Instruction No. 08/2019 of August 27 – Financial System: Credit Impairment Losses for the Credit Portfolio

INSTRUCTION NO. 08/2019 Page 1 of 72 INSTRUCTION NO. 08/2019 of August 27 SUBJECT: FINANCIAL SYSTEM

• Credit Impairment Losses for the Credit Portfolio Considering the entry into force on January 1, 2018, of International Financial Reporting Standard 9 – Financial Instruments, which replaces International Accounting Standard 39 – Financial Instruments: Recognition and Measurement. Considering the need to review Instruction No. 05/2016 of August 8, regarding credit impairment losses for the credit portfolio. Considering that this Instruction does not intend to make any interpretations of International Accounting Standards/International Financial Reporting Standards, as these are developed exclusively by the IFRS Interpretations Committee and issued by the International Accounting Standards Board (IASB). In accordance with the combined provisions of Article 21 and Article 51, both of Law No. 16/10 of July 15 – National Bank of Angola Law, and Article 93 of Law No. 12/15 of June 17 – Framework Law for Financial Institutions. DETERMINES:

1. Object This Instruction establishes the procedures that Banking Financial Institutions must follow to determine credit impairment losses for the credit portfolio granted to customers, as provided by International Financial Reporting Standard 9 – Financial Instruments, hereinafter abbreviated as IFRS 9.

CONTINUATION OF INSTRUCTION NO. 08/2019 Page 2 of 72 2. Scope This Instruction applies to Banking Financial Institutions under the supervision of the National Bank of Angola, as provided in and subject to the Framework Law for Financial Institutions, hereinafter abbreviated as Institutions. 3. Definitions Without prejudice to the definitions established in the Framework Law for Financial Institutions, for the purposes of this Instruction, the following are understood: 3.1 Financial Asset Acquired or Originated with Credit Impairment: a financial asset acquired or originated with credit impairment at initial recognition. 3.2 Financial Asset in Credit Impairment: a financial asset for which one or more events have occurred that have a negative impact on the estimated future cash flows of the same. Indicators that a financial asset is in credit impairment include observable data regarding the following events: a) Significant financial difficulty of the issuer or borrower; b) A contract default, such as a non-payment or delay; c) The Institution, for economic or contractual reasons related to the borrower's financial difficulties, has granted facilities that it would not otherwise have granted; d) It is probable that the borrower will enter bankruptcy or other financial reorganization proceedings; e) The disappearance of an active market for that financial asset due to financial difficulties; or f) The acquisition or creation of a financial asset at a significant discount that reflects incurred credit losses. 3.3 Back-Testing: comparison between observed values and estimated values for the different risk parameters used in quantifying credit impairment losses for the customer credit portfolio, with the objective of assessing the fit of the statistical model used to observed historical credit losses.

CONTINUATION OF INSTRUCTION NO. 08/2019 Page 3 of 72 3.4 Defaulted Credit: corresponds to the following categories: a) Credit with capital or interest installments overdue for more than 90 (ninety) days; and b) Credit with capital or interest installments overdue for less than 90 (ninety) days, but over which there is evidence justifying its classification as "defaulted credit", namely bankruptcy, debtor liquidation, among others. 3.5 Financial Guarantee Contract: a contract that obligates the issuer to make certain payments in order to reimburse the holder for a loss incurred due to a specific debtor not making payments on the expected date, under the initial or modified terms of a financial instrument. 3.6 Credit Facilities Restructured Due to Customer Financial Difficulties: credit operations in which contractual changes occurred motivated by customer financial difficulties. 3.7 Amortized Cost: the amount at which a financial asset or financial liability is measured at initial recognition, less principal repayments, plus or minus the cumulative amortization using the effective interest method of any difference between that initial amount and the maturity amount, and, for financial assets, adjusted for any loss allowance. 3.8 Derecognition: removal of a previously recognized financial asset or financial liability from an entity's balance sheet. 3.9 Credit Conversion Factor: the probability that an off-balance-sheet credit exposure will transform into a balance-sheet credit exposure. 3.10 Economic Group: a set of financial, banking or non-banking institutions and non-financial companies, in which there is a relationship of control by one institution over the others. 3.11 Fair Value: the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants, not related to each other, at the measurement date.

CONTINUATION OF INSTRUCTION NO. 08/2019 Page 4 of 72 3.12 Credit Loss: the difference between all contractual cash flows that are due to an Institution according to the contract and all cash flows that the Institution expects to receive, discounted at (i) the original effective interest rate, or (ii) the credit-adjusted effective interest rate for financial assets acquired or originated with credit impairment. 3.13 Expected Credit Losses: the weighted average of credit losses, using as weights the respective probabilities of default occurrence. 3.14 Lifetime Expected Credit Losses: corresponds to the expected credit losses resulting from all possible defaults over the expected life of a financial instrument. 3.15 12-Month Expected Credit Losses: corresponds to the portion of lifetime expected credit losses that represents expected credit losses resulting from default events relative to a financial instrument that are possible within 12 months after the reporting date. 3.16 Loss Allowance: corresponds to: a) Expected credit loss allowance for financial assets measured at amortized cost, lease receivables and contract assets; b) Cumulative impairment for financial assets measured at fair value through other comprehensive income; and c) Expected credit loss allowance for loan commitment contracts and financial guarantee contracts. 3.17 Recoverable Amount or Realizable Value: the present value of estimated future cash flows of the credit exposure, discounted at (i) the original effective interest rate, or (ii) the credit-adjusted effective interest rate for financial assets acquired or originated with credit impairment. 3.18 Loan-to-Value (LTV) Ratio: corresponds to the ratio between the amount of financing granted and the value of the collateral received.

CONTINUATION OF INSTRUCTION NO. 08/2019 Page 5 of 72 3.19 Cure Rate: the probability that defaulted credits will return to the state of performing credits, together with the simultaneous verification of the following conditions: a) An improvement in the debtor's situation, with full repayment expected according to the original or modified contract terms upon financial condition analysis; b) The debtor has no overdue amounts; and c) A quarantine period of 1 (one) year has elapsed after the first capital payment, during which the debtor regularly fulfilled its obligations, i.e., the debtor paid a significant amount of capital and interest from the contract without having any overdue exposure for a period exceeding 30 (thirty) days. 3.20 Effective Interest Rate: the rate that exactly discounts estimated future cash payments or receipts through the expected life of the financial asset or financial liability to the gross carrying amount of a financial asset or to the amortized cost of a financial liability. 3.21 Credit-Adjusted Effective Interest Rate: the rate that exactly discounts estimated future cash payments or receipts during the expected life of the financial instrument to the amortized cost of a financial asset acquired or originated with credit impairment. 3.22 Gross Carrying Amount of a Financial Asset: the amortized cost of a financial asset, before adjustment to take into account any loss allowance. 3.23 Associated Credit Collateral Value (Prorated): the separation of the value of received collateral proportionally across all credits granted by the Institution to which the collateral is associated. 3.24 Overdue: a financial asset is considered overdue when the borrower has not made a payment at the time it was contractually due.

CONTINUATION OF INSTRUCTION NO. 08/2019 Page 6 of 72 4. Measurement of Expected Credit Losses 4.1 Except as provided in paragraph 6 of this Instruction, at each reporting date, Institutions must measure the loss allowance for a credit exposure by an amount corresponding to expected credit losses, namely: a) Over its lifetime if the associated credit risk has increased significantly since initial recognition; and, b) Over a 12 (twelve)-month period if the credit risk associated with a credit exposure has not increased significantly since initial recognition. 4.2 Credit exposures must be classified into different stages according to the evolution of their credit risk since the initial recognition date, and not based on the credit risk at the reporting date: a) Stage 1 – a credit exposure must be classified in Stage 1 whenever there is no significant increase in credit risk since its initial recognition date. For exposures in this situation, expected 12 (twelve)-month credit loss must be recognized in the income statement. Interest revenue must be calculated on the gross carrying amount of the respective credit exposure; b) Stage 2 – a credit exposure in which a significant increase in credit risk has occurred since its initial recognition date must be classified in Stage 2. For exposures in this situation, expected lifetime credit loss must be recognized in the income statement. As with Stage 1 exposures, interest revenue must be calculated on the gross carrying amount of the respective credit exposure; c) Stage 3 – exposures in a state of credit impairment at the reporting date must be classified in this stage. For exposures in this situation, expected lifetime credit loss must be recognized in the income statement. Interest revenue must be calculated on the net carrying amount of the credit exposure, with Institutions presenting this amount in the financial margin, net of impairment losses established during the period. 4.3 Institutions must measure expected credit losses for a credit exposure in a way that reflects: a) An unbiased amount determined by evaluating a set of possible outcomes weighted by their respective probabilities; b) The time value of money; and c) Reasonable and supportable information that is available without undue cost or effort at the reporting date regarding past events, current conditions and forecasts of future economic conditions. 4.4 Institutions must ensure an adequate level of conservatism in the methodologies used for measuring expected credit losses for their credit exposures. 4.5 Institutions must apply a definition of default that is consistent with the definition used for internal management purposes regarding the credit risk of credit exposures. 5. Determination of Significant Increases in Credit Risk 5.1 At each reporting date, Institutions must assess whether the credit risk associated with a credit exposure has increased significantly since initial recognition. 5.2 To carry out the assessment referred to in the preceding point, Institutions must compare the probability of default relative to the credit exposure at the reporting date with the probability of default relative to the same exposure at initial recognition, and analyze all reasonable and supportable information that is available without implying undue costs or efforts and that are indicative of significant increases in credit risk since initial recognition. 5.3 Institutions may consider that the credit risk associated with a credit exposure has not increased significantly since initial recognition if it is determined that the exposure has low credit risk at the reporting date. 5.4 The credit risk of a credit exposure is considered low if it has a low probability of default, the borrower has a strong ability to meet its contractual cash flow obligations in the short term, and adverse changes in long-term economic and commercial conditions may, but not necessarily, reduce the borrower's ability to meet its contractual cash flow obligations. Credit exposures are not considered as having low credit risk if they are considered to have low loss risk simply due to the collateral value, and if a given exposure, without that collateral, would not be considered as having low credit risk. Additionally, credit exposures should not be considered to have low credit risk simply because they have a lower probability of default relative to other financial instruments of the Institution, or relative to the credit risk of the jurisdiction in which the Institution operates. 5.5 If reasonable and supportable prospective information is available that does not imply undue costs or efforts, Institutions cannot rely solely on information related to past due payments to determine whether credit risk has increased significantly since initial recognition. However, when this is not the case, Institutions may use information related to past due payments to determine whether there has been a significant increase in credit risk since the initial recognition of the credit exposure. 5.6 For the purposes of point 5.1 of paragraph 5 of this Instruction, Institutions must consider the provisions in Annex II of this Instruction, together with other indicators they deem adequate to the Institution's reality.

CONTINUATION OF INSTRUCTION NO. 08/2019 Page 7 of 72 5.7 Regardless of how Institutions assess significant increases in credit risk, there is a rebuttable presumption that the credit risk associated with a credit exposure has increased significantly since initial recognition when contractual payments are overdue for more than 30 (thirty) days. Institutions may rebut this presumption if they possess reasonable and supportable information that is available without unjustified costs or efforts demonstrating that credit risk has not increased significantly since initial recognition of the asset, despite contractual payments being overdue for more than 30 (thirty) days. If an Institution determines that there have been significant increases in credit risk before contractual payments are overdue for more than 30 (thirty) days, the rebuttable presumption is not applicable. 6. Credit Exposures Acquired or Originated with Credit Impairment 6.1 Notwithstanding the provisions of point 4.1 of paragraph 4 of this Instruction, at the reporting date, an Institution shall only recognize accumulated changes in lifetime expected credit losses since initial recognition as a loss allowance for financial assets acquired or originated with credit impairment. 6.2 At each reporting date, Institutions must recognize in their results the amount of change in lifetime expected credit losses as a gain or loss by impairment. Institutions must recognize favorable changes in lifetime expected credit losses as an impairment gain, even if the lifetime expected credit losses are lower than the amount of expected credit losses included in the estimated cash flows at initial recognition. 7. Inclusion of Prospective Information in the Determination of Expected Credit Losses 7.1 The measurement of expected credit losses requires the consideration of prospective information, namely the inclusion of future macroeconomic trends and scenarios. In this regard, expected credit loss estimates must include multiple macroeconomic scenarios whose probability of occurrence will be evaluated considering past events, current conditions and future macroeconomic trends. 7.2 When measuring expected credit losses, Institutions do not necessarily have to identify each possible scenario. However, Institutions must consider the risk or probability of a credit loss occurring, taking into account the possibility of a credit loss occurring and the possibility of no credit loss occurring, even if the probability of a credit loss is very low. In light of this, Institutions must identify at least two scenarios, in one of which a credit loss occurs and in the other scenario no credit loss occurs. 7.3 Institutions are not required to incorporate forecasts of future conditions over the entire expected life of a credit exposure. The degree of discernment required to estimate expected credit losses depends on the availability of detailed information. As the forecasting horizon increases, the availability of detailed information decreases and the degree of discernment required to estimate expected credit losses increases. For very distant future periods, Institutions may extrapolate projections from the available detailed information. 7.4 Estimates of changes in expected credit losses must reflect, and be consistent in terms of evolution, with changes in observable data from period to period.

CONTINUATION OF INSTRUCTION NO. 08/2019 Page 8 of 72 8. Period to Consider for Measuring Expected Credit Losses 8.1 The maximum period to consider when measuring expected credit losses is the maximum contractual period (including extension options) during which the Institution is exposed to credit risk, and not a longer period, even if that longer period is consistent with commercial practice. 8.2 Some credit exposures include both a loan and an unused loan commitment component, and the Institution's contractual ability to demand repayment and cancel the unused loan commitment does not limit its exposure to credit losses to the notice period provided in the contract. 8.3 Examples of the credit exposures referred to in the preceding point are renewable credit lines, such as credit cards, secured current accounts and credits in the form of overdrafts that can be contractually mobilized by Institutions with a term that may not exceed one day of advance notice. For these exposures, and only for these, Institutions must measure expected credit losses during the period in which they are exposed to credit risk, and expected credit losses will not be mitigated by credit risk management measures, even if this period extends beyond the maximum contractual period. 8.4 When determining the period during which it is expected to be exposed to credit risk, the Institution must consider factors such as historical information and experience regarding: a) The period during which the Institution was exposed to credit risk on similar credit exposures; b) The period for the occurrence of related defaults relative to similar credit exposures following a significant increase in credit risk; and c) The credit risk management actions that the Institution expects to undertake when the credit risk of the credit exposure increases, such as reducing or eliminating unused limits. 9. Credit Facilities Restructured Due to Customer Financial Difficulties 9.1 Institutions must identify and mark, in their respective information systems, credit facilities restructured due to customer financial difficulties. 9.2 For the purposes of the preceding point, Institutions must comply with the provisions in Annex I of this Instruction. 9.3 Institutions must define criteria to assess whether a renegotiated or modified credit should be derecognized. 9.4 If the contractual cash flows related to a credit exposure have been renegotiated or modified and it is not derecognized, Institutions must assess whether there has been a significant increase in the credit risk of the operation, in accordance with paragraph 1(a) of paragraph 4 of this Instruction, by comparing: a) The probability of default at the reporting date (based on modified contractual terms); and b) The probability of default at initial recognition (based on initial unmodified contractual terms). 9.5 Following a modification that results in the derecognition of the original credit exposure, there may be indications that the modified operation is in credit impairment at initial recognition, and, thus, it must be recognized as a credit exposure originated with credit impairment.