Directive No. 13/DSB/DRO/2019: Guide on AQA Methodology Implementation Recommendations for the 2019 Fiscal Year

CONTINUATION OF DIRECTIVE NO. 13/DSB/DRO/2019 Page 1 of 7 GOVERNOR DIRECTIVE NO. 13/DSB/DRO/2019 ORIGIN: Banking Supervision Department (DSB) Financial System Regulation and Organization Department (DRO) DATE 27/12/2019 SUBJECT: Guide on the Implementation Recommendations of the AQA Methodologies for the 2019 Fiscal Year

Considering the realization of the Asset Quality Assessment (AQA) exercise of Banking Financial Institutions, whose objective was to strengthen the Angolan Financial System;

Given the need to standardize the methodologies used in the aforementioned exercise in a transversal manner across all Banking Financial Institutions under the supervision of the Banco Nacional de Angola, under the terms and conditions provided for in Law No. 12/2015 of June 17, the Basic Law of Financial Institutions;

Without prejudice to the provisions of the International Accounting Standards and Financial Reporting Standards (IAS/IFRS) issued by the International Accounting Standards Board (IASB), namely IFRS 9 - Financial Instruments (IFRS 9);

This Directive serves to establish the following:

1. For accounting closing purposes of the 2019 fiscal year, Banking Financial Institutions must consider the methodologies applied in the AQA, in accordance with the provisions of the Annex, which is an integral part of this Directive.

2. Non-compliance with the provisions of this Directive constitutes an infraction provided for and punishable under the terms of the Basic Law of Financial Institutions.

3. Doubts and omissions resulting from the interpretation and application of this Directive are resolved by the Banco Nacional de Angola.

CONTINUATION OF DIRECTIVE NO. 13/DSB/DRO/2019 Page 2 of 7

4. This Directive enters into force on the date of its publication. Luanda, December 27, 2019. BANKING SUPERVISION DEPARTMENT

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Elavoko do Rosário Chaves João -Director- FINANCIAL SYSTEM REGULATION AND ORGANIZATION DEPARTMENT

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Carla Marisa Rodrigues Madeira Gomes -Director-

CONTINUATION OF DIRECTIVE NO. 13/DSB/DRO/2019 Page 3 of 7 ANNEX I Guide on the Implementation Recommendations of the AQA Methodologies for the 2019 Fiscal Year Accounting nature requirements

1. Portfolio of assets evaluation 1.1 Cash and Placements The calculation of expected losses for the portfolio of cash and placements in Investment Companies (OICs) must be carried out in accordance with the requirements defined in IFRS 9. Thus, the following assumptions are recommended: • Cash: consider a PD equivalent to 1/12 (one twelfth) of the 12-month PD considering the counterparty's rating (or the country where the counterparty is headquartered, if it has no rating) and an LGD of 60% for all counterparties that have not recorded a significant increase in credit risk; and • Placements: consider a 12-month PD considering the counterparty's rating (or the country where the counterparty is headquartered, if it has no rating) and an LGD of 60% for all counterparties that have not recorded a significant increase in credit risk. Without prejudice to the above, an LGD of 0% must be considered for the portfolio of cash and placements held with the Banco Nacional de Angola.

1.2 Securities Securities must be measured and classified accounting-wise in accordance with the application of the requirements defined in IFRS 9 and Instruction No. 12/2019, of August 28, on securities, as well as the business model defined by the Institutions.

In the specific case of impairment losses for national public debt in national and foreign currency (measured at amortized cost), the following criteria must be considered:

CONTINUATION OF DIRECTIVE NO. 13/DSB/DRO/2019 Page 4 of 7 • 12-month Probability of Default ("PD") for the Moody's rating publication applicable to the exercise in question; • Loss Given Default ("LGD") associated with sovereign Default events verified, as indicated in the aforementioned study.

For specific situations, namely securities that have been issued within the framework of recapitalization processes or others that presented contractually objectively below normal market conditions at that date, Institutions must determine the fair value at the initial recognition moment of securities classified at amortized cost.

1.3 Credit Portfolio – Individual Analysis Institutions must proceed with the analysis and validation of the methodology for calculating expected losses on an individual basis for the universe of individually significant credits, in accordance with the criteria defined in Instruction No. 08/2019, of August 27, on Impairment Losses for the Credit Portfolio, with reference to December 31, 2019.

Without prejudice to the requirements established in IFRS 9 regarding the weighting to be attributed to each of the financial projection scenarios, it is recommended that institutions use the following weights associated with the scenarios: • Base scenario: 70%; • Favorable scenario: 10%; and • Adverse scenario: 20%.

For the valuation of real estate collateral, for irrevocable powers of attorney for the constitution of mortgage to be considered as a credit risk mitigant, the following criteria must be observed: • 100% Discount: The Institution has only a promise of mortgage without irrevocable power of attorney (document from the Notary Public duly recognized).

CONTINUATION OF DIRECTIVE NO. 13/DSB/DRO/2019 Page 5 of 7 • 70% Discount: The Institution has only a promise of mortgage with irrevocable power of attorney (document from the Notary Public duly recognized). • Discount between 40% and 70%: In case there is additional guarantee documentation that reinforces its robustness as a credit risk mitigant, the Auditor was given the possibility to carry out an evaluation and decide on the discount to be applied within the interval between 40% and 70%, that is, a minimum discount of 40% should be applied. It is highlighted as relevant information to be analyzed by Institutions, illustratively, the following documents: • Property Registration Certificate; • Urban Property Matrix Certificate; • Deed of purchase and sale; • Deed of Constitution of Surface Right; and • Registration of property built on State land.

For the valuation of received real estate guarantees, Institutions must consider the evaluations of certified appraisers duly certified by the Capital Markets Commission (CMC). Additionally, the evaluation value must be adjusted with specific discount rates depending on the age of the evaluation. Thus, it is recommended to use the following discount rates according to the age of the property evaluation:

Base Scenario Discount Age of evaluation

= 50% work completed < 50% work completed Less than 1 year Not applicable Not applicable Between 1 and 2 years 20% 25% Between 2 and 3 years 30% 40% More than 3 years 55% 65%

CONTINUATION OF DIRECTIVE NO. 13/DSB/DRO/2019 Page 6 of 7 Favorable Scenario Discount Age of evaluation

= 50% work completed < 50% work completed Less than 1 year Not applicable Not applicable Between 1 and 2 years 15% 20% Between 2 and 3 years 25% 35% More than 3 years 50% 60%

Adverse Scenario Discount Age of evaluation

= 50% work completed < 50% work completed Less than 1 year Not applicable Not applicable Between 1 and 2 years 25% 30% Between 2 and 3 years 35% 45% More than 3 years 60% 70%

The discount values presented above refer to the end of the indicated period. For intermediate periods, discounts must be applied proportionally.

As provided for in Annex III of Instruction No. 08/2019, of August 27, in situations where the project evaluation is based on the income method or the residual method, and the assumptions used are considered acceptable, it is not necessary to apply any temporal discount factor.

For the measurement of impairment losses associated with credit exposures considered by Institutions as "State Risk", Institutions must consider, at a minimum, the criteria applied in the valuation of national public debt. This provision is also applicable to guarantees granted by the Angolan State.

CONTINUATION OF DIRECTIVE NO. 13/DSB/DRO/2019 Page 7 of 7 1.4 Credit Portfolio – Non-current assets held for sale and non-self-use assets Non-current assets held for sale and non-self-use assets must be measured in accordance with the application of applicable accounting rules, namely IFRS 5 - Non-current Assets Held for Sale and Discontinued Operations (IFRS 5). This Standard requires that assets that meet the classification criteria as held for sale be measured at the lower of carrying amount and fair value less costs to sell.

For the determination of the fair value of these assets, Institutions must consider the valuation value determined from a perspective in which the sale of the property is intended to occur in the short term, that is, the use of the Immediate Probable Transaction Value (IPTV). For situations where it is not available, the Institution must consider a discount of 20% on the Presumable Transaction Value (PTV).

As provided for in IFRS 5, the Institution must consider in the asset valuation the selling costs associated, with a reference minimum of 5% on the IPTV.

Additionally, this valuation must be adjusted based on specific discount rates depending on the age of the evaluation. Thus, it is recommended to use the following discount rates according to the age of the property evaluation:

Discount Age of evaluation

= 50% work completed < 50% work completed Less than 1 year Not applicable Not applicable Between 1 and 2 years 20% 25% Between 2 and 3 years 30% 40% More than 3 years 55% 65%

The discount values presented above refer to the end of the indicated period. For intermediate periods, discounts must be applied proportionally.