2018 Reports and Financial Statements 2018 Reports and Financial Statements depobank.it Content Content Corporate positions as at 21 March 2019 2 Shareholders’ Meeting call 3 2018 REPORTS AND FINANCIAL STATEMENTS 5 Board of Directors' Report on Operations 7 Financial statements as at 31 December 2018 41 Explanatory Notes 51 Report of the Board of Statutory Auditors 205 Report of the Auditing Company 215 Shareholders’ Meeting resolutions of 29 April 2019 223 Corporate positions at 29 April 2019 227 Shareholders’ list 231 2018 INDIVIDUAL NON-FINANCIAL STATEMENT 235 Methodological note 238 Identity and Profile 241 Relations with stakeholders and identification of material issues for the business 244 The governance model 248 Internal controls, compliance and risk management 253 Integrity in business conduct 263 DEPObank people 268 DEPObank clients 285 The supply chain 296 The Environment 298 Attachment 300 • Reconciliation table between material topics and aspects of GRI Standards 300 • GRI Content Index 301 Report of the Auditing Company 307 1 Corporate positions Corporate positions as at 21 March 2019 BOARD OF DIRECTORS Chairman Paolo Mario Tadini Deputy Chairman Pier Paolo Cellerino CEO Fabrizio Viola Directors Fabio Calì Giovanni Camera Rosa Cipriotti Francesco Colli Umberto Colli Ottavio Rigodanza Ezio Simonelli Paolo Vagnone BOARD OF STATUTORY AUDITORS Chairman Gianluigi Fiorendi Standing statutory auditors Lorenzo Banfi Paolo Francesco Maria Lazzati Alternate statutory auditors Andrea Brambilla Gianluca Pozzi 2 Shareholders’ Meeting call Shareholders’ Meeting call The ordinary shareholders’ meeting will be held on 29 April 2019 at 9.30 am in Via Anna Maria Mozzoni 1.1 on first call and, if necessary, on 30 April 2019, on second call at the same time and place, to discuss the following: AGENDA 1. Financial statements at 31 December 2018; Directors’ report, reports of the board of statutory auditors and the independent auditors; related resolutions. 2. Appointment of the independent auditors for the statutory audit of the 2019-2027 financial statements. 3. Remuneration and incentive policies; related resolutions. 3 2018 Reports and Financial Statements Board of Directors’ Report on Operations 2018 Reports and Financial Statements Board of Directors’ Report on Operations Dear shareholders, the bank made a profit of €5.2 million for the year compared to a profit of €89.5 million for 2017. Its equity amounted to €440.5 million at 31 December 2018 while it amounted to €1,943.8 million at the end of the previous year. Its operating revenue decreased by 45.7% to €162.6 million due to the com- bined effect of the reduction in net interest income from €52.2 million to €35.2 million (-32.6%), a decrease in fees, commissions and income from services from €151.5 million to €112.9 million (-25.5%) and a reduction in dividends from €90.2 million to €2.9 million (-96.7%). The gross operating profit came to €41.1 million for the year compared to €145.2 million for 2017. THE INTERNATIONAL The global economy grew 3.8% in 2018, like in 2017, although all the main countries’ ECONOMY economies decelerated, with the sole exception of the United States, where growth sped up from 2.2% in the previous year to 2.9%. This improvement was driven by robust internal demand and greater exports. Japan’s GDP growth rate contracted to 0.8% from 1.9%, hit by the downturn in consumption and exports and despite lively investments. The Eurozone’s GDP slowed down to 1.9% from 2.4%, reflecting the slump in both internal and external demand. As this trend initiated in the second half of the year, the unemployment rates at year end did not yet reflect its effect and indeed they improved not only in the United States (from 4.1% to 3.9%) but also in Japan (from 2.7% to 2.4%) and in the Eurozone (from 8.6% to 7.9%). The global inflation rate increased from 3.2% to 3.8%, driven mainly by the higher cost of raw materials and also partly the rise in US core inflation. In detail, con- sumer prices increased from 2.1% to 2.5% in the US, from 0.5% to 1.0% in Ja- pan and from 1.5% to 1.7% in the Eurozone. Net of the more volatile energy and food prices, this increase was from 1.8% to 2.1% in the US and 0.0% to 0.1% in Japan while inflation remained stable at 1.0% in the Eurozone. THE DOMESTIC Italy fell into recession in the second half of the year, with its GDP slowing to ECONOMY 0.9% on average (from 1.6%), widening the gap with the rest of the Eurozone. This stoppage was triggered by a contraction in exports (from 5.7% to 0.8%) and consumption (from 1.5% to 0.6%), while investments remained more buoyant (moving from 4.3% to 4.0%). Unemployment lagged behind this cycle, down to 10.3% at year end from 10.9% at the end of 2017. Inflation hovered at 1.2% despite the hike in prices of raw materials with a slow- down in the economy that led to a core inflation rate down from 0.7% to 0.5%. 8 Board of Directors’ Report on Operations This section provides a brief overview of the markets in which DEPObank operates. REFERENCE MARKET The Italian banking system is grappling with a large reduction in its members due Payment systems to mergers which reduced the number of Italian banks to just over 500 at the end of the year. As a result of new regulations, the transformation of ICCREA and Cassa Centrale Banca into holding companies of Credito Cooperativo has reduced the number of banks again. The use of non-cash payment instruments in Italy is still less than in other coun- tries but the positive trend continues. The growth rate of SCT (Sepa Credit Trans- fers) is 4% for the 2016-2018 two-year period while that of the SDD collections (Sepa Direct Debit Core and B2B) is 9%. The use of bank cheques and cashier’s cheques decreased by 20% and 22%, respectively, in the same period. Despite the progress made in recent years, the Italian payment system is still among those that make the greatest use of cash compared to the other Euro- zone members. The global transition to e-payments (e-payments and mobile payments) is faster than that estimated by the authorities and sector experts. The growth forecasts for the 2015-2019 period are continuing at an annual pace of 17.6% and 21.8% for e-payments and mobile payments, respectively. The large upswing in digital payments has been boosted mainly by the adoption of instant payments by many countries and the rapid development of this sector in the emerging economies. The authorities and the financial sector consider instant payments an essential tool for the war on cash. The European Central Bank and Bank of Italy, together with the European Pay- ments Council, have encouraged the automated clearing houses (ACHs) and payment service providers (PSPs) to develop and adopt the instant payment ser- vice (SCT Instant), based on the SEPA SCT scheme, and to provide it with very high service levels (seven days a week, 365 days a year). The aim is to modernise the payment system and concurrently retain the payment formats and schemes already in use by banks. A significant novelty affecting the sector has been the European Central Bank’s introduction of the instant payment service, TIPS (Target Instant Payment Settle- ment), in November 2018. In this complex scenario, the TIPS service’s success hinges on the Eurosystem’s ability to activate in time robust and efficient mechanisms to allow the authorised operators to work together as hoped for and promoted by the European Parlia- ment, based on the experience gained with the transition to SEPA. Indeed, the TIPS service’s operating model has been designed to avoid issues between the clearing and settlement systems, giving the European Central Bank a key role 9 2018 Reports and Financial Statements to avoid the problems that afflicted the European ACHs (e.g., EACHA vs EBA Clearing) in the past. The TIPS service is one of the pillars underpinning the structural development of the European Central Bank’s new liquidity management system (Vision 2020 project). Over the next few years, this will entail, inter alia, consolidation of the Tar- get2 and Target2-Securities and a new management system for collateral, where banks will use a single control point, Central Liquidity Management. The factor that will most probably lead the Instant Payment tool to become the most popular tool in the Eurozone is the possible increase in the individual transac- tion ceiling from the current €15,000 to €100,000. This move has been requested by many European banks and is currently being assessed by the European author- ities. While it has already been touted in this initial stage of the project, it is reason- able to expect that increasing the ceiling can only take place when the new instant payment model is sufficiently stable, robust and in wide use throughout Europe. The new ceiling will allow the instant payment tool to capture part of the B2B and C2B payments that are currently made using other systems. This will assist standardisation and optimisation of the management processes for the financial and supply chain segments of businesses, which can also add to the new op- tions of the revised Payment Services Directive (PSD2) to build up their opera- tions through new and innovative collection and payment methods. The European regulatory framework, focused on standardising payment pro- cesses, risk mitigation, increased competition and the generalised innovation of the payment system, has a significant effect on the decisions about operating and business models taken by the PSPs and, in general, all the stakeholders.