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 for Large Risks
• Holding of Participations in Non-Financial Enterprises

Given the need to establish prudential limits on large risks, as well as the holding of participations in Non-Financial Enterprises by Banking Financial Institutions, as established in Notice No. 08/21, of July 05, on Prudential Requirements;

Under the combined provisions of Article 166 of Law No. 14/21, of May 19, General Regime Law of Banking Financial Institutions, of sub-clauses d) and f) of paragraph 1 of Article 31 and of paragraph 1 of Article 98, both of Law No. 24/21, of October 18, Law of the National Bank of Angola.

I DETERMINE:

1. Object
   This Instruction establishes the limits on large risks, 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 July 05, on Prudential Requirements.

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

CONTINUATION OF INSTRUCTION NO. 12/2022 Page 2 of 26

3. Definitions
   Without prejudice to the definitions established in Law No. 14/21, of May 19, General Regime Law of Banking Financial Institutions, for the purposes of this Instruction, it is understood that:

3.1. Indirect Holding of Quotas or Shares: a person, natural or legal, is considered to indirectly hold quotas or shares in a company when these are attributable to them, according to the criteria fixed in paragraph 2 of Article 8 of Notice No. 01/22, of January 28, on Corporate Governance Code of 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 risks 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 fixed in this Instruction are not applicable to exposures or components of exposures, arising from assets directly deducted from own funds or other reductions of own funds related to the asset element.

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 Processes

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

CONTINUATION OF INSTRUCTION NO. 12/2022 Page 3 of 26

5.2. For the purposes of large risk exposures, Banking Financial Institutions may consider direct risk or the risk of the guarantors of the operations, provided they apply consistent and uniform methodologies during the validity of the operation.

5.3. For the purposes of the provision in the preceding sub-point, sellers of protection in credit derivative contracts are equated to guarantors.

5.4. In exposures assumed towards collective investment schemes and in securitization operations, Banking Financial Institutions must consider, in an articulated manner, the direct and underlying risks of the exposure and its economic reality.

6. Concentration Risk Control

6.1. Without prejudice to the limits referred to in this Instruction, Banking Financial Institutions must identify, assess, monitor, control, and report information 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 mandators of guarantees; b) Guarantors of operations, in case they opt not to consider direct risk; c) Counterparties in financial derivative operations, notably those traded over-the-counter; d) Countries of allocation of operations; e) Suppliers of goods and services; and, f) Dependence on technology used, inherent to computer systems.

6.2. The National Bank of Angola may determine adjustments to exposures on the matters referred to in the previous number, whenever it considers them necessary for good management of concentration risk.

CONTINUATION OF INSTRUCTION NO. 12/2022 Page 4 of 26

7. Information Reporting

7.1. Banking Financial Institutions must report to the National Bank of Angola, information on large risks and the holding of participations in non-financial enterprises, in accordance with the provisions of Article 35 of Notice No. 08/21, of July 05, on Prudential Requirements on an individual and consolidated basis, quarterly, through the maps and filling notes provided for in Annexes IV and V of this Instruction.

7.2. For the purposes of the provision in the previous number, if it is a financial group, the parent company must report the information, according to the consolidation perimeter, provided for in Article 5 of Notice No. 08/21, of July 05, on Prudential Requirements.

7.3. Banking Financial Institutions must ensure that the data reported in the tables attached to this Instruction are duly documented.

8. Transitional Provisions

8.1. Banking Financial Institutions must be in compliance with the provisions of this Instruction, from January 01, 2024, for exposures to the Angolan State expressed 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, can be deducted at 80% (eighty percent), and must be in compliance with the provisions of this Instruction in January 2024.

8.3. Banking Financial Institutions must report to the National Bank of Angola, the information required in Article 35 of Notice No. 08/21, of July 05, 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 of Notice No. 08/21, of July 05, on

CONTINUATION OF INSTRUCTION NO. 12/2022 Page 5 of 26 Prudential Requirements, on an individual and consolidated basis, quarterly, from November 2022.

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

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

11. Revocation
    Instruction No. 02/22, of March 29, on Prudential Limits for Large Risks, is hereby revoked.

12. Entry into Force
    This Instruction enters into force on the date of its publication.

PUBLISH.
Luanda, October 19, 2022.
THE GOVERNOR
JOSÉ DE LIMA MASSANO

CONTINUATION OF INSTRUCTION NO. 12/2022 Page 6 of 26

ANNEX I
Prudential Limits for Large Risks

1. Banking Financial Institutions must not assume large risks towards a counterparty or a group of interconnected counterparties, whose value exceeds 25% (twenty-five percent) of their Tier 1 own funds.

2. Whenever large risks concern holders of qualified participations or the group of interconnected counterparties includes the same shareholders, the limit is reduced to 10% (ten percent) of Tier 1 own funds, unless the large risk is on an entity.

3. The sum of the 20 (twenty) largest large risk exposures cannot exceed 300% (three hundred percent) of Tier 1 own funds.

4. For the purpose of calculating large risks, Banking Financial Institutions must consider the exemptions and deductions provided for in numbers 13 to 17 of this Annex.

5. The limits established in numbers 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 probability of exceeding the limits established in numbers 1 to 3 of this Annex, they must communicate the value of the exposures, immediately, to the National Bank of Angola.

7. For the purposes of the provision in the previous number, Banking Financial Institutions must present an action plan, within a period of 1 (one) month, contemplating their regularization up to 6 (six) months.

8. Verifying an excess of assumed exposures, this excess must be framed in the determination of Capital Ratios, being included in Risk-Weighted Assets (RWAs) and weighted by 1250% (one thousand two hundred and fifty percent).

9. For the purposes of the provision in the previous number, the corresponding value of own fund requirements is obtained through the multiplication of RWAs by 8% (eight percent).

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Exposure Categories in Risk

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

Table 1
Residual Maturity | Contracts on Interest Rates | Contracts on Exchange Rates and Gold | Contracts on Equity Securities | Contracts on Precious Metals except Gold | Contracts on Commodities, which are not Precious Metals --- | --- | --- | --- | --- | --- Less than or equal to 1 year | 0.0% | 1.0% | 6.0% | 7.0% | 10.0% Between 1 and five years inclusive | 0.5% | 5.0% | 8.0% | 7.0% | 12.0% More than 5 years | 1.5% | 7.5% | 10.0% | 8.0% | 15.0%

CONTINUATION OF INSTRUCTION NO. 12/2022 Page 8 of 26

11. Exposures arising from the following are not considered for the calculation of large risk limits:
    a) Foreign exchange operations during the normal settlement period according to commercial practices for each currency; b) Purchase or sale of securities operations, during the normal settlement period according to commercial practices, up to a limit of 5 (five) business days counted from the date of payment 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 and risk of counterparties in operations; and, d) Firm taking-in 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, which comply with the criteria established in Annex IV of Instruction No. 15/21, of October 27, on Calculation and Requirement of Regulatory Own Funds for Credit Risk and Counterparty Credit Risk, are eligible as mitigants of large risks.

13. The guarantees referred to in the previous number can be considered within the scope of the exemptions provided for in number 14 or the deductions according to numbers 15 to 17, of this Annex.

Exemptions

14. Exposures are exempt from the large risk limits established in numbers 1 to 3 of this Annex:
    a) Towards central administration, namely, the Angolan State and the National Bank of Angola, which are expressed and financed in national currency;

CONTINUATION OF INSTRUCTION NO. 12/2022 Page 9 of 26 b) Towards the National Bank of Angola which are expressed and financed in foreign currency; c) Fully linked to a guarantee, eligible under Annex IV of Instruction No. 15/21, of October 27, on 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, according to Annex I of Instruction No. 15/21, of October 27, on Calculation and Requirement of Regulatory Own Funds for Credit Risk and Counterparty Credit Risk; e) Fully linked to a guarantee, eligible under Annex IV of Instruction No. 15/21, of October 27, on 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 weight of 0% (zero percent) would be applied according to Annex I of Instruction No. 15/21, of October 27, on Calculation and Requirement of Regulatory Own Funds for Credit Risk and Counterparty Credit Risk; f) Assumed by a Banking Financial Institution towards companies that are in a relationship of dominance or group with it, provided that these are included in the consolidation perimeter for prudential purposes, provided for in Article 5 of Notice No. 08/21, of July 05, on Prudential Requirements or equivalent norms valid in a foreign country;

CONTINUATION OF INSTRUCTION NO. 12/2022 Page 10 of 26 g) Guaranteed by cash deposits, constituted in the lending Institution or in an Institution that is in a relationship of dominance or group with it; h) Fully linked to liabilities subject to netting agreements; i) Secured by deposit certificates, issued by the lending Institution or by an Institution that is in a relationship of dominance or group with it, provided that they are deposited in these entities; j) Arising from unused revocable credit lines, provided that the contract provides that the lines can only be used on the condition that they do not imply exceeding the limits provided for in numbers 1 to 3 of this Annex; and, k) Arising from contributions on deposit guarantee schemes, if Banking Financial Institutions that integrate them have the legal or contractual obligation to finance them; l) Without prejudice to the provisions in the preceding sub-clauses, exposures towards central administration, namely the state, which are expressed and financed in foreign currency and without international quotation, must observe the limits established in numbers 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 under Annex I of Instruction No. 15/21, of October 27, on 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 constant in Table 2 of Annex III to this Instruction must be deducted.

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17. Up to 50% (fifty percent) of the market value of the real estate property can be deducted from the value of the exposure or any part of the same fully guaranteed by real estate intended for housing, if the following conditions are cumulatively met:
    a) The National Bank of Angola has not attributed a risk weight greater than 35% (thirty-five percent) for risky positions or any parts of these latter guaranteed by real estate intended for housing; b) The exposure or part of this latter is fully guaranteed by:
    i. Mortgages on real estate intended for housing; and,

18. Up to 75% (seventy-five percent) of the value of the exposure guaranteed by real estate intended for housing can be deducted, under which the lessor maintains full ownership of that property and the lessee has not yet exercised their purchase option.

19. Up to 50% (fifty percent) of the market value of the real estate property can be deducted from the value of the exposure or any part of the same fully guaranteed by real estate for commercial purposes, if the following conditions are cumulatively met:
    a) The National Bank of Angola has not attributed a risk weight greater than 50% (fifty percent) for risky positions or parts of these guaranteed by real estate for commercial purposes; b) The risky position is fully guaranteed by:
    i. Mortgages on real estate intended for offices or other commercial facilities; and,
    ii. Offices or other commercial facilities and risky 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 real estate properties for commercial purposes are completely constructed.

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ANNEX II
Limits on Holding of Participations in Non-Financial Enterprises

1. Banking Financial Institutions cannot hold, directly or indirectly, quotas or shares of a non-financial enterprise or a group of interconnected non-financial enterprises, whose amount exceeds 15% (fifteen percent) of the regulatory own funds of the participating Institution.

2. The global amount of quotas or shares held, directly and indirectly, in non-financial enterprises, cannot exceed 40% (forty percent) of the regulatory own funds of the participating Institution.

3. Banking Financial Institutions cannot hold for a period longer than 3 (three) years, consecutive or interpolated, directly or indirectly, shares or quotas whose amount 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, due to prior request by Banking Financial Institutions, to be any of the following:
   i. A direct extension of banking activity;
   ii. Auxiliary services of 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 taking-in 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 are not applicable to Management Companies of Social Participations subject to supervision by the National Bank of Angola.

6. The limits established in numbers 1 to 3 of this Annex apply equally on a consolidated basis.

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7. Whenever holdings of quotas or shares in non-financial enterprises exceed or there is a probability of exceeding the limits established in numbers 1 to 3 of this Annex, Banking Financial Institutions must communicate the value of the holdings, immediately, to the National Bank of Angola.

8. For the purposes of the provision in the previous number, Banking Financial Institutions must present an action plan, within a period of one 1 (one) month, contemplating their regularization up to 6 (six) months.

9. Verifying an excess of assumed holdings, this excess must be framed in the determination of Capital Ratios, being included in Risk-Weighted Assets (RWAs) and weighted by 1250% (one thousand two hundred and fifty percent).

10. For the purpose of the provision in the previous number, the corresponding value of own fund requirements is obtained through the multiplication of RWAs by 8% (eight percent).

CONTINUATION OF INSTRUCTION NO. 12/2022 Page 14 of 26

ANNEX III
Assets and Off-Balance Sheet Items to Consider for Purposes of "Prudential Limits for Large Risks" 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 SECURITIZED VALUES
1.40 HEDGING 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 | Instrument Type | Account PCIFB | Off-Balance Sheet Class --- | --- | --- | --- High | • Guarantees with the nature of credit substitutes

• Acceptances
• Endorsements of bills where the signature of another Institution does not appear
• Irrevocable stand-by letters of credit with the nature of credit substitutes
• Sales of assets with repurchase agreement
• Unpaid portion of shares and other partially realized values
• Term deposits against term (forward deposits)
• Purchase of assets on installment
• Transactions with recourse | 9.10.20 | Liability towards Third Parties
  Medium | • Indemnities and guarantees that do not have the nature of credit substitutes
• Unused credit lines, with an initial maturity greater than one year
• Irrevocable stand-by letters of credit that do not have the nature of credit substitutes
• 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
• Documentary credits regarding which shipping documents serve as guarantee and other transactions with potential automatic settlement
  Low | • Unused credit lines, which can be unconditionally cancelled at any time and without prior notice or which 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 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
• Variable interest rate swaps of different nature (“basis swaps”)
• Forward contracts

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