant to paragraph a)

no. 2 of the Article 56 of the Articles of Association: 5 060 213.77

Allocation pursuant to paragraph a) no. 1 of Article 60 of the Articles of Association

(5% of the annual balances on the Available Funds of the respective

mutual schemes):

Individual Schemes

Membership Welfare Benefit 263 242.82

Montepio Egitaniense Clinical Services 955.55

Survival Pensions and Dowries 66 972.50

Welfare Capitals 45 037.79

Deferred Welfare Capitals with Option 62 863.61

Forward Welfare Capitals 1 535.06

Welfare Capitals for Specified Persons 27.96

Welfare Capitals for Younger 45 118.65

Temporary Welfare Capitals in case of Disability or Death 45.64

Temporary Disability Capital 1 713.71

Retirement Capitals 438 032.11

Retirement Saving 11 653.31

Guarantee Capitals 3 925.20

Welfare Capitals for Study 4 247.38

Death Grant 2 415.71

Death Grant – Lutuosa Nacional 98.05


Disability Pensions 801.28

Expenses Payment Guarantee (1983 Articles of Association) 58.46

Registration/Release of Emphiteutic Property 86.63

Retirement Pensions – Quotes Restitution – 6% 50 859.62


Retirement Pensions – Additional Disability – 6% 1 727.58



Retirement Capital Pensions – 3% 68.09

Collective Schemes Pensions 11.25

Deferred Capitals with Additional Cover 116.13

Disability Quotes – Collective Schemes 49.67

Collective Schemes 2 700.39

Perpetual Annuities – 4% 4 489.10

Perpetual Annuities – 6% 325.35 1 058 386.94

– Allocation pursuant to paragraph a) no. 1 and no. 2 of Article 60 and

of the Articles of Association

(53% of the annual balance on Available Funds of

the respective mutual scheme):

Expenses Payment Guarantee (1988 Articles of Association) 4 850 366.03 10 968 966.74

37

7.6.2.2. To the Permanent Funds of the Respective Schemes:(Euros)

– (Allocation pursuant to paragraph c) no. 1 of Article 60 of the Articles of Association)

– Technical Surpluses:

Survival Pensions and Dowries 1 272 477.56

Welfare Capitals 855 717.96

Deferred Welfare Capitals with Option 1 194 408.55

Forward Welfare Capitals 29 166.13

Welfare Capitals for Specified Persons 531.29

Welfare Capitals for Younger 857 254.28

Temporary Welfare Capitals in case of Disability or Death 867.16

Temporary Disability Capital 32 560.56

Welfare Capitals for Study 80 700.27

Death Grant 45 898.48

Death Grant – Lutuosa Nacional 1 863.03


Disability Pensions 15 224.39

Expenses Payment Guarantee (1983 Articles of Association) 1 110.69

Registration/Release of Emphiteutic Property 1 645.98



Retirement Pensions – Additional Disabilityz – 4% 29 368.79


Deferred Capitals with Additional Cover 2 206.40



Collective Schemes Pensions 213.72

Perpetual Annuities – 4% 85 292.83

Perpetual Annuities – 3% 6 181.55 6 418 729.63

7.6.2.3. To the Own Funds of the Respective Schemes:(Euros)

– (Allocation pursuant to paragraph c) of no. 1 of Article 60 of the Articles of Association)

Capitalisation Schemes

Individual Schemes

Retirement Capitals 8 322 610.13

Retirement Saving 221 412.87

Guarantee Capitals 74 578.72

Disability Quotes – Collective Schemes 943.75

Collective Schemes 51 307.37 8 670 852.84

– Membership Welfare Fund 5 001 613.54

– Montepio Egitaniense Clinical Services Fund 18 155.38

– Expenses Payment Guarantee Fund 4 301 267.99 17 991 889.75

TOTAL (2) 35 379 586.12

TOTAL (3) = TOTAL (2) - TOTAL (1) 34 924 708.76

38

(Euros)

(Allocation pursuant to Article 18 of the Articles of Association and Article 53 of the Mutualist Code)Whereas it is impossible to distribute improvements to:

– Schemes with negative Available Funds:Retirement Pensions (1922 Articles of Association)Retirement Pensions – 6%Disability and Retirement PensionsPerpetual Annuities for Specified PersonsSurvival AnnuitiesRetirement Capital Pensions – 6%

– Schemes that benefit from the release of mathematical actuarial provisions, set up in 2005, where the sums employed must be restituted as proposed in point 3.8:Retirement Pensions – 4%Retirement Capital Pensions – 4%

It is proposed that Benefit Improvements (1% of the Mathematical Reserves relating to benefit information and in progress) be distributed to the following schemes:

Survival Pensions and Dowries 234 057.00 Welfare Capitals 340 768.00 Deferred Welfare Capitals with Option 1 007 890.00 Forward Welfare Capitals 19 230.00 Welfare Capitals for Specified Persons 159.00 Welfare Capitals for Younger 358 557.00 Temporary Welfare Capitals in case of Disability or Death 17.00 Temporary Disability Capital 668.00 Welfare Capitals for Study 43 151.00 Death Grant 16 567.00 Death Grant – Lutuosa Nacional 166.00 Disability Pensions 3 646.00 Retirement Pensions – Additional Disability – 4% 68.00 Retirement Pensions – Additional Disability – 6% 903.00 Deferred Capitals with Additional Cover 671.00 Retirement Capital Pensions – 3% 229.00

TOTAL 2 026 747.00

As in the previous year, a test was conducted to check ifactuarial schemes were able to meet their liabilities, basedon more realistic assumptions; the calculations showed

7.7. PROPOSED ALLOCATION OF BENEFIT IMPROVEMENTS

7.8. PROPOSED RESTITUTION OF GENERAL RESERVE FUND AND TECHNICAL SURPLUSES

that some schemes may release mathematical reserves setup the previous year.

It is proposed that the following sums be returned:Euros)

– To the General Reserve FundRetirement Capital Pensions – 4% 125 460.22 Perpetual Annuities – 4% 85 292.83

210 753.05 – To Technical Surpluses

Survival Pensions and Dowries 996 279.86 Welfare Capitals for Younger 419 000.00 Temporary Disability Capital 5 000.00 Welfare Capitals for Study 31 000.00 Retirement Pensions – 4% 682 485.35 Retirement Pensions – Quotes Restitution – 6% 847 000.00 Retirement Pensions – Additional Disability – 4% 29 000.00 Retirement Pensions – Additional Disability – 6% 10 000.00

3 019 765.21

TOTAL 3 230 518.26

39

7.9. PROPOSED RESTITUTION OF AMOUNTS USED TO TOP UP AVAILABLE FUNDS

Pursuant to No. 3 of Article 56 of the Montepio Geral – As-sociação Mutualista Articles of Association the TemporaryWelfare Capitals in case of Disability and Death shouldreturn to the General Reserve Fund the sum of 13 348.76euros; this was the sum used in 2005 to top up the respec-

tive Available Fund (no. 3 of Article 64 of the Articles ofAssociation). Therefore it is proposed that the GeneralReserve Fund receive 850.16 euros, the remaining balanceon that Scheme’s Available Fund in 2006, following theallocation to the General Reserve Fund.

7.10. PROPOSED ALLOCATION OF RETURN ON RETIREMENT CAPITALS, RETIREMENTSAVING AND COLLECTIVE SCHEMES

Whereas the annual income generated by RetirementCapitals, Retirement Saving and Collective Schemes,which, after covering the guaranteed rates of return, is rep-resented by the allocation to the respective Own Funds, setout in 7.6.2.3. above, it is proposed that these capitalisa-tion schemes be assigned an overall annual return of

3.7%. In this way the guaranteed annual rate of return of3% is provided in line with the Regulations, plus 0.7% asa share of the annual profit on the schemes. RetirementCapitals taken out between 1 March 1990 and 31 August1992 will continue to receive the guaranteed annual returnof 5.5%.

7.11. PROPOSED DISTRIBUTION OF SUM TRANSFERRED FROM CAIXA ECONÓMICA

Given the value of the sum to be transferred from Caixa Económica, it is proposed, in accordance with Article 62 of theArticles of Association, that it be distributed as follows:

Euros)

To Membership Welfare Fund 125 000.00

To Available Funds, Administration and General Reserve Fund 20 252 000.00

TOTAL 20 377 000.00

7.12. PROPOSED INCREASE IN INSTITUTIONAL FINANCIAL INTEREST IN CAIXA ECONÓMICA

Whereas it is urgent to reinforce the Institutional Capital ofCaixa Económica and as the Associação Mutualista hasfunds which may be employed to that end, the Board ofDirectors, following a decision of the General Board, pro-

poses an increase of Caixa Económica Institutional Capitalby a sum of up to 50 000 000 euros, by the value and inthe moment that the Board of Directors consider oppor-tune.

7.13. PROPOSED ALLOCATION TO FUNDAÇÃO MONTEPIO GERAL

In order to allow Fundação Montepio Geral, founded byMontepio Geral – Associação Mutualista, to fulfil its aims,the Board of Directors proposes to the General Meeting a

transfer to the said body, from the Membership WelfareFund, in the sum of 600 000 euros.

40

7.14. BALANCE SHEET AND STATEMENT OF INCOME

BALANCE SHEET AS AT 31 DECEMBER 2006 AND 2005


2006 2005ASSETS NOTES GROSS DEPRECIATION NET NET

ASSETS AND PROVISIONS ASSETS ASSETS

TANGIBLE ASSETS 26 575 5 527 21 048 17 970Land and Natural Resources 7 3 060 3 060 3 040

Buildings and Other Constructions 7 17 687 5 527 12 160 12 427

Other Tangible Assets 7 80 80 77

Work in Progress 7 5 748 5 748 2 426

FINANCIAL INVESTMENTS 1 351 989 42 388 1 309 601 1 268 635Institutional Financial Interest 9 585 000 585 000 485 000

Other Financial Interests 9 43 876 1 310 42 566 41 779

Stakes in Capital – Other Shares 8 12 12 517

Bonds and other fixed Income Securities 8 272 175 2 425 269 750 95 257

Financing Loans 1 704 1 704 1 832

Real Estate Investments 7 144 955 36 548 108 407 104 578

Other Financial Applications 8 304 267 2 105 302 162 539 672

DEBTORS 1 241 328 913 1 484Members 452 452 448

State and Other Public Entities 17 391 391 186

Other Debtors 398 328 70 850

TRADING SECURITIES 479 479Other Securities 479 479

CASH AND BANK DEPOSITS 742 975 742 975 593 423Bank Deposits 35 742 975 742 975 593 423

ACCRUALS AND DEFERRALS 17 232 17 232 17 361Accrued Revenue 32 17 232 17 232 17 361

TOTAL DEPRECIATION 42 075

TOTAL PROVISIONS 6 168

TOTAL ASSETS 2 140 491 48 243 2 092 248 1 898 873

Lisbon, March 1st 2007

THE CHIEF ACCOUNTANTArmindo Marques Matias

See accompanying notes to the financial statements

41

EQUITY AND LIABILITIES NOTES 2006 2005

EQUITY

Social Fund

Own Funds 23 59 449 51 763

Technical Surpluses 20 and 23 60 410 53 312

Revaluation Reserves 10 and 23 32 910 32 910

Legal Reserves 23 139 946 124 577

Other Reserves 23 1 515 1 332

Net Profit for the Year 34 925 38 198

TOTAL EQUITY 329 155 302 092

LIABILITES

PROVISIONS FOR RISKS AND EXPENSES 1 758 507 1 591 222

Mathematical Provisions for Expenses Relating to Association Schemes 20 and 23 1 663 803 1 494 891

Grants and Benefit Improvements 20 and 23 94 704 96 331

CREDITORS 3 320 4 578

Beneficiaries 1 547 1 363

Amounts owed to Credit Institutions 33 1 419 2 760

State and Other Public Entities 17 49 37

Suppliers 20 87

Other Creditors 285 331

ACCRUALS AND DEFERRALS 1 266 981

Accrued Costs 32 1 266 981

TOTAL LIABILITIES 1 763 093 1 596 781

TOTAL EQUITY AND LIABILITIES 2 092 248 1 898 873

OBLIGATIONS AND FUTURE COMMITMENTSFoundation’s Funds Management 18 1 745 1 426

Commitments from Third Parties 18 24 174 5 112

Commitments to Third Parties 18 7 610 670

Other Obligations and future Commitments 18 393

TOTAL 33 922 7 208

THE BOARD OF DIRECTORSJosé da Silva Lopes – Chairman

António Tomás Correia

José de Almeida Serra

Rui Manuel Silva Gomes do Amaral

Eduardo José da Silva Farinha

42

STATEMENT OF INCOME AS AT 31 DECEMBER 2006 AND 2005


DEBIT NOTES 2006 2005

COSTS AND LOSSES

MEMBERSHIP COSTS 385 963 462 435

Increase on Mathematical Provisions 250 515 362 729

Other Membership Schemes Costs

Instalments 2 274 1 917

Overdue Capitals 36 109 229 77 123

Grants and Benefit Improvements 8 350 7 522

Perpetual Annuities 2 805 2 822

Other Membership Costs 12 790 10 322

EXTERNAL SUPPLIES AND SERVICES 3 537 2 169

PERSONNEL COSTS 26 7 475 7 594

DEPRECIATION 7 354 352

PROVISIONS 177 90

OTHER OPERATING COSTS AND LOSSES 758 689

FINANCIAL INVESTMENTS DEPRECIATION AND PROVISIONS 27 5 313 4 385

INTEREST AND SIMILAR COSTS 27 5 298 1 385

(A) 408 875 479 099

EXTRAORDINARY COSTS AND LOSSES 1 557 264

Donations 29 29 88

Losses arising from Fixed Assets 29 1 527 33

Other Extraordinary Losses 29 1 143

TOTAL COSTS (C) 410 432 479 363

PROFIT FOR THE YEAR 34 925 38 198

TOTAL DEBIT 445 357 517 561


THE CHIEF ACCOUNTANTArmindo Marques Matias


43

CREDIT NOTES 2006 2005

REVENUE AND GAINS

MEMBERSHIP REVENUE 349 422 429 137

Reduction in Mathematical Provisions 92 269 64 414

Other Membership Schemes Revenue

Fees 550 515

Quotizations 63 905 57 382

Capital Received 190 879 304 216

Perpetual Annuities 441 1 382

Other Membership Revenue 1 378 1 228

SUPPLEMENTARY REVENUE 5 4

OPERATING SUBSIDIES AND GRANTS 11 497 24 583

Allocation from Caixa Económica 23 11 497 24 583

FINANCIAL REVENUE AND GAINS 71 477 57 694

Interest Income 27 48 323 38 502

Investment property income 27 and 28 14 749 14 136

Profits arising from Investments 27 3 185 2 593

Exchange Rate Differences 2 100 208

Other Financial Revenue and Gains 27 2 662 2 247

Cover Operations Revenue 458 8

(B) 432 401 511 418

EXTRAORDINARY REVENUE AND GAINS 12 956 6 143

Gains on Fixed Assets 29 11 148 2 915

Reduction in Depreciation and Provisions 29 1 643 3 211

Previous Years Adjustments 29 159

Other Extraordinary Revenue and Gains 29 6 17

TOTAL CREDIT (D) 445 357 517 561

SUMMARY:

CURRENT PROFIT (B)-(A) 23 526 32 319

NET PROFIT (D)-(C) 34 925 38 198

THE BOARD OF DIRECTORSJosé da Silva Lopes – Chairman





44


2006 2005

CASH FLOW ARISING FROM OPERATING ACTIVITIES

Increase / (Decrease) in suppliers 110 (43)

Debtors and creditors (572) (1 483)

Membership costs (133 263) (97 393)

Membership profits 257 154 364 465

Members and beneficiaries 178 297

Other operating profits 32 31

Other operating costs (10 688) (9 479)

Own funds (532) (446)

Technical surpluses (646) (689)

Extraordinary losses and costs (23) (80)

Taxes (197) (43)

111 553 255 137

CASH FLOW ARISING FROM INVESTMENT ACTIVITIES

Proceeds from sale of other investments 2 377 839

Disposal/(acquisition) of investment property 12 265 13 007

Disposal/(acquisition) of investment securities 101 790 (177 442)

Disposal/(acquisition) of trading securities 75 –

Deposits with fixed maturity date (521 859) (21 852)

Commercial paper (479) 20 590

Interest income from deposits repayable on demand 7 626 8 979

Acquisition of tangible assets (6 597) 315

(404 802) (155 564)

CASH FLOW ARISING FROM FINANCING ACTIVITIES

Institutional financial investment (100 000) (40 000)

Profits transferred from CEMG 11 597 24 783

Financing loans 208 (16)

Loans from credit institutions (4 004) (1 353)

(92 199) (16 586)

Net changes in cash and equivalents (385 448) 82 987

Cash and equivalents at the beginning of the period 438 423 355 436

Cash and equivalents at the end ofthe period 52 975 438 423


7.15. STATEMENT OF CASH-FLOWS FOR THE YEARS ENDED 31 DECEMBER, 2006 AND 2005

45Introduction

Montepio Geral – Associação Mutualista («Association») isa private social welfare institution, established on 4 October,1840.

The purpose of the Association is to develop and promotesocial protection, solidarity and integrity activities in bene-

7.16. NOTES TO THE FINANCIAL STATEMENTS AT 31 DECEMBER, 2006 AND 2005

fit of the Associates and its families, as well as the benefi-ciaries designated by them.

3. Accounting policies

3.1. Basis of presentation

Montepio Geral – Associação Mutualista is a private mutualbenefit institution established in Portugal in 1840. TheAssociation has commenced its operations in 4 October,1840, and the Financial Statements presented reflect theresults of the operations for the years ended 31 December,2006 and 2005, and have been prepared in accordancewith the basic principle of historical cost.

The following notes are numbered in accordance with theMutual Associations Accounting Plan. This report onlyincludes the notes applicable or significant to the FinancialStatements.

The Association is exempt from presenting consolidatedFinancial Statements. On this basis, the FinancialStatements do not reflect the patrimonial changes thatcould result from the consolidation method application toinvestments and institutional financial investments.

The Financial Statements were prepared on a going con-cern basis based on the Association’s accounting records,maintained in accordance with the accounting principles ofthe Mutual Associations Accounting Plan, which is basedon the principles established on the Portuguese OfficialAccounting Plan, and regulated by the Decree-Law No.422/93 of 28 December.

3.2. Tangible assets

Tangible assets are recorded at cost or revalued amounts inaccordance with the Portuguese Legislation. The revalua-tion effects are recorded in the balance «Revaluationreserves» (notes 10, 11 and 23).

Depreciation is calculated on a straight-line basis, at themaximum rates permitted for taxation purposes, in accor-dance with Decree-Law No. 2/90, of 12 January, over thefollowing periods, which do not differ significantly fromtheir estimated useful life:

Number of years

Buildings and other constructions 50

Investment property 50

The buildings booked at the balance «Investment proper-ty» (note 7), are held for investment purposes and are notrelated to the Association operational activity.

3.3. Investments

Investments are accounted for at acquisition cost. Theinvestments held correspond to equity investments in com-panies that are related to the Association’s and CaixaEconómica Montepio Geral («Caixa») activities, with long-term nature. If unrealised losses are permanent, an impair-ment is recognised.

The institutional financial investment is accounted for atacquisition cost and corresponds to the subscribed andrealised capital of Caixa Económica Montepio Geral(«Caixa»).

3.4. Securities

Treasury bonds are recorded at acquisition cost. The posi-tive difference between the acquisition cost and the nomi-nal value, which corresponds to the premium paid uponpurchase, is amortised over the period to maturity.

Other securities are recorded at the lower of cost or mar-ket value (or presumed realisable value in case of unlistedsecurities).

Excluding Treasury bonds, unrealised losses resulting fromthe difference between cost and market value (or pre-sumed realisable value) are fully provided for.

3.5. Provisions for doubtful debts

Provision for doubtful debts is charged based on the evo-lution of doubtful debts balance, and is presented as adeduction to this balance.

The provision for doubtful debts is assessed every quarter,based on the debt overdue period.

3.6. Recognition of income and expenses

Income and expenses are recorded on an accrual basis. Thedifferences between the amounts received and paid andthe corresponding generated revenues and expenses areaccounted for as accruals and deferred income.

3.7. Mathematical provisions

Mathematical provisions cover the liabilities arising fromthe different forms of benefits subscribed by the Associa-

46

tes. These provisions are calculated on a monthly basisusing actuarial bases approved by Ministério do Trabalho eda Solidariedade Social. In 31 December, 2005, the Asso-ciation, considering the changes in course related with theaccounting standards and with the purpose of a progres-sive convergence with the requirements of the Interna-tional Financial Reporting Standards («IFRS»), has changedthe accounting policy concerning the mathematical provi-sions, and started to perform additionally, at each reportingdate, a liability adequacy test («LAT»), in order to evaluatethe mathematical provisions. The liability adequacy test isbased on the application of best estimates, namely thoseconcerning the life expectation and the interest rate usedin liabilities discount.

Considering that the liability adequacy test represents achange to the current accounting policies, the respectiveimpact determined as at 31 December, 2005, was recog-nised against the permanent fund – technical surpluses ofeach scheme up to the respective amount, and against thelegal reserve fund, in accordance with the article 59 of theAssociation by-laws.

The liability adequacy test will be performed separately toeach scheme. Any deficiency detected will be recognisedby the Association against income when determined.

3.8. Expenses related to Caixa Económica MontepioGeral

The Association supports not only the costs with theemployees allocated to the Direcção and Núcleo de Desen-volvimento of the Association, on the straight dependenceof Direcção Informática, but also the costs with the Órgãosde Gestão e Fiscalização and employees of the DirecçãoImobiliária e de Instalações. The amount supported corres-ponds to the compensation due by the Association regard-ing the assistance rendered by Caixa in several areas inwhich the Association does not have in place any organisa-tional structure and for the selling of mutualism schemes bythe commercial network (see note 26).

3.9 Profits related to Caixa Económica MontepioGeral

Net income received from Caixa was accounted betweenthe balances «Own funds» and «Contributions and ope-rating subsidies» in the income statement of the year inwhich they are received (note 35).

6. Number of associates

As at 31 December, 2006, the Association had 376 950 (2005: 333 638) effective associates responsible for 598 012 subs-criptions (2005: 506 321). As at 31 December, 2006 and 2005, the number of associates subscribing the different mem-bership schemes, are analysed as follows:

2006 2005

Individual schemes:

Retirement capitals 210 880 182 767

Care payment guarantee 136 040 122 509

Deferred welfare capitals with option 81 918 67 932

Retirement saving 13 964 10 812

Welfare capitals for younger 8 304 7 937

Welfare capitals 7 331 7 524

Retirement pensions 6 215 5 885

Survival pensions and dowries 1 897 1 976

Others 3 131 3 123

469 680 410 465

Additional coverage schemes:

Retirement pensions – quotes restitution 6 106 5 756

Disability temporary capitals 268 306

Retirement pensions – additional disability 311 305

Warrant capitals quotes 30 31

6 715 6 398

47

7. Tangible assets

This balance is analysed as follows:

incurred with the construction of a residential complexnamed «Residências Assistidas».

At 31 December 2006 the balance «Work in progress»includes an amount of Euros 5 583 000 related to costs

2006 2005Euros ‘000 Euros ‘000

Cost:

Tangible assets:

Land and natural resources 3 060 3 040

Buildings and other constructions 17 687 17 600

Other tangible assets 80 77

Work in progress 5 748 2 426

26 575 23 143

Investments:

Investment property 144 955 138 977

171 530 162 120

Accumulated depreciation:

Charge for the year (2 766) (2 668)

Accumulated charge for the previous years (39 309) (36 904)

(42 075) (39 572)

129 455 122 548

The tangible assets movements during the year 2006 are analysed as follows:

Balance as at Acquisitions/ Balance as at1 January Charges Transfers Disposals 31 DecemberEuros ‘000 Euros ‘000 Euros ‘000 Euros ‘000 Euros ‘000

Cost:

Tangible assets:

Lands and natural resources 3 040 20 – – 3 060

Buildings and other constructions 17 600 72 15 – 17 687

Other tangible assets 77 3 – – 80

Work in progress 2 426 6 524 (3 181) (21) 5 748

23 143 6 619 (3 166) (21) 26 575

Investments:

Investment property 138 977 3 283 3 166 (471) 144 955

162 120 9 902 – (492) 171 530


Tangible assets:

Buildings and other constructions 5 173 354 – – 5 527

Investments:

Investment property 34 399 2 412 – (263) 36 548

39 572 2 766 – (263) 42 075

48

The securities portfolio with reference to 31 December,2006, is presented in the Appendix I.

The Association accounts for securities portfolio, exceptTreasury bonds, at the lower of cost or market value. As at31 December, 2006, and resulting from the accounting

policy described in note 3.4, if the held-to-maturity portfo-lio was valued at market value, it would present unrealisedgains in the amount of Euros 15 185 000 (2005: Euros37 502 000).

8. Securities portfolio


2006 2005Euros ‘000 Euros ‘000

Shares:

In Portuguese companies – 505

In foreign companies 12 12

12 517

Bonds and other fixed income securities:

Issued by resident entities:

Guaranteed by public entities 32 118

Other resident issuers 55 493 39 079

Issued by non-resident entities 216 650 56 682

272 175 95 879

Provisions for bonds and other fixed income securities (2 425) (622)

269 750 95 257

Other securities:

Government bonds 258 244 465 419

Investment funds units:

In national securities funds 7 828 22 060

In foreign securities funds 1 755 20 000

In real estate funds 36 440 34 844

304 267 542 323

Provisions for other securities (2 105) (2 651)

302 162 539 672

571 924 635 446

492006

Euros ‘000

Bonds andother fixed Other

Shares income securities Securities Total

Acquisition cost 12 272 175 304 267 576 454

Provisions booked – (2 425) (2 105) (4 530)

Book value 12 269 750 302 162 571 924

Unrealised gains – 1 011 14 174 15 185

Market value 12 270 761 316 336 587 109

2005Euros ‘000

Bonds andother fixed Other

Shares income securities Securities Total

Acquisition cost 517 95 879 542 323 638 719

Provisions booked – (622) (2 651) (3 273)

Book value 517 95 257 539 672 635 446

Unrealised gains 224 893 36 385 37 502

Market value 741 96 150 576 057 672 948

The movements occurred in the provision for shares, bonds and other securities during the year 2006 are analysed as follows:

Euros ‘000

Balance as at Charge for Balance as at1 January the year Charge-off 31 December

Shares, bonds and other securities 3 273 2 900 (1 643) 4 530

9. Investments

This balance is analysed as follows:2006 2005

Euros ‘000 Euros ‘000

Institutional financial investment 585 000 485 000

Other investments 43 876 43 088

628 876 528 088

Provisions for investments (1 310) (1 309)

627 566 526 779

As at 31 December, 2006 and 2005, the difference between the acquisition cost and the market value (quoted securitiesbased on the Stock Exchange List or estimated realisable value for the non quoted securities), can be analysed as follows:

During 2006, Caixa Económica Montepio Geral increasedits share capital in the amount of Euros 100 000 000.Montepio Geral – Associação Mutualista fully subscribedthis capital increase.

Also during 2006, Lusitânia Vida, Companhia de Seguros,S.A., proceeded to an increase of share capital in the

amount of Euros 5 000 000, having Montepio Geral – As-sociação Mutualista subscribed the amount of Euros1 971 000.

Additionally, in 2006, Montepio Geral – Associação Mutua-lista proceeded to the sale of the investment in Impar– Comp. Cabo Verdiana de Seguros, S.A.R.L.

50

The balance of Investments can be analysed as follows:

2006

Acquisition Shareholders ProvisionsShare Number Percentage cost equity (*) bookedcapital of shares held Euros ‘000 Euros ‘000 Euros ‘000

Caixa Económica Montepio Geral 585 000 – 100,000% 585 000 822 175 –

Lusitania, Companhia de Seguros, S.A. 19 250 2 529 816 65,710% 23 769 22 864 –

Lusitania Vida, Companhia de Seguros, S.A. 14 000 220 042 39,293% 6 925 8 900 –

MCS – Moçambique, Comp. de Seguros, S.A.R.L. (MZM) 24 000 000 43 200 18,000% 379 173 95

Silvip, S.A. 750 3 960 26,400% 308 634 –

Futuro – Sociedade Gestora de Fundos de Pensões, S.A. 2 567 52 822 61,737% 1 963 3 771 –

MG Gestão de Activos Financeiros – S.G.F.I.M., S.A. 1 200 239 655 99,856% 1 331 2 300 –

MG Investimentos Imobiliários, S.A. 50 10 000 100,000% 50 34 –

Previsão – Soc. Gest. F.P., S.A. 3 500 10 000 1,429% 50 71 –

Clínica de Santa Maria de Belém, S.A. 2 240 66 240 14,786% 493 423 178

Hospital do Coração, S.A. 25 50 10,000% 2 N/D –

Sagies, S.A. 500 27 000 27,000% 97 116 –

Leacock (Seguros), Lda. 300 a) 81,000% 242 1 978 –

E.I.A. – Soc. de Ensino, Investigação e Adm., S.A. 1 825 70 000 3,836% 349 91 279

Soficatra, S.A. 7 859 1 500 0,473% 37 30 –

Bolsimo, Lda. 50 a) 91,000% 45 59 –

Banco de África Ocidental, S.A. (CFA) 1 343 200 10 074 7,500% 153 283 –

Credint, S.A. 50 4 350 87,00% 986 (12) 758

BDC – Banco de Desenv. e Com. Moçambique, S.A.R.L. (MZM) 190 331 900 663 224 34,846% 2 943 2 275 –

Caixa Económica de Cabo Verde, S.A.R.L. (CVE) 348 000 61 272 17,607% 2 582 2 906 –

Nova Câmbios, S.A. 500 3 000 30,000% 152 273 –

Residências Montepio, Serviços de Saúde, S.A. 3 000 1 529 700 50,990% 1 020 1 337 –

628 876 1 310

a) Represented by quotas

* The shareholders’ equity shown is referred to the latest financial statements available.

51

The Institutional financial investment corresponds to the institutional capital (100%) in Caixa Económica Montepio Geral.The balance sheet of Caixa, for the years ended 31 December, 2006 and 2005, can be presented as follows:

2006 2005Euros ‘000 Euros ‘000

Assets

Cash and deposits at central banks 242 772 207 707

Loans and advances to credit institutions repayable on demand 75 321 94 396

Other loans and advances to credit institutions 670 440 910 571

Loans and advances to customers 12 941 563 11 533 418

Financial assets held for trading 6 349 –

Financial assets at fair value through profit and loss 20 380 –

Available for sale financial assets 890 238 680 474

Hedging derivatives 14 220 –

Held to maturity investments 36 044 34 903

Investments in associates 28 236 26 269

Other intangible assets 79 028 80 402

Tangible assets 11 258 5 551

Other assets 207 039 377 302

15 222 888 13 950 993

Liabilities

Amounts owed to credit institutions 1 119 856 937 553

Amounts owed to customers 8 048 370 7 550 069

Debt securities 4 670 843 4 080 422

Other financial liabilities 41 743 –


Provisions 92 772 84 675

Other subordinated debts 301 229 310 649

Other liabilities 118 701 296 854

Total Liabilities 14 400 713 13 260 222

Shareholders’ Equity

Share capital 585 000 485 000

Fair value reserves 7 586 –

Retained earnings and other reserves 169 435 160 459

Net income for the year 60 154 45 312

Total Shareholders’ Equity 822 175 690 771

15 222 888 13 950 993

10. Fixed assets revaluation criteria

In prior years, Montepio Geral – Associação Mutualista hasrevalued the tangible assets, investment property andrespective accumulated depreciations, resulting on a reva-luation reserve in the amount of Euros 32 910 000 (note23).

In accordance with the Accounting Directive No. 16, No.2.4, the referred revaluation is considered as realised onlyby use or sell of the assets to which concerns.

52

11. Revaluation

The revaluation is analysed as follows:

Historical Revaluedcost Revaluations amounts

Euros ‘000 Euros ‘000 Euros ‘000

Tangible assets:

Land and natural resources 2 600 460 3 060

Buildings and other constructions 12 431 5 256 17 687

15 031 5 716 20 747

Investments:

Investment property 108 960 35 995 144 955

123 991 41 711 165 702

17. State and other public entities


2006 2005Euros ‘000 Euros ‘000

Assets:

Income tax with-held at source – 4

Recoverable VAT 200 110

VAT – reimbursements claimed 191 72

391 186

Liabilities:

Income tax with-held at source 36 30

VAT settlement 13 7

49 37

18. Obligations and future commitments

This account is analysed as follows:

2006 2005Euros ‘000 Euros ‘000

Commitments to third parties 7 610 670

Amounts received for deposit and management 1 745 1 426

Commitments from third parties 24 174 5 112

Other obligations and future commitments 393 –

The balances «Commitments to third parties» and «Com-mitments from third parties» are relative to Credit DefaultSwaps and Swaps contracted with Caixa EconómicaMontepio Geral.

The balance «Amounts received for deposit and manage-ment» includes the assets of several foundations and someattributed awards, which are managed by the Association.

53

20. Permanent Funds

As at 31 December, 2006 and 2005, the balance «Permanent funds of the associated schemes», can be analysed as fol-lows:

2006Euros ‘000

Surplus forMathematical subsidies and Technical

provisions additional benefits surpluses Total

Schemes:

Retirement capitals 1 329 718 – 10 182 1 339 900

Retirement saving 39 407 – – 39 407

Welfare capitals 9 407 24 684 10 884 44 975

Deferred welfare capitals with option 97 110 12 141 23 920 133 171

Retirement pensions 99 567 25 574 1 008 126 149

Welfare capitals for younger 29 958 6 875 9 232 46 065

Survival pensions and dowries 6 914 22 777 752 30 443

Others 24 099 2 653 4 432 31 184

1 636 180 94 704 60 410 1 791 294

Perpetual annuities 27 623 – – 27 623

1 663 803 94 704 60 410 1 818 917

2005Euros ‘000

Surplus forMathematical subsidies and Technical

provisions additional benefits surpluses Total

Schemes:

Retirement capitals 1 186 741 – 8 644 1 195 385

Retirement saving 28 914 – – 28 914

Welfare capitals 8 857 24 311 10 000 43 168

Deferred welfare capitals with option 89 397 13 636 22 419 125 452

Retirement pensions 92 643 25 252 – 117 895

Welfare capitals for younger 27 863 7 220 8 698 43 781

Survival pensions and dowries 7 926 23 315 321 31 562

Others 23 607 2 597 3 230 29 434

1 465 948 96 331 53 312 1 615 591

Perpetual annuities:

By-laws of 1966 28 943 – – 28 943

1 494 891 96 331 53 312 1 644 534

The allocation of the Association’s net assets by the different schemes has underlying the following distribution:

(i) Retirement capitals, retirement saving and collective schemes; and

(ii) Other schemes.

As at 31 December, 2006, the level of coverage of the netassets by the mathematical provisions corresponds to101.4% (2005: 101.4%) for retirement capitals, retire-ment saving and collective schemes, and to 172.2% (2005:167.2%) for other schemes.

The mathematical provisions include the amount of Euros55 536 000 (2005: 59 312 000), related to the schemes lia-

bilities increase due to the introduction of the liability ade-quacy test, as referred in note 3.7. The discount interestrate considered in the liability adequacy test performed asat 31 December, 2006 was 4% (2005: 3.5%).

54

23. Own and permanent funds, reserves and mathematical provisions

The balances included in Own funds and permanent funds, reserves and mathematical provisions, are analysed as follows:

Dividends paidNet changes

onBalance as at From From mathematical Transfers Balance as at

1 January Association Caixa provisions and charges Others 31 DecemberEuros ‘000 Euros ‘000 Euros ‘000 Euros ‘000 Euros ‘000 Euros ‘000 Euros ‘000

Own and permanent funds:

Own funds 51 763 8 118 100 – (500) (32) 59 449

Technical surpluses 53 312 4 691 – – 896 1 511 60 410

Perpetual rents

Technical surpluses – 128 – – (128) – –

105 075 12 937 100 – 268 1 479 119 859

Reserves:

Revaluation reserves 32 910 – – – – – 32 910

Legal reserves 124 577 16 151 – – (768) (14) 139 946

Other reserves 1 332 – – – 183 – 1 515

158 819 16 151 – – (585) (14) 174 371

Provisions for liabilities and charges

Mathematical provisionsfor membership schemes 1 494 891 6 267 – 162 757 – (112) 1 663 803

Surplus for subsidies and additional benefits 96 331 2 884 – (4 511) – – 94 704

1 591 222 9 151 – 158 246 – (112) 1 758 507

1 855 116 38 239 100 158 246 (317) 1 353 2 052 737

As at 31 December, 2006, the amount referred on «Others»transferred from the balance «Technical surpluses» includesthe annual charge for the decennial premium to be paid tothe Associates of «Retirement Capital» scheme. This amountwas charged against the balance «Other membershipscheme costs» in the statement of income.

As at 31 December, 2006, the amount referred on«Transfers and charges» in relation to the movement inOther reserves, is related to the reserves distribution forbuilding improvements.

During the years 2006 and 2005, the Association dividends received from Caixa (note 35), were accounted for in the fol-lowing balances:

2006 2005Euros ‘000 Euros ‘000

Contributions and operating subsidies 11 497 24 583

Own funds 100 200

11 597 24 783

As established on the Association by-laws, the purpose of Permanent Funds is to ensure the pensions’ payment, capitalsor other costs related to the different schemes to the Associates and its beneficiaries. This balance includes the commit-ments to beneficiaries related to subventions and improvements granted and technical surpluses, namely:

a) Technical surpluses – Part of the permanent funds, not covering the liabilities granted to the beneficiaries of theassociative schemes. Technical surpluses can be used for covering the annual deficit of any available funds.

b) Subventions and benefits improvement

i) Subventions excess – This excess is meant to cover the charges related with existent pensioners and membersbenefits improvement at the balance sheet date. The benefits are calculated according to the percentagesapproved by the General Meeting.

55

ii) Benefits improvement excess – This excess is meant to cover the improvement in actual and future benefits,in accordance to the Association by-laws. These benefits are calculated on an actuarial basis. Its distribution is madeat the benefits maturity date.

Legal reserves – A legal reserve comprising at least 5% ofthe balances of the funds at the end of each year, after themathematical provisions calculation, must be established inaccordance with the Association by-laws. The legal reservecan be used to cover costs resulting from contingencies, tocomplement the Available Funds when their income isinsufficient to cover the respective costs and to coverpotential losses of the Association.

Revaluation reserves – This reserve results from the fixedassets revaluation in compliance with the applicable legis-lation (note 3.2).

Mathematical provisions – These provisions are recordedat the balance Provisions for liabilities and charges and itspurpose is to cover the future liabilities with membershipschemes. These provisions were calculated according toactuarial technical bases approved by Ministério do Traba-lho e da Solidariedade Social. Additionally, as at 31 Decem-ber, 2006 and 2005, these provisions were subjected to aliability adequacy test, as described in note 3.7.

26. Personnel expense

The Association supports not only the costs with theemployees allocated to the Direcção and Núcleo de Desen-volvimento of the Association, on the straight dependenceof Direcção Informática, but also the costs with the Órgãosde Gestão e Fiscalização and employees of the DirecçãoImobiliária e de Instalações. The amount supported corres-ponds to the compensation due by the Association regarding

the assistance rendered by Caixa in several areas in whichthe Association does not have in place any organisationalstructure and for the selling of mutualism schemes by thecommercial network. As at 31 December, 2006, the per-sonnel expense supported by Association amounts to Euros7 475 000 (2005: Euros 7 594 000).

27. Statement of financial results

The amount of the accounts included in the Statement of financial results is analysed as follows:

2006 2005


Revenue:

Interest income 48 323 38 502

Investment property income 14 749 14 136

Profits arising from investments 3 185 2 593

Other financial profits and gains 5 220 2 463

71 477 57 694

Expenses:

Interest expenses 3 134 114

Buildings improvement 1 363 1 271

Exchange differences 801 –

Interest and similar expenses 5 298 1 385

Depreciation for investment property 2 412 2 316

Provisions for financial investments 2 901 2 069

Depreciation and provisions for financial investments 5 313 4 385

10 611 5 770

Net financial income 60 866 51 924

As 31 December, 2006, the balance Other financial gains includes an amount of Euros 2 100 000 related to exchange dif-ferences (2005: Euros 208 000).

56

28. Investment property income

The amount of this account is analysed as follows:

Euros’ 000

InvestmentBook Repairs and propertyvalue maintenance income

Buildings 165 702 1 363 14 749

29. Statement of extraordinary results

The amount of the accounts included in the Statement of extraordinary results is analysed as follows:

2006 2005Euros ‘000 Euros ‘000

Revenue:Gains arising from fixed assets 11 148 2 915Depreciation and provisions decrease 1 643 3 211Other gains attributable to previous years 159 –Other extraordinary gains 6 17

12 956 6 143Expenses:

Donations 29 88Losses arising from fixed assets 1 527 33Other extraordinary losses 1 143

1 557 264

Extraordinary income 11 399 5 879

32. Prepayments and accrued income


Euros ‘000 Euros ‘000Accrued income:

Interest receivableSecurities 9 493 13 508Others 4 487 1 746

Other accrued incomeReal estate funds 2 873 2 098Others 379 9

17 232 17 361

Accrued expense 1 266 981

As at 31 December, 2006, the balance Accrued expenseincludes the amount of Euros 1 083 000 (2005: 838 000),

related to obligations with the holiday pay (including sub-sidies).

57

33. Amounts owed to credit institutions

As at 31 December, 2006 and 2005, this balance refers toa loan granted from Caixa (note 35), with the purpose offinancing the reconstruction of «Edifício Grandella», in theamount of Euros 1,419,000 and Euros 2,760,000, respec-tively. The loan bears interest every six months and bene-fits from a reduction of 50% on the interest rate supported

by the Direcção Geral do Tesouro, in accordance with theparagraph b), No. 2, 2nd article, of the Decree-Law No.355/88, that established FEARC (Fundo Extraordinário deAjuda à Reconstrução do Chiado). As at 31 December,2006, the loan interest rate in force was 6% (2005: 5%).

As at 31 December, 2006, the loan repayable plan is analysed as follows:

Euros ‘000

2007 1 419

34. Income tax

The Association is a private social welfare institution (reci-procal aid association), benefiting from income tax exemp-tion (Imposto sobre o Rendimento das Pessoas Colectivas –IRC) in accordance with the Article 10, No. 1 b) of IRC

Legislation. This exemption was confirmed by Law No. 10-B/96 of 23 March, which approved the Public Budget forthe year of 1996.

35. Transactions with Caixa Económica Montepio Geral

The balances and main transactions between the Association and Caixa during the years ended 31 December, 2006 and2005, were the following:

2006 2005Euros ‘000 Euros ‘000

Deposits repayable on demand 52 975 438 423

Deposits with fixed maturity date 690 000 155 000

Amounts owed to credit institutions (Note 33) 1 419 2 760

Income received from investment property 10 030 9 538

Dividends received (Note 23) 11 597 24 783

Caixa institutional share capital increase (Note 9) 100 000 40 000

The amount of Euros 640 000 000 recorded in «Deposits with fixed maturity date» is related with capitalisation schemes.

58

36. Overdue capitals


2006 2005Euros ‘000 Euros ‘000

Retirement capitals 80 731 59 251

Deferred welfare capitals with option 24 585 14 941

Welfare capitals for younger 2 251 1 907

Others 1 662 1 024

109 229 77 123

The balance «Overdue capitals» refers to capital reimburse-ments of schemes for which the benefits are processed bypartial or total amortisation of the amounts paid by the

Associates. These reimbursements are deducted from theAssociation liabilities on the calculation of the mathemati-cal provisions.

59

SECURITIES PORTFOLIOAS AT 31 DECEMBER, 2006

Appendix I

INVESTMENT SECURITIES 576.454 587.109

Portuguese treasury bonds 258.244 266.127

Certificado De Renda Perpétua N.º 118 377,57 198,16% 1 –Consolidado 1941 648,44 65,85% – –Consolidado 1942 278 668,42 94,00% 262 162Consolidado 1943 2 209,67 47,18% 1 1Consolidado-Centenários 1940 409 842,28 99,84% 409 360O. T´s Abril 2005/2021 20 000 000,00 99,85% 19 969 19 394O. T´s Junho 2001/2011 87 000 000,00 101,65% 88 435 90 988O. T´s Junho 2002/2012 105 000 000,00 101,88% 106 974 110 047O. T´s Setembro 98/2013 41 700 000,97 101,18% 42 193 45 175

Bonds 272 175 270 761

Issued by residents 55 525 55 969

Lisnave/92 32 322,03 100,00% 32 32Aforro Montepio 2006 (5 Anos) – 4.ª Série 9 000,00 97,53% 9 9Aforro Montepio 2006 3 Anos – 12.ª Série 47 600,00 98,26% 47 48Aforro Montepio 2006 3 Anos – 13.ª Série 32 000,00 98,23% 31 32Aforro Montepio Associados 2006 3 Anos – 1.ª Série 2 000,00 98,61% 2 2Celulose Do Caima, SGPS 5 000 000,00 100,00% 5 000 5 000CEMG/2001 – Prazo Indeterminado 343 450,00 100,00% 343 340CGD /98 (Valor Real) – Cx. Subordinadas 249 398,95 99,82% 249 289EDP/98 1 328 797,59 99,74% 1 325 1 329Essi/96 748 200,00 99,60% 745 748MG Aforro 2006 (5 Anos) – 1.ª Série 122 200,00 98,88% 121 122MG Aforro 2006 (5 Anos) – 2.ª Série 84 000,00 99,20% 83 84MG Aforro 2006 (5 Anos) – 3.ª Série 13 000,00 98,49% 13 13MG Aforro Em Caixa 2005 – 1.ª Série 1 245 000,00 96,57% 1 202 1 245MG Aforro Em Caixa 2005 – 2.ª Série 2 555 100,00 96,12% 2 456 2 555MG Aforro Em Caixa 2005 – 3.ª Série 511 650,00 95,89% 491 512MG Aforro Em Caixa 2005 – 4.ª Série 2 015 850,00 95,73% 1 930 2 016MG Aforro Em Caixa 2006 – 10.ª Série 256 000,00 98,95% 253 256MG Aforro Em Caixa 2006 – 11.ª Série 51 250,00 98,61% 51 51MG Aforro Em Caixa 2006 – 1.ª Série 1 242 000,00 97,91% 1 216 1 242MG Aforro Em Caixa 2006 – 2.ª Série 601 250,00 97,50% 586 601MG Aforro Em Caixa 2006 – 3.ª Série 401 900,00 97,68% 393 402MG Aforro Em Caixa 2006 – 4.ª Série 617 150,00 97,77% 603 617MG Aforro Em Caixa 2006 – 5.ª Série 310 700,00 97,68% 304 311MG Aforro Em Caixa 2006 – 6.ª Série 736 600,00 97,64% 719 737MG Aforro Em Caixa 2006 – 7.ª Série 523 250,00 98,30% 514 523MG Aforro Em Caixa 2006 – 8.ª Série 185 150,00 98,19% 182 185MG Aforro Em Caixa 2006 – 9.ª Série 349 250,00 98,47% 344 349MG Aforro Especial 2005/2008 674 550,00 97,88% 660 675MG Aforro Especial Fev06-2009 552 100,00 98,21% 542 552MG Aforro Especial Jul06-2009 118 500,00 98,95% 117 119MG Busines Invest 2005/2008 1 307 000,00 97,82% 1 279 1 307MG Busines Invest 2006/2008 632 000,00 98,37% 622 632MG Cabaz Top 239 600,00 95,53% 229 240MG Commodities 61 000,00 92,49% 56 61MG Especial Poupança 890 400,00 96,21% 857 890MG Valor Garantido 332 800,00 96,42% 321 333Montepio Cabaz Bric 2006/08 5 000,00 97,04% 5 5Montepio Energia Renováveis 2006/08 1 500,00 98,79% 1 2

Nominal Nominal Book Value Market Value

Type of Securities Value Value Unit Total TotalEuros Euros Value Euros ‘000 Euros ‘000

See accompanying notes to the financial statements Ctd.

60

Mundicenter 1 000 000,00 100,00% 1 000 1 000Portucel 2005/2012 4 500 000,00 100,00% 4 500 4 522Portucel 2005/2010 5 000 000,00 100,00% 5 000 5 014Somec/94 149 700,00 99,46% 149 –Valor Imobiliário 4 000,00 101,94% 4 4Brisa Auto Estradas Portugal 1 000 000,00 99,64% 996 992Caixa Geral De Depósitos 1 000 000,00 98,94% 989 972Parpublica 5 000 000,00 100,00% 5 000 4 999CGD Hedge Funds 2012 1 000 000,00 97,00% 970 1 000CGD Tripla Garantia 3 000 000,00 99,75% 2 993 3 000BPI 2017 10 000 000,00 99,91% 9 991 10 000

Issued by non-residents 216 650 214 792

Abs Banco Popular 100 000,00 100,00% 100 100Allies Irish Banks Plc 1 000 000,00 99,90% 999 999Alpha Credit Group Plc 1 000 000,00 100,00% 1 000 1 000Anglo Irish Bank Corp 1 000 000,00 100,14% 1 001 1 001Autostrade Spa 2 500 000,00 100,60% 2 515 2 514Ayt Deuda Subordinada 1 500 000,00 100,00% 1 500 1 500Banca Delle Marche 500 000,00 99,97% 500 500Banca Delle Marche 1 000 000,00 99,96% 1 000 1 000Banca Italease 2 000 000,00 99,77% 1 995 1 997Banca Italease 1 000 000,00 99,93% 999 999Banca Lombarda 1 500 000,00 99,86% 1 498 1 499Banca Popolare Italiana 2 000 000,00 100,07% 2 001 2 003Banche Popolari Unite 2011 2 000 000,00 99,87% 1 997 1 997Banche Popolari Unite 2015 2 000 000,00 99,92% 1 998 2 001Banco Bpi Sa, Cayman 2 000 000,00 99,90% 1 998 1 998Banif Finance Ltd 500 000,00 99,90% 500 500Banif Finance Ltd 2 000 000,00 99,93% 1 999 1 999Banif Finance Ltd 2016 1 000 000,00 100,00% 1 000 1 000Bank Of America Corp 2 000 000,00 99,77% 1 995 1 998Bankinter Sa 1 000 000,00 99,89% 999 999BBVA Senior Finance 3 000 000,00 99,96% 2 999 2 999BBVA Sub Capital Unipers 1 500 000,00 100,00% 1 500 1 502BES Finance Ltd 1 000 000,00 98,30% 983 970Bilbao Bizkaia Kutxa 2 000 000,00 99,79% 1 996 1 995BMW Australia Finance 1 500 000,00 99,93% 1 499 1 499Caixa Económica Montepio Geral 1 000 000,00 100,03% 1 000 1 000Caja De Ahorros Galicia 3 500 000,00 99,91% 3 497 3 496Caja Sevilla Monpis 5 000 000,00 100,00% 5 000 5 000Cassa Risparmio Firenze 1 000 000,00 99,69% 997 997Castle Finance I. Ltd 1 500 000,00 100,00% 1 500 1 480Citicorp /1997 299 278,80 100,00% 299 299Citigroup 2013 500 000,00 99,98% 500 500Citigroup Inc 1 000 000,00 99,86% 999 1 000Commerzbank Ag 3 000 000,00 99,40% 2 982 2 959Commonwealth 1 500 000,00 99,82% 1 497 1 497Council Europe Fund /97 498 800,00 100,00% 499 499Daimlerchrysler Coordin 500 000,00 99,92% 500 500Danske Ank As 1 000 000,00 99,94% 999 999Deutsche Posrbank 2 000 000,00 99,70% 1 994 1 995Deutsche Telecom Int Fin 1 000 000,00 99,99% 1 000 1 000Dnb Nor Bank Asa 3 000 000,00 99,95% 2 999 2 999Dnb Norbank Asa 2 000 000,00 100,20% 2 004 2 005EBS Building Society 3 000 000,00 99,77% 2 993 2 993Endesa Capital Sa 1 500 000,00 100,02% 1 500 1 500Erste Bank 2 000 000,00 99,96% 1 999 2 001Espírito Santo Investment (Callable Flipper Ko 5 Years) 5 000 000,00 99,95% 4 997 5 000Espirito Santo Invst Plc 1 500 000,00 100,00% 1 500 1 500


Value Value Unit Total TotalEuros Euros Value Euros ‘000 Euros ‘000

Cont.

61

F Van Lanschot Bankiers 1 500 000,00 100,35% 1 505 1 505Finance For Danish Ind 1 000 000,00 99,86% 999 1 000Finantia 2 500 000,00 100,00% 2 500 2 500France Telecom 1 000 000,00 100,19% 1 002 1 001Ge Capital Euro Funding 1 500 000,00 99,80% 1 497 1 497Goldman Sachs Group Inc 1 000 000,00 99,92% 999 1 001Hsbc Finance Corp 1 000 000,00 100,26% 1 003 1 002Hypo Real Estate Bank Ag 2 500 000,00 99,98% 2 499 2 499Hypoverreinsbank Lux 1 000 000,00 103,21% 1 032 1 032Iberdrola Finanzas 1 000 000,00 99,97% 1 000 999Ing Verzekeringen Nv 2 000 000,00 99,86% 1 997 1 998Ing Verzekeringen Nv 1 000 000,00 99,94% 999 999Irish Nationwide Bldg So 1 500 000,00 99,97% 1 500 1 499Landsbanki Islands 500 000,00 98,71% 494 498Lb Baden-Wuerttemberg 1 000 000,00 98,10% 981 1 000Lehman Brothers Holdings 500 000,00 99,62% 498 500Lehman Brothers Holdings 1 000 000,00 99,83% 998 999Lusitano Plc (Lsme 1 A) 1 525 000,00 100,00% 1 525 1 525Mediobanca 2 000 000,00 99,88% 1 998 1 997Merrill Lynch & Co 1 000 000,00 99,90% 999 1 001Metro Ag 500 000,00 99,96% 500 500Morgan Stanley 1 000 000,00 100,06% 1 001 1 001Nibc Bank Nv 1 000 000,00 99,99% 1 000 1 000Nomura Europe Finance Nv 1 000 000,00 99,89% 999 999Preps Limited Partnership 1 200 000,00 100,00% 1 200 1 200Proms Xxs6-1 C 1 500 000,00 100,00% 1 500 1 500Pyme Banco Popular (Popy 2006-1 B) 1 500 000,00 100,00% 1 500 1 500Rci Banque Sa 1 500 000,00 99,86% 1 498 1 500Riviera (Citibank Intl Plc) 1 000 000,00 100,00% 1 000 1 000Rothshilds Cont Fin Plc 1 000 000,00 99,90% 999 999Santander Issuances 500 000,00 99,45% 497 498Sedna Finance 2 500 000,00 100,00% 2 500 2 500Sella Holding Banca Spa 1 000 000,00 99,94% 999 999Sella Holding Bnca 1 500 000,00 99,96% 1 499 1 500Skandinaviska Enskilda 1 000 000,00 99,93% 999 999Societé Genarali Acceptance 3 000 000,00 100,00% 3 000 3 000Sparebanken Rogaland 1 000 000,00 100,40% 1 004 1 000St George Bank Ltd 1 000 000,00 100,06% 1 001 1 000Standard Charteres Bank 1 000 000,00 99,72% 997 998Sydbank A/S 1 000 000,00 99,94% 999 1 000Telecom Italia Spa 500 000,00 99,94% 500 496Telefonica Emisiones Sau 500 000,00 100,02% 500 500Unicredito Italiano 1 000 000,00 99,89% 999 1 000Vodafone Group Plc 2 000 000,00 99,97% 1 999 2 008Volvo Treasury Ab 1 000 000,00 100,03% 1 000 1 000Washington Mutual Bk 2 000 000,00 99,92% 1 998 1 998Abb Intl Finance Ltd 1 000 000,00 101,24% 1 012 1 001Altadis Finance Bv 1 000 000,00 100,28% 1 003 1 000Bayer Corp 1 000 000,00 99,54% 995 992BEI 2017 15 000 000,00 99,60% 14 940 14 124BEI/96-16 379 240,00 100,43% 381 495Belgacom Sa Droit Pub 400 000,00 99,66% 399 396Bnp Paribas 500 000,00 99,96% 500 546Brisa Finance Bv 1 500 000,00 101,60% 1 524 1 518Buoni Poliennali Del Tes 1 000 000,00 98,01% 980 968Buoni Poliennali Del Tes 2 000 000,00 98,66% 1 973 1 964Carnival Plc 1 000 000,00 99,53% 995 983Ccce Cen Csse Eparg Prev 1 500 000,00 100,00% 1 500 1 478Compagnie De St Gobain 2 000 000,00 100,01% 2 000 1 985



Appendix I

See accompanying notes to the financial statements Ctd.

62

Deutsche Telekom Int Fin 1 000 000,00 99,89% 999 987EDP Finance 2 000 000,00 100,75% 2 015 1 992Endesa Sa 1 500 000,00 100,40% 1 506 1 501J P Morgan (Cupão Zero) 150 000,00 182,94% 274 274Nationwide 500 000,00 99,75% 499 532Porche Intl Finance 4 000 000,00 100,00% 4 000 3 758Portugal Telecom 2012 1 000 000,00 94,32% 943 924Portugal Telecom Int Fin 1 500 000,00 100,27% 1 504 1 498Repsol Intl Finance 1 000 000,00 103,48% 1 035 1 023Sun Life Canadá Funding 750 000,00 99,92% 749 786Telecom Italia Spa 500 000,00 98,95% 495 490Telefonica Emisiones Sau 1 000 000,00 97,96% 980 973Thyssenkrupp Ag 2 000 000,00 102,75% 2 055 2 037Veolia Environnement 1 000 000,00 99,04% 990 969Veolia Environnement 2013 3 000 000,00 102,75% 3 083 3 055Atlanteo 2019 1 000 000,00 100,00% 1 000 1 000Atlanteo 2020 5 000 000,00 99,75% 4 988 5 000Atlanteo Capital Limited 250 000,00 99,00% 248 250Atlanteo Capital Limited (Cupão Zero) 650 000,00 97,54% 634 650Barclays Bank 3 000 000,00 100,00% 3 000 3 000BEI 2016 5 000 000,00 98,50% 4 925 4 058BNP Paribas 777 5 000 000,00 99,00% 4 950 5 000Golden 2 Series 2 500 000,00 100,00% 2 500 2 500KBC Ifima 750 000,00 99,90% 749 750Nib - Triplo 5 1 300 000,00 100,00% 1 300 1 300Nib Capital 1 500 000,00 99,83% 1 498 1 500Pyramid 2005 4 000 000,00 100,00% 4 000 4 000UBS Float (Gbp-Eur 10Nc3M Ra) 1 000 000,00 99,00% 990 1 000Zela Finance Corporation 1 000 000,00 100,00% 1 000 1 000

Shares 12 12

Issued by non-residents 12 12

Five Arrows Fund 0,01 181,75 0,64 12 12

Investment funds 46 023 50 209

Issued by residents 44 268 48 687

MG Acções 100,34 2 509 3 301MG Acções Europa 50,00 1 500 1 379MG Multi Gestão Dinâmica 46,27 1 851 1 746MG Multi Gestão Equilibrada 48,50 727 751MG Euro Telcos 48,91 245 303MG Euro Utilities 49,76 249 386Fundo Alves Ribeiro (A R Medias Empresas Portugal) 49,88 748 1 416Fundo Vip 8,62 28 669 30 478Fundo Vision Escritórios 5,46 5 459 6 457Fundo Logistica Distribuiçâo 5,28 2 112 2 271Fundo Ibéria 5,00 199 199

Issued by non-residents 1 755 1 522

Global High Yield Bond Fund 11,70 11,70 1 755 1 522

TOTAL 576 454 587 109



Cont. Appendix I


65

8. Caixa EconómicaMontepio Geral – Individual

Members and CustomersAs well as pursuing its Mutual Association goals, Montepio also seeks tomeet its Members’ and Customers’ banking and financial needs, offeringa full range of products and services.

67

Caixa Económica Montepio Geral’s net assets totalled 15 223 million euros, at 31.12.06. which was a rise of 1 272 millioneuros (+9.1%).

8.1. TREND IN MAIN BALANCE SHEET ITEMS

The business segments which contributed the most to that growth were:

• Loans and advances to Customers, which accounted for 85% of total net assets at the year-end (82.7% at the endof 2005). The 12.2% growth recorded in 2006 reflects the strengthening of the credit side of the business;

• Financial assets available for sale and others at fair value, which are largely made up of low-risk, high-liquidity instru-ments and which grew by 31.3%;

• Liquidity assets, which despite falling to 989 million euros as a result of the regular matching of immediate liquidi-ty levels to regulatory and business requirements, continue to carry the greatest relative weight, with the exception ofCredit, within the asset structure.

Although the asset structure underwent no significantchange in 2006, mention should be made of the positivechange in available-for-sale financial assets, in particularinstruments eligible for refinancing operations conducted

with the Bank of Portugal and the ECB (European CentralBank), at the expense of Other Loans and advances toCredit Institutions, which usually yield a lower return.

ASSET STRUCTURE

ASSET STRUCTURE(thousands of euros)



FINANCIAL INVESTMENTS

Liquidity assets 988 533 6.5 1 212 674 8.7 -224 141 -18.5Cash and and Bank Deposits 318 093 2.1 302 103 2.2 15 990 5.3

Other loans and advances to Credit Institutions 670 440 4.4 910 571 6.5 -240 131 -26.4

Loans and advances to Customers (net of provisions) 12 941 563 85.0 11 533 418 82.7 1 408 145 12.2

Financial assets held for trading 20 454 0.1 20 454 –

Financial assets available for sale and others at fair value 893 334 5.9 680 475 4.9 212 859 31.3

Investments held to maturity 36 044 0.2 34 903 0.3 1 141 3.3

Hedging derivatives 9 031 0.1 27 269 0.2 -18 238 -66.9

OTHER INVESTMENTS 333 929 2.2 462 254 3.3 -128 325 -27.8Non-current assets held for sale 90 638 0.6 99 566 0.7 -8 928 -9.0

Others 243 291 1.6 362 688 2.6 -119 397 -32.9

TOTAL NET ASSETS 15 222 888 100.0 13 950 993 100.0 1 271 895 9.1

retained their relative weight in the liabilities and equitystructure, i.e. 33.9%.

Equity and provisions increased by 915 million euros, whilemaintaining their ranking (6.0%) in total liabilities andequity.

68

The liabilities and equity structure remained almostunchanged. Total external resources recorded growth of1 132 million euros (+8.6%), reflecting the efforts made by

the Commercial Networks and the Finance and Interna-tional Department to obtain financial resources.

Total Customer and Credit Institution Resources, made upof deposits and bonds placed with customers, grew by9.5%, as compared to December 2005. The relative weightof total resources saw no significant change, as it wentfrom 58.6%, at the end of 2005, to 58.8%, at the end of2006.

Total resources consisting of debt securities, excludingsecurities placed with customers, grew by 10.5% and also

TREND IN LIABILITIES AND EQUITY(thousands of euros)



Customer and Credit Institution Deposits 8 352 147 54.9 7 929 060 56.8 423 087 5.3

Securities placed with Clients (Cash Bonds) 587 950 3.9 235 000 1.7 352 950 150.2

Other Credit Institution Resources 3 857 0.0 5 322 0.1 -1 465 -27.5

Total Customer and Credit Institution Resources 8 943 954 58.8 8 169 382 58.6 774 572 9.5

Subordinated and Non-subordinated Loans, Syndicated and Debt Certificates 5 154 148 33.9 4 663 391 33.4 490 757 10.5

Other Liabilities 209 839 1.3 342 775 2.4 -132 936 -38.8

Total External Resources 14 307 941 94.0 13 175 548 94.4 1 132 393 8.6

Equity and Provisions 914 947 6.0 775 445 5.6 139 502 18.0

TOTAL LIABILITIES, EQUITY AND PROVISIONS 15 222 888 100.0 13 950 993 100.0 1 271 895 9.1

8.2. COMMERCIAL ACTIVITY

Despite being conducted in a setting not quite favourableto invest, Caixa Económica Montepio Geral’s commercialactivity in 2006 produced visible growth in business,

reflected in the resources it attracted (in particular depositsand structured products), personal credit and the cross-saleof group company products.

TREND IN MAIN CUSTOMER BUSINESS COMPONENTS(thousands of euros)

BUSINESS VARIABLES2006 2005 Change


Applications

Credit Granted 13 124 548 11 796 078 1 328 470 11.3

of which:

Mortgages 11 400 078 86.9 10 361 052 87.8 1 039 026 10.0

Credit and Interest Due 296 432 2.3 331 489 2.8 -35 057 -10.6

Resources

Total customer and credit institution resources 13 595 055 100.0 11 962 212 100.0 1 632 843 13.7

of which:

Recorded on Balance Sheet 8 943 954 65.8 8 169 382 68.3 774 572 9.5

Recorded off Balance Sheet 4 651 101 34.2 3 792 830 31.7 858 271 22.6

8.2.1. CREDIT

Total credit granted to customers grew by 11.3% in 2006.The Private Individuals Credit segment recorded a 14.0%

increase while Credit to Companies achieved growth of6.5%, compared to the figures at 31 December 2005.

69

2.9%. However, Investment and Treasury Credit were themost active components of the Companies segment,reporting growth of 9.6% and 13.0%, respectively.

Housing and construction credits recorded combinedgrowth of 9.7% in 2006, and their relative weight in totalcredit fell from 76.7% at the end of 2006 to 77.9% at theend of the previous year.

Credit to Traders and Liberal Professions increased by 28million euros, which represented a growth rate of 16.1%.There was the opposite trend in the Not-for-Profit Institu-tions and the Public Administrative Sector segments, wherebusiness volume was lower than that of the previous year.

The growth in Private Individuals Credit was higher thanthe other segments and its relative weight in the structurewent from 64.1% in 2005 to 65.6% in 2006. The majorcontributor was Credit for other purposes which grew by47.9%, especially «MG Lar Mais» Credit and IndividualCredit.

Staying in the Private Individuals Credit segment, theHousing credit portfolio saw an increase of 826 millioneuros (+11.7%), while retaining its relative weight ofaround 60.0% in the credit structure.

Credit to Companies recorded growth of 257 millioneuros, but saw its relative weight in the credit structure fallto 32.1% (-1.4 basis points). Construction Credit conti-nued to be the largest part at 16.5%, and saw growth of

The breakdown of credit by market segment shows thatPrivate Individuals. Construction and Public Works seg-ments continue to absorb the majority of CEMG credit,

with an aggregate share of 85.6% of total credit at theyear-end.

CREDIT BY SEGMENT AND BY PURPOSE(thousands of euros)

SEGMENTS / PURPOSES2006 2005 Change


1 – Private Individuals 8 609 722 65.6 7 554 437 64.1 1 055 285 14.0

Housing 7 902 762 60.2 7 076 337 60.0 826 425 11.7

Housing with Securitization 8 706 739 8 049 933 656 806 8.2

Other purposes 706 960 5.4 478 100 4.1 228 860 47.9

2 – Companies 4 217 685 32.2 3 960 754 33.5 256 931 6.5

Construction 2 169 942 16.5 2 109 587 17.9 60 355 2.9

Investment 1 063 562 8.1 970 214 8.2 93 348 9.6

Treasury 924 598 7.1 818 388 6.9 106 210 13.0

Other purposes 59 583 0.5 62 565 0.5 -2 982 -4.8

3 – Not-for-Profit Institutions 40 730 0.3 51 402 0.4 -10 672 -20.8

4 – Traders and Liberal Professions 198 446 1.5 170 925 1.5 27 521 16.1

5 – Public Administrative Sector 57 965 0.4 58 560 0.5 -595 -1.0

TOTAL 13 124 548 100.0 11 796 078 100.0 1 328 470 11.3

BREAKDOWN OF CREDIT BY SECTORS IN 2006

70

8.2.1.1. Housing Credit

Housing Credit portfolio grew by 11.7% in 2006, andrecorded a Loan to Value (LTV) ratio of 57.5% (56.4% in2005), finishing the year with a non-performance ratio of1.6% (1.8% in 2005).

New loans recorded growth of 83 million euros (+5.4%compared to 2005) and an LTV ratio of 71.5%, which influ-enced both the segment’s overall LTV (56.4% to 57.5%)and the average contract value, which rose to 64 thousandeuros in 2006, a 3 thousand Euro increase per contract.

The periodical surety revaluation program required byPart I, point 3.2.2. no. 4-C b) of the Annex to Bank ofPortugal Regulation no. 1/93, which calls for sureties to berevalued at least once every three years, updated the valueof the LTV ratio. Nonetheless, this ratio for new contractsis higher than the average ratio for CEMG credit.

8.2.1.2. Individual Credit

CEMG undertook a major campaign focused on IndividualCredit with the aim of diversifying the range of products

(+11.6%) in 2006, when compared with the previousyear’s figures.

Total credit granted increased in volume by 680 millioneuros (+17.2%) and in number by 11 519 contracts

offered to its customers. As a result, Individual Creditincreased by 63 million euros (+39.0%). General, Holidaysand Motor credit accounted for almost that entire rise(99.7%) and strengthened its position as the major compo-nent in Individual Credit (81.5% of the total).

This segment’s Credit and Interest Due (CID) ratio fell by0.4 b.p. in 2006, when compared to the 2005 figure, to0.7%.

TREND IN CREDIT GRANTED DURING THE YEAR(thousands of euros)

PURPOSES2006 2005 Changes

Quantity Value % Quantity Value % Quantity % Value %

1 – Private Individuals 55 889 2 225 394 48.0 64 512 1 868 026 47.3 -8 623 -13.4 357 368 19.1Housing 19 481 1 612 044 34.8 19 529 1 529 160 38.7 -48 -0.2 82 884 5.4Others 36 408 613 350 13.2 44 983 338 866 8.6 -8 575 -19.1 274 484 81.0

2 – Companies 51 258 2 289 806 49.5 31 390 2 004 568 50.7 19 868 63.3 285 238 14.2

Construction 1 167 1 031 792 22.3 1 185 1 103 595 27.9 -18 -1.5 -71 803 -6.5

Investment 2 204 360 949 7.8 1 715 228 494 5.8 489 28.5 132 455 58.0

Treasury 29 011 750 007 16.2 28 243 635 123 16.1 768 2.7 114 884 18.1

Other purposes 18 876 147 058 3.2 247 37 356 0.9 18 629 7 542.1 109 702 293.7

3 – Not-for-Profit Institutions 133 10 211 0.2 126 7 584 0.2 7 5.6 2 627 34.6

4 – Traders and Liberal Professions 3 610 107 357 2.3 3 338 71 015 1.8 272 8.1 36 342 51.2

5 – Public Adm. Sector 7 219 0.0 12 1 676 0.0 -5 -41.7 -1 457 -86.9

TOTAL 110 897 4 632 987 100.0 99 378 3 952 869 100.0 11 519 11.6 680 118 17.2


HOUSING CREDIT 2006 2005Change

Value %

Credit granted

Total credit 7 902 762 7 076 337 826 425 11.7

LTV ratio* 57.5% 56.4% 1.1 b.p.

Average contract value 64 61 3 5.3

CID (Credit and Interest Due) ratio 1.6% 1.8% -0.8 b.p.

New loans

Total credit contracts during the year 1 612 044 1 529 160 82 884 5.4

LTV ratio* 71.5% 68.1% 3.4 b.p.

Average contract value 83 78 5 6.0

* LTV ratio = Value of housing loans / Current value of associated surety valuations

71

8.2.1.3. Individual Credit – Revolving

Revolving Individual Credit comprises credit cards andauthorised current account overdrafts.

The number of active Montepio brand credit cards rose by31.3% in 2006, and the credit granted increased +19.9%,rising to 29 million euros. This growth was associated withthe increased take-up of the Mega Card, aimed at smallon-line purchases, and the launch of the «Mais Vida» Cardat the end of 2006, aimed at private customers andMontepio Members aged over 18.

Current account overdrafts were close to 15 million euros,representing a growth of +20.4%, as compared to 2005.

The non-performance ratio rose to 5.1% (2.0% in 2005) asa result of the change to accounting criteria for non-per-formance, in particular in the case of current account over-drafts. Although this type of credit carries significant risk,the interest rates are also high, making it a highly attractivebusiness and subject to great competition.

CEMG’s performance in both branches of Individual Credit(Individual and Revolving Individual) matched the forecasts,thanks to the diversification measures adopted.

8.2.1.4. Construction Credit

Construction Credit (credit used) recorded a moderateincrease of 60 million euros (+2.9%) in 2006, and account

for 71.3% of total credit contracts during the year. Unusedcredit (28.7%) was lower than in 2005.

The slower rate of growth can be explained by the reces-sion experienced by the construction industry.


INDIVIDUAL CREDIT2006 2005 Change


Credit grantedTotal credit 225 954 100.0 162 559 100.0 63 395 39.0

of which:General, Holiday and Motor 184 131 81.5 120 934 74.4 63 197 52.3Building works 35 302 15.6 35 308 21.7 -6 0.0Stock purchases 6 521 2.9 6 317 3.9 204 3.2

CID ratio 0.7% 1.1% -0.4 b.p.


INDIVIDUAL CREDIT – REVOLVING 2006 2005Change

Value %

Credit cardsNumber of cards 138 225 105 278 32 947 Units 31.3InvoicingCredit granted 29 125 24 286 4 839 19.9Commission 1 180 845 335 39.6

OverdraftsTotal credit 14 662 12 178 2 484 20.4

CID ratio 5.1% 2.0% 3.1 b.p.


CONSTRUCTION CREDIT 2006 2005Change

Value %

Credit grantedCredit used 2 169 942 2 109 587 60 355 2.9Average contract value 650 654 -4 -0.6CID ratio 3.0% 3.4% -0.4 b.p.Credit unused 872 497 928 026 -55 529 -6.0Total contracted credit 3 042 439 3 037 613 4 826 0.2

New credit contractsTotal credit contracts during the year 1 031 792 1 103 595 -71 803 -6.5Average contract value 884 931 -47 -5.1%

8.2.1.6. Credit and Interest Due

Credit and Interest Due dropped by 35 million euros (-10.6%) in 2006 to 296 million euros. This improvementwas mainly due to the Companies segment, 28 millioneuros (-20.0%) and to the Traders and Liberal Professions

segment, 5 million euros (-45.0%). The combination of anincrease in credit granted and a reduction in credit andinterest due led to a fall in the non-performance ratio of2.3% at the end of 2006 (2.8% in 2005).

72

Credit rotation, measured by the new credit contracts /total credit granted ratio, fell slightly (around two percent-age points). This slowdown did not have a negative effecton the quality of the credit granted, and the Credit andInterest Due ratio fell from 3.4% in 2005 to 3.0% in 2006.

8.2.1.5. Credit by Guarantee Type

The relative weight of Credit with a real security fell from90.4% at the end of 2005 to 89.7% at the end of 2006.

CREDIT GTANTED BY GUARANTEE TYPE(thousands of euros)

TYPES OF GUARANTEE2006 2005 Change


Real Security – Mortgage 11 400 078 86.9 10 361 052 87.8 1 039 026 10.0

Real Security – Other 373 199 2.8 302 083 2.6 71 116 23.5

Public Administrative Sector 57 965 0.4 58 560 0.5 -595 -1.0

Other Guarantees 757 219 5.8 718 929 6.1 38 290 5.3

Non Guaranteed 536 087 4.1 355 454 3.0 180 633 50.8

TOTAL 13 124 548 100.0 11 796 078 100.0 1 328 470 11.3

Non-guaranteed Credit recorded significant growth in2006, given its return weighted against the level of risk.

Nonetheless, its relative weight was still small and had nosignificant influence on the quality of the credit granted.

CREDIT GRANTED BY GUARANTEE TYPE

73

The non-performance ratio for the Companies segment fellto 2.7% at the end of 2006 (3.6% in 2005). All types ofCompanies credit played a part in this decrease.

As far as Private Individuals Credit is concerned, Credit andInterest Due was practically unchanged. This combinedwith the growth in Credit led to a drop in the Credit andInterest Due ratio to 2.0% (2.3% in 2005). By purpose thissegment recorded changes in opposite directions, withhousing following the downward trend (-6.6%) and non-housing purposes recording a +17.2% change.

The Traders and Liberal Professions segment saw a 5 mil-lion euro reduction in Credit and Interest Due and its non-performance ratio fell to 3.3% (6.9% at the end of 2005).

The overall effect of the above changes was a decrease inthe Credit and Interest Due ratio for Total Credit Grantedfrom 2.8% in 2005 to 2.3% at the end of 2006, Credit andInterest Due for over 3 months went from 2.6% in 2005 to2.0% in 2006, and the adjusted Credit and Interest Dueratio (net of that part for which 100% provision hasalready been made) remained the same at 1.8%.

The non-performance indicator, as defined by the Bank ofPortugal in Instruction no. 16/2004, which establishes theratio of non-performance credit (Credit due for over 90days and doubtful debt credit reclassified as due) to TotalCredit, was 2.5% at the end of 2006 as compared to 3.4%in 2005.

The dominance of Guarantees, and in particular mort-gages, reduces the risks associated with CEMG’s financingoperations, because in cases of non-performance, as a rule,

the credit granted can be recovered by means of the saleof the surety.

CREDIT AND INTEREST DUE BY SEGMENT AND BY PURPOSE(thousands of euros)

SEGMENTS / PURPOSES2006 2005 Change

Value CID Ratio Value CID Ratio Value %

1 – Private Individuals 176 200 2.0 176 932 2.3 -732 -0.4

Housing 121 973 1.5 130 653 1.8 -8 680 -6.6

Other purposes 54 227 7.7 46 279 9.7 7 948 17.2

2 – Companies 113 232 2.7 141 622 3.6 -28 390 -20.0

Construction 63 804 2.9 72 292 3.4 -8 488 -11.7

Investment 27 906 2.6 39 878 4.1 -11 972 -30.0

Treasury 21 487 2.3 28 946 3.5 -7 459 -25.8

Other purposes 35 0.1 506 0.8 -471 -93.0

3 – Not-for Profit Institutions 366 0.9 998 1.9 -632 -63.3

4 – Traders and Liberal Professions 6 516 3.3 11 837 6.9 -5 321 -45.0

5 – Public Administrative Sector 118 0.2 100 0.2 18 18.0

TOTAL 296 432 2.3 331 489 2.8 -35 057 -10.6

TREND IN CREDIT AND INTEREST DUE RATIOS

74

Housing and Construction Credit, the main items underCredit and Interest Due and which accounted for 62.7% of

total credit due at the end of 2006, are secured by realsecurity that are revalued periodically.

The breakdown of Credit Due by delay period shows a favourable change, thanks to a reduction in the relative weight ofthe longest overdue credit.

TREND IN THE MAIN CREDIT AND INTEREST DUE INDICATORS(thousands of euros)

INDICATORS 2006 2005Change

Value %

Customer Credit 13 124 548 11 796 078 1 328 470 11.3

Credit Due 296 432 331 489 -35 057 -10.6

Credit Due less than 3 monts 36 461 30 147 6 314 20.9

Credit Due over 3 months 259 971 301 342 -41 371 -13.7

Credit Due over 12 months 227 547 271 010 -43 463 -16.0

Doubtful Debt Credit reclassified as Due 71 159 93 235 -22 076 -23.7

Credit Due + Write-off operations 597 754 495 887 101 867 20.5

Credit Due up to 3 months compared to total Credit Due (%) 12.3 9.1 3.2 b.p.

Credit Due over 3 months compared to total Credit Due (%) 87.7 90.9 -3.2 b.p.

Credit Due over 12 months compared to total Credit Due (%) 76.8 81.8 -5.0 b.p.

Total Credit Provisions 304 133 377 037 -72 904 -19.3

General Credit Risks 87 793 79 522 8 271 10.4

Credit Due and Doubtful Debts 216 340 297 515 -81 175 -27.3

Credit Due Ratios as % of Total Credit

Credit and Interest Due Ratio 2.3 2.8 -0.5 b.p.

Credit and Interest Due over 3 months ratio 2.0 2.6 -0.6 b.p.

Credit and Interest Due over 12 months ratio 1.7 2.3 -0.6 b.p.

Non-performance credit ratio 2.5 3.4 -0.9 b.p.

Non-performance credit net of provisions ratio 0.9 0.9 0.0 b.p.

Credit Due Covered by Provisions (%)

Credit Due 102.6 113.7 -11.1 b.p.

Credit Due over 3 months 117.0 125.1 -8.1 b.p.

Credit Due over 12 months 133.7 139.1 -5.4 b.p.

BREAKDOWN OF CREDIT AND INTEREST DUE BY GUARANTEE

75

8.2.2. EXTERNAL RESOURCES

The aggregated value of Customer Deposits and securitiesheld by Clients grew 10.9% (+846 million euros) in 2006.Customer Deposits, where time deposits were especially

important, recorded growth of 493 million euros (+6.6%)while securities held by Clients increased by 353 millioneuros (+150.2%).

The level of Provision cover for Credit and Interest Due forover 3 months fell from 125.1% at the end of 2005 to117.0% at the end of 2006. The change in provisions didnot affect the quality of CEMG’s financial structure, espe-

cially when we consider that the risks associated with ahigh proportion of credit due are limited by mortgageguarantees.

PROVISION COVER OF CREDIT AND INTEREST DUE FOR THREE OR MORE MONTHS

The latter account for 6.6% of external intermediation resources, due mainly to the placing of a series of products withprivate customers.

TREND IN INTERMEDIATION AND DISINTERMEDIATION(thousands of euros)



1 – INTERMEDIATION 8 943 954 65.8 8 169 382 68.3 774 572 9.5

Client and Credit Institution Deposits 8 352 147 61.4 7 929 060 66.3 423 087 5.3

Securities held by Clients 587 950 4.3 235 000 2.0 352 950 150.2

Other Resources 3 857 0.0 5 322 0.0 -1 465 -27.5

2 – DESINTERMEDIATION 4 651 101 34.2 3 792 830 31.7 858 271 22.6

TOTAL 13 595 055 100.0 11 962 212 100.0 1 632 843 13.7

EXTERNAL INTERMEDIATION RESOURCES(thousands of euros)

RESOURCES2006 2005 Change


From Clients 8 600 084 96.2 7 754 253 94.9 845 831 10.9

Current Accounts 1 883 462 21.0 2 241 727 27.4 -358 265 -16.0

Time Deposits 4 635 443 51.8 3 534 636 43.3 1 100 807 31.1

Savings Accounts 1 493 229 16.7 1 742 890 21.3 -249 661 -14.3

Total Securities held by Clients 587 950 6.6 235 000 2.9 352 950 150.2

From Credit Institutions 343 870 3.8 415 129 5.1 -71 259 -17.2

Deposits 340 013 3.8 409 807 5.0 -69 794 -17.0

Other Resources 3 857 0.0 5 322 0.1 -1 465 -27.5

TOTAL RESOURCES 8 943 954 100.0 8 169 382 100.0 774 572 9.5

76

The reduction in Private Individuals Deposits is associatedwith the introduction of the Savings Directive that had adirect bearing on emigrant deposits, and with the securitiesplaced with Customers, which in some cases replaceddeposits. It was also caused by the more dynamic disinter-mediation products market.

Despite the downward trend in Private IndividualsDeposits, we sought to achieve greater consolidation ofthese resources, through successive issues of depositsmaturing after 3 to 5 years, in the form of structured pro-ducts.

8.2.2.2. Disintermediation Resources

Disintermediation Resources totalled 4 651 million euros atthe end of 2006 (+22.6% as compared to 2005). Themajor contribution to this growth came from depositedsecurities, which went up by 640 million euros (+22.3%),and continued to be the largest component in Off-balanceSheet Resources (75.5% of the total).

Investment Stock and Real Estate Funds maintained theirupward trend and recorded increases of +21.6% and+11.3%, respectively.

Resources from Credit Institutions followed a downwardtrend and had a negative impact on total external interme-diation resources.

Disintermediation Resources continued to increase at afaster rate than Intermediation Resources, reflecting theefforts made to place savings products over the year, inparticular Capitalisation Insurance, Investment Funds andRetirement Saving Plans.

8.2.2.1. Customer Deposits

A breakdown of deposits by type of customer shows, onthe one hand, the decline in Private Individuals Deposits (-1.3%), which fell to 64.0% of total deposits (68.3% in2005) and, on the other hand, the increase in the relativeweight of the public administrative sector (+98.3%),traders and liberal professions (+21.7%) and not-for-profitinstitutions (+25.8%).

TREND IN DEPOSITS BY TYPE OF CUSTOMER(thousands of euros)

SEGMENT2006 2005 Change


Private Individuals 5 342 349 64.0 5 413 008 68.3 -70 659 -1.3

Residents 5 239 340 62.7 5 208 373 65.7 30 967 0.6

Emigrants 88 288 1.1 190 205 2.4 -101 917 -53.6

Other Non-residents 14 721 0.2 14 430 0.2 291 2.0

Non-Monetary Companies 1 086 016 13.0 1 017 131 12.8 68 885 6.8

Not-for-Profit Institutions 952 751 11.4 757 540 9.6 195 211 25.8

Traders and Liberal Professions 41 877 0.5 34 423 0.4 7 454 21.7

Public Administrative Sector 589 141 7.0 297 151 3.7 291 990 98.3

Credit Institutions 340 013 4.1 409 807 5.2 -69 794 -17.0

TOTAL 8 352 147 100.0 7 929 060 100.0 423 087 5.3

DISINTERMEDIATION RESOURCES(thousands of euros)

DISINTERMEDIATION RESOURCES2006 2005 ChangeValue Value Value %

Deposited Securities 3 511 807 2 871 644 640 163 22.3

Stock Investment Funds 445 523 366 530 78 993 21.6

Treasury Funds 292 699 263 431 29 268 11.1

Bond Funds 15 841 21 198 -5 357 -25.3

Share Funds 74 635 55 313 19 322 34.9

Funds of Funds 62 348 26 588 35 760 134.5

Real Estate Funds 296 055 265 898 30 157 11.3

Open Pension Funds 199 433 177 836 21 597 12.1

Capitalisation Insurance 198 283 110 922 87 361 78.8

TOTAL DISINTERMEDIATION RESOURCES 4 651 101 3 792 830 858 271 22.6

77

Stock Investment Funds managed by MG-GAF, a MontepioGroup company, totalled 446 million euros at the end of2006. Treasury Funds continue to be the most representa-tive of these funds, although Funds of Funds recordedgreater growth, in both absolute and relative terms. Alsoworthy of note is the launching of a new emerging mar-kets fund that was well received.

Capitalisation insurance recorded growth of +78.8% in2006. The most important products were «MG RendimentoSeguro 2006», «MG Seguro Rendimento Crescente» and«MG Investimento 2006».

As for the Open-end Retirement Savings Plan Funds ma-naged by the Group company Futuro, they increased12.1%, thanks not only to general market growth, but alsoto the strong marketing of these products, brought aboutby the re-introduction of tax benefits for RetirementSavings Plans and the company’s commercial operations. It

should be noted that in 2007 Futuro has converted itsRetirement/Education Savings Plans into Retirement Sa-vings Plans, due to the change made in 2006 to tax bene-fits on Retirement/Education Savings Plans, which meantthat the benefit now only applies to Retirement SavingsPlans.

The «Valores e Investimentos Prediais (VIP)» Fund grew by11.3% in 2006, maintaining the previous year’s trend, andkept clear of the negative cycle that the real estate sectorhas gone through in recent years. Among the open-endreal estate funds, the VIP Fund was the most profitable inthe market, providing an annual return of 5.0%.

8.2.3. INTERNATIONAL ACTIVITY

Total transactions completed in this field in 2006 rose by43.4%, from 1 049 million euros at the end of 2005 to1 505 million euros at the end of 2006.

TREND IN MAJOR FOREIGN OPERATIONS(thousands of euros)

OPERATIONS2006 2005 Change


1 – GENERAL OPERATIONS 1 463 293 97.3 1 005 001 95.8 458 292 45.6

Cheques Issued 13 986 1.0 19 757 1.9 -5 771 -29.2

Payment Orders Issued 202 031 13.4 191 296 18.2 10 735 5.6

Cheques Purchased 64 736 4.3 62 547 6.0 2 189 3.5

Payment Orders Received 1 163 282 77.3 715 683 68.2 447 599 62.5

Money Gram Orders 19 258 1.3 15 718 1.5 3 540 22.5

2 – DOCUMENTARY OPERATIONS 41 260 2.7 44 337 4.2 -3 077 -6.9

Export Document Shipments 1 890 0.1 2 596 0.2 -706 -27.2

Import Document Shipments 8 267 0.6 14 530 1.4 -6 263 -43.1

Export Documentary Credit 12 594 0.9 7 989 0.7 4 605 57.6

Import Documentary Credit 5 731 0.3 5 773 0.6 -42 -0.7

Foreign Currency Financing 4 585 0.3 5 139 0.5 -554 -10.8

Foreign Discounts 3 611 0.2 5 487 0.5 -1 876 -34.2

Guarantees 4 582 0.3 2 823 0.3 1 759 62.3

TOTAL (1+2) 1 504 553 100.0 1 049 338 100.0 455 215 43.4

8.2.4. INSURANCE

CEMG’s insurance business includes both the life and non-life lines as a result of its partnerships with the Montepio

Group’s insurers, Lusitania Companhia de Seguros andLusitania Vida.

INSURANCE PORTFOLIO(quantities)

INSURANCE2006 2005 Change

Policies % Policies % Policies %

Life 284 390 64.4 224 403 63.6 59 987 26.7

Non-life 157 006 35.6 128 271 36.4 28 735 22.4

TOTAL 441 396 100.0 352 674 100.0 88 722 25.2

78

2006 saw a significant rise in sales and in commission onthe sale of insurance, with the total number of policies upby 25.2% to 441 396. This growth in the insurance port-

folio led to the earning of greater commission, in terms ofboth non-life insurance, +19.9% and life assurance,+13.0%.

8.3. FINANCIAL AND INVESTMENT ACTIVITIES

This field, which is dominated by other loans and advancesto Credit Institutions and in Securities Investments, recordeda combined decrease of 22 million euros (-1.1%) to finishthe year as 12.5% of total assets (13.8% at the end of2005).

The decrease in Credit Institutions Investments (-224 mil-lion euros) was offset by the rise in Bonds (+206 millioneuros), which meant the company retained its liquidity levelswhile increasing its profitability.

TREND IN INSURANCE COMMISSION

TREND IN FINANCIAL AND INVESTMENT ACTIVITIES(thousands of euros)



1 – Financial Activity

Cash and Liquidity Assets 318 093 16.7 302 103 17.3 15 990 5.3

Other loans and advances to Credit Institutions 670 428 35.2 910 890 65.3 -240 462 -26.4

TOTAL 1 988 521 51.9 1 212 993 82.6 -224 472 -18.5

% of Assets 6.5 8.7 -2.2 b.p.

2 – Investment Activity

Bonds 903 083 47.3 696 895 16.2 206 188 29.6

Shares and other securities 14 600 0.8 17 983 1.2 -3 383 -18.8

TOTAL 2 917 683 48.1 714 878 17.4 202 805 28.4

% of Assets 6.0 5.1 0.9 b.p.

TOTAL (1+2) 1 906 204 100.0 1 927 871 100.0 -21 667 -1.1

% of Assets 12.5 13.8 -1.3 b.p.

Impairment 8 414 9 309 -895 -9.6

NET TOTAL 1 897 790 1 918 562 -895 0.0

As regards investment in securities, the policy of investingin Bonds, mainly Floating Rate Notes continued. The aimwas to minimise interest rate and credit risks, while at thesame time limiting the potential negative effects on pru-

dential ratios. At the year-end, the combined investmentand earnings portfolios, across which the bonds are distri-buted, were valued at around 903 million euros.

79

The change recorded in the Shares and Other Securitiesaccount resulted from the adjustment to the accounting

measurement criteria, whereby assets were valued at fairmarket value rather than historic cost.

TREND IN FINANCIAL AND INVESTMENT ACTIVITIES

8.3.1. AVAILABLE-FOR-SALE AND HELD-TO-MATURI-TY FINANCIAL ASSETS

The portfolio of available-for-sale financial assets was valuedat 894 million euros (+30.1%) at the end of 2006, andbonds accounted for 96.7% of the total.

Held-to-maturity assets totalled 35 million euros and weremade up entirely of Treasury Bonds.

PORTFOLIO OF AVAILABLE-FOR-SALE AND HELD-TO-MATURITY SECURITIES(thousands of euros)

Portfolio Income

PORTFOLIO ITEMS 2006 2005 2006 2005Changes

Portfolio Income

Value Value Value Value % %

Available-for-sale Securities 894 164 687 237 35 152 17 280 30.1 103.4

Treasury Bonds 63 67 3 2 -5.1 105.9

Class D – Pelican Bonds 8 850 8 850 9 952 6 606 0.0 50.7

Other Bond Issues and Commercial Paper 855 880 653 808 25 197 10 672 30.9 136.1

Investment Fund Shares 9 480 12 375 -23.4

Shares and similar stock 5 099 5 607 0 -9.1

Financial Holdings 14 792 6 530 126.5

Held-to-maturity Securities 35 270 34 171 1 446 703 3.2 105.6

Treasury Bonds 35 270 34 171 1 446 703 3.2 105.6

Total 929 434 721 408 36 598 17 983 28.8 103.5

Impairment 7 838 8 374 -6.4

NET TOTAL 921 596 713 034 29.2

The most important item of available-for-sale securities,Other Bond Issues, consists of investments in securitiesthat, generally speaking, are eligible for Central EuropeanBank refinancing operations, which means that as well asbeing highly liquid, they are low risk and consequentlyhave high ratings.

Bonds, debt certificates and syndicated loans represented37.9% of all intermediation and disintermediation resour-ces as at 31 December 2006, having grown 10.5% overthe year. Non-subordinated bonds, which increased by 251million euros (+6.5%) in 2006, came to account for 28.4%of total external resources at the year-end.

8.3.2. EXTERNAL FUNDING

CEMG’s financial management pays primary attention todevising measures to attract funds to finance its activities

80

Credit Institution Resources fell by 69 million euros (-16.6%) in 2006.

and comply with the minimum liquidity ratio set by theBank of Portugal at all times.

TREND IN CREDIT INSTITUTION RESOURCES AND THOSE REPRESENTED BY SECURITIES(thousands of euros)



1 – Bonds, Debt Certificates and Syndicated Loans

Subordinated Bonds 300 000 5.5 309 976 6.1 -9 976 -3.2

Non-subordinated bonds 4 086 148 74.3 3 835 415 75.5 250 733 6.5

Syndicated Loans 225 000 4.1 225 000

Debt Certificates 543 000 9.9 518 000 10.2 25 000 4.8

TOTAL 1 5 154 148 93.7 4 663 391 91.8 490 757 10.5

% of Liabilites 35.8 35.2 0.6 b.p.

2 – Credit Institution Resources 346 021 6.3 415 129 8.2 -69 108 -16.6

% of Liabilites 2.4 3.1 -0.7 b.p.

TOTAL (1+2) 5 500 169 100.0 5 078 520 100.0 421 649 8.3

% of Liabilites 38.2 38.3 -0.1 b.p.

TREND IN CREDIT INSTITUTION RESOURCES AND BONDS AND DEBT CERTIFICATES

BOND PORTFOLIO FLOWS(millions of euros)

SECURITIES2006 2005

Event Value Event Value

1 – INFLOWS

Subordinated Liabilities Issue 50

Syndicated Loans Issue 225

Debt Certificates Issue 50 Issue 25

Debits represented by Securities Issue 1 000 Issue 1 555

TOTAL 1 1 325 1 580

2 – OUTFLOWS

Debits represented by Securities Term 750 Term 635

Debt Certificates Term 25

Fixed Term Subordinated Liabilities Depreciation 10 Depreciation 20

Indeterminate Term Subordinated Liabilities Reimbursement 50

TOTAL 2 835 655

TOTAL (1-2) 490 925

81

To achieve these aims three types of external market funding were used:

• Floating Rate Notes (FRN), senior and subordinated debt;

• Debt Certificates (Schuldschein);

• Syndicated Loan taken out in December 2006 for a five-year period.

Total debt issued was 1 325 million euros, while total out-flows were 835 million euros, so the final balanceincreased by 490 million euros.

Almost all operations run for a five-year period. Marketconditions together with the range of instruments used,meant all-in cost of the new issues was lower than that ofthe issues repaid, which in turn led to a reduction in averagecost of funding.

The diversity of the issue leaders in 2005 opened out therange of investors, which was important to the success ofthe placements.

In 2006 CEMG – Sede took part in the renewing of theEuro Medium Term Note Programme, which has a limit of5 000 million euros. That means that new issues are in linewith the requirements of Decree-Law no. 193/2005 of 7November.

Also in regard to attracting resources, a close link wasmaintained with the larger institutions, so as to provide, atall times, the adequate time deposit levels negotiated bythe Dealing Room.

8.4. FINANCIAL HOLDINGS PORTFOLIO

CEMG’s Financial Holdings Portfolio increased by around2 million euros resulting from the increase in LusitaniaVida’s share capital, and by around 8 million euros due to

the fair value adjustment to the holdings in Euronext, theWest African Bank and the Mozambique Commerce andDevelopment Bank.

8.5. PROPERTY ACQUIRED AS REFUNDING OF OWN CREDIT

The value of the Property for Trading Portfolio was 96 million euros at the end of 2006, which accounted for a -7.3%decrease compared to 2005.

TREND IN FINANCIAL HOLDINGS(thousands of euros)

COMPANIES2006 2005 Change

Value Value Value %

FINANCIAL HOLDINGSCaixa Económica de Cabo Verde 1 444 1 444

Banco MG Cabo Verde 7 001 7 001

Futuro S G Fundos Pensões 419 419

Lusitania Vida C.ª Seguros 7 170 5 202 1 968 37.8

Lusitania C.ª Seguros 10 816 10 816

UNICRE 311 311

SIBS 1 074 1 074

Euronext 8 491 1 841 6 650 361.3

Banco da África Ocidental 819 174 645 370.7

Banco Desenv. Com. Moçambique 1 929 912 1 017 111.5

Moçambique Cª Seguros 190 190

HTA Hotéis Turismo e Animação dos Açores 2 000 2 000

NORFIN – Soc. Gest. Fundos Inv. Imob. 50 50

Other 115 115

Sub-Total 41 829 31 549 10 280 32.6

SUPPLEMENTARY CAPITAL PAYMENTS

HTA Hotéis Turismo e Animação dos Açores 1 200 1 200

TOTAL 43 029 32 749 10 280 31.4

82

As regards the marketing of the properties portfolio, itshould be noted that Real Estate Agents accounted for

82.8% of sales of the properties for trading in 2006, i.e. a+19.3% rise.

At the end of the year the properties for trading portfoliowas made up of 1 381 properties, 52.5% of which were

not available for sale because of some legal or regulatorydetail and/or because they were occupied.

8.6. DISTRIBUTION CHANNELS AND MARKETING

8.6.1. DISTRIBUTION CHANNELS

Physical Distribution Network

No significant changes were made to the distribution net-works in 2006, so at the end of the year the domestic net-work included 295 branches, exactly the same number asthe previous year. In terms of business organisation,Montepio strengthened its new structure, consisting of sixretail Commercial Managements for the private individualsegments, micro-companies, self-employed and construc-tion firm segments, plus a Companies Commercial Mana-gement aimed at the «PME (Pequenas e Médias Em-presas)». Following on from the reorganisation started in2005, the concept of Premium Customer Managers wasintroduced in order to provide services to affluent privateindividual customers and that of Companies CustomerManagers to advise the «PME» segments.

At the international level, without its financial holdings inCape Verde, Guinea and Mozambique bank institutions,

Montepio had 6 representative offices serving Portugueseemigrant communities. It also owned a locally incorporat-ed bank in Cape Verde – «Banco Montepio Geral CaboVerde, IFI, SA.» – whose aim is to improve the serviceoffered to Customers abroad, especially at the resourcesmanagement level.

Multi-channel Montepio24 Services

In 2006 multi-channel business was reinforced and cur-rently accounts for the migration of 67% of all simpletransactions (compared to 65% in 2005). This growth wasdue to the 55% rise in the number of Internet Bankingtransactions. The total number of Customers signed up tothe Montepio24 service in December 2006 was 370 000.As for Montepio24 business services, some 9 734 compa-nies had signed up at the year-end, representing a 36%increase over 2005.

At the current time Montepio has one of the most com-plete on-line banking services in Portugal. Its banking servi-

BREAKDOWN OF PROPERTY FOR TRADE BALANCE(thousands of euros)


Value Value Value %

1 – Inicial Balance 104 016 104 071 -55 -0.1

2 – Incomings 24 073 29 024 -4 951 -17.1

3 – Outgoings 31 628 29 079 2 549 8.8

4 - FINAL BALANCE (1+2-3) 96 461 104 016 -7 555 -7.3

Impairment 11 106 10 453 653 6.2

NET FINAL BALANCE 85 355 93 563 -8 208 -8.8

TREND IN PROPERTY FOR TRADING

83

ces are available to private individuals and companies onthe Internet and its mobile banking service is adapted tothe various mobile internet technologies on the market. Italso has a real estate portal (marketing housing, shoppingand support services on-line, which includes a specialistsection for real estate brokers) and a motor portal (marketingmotor vehicle on-line).

Self-service and APT

In the Self-Service field and Automatic Payments Terminals(APT), the number of SIBS network Cash-points supportedby Montepio increased by 9.4%, which meant marketshare went up from 5.47% in 2005 to 5.62% in 2006. Asfor Automatic Payment Terminals (APT), market sharereached 4.53% (compared to 4.34% the previous year)

The Chave24 Network, which offers exclusive access toCustomers, recorded no significant change in the numberof ATM’s installed. The Company continued to pursue itspolicy of diversifying the type of machines used, providingcash dispensers, intelligent cheque deposits and updatingof bankbooks.

8.6.2. RANGE OF PRODUCTS AND SERVICES

In 2006 Montepio intensified its policy of broadening therange of its products and services, devising and launchingnew ones:

Private Individuals Segments

Structured Products

Continued to issue structured products in the form of CashBonds, in order to offer medium and long-term savingsoptions. These issues allowed CEMG to extend the maturi-ty of the resources from Customers, with most issues beingfor three and five years.

Products for Minors

Continued to pursue its policy of developing specific pro-ducts for childhood segments with the launch of the«Montepio Fun» account, whose mascot is the Panda fromthe children’s cable TV channel, Canal Panda.

Investment Funds

Along with «MG Gestão de Activos Financeiros», set up the«Multi Gestão Mercados Emergentes» Fund as a way of

providing Customers with products that take advantage ofthe dynamic nature of the emerging markets internationally.

Capitalisation Insurance

With the aid of Lusitania Vida, continued to issue new capi-talisation insurance as a way of providing long-term savingoptions, through both increasing fixed earnings and mixedearnings (fixed and variable).

Mixed Products

Innovative savings products were launched that combinetraditional savings products (such as time deposits) andalternative products that offer greater medium/long-termprofitability, such as Stock Investment Funds (MontepioSuperinvestimento), Pensions Fund (Montepio Mais Futuro)or Capitalisation Insurance (Montepio Prazo Seguro).

Companies Segment

Car and Equipment Leasing

Equipment and Car Leasing Products were relaunched.

Property Leasing

Specific Property Leasing products were launched aimed atresponding to the needs of Small and Medium-sized Enter-prises in terms of infrastructure, shops and warehouses.

Factoring

Factoring Services were made available to Small andMedium-sized Enterprises to assist them in the managingof their cashflows.

MARKET SHARES (ATM AND APT)

84

Structured Products

Issue structured products specifically for Small andMedium-sized Enterprises in order to allow them to investtheir surplus cash and their short/medium-term savings.

International Operations

Specific products were devised to support firms in theirinternational operations.

Specialist Credit

In cooperation with public bodies, special credit lines werelaunched for Trade and Tourism.

Means of Payment

Montepio has taken specific measures in this field, in par-ticular as regards cards. It set up its own managementstructure for these products (Department of Cards andMeans of Payment), so as to improve the quality of service(by developing new management tools) and the range ofproducts on offer to its Customers. The main develop-ments in 2006 were:

Debit Cards

Debit cards’ innovation when it became the first Portu-guese bank to launch Design Cards that incorporated va-rious textures, shapes and themes. «Imprensa NacionalCasa da Moeda» took part in their technological develop-ment. In 2006, Montepio also supplied cards compatiblewith EMV (Europay, Mastercard and Visa) rules, offeringgreater security through the microchip that ensures a higherlevel of authentication in payment networks.

The number of debit cards in use exceeded 510 000 in2006, which represented growth of 2.9% over the previ-ous year. Debit card market share remained at 4.75%.

Credit cards

Launch of the «Mais Vida» card, an innovative credit cardthat directly reflects the Group’s social economic character,since part of the margin earned by this card goes to socialwelfare institutions.

The number of credit cards grew by 31.33% in 2006, whilemarket share went from 2.17% in 2005 to 2.54% in 2006.

8.6.3. PROMOTIONAL CAMPAIGNS

Marketing

In 2006, Montepio retained its policy of marketing its servi-ces and brand name, in order to reinforce awareness of thedistinctive nature of its products and services, as well as thefactors that give its identity.

Housing Loan Campaign

The first quarter of 2006 saw the final stage of the HousingLoan campaigns begun earlier. They promoted the qualityof the service provided, conveying the promise of cus-tomized solutions and swift response to credit applications.

Savings Products Campaigns

In this field, Montepio launched campaigns aimed specifi-cally at encouraging medium-term savings, by promotingthe «MG Aforro» and «Aforro Montepio» cash bondissues, maturing after 3 and 5 years.

The «Montepio Fun» Product aimed at the school age seg-ment was launched as a funny way of encouraging savingfrom childhood. To this end, a partnership with the chil-dren’s television channel «Canal Panda» was entered into.

2006 was marked by the return of tax benefits to encoura-ge long-term savings, in particular Retirement SavingsPlans. In this light, Montepio ran a specific campaign topromote Retirement Savings Plans through its «MontepioMais Futuro» mixed product that combines a Time Depositwith a Retirement Savings Plans of the Customer’s choice.This campaign began on 31 October to coincide withInternational Savings Day, and also marked the beginningof a new line of communication, following the introductionof a new visual identity.

UEFA Euro Under-21 Sponsorship

Montepio was an official sponsor of UEFA’s Under-21European Championship, held in Portugal. Given thenature of the event, directed to encourage sports amongyoung people and those in training, its national impact andthe mobilisation of the host cities (located mainly alongPortugal’s northern coast), the association of the Montepiobrand with it was aimed at giving the brand a youngerimage and linking it with sports values. The brand’s visibi-lity, both through local contacts with the people in the sta-diums and the broad media coverage, had a very positiveimpact in terms of declared total recall and the obtainingof the rewards of sponsorship.

Identity Campaign

The advertising campaign devised to promote the newvisual identity took place in October. It set out to strengthenthe Montepio brand’s position as a social economic institu-tion, with a mission and a vision unique in the Portuguesefinancial world, given its roots as a mutual association. Tothat end a new slogan was devised: «E você? É dono doseu banco?». It puts the idea across in a simple and directway, showing that it is possible to be a Montepio member.

8.6.4. THE MONTEPIO BRAND – A NEW CORPORATEIDENTITY

The brand underwent major changes in 2006. After 23years, the Institution relaunched its brand with a new visualidentity, reinforcing its position as a social economic insti-tution, and focusing all advertising on its special characte-ristics that are based on the institutional genetic codederived from the mutual association movement.

The name «Montepio» was adopted, in response to con-sumers’ perceptions and the genralisation of the simplername, as a way of identifying the institution in the market.The colours were inspired by the hues of the Portugueseenvironment: the warm hues of ripe corn, the burnt yellow

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of the sun at dusk, sources of prosperity and energy, andsea blue, symbol of serenity and transparency that openthe way to building the future and the constant search forknowledge and skill. The symbol, which recalls a pelicanand its chick, restores the feeling of the intergenerationmutual association movement, the overseeing of growthand the passing on of values.

The combination of all these identifying elements showsthat the institution is open to modern ideas, but has notabandoned its traditional values and is seeking to adjust tothe evolution in its Members and Customers preferencesand behaviour.

The launch of the new Montepio identity was marked by ageneral change to the signs on all branches and to the logoon all means used to communicate with Customers andthe market.

A number of specific communication initiatives were deve-loped to launch the new Montepio image that includedinternal and external actions and an advertising campaignaimed at disseminating the new visual identity and thebrand’s position.

These initiatives gave rise to the highest ever brand recall indices (Source: Marktest – Publivaga):

8.7. RISK MANAGEMENT

Risk analysis and management is conducted in an integrated manner and from the standpoint of the Group by the RiskAnalysis and Management Division that is made up of three departments:

• Credit Risk Department

• Market Risk Department

• Operational Risk Department

In 2006, they pursued their work in keeping with bestinternational practice and the Basle II Agreement frame-work. That work included the revising of the internal creditrisk models, the designing of stress testing models, theintroduction of integrated information systems and thedevelopment of a pricing policy adjusted to the risk of themajor credit products.

Over the year the integrated risk management project wasimplemented, that takes into account the new equityrequirement calculation rules and integrates asset and lia-bility management analysis and credit impairment lossesaccording to the International Accounting Standards (IAS).

It was in this context that the impairment analysis modelswere approved, which are based on the use of credit risk

models (ratings and scorings), and on the likelihood ofrecovering materially significant credit in an impairment si-tuation. To that end, new analytical software was intro-duced that provided for linkage between the sectorsinvolved.

Credit Risk – Retail

Credit risk models play an essential role in credit decisions.Indeed, the granting of credit to individuals requiresrequests to be submitted to the reactive scoring modelsused by the different portfolios (Housing Loans, IndividualCredit and credit cards).

Credit decisions are dependent upon risk ratings and com-pliance with various rules governing financial capacity and

applicants’ behaviour. In order to support commercialstrategies, behavioural scoring models were also used.

New reactive scoring models have been introduced into theinformation systems of certain private credit portfolios thatrecognise the need to distinguish between customers andnon-customers (or recent customers). This project will befinished this year for the main credit portfolios concerned.New internal rating models for companies and scoringmodels for small firms are also in the IT completion stage.

Over the year the general aligning of pricing and credit riskwas completed for major private credit products, takinginto account the internal model classifications and theseverity of loss estimates. Work also began on specialistcredit products for companies (e.g. leasing and factoring).The other products in this field are expected to be handledin 2007, once the new internal rating models have becomeoperational.

In terms of reported credit risk information, a quarterlyreport was drawn up, including non-performance probabi-lities by risk category and credit portfolio, adjusted rate ofreturn indicators and a breakdown of credit portfolios byrisk category.

Overall Risks and Financial Assets

Efficient Balance Sheet Management also involves theAssets and Liabilities Committee (ALCO), which examinesinterest rate, liquidity and exchange rate risks, namely asregards compliance with the limits set for the static anddynamic gaps calculated.

Normally the static interest rate and liquidity gaps are posi-tive and moderate in size, except of course in those monthswhen payments are made relating to bond issue debt servi-ce. As for exchange rate risk, as a rule, the resourcesobtained in different currencies are hedged as assets in therespective monetary market and for periods not exceedingthose of the resources, which means any exchange rategaps result mainly from any adjustments between thehedge and resource deadlines.

In regard to risk information and analysis, regular reportsare provided on the credit and market risks on the compa-

ny’s financial assets and those of the other members of theGroup. For the company’s own portfolio, the various risklimits are defined using the Value-at-Risk (VaR) method.

Own portfolios are concentrated in variable rate debt secu-rities, which gives them a very low VaR (less than 0.1% ofthe invested sum over a ten-day period and with a 99%confidence interval). Credit risk exposure is also veryrestricted, since the bonds held are generally of investmentgrade.

OWN PORTFOLIO STRUCTURE BY RATINGSUnit 10^3 €

Value %

AAA 53 546 6.3

AA+ 1 000 0.1

AA 21 504 2.5

AA- 159 075 18.6

A+ 157 709 18.5

A 206 041 24.1

A- 174 815 20.5

BBB+ 63 523 7.4

BBB 12 497 1.5

BBB- and less – –

No rating 3 564 0.4

TOTAL 853 272 100

Operational Risk

A risk management model was completed for OperationalRisk, which covers all units in the corporate structure. Thismodel provides for the recording of relevant events, inkeeping with best practice and the Basle II framework. Itaids Operational Risk analysis and model building, as wellas identifies the action required to mitigate risk.

The management model operates in a decentralised man-ner and Operational Risk Self Assessors /Interlocutors andEnablers were appointed for all units in the corporate struc-ture.

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The work undertaken in 2006 included the following items:

• Management and Organisation: an internal communication campaign across the entire Institution and the defi-nition of Operational Risk Management Policies and Procedures;

• Qualitative Analysis: in cooperation with the relevant departments, mapping of the main activities, risks that mayarise in this context and the corresponding preventative controls, leading to Self assessment. Key Risk Indicators (KRI)were also defined, that is to say, alert indicators for the potential factors that can result in Operational Risk events;

• Quantitative Analysis: simulation of the regulatory capital calculation by means of Basic and Standard Indicatormethods. An internal data base was set up and a start was made on attracting Operational Risk events systematically.

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8.8. HUMAN RESOURCES

In 2006, as in the previous year, was pursued a policy oflow recruitment. However, there was a slight rise in thenumber of permanent CEMG employees, due to the set-ting up of new business areas, particularly in the Compa-nies sector, the contracting of specialist staff for the central

departments and the opening of a new private customersbranch.

As a result the number of CEMG’s employees rose from 2 853,as at 31 December 2005, to 2 918, as at 31 December 2006.

Of particular note is the increase in the number of CEMGstaff with higher education, due to the recruitment andselection policies. CEMG continued to favour recruitinggraduates of top quality Universities and Institutes, whoafter completing the training program joined the perma-nent staff. This policy set out to match the staff breakdownto the new working requirements in terms of both quanti-ty and quality.

The career opportunities plan continued at the techni-cal/specialist and management level. Processes and methodsof identifying potential were used to identify 120 employeeswho were later promoted to more demanding jobs.

As regards the annual trainee placement program, the linksto benchmark Universities were strengthened throughdirect contacts/approaches, advertisements and protocols,and by Montepio participation in specific events, such asthe Business Forum. As a result 80 students were recruitedwho successfully developed technical and commercial pro-jects in various organic units.

At the internal communication level, information on humanresources management and development was disseminatedthrough articles written for the magazine «Em Directo» andthrough the redesigning of the information available on theIntranet. Special mention should be made of the improve-ments made to the Training Schedule and the provision ofthe contents of the most important courses.

The studies required to implement the new Human Resour-ces Integrated Management Model was undertaken, inkeeping with sector best practice, and the remunerationpolicy was redefined basically with a view to reward per-formance and results.

In 2006 the policy aimed at increasing employees’ qualifi-cations, skills and development was pursued. Vocationaltraining was critical to enhance professional skills. A totalof 212 training courses were run, involving 9 783 partici-pants and 194 740 training hours.

TREN IN STAFF

STAFF BREAKDOWN2006 2005 Change

No. % No. % No. %

Permanent Staff 2 838 99.2 2 829 98.7 9 0.3

Fixed term contracts 80 24 56 233.3

Total Staff 2 918 2 853 65 2.3

Education

Higher Education 1 131 38.8 1 049 36.8 82 7.8

Other 1 787 61.2 1 804 63.2 -17 -0.9

Age range

under 40 1 812 62.1 1 816 63.7 -4 -0.2

40 or over 1 106 37.9 1 037 36.3 69 6.7

Distribution

Commercial networks 2 186 74.9 2 148 75.3 38 1.8

Central departments 732 25.1 705 24.7 27 3.8

The following courses are worthy of note:

• «Team Leadership and Management» training program;

• Certification program – Complementary Banking Course run by the Bank Training Institute;

• Premium Customer Manager training course;

• E-learning course in Products and Services.

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8.9. TECHNOLOGICAL RESOURCES

Technological and Computing Resources

A number of steps were taken in 2006 to continue consolidating the Company’s Information Systems, including:

• Development of External Lawyers portal;

• New Asset Management, Evaluations and Sureties software;

• New software for marketing insurance via the CEMG network;

• Development of a Credit Card Management application;

• Development of software for marketing FUTURO Funds via the CEMG network;

• Implementation of Datawarehouse structures and development of a Budget & Planning and Decision SupportSystem;

• Technological updating of the branch network systems infrastructure, including the replacement of all servers andworkstations;

• Real estate leasing management software;

• Factoring management software;

• Migration of time and demand deposits in foreign currencies to the central system;

• Development of Premium Client Manager support software;

• New scoring platform.

The following main structural projects were designed in 2006 and will impact fully in 2007:

• Implementation of new software supporting the Financial and International Management’s business;

• Computing developments within the scope of Basle II;

• Implementation of Anti Money Laundering (AML) monitoring system;

• Implementation of the operational CRM (Costumer Relationship Management) system;

• Improvement to the Workflow system that integrated new processes;

• Development of the mobile banking channel.

In the re-engineering and quality field, in line with the strategy of lowering administrative costs and streamlining processesand systems, and bearing in mind increased efficiency and productivity, the following measures were taken:

• Implementation of the Authorised Overdraft Workflow System;

• Drawing up and revising of Procedural Standards, especially in regard to processes connected with business deve-lopment;

• Enhancing of filing system through the scanning of documents;

• Centralisation of branch activities in back office structures, thus reducing the branches’ administrative work (underdevelopment);

• Implementation of a global and shared Customer Complaints and Suggestions Management System, aimed atimproving Customer Services Quality Standards (under development).

8.10. FINANCIAL ANALYSIS

8.10.1. EQUITY

As at 31 December 2006, CEMG’s Equity (capital + reser-ves + profit for the year) was 822 175 thousand euros,which represented a 131 404 thousand euros (+19.0%)

increase over 31 December 2005. This rise reflects the posi-tive effects of the 100 million euro increase in InstitutionalCapital, of the Net Profit for the year of 60 154 thousandeuros, and the increase in Revaluation Reserves of 7 586thousand euros. These effects offset the negative effect of

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the 2005 profit distribution, valued at 11 597 thousandeuros, and the deduction of 24 739 thousand euros due toadjustments caused by the introduction of IAS (in particular

the changes to the pensions fund liabilities calculationmethod, the impact of which shall be spread annually up to2012, and the changes to some asset measurement criteria).

8.10.2. OPERATING ACCOUNT

In 2006, the Profit for the Year of 60 154 thousand euroswas greater, by 14 842 thousand euros (+32.8%), thanthat in 2005. This growth was associated with the changes

recorded in Net Interest Income, profit on the sale of pro-perty acquired as own credit and impact on provisions ofrisk management policies.

TREND IN EQUITY(thousands of euros)

Equity as at 31 Dec 2005 690 771

Profit distribution 2005 -11 597

IAS introduction adjustments -24 739

Increase in Institutional Capital 100 000

Increase in Revaluation Reserves 7 586

Profit for the Year 60 154

Equity as at 31 Dec 2006 822 175

STATEMENT OF INCOME BY FUNCTIONS(thousands of euros)

ITEMS2006 2005 Change

AcronymsValue % Value % Value %

+ Interest and Similar Income (1) ISI 674 608 599 411 75 197 12.5

– Interest and Similar Charges (1) ISC 368 587 329 404 39 183 11.9

= Net Interest Income NII 306 021 83.2 270 007 77.8 36 014 13.3

+ Profit on Services Provided to Customers PSPC 67 532 18.4 69 715 20.1 -2 183 -3.1

Commission Received and Other Income and Revenue 85 076 86 863 -1 787 -2.1

Commission Paid and Other Charges and Expenses 17 544 17 148 396 2.3

+ Profit on Market Operations PMO -10 757 -2.9 2 112 0.6 -12 869 -609.3

Capitals (2) -12 635 -111 -12 524 11 282.9

Currency 1 878 2 223 -345 -15.5

+ Return on Financial Holdings RFH 1 797 0.5 3 014 0.8 -1 217 -40.4

+ Profit on Sale of Property for Trading PSPT 3 356 0.9 2 350 0.7 1 006 42.8

Gains 4 836 4 138 698 16.9

Losses 1 480 1 788 -308 -17.2

= Operating Banking Revenue OBR 367 949 100.0 347 198 100.0 20 751 6.0

– Operating Costs OC 218 258 59.3 198 016 57.0 20 242 10.2

Staff Costs 140 790 128 368 12 422 9.7

General Administrative Costs with Supplies and Services 77 468 69 648 7 820 11.2

= Operational Profit OP 149 691 40.7 149 182 43.0 509 0.3

– Depreciation D 12 884 11 085 1 799 16.2

– Net Provisions NP 76 653 92 785 -16 132 -17.4

= Profit for the Year PY 60 154 45 312 14 842 32.8

(1) Includes interest on fixed return securities and market operations;(2) Includes income from shares and variable return securities, except financial holdings.

Whilst provisions continue to be the major component inCash-flow, accounting for 51.2% of the total, Profit for the

Year’s increased contribution to Cash-flow led to animprovement in its qualitative breakdown.

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Net Interest Income of 306 021 thousand euros grew by36 014 thousand euros (+13.3%), increasing its relativeweight in Banking Revenue from 77.8% to 83.2%, indetriment to Other Net Revenue which recorded a declineof 19 347 thousand euros (-19.8%). The combined effectof these changes meant Banking Revenue, totalling 367 949thousand euros in 2006, grew by 20 751 thousand euros(+6.0%).

Operating Costs grew by 10.2% to 218 258 thousandeuros, absorbing 59.3% of Banking Revenue, whichaccounted for an increase of 2.3 b.p., compared to 2005.Nonetheless it should be mentioned that the changes in

accounting criteria and the investments made in 2006, inparticular the change in corporate image and identity, hada negative impact on Operating Costs.

Depreciation rose by 16.2% to 12 884 thousand euros.

Net Provisions stood at 76 653 thousand euros and recordeda fall of 16 132 thousand euros (-17.4%), reversing theupward trend of previous years.

The above results led to a Cash-flow increase of around 509thousand euros (+0.3%), in which the relative weight of NetProvisions fell (-11,0 b.p.) and that of Profit for the Year rose(+9.8 b.p.), in line with the change to its structure.

CASH-FLOW STRUCTURE(thousands of euros)

CASH-FLOW 2006 2005 Change

Total Cash-Flow 149 691 149 182 509 0.3%

Depreciation 8.6% 7.4% 1.2 b.p.

Net Provisions 51.2% 62.2% -11.0 b.p.

Profit for the Year 40.2% 30.4% 9.8 b.p.

8.10.2.1. Average Asset and Liability Interest Rates

In 2006, the average interest rate on investments was4.65%, equal to the 2005 rate, while the average interestrate on resources was 2.64%, which was -0.07 b.p. downon the previous year.

The change in these two rates was influenced by thechanges to the accounting criteria for reporting swap costsand revenues, as per the Adjusted Accounting Standards,which reduced the potential effect of more rigorous pricing.All the rates of investment and resource items increased.

The average interest rate on Customer Credit, which is themost important component in investments, rose to 4.65%,a +0.40 b.p. change. The average interest rate onSecurities Portfolio was 4.28%, representing an increase of+0.92 b.p., while the average interest rate on InterbankAssets stood at 2.53%, representing a +0.34 b.p. change,and the average interest rate on liquid assets was 2.69%,a more significant rise of +1.48 b.p.

CASH-FLOW STRUCTURE

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AVERAGE INTEREST RATES ON ASSETS AND LIABILITIES PRODUCTS(thousands of euros)

2006 2005 Change

PRODUCTSAverage Average Revenue/ Average Average Revenue/ Average Average Revenue/Balance Rate /Costs Balance Rate /Costs Balance Rate /Costs

Value % Value Value % Value Value b.p. Value

Investments

Costumer Credit 12 588 786 4.65 585 647 11 171 358 4.25 474 817 1 417 428 0.40 110 830

Liquid assets 151 546 2.69 4 081 249 282 1.21 3 022 -97 736 1.48 1 059

Securities Portfolio 857 751 4.28 36 674 474 869 3.36 15 945 382 882 0.92 20 729

Interbank assets 856 684 2.53 21 711 940 995 2.19 20 606 -84 311 0.34 1 105

Other investments 4 804 2.93 141 4 804 2.17 104 0 0.76 37

Swaps 23 743 82 289 -58 546

Average Rate 14 459 571 4.65 671 997 12 841 308 4.65 596 783 1 618 263 0.00 75 214

Resources

Customer deposits 8 133 682 2.06 167 695 7 602 712 1.77 134 532 530 970 0.29 33 163

Commercial paper resources 5 569 377 3.13 174 530 4 365 294 2.94 128 378 1 204 083 0.19 46 152

Interbank Resources 171 721 2.78 4 768 81 870 2.31 1 889 89 851 0.47 2 879

Other Resources 752 1.95 15 599 1.79 11 153 0.16 4

Swaps 18 968 61 966 -42 998

Average Rate 13 875 532 2.64 365 976 12 050 475 2.71 326 776 1 825 057 -0.07 39 200

As for Resources, the average interest rate on CustomerDeposits, the item with the largest relative weight, was2.06%, representing a change of 0.29 b.p. CommercialPaper Resources, which also carry considerable relativeweight, recorded a rate of 3.13%, the highest resourcesrate and an increase of 0.19 b.p. The average rate ofInterbank Resources was 2.78%, representing an increaseof 0.47 b.p., which means this rate is 0.25 b.p. higher thanthe average rate of Interbank Assets.

8.10.2.2. Financial Intermediation Rate

In 2006, the Financial Intermediation Rate (FIR) was 2.12%,accounting for a growth of 0.04 b.p., and continuing theupward trend witnessed since 2004.

FIR exceeds the difference between the average rate onInvestments and the average rate on Resources by 0.11b.p., due to the positive effect on business brought aboutby Equity.

8.10.2.3. Net Interest Income

The 36 014 thousand euros (+13.3%) increase in NetInterest Income was due, in the main, to the effects of theincreased business and also to the FIR, which offset for thenegative impact of hedging.

Compared to 2005, a breakdown of the change in NetInterest Income shows a significant improvement in the FIReffect and a significant worsening of the hedging effect.The former stems from the pricing management policy andthe latter from the terms of the swaps associated withbond issues and structured products.

TREN IN FIR AND AVERAGE INVESTMENT AND RESOURCE RATES

8.10.2.4. Profit on Services Provided to Customers

The Profit on Services Provided to Customers was 67 532thousand euros, representing a 2 183 thousand euros (-3.1%)decline compared to 2005, which meant it fell from 20.1%to 18.4% of Banking Revenue.

This change was influenced by a number of matters whichare secondary to fee generating business, since intermedia-tion fees grew by 13.2% and those associated with disin-termediation grew by 13.0%. The latter have the largestrelative weight (49.9%) among the various forms of thistype of revenue.

A decline of around 11 500 thousand euros was recordedin the credit operations, services provision and other opera-

tions. This was explained mainly by the extraordinary profitresulting from the closure of MG-Cayman, to the sum of3 420 thousand euros, recorded in 2005, and by thechange in the accounting for expense refunds (-3 071thousand euros) and the provision of evaluation services (-4 642 thousand euros), resulting of the introduction ofthe IAS, under which these revenues are deferred over theremaining life of the contracts.

The Fee from Cross Sales Operations – Insurance, StockInvestment Funds and Real Estate Investment Funds andthe SIBS Interbank System – increased substantially, inresponse to the commercial efforts made to diversify therevenue structure, especially as regards insurance, savingsproducts and means of payment.

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BREAKDOWN OF CHANGE IN NET INTEREST INCOME

TREND IN PROFIT ON SERVICES PROVIDED TO CUSTOMERS(thousands of euros)


Value Value Value %

Intermediation Fees 28 322 25 023 3 299 13.2Credit Operations 11 363 9 306 2 057 22.1

Guarantees 4 356 4 229 127 3.0

Maintaining Deposits 2 448 2 381 67 2.8

Cards – Annuities 4 727 3 971 756 19.0

Sale of Cheques 2 416 2 147 269 12.5

Foreign Operations 1 876 1 816 60 3.3

Other Fees 1 136 1 173 -37 -3.2

Disintermidiation Fees 33 608 29 751 3 857 13.0Cross Sales – Insurance 11 042 9 587 1 455 15.2

Cross Sales – Stock and Real Estate Investiment Funds 3 861 3 244 617 19.0

Cross Sales – PPR/PPA Futuro 1 896 1 791 105 5.9

SIBS – Net Commissions 14 775 13 657 1 118 8.2

MG Visa credit card 1 180 845 335 39.6

Securities Fees 854 627 227 36.1

Provision of Services 2 454 6 716 -4 262 -63.5

Others 3 148 8 225 -5 077 -61.7

Profit on Services Provided to Customers 67 532 69 715 -2 183 -3.1

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8.10.2.5. Financial Operations Profit

The Financial Operations Profit earned in the capital marketwas affected by the introduction of the IAS, as regards the

reporting of the fair value of the financial operationsundertaken, in particular the gains and losses on swaprevaluations.

PROFIT ON FINANCIAL OPERATIONS AND ON AVAILABLE-FOR-SALE FINANCIAL ASSETS(thousands of euros)


Value Value Value %

Financial operations profit -12 384 -452 -11 932 2 639.6Operations valued at fair value based on return -10 273 -10 273

Held-for-trading financial assets operations -4 262 -79 -4 183 5 294.9

Held-to-maturity financial assets operations -308 -373 65 -17.5

Hedge derivatives operations 2 459 2 459

Profit on Available-for-sale assets -251 341 -592 -173.6Shares -1 2 -3 -141.0

Bonds -466 338 -804 -237.8

Others 216 1 215 41 037.0

Total -12 635 -111 -12 524 11 247.1

8.10.2.6. Return on Financial Holdings

In 2006 the Return on Financial Holdings was 1 797 thou-sand euros, which represented a sharp decline of 1 217thousand euros (-40.4%). This change reflected theabsence of dividends from MG Cayman, due to the com-

pany’s closure. Significant growth in dividend paymentswas recorded by Euronext, Futuro, Unicre and LusitaniaSeguros.

As Banco MG Cabo Verde is still consolidating its financialposition, no dividends were distributed in 2006.

RETURN ON FINANCIAL HOLDINGS(thousands of euros)

COMPANIES2006 2005 Change

Value Value Value %

SIBS 61 113 -52 -46.0

MG Cayman 0 2 046 -2 046 -100.0

Caixa Económica de Cabo Verde 102 102 0 0.0

Futuro 126 34 92 270.6

Euronext 370 51 319 625.5

Unicre 290 92 198 215.2

Banco da África Ocidental 31 35 -4 -11.4

Norfin 89 40 49 122.5

MG Gestão de Activos Financeiros 0 0 0 0.0

Lusitania Vida 283 248 35 14.1

Lusitania Seguros 445 253 192 75.9

TOTAL 1 797 3 014 -1 217 -40.4

8.10.2.7. Profit on Sale of Property for Trading

The net book gain on the sale of property acquired asrefunds for own credit was 3 356 thousand euros in 2006,

which represented growth of 1 006 thousand euros(+42.8%).

PROFIT ON SALE OF PROPERTY FOR TRADING(thousands of euros)

PROFIT / LOSS2006 2005 Change

Value Value Value %

Profit on sale of property 4 836 4 138 698 16.9

Loss on sale of property 1 480 1 788 -308 -17.2

TOTAL 3 356 2 350 1 006 42.8

Staff Costs, totalling 140 790 thousand euros, grew by12 422 thousand euros (+9.7%). As a result their ratio toBanking Revenue rose from 37.0% to 38.3% (+1.3 b.p.).

This trend was explained by the increase in employeesremunerations, due in large measure to the additional 65

employees, by the significant growth in Mandatory SocialSecurity Charges, in particular the 1 776 thousand euros(+8.9%) increase in Pension Fund contributions, and by thesubstantial rise in Other Staff Costs, due to the change inthe accounting criterion for Seniority Bonuses.

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OPERATIONAL COSTS(thousands of euros)


Value Value Value %

A Staff Costs 140 790 128 368 12 422 9.7

B Cost of Supplies and Services 77 468 69 648 7 820 11.2

C Operating Costs (=A+B) 218 258 198 016 20 242 10.2

D Depreciation 12 884 11 085 1 799 16.2

E Operational Costs (=C+D) 231 142 209 101 22 041 10.5RATIOSStaff Costs/Banking Revenue 38.3% 37.0% 1.3 b.p.

Cost of Suppplies and Services/Banking Revenue 21.1% 20.1% 1.0 b.p.

Cost-to-Income (Operational Costs/Banking Revenue) 62.8% 60.2% 2.6 b.p.

Efficiency Ratio (Operating Costs/Banking Revenue) 59.3% 57.0% 2.3 b.p.

Cost of Supplies and Services was 77 468 thousand eurosin 2006, and recorded an year-and-year increase of 7 820thousand euros (+11.2%). Their ratio to Banking Revenuewas 21.1% (+1 b.p.).

The items with the highest relative weights in Cost ofSupplies and Services were Premises, Information Techno-logy services and Advertising and Similar. Of these Adver-

tising and Similar showed the highest growth (+25.5%),resulting from the new corporate image advertising cam-paign, along with Staff – Services (+25.0%), where theincrease was caused by the cost of temporary staff.Business Costs moved in the opposite direction, falling by148 thousand euros (-1.6%).

STAFF COSTS(thousands of euros)


Value Value Value %

Staff Costs

Management Remuneration 1 263 1 061 202 19.1

Employees Remuneration 97 910 93 101 4 809 5.2

Mandatory Social Security Charges 34 868 32 407 2 461 7.6

Other Staff Costs 6 749 1 799 4 950 275.1

TOTAL 140 790 128 368 12 422 9.7

8.10.2.8. Operational Costs

Operational Costs, which combine Staff Costs (60.9% ofthe total), Cost of Supplies and Services (33.5% of the total)and Depreciation (5.6% of the total), totalled 231 142thousand euros and recorded growth of 22 041 thousand

euros (+10.5%) over the previous year. This meant that therelative weight of Operational Costs in terms of BankingRevenue rose from 60.2% in 2005 to 62.8% in 2006 (+2.6b.p.).

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The changes recorded in Information Technology servicesand External Consultancy costs were related to the technicalmodernisation project, namely the purchase and designingof new software and the restructuring of services. Given thenew business demands and the prudence requirements,this modernisation process will continue as will the impacton this expenditure item.

The Depreciation charge for the year was 12 884 thousandeuros, accounting for 1 799 thousand euros (+16.2%) rise.That increase resulted in the main from depreciation ofsoftware which rose by 1 433 thousand euros (+49.7%).

COST OF SUPPLIES AND SERVICES(thousands of euros)


Value Value Value %

Cost of Supplies and Services

Supplies 5 297 4 857 440 9.1

Information technology services 18 175 17 002 1 173 6.9

Business 9 096 9 244 -148 -1.6

Premises 18 748 17 280 1 468 8.5

Advertising and similar 13 420 10 689 2 731 25.5

Staff – Services 7 322 5 859 1 463 25.0

External Consultancy 4 163 3 797 366 9.6

Other Services 1 247 920 327 35.6

TOTAL 77 468 69 648 7 820 11.2

The Cost-to-Income ratio, which measures the relationshipbetween Operational Costs and Banking Revenue, reversedthe downward trend of 2005, and went from 60.2% in

2005 to 62.8% in 2006, which represented a negativechange of 2.3 b.p.

DEPRECIATION(thousands of euros)


Value Value Value %

Depreciation:

Intangible Fixed Assets 4 319 2 886 1 433 49.7

Software 4 319 2 886 1 433 49.7

Tangible Assets 8 565 8 199 366 4.5

Buildings 3 753 4 021 -268 -6.7

Equipment 4 812 4 178 634 15.2

TOTAL 12 884 11 085 1 799 16.2

TREND IN COST-TO-INCOME RATIO

96

The aforesaid changes were related to:

• Negative changes in the various components of Profit on Services Provided to Customers, totalling 11 500 thousandeuros;

• Changes in the accounting for Staff costs – seniority payments, totalling 4 305 thousand euros,

and influenced about 3 basis points change in the Cost-in-Income ratio. Given that these were isolated changes in theflow of business funds and therefore not to be repeated,and the fact that the final change in the ration was 2.6basis points, we may conclude that the change in the ratiowas within expectations and was not aggravated by struc-tural changes in operating conditions.

8.10.2.9. Provisions and Impairment

The final balance on Provisions was 330 852 thousandeuros, which was 74 029 thousand euros (-18,3%) downon the previous year.

Total Credit Provisions, representing 91.9% of the total at31 December 2006, recorded, as a whole, a decrease of -72 903 thousand euros (-19.3%), due to the decreases inCredit Due Provisions and Doubtful Credit Debts whichabsorbed the 8 272 thousand euros (+10.4%) rise inGeneral Credit Risks Provisions.

Of other Provisions, the Property for Trading Provisions(3.4% of the total) have the most significant weight andgrew by 6.3%, while Securities Provisions (2.4% of thetotal) recorded a change of -6.4% and Sundry Risks Provi-sions (1.2% of total) increased by 8.8%.

TREND IN PROVISIONS AND IMPAIRMENT BY RISK TYPE(thousands of euros)

PROVISIONS TYPE2006 2005 Change


1 – Credit 304 134 91.9 377 037 93.1 -72 903 -19.3

1.1 – Due 160 587 48.5 228 371 56.4 -67 784 -29.7

1.2 – Doubtful Debt 51 592 15.6 65 259 16.1 -13 667 -20.9

1.3 – Adjustments 4 161 1.3 3 885 1.0 276 7.1

1.4 – General Credit Risks 87 794 26.5 79 522 19.6 8 272 10.4

2 – Country Risk 576 0.2 935 0.2 -359 -38.4

3 – Securities 7 838 2.4 8 374 2.1 -536 -6.4

4 – Property for Trading 11 106 3.4 10 453 2.6 653 6.3

5 – Sundry Risks 4 008 1.2 3 683 0.9 325 8.8

6 – Other Investments 2 220 0.7 2 929 0.7 -709 -24.2

7 – Other Risks and Charges 970 0.3 1 470 0.4 -500 -34.0

TOTAL 330 852 100.0 404 881 100.0 -74 029 -18.3

CREDIT AND INTEREST DUE PROVISION COVER

COVER RATIOS2006 2005 Change

% % b.p.

Total Credit Provisions / Total Credit Due 102.6 113.7 -11.1

Total Credit Provisions / Credit Due > 3 Months 117.0 125.1 -8.1

Securities Provision / Securities Portfolio 0.8 1.1 -0.3

Property for Trading Provision / Property for Trading 11.5 10.0 1.5

Total Provisions / Gross Assets 2.1 2.8 -0.7

As a result of the downward change in Total Provisions:

• The Gross Assets rate of cover by Total Provisions went from 2.8% at the end of 2005 to 2.1% at the end of 2006:a change of -0.7 basis points;

• The Total Credit Due and Due for over 3 months rate of cover by Total Provisions worsened. The Total Credit Duerate of cover went from 113.7% to 102.6%, representing a change of -11.1 basis points, and the Total Credit Duefor over 3 months rate of cover fell from 125.1% to 117.0%, a change of -8.1 b.p.;

• The Securities rate of cover also fell (-0.3 b.p.);

• Only the rate of cover on Property for Trading increased, by 1.5 b.p.

97

(ROA) was 0.41%, up by 0.07 b.p. as compared to 2005,while return on equity (ROE) reached 7.75%, recording arise of +1.08 b.p.

Since the multiplier recorded a small decrease, the rise inROE is directly related to the rise in ROA, which in turn wasmainly due to the adjustments to provisions.

the Running Costs / Average Net Assets ratio improved by -0.03 b.p., reaching 1.49%. Average Net Assets perEmployee were 5 543 thousand euros, an improvement of960 thousand euros (+20.9%), while the Average Number ofEmployees per Branch rose slightly to around 10.

8.10.4. EFFICIENCY AND OPERATING INDICATORS

The Efficiency and Operating Indicators showed various typesof behaviour. The Cost-to-Income ratio worsened by 2.59b.p., as mentioned above, while the Staff Costs / BankingRevenue ratio also increased by 1.57 b.p. On the other hand,

The potential risk that may arise as a result of the reductionin the degree of asset cover provided by the Provisions isoffset by the drop in the Credit and Interest Due ratio,which occurred to all asset classes concerned.

8.10.3. RATE OF RETURN (ROE AND ROA)

The main rate of return indicators reflect CEMG’s positiveperformance in 2006. The return on average net assets

BREAKDOWN OF ROA AND ROE


% % b.p.

(+) Interest and Equivalent Revenue Ratio 4.60 4.52 0.08

(–) Interest and Equivalent Costs Ratio 2.51 2.48 0.03

(+) Services Provided to Customers Ratio 0.46 0.56 -0.10

(+) Market Operations Ratio -0.07 0.02 -0.09

(+) Provisions Adjustments Ratio 1.42 0.86 0.56

(–) Provisions Set Up Ratio 1.95 1.56 0.39

(–) Cost of Supplies and Services Ratio 0.53 0.55 -0.02

(–) Staff Costs Ratio 0.96 0.97 -0.01

(–) Depreciation Ratio 0.09 0.08 0.01

(+) Other Net Revenue Ratio 0.04 0.02 0.02

(=) ROA 0.41 0.34 0.07

(x) Multiplier (Average Net Assets / Average Equity) 18.89 19.40 -0.51

(=) ROE 7.75 6.67 1.08

EFFICIENCY AND OPERATING INDICATORS

INDICATORS 2006 2005 Change

Operational Costs / Banking Revenue (cost to income) (%) * 62.82 60.52 2.30 b.p.

Staff Costs / Banking Revenue (%) * 38.26 36.69 1.57 b.p.

Operating Costs / Average Net Assets (%) 1.49 1.52 -0.03 b.p.

Average Net Assets / Average Number of Employees (m.€) 5 543 4 583 960

No. of Employees / Branch (Quantity) 9.89 9.67 0.22

* As per Bank of Portugal Instruction nº 16/2004

8.11. PENSIONS FUND

The Montepio Pensions Fund, which covers retirement and widows pensions of CEMG and MG-AM employees, recordedthe following changes:

• Retirement and widows pensions liabilities stood at 506 395 thousand euros at the year-end, an increase of 38 259thousand euros (+8.2%) over 2005, when they were 468 136 thousand euros;

Bank of Portugal Regulation 1/2005 on individual accounts,allowed Credit Institutions to continue to prepare theirindividual Financial Statements, pursuant to the rules laiddown in Instruction no. 4/96 – «Plano de Contas para oSistema Bancário» in the financial year beginning 1 January2005.

CEMG decided to present its individual accounts, duringthe transitional period, in keeping with Instruction no.4/96-PCSB and to adopt the Adjusted AccountingStandards referred to in points 2 and 3 of Bank of PortugalRegulation 1/2005 from 1 January 2006.

In order that the figures for 31.12.2006 and 31.12.2005be comparable, the previous year’s balances were reclassi-fied in accordance with the new Financial Statementsmodel introduced by the Adjusted Accounting Standards.

98

• The value of the fund’s assets went from 327 721 to 374 401 thousand euros (+14.2%). This growth was due tothe fact that over the year contributions totalled 36 195 thousand euros, while pensions paid were 9 097 thousandeuros and the net return on asset funds was 19 560 thousand euros;

• The Pensions Fund financing complies with the limits set by the Bank of Portugal, according to the IAS. At the year-end fund assets were equal to 73.9% of liabilities, as compared to 70.0% at the end of 2005;

• In 2006 the return on the Pensions Fund was 6%.

8.12. TRANSITION TO IFRS (INTERNATIONAL FINANCIAL REPORTING STANDARDS)

Article 4 of Regulation (EC) no. 1606/2002 of the Euro-pean Parliament and of the Council of 19 July 2002 on theapplication of international accounting standards, statesthat for each financial year starting on or after 1 January2005, companies governed by the law of a Member-Stateshall prepare their consolidated accounts in accordancewith the International Accounting Standards/ InternationalFinancial Reporting Standards (IAS/IFRS).

The same Regulation lays down that Member-States maypermit or require that the companies individual accountsand the consolidated accounts of companies whose sharesare not traded on a regulated market be prepared in accor-dance with the international accounting standards.

To that end, CEMG adopted the IAS from 1 January 2005when preparing its accounts.

TREND AND IMPACT OF MAJOR PENSIONS FUND VARIABLES(thousands of euros)

VARIABLES 2006 2005Change

Value %

1 Past Liabilities 506 395 468 136 38 259 8.2

2 Value of Fund 374 401 327 721 46 680 14.2

3 Degree of Cover (2:1) 73.9% 70.0% 3.9 b.p.

4 Fund Financing

4.1. Liabilities exempt of financing 18 329 16 535

4.2. Deferred financing liabilities – impact of IAS 72 724 95 112

4.3. Deferred financing liabilities – Mortality Table 41 405 43 585

4.4. Financing currently required ( 1-4.1-4.2-4.3) 373 937 312 904 61 033 19.5

4.5. Degree of Cover of Financing required (2:4.4) 100.1% 104.7% -4.6 b.p.

5 Liabilities recognised

5.1 Deferred recognition 130 449 158 525 -28 076 -17.7

Of which:

5.1.1. Inside the corridor 41 405 43 585

5.1.2. Outside the corridor 21 621 19 828

5.2. Recognised in Retained Earnings 67 423 95 112

6 Recognition of impact on Equity 89 044 138 697 -49 653 -35.8

6.1. Not deferred – over the corridor (5.1.2) 21 621 19 828

6.2 Deferred and phased

6.2.1. Impact recognised and deducted 13 217 40 649

6.2.2. Deferred impact to be recognised 54 206 78 220

7 Equity deduction (6.1+6.2.1) 34 838 60 477 -25 639 -42.4

99

In regard to the latest Fitch Ratings and assessment con-ducted in 2006, Outlook improvement should be stressed;this went from negative to stable, while the final rating

CEMG has been rated by two of the most prestigious rating agencies: Fitch Ratings and Moody’s. The latest ratings awardedare as follows:

8.13. RATING

RATINGS

RATING AGENCY Short-term Long-term

Fitch Ratings F2 A-

Moody's P-1 A3

remained unchanged (F2 in the short-term and A- in thelong-term).

The improved Outlook according to Fitch is based on the following facts:

• CEMG’s increased profitability over the last two years;

• the emphasis on the cross-selling of Group products and services;

• cost control;

• overall performance in relation to context.

The rating awarded (and retained) was based on:

• the low Housing Credit risk;

• the relatively comfortable base capital;

• high degree of specialisation within a market niche;

• the reasonable quality of the assets, with the non-performance credit well covered by provisions.

8.14. CAPITALISATION AND PRUDENTIAL RATIOS

Eligible Equity and Prudential ratios easily comply with the limits set by the Supervisory Authority.

EQUITY AND SOLVENCY, LIQUIDITY AND FIXED ASSETS RATIOS(thousands of euros)

INDICATORS2006 2005 Change

Value Value Value %

1. Eligible Equity 1 131 455 1 010 927 120 528 11.9

(+) Institutional Capital 585 000 485 000 100 000 20.6

(+) Reserves and Profits 245 923 219 963 25 960 11.8

(–) Regulatory Deductions 64 984 75 962 -10 978 -14.5

(=) Base Equities 765 939 629 001 136 938 21.8

(+) Complementary Equity 400 425 397 902 2 523 0.6

(–) Other deductions 34 909 15 976 18 933 118.5

2. Minimum Required Equity 841 738 753 365 88 373 11.7

3. Ratios

Solvency (BoP limit: 8%) 10.75% 10.74% 0.01 b.p.

Tier 1 (BoP limit: 4%) 7.28% 6.68% 0.60 b.p.

Liquidity (BoP limit: 90%) 97.33% 98.78% -1.45 b.p.

Fixed Assets (BoP limit: 100%) 13.18% 13.68% -0.50 b.p.

Pursuant to b) number 1, Article 23 of the Caixa Econó-mica Montepio Geral’s Articles of Association, the Board ofDirectors proposes the following distribution of the 60 154

thousand euros profit generated in 2006 (corrected to thesum of -24 739 thousand euros charged to RetainedEarnings) to the General Meeting:

100

Eligible Equity went from 1 010 927 thousand euros at theend of 2005 to 1 131 455 thousand euros at the end of2006, which represents an increase of 120 528 thousandeuros (+11.9%).

This change was brought about by the substantial increasein the Base Equity (+21.8%), the relative weight of whichrose (from 62.2% at the end of 2005 to 67.7% at the endof 2006) in detriment to Complementary Equity.

The Base Equity was strengthened by a 100 million eurosrise in Institutional Capital, a 25 960 thousand eurosincrease in Reserves and Net Profit, plus a 10 978 thousandeuros decrease in regulatory deductions, comprising intan-gible assets (previously intangible fixed assets), recognitionof the 2nd phase of the increase in Pensions Fund liabilitiesand the impact of the changes to accounting policies stem-ming from CEMG’s adoption of the NCA – «Normas deContabilidade Ajustadas» (Adjusted Accounting Standards).

The value of Complementary Equity remained practicallyunchanged. A new phase of a fixed term subordinatedbond issue worth 50 million euros, compensated for thepayment of an equal amount relating to indeterminateterm subordinated bonds.

The Solvency Ratio for 2006 was around 10.75%, whichwas basically the same as in the previous year and stood at2.75 b.p., comfortably above the minimum requirement.

The Base Equity item of the Solvency Ratio («Tier 1»),which must comply with the 4% minimum, stood at7.28%, a 0.60 b.p. increase over 2005, as a result of thesignificant increase in the Base Equity.

Although the Liquidity Ratio was down on the previousyear, it was 97.33% at the year-end, some 90% higherthan the minimum requirement.

The Fixed Asset Ratio was 13.18% at the year-end, well below its maximum limit of 100%.

The charge to Retained Earnings is the second paymentunder the depreciation plan referred to number 13-A ofBank of Portugal Regulation 12/2001, relating to PensionFunds, as amended by Bank of Portugal Regulation 4/2005.

That depreciation plan, dating back to 31.12.2004, resultsfrom the impact of the change to IAS, which call for the

cancellation of Corridor and Deferred Cost amounts, inaddition to the effect of the increased liabilities stemmingfrom the change in actuarial assumptions, which includepost-employment medical care, which previously were onlyrecognised at the time of payment.

8.15. PROPOSED PROFIT DISTRIBUTION


ITEM Value

TO LEGAL RESERVE 12 031

TO SPECIAL RESERVE 3 007

TO BE TRANSFERRED TO MONTEPIO GERAL – ASSOCIAÇÃO MUTUALISTA 20 377

PROFIT DISTRIBUTED 35 415

Transfer to Retained Earnings (BoP Regulation 12/2001) 24 739

TOTAL PROFIT 60 154

SOLVENCY (Bank of Portugal definition) LIQUIDITY (Bank of Portugal definition)

101

8.16. BALANCE SHEET AND STATEMENT OF INCOME

8.16.1. INDIVIDUAL BALANCE SHEET AS AT 31 DECEMBER 2006 AND 2005


2006 2005

GROSS IMPAIRMENT AND NET NETASSETS DEPRECIATION ASSETS ASSETS

ASSETSCash and deposits at central banks 242 772 242 772 207 707

Loans and advances to credit institutions repayable on demand 75 321 75 321 94 396

Financial assets held for trading 20 454 20 454

Other financial assets at fair value based on return 3 096 3 096

Available-for-sale financial assets 890 238 890 238 680 474

Other loans and advances to credit institutions 671 016 576 670 440 910 571

Loans and advances to customers 13 157 903 216 340 12 941 563 11 533 418

Held-to-maturity financial assets 36 044 36 044 34 903

Hedging derivatives 9 031 9 031 27 269

Available-for-sale non-current assets 103 964 13 326 90 638 99 566

Other tangible assets 167 173 88 145 79 028 80 402

Intangible assets 29 701 18 443 11 258 5 551

Investment in subsidiaries, associate companies and joint enterprises 28 236 28 236 26 269

Other assets 124 769 124 769 250 467

TOTAL ASSETS 15 559 718 336 830 15 222 888 13 950 993

LIABILITIESFinancial liabilities held for trading 38 564 38 564

Resources from other credit institutions 1 119 856 1 119 856 937 553

Resources from customers and other loans 8 048 370 8 048 370 7 550 069

Debt securities issued 4 670 843 4 670 843 4 080 422


Provisions 92 772 92 772 84 675

Other subordinated liabilities 301 229 301 229 310 649

Other liabilities 121 739 121 739 287 485

TOTAL LIABILITIES 14 400 713 14 400 713 13 260 222

EQUITYEquity 585 000 585 000 485 000

Revaluation reserves 15 990 15 990 8 404

Other reserves and retained earnings 161 031 161 031 152 055

Profit for the year 60 154 60 154 45 312

TOTAL EQUITY 822 175 822 175 690 771

TOTAL EQUITY AND LIABILITIES 15 222 888 15 222 888 13 950 993


THE CHIEF ACCOUNTANT THE BOARD OF DIRECTORSArmindo Marques Matias José da Silva Lopes – Chairman





8.16.2. STATEMENT OF INCOME BY NATURE INDIVIDUAL STATEMENT OF INCOME AS AT 31 DECEMBER 2006 AND 2005(thousands of euros)

2006 2005

Interest and similar income 674 608 599 411

Interest and similar charges 368 587 329 404

NET INTEREST INCOME 306 021 270 007

Return from equity instruments 1 798 3 013

Return on services and fees 70 348 63 344

Cost of services and fees 9 598 9 414

Profit on assets and liabilities at fair value based on return -12.076 -79

Profit on available-for-sale financial assets -252 341

Profit on currency revaluations 1 878 2 223

Profit on sale of other assets 3 299 5 363

Other operating profit 6 531 12 400

BANKING REVENUE 367 949 347 198

Staff costs 140 790 128 368

General administrative expenses 77 468 69 648

Depreciation charge for the year 12 884 11 085

Provisions net of adjustments 8 097 6 447

Correction to value associated with customer credit and other debtors (net of adjustments) 67 440 80 406

Impairment on other financial assets net of reversals and recoveries 88 -15

Impairment on other assets net of reversals and recoveries 1 028 5 947








102

103

8.16.3. STATEMENT OF INCOME BY FUNCTIONS AS AT 31 DECEMBER 2006 AND 2005


ITEMS 2006 2005

1 – INTEREST AND SIMILAR INCOME 674 608 599 411

– From Availabilities 4 157 3 022

– From Investments 639 152 508 305

– Other Interest and Income 31 299 88 084

2 – INTEREST AND SIMILAR CHARGES 368 587 329 404

– On External Resources 337 037 254 177

– On Equity and Equivalent 12 582 10 632

– Other Interest and Costs 18 968 64 594

3 – NET INTEREST INCOME(1–2) 306 021 270 007

4 – FEES AND OTHER INCOME AND EARNINGS 89 912 91 001

– Other Fees Received 70 348 63 345

– Other Income and Earnings 19 564 27 657

5 – FEES AND OTHER COSTS AND EXPENSES 19 024 18 936

– Other Fees Paid 9 598 9 414

– Other Costs and Expenses 9 426 9 522

6 – PROFIT ON SERVICE PROVIDED TO CUSTOMERS (4–5) * 70 888 72 066

7 – GAINS ON FINANCIAL OPERATIONS 136 673 7 241

8 – LOSSES ON FINANCIAL OPERATIONS 147 431 5 129

9 – RETURN ON SECURITIES INVESTMENTS 1

10 – PROFIT GENERATED BY MARKET OPERATIONS (7–8+9) –10 757 2 112

11 – RETURN ON FINANCIAL HOLDINGS 1 797 3 014

12 – OPERATING BANKING REVENUE (3+6+10+11) 367 949 347 198

13 – OPERATING COSTS 218 258 198 016

– Staff Costs 140 790 128 368

– General Administrative Costs – Supplies 5 297 4 857

– General Administrative Costs – Services 72 171 64 791

14 – DEPRECIATION CHARGE 12 884 11 085

15 – GROSS OPERATIONAL PROFIT (12 – 13 – 14) 136 807 138 097

16 – CHARGES TO PROVISIONS 76 653 92 785

– Charges 285 547 205 690

– Recoveries 208 894 112 905

17 – NET PROFIT FOR THE YEAR (15 – 16) 60 154 45 312

* Includes Net Profit on Sale of Property for Trading

104 (thousands of euros)

2006 2005

Cash flows arising from operating activitiesInterest income received 651 315 601 016Commission income received 54 590 63 265Interest expense paid (364 733) (332 624)Commission expense paid (10 107) (9 441)Payments to employees and suppliers (247 147) (183 588)Recovered from charged-off loans 1 254 985Other payments and receivables (29 370) 16 554

55 802 156 167(Increase) / decrease in operating assets

Loans and advances to credit institutions and customers (1 236 981) (1 032 902)Other assets 29 191 11 557

(1 207 790) (1 021 345)(Increase) / decrease in operating liabilities

Deposits from clients 460 705 58 360Deposits from credit institutions 221 318 100 819

682 023 159 179

(469 965) (705 999)Cash flows arising from investing activities

Dividends received 1 798 3 013(Acquisition) / sale of trading financial assets (3 746) –(Acquisition) / sale of other financial assets at fair value

through profit or loss 824 –(Acquisition) / sale of available for sale financial assets (201 690) (398 278)(Acquisition) / sale of hedging derivatives (88) –(Acquisition) / sale of held to maturity financial assets (1 141) (34 171)(Acquisition) / sale of shares in investments (1 967) 8 968Deposits owned with the purpose of monetary control (17 269) 33 751Proceeds from sale of fixed assets 3 233 194Acquisition of fixed assets (20 208) (8 261)

(240 254) (394 784)Cash flows arising from financing activities

Dividends paid (11 597) (24 782)Proceeds from issuance of share capital 100 000 40 000Proceeds from issuance of subordinated debt 1 388 770 1 793 145Reimbursement of subordinated debt (809 976) (654 952)Increase / (decrease) in other (sundry) liabilities 41 743 –

708 940 1 153 411

Net changes in cash and equivalents (1 279) 52 628

Cash and equivalents balance at the beginning of the year 149 912 97 284

Cash (note 15) 55 516 50 711

Loans and advances to credit institutions repayable on demand (note 16) 94 396 46 573

Cash and equivalents balance at the end of the year 148 633 149 912

See accompanying notes to the individual financial statements

8.17. STATEMENT OS CASH FLOWS AND STATEMENT OF CHANGES IN EQUITYFOR THE YEARS ENDED 31 DECEMBER, 2006 AND 2005

105

STATEMENT OF CHANGES IN EQUITY FOR THE YEARS ENDED 31 DECEMBER, 2006 AND 2005


GeneralTotal Share

and specialOther Fair value Retained

equity capitalreserves

reserves reserves earnings

Balance on 1 January, 2005 652 628 445 000 166 181 8 404 – 33 043

Transfers to reserves

General reserve – – 6 609 – – (6 609)

Special reserve – – 1 652 – – (1 652)

Increase in share capital 40 000 40 000 – – – –

Dividends paid (24 782) – – – – (24 782)

IAS 19 adjustments (22 387) – – – – (22 387)

Profit for the year 45 312 – – – – 45 312

Balance on 31 December, 2005 690 771 485 000 174 442 8 404 – 22 925

IAS 32 and 39 adjustments (5 886) – – – – (5 886)

684 885 485 000 174 442 8 404 – 17 039

Transfers to reserves

General reserve – – 9 062 – – (9 062)

Special reserve – – 2 266 – – (2 266)


Dividends paid (11 597) – – – – (11 597)

Fair value reserves 7 586 – – – 7 586 –

IAS 19 adjustments (18 853) – – – – (18 853)


Balance on 31 December, 2006 822 175 585 000 185 770 8 404 7 586 35 415


106

1.1. BASIS OF PRESENTATION

Caixa Económica Montepio Geral («Caixa») is a credit insti-tution held by Montepio Geral – Associação Mutualista,established on 24 March, 1844, and authorised to operatein accordance with Decree-Laws no. 298/92 of 31 Decem-ber, and no. 136/79 of 18 May, which regulate the activityof savings banks and establish some restrictions to theiractivities. However, Caixa is authorised to carry out bankingoperations in addition to those mentioned in its by-laws, ifpreviously authorised by the Bank of Portugal. This fact con-ducts to the practice of banking operations in general.

The Board of Directors approved these financial statementson 1 March, 2007. The financial statements are presentedin thousands of Euro, rounded to the nearest thousand.

For all periods up to and including the year ended 31December, 2005, Caixa prepared its financial statementsin accordance with the generally accepted accountingprinciples in Portugal for the banking sector («LocalGAAP»). In accordance with Regulation (EC) no.1606/2002 of the European Parliament and the Council,of 19 July 2002, and its adoption into Portuguese Lawthrough Decree- Law no. 35/2005, of 17 February andRegulation no. 1/2005 of the Bank of Portugal, Caixa’sfinancial statements are required to be prepared in accor-dance with Adjusted Accounting Standards established bythe Bank of Portugal, based in the application ofInternational Financial Reporting Standards («IFRS») asendorsed by the European Union («EU»), with the excep-tion of the issues referred in no. 2 and 3 of the Regulationno. 1/2005 and no. 2 of the Regulation no. 4/2005 of theBank of Portugal («NCA’s»). NCA’s are composed by allthe standards included in the International accountingStandards Board («IASB»), as well as interpretations issuedby the International Financial Reporting InterpretationsCommittee («IFRIC») and their predecessor bodies withthe exception of the issues referred in no. 2 and 3 of theRegulation no. 1/2005 and no. 2 of the Regulation no.4/2005 of Bank of Portugal: i) maintenance of the actualrequirements related with measurement and provision ofcredit granted, ii) employee benefits through the defini-tion of a deferral period to the transition impact to IAS 19and iii) restriction to the application of some issues estab-lished in IAS/IFRS.

The financial statements ended 31 December, 2006 havebeen prepared in accordance with NCA’s established bythe Bank of Portugal and in use at that period.

The financial statements are prepared under the historicalcost convention, as modified by the application of fair valuebasis for derivative financial instruments, financial assetsand liabilities held for trading, and available for sale assets,except those for which a reliable measure of fair value is notavailable. Recognised assets and liabilities that are hedgedunder hedge accounting are stated at fair value in respectof the risk that is being hedged. Other financial assets andliabilities and non-financial assets and liabilities are stated atamortised cost or historical cost. Non-current assets and lia-bilities are stated at the amortised or historical cost.

The accounting policies set out below have been appliedconsistently for the year ended 31 December, 2006. Thefinancial statements for the year ended as at 31 December,2005 were prepared in accordance with the generallyaccepted accounting principles in Portugal for the bankingsector, for comparative purposes.

The preparation of the financial statements in conformitywith NCA’s requires the Board of directors to make judg-ments, estimates and assumptions that affect the applica-tion of the accounting policies and reported amounts ofassets and liabilities, income and expenses. The estimatesand associated assumptions are based on historical expe-rience and various other factors that are believed to bereasonable under the circumstances, the results of whichform the basis of making the judgments about carrying valuesof assets and liabilities that are not readily apparent fromother sources. Actual results may differ from these esti-mates. The issues involving a higher degree of judgment orcomplexity, or where assumptions and estimates are con-sidered to be significant are presented in note 1.20.

Transition to NCA’s

These are Caixa’s first financial statements prepared inaccordance with NCA’s and are in compliance with IFRS 1for the determination of the transition adjustments, as at1 January, 2006. The reconciliation of shareholders’ equityand profit for the period as presented under IFRS 1 is pre-sented in note 38.

8.18. NOTES TO THE INDIVIDUAL FINANCIAL STATEMENTS31 DECEMBER, 2006


In the preparation of the consolidated financial statements at the date of transition, 1 January, 2006, Caixa has electedto take some exemptions as allowed by IFRS 1 which are presented as follows:

i) Property and equipment

Caixa decided to elect as deemed cost of property and equipment its carrying amount in accordance with the previ-ous accounting policies.

107

1.2. LOANS AND ADVANCES TO CUSTOMERS

Loans and advances to customers include loans andadvances originated by Caixa, which are not intended tobe sold in the short term and are recognised when cash isadvanced to borrowers.

The derecognition of these assets occurs in the followingsituations: (i) the contractual rights of Caixa have expired;

or (ii) Caixa transferred substantially all the risks andrewards associated.

Loans and advances to customers are initially recognised atfair value plus any directly attributable transaction costsand are subsequently measured at amortised cost using theeffective interest method, less provisions for loan losses.

Impairment

As referred in the accounting policy described in note 1.1, Caixa has prepared its financial statements in accordance with NCA’stherefore, in accordance with no. 2 and 3 of the Regulation no. 1/2005 of Bank of Portugal, Caixa adopted the requirementsestablished for the measurement and provision of credit granted used in the previous years, described as follows:

i) Specific provision for loan losses

The specific provision for loan losses is based on the appraisal of overdue loans including the related overdue amountsto cover specific credit risks. This provision is shown as a deduction against credit granted. The adequacy of this pro-vision is reviewed regularly by Caixa taking into consideration the existence of asset-backed guarantees, the overdueperiod and the current financial situation of the client.

The provision calculated under these terms, complies with the requirements established by the Bank of Portugal, inaccordance with Regulations no. 3/95, of 30 June 1995, no. 2/99, of 15 January 1999, and no. 8/03, of 8 February2003.

ii) General provision for loan losses

This provision is established to cover latent bad and doubtful debts which are present in any loan portfolio, includingguarantees, but which have not been specifically identified as such. This provision is recorded under provision for lia-bilities and charges.

The general provision for loan losses is in accordance with Regulation no. 3/95, of 30 June 1995, Regulation no. 2/99,of 15 January 1999 and Regulation no. 8/03, of 8 February 2003 of the Bank of Portugal.

iii) Provision for country risk

The provision for country risk is in accordance with Regulation no. 3/95, of 30 June of the Bank of Portugal, and isbased on the Instruction no. 94/96, of 17 June, of the Bank of Portugal, including the adoption of changes made toparagraph 2.4 of the referred Instruction published in October 1998.

iv) Loans charge-off

The loans charge-off is performed against the related provision for loan impairment, when these correspond to 100%of the loans amount and not loans bought at court auctions.

1.3. FINANCIAL INSTRUMENTS

i) Classification

Trading financial instruments are those that Caixa princi-pally holds for the purpose of short-term profit taking, withchanges in fair value recognised against earnings andinclude derivative contracts that are not designated ashedging instruments or at first recognition designated fairvalue through profit and loss. Changes in the fair value ofsuch instruments are recorded in the income statement. Alltrading derivatives with positive fair value are reported astrading assets and negative fair value as trading liabilities.

Financial assets or liabilities at fair value through profit orloss are financial assets or liabilities held for trading, whichare those acquired principally for the purpose of selling inthe short term and including derivatives that are not desig-nated as hedging instruments or that are designated at fair

value through profit or loss at inception. Changes in thefair value of such instruments are recorded in the incomestatement.

Held to maturity financial instruments are non-derivativefinancial assets with fixed payments or available anddefined maturity, which Caixa has the purpose of beingheld to maturity.

Available for sale financial assets are non derivative finan-cial assets that are not classified as held to maturity invest-ments or financial assets held for trading. Available for saleinstruments include equity and debt instruments.

Other financial liabilities comprise all financial liabilities notclassified as financial liabilities held for trading. Other fi-nancial liabilities include, among others, money marketfunding, deposits from credit institutions and customersand issued debt.

ii) Recognition date

Financial assets and financial liabilities are recognised usingtrade date accounting.

iii) Trading assets and trading liabilities

Treasury bills, debt securities, equity shares, derivatives notaccounted for as hedging instruments and short positionsin securities which have been acquired or incurred princi-pally for the purpose of selling or repurchasing in the nearterm or are part of a portfolio of identified financial instru-ments that are managed together and for which there isevidence of a recent actual pattern of short-term profit-taking are classified as held-for-trading. Such financialassets or financial liabilities are recognised initially at fairvalue, with transaction costs or profits taken to the incomestatement, and are subsequently remeasured at fair value.All subsequent gains and losses from changes in the fairvalue of these assets and liabilities, accrued interests anddividends received are recognised in the income statementwithin «Net gains arising from trading and hedging activi-ties» as they arise.

iv) Financial assets and liabilities at fair value through profitor loss

Financial assets and liabilities at fair value through profit orloss are initially recognised at fair value, with transactioncosts and profits are directly recognised in the incomestatement, and are subsequently remeasured at fair value.All subsequent gains and losses from changes in the fairvalue of these assets and liabilities, accrued interests anddividends received are recognised in the income statementwithin «Net gains arising from trading and hedging activi-ties» as they arise.

v) Available for sale assets

Treasury bills, debt securities and equity shares intended tobe held on a continuing basis are classified as available forsale assets unless designated at fair value through profitand loss or classified as held to maturity. Available for saleassets are initially measured at fair value plus direct andincremental transaction costs or profits. For debt securitiestransactions, costs are amortised to profit and loss usingthe effective interest method. Available for sale assets aresubsequently remeasured at fair value. Changes in fairvalue are recognised in equity until the securities are either

sold or impaired. On the sale of available for sale assets,cumulative gains or losses previously recognised in equityare recognised through the income statement and classi-fied as «Net gains arising from available for sale financialassets». Interest income is recognised on such securitiesusing the effective interest method, calculated over theasset’s expected life. Where dated investment securitieshave been purchased at a premium or discount, these pre-miums and discounts are included in the calculation of theeffective interest rate. Dividends are recognised in theincome statement when the right to receive payment hasbeen established.

An assessment is made at each balance sheet date as towhether there is any objective evidence of impairment,namely circumstances where an adverse impact on esti-mated future cash flows of the financial asset or group ofassets can be reliably estimated.

If an available for sale asset is determined to be impaired,the cumulative loss (measured as the difference betweenthe acquisition cost and the current fair value, less anyimpairment loss on that financial asset previously recog-nised in the income statement) is removed from equity andrecognised in the income statement. If, in a subsequentperiod, the fair value of a debt instrument classified asavailable for sale increases and that increase can be objec-tively related to an event occurring after the impairmentloss was recognised in the income statement, the impair-ment loss is reversed through the income statement. Thereversal of impairment losses recognised in the incomestatement on equity instruments is recognised in equity.

vi) Held to maturity investments

Held to maturity investments are recognised at amortisedcost, using interest effective method less impairment losses.

1.4. HEDGE ACCOUNTING

i) Hedge accounting

Caixa uses derivative financial instruments to hedge itsexposure to currency and interest rate risks, resulting fromfinancing and investment activities. However, derivativesnot qualified for hedging are accounted for as tradinginstruments.

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Derivative hedging instruments are stated at fair value and gains and losses on remeasurement are recognised in accor-dance with the hedging accounting model adopted by Caixa. An hedging relationship exists when:

– at the inception of the hedge there is formal documentation of the hedge;

– the hedge is expected to be highly effective;

– the effectiveness of the hedge can be reliably measured;

– the hedge is highly effective throughout the reporting period; and

– for hedges of a forecasted transaction, the transaction is highly probable and presents an exposure to variations incash flows that could ultimately affect net profit or loss.

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When a derivative financial instrument is used to hedgeexchange fluctuations arising from monetary assets or lia-bilities items, no hedge accounting model is applied andany gain or loss associated to the derivative or exchangedifference associated with the monetary item is recognisedthrough income.

ii) Fair value hedge

Changes in the fair value of derivatives that are designatedand qualify as fair value hedging instruments are recordedin the income statement, together with changes in the fairvalue of the asset or liability or group thereof that areattributable to the hedged risk. If the hedging relationshipno longer meets the criteria for hedge accounting, thecumulative adjustment to the carrying amount of a hedgeditem for which the effective interest method is used isamortised to the income statement over the residual periodto maturity.

iii) Hedge effectiveness

For each hedging relationship in order to be classified assuch according to IAS 39, effectiveness has to be demons-trated. As such Caixa performs prospective tests at incep-tion date and retrospective tests in order to demonstrate ineach reporting period the effectiveness, showing that thechanges in the fair value of the hedging instrument areneutralised by the changes in the hedged item for the riskcovered.

Any ineffectiveness is recognised immediately in the incomestatement.

iv) Embedded derivatives

Embedded derivatives should be accounted for separatelyif the economic characteristics and risks of the embeddedderivative are not closely related to the host contract,unless the hybrid (combined) instrument is measured at fairvalue with changes in fair value recognised directly in theincome statement. Embedded derivatives are classified astrading and accounted for at fair value with changesthrough profit and loss.

1.5. RECLASSIFICATIONS BETWEEN FINANCIALINSTRUMENTS CATEGORIES

Reclassification of financial assets and liabilities into or out ofthe fair value through profit and loss category is forbidden.

1.6. DERECOGNITION

Caixa derecognises financial assets when all rights to futurecash flows have expired or the assets are transferred. In theevent of a transferral of assets, derecognition can onlyoccur either when risks and rewards have substantiallybeen transferred or Caixa has not retained control of theassets.

Caixa derecognises financial liabilities when these are dis-charged, cancelled or extinguished.

1.7. FINANCE LEASE TRANSACTIONS

Caixa classifies its lease agreements as finance leases oroperating leases taking into consideration the substance ofthe transaction rather than its legal form, in accordancewith IAS 17 – Leases. A lease is classified as a finance leaseif it transfers substantially all the risks and rewards inciden-tal to ownership. All other leases are classified as operatingleases.

Operating leases

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

Finance leases

– As lessee

Finance lease contracts are recorded at inception date,both under assets and liabilities, at the cost of the assetleased, which is equal to the present value of outstandinglease instalments. Instalments comprise (i) an interestcharge, which is recognised in the income statement and(ii) the amortisation of principal, which is deducted fromliabilities. Financial charges are recognised as costs over thelease period, in order to produce a constant periodic rateof interest on the remaining balance of liability for eachperiod.

– As lessor

Assets leased out are recorded in the balance sheet asloans granted, for an amount equal to the net investmentmade in the leased assets.

Interest included in instalments charged to customers isrecorded as interest income, while amortisation of princi-pal, also included in the instalments, is deducted from theamount of the loans granted. The recognition of the interestreflects a constant periodic rate of return on the lessor’snet outstanding investment.

1.8. INTEREST INCOME AND EXPENSE

Interest income and expense for all instruments measuredat amortised cost are recognised in the income statementusing the effective interest method.

The effective interest rate is the rate that exactly discountsestimated future cash payments or receipts through theexpected life of the financial instrument or, when appropriate,a shorter period, to the net carrying amount of the finan-cial asset or financial liability.

When calculating the effective interest rate, Caixa esti-mates future cash flows considering all contractual termsof the financial instrument but without considering futureimpairment losses. The calculation includes all fees consi-dered as included in the effective interest rate, transactioncosts and all other premiums or discounts directly relatedwith the transaction.

If financial asset or a group of similar financial assets hasbeen written down as a result of an impairment loss, interestincome is recognised using the rate of interest used to dis-

count the future cash flows for the purpose of measuringthe impairment loss.

For derivative financial instruments, except those classifiedas hedging instruments of interest rate risk, the interestcomponent of the changes in the fair value is not separated

out and is classified under net losses/gains arising fromfinancial assets. For hedging derivatives of interest rate risk,the interest component of the changes in their fair value isrecognised under interest and similar income or interestexpense and similar charges.110

1.9. FEE AND COMMISSION INCOME

Fee and commission income are recognised according to the following criteria:

– fee and commission which are earned as services are provided are recognised in income over the period in whichthe service is being provided;

– fee and commission that are earned on the execution of a significant act, are recognised as income when the serviceis completed.

1.10. RESULTS ARISING FROM TRADING ANDHEDGING ACTIVITIES AND AVAILABLE FOR SALEFINANCIAL ASSETS

The results arising from trading and hedging activities andavailable for sale financial assets correspond to gains andlosses arising from financial assets and liabilities classifiedas trading (including derivatives and embeded derivatives)and the corresponding interest and dividends. Also includedare the gains and losses arising from the available for salefinancial assets portfolio.

1.11. PROPERTY AND EQUIPMENT

Property and equipment are stated at deemed cost lessaccumulated depreciation and impairment losses.

Subsequent costs are recognised as a separate asset onlywhen it is probable that future economic benefits associatedwith the item will flow to Caixa. All other repairs and main-tenance are charged to the income statement during thefinancial period in which they are incurred.

Caixa performs impairment testing whenever events or cir-cumstances show that the book value exceeds the recove-rable amount. The difference between the book value andrecoverable amount is charged to the profit and loss.

Development expenditure in respect of new projects is deferred to future periods and amortised over a three year periodas long as the following criteria are satisfied:

– the product or process is clearly defined and the costs attributable to the product or process can be separately iden-tified;

– the technical feasibility of the product or process has been demonstrated;

– the Board of Directors has indicated its intention to develop and market, or use, the product or process;

– there is a clear indication of a future market for the product or process or, its usefulness can be demonstrated;

– adequate resources exist to complete the project and market the product or process.

Depreciation is calculated on a straight-line basis, over the following periods which correspond to their estimated useful life:

Number of years

Buildings 50

Works in rented buildings 10

Equipment 4 to 10

1.12. INTANGIBLE ASSETS

Software

Software acquisition costs are capitalised and amortisedover a three year period, as well as implementation costs.

Maintenance costs are recognised as costs when occurred.

Research and development expenditure

Caixa has not incurred in research costs.

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The current service costs and any past service costs togetherwith the expected return on plan assets less the unwindingof the discount on the plan liabilities are charged to opera-ting costs.

Caixa’s net obligation in respect of defined benefit pensionplan is calculated separately by estimating the amount offuture benefit that employees have earned in return fortheir service in the current and prior periods. The benefit isdiscounted in order to determine its present value, and thefair value of any plan assets is deducted. The discount rateis the yield at balance sheet date on AAA credit ratedbonds that have maturity dates approximating the terms ofCaixa’s obligations.

Employee benefits, other than pension plans, namely postretirement health care benefits are also included in thebenefits plans calculation.

Under the corridor method, actuarial gains and losses notrecognised, exceeding 10% of the greater of the presentvalue of the defined benefit obligation and the fair value ofplan assets, are recognised in the income statement over aperiod of 25 years, corresponding to the expected remain-ing working life of the employees.

The funding policy of the Plan is to make annual contribu-tions by Caixa so as to cover the projected benefits obliga-tions, including the noncontractual projected benefits. Theminimum level required is 100% regarding the liability withpensioners and 95% regarding the employees in service.

1.17. INCOME TAX

According to the no. 1 a) of Article 10th, of IRC Legislation,Caixa is exempt from income tax payment (Imposto sobre

1.13. ASSETS ARISING OUT OF RECOVERED LOANS

Assets arising out of recovered loans include buildings andsecurities arising from the settlement of loan contracts.These assets are reported under «Other assets» and are ini-tially recognised at the recovered loan value.

Fair value is based on the market value, being determinedbased on the expectable selling price estimated throughregular valuations performed by Caixa.

Subsequent measurement is at the lower of its carryingamount and its corresponding fair value. No depreciation isprovided in respect of those assets. Any subsequent write-down of the acquired asset to fair value is recorded as animpairment loss and included in the income statement.

1.14. CASH AND CASH EQUIVALENTS

For the purposes of the cash flow statement, cash and cashequivalents comprise balances with less than three months’maturity from the balance sheet date, including cash anddeposits with banks. Cash and cash equivalents excluderestricted balances with central banks.

1.15. FOREIGN CURRENCY TRANSACTIONS

Transactions in foreign currencies are translated at theforeign exchange rate ruling at the date of the transaction.Monetary assets and liabilities denominated in foreign cur-rencies, which are stated at historical cost, are translated atthe foreign exchange rate ruling at that date. Foreignexchange differences arising on translation are recognised

in the income statement. Non-monetary assets and liabili-ties denominated in foreign currencies, which are stated athistorical cost, are translated at the foreign exchange rateruling at the date of the transaction. Non-monetary assetsand liabilities denominated in foreign currencies that arestated at fair value are translated to the reporting currencyat the foreign exchange rates ruling at the dates that thevalues were determined.

1.16. EMPLOYEE BENEFITS

Defined benefit plans

Caixa assumed the responsibility to pay its employees pen-sions on retirement or disabilities, as established in theterms of «Acordo Colectivo de Trabalho Vertical do SectorBancário (ACTV)».

The pension plan benefits is in accordance with the «PlanoACTV – Acordo Colectivo de Trabalho Vertical do SectorBancário» and the «Plano ACTQ – Acordo Colectivo dosQuadros do Sector Bancário».

Caixa’s pension obligations are financed by a fund managedby Futuro – Sociedade Gestora de Fundos de Pensões, S.A.

The Caixa’s net obligation in respect of pension plans(defined benefit pensions plan) is calculated annually ateach balance sheet date.

The actuarial calculation is made using the projected unitcredit method and following actuarial and financialassumptions, in line with parameters required IAS 19 – Em-ployee Benefits requirements.

In accordance with no. 2 of Regulation no. 4/2005 of the Bank of Portugal was established a deferral period for the tran-sition impact to IAS 19 as at 1 January, 2005, is analysed as follows:

BalancesDeferralperiod

Obligations with healthcare benefits 7 years

Deferred actuarial costs, corridor and disability decreases 5 years

Liabilities increases 5 years

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o Rendimento das Pessoas Colectivas – IRC). This exemp-tion was recognized by a regulation issued by theMinisterial Secretary of Fiscal Affairs dated 3 December,1993, and confirmed by the Law no. 10-B/96 from 23March, which approved the public budget for the year of1996.

1.18. SEGMENTAL REPORTING

A business segment is a distinguishable component ofCaixa that is engaged in providing an individual product orservice or a group of related products or services and thatis subject to risks and returns that are different from thoseof other business segments.

A geographical segment is a distinguishable component ofCaixa that is engaged in providing a product or service ora group of related products or services within a particulareconomic environment and that are subject to risks andreturns that are different from those which operates inother economic environments.

Given the nature of its activity and clients, Caixa is focusedunder one business segment.

1.19. PROVISIONS

Provisions are recognised when (i) Caixa has a present legalor constructive obligation, (ii) it is probable that its paymentwill be required and (iii) a reliable estimate can be made ofthe amount of the obligation.

1.20. CRITICAL ACCOUNTING ESTIMATES AND JUDGE-MENTS IN APPLYING ACCOUNTING POLICIES

IFRS set forth range of accounting treatments and requirethe Board of Directors to apply judgment and make esti-mates in deciding which treatment is most appropriate.The most significant of these accounting policies are dis-cussed in this section in order to improve understanding ofhow their application affects Caixa’s reported results andrelated disclosure.

Because in many cases there are several alternatives to theaccounting treatment chosen by the Board of Directors,Caixa’s reported results would differ if a different treat-ment were chosen. The Board of Directors believes that thechoices made by it are appropriate and that the financialstatements present Caixa’s financial position and resultsfairly in all material respects.

The alternative outcomes discussed below are presentedsolely to assist the reader in understanding the financialstatements and are not intended to suggest that otheralternatives or estimates would be more appropriate.

Impairment of available for sale investments

Caixa determines that available for sale investments areimpaired when there has been a significant or prolongeddecline in the fair value below its cost. This determinationof what is significant or prolonged requires judgement. Inmaking this judgement, Caixa evaluates among other fac-tors, the normal volatility in share price.

In addition, valuations are generally obtained through mar-ket quotation or valuation models that may requireassumptions or judgment in making estimates of fair value.

Alternative methodologies and the use of differentassumptions and estimates could result in a higher level ofimpairment losses recognised with a consequent impact inthe income statement of Caixa.

Impairment losses on loans and advances

The Caixa reviews its loan portfolios to assess impairmentlosses on a regularly basis, as described in Note 1.2.

The evaluation process in determining whether an impair-ment loss should be recorded in the income statement issubject to numerous estimates and judgments.

The frequency of default, risk ratings, loss recovery ratesand the estimation of both the amount and timing offuture cash flows, among other things, are considered inmaking this evaluation.

Alternative methodologies and the use of differentassumptions and estimates could result in a different levelof impairment losses with a consequent impact in theincome statement of the Caixa.

Fair value of derivatives

Fair value is based on listed market prices if available,otherwise fair value is determined either by dealer pricequotations (both for that transaction or for similar instru-ments traded) or by pricing models, based on net presentvalue of estimated future cash flows which take intoaccount market conditions for the underlying instruments,time value, yield curve and volatility factors. These pricingmodels may require assumptions or judgments in estimatingtheir values.

Consequently, the use of a different model or of differentassumptions or judgments in applying a particular modelcould produce different financial results for a particularperiod.

Held to maturity investments

Caixa follows the guidance of IAS 39 – Financial instru-ments: recognition and measurement on classifying non-derivative financial assets with fixed or determinable pay-ments and fixed maturity as held to maturity. Thisclassification requires significant judgement.

In making this judgement, Caixa evaluates its intention andability to hold such investments to maturity. If Caixa fails tokeep these investments to maturity other than for specificcircumstances – for example, selling an insignificant amountclose to maturity – it will be required to reclassify the entireclass as available for sale. The investments would thereforebe measured at fair value not amortised cost. The use ofdifferent assumptions and estimates would result in thedetermination of the fair value of this portfolio with a cor-responding entry in the fair value reserve in equity.

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Pension and other employees’ benefits

Determining pension liabilities requires the use of assump-tions and estimates, including the use of actuarial projec-tions, estimated returns on investment, and other factorsthat could impact the cost and liability of the pension plan.

Changes in these assumptions could materially affect thesevalues.

STATEMENT OF INCOME FOR THE YEARS ENDED 31 DECEMBER, 2006 AND 2005


NOTES 2006 2005

Interest income 3 674 608 599 411

Interest expense 3 368 587 329 404


Dividends from equity instruments 4 1 798 3 013

Net fee and commission income 5 60 750 53 930

Net gains arising from trading and hedging activities 6 (10 506) 1 771

Net gains arising from available for sale financial assets 7 (252) 341

Other operating income 8 8 884 17 151

TOTAL OPERATING INCOME 60 674 76 206

Staff costs 9 140 790 128 368

Other administrative costs 10 77 468 69 648

Depreciation 11 12 884 11 085

OPERATING COSTS 231 142 209 101

Provisions for loan losses 12 74 817 84 971

Other assets impairment 13 1 116 5 932

Other provisions 14 (534) 897

OPERATING PROFIT 60 154 45 312



114

115

BALANCE SHEET AS AT 31 DECEMBER, 2006 AND 2005


NOTES 2006 2005

ASSETSCash and deposits at central banks 15 242 772 207 707

Loans and advances to credit institutions repayable on demand 16 75 321 94 396

Other loans and advances to credit institutions 17 670 440 910 571

Loans and advances to customers 18 12 941 563 11 533 418

Financial assets held for trading 19 6 349 –

Other financial assets at fair value through profit or loss 19 20 380 –

Financial assets available for sale 19 890 238 680 474

Hedging derivatives 20 14 220 –

Financial assets held to maturity 21 36 044 34 903

Investments in associated companies 22 28 236 26 269

Property and equipment 23 79 028 80 402

Intangible assets 24 11 258 5 551

Other assets 25 207 039 377 302

TOTAL ASSETS 15 222 888 13 950 993

LIABILITIESDeposits from other credit institutions 26 1 119 856 937 553

Deposits from customers 27 8 048 370 7 550 069

Debt securities issued 28 4 670 843 4 080 422

Financial liabilities held for trading and other financialliabilities at fair value through profit or loss 29 41 743 –

Hedging derivatives 20 7 199 –

Provisions 30 92 772 84 675

Subordinated debt 31 301 229 310 649

Other liabilities 32 118 701 296 854


EQUITYShare capital 33 585 000 485 000

Fair value reserves 35 7 586 –

Reserves and retained earnings 34 and 35 169 435 160 459

Profit for the year 60 154 45 312

TOTAL EQUITY 822 175 690 771

TOTAL 15 222 888 13 950 993

Obligations and future commitments (Note 36)


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3. Net interest income

The amount of this account is comprised of:2006 2005


Interest income:

Interest on loans and advances 569 915 467 566

Interest on other assets 21 635 20 606

Interest on deposits 4 156 3 022

Interest on available for sale securities 35 152 14 666

Interest on held to maturity securities 1 446 1 278

Interest on hedging derivatives 23 737 82 257

Interest on financial instruments at fair value through profit or loss 84 33

Other interest and income 18 483 9 983

674 608 599 411

Interest expense:


Interest on securities issued 155 348 112 965

Interest on loans 16 625 12 994

Interest on other funding 14 364 8 436


Interest on financial instruments at fair value through profit or loss 18 2

Other interest and expense 2 638 2 864

368 587 329 404

Net interest income 306 021 270 007

2. Net interest income and net gains arising from trading, hedging and available forsale activities

Accounting Standards require separate disclosure of netinterest income and net gains arising from trading, hedg-ing activities and available for sale activities, as presented innotes 3, 6 and 7. This required disclosure, however, doesnot take into account that net interest and net gains from

trading, hedging and available for sale activities are gene-rated by a range of different business activities. In manycases, a particular business activity can generate both netinterest and trading income.

These balances are analysed as follows:2006 2005



Net gains arising from trading, hedging and available for sale activities (10 758) 2 112

295 263 272 119

117

4. Dividends from equity instruments



Dividends on available for sale securities 981 2 235

Dividends on investments in associated companies 817 778

1 798 3 013

5. Net fee and commission income



Fee and commission income:

From banking services 45 393 41 058

From commitments to third parties 9 896 8 947

From guarantees 4 726 4 488

From other services 10 333 8 851

70 348 63 344

Fee and commission expenses:


From securities operations 282 241

From other services 505 1 939

9 598 9 414

Net fee and commission income 60 750 53 930

6. Net gains arising from trading and hedging activities



Gains arising from trading and hedging activities:


Financial instruments at fair value through profit or loss 74 899 –

Foreign exchange activity 7 231 6 895

Financial instruments held for trading 31 306 –

Financial instruments held to maturity 31 3

136 264 6 898

Losses arising from trading and hedging activities:


Financial instruments at fair value through profit or loss 85 172 –


Financial instruments held for trading 35 568 79


146 770 5 127

Net gains arising from trading and hedging activities (10 506) 1 771

7. Net gains arising from available for sale financial assets



Gains arising from available for sale financial assets:


Issued by public entities – 305

Issued by other entities 410 38

410 343

Losses arising from available for sale financial assets:


Issued by public entities 1 2

Issued by other entities 661 –

662 2

Net gains arising from available for sale financial assets (252) 341

8. Other operating income



Other operating income:

Income from services 3 203 7 307

Reimbursement of expenses 2 291 5 268

Profits arising from deposits on demand management 5 778 3 760

Gains from the sale of investments arising from recovered loans 4 836 4 138

Other operating income 2 202 6 199

18 310 26 672

Other operating costs:

Indirect taxes 148 207

Donations and quotizations 153 264

Losses from the sale of fixed assets 1 480 1 788

Contributions to the Deposit Guarantee Fund 1 602 1 600

Other operating costs 6 043 5 662

9 426 9 521

Other net operating income 8 884 17 151

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119

9. Staff costs



Remunerations 99 173 94 684

Mandatory social security charges 34 868 32 407

Other staff costs 6 749 1 277

140 790 128 368

As referred in note 40, the caption Remunerations includes,as at 31 December, 2006, the amount of Euros 24 853 000(2005: Euros 20 170 000) related to the pension cost duringthe year.

As at 31 December, 2006, the remunerations attributableto the Board of Directors and Fiscal Board amount to Euros1 263 000 (2005: Euros 1 061 000) referring to staff costs.

The average number of employees by professional category at service in Caixa during 2006 and 2005 is analysed as fol-lows:

2006 2005

Management 125 115

Managerial staff 679 656

Technical staff 338 276

Specific categories 190 236

Administrative 1 527 1 545

Staff 90 94

2 949 2 922

10. Other administrative costs



Rents 20 334 19 579

Specialised services

Information technology services 3 036 3 033

Outsourcing 4 964 6 614

Other specialised services 10 727 6 948

Advertising 13 344 10 591

Communications 7 441 6 975

Water, electricity and fuel 3 453 3 409

Maintenance and related services 3 304 2 814

Transportation 2 525 2 283

Insurance 1 996 1 920

Travel, hotel and representation costs 1 665 1 340

Consumables 1 423 1 083

Training costs 1 002 1 359

Other supplies and services 2 254 1 700

77 468 69 648

11. Depreciation



Intangible assets:

Software 4 319 2 886

Property and equipment:

Land and buildings 3.753 4 021

Equipment:

Furniture 603 698

Office equipment 159 190

Computer equipment 2 128 1 254

Interior installations 1 721 1 766

Motor vehicles 63 98

Security equipment 138 172

8 565 8 199

12 884 11 085

12. Loans impairment



Loans and advances to costumers:

Charge for the year 282 822 193 578

Write-back for the year (206 751) (107 622)

Recovery of loans charged-off (1 254) (985)

74 817 84 971

13. Other assets impairment



Impairment for investments arising from recovered loans


Write-back for the year (774) (2 677)

1 028 5 947

Impairment for securities:

Charge for the year 88 1 358

Write-back for the year – (1 373)

88 (15)

1 116 5 932

120

121

14. Other provisions

The amount of this account is comprised of:

2006 2005Euros ‘000 Euros ‘000

Provision for country risk:

Charge for the year 501 937

Write-back for the year (860) (220)

(359) 717

Provision for liabilities and charges:



(175) 180

(534) 897

15. Cash and deposits at central banks



Cash 73 312 55 516

Bank of Portugal 169 460 152 191

242 772 207 707

The balance Bank of Portugal includes deposits to satisfy thelegal requirements to maintain a cash reserve for which thevalue is based on the value of deposits and other liabilities.

The cash reserve requirements according with the Euro-pean Central Bank System for Euro Zone, establishes the

maintenance of a deposit with the central bank equivalentto 2% of the average value of deposits and other liabilities,during each reserve requirement period.

16. Loans and advances to credit institutions repayable on demand



Credit institutions in Portugal 12 16

Credit institutions abroad 5 031 7 450

Amounts due for collection 70 278 86 930

75 321 94 396

The balance Amounts due for collection represents essentially cheques receivable from other credit institutions due forcollection.

17. Other loans and advances to credit institutions



Inter-bank Money Market 15 006 –

Credit institutions in Portugal 17 352 30 506


671 016 911 506

Impairment for other loans and advances to credit institutions (576) (935)

670 440 910 571

The balance Other loans and advances to credit institutions, by the period to maturity, is analysed as follows:

2006 2005Euros ‘000 Euros ‘000

Up to 3 months 660 575 886 269

3 months to 6 months 9 732 17 179

6 months to 1 year – 7 345

More than 5 years 590 589

Undetermined 119 124

671 016 911 506

Impairment for other loans and advances to credit institutions is analysed as follows:

2006 2005Euros ‘000 Euros ‘000

Impairment for other loans and advances to credit institutions:

Balance on 1 January 935 218

Impairment for the year 501 937


Balance on 31 December 576 935

122

123

18. Loans and advances to customers



Asset-backed loans 11 732 179 10 204 167

Other guaranteed loans 652 312 927 030

Unsecured loans 378 066 294 456

Public sector 58 226 58 610

Foreign loans 333 506

Finance leases 40 355 14 674

12 861 471 11 499 443

Overdue loans – less than 90 days 35 872 27 504

Overdue loans – more than 90 days 260 560 303 986

296 432 331 490

13 157 903 11 830 933

Impairment for credit risks (216 340) (297 515)

12 941 563 11 533 418

The analysis of loans and advances to customers, by type of credit, is as follows:

2006 2005Euros ‘000 Euros ‘000

Residents:

Short term

Discounted bills 150 692 120 158

Current account credits 617 306 647 822

Overdrafts 24 271 22 467

Loans 1 670 928 816

793 939 1 719 263

Medium and long term

Real estate loans

Mortgage 7 805 882 6 979 750

Construction 2 096 327 2 032 345


Other loans 2 124 635 752 906

12 067 199 9 779 674

Non-Residents:

Short term 333 506

12 861 471 11 499 443

Overdue loans:

Less than 90 days 35 872 27 504

More than 90 days 260 560 303 986

296 432 331 490

13 157 903 11 830 933

Impairment for credit risks (216 340) (297 515)

12 941 563 11 533 418

The balance Overdue loans for more than 90 days includesthe amount of Euros 6 806 000 (2005: Euros 6 813 000)related to loans bought at court auctions. These amountscorrespond to loans overdue for more than three years forwhich the contractual obligation with the former debtorhas been extinguished due to the acquisition in court auction

bankruptcy or acquisition through foresale but for whichthere are still pending legal actions.

Loans and advances to customers include only the amountof variable interest rate contracts.

124

The analysis of Loans and advances to customers, by maturity date and type of credit as at 31 December, 2006, is as fol-lows:

Loans and advances to customers

Up to 1 year to Over Undetermined1 year 5 years 5 years maturity Total

Euros ‘000 Euros ‘000 Euros ‘000 Euros ‘000 Euros ‘000

Asset-backed loans 439 964 2 357 373 8 934 842 235 804 11 967 983

Other guarantee loans 387 338 146 275 118 699 45 025 697 337

Unsecured loans 162 731 117 030 98 305 14 979 393 045

Public sector – 1 047 57 179 118 58 344

Foreign loans 333 – – – 333

Finance leases – 20 614 19 741 506 40 861

990 366 2 642 339 9 228 766 296 432 13 157 903

As at 31 December, 2006, there are two securitisationoperations between Caixa and other financial institutionspresented in the following paragraphs.

As at 19 December, 2002, Caixa Económica MontepioGeral has settled a securitisation operation with a SpecialPurpose Vehicle («SPV») – Pelican Mortgages no. 1 PLC,established in Dublin. The referred agreement consists in amortgage credit transfer for a period of 35 years, withoutrevolving period and with a fixed limit (Aggregate PrincipalAmount Outstanding) of Euros 650,000,000. The transferprice by which the loans were transferred was their nomi-nal value. The settlement costs have represented 0.016%of the referred nominal value.

As at 29 September, 2003, Caixa Económica MontepioGeral has settled a securitisation operation with a SpecialPurpose Vehicle («SPV») – Pelican Mortgages no. 2 PLC,established in Dublin. The referred agreement consists in amortgage credit transfer for a period of 33 years, withoutrevolving period and with a fixed limit (Aggregate PrincipalAmount Outstanding) of Euros 700 000 000. The transferprice by which the loans were transferred was their nomi-

nal value. The settlement costs have represented 0.0286%of the referred nominal value.

Caixa Económica Montepio Geral is the operation servicer,acting as collector of the credits sold. The received valuesare transferred to Pelican Mortgages no.1 PLC and toPelican Mortgages no. 2 PLC.

As at 31 December, 2004, in accordance with accountingprinciples, as established by the Bank of Portugal, theassets, loans and securities transfer under above transac-tions were derecognised. The acquired securities underthese transactions were classified as financial assets held tomaturity and provision in accordance with Regulation no.27/2000 of the Bank of Portugal.

In accordance with IFRS 1, Caixa follows derecognised cri-teria to individual statements to all transactions occur until1 January, 2004. For the all transactions after this date,Caixa follows de guidance of IAS 39 concerning derecog-nise, which refers that recognition have to occur eitherwhen risks and rewards have substantially been transferredor has not retained control of the assets.

As at 31 December, 2006, the securitisation operations, are presented as follows:

Issue Settlement date Currency Assets transferred Amount

Pelican Mortgages No.1 December 2002 Euros Mortgage credit 650 000 000

Pelican Mortgages No.2 September 2003 Euros Mortgage credit 700 000 000

1 350 000 000

125

The impact of loans transferred under the securitisation programmes in the Loans and advances to customers, is analysedas follows:

2006 2005Euros ‘000 Euros ‘000

Pelican Mortgages No.1 301 741 404 285

Pelican Mortgages No. 2 501 400 568 783

803 141 973 068

As at 31 December, 2006, the Notes issued by the special purpose vehicles, are analysed as follows:

Nominal BondsBonds value Reimbursement rating

Issue issued Euros Currency date (Moody’s)

Pelican Mortgages No. 1 Class A 611 000 000 Euros 2037 Aaa

Class B 16 250 000 Euros 2037 A2

Class C 22 750 000 Euros 2037 Baa2

Class D 3 250 000 Euros 2037 –

Pelican Mortgages No. 2 Class A 659 750 000 Euros 2036 Aaa

Class B 17 500 000 Euros 2036 A1

Class C 22 750 000 Euros 2036 Baa2

Class D 5 600 000 Euros 2036 –

The balance Finance leases, by the period to maturity as at 31 December 2006, is analysed as follows:

Finance leases

Up to 1 year to Over1 year 5 year 5 year Total

Euros ‘000 Euros ‘000 Euros ‘000 Euros ‘000

Outstanding rents 10 159 21 229 15 918 47 306

Outstanding interest (2 533) (4 106) (3 981) (10 620)

Residual values 121 1 392 2 156 3 669

7 747 18 515 14 093 40 355

The balance Finance leases, by the period to maturity as at 31 December 2005, is analysed as follows:

Finance leases

Up to 1 year to Over1 year 5 year 5 year Total


Outstanding rents 9 077 5 706 345 15 128

Outstanding interest (593) (565) (32) (1 190)

Residual values 622 23 91 736

9 106 5 164 404 14 674

The analysis of Overdue loans, by type of credit, is as follows:

2006 2005Euros ‘000 Euros ‘000

Asset-backed loans 235 804 262 231



Public sector 118 100

Finance leases 506 318

296 432 331 490

The analysis of Overdue loans, by type of client, is as follows:

2006 2005Euros ‘000 Euros ‘000

Corporate:

Construction 63 804 72 292

Investment 27 906 39 878

Other short term loans 21 487 28 946

Other purposes 35 506

Private:

Mortgage loans 121 973 128 558

Consumer credit 14 282 10 682

Other loans 46 827 50 528


296 432 331 490

The impairment for credit risks is analysed as follows:

2006 2005Euros ‘000 Euros ‘000

Impairment for credit risks:

Balance on 1 January 297 515 262 591



Loans charged-off (148 974) (44 765)

Balance on 31 December 216 340 297 515

126

127

The table below shows the analysis of the impairment for loans and advances to customers as at 31 December, 2006:

Classes of overdue loans

Up to 3 months to 6 months to 1 year to 3 Over3 months 6 months 12 months years 3 years TotalEuros ‘000 Euros ‘000 Euros ‘000 Euros ‘000 Euros ‘000 Euros ‘000

Secured overdue loans 32 059 5 595 18 579 109 286 115 934 281 453

Impairment 250 591 4 766 65 696 83 831 155 134

Unsecured overdue loans 3 473 1 462 2 523 3 543 3 978 14 979

Impairment 162 366 1 576 3 543 3 967 9 614

Total overdue loans 35 532 7 057 21 102 112 829 119 912 296 432

Total impairment for overdue loans 412 957 6 342 69 239 87 798 164 748

Total impairment for overdue loans and for

other credit risks 10 89 1 961 27 524 22 008 51 592

Total impairment for credit risks 419 1 029 8 202 94 774 111 916 216 340

In accordance with Caixa’s policy, interest on overdueloans for a period over 30 days not covered by asset-

backed guarantees, is only recorded as income whenreceived.

The specific provision for credit risks, by type of credit, is as follows:

2006 2005Euros ‘000 Euros ‘000




216 340 297 515

The loans charge-off is performed during the year of 2006 and is related with the provision for credit risk.

The analysis of the loans charged-off, by type of credit, is as follows:

2006 2005Euros ‘000 Euros ‘000




148 974 44 765

The recovered loans and overdue interest, performed duringthe period of 1, January and 31, December, 2006 and2005, related with asset-backed loans recovered, amounts

to Euros 1 254 000 (2005: Euros 985 000), as referred innote 12.

19. Financial assets held for trading, at fair value through profit or loss and availablefor sale


2006 2005Euros ‘000 Euros ‘000

Financial assets held for trading:

Shares 20 –

Derivatives 6 329 –

6 349 –Other financial assets at fair value through profit or loss:

Options 431 –

Bonds 3 096 –


20 380 –Financial assets available for sale:


Issued by Government and public entities 65 68

Issued by other entities 867 642 663 320

Impairment for fixed income securities (6 589) (6 856)

861 118 656 532

Overdue securities 998 998

Impairment for overdue securities (998) (998)

– –

Shares and other variable income securities 29 371 24 462

Impairment for shares (251) (520)

29 120 23 942

890 238 680 474

The balance Trading derivatives includes the valuation ofthe embedded derivatives separated from the host contractin accordance with the accounting policy presented in note1.3 in the amount of Euros 3 179 000. This note has to beanalysed with note 29.

As referred in the accounting policy presented in note 1.3,the available for sale securities are presented at marketvalue with fair value changes accounted for in fair valuereserves, as referred in note 35.

As at 31 December, 2005, in accordance with the generallyaccepted accounting principles in Portugal for the bankingsector, the available for sale securities are presented net ofprovisions for potential losses in the amount of Euros6 856 000 related with for potential losses, calculated asthe difference between acquisition cost and market value,in accordance with paragraph no. 10, 20 of Regulationno. 3/95, 30 June, of Bank of Portugal.

128

129

The analysis of financial assets held for trading, at fair value through profit or loss and available for sale, by type of finan-cial instrument, is as follows:

2006 2005

Securities Securities

At fair valuethrough profit Available Available

or loss Trading for sale Total Trading for sale TotalEuros ‘000 Euros ‘000 Euros ‘000 Euros ‘000 Euros ‘000 Euros ‘000 Euros ‘000

Interest rate and currency derivatives:

OTC market – – –

Swaps 16 853 6 221 – 23 074 – – –

Options 431 – – 431 – – –

17 284 6 221 – 23 505 – – –

Credit derivatives:

OTC market

Credit default swaps – 108 – 108 – – –

Fixed income:

Bonds issued by Portuguese Government

and public entities – – 65 65 – 68 68

Bonds issued by other entities:

Portuguese issuers – – 25 641 25 641 – 34 913 34 913

Foreign issuers 3 096 – 838 448 841 544 – 592 525 592 525

Commercial paper – – 4 551 4 551 – 36 880 36 880

3 096 – 868 705 871 801 – 664 386 664 386

Quoted 3 096 – 741 507 744 603 – 538 373 538 373

Unquoted – – 127 198 127 198 – 126 013 126 013

Variable income:

Shares in companies

Portuguese – 20 6 845 6 865 – 7 510 7 510

Foreign – – 13 046 13 046 – 4 577 4 577

Investment fund units – – 9 480 9 480 – 12 375 12 375

– 20 29 371 29 391 – 24 462 24 462

Quoted – 20 20 877 20 897 – 5 853 5 853

Unquoted – – 8 494 8 494 – 18 609 18 609

Impairment for overdue securities – – (998) (998) – (998) (998)

Impairment for securities – – (6 840) (6 840) – (7 376) (7 376)

– – (7 838) (7 838) – (8 374) (8 374)

20 380 6 349 890 238 916 967 – 680 474 680 474

The trading portfolio is stated at market value.

As referred in the accounting policy presented in note 1.3,the available for sale securities portfolio is presented net offair value reserve and impairment losses in the amount ofEuros 7 586 000 and Euros 7 838 000 (31 December,2005: Euros 8 374 000), respectively.

The balance Bonds issued by other Portuguese issuersincludes the amount of Euros 5 599 000 (2005: Euros14 117 000) related to subordinated securities.

The securities of portfolio, namely trading, securities at fair value through profit or loss and available for sale securities, bymaturity date as at 31 December, 2006, is as follows:

Due within 3 months to Over Undetermined3 months 1 year 1 year maturity TotalEuros ‘000 Euros ‘000 Euros ‘000 Euros ‘000 Euros ‘000


OTC market

Swaps 959 1 788 20 327 – 23 074

Options – – 431 – 431

959 1 788 20 758 – 23 505

Credit derivatives:

OTC market

Credit default swaps – 4 104 – 108

Fixed income:

Bonds issued by Portuguese Governmentand public entities – – 61 4 65


Portuguese issuers – 5 631 20 010 – 25 641

Foreign issuers 5 021 32 149 786 208 18 166 841 544

Commercial paper 1 621 1 932 – 998 4 551

6 642 39 712 806 279 19 168 871 801

Quoted 5 021 32 261 689 151 18 170 744 603

Unquoted 1 621 7 451 117 128 998 127 198

Variable income:

Shares in companies

Portuguese 20 – 4 662 2 183 6 865

Foreign 8 491 – – 4 555 13 046

Investment fund units – – – 9 480 9 480

8 511 – 4 662 16 218 29 391

Quoted 8 511 – – 12 386 20 897

Unquoted – – 4 662 3 832 8 494

Impairment for securities – – (6 589) (1 249) (7 838)

16 112 41 504 825 214 34 137 916 967

130

131

The analysis of the securities portfolio available for sale securities, by maturity date as at 31 December, 2005, is as fol-lows:

Due within 3 months to Over Undetermined3 months 1 year 1 year maturity TotalEuros ‘000 Euros ‘000 Euros ‘000 Euros ‘000 Euros ‘000

Fixed income:




Foreign issuers – 1 003 586 484 5 038 592 525

Commercial paper 35 882 – – 998 36 880

35 882 9 520 612 944 6 040 664 386

Quoted – 9 520 526 820 2 033 538 373

Unquoteds 35 882 – 86 124 4 007 126 013

Variable income:

Shares in companies

Portuguese 7 510 7 510

Foreign 4 577 4 577

Investment fund units 12 375 12 375

24 462 24 462

Quoted 5 853 5 853

Unquoted 18 609 18 609

Impairment for securities – (21) (6 828) (1 525) (8 374)

35 882 9 499 606 116 28 977 680 474

The analysis of the trading and at fair value through profit or loss derivatives by maturity as at 31 December, 2006, is asfollows:

2006

Notional with remaining term Fair value

Less than 3 months to More than3 months 1 year 1 year Total Positive NegativeEuros ‘000 Euros ‘000 Euros ‘000 Euros ‘000 Euros ‘000 Euros ‘000

Interest rate derivatives:

OTC market

Swaps 100 000 557 986 2 166 422 2 824 408 22 644 40 830

Options – – 53 400 53 400 431 431

100 000 557 986 2 219 822 2 877 808 23 075 41 261

Currency derivatives:

OTC market

Swaps 11 025 – – 11 025 430 424

Credit derivatives:

OTC market

Credit default swaps – 15 000 10 000 25 000 108 58

111 025 572 986 2 229 822 2 913 833 23 613 41 743

Caixa uses derivatives to hedge interest rate risks. Theaccounting method depends on the nature of the hedgedrisk, namely if Caixa is exposed to fair value changes, varia-bility in cash-flows or highly probable forecast transactions.As at 31 December, 2005, in compliance with local account-ing criteria, Caixa had a set of fixed rate debt issues for whichthere were financial derivative instruments (IRS) with the pur-pose of hedging the interest rate risk related to those issues.

From 1 January, 2006, for the hedging relationships whichcomply with the hedging requirements of IAS 39, Caixa

adopted the fair value hedge model, and holds in its deriva-tives portfolio mainly interest rate swaps, which are hedgingfair value changes of interest rate risk of Deposits from othercredit institutions and Deposits from customers.

Caixa accounted in earnings the amount of Euros 9 418 000regarding the fair value changes of the risk of interest rateassociated to the assets and liabilities described before.

132

20. Hedging derivatives


2006 2005Euros ‘000 Euros ‘000

Assets:

Interest rate swaps 14 220 –

Liabilities:

Interest rate swaps 7 199 –

The adjustment calculated to the assets and liabilities which includes hedged items is analysed as follows:

2006 2005Euros ‘000 Euros ‘000

Deposits from other credit institutions 8.004 –

Deposits from customers 1 414 –

9 418 –

The analysis of the hedging derivatives by maturity as at 31 December 2006, is as follows:

2006


Less than 3 months to More than3 months 1 year 1 year Total Positive NegativeEuros ‘000 Euros ‘000 Euros ‘000 Euros ‘000 Euros ‘000 Euros ‘000

Fair value hedge derivatives

with interest rate risk 100 000 578 986 2 155 963 2 834 949 14 220 7 199

133

21. Financial assets held to maturity


2006 2005Euros ‘000 Euros ‘000

Fixed income securities:

Bonds issued by public entities 36 044 34 903

As at 31 December, 2006, the investments held to maturity, are analysed as follows:

Issue ReimbursementIssue Date date Interest rate Euros ‘000

OT – Junho 98/2008 February, 1998 June, 2008 Fixed rate of 5.375% 6 837

OT – Setembro 98/2013 May, 1998 September, 2013 Fixed rate of 5.450% 97

OT – Julho 99/2009 January, 1999 July, 2009 Fixed rate of 3.950% 6 372

OT – Junho 02/2012 February, 2002 July, 2012 Fixed rate of 5.000% 106

OT – Maio 00/2010 January, 2000 May, 2010 Fixed rate of 5.850% 6 807

OT – Julho 04/2008 July, 2004 July, 2008 Fixed rate of 3.250% 13 500

OT – Junho 01/2011 March, 2001 June, 2011 Fixed rate of 5.150% 1 103

OT – Outubro 05/2015 July, 2005 October, 2015 Fixed rate of 3.350% 101

OT – Abril 05/2011 November, 2005 April, 2011 Fixed rate of 3.200% 1 121

36 044

The investments held to maturity are stated in accordance with the accounting policy presented in note 1.3.

22. Investments in associated companies


2006 2005Euros ‘000 Euros ‘000

Investments in associated companies and other:

Banco Montepio Geral – Cabo Verde, Sociedade Unipessoal, S.A. (IFI) 7 001 7 001

Lusitania, Companhia de Seguros, S.A. 10 816 10 816

Lusitania Vida, Companhia de Seguros, S.A. 7 169 5 202

HTA – Hotéis, Turismo e Animação dos Açores, S.A. 3 200 3 200

Norfin – Soc. Gestora de Fundos Invest. Imob., S.A. 50 50

28 236 26 269

Unquoted 28 236 26 269

Banco Montepio Geral – Cabo Verde, Sociedade Unipes-soal, S.A. (IFI) was established on 16 August, 2005 and itspurpose is the internationalisation of Caixa, namely toenable it to obtain and maintain funds and provide clientsalternatives outside the domestic market. The company’sshare capital amounts to CVE 772 000 000 being fullysubscribed and paid by Caixa.

During 2005, Caixa fully subscribed the capital of BancoMontepio Geral – Cabo Verde, Sociedade Unipessoal, S.A.(IFI) in the amount of Euros 7 001 000.

Lusitania, Companhia de Seguros, S.A. was established on6 June, 1986, and its purpose is the practice of insuranceand reinsurance for all technical areas, with the exceptionof life insurance. The company’s share capital amounts toEuros 19 250 000 and its shareholders, in addition to Caixa,are Montepio Geral – Associação Mutualista (65.71%) andLusitania Vida, Companhia de Seguros, S.A. (3.32%).

Lusitania Vida, Companhia de Seguros, S.A. was establishedon 15 May, 1987, and its purpose is the practice of allforms of life insurance and reinsurance. The company’sshare capital amounts to Euros 14 000 000 and its share-holders, besides Caixa, are Montepio Geral – AssociaçãoMutualista (39.22%) and Lusitania, Companhia de Segu-ros, S.A. (11.17%).

During the second semester of 2006, in accordance withincrement of capital of the Lusitania Vida, Companhia deSeguros, S.A., Caixa subscribed 78 684 shares in theamount of Euros 1 967 000, corresponding to 39.34% ofcompany’s share capital.

In order to carry out their operations, both companies havetheir own branches and a network of insurance brokersusing also Caixa’s branches to sell their products.

134

The main indicators of the associated companies are analysed as follows:

Assets Liabilities Income ProfitEuros ‘000 Euros ‘000 Euros ‘000 Euros ‘000

31 December, 2006

Banco Montepio Geral – Cabo Verde, Sociedade Unipessoal, S.A. (IFI) 264 480 257 246 8 055 340

Lusitania, Companhia de Seguros, S.A. (*) 285 837 252 046 113 147 2 714

Lusitania Vida, Companhia de Seguros, S.A. (*) 366 832 345 154 155 050 3 233

HTA – Hotéis, Turismo e Animação dos Açores, S.A. 59 415 45 993 9 045 105

Norfin – Soc. Gestora de Fundos

Invest. Imob., S.A. 4 118 831 3 810 1 323

31 December, 2005

Banco Montepio Geral – Cabo Verde, Sociedade Unipessoal, S.A. (IFI) 237 752 230 859 576 (108)



HTA – Hotéis, Turismo e Animação dos Açores, S.A. 66 523 53 207 7 966 (1 150)

Norfin – Soc. Gestora de Fundos Invest. Imob., S.A. 3 677 588 2 973 1 251

Notes: (*) Financial Statements prepared in accordance with IFRS.

135

23. Property and equipment


2006 2005Euros ‘000 Euros ‘000

Cost:

Land and buildings:

For own use 63 413 66 304

Leasehold improvements in rented buildings 32 452 31 841

Work in progress 82 82

Equipment:

Furniture 8 253 9 271

Office equipment 2 531 2 737



Motor vehicles 1 153 1 464

Security equipment 2 720 2 621

Works of art 422 419


Work in progress 554 1 249

167 173 163 370




(88 145) (82 968)

79 028 80 402

The Property and equipment movements, during the year, are analysed as follows:

Balance on Acquisitions/ Adjustment/ Balance on1 January Charges Disposals Transfers 31 DecemberEuros ‘000 Euros ‘000 Euros ‘000 Euros ‘000 Euros ‘000

Cost:

Land and buildings:

For own use 66 304 363 (3 254) – 63 413

Leasehold improvements in rented buildings 31 841 327 – 284 32 452

Work in progress 82 – – – 82

98 227 690 (3 254) 284 95 947

Equipment:

Furniture 9 271 437 (1 455) – 8 253

Office equipment 2 737 67 (273) – 2 531

Computer equipment 26 967 6 515 (928) – 32 554

Interior installations 20 385 1 804 (143) 962 23 008

Motor vehicles 1 464 14 (325) – 1 153

Security equipment 2 621 100 (1) – 2 720

63 445 8 937 (3 125) 962 70 219

Works of art 419 3 – – 422


Work in progress 1 249 551 – (1 246) 554

163 370 10 182 (6 379) – 167 173


Land and buildings:

For own use 12 466 1 000 (639) – 12 827

Leasehold improvements inrented buildings 20 043 2 753 – – 22 796

Equipment:

Furniture 7 395 603 (1 215) – 6 783


Computer equipment 24 075 2 128 (927) – 25 276

Interior installations 13 038 1 721 (8) – 14 751

Motor vehicles 1 360 63 (325) – 1 098


82 968 8 565 (3 388) – 88 145

136

137

24. Intangible assets


2006 2005Euros ‘000 Euros ‘000

Cost:

Set up costs and key money 33 33

Software 29 596 19 618

Assets advance 72 24

29 701 19 675Accumulated depreciation:



(18 443) (14 124)

11 258 5 551

The Intangible assets movements, during the year 2006, are analysed as follows:

Balance on Acquisitions/ Balance on1 January Charges 31 DecemberEuros ‘000 Euros ‘000 Euros ‘000

Cost:

Set up costs and key money 33 – 33

Software 19 618 9 978 29 596

Assets advances 24 48 72

19 675 10 026 29 701


Software 14 124 4 319 18 443

25. Other assets


2006 2005Euros ‘000 Euros ‘000

Investments arising from recovered loans 103 964 112 948

Recoverable government subsidies on mortgage loans 23 879 21 222

Other debtors 7 549 5 223

Other accrued income 2 964 2 623

Prepayments and deferred costs 69 581 209 322

Sundry debtors 12 428 39 346

220 365 390 684

Impairment for investments arising from recovered loans (13 326) (13 382)

207 039 377 302

The balance Investments arising from recovered loansincludes the buildings recovered related with overdue loansin the amount of Euros 96 461 000 (2005: Euros104 016 000). The referred buildings are recognised inaccordance with the accounting policy described in note1.13.

The balance Recoverable government subsidies on mort-gage loans, in the amount of Euros 23 879 000 (2005:Euros 21 222 000), corresponds to mortgage credit interestsubsidies, in accordance with the regulations applicable tomortgage loans benefits. The referred amounts do notbear interest and are claimed monthly.

138

As at 31 December, 2006 and 2005 the balance Recoverable government subsidies on mortgage loans is analysed as fol-lows:

2006 2005Euros ‘000 Euros ‘000

Recoverable government subsidies on mortgage loans 4 607 4 526

Subsidies unclaimed 10 511 10 479

Overdue subsidies unclaimed 8 761 6 217

23 879 21 222

As at 31 December, 2006 and 2005, the balance Recove-rable government subsidies on mortgage loans includes anamount of Euros 3 473 000 not-recognised by the treasuryauthorities. This amount is totally provided for in the ba-lance Provisions, as referred in note 30.

As at 31 December, 2006, the balance Prepayments anddeferred costs includes an amount of Euros 67 423 000

referring to the impacts of the application of IAS 19requirements not yet deferred, related to actuarial gainsand losses of pension fund at 1 January, 2005. Thisamount will be charge for five or seven years perioddepending on whether it relates to obligations with healthor employees benefits, respectively, as referred in theaccounting policy described in note 1.16.

The impairment for investments arising from recovered loans is analysed as follows:

2006 2005Euros ‘000 Euros ‘000


Impairment for the year 1 802 8 624


Amounts charged off (1 084) (1 531)


139

26. Deposits from other credit institutions


2006 2005

Non interest Interest Non interest Interestbearing bearing Total bearing bearing Total

Euros ‘000 Euros ‘000 Euros ‘000 Euros ‘000 Euros ‘000 Euros ‘000

Credit institutions in Portugal – 59 808 59 808 – 148 380 148 380

Credit institutions abroad 17 515 1 042 533 1 060 048 10 751 778 422 789 173

17 515 1 102 341 1 119 856 10 751 926 802 937 553

The balance Deposits from other credit institutions, analysed by the period to maturity, is as follows:

2006 2005Euros ‘000 Euros ‘000

Up to 3 months 421 965 269 791


6 months to 1 year 78 708 4 147

1 year to 5 years 477 641 463 828

More than 5 years 58 584 58 333

1 117 704 937 553

Adjustments arising from hedging operations 2 152 –

1 119 856 937 553

27. Deposits from customers


2006 2005



Deposits repayable on demand 1 883 462 – 1 883 462 2 241 726 – 2 241 726

Time deposits (*) – 4 663 430 4 663 430 – 3 552 927 3 552 927

Saving accounts (*) – 1 502 838 1 502 838 – 1 752 918 1 752 918

Other items 3 141 – 3 141 2 498 – 2 498

Adjustments arising from hedging operations (4 501) – (4 501) – – –

1 882 102 6 166 268 8 048 370 2 244 224 5 305 845 7 550 069

Observations: (*) Deposits for which the embedded derivative was separate from the host contract, in accordance with note 20 and accounting policy in note 1.4.

In accordance with Regulation no. 180/94, of 15 Decem-ber, the Deposit Guarantee Fund was established to gua-rantee the reimbursement of funds deposited in Credit

Institutions. The calculations of the annual contributionsfor this Fund are based on the criteria laid out in Regulationno. 11/94, of the Bank of Portugal.

The balance Deposits from customers, analysed by the period to maturity, is as follows:

2006 2005Euros ‘000 Euros ‘000

Deposits repayable on demand 1 883 462 2 241 726

Time deposits and saving accounts:

Up to 3 months 3 669 657 3 157 604

3 months to 6 months 940 173 808 984

6 months to 1 year 715 470 615 635

1 year to 5 years 785 720 676 083


6 166 268 5 305 845

Adjustments arising from hedging operations (4 501) –

6 161 767 5 305 845

Other items:

Up to 3 months 3 141 2 498

8 048 370 7 550 069

28. Debt securities issued

The balance Debt securities issued is related with Bonds issued. This balance, analysed by the period to maturity, is as fol-lows:

2006 2005Euros ‘000 Euros ‘000

Up to 6 months 401 658 558 209

6 months to 1 year 129 098 200 806

1 year to 5 years 3 355 816 2 518 178

More than 5 years 799 185 803 229

4 685 757 4 080 422

Adjustments arising from hedging operations (14 914) –

4 670 843 4 080 422

140

141

As at 31 December, 2006, the characteristics of bonds issued are analysed as follows:

Issue Reimbursement Interest 2006Issue date date Rate Euros ‘000

Bonds issued:Obr. CEMG / 02 – 1.ª Emissão Jan. 2002 Jan. 2012 Euribor 6 months + 1% 50 000Obr. CEMG / 03 Mar. 2003 Mar. 2008 Fixed rate of 3.8% 100 000Obr. CEMG / 03 Aug. 2003 Aug. 2009 Fixed rate of 3.548% 100 000Obr. CEMG / 03 Nov. 2003 Nov. 2008 Pribor 6 months + 0.18% 18 192Obr. CEMG / 03 Nov. 2003 Nov. 2008 Euribor 3 months + 0.30% 200 000Obr. CEMG / 03 Jan. 2004 Nov. 2008 Euribor 3 months + 0.30% 100 000Obr. CEMG / 04 Feb. 2004 Aug. 2007 Fixed rate of 3.25% 120 000Obr. CEMG / 04 Mar. 2004 Mar. 2007 Euribor 3 months + 0.20% 400 000Obr. CEMG / 04 Mar. 2004 Mar. 2009 Hibor 3 months + 0.26% 9 765Obr. CEMG / 04 Sep. 2004 Sep. 2014 Euribor 3 months + 0.25% 15 000Obr. CEMG / 04 Sep. 2004 Sep. 2014 Euribor 3 months + 0.31% 50 000Obr. CEMG / 04 Sep. 2004 Sep. 2014 Euribor 3 months + 0.31% 50 000Obr. CEMG / 04 Sep. 2004 Sep. 2009 Fixed rate of 4.6% 18 192Obr. CEMG / 04 Nov. 2004 Nov. 2009 Euribor 3 months + 0.25% 300 000Obr. CEMG / 04 Feb. 2005 Nov. 2009 Euribor 3 months + 0.25% 300 000Obr. CEMG / 05 Feb. 2005 Feb. 2015 Fixed rate of 3.628% 125 000Obr. CEMG / 05 Mar. 2005 Mar. 2015 Euribor 3 months + 0.25% 5 000Obr. CEMG / 05 May 2005 May 2012 Euribor 3 months + 0.25% 500 000Obr. caixa MG Aforro – 1.ª Emissão Aug. 2005 Aug. 2009 Fixed rate of 2% 19 000Obr. CEMG / 05 Sep. 2005 Sep. 2010 Euribor 3 months + 0.20% 500 000Obr. CEMG / 05 Oct. 2005 Sep. 2010 Euribor 3 months + 0.20% 125 000Obr. caixa MG Aforro – 2.ª Emissão Oct. 2005 Oct. 2009 Fixed rate of 2% 62 000Obr. caixa MG Cabaz TOP – 1.ª Emissão Oct. 2005 Oct. 2007 Fixed rate of 2% 8 500Obr. caixa MG Aforro – 3.ª Emissão Nov. 2005 Nov. 2009 Fixed rate of 2% 14 000Obr. caixa MG Especial Poupança Nov. 2005 Nov. 2010 Fixed rate of 2% 23 000Obr. caixa MG Aforro – 4.ª Emissão Dec. 2005 Dec. 2009 Fixed rate of 2% 52 000Obr. caixa MG Business Invest Dec. 2005 Dec. 2008 Fixed rate of 2.5% 26 500Obr. caixa MG Aforro Especial Dec. 2005 Dec. 2008 Fixed rate of 2.5% 30 000Obr. CEMG / 06 Jan. 2006 Jan. 2011 Euribor 3 months + 0.20% 500 000Obr. caixa MG Valor Garantido 2006 Jan. 2006 Jan. 2011 Fixed rate of 2.65% 10 000Obr. caixa MG Aforro/06 – 1.ª Emissão Feb. 2006 Feb. 2009 Fixed rate of 2.5% 40 000Obr. caixa MG Aforro/06 – 2ª. Emissão Feb. 2006 Feb. 2009 Fixed rate of 2.325% 17 000Obr. caixa MG Aforro Especial Fev.06 Feb. 2006 Feb. 2009 Fixed rate of 2.525% 9 000Obr. caixa MG Aforro/06 – 3.ª Emissão Mar. 2006 Mar. 2009 Fixed rate of 2.5% 17 000Obr. caixa MG Aforro/06 – 4.ª Emissão Mar. 2006 Mar. 2009 Fixed rate of 2.625% 23 000Obr. caixa MG Business Invest 2006 Mar. 2006 Mar. 2008 Fixed rate of 2.50% 17 000Obr. caixa MG Aforro/06 – 5.ª Emissão Apr. 2006 Apr. 2009 Fixed rate of 2.50% 20 000Obr. caixa MG Aforro/06 – 6.ª Emissão May 2006 May 2009 Fixed rate of 2.625% 20 000Obr. caixa MG Valor Imobiliário May 2006 May 2009 Fixed rate of 1% 2 000Obr. caixa MG Commodities May 2006 May 2009 Fixed rate of 3.75% 4 700Obr. caixa MG Aforro/06 – 7.ª Emissão Jun. 2006 Jun. 2009 Fixed rate of 2.875% 25 000Obr. caixa MG Aforro/06 – 8.ª Emissão Jul. 2006 Jul. 2009 Fixed rate of 2.75% 18 000Obr. caixa MG Aforro Especial Jul.06 Jul. 2006 Jul. 2009 Fixed rate of 3% 13 000Obr. caixa MG Aforro/06 – 9.ª Emissão Aug. 2006 Aug. 2009 Fixed rate of 2.875 % 23 000Obr. caixa MG Aforro/06 5 anos – 1.ª Emissão Aug. 2006 Aug. 2011 Fixed rate of 3% 7 000Obr. caixa MG Aforro/06 – 10.ª Emissão Aug. 2006 Aug. 2009 Fixed rate of 3% 15 000Obr. caixa MG Aforro/06 5 anos – 2.ª Emissão Aug. 2006 Aug. 2011 Fixed rate of 3% 4 000Obr. CEMG / 06 Sep. 2006 Sep. 2011 Euribor 3 months + 0.25% 500 000Obr. caixa MG Aforro/06 – 11.ª Emissão Sep. 2006 Sep. 2009 Fixed rate of 3% 15 000Obr. caixa MG Aforro/06 5 anos – 3.ª Emissão Sep. 2006 Sep. 2011 Fixed rate of 3% 3 500Obr. caixa MG Aforro/06 – 12.ª Emissão Nov. 2006 Nov. 2009 Fixed rate of 3% 17 000Obr. caixa MG Aforro/06 5 anos – 4.ª Emissão Nov. 2006 Nov. 2011 Fixed rate of 3% 3 750Obr. caixa MG Aforro/06 5 anos – 5.ª Emissão Dec. 2006 Dec. 2011 Fixed rate of 3.125% 1 000Obr. caixa MG Aforro/06 – 13.ª Emissão Dec. 2006 Dec. 2009 Fixed rate of 3.125% 6 000Obr. caixa MG Ass./06 5 anos – 1.ª Emissão Dec. 2006 Dec. 2011 Fixed rate of 3.25% 1 000Obr. caixa MG Ass./06 3 anos – 1.ª Emissão Dec. 2006 Dec. 2009 Fixed rate of 3.25% 7 000Obr. caixa MG Energ. Renováveis Dez 2006/08 Dec. 2006 Dec. 2008 Fixed rate of 1.75% 5 000Obr. caixa Cabaz Bric Dec. 2006 Dec. 2008 Fixed rate of 7% 9 000

4 674 099Adjustments arising from hedging operations (14 914)Accruals, deferred costs and incomes 11 658

4 670 843

As at 31 December, 2006, the bonds issued bear postponedand anticipated interest at an effective interest rate rangingbetween 1% and 7%.

The CEMG/02 1ª Emissão cash bonds present a 6% cap.

The MG Cabaz Top 1ª Emissão bonds present a 2% floor.

142The reimbursements of bonds in 2006, are analysed as follows:

ReimbursementIssue Reimbursement Interest amount

Issue date date Rate Euros ‘000

Bonds issued:

Obr. CEMG / 01 – 1.ª Emissão Mar.2001 Jun.2006 Euribor 3 months + 0.35% 250 000

Obr. CEMG / 01 – 1.ª Emissão Jun.2001 Jun.2006 Fixed rate of 5.25% 300 000

Obr. CEMG / 04 – 1.ª Emissão Jul.2004 Jul.2006 Euribor 3months + 0.125% 200 000

750 000

The Debt securities issued with reimbursement date during the 2007 amount to Euros 528 500 000.

29. Financial liabilities held for trading and other financial liabilities at fair value throughprofit or loss


2006 2005Euros ‘000 Euros ‘000

Financial liabilities held for trading:

Currency derivatives 424 –

Interest rate derivatives 6 971 –

Credit default swaps 58 –

Options 431 –

7 884 –

Other financial liabilities at fair value through profit or loss:


41 743 –

The balance Financial liabilities held for trading includes,the embedded derivatives valuation separated from thehost contract in accordance with the accounting policy pre-

sented in note 1.3, in the amount of Euros 3 179 000. Thisnote should be analysed together with note 19.

143

30. Provisions


2006 2005Euros ‘000 Euros ‘000

Provisions for general banking risks 87 794 79 522

Provisions for liabilities and charges 4 978 5 153

92 772 84 675

The provisions for general banking risks are analysed as follows:

2006 2005Euros ‘000 Euros ‘000





The provisions for general banking risks was charged inaccordance with Regulations no. 3/95, of 30 June, no. 2/99,of 15 January and no. 8/03, of 30 January of the Bank of

Portugal, as referred in the accounting policy as describedin note 1.2.

The provisions for liabilities and charges are analysed as follows:

2006 2005Euros ‘000 Euros ‘000




Amounts charged-off – 90)

Transfers – (551)


The provisions were accounted in accordance with the probability of occurrence of certain contingencies related withCaixa’s activity.

31. Subordinated debt


2006 2005Euros ‘000 Euros ‘000

Cash bonds – 9 982Bonds with fixed maturity date 200 347 149 770

Perpetual bonds 100 882 150 897

301 229 310 649

As at 31 December, 2006, the subordinated debt issues, are analysed as follows:

Issue Maturity Interest Number of 2006Issue date date rate bonds Euros ’000

Bonds with fixed maturity date:

CEMG/03 1.ª emissão Feb. 2003 Feb. 2013 Euribor 3 months + 1.3% 10 000 100 028

CEMG/03 2.ª emissão May 2003 Feb. 2013 Euribor 3 months + 1.3% 5 000 50 014

CEMG/06 Apr. 2006 Apr. 2016 Euribor 3 months + 0.45% 50 000 50 305

200 347Perpetual bonds:

CEMG/01 Jul. 2001 Undetermined Euribor 3 months + 1.1% 2 000 000 100 882

301 229

144

At the end of the seventh year of the CEMG/01 perpetualbonds and subsequently at each interest payment date,Caixa can reimburse the bonds in full at par, after authori-sation of the Bank of Portugal. If the bonds are not reim-bursed during that period the interest rate spread will beincreased to 210 basis points. This issue is listed atEuronext Lisbon Official Stock Exchange Market.

The CEMG/03 subordinated bonds have an anticipatedreimbursement option in 2008.

As at 31 December, 2006, the effective interest rate rangeof the subordinated debt bears postponed interest everythree and six months is set between 3.949% and 4.925%.

The reimbursements of subordinated debt in 2007 are analysed as follows:

Issue Maturity Interest Number of ReimbursementIssue date date rate bonds Amount

CEMG/99 May 1999 Undetermined Euribor 3 months + 1.1% 1 000 000 50 000

CEMG/96 Dec. 1996 Dec. 2006 Euribor 6 months + 0.20% 4 987 978 972 9 976

59 976

The analysis of the subordinated debt, by the period to maturity, is as follows:

2006 2005Euros ‘000 Euros ‘000

Up to 1 year – 9 982

More than 5 year 301 229 300 667

301 229 310 649

145

32. Other liabilities


2006 2005Euros ‘000 Euros ‘000

Creditors:

Suppliers 9.344 5.046

Other creditors 12.126 30.945

Public sector 8.065 7.550

Holiday pay and subsidies 26.121 19.949

Other administrative costs payable – 340

Deferred income 579 548

Stock exchange transactions pending settlement 1.502 6.508

Other sundry liabilities 60.964 225.968

118.701 296.854

As at 31 December 2006, the balances related with the obligations related with pensions, included in Other sundry liabi-lities are analysed as follows:

2006Euros ‘000

Projected benefit obligations 506 395

Fair value of Plan Assets (374 401)

131 994Actuarial losses

Corridor 92 045

Amount in excess of the corridor 21 621

113 666

18 328

As at 31 December, 2005, the balance Other sundry liabili-ties includes the amount of Euros 140,415,000 and Euros39 860 000 related with liabilities exempt from financing

and the additional contribution to the Pensions Fund madeby Caixa during 2006 with value date of 2005, respective-ly.

33. Share capital

On 6 June, 2006, following the General Assembly delibera-tion, Caixa increased the share capital in the amount ofEuros 100 000 000, by cash transfer.

After the referred operation, the share capital of Caixa,amounts to Euros 585 000 000, totally subscribed by Mon-tepio Geral – Associação Mutualista, and is fully paid.

35. Fair value reserves, other reserves and retained earnings


2006 2005Euros ‘000 Euros ‘000

Fair value reserves 7 586 –

Reserves and retained earnings

General reserve 131 198 122 136

Special reserve 54 572 52 306

Other reserves 8 404 8 404

Retained earnings (24 739) (22 387)

169 435 160 459

The general and special reserves movements are analysed in note 34.

The Fair value reserves correspond to the accumulated fair value changes of the financial instruments available for sale, inaccordance with the accounting policy described in note 1.3. The gross movements during 2006 are analysed as follows:

Balance on Balance on1 January Reavaluation Acquisitions Disposals 31 DecemberEuros ‘000 Euros ‘000 Euros ‘000 Euros ‘000 Euros ‘000

Fixed income:


Portuguese issuers – (18) – 22 4

Foreign issuers – 107 (54) 131 184

– 89 (54) 153 188

Variable income:

Shares in foreign companies – 8 311 – 2 8 313

Investment fund units – (865) 12 (62) (915)

– 7 446 12 (60) 7 398

– 7 535 (42) 93 7 586

146

34. General and special reserves

The general and special reserves are charged under thescope of Decree-Law no. 136/79, of 18 May. The generalreserve is charged to cover any risk and extraordinary lossesor depreciation.

Under the Portuguese regulations, the general reserveshould be charged, at least, in a minimum of 20% of theprofit for the year. The limit of general reserve is 25% oftotal deposits. This reserve is not available for distribution

and it can be used to improve future income performancesor to increase capital.

The special reserve is charged to cover losses from currentoperations. Under the Portuguese regulations, the specialreserve should be charged, at least, in a minimum of 5%of the profit for the year. This reserve is not available fordistribution and it can be used to improve income perform-ances or to increase capital.

As at 31 December, 2006, the balance Retained earningsincludes the amount of Euros 18 853 000 related with the

IAS 19 transition adjustments amortisation, as referred inthe accounting policy described in note 1.16.

147


Obligations and future commitments are analysed as follows:

2006 2005Euros ‘000 Euros ‘000

Guarantees granted 300 343 281 027

Guarantees received 30 171 246 31 376 921

Commitments to third parties 1 452 059 1 328 288


Securitised loans 803 141 973 068

Securities and other items held for safekeeping on behalf of customers 5 595 430 4 556 235

The amounts of Guarantees granted and Commitments to third parties are analysed as follows:

2006 2005Euros ‘000 Euros ‘000

Guarantees granted:

Guarantees 294 087 278 580

Open documentary credits 6 256 2 447

300 343 281 027

2006 2005Euros ‘000 Euros ‘000

Commitments to third parties:

Irrevocable commitments

Term deposits contracts 4 662 5 327

Irrevocable credit lines 204 611 191 904

Annual contribution to the Guarantee Deposits Fund 19 142 18 859

Potential obligation with the Investors’ Indemnity System 2 200 1 896

Revocable commitments

Revocable credit lines 1 221 444 1 110 302

1 452 059 1 328 288

As at 31 December, 2006 and 31 December, 2005, thebalance Annual contribution to the obligations ofGuarantee Deposits Fund is related with the irrevocablecommitment assumed by Caixa and required by law, todeliver the unrealised amounts of annual contributionsrequired by the Fund.

The balance Potential obligation with the Investors’Indemnity System, as at 31 December, 2006 and 31 De-cember, 2005, is related with the irrevocable commitment

assumed by Caixa and required by law, to deliver to thatSystem the necessary amounts for Caixa’s obligation withthe investors’ indemnities to be paid.

The financial instruments recorded in off-balance sheetaccounts (obligations and future commitments), are alsosubject to the same control and approval proceduresrequired for the credit portfolio. The Board of Directorsdoes not anticipate any material losses as a result of thesetransactions.

37. Distribution of profit

On 30 March, 2006, following the General Assembly deli-beration, Caixa distributed to Montepio Geral – Associação

Mutualista in the amount of Euros 11 597 000 (2005:Euros 24 782 000).

38. Transition adjustments to NCA’s

For all periods up to and including the year ended 31December, 2005, Caixa prepared its financial statements inaccordance with the generally accepted accounting princi-ples in Portugal for the banking sector («Local GAAP»). Inaccordance with Regulation (EC) no. 1606/2002 of theEuropean Parliament and the Council, of 19 July 2002, andits adoption into Portuguese Law through Decree-Lawno. 35/2005, of 17 February and Regulation no. 1/2005 ofthe Bank of Portugal, Caixa’s financial statements from 1January, 2006 forward, are required to be prepared in accor-dance with Adjusted Accounting Standards established bythe Bank of Portugal, which are supported in the applicationof International Financial Reporting Standards («IFRS») asendorsed by the European Union, with the exception of theissues referred in no. 2 and 3 of the Regulation no. 1/2005and no. 2 of the Regulation no. 4/2005 of the Bank ofPortugal («NCA’s»).

NCA’s are composed by all the standards included in theInternational accounting Standards Board («IASB»), as well

as interpretations issued by the International FinancialReporting Interpretations Committee («IFRIC») and theirpredecessor bodies with the exception of the issuesreferred in no. 2 and 3 of the Regulation no. 1/2005 andno. 2 of the Regulation no. 4/2005 of Bank of Portugal:i) maintenance of the actual requirements related withmeasurement and provision of credit granted, ii) employeebenefits through the definition of a deferral period to thetransition impact to IAS 19 and iii) restriction to the appli-cation of some issues established in IAS/IFRS.

The accounting policies described in note 1.1 to 1.20 wereused in the preparation of the financial statements for theyear ended 31 December, 2006, in the preparation of thecomparative financial information for the year ended 31December, 2005, as well in the preparation of the openingbalance sheet in accordance with NCA’s as at 1 January,2006 (transition date).

148

The major differences between Local GAAP and NCA’s, with impact in Caixa’s financial statements as at 1 January, 2006and the reconciliation of equity as at that date are presented as follows:

1 January, 2006

EquityEuros ‘000

Local GAAP Note 690 771

Adjustments to NCA’s

Valuation of investments in financial assets (a) 576

Effective interest rate (b) (15 789)

Hedging accounting and embedded derivatives (c) 1 602

Financial assets and liabilities through profit or loss (d) 7 725

Total of transition adjustments (5 886)

In accordance with NCA’s 684 885

The major adjustments are analysed as follows:

a) Valuation of investments in financial assets

Under Local GAAP, the fixed income and variable income securities are recorded at nominal value and cost, respec-tively and the potential losses resulting from the difference between the carrying amount and market value are fullyprovided against income statement.

In accordance with NCA’s, and as referred in the accounting policy presented in note 1.3, the securities which are heldas available for sale are carried at fair value, and the difference between the acquisition cost and the market value isaccounted for against fair value reserves. These financial assets are periodically subject to impairment tests.

b) Application of effective interest rate

Fee and commission income was previously accounted for, in accordance with Local GAAP, in the period when theservice was charged to the customers, except when charged to cover the costs of a continuing service over a period.In these cases, income was recognised on an appropriate basis over the relevant period.

Under NCA’s, the main change in accounting relates to loan fee income and incremental income and costs that aredirectly attributable to loan origination, which are amortised against the income statement over the expected life ofthe loan as part of the effective interest rate calculation.

149

c) Hedge accounting and embedded derivatives

In accordance with Local GAAP, the hedging derivatives transactions are registered in Obligations and future commit-ments (Off-balance sheet) for the notional amount of the contracts, until the maturity of the contracts. The hedgingcontracts were not revaluated and the interest receivable and payable was accrued over the period of the contracts.

The adoption of IAS 39 had a significant impact in the procedures and systems of Caixa, as a result of the followingaspects: i) classification of the operations under the scope of the rules applicable to each operation ii) complexity incomplying with the criteria related to hedging; iii) rigorous valuation requirements; and iv) requirements underlyinghedge accounting and embedded derivatives.

On this basis, Caixa identified the operations which had been considered for hedging purposes in accordance withLocal GAAP and simultaneously identified the hedging models to be adopted under IAS 39. Thus, considering the cur-rent policy of hedging of risks defined by Caixa and with the purpose of minimizing the volatility of results, fair valuehedge accounting model was adopted for financial assets and liabilities that generate fixed income and for whichCaixa intends to reduce the exposure to fair value hedge variations. When a derivative financial instrument hedges theexposure to changes in the fair value of an asset or liability, the hedged item is stated at fair value in respect of therisk being hedged. Gains or losses on remeasurement of both the hedging instrument and the hedged item are recog-nised in the income statement.

Embedded derivatives are accounted for separately as derivatives if the economic characteristics and risks of theembedded derivative are not closely related to the host contract with changes in fair value recognised directly in theincome statement. Embedded derivatives are classified as trading and accounted for at fair value with changesthrough profit or loss.

d) Financial assets and liabilities through profit or loss

In accordance with IAS 39 revised at June, 2005, Caixa registered financial assets and liabilities at fair value throughprofit or loss recognised before as fair value accounting hedge items and financial liabilities with embedded deriva-tives.

The classification of these items was changed in accordance with paragraph 105B of revised version of IAS 39 at June,2005 and designated at fair value through profit and loss.

As at 1 January, 2006, the transition adjustment includes the adjustment of fair value of financial liabilities throughprofit and loss, as well as the adjustment of derivatives fair value contracted by Caixa in the associate market.

Fair value of financial assets and liabilities through profit and loss are initially recognised at fair value, with transactioncosts and profits recognised through profit and loss, and subsequently recognised at fair value. Subsequent costs andprofits resulting from changes in fair value, interest accrual and dividends receipts are recognised in balance Net gainsarising from trading and hedging activities of income statement.

Fair value is based on market prices, whenever these areavailable. If market prices are not available, as it happensregarding many products sold to clients, fair value is esti-mated through internal models based on cash-flow dis-counting techniques.

Cash-flows for the different instruments sold are calculatedaccording with its financial characteristics and the discountrates used include both the interest rate curve and the cur-rent conditions of the pricing policy in the Caixa.

Therefore, the fair value obtained is influenced by theparameters used in the evaluation model that, necessarilyhave some degree of judgement and reflect exclusively thevalue attributed to different financial instruments. Howeverit does not consider prospective factors, like the futurebusiness evolution.

Under these conditions, the values presented cannot beunderstood as an estimate of the economic value of theCaixa.

39. Fair Value

The main methods and assumptions used in estimating the fair value for the assets and liabilities of the Caixa are presentedas follows:

Cash and deposits at central banks, Loans and advances to credit institutions repayable on demand

Considering the short maturity of these financial instruments, the amount in the balance sheet is a reasonable esti-mate of its fair value.

Other loans and advances to credit institutions

The fair value of these financial instruments is calculated discounting the expected principal and interest future cashflows for these instruments, considering that the payments of the installments occur in the contractually defined dates.The discount rate used reflects the current conditions applied by the Caixa in identical instruments for each of thedifferent maturities.

Financial assets held for trading, Financial liabilities held for trading and Financial assets available for sale

These financial instruments are accounted at fair value, which is based in market prices, whenever these are available.If market prices are not available, fair value is estimated through internal models based on cash-flow discounting tech-niques.

In the case of unquoted shares, these are recognised at historical cost when no market prices are available and it isnot possible to determine reliably its fair value.

Hedging derivatives

Hedging derivatives are accounted for at fair value.

Loans and advances to customers with defined maturity date

The fair value of these instruments is calculated discounting the expected principal and interest future cash flows forthese instruments, considering that the payments of the installments occur in the contractually defined dates. The dis-count rate used reflects the current conditions applied by the Caixa in similar instruments for each of the homoge-neous classes of this type of instrument and with similar maturity. This calculation considers credit risk spreads.

Loans and advances to customers without defined maturity date

Considering the short maturity of these financial instruments, the conditions of the existing portfolio are similar to cur-rent conditions used by the Caixa. Therefore the amount in the balance sheet is a reasonable estimate of its fair value.

Deposits from customers

The fair value of these financial instruments is calculated by discounting the expected principal and interest future cashflows, considering that payments occur in the contractually defined dates. The discount rate used reflects the currentconditions applied by the Caixa in identical instruments with a similar maturity.

Debt securities issued and Subordinated debt

For these financial instruments, fair value was calculated for the components that are not yet reflected in the balancesheet of the Caixa. For the fixed interest rate instruments for which Caixa applies an hedge-accounting policy, the fairvalue regarding the interest rate risk is already accounted for.

In fair value calculation the other risk components were also considered, apart from the interest rate risk. Fair value isbased on market prices, whenever these are available. If market prices are not available, fair value is estimated throughinternal models based on cash-flow discounting techniques.

150

151

The next table shows the main adjustments to the financial assets and liabilities of the Caixa that do not represent its fairvalue:

2006

Held for Available for Amortisedtrading sale cost Others Book value Fair value


Financial assets:

Cash and deposits at central banks – – – 242 772 242 772 242 772

Loans and advances to credit institutionsrepayable on demand – – – 75 321 75 321 75 321

Other loans and advances to credit institutions – – 670 440 – 670 440 670 458

Loans and advances to customers – – 12 941 563 – 12 941 563 13 694 466

Financial assets held for trading 6 349 – – – 6 349 6 349

Other financial assets at fair value throughprofit or loss 20 380 – – – 20 380 20 380

Financial assets available for sale – 890 238 – – 890 238 890 238

Hedging derivatives 14 220 – – – 14 220 14 220

Financial assets held to maturity – – 36 044 – 36 044 36 044

Investments in associated companies – – – 28 236 28 236 28 236

40 949 890 238 13 648 047 346 329 14 925 563 15 678 484

Financial liabilities:

Deposits from other credit institutions – – 1 119 856 – 1 119 856 1 119 856

Deposits from customers – – 8 048 370 – 8 048 370 8 053 479

Debt securities issued – – 4 670 843 – 4 670 843 4 670 843

Financial liabilities held for trading and otherfinancial assets at fair value throughprofit and loss 41 743 – – – 41 743 41 743


Subordinated debt – – 301 229 – 301 229 301 229

48 942 – 14 140 298 – 14 189 240 14 194 349

2005

Held for Available for Amortisedtrading sale cost Others Book value Fair value


Financial assets:

Cash and deposits at central bank – – – 207 707 207 707 207 707


Financial assets available for sale – – 910 571 – 910 571 910 740




IInvestments in associated companies – – – 26 269 26 269 26 269

– 680 474 12 478 892 328 372 13 487 738 13 733 371


Deposits from other credit institutions – – 937 553 – 937 553 937 553




– – 12 878 693 – 12 878 693 12 898 292

40. Pensions

152

Caixa assumed the responsibility to pay to their employees,pensions on retirement or disabilities. These responsibilitiesalso comply with the terms of the «Acordo Colectivo deTrabalho do Sector Bancário» (ACTV). To cover its respon-

sibilities, Caixa makes annual contributions to the pensionfund, managed by Futuro – Sociedade Gestora de Fundosde Pensões, S.A.

As at 31 December, 2006 and 2005, the number of participants covered by this pension plan is analysed as follows:

2006 2005

Number of participants

Pensioners 499 451

Employees 2 932 2 938

3 431 3 389

In accordance with the accounting policy, described in note 1.16, the pension obligation and the respective funding as at31 December, 2006 and 2005 based on an actuarial valuation made using the projected unit credit method are analysedas follows:

2006 2005Euros ‘000 Euros ‘000

Projected benefit obligations

Pensioners 139 497 115 393

Employees 366 898 352 743

506 395 468 136

Value of the fund (374 401) (327 721)

Unfunded liabilities 131 994 140 415

Liabilities exempt from financing (131 994) (140 415)

– –

Liabilities from future services 405 742 355 026

As at 31 December, 2006 there are no buildings in use or securities issued by Caixa recorded in the Pension Fund’sFinancial Statements.

The change in the present value of obligations during 2006 and 2005 is analysed as follows:

2006 2005Euros ‘000 Euros ‘000


Adjustments resulting of Regulation no. 6/05 and no. 12/05 (see note 1.16) – 72 599


Service cost 18 797 14 206

Interest cost 20 689 18 639

Expected return on plan assets (15 508) (12 675)

Actuarial gains and losses

Current 3 683 (6 829)

Arising from changes in actuarial assumptions

Changes in assumptions – 15 437

Changes in discount rates – 38 107

Changes in mortality tables – 43 585

Contributions to the Fund (36 195) (62 198)

Others 113 (811)


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The change in the fair value of assets of the Fund during 2006 is analysed as follows:

2006 2005Euros ‘000 Euros ‘000


Expected return on plan assets 15 508 12 675

Actuarial gains 4 187 1 124

Contributions to the Fund 36 195 61 074

Payments (9 097) (8 074)

Employees contributions – 1 124

Others (113) –


The contributions to the Fund include the additional contri-bution in the amount of Euros 8 000 000 made by Caixa

during January, 2007 with value date of 2006. The pensionfund contributions in 2006 were fully paid in cash.

The securities issued by companies of Caixa accounted on the portfolio of the Fund are analysed as follows:

2006 2005Euros ‘000 Euros ‘000

Variable income securities 5 800 3 485

In accordance with IAS 19, deferred actuarial losses, including the corridor, as at 31 December, 2006 are analysed as fol-lows:

Actuarial losses

Amount inexcess of the

Corridor corridorEuros ‘000 Euros ‘000


Actuarial gains and losses:

Current – 3 683

Changes in the corridor 4 353 (4 353)

Actuarial losses depreciation – (875)

Other changes – (2.348)


As at 31 December 2006, considering the value of theactuarial gains and losses registered in the calculation ofthe benefit obligations and in the value of the Fund, thevalue of the corridor calculated in accordance with para-graph 92 of IAS 19, amounted to Euros 92 045 000 (2005:Euros 87 692 000).

As at 31 December 2006, the net actuarial gains and lossesin excess of the value of the corridor amounted to Euros21 621 000 (2005: Euros 25 514 000) and will be recordedin results over a 25 year period considering the balance atthe beginning of the year, as referred in the accountingpolicy presented in note 1.16.

In 2006, Caixa accounted as pension costs the amount of Euros 24 853 000 (2005: Euros 20 170 000). The analysis ofthe cost of the year is as follows:

2006 2005Euros ‘000 Euros ‘000




Actuarial losses depreciation 875 –

Cost of the year 24 853 20 170

Considering the market indicators, particularly the estimations of the inflation and the long term interest rate for EuroZone as well as the demographic characteristics of the participants, Caixa changed the actuarial assumptions used for thecalculation of the liabilities for the pension obligations with reference to 31 December, 2005. The comparative analysis ofthe actuarial assumptions is shown as follows:

2006 2005

Increase in future compensation levels 3,00% 3,00%

Pensions increase rate 2,00% 2,00%

Projected rate of return of fund assets 4,75% 4,75%

Discount rate 4,75% 4,75%

Mortality tables TV 88/90 TV 88/90

Disability rate SOA Trans Male SOA Trans Male

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The assumptions used in the calculation of the pension lia-bilities are in accordance with the requirements of IAS 19.

No disability retirements are considered in the calculationof the total liabilities.

Net actuarial gains related to the diference between the actuarial assumptions used for the estimation of the pension lia-bilities and the actual liabilities for the year ended 31 December, 2006 amounted to Euros 3 683 000 and are analysed asfollows:

Actuarial(gains) / losses

2006Euros ‘000

Increase in future compensation levels 4 944

Pensions increase rate 2 926

Return of fund assets (4 187)

3 683

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41. Amounts owed by associated companies

As at 31 December, 2006, Caixa had credits over associated companies, represented or not by securities, included in theitems of Loans and advances to customers that are analysed as follows:

Loans andadvances

to customersEuros ‘000

HTA – Hotéis, Turismo e Animação dos Açores, S.A. 14 600

Unicre – Cartão Internacional de Crédito, S.A. 886

Futuro – Sociedade Gestora de Fundo de Pensões, S.A. 30

Credint – Consultoria Financeira e Creditícia, S.A. 183

15 699

As at 31 December, 2006, the Caixa’s liabilities with associated companies, represented or not by securities, included initems Deposits from credit institutions and from customers and in Subordinated debt, are analysed as follows:

Deposits from Deposits from Subordinatedcredit institutions customers debt Total

Company Euros ‘000 Euros ‘000 Euros ‘000 Euros ‘000

Lusitania Companhia de Seguros, S.A . – 28 865 1 000 29 865

Lusitania Vida Companhia de Seguros, S.A – 26 010 1 250 27 260

HTA – Hotéis, Turismo e Animação dos Açores, S.A. – 345 – 345

Caixa Económica de Cabo Verde 9 682 – – 9 682

SIBS – Sociedade Interbancária de Serviços, S.A. – 243 – 243

MG Gestão de Activos Financeiros - – S.G.F.I.M., S.A. – 31 645 – 31 645

Futuro – Sociedade Gestora de Fundo de Pensões, S.A. – 3.250 – 3.250

Banco da África Ocidental, S.A. 1 442 – – 1 442

Norfin – Sociedade Gestora de FIM, S.A. – 9 451 – 9 451

Credint – Consultoria Financeira e Creditícia, S.A. – – – –

Bolsimo – Gest. Imob., Lda. – 55 – 55

11 124 99 864 2 250 113 238

42. Amounts owed by Caixa to subsidiary companies

As at 31 December, 2006 the Amounts owed by Caixa to subsidiary companies, represented or not by securities, includedin the balance Amounts owed to credit institutions, are analysed as follows:

Amountsowed to credit

institutionsEuros ‘000

Banco MG – Cabo Verde, Sociedade Unipessoal, S.A (IFI) 264 033

43. Related party transactions

The significant transactions and balances with the Group companies are detailed in the corresponding notes.

44. Risk management

The Group Montepio Geral («Caixa») is subject to severalrisks during the course of its business.

The Group’s risk-management policy is designed to ensureadequate relationship at all times between its own fundsand the business it carries on, and also to evaluate therisk/return profile by business line.

In this connection, monitoring and control of the maintypes of financial risk – credit, market, liquidity and opera-tional – to which the Group’s business is subject are of par-ticular importance.

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– Credit Risk Department;

– Market Risk Department;

– Operational Risk Department;


Over the year the integrated risk management project wasdeveloped, that takes into account the new equity require-ment calculation rules and integrates asset and liabilitymanagement analysis and credit impairment losses accord-ing to the IFRS.

It was in this context that the impairment analysis modelswere approved, which are based on the use of credit riskmodels (ratings and scorings), and on the likelihood ofrecovering materially significant credit in an impairmentsituation. To that end, new software was introduced thatprovided for linkage between the sectors involved.

Main types of risk

Credit – Credit risk is associated with the degree of uncer-tainty of the expected returns as a result of the inabilityeither of the borrower (and the guarantor, if any) or of theissuer of a security or of the counterparty to an agreementto fulfil their obligations.

Market – Market risk reflects the potential loss inherent ina given portfolio as a result of changes in rates (interestand exchange) and/or in the prices of the various financialinstruments that make up the portfolio, considering boththe correlations that exist between them and the respectivevolatility.

Liquidity – Liquidity risk reflects the Group’s inability tomeet its obligations at maturity without incurring in signifi-cant losses resulting from the deterioration of the fundingconditions (funding risk) and/or from the sale of its assetsbelow market value (market liquidity risk).

Operational - Operational risk is the potential loss resultingfrom failures or inadequacies in internal procedures, per-sons or systems, and also the potential losses resultingfrom external events.

Internal organisation

The Board of Directors is responsible for risk managementstrategy and policies, and it is advised by the Risk Analysisand Management Divison in these fields, that undertakethe analysis and the risk management from the standpointof the Group, and coordinate its actions with the Assetsand Liabilities Committee («ALCO»).

The Internal Auditing Management, as support to theBoard of Directors, has the main duties to assessing reportson the internal control system to be sent annually to theBank of Portugal, to check compliance with the applicablelegislation on the part of the various departments, and toidentify major risk areas and submitting its conclusions tothe Board of Directors.

Depending on the nature and severity of the risk, plans,programs or actions shall be drawn up, supported by infor-mation systems, and procedures shall be devised that pro-vide a high degree or realiabily as to the risk managementmeasures defined whenever necessary.

157

The Dealing Room shall cooperate with the Risk Analysisand Management in order to measure and control opera-tions and portfolio risks, as well as suitably monitor Caixa’soverall risk positions.

In terms of compliance risk, the Internal Auditing Mana-gement/Compliance Office shall control, identify andassess the various situations that contribute to this risk,namely in terms of transactions/activities, business, productsand departments.

In this context, the Internal Auditing Management shallalso assess the internal control system, identifying the areasof major importance/risk, to ensure efficient governance.

Risk evaluation


Credit risk models play a significant role in credit decisions.Indeed, the granting of credit to individuals requiresrequests to be submitted to the reactive scoring modelsused by the different portfolios (housing loans, individualcredit and credit cards).

Credit decisions are dependent upon risk ratings and com-pliance with various rules governing financial capacity andapplicants’ behaviour. In order to support commercialstrategies, behavioural scoring models were also used.

New reactive scoring models have been introduced into theinformation systems of certain private credit portfolios thatrecognise the need to distinguish between customers andnon-customers (or new customers). This project will be fin-ished this year for the main credit portfolios concerned.New internal rating models for companies and scoringmodels for small businesses are also in the IT completionstage.


In terms of reported credit risk information, a quarterlyreport was drawn up, including nonperformance probabili-

ties by risk category and credit portfolio, adjusted rate ofreturn indicators (RAROC) and a breakdown of credit port-folios by risk category.


Efficient balance sheet management also involves theAssets and Liabilities Committee (ALCO), which examinesinterest rate, liquidity and exchange rate risks, namely asregards compliance with the limits set for the static anddynamic gaps calculated.

Normally the static interest rate and liquidity gaps are posi-tive and moderate in size, except of course in those monthswhen payments are made relating to bond issue debt servi-ce. As for exchange rate risk, as a rule, the resourcesobtained in different currencies are hedged as assets in therespective monetary market and for periods not exceedingthose of the resources, which means any exchange rategaps result mainly from any adjustments between thehedge and resource deadlines.

In regard to risk information and analysis, regular reportsare provided on the credit and market risks on the compa-ny’s financial assets and those of the other members of theGroup. For the company’s own portfolio, the various risklimits are defined using the Value-at-Risk (VaR) method.

Own portfolios are concentrated in variable rate debt secu-rities, which gives them a low VaR (Var calculation is basedon analytical methodology development by risk metrics,concerning a ten-day period and with a 99% confidenceinterval). Credit risk exposure is also very restricted, due tothe bonds portfolio held are usually of investment gradelevels.

Operational Risk

A risk management model was completed for OperationalRisk, which covers all units in the corporate

structure. This model provides for the recording of relevantevents, in keeping with best practice and the Basle II frame-work. It aids Operational Risk analysis and model building,as well as identifies the action required to mitigate risk.

The management model operates in a decentralised man-ner and Operational Risk Self assessors /Interlocutors andEnablers were appointed for all units in the corporate struc-ture.

45. Accounting standards recently issued (to be provided)

The new standards and interpretations that have been issued, but are not yet effective and that the Caixa has not yetapplied in the preparation of the Financial Statements can be analysed as follows:

IFRIC 8 – Scope of IFRS 2

The International Financial Reporting Interpretations Committee («IFRIC») has issued on 12 January 2006 anInterpretation – IFRIC 8 Scope of IFRS 2, which was approved by the European Commission on 8 September, 2006.

The Interpretation clarifies that the accounting standard IFRS 2 – Share-based Payment applies to arrangements wherean entity makes share based payments for apparently nil or inadequate consideration. IFRIC 8 explains that, if the iden-tifiable consideration given appears to be less than the fair value of the equity instruments granted or liability incurred,this situation typically indicates that other consideration has been or will be received and IFRS 2 therefore applies.

This IFRIC is mandatory and applicable for annual periods beginning on or after 1 May, 2006.

Caixa doesn’t expect any material impact from the adoption of this interpretation.

IFRIC 9 – Reassessment of Embedded Derivatives

The International Financial Reporting Interpretations Committee («IFRIC») has issued on 12 March 2006 an Interpre-tation – IFRIC 9 – Reassessment of Embedded Derivatives, which was approved by the European Commission on 8September, 2006.

This interpretation clarifies that the reassessment of embedded derivatives should be performed whenever there arechanges to the underlying contracts.

This IFRIC is mandatory and applicable for annual periods beginning on or after 1 June, 2006.


IFRIC 10 – Interim Financial Reporting and Impairment

The International Financial Reporting Interpretations Committee («IFRIC») has issued on 20 July, 2006 an Interpre-tation – IFRIC 10 – Interim Financial Reporting and Impairment, which should be approved by the EuropeanCommission during the second quarter of 2007

This IFRIC prohibits the reversal of impairment losses recognised in previous interim reporting period in respect ofgoodwill, an investment in an equity instrument or a financial asset carried at cost.

This IFRIC is mandatory and applicable for annual periods beginning on 2007 and its application will be prospectivefor the abovementioned asset types, from the date that the Caixa first applied the measurement criteria of IAS 36 andIAS 39.


IFRIC 11 – IFRS 2 – Changes in Contributions to Employee Share Purchase Plans

The International Financial Reporting Interpretations Committee («IFRIC») has issued on 2 November 2006 an Interpre-tation – IFRIC 11 – IFRS 2 – Changes in Contributions to Employee Share Purchase Plans, which should be approvedby the European Commission during the second quarter of 2007.

This interpretation addresses on two issues:

1. a) Contracts where an entity grants to its employees rights to equity instrument of the entity, and either choosesor is required to buy equity instruments from another party, to satisfy its obligations to its employees;

b) Contracts where an entity’s employees are granted rights to equity instruments of the entity, either by the enti-ty itself or by its shareholders, and the shareholders of the entity provide the equity instruments needed.

2. Contracts with share-based payments that involve two or more entities within the same Group.

This IFRIC is mandatory and applicable for periods beginning on or after 1 January, 2007.


158

159

IFRS 7 – Financial Instruments: Disclosures and a complementary Amendment to IAS 1 – Presentation ofFinancial Statements - Capital Disclosures

The International Accounting Standards Board («IASB») issued on 18 August, 2005 International Financial ReportingStandard («IFRS») 7 – Financial Instruments: Disclosures and a complementary Amendment to IAS 1 – Presentation ofFinancial Statements – Capital Disclosures.

The IFRS introduces new requirements to improve the information on financial instruments that is disclosed in entities’financial statements. It replaces IAS 30 – Disclosures in the Financial Statements of Banks and Similar FinancialInstitutions and some of the requirements in IAS 32 – Financial Instruments: Disclosure and Presentation. TheAmendment to IAS 1 introduces requirements for disclosures about an entity’s capital.

Caixa doesn’t expect any material impact from the adoption of the IFRS 7.

IFRS 8 – Operational segments

The International Accounting Standards Board («IASB») has issued on 30 November, 2006 the IFRS 8 – Operationalsegments, which should be approved by the European Commission during the second quarter of 2007.

The IFRS 8 – Operational segments sets out requirements for disclosure of information about an entity’s operating seg-ments and also about the entity’s products and services, the geographical areas where the entity operates and whereits major clients are located. This standard specifies how an entity should disclose its information in the annual finan-cial statements and, as a consequential amendment to IAS 34 - Interim Financial Reporting, regarding the informationto be disclosed in the interim financial reporting. Each entity should also provide a description of the segmental infor-mation disclosed namely profit or loss and of segment assets, as well as a brief description of how the segmental infor-mation is produced.

This IFRS is mandatory and applicable for periods beginning 1 January, 2009.


8.19. REPORT ON THE AUDIT WORK(see 9.8)

To the Members:

Pursuant to paragraph d) no. 1 of article 36 of the Montepio Geral – Associação Mutualista’s Articles of Association,hereinafter referred to as («Montepio Geral»), and paragraph f) of article 25 of the Caixa Económica Montepio Geral’sArticles of Association, hereinafter referred to as («Caixa Económica»), we hereby submit for your appreciation ourReport on their activities and our Opinion on the Annual Reports and Financial Statements for 2006 of the MontepioGeral and the Caixa Económica, prepared by the Board of Directors.

Montepio Geral’s Financial Statements were prepared in accordance with the accounting principles generally acceptedin Portugal for Mutual Associations.

Caixa Económica’s individual Financial Statements were prepared in accordance with the Adjusted AccountingStandards.

REPORT

8.21. INTERNAL AUDIT BOARD’S REPORT AND OPINION

1. The Internal Audit Board of both entities was elect-ed in December 2006 and took office at the beginningof January 2007, beginning its activities immediately.

2. Under these circumstances, given that it had to pre-pare an Opinion on the Annual Reports and FinancialStatements for 2006, a year which it naturally had notmonitored, the Internal Audit Board focused its activi-ties in the first two months of 2007 on obtaining infor-mation and general details from the Board of Directorsand the Managements most directly linked to accountingand internal control matters, as well as from theIndependent Auditors, about the two institutions theymonitored throughout 2006. The Internal Audit Boardtook part, at its own request or by invitation, in Boardof Directors meetings, in meetings with the Heads ofsaid Managements and the Auditors’ representatives,where we were provided with the cooperation request-ed and for which we express our thanks.

3. As regards the Annual Report, the Internal AuditBoard checked that, in all essence, the contents are inagreement with the Financial Statements presented,and comply with the legal and statutory requirements.It sets out the activities of Associação Mutualista andCEMG, as well as provides appropriate information onthe two Institutions’ Balance Sheets and FinancialStatements for 2006.

4. When examining the Financial Statements, whoseNotes contain detailed information about both theStatements’ presentation and the main accountingpolicies and measurement criteria, the Internal AuditBoard based its opinion essentially on the IndependentAuditors’ Reports and the Statutory Audit Opinion of

the Financial Statements, since they had monitoredand audited the accounting records throughout 2006and the accounting documents prepared and duly sub-mitted by the Board of Directors.

5. On that basis it is our conviction that the FinancialStatements present fairly in all material respects thefinancial position of Montepio Geral and Caixa Econó-mica as at 31 December 2006, the results of their ope-rations and their cash flows for the year ending on thatdate, in keeping with the legal and statutory require-ments.

6. We also examined the report on the supervisionmade by the Independent Auditors and we are familiarwith their unreserved Statutory Audit Opinion andAuditors’ Report of financial statements, with whichwe agree.

7. The Internal Audit Board members wish to thank theBoard of Directors for their kind words and wish topublicly acknowledge the cooperation the Board gavethem.

The Internal Audit Board members wish to express theirsupport for the vote of thanks and recognition to allthe Bodies referred to in the Report that the Board ofDirectors has proposed to the General Meeting, andtheir deep sense of loss in regard to deceased Mem-bers and Employees.

In this respect we feel we must invoke the memory ofDr. Costa Leal, a peerless figure who left an indeliblemark in terms of both his humanity and his role in thegrowth and modernization of the two Institutions.

162

163

In light of the above we are of the

OPINION

That the General Meeting should approve:

a) The Annual Reports and Financial Statements of Montepio Geral e Caixa Económica for the year ending on 31December 2006;

b) The proposed profit distribution set out in the aforesaid Annual Reports;

c) A vote of thanks to the Board of Directors for the efficient way in which they have managed the Institutions andwhich should be extended to the Employees for the dedication they have shown.

Lisbon, 13 March 2007

THE INTERNAL AUDIT BOARD

Manuel Jacinto Nunes – Chairman

Gabriel José dos Santos Fernandes – Member

José Moreira Venâncio – Member

This report has been prepared in accordance with the form setout in Regulation no. 7/2001 (as amended by Stock ExchangeCommission – «Comissão do Mercado de Valores Mobiliários»Regulations no. 11/2003 and no. 10/2005) bearing in mindthe increased transparency and quality of the information pro-vided. It contains information relating to the adoption of therecommendations and the Institution’s legal nature.

We have sought to perfect the governance model, alwaystaking into account the needs of the market in general and

the Members in particular. To that end, and despite thefact that we are not a company, a Working Party was setup in 2006 to examine compliance with Stock ExchangeCommission Recommendations and best market practices,with the institutional structure and the Institution’s currentpractices. It also proposes the necessary adjustments asregards organisational and internal operation matters.

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8.22. INSTITUTION’S CORPORATE GOVERNANCE REPORT

STOCK EXCHANGE COMMISSION RECOMMENDATIONS

DEGREE OF ADOPTION

Partially adopted.

There is no Investor Support Office, becausewe do not resort to the market to obtain capi-tal. However, there is a department responsi-ble for disclosing institutional and financialinformation.

The information is also published on our web-site which is open to all.

II – THE EXERCISE OF VOTING RIGHTS

RECOMMENDATION 2

The active exercising of voting rights, whether directly, by post or by proxy should not berestricted. To this end, the following acts are considered to restrict the active exercise of vot-ing rights: a) the imposition of a period of more then 5 working days between the deposit orblocking of shares and permission to attend the general meeting; b) any statutory restrictionon postal voting; c) the imposition of a requirement that postal votes be received more than5 days in advance.

We acknowledge the right of all to exercisetheir right to vote under equal conditions.

Postal votes are used to elect our GoverningBodies.

I – DISCLOSURE OF INFORMATION

RECOMMENDATION 1

The company must ensure that it has permanent contact with the market, that the principleof equality among shareholders is upheld and that uneven access of investors to informationis prevented. To those ends, the company should set up an investor support office.

III – CORPORATE RULES

RECOMMENDATION 3

The company shall establish an internal control system for the efficient detection of riskslinked to its activity, as a means of safeguarding its assets and enhancing the transparency ofits corporate governance practices.

RECOMMENDATION 4

Measures taken to prevent the success of takeover bids should respect the interests of thecompany and its shareholders. Defensive clauses intended to cause an automatic erosion ofcompany assets in the event of the transfer of control, or changes to the composition of theboard which prove detrimental to the free transfer of shares and the free assessment byshareholders of the performance of members of the board shall be deemed to run contraryto those interests.

Adopted.

Not applicable.

CHAPTER 0

COMPLIANCE STATEMENT

In regard to the Recommendations issued by the Stock Exchange Commission, below we set out the degree to which theyhave been adopted and their applicability.

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IV – BOARD OF DIRECTORS

RECOMMENDATION 5

The board shall be composed of a number of members who provide effective guidance forthe management of the company and the persons responsible for said management.

RECOMMENDATION 5-A

The board shall include sufficient non-executive directors who shall continually monitor andassess the executive directors’ management of the company. Members of other governingbodies may fulfil a complementary role or, at the very most, act as a replacement, providedthey have equivalent supervisory powers and they are duly exercised.

RECOMMENDATION 6

The non-executive members of the board shall include a sufficient number of independentmembers. When there is only one non-executive director, he/she shall also be independent.Independent members of other corporate bodies may exercise ancillary roles or, at the verymost, replace board members, provided they have equivalent supervisory powers and theyare duly exercised.

RECOMMENDATION 7

The board shall create internal audit committees, with the power to assess the corporatestructure and its governance.

RECOMMENDATION 8

The remuneration of members of the board shall be structured in such a way as to permit theinterests of board members to be in line with those of the company, and shall be disclosedannually in individual terms.

RECOMMENDATION 8-A

A policy statement regarding the remuneration of members of a company’s corporate bodiesshall be submitted to the attention of shareholders at the annual general meeting.

RECOMMENDATION 9

Members of the Remuneration Committee or its equivalent shall be independent as regardsthe members of the board of directors.

RECOMMENDATION 10

A proposal shall be submitted to the general meeting with regard to the approval of plansfor the allotment of shares, and/or options to purchase shares or based on variations in shareprices, to members of the board of directors and/or employees. Said proposal shall containall information required to assess the plan correctly. The proposal shall be accompanied bythe rules of procedure for the plan, or, if these have not yet been drafted, by the general con-ditions that will apply.

RECOMMENDATION 10-A

The company shall adopt a policy whereby alleged irregularities occurring within the compa-ny are reported. The general outline of this policy shall be disclosed in the corporate gover-nance report.

STOCK EXCHANGE COMMISSION RECOMMENDATIONS (continued)

DEGREE OF ADOPTION

Adopted.

The terms of the Articles of Association areapplied.

All board members are executives.

Partially adopted.

The Institution does not possess internal auditcommittees, but the Internal AuditingManagement, as part of the Board ofDirectors staff, performs that role.

Not adopted.

The Board of Directors’ remuneration is dis-closed in overall terms.

Not Adopted.

Under the terms of the Articles of Association,the Remuneration Committee, elected by theGeneral Meeting, shall be comprised ofMembers with powers to set the earnings ofthose belonging to the corporate bodies.

Addopted.

Not applicable.

Legally speaking the Institutions, bothAssociação Mutualista and Caixa Económicaare not companies. They have no shares.

Partially adopted.

While there is not exactly a reporting policy forirregularities, the Internal AuditingManagement is responsible for handling them.

CHAPTER I – DISCLOSURE OF INFORMATION

1. GOVERNING BODIES STRUCTURE, POWERS ANDPROCEDURES

The General Meeting of 14 December 2006 elected theGoverning Bodies for the three-year period 2007-2009, forMontepio Geral – Associação Mutualista (MGAM) andCaixa Económica Montepio Geral (CEMG) simultaneously.They have the same members who took office on 9January 2007. Their composition is set out in the Annualreport in the section «Governing Bodies».

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STOCK EXCHANGE COMMISSION RECOMMENDATIONS (continued)

IV – BOARD OF DIRECTORS (continued)

RECOMMENDATION 11

The institutional investors shall take into consideration the diligent, efficient and critical useof the rights inherent in the assets they hold or whose management has be entrusted tothem, in particular as to information and voting rights.

DEGREE OF ADOPTION

Adopted.

Main Powers of the General Meeting• Elect or remove members of the Governing Bodies;

• Approve the Board of Directors (BD) annual report, the accounts for the year and the Internal Audit Board’s opinionand also review the General Board’s report;

• Approve the action program and budget submitted by the BD, and the Internal Audit Board’s opinion;

• Approve the profit distribution;

• Authorise the setting up of equity not expressly provided for in the Charter and an increase in any funds, when itdoes not fall within the Board of Directors powers;

• Approve amendments to the Articles of Association;

• Elect, every three years, and delegate the necessary power to a committee to set the remuneration of GoverningBodies members.

Composition of General Meeting Board The General Meeting Board shall consist of a Chairmanand two Secretaries. If the Chairman is unable to attend ameeting, he/she shall be replaced by the 1st Secretary whoshall in turn be replaced by the 2nd Secretary, in cases ofabsence or impediment.

Proceedings at General MeetingProceedings at General Meeting shall be governed by spe-cific regulations which shall complement MGAM’s andCEMG’s Articles of Association.

The General Meeting Board Chairman shall call the GeneralMeeting, extraordinary or ordinary session, giving at leastfifteen days notice.

The ordinary session General Meeting shall not proceed tobusiness if at least half of the Members are not present. At

the second appointed time, the GM shall be duly constituted,after one hour, no matter how many Members are present.

However, resolutions requiring the revising or amendmentof the Articles of Association, mergers, splits, transformationand incorporation of or in Caixa Económica, shall require thepresence of at least two-thirds of all Members, at the firstappointed time, and any number of Members, at the secondappointed time, between fifteen and twenty days later.

All documents referring to the agenda in the notice callingthe GM shall be placed at the Members disposal, at headoffice, fifteen days before the meeting at which they are tobe discussed, and shall be sent to the Stock ExchangeCommission and to EURONEXT, when the documentsrelate to the accounts, in accordance with the Law andapplicable regulations.

The call notice shall always be published via the following channels:

• the media;

• Montepio’s website (www.montepio.pt);• the Stock Exchange Commission’s extranet;

• the Intranet portal.

1.1. General Meeting

The General Meeting (GM) is the institutional body thatbrings together all adult, full Members of Montepio Geral,who were admitted over 2 years previously. Each Memberhas one vote.

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GENERAL MEETINGS HELD IN 2006

15 March(1st call)04 April(2nd call)10 April

(works continued)

28 June(1st call)17 July

(2nd call)

11 July(1st call)26 July

(2nd call)04 September

(works continued)11 September

(works continued)

EXTRAORDINARY GENERAL MEETINGS (3)

Revising of various sections of chapters in the Montepio Geral-Associação Mutualista BenefitsRegulation

Ratification of the General Board decision that approved an amendment to the PerpetualAnnuities Regulation

Revising of chapters of the Montepio Geral-Associação Mutualista Benefits Regulation

Suspension of new subscriptions

Creation of new schemes and amendment of the Benefits Regulation

ORDINARY GENERAL MEETINGS (2)

Montepio Geral – Associação Mutualista and Caixa Económica Montepio Geral Annual Reportand Accounts and Internal Audit Board’s Opinion for the year 2005

Appreciation of the General Board’s Report

Ratification of the Board of Directors decision as to the retaining of Member status by thosewho having completed payment of the sums due have become beneficiaries/pensioners

Discussion of the Board of Directors proposal as to a new range of schemes that are part ofthe Benefits Regulation

Election of a Committee to prepare a project based on the proposal presented by the Boardof Directors

Action Program, Budget and Internal Audit Board’s Opinion for 2007, for Montepio Geral – As-sociação Mutualista and Caixa Económica Montepio Geral

Election of Remuneration Committee for the three-year period 2007/2009

30 March(1st call)

30 March(2nd call)

28 December(1st call)

28 December(2nd call)

ELECTORAL MEETING

Election of Montepio Geral – Associação Mutualista and Caixa Económica Montepio GeralGoverning Bodies for the period 2007/2009

14 December

1.2. BOARD OF DIRECTORS

The Board of Directors shall manage the business and affairs of MGAM and CEMG.

Main Powers of the Board of Directors

• Approve increases in institutional capital and the issue of investment fund shares;

• Approve the purchase, sale and pledging of fixed assets;

• Approve the opening and closing of branches and any other form of representation;

• Draw up the annual report and accounts and the profit distribution proposal, as well as the action program andbudget for the following year;

• Define the strategic guidelines for the pluriannual plans.

Composition of the Board of Directors

The Board of Directors of MGAM and of CEMG shall becomprised of a Chairman and four members.

Proceedings of the Board of Directors

The Board of Directors operates on a collegial basis. Ameeting of Directors is duly constituted if at the beginningof the meeting the majority of its members are present. Itshall meet at least twice a week. Resolutions shall be taken

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by a majority vote of the directors present and theChairman shall have a casting vote.

The Board of Directors may appoint representatives to re-present the Institutions in any acts and contracts, and shalldefine the extent of their powers.

1.3. INTERNAL AUDIT BOARD

The Internal Audit Board shall control and superviseMGAM and CEMG.

Main Powers of the Internal Audit Board

• Check compliance with the Law, the Articles of Association and the Regulations;

• Check the accuracy of the books, accounting records and supporting documents;

• Draw up an annual report on its activities and an opinion on the Board of Directors annual report, accounts, pro-posals, budget and action program.

Composition of the Internal Audit Board

The Internal Audit Board shall consist of a Chairman andtwo members, one of whom shall be a CharteredAccountant and another appointed by the employeesunder article 40 of MGAM’s Articles of Association andarticle 28 of CEMG’s Articles of Association.

Proceedings of Internal Audit Board

Resolutions may only be taken when the majority of its mem-bers are present and the Chairman shall have a casting vote.

The Internal Audit Board met eighteen times in 2006.

1.4. GENERAL BOARD

Main Powers of the General Board

The General Board shall establish MGAM’s and CEMG’sstrategy and, upon a Board of Directors proposal, approvethe general guidelines for pluriannual action plans andtheir revision.

Furthermore the General Board shall:

• Set the geographical location policy;

• Approve the report on group companies presented by the Board of Directors;

• Give its opinion on all matters submitted to it by any of the other Associative Bodies;

• Draw up an annual report on its activities.

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Composition of the General Board

The General Board shall consist of the members of theGeneral Meeting Board, the Board of Directors and theInternal Audit Board and by members elected from amongthe Members present at the General Meeting.

Proceedings of General Board

The General Board shall be convened by the Chairman,generally with at least eight days notice, and resolutionsshall be taken by a majority vote of the members.

The General Board met five times in 2006.

1.5. MONTEPIO GERAL ORGANISATIONAL STRUCTURE

The organisational structure is not only functional, but also,in a decisive manner, a market-oriented structure, in whichvarious structural bodies and an advisory one report direct-ly to the Board of Directors.

The following aspects of the structural reorganisation are worthy of special mention in 2006:

a) The setting up of the Board Support Office, which reports directly to the Board of Directors. It supports the Boardsof Directors in the monitoring of the private customer and business commercial networks and other of the Institution’sdepartments. It focuses on implementing measures in accordance with the Board of Directors’ guidelines;

b) The change in name from Auditing and Inspection Management to Internal Auditing Management, which nowoversees the following departments:

• Operational Auditing Office, which incorporates the Functional Auditing Unit and the Group Company Auditing Unit;

• Compliance Office;

• Bank Fraud and Inspection Office;

• Information Systems Auditing Office, which incorporates the Distance Auditing Unit and the Computer Auditing Unit.

c) The setting up of the Financial and International Management, the Markets and Risk Cover Department which incor-porates the Markets Office and the Risk Cover Office;

d) The setting up of the Social Responsibility Office, whose policy and program are described in the relevant chapterof the Annual Report.

2. RISK CONTROL AND MANAGEMENT SYSTEM

The Board of Directors is responsible for risk managementstrategy and policies, and it is advised by the Risk Analysisand Management Division in this field.

The risk management and control system is described indetail in the relevant chapter of the Annual Report.

In addition to the information contained in the AnnualReport, it is important to consider the powers of theInternal Auditing Management, in its role as a support tothe Board of Directors. Important duties include assessingreports on the internal control system to be sent annuallyto the Bank of Portugal, checking compliance with theapplicable legislation on the part of the various depart-ments, and identifying major risk areas and submitting itsconclusions to the Board of Directors.

3. PROFIT DISTRIBUTION

CEMG was incorporated with the aim of placing its profit,after the deductions laid down in its Articles of Association,at the disposal of Montepio Geral - Associação Mutualista(MGAM), so that the latter could apply that profit to meetis aims, as set out in article 4 of its Articles of Association.

Furthermore, under article 7 of CEMG’s Articles of Asso-ciation, institutional capital is permanent, non-callable andshall not give rise to the payment of interest or dividends.

The institutional capital shall consist of amounts providedboth by MGAM to that end and which shall become part ofCEMG’s assets, and by the incorporation of CEMG reserves.

As at 31 December 2006, CEMG’s institutional capital was585 million euros and was fully paid up.

4. REMUNERATION COMMITTEE

The Remuneration Committee shall consist of three per-sons, a Chairman and two members, to be elected everythree years by the General Meeting of Members, and ischarged with setting the remuneration of the GoverningBodies. No member of the Remuneration Committee shallbe a member of the Board of Directors, a spouse or rela-tive, up to and including the third degree, of any suchmember.

The last election took place at the General Meeting on 28December 2006, and the following persons were electedfor the period 2007/2009:

Chairman

Luís Eduardo Silva Barbosa

Members

António Francisco Espinho Romão

Arlindo Gomes de Carvalho

5. EXTERNAL AUDITOR

KPMG & Associados – SROC, SA is the External Auditorresponsible for Auditing the Institution’s Accounts. In2006, it was paid fees of 364 866 euros.

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CHAPTER II – THE EXERCISE OF THE VOTING RIGHT

1. STATUTORY RULES

Under the Articles of Association, the voting right can be exercised both in person and by post - in the case of electionsto the governing bodies.

In this context, attendance of and participation in General Meetings shall be subject to a set of rules, pursuant to the pro-visions of the Articles of Association, namely:

• General meetings shall be called with at least fifteen days notice;

• All documents relating to the agenda shall be placed at Members’ disposal, at head office, at least fifteen daysbefore the date of the meeting.

The normal voting method shall be a public vote.

2. EXERCISING THE VOTING RIGHT BY POST

In the case of associative body elections, the secret votemay be exercised both directly and by post, in accordancewith MGAM’s and CEMG’s Articles of Association.

The call notice shall clearly state the date, time and placeof the General Meeting, as well as provide information asto the places where Members may obtain further informa-tion and where votes will be received.

Members shall also be sent the documents required toexercise their voting rights by post.

3. EXERCISING THE VOTING RIGHT BY ELECTRONIC MEANS

Further to what was said above in regard to the composi-tion of the Internal Audit Board, Institution employees mayelect an employee-Member to that body in line with theterms of the Articles of Association.

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When electing the Governing Bodies for the period2007/2009, the employee-Member was elected to theInternal Audit Board by electronic means for the first time.Voting was conducted by means of the intranet in accor-dance with the legal and the applicable Articles ofAssociation rules.

There is still no system that allow for the voting right to beexercised by electronic means when electing the other gov-erning bodies.

4. LIMITING THE VOTING RIGHT

Under the terms of MGAM’s Articles of Association, theremay be several Member categories. Nonetheless, only fullMembers, that is, individuals who meet certain conditions,such as having been admitted at least two years earlier, beingof age, and who comply with the applicable legislation, reg-ulations and terms of the Articles of Association, may takepart in General Meetings and exercise the right to vote. Thesame applies to the exercising of the right to vote by post.

CHAPTER III – INSTITUTIONAL RULES

1. INTERNAL RULES AND REGULATIONS

In addition to complying with the provisions of the law, theArticles of Association and the regulations, all activitiesconducted by Montepio Geral (Associação Mutualista eCaixa Económica) is also governed by the governing bodyguidelines, internal rules, the code of conduct and ethicalstandards.

The term «Internal Regulatory Framework» includes notonly the Articles of Association of MGAM and CEMG, theMGAM Benefits Regulation and the Internal Regulationcovering CEMG’s Financial Intermediation, but also con-sists of all documents, which given their aims and contents,must be complied with by all employees.

In order to ensure compliance with prudential standards anew “Internal Standard” was introduced that defines notonly the type of compulsory information to be reported tothe supervisory bodies (the Bank of Portugal and the StockExchange Commission) and to other external bodies, butalso the department responsible for reporting that infor-mation.

2006 saw the approval of the Auditing Regulation, aimedat governing the activities of the Internal AuditingManagement, its relationship with the various MGAM andCEMG departments, with Montepio Geral group compa-nies and with outside bodies.

2. INTERNAL PROCEDURES FOR CONTROLLING RISKS

Depending on the nature and severity of the risk, plans,programs or actions shall be drawn up, supported by infor-mation systems, and procedures shall be devised that pro-vide a high degree of reliability as to the risk managementmeasures defined whenever necessary.

The Risk Analysis and Management Division shall under-take the analysis and the risk management from the stand-point of the Group, and coordinate its actions with theAssets and Liabilities Committee (ALCO).

The Dealing Room shall cooperate with the Risk Analysisand Management Division in order to measure and controloperations and portfolio risks, as well as suitably monitorCEMG’s overall risk positions.

In terms of compliance, the Internal Auditing Mana-gement/Compliance Office shall control, identify andassess the various situations that contribute to the said risk,namely in terms of transactions/activities, business, productsand departments.

In this context, the Internal Auditing Management, in con-junction with the External Auditors, shall also assess theinternal control system, identifying the areas of majorimportance/risk, to ensure efficient governance.

CHAPTER IV – BOARD OF DIRECTORS

1. NATURE OF BOARD OF DIRECTORS

The Board of Directors, whose members serve on theBoards of MGAM and CEMG, are all executive board mem-

bers and is made up of a Chairman and four members.Their office shall be for three years, and there shall be norestrictions on their re-election.

1.1 Duties

Under Montepio Geral’s organisational structure, the Board of Directors’ duties are distributed as follows:

José da Silva Lopes

Planning and Studies Management, Risk Analysis and Management Division, Public Institutional Relations Office,Social Responsibility Office and the group companies operating in the finance, insurance and pension fund fields.


General Secretariat, Commercial Managements, Marketing and New Channels Management, Board Support Office,Customer Procuracy Office and the group companies operating in the finance, insurance and pension fund fields.


Associação Mutualista Management, Financial and International Management and the group companies operatingin the finance and pension fund fields.


Human Resources Management, Operations and Logistics Management and the Computing and OrganisationManagement.


Internal Auditing Management, Property and Premises Management, Legal and Credit Recovery Management,Accounting Department and the group company operating in the insurance field.

1.2. Board of Directors offices on Montepio Group companies

The Board of Directors hold the following offices in the group companies:

Chairman: José da Silva Lopes

Chairman of the Board of Directors of Lusitania, Companhia de Seguros, SA

Chairman of the Board of Directors of Lusitania Vida, Companhia de Seguros, SA

Chairman of the Board of Directors of MG Gestão de Activos Financeiros – SGFIM, SA

Chairman of the Board of Directors of Futuro – Soc. Gestora de Fundos e Pensões, SA

Chairman of the General Meeting Board of Caixa Económica de Cabo Verde, SA (CECV)

Member: António Tomás Correia

Member of the Board of Directors of MG Gestão de Activos Financeiros – SGFIM, SA

Member of the Board of Directors of Futuro – Soc. Gestora de Fundos e Pensões, SA

Member of the Board of Directors of Lusitania, Companhia de Seguros, SA

Member of the Board of Directors of Lusitania Vida, Companhia de Seguros, SA

Member: José de Almeida Serra

Chairman of the Board of Directors of MG Investimentos Imobiliários, SA

Chairman of the Management Board of Bolsimo – Gestão imobiliária, Lda.

Chairman of the Board of Directors of Banco Montepio Geral – Cabo Verde, Company Unipessoal, SA (IFI)

Member of the Board of Directors of MG Gestão de Activos Financeiros – SGFIM, SA

Member of the Board of Directors of Futuro – Soc. Gestora de Fundos e Pensões, SA

Member: Eduardo José da Silva Farinha

Chairman of the Board of Management of Leacock, Corretora de Seguros, Lda.

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1.3. Professional qualifications of the Board of Directors

Board of Directors Professional Qualifications Professional activities over last five years

José da Silva Lopes





Graduate in Finance from ISCEF

Doctor «Honoris Causa» fromISEG, UTL

Graduate in Law from LisbonUniversity

Graduate in Finance from ISCEFand postgraduate fromMassachusetts Institute ofTechnology

Graduate in Finance from ISEG

Graduate in Finance from ISCEF

From 1996 to 2003 Chairman of Economicand Social Council

Since 2004 Chairman of the Board ofDirectors of Montepio Geral

From 1995 to 2003 Board Member of CGD

Since 2004 Board Member of MontepioGeral

From 1999 to 2003 Board Member ofSOGROUP (Group CGD)

Since 2004 Board Member of MontepioGeral

From 2000 to 2006 Board Member ofBanif – Banco International do Funchal, SA,and a series of companies in the financialgroup

Since January 2007 Board Member ofMontepio Geral

From 1996 to 2006 Chairman of the Boardof Directors of Credivalor

Since January of 2007 Board Member ofMontepio Geral

2. BOARD OF DIRECTORS REMUNERATION

The Board of Directors’ remuneration is approved annuallyby the Remuneration Committee. In the year ending on 31December 2006, the total value of the remunerationearned by the members of the Board was 2 092 963 euros.

3. COMMUNICATION OF IRREGULARITIES

The Internal Auditing Management supports the Board ofDirectors in the performance of its disciplinary role, stem-

ming from acts involving MGAM and CEMG employeesthat breach the rules in force.

The Internal Auditing Management shall be informed of alland any irregularities detected. Its Compliance Office shallreceive complaints, investigate and handle any irregular si-tuations.

As a result of earlier comments, there is no perfect matchbetween what occurs within what can be called theMontepio Geral group and that which occurs in a group ofcompanies set up under the Commercial Companies Code.

MGAM is an association and individuals may join it andtheir relative positions constitute the equivalent of associa-tive rights.

MGAM set up a foundation like body, CEMG, and owns,along with the latter, holdings in various companies.

Those holdings include MG Gestão de Activos Financeiros– Sociedade Gestora de Fundos de Investimento Mobiliá-rio, SA and Futuro – Sociedade Gestora de Fundos dePensões, SA. These Montepio Geral group companies actin the market as institutional investors and both MGAMand CEMG have a majority holding in those companies.

Thus a group or control situation arises, but legally speak-ing since MGAM and CEMG are not companies, that situa-tion does not match the legal concept set out in theCommercial Companies Code (CCC).

In this context, they do not interfere, directly or indirectly,in the exercise of the voting rights stemming from theshares making up the investment fund and the shares mak-ing up the pension funds.

MG Gestão de Activos Financeiros – SGFIM, SA, the stockinvestment fund management company is charged withadministrating and managing the respective funds.

Futuro-SGFP, SA, the pension fund management companyis charged with administrating and managing the respec-tive funds.

However in regard to the exercise of the voting rightsstemming from the shares held by the funds in one orother company, the rule, applying to both national and for-eign companies, is not to participate in the GeneralMeetings of the issuers, since the shareholder positions areseen as mere financial holdings. Thus there is no interfe-rence in their management and strategy.

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CHAPTER V – INSTITUTIONAL INVESTORS

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9. Caixa EconómicaMontepio Geral– Consolidated

GrowthMontepio values us throughout our lives. It helps us grow strong andupward in our own way.

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The Annual Report on CEMG’s individual activity providesa detailed description of matters important to the pursuitof MG Group’s various lines of business, so those matters

will not be repeated in this report, which will concentrateinstead on matters associated with the consolidation of theaccounts.

9.1. INTRODUCTION

Consolidation scope

The consolidation scope, defined pursuant to the legal guidelines, encompasses the following entities:

1. Consolidated using the full consolidation method:

– CEMG;

– MG Cabo Verde;

– «Pelican Mortgages No.1» and «Pelican Mortgages No.2»; these entities, which undertake securitisation opera-tions, are included in the consolidation because it may be inferred that CEMG exercises control over their activities,according to «NIC» criteria.

2. Consolidated using the net worth method – This method is used to consolidate associate companies in which CEMGhas a longstanding investment but over which it exercises no control. The following companies fall into this category:

– Lusitania, Companhia de Seguros, SA (*);

– Lusitania Vida, Companhia de Seguros, SA (*);

– HTA – Hotéis, Turismo e Animação dos Açores, SA;

– Norfin – Soc. Gestora de Investmento Fundos Imobiliários, SA.

Differences between Individual and Consolidated Profit

* This consolidation only takes into account CEMG’s direct holdings in Lusitania (26.2%) and in Lusitania Vida (39.3%). MGAM’s direct holdings in these companies (65.7% and 39.2%, respectively) do notfall within the consolidation scope.

Summary of Indicators

An analysis of the main indicators relating to CEMG’s consolidated accounts as at 31 December 2005 and 2006, lead tothe following conclusions:

• Net Profit grew by 10.2% as compared to 2005;

• ROA and ROE were 0.42% and 9.30%, respectively;

• The solvency ratio was 10.79% and the Tier 1 ratio was 7.24%.

IMPACT ON PROFIT AND ON EQUITY OF CONSOLIDATING FINANCIAL HOLDINGS(thousands of euros)

ITEMS Net Profit Equity

CEMG – Individual Accounts 31.Dec.06 60 154 822 175

Impact of Consolidating Financial Holdings 2 476 -396

Full Consolidation 340

MG Cabo Verde 340

Net Worth 2 136 -396

Lusitania 712 -2 118

Lusitania Vida 1,272 2 026

NORFIN 131 234

HTA Hoteis Turismo A Açores 21 -538

Other Consolidation Readjustments 990 -59 169

CEMG – Consolidated Accounts 31.Dec.06 63 620 762 610

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9.2. SUMMARY OF GROUP ACTIVITY

Montepio Geral Group ended the year with consolidated net assets of 15 899 million euros, representing growth of 8.4%as compared to 2005.


CONSOLIDATED INDICATORS 2006 2005Change

Absolute Relative

1. SIZE

Net Assets 15 898 640 14 671 864 1 226 776 8.4%

Change 8.36% 19.66% -11.30 b.p.

Equity (Capital, Reserves and Profit) 762 610 600 122 162 488 27.1%

2. PROFITABILITY AND EFFICIENCY

Cash Flow 153 157 151 392 1 765 1.2%

Net Profit for the Year 63 620 57 743 5 877 10.2%

Net Profit for the Year / ROA 0.42% 0.43% -0.01 b.p.

Net Profit fro the Year / ROE 9.30% 10.19% -0.89 b.p.

Banking Revenue / ROA 2.42% 2.58% -0.16 b.p.

Cost to Incom 62.60% 60.12% 2.48 b.p.

3. CREDIT RISK

Credit and Interest Due Ratio 2.13% 2.59% -0.46 b.p.

Credit and Interest Due over 90 days ratio 1.87% 2.39% -0.52 b.p.

4. PRUDENCE

Solvency and Market Ratio 10.79% 10.68% 0.11 b.p.

Base Equity Adequacy Ratio (Tier 1) 7.24% 6.53% 0.71 b.p.

TREND IN NET ASSETS(thousands of euros)

TYPE OF ASSETS2006 2005 Change


Customer Credit 13 660 648 85.9 12 415 395 84.6 1 245 253 10.0

Liquidity assets 349 336 2.2 337 395 2.3 11 941 3.5

Financial assets and other investments 1 647 324 10.4 1 672 388 11.4 -25 064 -1.5

Other assets 241 332 1.5 246 686 1.7 -5 354 -2.2

TOTAL ASSETS 15 898 640 100.0 14 671 864 100.0 1 226 776 8.4

The asset structure saw no substantial change, despite theslight increase in the relative weight of Credit to 85.9% oftotal assets (+1,3 b.p.) and slight falls in the relative weightsof liquid assets and financial investments, which togetheraccounted for 12.6% of the asset structure (-1.1 b.p.).

As for the consolidated liabilities structure, total externalresources, valued at 15 136 million euros, recorded growthof 7.6% and saw their relative weight in Total Equity andLiabilities drop slightly to 95.2% (-0.7 b.p., compared to2005).

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Customer Resources continued to be the largest slice of(52.2%) of Equity and Liabilities, recording growth of 526million euros. Nonetheless despite this 6.8% rise, they lost0.8 b.p. in terms of relative weight in the structure. Thebeneficiary was Credit Institution Resources whose relativeweight was 5.4% at the year-end (+0.6 b.p. compared to

the previous year) and which recorded a 21.1% increase ascompared to 2005.

Resources represented by securities, from loans grew to 5 835million euros, up +8.2% on December 2005, but there wasno significant change to their ranking within the liabilitiesstructure.

TREND IN EQUITY AND LIABILITIES(milhares de euros)

TYPE OF LIABILITIES2006 2005 Change


Customer Resources 8 305 197 52.2 7 779 526 53.0 525 671 6.8Credit Institution Resources 855 944 5.4 706 601 4.8 149 343 21.1Financial Liabilities 5 834 843 36.7 5 394 283 36.8 440 560 8.2Other Liabilities 140 046 1.0 191 332 1.3 -51 286 -26.8

TOTAL EXTERNAL RESOURCES 15 136 030 95.2 14 071 742 95.9 1 064 288 7.6

TOTAL EQUITY 762 610 4.8 600 122 4.1 162 488 27.1

TOTAL EQUITY AND LIABILITIES 15 898 640 100.0 14 671 864 100.0 1 226 776 8.4

9.3. PROFIT, EFFICIENCY AND PROFITABILITY

The Consolidated Profit in 2006 was 63 620 thousandeuros, up by 5 877 thousand euros (+10.2%) in compari-son with the previous year (57 743 thousand euros). Anumber of factors contributed to this favourable develop-

ment, including: the increase in active business operations,such as Customer Credit, which gave rise to an increase inNet Interest Income and positive trend in provisions andimpairments.

CONSOLIDATED STATEMENT OF INCOME BY FUNCTIONS(thousands of euros)

2006 2005 Change


Interest and equivalent revenues 674 447 602 808 71 639 11.9Interest and equivalent costs 368 352 328 449 39 903 12.1

NET INTEREST INCOME 306 095 82.9 274 359 78.9 31 736 11.6

Return from equity instruments 981 0.3 2 193 0.6 (1 212) -55.3Return on services and fees 70 422 19.1 62 413 18.0 8 009 12.8Cost of services and fees 9 598 2.6 9 300 2.7 298 3.2Profit on assets and liabilities at fair value based on return (9 374) -2.5 4 225 1.2 (13 599) -321.9Profit on available-for-sale financial assets (236) -0.1 390 0.1 (626) -160.5Profit on currency revaluations 1 859 0.5 2 223 0.6 (364) -16.4Profit on sale of other assets 3 299 0.9 5 572 1.6 (2 273) -40.8Other operating profit 5 881 1.5 5 829 1.7 52 0.9

Total operational revenue 63 234 17.1 73 545 21.1 (10 311) -14.0

BANKING REVENUE 369 329 100.0 347 904 100.0 21 425 6.2

Staff costs 140 790 38.1 128 368 36.9 12 422 9.7General administrative expenses 77 518 21.0 69 696 20.0 7 822 11.2Depreciation charge for the year 12 884 3.5 11 086 3.2 1 798 16.2

Total operating costs 231 192 62.6 209 150 60.1 22 042 10.5

Provisions net of adjustments (175) 0.0 180 0.1 (355) -197.2Impairment on credit net of reversals and recoveries 75 712 20.5 76 664 22.0 (952) -1.2Impairment on other financial assets net of reversals and recoveries 88 0.0 (229) -0.1 317 -138.4Impairment on other assets net of reversals and recoveries 1 028 0.3 5 947 1.7 (4 919) -82.7

OPERATIONAL PROFIT 61 484 16.6 56 192 16.2 5 292 9.4

Profit on Net Worth 2 136 0.6 1 551 0.4 585 37.7

CONSOLIDATED NET PROFIT FOR THE YEAR 63 620 17.2 57 743 16.6 5 877 10.2

Cash-Flow 153 157 151 391 1 766 1.2

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Cash Flow for the year was 153 157 thousand euros,which represented an increase of 1 765 thousand euros(+1.2%), in relation to the previous year.

The Group’s operational efficiency suffered a slight decline.The Cost-to-Income ratio (% Operating Costs / Banking

Revenue) recorded a +2.5 b.p. change, going from 60.1%in 2005 to 62.6% in 2006. This worsening of the Cost-to-Income ratio was related to the 10.5% increase in operatingcosts, despite the 6.2% rise in Banking Revenue.

RELATIVE EFFICIENCY

ITEM 2006 2005 Change

Staff Costs / Banking Revenue 38.1% 36.9% 1.2 b.p.

General Administrative Costs / Banking Revenue 21.0% 20.0% 1.0 b.p.

Depreciation / Banking Revenue 3.5% 3.2% 0.3 b.p.

COST TO INCOME 62.6% 60.1% 2.5 b.p.

The Return on Assets (ROA) remained at 0.4%, and the Return on Equity (ROE) was 9.3%, -0.9 b.p. as compared to theprevious year’s results (10.2%).

PROFITABILITY

ITEM 2006 2005 Change

Profit / ROA 0.4% 0.4% 0.0 b.p.

Profit / ROE 9.3% 10.2% -0.9 b.p.

Banking Revenue / Average Net Assets 2.4% 2.6% -0.2 b.p.

9.4. CAPITALISATION AND PRUDENTIAL RATIOS

The Consolidated Base Equity, consisting of the Institutio-nal Capital, Reserves and Net Profit for the Year, rose to845 810 thousand euros at the end of 2006. At that timeEligible Equity (Base Equity + Complementary Equity) stoodat 1 138 023 thousand euros. As a result, the value of

Eligible Equity exceeded that of Minimum Equity by294 461 thousand euros.

The Consolidated Solvency Ratio, as defined by the Bank ofPortugal, was 10.79%, which is above the legal minimumset by that Central Bank.

CONSOLIDATED EQUITY AND LIQUIDITY AND SOLVENCY RATIOS(thousands of euros)

INDICATORS2006 2005 Change

Valor Valor Value %

1. Eligible Equity 1 138 023 1 015 724 122 299 12.0%

(+) Base Equity 763 435 643 682 119 753 18.6%

(+) Complementary Equity 401 918 394 739 7 179 1.8%

(–) Deductions 27 330 22 697 4 633 20.4%

2. Minimum Equity 843 562 760 494 83 068 10.9%

3. Ratios

Solvency (Bop limit: 8%) 10.79% 10.68% 0.11 b.p.

Tier 1 (BoP limit: 4%) 7.24% 6.53% 0.71 b.p.

Fixed Asset (BoP limit: 100%) 13.03%

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9.5. BALANCE SHEET AND STATEMENT OF INCOME BY FUNCTIONS

CONSOLIDATED BALANCE SHEET AS AT 31 DECEMBER, 2006 AND 2005


2006 2005

GROSS IMPAIRMENT AND NET PREVIOUSASSETS DEPRECIATION ASSETS YEAR

ASSETSCash and deposits at central banks 242 772 242 772 207 707

Loans and advances to credit institutions repayable on demand 106 564 106 564 129 688

Financial assets held for trading 20 319 20 319 17 610

Other financial assets at fair value based on return 3 096 3 096

Available-for-sale financial assets 887 977 887 977 678 666

Other loans and advances to credit institutions 671 016 576 670 440 910 571

Loans and advances to Customers 13 957 649 297 001 13 660 648 12 415 395

Held-to-maturity financial assets 36 044 36 044 34 776


Available-for-sale non-current assets 103 964 13 326 90 638 102 495

Other tangible assets 167 180 88 145 79 035 80 409

Intangible assets 29 701 18 443 11 258 5 551

Investment in subsidiaries, associate companies and joint enterprises 20 417 20 417 17 935

Other assets 60 401 60 401 58 231

TOTAL ASSETS 16 316 131 417 491 15 898 640 14 671 864

LIABILITIESFinancial liabilities held for trading 38 384 38 384 15 266

Resources from other credit institutions 855 944 855 944 706 601

Resources from customers and other loans 8 305 197 8 305 197 7 779 526

Debt securities issued 5 487 890 5 487 890 5 066 741


Provisions 4 978 4 978 5 153

Other subordinated liabilities 301 229 301 229 310 649

Other liabilities 135 068 135 068 186 179

TOTAL LIABILITIES 15 136 030 15 136 030 14 071 742

EQUITYEquity 585 000 585 000 485 000

Revaluation reserves 15 593 15 593 7 652

Other reserves and retained earnings 98 397 98 397 49 727

Profit for the Year 63 620 63 620 57 743

TOTAL EQUITY 762 610 762 610 600 122

TOTAL EQUITY + LIABILITIES 15 898 640 15 898 640 14 671 864







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CONSOLIDATED STATEMENT OF INCOME AS AT 31 DECEMBER 2006 AND 2005


2006 2005

Interest and similar income 674 447 602 808

Interest and similar charges 368 352 328 449


Return from equity instruments 981 2 193

Return on services and fees 70 422 62 413

Cost of services and fees 9 598 9 300

Profit on assets and liabilities at fair value based on return -9 374 4 225

Profit on available-for-sale financial assets -236 390

Profit on currency revaluations 1 859 2 223

Profit on sale of other assets 3 299 5 572

Other operating profit 5 881 5 829

BUSINESS REVENUE 369 329 347 904

Staff costs 140 790 128 368

General administrative expenses 77 518 69 696

Depreciation charge for the year 12 884 11 086

Provisions net of adjustments -175 180

Correction to value associated with customer credit and other debtors (net of adjustments) 75 712 76 664

Impairment on other financial assets net of reversals and recoveries 88 -229

Impairment on other assets net of reversals and recoveries 1 028 5 947

Profit on associate companies and joint enterprises (net worth) 2 136 1 551

CONSOLIDATED PROFIT FOR THE YEAR 63 620 57 743







183(thousands of euros)

2006 2005

Cash flows arising from operating activitiesInterest income received 665.354 2.373.559Commission income received 70.453 62.334Interest expense paid (353.630) (226.965)Commission expense paid (10.107) (9.571)Payments to employees and suppliers (219.989) (110.153)Recovered from charged-off loans 1.254 985Other payments and receivables (46.814) 11.335

106.521 2.101.524

(Increase) / decrease in operating assetsLoans and advances to credit institutions and customers (1.069.188) (2.025.407)Other assets 1.554 (65.180)

(1.067.634) (2.090.587)

(Increase) / decrease in operating liabilitiesDeposits from clients 515.310 124.198Deposits from credit institutions 148.008 12.963

663.318 137.161

(297.795) 148.098

Cash flows arising from investing activitiesDividends received 981 2.193(Acquisition) / sale of trading financial assets 2.889 (20.334)(Acquisition) / sale of other financial assets at fair value

through profit or loss (6.901) –(Acquisition) / sale of available for sale financial assets (201.577) (2.159.570)(Acquisition) / sale of hedging derivatives 9.513 –(Acquisition) / sale of held to maturity financial assets (1.268) (35.508)(Acquisition) / sale of shares in investments (1.149) 229Deposits owned with the purpose of monetary control (17.269) 33.751Proceeds from sale of fixed assets 3.234 194Acquisition of fixed assets (20.208) (8.269)

(231.755) (2.187.314)

Cash flows arising from financing activitiesDividends paid (11.597) (24.782)Proceeds from issuance of share capital 100.000 40.000Proceeds from issuance of subordinated debt 1.389.939 2.766.870Reimbursement of subordinated debt (980.417) (654.952)Increase / (decrease) in other (sundry) liabilities 26.297 –

524.222 2.127.136

Net changes in cash and equivalents (5.328) 87.920

Cash and equivalents balance at the beginning of the year 185.204 97.284

Cash (note 16) 55.516 50.711

Loans and advances to credit institutions repayable on demand (note 17) 129.688 46.573

Cash and equivalents balance at the end of the year 179.876 185.204

See accompanying notes to the consolidated Financial Statements

9.6. CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE YEARS ENDED 31 DECEMBER,2006 AND 2005

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CONSOLIDATED STATEMENT OF INCOME FOR THE YEARS ENDED 31 DECEMBER, 2006 AND 2005


NOTES 2006 2005

Interest income 3 674 447 602 808

Interest expense 3 368 352 328 449


Dividends from equity instruments 4 981 2 193

Net fee and commission income 5 60 824 53 113

Net gains arising from trading and hedging activities 6 (7 823) 6 002

Net gains arising from available for sale financial assets 7 (236) 390

Other operating income 8 8 234 11 847

Total operating income 61 980 73 545

Staff costs 9 140 790 128 368

Other administrative costs 10 77 518 69 696

Depreciation 11 12 884 11 086

Operating costs 231 192 209 150

Provisions for loan losses 12 74 905 75 947

Other assets impairment 13 1 028 5 718

Other provisions 14 (534) 897

Operating loss 61 484 56 192

Share of profit of associates under the equity method 15 2 136 1 551

Profit for the year 63 620 57 743


9.7. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

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CONSOLIDATED BALANCE SHEET AS AT 31 DECEMBER, 2006 AND 2005


NOTES 2006 2005

ASSETS

Cash and deposits at central banks 16 242 772 207 707Loans and advances to credit institutions repayable on demand 17 106 564 129 688Other loans and advances to credit institutions 18 670 440 910 571Loans and advances to customers 19 13 660 648 12 415 395Financial assets held for trading 20 6 214 17 610Other financial assets at fair value through profit or loss 20 20 380 –Financial assets available for sale 20 887 977 678 666Hedging derivatives 21 14 220 29 153Financial assets held to maturity 22 36 044 34 776Investments in associated companies 23 20 417 17 935Property and equipment 24 79 035 80 409Intangible assets 25 11 258 5 551Other assets 26 142 671 144 403

TOTAL ASSETS 15 898 640 14 671 864

LIABILITIES

Deposits from other credit institutions 27 855 944 706 601Deposits from customers 28 8 305 197 7 779 526Debt securities issued 29 5 487 890 5 066 741Financial liabilities held for trading and other financial

liabilities at fair value through profit or loss 30 41 563 15 266Hedging derivatives 21 7 199 3 847Provisions 31 4 978 5 153Subordinated debt 32 301 229 310 649Other liabilities 33 132 030 183 959


EQUITY

Share capital 34 585 000 485 000Fair value reserves 36 7 586 (148)Reserves and retained earnings 35 and 36 106 404 57 527Profit for the year 63 620 57 743

TOTAL EQUITY 762 610 600 122

15 898 640 14 671 864

Obligations and future commitments (Note 37)


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CONSOLIDATED STATEMENT OF CHANGES IN EQUITY FOR THE YEARS ENDED 31 DECEMBER, 2006 AND 2005


General andTotal Share special Other Fair value Retained

equity capital reserves reserves reserves earnings

Balance on 31 December, 2004 527 387 445 000 166 181 4 415 – (88 209)

Transfers to reserves:

General reserve – – 6 609 – – (6 609)

Special reserve – – 1 652 – – (1 652)


Dividends paid (24 782) – – – – (24 782)

Fair value reserves (148) – – – (148) –

Equity method (78) – – (78) – –


Balance on 31 December, 2005 600 122 485 000 174 442 4 337 (148) (63 509)

Transfers to reserves:

General reserve – – 9 062 – – (9 062)

Special reserve – – 2 266 – – (2 266)


Dividends paid (11 597) – – – – (11 597)

Fair value reserves 7 734 – – – 7 734 –

Equity method 2 731 – – 3 670 – (939)


Balance on 31 December, 2006 762 610 585 000 185 770 8 007 7 586 (23 753)



1.1. BASIS OF PRESENTATION

Caixa Económica Montepio Geral («Caixa») is a credit insti-tution held by Montepio Geral – Associação Mutualista,established on 24 March, 1844, and authorised to operatein accordance with Decree-Laws No. 298/92 of 31December, and No. 136/79 of 18 May, which regulate theactivity of savings banks and establish some restrictions totheir activities. However, Caixa is authorised to carry outbanking operations in addition to those mentioned in itsby-laws, if previously authorised by the Bank of Portugal.This fact conducts to the practice of banking operations ingeneral.

The Board of Directors approved these consolidated finan-cial statements on 8 March, 2007. The financial statementsare presented in thousands of euro, rounded to the nearestthousand.

In accordance with Regulation (EC) No. 1606/2002 fromthe European Parliament and the Counsel, of 19 July, 2002,and its adoption into Portuguese Law through Decree-LawNo. 35/2002, of 17 February and Regulation No. 1/2005from the Bank of Portugal, Caixa’s consolidated financialstatements are required to be prepared in accordance withInternational Financial Reporting Standards («IFRS») asendorsed by the European Union («EU») for the year ended31 December 2005. IFRS comprise accounting standardsissued by the International Accounting Standards Board(«IASB») as well as interpretations issued by the Interna-tional Financial Reporting Interpretations Committee («IFRIC»)and their predecessor bodies.

The consolidated financial statements for the year ended31 December, 2006 have been prepared in accordancewith the IFRS, effective and adopted for use in the EU as at31 December, 2006.

The financial statements are prepared under the historicalcost convention, as modified by the application of fair valuebasis for derivative financial instruments, financial assetsand liabilities held for trading, and available for sale assets,except those for which a reliable measure of fair value is notavailable. Recognised assets and liabilities that are hedgedunder hedge accounting are stated at fair value in respectof the risk that is being hedged. Other financial assets andliabilities and non-financial assets and liabilities are stated atamortised cost or historical cost. Non-current assets and lia-bilities are stated at the amortised or historical cost.

The accounting policies set out below have been appliedconsistently throughout Caixa entities and for all periodspresented in these consolidated financial statements.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 31 DECEMBER, 2006

The preparation of the financial statements in conformitywith IFRS requires the Board of Directors to make judg-ments, estimates and assumptions that affect the applica-tion of the accounting policies and reported amounts ofassets and liabilities, income and expenses. The estimatesand associated assumptions are based on historical expe-rience and various other factors that are believed to bereasonable under the circumstances, the results of whichform the basis of making the judgments about carryingvalues of assets and liabilities that are not readily apparentfrom other sources. Actual results may differ from theseestimates. The issues involving a higher degree of judg-ment or complexity, or where assumptions and estimatesare considered to be significant are presented in note 1.21.

1.2. BASIS OF CONSOLIDATION

Investments in subsidiaries

Investments in subsidiaries where Caixa exercises controlare fully consolidated from the date Caixa assumes controlover its activities and until the control ceases to exist.Control is presumed to exist when Caixa owns more thanhalf of the voting rights. Additionally, control exists whenCaixa has the power, directly or indirectly, to govern thefinancial and operating policies of an entity to obtain be-nefits from its activities, even if the percentage of share-holding is less than 50%.

When the accumulated losses of a subsidiary attributableto the minority interest exceed the equity of the subsidiaryattributable to the minority interest, the excess is attributedto Caixa and charged to the income statement as it occurs.Profits subsequently reported by the subsidiary are recog-nised as profits of Caixa until the prior losses attributableto minority interest previously recognised by Caixa havebeen recovered.

Associates

Investments in associated companies are consolidated by theequity method, since the date Caixa acquires significant in-fluence until the date it ceases. Associates are those entities,in which Caixa has significant influence, but not control, overthe financial and operating policy decisions of the investee. Itis assumed that Caixa has significant influence when it holds,directly or indirectly, 20% or more of the voting rights of theinvestee. Conversely, if Caixa holds, directly or indirectly lessthan 20% of the voting rights of the investee, it is presumedthat Caixa does not have significant influence, unless suchinfluence can be clearly demonstrated.

The existence of significant influence by Caixa is usually evidenced in one or more of the following ways:

– representation on the Board of Directors or equivalent governing body of the investee;

– participation in policy-making processes, including participation in decisions about dividends or other distributions;

– material transactions between Caixa and the investee;

Transactions eliminated on consolidation

Intragroup balances and any unrealised gains and lossesarising from intragroup transactions, are eliminated inpreparing the consolidated financial statements. Unrealisedgains and losses arising from transactions with associatesand jointly controlled entities are eliminated to the extentof Caixa’s interest in the entity.

1.3. LOANS AND ADVANCES TO CUSTOMERS

Loans and advances to customers include loans andadvances originated by Caixa, which are not intended tobe sold in the short term and are recognised when cash isadvanced to borrowers.

The derecognition of these assets occurs in the followingsituations: (i) the contractual rights of Caixa have expired;or (ii) Caixa transferred substantially all the risks andrewards associated.

Loans and advances to customers are initially recognised atfair value plus any directly attributable transaction costs

and are subsequently measured at amortised cost using theeffective interest method, less impairment losses.

Impairment

Caixa policy consists in a regular assessment of the exis-tence of objective evidence of impairment in their loanportfolios. Impairment losses identified are charged againstincome and subsequently the charge is reversed, if there isa reduction of the estimated impairment loss, in a subse-quent period.

After initial recognition, a loan or a loan portfolio, definedas a group of loans with similar credit risk characteristics,may be classified as impaired when there is objective evi-dence of impairment as a result of one or more events andwhen the loss event has an impact on the estimated futurecash flows of the loan or of the loan portfolio that can bereliably estimated.

In accordance with IAS 39, there are two methods for lossesimpairment calculation: (i) individually assessed loans; and(ii) collective assessed loans.

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– interchange of managerial personnel;

– provision of essential technical information.

The consolidated financial statements include the attribu-table part of the total results and reserves of associatedcompanies accounted on an equity basis. When Caixashare of losses exceeds its interest in an associate, Caixa’scarrying amount is reduced to nil and recognition of fur-ther losses is discontinued except to the extent that Caixahas incurred in legal or constructive obligations or madepayments on behalf of an associate.

Special Purpose Entities («SPE’s»)

Caixa fully consolidates certain SPE’s when the substanceof the relation with those entities indicates that Caixa exer-cises control over its activities, independently of the per-centage of the equity held.

The evaluation of the existence of control is determined based on the criteria established by SIC 12 – Consolidation –Special Purpose Entities, which can be analysed as follows:

– The activities of the SPE, in substance, are being conducted on behalf of Caixa, in accordance with the specific needsof Caixa’s business, so as to obtain benefits from these activities;

– Caixa has the decision-making powers to obtain the majority of the benefits of the activities of the SPE;

– Caixa has the right to obtain the majority of the benefits of the SPE and therefore may be exposed to risks incidentto the activities of the SPE; or

– Caixa in substance retains the majority of the residual or ownership risks related to the SPE or its assets in order toobtain benefits from its activities.

i) Individually assessed loans

Impairment losses on individually assessed loans are determined by an evaluation of the exposures on a case-by-case basis.For each loan considered individually significant, Caixa assesses, at each balance sheet date, the existence of any objec-tive evidence of impairment. In determining such impairment losses on individually assessed loans, the following factorsare considered:

– Caixa aggregate exposure to the customer and the existence of overdue loans;

– the viability of the customers’ business and capability to generate sufficient cash flow to service their debt obliga-tions in the future;

– the existence, nature and estimated value of the collaterals;

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Impairment losses are calculated by comparing the presentvalue of the expected future cash flows, discounted at theoriginal effective interest rate of the loan, with its currentcarrying value and the amount of any loss is charged in theincome statement. The carrying amount of impaired loansis reduced through the use of an allowance account. Forloans with a variable interest rate, the discount rate usedcorresponds to the effective annual interest rate, whichwas applicable in the period that the impairment wasdetermined.

The present value of the estimated future cash flows of acollateralised loan reflects the cash flows that may resultfrom the foreclosure less costs for obtaining and selling thecollateral.

Individual loans that are not identified as having an objec-tive evidence of impairment are grouped on the basis ofsimilar credit risk characteristics, and assessed collectively.

ii) Collective assessment

Impairment losses are calculated on a collective basis in two different scenarios:

– for homogeneous groups of loans that are not considered individually significant; or

– in respect of losses which have been incurred but have not yet been identified («IBNR») on loans subject to indivi-dual assessment for impairment (see section (i)).

The collective impairment loss is determined considering the following factors:

– historical loss experience in portfolios of similar risk characteristics;

– knowledge of the current economic and credit conditions and its influence in historical losses level;

– the estimated period between a loss occurring and that loss being identified.

The methodology and assumptions used to estimate thefuture cash flows are revised regularly by Caixa in order tomonitor the differences between estimated and real losses.

Loans which have been individually assessed and no evi-dence of impairment has been identified, are groupedtogether based on similar credit risk characteristics for cal-culating a collective impairment loss. This loss covers loansthat are impaired at the balance sheet date but which willnot be individually identified as such until some time in thefuture.

The loans charge-off is performed against the related pro-vision for loan impairment, when these correspond to100% of the loans amount. Subsequent recoveries ofamounts previously written off are accounted as profits inthe income statement in the period they occur.

1.4. FINANCIAL INSTRUMENTS

i) Classification

Trading financial instruments are those that Caixa princi-pally holds for the purpose of short-term profit taking, withchanges in fair value recognised against earnings andincludes derivative contracts that are not designated ashedging instruments or at first recognition designated fairvalue through profit and loss.

Changes in the fair value of such instruments are recordedin the income statement. All trading derivatives with posi-tive fair value are reported as trading assets and negativefair value as trading liabilities.

Held to maturity financial instruments are non-derivativefinancial assets with fixed payments or available anddefined maturity, which Caixa has the purpose of beingheld to maturity.

Available for sale financial assets are non derivative finan-cial assets that are not classified as held to maturity invest-ments or financial assets at fair value through profit or loss.Available for sale instruments include equity and debtinstruments.

Other financial liabilities comprise all financial liabilities notclassified as financial liabilities at fair value with changesthrough the income statement. Other financial liabilitiesinclude, among others, money market funding, depositsfrom credit institutions and customers and issued debt.

ii) Recognition date

Financial assets and financial liabilities are recognised usingtrade date accounting.

iii) Trading assets and trading liabilities

Treasury bills, debt securities, equity shares, derivatives notaccounted for as hedging instruments and short positions

– a significant downgrading in the clients rating;

– the assets available on liquidation or bankruptcy;

– the ranking of all creditor claims;

– the amount and timing of expected receipts and recoveries.

Derivative hedging instruments are stated at fair value and gains and losses on remeasurement are recognised in accor-dance with the hedging accounting model adopted by Caixa. A hedging relationship exists when:

– at the inception of the hedge there is formal documentation of the hedge;

– the hedge is expected to be highly effective;

– the effectiveness of the hedge can be reliably measured;

– the hedge is highly effective throughout the reporting period; and

– for hedges of a forecasted transaction, the transaction is highly probable and presents an exposure to variations incash flows that could ultimately affect net profit or loss.

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in securities which have been acquired or incurred princi-pally for the purpose of selling or repurchasing in the nearterm or are part of a portfolio of identified financial instru-ments that are managed together and for which there isevidence of a recent actual pattern of short-term profit-taking are classified as held for trading. Such financialassets or financial liabilities are recognised initially at fairvalue, with transaction costs or profits taken to the incomestatement, and are subsequently remeasured at fair value.All subsequent gains and losses from changes in the fairvalue of these assets and liabilities, accrued interests anddividends received are recognised in the income statementwithin «Net gains arising from trading and hedging activi-ties» as they arise.

iv) Financial assets and liabilities at fair value through profitor loss

Financial assets and liabilities at fair value through profit orloss are initially recognised at fair value, with transactioncosts and profits are directly recognised in the incomestatement, and are subsequently remeasured at fair value.All subsequent gains and losses from changes in the fairvalue of these assets and liabilities, accrued interests anddividends received are recognised in the income statementwithin «Net gains arising from trading and hedging activi-ties» as they arise.

v) Available for sale assets

Treasury bills, debt securities and equity shares intended tobe held on a continuing basis are classified as available forsale assets unless designated at fair value through profitand loss or classified as held-to-maturity. Available for saleassets are initially measured at fair value plus direct andincremental transaction costs or profits. For debt securitiestransactions, costs are amortised to profit and loss usingthe effective interest method. Available for sale assets aresubsequently remeasured at fair value. Changes in fairvalue are recognised in equity until the securities are eithersold or impaired. On the sale of available for sale assets,cumulative gains or losses previously recognised in equityare recognised through the income statement and classi-fied as «Net gains arising from available for sale financial

assets». Interest income is recognised on such securitiesusing the effective interest method, calculated over theasset’s expected life. Where dated investment securitieshave been purchased at a premium or discount, these pre-miums and discounts are included in the calculation of theeffective interest rate. Dividends are recognised in theincome statement when the right to receive payment hasbeen established.

An assessment is made at each balance sheet date as towhether there is any objective evidence of impairment,namely circumstances where an adverse impact on esti-mated future cash flows of the financial asset or group ofassets can be reliably estimated.

If an available for sale asset is determined to be impaired,the cumulative loss (measured as the difference betweenthe acquisition cost and the current fair value, less anyimpairment loss on that financial asset previously recog-nised in the income statement) is removed from equity andrecognized in the income statement. If, in a subsequentperiod, the fair value of a debt instrument classified asavailable for sale increases and that increase can be objec-tively related to an event occurring after the impairmentloss was recognised in the income statement, the impair-ment loss is reversed through the income statement. Thereversal of impairment losses recognised in the incomestatement on equity instruments is recognised in equity.

vi) Held to maturity investments

Held to maturity investments are recognised at amortisedcost, using interest effective method less impairment losses

1.5. HEDGE ACCOUNTING

i) Hedge accounting

Caixa uses derivative financial instruments to hedge itsexposure to currency and interest rate risks, resulting fromfinancing and investment activities. However, derivativesnot qualified for hedging are accounted for as tradinginstruments.

When a derivative financial instrument is used to hedgeexchange fluctuations arising from monetary assets or lia-bilities items, no hedge accounting model is applied and

any gain or loss associated to the derivative or exchangedifference associated with the monetary item is recognisedthrough income.

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ii) Fair value hedge

Changes in the fair value of derivatives that are designatedand qualify as fair value hedging instruments are recordedin the income statement, together with changes in the fairvalue of the asset or liability or group thereof that areattributable to the hedged risk. If the hedging relationshipno longer meets the criteria for hedge accounting, thecumulative adjustment to the carrying amount of a hedgeditem for which the effective interest method is used isamortised to the income statement over the residual periodto maturity.

iii) Hedge effectiveness

For each hedging relationship in order to be classified assuch according to IAS 39, effectiveness has to be demons-trated. As such Caixa performs prospective tests at incep-tion date and retrospective tests in order to demonstrate ineach reporting period the effectiveness, showing that thechanges in the fair value of the hedging instrument areneutralised by the changes in the hedged item for the riskcovered.

Any ineffectiveness is recognised immediately in theincome statement.

iv) Embedded derivatives

Embedded derivatives should be accounted for separatelyif the economic characteristics and risks of the embeddedderivative are not closely related to the host contract,unless the hybrid (combined) instrument is measured at fairvalue with changes in fair value recognised directly in theincome statement. Embedded derivatives are classified astrading and accounted for at fair value with changesthrough profit and loss.

1.6. RECLASSIFICATIONS BETWEEN FINANCIAL INS-TRUMENTS CATEGORIES

Reclassification of financial assets and liabilities into or outof the fair value through profit and loss category is prohi-bited.

1.7. DERECOGNITION

Caixa derecognises financial assets when all rights to futurecash flows have expired or the assets are transferred. In theevent of a transferral of assets, derecognition can onlyoccur either when risks and rewards have substantiallybeen transferred or Caixa has not retained control of theassets.

Caixa derecognises financial liabilities when these are dis-charged, cancelled or extinguished.

1.8. FINANCE LEASE TRANSACTIONS

Caixa classifies its lease agreements as finance leases oroperating leases taking into consideration the substance ofthe transaction rather than its legal form, in accordancewith IAS 17 – Leases. A lease is classified as a finance leaseif it transfers substantially all the risks and rewards inciden-

tal to ownership. All other leases are classified as operatingleases.

Operating leases

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

Finance leases

– As lessee

Finance lease contracts are recorded at inception date,both under assets and liabilities, at the cost of the assetleased, which is equal to the present value of outstandinglease instalments. Instalments comprise (i) an interestcharge, which is recognised in the income statement and(ii) the amortisation of principal, which is deducted fromliabilities. Financial charges are recognised as costs over thelease period, in order to produce a constant periodic rateof interest on the remaining balance of liability for eachperiod.

– As lessor

Assets leased out are recorded in the balance sheet asloans granted, for an amount equal to the net investmentmade in the leased assets.

Interest included in instalments charged to customers isrecorded as interest income, while amortisation of princi-pal, also included in the instalments, is deducted from theamount of the loans granted. The recognition of the inte-rest reflects a constant periodic rate of return on thelessor’s net outstanding investment.

1.9. INTEREST INCOME AND EXPENSE

Interest income and expense for all instruments measuredat amortised cost are recognised in the income statementusing the effective interest method.

The effective interest rate is the rate that exactly discountsestimated future cash payments or receipts through theexpected life of the financial instrument or, when appro-priate, a shorter period, to the net carrying amount of thefinancial asset or financial liability.

When calculating the effective interest rate, Caixa esti-mates future cash flows considering all contractual termsof the financial instrument but without considering futureimpairment losses. The calculation includes all fees consi-dered as included in the effective interest rate, transactioncosts and all other premiums or discounts directly relatedwith the transaction.

If financial asset or a group of similar financial assets hasbeen written down as a result of an impairment loss, inte-rest income is recognised using the rate of interest used todiscount the future cash flows for the purpose of measur-ing the impairment loss.

For derivative financial instruments, except those classifiedas hedging instruments of interest rate risk, the interestcomponent of the changes in the fair value is not separatedout and is classified under net losses/gains arising from

recognised under interest and similar income or interestexpense and similar charges.

1.10. FEE AND COMMISSION INCOME

Fees and commission are recognised according to the following criteria:

– fee and commission which are earned as services are provided are recognised in income over the period in whichthe service is being provided;

– fee and commission that are earned on the execution of a significant act, are recognised as income when the ser-vice is completed.

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financial assets. For hedging derivatives of interest rate risk,the interest component of the changes in their fair value is

1.11. RESULTS ARISING FROM TRADING AND HEDGINGACTIVITIES AND AVAILABLE FOR SALE FINANCIAL ASSETS

The results arising from trading and hedging activities andavailable for sale financial assets correspond to gains andlosses arising from financial assets and liabilities classifiedas trading (including derivatives and embeded derivatives)and the corresponding interest and dividends. Also includedare the gains and losses arising from the available for salefinancial assets portfolio.

1.12. PROPERTY AND EQUIPMENT

Property and equipment are stated at deemed cost lessaccumulated depreciation and impairment losses. Subse-

quent costs are recognised as a separate asset only when itis probable that future economic benefits associated withthe item will flow to Caixa. All other repairs and mainte-nance are charged to the income statement during thefinancial period in which they are incurred.

Caixa performs impairment testing whenever events or cir-cumstances show that the book value exceeds the recove-rable amount. The difference between the book value andrecoverable amount is charged to the profit and loss.

Depreciation is calculated on a straight-line basis, over the following periods which correspond to their estimated useful life:

Number of years

Buildings 50

Works in rented buildings 10

Equipment 4 to 10

1.13. INTANGIBLE ASSETS

Software

Software acquisition costs are capitalised and amortisedover a three year period, as well as implementation costs.

Maintenance costs are recognised as costs when occurred.

Research and development expenditure

Caixa has not incurred in research costs.

Development expenditure in respect of new projects is deferred to future periods and amortised over a three year periodas long as the following criteria are satisfied:

– the product or process is clearly defined and the costs attributable to the product or process can be separately iden-tified;

– the technical feasibility of the product or process has been demonstrated;

– the Board of Directors has indicated its intention to develop and market, or use, the product or process;

– there is a clear indication of a future market for the product or process or, its usefulness can be demonstrated;

– adequate resources exist to complete the project and market the product or process.

1.14. ASSETS ARISING OUT OF RECOVERED LOANS

Assets arising out of recovered loans include buildings andsecurities arising from the settlement of loan contracts.These assets are reported under «Other assets» and are ini-tially recognised at the recovered loan value.

Fair value is based on the market value, being determinedbased on the expectable selling price estimated throughregular valuations performed by Caixa.

Subsequent measurement is at the lower of its carryingamount and its corresponding and fair value. No deprecia-

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tion is provided in respect of those assets. Any subsequentwrite-down of the acquired asset to fair value is recorded asan impairment loss and included in the income statement.

1.15. CASH AND CASH EQUIVALENTS

For the purposes of the cash flow statement, cash and cashequivalents comprise balances with less than three months’maturity from the balance sheet date, including cash anddeposits with banks.

Cash and cash equivalents exclude restricted balances withcentral banks.

1.16. FOREIGN CURRENCY TRANSACTIONS

Transactions in foreign currencies are translated at the fo-reign exchange rate ruling at the date of the transaction.Monetary assets and liabilities denominated in foreign cur-rencies, which are stated at historical cost, are translated atthe foreign exchange rate ruling at that date. Foreignexchange differences arising on translation are recognisedin the income statement. Non-monetary assets and liabili-ties denominated in foreign currencies, which are stated athistorical cost, are translated at the foreign exchange rateruling at the date of the transaction. Non-monetary assetsand liabilities denominated in foreign currencies that arestated at fair value are translated to the reporting currencyat the foreign exchange rates ruling at the dates that thevalues were determined.

1.17. EMPLOYEE BENEFITS

Defined benefit plans

Caixa assumed the responsibility to pay its employees pen-sions on retirement or disabilities, as established in theterms of «Acordo Colectivo de Trabalho Vertical do SectorBancário (ACTV)».

The pension plan benefits is in accordance with the «PlanoACTV – Acordo Colectivo de Trabalho Vertical do SectorBancário» and the «Plano ACTQ – Acordo Colectivo dosQuadros do Sector Bancário».

Caixa’s pension obligations are financed by a fund managedby Futuro – Sociedade Gestora de Fundos de Pensões, S.A.

The net obligation in respect of pension plans (definedbenefit pension plans) is calculated on an annually, at eachbalance sheet date.

In accordance with IFRS 1, Caixa elected at the transitiondate, 1 January 2004, for the recognition at equity of allactuarial gains and losses, accounted as assets in accor-dance with prior accounting principles («reset method»).

The actuarial calculation is made using the projected unitcredit method and following actuarial and financialassumptions, in line with parameters required IAS 19requirements.

The current service costs and any past service costs togetherwith the expected return on plan assets less the unwindingof the discount on the plan liabilities are charged to ope-rating costs.

Caixa’s net obligation in respect of defined benefit pensionplan is calculated by estimating the amount of future bene-fit that employees have earned in return for their service inthe current and prior periods. The benefit is discounted inorder to determine its present value, and the fair value ofany plan assets is deducted. The discount rate is the yieldat balance sheet date on AAA credit rated bonds that havematurity dates approximating the terms of Caixa’s obliga-tions. The net obligation is determined after the deductionof the fair value assets of the Pensions Plan.

Employee benefits, other than pension plans, namely postretirement health care benefits are also included in thebenefits plans calculation.

Under the corridor method, actuarial gains and losses notrecognised, exceeding 10% of the greater of the presentvalue of the defined benefit obligation and the fair value ofplan assets, are recognised in the income statement over aperiod of 25 years, corresponding to the expected remain-ing working life of the employees.

The funding policy of the Plan is to make annual contribu-tions by Caixa so as to cover the projected benefits obliga-tions, including the noncontractual projected benefits. Theminimum level required is 100% regarding the liability withpensioners and 95% regarding the employees in service.

1.18. INCOME TAX

According to the No. 1 a) of Article 10th, of IRC Legisla-tion, Caixa is exempt from income tax payment (Impostosobre o Rendimento das Pessoas Colectivas – IRC). Thisexemption was recognized by a regulation issued by theMinisterial Secretary of Fiscal Affairs dated 3 December,1993, and confirmed by the Law No. 10-B/96 from 23March, which approved the public budget for the year of1996.

1.19. SEGMENTAL REPORTING

A business segment is a distinguishable component of anentity that is engaged in providing an individual product orservice or a group of related products or services and thatis subject to risks and returns that are different from thoseof other business segments.

A geographical segment is a distinguishable component ofCaixa that is engaged in providing a product or service ora group of related products or services within a particulareconomic environment and that are subject to risks andreturns that are different from those which operates inother economic environments.


1.20. PROVISIONS

Provisions are recognised when (i) Caixa has a present legalor constructive obligation, (ii) it is probable that its paymentwill be required and (iii) a reliable estimate can be made ofthe amount of the obligation.

194

1.21. CRITICAL ACCOUNTING ESTIMATES ANDJUDGEMENTS IN APPLYING ACCOUNTING POLICIES

IFRS set forth range of accounting treatments and requirethe Board of Directors to apply judgment and make esti-mates in deciding which treatment is most appropriate.The most significant of these accounting policies are dis-cussed in this section in order to improve understanding ofhow their application affects Caixa reported results andrelated disclosure.

Because in many cases there are several alternatives to theaccounting treatment chosen by the Board of Directors,Caixa’s reported results would differ if a different treat-ment were chosen. Board of Directors believes that thechoices made by it are appropriate and that the financialstatements present Caixa’s financial position and resultsfairly in all material respects.

The alternative outcomes discussed below are presentedsolely to assist the reader in understanding the financialstatements and are not intended to suggest that otheralternatives or estimates would be more appropriate.

Impairment of available for sale equity investments

Caixa determines that available for sale equity investmentsare impaired when there has been a significant or pro-longed decline in the fair value below its cost. This deter-mination of what is significant or prolonged requiresjudgement. In making this judgement, Caixa evaluatesamong other factors, the normal volatility in share price.

In addition, valuations are generally obtained through mar-ket quotation or valuation models that may requireassumptions or judgment in making estimates of fair value.

Alternative methodologies and the use of differentassumptions and estimates could result in a higher level ofimpairment losses recognised with a consequent impact inthe income statement of Caixa.

Impairment losses on loans and advances

Caixa reviews its loan portfolios to assess impairment on aregularly basis, as described in note 1.3.

The evaluation process in determining whether an impair-ment loss should be recorded in the income statement issubject to numerous estimates and judgments. The fre-quency of default, risk ratings, loss recovery rates and theestimation of both the amount and timing of future cashflows, among other things, are considered in making thisevaluation.

Alternative methodologies and the use of differentassumptions and estimates could result in a different levelof impairment losses with a consequent impact in theincome statement of Caixa.

Fair value of derivatives

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

quotations (both for that transaction or for similar instru-ments traded) or by pricing models, based on net presentvalue of estimated future cash flows which take intoaccount market conditions for the underlying instruments,time value, yield curve and volatility factors. These pricingmodels may require assumptions or judgments in estimat-ing their values.

Consequently, the use of a different model or of differentassumptions or judgments in applying a particular modelcould produced different financial results for a particularperiod.

Held to maturity investments

Caixa follows the guidance of IAS 39 on classifying non-derivative financial assets with fixed or determinable pay-ments and fixed maturity as held-to-maturity. This classifi-cation requires significant judgement.

In making this judgement, Caixa evaluates its intention andability to hold such investments to maturity. If Caixa fails tokeep these investments to maturity other than for specificcircumstances – for example, selling an insignificant amountclose to maturity - it will be required to reclassify the entireclass as available for sale. The investments would thereforebe measured at fair value not amortised cost.

The use of different assumptions and estimates wouldresult in the determination of the fair value of this portfo-lio with a corresponding entry in the fair value reserve inequity.

Securitisations and special purpose entities (SPE)

Caixa sponsors the formation of special purpose entities(SPE) primarily for asset securitisation transactions and forliquidity purposes.

Caixa does not consolidate SPE that it does not control. Asit can sometimes be difficult to determine whether Caixadoes control an SPE, it makes judgements about its expo-sure to the risks and rewards, as well as about its ability tomake operational decisions for the SPE in question (note1.2).

The determination of the SPE that needs to be consolidatedby Caixa requires the use of estimates and assumptions indetermining the respective expected residual gains andlosses and which party retains the majority of such residualgains and losses. Different estimates and assumptionscould lead Caixa to a different scope of consolidation witha direct impact in net income.

Pension and other employees’ benefits

Determining pension liabilities requires the use of assump-tions and estimates, including the use of actuarial projec-tions, estimated returns on investment, and other factorsthat could impact the cost and liability of the pension plan.

Changes in these assumptions could materially affect thesevalues.

195

3. Net interest income



Interest income:

Interest on loans and advances 580 516 475 048

Interest on other assets 21 653 20 606


Interest on available for sale securities 35 152 14 666

Interest on held to maturity securities 1 446 1 278

Interest on trading securities 84 33


Other interest and income 7 701 5 898

674 447 602 808

Interest expense:


Interest on securities issued 155 348 112 966

Interest on loans 16 625 12 994

Interest on other funding 9 909 10 051


Interest on trading securities 18 3

Other interest and expense 27 233

368 352 328 449


These balances are analysed as follows:2006 2005



Net gains arising from trading, hedging and available for sale activities (8 059) 6 392

298 036 280 751

2. Net interest income and net gains arising from trading, hedging and available forsale activities

Accounting Standards require separate disclosure of netinterest income and net gains arising from trading, hedg-ing activities and available for sale activities, as presented innotes 3, 6 and 7. This required disclosure, however, doesnot take into account that net interest and net gains from

trading, hedging and available for sale activities are gene-rated by a range of different business activities. In manycases, a particular business activity can generate both netinterest and trading income.

4. Dividends from equity instruments

This caption in the amount of Euros 981 000 (2005: Euros 2 193 000) is related to income from investments.

5. Net fee and commission income



Fee and commission income:


From guarantees granted 4 800 4 488

From transactions with third parties 1 063 793

From commitments to third parties 8 833 8 166

From other services 10 342 8 853

70 422 62 413

Fee and commission expenses:


From securities operations 282 241

From other services 505 1 825

9 598 9 300

Net fees and commission income 60 824 53 113

6. Net gains arising from trading and hedging activities



Gains arising from trading and hedging activities:

Hedging derivatives 23 124 26 137

Financial instruments at fair value through profit and loss 74 899 24 478


Financial instruments held for trading 33 550 21 381


138 909 78 951

Losses arising from trading and hedging activities:

Hedging derivatives 20 338 26 402

Financial instruments at fair value through profit and loss 85 322 17 127


Financial instruments held for trading 35 287 24 243


146 732 72 949

Net gains arising from trading and hedging activities (7 823) 6 002

196

197

7. Net gains arising from available for sale financial assets



Gains arising from available for sale financial assets:

Bonds and other fixed income securities

Issued by Public entities – 305


Other securities 217 2

426 417

Losses arising from available for sale financial assets:

Bonds and other fixed income securities

Issued by Public entities 1 2


662 27

Net gains arising from available for sale financial assets (236) 390

8. Other operating income



Other operating income:

Income from services 3 203 2 574

Reimbursement of expenses 2 291 2 931

Profits arising from deposits on demand management 5 763 3 760

Gains on sale of investments – 3 420

Gains on sale of investments arising out of recovered loans 4 836 4 138

Other operating income 2 217 3 060

18 310 19 883

Other operating costs:

Indirect taxes 173 232

Donations and quotizations 153 264

Losses on sale of investments arising out of recovered assets 1 480 1 788

Losses on sale of fixed assets – 78

Contributions to the Deposit Guarantee Fund 1 602 1 600

Other operating costs 6 668 4 074

10 076 8 036

Other net operating income 8 234 11 847

As at 31 December, 2005 the caption Gains on sale of investments is related to the unrealised gains from the liquidationof Montepio Geral – Cayman.

9. Staff costs



Remunerations 99 173 94 684

Mandatory social security charges 34 868 32 407

Other staff costs 6 749 1 277

140 790 128 368

198

As referred in note 40, the caption Remunerationsincludes, as at 31 December, 2006, the amount of Euros24 853 000 (2005: Euros 20 170 000) related to the pen-sion cost during the year.

As at 31 December, 2006, the remunerations attributableto the Directors and Fiscal Board amount to Euros1 263 000 (2005: Euros 1 061 000) referring to staff costs.

The average number of employees at service in Caixa during 2006 and 2005, by categories, is analysed as follows:

2006 2005

Management 125 115

Managerial staff 679 656

Technical staff 338 276

Specific categories 190 236

Administrative 1 527 1 545

Staff 90 94

2 949 2 922

10. Other administrative costs



Rents 20 342 19 583

Specialised services

Information technology services 3 036 3 033

Outsourcing 5 000 4 012

Other specialised services 10 728 9 589

Advertising 13 344 10 591

Communications 7 443 6 978

Water, electricity and fuel 3 454 3 409

Maintenance and related services 3 304 2 814

Transportation 2 525 2 283

Insurance 1 996 1 920

Travel, hotel and representation costs 1 665 1 340

Consumables 1 424 1 083

Training costs 1 002 1 359

Other supplies and services 2 255 1 702

77 518 69 696

199

11. Depreciation



Intangible assets:

Software 4 319 2 886

Property and equipment:

Land and buildings 3.753 4 021

Equipment:

Furniture 603 699

Office equipment 159 190



Motor vehicles 63 98

Security equipment 138 172

8 565 8 200

12 884 11 086

12. Loans impairment



Impairment for loans and advances to customers:



Recovery of loans charged-off (1 254) (985)

74 905 75 947

13. Other assets impairment



Impairment for investments arising out of recovered loans:



1 028 5 947

Impairment for securities:

Impairment for the year – –

Write-back for the year – (229)

– (229)

1 028 5 718

200

14. Other provisions

The amount of this account is comprised of:

2006 2005Euros ‘000 Euros ‘000

Impairment for country risk:



(359) 717

Provision for liabilities and charges:



(175) 180

(534) 897

15. Share of profit of associates under the equity method

The contribution of the associated companies accounted for under the equity method to Caixa’s profit is as follows:

2006 2005Euros ‘000 Euros ‘000

Lusitania, Companhia de Seguros, S.A. 712 738

Lusitania Vida, Companhia de Seguros, S.A. 1 272 919


HTA – Hotéis, Turismo e Animação dos Açores, S.A. 21 (230)

2 136 1 551

16. Cash and deposits at central banks



Cash 73 312 55 516

Bank of Portugal 169 460 152 191

242 772 207 707

The balance Bank of Portugal includes deposits to satisfy thelegal requirements to maintain a cash reserve for which thevalue is based on the value of deposits and other liabilities.

The cash reserve requirements according with the Euro-pean Central Bank System for Euro Zone, establishes the

maintenance of a deposit with the central bank equivalentto 2% of the average value of deposits and other liabilities,during each reserve requirement period.

201

17. Loans and advances to credit institutions repayable on demand





Amounts due for collection 70 278 86 929

106 564 129 688

The balance Amounts due for collection represents essentially cheques receivable from other credit institutions due forcollection.

18. Other loans and advances to credit institutions



Inter-bank Money Market 15 006 –



671 016 911 506

Impairment for other loans and advances to credit institutions (576) (935)

670 440 910 571

The balance Other loans and advances to credit institutions, by the period to maturity, is analysed as follows:

2006 2005Euros ‘000 Euros ‘000

Up to 3 mont 660 575 886 539


6 months to 1 year – 7 291

More than 5 years 590 590

Undetermined 119 124

671 016 911 506

Impairment for other loans and advances to credit institutions is analysed as follows:

2006 2005Euros ‘000 Euros ‘000

Impairment for other loans and advances to credit institutions:

Balance on 1 January 935 218



Balance on 31 December 576 935

202

19. Loans and advances to customers



Asset-backed loans 12 527 599 11 170 990



Public sector 58 226 58 805

Foreign loans 333 506


13 661 217 12 453 721

Overdue loans – less than 90 days 35 872 27 504

Overdue loans – more than 90 days 260 560 303 986

296 432 331 490

13 957 649 12 785 211

Impairment for loans and advances to customers (297 001) (369 816)

13 660 648 12 415 395

The analysis of Loans and advances to customers, by type of credit, is as follows:

2006 2005Euros ‘000 Euros ‘000

Residents:

Short term

Discounted bills 150 692 120 743

Current account credits 617 306 607 821

Overdrafts 24 271 22 881

Loans 1 670 61 104

793 939 812 549

Medium and long term

Real estate loans

Mortgage 8 605 625 7 949 713

Construction 2 096 327 2 035 537


Other loans 2 124 638 1 640 742

12 866 945 11 640 666

Non-Residents:

Short term 333 506

13 661 217 12 453 721

Overdue loans:

Less than 90 days 35 872 27 504

More than 90 days 260 560 303 986

296 432 331 490

13 957 649 12 785 211

Impairment for loans and advances to customers (297 001) (369 816)

13 660 648 12 415 395

203

The analysis of Loans and advances to customers, by maturity date and type of credit as at 31 December, 2006, is as fol-lows:

Loans

Up to 1 year to Over Undetermined1 year 5 years 5 years maturity Total


Asset-backed loans 440 222 2 318 788 9 768 589 235 804 12 763 403

Other guarantee loans 367 272 168 362 118 699 45 025 699 358

Unsecured loans 160 417 119 345 100 609 14 979 395 350

Public sector – 1 047 57 179 118 58 344

Foreign loans 333 – – – 333

Finance leases – 20 614 19 741 506 40 861

968 244 2 628 156 10 064 817 296 432 13 957 649

The balance Loans and advances to customers includes the amounts of securitised loans related with traditional securiti-sations held by SPV’s and consolidated in accordance with SIC 12, as referred in the accounting policy described in note1.2. As at 31 December, 2006, these loans amount to Euros 799 745 000 (2005: Euros 987 488 000), and are analysedas follows

2006 2005Euros ‘000 Euros ‘000

Pelican Mortgages No.1 300 941 413 817

Pelican Mortgages No. 2 498 804 573 671

799 745 987 488

The balance Overdue loans for more than 90 days includesthe amount of Euros 6 806 000 (2005: Euros 6 813 000)related to loans bought at court auctions. These amountscorrespond to loans overdue for more than three years forwhich the contractual obligation with the former debtorhas been extinguished due to the acquisition in court auction

bankruptcy or acquisition through for sale but for whichthere are still pending legal actions.

Loans and advances to customers include only the amountof variable interest rate contracts.

Caixa engages in mortgage loans securitisation operations.For this purpose, traditional securitizations and syntheticsecuritisations are used through specifically created SpecialPurpose Entities (SPEs). As referred in note 1.2, when thesubstance of the relationships with the SPE’s indicates thatCaixa holds control of the activities, the SPE’s are fully con-solidated.

As at 31 December, 2006, there are two securitisationoperations between Caixa and other financial institutionspresented in the following paragraphs.

As at 19 December, 2002, Caixa Económica MontepioGeral has settled a securitisation operation with a SpecialPurpose Vehicle («SPV») – Pelican Mortgages no. 1 PLC,established in Dublin. The referred agreement consists in amortgage credit transfer for a period of 35 years, withoutrevolving period and with a fixed limit (Aggregate PrincipalAmount Outstanding) of Euros 650 000 000. The transfer

price by which the loans were transferred was their nomi-nal value. The settlement costs have represented 0.016%of the referred nominal value.

As at 29 September, 2003, Caixa Económica MontepioGeral has settled a securitisation operation with a SpecialPurpose Vehicle («SPV») – Pelican Mortgages no. 2 PLC,established in Dublin. The referred agreement consists in amortgage credit transfer for a period of 33 years, withoutrevolving period and with a fixed limit (Aggregate PrincipalAmount Outstanding) of Euros 700 000 000. The transferprice by which the loans were transferred was their nomi-nal value. The settlement costs have represented 0.0286%of the referred nominal value.

Caixa Económica Montepio Geral is the operation servicer,acting as collector of the credits sold. The received valuesare transferred to Pelican Mortgages no.1 PLC and toPelican Mortgages no. 2 PLC.

204

As at 31 December, 2006, the securitisation operations, are presented as follows:

Issue Settlement date Currency Assets transferred Amount

Pelican Mortgages No.1 December 2002 Euros Mortgage credit 650 000 000

Pelican Mortgages No.2 September 2003 Euros Mortgage credit 700 000 000

1 350 000 000

The balance Finance leases, by the period to maturity as at 31 December, 2006, is analysed as follows:

Finance leases

Up to 1 year to Over1 year 5 years 5 years Total


Outstanding rents 10 159 21 229 15 918 47 306

Outstanding interest (2 533) (4 106) (3 981) (10 620)

Residual values 121 1 392 2 156 3 669

7 747 18 515 14 093 40 355

The balance Finance leases, by the period to maturity as at 31 December, 2005, is analysed as follows:

Finance leases

Up to 1 year to Over1 year 5 years 5 years Total


Outstanding rents 9 077 5 706 345 15 128

Outstanding interest (593) (565) (32) (1 190)

Residual values 622 23 91 736

9 106 5 164 404 14 674

The analysis of Overdue loans, by type of credit, is as follows:

2006 2005Euros ‘000 Euros ‘000





Finance leases 506 318

296 432 331 490

205

The analysis of Overdue loans, by type of client, is as follows:

2006 2005Euros ‘000 Euros ‘000

Corporate:

Construction 63 804 72 292

Investment 27 906 39 878

Other short term loans 21 487 28 946

Other loans 35 506

Private:

Mortgage loans 121 973 128 558

Consumer credit 14 282 10 682

Other loans 46 827 50 528


296 432 331 490

The impairment for credit risk is analysed as follows:

2006 2005Euros ‘000 Euros ‘000

Impairment for credit risk:




Loans charged-off (148 974) (44 765)

Transfers – 1 803


In accordance with Caixa’s policy, interest on credits overdue for a period over 30 days not covered by asset-backedguarantees, is only recorded as income when received.

The table below shows the analysis of the impairment for credit risk as at 31 December, 2006:

Classes of overdue loans

Up to 3 months 6 months to 1 year to 3 Over3 months to 6 months 12 months years 3 years TotalEuros ‘000 Euros ‘000 Euros ‘000 Euros ‘000 Euros ‘000 Euros ‘000

Secured overdue loans 32 059 5 595 18 579 109 286 115 934 281 453

Impairment 250 591 4 766 65 696 76 699 148 002

Unsecured overdue loans 3 473 1 462 2 523 3 543 3 978 14 979

Impairment 162 366 1 576 3 543 3 967 9 614

Total overdue loans 35 532 7 057 21 102 112 829 119 912 296 432

Total impairment for overdue loans 412 957 6 342 69 239 80 666 157 616

Total impairment for overdue loans and for

other credit risks 87 803 89 1 961 27 524 22 008 139 385

Total impairment for credit risks 88 215 1 046 8 303 96 763 102 674 297 001

The analysis of recovered loans and overdue interest, per-formed during 2006 and 2005, amounts to Euros 1 254 000

(2005: Euros 985 000) related with asset-backed loansrecovered.

206

The impairment for credit risk, by type of credit, is as follows:

2006 2005Euros ‘000 Euros ‘000




297 001 369 816

The loans charge-off is performed during 2006 and is related with the impairment for credit risk.

The analysis of the loans charged-off, by type of credit, is as follows:

2006 2005Euros ‘000 Euros ‘000




148 974 44 765

207

20. Financial assets held for trading, at fair value through profit or loss and availablefor sale


2006 2005Euros ‘000 Euros ‘000

Financial assets held for trading:

Shares 20 –

Derivatives 6 194 17 610

6 214 17 610Other financial assets at fair value through profit or loss:

Options 431 –

Bonds 3 096 –


20 380 –Financial assets available for sale:


Issued by Government and Public entities 65 68

Issued by other entities 858 792 654 476

Impairment for fixed income securities – –

858 857 654 544

Overdue securities 998 998

Impairment for overdue securities (998) (998)

– –

Shares and other variable income securities 29 371 24 373

Impairment for shares (251) (251)

29 120 24 122

887 977 678 666

The balance Trading derivatives includes the valuation ofthe embedded derivatives separated from the host contractin accordance with the accounting policy presented in note1.4 in the amount of Euros 3 179 000. This note has to beanalysed with note 30.

As referred in the accounting policy presented in note 1.4the available for sale securities are presented at marketvalue with fair value changes accounted for in fair valuereserves, as referred in note 36.

208

The analysis of financial assets held for trading, at fair value through profit or loss and available for sale, by type of finan-cial instrument, is as follows:

2006 2005

Securities Securities

At fair valuethrough profit Available Available

or loss Trading for sale Total Trading for sale TotalEuros ‘000 Euros ‘000 Euros ‘000 Euros ‘000 Euros ‘000 Euros ‘000 Euros ‘000


OTC market

Swaps 16 853 6 086 – 22 939 – – –

Options 431 – – 431 – – –

17 284 6 086 – 23 370 – – –

Credit derivatives:

OTC market

Credit default swaps – 108 – 108 17 610 – 17 610

Fixed income:

Bonds issued by Portuguese Governmentand public entities – – 65 65 – 68 68


Portuguese issuers – – 25 641 25 641 – 34 889 34 889

Foreign issuers 3 096 – 829 598 832 694 – 583 705 583 705

Commercial paper – – 4 551 4 551 – 36 880 36 880

3 096 – 859 855 862 951 – 655 542 655 542

Quoted 3 096 – 741 507 744 603 – 526 901 526 901

Unquoted – – 118 348 118 348 – 128 641 128 641

Variable income:

Shares in companies

Portuguese – 20 6 845 6 865 – 12 087 12 087

Foreign – – 13 046 13 046 – 12 286 12 286

Investment fund units – – 9 480 9 480 – – –

– 20 29 371 29 391 – 24 373 24 373

Quoted – 20 20 877 20 897 – 5 764 5 764

Unquoted – – 8 494 8 494 – 18 609 18 609

Impairment for overdue securities – – (998) (998) – (998) (998)

Impairment for securities – – (251) (251) – (251) (251)

– – (1 249) (1 249) – (1 249) (1 249)

20 380 6 214 887 977 914 571 17 610 678 666 696 276

The trading portfolio is stated at market value.

As referred in the accounting policy presented in note 1.4,the available for sale securities portfolio is presented net offair value reserve and impairment losses in the amount ofEuros 7 586 000 (2005: Euros 148 000) e de Euros1 249 000 (2005: Euros 1 249 000), respectively.

The balance Bonds issued by other Portuguese issuersincludes the amount of Euros 5 599 000 (2005: Euros14 090 000) related to subordinated securities.

209

The analysis of the securities portfolio, namely trading and available for sale securities, by maturity date as at 31 December,2006, is as follows:

Due within 3 3 months to Over Undeterminedmonths 1 year 1 year maturity Total



OTC market:

Swaps 959 1 788 20 192 – 22 939

Options – – 431 – 431

959 1 788 20 623 – 23 370

Credit derivatives:

OTC market:

Credit default swaps – 4 104 – 108

Fixed income:




Foreign issuers 5 021 32 149 777 358 18 166 832 694

Commercial paper 1 621 1 932 – 998 4 551

6 642 39 712 797 429 19 168 862 951

Quoted 5 021 32 261 689 151 18 170 744 603

Unquoted 1 621 7 451 108 278 998 118 348

Variable income:

Shares in companies

Portuguese 20 – 4 662 2 183 6 865

Foreign 8 491 – – 4 555 13 046

Investment fund units – – – 9 480 9 480

8 511 – 4 662 16 218 29 391

Quoted 8 511 – – 12 386 20 897

Unquoted – – 4 662 3 832 8 494

Impairment for securities – – – (1 249) (1 249)

16 112 41 504 822 818 34 137 914 571

210

The analysis of the securities portfolio, namely trading and available for sale securities, by maturity date as at 31 December,2005, is as follows:

Due within 3 3 months to Over Undeterminedmonths 1 year 1 year maturity Total



OTC market:

Swaps 9 1 17 600 – 17 610

Fixed income:

Bonds issued by Portuguese Governmentand Public entities – – 63 5 68



Foreign issuers – 1 004 577 669 5 032 583 705

Commercial paper 35 882 – 998 – 36 880

35 882 9 500 605 123 5 037 655 542

Quoted – – 524 873 2 028 526 901

Unquoted 35 882 9 500 80 250 3 009 128 641

Variable income:

Shares in portuguese

companies 12 087 12 087

Investment fund units 12 286 12 286

24 373 24 373

Quoted 5 764 5 764

Unquoted 18 609 18 609

Impairment for securities – – (998) (251) (1 249)

35 891 9 501 621 725 29 159 696 276

The analysis of the trading derivatives by maturity as at 31 December, 2006, is as follows:

2006


Less than 3 3 months to More thanmonths 1 year 1 year Total Positive Negative


Interest rate derivatives:

OTC market

Swaps 100 000 557 986 2 135 804 2 793 790 22 509 40 650

Options – – 53 400 53 400 431 431

100 000 557 986 2 189 204 2 847 190 22 940 41 081

Currency derivatives:

OTC market:

Swaps 11 025 – – 11 025 430 424

Credit derivatives:

OTC market

Credit default swaps – 15 000 10 000 25 000 108 58

111 025 572 986 2 199 204 2 883 215 23 478 41 563

211

21. Hedging derivatives


2006 2005Euros ‘000 Euros ‘000

Assets:

Interest rate swaps 14 220 29 153

Liabilities:

Interest rate swaps 7 199 3 847

Caixa uses derivatives to hedge interest rate risks. Theaccounting method depends on the nature of the hedgedrisk, namely if Caixa is exposed to fair value changes, varia-bility in cash-flows or highly probable forecast transactions.As at 31 December, 2004, in compliance with applicableaccounting criteria, Caixa had a set of fixed rate debt issuesfor which there were financial derivative instruments(«IRS») with the purpose of hedging the interest rate riskrelated to those issues.

From 1 January, 2005, for the hedging relationships whichcomply with the hedging requirements of IAS 39, Caixa

adopted the fair value hedge model, and holds in its deri-vatives portfolio mainly interest rate swaps, which arehedging fair value changes of interest rate risk of Depositsfrom other credit institutions and Deposits from customers.

Caixa accounted in earnings the amount of Euros 9 418 000regarding the fair value changes of the risk of interest rateassociated to the assets and liabilities before described.

The adjustment calculated to the assets and liabilities which includes hedged items is analysed as follows:

2006 2005Euros ‘000 Euros ‘000

Deposits from other credit institutions 8.004 11 187

Deposits from customers 1 414 357

9 418 11 544

The analysis of the hedging derivatives by maturity as at 31 December, 2006, is as follows:

2006


Less than 3 3 months to More thanmonths 1 year 1 year Total Positive Negative


Fair value hedge derivatives

with interest rate risk 100 000 578 986 2 155 963 2 834 949 14 220 7 199

212

22. Financial assets held to maturity


2006 2005Euros ‘000 Euros ‘000

Fixed income securities:

Bonds issued by public entities 36 044 34 776

As at 31 December, 2006, the investments held to maturity, are analysed as follows:

Issue ReimbursementIssue date date Interest rate Euros ‘000

OT – Junho 98/2008 February, 1998 June, 2008 Fixed rate of 5.375% 6 837

OT – Setembro 98/2013 May, 1998 September, 2013 Fixed rate of 5.450% 97

OT – Julho 99/2009 January, 1999 July, 2009 Fixed rate of 3.950% 6 372

OT – Junho 02/2012 February, 2002 June, 2012 Fixed rate of 5.000% 106

OT – Maio 00/2010 January, 2000 May, 2010 Fixed rate of 5.850% 6 807

OT – Julho 04/2008 JJuly, 2004 July,, 2008 Fixed rate of 3.250% 13 500

OT – Junho 01/2011 March, 2001 June, 2011 Fixed rate of 5.150% 1 103

OT – Outubro 05/2015 July, 2005 October, 2015 Fixed rate of 3.350% 101

OT – Abril 05/2011 November, 2005 April, 2011 Fixed rate of 3.200% 1 121

36 044

The investments held to maturity are stated in accordance with the established in the accounting policy presented in note1.4.

23. Investments in associated companies


2006 2005Euros ‘000 Euros ‘000

Investments in associated companies and other:

Lusitania, Companhia de Seguros, S.A. 8 879 8 860

Lusitania Vida, Companhia de Seguros, S.A. 8 529 6 106

HTA – Hotéis, Turismo e Animação dos Açores, S.A. 2 684 2 663


20 417 17 935

Unquoted 20 417 17 935

Equity method 20 417 17 935

213

The main indicators of the associated companies are analysed as follows:

Assets Liabilities Income ProfitEuros ‘000 Euros ‘000 Euros ‘000 Euros ‘000

31 December, 2006



HTA – Hotéis, Turismo e Animação dos Açores, S.A. 59 415 45 993 9 045 105

Norfin – Soc. Gestora de Fundos

Invest. Imob., S.A. 4 118 831 3 810 1 323

31 December, 2005



HTA – Hotéis, Turismo e Animação dos Açores, S.A. 66 523 53 207 7 966 (1 150)

Norfin – Soc. Gestora de Fundos Invest. Imob., S.A. 3 677 588 2 973 1 251

Notes: (*) Financial Statements prepared in accordance with IFRS.

Banco Montepio Geral – Cabo Verde, Sociedade Unipes-soal, S.A. (IFI) was established on 16 August, 2005 and itspurpose is the internationalisation of Caixa, namely toenable it to obtain and maintain funds and provide clientsalternatives outside the domestic market. The company’sshare capital amounts to CVE 772 000 000 being fully sub-scribed and paid by Caixa.

During 2005, Caixa fully subscribed the capital of BancoMontepio Geral – Cabo Verde, Sociedade Unipessoal, S.A.(IFI) in the amount of Euros 7 001 000.

Lusitania, Companhia de Seguros, S.A. was established on6 June, 1986, and its purpose is the practice of insuranceand reinsurance for all technical areas, with the exceptionof life insurance. The company’s share capital amounts toEuros 19 250 000 and its shareholders, in addition to Caixa,are Montepio Geral – Associação Mutualista (65.71%) andLusitania Vida, Companhia de Seguros, S.A. (3.32%).

Lusitania Vida, Companhia de Seguros, S.A. was estab-lished on 15 May, 1987, and its purpose is the practice ofall forms of life insurance and reinsurance. The company’sshare capital amounts to Euros 14 000 000 and its share-holders, besides Caixa, are Montepio Geral – AssociaçãoMutualista (39.22%) and Lusitania, Companhia de Segu-ros, S.A. (11.17%).

During the second semester of 2006, in accordance withincrement of capital of the Lusitania Vida, Companhia deSeguros, S.A., Caixa subscribed 78 684 shares in theamount of Euros 1 967 000, corresponding to 39.34% ofcompany’s share capital.

In order to carry out their operations, both companies havetheir own branches and a network of insurance brokersusing also Caixa’s branches to sell their products.

As at 31 December, 2006, the companies considered for consolidation purposes are analysed as follows:

Head Share % Held by ConsolidationSubsidiary office capital Currency Activity Caixa method

Non-life

Lusitania, Companhia de Seguros, S.A. (*) Lisbon 19 250 000 Euros insurance and 26%Equity

reinsurancemethod

Life insurance

Lusitania Vida, Companhia de Seguros, S.A. (*) Lisbon 14 000 000 Euros and 39%Equity

reinsurancemethod

Banco Montepio Geral – Cabo Verde, Full consolidationSociedade Unipessoal, S.A. (IFI)

Praia 772 000 000 ECV Banking 100%method

214

24. Property and equipment


2006 2005Euros ‘000 Euros ‘000

Cost:

Land and buildings:

For own use 63 413 66 304

Leasehold improvements in rented buildings 32 452 31 841

Work in progress 82 82

Equipment:

Furniture 8 258 9 277

Office equipment 2 531 2 737

Hardware 32 556 26 969


Motor vehicles 1 153 1 464

Security equipment 2 720 2 621

Works of art 422 419


Work in progress 554 1 249

167 180 163 378




(88 145) (82 969)

79 035 80 409

215

The Property and equipment movements, during the year 2006 are analysed as follows:

Balance on Acquisitions/ Adjustment/ Balance on1 January Charges Disposals Transfers 31 DecemberEuros ‘000 Euros ‘000 Euros ‘000 Euros ‘000 Euros ‘000

Cost:

Land and buildings:

For own use 66 304 363 (3 254) – 63 413

Leasehold improvements in rented buildings 31 841 327 – 284 32 452

Work in progress 82 – – – 82

98 227 690 (3 254) 284 95 947

Equipment:

Furniture 9 277 437 (1 456) – 8 258


Hardware 26 969 6 515 (928) – 32 556

Interior installations 20 385 1 804 (143) 962 23 008

Motor vehicles 1 464 14 (325) – 1 153


63 453 8 937 (3 126) 962 70 226

Works of art 419 3 – – 422


Work in progress 1 249 551 – (1 246) 554

163 378 10 182 (6 380) – 167 180


Land and buildings:

For own use 12 466 1 000 (639) – 12 827

Leasehold improvements in rented buildings 20 043 2 753 – – 22 796

Equipment:

Furniture 7 395 603 (1 215) – 6 783


Hardware 24 075 2 128 (927) – 25 276

Interior installations 13 038 1 721 (8) – 14 751

Motor vehicles 1 360 63 (325) – 1 098


82 968 8 565 (3 388) – 88 145

25. Intangible assets


2006 2005Euros ‘000 Euros ‘000

Cost:

Set up costs and key money 33 33

Software 29 596 19 618

Assets advances 72 24

29 701 19 675Accumulated depreciation:



(18 443) (14 124)

11 258 5 551

216

The Intangible assets movements, during the year 2006 are analysed as follows:

Balance on Acquisitions/ Balance on1 January Charges 31 DecemberEuros ‘000 Euros ‘000 Euros ‘000

Cost:

Set up costs and key money 33 – 33

Software 19 618 9 978 29 596

Assets advances 24 48 72

19 675 10 026 29 701


Software 14 124 4 319 18 443

26. Other assets


2006 2005Euros ‘000 Euros ‘000

Investments arising out of recovered loans 103 964 112 948

Recoverable subsidies from the Portuguese Government 23 879 21 222

Other debtors 7 549 5 223

Other accrued income 2 964 2 623

Prepayments and deferred costs 2 158 1 005

Sundry debtors 15 4838 14 764

155 997 157 785

Impairment for investments arising out of recovered loans (13 326) (13 382)

142 671 144 403

The balance Investments arising out of recovered loansincludes the buildings recovered related with overdue loansin the amount of Euros 96 461 000 (2005: Euros104 016 000). The referred buildings are recognised inaccordance with the accounting policy described in note1.13.

The balance Recoverable subsidies from the PortugueseGovernment, in the amount of Euros 23 879 000 (2005:Euros 21 222 000), corresponds to mortgage credit interestsubsidies, in accordance with the regulations applicable tomortgage loans benefits. The referred amounts do notbear interest and are claimed monthly.

As at 31 December, 2006 and 2005, the balance Recoverable subsidies from the Portuguese Government is analysed asfollows:

2006 2005Euros ‘000 Euros ‘000

Recoverable subsidies from the Portuguese Governments 4 607 4 526

Subsidies unclaimed 10 511 10 479

Overdue subsidies unclaimed 8 761 6 217

23 879 21 222

As at 31 December, 2006 and 2005, the balance Recove-rable subsidies from the Portuguese Government includesan amount of Euros 3 473 000 not-recognised by the

treasury authorities. This amount is totally provided for inthe balance Provisions, as referred in note 31.

217

The impairment for investments arising from recovered loans is analysed as follows:

2006 2005Euros ‘000 Euros ‘000




Amounts charged off (1 084) (1 531)


27. Deposits from other credit institutions


2006 2005



Credit institutions in Portugal – 59 808 59 808 – 148 380 148 380

Credit institutions abroad 16 569 779 567 796 136 10 751 547 470 558 221

16 569 839 375 855 944 10 751 695 850 706 601

The balance Deposits from other credit institutions, analysed by the period to maturity, is as follows:

2006 2005Euros ‘000 Euros ‘000

Up to 3 months 158 052 31 417


6 months to 1 year 78 708 4 146

1 year to 5 years 477 642 463 843


853 792 701 143

Adjustments arising from hedging operations 2 152 5 458

855 944 706 601

28. Deposits from customers


2006 2005



Deposits repayable on demand 1 883 462 – 1 883 462 2 241 727 – 2 241 727

Time deposits (*) – 4 920 433 4 920 433 – 3 780 142 3 780 142

Saving accounts (*) – 1 502 838 1 502 838 – 1 756 528 1 756 528

Other items 3 141 – 3 141 2 498 – 2 498

Adjustments arising from hedging operations (4 677) – (4 667) – (1 369) (1 369)

1 881 926 6 423 271 8 305 197 2 244 225 5 535 301 7 779 526

Observations: (*) Deposits for which the embedded derivative was separate from the host contract, in accordance with note 21 and accounting policy in note 1.5.

218

In accordance with Regulation no. 180/94, of 15 Decem-ber, the Deposit Guarantee Fund was established to gua-rantee the reimbursement of funds deposited in Credit

Institutions. The calculations of the annual contributionsfor this Fund are based on the criteria laid out in Regulationno. 11/94, of the Bank of Portugal.

The balance Deposits from costumers, analysed by the period to maturity, is as follows:

2006 2005Euros ‘000 Euros ‘000

Deposits repayable on demand 1 883 462 2 241 727

Time deposits and saving accounts:

Up to 3 months 3 779 154 3 257 519

3 months to 6 months 1 004 750 866 065

6 months to 1 year 793 802 684 234

1 year to 5 years 790 272 681 191


6 423 271 5 536 670

Adjustments arising from hedging operations (4 677) (1 369)

6 418 594 5 535 301

Other items:

Up to 3 months 3 141 2 498

6 421 735 5 537 799

8 305 197 7 779 526

29. Debt securities issued

The balance Debt securities issued is related with Bonds issued. This balance, analysed by the period to maturity, is as fol-lows:

2006 2005Euros ‘000 Euros ‘000

Up to 6 months 401 658 558 209

6 months to 1 year 129 098 199 925

1 year to 5 years 3 355 816 2 521 709

More than 5 years 1 616 232 1 788 067

5 502 804 5 067 910

Adjustments arising from hedging operations (14 914) (1 169)

5 487 890 5 066 741

219

As at 31 December, 2006, the balance Debt securities issued is comprised of the following issues:

Issue Reimbursement Interest 2006Issue date date Rate Euros ‘000

Bonds issued:Obr. CEMG / 02 – 1.ª Emissão Jan. 2002 Jan. 2012 Euribor 6 months + 1% 50 000Pelican Mortgage No. 1 Dec. 2002 Dec. 2037 W.A.I. – 1.33% 306 952Pelican Mortgage No. 2 Sep. 2003 Sep. 2036 W.A.I. – 1.53% 510 095Obr. CEMG / 03 Mar. 2003 Mar. 2008 Fixed rate of 3.8% 100 000Obr. CEMG / 03 Aug. 2003 Aug. 2009 Fixed rate of 3.548% 100 000Obr. CEMG / 03 Nov. 2003 Nov. 2008 Pribor 6 months + 0.18% 18 192Obr. CEMG / 03 Nov. 2003 Nov. 2008 Euribor 3 months + 0.30% 200 000Obr. CEMG / 03 Jan. 2004 Nov. 2008 Euribor 3 months + 0.30% 100 000Obr. CEMG / 04 Feb. 2004 Aug. 2007 Fixed rate of 3.25% 120 000Obr. CEMG / 04 Mar. 2004 Mar. 2007 Euribor 3 months + 0.20% 400 000Obr. CEMG / 04 Mar. 2004 Mar. 2009 Hibor 3 months + 0.26% 9 765Obr. CEMG / 04 Sep. 2004 Sep. 2014 Euribor 3 months + 0.25% 15 000Obr. CEMG / 04 Sep. 2004 Sep. 2014 Euribor 3 months + 0.31% 50 000Obr. CEMG / 04 Sep. 2004 Sep. 2014 Euribor 3 months + 0.31% 50 000Obr. CEMG / 04 Sep. 2004 Sep. 2009 Fixed rate of 4.6% 18 192Obr. CEMG / 04 Nov. 2004 Nov. 2009 Euribor 3 months + 0.25% 300 000Obr. CEMG / 04 Feb. 2005 Nov. 2009 Euribor 3 months + 0.25% 300 000Obr. CEMG / 05 Feb. 2005 Feb. 2015 Fixed rate of 3.628% 125 000Obr. CEMG / 05 Mar. 2005 Mar. 2015 Euribor 3 months + 0.25% 5 000Obr. CEMG / 05 May 2005 May 2012 Euribor 3 months + 0.25% 500 000Obr. caixa MG Aforro – 1.ª Emissão Aug. 2005 Aug. 2009 Fixed rate of 2% 19 000Obr. CEMG / 05 Sep. 2005 Sep. 2010 Euribor 3 months + 0.20% 500 000Obr. CEMG / 05 Oct. 2005 Sep. 2010 Euribor 3 months + 0.20% 125 000Obr. caixa MG Aforro – 2.ª Emissão Oct. 2005 Oct. 2009 Fixed rate of 2% 62 000Obr. caixa MG Cabaz TOP – 1.ª Emissão Oct. 2005 Oct. 2007 Fixed rate of 2% 8 500Obr. caixa MG Aforro – 3.ª Emissão Nov. 2005 Nov. 2009 Fixed rate of 2% 14 000Obr. caixa MG Especial Poupança Nov. 2005 Nov. 2010 Fixed rate of 2% 23 000Obr. caixa MG Aforro – 4.ª Emissão Dec. 2005 Dec. 2009 Fixed rate of 2% 52 000Obr. caixa MG Business Invest Dec. 2005 Dec. 2008 Fixed rate of 2.5% 26 500Obr. caixa MG Aforro Especial Dec. 2005 Dec. 2008 Fixed rate of 2.5% 30 000Obr. CEMG / 06 Jan. 2006 Jan. 2011 Euribor 3 months + 0.20% 500 000Obr. caixa MG Valor Garantido 2006 Jan. 2006 Jan. 2011 Fixed rate of 2.65% 10 000Obr. caixa MG Aforro/06 – 1.ª Emissão Feb. 2006 Feb. 2009 Fixed rate of 2.5% 40 000Obr. caixa MG Aforro/06 – 2ª. Emissão Feb. 2006 Feb. 2009 Fixed rate of 2.325% 17 000Obr. caixa MG Aforro Especial Fev.06 Feb. 2006 Feb. 2009 Fixed rate of 2.525% 9 000Obr. caixa MG Aforro/06 – 3.ª Emissão Mar. 2006 Mar. 2009 Fixed rate of 2.5% 17 000Obr. caixa MG Aforro/06 – 4.ª Emissão Mar. 2006 Mar. 2009 Fixed rate of 2.625% 23 000Obr. caixa MG Business Invest 2006 Mar. 2006 Mar. 2008 Fixed rate of 2.50% 17 000Obr. caixa MG Aforro/06 – 5.ª Emissão Apr. 2006 Apr. 2009 Fixed rate of 2.50% 20 000Obr. caixa MG Aforro/06 – 6.ª Emissão May 2006 May 2009 Fixed rate of 2.625% 20 000Obr. caixa MG Valor Imobiliário May 2006 May 2009 Fixed rate of 1% 2 000Obr. caixa MG Commodities May 2006 May 2009 Fixed rate of 3.75% 4 700Obr. caixa MG Aforro/06 – 7.ª Emissão Jun. 2006 Jun. 2009 Fixed rate of 2.875% 25 000Obr. caixa MG Aforro/06 – 8.ª Emissão Jul. 2006 Jul. 2009 Fixed rate of 2.75% 18 000Obr. caixa MG Aforro Especial Jul.06 Jul. 2006 Jul. 2009 Fixed rate of 3% 13 000Obr. caixa MG Aforro/06 – 9.ª Emissão Aug. 2006 Aug. 2009 Fixed rate of 2.875 % 23 000Obr. caixa MG Aforro/06 5 anos – 1.ª Emissão Aug. 2006 Aug. 2011 Fixed rate of 3% 7 000Obr. caixa MG Aforro/06 – 10.ª Emissão Aug. 2006 Aug. 2009 Fixed rate of 3% 15 000Obr. caixa MG Aforro/06 5 anos – 2.ª Emissão Aug. 2006 Aug. 2011 Fixed rate of 3% 4 000Obr. CEMG / 06 Sep. 2006 Sep. 2011 Euribor 3 months + 0.25% 500 000Obr. caixa MG Aforro/06 – 11.ª Emissão Sep. 2006 Sep. 2009 Fixed rate of 3% 15 000Obr. caixa MG Aforro/06 5 anos – 3.ª Emissão Sep. 2006 Sep. 2011 Fixed rate of 3% 3 500Obr. caixa MG Aforro/06 – 12.ª Emissão Nov. 2006 Nov. 2009 Fixed rate of 3% 17 000Obr. caixa MG Aforro/06 5 anos – 4.ª Emissão Nov. 2006 Nov. 2011 Fixed rate of 3% 3 750Obr. caixa MG Aforro/06 5 anos – 5.ª Emissão Dec. 2006 Dec. 2011 Fixed rate of 3.125% 1 000Obr. caixa MG Aforro/06 – 13.ª Emissão Dec. 2006 Dec. 2009 Fixed rate of 3.125% 6 000Obr. caixa MG Ass./06 5 anos – 1.ª Emissão Dec. 2006 Dec. 2011 Fixed rate of 3.25% 1 000Obr. caixa MG Ass./06 3 anos – 1.ª Emissão Dec. 2006 Dec. 2009 Fixed rate of 3.25% 7 000Obr. caixa MG Energ. Renováveis Dez 2006/08 Dec. 2006 Dec. 2008 Fixed rate of 1.75% 5 000Obr. caixa Cabaz Bric Dec. 2006 Dec. 2008 Fixed rate of 7% 9 000

5 491 146Adjustments arising from hedging operations (14 914)Accruals, deferred costs and income 11 658

5 487 890

As at 31 December, 2006, for the bonds issued bear post-poned and anticipated interest at an effective interest rateranging between 1% and 7%.

The CEMG/02 1.ª Emissão cash bonds present a 6% cap.

The MG Cabaz Top 1.ª Emissão bonds present a 2% floor.

220The reimbursements of bonds in 2006, are analysed as follows:

ReimbursementIssue Reimbursement Interest amount

Issue date date rate Euros ‘000

Bonds issued:

Obr. CEMG / 01 – 1.ª Emissão Mar. 2001 Jun. 2006 Euribor 3 months + 0.35% 250 000

Obr. CEMG / 01 – 1.ª Emissão Jun. 2001 Jun. 2006 Fixed rate of 5.25% 300 000

Obr. CEMG / 04 – 1.ª Emissão Jul. 2004 Jul. 2006 Euribor 3 months + 0.125% 200 000

750 000

The Debt securities issued with reimbursement date during 2007 amount to Euros 528 500 000.

30. Financial liabilities held for trading and other financial liabilities at fair valuethrough profit or loss


2006 2005Euros ‘000 Euros ‘000

Financial liabilities held for trading:

Currency derivatives 424 23

Interest rate derivatives 6 791 14 943

Credit default swaps 58 –

Options 431 300

7 704 15 266

Other financial liabilities at fair value through profit or loss:


41 563 15 266

The balance Trading derivatives includes the valuation ofthe embedded derivatives separated from the host contractin accordance with the accounting policy presented in note

1.4 in the amount of Euros 3 179 000. This note has to beanalysed with note 20.

221

31. Provisions


2006 2005Euros ‘000 Euros ‘000

Other provisions for liabilities and charges 969 1 470

Provisions for general banking risks 4 009 3 683

4 978 5 153

The other provisions for liabilities and charges are analysed as follows:

2006 2005Euros ‘000 Euros ‘000


Impairment for the year – 1 193


Amounts charged-off – (90)

Balance on 31 December 969 1 470

The provision for general banking risks is analysed as follows:

2006 2005Euros ‘000 Euros ‘000


Impairment for the year 335 –


Amounts charged-off – (551)


32. Subordinated debt


2006 2005Euros ‘000 Euros ‘000

Cash bonds – 9 982Bonds with fixed maturity date 200 347 149 770

Perpetual bonds 100 882 150 897

301 229 310 649

As at 31 December, 2006, the subordinated debt issues, are analysed as follows:

Issue Maturity Interest Number of 2006Issue date date rate bonds Euros ’000

Bonds with fixed maturity date:

CEMG/03 1.ª emissão Feb. 2003 Feb. 2013 Euribor 3 months + 1.3% 10 000 100 028

CEMG/03 2.ª emissão May 2003 Feb. 2013 Euribor 3 months + 1.3% 5 000 50 014

CEMG/06 Apr. 2006 Apr. 2016 Euribor 3 months + 0.45% 50 000 50 305

200 347Perpetual bonds:

CEMG/01 Jul. 2001 Undetermined Euribor 3 months + 1.1% 2 000 000 100 882

301 229

222

At the end of the seventh year of the CEMG/01 perpetualbonds and subsequently at each interest payment date,Caixa can reimburse the bonds in full at par, after authori-sation of the Bank of Portugal. If the bonds are not reim-bursed during that period the interest rate spread will beincreased to 210 basis points. This issue is listed atEuronext Lisbon Official Stock Exchange Market.

The CEMG/03 subordinated bonds have an anticipatedreimbursement option in 2008.

As at 31 December, 2006, the effective interest rate rangeof the subordinated debt bears postponed interest everythree and six months is set between 3.949% and 4.925%.

The reimbursements of subordinated debt in 2006, are analysed as follows:

ReimbursementIssue Reimbursement Interest Number of amount

Issue date date rate bonds Euros ’000

CEMG/99 May 1999 Undetermined Euribor 3 months + 1.1% 1 000 000 50 000

CEMG/96 Dec. 1996 Dec. 2006 Euribor 6 months + 0.20% 4 987 978 972 9 976

59 976

The analysis of the subordinated debt, by the period to maturity, is as follows:

2006 2005Euros ‘000 Euros ‘000

Up to 1 year – 9 982

More than 5 year 301 229 300 667

301 229 310 649

223

33. Other liabilities


2006 2005Euros ‘000 Euros ‘000

Suppliers 9.344 5.046

Other creditors 18 065 34 431

Public sector 8.065 7.550

Holiday pay and subsidies 26.121 19 950

Other administrative costs payable – 340

Deferred income 579 548

Stock exchange transactions pending settlement 1.502 6.508

Other sundry liabilities 68 354 109 586

132 030 183 959

As at 31 December 2006, the balances related with the obligations related with pensions, included in Other sundry liabi-lities are analysed as follows:

2006Euros ‘000

Projected benefit obligations 506 395

Fair value of Plan Assets (374 401)

131 994Actuarial losses

Corridor 92 045

Amount in excess of the corridor 21 621

113 666

18 328

34. Share capital

On 6 June, 2006, following the General Assembly delibe-ration, Caixa increased the share capital in the amount ofEuros 100 000 000, by cash transfer.

After the referred operation, the share capital of Caixa,amounts to Euros 585 000 000, totally subscribed byMontepio Geral – Associação Mutualista, and is fully paid.

35. General and special reserve

The general and special reserves are charged under thescope of Decree-Law No. 136/79, of 18 May. The generalreserve is charged to cover any risk and extraordinary lossesor depreciation.

Under the Portuguese regulations, the general reserveshould be charged, at least, in a minimum of 20% of theprofit for the year. The limit of general reserve is 25% oftotal deposits. This reserve is not available for distribution

and it can be used to improve future income performancesor to increase capital.

The special reserve is charged to cover losses from currentoperations. Under the Portuguese regulations, the specialreserve should be charged, at least, in a minimum of 5%of the profit for the year. This reserve is not available fordistribution and it can be used to improve income perfor-mances or to increase capital.

224

36. Fair value reserves, other reserves and retained earnings


2006 2005Euros ‘000 Euros ‘000

Fair value reserves 7 586 (148)

Reserves and retained earnings:

General reserve 131 198 122 136

Special reserve 54 572 52 306

Other reserves 8 007 4 337

Retained earnings (87 373) (121 252)

106 404 57 527

113 990 57 379

The Fair value reserves correspond to the accumulated fair value changes of the financial instruments available for sale, inaccordance with the accounting policy described in note 1.5. The gross movements during 2006 are analysed as follows:

Balance on Balance on1 January Reavaluation Acquisitions Disposals 31 DecemberEuros ‘000 Euros ‘000 Euros ‘000 Euros ‘000 Euros ‘000

Fixed income:

Bonds issued by public national entities 1 (1) – – –


Portuguese issuers (26) 8 – 22 4

Foreign issuers (34) 141 (54) 131 184

(59) 148 (54) 153 188

Variable income:

Shares in foreign

Companies – 8 311 – 2 8 313

Investment fund units (89) (776) 12 (62) (915)

(89) 7 535 12 (60) 7 398

(148) 7 683 (42) 93 7 586


These balances are analysed as follows:

2006 2005Euros ‘000 Euros ‘000

Guarantees granted 300 343 281 027

Guarantees received 30 171 246 31 376 921

Commitments to third parties 1 452 059 1 328 288


Securitised loans 803 141 973 068

Amounts received on deposit 5 595 430 4 556 235

225

39. Fair value

Fair value is based on market prices, whenever these areavailable. If market prices are not available, as it happensregarding many products sold to clients, fair value is esti-mated through internal models based on cash-flow dis-counting techniques.

Cash-flows for the different instruments sold are calculatedaccording with its financial characteristics and the discountrates used include both the interest rate curve and the cur-rent conditions of the pricing policy in the Caixa.

Therefore, the fair value obtained is influenced by theparameters used in the evaluation model that, necessarilyhave some degree of judgement and reflect exclusively thevalue attributed to different financial instruments. Howe-ver it does not consider prospective factors, like the futurebusiness evolution.

Under these conditions, the values presented cannot beunderstood as an estimate of the economic value of theCaixa.

The amounts of Guarantees granted and Commitments to third parties are analysed as follows:

2006 2005Euros ‘000 Euros ‘000

Guarantees granted:

Guarantees 294 087 278 580

Open documentary credits 6 256 2 447

300 343 281 027

2006 2005Euros ‘000 Euros ‘000

Coommitments to third parties:

Irrevocable commitments

Term deposits contracts 4 662 5 327

Irrevocable credit lines 204 611 191 904

Annual contribution to the obligations of Guarantee Deposits Fund 19 142 18 859

Potential obligation with the Investors’ Indemnity System 2 200 1 896

Revocable commitments

Revocable credit lines 1 221 444 1 110 302

1 452 059 1 328 288

The financial instruments recorded in off-balance sheetaccounts, are also subject to the same control and approvalprocedures required for the credit portfolio. The Board of

Directors does not anticipate any material losses as a resultof these transactions.

38. Distribution of profit

On 30 March, 2006, following the General Assemblydeliberation, Caixa distributed to Montepio Geral – Asso-

ciação Mutualista in the amount of Euros 11 597 000(2005: Euros 24 782 000).

226

The main methods and assumptions used in estimating the fair value for the assets and liabilities of the Caixa are presentedas follows:

Cash and deposits at central banks, Loans and advances to credit institutions repayable on demand

Considering the short maturity of these financial instruments, the amount in the balance sheet is a reasonable esti-mate of its fair value.

Other loans and advances to credit institutions

The fair value of these financial instruments is calculated discounting the expected principal and interest future cashflows for these instruments, considering that the payments of the installments occur in the contractually defined dates.The discount rate used reflects the current conditions applied by the Caixa in identical instruments for each of thedifferent maturities.

Financial assets held for trading, Financial liabilities held for trading and Financial assets available for sale

These financial instruments are accounted at fair value, which is based in market prices, whenever these are available.If market prices are not available, fair value is estimated through internal models based on cash-flow discounting tech-niques.

In the case of unquoted shares, these are recognised at historical cost when no market prices are available and it isnot possible to determine reliably its fair value.

Hedging derivatives

Hedging derivatives are accounted for at fair value.

Loans and advances to customers with defined maturity date

The fair value of these instruments is calculated discounting the expected principal and interest future cash flows forthese instruments, considering that the payments of the installments occur in the contractually defined dates. The dis-count rate used reflects the current conditions applied by the Caixa in similar instruments for each of the homoge-neous classes of this type of instrument and with similar maturity. This calculation considers credit risk spreads.

Loans and advances to customers without defined maturity date

Considering the short maturity of these financial instruments, the conditions of the existing portfolio are similar to cur-rent conditions used by the Caixa. Therefore the amount in the balance sheet is a reasonable estimate of its fair value.

Deposits from customers

The fair value of these financial instruments is calculated by discounting the expected principal and interest future cashflows, considering that payments occur in the contractually defined dates. The discount rate used reflects the currentconditions applied by the Caixa in identical instruments with a similar maturity.

Debt securities issued and Subordinated debt

For these financial instruments, fair value was calculated for the components that are not yet reflected in the balancesheet of the Caixa. For the fixed interest rate instruments for which Caixa applies an hedge-accounting policy, the fairvalue regarding the interest rate risk is already accounted for.

Pn fair value calculation the other risk components were also considered, apart from the interest rate risk. Fair valueis based on market prices, whenever these are available. If market prices are not available, fair value is estimatedthrough internal models based on cash-flow discounting techniques.

227

The next table shows the main adjustments to the financial assets and liabilities of the Caixa that do not represent its fairvalue:

2006

Held for Available for Amortised Book Fairtrading sale cost Others value value


Financial assets:






Other financial assets at fair value through profit or loss 20 380 – – – 20 380 20 380





40 814 887 977 14 367 132 369 753 15 665 676 16 618 622





Financial liabilities held for trading and other financial assets at fair valuethrough profit or loss 41 563 – – – 41 563 41 563



48 762 – 14 950 260 – 14 999 022 15 004 557

2005

Held for Available for Amortised Book Fairtrading sale cost Others value value


Financial assets:










46 763 678 666 13 360 742 355 330 14 441 501 14 705 905





Financial liabilities held for trading 15 266 – – – 15 266 15 266



19 113 – 13 863 517 – 13 882 630 13 898 430

40. Pensions

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Caixa assumed the responsibility to pay to their employees,pensions on retirement or disabilities. These responsibilitiesalso comply with the terms of the «Acordo Colectivo deTrabalho do Sector Bancário» (ACTV). To cover its respon-

sibilities, Caixa makes annual contributions to the pensionfund, managed by Futuro – Sociedade Gestora de Fundosde Pensões, S.A.

As at 31 December, 2006 and 2005, the number of participants covered by this pension plan is analysed as follows:

2006 2005

Number of participants

Pensioners 499 451

Employees 2 932 2 938

3 431 3 389

In accordance with the accounting policy, described in note 1.17, the pension obligation and the respective funding as at31 December, 2006 and 2005 based on an actuarial valuation made using the projected unit credit method are analysedas follows:

2006 2005Euros ‘000 Euros ‘000

Projected benefit obligations

Pensioners 139 497 115 393

Employees 366 898 352 743

506 395 468 136

Value of the fund (374 401) (327 721)

Unfunded liabilities 131 994 140 415

Liabilities exempt from financing (131 994) 140 415)

– –

Liabilities from future services 405 742 355 026

As at 31 December, 2006 there are no buildings in use or securities issued by Caixa recorded in the Pension Fund’sFinancial Statements.

The change in the present value of obligations during 2006 and 2005 is analysed as follows:

2006 2005Euros ‘000 Euros ‘000





Actuarial gains and losses

Current 3 683 (6 829)

Arising from changes in actuarial assumptions

Increase in future compensation levels – 15 437

Changes in discount rates – 38 107

Changes in mortality tables – 43 585

Contributions to the fund (36 195) (62 198)

Fund expenses 113 (811)


229

The change in the fair value of assets of the Fund during 2006 is analysed as follows:

2006 2005Euros ‘000 Euros ‘000


Expected return on plan assets 15 508 12 675

Actuarial gains 4 187 1 124

Contributions to the Fund 36 195 61 074

Payments (9 097) (8 074)

Others (113) –


The contributions to the Fund include the additional contri-bution in the amount of Euros 8 000 000 made by Caixa

during January, 2007 with value date of 2006. The pensionfund contributions in 2006 were fully paid in cash.

The securities issued by companies of Caixa accounted on the portfolio of the Fund are analysed as follows:

2006 2005Euros ‘000 Euros ‘000

Variable income securities 5 800 3 485

In accordance with IAS 19, deferred actuarial losses, including the corridor, as at 31 December, 2006 are analysed as fol-lows:

Actuarial losses

Amount in excessCorridor of the Corridor


Balance on 1 January, 2006 87 692 25 514

Actuarial gains and losses:

Current – 3 683

Changes in the corridor 4 353 (4 353)

Actuarial losses depreciation above corridor – (875)

Other changes – (2.348)

Balance on 31 December, 2006 92 045 21 621

As at 31 December 2006, considering the value of theactuarial gains and losses registered in the calculation ofthe benefit obligations and in the value of the Fund, thevalue of the corridor calculated in accordance with para-graph 92 of IAS 19, amounted to Euros 92 045 000 (2005:Euros 87 692 000).

As at 31 December 2006, the net actuarial gains and lossesin excess of the value of the corridor amounted to Euros21 621 000 (2005: Euros 25 514 000) and will be recordedin results over a 25 year period considering the balance atthe beginning of the year, as referred in the accountingpolicy presented in note 1.17.

230

In 2006, Caixa accounted as pension costs the amount of Euros 24 853 000 (2005: Euros 20 170 000). The analysis ofthe cost of the year is as follows:

2006 2005Euros ‘000 Euros ‘000




Actuarial gains and losses depreciation 875 –

Cost of the year 24 853 20 170

Considering the market indicators, particularly the estimations of the inflation and the long term interest rate for EuroZone as well as the demographic characteristics of the participants, Caixa maintained the actuarial assumptions used forthe calculation of the liabilities for the pension obligations with reference to 31 December, 2005. The comparative analy-sis of the actuarial assumptions is shown as follows:

2006 2005

Increase in future compensation levels 3.00% 3.00%

Pensions increase rate 2.00% 2.00%

Projected rate of return of fund assets 4.75% 4.75%

Discount rate 4.75% 4.75%

Mortality tables TV 88/90 TV 88/90

Disability rate SOA Trans Male SOA Trans Male

The assumptions used in the calculation of the pension lia-bilities are in accordance with the requirements of IAS 19.

No disability retirements are considered in the calculationof the total liabilities.

Net actuarial gains related to zthe difference between the actuarial assumptions used for the estimation of the pensionliabilities and the actual liabilities for the year ended 31 December 2006 amounted to Euros 3 683 000 and are analysedas follows:

Actuarial(gains) / losses

2006Euros ‘000

Increase in future compensation levels 4 944

Pension increase rate 2 926

Return of fund assets (4 187)

3 683

231

41. Related parties

As at 31 December 2006, Caixa had credits over subsidiaries, represented or not by securities, included in the items ofLoans and advances to credit institutions and to customers are analysed as follows:

Loans andadvance tocostumersEuros ‘000

HTA – Hotéis, Turismo e Animação dos Açores, S.A. 14 600

Unicre – Cartão Internacional de Crédito, S.A. 886

Futuro – Sociedade Gestora de Fundo de Pensões, S.A. 30

Credint – Consultoria Financeira e Creditícia, S.A. 183

15 699

As at 31 December 2006, the Caixa’s liabilities with subsidiaries, represented or not by securities, included in itemsDeposits from credit institutions and to customers and in Subordinated debt, are analysed as follows:

Deposits from Deposits from Subordinatedcredit institutions customers debt Total

Company Euros ‘000 Euros ‘000 Euros ‘000 Euros ‘000

Lusitania Companhia de Seguros, S.A . – 28 865 1 000 29 865

Lusitania Vida Companhia de Seguros, S.A – 26 010 1 250 27 260

HTA – Hotéis, Turismo e Animação dos Açores, S.A. – 345 – 345

Caixa Económica de Cabo Verde 9 682 – – 9 682

SIBS – Sociedade Interbancária de Serviços, S.A. – 243 – 243

MG Gestão de Activos Financeiros - – S.G.F.I.M., S.A. – 31 645 – 31 645

Futuro – Sociedade Gestora de Fundo de Pensões, S.A. – 3.250 – 3.250

Banco de África Ocidental, S.A. 1 442 – – 1 442

Norfin – Sociedade Gestora de FIM, S.A. – 9 451 – 9 451

Credint – Consultoria Financeira e Creditícia, S.A. – – – –

Bolsimo – Gest. Imob., Lda. – 55 – 55

11 124 99 864 2 250 113 238

42. Segmental reporting

232


Caixa offers a wide range of banking activities and finan-cial services in Portugal and Cape Verde.

Geographical Segments

Aimed at the strategy of development, Caixa operates withspecial emphasis in the Portuguese and Cape Verde mar-

kets. Considering this, the geographical segments includePortugal and Cape Verde. The segment Portugal reflects,essentially, the activities carried by Caixa EconómicaMontepio Geral. The segment Cape Verde includes thebusiness carried by Banco Montepio Geral – Cabo Verde,Sociedade Unipessoal, S.A. (IFI).

As at 31 December, 2006, the net contribution of the major geografic segments is analysed as follows:

Statement of income Portugal Cape Verde Adjustments Consolidated

Interest income 675 560 7 085 (8 198) 674 447

Interest expense 369 719 6 831 (8 198) 368 352

Net interest income 305 841 254 – 306 095

Commissions and other income 90 139 – – 90 139

Commissions and other costs 20 311 25 – 20 336

Net commissions and other income 69 828 (25) – 69 803

Net gains arising from trading activity (7 984) 161 – (7 823)

Staff costs and administrative costs 218 258 50 – 218 308

Depreciations 12 884 – – 12 884

Total operating costs 231 142 50 – 231 192

Impairment and provisions 75 399 – – 75 399

Income before share of profit of associates under the equity method 61 144 340 – 61 484

Share of profit of associates under the equity method 2 136 – – 2 136

Profit for the year 63 280 340 – 63 620

Balance sheet Portugal Cape Verde Adjustments Consolidated

Cash and Loans and advances to credit institutions 1 019 657 264 269 (264 150) 1 019 776

Loans and advances to customers 13 660 648 – – 13 660 648

Financial assets available for sale 894 978 – (7 001) 887 977

Other assets 330 028 211 – 330 239

Total Assets 15 905 311 264 480 (271 151) 15 898 640

Deposits from other credit institutions 1 119 856 238 (264 150) 855 944

Deposits from customers 8 048 370 256 827 – 8 305 197

Debt securities issued 5 487 890 – – 5 487 890

Other liabilities 486 818 181 – 486 999

Total Liabilities 15 142 934 257 246 (264 150) 15 136 030

Total Equity 762 377 7 234 (7 001) 762 610

Total Liabilities and Equity 15 905 311 264 480 (271 151) 15 898 640

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As at 31 December, 2005, the net contribution of the major geographic segments is analysed as follows:

Statement of income Portugal Cayman Islands Adjustments Consolidated

Interest income 602 808 576 (576) 602 808

Interest expense 328 393 632 (576) 328 449

Net interest income 274 415 (56) – 274 359

Commissions and other income 84 906 – – 84 906

Commissions and other costs 17 338 25 – 17 363

Net commissions and other income 67 568 (25) – 67 543

Net gains arising from trading activity 6 002 – – 6 002

Staff costs and administrative costs 198 038 26 – 198 064

Depreciations 11 085 1 – 11 086

Total operating costs 209 123 27 – 209 150

Impairment and provisions 82 562 – – 82 562

Income before share of profit of associates under the equity method 56 300 (108) – 56 192

Share of profit of associates under the equity method 1 551 – – 1 551

Profit for the year 57 851 (108) – 57 743

Balance sheet Portugal Cayman Islands Adjustments Consolidated

Cash and Loans and advances to credit institutions 1 246 664 237 745 (236 443) 1 247 966

Loans and advances to customers 12 415 395 – – 12 415 395

Financial assets available for sale 685 667 – (7 001) 678 666

Other assets 329 830 7 – 329 837

Total Assets 14 677 556 237 752 (243 444) 14 671 864

Deposits from other credit institutions 943 044 – (236 443) 706 601

Deposits from customers 7 548 667 230 859 – 7 779 526

Debt securities issued 5 066 741 – – 5 066 741

Other liabilities 518 874 – – 518 874

Total Liabilities 14 077 326 230 859 (236 443) 14 071 742

Total Equity 600 230 6 893 (7 001) 600 122

Total Liabilities and Equity 14 677 556 237 752 (243 444) 14 671 864

43. Risk management

The Group Montepio Geral («Caixa») is subject to severalrisks during the course of its business.

The Group’s risk-management policy is designed to ensureadequate relationship at all times between its own fundsand the business it carries on, and also to evaluate therisk/return profile by business line.

In this connection, monitoring and control of the maintypes of financial risk – credit, market, liquidity and opera-tional – to which the Group’s business is subject are of par-ticular importance.

234


– Credit Risk Department;

– Market Risk Department;

– Operational Risk Department;


Over the year the integrated risk management project wasdeveloped, that takes into account the new equity require-ment calculation rules and integrates asset and liabilitymanagement analysis and credit impairment losses accord-ing to the IFRS.

It was in this context that the impairment analysis modelswere approved, which are based on the use of credit riskmodels (ratings and scorings), and on the likelihood of re-covering materially significant credit in an impairmentsituation. To that end, new software was introduced thatprovided for linkage between the sectors involved.

Main types of risk

Credit – Credit risk is associated with the degree of uncer-tainty of the expected returns as a result of the inabilityeither of the borrower (and the guarantor, if any) or of theissuer of a security or of the counterparty to an agreementto fulfil their obligations.

Market – Market risk reflects the potential loss inherent ina given portfolio as a result of changes in rates (interestand exchange) and/or in the prices of the various financialinstruments that make up the portfolio, considering boththe correlations that exist between them and the respectivevolatility.

Liquidity – Liquidity risk reflects the Group’s inability tomeet its obligations at maturity without incurring in signifi-cant losses resulting from the deterioration of the fundingconditions (funding risk) and/or from the sale of its assetsbelow market value (market liquidity risk).

Operational – Operational risk is the potential loss resultingfrom failures or inadequacies in internal procedures, per-sons or systems, and also the potential losses resultingfrom external events.

Internal organisation

The Board of Directors is responsible for risk managementstrategy and policies, and it is advised by the Risk Analysisand Management Divison in these fields, that undertakethe analysis and the risk management from the standpointof the Group, and coordinate its actions with the Assetsand Liabilities Committee («ALCO»).

The Internal Auditing Management, as support to theBoard of Directors, has the main duties to assessing reportson the internal control system to be sent annually to theBank of Portugal, to check compliance with the applicablelegislation on the part of the various departments, and toidentify major risk areas and submitting its conclusions tothe Board of Directors.

Depending on the nature and severity of the risk, plans,programs or actions shall be drawn up, supported by infor-mation systems, and procedures shall be devised that pro-vide a high degree or realiabily as to the risk managementmeasures defined whenever necessary.

The Dealing Room shall cooperate with the Risk Analysisand Management in order to measure and control opera-tions and portfolio risks, as well as suitably monitor Caixa’soverall risk positions.

In terms of compliance risk, the Internal AuditingManagement/Compliance Office shall control, identify andassess the various situations that contribute to this risk,namely in terms of transactions/activities, business, productsand departments.

In this context, the Internal Auditing Management shallalso assess the internal control system, identifying the areasof major importance/risk, to ensure efficient governance.

235

Risk evaluation


Credit risk models play a significant role in credit decisions.Indeed, the granting of credit to individuals requiresrequests to be submitted to the reactive scoring modelsused by the different portfolios (housing loans, individualcredit and credit cards).

Credit decisions are dependent upon risk ratings and com-pliance with various rules governing financial capacity andapplicants’ behaviour. In order to support commercialstrategies, behavioural scoring models were also used.

New reactive scoring models have been introduced into theinformation systems of certain private credit portfolios thatrecognise the need to distinguish between customers andnon-customers (or new customers). This project will be fi-nished this year for the main credit portfolios concerned.New internal rating models for companies and scoringmodels for small businesses are also in the IT completionstage.


In terms of reported credit risk information, a quarterlyreport was drawn up, including nonperformance probabili-ties by risk category and credit portfolio, adjusted rate ofreturn indicators (RAROC) and a breakdown of credit port-folios by risk category.


Efficient balance sheet management also involves theAssets and Liabilities Committee (ALCO), which examines

interest rate, liquidity and exchange rate risks, namely asregards compliance with the limits set for the static anddynamic gaps calculated.

Normally the static interest rate and liquidity gaps are posi-tive and moderate in size, except of course in those monthswhen payments are made relating to bond issue debt servi-ce. As for exchange rate risk, as a rule, the resources obtainedin different currencies are hedged as assets in the respec-tive monetary market and for periods not exceeding thoseof the resources, which means any exchange rate gapsresult mainly from any adjustments between the hedgeand resource deadlines.

In regard to risk information and analysis, regular reportsare provided on the credit and market risks on the compa-ny’s financial assets and those of the other members of theGroup. For the company’s own portfolio, the various risklimits are defined using the Value-at-Risk (VaR) method.

Own portfolios are concentrated in variable rate debt secu-rities, which gives them a low VaR (Var calculation is basedon analytical methodology development by risk metrics,concerning a ten-day period and with a 99% confidenceinterval). Credit risk exposure is also very restricted, due tothe bonds portfolio held are usually of investment gradelevels.

Operational Risk

A risk management model was completed for OperationalRisk, which covers all units in the corporate structure. Thismodel provides for the recording of relevant events, inkeeping with best practice and the Basle II framework. Itaids Operational Risk analysis and model building, as wellas identifies the action required to mitigate risk.

The management model operates in a decentralised man-ner and Operational Risk Self assessors /Interlocutors andEnablers were appointed for all units in the corporate struc-ture.

44. Accounting standards recently issued (to be provided)

The new standards and interpretations that have been issued, but are not yet effective and that the Caixa has not yetapplied in the preparation of the Financial Statements can be analysed as follows:

IFRIC 8 – Scope of IFRS 2

The International Financial Reporting Interpretations Committee («FRIC») has issued on 12 January 2006 anInterpretation – IFRIC 8 Scope of IFRS 2, which was approved by the European Commission on 8 September, 2006.

The Interpretation clarifies that the accounting standard IFRS 2 – Share-based Payment applies to arrangements wherean entity makes share based payments for apparently nil or inadequate consideration. IFRIC 8 explains that, if the iden-tifiable consideration given appears to be less than the fair value of the equity instruments granted or liability incurred,this situation typically indicates that other consideration has been or will be received and IFRS 2 therefore applies.

This IFRIC is mandatory and applicable for annual periods beginning on or after 1 May, 2006.


IFRIC 9 – Reassessment of Embedded Derivatives

The International Financial Reporting Interpretations Committee («IFRIC») has issued on 12 March 2006 anInterpretation – IFRIC 9 – Reassessment of Embedded Derivatives, which was approved by the European Commissionon 8 September, 2006.

This interpretation clarifies that the reassessment of embedded derivatives should be performed whenever there arechanges to the underlying contracts.

This IFRIC is mandatory and applicable for annual periods beginning on or after 1 June, 2006.


IFRIC 10 – Interim Financial Reporting and Impairment

The International Financial Reporting Interpretations Committee («IFRIC») has issued on 20 July 2006 an Interpretation– IFRIC 10 – Interim Financial Reporting and Impairment, which should be approved by the European Commission dur-ing the second quarter of 2007.

This IFRIC prohibits the reversal of impairment losses recognised in previous interim reporting period in respect ofgoodwill, an investment in an equity instrument or a financial asset carried at cost.

This IFRIC is mandatory and applicable for annual periods beginning on 2007 and its application will be prospectivefor the abovementioned asset types, from the date that the Caixa first applied the measurement criteria of IAS 36 -Impairement of Assets and IAS 39 – Financial Instruments: Recognition and Measurement.


IFRIC 11 – IFRS 2 – Changes in Contributions to Employee Share Purchase Plans

The International Financial Reporting Interpretations Committee («IFRIC») has issued on 2 November 2006 anInterpretation – IFRIC 11 – IFRS 2 – Changes in Contributions to Employee Share Purchase Plans, which should beapproved by the European Commission during the second quarter of 2007.

This interpretation addresses on two issues:

1. a) Contracts where an entity grants to its employees rights to equity instrument of the entity, and either choosesor is required to buy equity instruments from another party, to satisfy its obligations to its employees;

b) Contracts where an entity’s employees are granted rights to equity instruments of the entity, either by the entityitself or by its shareholders, and the shareholders of the entity provide the equity instruments needed.

2. Contracts with share-based payments that involve two or more entities within the same Group.

This IFRIC is mandatory and applicable for periods beginning on or after 1 January, 2007.


236

237

IFRS 7 – Financial Instruments: Disclosures and a complementary Amendment to IAS 1 – Presentation ofFinancial Statements – Capital Disclosures

The International Accounting Standards Board («IASB») issued on 18 August, 2005 International Financial ReportingStandard («IFRS») 7 – Financial Instruments: Disclosures and a complementary Amendment to IAS 1 – Presentation ofFinancial Statements - Capital Disclosures..

The IFRS introduces new requirements to improve the information on financial instruments that is disclosed in entities’financial statements. It replaces IAS 30 – Disclosures in the Financial Statements of Banks and Similar FinancialInstitutions and some of the requirements in IAS 32 – Financial Instruments: Disclosure and Presentation. TheAmendment to IAS 1 introduces requirements for disclosures about an entity’s capital.


IFRS 8 – Operational segments

The International Accounting Standards Board («IASB») has issued on 30 November, 2006 the IFRS 8 – Operationalsegments, which should be approved by the European Commission during the second quarter of 2007.

The IFRS 8 – Operational segments sets out requirements for disclosure of information about an entity’s operating seg-ments and also about the entity’s products and services, the geographical areas where the entity operates and whereits major clients are located. This standard specifies how an entity should disclose its information in the annual finan-cial statements and, as a consequential amendment to IAS 34 – Interim Financial Reporting, regarding the informa-tion to be disclosed in the interim financial reporting. Each entity should also provide a description of the segmentalinformation disclosed namely profit or loss and of segment assets, as well as a brief description of how the segmen-tal information is produced.

This IFRS is mandatory and applicable for periods beginning 1 January, 2009.


242To the Members:

Pursuant to the powers laid down in paragraph f) article 25 of Caixa Económica Montepio Geral’s Articles ofAssociation, hereinafter referred to as «Caixa Económica», the Internal Audit Board submits for your appreciation itsReport and Opinion on the Board of Directors’ Consolidated Management Report and Consolidated FinancialStatements for 2006 relating to CEMG and the associated companies covered by the consolidation.

REPORT

1. We have examined the Board of Directors’ Conso-lidated Report and Consolidated Accounts, consistingof the Consolidated Balance Sheet as at 31 December2006, the Consolidated Statement of Income, the Con-solidated Cashflow and Equity Statements for 2006 andthe respective Notes to the Consolidated Accounts.

2. As regards the Consolidated Management Report,the Internal Audit Board checked that, in all materialrespects, its contents match the Consolidated FinancialStatements presented and comply with the require-ments of the law and the Articles of Association.

3. Pursuant to the provisions of article 11 of Decree-Law no. 35/2005 of 17 February, applied to FinancialInstitutions by Bank of Portugal Regulations nos. 1 to6/2005 of 28 February, CEMG has, since 1 January2005, applied the International Financial ReportingStandards (IFRS) adopted by the European Union whenpreparing its Consolidated Financial Statements. Thus

9.10. INTERNAL AUDIT BOARD’S REPORT AND OPINION OF CONSOLIDATEDFINANCIAL STATEMENTS

the Financial Statements for 2006 and 2005 are com-parable.

4. When examining the Consolidated Financial Sta-tements for the year, the Internal Audit Board based itsopinion on the Statutory Audit Opinion and Auditors’Report of Consolidated Financial Statements, plus theReport on the Audit Work drawn up by the IndependentAuditors.

5. As a result of the work undertaken, it is our opinionthat the Consolidated Financial Statements (Consoli-dated Balance Sheet as at 31 December 2006, Conso-lidated Statement of Income, Consolidated Cashflowand Equity Statements for 2006 and the respectiveNotes) provide a suitable understanding of CEMG’sfinancial position as at 31 December 2006 and that ofthe associated companies covered by the consolida-tion, and of how the consolidated profit for 2006 wasobtained.

In the light of the above we are of the

OPINION

That the General Meeting should approve the Consolidated Management Report and the Consolidated FinancialStatements as at 31 December 2006.


THE INTERNAL AUDIT BOARDManuel Jacinto Nunes – Chairman

Gabriel José dos Santos Fernandes – Member

José Moreira Venâncio – Member

10. Social ResponsibilitySOCIAL RESPONSIBILITY IN MONTEPIO

– A TRADITION WITH A FUTURE

243

Montepio’s experience in the field of sustainable develop-ment stems from its mutual association roots and consti-tutes the achievement of its mission as a social economicstructure.

Montepio has always played an important role in Portu-guese society, through its philanthropic acts. It has left anindelible mark and is a benchmark for good practice interms of harmony between the pursuit of profits and thepromotion of quality living.

By incorporating the new concept of social responsibility inits policies and practices, Montepio has given its actionsadded value and brought them in line with a more mo-dern, focussed approach. The year was marked by theadoption of an integrated strategy that allowed the Groupto focus on socially sustainable acts in fields more directlyassociated with its mission, favouring key partners andachieving greater return in terms of visibility and growth.

To that end the Social Responsibility Office was set up tomanage the internal changes and to identify examples ofgood practice undertaken by the various bodies and coor-dinate their efforts. The Office was also charged with pro-ducing a series of strategic documents aimed at ensuring acomprehensive approach.

With Associação Mutualista and Caixa Económica’s Articlesof Association, the Mutual Associations Code and currentinternal regulations were laid to establish a Code ofConduct.

Regulations were also drawn up and approved in regard toSponsorships and Voluntary Work, which clarified the sup-port criteria, devised mechanisms for evaluating impactand return and led to the building of stable relationshipswith bodies in the third sector.

1. DEVELOPING A SOCIAL RESPONSIBILITY POLICY

2. SUPPORT PROVIDED

In addition to redefining its social policy, Montepio upheldits sponsorship tradition and supported dozens of projectsand organisations.

In keeping with its roots and mutual association nature,Montepio, through the Mutual Benefit Association, madevarious donations to bodies with which it has cooperationagreements and supported events that promote mutualsociety values.

Of the many donations made by the Member Solidarity Fund,special mention should be made of those to the «AssociaçãoMutualista Benéfica-Previdente» and the «Fórum Abel Varzim».

Under the auspices of the Marketing and New ChannelsManagement, recognition was given to institutions ofsocial merit, in particular to four associations that workwith handicapped people, which received 100 000 euros atChristmas instead of the traditional gifts.

This act was a step ahead of the International Year of EqualOpportunities for All, which shows the Montepio strongrelationship with the community.

In accordance with Montepio Geral’s Foundation Articlesof Association, Montepio Geral showed its solidarity inmany fields.

Montepio Geral Foundation’s work will, in good time, be the subject of a full report, but mention must be made of thedonations it made, totalling 486 252 euros, spread across the following fields:

Budgetary Items Amount donated

Arts / Sciences / Culture / Health 98 524 €Economics / Management / Social Sciences 29 521 €Social / Solidarity 249 195 €Scholarships 15 000 €Other Expenses 94 012 €

244

As in previous years, the Foundation set out to support awide range of events and actions, both in terms of goalsand methods and in terms of beneficiaries.

The following actions are good examples of how to behaveas a socially responsible and ethical company.

• In the solidarity field, with a view to contribute to the well-being of children at risk, the Foundation supported various bodies, in particular the Portuguese Association for the Rights of Minors and the Family («AssociaçãoPortuguesa para o Direito dos Menores e da Família»), which received a 25 000 euro donation;

• Also in the solidarity field, this time to help the elderly, the Foundation supported the Casapiana Association(«Associação Casapiana») in its efforts to launch a new home help service to the amount of 15 000 euros;

• In the area of visual impairment, a grant was given to the Braga Disctrict Association of the Visually Impaired(«Associação de Deficientes Visuais do Distrito de Braga») in the sum of 25 000 euros, and a partnership establishedwith the Association for the Teaching of the Blind («Associação Promotora do Ensino de Cegos») in order to imple-ment the project Accessibility for All («Acessibilidades para Todos»), which will see means of communications adoptthe universal design principle and be at the heart of an inclusive approach;

• The Foundation is also interested in promoting citizenship, and consequently made donations to «AMI», the Pró-Dignitate Foundation («Fundação Pró-Dignitate»), the Justice and Peace Commission («Comissão Justiça e Paz»),International Amnesty – Portuguese Section («Amnistia Internacional – Secção Portuguesa») and Civitas charity;

• In recognition of the importance of teaching and education aimed at excellence, a number of donations were madeto secondary schools and higher education bodies, in order to promote quality, dedication and student performanceand results as well as contribute to a demanding environment. Examples include the 5 000 euro donation to the SocialStudies Centre («Centro de Estudos Sociais»), the 20 000 euro donation to the 25 April Association («Associação 25de Abril») and the grants of 5 500 euros and 7 500 euros, respectively, to ISEG and Lisbon City Foundation («FundaçãoCidade de Lisboa»).

• Finally, in the area of publishing, the foundation gave particular support to the «União das Misericórdias Portuguesas»,to the sum of 75 000 euros, to aid the publication of the reference work «Portugaliae Monumenta Misericordiarum», asa way of preserving the history of charitable institutions in Portugal.

3. PART OF A LARGER GROUP

In 2006 the Group also strengthened its links with outsidebodies in the national and international social responsibili-ty domain.

In addition to its membership of the Portuguese SocialResponsibility Association and the European Saving BanksGroup’s Social Responsibility Committee, Montepio joined

the Entrepreneurs for Social inclusion Association, acting asa founder, in response to appeal from the PortuguesePresident.

At the end of the year, the Group became a member of theGrace Association, which allowed it to launch the BusinessVolunteer program.

4. FORGING NEW PATHS

Other social responsibility practices aimed at reinforcingthe environmental protection structure are also worthy ofnote, in particular the paper recycling measures and the inkcartridges recycling partnership with the Gil Foundation.

In the year in which Microcredit won international recogni-tion, thanks to the awarding of the Nobel Peace Prize to itsinventor, the Montepio Group also decided to follow thispath by setting up its own Microcredit service, in partner-ship with the Lisbon Santa Casa da Misericórdia.

Within the scope of its social responsibility policy, theMontepio Group started its Microcredit business in the lat-

ter half of the year by opening a branch in Lisbon on 29September, dedicated solely to Microcredit operations.

These operations comprise the granting of financing tosmall projects aimed at self-employment and the socialinclusion of their developers, who would not be eligible forfinance under the traditional credit system.

To that end, on 30 May 2006, a cooperation and partner-ship agreement was signed with the Lisbon Santa Casa daMisericórdia (LSCM). Under this agreement small quantitiesof credit have been granted for social reinsertion purposesto persons supported by LSCM programs.

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Through such operations Montepio sets out to contributeactively to the fight against unemployment and poverty,encouraging initiative, entrepreneurship and the develop-ment of the society to which it belongs, in keeping withthe strategic goals set for this field.

Finally, mention must be made of the launch of a new CreditCard – «Cartão + Vida». It is a commercial experiment thatalso benefits charities selected by Montepio Geral Founda-tion.

Currently three reputable bodies that have a commercialrelationship with Montepio Geral, and also constitute advan-tageous partnerships are covered: the Portuguese Associa-tion of Relatives and Friends of Alzheimer Patients («Associa-ção Portuguesa dos Familiares e Amigos dos Doentes deAlzheimer»), the Life and Peace Community («A ComunidadeVida e Paz») and Cercitop.

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LUSITANIA – COMPANHIA DE SEGUROS, S.A.

Object and history

LUSITANIA is the Montepio Group’s non-life insurer and has been in business since 1986.

When undertaking its activities LUSITANIA always seeks to achieve:

• A high degree of efficiency across departments;

• A suitable resources application policy;

• An increased market share;

• A permanent policy of innovation and critical appraisal;

• The highest quality service provided to insured persons and third parties;

• Full compliance with the Law and the applicable regulations.

11. Montepio GeralGroup’s Financial Holdings

In 2006 LUSITANIA gave priority to developing its Ban-cassurance and Brokers distribution channels and to inte-grating and aligning still further its strategy within theMontepio Group.

In addition LUSITANIA has paid particular attention toadapting its processes and systems to the new prudentialrequirements that are being introduced in a gradual man-ner by the Portuguese Insurance Institute under theSolvency project.

Financial Indicators

In 2006 LUSITANIA’s turnover (Gross Premiums Issued) was147.4 million euros, which represented an increase of13.6% over the previous year.

This growth rate clearly exceeded that of the non-life mar-ket, which stagnated in 2006, as well as that of its maincompetitors. As a result LUSITANIA went from 10th to 9thin the sector ranking and saw its market share rise to3.6%, 0.44% up on the previous year.

Current Profit Activity recorded an impressive 56.3%increase, benefiting from the strong growth in turnover.Nonetheless, the Net Profit for the Year did not move inthe same direction, falling 19.6% as compared to 2005,which had a negative impact on LUSITANIA’s rates of return.ROA fell from 1.29% in 2005 to 0.89% in 2006, while ROEwent from 9.19% to 7.02% over the same period.

FINANCIAL INDICATORS(thousands of euros)


Value %

Net Assets 286 841 238 586 48 255 20.2

Equity 34 795 33 351 1 444 4.3

Gross Premiums Issued 147 350 129 725 17 625 13.6

Profit for the Year 2 342 2 911 -569 -19.6

ROA 0.89% 1.29% -0.40 b.p. –

ROE 7.02% 9.19% -2.17 b.p. –

No. of employees at 31 December 348 331 17 5.1

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Prospects

The next few years are expected to witness major changesto the insurance sector’s legal and regulatory framework,preparations for which will have to begin in 2007. In thislight, particular attention will be paid to the adjustmentsrequired by the adopting of International AccountingStandards from 2007 and the new requirements of the

Solvency II Project. Emphasis will be placed on matters ofgovernance, internal control, risk management and infor-mation made available to the market.

In 2007, in addition to the changes in the legal and regu-latory framework, LUSITANIA will focus on implementingnew ways of improving the performance of its distributionnetworks and automating and optimising its processes.

LUSITANIA VIDA – COMPANHIA DE SEGUROS, S.A.

Object and history

LUSITANIA VIDA is the Montepio Group’s life assurer andwas incorporated in May 1987. It specialises in individualand group life assurance, offering cover for death, disabil-ity, accidents and hospitalisation subsidies.

In 2006 LUSITANIA VIDA, in cooperation with CEMG,devised and completed a series of projects aimed atimproving its operations and ensuring the growth of theBancassurance network, the company’s principal distribu-tion channel. This assurance company’s strategic alignmentwithin the Montepio Group continued to be an importantaction area in 2006.

Products developed by LUSITANIA VIDA have become animportant means of attracting savings to CEMG. Mentionmust be made of the 11 new capitalisation insuranceslaunched in 2007 that were extremely well received byCEMG clients.


In 2006, direct insurance gross premiums issued by LUSITA-NIA VIDA recorded strong growth of 40.4%, in compari-son with a -5.2% recession in the sector. As a result itsmarket share rose 56 base points from 1.16% in 2005 to1.72% in 2006 and the company went up 3 places in thelife assurers ranking, finishing the year in 8th place.

In line with the growth in premiums issued, LUSITANIAVIDA has seen its Assets grow considerably in recent years,by 28.9% in 2005 and by 40.3% in 2006. This reflects theincrease in the Bancassurance network’s business.

Thanks to the upsurge in business, LUSITANIA VIDA’s NetProfit recorded an increase of 42.1%, which led toimprovements in its profitability indicators: ROA and ROEwere up by 0.05% and 2.1%, respectively.



Value %

Net Assets 367 805 262 136 105 669 40.3

Equity 22 652 21 046 1 606 7.6

Gross Premiums Issued 148 164 105 500 42 664 40.4

Profit for the Year 3 114 2 192 922 42.1

ROA 0.99% 0.94% 0.05 b.p. –

ROE 14.80% 12.70% 2.10 b.p. –


Prospects

In 2007 LUSITANIA VIDA should continue to experience anupsurge in its business, benefiting from the potentialgrowth of the CEMG client base and the increaseddemand for diversified and more sophisticated products.The devising of innovative savings products will thus con-tinue to be a critical factor in LUSITANIA VIDA’s success.

LUSITANIA VIDA, just like LUSITANIA, will have to prepareitself for the major changes that will be introduced to theinsurance sector’s legal and regulatory framework over thecoming years. Nonetheless, given the different nature ofthe two companies’ business, LUSITANIA VIDA should findthat the changes it faces are less complex.

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Object and history

Futuro is a pension fund management company that has,since its incorporation in 1988, focused on managingclosed pension funds of major companies as well as openpension funds aimed at small and medium-sized enterprisesand individuals. Since the end of 2003 Futuro has been onthe Board of APFIPP, the association that represents theinvestment funds, pension fund and asset managementsector.

The total value of the assets managed by Futuro was 1.159million euros at the year-end, which constituted growth of11.1%. This increase was due in large measure to theimpressive growth of 57.9% in the open funds aimed atsmall and medium-sized enterprises and the 11.1%increase in the value of the closed funds. In 2006 openfunds aimed at individuals benefited from the partialrestoring of the tax incentives on Retirement Savings Plans,recording an 8.8% increase in the assets managed, thusrecovering from the stagnation seen in the previous year.

The breakdown of assets managed by category changedslightly from 2005 to 2006. The relative weight of openpension funds aimed at small and medium-sized enterprisesrose from 1.4% to 1.9%, while those of closed pensionfunds and open pension funds aimed at individualsdropped from 73.4% to 73.3% and 25.3% to 24.7%,respectively. The most important open fund was the PPR5* Fund, the largest of the six opened funds managed by

Futuro and the oldest Retirement Savings plan in the mar-ket.

In December 2006 Futuro was ranked 8th in the pensionfund manager market, while in terms of assets managed itheld a 5.5% market share, a position only bettered by themanagement companies linked to the 5 major financialgroups operating in Portugal and by the Bank of Portugal’sPension Fund Management Company.

In 2006 the Montepio Geral Pension Fund, managed byFuturo, had an annual gross rate of return of 6.5% (5.7%in 2005), mainly as a result of the excellent performance ofthe stock markets over the year.


In 2006, changes in the main performance indicators andFuturo’s overall performance were very positive. Operatingprofits were up by 9.7% and Net Profit for the Yearincreased by 9.5%, due to the growth in total assets managedand the excellent profitability of the closed pension fundsin 2006, which led to a significant rise in the excess returncommission paid by the closed pension funds.

Consequently, profitability indicators showed considerableimprovement, when compared to 2005. The return onaverage assets was 19.97% and the return on equity was25.38%, accounting for rises of 1.8 and 4.7 percentagepoints, respectively.

FUTURO – SOCIEDADE GESTORA DE FUNDOS DE PENSÕES, S.A.

Prospects

In 2007 Futuro’s business is likely to be marked by changesto the pension fund sector’s regulatory framework. Theywill be introduced by the Portuguese Insurance Institute tocomplement Decree-Law nº 12/2006, which laid down anew legal framework for pension funds. Important amongthe expected changes will be those relating to pension

fund governance structures and management companies’internal control and risk management systems.

Another important priority for Futuro will be its furtherintegration into Montepio Group, especially in regard toMarketing and Commercial activities. This will be possiblethanks to the new software introduced at Caixa EconómicaMontepio Geral’s branches.



Value %

Assets managed 1 158 598 1 042 385 116 213 11.1

Net Assets 7 588 7 397 191 2.6

Equity 6 108 5 895 213 3.6

Operating Profit 7 247 6 608 639 9.7

Profit for the Year 1 496 1 367 129 9.5

Cash Flow 1 569 1 551 18 1.1

ROA 19.97% 18.12% 1.85 b.p. –

ROE 25.38% 20.65% 4.73 b.p. –


250

Object and history

MG Gestão de Activos Financeiros specialises in the man-agement of the Montepio Group’s financial assets. Thecompany has focused its business on the management ofinvestment funds and the discretionary management ofthe Group’s portfolios since 2004. That was the year itchanged from being an investment fund manager, knownas MG Fundos, into MG Gestão de Activos Financeiros andbroadened its activities to include the discretionary man-agement of portfolios and management of real estateinvestment funds and risk capital.

At the end of 2006, the total assets managed by MGGestão de Activos Financeiros were valued at 1 311.3 mil-lion euros, which represented growth of 18.8% as com-pared to the previous year. Discretionary management ofportfolios was fairly healthy in 2006, with assets managedrising to 865.8 million euros at the year-end, an increase of17.5% over the previous year. However, of special notewas the 21.6% expansion in stock investment fund man-agement business which was clearly well above the 3%growth in that market in 2006. As a result MG Gestão deActivos Financeiros saw its market share rise 23 base pointsto 1.53%, at the year-end.

In the stock investment fund segment, the performance ofshare funds and funds of funds was noteworthy.

Supported by the funds’ excellent profitability, they recordeda sharp increase in the assets managed in 2006. Benefitingfrom the growth in this type of funds and the introductionof a fourth fund of funds, the combined assets of sharefunds and funds of funds accounted for 30.7% of the totalassets managed by MG Gestão de Activos Financeiros atthe end of 2006, compared to 22.3% at the end of 2005.


In 2006 MG Gestão de Activos Financeiros’ Profit for theYear was up 24.6%, reflecting the growth in the assetsmanaged and the increased relative weight of the variablereturn funds and the funds of funds in the total investmentfunds portfolio. This fact is of special relevance becausesuch funds generate fees per asset unit higher than that offixed return funds.

Accordingly, MG Gestão de Activos Financeiros’ profitabil-ity indicators recorded an upward trend from 2005 to2006, with return on assets going from 13.0% to 14.8%and return on equity rising by 3.3 percentage points to19.0% at the year-end.

MG GESTÃO DE ACTIVOS FINANCEIROS – SGFIM

Prospects

In 2007 MG Gestão de Activos Financeiros business isexpected to concentrate on broadening the range of fundson offer and on the search for fund performance levelsabove the market average.

Implementation of the Securities Markets Directive, to becompleted in November 2007, is likely to be the main chal-lenge faced by MG Gestão de Activos Financeiros in the

coming year. Therefore, in 2007 MG Gestão de ActivosFinanceiros will have to adjust to the new organisationalrequirements and the rules of conduct, while preparing forgreater competition among the investment companiesoperating in the European Union, brought about by theharmonisation and convergence of the legislation govern-ing those companies and by the more simplifiedCommunity supervision.



Value %

Assets Managed* 445 509 366 523 78 986 21.6

Net Assets 2 984 2 570 414 16.1

Equity 2 286 2 172 114 5.3

Operating Profit 3 654 1 959 1 695 86.5

Profit for the Year 412 331 81 24.6

Cash Flow 439 368 71 19.4

ROA 14.83% 13.04% 1.80 b.p. –

ROE 18.97% 15.68% 3.29 b.p. –


(*) only FIM

251

Object and history

Leacock is an insurance broker held by the MontepioGroup since 1993. Following the reorganisation of theGroup’s insurance sector which began in 2004, the brokerceased to provide bancassurance services to CEMG, whichled to a substantial drop in business in the following years.Therefore, Leacock started to direct its activities towardsattracting and managing its own portfolio, and its mainaim is to maximise return for its shareholders.


As in 2005, the year was marked by the effect of the redi-recting of Leacock’s commercial activities decided in 2004.Net Assets were reduced by around 40% and turnover bymore than 50%, which led to a net loss of -130 thousandeuros in 2006. An internal reorganisation process is under-way that will give rise to profits once again.

LEACOCK (SEGUROS), LDA.



Value %

Net Assets 2 746 4 602 -1 856 -40.3

Equity 2 442 2 654 -212 -8.0

Services rendered 530 1 177 -647 -54.9

Profit for the Year -130 84 -214 -253.8

Cash Flow -47 203 -250 -123.2

ROA -3.53% 1.46% -4.99 b.p. –

ROE -4.89% 2.33% -7.22 b.p. –

No. of employees at 31 December 12 13 -1 -7.7

BANCO MONTEPIO GERAL CABO VERDE

Object and history

Banco Montepio Geral Cabo Verde is a credit institution,incorporated in Cape Verde at the end of 2005 by CEMG.

It is an autonomous business unit, whose commercial activ-ities are centred on the attracting of funding from residentand non-resident bodies. It acts as CEMG’s institutionaltool for international business.



Value %

Net Assets 264 480 237 752 26 728 11.2

Equity 7 234 6 894 340 4.9

Profit for the Year 341 -108 449 –

In 2006, Banco Montepio Geral Cabo Verde completed its first full year of business with a Net Assets growth of 11.2%and a Net Profit of 341 thousand euros.

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General SecretariatAntónio Pedro de Sá Alves SameiroGeneral Secretary

Human Resources Management Management and Training Department Rui Sérgio Carvalho Santos Calheiros Gama Maria Isabel Marques Nunes Manager Assistant Manager

Processing DepartmentOscar Spínola Duarte Silva Assistant Manager

Associação Mutualista Management Mutualist Management DepartmentPedro Maria Bleck da Silva Fernanda Gue Young Manager Assistant Manager

José Alberto Pereira Pitacas Mutualist DepartmentManager Luís Artur Estevão Bravo

Assistant Manager

Mutualist Development DepartmentRita Maria Machado Silva Pereira Costa PimentelAssistant Manager

Planning and Studies Management Strategy and Planning Department Virgílio Manuel Boavista Lima Maria Lúcia Ramos Bica Coordinating Manager Manager

José Jesus Martins Budget and Control DepartmentManager Tomás Correia Cunha Góis Figueira

Assistant Manager

Studies DepartmentRui Manuel Bernardes SerraDeputy Manager

Internal Auditing Management Operational Auditing OfficeFrancisco José Gaveta Alhandra Duarte Alexandra Paula Xavier Serras PereiraManager Assistant Manager

Augusto Pinheiro Ferreira Bank Fraud and Inspection OfficeManager Albino Santos Pereira

Assistant Manager

Compliance OfficeDaniel João Silva CabaçoAssistant Manager

12. Management

254

Financial and International Management Financial Department António Augusto Almeida Artur Jorge Correia Gama Coordinating Manager Manager

International Department Luís Manuel Lourenço Manager

Markets and Risk Cover DepartmentMiguel Alexandre Teixeira CoelhoManager

Marketing and New Channels Management Marketing Image and Advertising DepartmentPedro Jorge Gouveia Alves Filomena Maria Cambraia Santos Moita Macedo Manager Deputy Manager

New Distribution Channels DepartmentFernando Jorge Lopes Centeno Amaro Manager

Cards and Means of Payment DepartmentVasco Francisco Coelho AlmeidaDeputy Manager

Computing and Organization Management Computer Development DepartmentMário José Esteves Rodrigues José João Garção Cabeças Coordinating Manager Manager

Organization and Quality DepartmentAntónio José AlexandreAssistant Manager

Information Systems and Management DepartmentJosé Manuel Simões Freitas Manager

Operations, Distribution Systems and Channels DepartmentMário José Esteves Rodrigues Coordinating Manager

Legal and Credit Recovery Management Legal Advice DepartmentArmando Augusto Pinto Silva Carla Cristina Teixeira Morgado Manager Assistant Manager

Disputes DepartmentMaria Carmo Martins Ventura Calvão Assistant Manager

Management and Control Department Palmira Gue Gom Assistant Manager

Credit Recovery DepartmentVítor Guilherme Matos Filipe Assistant Manager

Property and Premises Management Property DepartmentVítor Louro Branco Vítor Louro Branco Coordinating Manager Coordinating Manager

Premises DepartmentCarlos Alberto Correia Braz Manager

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Operations and Logistic Management Operations Department José Agostinho Rodrigues Viveiros José Manuel Rodrigues Simões Coordinating Manager Manager

Risk Analyses and Management Division Credit Risk DepartmentJorge Humberto Cruz Barros Jesus Luís João Eduardo Dias FernandesManager Assistant Manager

João Carlos Martins Cunha Neves Market Risk DepartmentManager Pedro Maria Corte Real Alarcão Júdice

Manager

Operational Risk DepartmentMaria Fernanda Infante Melo Costa CorreiaDeputy Manager

North Commercial Management Braga Regional Department António Guimarães Pimenta Isabel Cristina Pereira da Silva Manager Deputy Manager

Vítor Fernando Santos Cunha Guimarães Regional DepartmentAssistant Manager Francisco Martins Marques Silva

Deputy Manager

Vila Real Regional DepartmentAgostinho José Vaz AfonsoArea Manager

Paredes Regional DepartmentErnesto Jorge Monteiro Silva Area Manager

Vila Nova de Famalicão Regional Department Pedro Miguel Furtado Figueiredo Area Manager

Greater Porto Commercial Management Porto – Aliados Regional Department António Santos Correia Domingos Teixeira Cerqueira Manager Deputy Manager

Manuel Luís da Costa Leite Gaia Regional Department Assistant Manager Manuel Delfim Correia Sousa

Area Manager

Maia Regional Department Fernando Joaquim Dias Soares Assistant Manager

Porto – Costa Cabral Regional Department Jorge Manuel Fernandes Reis LopesArea Manager

Aveiro Regional Department Alberto Marques CrisóstomoAssistant Manager

S. João da Madeira Regional Department António Manuel Valério BatistaDeputy Manager

Centre Commercial Management Coimbra Regional Department Manuel Duarte Cardoso Martins Sandra Paula Sousa VindeirinhoManager Area Manager

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Centre Commercial Management (cont.) Viseu Regional DepartmentAntónio Manuel Monteiro Tarrafa António José Tadeu Gonçalves Esteves Assistant Manager Deputy Manager

Castelo Branco Regional DepartmentEduardo Alberto Godinho CaladoArea Manager

Leiria Regional Department Américo MendesDeputy Manager

Santarém Regional DepartmentAlfredo Luís Fernandes Caldeira Deputy Manager

Lisbon and Autonomous Regions Commercial Lisboa – Baixa Regional Department Management João Ribeiro Pisco CruzManuel Quelhas Gomes Assistant ManagerManager Lisboa – Centro Regional DepartmentAntónio Mendes Almeida Ernesto Assunção Louro Saraiva Assistant Manager Assistant Manager

Lisboa – Ocidental Regional Department Pedro Miguel Rodrigues CrespoDeputy Manager

Lisboa – Norte Regional Department João Pedro Ribeiro Velez RodriguesAssistant Manager

Madeira Regional DepartmentJoão Manuel Andrade Pereira Deputy Manager

Sérgio Paulo Aveiro Gouveia Deputy Manager

Açores Regional DepartmentGeorge Manuel Moniz Gaspar Deputy Manager

Greater Lisbon Commercial Management Parede Regional Department Horácio Marques Pissara Armando Jorge Pereira Oliveira LopesManager Area Manager

João Filipe Milhinhos Roque Amadora Regional DepartmentAssistant Manager Maria Guilhermina Martins Trindade Pereira Melo

Deputy Manager

Sintra Regional DepartmentPaulo Jorge Cunha RainhoDeputy Manager

Odivelas/Vila Franca de Xira Regional Department Pedro Manuel Gaspar Vasconcelos CarrascoArea Manager

Oeste Regional DepartmentCarlos Alberto Encarnação Bento MarquesArea Manager

257

South Commercial Management Almada Regional Department José Plácido Mendonça Murtinha Duarte Manuel Rodrigues TeixeiraManager Area Manager

José Santos Nogueira Serra Barreiro Regional Department Assistant Manager José Henrique Jesus Silva

Area Manager

Setúbal Regional Department Ramiro Almeida FigueiredoDeputy Manager

Évora Regional Department Pedro Jorge Ponte AraújoArea Manager

Algarve Regional Department João Manuel Rocha PalmaDeputy Manager

Companies Commercial Management Companies Regional Department – North Manuel Lopes da Silva José Magalhães MoreiraCoordinating Manager Assistant Manager

Companies Regional Department – CentreMário Jorge Costa Freitas AlmeidaDeputy manager

Companies Regional Department – LisbonLuís Miguel Reis Branco PardalAssistant Manager

Companies Regional Department – South and Autonomous RegionsAntónio João Silva AlvesArea Manager

Credit Risk Analysis Department Maria José Loureiro Ramires Ramos Tiroa Assistant Manager

Accounting DepartmentArmindo Marques Matias Manager

José Manuel Jesus MartinsAssistant Manager

Customer Procuracy OfficeMiguel Nunes SalesManager

Board Support OfficePedro Miguel Moura Líbano MonteiroManager

Public Institutional Relations OfficeAna Rita Pimentel Dias Pinho BrancoGrade II

Social Responsability OfficePaula Alexandra Gonçalves Oliveira GuimarãesGrade II Technical Staff

Head of ComplianceFrancisco José Gaveta Alhandra Duarte

Advice José Silva Monteiro Advisor

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259

2006 marked the end of the 2004/2006 mandate, a periodof many challenges as well as the time when we turned overa new leaf in terms of our operations and our public image.

Along this road we had the firm support of our Membersand Clients who honoured us with their choice and con-tributed to Montepio’s overall development.

The Board of Directors would like to express its thanks andappreciation for the confidence shown in us.

The Board would also like to acknowledge and thank all thesupport provided over the year by the Members of theGeneral Meeting Board, Internal Audit Board and GeneralBoard.

We cannot fail to show Montepio’s appreciation to theGovernment for its support, in particular the Prime Minis-ter, Ministers of Finance, Employment and Social Security,and Health, and the Regional Governments of the Azoresand Madeira.

Special tribute must also be paid to all our Staff andEmployees who have contributed greatly to Montepio’sdevelopment. We wish to express our appreciation for theprofessionalism they have shown and the way they haveresponded to the changes in and growth of Montepio.

13. Acknowledgement

The Board of Directors thanks also extend to all those bodies that cooperated with the Group in 2006, in particular:

• The Governor of the Bank of Portugal, as well as its Board of Directors and Departments, for the support provided;

• The Stock Exchange Commission («Comissão do Mercado de Valores Mobiliários»), for its supervision and opinions;

• The Portuguese Banks Association («Associação Portuguesa de Bancos»), the European Savings Banks Grouping andCredit Institutions generally, for all their cooperation;

• The various national and foreign mutual associations for their constant availability and their cooperation.

And finally, when submitting the Annual Report andAccounts to the General Meeting, the Board of Directorsproposes that it seconds our votes of thanks and apprecia-tion expressed herein, as well as our expression of ourdeepest sympathy in memory of deceased Members andEmployees.

Early 2007 saw the death of António de Seixas da CostaLeal. It was with great sadness and sense of loss that the

Board of Directors received this news, which representedthe loss of one of the greatest figures in Montepio’s histo-ry and the driving force behind the Group’s growth in the80’s.

Lisbon, 21 February 2007

THE BOARD OF DIRECTORS

José da Silva Lopes – Chairman





ANNUAL REPORT 2006

MONTEPIO GERAL

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