Instruction No. 12/2022 of 19 October on Prudential Limits for Large Exposures and Holdings in Non-Financial Enterprises

INSTRUCTION NO. 12/2022 of 19 October SUBJECT: FINANCIAL SYSTEM

• Prudential Limits on Large Exposures
• Holdings in Non-Financial Enterprises

Whereas it is necessary to establish prudential limits on large exposures, as well as holdings in Non-Financial Enterprises by Banking Financial Institutions, as set forth in Notice No. 08/21 of 05 July on Prudential Requirements; Pursuant to the combined provisions of Article 166 of Law No. 14/21 of 19 May, the General Regime of Banking Financial Institutions Law, and of sub-paragraphs d) and f) of paragraph 1 of Article 31.º and paragraph 1 of Article 98.º, both of Law No. 24/21 of 18 October, the National Bank of Angola Law; I HEREBY DETERMINE:

1. Object This Instruction establishes the limits on large exposures, as well as the participation of Banking Financial Institutions in the capital of Non-Financial Enterprises, in accordance with the provisions of Notice No. 08/21 of 05 July on Prudential Requirements.

2. Scope This Instruction applies to Banking Financial Institutions under the supervision of the National Bank of Angola, as provided for in Law No. 14/21 of 19 May, the General Regime of Banking Financial Institutions Law.

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3. Definitions Without prejudice to the definitions established in Law No. 14/21 of 19 May, the General Regime of Banking Financial Institutions Law, for the purposes of this Instruction, the following shall be understood: 3.1. Indirect Holding of Shares or Stock: A person, whether natural or legal, shall be deemed to indirectly hold shares or stock in a company when these are attributable to them, in accordance with the criteria set out in paragraph 2 of Article 8.º of Notice No. 01/22 of 28 January on the Corporate Governance Code for Banking Financial Institutions. 3.2. Exposures: The assets and off-balance sheet items listed in Annex III to this Instruction and forming an integral part thereof.

4. General Requirements 4.1. Banking Financial Institutions must calculate the limits on large exposures and their participation in the capital of Non-Financial Enterprises, as provided for in Annexes I and II of this Instruction. 4.2. The limits set forth in this Instruction do not apply to exposures or components of exposures arising from assets directly deducted from own funds or other own fund reductions related to the asset component. 4.3. Excesses beyond the limits provided for in this Instruction are subject to own fund requirements, as provided for in Annexes I and II of this Instruction.

5. Policies and Procedures 5.1. Banking Financial Institutions must adopt operational procedures associated with solid, effective, and complete internal control policies and processes for identifying all risk concentration situations, as well as for controlling the limits referred to in this Instruction.

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5.2. For the purposes of large exposure risk, Banking Financial Institutions may consider direct risk or the risk of the guarantors of the operations, provided they apply consistent and uniform methodologies throughout the duration of the operation. 5.3. For the purposes of the preceding sub-paragraph, sellers of protection in credit derivative contracts shall be treated as guarantors. 5.4. In exposures assumed towards collective investment schemes and in securitization operations, Banking Financial Institutions must consider, in an integrated manner, the direct and underlying risks of the exposure and its economic reality.

6. Concentration Risk Management 6.1. Without prejudice to the limits referred to in this Instruction, Banking Financial Institutions must identify, assess, monitor, control, and report on concentration risk, particularly in stress situations that may occur in financial markets, with impacts on the following elements: a) Activity sectors of borrowers and guarantors; b) Guarantors of the operations, in case they opt not to consider direct risk; c) Counterparties in financial derivative operations, notably those traded over-the-counter; d) Countries to which the operations are allocated; e) Suppliers of goods and services; and f) Technology dependence inherent to the information systems. 6.2. The National Bank of Angola may determine adjustments to exposures on the matters referred to in the preceding paragraph whenever it deems them necessary for the proper management of concentration risk.

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7. Information Reporting 7.1. Banking Financial Institutions must report to the National Bank of Angola information on large exposures and holdings in non-financial enterprises, in accordance with Article 35.º of Notice No. 08/21 of 05 July on Prudential Requirements, on an individual and consolidated basis, quarterly, through the forms and filling notes provided for in Annexes IV and V of this Instruction. 7.2. For the purposes of the preceding paragraph, in the case of a financial group, the parent company must report the information according to the consolidation perimeter provided for in Article 5.º of Notice No. 08/21 of 05 July on Prudential Requirements. 7.3. Banking Financial Institutions must ensure that the data reported in the tables annexed to this Instruction are duly documented.

8. Transitional Provisions 8.1. Banking Financial Institutions must comply with the provisions of this Instruction from 01 January 2024, for exposures to the Angolan State denominated in foreign currency. 8.2. For the purposes of Annex I of this Instruction, the value of exposures on or linked to the guarantee of Banking Financial Institutions may be deducted at 80% (eighty percent), and must be in compliance with this Instruction by January 2024. 8.3. Banking Financial Institutions must report to the National Bank of Angola the information required in Article 35.º of Notice No. 08/21 of 05 July on Prudential Requirements, on an individual basis monthly, and on a consolidated basis quarterly, until October 2022. 8.4. Banking Financial Institutions must report the information required in Article 35.º of Notice No. 08/21 of 05 July on Prudential Requirements, on an individual and consolidated basis, quarterly, from November 2022 onwards.

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9. Sanctions Non-compliance with the provisions established in this Instruction constitutes a regulatory offense punishable under Law No. 14/21 of 19 May, the General Regime of Banking Financial Institutions Law.

10. Doubts and Omissions Doubts and omissions resulting from the interpretation and application of this Instruction shall be resolved by the National Bank of Angola.

11. Repeal Instruction No. 02/22 of 29 March on Prudential Limits on Large Exposures is hereby repealed.

12. Entry into Force This Instruction enters into force on the date of its publication. PUBLISH. Luanda, 19 October 2022. THE GOVERNOR JOSÉ DE LIMA MASSANO

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ANNEX I PRUDENTIAL LIMITS ON LARGE EXPOSURES

1. Banking Financial Institutions must not assume large exposures towards a counterparty or a group of interconnected counterparties, the value of which exceeds 25% (twenty-five percent) of their Tier 1 capital.
2. Whenever large exposures concern holders of qualifying holdings or the group of interconnected counterparties includes the same shareholders, the limit is reduced to 10% (ten percent) of Tier 1 capital, unless the large exposure is towards an entity.
3. The sum of the 20 (twenty) largest large exposure positions must not exceed 300% (three hundred percent) of Tier 1 capital.
4. For the purpose of calculating large exposures, Banking Financial Institutions must consider the exemptions and deductions provided for in paragraphs 13 to 17 of this Annex.
5. The limits established in paragraphs 1 to 3 of this Annex apply equally on a consolidated basis.
6. Whenever Banking Financial Institutions exceed the assumed exposures or there is a likelihood of exceeding the limits established in paragraphs 1 to 3 of this Annex, they must immediately communicate the value of the exposures to the National Bank of Angola.
7. For the purposes of the preceding paragraph, Banking Financial Institutions must submit an action plan within 1 (one) month, providing for their regularization within 6 (six) months.
8. In the event of an excess of assumed exposures, this excess must be factored into the calculation of Capital Ratios, being included in Risk-Weighted Assets (RWAs) and weighted at 1250% (one thousand two hundred and fifty percent).
9. For the purposes of the preceding paragraph, the corresponding own fund requirement value is obtained by multiplying the RWAs by 8% (eight percent).

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Categories of Exposure in Risk 10. Exposures must be considered according to the following criteria: a) Assets at their accounting book value, in accordance with IAS/IFRS, with the exception of exposures belonging to the trading book; b) The trading book at the excess of long positions over short positions; c) High, medium, medium/low, and low off-balance sheet items listed in Table 2 of Annex III of this Instruction, at their nominal value; and d) Off-balance sheet items relating to financial derivative instruments, referred to in Annex III of this Instruction, at the value resulting from multiplying their notional value by the percentages in Table 1.

Table 1

Residual Maturity	Interest Rate Contracts	Exchange Rate and Gold Contracts	Equity Securities Contracts	Precious Metals Contracts (excluding Gold)	Commodities Contracts (excluding Precious Metals)
Less than or equal to 1 year	0.0%	1.0%	6.0%	7.0%	10.0%
Between 1 and 5 years inclusive	0.5%	5.0%	8.0%	7.0%	12.0%
Greater than 5 years	1.5%	7.5%	10.0%	8.0%	15.0%

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11. The following exposures are not considered for the calculation of large exposure limits: a) Foreign exchange operations during the normal settlement period according to commercial practices for each currency; b) Securities purchase or sale operations during the normal settlement period according to commercial practices, up to a limit of 5 (five) business days counted from the payment date or delivery of the securities; c) Fund transfers, including payment services, clearing and settlement, in any currency, as well as clearing, settlement, and custody services for financial instruments on behalf of and at the risk of counterparties in operations; and d) Firm commitment operations, up to a limit of 5 (five) business days, counted from the date the Institution received the previously subscribed assets.

Associated Guarantees 12. Real and personal guarantees received by Banking Financial Institutions that meet the criteria established in Annex IV of Instruction No. 15/21 of 27 October on the Calculation and Requirement of Regulatory Own Funds for Credit Risk and Counterparty Credit Risk are eligible as mitigants for large exposures. 13. The guarantees referred to in the preceding paragraph may be considered within the exemptions provided for in paragraph 14 or the deductions according to paragraphs 15 to 17 of this Annex.

Exemptions 14. The following exposures are exempt from the large exposure limits established in paragraphs 1 to 3 of this Annex: a) Towards central administrations, notably the Angolan State and the National Bank of Angola, that are denominated and financed in national currency; b) Towards the National Bank of Angola that are denominated and financed in foreign currency; c) Fully linked to an eligible guarantee, in accordance with Annex IV of Instruction No. 15/21 of 27 October on the Calculation and Requirement of Regulatory Own Funds for Credit Risk and Counterparty Credit Risk, granted by the National Bank of Angola; d) Towards central state administrations, Central Banks, international organizations, or Multilateral Development Banks to which a risk weight of 0% (zero percent) is applied, in accordance with Annex I of Instruction No. 15/21 of 27 October on the Calculation and Requirement of Regulatory Own Funds for Credit Risk and Counterparty Credit Risk; e) Fully linked to an eligible guarantee, in accordance with Annex IV of Instruction No. 15/21 of 27 October on the Calculation and Requirement of Regulatory Own Funds for Credit Risk and Counterparty Credit Risk, granted by central state administrations, Central Banks, international organizations, or Multilateral Development Banks to which a risk weight of 0% (zero percent) would be applied in accordance with Annex I of Instruction No. 15/21 of 27 October on the Calculation and Requirement of Regulatory Own Funds for Credit Risk and Counterparty Credit Risk; f) Assumed by a Banking Financial Institution towards companies with which it is in a relationship of control or group, provided they are included in the consolidation perimeter for prudential purposes, provided for in Article 5.º of Notice No. 08/21 of 05 July on Prudential Requirements or equivalent norms in force in a foreign country;

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g) Guaranteed by cash deposits, constituted in the borrowing Institution or in an Institution with which it is in a relationship of control or group; h) Fully linked to liabilities subject to netting agreements; i) Secured by deposit certificates, issued by the borrowing Institution or by an Institution with which it is in a relationship of control or group, provided they are deposited in these entities; j) Arising from revocable credit lines not utilized, provided the contract stipulates that the lines can only be used on the condition that they do not imply exceeding the limits provided for in paragraphs 1 to 3 of this Instruction; and k) Arising from contributions to deposit guarantee schemes, provided that the Banking Financial Institutions that are part of them have a legal or contractual obligation to finance them; l) Without prejudice to the provisions of the preceding sub-paragraphs, exposures towards the central administration, notably the State, that are denominated and financed in foreign currency and not quoted internationally, must observe the limits established in paragraphs 1 and 3 of this Instruction.

Partial Deductions to Exposures 15. 80% (eighty percent) of the value of exposures on or linked to the guarantees of local or regional administrations, to which a risk weight of 20% (twenty percent) would be applied in accordance with Annex I of Instruction No. 15/21 of 27 October on the Calculation and Requirement of Regulatory Own Funds for Credit Risk and Counterparty Credit Risk, must be deducted. 16. 50% (fifty percent) of the value of exposures classified as low and medium/low risk, according to Table 2 of Annex III to this Instruction, must be deducted. 17. 50% (fifty percent) of the market value of the real estate property may be deducted from the value of the exposure or any part thereof fully secured by residential real estate, provided the following conditions are cumulatively met: a) The National Bank of Angola has not assigned a risk weight greater than 35% (thirty-five percent) to the risk positions or any parts thereof secured by residential real estate; b) The exposure or part thereof is fully secured by: i. Mortgages on residential real estate; and

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18. 75% (seventy-five percent) of the value of the exposure secured by residential real estate may be deducted, under which the lessor retains full ownership of the property and the lessee has not yet exercised their purchase option.
19. 50% (fifty percent) of the market value of the real estate property may be deducted from the value of the exposure or any part thereof fully secured by commercial real estate, provided the following conditions are cumulatively met: a) The National Bank of Angola has not assigned a risk weight greater than 50% (fifty percent) to the risk positions or parts thereof secured by commercial real estate; b) The risk position is fully secured by: i. Mortgages on real estate intended for offices or other commercial facilities; and ii. Offices or other commercial facilities and risk positions related to real estate leasing operations. c) The value of the real estate property does not depend significantly on the credit quality of the borrower; and d) The commercial real estate properties are completely constructed.

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ANNEX II LIMITS ON HOLDINGS IN NON-FINANCIAL ENTERPRISES

1. Banking Financial Institutions may not directly or indirectly hold shares or stock of a non-financial enterprise or a group of interconnected non-financial enterprises, the amount of which exceeds 15% (fifteen percent) of the participating Institution's regulatory own funds.
2. The total amount of shares or stock held, directly and indirectly, in non-financial enterprises, must not exceed 40% (forty percent) of the participating Institution's regulatory own funds.
3. Banking Financial Institutions may not hold for a period exceeding 3 (three) years, consecutive or non-consecutive, directly or indirectly, shares or stock the amount of which exceeds 25% (twenty-five percent) of the capital of a non-financial enterprise.
4. The following are not considered for the calculation of the limits defined in this Annex: a) Non-financial enterprises that carry out activities that the National Bank of Angola considers, following prior request by the Banking Financial Institutions, to be any of the following: i. A direct extension of banking activity; ii. Auxiliary services to banking activity; and iii. Leasing, factoring, investment fund management, IT services management, or any other similar activity. b) The holding of shares resulting from firm commitment operations, up to a limit of 5 (five) business days, counted from the date the Banking Financial Institution received the previously subscribed assets.
5. The limits defined in this Instruction do not apply to Management Companies for Shareholdings subject to the supervision of the National Bank of Angola.
6. The limits established in paragraphs 1 to 3 of this Annex apply equally on a consolidated basis.

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7. Whenever holdings of shares or stock in non-financial enterprises exceed or are likely to exceed the limits established in paragraphs 1 to 3 of this Annex, Banking Financial Institutions must immediately communicate the value of the holdings to the National Bank of Angola.
8. For the purposes of the preceding paragraph, Banking Financial Institutions must submit an action plan within 1 (one) month, providing for their regularization within 6 (six) months.
9. In the event of an excess of assumed holdings, this excess must be factored into the calculation of Capital Ratios, being included in Risk-Weighted Assets (RWAs) and weighted at 1250% (one thousand two hundred and fifty percent).
10. For the purposes of the preceding paragraph, the corresponding own fund requirement value is obtained by multiplying the RWAs by 8% (eight percent).

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ANNEX III ASSETS AND OFF-BALANCE SHEET ITEMS TO BE CONSIDERED FOR THE PURPOSES OF "PRUDENTIAL LIMITS ON LARGE EXPOSURES" The assets listed in Table 1 and the off-balance sheet items present in Table 2, both of this Annex, must be considered.

Table 1 – Assets

Account PCIFB	Asset Class
1.10	CASH AND AVAILABLE FUNDS
1.20	APPLICATIONS IN CENTRAL BANKS AND IN OTHER CREDIT INSTITUTIONS
1.30	SECURITIES AND SECURITIES
1.40	HEDGE DERIVATIVES WITH POSITIVE FAIR VALUE
1.50	CREDITS IN THE PAYMENT SYSTEM
1.60	FOREIGN EXCHANGE OPERATIONS
1.70	CREDITS TO CLIENTS
1.80	OTHER ASSETS
1.90.10	INVESTMENTS IN SUBSIDIARIES, ASSOCIATES, AND JOINT VENTURES

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Table 2 – Off-Balance Sheet Items

Risk Level	Type of Instrument	PCIFB Account	Off-Balance Sheet Class
High	• Guarantees with the nature of credit substitutes<br>• Acceptances<br>• Endorsements of bills where the signature of another Institution does not appear<br>• Irrevocable stand-by letters of credit with the nature of credit substitutes<br>• Sales of assets with repurchase agreements<br>• Unpaid portion of shares and other partially paid securities<br>• Forward deposits<br>• Forward purchase of assets<br>• Recourse transactions	9.10.20	Liability towards Third Parties
Medium	• Indemnities and guarantees that do not have the nature of credit substitutes<br>• Unused credit lines with an initial maturity greater than one year<br>• Irrevocable stand-by letters of credit that do not have the nature of credit substitutes<br>• Documentary credits, issued and confirmed, except those of medium/low risk
Medium / Low	• Unused credit lines with an initial maturity less than or equal to one year and irrevocable<br>• Documentary credits for which shipping documents serve as collateral and other potential automatic settlement transactions
Low	• Unused credit lines that can be unconditionally cancelled at any time and without prior notice or that provide for automatic cancellation due to deterioration of the borrower's credit situation
Medium	• Note Issuance Facilities (NIF), revolving underwriting facilities (RUF), and other similar instruments	9.10.30.20	Securities and securities subscribed for primary placement
High	• Credit derivatives	9.10.40	Reference value of financial derivative instruments
N/A	• Interest rate swaps in the same currency<br>• Variable interest rate swaps of different nature ("base swaps")<br>• Forward contracts

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