Notice No. 02/2016 on Regulatory Own Funds

Published in the Official Gazette, I Series, No. 97, of June 15 NOTICE NO. 02/2016 SUBJECT: REGULATORY OWN FUNDS

Considering the development of the Angolan Financial System and international best practices, it was necessary to revise Notice No. 05/2007, of September 26, which establishes new risk categories considered in the calculation of the regulatory solvency ratio and redefines the characteristics of financial instruments considered in the determination of regulatory own funds.

In these terms, and under the combined provisions of letters d) and f) of paragraph 1 of Article 21st and letter d) of paragraph 1 of Article 51st, both of Law No. 16/10, of July 15 – Law of the Bank of Angola, and Article 88st of Law No. 12/15, of June 17 – Law of the Bases of Financial Institutions.

I DETERMINE:

Article 1. (Object) This Notice aims to regulate the calculation methodology, establish the minimum value of the regulatory solvency ratio (RSR), and define the scope and characteristics of the elements comprising regulatory own funds (ROF).

Article 2. CONTINUATION OF NOTICE NO. 02/2016 Page 2 of 15 (Scope) This Notice applies to Financial Institutions under the supervision of the Bank of Angola, under the terms and conditions provided for in the Law of the Bases of Financial Institutions, hereinafter abbreviated as Institutions.

Article 3. (Definitions) Without prejudice to the definitions established in the Law of the Bases of Financial Institutions, for the purposes of this Notice, the following are understood:

1. Financial Group: a set of resident and non-resident companies that have the nature of banking and non-banking financial institutions, with the exception of financial institutions linked to insurance and social security activities, in which there is a relationship of control by a parent company supervised by the Bank of Angola over the other companies comprising it.

2. Own Elements: all and any financial instruments whose issuer and holder is the financial institution itself.

3. Parent Company: a legal entity that exercises a relationship of control or group over another legal entity, designated as a subsidiary, when they are financial institutions under the supervision of the Bank of Angola.

4. Relationship of control or group: "relationship of control" as defined in the Law of the Bases of Financial Institutions.

5. Special Purpose Vehicle: an entity with activity restricted to the issuance of eligible instruments as a positive element of regulatory own funds, normally headquartered in a country or territory characterized by lower requirements regarding: a) obtaining authorization to exercise financial activity; b) the special banking secrecy regime; and c) obtaining tax advantages.

Article 4. CONTINUATION OF NOTICE NO. 02/2016 Page 3 of 15 (Calculation of the regulatory solvency ratio)

1. Financial institutions under the supervision of the Bank of Angola must maintain regulatory own funds compatible with their nature and scale of operations, permanently ensuring a regulatory solvency ratio calculated according to paragraph 2 of this article, not lower than 10% (ten percent).

2. The regulatory solvency ratio reflects the relationship between regulatory own funds and the value of regulatory own fund requirements according to the following formula: RSR = (ROF / Requirements for ROF) × 10%

3. Regulatory own funds correspond to the algebraic sum of Base Own Funds and Supplementary Own Funds, calculated according to Articles 5st and 7st of this Notice, respectively, minus the elements provided for in Article 10st of this Notice.

4. Regulatory own fund requirements correspond to the sum of individual requirements calculated according to the following Notices issued by the Bank of Angola: a) Notice No. 03/2016, on Regulatory Own Fund Requirement for Credit Risk and Counterparty Credit Risk; b) Notice No. 04/2016, on Regulatory Own Fund Requirement for Market Risk and Counterparty Credit Risk in the Trading Book; c) Notice No. 05/2016, on Regulatory Own Fund Requirement for Operational Risk.

5. The ratio provided for in paragraph 2 of this article must not be lower than: a) 8.5% (eight point five percent) considering, in its numerator, base own funds, calculated according to Article 5st of this Notice; b) 7.0% (seven point zero percent) considering, in its numerator, the elements provided for in letters a) to g) of paragraph 2, minus the

CONTINUATION OF NOTICE NO. 02/2016 Page 4 of 15 elements referred to in letters a) to k) of paragraph 4, both of Article 5st of this Notice.

Article 5. (Base Own Funds)

1. Base own funds consist of the algebraic sum of the elements mentioned in paragraph 2 minus the elements referred to in paragraph 4, both of this article.

2. The following are considered positive elements of base own funds: a) paid-up share capital; b) issuance premiums relating to elements covered by the previous letter; c) specific reserve to record the value of monetary update of paid-up share capital; d) positive carried-forward results from previous years; e) legal, statutory, and other reserves arising from undistributed results, or constituted for capital increase; f) positive net result of the previous year; g) positive provisional net result of the current year; h) portion of reserves and results corresponding to deferred tax assets, to the extent that they are associated with losses that contain as a negative element of base own funds; i) instruments whose issuance conditions were previously approved by the Bank of Angola and meet the requirements provided for in Article 6st of this Notice.

3. The positive net results of the previous year and the current year, referred to in the previous paragraph, may only be considered if the following conditions are cumulatively met: a) they have been determined in accordance with the accounting rules established by the Bank of Angola;

CONTINUATION OF NOTICE NO. 02/2016 Page 5 of 15 b) they have been deducted from the values of taxes, dividends, and other charges provided for proportionally to the period to which they relate; and c) they have been certified by the certified accountant member of the supervisory body or sole auditor and by the external auditor.

4. The following are considered negative elements of base own funds: a) treasury shares, at the book value on the balance sheet; b) negative results, carried forward from previous years; c) negative net result of the previous year; d) negative latent results relating to the revaluation of available-for-sale securities and cash flow hedging and foreign investment operations; e) negative provisional net result of the current year; f) net intangible fixed assets after amortization; g) expenses with deferred costs related to pension liabilities; h) portion of reserves and results corresponding to deferred tax liabilities, to the extent that they are associated with gains that contain as a positive element of base own funds; i) positive revaluation differences arising from the application of the equity method; j) insufficiency of provisions compared to the provisions of Notice No. 12/2014, of December 17, on the constitution of provisions; and k) unrecognized actuarial losses; and l) other own elements coverable by letter i) of paragraph 2 of this article.

Article 6. (Requirements for some financial instruments of base own funds)

1. The instruments referred to in letter i) of paragraph 2 of Article 5st of this Notice must meet the following requirements:

CONTINUATION OF NOTICE NO. 02/2016 Page 6 of 15 a) be issued and paid-up; b) present a subordinate character, in the event of dissolution or liquidation of the issuer, compared to deposits, other non-subordinated liabilities, and instruments provided for in letters d) and f) of paragraph 2 of Article 7st of this Notice; c) not contain any guarantee issued by the issuer, by an entity in a relationship of control or group with it, or by a related party; d) not have a defined maturity and not contain relevant incentives for their repayment by initiative of the issuer; e) only be repayable, by discretionary initiative of the issuer, once the minimum period of 5 (five) years has elapsed since their issuance and with prior authorization from the Bank of Angola, with the issuer having to demonstrate that: i. the instruments are replaced by others with the same or higher quality regarding the capacity to absorb losses; or ii. the financial and structural solvency conditions of the Institution are not affected by the repayment, existing, after its occurrence, an excess of regulatory own funds compared to prudential ratios and limits; f) the payment of remuneration to holders may be cancelled for an unlimited period of time, on a non-cumulative basis; g) cancelled remuneration payments under the previous letter may be freely allocated to cover losses; h) instruments may be allocated to cover losses through their conversion into ordinary capital or the use of a discount factor on their nominal value; and i) must be registered and cannot have been acquired or financed by entities belonging to the financial group controlled by the issuer.

2. Regarding the provisions of the previous paragraph of this article and without prejudice to the analysis by the Bank of Angola of all conditions of the issuance of financial instruments, the following requirements must be considered: a) for the purposes of letter d) of the previous paragraph, relevant incentives for repayment are considered to exist when an increase in the interest rate equal to or greater than 2% (two percent) is expected in the event that repayment does not occur; b) the situations provided for in letters f), g), and h) of the previous paragraph must arise from the initiative of the issuer or imposition by the Bank of Angola and cannot constitute a default event capable of being used to request the bankruptcy of the issuer; c) the conversion or reduction of nominal value provided for in letter h) of the previous paragraph must be approved by the corporate bodies of the issuing Institutions as a condition for the issuance of the instruments; and d) Institutions cannot distribute dividends while the situation provided for in letter f) subsists.

Article 7. (Supplementary Own Funds)

1. Supplementary own funds consist of the algebraic sum of the elements mentioned in paragraph 2 minus the elements referred to in paragraph 3, both of this article.

2. The following are considered positive elements of supplementary own funds: a) redeemable preferred shares; b) generic funds and provisions; c) reserves arising from the revaluation of own-use real estate; d) subordinated debt, in the form of loans or bonds issued, whose issuance conditions were previously approved by the Bank

CONTINUATION OF NOTICE NO. 02/2016 Page 8 of 15 of Angola and meet the requirements provided for in Article 8st of this Notice; e) positive latent results relating to the revaluation of available-for-sale securities and cash flow hedging and foreign investment operations, up to 45% (forty-five percent) of their value (by the amount of the net effect of the hedge) before taxes; f) other instruments whose issuance conditions were previously approved by the Bank of Angola and meet the requirements provided for in Article 8st, provided they are not coverable by letter i) of paragraph 2 of Article 5st, both of this Notice.

3. The following are considered negative elements of supplementary own funds: own elements coverable by letters a), d), and f) of paragraph 2 of this article, ensuring that the reduction requirements provided for in Article 9st of this Notice are duly met.

4. The positive results referred to in letter e) of paragraph 2 of this article may only be considered when certified by the certified accountant member of the supervisory body or sole auditor and by the external auditor.

Article 8. (Requirements for some financial instruments of supplementary own funds)

1. The instruments referred to in letters d) and f) of paragraph 2 of Article 7st of this Notice must meet the following requirements: a) be issued and paid-up; b) present a subordinate character, in the event of dissolution, compared to deposits and other non-subordinated liabilities; c) not contain any guarantee issued by the issuer, by an entity in a relationship of control or group with it, or by a related party;

CONTINUATION OF NOTICE NO. 02/2016 Page 9 of 15 d) have an initial maturity not lower than 5 (five) years and not contain relevant incentives for their repayment by initiative of the issuer; e) only be repayable, by discretionary initiative of the issuer, after the minimum period of 5 (five) years has elapsed and with prior authorization from the Bank of Angola, with the issuer having to demonstrate compliance with the conditions provided for in letter e) of paragraph 1 of Article 6st of this Notice; f) the payment of remuneration to holders may be cancelled for an unlimited period of time on a cumulative basis; g) cancelled remuneration payments under the previous letter may be freely allocated to cover losses; h) instruments may be allocated to cover losses through their conversion into ordinary capital or the use of a discount factor on their nominal value; i) must be registered and cannot have been acquired or financed by entities belonging to the financial group controlled by the issuer.

2. Regarding the provisions of the previous paragraph of this article and without prejudice to the analysis of all issuance conditions by the Bank of Angola: a) for the purposes of letter d) of paragraph 1 of this article, relevant incentives for repayment are considered to exist when an increase in the interest rate equal to or greater than 1% (one percent) is expected in the event that repayment does not occur; b) the situations provided for in letters f), g), and h) of the previous paragraph must arise from the initiative of the issuer or imposition by the Bank of Angola and cannot constitute a default event capable of being used to request the bankruptcy of the issuer; c) the conversion or reduction of nominal value provided for in letter h) of the previous paragraph: i. must be approved by the corporate bodies of the issuing Institutions as a condition for the issuance of the instruments; and

CONTINUATION OF NOTICE NO. 02/2016 Page 10 of 15 ii. may only occur after the situation provided for in letter h) of paragraph 1 of Article 6st of this Notice, if this exists; d) while the situation provided for in letter f) subsists, Institutions cannot remunerate, under any title, the instruments provided for in letter i) of paragraph 2 of Article 5st of this Notice.

3. The proposal for resolution submitted to the general assembly regarding the issuance of the instruments referred to in letter a) of paragraph 2 of Article 7st of this Notice must make explicit mention of the possibility of opposition by the Bank of Angola.

Article 9. (Reduction Program)

1. Redeemable preferred shares and subordinated debt referred to in letters a) and d) of the previous paragraph and other instruments referred to in letter f) of paragraph 2 of Article 7st of this Notice, respectively, are subject to a gradual reduction program of the amount eligible for the calculation of supplementary own funds, carried out at a rate of 20% (twenty percent) per year, during the 5 (five) years preceding repayment, with reference to the last day of each year.

2. Financial institutions may repay the portions that cease to be considered in the calculation of their supplementary own funds, under the terms of the previous paragraph of this article, with prior authorization from the Bank of Angola.

3. In the case where the contractual terms applicable to the instruments referred to in paragraph 1 of this article provide for the existence of different repayment portions, staggered over time, by initiative of the issuer, the provisions of paragraph 2 of this article apply autonomously to each of these portions.

Article 10. (Deductions from base and supplementary own funds)

CONTINUATION OF NOTICE NO. 02/2016 Page 11 of 15

1. In the determination of base and supplementary own funds, the following must be deducted: a) instruments issued or contracted by other financial institutions, of which the Institutions are holders, provided for in letters a) and i) of paragraph 2 of Article 5st and in letters a), d), and f) of paragraph 2 of Article 7st, both of this Notice. This deduction must consider the book value on the balance sheet, net of provisions, and must meet the following conditions: i. if the Institution holds a participation greater than 10% (ten percent) of the capital of the participatory company, the total amount of the aforementioned instruments will be deducted; or ii. if the institution holds a participation equal to or less than 10% (ten percent) of the capital of the participatory company, and greater than 10% (ten percent) of the capital of the participating company, the value of the aforementioned instruments will be deducted excluding 10% (ten percent) of the own funds of the participatory company, considered before this deduction; b) excesses compared to the limits established in Notice No. 09/2016, on prudential limits for large exposures.

2. The deduction provided for in letter a) of paragraph 1 of this article includes holdings in other Institutions authorized by the Bank of Angola, in the companies provided for in the Law of the Bases of Financial Institutions, as well as in non-resident entities that possess the nature and develop similar activity to the aforementioned companies.

Article 11. (Use of Special Purpose Vehicles)

CONTINUATION OF NOTICE NO. 02/2016 Page 12 of 15

1. The instruments provided for in letter i) of paragraph 2 of Article 5st and in letters d) and f) of paragraph 2 of Article 7st, both of this Notice, may be issued through a special purpose vehicle whose activity is restricted to the issuance of these instruments and associated hedging operations.

2. The instruments referred to in the previous paragraph of this article must meet the following requirements: a) possess the characteristics provided for in Articles 6st and 8st of this Notice to be accepted as base and supplementary own funds, respectively, under the same conditions as those issued by entities belonging to the financial group; b) be available for use and for covering losses of at least one institution belonging to the financial group; and c) cannot grant the holder the right to claim the insolvency of the issuing vehicle or entities belonging to the financial group.

Article 12. (Application on a consolidated basis) Parent companies of financial groups are subject to compliance with the provisions of this Notice on a consolidated basis.

Article 13. (Determination of regulatory own funds on a consolidated basis) In the determination of regulatory own funds on a consolidated basis, financial institutions must: a) consider the balance sheet and off-balance sheet elements resulting from the consolidation carried out in accordance with the standards issued by the Bank of Angola, considering the supervision perimeter relative to the financial group under the terms of Notice No. 03/2013, of April 22, on prudential supervision on a consolidated basis;

CONTINUATION OF NOTICE NO. 02/2016 Page 13 of 15 b) apply, on a consolidated basis, the definitions, limits, qualitative requirements, and determination rules provided for in this Notice; c) make the following adjustments: i. add to base own funds minority interests, negative first consolidation differences, and negative revaluation differences arising from the application of the equity method; ii. reduce base own funds by the differences referred to in the previous point if they are positive.

Article 14. (Framing Rules)

1. The events, acts, requirements, and other relevant provisions for prudential framing purposes provided for in this Notice, namely the rules for the repayment of borrowed capital, the payment of interest, and the allocation to cover losses of the instruments provided for in letter i) of paragraph 2 of Article 5st and in letters d) and f) of paragraph 2 of Article 7st, both of this Notice, cannot be considered on a consolidated basis without previously generating effects on an individual basis.

2. The issuance conditions of the securities may provide that the conversions provided for in letter h) of paragraph 1 of Article 6st and in letter h) of paragraph 1 of Article 8st, both of this Notice, may generate effects directly in the parent company of the financial group.

Article 15. (Information Provision)

CONTINUATION OF NOTICE NO. 02/2016 Page 14 of 15 The Bank of Angola establishes, in specific regulation, the structure and minimum content of the reports and other information elements that must be submitted within the scope of this Notice.

Article 16. (Sanctions) Non-compliance with the mandatory norms established in this Notice constitutes an offense punishable under the Law of the Bases of Financial Institutions.

Article 17. (Transitional Provision)

1. Institutions must comply with the provisions of this Notice within 18 (eighteen) months after the date of its publication, a period during which the current regulation on the solvency ratio remains in force.

2. Without prejudice to the provisions of the previous paragraph, Institutions must begin providing information for the calculation of the regulatory solvency ratio presented in this Notice, 12 (twelve) months after the date of its publication.

3. Institutions must submit to the Bank of Angola, within 90 (ninety) days after the publication of this Notice, a detailed action plan describing the measures they intend to implement to achieve compliance provided for in paragraph 1 of this article.

4. Redeemable preferred shares, subordinated debts, and instruments that meet the requirements established in Article 8st of this Notice, which are issued on the date of entry into force of the same regulation, continue to be eligible for supplementary own funds until their repayment, according to the initial conditions of the loans.

Article 18. (Revocation)

CONTINUATION OF NOTICE NO. 02/2016 Page 15 of 15 Notice No. 05/2007, of September 26, is revoked, with effects from 18 (eighteen) months counting from the date of publication of this Notice.

Article 19. (Provisional)