Reports and Financial Statements 2017
Translation from the Italian original which remains the definitive version 15th Financial year
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Unione di Banche Italiane Società per azioni or “UBI Banca” in the abbreviated form.
Joint Stock Company Head Office and General Management: Piazza Vittorio Veneto 8, Bergamo (Italy) Operating offices: Bergamo, Piazza Vittorio Veneto 8; Brescia, Via Cefalonia 74 Member of the Interbank Deposit Protection Fund and the National Guarantee Fund Tax Code, VAT No. and Bergamo Company Registration No. 03053920165 ABI (Italian Banking Association) 3111.2 Register of Banks No. 5678 Register of banking groups No. 3111.2 Parent of the Unione di Banche Italiane Banking Group Share capital as at 31st December 2017: Euro 2,843,177,160.24 fully paid up
www.ubibanca.it
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Contents
UBI Banca: company officers ...... 6 UBI Banca Group: key figures and performance indicators ...... 7 UBI Banca Group: branch network as at 31st December 2017 ...... 9 UBI Banca Group: the main investments as at 31st December 2017 ...... 10 The rating ...... 11 Notice of call ...... 14
CONSOLIDATED FINANCIAL STATEMENTS OF THE UBI BANCA GROUP AS AT AND FOR THE YEAR ENDED 31ST DECEMBER 2017
CONSOLIDATED MANAGEMENT REPORT ...... 19 ▪ The macroeconomic scenario ...... 20 ▪ Significant events in 2017 ...... 29 ▪ Commercial activity ...... 45 ▪ The distribution network and market positioning……………...... 61 ▪ Human resources ...... 64 ▪ The scope of consolidation ...... 68 ▪ Reclassified consolidated financial statements, reclassified income statement net of the most significant non-recurring items and reconciliation schedules ...... 74 ▪ The consolidated income statement ...... 83 ▪ General banking business with customers: funding ...... 95 - Total banking funding ...... 95 - Direct banking funding ...... 96 - Indirect banking funding and assets under management ...... 100 - Insurance funding and technical reserves ...... 103 ▪ General banking business with customers: lending ...... 104 - Performance of the loan portfolio ...... 104 - Risk ...... 108 ▪ The interbank market and the liquidity position ...... 115 ▪ Financial activities ...... 119 ▪ Equity and capital adequacy ...... 136 ▪ R&D and Innovation ...... 142 ▪ The internal control system ...... 143 ▪ Transactions with related parties and with connected parties ...... 144 ▪ Consolidated companies: the principal figures ...... 148 - Information on Banca Teatina and the main product companies ...... 152 ▪ Other information ...... 158 - Treasury shares ...... 158 - Litigation ...... 158 - Inspections ...... 158 - Developments in the regulatory framework...... 163 - Tax aspects ...... 168 - Investor relations and external communication ...... 173 - The “Italian Responsible Payments Code” ...... 174 - Social and environmental responsibility ...... 174 ▪ Principal risks and uncertainties to which the UBI Banca Group is exposed ...... 175 ▪ Subsequent events and the business outlook ...... for consolidated operations ...... 182
STATEMENT OF THE CHIEF EXECUTIVE OFFICER AND OF THE SENIOR OFFICER RESPONSIBLE FOR PREPARING THE CORPORATE ACCOUNTING DOCUMENTS ...... 183
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INDEPENDENT AUDITORS’ REPORT ...... 185
Consolidated financial statements ...... 195 ▪ Consolidated balance sheet ...... 196 ▪ Consolidated income statement ...... 197 ▪ Consolidated statement of comprehensive income ...... 198 ▪ Statement of changes in consolidated equity ...... 199 ▪ Consolidated statement of cash flows ...... 201
Notes to the consolidated financial statements ...... 203 ▪ Part A – Accounting policies ...... 204 - A.1 – General part ...... 204 - A.2 – The main items in the financial statements ...... 230 - A.3 – Information on transfers between portfolios of financial assets ...... 257 - A.4 – Information on fair value ...... 258 - A.5 – Information on “Day one profit/loss” ...... 267 ▪ PART B – Notes to the consolidated balance sheet ……………………………………………...... 268 - Assets ...... 268 - Liabilities ...... 299 - Other information ...... 336 ▪ Part C – Notes to the consolidated income statement ...... 342 ▪ Part D – Consolidated comprehensive income ...... 362 ▪ Part E – Information on risks and the relative hedging policies ...... 363 ▪ Part F – Information on consolidated equity ...... 497 ▪ Part G – Business combination transactions concerning companies or lines of business .... 507 ▪ Part H – Transactions with related parties ...... 514 ▪ Part I – Share-based payments ...... 518 ▪ Part L – Segment Reporting ...... 522
Attachments to the Consolidated Financial Statements ...... 526 ▪ Disclosures concerning the fees of the independent auditors and services other than auditing in compliance with Art. 149 duodecies of Consob Issuers’ Regulations ...... 527 ▪ Information pursuant to letters a), b) and c) of Attachment A to Part One, Title III, Chapter 2 of Bank of Italy Circular No. 285 of 17th December 2013 Situation as at 31st December 2017 ...... 528
SEPARATE FINANCIAL STATEMENTS OF UBI BANCA SPA AS AT AND FOR THE YEAR ENDED AS AT 31ST DECEMBER 2017
MANAGEMENT REPORT ...... 1* ▪ UBI Banca: key figures and performance indicators ...... 2* ▪ Introduction ...... 3* ▪ The organisational structure of UBI Banca ...... 3* ▪ Human resources ...... 7* ▪ Reclassified financial statements, reclassified income statement net of the most significant non-recurring items and reconciliation schedules ...... 9* ▪ The income statement ...... 19* ▪ General banking business ...... 26* - Direct banking funding ...... 26* - Indirect banking funding and assets under management ...... 28* - Lending ...... 29* - Operations on the interbank market ...... 33* ▪ Financial activities ...... 36* ▪ Equity and capital adequacy ...... 44* ▪ Relations with Group member companies ...... 46* ▪ Transactions with related parties and with connected parties ...... 46*
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▪ Share performance and shareholder structure ...... 48* - Share performance ...... 48* - Investor Relations: relations with analysts and institutional investors ...... 50* - Report on corporate governance and ownership structure ...... 51* - Treasury shares ...... 51* - De jure and delegated powers of the corporate bodies ...... 52* ▪ Other information ...... 53* - Litigation ...... 53* - Complaint management ...... 53* ▪ Principle risks and uncertainties to which UBI Banca is exposed ...... 56* ▪ Subsequent events and the business outlook for operations ...... 56* ▪ Proposal to replenish the loss for the year and the declaration of a dividend ...... 57*
STATEMENT OF THE CHIEF EXECUTIVE OFFICER AND OF THE SENIOR OFFICER RESPONSIBLE FOR PREPARING THE CORPORATE ACCOUNTING DOCUMENTS ...... 59*
INDEPENDENT AUDITORS’ REPORT ...... 63*
SEPARATE FINANCIAL STATEMENTS ...... 73* ▪ Balance sheet ...... 74* ▪ Income statement ...... 75* ▪ Statement of comprehensive income ...... 76* ▪ Statement of changes in equity ...... 77* ▪ Statement of cash flows ...... 79*
NOTES TO THE ACCOUNTS ...... 81* ▪ Part A – Accounting policies ...... 82* - A.1 – General part ...... 82* - A.2 – The main items in the financial statements ...... 100* - A.3 – Information on transfers between portfolios of financial assets ...... 124* - A.4 – Information on fair value ...... 125* - A.5 – Information on “Day one profit/loss” ...... 136* ▪ Part B – Notes to the balance sheet ...... 137* - Assets ...... 137* - Liabilities ...... 169* - Other information ...... 194* ▪ Part C – Notes to the income statement ...... 199* ▪ Part D – Comprehensive income ...... 220* ▪ Part E – Information on risks and the relative hedging policies ...... 222* ▪ Part F – Information on equity ...... 326* ▪ Part G – Business combination transactions concerning companies or lines of business .... 333* ▪ Part H – Transactions with related parties ...... 335* ▪ Part I – Share-based payments ...... 341* ▪ Part L – Segment Reporting ...... 345*
ATTACHMENTS TO THE SEPARATE FINANCIAL STATEMENTS ...... 346* ▪ List of real estate properties ...... 347* Report as at 31st December 2017 on the Pension Fund for the personnel of the former Cassa di Risparmio di Loreto ...... 364* ▪ Disclosures concerning the fees of the independent auditors and services other than auditing in compliance with Art. 149 duodecies of Consob Issuers’ Regulations ...... 365*
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REPORT ON CORPORATE GOVERNANCE AND OWNERSHIP STRUCTURE OF UBI BANCA S.P.A. in accordance with Art,123-bis of the Consolidated Finance Law
REPORT OF THE SUPERVISORY BOARD TO THE SHAREHOLDERS’ MEETING in compliance with Art. 153, paragraph 1 of Legislative Decree No. 58 of 24th February 1998 and Art. 38, paragraph 1, letter h) of the Articles of Association
REPORTS ON THE OTHER ITEMS ON THE AGENDA OF THE SHAREHOLDERS’ MEETING
Appointment of the Board of Arbitrators
Remuneration Report - 2018 Shareholders’ Meeting - Report on the verification of compliance of remuneration and incentive practices with policies approved by the bank and with the regulatory framework
Proposal for setting remuneration and incentive policies for members of the Supervisory Board and members of the Management Board in accordance with the regulations and legislation in force
Remuneration schemes based on financial instruments: proposal to pay a portion of the short-term (annual) variable component of remuneration for “Identified Staff” in financial instruments and a proposal to authorise the purchase of treasury shares to service the incentive scheme - Information document pursuant to Art. 84-bis of the Issuers’ Regulations – short-term (annual) incentive scheme for “Identified Staff”
Proposal for authorisation to purchase treasury shares to be used for the 2017-2019/2020 long- term incentive scheme - Updated information document pursuant to Art. 84-bis of the Issuers’ Regulations – long-term incentive scheme for “Identified Staff”
Proposal regarding the criteria and limits for determining remuneration to be agreed in the event of the early termination of an employment relationship or early retirement from corporate office
Proposal to set the ratio between the variable and fixed components of remuneration up to a limit of 2:1 for certain positions within UBI Pramerica SGR S.p.A.
GLOSSARY
BRANCH NETWORK OF THE UBI BANCA GROUP
CALENDAR OF CORPORATE EVENTS OF UBI BANCA FOR 2018
CONTACTS
Key The following abbreviations are used in the tables: - dash (-): when the item does not exist; - not significant (n.s.): when the phenomenon is not significant; - not available (n.a.): when the information is not available; - a cross “X”: when no amount is to be given for the item (in compliance with Bank of Italy instructions).
All figures are given in thousands of euros, unless otherwise stated.
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UBI Banca: company officers
Honorary Chairmen Gino Trombi Emilio Zanetti
Supervisory Board (Appointed by a Shareholders' meeting on 2nd April 2016) Chairman Andrea Moltrasio Senior Deputy Chairman Mario Cera Deputy Chairman Pietro Gussalli Beretta Deputy Chairman Armando Santus Francesca Bazoli Letizia Bellini Cavalletti Pierpaolo Camadini Ferruccio Dardanello (*) Alessandra Del Boca Giovanni Fiori Patrizia Michela Giangualano Paola Giannotti Lorenzo Renato Guerini Giuseppe Lucchini Sergio Pivato
Management Board (appointed by the Supervisory Board on 14th April 2016) Chairwoman Letizia Maria Brichetto Arnaboldi Moratti Deputy Chairman Flavio Pizzini Chief Executive Officer Victor Massiah (**) Silvia Fidanza Osvaldo Ranica Elvio Sonnino Elisabetta Stegher
General Management General Manager Victor Massiah (**) Senior Deputy General Manager Elvio Sonnino Deputy General Manager Frederik Geertman Deputy General Manager Rossella Leidi
Senior Officer Responsible in accordance with Art. 154 bis of the Consolidated Finance Law Elisabetta Stegher
Independent Auditors DELOITTE & TOUCHE Spa
(*) Appointed by an Ordinary Shareholders’ Meeting held on 7th April 2017 to fill a vacancy on the Supervisory Board. The Board Member will remain in office until the expiry of the term of office of the original board member replaced and that is until the Shareholders’ Meeting that will be held after the end of the financial year 2018.
(**) Appointed Chief Executive Officer and General Manager by the Management Board on 15th April 2016.
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UBI Banca Group: key figures and performance indicators1
31.12.2017 31.12.2016 31.12.2015 31.12.2014 31.12.2013 31.12.2012 31.12.2011 31.12.2010 31.12.2009 31.12.2008 (*)
STRUCTURAL INDICATORS Net loans and advances to customers/total assets 72.5% 72.8% 72.2% 70.3% 71.2% 70.1% 76.8% 78.0% 80.1% 79.0% Direct banking funding from customers/total liabilities 74.2% 75.8% 78.1% 76.5% 74.5% 74.6% 79.2% 81.8% 79.5% 80.0% Net loans and advances to customers/direct funding from customers 97.8% 96.1% 92.4% 91.9% 95.5% 94.0% 97.0% 95.4% 100.8% 98.7% Equity (inclusive of profit/loss) /total liabilities 7.8% 8.0% 8.5% 8.1% 8.3% 7.4% 6.9% 8.4% 9.3% 9.1% Assets under management/indirect funding from individual customers 67.8% 66.5% 61.1% 57.1% 55.2% 54.3% 51.2% 54.6% 53.2% 53.1% Financial leverage ratio (total assets - intangible assets)/(equity inclusive of profit/loss + equity attributable to non-controlling interests - intangible assets) 15.2 15.0 13.2 14.0 14.7 17.0 18.5 19.3 17.1 17.3
PROFIT INDICATORS ROE (net profit)/(equity inclusive of profit/loss) 7.0% n.s. 1.2% 2.4% 2.4% 0.8% 3.9% 1.6% 2.4% 0.6% ROTE [net profit/tangible equity (equity inclusive of profit/loss - intangible assets)] 8.4% n.s. 1.4% 2.9% 3.4% 1.2% 5.9% 3.1% 4.6% 1.2% ROA (net profit/total assets) 0.54% n.s. 0.10% 0.19% 0.20% 0.06% 0.27% 0.13% 0.22% 0.06% The cost:income ratio (operating expenses/operating income) 67.8% 69.0% 64.5% 61.8% 62.3% 64.3% 69.5% 70.6% 64.4% 63.9% Staff costs/operating income 41.4% 40.9% 38.4% 38.2% 37.9% 39.0% 41.4% 41.5% 37.5% 38.8%
Net impairment losses on loans/net loans to customers (loan losses) 0.79% 1.91% 0.95% 1.08% 1.07% 0.91% 0.61% 0.69% 0.88% 0.59% Net interest income/operating income 45.5% 48.0% 48.4% 53.3% 50.9% 52.8% 61.7% 61.3% 61.5% 68.7% Net fee and commission income/operating income 43.2% 42.8% 38.6% 36.0% 34.5% 33.5% 34.7% 33.9% 31.1% 33.3% Net result on financial activities/operating income 7.1% 4.9% 8.6% 5.9% 9.4% 7.3% 0.2% 1.0% 3.2% -5.9%
RISK INDICATORS Net bad loans/net loans to customers 4.37% 4.87% 5.07% 4.70% 3.89% 3.18% 2.49% 1.91% 1.36% 0.88% Net impairment losses on non-performing loans / gross non-performing loans (coverage for non-performing loans) 45.05% 45.08% 38.64% 38.56% 41.60% 42.60% 43.31% 48.69% 51.57% 54.58%
Coverage for bad loans, gross of write-offs of positions subject to bankruptcy proceedings and the relative impairment losses (2) 58.36% 58.48% 52.25% 53.36% 56.05% 57.63% 59.06% 63.62% 66.10% Net non-performing loans/net loans and advances to customers 8.84% 9.84% 11.45% 11.10% 10.53% 8.73% 6.30% 5.17% 4.62% 2.40%
CAPITAL RATIOS Basel 3 phased-in from 31 3 2014 (3) Tier 1 ratio (Tier 1 capital after filters and deductions/RWAs) 11.56% 11.48% 12.08% 12.33% 13.23% 10.79% 9.09% 7.47% 7.96% 7.73% Common Equity Tier 1 ratio (CET1 capital after filters and deductions/RWAs) 11.56% 11.48% 12.08% 12.33% 12.60% 10.29% 8.56% 6.95% 7.43% 7.09% Total capital ratios (total own funds/RWAs) 14.13% 14.10% 13.93% 15.29% 18.91% 16.01% 13.50% 11.17% 11.91% 11.08% Total own funds (figures in thousands of euro) 9,475,473 8,389,105 8,545,017 9,441,598 11,546,144 12,203,619 12,282,153 10,536,200 10,202,555 9,960,812 of which: Tier 1 capital after filters and deductions 7,754,502 6,829,283 7,408,894 7,615,265 8,075,247 8,263,720 8,276,278 7,047,888 6,816,876 6,944,723 Risk weighted assets (RWAs) 67,053,683 59,483,864 61,344,866 61,762,588 61,045,600 76,589,350 91,010,213 94,360,909 85,677,000 89,891,825
INCOME STATEMENT, BALANCE SHEET FIGURES (in thousands of euro), STRUCTURAL DATA (numbers) Profit (loss) for the year attributable to the shareholders of the Parent 690,557 (830,150) 116,765 (725,767) 250,830 82,708 (1,841,488) 172,121 270,099 69,001 Profit (loss) for the year attributable to the shareholders of the Parent before Business Plan impacts (previously redundancy expenses and impairment) 133,600 (565,812) 182,774 233,230 314,550 184,581 349,373 177,293 289,022 88,810
Profit (loss) for the year normalised related of the Parent 188,688 (474,357) 195,132 146,537 100,220 97,324 111,562 105,116 173,380 425,327 Operating income 3,578,481 3,119,499 3,370,864 3,409,630 3,437,292 3,526,311 3,438,339 3,496,061 3,906,247 4,089,739 Operating expenses (2,427,035) (2,153,466) (2,175,181) (2,108,222) (2,141,798) (2,266,660) (2,389,626) (2,468,564) (2,514,347) (2,611,348) Net loans and advances to customers 92,338,083 81,854,280 84,586,200 85,644,223 88,421,467 92,887,969 99,689,770 101,814,829 98,007,252 96,368,452 of which: net bad loans 4,035,164 3,987,303 4,287,929 4,025,079 3,437,125 2,951,939 2,481,417 1,939,916 1,332,576 848,671 Net non-performing loans 8,160,743 8,055,608 9,688,549 9,508,105 9,312,273 8,105,174 6,279,884 5,261,129 4,532,234 2,315,913 Direct banking funding from customers 94,449,770 85,166,013 91,512,399 93,207,269 92,603,936 98,817,560 102,808,654 106,760,045 97,214,405 97,591,237 Indirect funding from customers 96,465,661 82,116,612 79,547,957 75,892,408 71,651,786 70,164,384 72,067,569 78,078,869 78,791,834 74,288,053 of which: assets under management 65,443,496 54,631,219 48,567,539 43,353,237 39,553,848 38,106,037 36,892,042 42,629,553 41,924,931 39,430,745 Total banking funding from customers 190,915,431 167,282,625 171,060,356 169,099,677 164,255,722 168,981,944 174,876,223 184,838,914 176,006,239 171,879,290 Equity attributable to the shareholders of the Parent (inclusive of profit/loss) 9,925,183 8,989,578 9,981,862 9,804,048 10,339,392 9,737,882 8,939,023 10,979,019 11,411,248 11,140,207 Intangible assets 1,728,328 1,695,973 1,757,468 1,776,925 2,918,509 2,964,882 2,987,669 5,475,385 5,523,401 5,531,633 Total assets 127,376,141 112,383,917 117,200,765 121,786,704 124,241,837 132,433,702 129,803,692 130,558,569 122,313,223 121,955,685 Branches in Italy 1,838 1,524 1,554 1,668 1,725 1,727 1,875 1,892 1,955 1,944
(*) The figures as at and for the period ended 31st December 2017 relate to the UBI Banca Group inclusive of the New Banks that were included in the consolidation from 1st April 2017. The figures for previous periods on the other hand are based on historical data and therefore on the UBI Banca “Stand- Alone” Group.
The notes to the table are reported on the following page.
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(1) The indicators have been calculated using the reclassified figures contained in the section “Reclassified consolidated financial statements, reclassified income statement net of the most significant non-recurring items and reconciliation schedules” in the Consolidated Management Report. In consideration of the loss recorded, profit indicators have not been given for 2016 because they hold little significance. The profit indicators for 2014 and 2011 were calculated on profit for the year before redundancy expenses and impairment losses. Account has been taken with regard to the Alternative Performance Measures reported in this Consolidated Management Report and in particular in the Consolidated Management Report of the ESMA guidelines issued on 5th October 2015, which the Consob incorporated in its supervisory practices (Communication No. 0092543 of 3rd December 2015). Those guidelines became applicable from 3rd July 2016. Furthermore, on 18th August 2016, the Management Board approved the new UBI Banca Group guidelines on the identification of non-recurring items. Information on the share is reported in the relative section of the UBI Banca Management Report. (2) The coverage for bad loans inclusive of write-offs (write-offs of positions still subject to ongoing bankruptcy proceedings) as at 31st December 2015 onwards has been calculated using financial accounting data; the percentages shown for previous periods, however, remain of a management accounting nature.
(3) Capital ratios as at 31st December 2013 and as at 31st December 2012 were calculated according to AIRB Basel 2 rules and relate to the following ratios respectively: - the Tier 1 ratio (Tier 1 capital/risk weighted assets); - the core Tier 1 ratio after specific deductions from the Tier 1 capital (Tier 1 capital net of preference shares and savings or privileged shares held by non-controlling interests/risk weighted assets); - the Total capital ratio (regulatory capital + Tier 3/risk weighted assets). For previous periods the figures were calculated according to the Basel 2 standard rules. (4) Part time employees have been calculated within average total staff according to convention on a 50% basis.
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UBI Banca Group: branch network as at 31st December 2017
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UBI Banca Group: the main investments as at 31st December 2017
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The rating
The ratings assigned to the UBI Banca Group by the main international agencies are given below.
Following the announcement and the subsequent stipulation of a contract to acquire three of the four bridge banks formed in November 2015 from the Resolution Fund, on 24th January 2017 Moody’s confirmed its ratings for UBI Banca with a stable outlook. On 6th October 2017 Moody’s confirmed its “Baa2” long-term rating assigned to Italy with the outlook again negative (Italy is currently the only country in the Euro Area with a negative outlook). On the following 17th October Moody’s again affirmed its negative outlook for the banking system in Italy. According to the agency, expectations for Italian banks in the next 12-18 months will continue to be conditioned by pressure to reduce stocks of problem loans, by persistent low profitability and by significant exposures to Italian sovereign debt risk, although in a context of economic recovery and lower inflows of bad loans. Furthermore, the decline in progress in stocks of bonds held by retail customers is increasing the risk of losses for depositors and bondholders in a resolution scenario.
MOODY'S (I) The ability to repay long-term deposits (with original maturity of one year or more) in local currency. (Aaa: best rating – C: Default). Long-term Bank deposits rating (I) Baa2 (II) The ability to repay short-term deposits (with original
Short-term Bank deposits rating (II) Prime-2 maturity of 13 months or less) in local currency. (Prime-1: highest quality – Not prime: not classifiable within Baseline Credit Assessment (BCA) (III) ba2 any of the prime categories)
Long-term Issuer Rating (IV) Baa3 (III) The BCA is not a rating but an opinion on the intrinsic financial strength of the bank in the absence of external Long-term Counterparty Risk Assessment (V) Baa2(cr) support Short-term Counterparty Risk Assessment (V) Prime-2(cr) (Aaa: best rating – C: Default). Outlook Stable (IV) Rating on the ability of the issuer to honour senior debt and bonds (Aaa: best rating – C: Default).
RATINGS ON ISSUES (V) The counterparty risk (CR) assessment is not a rating but
Senior unsecured rating Baa3 an opinion on the likelihood of a default on certain senior operating obligations and other contractual commitments Subordinated debt Ba3 entered into by the bank Covered Bonds [Aaa(cr): best rating – C (cr): Default] (First Programme – residential mortgages) Aa2 [P-1 (cr): best rating – Not prime (cr): not classifiable within any of the prime categories]
On the basis of the announcement to present a binding offer for the three bridge banks, on 13th January 2017 S&P Global Ratings confirmed its ratings for UBI Banca with a stable outlook. The ratings were again affirmed in a periodic annual revision on 4th May 2017. On 27th October 2017 the agency upgraded its ratings for Italy, raising its long-term rating to “BBB” from “BBB-” before and its short-term rating to “A-2” from the previous “A-3” rating with a stable outlook. This upgrade reflected an improved outlook for domestic economic growth supported by an increase in investments and employment as well as by an expansionary monetary policy. S&P also forecast that the government will reach its target deficit to GDP ratio and start a period of reducing that ratio. Finally, the rating upgrade reflects the solution to the crises of Monte dei Paschi and regional Venetian banks as well as an acceleration in the reduction in stocks of non-performing loans. The upgrade of the sovereign rating was followed by a review of ratings assigned to Italian banks, announced on 31st October 2017. In this regard the agency confirmed the ratings assigned to UBI Banca, with a stable outlook.
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(i) The issuer credit rating reflects the agency’s ability to meet S&P GLOBAL RATINGS its financial commitments. It is based on an assessment of its intrinsic creditworthiness, supplemented by an assessment of the potential extraordinary support (from
government or from the group to which it belongs or Short-term Issuer Credit Rating (i) A-3 alternatively from its additional ability to absorb losses) on which the bank could count if it ran into difficulties. Long-term Issuer Credit Rating (i) BBB- Short-term: ability to repay short-term debt with a maturity
of less than one year (A-1: best rating – D: default). Stand Alone Credit Profile (SACP) (ii) bbb- Long-term: ability to pay interest and principal on debt with a maturity of longer than one year
Outlook (long-term rating) Stable (AAA: best rating – D: Default). (ii) The SACP is a rating of the intrinsic creditworthiness of the bank in the absence of external support (from government RATINGS ON ISSUES or from the group to which it belongs). It is calculated on the basis of an “anchor SACP”, which summarises economic and industry risk for the Italian banking sector. This is then Senior unsecured debt BBB- adjusted to take account of bank-specific factors such as
capitalisation and profits, market positioning, exposure to Subordinated debt BB risk and the funding and the liquidity situation, which are also assessed from a comparative viewpoint.
On 20th February 2017, Fitch Ratings downgraded its long-term rating (Long-term Issuer Default Rating) for UBI Banca by one notch from “BBB” to “BBB-”, and it’s Viability Rating from “bbb” to “bbb-”. The outlook has remained negative. The reason for this downgrade was the impact of non-performing loans on capital, considered high from a forward-looking viewpoint notwithstanding the targets set in the 2019/2020 Business plan to reduce them. On 21st April 2017, this agency downgraded its rating on long-term Italian sovereign debt by one notch, bringing it down from “BBB+” to “BBB” with a stable outlook.
When the Fitch carried out its annual review on 2nd February 2018, it confirmed its ratings for UBI Banca, maintaining a negative outlook. That confirmation reflected the agency’s expectations that in the medium-term UBI Banca would accelerate its reduction of its stock of non-performing exposures, compared with the targets set in its current business plan.
(1) The ability to repay debt in the short-term (less than 13 FITCH RATINGS months) (F1+: best rating – D: default)
(2) The ability to promptly meet financial commitments in the long-term, independently of the maturity of individual Short-term Issuer Default Rating (1) F3 obligations. This rating is an indicator of the probability that an issuer will default. Long-term Issuer Default Rating (2) BBB- (AAA: best rating – D: Default). (3) An assessment of a bank’s intrinsic strength in the event Viability Rating (3) bbb- that it cannot rely on forms of extraordinary external support (aaa: best rating - f: default) Support Rating (4) 5 (4) A rating of the likelihood of possible extraordinary external NF support (from the state or large shareholders) if the bank Support Rating Floor (5) (No Floor) runs into difficulty in honouring its senior obligations. [1: high probability of external support – 5: no reliance may Outlook (Long-term Issuer Default Rating) Negative be placed on any possible support (as is the case for European banks subject to the BRRD resolution regime)]
(5) This rating gives additional information, closely linked to the RATINGS ON ISSUES Support Rating, in that for each level of the Support Rating it identifies the minimum level which the Issuer Default Rating Senior unsecured debt BBB- could reach if negative events were to occur (No Floor for European banks subject to the BRRD resolution regime). Subordinated debt BB+
DBRS, in consideration of the increased probability that under the BRRD regime (Directive for the recovery and resolution of banks) all subordinated debts are used, together with capital, to absorb losses, on 13th January 2017 DBRS placed the subordinated securities issued by 27 European banking groups (including UBI Banca) with a rating of one notch below the intrinsic assessment under review with possible negative implications. This review was concluded on 9th June. UBI Banca’s subordinated debt rating (previously “under review with negative implications”) was therefore reduced by one notch to “BBB (low)” from the previous “BBB” with a negative trend. Again on 13th January it revised its Italian sovereign debt rating, downgrading it from “A (low)” to “BBB (high)” with a stable trend.
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As concerns, on the other hand, the acquisition of the bridge banks, on 20th January the agency confirmed all its ratings for UBI Banca, modifying the trend from stable to negative to take account of the potential risks, including execution risks, connected with the operation. On 14th July a series of actions was announced on European issuers designed to standardise the “nomenclature” of its long and short-term ratings of banking organisations. None of these actions gave rise to changes to the ratings assigned. More specifically the following new rating areas were introduced, with a distinction between long and short-term and the separation between “debt” and “deposits” (which could in future lead to assessment of these liabilities in different terms and therefore with possible different ratings): Long-term Issuer rating, Long-term Senior Debt, Long-term Deposits, together with the corresponding Short-term Issuer rating, Short-term Debt and Short-term Deposits. Finally, as part of its annual review, on 27th November 2017, DBRS downgraded all its UBI Banca ratings by one notch, bringing, amongst other things, its long-term issuer rating down from “BBB (high)” to “BBB” and its short-term issuer rating down from “R-1 (low)” to “R-2 (high)”. In the meantime, the intrinsic assessment was downgraded to “BBB”, while the support assessment remained unchanged at “SA3”. The trend, which was negative before, became stable for all ratings. The downgrade was linked both to high volumes of non-performing loans, notwithstanding the progress made in terms of total volumes and improvement in coverage, and also to challenges to improve profits. UBI Banca continues to show weakness on asset quality and profit indicators compared with peers with a rating of BBB (high). Furthermore, DBRS considers growing pressure from regulators to accelerate reductions in stocks as a further potential challenge for the Bank. On the following 4th December, as part of the rating action already mentioned, the agency confirmed its “AA (low)” rating on covered bonds issued under the first programme (backed by residential mortgages) and its “A” rating on the covered bonds issued under the second programme (mainly commercial mortgages). On 12th January 2018 DBRS confirmed its Italian sovereign debt rating, – “BBB (high)” on long-term debt and R-1 (low) on short-term debt – with a stable trend.
(I) The issuer rating is not a rating on issues but on the issuer, DBRS because it is an assessment of its creditworthiness. The
rating is assigned on a long-term basis using the long-term rating scale and on a short-term basis using the relative Long-term Issuer rating (I) BBB scale. In the banking sector, the Issuer Rating represents the final rating on the credit worthiness of a bank which Short-term Issuer rating (I) R-2 (high) incorporates both the Intrinsic Assessment and possible considerations regarding external support. Long-term Senior Debt (II) BBB LTIR – AAA: highest credit quality – C: very highly speculative Short-term Debt (II) R-2 (high) STIR - R-1 (high): highest credit quality – R-5: very highly speculative Long-term Deposits (III) BBB (II) The ability to repay long-term debt (maturing in more than one year), or short-term debt. Short-term Deposits (III) R-2 (high) LTSD – AAA: highest credit quality – C: very highly speculative
Intrinsic Assessment (IV) BBB STD - R-1 (high): highest credit quality – R-5: very highly speculative.
Support Assessment (V) SA3 (III) The ability to repay long-term deposits (maturing in more than one year) and short-term deposits.
Long-Term Critical Obligations rating (VI) A (low) LTD – (AAA: highest credit quality – C: very highly speculative)
Short-Term Critical Obligations rating (VI) R-1 (low) R-1 (high): highest credit quality - R-5: very highly speculative
Trend (all ratings) Stable (IV) The Intrinsic Assessment (IA) is a rating of the intrinsic financial strength of a bank in the absence of external support. It assesses a bank’s intrinsic fundamentals in five
RATINGS ON ISSUES areas: commercial network, earnings capacity, liquidity and funding, risk profile and capitalisation. AAA: best rating – C: worst rating Senior unsecured BBB (V) External support assessment (Group to which it belongs or government) in case of need. Subordinated debt BB (high) [SA1: internal support from the group to which it belongs; Covered Bonds SA2: external support (government); SA3: no external (First Programme – residential mortgages) AA (low) support – SA4: potential support to the group to which it belongs] Covered Bonds
(Second Programme – commercial mortgages) A (VI) The Critical Obligations Rating (COR) is a rating on default risks intrinsic to some classes of obligations/exposures considered critical that have a higher probability of being excluded from bail-in (such as those resulting from derivatives, payment services, covered bond issues, etc.). LTCOR – AAA: highest credit quality – C: very highly speculative STCOR – R-1 (high): highest credit quality – R-5: very highly speculative.
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Notice of call1
An Ordinary General Meeting of the Shareholders of Unione di Banche Italiane Spa is convened for
6th April 2018 at 9.30 a.m. in a single call at the Corrado Faissola Conference Hall of the operating headquarters of Unione di Banche Italiane Socità per Azioni in Brescia at 11, Piazza Monsignor Almici to discuss and resolve upon the following
Agenda
Ordinary Session 1. Proposal to distribute a dividend drawn from the extraordinary reserve, subject to the prior presentation of the separate and consolidated financial statements as at and for the year ended 31st December 2017 and a proposal to replenish losses for the year, drawn from the share premium reserve. 2. Appointment of the Board of Arbitrators 3. Report on remuneration: resolution in accordance with Art. 123-ter, paragraph 6 of Legislative Decree No. 58/1998. 4. Proposal for setting remuneration and incentive policies for members of the Supervisory Board and members of the Management Board in accordance with the regulations and legislation in force. 5. Remuneration schemes based on financial instruments: proposal to pay a portion of the short-term (annual) variable component of remuneration for “Identified Staff” in financial instruments and a proposal to authorise the purchase of treasury shares to service the incentive scheme. 6. Proposal to authorise the purchase of treasury shares to service the 2017-2019/20 long-term (multi- year) incentive scheme. 7. Proposal regarding the criteria and limits for determining remuneration to be agreed in the event of the early termination of an employment relationship or early retirement from corporate office. 8. Proposal to set the ratio between the variable and fixed components of remuneration up to a limit of 2:1 for staff holding certain positions at UBI Pramerica SGR Spa.
* * * Information on the share capital as of today The authorised, subscribed and paid-up share capital of Unione di Banche Italiane Società per azioni (hereinafter also the “Bank” or the “Company”) amounts to €2,843,177,160.24, consisting of 1,144,285,146 shares with no nominal value. At the date of this notice UBI Banca possesses 2,984,880 treasury shares.
Participation in the Shareholders’ Meeting Those persons with the right to vote for whom a communication certifying their legitimate right has been received by the Bank within the legal time limits may take part in the Shareholders’ Meeting; according to the provisions of Art. 83-sexies of Legislative Decree No. 58/1998 (the “Consolidated Finance Law”), that communication is made to the Bank by an authorised intermediary on the basis of the records relating to the end of the accounting day of the seventh trading day prior to the date of the Shareholders’ Meeting (26th March 2018 – “record date”). Those who only became owners of shares of the Bank subsequent to that date shall have no right to take part and vote in the Shareholders’ Meeting. The communication from the intermediary must be received by the Bank by the end of the third trading day prior to the date set for the shareholders’ meeting, and that is by 3rd April 2018. The legitimate right to attend and vote nevertheless remains, should the communications be received by the Bank later than the aforementioned time limit, provided they are received before the commencement of the proceedings of the Shareholders’ Meeting. It is underlined that each ordinary share gives the right to one vote. Voting by mail is not permitted.
Participation and voting by proxy Those with the right to vote may have themselves represented in Shareholders’ Meetings in compliance with the relative provisions of the law by means of a proxy, with the option of using the facsimile proxy form available on the corporate website “www.ubibanca.it – Shareholders Section – Shareholders’ Meetings – April 2018 Shareholders’ Meeting”. The proxies may be conferred by means of an electronic document with an advanced electronic signature, qualified or digital in accordance with Art. 21, paragraph 2 of Legislative Decree No. 82/2005. Proxies may be notified by means of email, at the address “[email protected]”.
1 The notice of call to convene a Shareholders’ Meeting was published on the corporate website of UBI Banca on 6th March 2018. An abstract of that same notice was also published on 7th March 2018, not only in local newspapers but also in the national daily newspapers Il Sole 24Ore, MF and Corriere of the Sera, as well as in the Financial Times, one of the leading international financial newspapers.
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If a proxy holder transmits or delivers a copy of the proxy to the Company, that person must certify under their own responsibility, when being accredited for access to the proceedings of the Shareholders’ Meeting, that it is a true copy of the original proxy and to the identity of the principal.
Proxy holder designated by the bank A proxy may be granted, free of charge, with voting instructions on all or some of the items on the agenda, to Computershare Spa as the “Designated Proxy Holder” in accordance with Art. 135-undecies of the Consolidated Finance Law by the end of the second trading day prior to the date of the Shareholders’ Meeting (and therefore by 4th April 2018). The proxy is valid solely for proposals in relation to which voting instructions have been given. The proxy and the voting instructions may always be revoked at any time within the time limit indicated above. A special form must be used to confer a proxy on the Designated Proxy Holder which will be made available on the corporate website “www.ubibanca.it – Shareholders Section – Shareholders’ Meetings – April 2018 Shareholders’ Meeting”, starting from the date on which the names of the candidates are disclosed to the public and that is not later than the 16th March 2018. If necessary, the proxy form will be transmitted in hardcopy form to those who request this either of Computershare Spa on the Tel. No. 011,0923200, or of the Corporate Affairs Service of the Bank. The proxy must arrive with the voting instructions conferred on the Designated Proxy Holder by the aforementioned time limit of 4th April 2018 following one of the procedures indicated on the proxy form itself.
Additions to the agenda and the submission of new proposals for resolutions On the basis of Art. 126 bis of the Consolidated Finance Law, Shareholders who, either alone or jointly, represent at least one fortieth of the share capital may ask, with a written application, within at least ten days of the publication of this notice (i.e. not later than 16th March 2018) for items to be added to the agenda, indicating the additional matters proposed, or submitting proposals for resolutions regarding matters already on the agenda. The written application must be submitted according to one of the following procedures: - delivery to the “Corporate Affairs Service” of the Bank at 8 Piazza Vittorio Veneto Bergamo by 5.00 p.m. on 16th March 2018; - by sending them by certified electronic mail to the address “[email protected]”, attaching the documents in pdf format with a digital signature by 16th March 2018. The applications must be accompanied by a report which gives the reasons for the proposals for resolutions on new matters which it is proposed should be addressed or the reason for the additional proposals for resolutions submitted on matters already on the agenda. The applicants must send communications to the Company through their intermediaries certifying to the ownership of shares. If they have requested their intermediary to issue that communication, it is sufficient to provide references to that communication in the application or at least the name of the intermediary. Any additions to the agenda or the submission of any proposals for resolutions regarding matters already on the agenda shall be disclosed at least fifteen days before the date set for the Shareholders’ Meeting (i.e. by 22nd March 2018) following the same procedures as those laid down for the publication of this notice. At the same time, the reports prepared by applicants for additions and/or the submission of further proposals for resolutions submitted, accompanied by any assessments that may be presented by the Governing Bodies, shall be disclosed to the public according to the same procedures applying to documentation relating to the Shareholders’ Meeting. It is underlined that additions are not permitted for matters on which the shareholders vote in accordance with the law on proposals submitted by the Management Board or the Supervisory Board or on the basis of a draft document or a report prepared by them, other than those indicated in article 125-ter, paragraph 1 of the Consolidated Finance Law.
The right to submit questions on matters on the agenda In accordance with Art. 127-ter of the Consolidated Finance Law, those holding the right to vote may submit questions on the items on the agenda even before the Shareholders’ Meeting, ensuring that they are received by the end of the third day prior to the date of the Shareholders’ Meeting, which is by 3rd April 2018. The questions can be sent by delivering them to the Corporate Affairs Service at 8, Piazza Vittorio Veneto, Bergamo or by email to the address [email protected]. The applicants must send communications to the Company through their intermediaries certifying that they may legitimately exercise this right. If they have requested their intermediary to issue that communication to participate in the Shareholders’ Meeting, it is sufficient to provide references to that communication in the request or at least the name of the intermediary. Questions received before the Shareholders’ Meeting and which are found to be relevant to the items on the agenda will be given answers in accordance with the law not later than during the Shareholders’ Meeting. The bank may provide a single answer to questions with the same content.
Appointment of the Board of Arbitrators – presentation of candidatures In accordance with Art. 43 of the Articles of Association, the election of the Board of Arbitrators, composed of a Chairman, two full members and two alternate members should take place on the basis of individual candidates submitted by Shareholders and/or by the Supervisory Board, where the maximum number is that of the number of Arbitrators to be elected. The candidature, signed by the person or persons submitting it, must indicate the name of the candidate to the office of Arbitrator, with no distinction made between full and alternate, and it must be deposited at the registered offices within the time limit set by the regulations in force for the submission of lists of candidates for election to the Supervisory Board (and that is by the twenty fifth day prior to the Shareholders’ Meeting and therefore not later than 12th March 2018). It must be accompanied: (i) by information on the identity of the Shareholder or Shareholders submitting it, with an indication of the number of shares and therefore the percentage totally held, to be certified when the candidature is deposited according to the procedures set by the regulations in force; (ii) by exhaustive
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information on the personal and professional characteristics of the candidate and (iii) by the declaration with which the candidate accepts their candidature. The signature of each Shareholder submitting a list must be duly authenticated in accordance with the law by employees of either the Bank or its subsidiaries specifically authorised by the Management Board. In order to facilitate procedures for the submission of candidatures, the following is available on UBI Banca’s corporate website “www.ubibanca.it – Shareholders Section – Shareholders’ Meetings – April 2018 Shareholders’ Meeting”: - a facsimile of the letter accompanying the candidatures containing the list of documentation that must accompany them; - a facsimile for the declaration by candidates that they accept their candidature. The aforementioned candidature proposals are presented using one of the following procedures: - delivery to the “Corporate Affairs Service” of the Bank at 8, Piazza Vittorio Veneto, Bergamo by 5.00 p.m. on 12th March 2018; - by sending them by certified electronic mail to the following address “[email protected]”, attaching the documents in pdf format with a digital signature not later than 12th March 2018. The above candidatures received by the ”Corporate Affairs Service” will be progressively registered and numbered on the basis of the day and time of receipt. Candidatures submitted that fail to observe the procedures reported above are considered as not submitted. If no candidatures are submitted within the time limit set above, the Shareholders’ Meeting shall vote on candidatures submitted during the meeting by the Shareholders present. Each person with the right to vote may vote for a maximum number of candidates equal to that of the Arbitrators to be elected. The candidates shall be ranked in decreasing order on the basis of the number of votes obtained. The first three candidates voted shall be elected as Full Arbitrators and the next two candidates voted shall be elected as Alternate Arbitrators. In the event of a tied vote between candidates, the Shareholders’ Meeting shall vote by ballot in order to establish the rank order. The candidate who receives the majority of the votes shall be elected Chairman. The candidatures received for appointment as Arbitrators and the relative curricula vitae shall be made available to the public at least 21 days before the Shareholders' Meeting (i.e. not later than 16th March 2018) at the registered offices and on a storage facility named “1info” (www.1info.it) and they shall also be published on the corporate website of the Bank (www.ubibanca.it – Shareholders Section – Shareholders’ Meetings – April 2018 Shareholders’ Meeting). For further information reference is made to the Illustrative Report on the second item on the agenda of the Ordinary Shareholders’ Meeting available to the public as specified below.
Documentation for the shareholders’ meeting The documentation relating to the items on the agenda is made available to the public at the registered offices of the Bank at 8 Piazza Vittorio Veneto, Bergamo, on the corporate website of the Bank (www.ubibanca.it – Shareholders’ Section) and on the storage facility named “1info” (www.1info.it) within the time limits and according to the procedures of the Law and regulations. Shareholders may view and obtain copies of the aforementioned documentation in accordance with the law by applying in advance to the “Corporate Affairs Service” of the Bank at 8, Piazza Vittorio Veneto, Bergamo. This notice to convene is published in accordance with Art. 125-bis of the Consolidated Finance Law and with Art. 15 of the Articles of Association on the corporate website of the Bank (www.ubibanca.it – Shareholders Section – Shareholders’ Meetings – April 2018 Shareholders’ Meeting) and an abstract of it is published in daily newspapers (“Il Sole 24 Ore”, “MF” and “Financial Times); it is also published on the storage facility named “1info” (www.1info.it) in accordance with the procedures of the Law and regulations. In accordance with Legislative Decree No. 196/2003, UBI Banca S.p.A. is the personal data controller. Full information on personal data processing is provided on the corporate website www.ubibanca.it.
Bergamo, 6th March 2018
The Chairwoman of the Management Board
Letizia Maria Brichetto Arnaboldi Moratti
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Consolidated
Financial
Statements of
the UBI Banca
Group
as at and for the year ended 31st December 2017
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Legislative Decree No. 254 of 30th December 2016, which implements Directive 2014/95/EU regarding disclosures of a non-financial nature was published in the Official Journal on 10th January 2017. It came into force on 25th January 2017, but the relative provisions relating to declarations and reports are applicable to financial years starting from 1st January 2017.
The new regulations require public-interest entities (including banks) with over 500 employees and assets of more than €20 million to prepare a declaration of a non-financial nature each financial year which covers environmental and social matters relating to personnel, respect for human rights and the proactive and passive fight against corruption that are significant with regard to the activities and nature of the company. The declaration may be contained in the management report pursuant to Art. 2428 of the Italian Civil Code and to Art. 41 of legislative Decree No. 136/2015, or it may constitute a separate report, with similar wording, approved by the management body and made available to the supervisory body and body engaged to carry out the external statutory audit, within the same time limits set for proposed financial statements and it is subject to publication in the Company Register, together with the management report.
In view of the above, UBI Banca decided to prepare a separate report entitled “Consolidated declaration of a non-financial nature prepared in accordance with Legislative Decree No. 254 of 30th December 2016 (“Sustainability Report)”, published at the same time as the Consolidated Management Report. The two reports are therefore to be read jointly, one in relation to the other.
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CONSOLIDATED
MANAGEMENT REPORT
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The macroeconomic scenario1
In 2017 the global scenario saw a consolidation of the global recovery, driven by a positive trend for investments. Nevertheless, the general framework continued to be affected by geopolitical variables: repeated terrorist attacks on a large-scale; North Korea's nuclear armament plan and repeated missile tests in a climate of growing international discord, despite recent signs of a thaw in tensions between the two Koreas; a heightening in tensions between Russia and the US also in relation to interference in the US presidential elections; the diplomatic crisis between the Gulf States, in particular Iran and Saudi Arabia; the halt to negotiations for Turkey to join the European Union following the outcome of the referendum in April on presidential powers; the difficult economic and social situation in Venezuela; tensions between Israel and Palestine in connection with the United States' decision to move the US Embassy from Tel Aviv to Jerusalem following their recognition of the latter as the capital of Israel. Further risk factors for growth are linked to uncertainty about the future direction US commercial policies – increasingly taking a protectionist turn – and the expansive nature of the US fiscal reform approved in December2, in addition to doubts about the outcomes of the Brexit negotiations3. Despite the defeat of the populist parties in the Dutch and French elections helping to reduce the risk of the Union breaking up, holding back the advance of the eurosceptics, there are still internal political risks within Europe, with fractures in the political framework in Catalonia, following the independence referendum in October4, and difficulties in the formation of a new government in Germany following the autumn elections5; there are also significant areas of disagreement between countries with regard to managing migration flows. In Italy, the rescue in June of important crisis-hit banks helped reduce the risk perceived by investors over the vulnerability of the Italian banking system. After approval of the new electoral law in November, the end of the parliamentary term and calling of elections for the 4th of March 2018 led to a re-emergence of the risk of government instability that could lead to a slowdown in structural reforms and growth.
During the year, fluctuations in the spread between ten-year BTPs and the equivalent German Bunds grew, in particular at the time of elections in Europe and tensions connected to the
1 Prepared on the basis of data available as at 22nd January 2018. 2 At almost a year since his arrival at the White House, the US President has managed to have his promised fiscal law approved by the House of Representatives and the Senate. The law contains a package of reforms to support growth such as a reduction in corporate income tax, including on income earned abroad by American multinationals. 3 In December a draft agreement was reached on the first part of the complex negotiations for the United Kingdom's exit from the European Union. This first stage – regarding the separation of the United Kingdom from the EU – involved reached progress, deemed to be “sufficient” by the European Union, on three fundamental issues: the delicate Irish border problem, the rights of EU citizens in the UK and the financial compensation payable by the UK. While it often seemed uncertain as to whether an agreement could be reached on the first phase of the negotiations, the second phase – on the configuration of relations between the two economies – appears even more complex and the outcome even more difficult to predict. 4 On 1st October the referendum on Catalonian independence called by the former President Puigdemont was held, supported by a majority of the Catalan Parliament, but considered illegal by the Spanish government. After weeks of uncertainty, at the end of October the Catalan parliament approved the declaration of independence, leading to an immediate reaction by the Spanish government, which applied article 155 of the Constitution, restricting the autonomy of the region, which has been accused of undertaking a unilateral, unlawful direction. At the same time the Spanish prime minister dissolved the Catalan parliament and called early elections for 21st December, again won by the advocates of independence, even though the party with an outright majority was the liberal Ciudadanos. 5 The elections at the end of September gave German Chancellor Angela Merkel her fourth mandate, albeit with less consensus than in the past, to the benefit of the extreme-right anti-EU AFD coalition, resulting in a deadlock in the formation of a new government, After the failure of various attempts at forming a coalition, in January an agreement was reached between Schulz's social-democrat party and Angela Merkel's Christian Democrats, which could lead to the creation of a solid and stable government by the end of the spring.
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Italian political situation. The restoration of faith in Europe's solidity, consolidation of economic growth in the euro area and extension of the quantitative easing (QE) programme in October helped to bring the spread back to its levels of the end of 2016 (157 basis points in December; 161 basis points at the end of the previous year).
Ten-year BTP-Bund spread 600
550
500
450
400
350 Basis points 300
250
200
150
100
50
0 GFMAMGLASONDGFMAMGLASONDGFMAMGLASONDGFMAMGLASONDGFMAMGLASONDGFMAMGLASONDGFMAMGLASOND 2011 2012 2013 2014 2015 2016 2017 Source: Thomson Financial Reuters
In the light of the gradual strengthening of the recovery, the major central banks have continued with accommodative monetary policies, albeit accompanied by many signs that stimuli will gradually be reduced. As concerns the European Central Bank: there was initial confirmation of the measures decided at the end of 2016 involving extension of the end of the quantitative easing (QE) programme until at least the end of 2017 and in any case until inflation in the euro area is in line with the monetary policy goal (approximately 2%), together with a reduction in monthly purchases to €60 billion from €80 billion previously, starting in April 20176. In order to prevent the extension of the programme from running into a shortage of assets to purchase, the Governing Council of the ECB also confirmed the possibility, from January 2017, of accepting operations on assets with a minimum remaining life of one year and, if necessary, on securities with a yield to maturity of less than the rate on deposits held with the ECB. At its October meeting, the European Central Bank decreed an extension of the Asset Purchases Programme until at least September 2018, or beyond if necessary in order to reach the inflation target, but at the same time it cut the monthly asset purchases by half to €30 billion from January 2018; the rate on principal refinancing operations was kept at its record low of 0%, while the rate on deposits held by banks with the ECB remained at -0.40%. On 29th March 2017 the last of four targeted longer-term refinancing operations (TLTRO IIs)7 was settled that had been decided in March 2016 by the ECB in order to strengthen monetary policy transmission and stimulate a greater propensity to lend. The total funds paid out in the four auctions came to €740 billion (€331 billion net of voluntary repayments of the funding still outstanding obtained from the first series of TLTROs). Bank of Italy counterparties were allotted a total of €241 billion (€128 billion net). Given the consolidation of the US economy and strengthening of the labour market, the Federal Reserve raised reference interest rates three times during 2017 (25 basis points in March, June and December) while in October it launched a process in order to gradually reducing its asset portfolio by halting the reinvestment of revenues from securities reaching maturity for a maximum sum which will gradually be raised (from €10 to €50 billion over twelve months). The announced reduction will therefore be of $450 billion.
The Bank of Japan left its reference rate unchanged in negative territory (-0.10%), as it continued with its expansionary policy focused on control of interest rates for different maturities, instead of on a monetary- based target (confirmed at €80 thousand billion yen per year), which may be varied in order to control the yield curve (Qualitative and Quantitative Easing, QQE).
6 As at 12th January 2017, a total of €1,898 billion in securities, €242 billion in covered bonds, €25 billion in ABS and €133 billion in corporate bonds had been purchased. 7 As with previous operations, this will also have a four-year maturity. The interest rate, which will be the same as that on principal refinancing operations, may be reduced on the basis of the loans granted by each counterparty, down to that on deposits held with the central bank that are currently negative. As already reported at the time of the first operation in June 2016, the possibility for banks to transfer funds obtained from previous TLTROs to the new TLTRO IIs was provided for, benefiting from the more attractive conditions of the latter both in terms of the cost and due to the absence of early repayment requirements in the event of failure to
reach the benchmark.
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In a context of slowing growth and rising inflation in the UK, the Bank of England increased the official interest rate by 25 basis points, bringing it back to 0.50% in November, at the same time confirming the existing quantitative easing programme.
Monetary policies remain mainly accommodative in major emerging countries, with the exception of China8.
On foreign exchange markets 2017 saw a weakening of the dollar against major international currencies, primarily due to the emergence of doubts over the size and timing of measures to support the United States economy and subsequently over the efficacy of such measures. On the other hand, a relaxation of tensions in the European political climate after the French elections, stronger economic growth in the area and the continuation of expansionary support by the ECB resulted in a generalised rise in value of the euro. As shown in the table, sterling, already weakened by Brexit-related risks, depreciated further as a result of the British The main exchange rates and oil (Brent) and commodities prices elections in June. In January 2018 the stall in Dec-17 Sep-17 Jun-17 Mar-17 Dec-16 % change negotiations for the formation A B C D E A/E of a coalition government in Euro/Dollar 1.1996 1.1812 1.1423 1.0649 1.0513 14.1% Euro/Yen 135.16 132.85 128.34 118.63 122.87 10.0% Germany was resolved, and Euro/Yuan 7.805 7.8589 7.744 7.3313 7.2992 6.9% this, together with growing Euro/Franc CH 1.1688 1.1434 1.0944 1.0682 1.0700 9.2% expectations that the ECB Euro/Sterling 0.8875 0.8816 0.8767 0.8483 0.8519 4.2% Dollar/Yen 112.67 112.47 112.35 111.38 116.87 -3.6% could bring QE to an end Dollar/Yuan 6.5063 6.6533 6.7793 6.8832 6.9430 -6.3% before the expected term, Futures - Brent (in $) 66.87 56.79 48.77 53.53 56.82 17.7% CRB Index (commodities) further strengthened the euro 193.86 183.09 174.78 185.88 192.51 0.7% against the US dollar. Source: Thomson Financial Reuters
Euro-dollar and dollar-yen exchange rates (2010-2017)
1.55 128
1.50 123 €/$ $/Yen (scala dx.) 1.45 118
1.40 113
1.35 108
1.30 103
1.25 98
1.20 93
1.15 88
1.10 83
1.05 78
1.00 73 GFMA MG L A SON DGFMA MG L A SON DGFMA MG L A SON DGFMA MG L A SON DGFMA MG L A SON DGFMA MG L A SON DGFMA MG L A SON D 20112012 2013 2014 2015 2016 2017
8 In the first half of 2017 the central bank of Brazil cut its official rate eight times (75 bp in January and February and 100 bp in April, May, July and September, 75 bp in October and 50 bp in December) in response to lower inflation, bringing it down to 7.00%, while the Russian Central Bank cut its reference rate on six occasions (25 bp in March, 50 bp in April, 25 bp in June, 50 bp in September, 25 bp in October and 50 bp in December) to now stand at 7.75%. In India the monetary authorities reduced the repo rate from 6.25% to 6.00% in August, while in China the People’s Bank of China maintained the current reference interest rate of 4.35%, while gradually tightening monetary conditions, facilitating the rise in interbank rates and introducing new prudential measures in the banking industry and sate management.
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The macroeconomic framework
According to the International Monetary Fund’s latest forecasts9 the world economy grew 3.7% in 2017, slightly faster than a year before (up 3.2%), remaining uneven across different geographical areas (up 4.7% in emerging areas and 2.3% in advanced countries). The global economic cycle has gradually gained strength, as a result of the solidity of the US economy and positive signs in Europe and emerging countries, as Russia and Brazil have emerged from recession and the Chinese economy has surged forward once again. When revising its 2018 growth forecasts upwards (by 3.9%), the IMF underlined how the economy could be boosted by the US tax reform, but also pointed out the risk that the recovery could be held back by increasingly bitter tensions in Asia and the Middle East and by political uncertainty in some countries, including Italy. Despite its slow rise, inflation remained low in all the main industrialised countries, with the exception of the UK; conversely, in emerging countries – China excepted – prices continue to vary considerably, although rapidly returning to levels close to those recommended by the respective central banks. Inflation was also affected by the recovery in oil prices since June, against substantially stable non-energy raw materials. In the second part of the year the CRB index recorded a 10.9% rise, which more than offset the fall in the first half, as a result of world economic growth in excess of expectations and a weaker dollar.
Brent oil prices (2010-2017) 130 125 120 115 110 105 100 95 90 85 80 75 70 65 60 55 50 45 40 35 30 25 G FMAMG L A S OND G FMAMG L A S OND G FMAMG L A S OND G FMAMG L A S OND G FMAMG L A S OND G FMAMG L A S OND G FMAMG L A S OND G FMAMG L A S OND 2010 2011 2012 2013 2014 2015 2016 2017
As the table shows, from a low point of $45 a barrel towards the end of June, Brent prices began to rise once more in the wake of the fall in global stocks and halt in production of some oil exporting countries. In the last quarter, the increase in the demand for oil, continued cuts in supply by OPEC and Russia 10 and geopolitical tensions in Iran and Venezuela gave oil prices a further boost, and at the end of the year prices stood at $67 a barrel (up 17.7% over the year), reaching $70 in the following weeks.
9 January 2018 update. 10 In December 2016 OPEC producers signed an agreement with producers not belonging to the cartel in order to reduce the daily volumes of crude oil extracted. The agreement was originally for six months, and was extended for the first time in May (to March 2018) and subsequently in November (to the end of 2018). This latter revision included countries such as Libya and Nigeria, which had previously been excluded for humanitarian reasons, and included the option of adjusting cuts to production in June if there should emerge market uncertainties around supply and demand.
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Actual and forecast data: industrialised countries
Deficit (+) Surplus (-) Public Consumer prices Unemployment Reference interest Gross domestic product sector (average annual rate) (average annual rate) rates (% of GDP) Percentages 2016 2017(2) 2018(2) 2016 2017(1) 2018(2) 2016 2017(1) 2018(2) 2016 2017(2) 2018(2) Dec 16 Jan-18
United States 1.5 2.3 2.5 1.3 2.1 2.1 4.9 4.3 4.0 5.0 4.5 4.7 0.50-0.75 1.25-1.50 Japan 0.9 1.7 1.3 -0.1 0.4 0.7 3.1 3.0 3.0 4.9 6.5 6.1 -0.10-0 -0.10-0 Euro Area 1.8 2.4 2.3 0.2 1.5 1.4 10.0 9.1 8.5 1.5 1.1 0.8 0.00 0.00 Italy 0.9 1.6 1.5 -0.1 1.3 1.0 11.7 11.4 11.0 2.5 2.1 1.6 -- Germany 1.9 2.2 2.5 0.4 1.7 1.8 4.1 3.7 3.2 -0.8 -1.0 -1.0 -- France 1.2 1.9 1.9 0.3 1.2 1.2 10.1 9.6 9.1 3.4 2.9 2.4 -- Portugal 1.4 2.8 2.2 0.6 1.6 1.5 11.2 9.7 9.0 2.0 1.2 0.7 -- Ireland 5.1 5.1 4.9 -0.2 0.2 0.4 8.4 6.4 5.9 0.7 1.1 0.1 -- Greece -0.3 1.1 1.5 0.0 1.3 1.3 23.6 22.3 20.7 -0,5 0.9 0.9 -- Spain 3.3 3.1 2.7 -0.3 2.0 1.4 19.6 17.8 16.9 4.5 2.9 2.1 -- United Kingdom 1.9 1.5 1.4 0.7 2.7 2.9 4.9 4.3 4.3 2.9 1.9 1.7 0.25 0.50
(1) Official statistics or, if unavailable, forecasts Source: IMF, Prometeia and Official Statistics (2) Forecasts
The US growth trend gradually grew stronger in the first nine months of the year. In the third quarter annualised year-on-year GDP growth was 3.2% (compared with 3.1% in the second quarter and 1.2% in the first). The information available is consistent with steady growth also in the fourth quarter, once again driven by consumption and investment. The labour market continued to provide encouraging signals, while inflation remained under observation. During the year inflation slowed down, and the FED considers it a temporary phenomenon, and is more concerned about the expected expansion of the deficit and federal debt since the tax reform became law.
Actual and forecast data: the principal emerging countries
Consumer prices Unemployment Reference interest Gross domestic product (average annual rate) (average annual rate) rates Percentages 2016 2017(2) 2018(2) 2016 2017(1 ) 2018(2) 2016 2017(1) 2018(2) Dec-16 Jan-18
China 6.7 6.9 6.3 2.0 1.6 2.6 4.0 4.0 4.0 4.35 4.35 India 7.9 6.6 7.1 4.9 3.3 4.7 n.a. n.a. n.a. 6.25 6.00 Brazil -3.5 1.1 2.0 8.7 3.5 3.6 11.3 13.1 11.8 13.75 7.00 Russia -0.2 1.6 2.3 7.1 3.7 6.3 5.5 5.5 5.5 10.00 7.75
(1) Official statistics or, if unavailable, forecasts Source: IMF, Prometeia and Official Statistics (2) Forecasts The Chinese economy is involved in a difficult transition from an investment-based to a consumer-based model of development. In 2017 it showed signs of recovery, with GDP rising 6.9% year-on-year (the four year-on-year quarterly rises were 6.8%, 6.8%, 6.9% and 6.9%) compared with 6.7% in 2016. The outlook for the country’s growth is one of a gradual slowdown, consistent with the profile outlined by the authorities to absorb existing economic and financial imbalances11.
In Japan the economy appears to be experiencing moderate growth, with GDP up 0.6% year-on-year in the third quarter (up 0.4% and 0.7% respectively in the first and second quarters), due to the positive contribution of net exports against a fall in consumption12. The initial data for the fourth quarter also seem to confirm the current trend. The results of recent elections, have also reinforced the prime minister's position, with the expectation of an intensive phase of fiscal reforms supporting growth.
In the euro area the recovery consolidated with a continuous reduction in the discrepancies between the individual countries. In the third quarter the quarter-on-quarter increase was 0.6% (up 0.6% and 0.7% respectively in the first and second quarters), supported by the positive contribution of fixed investments, inventories, and consumption in particular, against a balance of trade of practically nil. The available data continue to provide positive signals: the €-coin indicator calculated by Bank of Italy – which provides an estimate of the underlying dynamics of European GDP – rose for the seventh consecutive month in December, reaching its highest level since May 2006.
The Italian economy also recovered strength, although growth continued to remain lower than that of other countries in the area. In the third quarter GDP growth accelerated to 0.4%
11 In May the rating agency Moody’s downgraded its long-term rating for China from Aa3 to A1, with a Stable Outlook, due to risks related to the disproportionate increase in private debt. S&P Global cut the country's rating from AA- to A+ with a Stable Outlook in September, for the same reason. 12 Bucking the trend of US isolationism, in December the negotiations for a trading agreement between Europe and Japan signed in early July were completed. The agreement involved the elimination over an extensive period of time of the majority of duty and trade barriers currently existing between the two.
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year-on-year (+0.5% and +0.3% respectively in the first and second quarters) incorporating the positive contribution from consumption, net exports and fixed investments against a negative contribution from inventories. In the autumn months GDP is expected to perform in line with the previous period, suggesting that the current rate of growth of the economy is set to continue. The seasonally adjusted industrial production index has seen short-term growth since February, varying by 2.2% in November, the result of opposing trends in the various industries. The largest increases were seen in the “manufacture of pharmaceutical products” (up 17.9%), “other manufacturing industries” (up 5.2%) and “manufacture of means of transport ” (up 5%), while the main decreases were in “mineral extraction activities” (down 11.2%) and “manufacture of electronic equipment” (down 6.3%). Despite the elimination of incentives for recruiting new staff and an increase in participation in the labour market, during the year the unemployment rate fell to 11% in November (11.8% in December 2016). On the other hand, the unemployment rate for the 15 to 24 age group was 32.7% (38.9% at the end of 2016)13. The overall figure continues to be mitigated by government-backed temporary redundancy schemes, which saw a reduction in the Wage Integration Fund over the year: 351.1 million hours authorised, compared with 579.2 million hours in 2016 (down 39.4%), resulting from a fall across the board in the various components making up the figure (ordinary category down 23.7%; extraordinary category down 43.2%; replacement fund down 51.6%). Inflation, measured by the harmonised consumer price index, peaked in April (2%) and then fell to 1% in December, back at the low levels of the start of the year (0.5% at the end of 2016). As a result the average annual change in consumer prices was 1.3% (-0.1% in 2016). The surplus on the balance of trade was €42.2 billion in the first eleven months of the year (compared with €44 billion in the same period of 2016) due to a substantial increase in the surplus on non-energy products, approximately two thirds of which is stably attributable to plant and equipment, which more than offset the energy deficit (of -€ 30.2 billion). The overall surplus was driven by higher volumes of trade, with imports growing 9.5% and exports 7.9% year-on-year, as a result also of stronger performance on markets outside the EU14. As regards public finances, according to official forecasts, which take into account the 2018-2020 Stability Law approved by Parliament in December, in 2018 the deficit-to-GDP ratio is expected to fall to 1.6% from its 2017 level of 2.1% (2.5% in 2016), while the debt-to-GDP ratio is expected to fall to 130% from its 2017 level of 131.6% (132% in 2016). Last November the European Commission signalled the risk for 2018 that Italy's public accounts could fail to comply with the Stability and Growth Pact, and will make a further assessment of the situation in the coming months.
Financial markets
As the table shows, all the main financial markets ended 2017 with very positive performances: the solid global growth and monetary policies of central banks have helped to reduce the risks for financial stability, despite continued uncertainty about US economic policies and global geopolitical tensions. The US stock markets reached new record highs thanks to the positive performance of the economy and recovery in oil prices, receiving a further boost from mid-November with the imminent launch of fiscal reform.
13 This figure gives young people unemployed as a percentage of total young people in employment and seeking employment. 14 As already reported, in February the European Parliament voted in favour of a comprehensive economic and trade agreement (CETA) between the EU and Canada, which concluded the process of European ratification and allowed the agreement to provisionally come into force in September, while waiting for each member state of the union to ratify it in order to come fully into effect. Under the CETA, the EU and Canada are committed to ensuring that economic growth, social development and protection of the environment go hand-in-hand, thereby creating a new global reference framework for future trade agreements.
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In Europe, despite the The principal share indices in local currency rise in GDP and Dec-17 Sep-17 Jun-17 Mar-17 Dec-16 % c ha nge reduction in the risk of A B C D E A/E the EU breaking up, the Ftse Mib (Milan) 21,853 22,696 20,584 20,493 19,235 13.6% recovery in list prices was Ftse Italia All Share (Milan) 24,192 25,025 22,746 22,568 20,936 15.5% penalised by Xetra Dax (Frankfurt) 12,918 12,829 12,325 12,313 11,481 12.5% uncertainties concerning Cac 40 (Paris) 5,313 5,330 5,121 5,123 4,862 9.3% Ftse 100 (London) 7,688 7,373 7,313 7,323 7,143 7.6% the banking industry in S&P 500 (New York) 2,674 2,519 2,423 2,363 2,239 19.4% the last quarter. In June DJ Industrial (New York) 24,719 22,405 21,350 20,663 19,763 25.1% the agreed measures Nasdaq Composite (New York) 6,903 6,496 6,140 5,912 5,383 28.2% Nikkei 225 (Tokyo) 22,765 20,401 20,033 18,909 19,114 19.1% applicable to Italian Topix (Tokyo) 1,818 1,675 1,612 1,513 1,519 19.7% intermediaries suffering MSCI emerging markets 1,154 1,082 1,011 958 862 33.8% problems reduced Source: Thomson Financial Reuters systemic risk, improving the prospects for the industry, although in the last few months of the year news of the publication of the addendum to the guidelines on non-performing exposures by the ECB affected all the European stock markets to a certain extent, especially in Italy. The latter only benefited in part by the approval of the new electoral law and the improved debt rating by S&P15, and were affected mainly by the falls in bank securities following the announcement by some banks that they would be implementing capital reinforcement measures. The MSCI index – which summarises the performance of emerging countries – recorded an increase of around 34% in the twelve month, thanks to significant progress on the Indian and Brazilian stock markets, against a moderate increase in China and slight fall in Russia.
Principal long-term interest rates (2011-2017)
7.70
7.20 Ten-year US Treasury Ten-year BTP Ten-year Bund 6.70
6.20
5.70
5.20
4.70
4.20
3.70
3.20
2.70
2.20
1.70
1.20
0.70
0.20
-0.30 GFMAMGLASONDGFMAMGLASONDGFMAMGLASONDGFMAMGLASONDGFMAMGLASONDGFMAMGLASONDGFMAMGLASOND 2011 2012 2013 2014 2015 2016 2017
The stock markets managed by the Italian Stock Exchange Borsa Italiana – which outperformed the rest of Europe – ended the year with an increase of more than 13%. The result was accompanied by a slight increase in the value of trading (€629.1 billion, up 0.8%), although there was a fall in volumes (70.2 million; down 7%). Borsa Italiana confirmed its position as European leader in the volume of contracts exchanged on the electronic systems, including both ETF Plus and MOT. ETF Plus in fact achieved €64.9 billion in terms of volumes handled (up 22.2% year-on-year), while the trading value fell to €97.7 billion during the year (down 9.4%). Equally, the value of trading on the fixed income markets (MOT and ExtraMOT) fell to €207.1 billion (down 5.2%), while trading volumes fell to 3.5 million, (down 7.2%). At the end of the year 421 companies were listed on the Italian stock exchange, up from the 387 at the end of 2016, with 16 new companies being admitted to the Global Equity Market (GEM) and 18 to AIM Italia, where trading increased significantly – both in volumes and value – due to the launch of the individual savings schemes (ISS, in Italian “PIR”). Capitalisation reached €640 billion, up from €525.1 billion at the end of 2016, equivalent to 37.5% of Italian
15 After Italy's sovereign debt was downgraded by DBRS in January (from A (low) to BBB (high), outlook stable) and Fitch in April (from BBB+ to BBB, outlook stable), on 27th October 2017 S&P Global upgraded Italy's long-term rating to “BBB” from “BBB-”, and short-term rating to “A-2” from “A-3”, outlook stable.
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GDP (31.8% the previous year). Turnover velocity16 fell from 119% in 2016 to 98% in 2017, reflecting the different dynamics of trading value and capitalisation.
The banking system
An improvement in the economic situation allowed the banking system to consolidate signs of a recovery for lending and of improvement in credit quality, while funding remained essentially stable.
On the basis of the initial estimates published by the Italian Banking Association17, at the end of December the year-on-year rate of change in direct funding (deposits of residents and bonds) appeared nil (down 0.01%) compared with a fall of 0.5% at the end of 2016.
The abundant and competitive liquidity injected into the banking system by the ECB through the TLTROs and short-term lending facilities has affected the trend for bond funding (down 15.2% compared with a fall of 17.9% at the end of 201618). The constant fall in the latter – caused also by securities maturing and being reinvested by customers in asset management products – contrasts with the increase in other types of funding (up 3.6% compared with a rise of 4.8% in December 201619). As shown by detailed Bank of Italy data for November20, other types of funding benefited mainly from a strong increase in current account deposits (up 7.8% compared with November 2016), against a progressive reduction in term deposits with maturities of up to two years (down 18.3%).
Data for November published by the Bank of Italy shows that21 loans to residents belonging to the private sector increased year-on-year by 1.4% (up 1.1% in December 2016), in terms of borrowers, showing a continuation of the positive trend for households compared with still marginal changes for non-financial companies, notwithstanding increasingly more attractive terms. Over the twelve-month period, the growth in lending to households picked up (up 2.8% compared with a rise of 1.9% in December 2016), mainly concerning consumer credit and to a lesser extent home purchase mortgages, while for companies the situation remained weak (up 0.3% from a rise of 0.2% at the end of 2016), conditioned by investments. According to Italian Banking Association reports, in December 2017 the annual growth in loans to private sector residents increased by 2.2%22.
In terms of risk, asset quality has continued to improve, boosted by consolidation of the recovery and a reduction in the flow of new non-performing exposures. In November private sector bad loans net of impairment20 fell to €172.6 billion, a reversal of the trend year-on-year (down 13.1% compared with a rise of 0.1% in 2016). Total outstanding loans consisted of €48.6 billion to households (down 8.4%; down 0.6%) and of €121.5 billion to businesses (down 14.5%; up 0.2%). The ratio of gross private sector bad loans to private sector loans therefore reached 10.71% (12.32% in December 2016). Net bad loans, which amount to €66.3 billion – the lowest level since March 2013 – fell
16 An indicator which, as a ratio of the volumes of shares traded to capitalisation, gives a measure of the turnover of shares traded. 17 Italian Banking Association, Monthly Outlook, Economia e Mercati Finanziari-Creditizi, January 2018. 18 The changes were calculated by excluding the portion included within the investments in the securities portfolio from bond funding. 19 The changes were calculated by excluding amounts relating to disposals of loans and transactions with central counterparties from deposits. 20 Supplement to the Statistics Bulletin “Banche e moneta: serie nazionali”, January 2018. 21 Supplement to the Statistics Bulletin “Banche e moneta: serie nazionali”, January 2018. The growth rates for lending have been adjusted by the Bank of Italy to take account of securitisations and other loans disposed of and written off the balance sheets of banks. 22 The change was calculated by the Italian Banking Association consistent with the criterion used by the Bank of Italy mentioned in the preceding footnote.
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significantly during the year (down 22.2% from the 1.9% decrease of 2016). The ratio of net bad loans to total loans fell as a consequence to 3.74% (4.89% at the end of 2016). On the basis of the “Financial Stability Report” published by the Bank of Italy in November, gross non- performing exposures (bad loans, unlikely-to-pay loans and past-due loans) stood at €324 billion in June 2017, accounting for 16.4% of total gross loans to customers (€1,979 billion)23. Net of impairment losses, total non-performing loans amounted to €151 billion accounting for 8.4% of total net exposures (€1,796 billion). Coverage, measured as the ratio of impairment losses to gross non-performing loans, stood at 53.5%, while that for bad loans was 65.6% compared with 33.7% for unlikely-to-pay loans and 19.2% for past-due exposures.
Securities issued by residents in Italy held in the portfolios of Italian banks stood at €670.8 billion in November, down €64.3 billion year-on-year (down 8.8%). The trend mainly reflects the performance of investments in Italian government securities (€336.6 billion), with a €46.2 billion year-on-year fall, essentially due to medium- to long-term securities (CCT and BTP; down €42.2 billion). Similarly, “other certificates” (€326.6 billion) fell by €17.5 billion, mainly in the bonds issued by banks component (down €13.5 billion), which accounted for 64.9% of the total.
As concerns business with households and non-financial companies, in December the average interest rate on bank funding from customers calculated by the Italian Banking Association17 (which includes the yield on deposits, bonds and repurchase agreements in euro) fell to 0.89% (0.99% at the end of 2016), while the weighted average interest rate on loans in euro reached a record low of 2.69% (2.85% the previous year).
23 Loans to customers also included non-current assets and disposal groups held for sale.
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Significant events in 2017
The acquisition of the New Banks
As reported in the previous annual financial statements, on 11th January 2017, the Supervisory Board, on the basis of a proposal from the Management Board, decided to approve and submit a binding offer to the Resolution Fund to purchase 100% of the share capital of Nuova Banca delle Marche (in possession, to-date, of 94.65% of Cassa di Risparmio di Loreto), Nuova Banca dell’Etruria e del Lazio (in possession, amongst other things, of 100% of Banca Federico del Vecchio) and Nuova Cassa di Risparmio di Chieti (the “New Banks” originally referred to as the “Target Bridge Institutions”), constituting three of the four Bridge Banks formed following intervention by the Resolution Fund in November 2015 for which a business, financial and operating rationale was identified, designed for the potential creation of value for the UBI Banca Group.
The offer, valid until 18th January 2017 inclusive, was accepted by the Directors of the Bank of Italy, in their capacity as the managers on behalf of the Resolution fund, who on that same day approved the signing of the contract for the sale of the New Banks to UBI Banca, which occurred at the same time.
The sales contract involved the purchase being subject to a series of suspensive conditions, including the following: (i) obtaining the required authorisations from the competent supervisory authorities in accordance with their respective areas of responsibility (i.e. the Bank of Italy/European Central Bank, the Italian Competition Authority and the Institute for the Supervision of Insurance); (ii) the disposal without recourse, to be completed before the closing date, of approximately €2.2 billion of gross non-performing exposures; (iii) the approval by a Shareholders’ meeting of UBI Banca of an increase in share capital for up to a maximum of €400 million; (iv) the implementation and conclusion of the recapitalisation by the Seller of the New Banks for a total amount initially estimated at €450 million, but which on conclusion of the procedures laid down for that purpose in the agreement came to €713 million.
The sales agreement also called for a limitation of the risks taken by verifying prior compliance with certain “Significant Parameters” 1 (details of which are given in the consolidated management report in the 2016 Annual Report), which was done successfully.
During the first months of the year, all the activities preparatory to the conclusion of the acquisition were therefore set in motion. First of all, the necessary authorisation applications were submitted to the following: the Bank of Italy/European Central Bank (specifically for the acquisition of the banks and for the increase in the share capital of UBI Banca); the Institute for the Supervision of Insurance (for the purchase, indirectly, of the controlling interests held by Nuova Banca dell’Etruria e del Latium in BancAssurance Popolari Spa and in BancAssurance Popolari Danni Spa); the Italian Competition Authority (for the concentration resulting from the acquisition of the banks). Authorisation was issued on 4th April by the insurance institute; it was also received from the competition authority on 12th April and from the Bank of Italy/ECB on 28th April.
Looking towards completion of the operation, on 5th May the Management and Supervisory Boards approved the update to the 2019-2020 Business Plan presented to the markets on 11th
1 More specifically, the actual level at the closing date of the contract parameter related to total equity of the three banks was verified. As at 31st December 2016: equity on a pro forma basis was approximately €1,050 million, higher than the minimum required of €1,010 million; the weighted-average CET1 ratio was higher than the minimum threshold of 9.1%.
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May. For details, see the interim financial report for the period ended 30th June and the press release and presentation to the markets, which are available on our website in the section Investor Relations.
Following the satisfaction of the suspensive conditions to which implementation of the purchase and sale contract, signed with the Bank of Italy on 18th January 2017, was subject and the verification of the Significant Parameters, UBI Banca therefore proceeded to the purchase of 100% of the share capital of the three banks2.
The deal was closed on 10th May 2017, preceded on that same date by the purchase without recourse by the Atlante II Fund of €2.2 billion of non-performing loans held by the New Banks. This transaction was the first for Atlante II, a fund created in 2016 solely for the purchase of non- performing loans from Italian banks.
Also on 10th May, at the time of the closing, shareholders’ meetings of the New Banks were held which proceeded, in ordinary session, to, amongst other things, appoint a new board of directors designated by UBI Banca, and also, in extraordinary session, as agreed under the contract of 18th January 2017, to approve changes to the respective names of the companies and to transfer the registered addresses to Bergamo, as part of a broader revision of their articles of association. The full set of amendments to the respective articles of association (inclusive of the new company names: Banca Adriatica for Nuova Banca delle Marche, Banca Tirrenica for Nuova Banca dell’Etruria e del Latium, and Banca Teatina for Nuova Cassa di Risparmio di Chieti) became effective on 6th September, the date on which they were filed with the competent company registrars, once the required authorisation had been obtained from the Bank of Italy/ECB (23rd August). On 10th May, the shareholders’ meeting of Banca Federico del Vecchio was also held which, amongst other things, proceeded in ordinary session to appoint a new board of directors designated by UBI Banca and, in extraordinary session, to amend its articles of association in line with the general approach adopted within the UBI Banca Group as a whole. As concerns Cassa Di Risparmio di Loreto on the other hand, a shareholders’ meeting was held on 17th May 2017 to appoint a new board of directors designated by UBI Banca and to make the amendments to standardise its articles of association.
The share capital increase
On 7th April 2017, a Shareholders’ Meeting, held in extraordinary session, approved a proposal to confer an authorisation on the Management Board to increase the share capital by a maximum amount of €400 million. More specifically, the resolutions passed with a vote in favour of 99.8% of the share capital in attendance authorised the Management Board, pursuant to Art. 2443 of the Italian civil code, to increase the share capital by payment, in one or more tranches, by 31st July 2018, subject to prior approval by the Supervisory Board, by a total maximum amount of €400 million, inclusive of any share premiums, by the issue of ordinary shares with no nominal value and being of the same class as those already outstanding, to be offered as an option to rights holders, with the broadest powers to establish, from time to time and in observance of the above limitations, the procedures, the terms and the conditions of the operation, inclusive of the issue price and comprising any share premiums and dividend entitlements. The efficacy of the resolution and of the related powers was subordinate to execution of the purchase, by UBI Banca, of the entire share capital of the three banks by the deadline of 31st July 2018.
Upon obtaining authorisation from the Supervisory Board, the Management Board first resolved, on 6th June, to begin execution of the mandate received from the Shareholders and, at a subsequent meeting on 8th June, established the definitive conditions for the increase in share capital as well as the calendar for the Option Rights Offering of the new shares. More specifically, the share capital increase was to involve the issuance of 167,006,712 ordinary
2 In view of the conclusion of the acquisition, with three separate provisions issued on the same day as the closing, the Bank of Italy declared the end of “bridge bank” status for New Banks in accordance with Art. 44, paragraph 1, letter a) of Legislative Decree No. 180/2015 because the National Resolution Fund had disposed of the 100% stake it held in the share capital of those banks.
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shares of UBI Banca, with no nominal amount stated, of the same class of the UBI Banca ordinary shares already outstanding and with normal dividend entitlement, to be offered as an option to shareholders of UBI Banca with the right to them, at a ratio of six newly issued shares for every 35 shares held, at a subscription price of €2.395 for each new share, to be recognised entirely as share capital, for a maximum amount of €399,981,075.24.
Once the necessary authorisations were obtained, the Option Rights Offering period began on 12th June, at the end of which (27th June 2017) 967,529,640 option rights were exercised for the subscription of 165,862,224 shares, equal to 99.31% of the total shares offered and for a total issue price of €397,240,026.48. Subscription of the shares took place on 27th June 2017, with the same value date.
The remaining 6,676,180 rights not exercised during the subscription period, which gave the right to subscribe 1,144,488 shares, corresponding to 0.69% of the total shares offered, for a value of €2,741,048.76, were offered on the stock market, in accordance with Art. 2441, paragraph 3 of the Italian civil code. The offering was held on the trading day of 30th June 2017 and resulted in the sale of all rights. The exercising of 6,675,830 rights purchased on the stock market led to the subscription of 1,144,428 shares, which took place on 5th July 2017 with the same value date.
As such, upon completion of the procedures defined under Art. 2441 of the Italian civil code, a total of 167,006,652 ordinary shares, equal to over 99.99% of the newly issued shares for a value of €399,980,931.54, were subscribed.
In accordance with the terms of the underwriting agreement signed by Credit Suisse, Banca IMI Banco Santander and Mediobanca, in their capacity as underwriters, to cover the entire increase in share capital, the remaining 60 shares resulting from the 350 unexercised rights for a value of €143.70, were subscribed on 7th July. The entire amount of the capital increase (i.e. €399,981.075.24) was allocated to share capital.
In accordance with Art. 2444 of the Italian civil code, on 7th July 2017 the certification of execution of the entire capital increase was filed with the Bergamo company registrar. The registration of the new share capital (€2,843,075,560.24 on 1,144,244,506 ordinary shares with no nominal value) with the Bergamo company registrar took place on the following 14th July.
The table below provides a summary of the changes in share capital during 2017, taking account of the shares issued in conjunction with the merger of Cassa di Risparmio di Loreto (CARILO) as described below.
UBI BANCA SHARE CAPITAL: CHANGES IN 2017
Number of total Number of shares Amount of shares Date Reasons outstanding Share capital issued issued shares 31.12.2016 976,300,395 2,440,750,987.50 28.02.2017 937,399 2,343,497.50 Mergers of three network banks 977,237,794 2,443,094,485.00 of which: 618,315 1,545,787.50 Banca Popolare di Ancona 24,050 60,125.00 Banca Carime 295,034 737,585.00 Banca di Valle Camonica 14.07.2017 167,006,712 399,981,075.24 Share capital increase 1,144,244,506 2,843,075,560.24 23.10.2017 40,640 101,600.00 CARILO merger 1,144,285,146 2,843,177,160.24 31.12.2017 1,144,285,146 2,843,177,160.24
All the shares issued in 2017 have normal dividend entitlement from 1st January 2017.
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Implementation of the 2017-2020 Business Plan (updated to take account of the acquisition of the New Banks)
. The Single Bank
In the first half of 2017, the complex Single Bank Project, based on the merger of seven subsidiary network banks into UBI Banca, was completed ahead of its original schedule. The merger of the seven network banks into UBI Banca took place in two stages: • the first regarded Banca Popolare Commercio e Industria and Banca Regionale Europea, with the signing on 15th November 2016 of two separate merger deeds, which took effect with regard to third parties from 21st November 2016 (from 1st January 2016 for accounting and tax purposes). At the same time as the BRE merger deed was signed, UBI Banca concluded the purchase of the savings shares and the privileged shares held by the Fondazione Cassa di Risparmio di Cuneo, in implementation of an agreement signed with that foundation on 27th June 2016 and disclosed to the market on that same date3; • the second stage involved all the remaining network banks (Banca Popolare di Bergamo, Banca Popolare di Ancona, Banca Carime, Banco di Brescia and Banca di Valle Camonica) with the signing on 2nd February 2017 of four separate merger deeds (one for each network bank, exception being made for the signing of a single merger deed for BBS and BVC), which took effect with regard to third parties from 20th February 2017 (from 1st January 2017 for accounting and tax purposes). From an operational viewpoint, the second wave of migration onto UBI Banca’s IT system was also brought successfully to conclusion, which ensured that all the branches migrated were fully operational right from the first day of business. The operation regarded a total of approximately 1,150 branches and operating facilities, 8.3 million customer registrations, 2.45 million current accounts and 1.47 million securities custody deposits and it involved approximately 6,000 employees in the preparatory and post migration stage. The related changes concerning the share capital of UBI Banca for the current financial year— as summarised in the table above—are detailed in the section “The consolidation scope”.
Regulation for the management of UBI Banca’s charitable donations The revision of UBI Banca’s organisational model, which accompanied the implementation of the Single Bank, also involved the process to manage activities connected with the Group’s charitable donations. In November 2016, the Supervisory Board laid down specific guidelines on this matter which regarded the centralised management of the articles of association-related fund (pursuant to Art. 44.3 of UBI Banca’s Articles of Association) and criteria for distributing the availability of funds among the Macro Geographical Areas (MGAs). The “Regulation for the process to manage UBI Banca’s charitable donations” was drawn up on the basis of these guidelines, the final version of which was approved by the Supervisory Board on 14th February 2017, after prior examination by the Management Board. The approval of that regulation constituted the preparatory stage for a 2017 annual plan of intervention by UBI Banca, approved by the Supervisory Board on 7th March after preliminary assessment by the Appointments Committee.
On the basis of the new organisational model, charitable donations made by the Group will be carried out as follows: • for the more far-ranging interventions (inter-regional), mainly by the Supervisory Board; • for those of a more specifically local nature, by the individual MGAs concerned, or by the “historical” foundations supported for many years by the former network banks4, through their endowments, which may be added to by donations from the Group.
3 UBI Banca purchased all the privileged shares of BRE not owned by UBI Banca (50,473,189 shares) and all the savings shares of BRE owned by the Fondazione Cassa di Risparmio di Cuneo (18,240,680 shares), which previously held 24.904% of BRE’s share capital, for a total price of €120 million. With that agreement, UBI Banca also agreed with that foundation that it may keep certain prerogatives related to BRE and the geographical area in which the foundation operates. 4 Fondazione Banca Popolare di Bergamo ONLUS, Fondazione UBI per Varese ONLUS, Fondazione Banca San Paolo, Fondazione CAB - Istituto di Cultura Giovanni Folonari, and Fondazione Banca Popolare Commercio e Industria ONLUS.
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With a view to ensuring more effective relations with local communities, five Local Operational Teams have been planned initially, where each MGA Manager will be accompanied by a specifically designated Member of the Supervisory Board with experience in the local area concerned.
. The new distribution model
With the adoption of the new distribution model, customer segmentation has been revised and branch roles have been rationalised with the introduction of dedicated new positions and/or teams. Three branch models (Flagship, Full and Traditional), based on size and on the services offered, have also been defined, and a new physical layout for the branches is currently being implemented in order to give the UBI Banca Group a new, distinctive image. Finally, we have launched a project known as “Liberare tempo commerciale” (essentially: Free up time for sales) with the goal of reducing the amount of time that network employees spend on prevalently “administrative” tasks in order to improve the level of service provided to customers. For further details, see the section “Commercial activity”.
. UBI Welfare
In March 2017, following the creation of the new Wealth and Welfare unit in August 2016 and in line with the objectives of the Business Plan to develop integrated welfare services for the employees of our business clients, UBI Banca launched the innovative UBI Welfare service. With this proposal, the Group is able to provide businesses of all sizes looking to implement distinctive programmes for their employees with many years of experience managing company welfare and working with social and other non-profit organisations. For more information, see the section “Commercial activity”.
. The integration of the New Banks
The project to integrate the New Banks, in terms of both information systems and business model, called for the merger of the three acquired banks—Nuova Banca delle Marche (renamed Banca Adriatica), Nuova Banca dell’Etruria e del Lazio (renamed Banca Tirrenica), and Nuova Cassa di Risparmio di Chieti (renamed Banca Teatina)—and of the two banks controlled by these acquired banks (Cassa di Risparmio di Loreto, or “CARILO”, and Banca Federico del Vecchio) into the Parent in accordance with the Single Bank model adopted by the UBI Banca Group. The related Merger Plan pursuant to Art. 2501-ter of the Italian civil code was prepared by the UBI Banca Management and Supervisory Boards, within the scope of their respective responsibilities, on 10th and 11th May 2017, respectively. On the days that followed a similar resolution was also passed by the boards of directors of each of the banks to be merged.
On 25th May 2017, an application was submitted to the Bank of Italy/ECB for, in particular, the merger of the five banks and for possible changes to UBI Banca’s share capital as a result of the merger of Cassa di Risparmio di Loreto (CARILO); the relative authorisation was issued on 3rd August.
At its meeting of 12th September, the UBI Banca Supervisory Board approved the Merger Plan of the five banks in accordance with Articles 2505 and 2505-bis of the civil code and Art. 38.1, letter u), of the Articles of Association. The related resolution was filed with the Bergamo company registrar on 13th September. Also on 12th September, the Merger Plan was approved by the competent corporate bodies of the companies to be merged, i.e. by the boards of directors of Banca Adriatica, Banca Tirrenica, Banca Teatina, and Banca Federico del Vecchio and by the shareholders of CARILO. All of the related resolutions were filed with the competent company registrars on 13th September.
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* * *
In order to make the integration of the New Banks possible in full compliance with the operational model adopted by the UBI Banca Group, it was deemed necessary to execute the following operations within the Group:
. the preparatory transfer, to Prestitalia Spa, of loans and advances of the New Banks related to the salary and pension-backed loans (sold in block in accordance with Art. 58 of Italian Legislative Decree 385/1993, i.e. the Consolidated Banking Law). The UBI Banca Management Board on 18th July 2017, the boards of directors of the New Banks on 19th July, and the board of directors of Prestitalia on 2nd August, within the scope of their respective responsibilities, approved the sale without recourse to Prestitalia by the New Banks, in block, of the loans and advances related to salary and pension-backed personal loans and loans paid by the deduction of repayments from salary. The sales by Banca Adriatica and Banca Tirrenica were completed on 13th September, effective for accounting purposes on 1st September 2017, and concerned loans and advances for a total net carrying value of €12.5 million (€0.8 million for Banca Adriatica and €11.7 million for Banca Tirrenica). The migration to the Prestitalia information systems was also completed during the month of September. The sale by Banca Teatina was then completed on 12th December, effective for accounting purposes on 1st December 2017, and concerned loans and advances for a total net carrying value of €20.5 million. The migration to the Prestitalia information systems was also completed during the month of December. More specifically, each and every loan of money resulting from financing contracts and in general each sum due, which the transferring banks had the right to receive from principal debtors, from government administrations, from insurance companies and/or from any other third party following the disbursement of the financing, was transferred. Unless otherwise agreed upon, only loans and advances related to financing agreements signed and active as at 1st September 2017, for Banca Adriatica and Banca Tirrenica, or as at 1st December 2017, for Banca Teatina, and for which the necessary cumulative conditions were met, were involved in the sale. All other rights (including underwriting rights) of the selling banks in relation to the loans and advances—and specifically all rights and claims (including for damages), legal and procedural actions and exceptions, and other related or ancillary rights granted by all applicable laws—have also been transferred to Prestitalia without the need for any formal annotations, with the exception of the filing of the sale with the company registrar and of any other alternative forms of disclosure of the sale as established by the Bank of Italy in accordance with Art. 58 of Legislative Decree 385/1993;
. the preparatory transfer, to UBI Leasing Spa, of the businesses conducted by Banca Adriatica and by Banca Tirrenica (transfer of business units). Also on 18th July 2017, the UBI Banca Management Board approved a project for the reorganisation of the scope of the leasing businesses related to Banca Adriatica (formerly Nuova Banca delle Marche) and Banca Tirrenica (formerly Nuova Banca dell’Etruria e del Lazio) to be achieved by transferring two distinct business units to UBI Leasing in accordance with Art. 2434-ter of the Italian civil code. The final terms of the transfer were approved, within the scope of their respective responsibilities, by the board of directors of Nuova Banca delle Marche on 19th July, by the board of directors of Nuova Banca dell’Etruria e del Lazio and Banca Tirrenica on 24th August, and by the board of directors of UBI Leasing on 28th August. On 28th August, the shareholders of UBI Leasing approved an increase in share capital to service the transfer of the two units, subject to elimination of the nominal value of the shares, for a total of €3,395,002.00 by issuing 778,313 ordinary shares to be allocated as follows: (i) 566,713 shares to Banca Adriatica; (ii) 211,600 shares to Banca Tirrenica. In conjunction with the meeting of UBI Leasing shareholders, the deed of transfer of the two business units to UBI Leasing was signed and become effective as of 1st September 2017. The migration to UBI Leasing information systems took place during the weekend of 16th and 17th September, with the consequent operational launch of the transfer of the business units on 18th September. Each of the two lines of business was transferred with balances settled. Within the scope of the units transferred, the net carrying value of the finance leases transferred by Banca Adriatica and Banca Tirrenica came to €716 million and €172 million, respectively, for a total of €888 million;
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. the transfer, to UBI Sistemi e Servizi, of the ICT and back-office functions of the New Banks following their merger into UBI Banca. In full compliance with the organisation and operational structure adopted by the Group, it was deemed appropriate to transfer, to UBI Sistemi e Servizi (UBI.S), three business units of the New Banks related to their ICT and back-office functions (including administrative support, facility management, logistics, and real estate) following the merger of each of the New Banks into UBI Banca. The transfer, by UBI Banca to UBI.S, of the business unit related to: (i) Banca Adriatica took place by way of a deed dated 30th October and was effective as of 1st November 2017; (ii) Banca Tirrenica took place by way of a deed dated 28th November and was effective as of 1st December; and (iii) Banca Teatina is to take place following the merger of this bank into UBI Banca (scheduled for the end of February of this year) to be effective as of 1st March 2018. The transfer, by UBI Banca to UBI.S, of the business unit related to Banca Tirrenica was preceded by the transfer, by Banca Tirrenica to UBI.S—by way of a deed dated 18th October and effective as of 1st November—of a 100% interest in Etruria Informatica Srl, an ICT services company. With the goal of further simplifying the Group’s organisation, work has begun on the merger of Etruria Informatica Srl into UBI.S, which has included preparation, on 7th February 2018, of the merger plan by the boards of directors of the two companies in accordance with Art. 2501-ter of the Italian civil code. On 20th September 2017, in order to further harmonise the organisational models of the New Banks with that of UBI Banca and to simplify the process of transferring the ICT and back-office functions of the New Banks to UBI Banca upon their merger into the Parent and subsequently to UBI.S, the organisational structures of these banks was revised.
* * *
Given the many activities required—particularly of an ICT nature—execution of the entire merger of the New Banks has been organised into three stages. The first two of these have been completed as of the date of this report, while the third is currently being completed.
• The first step involved Banca Adriatica and CARILO - Cassa di Risparmio di Loreto and it was concluded on 23rd October. The deeds for the mergers of the two banks into the Parent were signed on 16th October and filed on the following 17th October with the competent Company Registrars in accordance with Art. 2504 of the Italian Civil Code. They took effect with regard to third parties from 23rd October and for accounting and tax purposes from 1st October 2017. From the effective date towards third parties, the share capital of both Banca Adriatica and CARILO has been nullified. Whereas the merger of Banca Adriatica did not result in any change in the number of shares or value of share capital for UBI Banca, the merger of CARILO led to the issue of 40,640 UBI Banca shares without nominal value and with normal dividend entitlement in exchange of 64,000 CARILO shares (equal to 1.14% of CARILO share capital) held by the sole minority shareholder at a swap rate of 0.635 UBI Banca shares for each CARILO share, for a consequent increase in share capital of €101,600.5 As a result, as at 23rd October 2017, UBI Banca capital came to €2,843,177,160.24 (on 1,144,285,146 ordinary shares with no nominal value) and remained as such at 31st December 2017 and as at the date of this report. The mergers of Banca Adriatica and CARILO did not involve any other amendments to UBI Banca’s Articles of Association. Over the weekend of 21-22 October, the two banks were successfully migrated to the UBI Banca information system, and this concerned a total of 285 branches and operating outlets, some 2.7 million customer files, nearly 580,000 current accounts, and over 137,000 securities deposits, while also engaging a total of some 2,600 employees in the pre- and post-migration phases.
5 The issuance of new shares was made necessary because the non-controlling shareholder of CARILO did not exercise its right to sell all or part of the shares that it held to UBI Banca in accordance with Art. 2505 bis of the Italian Civil Code. The right to sell could have been exercised at a price of €1.4 per share, as determined by a meeting of the Board of Directors of CARILO in compliance with the provisions of Art. 2437 ter of the Italian Civil Code and within a time limit of fifteen days from the date of the filing of the merger resolution passed by a CARILO Shareholders’ Meeting.
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Rationalisation of geographical coverage was carried out at the same time as the merger of the two banks which involved 65 units6. The following branches were closed: 44 branches (37 belonging to Banca Adriatica and 7 to CARILO) and 3 mini-branches belonging to Banca Adriatica7; 64 branches were transformed into mini-branches (62 for Banca Adriatica and 2 for CARILO), while 16 branches and 2 mini-branches belonging to UBI Banca were merged with a Banca Adriatica unit and transferred to the premises of the latter. At the same time, again with effect from 23rd October, the organisational configuration of UBI Banca was modified. The changes, approved by the competent governing bodies, involved the following: • a change in the configuration of the distribution network in the Central South area, with the division of these, in the first initial stage, into two Macro Geographical Areas (South Macro Geographical Area and Central Macro Geographical Area); • the consequent roll-out of some specialist central units for each of the two Macro Geographical Areas, consistent with the organisational model already in operation in UBI Banca for the other Macro Geographical Areas (e.g.: the Human Resource Management and Development Macro Geographical Area); • the roll-out of specialist units in new areas of activity not present in the UBI Banca model (e.g. in service credit recovery - REV).
• The second step, which concerned Banca Tirrenica and Banca Federico del Vecchio, was concluded on 27th November. The deed of merger of the two banks into the Parent was signed on 14th November and filed with the competent company registrars in accordance with Art. 2504 of the Italian civil code on 16th November. The transaction became effective with regard to third parties on 27th November, with the accounting and tax effects beginning on 1st October 2017. Given that Banca Tirrenica and Banca Federico del Vecchio were wholly owned directly or indirectly by UBI Banca, the merger did not have any effect on the number of shares or on the share capital of the surviving company. More broadly speaking, the merger also had no effect on the UBI Banca Articles of Association. Over the weekend of 25-26 November, the two banks were successfully migrated to the UBI Banca information system, and this concerned a total of 141 branches and operating outlets, about 2 million customer files, nearly 212,000 current accounts, and over 108,000 securities deposits, while also engaging a total of about 1,500 employees in the pre- and post-migration phases.
6 To these actions, we must also add the closure of the Banca Adriatica unit known as “Filiale On Line” (Online Branch). 7 In detail, these are the closures made on 23rd October 2017: - BANCA ADRIATICA: Bologna Via Riva Reno, 6; Ravenna; Reggio nell’Emilia; Cattolica (Rimini); Novafeltria Via Garibaldi, 6 (Rimini); Guidonia Montecelio (Rome); Roma Via Crescenzio, 45/53; Via Tiburtina, 533/535; Piazza San Giovanni Bosco, 30; Via Andrea Doria, 74/76/78; Viale Somalia, 227/229; Velletri (Rome); Ancona Via Ricostruzione, 6; Camerano (Ancona); Fabriano Via Martiri della Libertà, 44 (Ancona); Falconara Marittima Via XX Settembre, 4 (Ancona); Jesi Via Caduti sul Lavoro, 2/3; Viale della Vittoria, 26 (Ancona); Loreto (Ancona); Monte San Vito Piazza della Repubblica, 17 (Ancona); Montemarciano Via Verga, 7 (Ancona); Senigallia Via Rossini, 1 (Ancona); Monte Roberto (Ancona); Castelbellino Via Roma, 36 (Ancona); Ascoli Piceno Via E. Mari, 18; Fermo Via Trento, 168 – corner of Piazza Mascagni, 1/2/3; Porto San Giorgio (Fermo); Camerino (Macerata); Cingoli Via G. Rossini, 54 (Macerata); Matelica (Macerata); Tolentino Via Brodolini, 50/52 (Macerata); Acqualagna (Pesaro e Urbino); Fano Via C.Battisti, 19/25 (Pesaro e Urbino); Macerata Feltria (Pesaro e Urbino); Mondavio Via Cesanense, 30 (Pesaro e Urbino); Pesaro Via del Novecento, 11; Via della Repubblica, 38; Via V. Rossi, 71; Sant’Angelo in Lizzola (Pesaro e Urbino); Borgo Pace (Pesaro e Urbino); - CASSA DI RISPARMIO DI LORETO: Ancona Via Ruggeri, 3/O; Corso Garibaldi, 44/46; Campocavallo (Ancona); Castelfidardo Via 25 Aprile, 67/69 (Ancona); Civitanova Marche (Macerata); Porto Recanati (Macerata); Recanati (Macerata).
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With the same legal effect of the mergers, the following actions were also implemented: 31 Banca Tirrenica branches8 were shut down, while six were converted into mini-branches; eight branches and three mini-branches of UBI Banca were merged with and transferred to Banca Tirrenica units.9 In line with the ongoing process of merging the New Banks into the Parent, the organisational configuration of UBI Banca, as approved by the competent corporate bodies, was also updated by way of: • the reconfiguration of the distribution structure in central Italy with the creation of the Macro Geographical Area “MGA Lazio Tuscany Umbria” and the related units (i.e. three new Local Departments), which encompasses the territories of Lazio and Umbria that were previously a part of the Central Italy MGA, which was consequently adjusted and renamed the Marche and Abruzzo Macro Geographical Area; • the consequent roll-out of some specialist central units for the Latium Tuscany Umbria Macro Geographical Area, consistent with the organisational model already in operation at UBI Banca in the other Macro Geographical Areas (e.g.: the Human Resource Management and Development Macro Geographical Area); • the activation of units dedicated to the new areas of business that were not a part of the previous UBI Banca model (e.g. Gold Operations).
• The third step concerns Banca Teatina, for which the efficacy with regard to third parties is scheduled for 26th February 2018. Because Banca Teatina is wholly owned by the Parent, the merger will not have any effect on number of shares or on share capital, nor are any changes expected to be made to the UBI Banca Articles of Association. Twelve branches of Banca Teatina are scheduled to be closed, while twelve others are to be converted into mini-branches; at the same time, eight UBI Banca branches are to be merged with and transferred to units of Banca Teatina.
Finally, it should be noted that, while the merger of the recently acquired banks will allow for a rationalisation of the Group’s presence in terms of traditional branches, the evolution of the distribution model is also already leading to the activation of new “Top Private” and “Corporate & Investment Banking” units and/or to the requalification of existing corners into Top Private/Corporate centres (see the section “The distribution network and market positioning”).
The supplementary business plan for insurance business
Following the entrance within the scope of consolidation of the companies BancAssurance Popolari Spa and BancAssurance Popolari Danni Spa (the former Etruria Group), the Management Board, on 5th September 2017, and the Supervisory Board, on the following 12th September, approved a supplementary Business Plan dedicated specifically to insurance business.
In compliance with the agreements made when the acquisition of the New Banks was concluded, on the basis of constraints relating to the organisational structure of the insurance partners and the significance of the business, the following strategic guidelines were defined: • BancAssurance Popolari (life and pension sector): maintenance with the gradual full integration of the products already provided by the Group; • BancAssurance Popolari Danni (non-life sector): suspension of production by the company as of the date of the merger of Banca Tirrenica into UBI Banca (27th November 2017).
8 In detail, these are the closures made on 27th November 2017: BANCA TIRRENICA: Bologna Via Riva di Reno, 54F; Via E. Levante, 96A; Cesena Via Cesare Battisti, 90 (Forlì-Cesena); Rimini Via Marzabotto, 6; Cattolica Via Emilia Romagna, 63 (Rimini); Tivoli Viale Trieste, 101/103 (Roma); Roma Corso Trieste, 137, Viale Ippocrate 3A/49; Piazzale caduti della Montagnola, 44/46; Viale Giulio Agricola, 14/22A; Viterbo Via Vicenza – corner of Via Treviso; Tarquinia Piazzale Europa, 5 (Viterbo); Sesto San Giovanni Viale Gramsci, 49/51 (Milan); Ancona Via Strada Vecchia del Pinocchio, 26Z; Senigallia Via R. Sanzio (Ancona); Jesi Via Mura Occidentali, 11 (Ancona); Fabriano Via Dante Alighieri, 41 (Ancona); Porto Sant’Elpidio Via Umberto I, 81 (Fermo); Macerata Piazza della Vittoria; Urbania Via Vittorio Veneto, 50 (Pesaro e Urbino); Pesaro Viale Gramsci, 12/16; Fano Via Roma, 131 (Pesaro e Urbino); Campobasso Via XXIV maggio, 97/99; Pratovecchio Stia Via Roma – corner of Via Buozzi, 14/16 (Arezzo); Cortona Via S. Margherita, 5 (Arezzo); Bibbiena Piazza Roma, 10/11 (Arezzo); Perugia Via Armando Diaz, 102; Via Settevalli – corner of Via Minottini, 6; Gualdo Tadino Via Flaminia (Perugia); Foligno Via Cesare Battisti, 19C (Perugia); Costacciaro Corso Mazzini, 34/42 (Perugia). 9 In addition to these actions, there was also the closure of the Banca Tirrenica unit known as “Filiale On Line” (Online Branch).
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. Developments to the organisational structure of UBI Banca
With the abandonment of the federal model, the merger of the Network Banks into the Parent, and the acquisition and subsequent merger of the New Banks, the UBI Banca organisational structure was generally revised in line with the forecasts of the 2019-2020 Business Plan and its subsequent update in May 2017. For details, see “The UBI Banca organisation chart” in the Parent’s Management Report.
. Trade union negotiations
In 2017, trade union negotiations concerned both the procedures that began on 15th June as established by law and by the agreement related to the update to the Business Plan and the completion of the standardisation of supplemental company bargaining agreements (related to the “stand-alone” UBI Banca Group). With regard to the latter, on 26th July 2017 the Group signed an agreement with all trade unions which supplemented the Trade Union Memorandum of Intent of 11th December 2016. The following was carried out in this respect: • conclusion of the harmonisation in a single agreement of the supplementary company agreements still existing relating to UBI Banca (and to the former merged network banks) and to UBI.S.; • acceptance of the 62210 applications for adherence to the “solidarity fund” (the remaining quota with respect to the redundancies already defined resulting from the implementation of the Single Bank Project) submitted under the redundancy plan contained in the aforementioned December Memorandum of Intent (which involved voluntary redundancies for some 1,300 employees). These additional redundancies are planned to take place by 31st March 2018 (501 had already been completed as at 31st December 2017), ahead of schedule with regard to the Business Plan targets (the relative expenses had already been totally recognised in 2016). These redundancies allow implementation of generation turnover and also support for youth employment, with the recruitment of 250 new staff by the end of 2019 also by means of the confirmation of temporary contract positions (100 approx.) existing in the Group as permanent.
Meetings with trade unions resumed at the beginning of September in relation to the update of the Business Plan to take account of the acquisition of the New Banks. The agreement with trade union organisations was signed on 26th October 2017. This agreement, concluded at the same time as the first of the three mergers, contains a framework of rules to be applied in the progressive steps for the implementation of the Business Plan. It is designed to go hand-in-hand with processes for the Group’s reorganisation and strategic development and at the same time to manage the repercussions on the working conditions of staff according to criteria of social and economic sustainability, with attention paid to employment and geographical mobility, but nevertheless within the necessary limits set for the overall restructuring and increased efficiency of the Group, designed to achieve the objectives and synergies set out in that same Business Plan.
The agreement is based on the following key aspects: - the activation of an incentivised redundancy plan, which will allow a total of approximately 400 staff in the Group (of which 74 relating to the New Banks), who satisfy the relative pension requirements by 31st December 2024, to gain voluntary access to pension treatment, which is to say to the benefits of the sector “solidarity fund”. These redundancies are expected to be completed by January 2018, and they have resulted in additional costs for a gross total of €57.9 million, which were recognised on the consolidated income statement for the fourth quarter of 2017, while synergies are expected to be in line with the forecasts of the Business Plan; - the confirmation and extension of part-time work to all areas of the Group, the maintenance of flex time connected, in part, to the temporary suspension of work as agreed
10 Total applications approved increased marginally compared to the figure previously reported due to changes made during the latter months of the year.
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upon at the New Banks, and the right for all Group employees to voluntarily request extraordinary leave for 2018; - the search for solutions, including organisational solutions, consisting of the identification of decentralised operating and command centres, designed to conserve employment and professional expertise directly in the local areas in which the staff concerned are located, supported also by appropriate personnel role-change and retraining programmes. The continuation of the generation turnover plan was also agreed on the basis of the numbers already laid down in the Business Plan, with provisions for the recruitment by the end of 2018 of approximately 130 new staff, also to support youth employment.
The table provides the detail of total PERSONS LEAVING ON REDUNDANCY SCHEMES 26.10.2017 applications approved, as Geographical Area covered by a Applications Perimeter agreement Macro Area (MGA applicable) accepted summarised at the trade union forecast meeting of 17th January 2018. Bergamo and West Lombardy 35 49 th Brescia and the North East 25 25 Compared to the agreement of 26 Employees of Group North West 15 15 October 2017, of the 398 approvable companies in service at Milan and Emilia Romagna 30 30 applications—74 from the New Banks organisational units Latium, Tuscany and Umbria 65 50 located in provinces The Marches and Abruzzo 84 66 and 324 from the stand-alone UBI covered by the MGAs South 70 90 Banca Group—73 and 325 were Total Stand Alone UBI Banca Group 324 325 Banca Adriatica, CARILO, Banca Tirrenica, Banca Federico 74 73 accepted, as compared to 950 del Vecchio and Banca Teatina applications received. Total New Banks 74 73 There were another 650 Total UBI Banca Group 398 398 applications within the stand-alone Group that were off the list, and with regard to these the Parties agreed, at the January meeting, to their validity and efficacy for future approval, in whole or in part, unless withdrawn by the individual employees concerned, should there be extraordinary funds available, within the limits of said funds and in line with other technical, organisational and operational needs and, in any event, in accordance with criteria, conditions, and timeframes to be established by way of an implementing trade union agreement.
Also based on the Memorandum of Intent of 11th December 2016, which called for the standardisation of employment contracts also for the companies of the UBI Banca Group, on 11th January 2018 a trade union agreement was reached for the supplemental bargaining agreements for IW Bank, Prestitalia, UBI Factor, UBI Leasing, and UBI Pramerica SGR. The new provisions are to be applied to all companies beginning on 1st March 2018, with the exception of Prestitalia (1st July 2018). Finally, as a result of the Framework Agreement of 26th October 2017, which called for the future application of the second level contractual rules in force at UBI Banca with regard to the employees of the New Banks acquired, on the basis of the procedures and timetables to be identified with a trade union agreement, a special agreement was signed on 1st February 2018 to establish the gradual standardisation of company rules and regulations by 2020.
. The long-term incentive scheme
On 7th April 2017 a Shareholders’ Meeting approved a long-term incentive scheme for key management personnel (“identified staff”) of the Group11 to support the 2017-2020 Business Plan with the objective of bringing the interests of management increasingly into line with those of shareholders on a long-term basis. The scheme approved contains innovative features new to the banking scene because it involves a direct financial commitment by the personnel concerned with the direct purchase on the market of shares in the Bank by each manager amounting to a predetermined percentage of annual gross salary. The shares remain locked-in and unavailable for the whole duration of the scheme. The investment made by managers may increase as a result of the scheme’s structure, which involves recognition of a growing number of shares based mainly on the achievement of objectives linked to the Business Plan (results in 2019 and in 2020) and on an increase in the share price. Any bonuses earned will be paid in shares of the Bank, considered the most appropriate instrument to ensure that the interests of all shareholders and stakeholders are aligned with those of management.
11 With the exception of members of governing bodies, corporate control functions and other specific positions.
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On 20th September 2017 UBI Banca’s Management Board took note of the number of staff participating: approximately 400,000 shares were purchased on the market with management’s own funds for a total value of €1.6 million. Finally, on the following 4th October, the Bank began the programme of buying back its own shares to service the aforementioned long-term incentive scheme. For details, see the UBI Banca Management Report.
. The other projects
The other initiatives included in the “Transformation Plan” of the Business Plan are proceeding and they are regularly monitored and reported to senior management in order to constantly assess the achievement of the expected results and that these initiatives comply with the goals set.
Developments in Group governance and approval of guidelines
The UBI Banca Group was established in 2007 based on three pillars: our nature as a co- operative bank, our federal model, and our dual-board governance.
Over the last three years, the Group has pursued an important path for the company by gradually altering two of founding pillars—i.e. co-operative nature and federal model—while preserving the virtuous aspect of bond with traditional communities and with various stakeholders. This process featured: - the approval, in May 2014, of a major revision to the Articles of Association in order to evolve the UBI Banca organisation towards an “integrated mutual banking” model that remains rooted in the principle of per capita voting and that is able to promote balanced representation of the corporate bodies, stricter prerequisites for board members, and greater openness towards the markets; - the transformation into a società per azioni (joint-stock company) in October 2015, along with abandoning the mutual-banking model and reducing the number of members of the two boards from 32 to 22; - implementation of the Single Bank Project from November 2016 to February 2017, which included the merger of the seven Network Banks in to UBI Banca and the abandonment of the federal model; - expansion of the scope of operations with the acquisition, in May 2017, of the New Banks and the imminent completion of the process, which began in October 2017, of merging them into UBI Banca; - the progressive simplification of the consolidated companies and a significant reduction, of over 70%, in subsidiaries and the number of directors from 2007 to today.
While continuing to pursue innovation in governance so as to align the Group with best practices both in Italy and in Europe, it also became necessary to evaluate the third founding pillar, that of the dual-board governance model—which is not common among publicly listed corporations in Italy—in order to assess its fit with the new organisation.
The approach chosen in terms of projects was that of a working Group (Commission) consisting of members of the Supervisory Board which, by reporting periodically to the boards, was considered a more effective solution than that of full board meetings to carry out the necessary investigations. Established in June but not operational until July, this governance Commission—chaired by Andrea Moltrasio, Chairman of the Supervisory Board, and with members Mario Cera (Senior Deputy Chairman), Pietro Gussalli Beretta and Armando Santus (Deputy Chairmen), and Giovanni Fiori (chairman of the Internal Controls Committee)—with the support of both outside experts and units within the Bank (i.e. Chief General Counsel and the Supervisory Board Support Area), assessed the legal and theoretical aspects of general and industry-
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specific legislation and examined some of the most representatives cases nationally and internationally in order to determine which solutions were most appropriate for the UBI Banca Group.
On 12th December 2017, based on these assessments, the Supervisory Board approved the guidelines for revising corporate governance, which call for the adoption of the single-tiered model in that it is: (i) more readily recognisable given its popularity internationally; (ii) more efficient with regard to organisational aspects; and (iii) able to maintain the board’s keen focus on the function of Control, with the consequent involvement in making strategy decisions and in managing the company.
The model chosen is as follows: - a Board of Directors of 15 members, two-thirds of whom are to be independent; - an internal Management Control Committee of five members; - a system of nominations essentially in line with the current system, i.e. members taken from the first two slates with percentage thresholds for defining the number of minority board members, with a maximum of three.
These guidelines have been provided to the Management Board, which must now present a proposal for altering the Articles of Association, and this proposal is to be approved by the Supervisory Board. The project and the new Articles of Association will then be submitted to the competent authorities for their assessment before being presented to the Shareholders at an extraordinary meeting. The process described above, together with the subsequent revision of internal policies and procedures, is expected to be completed by the time of the 2019 meeting of Shareholders held to appoint the board members for the next three-year term.
The Non-Performing Loan Strategic Plan
On the basis of the results of a public consultation conducted in the period September-November 2016, on 20th March 2017 the European Central Bank published the final version of its guidelines on non-performing loans (NPLs). The document contains measures, processes and best practices that banks are urged to apply in their treatment of non-performing positions and which will form part of continuous dialogue with the supervisory authority.
In compliance with the provisions of ECB documents, starting in 2017 the UBI Banca Group formulated guidelines for the management of problem loans set out in the document entitled “RAF - Credit risk management policy”, with which it also introduced risk-based monitoring and a Strategic NPL Plan which was submitted to the Supervisory Authority on 17th March 2017.
In recent years the Group has made important investments both in resources and tools dedicated to the management of non-performing loans. Encouraged by the positive performance of credit recovery on bad loans and the improvement recorded in 2016 for exposures classified as unlikely-to-pay, the Group’s strategy to reduce NPLs consists mainly of an internal approach which leverages on making existing controls even stronger by means of the following: a management approach that anticipates the presumable deterioration of credit, by strengthening the early-warning system and introducing management on an industrial scale of the renegotiation processes at the first signs of arrears by means of a specialist team for these activities;12 the introduction of a business unit – separate from ordinary lending processes – to specialise in the management of unlikely-to-pay loans (drawing on the experience and expertise acquired with managing bad loans), with direct monitoring by customer segment
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by specialist staff12 and by recourse to outsourcing for “small amounts”; the proactive management of real estate collateral to benefit from the direct and induced effects of the activities of Re.O.Co., the Group’s newly formed property company;13 the introduction of the selective disposal of NPLs in “small amount” portfolios (e.g. consumer and POE [small economic operator] loans) and selected disposals (e.g. “single name”) on positions backed by “commercial real estate” collateral, also in consideration of the expected improvement in the property market. In respect of the above, on 3rd April the newly created “Credit Policies and Monitoring Function” came into operation on the staff of the Credit Policies and Monitoring Area with the task of overseeing activities to manage the actions and targets of the NPL Strategic Plan and the new activities introduced by the ECB. The new unit’s duties are as follows: • to provide support for the annual update of the aforementioned plan and to identify additional action to take to achieve its goals; • overall monitoring of results, the state of progress with initiatives and the results of individual actions, with an analysis of any failures to meet the plan’s targets.
The plan submitted to the ECB – on the UBI Banca Group “stand-alone” perimeter – furnishes details of the strategy formulated to manage problem loans deployed for the period 2017-2021 and through those actions it aims at an overall reduction in total gross non-performing loans (to €9.8 billion) with a parallel decrease in their percentage of total gross loans (to 10.4%), all by 2021.
The targets specified in the document have been revised within the scope of updating the 2017-2020 Business Plan in order to also include the New Banks acquired, but they cannot be considered an adaptation of the plan presented to the ECB given the different time period covered by the two plans. The Business Plan sets a target for reducing non-performing loans to roughly €12.9 billion (11.9% of total gross loans and advances) by 2020. As at the date of this report, the Bank is working on the annual update of the NPL Strategic Plan called for under the guidelines, and this is to be presented to the Supervisory Authority during the first quarter of 2018. The New NPL Plan will confirm the priority of the strategy for the internal management of credit recovery — which has already enabled us to surpass the 2017 targets of the Business Plan — but also the strategy to dispose of non-performing exposures. In fact the sale of a significant portfolio of non-performing loans over the next three years has been approved in order to accelerate the achievement of a percentage of gross non-performing loans below 10% between 2019 and 2020. That provision has been appropriately factored in to future scenarios considered for the purposes of estimating expected losses on first time adoption of the new IFRS 9 accounting standard.
The ECB sensitivity analysis: publication of the results
On 28th February 2017 the European Central Bank launched a specific stress test on banking book interest rate risk entitled “Sensitivity analysis of IRRBB – Stress Test 2017”, because this had been identified as one of the main risks to which banks subject to direct supervision are exposed. The purpose of the stress test, based on year-end 2016 numbers, was to provide the ECB with sufficient information to understand the sensitivity of assets and liabilities in the banking book and net interest income to changes in interest rates. Six hypothetical shocks were applied taken from the standards defined by the Basle Committee for banking supervision in the document “Standards – Interest rate risk in the banking book” published in April 2016 (the shocks consider different changes in the level and shape of the yield curve and they are conceived to identify potential vulnerabilities in the banking books of intermediaries). On 9th October the supervisory authority published the results of the exercise which considered the management of interest rate risk by the majority of European banks to be appropriate. Higher interest rates would lead to higher net interest income in the next three years for a majority of directly supervised banks, but to a small reduction on average in the economic value of their equity.
12 See also the section “The UBI Banca organisation chart” in the UBI Banca Management Report. 13 The direct effects are those auctions won by Re.O.Co. while the induced effects are those won by third parties.
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The test showed that a hypothetical increase in interest rates of 200 basis points would lead on aggregate to a rise in net interest income of 4.1% in 2017 and of 10.5% by 2019, while the economic value of equity would decrease by 2.7%. Should interest rates stay at their end-2016 level and in the absence of any credit growth, the aggregate net interest income would however decrease by 7.5%. These projections are strongly influenced by the assumptions banks make about their customers’ behaviour.
The results of the exercise were only given on an aggregate basis, but a quantitative breakdown was given of the impacts of a possible rise in interest rates over a time horizon of one year: • 19% of banks (including UBI Banca) would record advantages both in terms of net interest income and equity (banks with a predominant presence of floating rate loans); • 57% would record benefits for net interest income but not for equity; • 4% would be negatively affected in terms of net interest income, but would see a benefit in terms of equity; • the remaining 20% would be negatively affected on both measurements. To summarise, 76% of banks would show growth in net interest income and 77% a negative impact on equity.
The ECB also asked banks about the behavioural models they use to measure and manage their interest rate risk and how they assess underlying risks. The exercise revealed that most deposit models are based solely on a period of decreasing interest rates and hence might entail high model risk. In this respect we report that UBI Banca adopts a prudential approach to customer behaviour profiles in terms of the stickiness of deposits.
The stress test also illustrated how banks use interest rate derivatives for hedging risk exposures and reaching a target interest rate profile and how they adopt quite diverse “positioning” towards future interest rates movement. The management of interest-rate risk within the UBI Banca Group is, first and foremost, centred around a natural-–edge model, i.e. the natural offsetting of risks on both sides of the balance sheet, using derivative instruments only when this offsetting is deemed to be inadequate or unacceptable.
The results also helped supervisors to calibrate “Pillar 2 Guidance” as part of the SREP, with the assignment of a “bonus” or a “penalty” in terms of capital requirements. Banks were divided into four classes and for the first two, consisting of 12 and 48 banks respectively, the reduction in capital requirements reached 25 basis points in the best cases, while at the same time the increase in requirements for the other two classes reached a maximum of 25 basis points.
EBA Transparency Exercise 2017
During their meeting of May 2017, the Board of Supervisors of the EBA approved the information package for the 2017 EU-wide Transparency Exercise, which, since 2016, is carried out annually and published together with the Risk-Assessment Report (RAR). The annual transparency exercise is based solely on COREP/FINREP data as concerns methodology and scope in order to provide the market with sufficient information of the proper type. The statements were prepared by the EBA and then sent out for verification by banks and by the Supervisory Authorities. The banks were given the opportunity to correct any errors identified and then submit the correct data by way of the usual reporting channels.
On 24th November 2017, the EBA published its tenth report on the risks and vulnerabilities of Europe’s banking industry. This report was published together with information related to the EU-wide Transparency Exercise 2017, which provides the most relevant data on 132 banks in 25 European nations in an accessible, readily comparable format. In the announcement, the EBA underscored the fact that the results point to an increased resiliency of Europe’s banking industry within a favourable financial and macroeconomic landscape, with capital levels further strengthening, asset quality improving, and even profits showing modest gains.
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This was despite the fact that the EBA feels further progress in the management of non- performing loans is necessary, while long-term sustainability of the business model continues to be a challenge. The numbers as at 30th June 2017 show, in particular, an average transitional CET1 ratio of 14.3% (13.6% at 30th June 2016) and the level of non-performing falling to 4.5% (from 5.4%), which reflects the progress made in cleaning up banks’ balance sheets. Nonetheless, the level of NPLs remains historically high, although coverage has risen to 45% (from 43.9%) with a high degree of dispersion from one country to another. Having benefitted from the favourable landscape, profitability appears to have improved slightly, but it remains a key challenge for the entire banking industry in Europe. Debt markets have remained stable on low levels of volatility. Accommodative monetary policies and buy-back programmes by the central bank have helped keep funding costs low; nonetheless, emission volumes for the first quarter decreased compared to the same period of 2016. In a landscape of rapid technological change, the greatest risks remain tied to network attacks and data security.
Outcome of SREP 2017
On 28th December 2017, upon completion of the Supervisory Review and Evaluation Process (SREP), UBI Banca received a communication from the ECB specifying the capital requirements to be met for 2018: • a new minimum phased-in CET1 requirement of 8.625%14, as compared to the 7.5% set for 2016; • a minimum SREP Total Capital ratio requirement of 10.25%.15 If the capital conservation buffer of 1.875% is added, this then gives a minimum requirement in terms of the regulatory total capital ratio of 12.125% (11% in 2017). The requirements for 2018 also take account of the inclusion of the three banks acquired in May 2017. As at 31st December 2017, having posted a phased-in CET1 ratio of 11.56% and a phased-in Total Capital Ratio of 14.13%, the Group is positioned well above the minimum requirements.
14 The result of the sum of the minimum Pillar 1 capital requirement (4.5%), the Pillar 2 requirement (2.25%) and the capital conservation buffer (1.875%), the latter of which calculated according to the transitional phased-in rules laid down by the Bank of Italy. (In 2017, the CCB was 1.25%, whereas it will reach 2.5% in 2019.) 15 The result of the sum of the minimum Pillar 1 regulatory capital requirement (8%) and the Pillar 2 requirement (2.25%).
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Commercial activity
In 2017 the UBI Banca Group's distribution network changed significantly as a result of the acquisition and integration of the New Banks, which primarily operate in Central Italy. A new distribution model was also implemented as part of the integration process, redesigning both the local network and some aspects of the internal organisation of branches. To ensure uniform distribution between areas, following the retirement of the federal model — also completed in 2017 — Italy was divided into seven Macro Geographical Areas and 48 Local Departments, which are accompanied by two specialised divisions, Corporate and Investment Banking and Top Private Banking.
At the level of customer segments, commercial activity targeting the Private Individuals segment focused on supporting individuals and families by granting loans, providing investment advice and facilitating transactions. Lending initiatives were mainly aimed at: • support for planned home purchases; • consumer credit, particularly for employees and pensioners, as both traditional loans and loans secured by one-fifth of salary or pension. In asset management, commercial activity — tailored to customers' needs and risk profiles and carried out through advisory service – pursued the goal of improving the portfolio efficiency and diversification (consistency with model portfolios). In addition, given the low interest rates for customers, initiatives also aimed to redirect deposits to asset management and insurance products. Particularly worthy of mention during the year were the distribution of asset management products featuring a “window placement” mechanism and the increasing interest in non-traditional — typically multi-sector — insurance products, especially Sector III products.
Finally, the payment instruments available to customers were expanded to include the new Hybrid credit card, a flexible, innovative instrument that also allows customers to pay off individual charges according to an instalment plan.
In the Corporate segment, Corporate Account Managers maintained a greater presence at the offices of retail business and corporate customers with the aim of providing stronger support for local businesses. Initiatives primarily focused on supporting working capital needs and investment plans, as well as use of more traditional forms of credit, with assistance and advice from specialised business lines. The Group made considerable efforts to expand its capacities in order to develop specialist skills in various fields.
The new distribution model
Customer segmentation was revised when the new distribution model was adopted: the results of the application of asset thresholds were supplemented by the findings of a behavioural analysis aimed at identifying customers with the greatest development potential, to create portfolios that are as uniform as possible and thus to improve commercial focus. Branch roles were rationalised by adding new positions dedicated to supporting business in the Private Individuals segment and by improving coverage of the Medium-Sized Enterprises segment. In particular, the following roles were created: . Local Department Family and Private Individual Advisor: a roving position tasked with enhancing the commercial activity of Local Departments with regard to investment and financing products; . Customer Assistant and Digital Development: a position charged with providing assistance to customers and supporting the spread of the use of direct channels.
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In addition, advisors for Small and Medium-Sized Enterprises (SMEs) formed Business Teams to improve the management and development of customers in the medium-sized enterprises segment, consolidating the network's expertise. SME customers were thus almost completely centralised with the main branches: in fact, 71% of customers are managed by Teams. Each Team is composed of two or three advisors, each of whom has his or her own customer portfolio to handle, and an assistant who provides support for operational and administrative aspects. To complete the new distribution model, three branch models were designed, each with its own size and range of services: . Flagship: large branches featuring an innovative design and layout and located in highly visible areas; . Full: branches that serve all customer segments, with at least one full time equivalent (FTE) in each role; . Traditional: medium and small branches.
A new physical branch layout is currently being implemented with the aim of creating a distinctive new image for the Group. Its key features are a reception area in support of customers' needs and a digital education area. The restructuring plan, which was launched in 2017 at three pilot branches located in Bergamo and Milan, is set to continue over the next three years, extending to approximately 700 branches.
Finally, in May a new project entitled “Liberare tempo commerciale” (“Freeing up commercial time”) was launched. This project seeks to reduce the time that network personnel devote to primarily “administrative” activities, while also increasing customer service levels. An initial series of measures was then implemented under the supervision of the Commercial Operations Service. In particular, the following projects were overseen in 2017: . in anti-money laundering, the initiative “A Risk-Based Approach to Customer Due Diligence: Revision of the Approach and Operations” was launched and a series of measures were taken to guide the network's efforts to monitor risks more efficiently by identifying the positions at the greatest risk of money-laundering, while also facilitating the customer due diligence process. These results were achieved by leveraging the potential of technologies based on big data, which allowed the construction of a database of the Group's entire “customer pool”, while also calibrating activities according to risk profile; . the succession management procedure is currently being digitalised and simplified: in the first half of 2018 this will involve providing the network with a dedicated application that will simplify the processes of authorisation and release of the decedant's assets. Cases will be sorted by the type of the assets concerned to reduce processing times and administrative formalities, which are currently performed by heirs and network without distinction; . in mortgage lending processes, and in the granting phase in particular, the main causes of inefficiency were identified in concert with network personnel and the resultant measures were designed to develop IT systems and simplify processes. An initial project involving the simplification of support forms has already been completed. In 2018 work will focus on processes involving parties external to the Bank (such as notaries, insurers and real-estate appraisers); . the Advances on Invoices process began to be redesigned in close coordination with initiatives involving the digitalisation of customer-side processes, according to an integrated physical/digital approach intended to improve the customer and employee experience, increase process execution speed, thereby reducing headcount, and increase process quality, driving a reduction in time-to- market and operational risks; . the roadmap for the development of network operations continued to be implemented through the design of a plan for the gradual digitalisation of forms and contracts, accompanied by an extension of the use of the advanced electronic signature and related supporting devices (such as tablets).
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Commercial activity: private individual customers1
By launching its new Hybrid credit card, the Group sought to maintain its position of leadership in the electronic payments sector, replacing its Libra credit card with a flexible, innovative instrument. The Hybrid card functions as a chip and pin credit card with full repayment of the balance and with the option for the primary cardholder to convert one or more charges of €250 to €5,000 to an instalment plan (instalment function), subject to the applicable credit limits, in return for payment of the fixed deferred monthly fees indicated in each instalment plan. The new card – in addition to being paired with the modular account QUBÌ – is also available with personalised card designs featuring NBA, Juventus and Atalanta themes.
In mortgage lending, the Group further enhanced its ability to offer specialised consulting both in-branch and remotely, through remote mortgage specialists. Potential customers interested in UBI Banca's products can decide to work with an expert directly at a branch or conveniently over the telephone or through a text or video chat system – a true multi-channel experience. On a related note, efforts to reinforce positioning continued in 2017 with the launch of the communications campaign “Ogni casa è possibile” (“All homes are possible”), dedicated to supporting individual home purchase projects in the various customer segments. a competition with 200 IKEA gift cards with a value of €2,000 each as the prizes was held.
In the consumer credit segment, an important communications campaign was conducted with the aim of raising awareness and reinforcing the positioning of the UBI Banca Group's products.
There were also continuing efforts to increase access to products and services according to a multi-channel approach, involving the development of new digital platforms that permit first- adopters to make combined use of physical channels (the traditional branch network) and the various remote channels (contact centre, ATMs, Internet banking and mobile banking). In particular, marketing of consumer loans and purchase and renewal of car insurance policies via the Internet channel were launched in 2017.
In investments, asset management and life insurance policies continued to be offered, and financial education of customers played a significant role in connection with marketing of fund-based savings schemes. In particular, mention should be made of the investment savings plans of UBI Pramerica and the new individual savings schemes (ISS, in Italian “PIR”). The communications campaign “Un PAF per il tuo domani” (“An investment savings plan for your future”) was dedicated to these instruments at all branches of the Group's banks, including the recently acquired New Banks.
Efforts to comply with the new MiFID II regulations, which entered into effect in early 2018 and are intended to enhance investor protection and improve the transparency of the financial markets, also had a strong impact on the reporting year. Among the aspects that will contribute to increasing investor protection, mention should be made of: . the preparation of new documentation to be delivered to customers to provide information on the characteristics of financial instruments; . the expansion of the periodic statement to include an explicit account of all costs and expenses borne by the customer during the year; . the offering of products increasingly suited to the demands of customers with differing needs and expectations and the introduction of a cost/benefit check when financial products are purchased and sold.
Compliance with MiFID II required certification of the investment competencies of the network of advisors, including through the mapping of their financial knowledge and expertise. Where
1 The private individual customers served by retail branches are divided into two categories: Mass Market (natural persons with financial assets – direct and indirect funding – of less than €100,000) and Affluent (natural persons with financial assets of €100,000 to €1,000,000).
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necessary, new training courses were designed to ensure that customers receive increasingly professional advisory service.
Lastly, the Group continues to develop its advisory models to suit the investment needs and financial profiles of its customers in accordance with the new regulatory guidelines.
Commercial activity: Corporate2:
The most important initiatives of 2017 are listed below.
“Uscire per Business” (“Going Out for Business”) Measures in support of small and medium enterprises (SMEs) continued in 2017, confirming the importance of an approach focused on customer relations. In particular, “Uscire per Business” initiatives continued, with the aim of supporting corporate customers with the need to increase short-term credit facilities and to finance investments, with the involvement of loan evaluation personnel to streamline the granting process and of UBI Leasing and SF Consulting to ensure effective exploitation of the tax relief offered by the Piano Nazionale Industria 4.0 (“National Plan for Industry 4.0”) legislation through a specialised consulting service.
Sectoral approach and supply chain credit Emphasis continued to be placed on the sectors of the economy in which Italian businesses have a reputation for excellence — food and agriculture, machine tools and home furnishings — with the goal of providing corporate customers with a distinctive service that includes dedicated offers and specialised advice. A new “sectoral approach” also began to be studied, adapting commercial and credit guidance to specific sectors to ensure even more effective support for corporate customers, in addition to a new “supply chain credit” process intended to create bespoke offers to suit each supply chain's needs, after identifying the corporate customer at the beginning of the supply chain and all its strategic suppliers. • Commercial initiatives in the farm and food sector The Group devotes particular attention to the Italian farm and food sector, which is typically highly export-intensive, as remained the case in 2017, when it recorded a volume of more than €40 billion (+6% on 2016, due in particular to wine, cured meats and cheeses), favouring credit products that develop production chains, with an eye to the memorandum of understanding signed with the Ministry of Agricultural Policies in 2016.
Agreement with Confindustria Various co-operation agreements were signed in 2017. Particular mention should be made of the co- operation agreement with Confindustria aimed at ensuring that Digital Innovation Hubs (DIHs, technology districts created to help SMEs adapt to the new industrial revolution) function optimally and at creating a dedicated lounge environment within the framework of Borsa Italiana's Elite programme3. The UBI Banca Group has made available specialised personnel tasked with fostering greater synergies between the Bank, DIHs and enterprises by offering participating SMEs specific consulting services (in some cases through the Group's specialised consulting firms, such as SF Consulting), support with access to standard and subsidised credit, joint training in co-operation with Confindustria and medium- /long-term products funded by a loan pool of €1 billion (the “Research, development and innovation loan pool”). Now that it is participating in Borsa Italiana's Elite Programme, the Group is able to support premier corporate clients in implementing their growth plans by providing high valued-added services such as assistance with cultural and organisational change, facilitation of internationalisation and access to capital markets.
2 The corporate customers served by Retail Branches and Corporate Centres are divided into: Micro-Enterprises (small businesses with turnover of less than €300,000 or total systemic credit facilities of less than €50,000); Medium Enterprises (businesses with turnover of €300,000 to €10,000,000 or total systemic credit facilities of €50,000 to €6,000,000); and Core Corporate (businesses with turnover of €10,000,000 to €250,000,000 or total systemic credit facilities of €6,000,000 to €150,000,000). 3 Elite is the London Stock Exchange Group's international programme in co-operation with Confindustria dedicated to the most ambitious companies with solid business models and clear growth strategies; the programme provides access to numerous financing opportunities, improves companies' visibility and attractiveness, puts them in touch with potential investors and assists management with the process of cultural and organisational change. New Italian companies are presented through the established lounge model with the innovative goal of creating a dedicated environment that places the bank's customer in the middle of a web of opportunities and value.
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Formula Impresa The new Formula Impresa product suite, intended for micro-enterprises and SMEs, began to be marketed in the second quarter of the year. The suite is divided into eleven different lines calibrated for the customer's business sector and operations. Each package consists of a defined number of products, including a bank account, selected to meet a range of needs. The new package-based offerings were designed to simplify and adapt their predecessors to changed market needs. Over 15,000 Corporate Formula packages were activated in 2017, in just nine months.
Capital Goods Loan Pool (known as the “Nuova Sabatini”) These are loans granted to small and medium enterprises some of the interest payments on which are subsidised by the Ministry for Economic Development. The subsidy was re-activated with effect from 2nd January 2017 after new funds were made available by the Ministry. In support of the transition to a digital economy and to increase innovation and efficiency in Italian business, investments in digital technologies and waste tracking and weighing systems were also made eligible for financing and subsidies, with a deadline of 1st March 2017 for enterprises to apply to banks for access to subsidies. A total of 378 loans with a collective value of €111 million were finalised in 2017. At the end of December there were 946 outstanding loans with a residual balance due of €210 million.
Initiatives in co-operation with the European Investment Bank (EIB) During the year, the UBI Banca Group continued to offer medium to long-term loans (maximum term of ten years) to companies under attractive terms thanks to the positive collaboration with the European Investment Bank. In particular, in 2017 approximately 190 loans totalling approximately €136 million were granted as part of two loan pools intended to support investments by SMEs and mid-cap companies. Approval of a loan pool intended to finance social activities is planned for the first half of 2018.
Initiatives benefiting victims of natural disasters • Measures for populations hit by the 2012 earthquake in Emilia Romagna, Lombardy and Veneto Unsecured loans continued to be granted under the agreement between the Italian Banking Association and Cassa Depositi e Prestiti (a state controlled fund and deposit institution) dated 17th December 2012 known as “Plafond Ricostruzione Sisma 2012” (the “2012 Earthquake Reconstruction Loan Pool”). The loans in question have terms of 15 to 25 years, depending on the amount of the loan. The loans are repaid solely using the tax credit granted to the borrower and then transferred by the borrower to the Bank. In 2017 UBI Banca finalised 62 loans, which had a residual balance due of approximately €8.3 million at the end of 2017. • UBI Banca Group loan pools for earthquake victims in the regions of Lazio, Marche, Umbria and Abruzzo To support victims of the series of earthquakes that began on 24th August 2016, loan pools totalling €150 million were formed to repair and rebuild homes and businesses and to earthquake-proof homes. • Legally mandated suspension of repayment of UBI Banca loans In the 131 municipalities officially damaged by the 2016 earthquake, as required by law UBI Banca suspended repayment of mortgage and other loans for businesses and mortgage loans for first homes rendered unfit for use or destroyed until 31st December 2017. This suspension will continue to be applied throughout 2018, as mandated by the most recent Annual Finance Law (until 31st December 2020 for businesses and first homes in the “red zone”). • Agreement between the Italian Banking Association and Cassa Depositi e Prestiti on the “Central Italy Earthquake Loan Pool” The Group adhered to the above agreement of 18th November 2016 for the granting of subsidised loans to repair and rebuild properties damaged by seismic phenomena. These loans, which are guaranteed by the Italian central government, are funded by the Cassa Depositi e Prestiti and issued at fixed interest rates established by the latter institution, with terms of 15 to 25 years. The borrowers are eligible for a tax credit equal to the instalments due, which they transfer to the Bank as the sole means of repayment of the loans. In 2017 UBI finalised ten loans amounting to approximately €1.3 million. • Agreement between the Italian Banking Association and Cassa Depositi e Prestiti on the “Central Italy Earthquake Moratorium Loan Pool” A further agreement dated 3rd July 2017 is in effect between the two above institutions governing the granting of subsidised loans to be used to pay suspended 2017 taxes due by 31st December 2017 (2017
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loan pool) and in 2018 (2018 loan pool), intended for business owners and self-employed workers in the areas affected by the seismic events. The loans, which bear interest at a rate set by the Cassa Depositi e Prestiti (0.75% for the 2017 loan pool), have a term of 85 months (including a pre-amortisation period of 25 months). Principal is repaid by the borrowers, whereas the bank receives a tax credit equivalent to the interest payment (on the single date of 31st December 2018). The loans are guaranteed by the Italian central government and thus have no impact on capital (RWAs). At the end of November the Group had finalised 1,079 loans totalling approximately €49 million drawing on the 2017 loan pool.
Commercial activity of divisions focused on HNWIs
Top Private Banking
UBI Top Private Banking is the division of the UBI Banca Group dedicated to the private banking market.4 It currently manages assets of over €35.4 billion through bespoke service models tailored to each customer segment (private individuals, business owners, enterprises and institutions) and wealth bracket. The commercial network currently consists of 27 Top Private Banking Centres located throughout Italy, where 261 Private Relationship Managers are based. In 2017 the expansion process, involving the finalisation of the Single Bank project through the merger of the Network Banks into UBI Banca and the acquisition and subsequent merger with the New Banks, received further impetus from the project “Sviluppo Emilia Romagna” (“Development of Emilia Romagna”), involving the participation of expert senior personnel with specific knowledge of the areas in which they operate.
Through its Private Relationship Managers, this division's service model is capable of meeting customers' every need, ranging from the core wealth management service (based on bespoke advisory solutions) to family advisory service, which provides solutions for managing, governing and protecting the wealth of households and companies and for succession planning, including trusts and fiduciary companies, through specialised offices in Italy and abroad. Digitalisation of the services offered began during the year, involving investments in technology that permit customers and Private Relationship Managers to interact in an innovative manner on wealth management matters. Several important financial events focusing on private banking customers, organised by UBI Top Private Banking in co-operation with UBI Pramerica SGR, were also held in 2017 at the main offices in Italy, with a focus on economic issues and financial market trends.
Corporate & Investment Banking
In 2017 the Corporate & Investment Banking Division completed the process of centralising the Group's large corporate customers5 with the Division's offices. There are approximately 700 directly served large corporate accounts, managed directly by the Division through its 26 Global Relationship Managers, with the aim of increasing the level of intensity of relationship coverage. During the year the Investment Banking structure was revamped according to a new organisational design better suited to pursuing the advisory- centric service model dedicated to both directly managed large corporate customers and mid- corporate customers, which are served by the Macro Geographical Areas. In particular, specialists have been added to support relationship managers in analysing the corporate finance needs of the Group's customers. By contributing their direct knowledge of trends in specific sectors and segments of the economy, these specialists will help enhance the
4 UBI Top Private Banking manages private banking clients with financial wealth (direct and indirect funding) of greater than €1 million. 5 Large corporate customers include enterprises and groups with turnover of more than €250,000,000 or total systemic credit facilities of more than €150,000,000 and a high level of financial sophistication.
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network's ability to advise customers and to offer bespoke solutions in merger and acquisition advisory, access to capital markets and corporate finance. This is believed to represent a further improvement in the efficacy of our offerings for corporate customers to include a full range of traditional and corporate and structured finance products and services. According to an approach based on coordinated planning with customers, the Corporate & Investment Banking Division can thus support companies' growth and development projects over time.
Commercial activity in specialist areas and companies
UBI Welfare
Company welfare is an increasingly widespread means of meeting the needs of workers and their families by supplementing public service in the areas of healthcare, pension planning, education, leisure time, protection and work-life balance. The Group has many years of experience in managing company well-being programmes for its employees and is distinguished by its many initiatives, some of which are implemented in co-operation with socially beneficial companies and third sector organisations.
The innovative UBI Welfare service was launched in March 2017. The service is intended for companies of all sizes that wish to implement distinctive programmes for their employees. UBI Banca decided to be the first-mover in Italy's banking sector by offering specific, high-quality solutions that help companies become more competitive, improve productivity, create a better company environment, and attract and retain talented personnel, thus increasing the well-being of their local communities.
Among its other benefits, the service provides access to the benefits envisaged by the law6, in some cases eliminating the “tax wedge”, thus making companies more competitive and increasing workers' purchasing power, while also improving their satisfaction levels.
In keeping with its mission of maintaining close ties to the community, UBI Banca aims to build a “welfare ecosystem” able to meet the needs of individuals and companies by creating a true and genuine proximity network in which companies and third sector operators can become suppliers of welfare services: a network of well-being that provides integrated, supplementary social protection. The new service offers companies full support throughout the entire process of designing and implementing their plans, from support in surveying their employees' real needs to providing information and training to the company's management and employees to raise awareness of the related benefits and increase the initiative's success; from provision of a flexible, customisable platform to manage performance bonuses, suited to companies of all sizes and needs – with extensive options for receiving bonuses in the form of goods and services – to the use of the bank's financial instruments to normalise cash flows (relating, for example, to the payment of bonuses during the year).
The service is available in various configurations intended for: - companies interested in implementing a complete, flexible welfare plan based on an end-to- end solution according to a model that can be customised to suit their needs, size and type of organisation (UBI Welfare); - companies seeking a basic solution to provide flexible benefits or manage the part of remuneration according to collective bargaining agreements, such as the agreement for the mechanical engineering sector (UBI Welfare Start);
6 In order to increase the competitiveness of Italian companies, the 2016 Legge di Stabilità (“stability law” – annual finance law) and the 2017 Legge di Bilancio (“Budget Law” – law to approve government accounts) introduced significant tax benefits on bonuses linked to results (i.e. for increases in productivity, profitability, quality, efficiency and innovation) that are paid by companies in the private sector and also on workers’ profit-sharing schemes as follows: - the application of a 10% flat rate tax to replace IRPEF (personal income tax) and the relative additional personal income taxes; - complete elimination of the tax wedge if employees choose to receive their productivity bonuses or share of profits not in cash, but in the form of company welfare services, with advantages both for the companies and for the employees.
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- companies that due to their limited size or other reasons opt for a network solution (business networks) based on a platform with standard features (UBI Welfare Network).
The UBI Welfare Service – launched with the support of a print, ratio and Web communications campaign targeting business owners – is being marketed increasingly successfully by the entire UBI Banca distribution network, due in part to the presence of Welfare Specialists spread throughout the country: these are a new type of professional who have completed a specific training programme and are capable of assisting entrepreneurs in structuring and managing their welfare plans.
During the year, relationship and development activities continued with the main employers and trade associations, with very positive feedback in terms of appreciation and interest in the proposals. This led to the signing of various collaboration agreements.
The year also saw the launch of the UBI Welfare Observatory, created with the scientific coordination of ADAPT, an advanced industrial relations and labour training programme created in 2000 by Professor Marco Biagi, which will soon result in the publication of the first Report on Welfare, based on observations made in the UBI Banca Group's areas of operation.
Abroad
Opening up new foreign markets remains an indispensable target/condition for Italian businesses, given the continuation of the contained growth recorded in the domestic market in recent years. UBI Global Transaction Banking (UBI GTB) is the Group Area specialising in foreign operations, providing specific advisory and operational support for trade finance customers. UBI GTB has a network of commercial specialists throughout the area where the Group operates and 26 operational centres in Italy. The advice and operational support provided include a wide range of products focused on the management of contracts and payment methods for the foreign import and export activities of Italian companies, with particular attention to covering the risks related to these activities (country risk, foreign bank risk, currency risk etc.).
In 2017 UBI Banca reinforced and rationalised its network of GTB specialists. It also organised joint commercial initiatives between the branch network, corporate centres and GTB specialists.
For over 20 years the UBI Banca Group has adopted a limited direct presence strategy (mainly through Representative Offices) in the areas of the world of the greatest interest for Italian exports. There are currently eight Representative Offices around the world (New York, Sao Paulo, Casablanca, Moscow, Dubai, Mumbai, Hong Kong and Shanghai) and five Foreign Branches in Europe (Madrid, Munich, Antibes, Menton and Nice). These units, together with a co-ordinated range of export-related banking and financial products and services and specialist services offering advice on planning and researching foreign markets, meet the foreign growth requirements of Italian SMEs.
The advisory services offered by the Group, both directly through its Representative Offices and through partnerships with specialised Italian and foreign companies, is intended to support companies with their projects to go international as well as helping them during the implementation stage of their operational plans. The consultants working with the Group and our close network of relationships with the foreign banks that UBI Banca does business with (over 2,000), enable us to support the needs of companies in over 140 foreign countries. This year the Bank has once again received quality awards for transaction management from leading organisations around the world.
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Leasing
Over the course of 2017 UBI Leasing formulated its commercial policies using the existing medium to long-term strategic guidelines, on the basis of two main priorities: . a focus on machinery and equipment and auto products, in order to rebalance the product mix of contracts concluded by reducing the impact of the real estate property sector. . greater emphasis on the retail market, which is growing compared with previous financial years and is the first indicator of dynamism in the leasing business. Great and constant attention has been paid in developing business to the allocation of the risk and profitability of individual transactions, which has positioned UBI Leasing among the top ten operators in the Italian market in terms of financing. Market conditions have become more competitive and particular care has therefore been taken with regard to the profitability of transactions, forgoing possible opportunities where the profit margins were considered unsatisfactory in terms of RORAC.7 UBI Leasing has continued to offer its clients medium to long-term financing at advantageous conditions for up to twelve years, partly thanks to the Group’s long-term co-operation with the EIB: around 500 finance contracts were concluded in 2017, amounting to around €100 million using subsidised funding provided by the EIB. As concerns the relationship with the banking distribution network, intense activity to develop potential target customers has continued during the year in conjunction with UBI Banca, while maintaining the positive trend for contracts signed, especially in the retail sector, and taking full advantage of the opportunities resulting in part from current tax incentives to support businesses. In parallel with the above, there has been an internal focus on identifying any additional product and/or process initiatives that would further stimulate the placement of machinery and equipment and auto products.
The UBI Leasing’s commercial unit provided intense training for the network during the first quarter of the year, especially in relation to the provisions of the Finance Act that have an impact on company investments (super/hyper-amortisation and the Sabatini Law). A specific commercial initiative for companies investing in “Industry 4.0” machines was launched during the second quarter. Furthermore in the fourth quarter, the Non-Profit Leasing initiative was launched. It is designed to promote and support projects that benefit society by means of special concessions and procedures, as long as all aspects of the project (the applicant, the purpose of the transaction and its impact on the community and the environment) are consistent with the objective of having a significant social impact on the communities in which UBI Leasing operates. In addition to the benefits associated with leasing, this product range offers clients more attractive terms and conditions than those normally applied.
Lastly, efforts targeted at government business have continued with constant monitoring of tenders and participation in those considered most interesting and profitable, using an approach that focuses on the local areas in which the Bank operates, particularly for selected players with good repayment capacities.
UBI Factor
The year 2017 saw a considerable change in trends on the domestic factoring market mainly attributable to a substantial fall in prices and excess liquidity in the system, circumstances that led to a significant increase in competition, above all in the Large Corporate segment. In this market context, UBI Factor has undertaken a considerable overhaul of its organisational structure which involved the company’s distribution network (bringing it into line with the new commercial structure adopted by UBI Banca with the Single Bank model), its
7 A management accounting target used to calculate the return below which transactions are not accepted: it is calculated by using the expected results of the transactions relating to a financial instrument, project or operational activity as the numerator and the capital to be invested, adjusted to take account of the associated risks, as the denominator.
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commercial processes and the units and systems used to monitor the performance of its business development carried out jointly with the banking distribution network . Over the course of the year and in line with the corporate mission of the captive companies in the Group, UBI Factor worked with the Macro Geographical Areas to launch a business development process with the aim of achieving an appreciable increase in the number of new Mid Corporate clients. At the same time, the company has maintained its commitment to business development in the Large Corporate segment through joint commercial action with the UBI Banca Group Corporate and Investment Banking unit.
Prestitalia
Prestitalia has continued its successful distribution of salary and pension-backed loans, enabling over 25,000 employees and pensioners to fulfil their plans and meet their financial requirements in a quick and simple way.
The year 2017 was particularly intense for Prestitalia which faced major commercial, regulatory and technological challenges, but it ended with positive results: the total grants, markedly up compared with the previous year, allowed the Company to strengthen its position among the leading operators in the salary-backed loan sector, with a market share of around 8% in terms of loans granted. This growth involved a significant organisational effort that Prestitalia was able to achieve partly as a result of the increasing level of automation and innovation used to support production processes, making it possible to maintain high levels of efficiency. The company, in agreement with the Parent, promotes self-regulation initiatives, considering them to be effective tools for overcoming the difficulties of the sector and ensuring maximum protection for clients in order to develop the market in a sound and healthy way. During 2017 Prestitalia adhered to the new Self-Regulation Code for Financial companies, based on a memorandum of intent signed by Assofin, the Italian Consumer and Mortgage Credit Association, and the main consumer associations. This memorandum is intended to: . increase consumer protection, by preventing the possible occurrence of cases of over- indebtedness; . improve the essential transparency of customer relationships, by increasing levels of awareness and knowledge of the costs that will be incurred and product characteristics; . ensure the maximum integrity and operational efficiency of all the parties involved in the distribution chain and incentivise the sales networks to seek new financing contracts, rather than renewing existing ones.
Prestitalia operates throughout Italy through its own network of financial agents and the UBI Banca Group branch network, where two targeted product ranges are available: . Creditopplà Relax: a loan for pensioners with 7,073 loans amounting to approximately 85.4 million euro concluded during the year; . Creditopplà Quinto: a loan for employees with 3,702 loans amounting to approximately 72.9 million were concluded during the year.
IW Bank
IW Bank has continued to develop in 2017, improving its range of products and services and the related operational and commercial support tools. Attention is drawn to the implementation of the “new front end” development project by enabling all customers to use the entire range of services offered on the bank’s platform, which has been upgraded with a new home banking service, banking apps and trading apps. Development activities for new products and services have also continued with particular reference to the following initiatives: . broadening the range of asset management products that can be distributed through indirect networks with the launch of the new foreign domiciled funds (e.g. a new distribution agreement with Allianz GI), the launch of UBI Pramerica “Individual Savings
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Scheme” products, extended distribution channels for funds that were already available online (Soprarno, Natixis, Goldman Sachs and Candriam) and the launch of new services linked to the existing product range (e.g. the Threadneedle Capital Accumulation Plan); . innovation aimed at digitising operational processes distributed through indirect networks with an increase in the range of financial instruments that can be distributed using the “Web Paperless” service, with the progressive inclusion of funds from new investment houses and the implementation of a new service, the “Firma Elettronica Avanzata Omnicanale” (omni-channel advanced electronic signature), for the digital management of the various stages involved in the provision of advisory services and, following its full implementation, the sale of products and services provided by the bank; . the introduction of a “decumulation” service linked to Aviva Unit Linked policies, which enables customers to optimise the management of cash flows from their investments; . the launch of new upfront “window” placements of specifically designed certificates for the customers of the Financial Advisors; . launch of a new trading app, developed at the end of last year, specifically designed to meet even the most sophisticated requirements of customers who trade. It was awarded the FintechAge Awards specialist prize as the best trading app for tablets and smartphones on the Italian market; . implementation of marketing campaigns and initiatives to acquire and/or develop customers (focus on trading business, e.g. local road shows) and the development of online customers by Financial Advisors (promotion focus), partly using target initiatives to support cross-selling and share of wallet.
Lastly, a project has been launched to develop the software platform for Financial Advisors with the dual objective of perfecting the existing solution and at the same time creating new functions that can support the evolved range of financial advisory services, while increasing the commercial effectiveness of the distribution network, in line with evolving trends and market benchmarks.
UBI Comunità
The 2019/2020 Business Plan, implemented during the reporting year, includes a new organisational structure and positioning with regard to the world of welfare, with the formation of the new UBI Comunità Area with responsibility for the oversight and development of business areas and commercial relations in relation both to Church and non-Church nonprofit organisations and the civil economy and also to public authorities and the various groupings of associations. With this new organisational configuration, the Group intends to further consolidate and strengthen its relations with the local communities in which it operates and the various stakeholders and economic and social realities existing in them, creating shared (i.e. social) value together with economic value for those communities. This has been achieved by promoting and supporting partnership initiatives between the public, private and private- social sectors, by increasingly greater inclusion and involvement of local communities and also by sharing the abilities, professionalism and expertise found within the Group.
Third sector and civil economy
The aim of UBI Comunità is to support investments with a high social impact and to thereby support social enterprise programmes linked to local community development and new lines of action, as well as to develop its role as a strategic partner for Church and non-Church nonprofit organisations. For UBI Banca, the third sector represents an economic and customer relationship asset of strategic importance, and requires a dedicated, specialised approach. A new service model came into operation in 2017, with the progressive introduction of a commercial team dedicated to the development and management of relations with third sector players, who are specialised consultants located in local areas with a higher concentrations of customers. New instruments were also introduced aimed at better and more effective loan processing, as well as the management and development of business. At the same time, the
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range of products and services was simplified, with the launch of new products in a “Formula Impresa Non Profit” (nonprofit business formula) package.
Public authorities and associations
The centralisation of activities for participation in calls for tenders for the management of the treasury services of public authorities and private sector institutions came into operation in 2017. This process saw UBI Comunità work to integrate the authorities managed by the New Banks acquired in May and brought the number of authorities receiving treasury management services to a total of over 2,150. The organisational structure was completed with the introduction of local contact staff to support authorities with specialised consulting. Actions were taken during the year to improve and increase the efficiency of services for public administrations, such as promotion of the Ordinativo Informatico (a dedicated payment management system), which reduces operating risks and rationalises service execution times, thus freeing up time for the performance of true public service functions. This activity led to management of 72% of all transactions via the dedicated system. Within the overall programme for the development of synergies with public and private sector institutions, UBI Comunità again maintained its commitment to assisting with financial education and increasing it, with a special focus on youth. In cooperation with “FEDUF – Fondazione per l’Educazione Finanziaria e al Risparmio” (“Foundation for Financial and Savings Education), during the year 3,475 students took part in educational events, and specific training courses were delivered involving 230 classes and a total of 5,750 students. The Bank strengthened its commitment to local development by joining the “Alternanza Scuola Lavoro” (School-Work) programme, provided under “La Buona Scuola” (“Good School”) law (Law No. 107/2015). The courses and initiatives undertaken during the academic year involved a total of over 92,000 pupils.
Customer satisfaction
The Customer Satisfaction analysis system implemented by UBI Banca has been enhanced over the years. UBI Banca now operates a monitoring system that combines continuous observation of customer satisfaction with ongoing analysis of corporate KPIs of service levels and market comparisons. The research applies different methods, depending on the issues under exploration and the characteristics of the customers concerned. The set of surveys includes both quantitative and qualitative analyses, conducted with panels of external and internal customers, as well as on-line surveys to gather opinions from Qui UBI's internet- banking users.
Every moment of interaction with the customer is monitored, analysed and reported using indicators, where UBIndex constitutes the highest level summary indicator. UBIndex is a perceived-quality indicator expressing the level of customer satisfaction by means of weighted totals from evaluations of four base components: overall satisfaction; "recommendability" (level of involvement in UBI Banca); loyalty (strength of customer-bank link); perceived added value compared to competitors.
After a period of growth in customer satisfaction recorded by the historical data series, in 2017 the retail UBIndex recorded a decline to 64 from 66 in 2016. This is nevertheless still 3 points above the benchmark (of 61). The Corporate Clients of UBI Corporate Centres continued to register a satisfaction index of 69.5 points above benchmark.8
8 The results were obtained using a combination of CATI and CAWI (computer-assisted telephone and web) methods with over 90 thousand private individual and company customers and over 10,000 customers of competitor banks.
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UBINDEX – UBI Banca (Geographical Macro Area perimeter) vs. the sector Market trends 2013 - 2017
RETAIL 64 66 64 60 UBI – Retail +6 points 58 Benchmark +8 points 59 61 55 56 53 2013 2014 2015 2016 2017
CORPORATE 69 69* 66 UBI – Corporate Centres +14 Benchmark +11 58 65 55 63 64 57 53 2013 2014 2015 2016 2017
* The 2017 data relates to Corporate Centres, following a change in the Corporate Market perimeter.
The new Top Private Banking and Corporate Investment Banking (CIB) business units achieved very positive results, with satisfaction indexes of 68 and 74, respectively. In line with past practice, a survey was conducted on companies that operate internationally: the customers who use UBI Banca’s foreign business services were more satisfied (79) than customers who do business on the domestic market.
With regard to the service levels, customers continued to maintain a strongly positive opinion on the adequacy of the range of services and the quality, with scores of around 3.5 (on a 1-5 scale). The same occurred for opinions on the level of professionalism in the distribution network in customer relationships (3.9) and for the opinion on customer telephone, chat and e-mail services, at 3.9. Constant monitoring of reports of problems by customers showed a decrease down to an average value across markets of 10%, including the most demanding ones (private banking and corporate clients). Over the course of 2017, there was a slight increase in the use of more than one bank among retail customers (up from 30% to 34%), while this share among private banking and corporate customer levels remained stable, at 60% and 90% respectively.
An analysis of customers lost reveals a picture of an ever more demanding customer, who pays close attention to relationship aspects. Decisions to leave UBI Banca are heavily determined by organisational and technological aspects, as well as costs issues.
New customers are in large part very young, with 49% belonging to the 18-24 age range, and there is a high index of satisfaction (74) among these. The choice of UBI Banca is linked mostly to factors of value for money (better terms and conditions and special offers on products) and the competence and helpfulness of personnel. Surveys were repeated again in 2017 on the product companies UBI Leasing and UBI Pramerica and the first surveys were carried out on UBI Factor and Prestitalia clients, thus further expanding the spectrum of areas analysed.
The UBI Banca Group customer surveys include an analysis of the Group’s image. In the 2017 this survey recorded good results for all attributes surveyed, with particularly positive scores for professionalism and reliability.
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Internal customer satisfaction and the Mystery Customer programme
Internal Customer Satisfaction (CSI) surveys are conducted by interviewing "internal customers", first and foremost the distribution network staff, who are asked for their opinions on different products, apps and processes provided by units at UBI Banca, UBI Sistemi e Servizi and the product companies.
In 2017, surveys were conducted on quality standards in the following areas: Systems and services; Digital services; Finance: products/services offered by UBI Pramerica SGR; Loans: support services for medium to long-term loans.
Around seven thousand staff took part, with an average redemption rate (active participation in the survey) of approximately 60%. The highest scores were for the efficacy of processes and usefulness of software apps, with these results recurring repeatedly through almost all surveys.
“Mystery Client” surveys monitor the quality delivered by the Bank during the initial stages of the purchasing process followed for products and services by a potential customer. Over the course of the year, over 1,300 Mystery Client visits were made to an equal number of branches, under this programme.9 The results were positive for all the surveys conducted. Customers tend to express greatest appreciation for their welcome and the way staff listen to their needs.
Quality Project
Expected quality is explored through qualitative and quantitative assessments, through which the Bank gathers strategic information to react as flexibly as possible to customers' changing needs and expectations. The “Quality Pyramid” is continuously reviewed and updated over the year. The same results were achieved in 2017 as in 2016 and on this basis customer trust continues to be the primary objective for the Bank. A relationship of trust is built first of all on the guarantee of a bank’s capital strength and secondly on improving the technical expertise of the staff, who are called on to deliver a straightforward, rapid and transparent service, which meets a customer’s true needs.
UBI Banca's positioning in 2017 with regard to quality items was satisfactory and indicates the Bank's ability to maintain standards close to the ideal quality recommended by customers.
During the year, the Bank commenced an initiative to support branches with low levels of customer satisfaction (“weak branches”). Under the “Progetto Ascolto” (“Consultation Project”), customers were submitted a questionnaire with which they could identify the specific needs and problems where intervention would be required. This programme, introduced in the second half of 2017, enabled 67% of the weak branches involved in the initiative to improve their satisfaction scores.
9 The visits included analysis of the range of services for the following: package accounts for private banking customers; package accounts for small businesses customers, financial consulting concerning investments; home mortgages.
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Complaint management
Complaints and claims are indicators and predictors of potential problem areas found in the product range, in the delivery of services and in the overall quality of customer relationships, and at the same time they represent valuable opportunities to re-establish and/or improve constructive and satisfactory relationships with the customers. It is therefore of central importance to pay “listen” when complaints and claims are brought to the Bank's attention, and to act with utmost care in ensuring direct, timely and thorough responses, satisfying the customers’ requests and expectations. Given this, one of the important elements pursued by UBI Banca Group in its mission of “fare Banca per bene” (to bank fairly and well) is to provide appropriate and proactive complaint management as part of its overall strategy for quality improvement in customer relationships. Complaint management represents a particularly useful source of information in striving for improved quality, integrity and transparency in the provision of services, as well as in the management of emerging problems related to production and distribution processes, both of which are essential conditions for optimisation of bank-customer relationships. Complaints therefore become the driver of a process which continues through all stages: in the planning, design, functioning and improvements of products and services, and in the implementation of operational processes. Thanks to efficient interaction between the departments assigned to complaint management and other company departments, this process has decisive impacts on service standards and on the design of the range of products and services, helping them to evolve constantly and/or to start corrective action. From an operational point of view, the use of a single software app enables immediate sharing of information on problems, as well as providing an intragroup support and coordination tool for monitoring and analysing results.
First-time complaints received by the Group in 2017 were as follows: Total UBI Banca Group 28,284 - of which UBI Banca 15,563 - of which Banca Teatina 474 - of which other Group companies 12,247
In line with the state directives on transparency and Group guidelines, customers may use all possible means of communication: traditional mail, email, certified email, fax, or links via Internet and apps. Monitoring shows that 93% of complaints were filed via remote channels and 7% using hardcopy methods.
2017: distribution of complaints by channel of receipt
Telephone/verbal 0.1% Hardcopy 7.2%
Remote channels 92.7%
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Claims and complaint management at Banca Teatina
In 2017 there were 474 complaints filed with Banca Teatina (-28% compared with the previous year). These mainly involved lending business with 360 first-time complaints relating to the reimbursement of fees and commissions and insurance costs related to salary and pension backed loans repaid ahead of schedule during the last ten years and based on contracts which are by now out of date. In the twelve months Banca Teatina processed 496 complaints, amounting to approximately 93% of those received, with settlement in favour of the customers in 57% of cases (64% in 2016), and a total amount paid remaining essentially stable compared with the previous year, almost entirely involving complaints regarding salary and pension backed loans. While the response times to complaints are already well within the limits set by the regulations in force, they nevertheless improved further, down from an average 22 to an average 17 days. Other significant data concerning complaints and claims are reported as follows: - 34 mediation applications, down from 63 in 2016; - 102 appeals to the Financial Banking Arbitrator, compared with 81 in the previous year; - 13 complaints to the various supervisory authorities, compared with 16 last year.
Complaint and dispute management in Group companies
During the year the other UBI Group companies received 12,247 first-time complaints, 3,836 repeats, 3,298 appeals to the Financial Banking Arbitrator (ABF), 17 appeals to the Arbitrator for Financial Disputes (ACF) and 134 complaints to the supervisory authorities. The companies themselves were also invited to participate in 434 mediation processes. The complaints received by Group companies are almost completely (88%) due to those recorded by Prestitalia related to requests (still very frequent throughout the sector) for reimbursement requests for loan fees and commissions and insurance costs related to salary and pension backed loans repaid ahead of schedule over the last ten years. These complaints continue to consist of class action law suits brought by “specialised” law firms, for which appropriate provisions have been made. The share of complaints received by IW Bank was 11%, while only very marginal numbers related to UBI Leasing, UBI Factor and UBI Pramerica. In 2017 Group companies processed 12,209 complaints, 3,875 repetitions, 3,220 ABF appeals, 14 ACF appeals, 134 applications to the supervisory authorities and 423 mediation processes. In particular, 60% of first-time complaints were settled by accepting the arguments presented by the customers, unchanged compared with 61% in 2016, whereas payments were only made to applicants in 61 mediation cases.
Claims and dispute management at the Parent
For information concerning the Parent please see the contents of the UBI Banca Spa management report.
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The distribution network and market positioning
The branch network of the Group
As at 31st December 2017 the UBI Banca Group's distribution network consisted of 1,843 branches, of which 1,838 in Italy, distributed as reported in the table “The branch network of the UBI Banca Group in Italy and abroad”, having fallen to 1,842 at the date of this report1. The various changes during the year included: action taken to streamline the distribution network following the completion in February of the second stage of the “Single Bank Project”, which led to the closure of 69 branches [6 of the former BPB, 35 of the former BBS, 5 of the former CARIME, 14 of the former BVC and 9 of UBI Banca (the former BPCI)] and of 13 mini-branches (2 of the former BPB, 9 of the former CARIME and 2 of the former BVC), while 52 branches were transformed into mini- branches [16 of the former BPB, 23 of the former BBS, 7 of the former BVC and 6 of UBI Banca (the former BPCI)] and 7 mini-branches of the former CARIME were converted into branches2; . the streamlining of the distribution network that accompanied the first and second phases of the integration of the New Banks in October and November3; the closure of an additional 16 mini-branches of UBI Banca (not part of the mass closures mentioned above)4 and the closing of five branches of Banca Teatina with effect from 1st June 20175. We also report that the transfer to UBI Banca of two foreign branches in Munich (Germany) and Madrid (Spain) belonging to UBI Banca International Sa in preparation for the disposal of the subsidiary, which entered into effect from 1st November, with the resulting closure of the foreign branch in Luxembourg.
The branch network of the UBI Banca Group in Italy and abroad
31.12.2017 number of branches
UBI Banca Spa 1,762 (1 ) The figure includes 3 foreign branches. of which North West Macro Geographical Area (1) 199
of which Macro Geographical Area Milan and Emilia Romagna (2) 225 (2) The figure does not include the 12 units which specialise of which Bergamo and West Lombardy Macro Geographical Area 303 exclusively in pawn credit. of which Brescia and North East Macro Geographical Area 235 (3) The figure is e inclusive of 2 foreign branches. of which Macro Geographical Area Latium Tuscany Umbria 265 of which Macro Geographical Area Marches and Abruzzo 272 (4) The figure also includes financial advisors belonging to the Wealth Management Area of the new IW Bank Spa. of which Macro Geographical Area South 257
of which branches not comprised within Macro geographical areas (3) 6 IW Bank Spa 21 Banca Teatina Spa 60 TOTAL 1,843
Total Branches in Italy 1,838
Financial advisors (4) 758
1 The slight change that occurred compared with the end of the year, relating to January, is the result of the closure of the Manerbio mini-branch in the Brescia and North-East Macro Geographical Area. 2 Details of the closures carried out with effect from 20th February 2017 are given in the section “The distribution network and market positioning” in the consolidated management report of the 2016 Annual Report which may be consulted. 3 For the details of the closures undertaken with effect from 23rd October and 27th November 2017, see the section “Significant events that occurred in 2017” in the Consolidated Management Report. 4 Frosinone (at the air and naval military base) in January, Succivo in April, Jesi (at New Holland), Offagna and Pozzuoli (at the air and naval academy) in May, Gallarate, Marone and Busto Arsizio in June, Saronno in July, Mantua and Chiari in September, Rome Via Fucini and Monte Marenzo in October, Rome Vigna Stelluti and Rome Via Aurelia 504 in November and Camerata Cornello in December. 5 Lanciano and Monteodorisio (Chieti); Pescara, Via Alento 117; Rome, Viale Castro Pretorio 114; Perugia, Via della Valtiera 9.
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A full list of all Group branches in Italy and abroad is given in the final pages of this publication. The situation represented refers to the date of approval of the draft financial statements and thus does not reflect the merger with Banca Teatina, which will be consummated on 26th February 2018, nor the closures to be undertaken on that same date, as a result of which the Group will have a total of 1,822 branches, of which 1,817 in Italy.
Action taken on branches in 2017
Closures of:Mergers of: Transformation Transformation Branch of branches of mini- mergers/ mini- mini- mini- into mini- branches into acquisitions branches branches branches branches branches branches branches
UBI Banca Spa 1,369 202 144 32 24 5 122 7 of which: - former Banca Popolare di Bergamo Spa 273 73 6 2 - - 16 - - former Banco di Brescia Spa 258 29 35 - - - 23 - - former Banca Popolare di Ancona Spa 136 66 ------former Banca Carime Spa 188 23 5 9 - - - 7 - former Banca di Valle Camonica Spa 53 11 14 2 - - 7 - - former Banca Adriatica 276 - 37 3 - - 62 -
- former CARILO - Cassa di Risparmio di Loreto 15 - 7 - - - 2 - - former Banca Tirrenica 162 - 31 - - - 6 - - former Banca Federico del Vecchio 6 ------UBI Banca International Sa - Luxembourg 2 - 1 - - - - - Banca Teatina 65 - 5 - - - - - TOTAL 1,434 202 150 32 24 5 122 7
In accordance with the new distribution model laid down in the 2019/2020 Business Plan, UBI Banca Private & Corporate Unity was restructured into two divisions: Top Private Banking (TPB) – specialised in serving top private banking clients 6 – and Corporate & Investment Banking (CIB), which manages all large corporate group clients7. These divisions became fully operational in early 2017, according to a structure that was as follows at the end of the year:
Top Private Banking: 27 Centres and 55 Corporate Centres and Top Private Banking Centres Corners 31.12.2017 Five new centres (there were 22 at the end of the half-year) were opened in the second half of the Corporate Centres (*) 48 year, in Modena, Arezzo, Florence, Civitanova North West Macro Geographical Area 5 Marche and Pesaro, the latter two by converting Macro Geographical Area Milan and Emilia Romagna 7 Bergamo and West Lombardy Macro Geographical Area 7 existing corners during the completion of the first Brescia and North East Macro Geographical Area 6 two phases of integration of the New Banks, which Macro Geographical Area Latium Tuscany Umbria 8 resulted in the opening of 17 new corners (40 at the Macro Geographical Area Marches and Abbruzzo 8 end of June); Macro Geographical Area South 7 "Corners" 59 Corporate & Investment Banking (CIB): 48 North West Macro Geographical Area 4 Corporate Centres and 59 Corners Macro Geographical Area Milan and Emilia Romagna 11 Bergamo and West Lombardy Macro Geographical Area 20 As a consequence of the Banca Adriatica, CARILO, Brescia and North East Macro Geographical Area 12 Banca Tirrenica and Banca Federico del Vecchio Macro Geographical Area Latium Tuscany Umbria 2 mergers, the number of centres (38 at the end of the Macro Geographical Area Marches and Abbruzzo 4 first half of the year) recorded seven new openings8 Macro Geographical Area South 6 and the transformation of the Ancona, San Total 107 Benedetto del Tronto and Tortona corners into Top Private Banking Centres 27 centres. These conversions, together with the "Corners" 55 Total 82 closure of the Concesio Corner in July and the closure of the Macerata, Todi and Perugia Corners (*) The figure does not include three UBI Banca units operational since 6th May 2013 and dedicated to corporate customers only. in October, reduced the total number of corners (66 at the end of June).
Finally, market coverage also continues to be provided by a network of 758 financial advisors belonging to IW Bank S.p.A. (787 at the end of 2016), currently undergoing a process to rationalise the associated portfolios managed.
6 The Top Private Banking Division manages private banking clients with financial wealth (direct and indirect funding) of greater than €1 million. 7 Large Corporate: clients with turnover of at least €250 million or total systemic credit facilities of at least €150 million. 8 Corporate Centres: Coastal Rome and South Lazio; Urbino; Macerata; Umbria (Perugia), Florence - North Tuscany, Arezzo, Siena – Livorno – Grosseto.
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The positioning of the Group UBI Banca Group: market shares(*)
The table summarises the market positioning of the UBI Banca Group at 31.12.2017 30.6.2017 both national and regional level and in provinces where a more significant Deposits Lending Branches presence exists. (**) (***) (***) The figures are based on the latest available data from the Bank of Italy: North Italy 6.4% 5.4% 6.2% st th 31 December 2017 for the branches and 30 June 2017 for balance sheet Lombardy 13.0% 8.7% 8.9% figures. Prov. of Bergamo 23.7% 32.3% 35.8% Prov. of Brescia 22.4% 28.8% 28.9% Prov. of Como 6.4% 5.9% 8.3% Market share in terms of branches at national level stood at Prov. of Lecco 5.8% 5.3% 9.6% Prov. of Mantua 4.5% 3.6% 3.7% 6.9%, with a significant increase in market coverage in the Prov. of Milan 8.7% 4.1% 4.7% Prov. of Monza Brianza 9.5% 8.4% 11.1% regions of central Italy which reflects the high Prov. of Pavia 14.8% 14.2% 12.3% concentration in that area of the branches of the acquired Prov. of Sondrio 6.0% 1.6% 4.6% banks. Prov. of Varese 24.5% 28.6% 22.5% Piedmont 7.6% 5.3% 4.2% Furthermore, the Group continues to have a substantial Prov. of Turin 2.9% 2.2% 1.8% Prov. of Alessandria 13.3% 7.5% 9.8% presence in Milan (8.7%) and in Rome (6.3%), with shares Prov. of Cuneo 21.0% 18.3% 14.9% of higher than 10% in as many as 24 Italian provinces. Prov. of Novara 3.9% 4.5% 6.0% Liguria 4.8% 3.9% 6.7% Prov. of Genoa 4.4% 3.2% 6.0% National market share of conventional funding – which does Prov. of Imperia 5.5% 3.1% 7.9% Prov. of La Spezia 6.8% 10.1% 6.7% not include bonds – stands at 4.7%, slightly up compared Prov. of Savona 4.1% 2.8% 8.7% with 4.6% at the end of 2016, while the share of loans Emilia Romagna 2.0% 1.4% 2.4% Prov. of Rimini 6.1% 4.3% 6.9% stands at 6%, marginally down from 6.2% in December Prov. of Bologna 1.7% 1.2% 2.2% 2016. Prov. of Piacenza 4.3% 2.9% 3.8% Central Italy 9.3% 3.5% 6.2% Marches 27.9% 39.1% 30.1% Prov. of Ancona 30.4% 41.5% 38.5% As a result, amongst other things, of the characteristics of Prov. of Macerata 38.2% 58.5% 32.9% the original banking groups, in some areas where the Prov. of Pesaro and Urbino 26.7% 34.4% 25.1% Prov. of Fermo 23.9% 26.2% 29.4% Group’s presence is stronger it continues to have a market Prov. of Ascoli Piceno 11.3% 11.8% 15.6% Umbria 8.9% 6.6% 8.3% share of conventional funding and/or lending that is Prov. of Perugia 10.5% 7.6% 9.0% greater than the percentage of branches. Prov. of Terni 3.7% 3.1% 5.4% Latium 6.2% 1.2% 4.5% Prov. of Rome 6.3% 1.1% 4.5% Prov. of Viterb o 14.3% 13.1% 11.3% Prov. of Rieti 10.1% 7.5% 6.0% The international presence Tuscany 4.7% 3.4% 1.6% Prov. of Arezzo 19.7% 20.9% 14.2% Prov. of Florence 3.7% 2.2% 0.6% Prov. of Siena 6.6% 2.9% 0.8% Prov. of Grosseto 4.8% 4.9% 2.1% At the date of this report the international presence was Prov. of Livorno 3.8% 3.2% 2.0% structured as follows: South Italy 9.0% 7.5% 6.7% Calabria 18.0% 19.7% 13.5% five foreign branches of UBI Banca, three of which in France Prov. of Catanzaro 11.2% 12.9% 9.4% (Nice, Menton and Antibes), resulting from the merger of the Prov. of Cosenza 21.2% 27.1% 17.6% Prov. of Crotone 15.6% 11.0% 9.0% former Banca Regionale Europea, and two in Munich and Prov. of Reggio Calabria 20.8% 16.1% 11.2% Madrid respectively, transferred from UBI Banca International Prov. of Vibo Valentia 13.3% 24.5% 17.9% st Abruzzo 14.5% 12.3% 11.7% SA, which the Group disposed of with effect from 1 November Prov. of Chieti 32.9% 32.5% 24.1% 2017; Prov. of L'Aquila 4.6% 3.0% 1.5% Prov. of Pescara 12.1% 9.5% 11.6% representative offices in San Paolo of Brazil, Mumbai, Shanghai Prov. of Teramo 5.8% 3.0% 6.6% Hong Kong, Moscow, Dubai, New York and Casablanca; Molise 8.4% 6.6% 9.8% Prov. of Isernia 23.1% 17.4% 20.3% equity investments (mainly controlling interests) in three foreign Prov. of Campobasso 4.3% 3.5% 7.1% companies: UBI Trustee Sa (Luxembourg), UBI Management Co. Basilicata 7.5% 10.4% 7.9% Sa (Luxembourg) and Zhong Ou Asset Management Co. Ltd Prov. of Potenza 7.3% 11.2% 8.6% Prov. of Matera 8.0% 9.2% 6.7% (China); Apulia 7.5% 6.3% 4.8% one branch of UBI Factor Spa in Krakow in Poland; Prov. of Bari 9.7% 7.3% 5.1% Prov. of Brindisi 10.5% 8.0% 6.3% 37 commercial co-operation agreements with foreign banks Prov. of Barletta Andria Trani 5.6% 5.9% 4.7% (covering over 50 countries) 9 – in addition to three “trade Prov. of Taranto 8.6% 7.2% 5.4% Campania 5.5% 4.1% 4.8% facilitation” agreements with the European Bank for Prov. of Naples 5.3% 3.6% 4.0% Reconstruction and Development (EBRD), the International Prov. of Caserta 8.3% 6.8% 9.1% Financial Corporation (IFC) and the Asian Development Bank Prov. of Salerno 6.0% 5.0% 5.5% Total Italy 6.9% 4.7% 6.0% (ADB) – and also a “product partnership” in the Middle East (*) Source Bank of Italy: regulatory registers and lists for branch shares; matrix reports for and in Asia to guarantee effective assistance on all the balance sheet totals. principal markets in those areas for our corporate clients. (**) Current accounts, certificates of deposit, savings deposits. Bonds are excluded. (***) M arket share by lo catio n o f the branch. The matrix repo rt fo r lending refers to item 58335 02 relating to total loans for the private sector and it includes gross bad loans.
9 The number of these agreements (of which there were 35 at the end of 2016) rose to 37 following the signing of two “Master Risk Participation Agreements” concluded by the Parent Company in February and March with the Wells Fargo Bank and with Santander Bank for the purpose of increasing mutual collaboration in the areas of customer assistance and commercial operations.
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Human resources
The composition of Group personnel and changes in 2017
Group staff
Employees actually in service Employees on the payroll
31.12.2017 31.12.2016 Changes 31.12.2017 31.12.2016 Changes Stand-Alone UBI Stand-Alone UBI Banca Group Banca Group Number ABA-BCDC-D
UBI Banca Spa* 17,914 14,414 3,500 18,869 15,777 3,092 IW Bank Spa 298 305 -7 282 293 -11 UBI Banca International Sa - 88 -88 - 84 -84 UBI Sistemi e Servizi SCpA 1,876 2,044 -168 1,110 862 248 UBI Leasing Spa 227 207 20 223 208 15 Prestitalia Spa 173 170 3 88 89 -1 UBI Pramerica SGR Spa 160 154 6 125 120 5 UBI Factor Spa 145 144 1 121 124 -3 UBI Academy SCRL 15 15 - - - - UBI Trustee Sa 6 6 - 5 5 - BPB Immobiliare Srl 5 4 1 5 4 1 Kedomus Srl 5 3 2 - - - UBI Management Company Sa 4 5 -1 3 4 -1 Centrobanca Sviluppo Impresa SGR Spa** ------Banca Teatina Spa*** 494 - 494 496 - 496 BancAssurance Popolari Spa*** 38 - 38 39 - 39 Etruria Informatica Srl*** 37 - 37 42 - 42 BancAssurance Popolari Danni Spa*** 10 - 10 8 - 8 Assieme Srl*** 5 - 5 5 - 5 Oro Italia Trading Spa - in liquidation*** 2 - 2 2 - 2 TOTAL 21,414 17,559 3,855 21,423 17,570 3,853 Workers on staff leasing contracts ------TOTAL UBI BANCA GROUP STAFF 21,414 17,559 3,855 TOTAL FTE STAFF 20,713.3 17,012.5 3,700.8 On secondment outside the Group - out 14 18 -4 - in 5 7 -2 TOTAL WORKFORCE 21,428 17,577 3,851 21,428 17,577 3,851
* The mergers of the seven network banks into UBI Banca Spa were concluded in November 2016 and in February 2017. In addition, in October 2017 UBI Banca merged with Banca Adriatica and CARILO - Cassa di Risparmio di Loreto, and then in November 2017 with Banca Tirrenica and Banca Federico del Vecchio. ** As at 31st December 2017, as also on the comparative reporting dates, two persons were working at the company, who were on partial secondment from other Group companies and were therefore not counted among employees actually in service. *** Following the closing of the deal for the acquisition of the New Banks, which took place on 10th May, the companies indicated were included in the consolidation with effect from 1st April 2017.
The table above gives details for each company of the actual distribution of ordinary employees (workers on permanent and temporary contracts and on apprenticeship contracts) within the Group as at 31st December 2017, adjusted to take account of secondments from and to other entities within or external to the Group (column A). The comparative figures as at 31st December 2016 (column B) refer to the stand-alone Group only; accordingly, the comparison between the two periods is not uniform. Column C instead indicates, for each company, the number of employees on the payroll as at 31st December 2017, compared to the situation as at the end of 2016 for the stand-alone Group only (column D), which means that the comparison between the two periods is not uniform.
Compared to the situation disclosed in the previous financial statements, UBI Banca's headcount as at 31st December 2016 decreased by one as a result of dispute regarding dismissal concluded in October 2017 with effect from July 2012.
At the end of 2017 the UBI Banca Group's headcount was 21,414 compared to 17,559 employees in service as at December 2016 for the stand-alone Group. The increase reflects above all the inclusion in the Group of the banks in central Italy and their subsidiaries in the second quarter, despite significant efficiency gains resulting from the completion of the Single Bank project and the closing of the acquisition. In terms of full time equivalents (FTEs), on the other hand, and that is with account taken of the part-time worker effect, Group staff numbered 20,713.3.
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As may be seen from the table, the increase in headcount was chiefly concentrated at the level of the Parent Company – due to the merger in the fourth quarter with four of the five New Banks acquired – and of UBI Leasing, following the transfer of 26 employees from Banca Adriatica and Banca Tirrenica along with the contribution of their respective business operations. None of the other Group companies presented substantial changes, with the exceptions of: - UBI Sistemi e Servizi (-168 employees), which saw (i) the centralisation within UBI Banca of activities performed by former UBI.S offices; (ii) the severance of employees who had access to the Solidarity Fund; and (iii) the inclusion of employees from the business operations contributed to UBI.S by UBI Banca in conjunction with the mergers of Banca Adriatica and Banca Tirrenica; - UBI Banca International (-88 employees) due to the closing of the sale, on 1st November, of 100% of the interest in the company to EFG International.
There were 1,379 total departures under redundancy schemes during the year, only partially offset by the new employees hired within the framework of the agreements reached.
At the level of the stand-alone UBI Banca Group, there were 1,108 departures due to voluntary acceptance of incentive plans, broken down as follows: • 607 under the “2019/2020 Business Plan Trade Union Memorandum of Intent” signed on the 11th December 2016 which involved 622 1 voluntary redundancies in the first organisational restructuring stage related to the implementation of the Single Bank Project. The remaining 15 staff will leave by the end of the first quarter of 2018; • 501 under the agreement signed on 26th July 2017, which received 622 applications for access to the Solidarity Fund submitted under the aforementioned December memorandum (the remaining departures already agreed, resulting from the completion of the Single Bank). At the end of the year, 80.5% of the total redundancies had been completed (501 employees)2. Considering the 325 applications approved under the Agreement of 26th October 2017, for which the related staff began to leave in January 2018, there were 461 employees whose departures were still pending as at the end of December.
Turning to the New Banks acquired, 271 employees left, broken down as follows: • 198 staff left under the Agreements signed in March and April 2017, which provided for the departure of a total of 359 staff, for a remainder of 161; • 72 under previously signed plans, for a remainder of 79 staff; • one under the Agreement signed in July by Banca Teatina (then Nuova Cassa di Risparmio di Chieti), in completion and supplementation of the April 2017 agreement3. Considering that the 73 staff – inclusive of the 11 under the July agreement – subject to the Agreement of 26th October 2017 began to leave in January 2018, there were 312 staff yet to depart as at 31 December 2017.
Consistent with commitments entered into by the Group in recent years, new recruits were appointed in 2017 involving 705 staff (169 permanent, 319 one temporary contracts and 217 on apprenticeships), with a view to generation turnover and support for youth employment, which partially offset those staff who left.
1 The 600 redundancies planned during the first stage of the Business Plan were added to by 22 redundancies relating to excess applications received under the April 2016 Agreement, accepted in the December 2016 Memorandum of Agreement. 2 The total number of applications approved was adjusted marginally in the fourth quarter. The remaining 121 staff will leave gradually by the end of the third quarter of 2018. 3 The Agreement initially provided for the departure of a further 12 resources, subsequently reduced to 11 due to adjustments applied in the final months of the year.
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In terms of type of contract for staff on employee Employees on the payroll type contracts, as at 31st December 2017 staff on 31.12.2017 31.12.2016 temporary contracts and apprentices taken Stand-Alone UBI Banca Group together accounted for 1.7% of the total workforce Number on the payroll. Total employees 21,423 17,570 of whichpermanent 21,063 17,478 In addition to the 319 recruitments on temporary on temporary contracts 150 92 contracts, there were also 89 stabilisations (i.e. apprentices (*) 210 - conversions of temporary contracts to permanent (*) An apprenticeship is a contract for young people between the ages of contracts). 18 and 29, by which they acquire a qualification through training at work which provides them with specific occupational skills. The duration of the currently existing contracts in the UBI Banca Group is 24 months. The percentage of employee workers on part-time contracts as at the end of 2017 was 13.3% (12.4% as at December 2016 at the level of the stand-alone Group), while that of female personnel was 42.3% (39.1%).
Finally, with regard to the provisions of the Framework Agreement of 11th December 2016 on periods of extraordinary leave, approximately 144,000 thousand days of such leave were granted and taken in 2017, in light of the production and organisational needs of the Group's individual departments and companies. Over 26,000 days of parental leave were granted and taken4.
Composition of staff in Group Banks* by rank With regard to the composition of bank staff by 31.12.2017 31.12.2016 % Stand-Alone UBI % rank, the highest Banca Group Number classification level Senior managers 327 1.7% 306 1.9% (executives) continued to Middle managers 3rd and 4th level 3,205 16.7% 2,887 17.9% represent a modest Middle managers 1st and 2nd level 4,641 24.2% 4,132 25.6% percentage of the total, 3rd Professional Area (office staff) 10,866 56.7% 8,661 53.6% 1st and 2nd Professional Area (other staff) 112 0.7% 168 1.0% consistent with the average TOTAL FOR BANKS 19,151 100.0% 16,154 100.0% for Italy's top five banking groups, and below the * The figures reported include UBI Banca and IW Bank staff national industry-wide average (2.1%)5. Due to the characteristics of the New Banks acquired, the table also shows an increase in the weight of the professional areas, accounting for 57.4% overall, above the average for the top five banking groups.
As at 31st December 2017 the average age of the Group's employees was 46 years and 4 months (46 years and 9 months for the stand-alone Group), while the average length of service was 19 years and 3 months (20 years in December 2016).
For further information on the composition of the Group's staff, ordinary trade union relations (such as those concerning agreements for the payment of the company bonus), training, internal communication, the work environment and welfare initiatives, see the specific sections of the “Consolidated non-financial report drafted in accordance with Legislative Decree No. 254 of 30th December 2016 (Sustainability Report)”, published together with this Report.
Remuneration and incentive policies
For information on remuneration and incentive policies, see the attached Remuneration Report, which may also be consulted on the institutional website www.ubibanca.it, among the “Reports to the Shareholders' Meeting” included in the section Shareholders/Shareholders' Meetings, 6th April 2018. The report was prepared in accordance with articles 123 ter of the Consolidated Banking Act and 84 quater of the Issuers' Regulations and with the supervisory regulations on
4 The figures also include Banca Adriatica and CARILO - Cassa di Risparmio di Loreto from 1st October 2017 and Banca Tirrenica and Banca Federico del Vecchio from 1st November 2017. 5 Source: Italian Banking Association, “Report on Statistical Personnel Data – 2016”, January 2018.
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“Remuneration and incentive policies and practices” of banks and banking groups issued on 18th November 2014 implementing the provisions contained in European Union Directive CRD IV (2013/36/EU) and the policies developed internationally. Reference is also made to public disclosure requirements under Pillar III as regulated by EU Regulation No. 575/2013 (known as the CRR). Further information is given on the matter in the UBI Banca report on corporate governance, again in an attachment to this document.
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The scope of consolidation
The companies that formed part of the consolidation as at 31st December 2017 are listed below, divided into subsidiaries (fully consolidated) and associates (consolidated using the equity method). The percentage of control or ownership attributable to the Group (direct or indirect), their headquarters (registered address or operating headquarters) and the share capital are also given for each of them.
Fully consolidated companies (control is by the Parent of the Group where no other indication is given):
1. Unione di Banche Italiane Spa - UBI Banca (Parent ) registered address: Bergamo, Piazza Vittorio Veneto, 8 – share capital: €2,843,177,160.241
2. UBI Trustee Sa (100% controlled) registered address: 37/A, Avenue J.F. Kennedy, L – Luxembourg – share capital: €250,000 3. Prestitalia Spa (100% controlled) registered address: Bergamo, Via A. Stoppani, 15 – share capital: €205,722,715 4. IW Bank Spa (100% controlled) registered address: Milan, Piazzale F.lli Zavattari, 12 – share capital: €67,950,000 5. Centrobanca Sviluppo Impresa SGR Spa2 (100% controlled) registered address: Milano, Corso Europa, 16 – share capital: €2,000,000 6. UBI Pramerica SGR Spa (65% controlled) operating headquarters: Milano, Via Monte di Pietà, 5 – share capital: €19,955,465 7. UBI Management Company Sa (100% controlled by UBI Pramerica SGR) registered address: 37/A, Avenue J.F. Kennedy, L – Luxembourg – share capital: €125,000 8. UBI Leasing Spa (controlled 100%) registered address: Brescia, Via Cefalonia, 74 – share capital: € 644,952,8083 9. Unione di Banche Italiane per il Factoring Spa - UBI Factor Spa (100% controlled) registered address: Milan, Via f.lli Gabba, 1 – share capital: €36,115,820 10. BPB Immobiliare Srl (100% controlled) registered address: Bergamo, Piazza Vittorio Veneto, 8 – share capital: €185,680,000 11. Kedomus Srl (100% controlled) registered address: Brescia, Via Cefalonia, 74 – share capital: €300,000 12. UBI Sistemi e Servizi Scpa4 – Consortium Stock Company (91.9362% controlled and 4.3141% interest held by IW Bank; 1.4385% held by UBI Pramerica SGR 0.7192% held by UBI Factor; 0.0719% held by Prestitalia and by BancAssurance Popolari Spa; and 0.0097% held by UBI Academy) registered address: Brescia, Via Cefalonia, 62 – share capital: €36,149,948.64 13. UBI Academy SCRL - Limited Consortium Company (88% controlled and 3% held by: IW Bank and UBI.S; 1.5% held by: UBI Pramerica SGR, UBI Leasing, UBI Factor and Prestitalia) registered address: Bergamo, Via f.lli Calvi, 9 – share capital: €100,000
1 The share capital of the Parent changed during the year following the mergers by acquisition of the Network Banks and the New Banks in addition to the conclusion in July of an operation to increase the share capital by a total of €399,981,075.24. 2 With a note dated 12th January 2018, the Bank of Italy notified the removal of this company from the register of asset management companies. As already reported, this asset management company managed the Sviluppo Imprese Fund, which was liquidated on 16th August 2016. 3 The purchase by the Parent of 405,550 UBI Leasing shares sold by the non-controlling shareholder Banca Valsabbina was concluded on 1st August 2017. See the note on this company reported in this section. 4 The Group holds a controlling 98.5615% interest in the share capital of UBI.S; the remaining 1.4385% is held by Cargeas Assicurazioni Spa (the former UBI Assicurazioni Spa).
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14. UBI Finance Srl5 (60% controlled) registered address: Milano, Foro Bonaparte, 70 – share capital: €10,000 15. UBI Finance CB 2 Srl6 (60% controlled) registered address: Milano, Foro Bonaparte, 70 – share capital: €10,000 16. 24-7 Finance Srl7 17. UBI Finance 2 Srl - in liquidation8 18. UBI SPV BBS 2012 Srl9 19. UBI SPV BPCI 2012 Srl9 20. UBI SPV BPA 2012 Srl9 21. UBI SPV Group 2016 Srl10 22. UBI SPV Lease 2016 Srl11
The banks and companies which joined the UBI Banca Group following the acquisition of the New Banks are as follows: 1. Banca Teatina Spa (100% controlled) registered address: Bergamo, Piazza Vittorio Veneto, 8 – share capital: €141,000,000 2. BancAssurance Popolari Spa (89.5342%; originally controlled by Nuova Banca dell’Etruria e del Lazio) registered address: Arezzo, Via P. Calamandrei, 255 – share capital: €61,080,900 3. BancAssurance Popolari Danni Spa (50.7655% controlled by Nuova Banca dell’Etruria and 49.2345% held by BancAssurance Popolari, originally held by Nuova Banca dell’Etruria e del Lazio) registered address: Arezzo, Via P. Calamandrei, 255 – share capital: €5,500,000 4. Oro Italia Trading Spa - in liquidation (100% controlled; originally held by the former Nuova Banca dell’Etruria e del Lazio) registered address: Arezzo, Via P. Calamandrei, 255 – share capital: €500,000 5. Etruria Informatica Srl12 (100% controlled by UBI Sistemi e Servizi Scpa; originally held by the former Nuova Banca dell’Etruria e del Lazio) registered address: Arezzo, Via P. Calamandrei, 255 – share capital: €260,000 6. Mecenate Srl13 (95% controlled; originally held by the former Nuova Banca dell’Etruria e del Lazio) registered address: Arezzo, Via P. Calamandrei, 255 – share capital: €10,000
5 A special purpose entity in accordance with Law No. 130/1999, this company, enrolled on the general list of intermediaries pursuant to Art. 106 of the Consolidated Banking Act, was formed on 18th March 2008 to allow UBI Banca to implement the first programme to issue covered bonds backed by residential mortgages. 6 A special purpose entity in accordance with Law No. 130/1999, this company, enrolled on the general list of intermediaries pursuant to Art. 106 of the consolidated banking act, was formed on 20th December 2011 to allow the UBI Banca to implement a second programme to issue covered bonds backed mainly by commercial non-residential mortgages. 7 A special purpose entity used in compliance with Law No. 130/1999 for the securitisations of the former B@nca 24-7 performed in 2008. It was consolidated because this company is in reality controlled, since its assets and liabilities were originated by a Group member company. UBI Banca holds a 10% stake. 8 A special purpose entity used in accordance with Law No. 130/1999 for the securitisation of a portfolio of Banco di Brescia performing loans at the beginning of 2009. It was consolidated because this company is in reality controlled, since its assets and liabilities were originated by a Group member company. UBI Banca holds a 10% stake. The securitisation was closed down in May 2014. A Shareholders’ Meeting held on 26th February 2015 resolved to put the entity into early voluntary liquidation (with the relative records filed with the Company Registrar on 16th March 2015). 9 A special purpose entity formed in accordance with Law No. 130/1999 for the securitisation of the performing loans to SMEs of some former network banks (Banco di Brescia, Banca Popolare Commercio e Industria and Banca Popolare di Ancona) carried out in the last part of 2012. They were consolidated because they are in reality controlled, since their assets and liabilities were originated by Group member companies. UBI Banca holds a 10% stake in each of them. The three securitisations were closed down early on 15th November 2016. 10 A special purpose entity formed in accordance with Law No. 130/1999 for the securitisation of residential mortgages recognised on the books of the former network banks (BPB, BBS, BPCI, BRE, BPA, Carime) carried out in August 2016. It was consolidated because this company is in reality controlled, since its assets and liabilities were originated by a Group member company. UBI Banca holds a 10% stake. 11 A special purpose entity formed in accordance with Law No. 130/1999 for the securitisation of performing loans by UBI Leasing in July 2016. It was consolidated because this company is in reality controlled, since its assets and liabilities were originated by a Group member company. UBI Banca holds a 10% stake. 12 The interest held in this company, originally held by the former Nuova Banca dell’Etruria e del Lazio, was sold on 1st November to the consortium company. 13 A special purpose entity used in accordance with Law No. 130/1999 for the former Banca dell’Etruria e del Lazio securitisations performed in 2007, 2009 and 2011, relating to performing residential mortgages. The securitisations structured in 2009 and 2011 were closed down.
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7. Focus Impresa14 8. Marche Mutui 2 Società per la Cartolarizzazione s.r.l.15 9. Marche M6 Srl15
10. Assieme Srl (89.79% controlled by BancAssurance Popolari) registered address: Arezzo, Via T. Edison, 45 – share capital: €30,000
Companies consolidated using the equity method (the investment is by the Parent where no other indication is given):
1. Aviva Vita Spa (20% interest held) registered address: Milan, Via A. Scarsellini, 14 – share capital: €155,000,000 2. Lombarda Vita Spa (40% interest held) registered address: Brescia, Corso Martiri della Libertà, 13 – share capital: €185,300,000 3. Polis Fondi SGRpA (19.6% interest held) registered address: Milano, Via Solferino, 7 – share capital: €5,200,000 4. Zhong Ou Asset Management Co. Ltd (formerly Lombarda China Fund Management - 25%) interest held) registered address: 8f Bank of East ASIA Finance Tower, 66 Hua Yuan Shi Qiao Road, Pudong New Area, 200120 Shanghai (China) – share capital: 188,000,000 yuan/renminbi 5. SF Consulting Srl (35% interest held) operating headquarters: Mantova, Via P.F. Calvi, 40 – share capital: €93,600 6. UFI Servizi Srl (23.1667% interest held by Prestitalia) registered address: Roma, Via G. Severano, 24 – share capital: €150,000
Company that joined the Group following the acquisition of the New Banks 7. Montefeltro Sviluppo SCRL (26.3699%; originally held by the former Nuova Banca delle Marche) registered address: Urbania (PU), Via A. Manzoni, 25 – share capital: €73,000
14 This is a closed-end fund, reserved for “qualified investors” recognised within available-for-sale financial assets (balance sheet item 40), consolidated in relation to an investment that had been made by the former Banca delle Marche and to the predominant position exercised in shareholders meetings by subscribers of the fund (80,7692% of the shares held). 15 A special purpose entity formed in accordance with Law No. 130/1999 for securitisations by the former Banca delle Marche. At the end of the year two securitisations existed carried out in 2006 (Marche Mutui 2, an RMBS securitisation of a portfolio of performing regulated mortgages backed by first mortgage guarantees) and in 2013 (Marche M6, an RMBS securitisation of a portfolio of performing residential mortgages) respectively. The sub-section “Changes in the consolidation scope” gives details of the securitisation was closed down during the year. They were consolidated because they are in reality controlled, since their assets and liabilities were originated by a Group member company. The Group holds no equity interests in the companies.
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Changes in the scope of consolidation
The scope of consolidation underwent the changes reported below compared with 31st December 2016.
Fulfillment of the Single Bank Project With the “second wave” of the project the mergers into UBI Banca of Banca Popolare di Bergamo, Banco di Brescia, Banca Popolare di Ancona, Banca Carime and Banca di Valle Camonica took effect in accordance with and within the meaning of articles 2501 et seq of the Italian Civil Code on 20th February 2017. As a consequence the last five network banks were eliminated from the consolidation with effect for accounting and tax purposes from 1st January 2017. A summary is given below of the main steps involved, but it should be considered that as a result of the merger the shareholders of the merged banks other than the Parent were allotted newly issued UBI Banca shares on the basis of the share exchange ratios set, while the shares of the merged banks held by the Parent were cancelled with no share exchange and no cash settlement was provided for: Banco di Brescia – Banca Popolare di Bergamo: as these were fully owned by the Parent, no share exchange ratio was set. The mergers by incorporation were approved by the respective Boards of Directors in accordance with Article 2505 of the Italian Civil Code and with the Articles of Association on 29th September and 7th October 2016 respectively; as concerns the other network banks, the mergers of which into the Parent were approved by the relative Extraordinary Shareholders’ Meetings held on 11th, 13th and 14th October 2016, exchange ratios were set which gave rise to the issue of new UBI Banca shares to non-controlling shareholders, as indicated below: - for BPA, 6.0815 UBI Banca shares for every single BPA share, amounting to 618,315 new shares of the merging bank; - for CARIME, 0.1651 UBI Banca shares for every single CARIME share, amounting to 24,050 new shares of the merging bank; - for BVC, 7.2848 UBI Banca shares for every single BVC share, amounting to 295,03416 new shares of the merging bank. The new share capital of UBI Banca, amounting to €2,443,094,485.00 for a total of 977,237,794 shares with no nominal amount was filed with the Bergamo Company Registrar on 28th February 201717. As of 20th February 2017 the equity investments and shareholdings of the former network banks transferred to the Parent were as follows: the percentages of shares held in UBI.S by BPB, BBS, BPA and CARIME (2.8769% each) and by BVC (1.4385%), which brought the controlling interest held up to 92.0080% (79.0619% as at 31st December 2016); the ownership stakes held in UBI Academy by BPB, BBS, BPA and CARIME of 3% each and by BVC of 1.5%, which brought UBI Banca’s controlling interest up to 88% (from 74.5% at the end of 2016); the UBI Banca International shares (the company was sold with effect from 1st November 2017) held by BBS and BPB, amounting to 5.4825% and 3.1598% respectively of this Luxembourg bank’s share capital, which gave UBI Banca total ownership (up from 91.3577% in December 2016); 500 shares held by CARIME in the share capital of the Bank of Italy.
The acquisition of the New Banks The acquisition of full ownership of the following banks was completed on 10th May 201718: - 10,000,000 shares of Nuova Banca dell’Etruria e del Lazio (subsequently renamed Banca Tirrenica19) at a price of €0.33;
16 Banca di Valle Camonica had been 89,8867% controlled by the Parent and BBS held 8,8387%. All the relative shares were cancelled with no share exchange and therefore the new UBI Banca shares issued related only to the portion held by non- controlling interests. 17 On 20th February 2017, 936,467 new UBI Banca shares were issued in conjunction with the mergers, further increased by 932 on 28th February 2017 following the application of rounding-off procedures. 18 A detailed discussion on the acquisition process is given in the section “Significant events in 2017”. 19 With effect from 6th September 2017, the three banks changed their company name and transferred their registered offices to Bergamo.
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- 10,000,000 shares of Nuova Banca delle Marche (renamed Banca Adriatica) at a price of €0.34; - 10,000,000 shares of Nuova Cassa di Risparmio di Chieti (now Banca Teatina) at a price of €0.33 .
With the acquisition of the aforementioned banks, the consolidation scope was broadened with effect from 1st April 2017 to also include the relative ownership interests (in banking and ordinary companies) subject to the rules and standards for inclusion in the scope of consolidation.
As described in detail in the section “Significant events that occurred during the year 2017” to which reference may be made, the mergers into the Parent of Banca Adriatica and of CARILO - Cassa di Risparmio di Loreto20 98.8612% (controlled by Banca Adriatica) took effect from 23rd October, while the mergers of Banca Tirrenica and of Banca Federico del Vecchio (wholly owned by Banca Tirrenica) took effect from 27th November: Banca Teatina will be merged into UBI Banca by 26th February 2018. As a result of the merger reported above, all the shareholdings of the merged banks were transferred to the Parent (with the sole exception of Etruria Informatica, acquired by UBI.S). In detail: . The merged banks had held, amongst other holdings, 2,710 shares of the Bank of Italy, which in addition to the 1,259 shares already held by UBI Banca (the former BRE and the former CARIME) brought the total number held by the UBI Banca Group at the end of 2017 to 3,969 shares equivalent to 1.3230% of the share capital (3,818 held by UBI Banca and 151 held by Banca Teatina); . the percentages of shares held in UBI.S by Group companies changed, as reported in the list at the beginning this section, following the transfer by the Parent of 50,000 shares of the company BancAssurance Popolare Spa on 21st November 2017. The controlling interest held by UBI Banca therefore rose from 92.0080% to 91.9362%.
We report the following with regard to other equity investments, special purpose entities excluded, which entered the scope of consolidation on 1st April: • Focus Gestioni Company - in liquidation (former Nuova Banca delle Marche): on the 5th July 2017 the company was removed from Register of Companies following the final winding up of the voluntary liquidation approved by an Extraordinary Shareholders’ Meeting held on the 15th September 2016 and it took effect from the 1st October 2016; • Oro Italy Trading Spa - in liquidation (former Nuova Banca dell’Etruria e del Lazio): on 8th November 2017 the procedure for the liquidation of the company Oro Trading Italia Trading Spa (controlled by the former Banca Tirrenica) was filed with the Arezzo Company Registrar. The company continues to be included in the scope of consolidation until its removal from the registry is notified. • Assieme Srl (BancAssurance Popolari - former Nuova Banca dell’Etruria e del Lazio): a Shareholders’ Meeting was held on 27th November 2017 which resolved to partially draw on the share capital to replenish losses and to subsequently reconstitute that capital up to the previous amount of €30,000. Following the partial adherence by the minority shareholder and the subscription of the part offered to rights holders and of the options not taken up by BancAssurance Popolari, the percentage held by the latter company rose from 80% to the present 89.79%.
Special purpose entities for securitisations • UBI Lease Finance 5 Srl – in liquidation: a Shareholders’ Meeting was held on 24th January 2017 to approve the final liquidation financial statements as the last administrative action taken before removing the entity from the Register of Companies, which took place on 6th March 2017; • UBI Finance 3 Srl – in liquidation: a Shareholders’ Meeting was held on 6th March 2017 to approve the final liquidation financial statements (reconvened) as the last administrative action taken before removing the entity from the Register of Companies, which took place on 19th April 2017;
* * * • Marche M5 Srl (former Banca delle Marche): at the end of July 2017, at the time of the interest payment date of 27th July, the securitisation of a portfolio of performing commercial mortgages and unsecured loans to SMEs was closed down;
20 The merger of CARILO involved the issue of 40,640 UBI Banca shares with no nominal value and with normal dividend entitlement allotted with a share exchange of 64,000 CARILO shares (1.14% of the CARILO share capital) held by the sole non-controlling shareholder on the basis of an exchange ratio of 0.635 UBI Banca shares to every one CARILO share, with a consequent increase of €101,600 in the share capital.
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• Marche Mutui 4 Srl (former Banca delle Marche): at the end of August 2017, at the time of the interest payment date of 25th August, the securitisation of a mixed portfolio of performing residential and commercial mortgages was closed down; • Etruria Securitization SPV Srl – this special purpose entity, used by the former Banca dell’Etruria e del Lazio for the securitisation Etruria Securitization Srl, performed in the 2012 and relating to ordinary and regulated mortgages and unsecured loans to SMEs and “small economic operators”, was excluded from the scope of consolidation following the early close down of the securitisation on 15th September.
With the early close down of the securitisations reported above, the three special purpose entities were excluded from the scope of consolidation since the condition of substantial control of them (assets and liabilities originated by Group companies) was no longer satisfied. The Group holds no ownership interests in the companies.
Other companies On 17th July 2017, UBI Banca was authorised by the China Securities Regulatory Commission to sell an initial quota (10%) of the share capital held in Zhong Ou Asset Management Co. Ltd (a Chinese registered fund management company in which a 35% interest is held) to senior managers in that same company. This is in accordance with agreements entered into at the end of 2013 which grant managers call options on 11.7% of the share capital held by UBI Banca on achieving certain quantitative objectives. In consideration of the achievement of those quantitative goals as early as 2015, the Group had reclassified the quota of the investment to be sold within non-current assets held for sale in accordance with IFRS 5. The sale authorised was concluded on 12th September 2017, thereby reducing the percentage of the share capital held from 35% at the end of 2016 to 25%. The remaining 1.7% that UBI Banca is committed to sell remains recognised within assets held for sale.
* * *
1. The purchase by the Parent of 405,550 UBI Leasing shares sold by the non-controlling shareholder Banca Valsabbina for a total price of €1,850,000 was concluded on 1st August 2017. As a result of the transaction, UBI Banca now holds 100% of the share capital (99.6207% held at the end of 2016). On 28th August, an Extraordinary Shareholders’ Meeting of UBI Leasing, after first eliminating the nominal value of its ordinary shares, approved an increase in the share capital by a total €3,395,002 through the issue of 778,313 new ordinary shares, with normal dividend entitlement, to be carried out by means of contributions in kind. The increase was reserved to Banca Adriatica (566,713 shares; €2,472,002) and to Banca Tirrenica (211,600 shares; €923,000); subscription of the shares took place by the contribution by these banks of lines of business consisting of leasing activities. The increase in the share capital was concluded on 29th September when the relative filings were made with the Company Registrar of Brescia. The new share capital, fully subscribed and paid-up, therefore amounts to €644,952,808.00 and is represented by 107,704,614 ordinary shares with no nominal value, as also results from an update of Art. 5 of the Articles of Association. The percentages initially held by Banca Tirrenica (0.20%) and by Banca Adriatica (0.52%), were transferred to UBI Banca following their merger into the Parent.
* * *
As of 1st November the sale took effect of 100% of the share capital of UBI Banca International Sa to EFG International AG, an international company located in Zurich that specialises in asset management and private banking services. As provided for by a sales contract signed in April 2016, the conclusion of the transaction was preceded on 21st September by a reduction in equity carried out by means of the following: - a reduction in the share capital from €70,613,580 to €36,618,000 as a result of the redemption of 66,658 shares at face value (falling therefore from 138,458 to 71,800 shares); - a distribution from the share premium reserve amounting to €14,200,624.
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Reclassified consolidated financial statements, reclassified income statement net of the most significant non-recurring items and reconciliation schedules
Reclassified consolidated balance sheet
31.12.2017 31.12.2016 Changes % changes Aggregate Figures in thousands of euro
ASSETS 10. Cash and cash equivalents 811,578 3,219,180 -2,407,602 -74.8% 20. Financial assets held for trading 924,475 881,457 43,018 4.9%
30. Financial assets designated at fair value 92,290 218,743 -126,453 -57.8% 40. Available-for-sale financial assets 9,861,978 13,516,860 -3,654,882 -27.0% 50. Held-to-maturity investments 5,937,872 7,327,544 -1,389,672 -19.0% 60. Loans and advances to banks 7,836,002 4,820,974 3,015,028 62.5%
70. Loans and advances to customers 92,338,083 93,769,311 -1,431,228 -1.5% 80. Hedging derivatives 169,907 466,715 -296,808 -63.6% 90. Fair value change in hedged financial assets (+/-) -2,035 39,398 -41,433 -105.2% 100. Equity investments 243,165 254,384 -11,219 -4.4% 110. Technical reserves of reinsurers 347 369 -22 -6.0%
120. Property, plant and equipment 1,811,743 1,844,592 -32,849 -1.8% 130. Intangible assets 1,728,328 1,719,950 8,378 0.5% of which: goodwill 1,465,260 1,468,808 -3,548 -0.2%
140. Tax assets 4,170,387 4,393,975 -223,588 -5.1% 150. Non-current assets and disposal groups held for sale 962 5,681 -4,719 -83.1% 160. Other assets 1,451,059 1,645,992 -194,933 -11.8% Total assets 127,376,141 134,125,125 -6,748,984 -5.0%
LIABILITIES AND EQUITY 10. Due to banks 16,733,006 14,458,089 2,274,917 15.7%
20. Due to customers 68,434,827 70,989,458 -2,554,631 -3.6% 30. Debt securities issued 26,014,943 32,268,779 -6,253,836 -19.4% 40. Financial liabilities held for trading 411,653 861,478 -449,825 -52.2% 50. Financial liabilities designated at fair value 43,021 40,329 2,692 6.7%
60. Hedging derivatives 100,590 279,455 -178,865 -64.0% 80. Tax liabilities 223,397 243,771 -20,374 -8.4% 100. Other liabilities 2,742,088 2,520,157 221,931 8.8% 110. Post-employment benefits 350,779 422,230 -71,451 -16.9% 120. Provisions for risks and charges: 536,265 751,965 -215,700 -28.7% a) pension and similar obligations 137,213 145,373 -8,160 -5.6% b) other provisions 399,052 606,592 -207,540 -34.2%
130. Technical reserves 1,780,701 1,675,012 105,689 6.3%
140.+170.+180. +190.+ 200. Share capital, share premiums, reserves, valuation reserves and treasury shares 9,234,626 11,393,077 -2,158,451 -18.9% 210. Non-controlling interests 79,688 82,644 -2,956 -3.6%
220. Profit (loss) for the year 690,557 -1,861,319 2,551,876 n.s. Total liabilities and equity 127,376,141 134,125,125 -6,748,984 -5.0%
The figures as at 31st December 2017 relate to the new perimeter of the UBI Banca Group. Therefore in order to allow a consistent examination of balance sheet items, the figures as at 31st December 2016 have been restated in “aggregate” form, thereby presenting them fully in line with the tables used to support the commentary contained in the subsequent sections.
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Reclassified consolidated quarterly balance sheets
31.3.2017 31.12.2016 30.9.2016 30.6.2016 31.3.2016 Stand-Alone Stand-Alone Stand-Alone Stand-Alone Stand-Alone 31.12.2017 30.9.2017 30.6.2017 UBI Banca UBI Banca UBI Banca UBI Banca Figures in thousands of euro UBI Banca Group Group Group Group Group
ASSETS 10. Cash and cash equivalents 811,578 2,483,097 2,986,091 476,835 519,357 490,884 476,840 506,194 20. Financial assets held for trading 924,475 761,622 671,482 627,034 729,616 677,514 681,543 966,772 30. Financial assets designated at fair value 92,290 115,811 161,374 190,448 188,449 189,638 188,641 194,738 40. Available-for-sale financial assets 9,861,978 10,662,618 11,128,949 8,475,803 9,613,833 14,144,698 15,417,870 15,699,461 50. Held-to-maturity investments 5,937,872 5,982,945 5,993,150 7,274,195 7,327,544 3,403,798 3,452,886 3,445,469 60. Loans and advances to banks 7,836,002 6,109,768 8,793,116 4,850,605 3,719,548 4,108,062 3,930,021 3,591,309 70. Loans and advances to customers 92,338,083 93,879,802 94,228,583 84,521,597 81,854,280 82,010,978 83,906,862 84,072,553 80. Hedging derivatives 169,907 433,309 425,087 424,061 461,767 792,164 791,268 714,946 90. Fair value change in hedged financial assets (+/-) -2,035 -34,615 -13,717 10,591 23,963 68,955 63,857 61,469 100. Equity investments 243,165 252,120 245,758 254,842 254,364 260,220 253,719 259,545 110. Technical reserves of reinsurers 347 416 516 - - - - - 120. Property, plant and equipment 1,811,743 1,808,786 1,815,457 1,637,718 1,648,347 1,652,607 1,659,827 1,673,882 130. Intangible assets 1,728,328 1,712,579 1,715,241 1,686,920 1,695,973 1,688,282 1,685,184 1,747,089 of which: goodwill 1,465,260 1,465,260 1,465,260 1,465,260 1,465,260 1,465,260 1,465,260 1,465,260 140. Tax assets 4,170,387 4,180,815 4,245,141 2,982,254 3,044,044 2,981,776 3,006,517 2,790,272 150. Non-current assets and disposal groups held for sale 962 1,308 6,455 5,811 5,681 64,401 63,883 70,283 160. Other assets 1,451,059 1,283,745 1,876,852 924,423 1,297,151 832,951 1,081,317 895,255 Tota l a sse ts 127,376,141 129,634,126 134,279,535 114,343,137 112,383,917 113,366,928 116,660,235 116,689,237
LIABILITIES AND EQUITY 10. Due to banks 16,733,006 16,569,895 16,530,503 16,665,755 14,131,928 13,800,894 13,691,017 11,495,105 20. Due to customers 68,434,827 70,279,772 70,112,391 56,443,308 56,226,416 53,789,291 55,460,078 56,527,759 30. Debt securities issued 26,014,943 26,274,287 28,362,209 27,562,538 28,939,597 30,794,003 32,064,830 33,124,613 40. Financial liabilities held for trading 411,653 717,358 710,665 722,633 800,038 584,324 612,314 610,468 50. Financial liabilities designated at fair value 43,021 42,285 39,017 - - - - - 60. Hedging derivatives 100,590 154,153 183,463 195,586 239,529 1,100,804 1,110,942 1,000,034 80. Tax liabilities 223,397 228,807 243,275 229,327 232,866 243,662 241,596 427,460 100. Other liabilities 2,742,088 2,571,223 5,226,358 2,726,147 1,962,806 2,750,791 3,230,328 2,476,949 110. Post-employment benefits 350,779 365,220 376,866 306,523 332,006 343,160 339,679 337,289 120. Provisions for risks and charges: 536,265 625,553 747,427 466,939 457,126 587,569 591,468 255,392 a) pension and similar obligations 137,213 136,683 140,033 69,230 70,361 72,347 73,527 68,981 b) other provisions 399,052 488,870 607,394 397,709 386,765 515,222 517,941 186,411 130. Technical reserves 1,780,701 1,775,807 1,723,643 - - - - - 140.+170.+180.+ 190.+ 200. Share capital, share premiums, reserves, valuation reserves and treasury shares 9,234,626 9,255,310 9,260,113 8,906,575 9,819,728 9,644,117 9,629,328 9,877,656 210. Non-controlling interests 79,688 72,041 67,560 50,769 72,027 482,826 475,640 514,451 220. Profit (loss) for the period 690,557 702,415 696,045 67,037 -830,150 -754,513 -786,985 42,061 Total liabilities and equity 127,376,141 129,634,126 134,279,535 114,343,137 112,383,917 113,366,928 116,660,235 116,689,237
The figures are for the new perimeter of the UBI Banca Group from 30th June 2017. 75 WorldReginfo - 443ee11b-e188-477f-9b0d-38a07c5d7da1
Reclassified consolidated income statement
4th Quarter 2016 2016 4th Quarter 2017 of which: Stand-Alone UBI Changes % changes Stand-Alone Changes % changes 2017 Allocation of Banca Group UBI Banca Badwill Group ABA-BA/BCDC-DC/D Figures in thousands of euro of which: Allocation of 10.-20. Net interest income 1,626,615 2,976 1,497,891 128,724 8.6% 478,943 Badwill1,176 364,765 114,178 31.3% 70. Dividends and similar income 13,090 - 9,678 3,412 35.3% 2,723 - (59) 2,782 n.s. Profits of equity-accounted investees 23,391 - 24,136 (745) (3.1%) 6,845 - 5,197 1,648 31.7%
40.-50. Net fee and commission income 1,546,263 - 1,335,033 211,230 15.8% 395,031 - 346,188 48,843 14.1% of which performance fees 22,894 - 26,349 (3,455) (13.1%) 13,295 - 18,291 (4,996) (27.3%)
80.+90.+ Net income from trading, hedging and disposal/repurchase activities and from 100.+110. assets/liabilities designated at fair value 252,613 - 153,711 98,902 64.3% 67,492 (648) 47,367 20,125 42.5%
150.+160. Net income from insurance operations 12,369 (475) - 12,369 - 3,662 (475) - 3,662 - 220. Other net operating income/expense 104,140 - 99,050 5,090 5.1% 28,460 - 22,047 6,413 29.1% Operating income 3,578,481 2,501 3,119,499 458,982 14.7% 983,156 53 785,505 197,651 25.2% 180.a Staff costs (1,480,942) - (1,275,306) 205,636 16.1% (384,268) - (321,521) 62,747 19.5% 180.b Other administrative expenses (787,630) 3,726 (734,654) 52,976 7.2% (209,757) 2,165 (241,245) (31,488) (13.1%) Depreciation, amortisation and net impairment losses on property, plant and equipment and 200.+210. intangible assets (158,463) (6,105) (143,506) 14,957 10.4% (43,521) (14,575) (37,511) 6,010 16.0% Operating expenses (2,427,035) (2,379) (2,153,466) 273,569 12.7% (637,546) (12,410) (600,277) 37,269 6.2% Net operating income 1,151,446 122 966,033 185,413 19.2% 345,610 (12,357) 185,228 160,382 86.6%
130.a Net impairment losses on loans (728,343) 63,973 (1,565,527) (837,184) (53.5%) (310,663) 9,794 (191,773) 118,890 62.0% 130. b+c+d Net impairment losses on other financial assets and liabilities (133,963) - (130,057) 3,906 3.0% (3,600) (11,838) (79,204) (75,604) (95.5%) 190. Net provisions for risks and charges (9,009) 5,327 (42,885) (33,876) (79.0%) 1,452 5,327 (12,684) (14,136) n.s. 240.+270. Profits (losses) from the disposal of equity investments 859 - 22,969 (22,110) (96.3%) (221) - 21,027 (21,248) n.s. Pre-tax profit (loss) from continuing operations 280,990 69,422 (749,467) 1,030,457 n.s. 32,578 (9,074) (77,406) 109,984 n.s. 290. Taxes on income for the period/year from continuing operations (120,367) (22,454) 182,388 (302,755) n.s. (8,173) (624) 20,669 (28,842) n.s. 330. (Profit) loss for the period/year attributable to non-controlling interests (27,023) - 1,267 (28,290) n.s. (8,186) - (8,298) (112) (1.3%) Profit (loss) for the period/year attributable to the shareholders of the Parent before the Business Plan and other impacts 133,600 46,968 (565,812) 699,412 n.s. 16,219 (9,698) (65,035) (81,254) n.s.
180.a Redundancy expenses net of taxes and non-controlling interests (41,093) - (207,783) (166,690) (80.2%) (37,500) - 114 (37,614) n.s. 210. Impairment losses on brands net of taxes and non-controlling interests - - (37,936) 37,936 100.0% - - - - - 180.b Single Bank Project expenses net of taxes and non-controlling interests (6,615) - (15,541) (8,926) (57.4%) (160) - (7,638) (7,478) (97.9%) 200. interests (2,908) - (3,078) (170) (5.5%) (2,908) - (3,078) (170) (5.5%) 180.b New Banks Project expenses net of taxes and non-controlling interests (33,237) - - (33,237) - (12,079) - - (12,079) - 265. Negative consolidation difference 640,810 640,810 - 640,810 - 24,570 24,570 - 24,570 - 340. Profit (loss) for the period/year attributable to the shareholders of the Parent 690,557 687,778 (830,150) 1,520,707 n.s. (11,858) 14,872 (75,637) (63,779) (84.3%)
The reclassified income statement for the year ended 31st December 2017 relates to the new perimeter of the UBI Banca Group, while as with the figures for the fourth quarter of 2016, those for the year ended 31st December 2016 relate to the Stand-Alone UBI Banca Group.
76 WorldReginfo - 443ee11b-e188-477f-9b0d-38a07c5d7da1
Reclassified consolidated quarterly income statements
2017 2016
1st Quarter 4th Quarter 3rd Quarter 2nd Quarter 1st Quarter Stand-Alone Stand-Alone Stand-Alone Stand-Alone Stand-Alone 4th Quarter 3rd Quarter 2nd Quarter UBI Banca UBI Banca UBI Banca UBI Banca UBI Banca Group Group Group Group Group Figures in thousands of euro
10.-20. Net interest income 478,943 402,472 398,013 347,187 364,765 367,554 377,972 387,600 70. Dividends and similar income 2,723 324 7,998 2,045 (59) 1,138 8,076 523 Profits of equity-accounted investees 6,845 5,948 6,789 3,809 5,197 6,989 6,698 5,252 40.-50. Net fee and commission income 395,031 389,837 410,534 350,861 346,188 321,392 330,307 337,146 of which performance fees 13,295 2,386 3,990 3,223 18,291 2,524 3,223 2,311 80.+90.+ 100.+110. Net income from trading, hedging and disposal/repurchase activities and from assets/liabilities designated at fair value 67,492 36,364 83,397 65,360 47,367 23,755 66,875 15,714 150.+160. Net income from insurance operations 3,662 4,562 4,145 - - - - - 220. Other net operating income/expense 28,460 16,835 29,956 28,889 22,047 24,760 25,538 26,705 Operating income 983,156 856,342 940,832 798,151 785,505 745,588 815,466 772,940 180.a Staff costs (384,268) (379,782) (396,313) (320,579) (321,521) (314,687) (319,311) (319,787) 180.b Other administrative expenses (209,757) (211,834) (199,694) (166,345) (241,245) (166,083) (155,526) (171,800) 200.+210. Depreciation, amortisation and net impairment losses on property, plant and equipment and intangible assets (43,521) (39,640) (40,207) (35,095) (37,511) (34,265) (35,688) (36,042) Operating expenses (637,546) (631,256) (636,214) (522,019) (600,277) (515,035) (510,525) (527,629) Net operating income 345,610 225,086 304,618 276,132 185,228 230,553 304,941 245,311 130.a Net impairment losses on loans (310,663) (135,052) (147,826) (134,802) (191,773) (167,381) (1,051,034) (155,339) 130. b+c+d Net impairment losses on other financial assets and liabilities (3,600) (31,558) (82,663) (16,142) (79,204) (386) (50,719) 252 190. Net provisions for risks and charges 1,452 (5,109) 2,108 (7,460) (12,684) (3,544) (20,289) (6,368) 240.+270. Profits (losses) from the disposal of equity investments (221) 468 496 116 21,027 339 1,201 402 Pre-tax profit (loss) from continuing operations 32,578 53,835 76,733 117,844 (77,406) 59,581 (815,900) 84,258 290. Taxes on income for the period year from continuing operations (8,173) (32,780) (40,407) (39,006) 20,669 (14,721) 210,792 (34,352) 330. (Profit) loss for the period attributable to non-controlling interests (8,186) (6,393) (6,362) (6,082) (8,298) (7,707) 24,672 (7,400) Profit (loss) for the period attributable to the shareholders of the Parent before the Business Plan and other impacts 16,219 14,662 29,964 72,756 (65,035) 37,153 (580,436) 42,506 180.a Redundancy expenses net of taxes and non-controlling interests (37,500) (1,308) (2,285) - 114 (218) (207,234) (445) 210. Impairment losses on brands net of taxes and non-controlling interests ------(37,936) - 180.b Single Bank Project expenses net of taxes and non-controlling interests (160) (349) (1,489) (4,617) (7,638) (4,463) (3,440) - 200. Impairment losses on property, plant and equipment net of taxes and non-controlling interests (2,908) - - - (3,078) - - - 180.b New Banks Project expenses net of taxes and non-controlling interests (12,079) (9,975) (10,082) (1,102) - - - - 265. Negative consolidation difference 24,570 3,340 612,900 - - - - -
340. Profit (loss) for the period/year attributable to the shareholders of the Parent (11,858) 6,370 629,008 67,037 (75,637) 32,472 (829,046) 42,061
The reclassified income statement for the second, third and fourth quarters of 2017 relates to the new perimeter of the UBI Banca Group.
77 WorldReginfo - 443ee11b-e188-477f-9b0d-38a07c5d7da1
Reclassified consolidated income statement net of the most significant non-recurring items
2016 2017 Stand-Alone UBI Banca Group Changes % changes
net of non- net of non- recurring items recurring items Figures in thousands of euro
Net interest income 1,626,615 1,497,891 128,724 8.6% Dividends and similar income 13,090 9,678 3,412 35.3% Profits of equity-accounted investees 23,391 24,136 (745) (3.1%) Net fee and commission income 1,546,263 1,335,033 211,230 15.8% of which performance fees 22,894 26,349 (3,455) (13.1%) Net income from trading, hedging and disposal/repurchase activities and from assets/liabilities designated at fair value 196,676 153,711 42,965 28.0% Net income from insurance operations 12,369 - 12,369 - Other net operating income/expense 104,140 99,050 5,090 5.1%
Operating income 3,522,544 3,119,499 403,045 12.9% Staff costs (1,480,942) (1,275,306) 205,636 16.1% Other administrative expenses (787,630) (660,003) 127,627 19.3% Depreciation, amortisation and net impairment losses on property, plant and equipment and intangible assets (158,463) (143,506) 14,957 10.4%
Operating expenses (2,427,035) (2,078,815) 348,220 16.8%
Net operating income 1,095,509 1,040,684 54,825 5.3% Net impairment losses on loans (728,343) (1,565,527) (837,184) (53.5%) Net impairment losses on other financial assets and liabilities (2,695) (53,117) (50,422) (94.9%) Net provisions for risks and charges (9,009) (42,885) (33,876) (79.0%) Profits from the disposal of equity investments - 1,024 (1,024) (100.0%) Pre-tax profit (loss) from continuing operations 355,462 (619,821) 975,283 n.s. Taxes on income for the year from continuing operations (139,751) 144,216 (283,967) n.s. (Profit) loss for the year attributable to non-controlling interests (27,023) 1,248 (28,271) n.s.
Profit (loss) for the year attributable to the shareholders of the Parent 188,688 (474,357) 663,045 n.s.
The normalised reclassified income statement for the year ended 31st December 2017 relates to the new perimeter of the UBI Banca Group.
78 WorldReginfo - 443ee11b-e188-477f-9b0d-38a07c5d7da1
Reclassified consolidated income statement net of the most significant non-recurring items: details
2017-2020 Business Plan Other non-recurring items 2019/2020 Business Plan Other non-recurring items
2016 Impairment 2016 losses on IDPF (interbank 2017 Stand-Alone deposit protection Stand-Alone UBI Banca AFS 2017 Profit on the Additional Impairment securities in Profit on the fund) UBI Banca Impairment Group Bridge Bank Single Bank Impairmentdisposal of Impairment net of non- Single Bank contribution Profitlosses on the on the IDPF Allocation of disposal of Redundancy intervention Redundancy Brandlosses on Project Project losses onPP&E the and losses on recurring items Group Project to the disposalowned real of net of non- (interbank Badwill HTM expenses expenses for expenses impairmentthe Atlante expenses expenses Atlante Fundequity PP&E expenses Resolution propertiesestate recurring items deposit investments CariCesena Fund investments Fund properties protection Carim and fund) Carismi voluntary scheme
Figures in thousands of euro
Net interest income 1,626,615 1,626,615 1,497,891 1,497,891 Dividends and similar income 13,090 13,090 9,678 9,678 Profits of equity-accounted investees 23,391 23,391 24,136 24,136 Net fee and commission income 1,546,263 1,546,263 1,335,033 1,335,033 of which performance fees 22,894 22,894 26,349 26,349 Net income from trading, hedging and disposal/repurchase activities and from assets/liabilities designated at fair value 252,613 (55,937) 196,676 153,711 153,711 Net income from insurance operations 12,369 12,369 - - Other net operating income/expense 104,140 104,140 99,050 99,050
Operating income 3,578,481 - (55,937) ------3,522,544 3,119,499 ------3,119,499 Staff costs (1,480,942) (1,480,942) (1,275,306) (1,275,306) Other administrative expenses (787,630) (787,630) (734,654) 74,651 (660,003) Depreciation, amortisation and net impairment losses on property, plant and equipment and intangible assets (158,463) (158,463) (143,506) (143,506)
Operating expenses (2,427,035) ------(2,427,035) (2,153,466) - - - - 74,651 - - - (2,078,815)
Net operating income 1,151,446 - (55,937) ------1,095,509 966,033 - - - - 74,651 - - - 1,040,684 Net impairment losses on loans (728,343) (728,343) (1,565,527) (1,565,527) Net impairment losses on other financial assets and liabilities (133,963) 89,265 42,003 (2,695) (130,057) 73,030 3,910 (53,117) Net provisions for risks and charges (9,009) (9,009) (42,885) (42,885) Profits from the disposal of equity investments 859 (859) - 22,969 (21,945) 1,024
Pre-tax profit (loss) from continuing operations 280,990 - (55,937) - - - 89,265 (859) - 42,003 355,462 (749,467) - - - 73,030 74,651(21,945) - 3,910 (619,821) Taxes on income for the year from continuing operations (120,367) 18,499 (24,548) 555 (13,890) (139,751) 182,388 (20,083) (24,271) 7,257 (1,075) 144,216 (Profit) loss for the year attributable to non-controlling interests (27,023) (27,023) 1,267 (17) (2) 1,248 Profit (loss) for the year attributable to the shareholders of the Parent before the Business Plan and other impacts 133,600 - (37,438) - - - 64,717 (304) - 28,113 188,688 (565,812) - - - 52,947 50,363 (14,688) - 2,833 (474,357) Redundancy expenses net of taxes and non-controlling interests (41,093) 41,093 - (207,783) 207,783 - Impairment losses on brands net of taxes and non-controlling interests - - (37,936) 37,936 - Single Bank Project expenses net of taxes and non-controlling interests (6,615) 6,615 - (15,541) 15,541 - Impairment losses on property, plant and equipment net of taxes and non-controlling interes(2,908) 2,908 - (3,078) 3,078 - New Banks Project expenses net of taxes and non-controlling interests (33,237) 33,237 - - - Negative consolidation difference 640,810 (640,810) - - -
Profit (loss) for the year attributable to the shareholders of the Parent 690,557 (640,810) (37,438) 33,237 6,615 41,093 64,717 (304) 2,908 28,113 188,688 (830,150) 207,783 37,936 15,541 52,947 50,363 (14,688) 3,078 2,833 (474,357)
ROE (Profit/(Equity + Profit for the year)) 7.0% 1.9% n.s. n.s. Cost:income ratio 67.8% 68.9% 69.0% 66.6%
The normalised reclassified income statement for the year ended 31st December 2017 relates to the new perimeter of the UBI Banca Group.
79 WorldReginfo - 443ee11b-e188-477f-9b0d-38a07c5d7da1
Reconciliation schedule for the year ended 31st December 2017
RECLASSIFIED INCOME STATEMENT Reclassifications 2017 2017
Depreciation Mandatory Net income Impairment 2017-2020 BP 2017-2020 BP Re cla ssifie d Items Profit of equity- for improve- 2017-2020 BP consolidated Tax from losses on Single Bank New Banks consolidated accounted ments to Redundancy financial recoveries insurance real estate Project Project financial investees leased expenses operations properties expenses expense statements assets statements Figures in thousands of euro
10.-20. Net interest income 1,651,238 (24,623) 1,626,615
70. Dividends and similar income 13,684 (594) 13,090 Profits of equity-accounted investees - 23,391 23,391
40.-50. Net fee and commission income 1,546,791 (528) 1,546,263 80.+90.+ Net income from trading, hedging and disposal/repurchase activities and 100.+110. from assets/liabilities designated at fair value 265,103 (12,490) 252,613
150.+160. Net income from insurance operations (18,256) 30,625 12,369
220. Other net operating income/expense 319,825 (229,386) 6,091 7,610 104,140 Operating income 3,778,385 (229,386) 23,391 6,091 - - - - - 3,578,481
180.a Staff costs (1,542,463) 61,521 (1,480,942)
180.b Other administrative expenses (1,076,815) 229,386 9,862 49,937 (787,630) Depreciation, amortisation and net impairment losses on property, plant (156,684) 200.+210. and equipment and intangible assets (6,091) 4,312 (158,463) Operating expenses (2,775,962) 229,386 - (6,091) - 4,312 61,521 9,862 49,937 (2,427,035) Net operating income 1,002,423 - 23,391 - - 4,312 61,521 9,862 49,937 1,151,446
130.a Net impairment losses on loans (728,343) (728,343) 130. b+c+d Net impairment losses on other financial assets and liabilities (133,963) (133,963)
190. Net provisions for risks and charges (9,009) (9,009)
240.+270. Profits from the disposal of equity investments 24,250 (23,391) 859 Pre-tax profit from continuing operations 155,358 - - - - 4,312 61,521 9,862 49,937 280,990
290. Taxes on income for the year from continuing operations (79,176) (1,404) (20,345) (3,206) (16,236) (120,367)
330. Profit for the year attributable to non-controlling interests (26,435) (83) (41) (464) (27,023) Profit for the year attributable to the shareholders of the Parent before the Business Plan and other impacts 49,747 - - - - 2,908 41,093 6,615 33,237 133,600 180 a. Redundancy expenses net of taxes and non-controlling interests - (41,093) (41,093) 180 b. Single Bank Project expenses net of taxes and non-controlling interests - (6,615) (6,615) 180 b. New Banks Project expenses net of taxes and non-controlling interests - (33,237) (33,237) 200. Impairment losses on real estate net of taxes and non-controlling interests - (2,908) (2,908) 265, Negative consolidation difference 640,810 640,810 340. Profit for the year attributable to the shareholders of the Parent 690,557 ------690,557
Reconciliation schedule for the year ended 31st December 2016
2016 2016 RECLASSIFIED INCOME STATEMENT Stand-Alone Reclassifications Stand-Alone UBI Banca UBI Banca Group Group Redundancy Ite ms Single Bank Depreciation expenses (purs. Brand Mandatory Project Reclassified Profit of equity- for improve- to 11 12 2016 impairment Real estate consolidated Tax expenses consolidated accounted ments to Agreement and (2019/2020 property financial recoveries (2019/2020 financial investees leased adjustments Business impairment Business statements assets purs. to 23 12 Plan) statements Plan) Figures in thousands of euro 2015 Agreement)
10.-20. Net interest income 1,497,891 1,497,891
70. Dividends and similar income 9,678 9,678 Profits of equity-accounted investees - 24,136 24,136
40.-50. Net fee and commission income 1,335,033 1,335,033 80.+90.+ Net income from trading, hedging and disposal/repurchase activities 100.+110. and from assets/liabilities designated at fair value 153,711 153,711
220. Other net operating income/expense 306,541 (212,416) 4,925 99,050 Operating income 3,302,854 (212,416) 24,136 4,925 - - - - 3,119,499
180.a Staff costs (1,599,717) 324,411 (1,275,306)
180.b Other administrative expenses (970,465) 212,416 23,395 (734,654) Depreciation, amortisation and net impairment losses on property, 200.+210. plant and equipment and intangible assets (206,020) (4,925) 62,854 4,585 (143,506) Operating expenses (2,776,202) 212,416 - (4,925) 324,411 62,854 23,395 4,585 (2,153,466) Net operating income 526,652 - 24,136 - 324,411 62,854 23,395 4,585 966,033 130.a Net impairment losses on loans (1,565,527) (1,565,527) 130. b+c+d Net impairment losses on other financial assets and liabilities (130,057) (130,057)
190. Net provisions for risks and charges (42,885) (42,885)
240.+270. Profits from the disposal of equity investments 47,105 (24,136) 22,969 Pre-tax loss from continuing operations (1,164,712) - - - 324,411 62,854 23,395 4,585 (749,467) 290. Taxes on income for the year from continuing operations 319,619 (107,283) (20,836) (7,606) (1,506) 182,388
330. Loss for the year attributable to non-controlling interests 14,943 (9,345) (4,082) (248) (1) 1,267 Loss for the year attributable to the shareholders of the Parent before the Business Plan and other impacts (830,150) - - - 207,783 37,936 15,541 3,078 (565,812) 180.a Redundancy expenses net of taxes and non-controlling interests - (207,783) (207,783) 210. Impairment losses on brands net of taxes and non-controlling interests - (37,936) (37,936) Single Bank Project expenses net of taxes and non-controlling 180.b interests - (15,541) (15,541) Impairment losses on property, plant and equipment net of taxes and 200. non-controlling interests - (3,078) (3,078)
340. Loss for the year attributable to the shareholders of the Parent (830,150) ------(830,150)
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Notes to the reclassified consolidated financial statements
The mandatory financial statements have been prepared on the basis of Bank of Italy Circular No. 262 of 22nd December 2005 and subsequent updates. Therefore, for the purposes of the preparation of these financial statements, the provisions of the fourth update of that document issued on 15th December 2015 have been observed. These statements include the balance sheet and income statement figures for Banca Adriatica (the former Nuova Banca delle Marche), Banca Tirrenica (the former Nuova Banca dell’Etruria e del Lazio) and Banca Teatina (the former Nuova Cassa di Risparmio di Chieti ) and their respective subsidiaries from 1st April 2017, taken as the date on which the acquisition of control took place in accordance with the IFRS 3. The figures as at and for the year ended 31st December 2017 are fully comparable with those as at and for the periods ended 30th June 2017 and 30th September 2017, but they are not comparable with previous comparative periods which represent the UBI Banca Group without the contribution of the New Banks.
Reclassified financial statements have been prepared in order to allow a meaningful management commentary on capital and operating figures. In detail: - from a balance sheet viewpoint, the reclassified statement as at 31st December 2017 is presented with an “aggregate” column as at 31st December 2016 (in order to also take account of figures relating to the New Banks) and this allows a consistent examination of balance sheet items on an annual basis, in terms that are fully in line with the tables contained in the sections that give a commentary. In order to improve the comparability of the reclassified financial statements, the balance sheet figures for the New Banks have been adjusted to sterilise the impacts of movements that took place in the non-performing loan positions subject to transfer (to REV in the first quarter of 2017 – second tranche –and to the Atlante Fund II in the second quarter of 2017), as well as the repayment of the performing loan to REV (resulting from the first transfer in January 2016) which took place in the first quarter of 2017, for a total of €2,485 million, with the reclassification of these items mainly into cash and cash equivalents and to a marginal extent into the item amounts due to banks. The statement reporting the quarterly balance sheets, on the other hand, shows figures inclusive of the New Banks as at 31st December, 30th September and 30th June 2017, while all the previous periods relate to the Stand-Alone UBI Banca Group.
- from an income statement viewpoint, the reclassified income statement has been drawn up with the effects on the 2017 income statement of the purchase price allocation on the new banks (badwill) highlighted. With regard to the comparative periods, consideration was given to the very particular situation in which the New Banks found themselves in 2016, since these had been generated from resolutions of the preceding banks that had been placed under administration. As a result of those very particular situations it was not considered representative nor easy to understand if comparative income statement figures were presented to give an account of the Group’s profitability in 2016 inclusive of the new banks. The income statement for the UBI Banca Group (inclusive of the New Banks acquired) has been adjusted for the period 1st April to 10th May in order to eliminate the operating impacts (interest income, impairment losses on loans and losses on disposals) of the loan portfolio transferred to the Atlante Fund on 10th May 2017 with effect from 1st January 2017. As also already reported the income statements included the results of UBI Banca International until the end of October (10 months), because this company was sold with effect from 1st November 2017.
These statements have not been subjected to audit by the independent auditors.
On the basis of the foregoing, along the same lines as in previous financial reports, the following rules have been applied to the reclassified financial statements to allow a vision that is more consistent with a management accounting style: - the item profits (losses) of equity-accounted investees includes the profits (losses) of equity-accounted investees included within item 240 in the mandatory financial statements; - net income from insurance operations comprises the following revenues of BancAssurance Popolari Spa and BancAssurance Popolari Danni Spa: net interest, dividends, net fees and commissions, the result for finance activities, net premiums (item 150), the balance on income and expenses of insurance operations (items 160 and 220); - the item other net operating income/expense includes item 220, net of the reclassifications mentioned under other points; - the tax recoveries recognised within item 220 of the mandatory financial statements (other net operating income/expenses) were reclassified as a reduction in indirect taxes included within other administrative expenses; - the item net impairment losses on property, plant and equipment and intangible assets includes items 200 and 210 in the mandatory financial statements and also the instalments relating to the depreciation of leasehold improvements classified within item 220; - the item profits (losses) from the disposal of equity investments includes the item 240, net of profits (losses) of equity-accounted investees and also item 270 in the mandatory financial statements;
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* * *
- expenses incurred in relation to the new 2019/2020 Business Plan have been separated and stated on single lines (net of taxes and non-controlling interests) at the foot of the statements (the expenses were recognised in the income statement initially in the second quarter of 2016, at the time of its approval, with slight adjustments following, amongst other things, the update of the plan in May 2017) as follows: • redundancy expenses include part of item 180a in the mandatory financial statements; • expenses incurred for the Single Bank Project contain part of item 180b in the mandatory financial statements; • impairment of brands, recognised in the second quarter of 2016, includes part of item 210; • the expenses incurred in relation to the Project to Acquire the New Banks include part of item 180b; • the negative consolidation difference (item 265) incorporates, as an income item, the badwill that arose at the time of the first consolidation from the difference between the purchase price and the equity of the New Banks; - net impairment losses on property, plant and equipment (net of taxes and non-controlling interests) include part of item 200 in the mandatory financial statements.
The reconciliation of the items in the reclassified financial statements with the figures in the mandatory financial statements has been facilitated, on the one hand, with the insertion in the margin against each item of the corresponding number of the item in the mandatory financial statements with which it is reconciled and, on the other hand, with the preparation of special reconciliation schedules.
The comments on the performance of the main balance sheet and income statement items are made on the basis of the reclassified financial statements and of the reclassified financial statements for the comparative periods, and the tables providing details included in the subsequent sections of this financial report have also been prepared on that same basis.
In order to facilitate analysis of the Group’s operating performance and in compliance with Consob Communication No. DEM/6064293 of 28th July 20061, two special schedules have been included. One is a brief summary (which provides a comparison of the normalised results for the period) and one is more detailed, which shows the impact on earnings of the principal non-recurring events and items – since the relative effects on capital and cash flow, being closely linked, are not significant – which are summarised as follows:
Fiscal year 2017: - expenses in connection with the approval of the 2017/2020 Business Plan (allocation of badwill, limited to the negative consolidation difference, profit from the partial disposal of the HTM portfolio, acquisition of the New Banks, expenses incurred for the Single Bank Project, redundancy expenses); - impairment losses on investment in the Atlante Fund; - expenses relating to the IDPF (Interbank Deposit Protection Fund) intervention for Caricesena, Cassa di Risparmio di Rimini and Cassa di Risparmio di San Miniato. - profit on the disposal of property, plant and equipment and equity investments; - impairment losses on real estate property relating to the Parent and BPB Immobilare.
Fiscal year 2016: - expenses connected with the approval of the 2019/2020 Business Plan (redundancy expenses, impairment losses on network bank brands, IT expenses and legal and corporate affairs expenses connected with the Single Bank Project); - impact of the valuation of the Atlante Fund, additional contribution to the Resolution Fund, impairment of the IDPF (Interbank Deposit Protection Fund) Voluntary Scheme (Cassa di Risparmio di Cesena); - profit on the disposal of real estate properties; - impairment losses on property, plant and equipment (owned properties).
1 Following the entry into force (on 3rd July 2016) of ESMA guidelines 2015/1415 which the Consob (Italian securities market authority) incorporated in its issuer and supervisory and monitoring practices, the UBI Banca Group criteria for the identification of non-recurring items (reported in the normalised statements) have been subject to revision. The new criteria approved by the Management Board on 18th October 2016 limit the nature of non-recurring expenses to clearly specified items of income and expense (connected for example with the adoption of a Business Plan, or with the impacts of valuations and disposals of property plant and equipment, tangible and financial assets and HTM investments, with the effects of regulatory and methodological changes and also with extraordinary events including those of a systemic nature).
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The consolidated income statement
The income statement figures commented on are based on the reclassified consolidated financial statements (the income statement, the quarterly income statements and the income statement net of the more significant principal non-recurring items – in brief and detailed versions) contained in another section of this report and the tables furnishing details presented below are also based on those statements. The notes that follow those reclassified financial statements may be consulted as may the reconciliation schedules for a description of the reclassification. The commentary examines changes that occurred in 2017 compared with 2016, and also (highlighted with a slightly different background colour) those occurring in the fourth quarter of 2017 compared with the preceding three months. Furthermore, the data for the period ended 31st December 2017 includes the operating figures for the New Banks acquired from the date after their acquisition and therefore only relating to the second, third and fourth quarters only: the figures for the comparative period ended 31st December 2016 as well as for the first quarter of 2017 have not been restated and therefore relate to the historical UBI Banca Group (termed the “stand-alone” UBI Banca Group). In fact, given the particular operating circumstances of these New Banks prior to their acquisition, a restatement of the comparative figures would be scarcely representative.
The UBI Banca Group reported a profit of €690.6 million in 20171 (compared with a loss of €830.2 million in 2016 due to the impacts of the impairment of the investments in the Atlante Fund, the additional contributions to the Resolution Fund and the adjustments relating to the Interbank Deposit Protection Fund Voluntary Scheme and, above all, the charges relating to implementation of the 2019/2020 Business Plan). The result for the year included the negative consolidation difference of €640.8 million taken to the income statement on a single occasion to reflect the badwill resulting from the acquisition of the New Banks2.
At the quarterly level, a loss of €11.9 million was recorded in the fourth quarter, essentially due to greater impairment losses on loans and the recognition of additional redundancy expenses negotiated in the Trade Union Agreement of 26th October 2017, only partially offset by the improvement in operating income. The “badwill reversal” 3 amounted to a negative €9.7 million for the quarter, compared to a positive contribution of €42.9 million recorded in the period July-September 2017, which ended with a profit of €6.4 million.
Ordinary operations generated operating income of €3,578.5 million, up from €3,119.5 million in 2016, benefiting from the recovery of net interest income, the significant growth in net fee and commission income and a larger contribution from financial activities. From a quarter-on-quarter viewpoint, operating income continued to rise, climbing to €983.2 million (from €856.3 million in the preceding three months), due, as in the annual comparison, to the increase in core revenues – net interest income (inclusive, in the fourth quarter, of the benefit from TLTRO II) and fee and commission income — and the results of trading.
Net interest income, inclusive of the “badwill reversal” of a positive €3 million, amounted to €1,626.6 million, compared to €1,497.9 million in the comparative period (+8.6%), reflecting the contribution resulting from the inclusion of the New Banks and the accounting treatment of the benefit from the TLTRO II financing of €68.8 million4 provided by the ECB. In detail:
1 Normalised profit amounted to €188.7 million compared to € -474.4 million in 2016. 2 The income statement and balance sheet results include the impact of the allocation of badwill amounting as at 31st March 2017 to €354.5 million. That allocation, which results from the restatement of the assets and liabilities acquired at fair value as at the date of the first consolidation, led to the write-down mainly of non-performing loans, while the value of medium to long-term performing loans was in line with the stated value. Much smaller write-downs were recognised on medium to long-term funding, on software and on contracts relating to real estate property funds, while slightly positive values were found for assets under management and core deposits. In accordance with IFRS 3, due to the complexity of this process, the accounting treatment of business combinations may be definitively completed within 12 months of the acquisition date. At 31st December 2017, the allocation process had become definitive: the amounts temporarily estimated as at 30th June 2017 had in some cases been adjusted on the basis of additional and/or more accurate information obtained in the interim. Following the allocation mentioned above, a portion remained (termed “bargain purchase”), which was recognised temporarily in the income statement in the second quarter amounting to €612.9 million. In the third and fourth quarters, this portion increased by a net amount of +€3.3 million and +€24.6 million, respectively, due to the availability of new information.The adjustments made to balance sheet items as part of the purchase price allocation also gave rise, already from the second quarter, to a “reversal” (the sum of the positive and negative impacts) amounting to +€47 million at an annual level. Part G of the notes to the consolidated financial statements, “Business combination transactions concerning companies or lines of business” may be consulted for further information. 3 Effects on the income statement of the purchase price allocation on the new banks. 4 The amount recognised refers to the interest accrued since June 2016, the date on which the first TLTRO II loan was contracted by the UBI Banca Group (€10 billion, raised to €12.5 billion in March 2017 and kept at this level for the rest of the year). The interest accrued in 2016 amounts to €20.6 million.
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• business with customers yielded net interest income of €1,401 million, (€1,279.2 million in 2016). The improvement was due in part to the contributions provided by the New Banks: asset volumes – in terms of average balances calculated for management purposes according to gross interest-bearing loans – increased by 11.3% (+13% for medium-to-long term and +5% for short-term), partially offset by the rate effect on the loan portfolio, which shows a narrowing of the mark-up over both time horizons. Funding also increased (+13.2% in terms of average outstanding balances, in particular with regard to short-term funding), resulting in greater interest expense on customer deposits. The customer spread reduced by 7 basis points overall, affected by a greater reduction in interest rates on lending compared with those on funding. The balance also includes the smaller differentials collected primarily in relation to hedges on bonds, partly following the gradual reduction of this business, and on mortgages (€140 million compared with €188.8 million before); • the securities portfolio generated net interest income of €186.6 million, down compared to the previous year (€227.1 million in 2016), essentially due to the significant decline (- €174.5 million) in revenues on the portfolio of available-for-sale financial assets, on which profits were taken during the year, not offset by the increase in interest on the HTM portfolio, which showed higher average balances in 2017 than in 2016. The contribution from the trading book remained negligible. This business also incorporated the cost of uncovered short positions of marginal amounts (down from €2.6 million to €0.6 million) and hedging derivatives (-€19.5 million compared to -€121.2 million in the comparative period due to the close down of hedges in relation to sales of securities); • business on the interbank market generated a positive balance of €38.7 million (-€9.3 million in 2016), benefiting from the recognition of €68.8 million relating to the TLTRO II bonus, despite a parallel increase in interest expense. Interest expense reflects both the greater investment of liquidity with the ECB starting in June and the larger average debt exposure to other banks.
Interest and similar income: composition
2016 Debt Other 2017 Stand-Alone Financing instruments transactions (*) UBI Banca Figures in thousands of euro Group 1. Financial assets held for trading 881 - 1,424 2,305 2,889 2. Financial assets designated at fair value - - - - - 3. Available-for-sale financial assets 127,739 - - 127,739 302,247 3. Held-to-maturity investments 76,657 - - 76,657 45,773 5. Loans and advances to banks 175 77,634 30 77,839 8,807 6. Loans and advances to customers 7,479 1,823,389 109 1,830,977 1,733,117 7. Hedging derivatives X X 120,658 120,658 67,247 8. Other assets X X 402 402 1,041 Total 212,931 1,901,023 122,623 2,236,577 2,161,121
Interest and similar expense: composition
2016 Other 2017 Stand-Alone Borrowings Securities transactions (*) UBI Banca Figures in thousands of euro Group
1. Due to central banks (16,931) X - (16,931) (3,792) 2. Due to banks (22,400) X - (22,400) (14,013) 3. Due to customers (87,675) X (946) (88,621) (46,324) 4. Debt securities issued X (481,365) - (481,365) (596,433) 5. Financial liabilities held for trading (566) - - (566) (2,593) 6. Financial liabilities designated at fair value - - - - - 7. Other liabilities and provisions X X (79) (79) (75) 8. Hedging derivatives X X - - - Total (127,572) (481,365) (1,025) (609,962) (663,230)
Net interest income 1,626,615 1,497,891
(*) The figures for the period ended 31st of December 2017 include interest for the New Banks acquired from 1st April 2017. Interest on non-performing assets does not include interest on arrears and relates almost entirely to financing granted to customers amounting to €183.7 million for 2017 (€184.7 million in 2016).
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At the quarterly level, net interest income progressively improved: the item began to recover constantly in the second quarter (growth from the first to the second quarter is essentially due to the inclusion of the New Banks), particularly with regard to business with customers. A management accounting analysis shows that this recovery may be attributed to the component of funding that registered a decline in average volumes (-€0.8 billion, essentially due to the significant decline in bond funding and, albeit in more modest terms, in short-term customer funding, despite an increase in medium-to-long term funding on institutional markets), accompanied by a decrease of five basis points in the average rate paid on funding; these factors were more than enough to offset the smaller contribution of loans, despite a slight increase in lending volumes. The lower cost of funding balanced out the decline in the average rate on loans (penalised by strong competition, above all in the short term). Accordingly, the customer spread remained essentially stable between the two quarters (+1 bp). Interest on financial activities, after declining from the second quarter to the third due to the actions taken on the securities portfolios of the acquired Banks, stabilised at just above €44 million. Turning to the contribution of the interbank market, the fourth quarter, as emphasised above, reflects the recognition of the TLTRO II interest, net of which, the negative balance (-€11.2 million) would be slightly higher than in the third quarter, attributable to higher interest expense, primarily on amounts due to banks other than central banks.
Quarterly net interest income
2017 1st Quarter Stand-Alone 4th Quarter 3rd Quarter 2nd Quarter UBI Banca Figures in thousands of euro Group
Banking business with customers 376,570 367,622 355,889 300,899 Financial activities 44,644 44,247 48,959 48,797 Interbank business 57,654 (9,527) (6,947) (2,515) Other items 75 130 112 6
Net interest income 478,943 402,472 398,013 347,187
During the year, dividends and similar income amounted to €13.1 million (+€3.4 million compared to 2016), of which: €7.6 million relating to UBI Banca's AFS portfolio (€2.7 million attributable to the fourth quarter), €1 million to the Parent Company's private-equity investments classified according to the FVO; €1 million attributable to Banca Teatina and €0.6 million on insurance business. The return on the stakes held in the Bank of Italy5 contributed €1.4 million to the amount relating to AFS securities.
Profits of equity-accounted investees6 totalled €23.4 million (€24.1 million in the previous year), deriving from: Lombarda Vita (€8.5 million versus the previous €11.5 million), Zhong Ou (€6.7 million compared to €7.3 million) and Aviva Vita (€8.2 million from €5.5 million).
Net fee and commission income rose to €1,546.3 million (up €211.2 million compared with 2016) as a result of the performance of management, trading and advisory services, only partially dampened by the weakness of general banking services and by a decrease in performance fees by UBI Pramerica SGR, which were down €3.5 million on an annual basis. In detail: • management, trading and advisory services rose to €838.1 million from €746.1 million7 (+€92 million), driven by placement of securities (+€24.4 million), portfolio management (+€44.7 million), distribution of third party services (+€33.8 million, of which +€31 million relating to insurance products, to be attributed to performance of average new business volumes), against greater fee and commission expense for the distribution of financial
5 These are dividends attributable to the former BRE and former CARIME collected in the first quarter. 6 The item consists of the profits of the companies recognised on the basis of the percentage interest held by the Group. 7 The amount consists of management, trading and advisory services net of the corresponding expense items and is calculated excluding currency trading.
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instruments, products and services through indirect networks (+€8.4 million) tied to the business volumes of financial advisors. Trading (-€2.5 million) and the receipt and transmission of orders (-€1.3 million) declined slightly; • ordinary banking business8 contributed €708 million (€589 million in 2016), with much of the increase attributable to the contribution from the New Banks. In particular, there were increases in collection and payment services (+€25.4 million), guarantees issued and received (+€2.3 million), current account administration (+€46.3 million), other services (+€44.9 million, due in part to an increase of +€22.2 million in commitment fees, accounting for €156.3 million of the aggregate) and currency trading (+€1.5 million). On the other hand, factoring declined (-€1.4 million).
Fee and commission income: composition Fee and commission expense: composition
2016 2016 Stand- Stand-Alone Alone UBI 2017 (*) 2017 (*) UBI Banca Banca Group Group Figures in thousands of euro Figures in thousands of euro
a) guarantees granted 46,115 44,042 a) guarantees received (1,182) (1,419) c) management, trading and advisory services 945,017 838,063 c) management and trading services: (98,428) (85,082) 1. trading in financial instruments 14,352 16,572 1. trading in financial instruments (10,969) (10,691) 2. foreign exchange trading 8,455 6,953 2. foreign exchange trading (1) (36) 3. portfolio management 388,719 343,372 3. portfolio management (8,981) (8,311) 3.1. individual 78,519 74,660 3.1. own (63) - 3.2. collective 310,200 268,712 3.2. on behalf of third parties (8,918) (8,311) 4. custody and administration of securities 9,543 8,733 4. custody and administration of securities (6,643) (5,357) 5. depository banking - - 5. placement of financial instruments (8,701) (5,996) 6. placement of securities 260,491 233,396 6. financial instruments, products and 7. receipt and transmission of orders 34,290 35,621 services distributed through indirect networks (63,133) (54,691) 8. advisory activities 8,744 6,789 d) collection and payment services (52,163) (44,649) 8.1 on investments 8,744 6,789 e) other services (45,533) (42,809) 9. distribution of third party services 220,423 186,627 Total (197,306) (173,959) 9.1. portfolio management 366 22 9.1.1. individual 366 22 9.2. insurance products 191,910 160,872 9.3. other products 28,147 25,733 d) collection and payment services 179,113 146,234 e) servicer activities for securitisation transactions 132 - f) services for factoring transactions 12,559 13,937 i) current account administration 239,475 193,141 j) other services 321,158 273,575 Total 1,743,569 1,508,992 Net fee and commission income 1,546,263 1,335,033
(*) The figures for the year ended 31st December 2017 include the contribution from the New Banks from 1st April 2017.
At the quarterly level, net fee and commission income rose to €395 million, from €389.8 million in the preceding three months. In detail, management, trading and advisory services increased to €212 million from the previous €205.8 million: among the main components, there were increases in portfolio management (+€13 million, of which €10.9 million of performance fees), revenues from the distribution of third party services (+€2.7 million) and the receipt and transmission of orders (+€1.7 million). These performances offset the decline in income from trading (-€1 million), placement of securities[ -€6.9 million, reflecting the lesser contribution of up-front fees on the placement of the Group's Sicavs/funds (€23.8 million compared to €35.7 million in the third quarter)] and the increase in the cost of the indirect distribution of financial instruments (+€2.2 million). Banking services declined modestly to €183 million (-€1 million), reflecting gains in current account administration (+€2.2 million, due in part to the seasonal nature of the debiting of traditional accounts), factoring (+€0.3 million) and currency trading (+€0.1 million), more than offset by the downtrend in fees and commissions from collection and payment (-€0.7 million), other services (-€2.4 million, due to the decline in commitment fees of €2.7 million) and the guarantee component (-€0.5 million).
8 All the changes are calculated by subtracting fee and commission expense from the respective fee and commission income.
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Quarterly net fee and commission income
2017 1st Quarter Stand-Alone 4th Quarter 3rd Quarter 2nd Quarter UBI Banca Figures in thousands of euro Group
Management, trading and advisory services (net of the corresponding expense items): 212,050 205,804 217,174 203,107 trading in financial instruments 73 1,054 1,425 831 portfolio management 106,317 93,258 93,043 87,120 custody and administration of securities 893 1,166 534 307 depository bank - - - - placement of securities 54,123 60,991 71,131 65,545 receipt and transmission of orders 8,786 7,121 8,963 9,420 advisory activities 2,091 2,958 1,758 1,937 distribution of third party services 55,775 53,044 56,565 55,039 portfolio management 4 175 182 5 insurance products 45,932 45,059 50,601 50,318 other products 9,839 7,810 5,782 4,716 financial instruments, products and services distributed through indirect networks (16,008) (13,788) (16,245) (17,092) Banking services (net of the corresponding expense items): 182,981 184,033 193,360 147,754 guarantees 10,315 10,862 11,361 12,395 foreign exchange trading 2,246 2,147 2,286 1,775 collection and payment services 33,119 33,792 35,740 24,299 servicer activities for securitisation operations 17 15 100 - services for factoring transactions 3,366 3,089 3,118 2,986 current account administration 65,191 63,038 62,504 48,742 other services 68,727 71,090 78,251 57,557 Net fee and commission income 395,031 389,837 410,534 350,861
During the year, financial activities generated profits of €252.6 million – inclusive of the capital gain on the sale of part of the HTM portfolio (one-off) of €55.9 million – compared to the €153.7 million recorded in the same period of 2016. Details are given as follows: • trading contributed profits of €122.9 million (approximately €70 million in the comparative period), of which +€3.6 million attributable to debt instruments (€3.3 million as profits on trading and €0.3 million from the closure of uncovered short position), +€72.4 million to equity instruments and the related derivatives (almost all listed on regulated markets and referring to equity indices, including, among the capital gains on the derivative instruments, €62.7 million referring to the valuation of options on the Group's portfolio of equity interests), -€0.1 million to units in UCITS, +€33.2 million to foreign exchange trading in relation to business with corporate clients 9 and +€13.4 million to derivatives on debt instruments and interest rates (profits, gains and accruals). The latter, which also incorporate business carried out on behalf of customers, reflect both trading in derivatives (including possible unwinding) and fair value movements in the derivatives themselves (for investment and balanced on the market) as well as the realisation of the relative differentials; • hedging, which consists of the change in the fair value of derivatives and of the relative items hedged, generated a loss of €419 thousand, attributable above all to increases in the value of the derivatives hedging bonds (+€414 thousand in 2016, mainly in relation to positive fair value movements in bonds, almost entirely offset by the negative impacts resulting on assets); • the disposal/repurchase of financial assets/liabilities generated profits of €117.4 million, as follows: +€130.8 million from the sale of financial assets, of which: +€121.9 million from the AFS portfolio (+€113.8 million from debt instruments – including €77.8 million of Italian government bonds held by UBI Banca – +€1 million from equity instruments and €7.1 million from UCITS), -€47 million from the disposal of loans and receivables (bad loans and unlikely to pay exposures), and +€55.9 million (normalised) deriving from the partial sale of the HTM portfolio in June; -€13.4 million from the repurchase of debt securities issued as part of normal direct business with customers in a context of interest rates that are again falling.
In 2016 profits of €91.8 million were recorded, including: €117.1 million on the sale of Italian government bonds, €3.7 million from sales of corporate bonds, €9.2 million from shares of Visa Europe Ltd., €7.3 million from the adjustment of the price of sale of ICBPI in December 2015, €11.3 million from UCITS, of which €9.2 million from the redemption of units of the Centrobanca Sviluppo Impresa Fund, and -€31.5 million from the sale of loans and receivables (chiefly bad loans).
9 The Group does not enter into speculative positions and the results relate to business with customers and on own behalf generally balanced on the market. As a consequence, the items in question (line items 1.5, 4.1 and 3) must be considered together as a whole. On the whole the items relate to the results of spot and forward currency trading by customers (transactions closed and/or existing) and also transactions on behalf of customers balanced operationally by UBI Banca on the market.
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• fair value movements and also profit-taking both on investments in UCITS funds and on private- equity investments generated a profit of €12.8 million, of which €2.2 million relating to UCITS and €10.6 million on equity instruments (-€8.4 million in 2016, resulting from the write-down of the Tages fund and the residual hedge fund position).
Net trading income
Profits from Losses from Net income Gains Losses 2016 Stand- trading trading 2017 (*) Alone UBI Figures in thousands of euro (A) (B) (C) (D) [(A+B)-(C+D)] Banca Group
1. Financial assets held for trading 2,374 28,966 (790) (6,161) 24,389 38,136 1.1 Debt instruments 263 4,622 (496) (1,036) 3,353 4,024 1.2 Equity instruments 1,498 812 (107) (73) 2,130 (62) 1.3 Units in UCITS 14 107 (187) (52) (118) (403) 1.4 Financing ------1.5 Other 599 23,425 - (5,000) 19,024 34,577 2. Financial liabilities held for trading - 419 - (164) 255 1,596 2.1 Debt instruments - 419 - (164) 255 1,596 2.2 Payables ------2.3 Other ------3. Financial assets and liabilities: exchange rate differences X X X X 309 (3,859) 4. Derivative instruments 310,554 506,884 (392,413) (341,026) 97,898 34,074 4.1 Financial derivatives 310,554 506,884 (392,413) (341,026) 97,898 34,074 - on debt instruments and interest rates 244,810 486,744 (390,739) (327,440) 13,375 27,686 - on equity instruments and share indices 63,991 10,092 (61) (3,720) 70,302 3,040 - on currencies and gold X X X X 13,899 2,935 - other 1,753 10,048 (1,613) (9,866) 322 413 4.2 Credit derivatives ------Total 312,928 536,269 (393,203) (347,351) 122,851 69,947
Net hedging income (loss)
2016 Stand- 2017 Alone UBI Banca Group Figures in thousands of euro
Net hedging income (loss) (419) 415
Profit from disposal or repurchase
2016 Stand- Net profit Profits Losses Alone UBI 2017 Banca Group Figures in thousands of euro
Financial assets 1. Loans and advances to banks 4 - 4 - 2. Loans and advances to customers 7,042 (54,102) (47,060) (31,482) 3. Available-for-sale financial assets 128,452 (6,513) 121,939 149,014 3.1 Debt instruments 120,036 (6,238) 113,798 120,814 3.2 Equity instruments 1,258 (275) 983 16,917 3.3 Units in UCITS 7,158 - 7,158 11,283 3.4 Financing - - - - 4. Held-to-maturity investments 55,937 - 55,937 - Total assets 191,435 (60,615) 130,820 117,532 Financial liabilities 1. Due to banks - - - - 2. Due to customers 72 - 72 - 3. Debt securities issued 1,052 (14,569) (13,517) (25,762) Total liabilities 1,124 (14,569) (13,445) (25,762) Total 192,559 (75,184) 117,375 91,770
Net profit (loss) on financial assets and liabilities designated at fair value
2016 Stand- 2017 Alone UBI Banca Group Figures in thousands of euro
Net profit (loss) on financial assets and liabilities designated at fair value 12,806 (8,421)
Net income from trading, hedging and disposal/repurchase activities and from assets/liabilities designated at fair value 252,613 153,711
(*) The figures for the year ended 31st December 2017 include the contribution from the New Banks from 1st April 2017.
In the fourth quarter, the profits generated by financial activities nearly doubled to €67.5 million, from €36.4 million in the preceding three months, due above all to the contribution from trading (€70.2 million), which includes €62.7 million relating to the valuation of the options on the Group's portfolio of equity investments.
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The sale of financial assets generated a loss of €3.4 million due to the negative impact of the disposal of loans and receivables (-€17.5 million) and the repurchase of debt securities issued (-€2.4 million), less than fully offset by the net profit on the disposal of AFS instruments (+€16.5 million): in the third quarter, the item benefited from net profits on the sale of the primarily government securities in the AFS portfolio of €31.9 million (whereas the second quarter included the one-off partial disposal of securities from the HTM portfolio of €55.9 million).
Quarterly performance by financial activities
2017 1st Quarter Stand-Alone Figures in thousands of euro 4th Quarter 3rd Quarter 2nd Quarter UBI Banca Group
Net trading income 70,158 9,739 19,004 23,950 Net hedging income (loss) (508) 1,457 721 (2,089) Total assets (1,011) 29,708 58,813 43,310 Total liabilities (2,437) (5,177) (3,022) (2,809) Profit (loss) from disposal or repurchase (3,448) 24,531 55,791 40,501 Net income on financial assets and liabilities designated at fair value 1,290 637 7,881 2,998
Net income 67,492 36,364 83,397 65,360
Net income from insurance operations – which is associated with the insurance subsidiaries (BancAssurance Popolari e BancAssurance Popolari Danni), and thus refers to three quarters, amounted to €12.4 million, of which €3.7 million attributable to the fourth quarter.
Net operating income/expenses Other net operating income/expense rose moderately to €104 million 2016 Stand- from €99 million in 2016, the 2017 Alone UBI result of an increase in both (*) Banca Group income (+€18.4 million) and Figures in thousands of euro expenses (+€13.3 million). Other operating income 175,004 156,627 Among positive components, Recovery of expenses and other income on current accounts 25,984 20,550 mention should be made in Recovery of insurance premiums 19,758 19,923 particular of expense recoveries Recoveries of taxes 229,386 212,416 on current accounts (+€5.4 Rents and other income for property management 6,336 4,898 Recovery of expenses on finance lease contracts 15,679 16,483 million), associated with the Other income and prior year income 107,247 94,773 volumes acquired due to the Reclassification of "tax recoveries" (229,386) (212,416) merger with the New Banks, Other operating expenses (70,864) (57,577) whereas the fast credit Depreciation of leasehold improvements (6,091) (4,925) processing fee, included among Costs relating to finance lease contracts (10,978) (11,124) prior year income, decreased by Expenses for public authority treasury contracts (2,519) (3,334) €4.6 million to €40.4 million. Other expenses and prior year expense (57,367) (43,119) In terms of expenses, the Reclassification of depreciation of leasehold improvements 6,091 4,925 increase in prior year expense Total 104,140 99,050 (+€14.2 million) was primarily (*) The figures for the year ended 31st December 2017 include the contribution from the New Banks attributable to legal defence and from 1st April 2017. revocation (clawback) proceedings.
At the quarterly level, net operating income/expenses increased, amounting to €28.5 million in the fourth quarter (€16.8 million in the previous three months). This result was primarily due to the decrease in expenses (-€14.4 million), as a result of lesser prior year expense (-€14.8 million), accompanied by a smaller decline in income (-€2.7 million), caused by the fall in prior year income (-€3.9 million), while the fast processing fee remained stable (€8.8 million compared to the previous €8.5 million).
It must always be considered that because the underlying items of prior year income and expense items are of a varied and non-structural nature, they often fluctuate greatly from one period to another.
Operating expenses – which do not yet reflect the cost savings envisaged in the Business Plan – amounted to €2,427 million, up by €273.6 million, due to the inclusion of the expenses attributable to the New Banks: in both years, other administrative expenses include the
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ordinary and additional contributions to Staff costs: composition the Resolution Fund and Deposit 2016 Stand- 2017 Guarantee Scheme (DGS) of €69.9 Alone UBI 10 11 (*) million in 2017 and €131.9 million in Banca Group Figures in thousands of euro 2016. In detail: 1) Employees (1,468,927) (1,260,940) • staff costs (which do not include a) Wages and salaries (1,035,532) (893,779) redundancy expenses) amounted to b) Social security charges (276,406) (237,614) €1,480.9 million (+€205.6 million). As c) Post-employment benefits (54,804) (49,511) may be seen from the table, the d) Pension expense (79) - increases were concentrated in e) Provision for post-employment benefits (2,425) (1,694) f) Pensions and similar obligations: expenses for employee staff and (2,543) (1,140) resulted mainly from the inclusion of - defined contribution (1,709) - the New Banks' resources.The increase - defined benefit (834) (1,140) g) Payments to external supplementary pension in headcount offset the decline arising plans: (44,060) (40,912) from the various forms of containment - defined contribution (43,031) (40,535) of labour costs (redundancy schemes12, - defined benefit (1,029) (377) but also extraordinary leave and new i) Other employee benefits (53,078) (36,290) part-time staff) negotiated in the 2) Other staff in service (1,415) (1,484) - Expenses for agency staff on staff leasing (11) (123) various union agreements entered into - Other expenses (1,404) (1,361) from time to time. The increase also 3) Directors and statutory auditors (10,433) (12,882) reflected the stable pay levels as a 4) Expenses for retired staff (167) - result of the national trade union Total (1,480,942) (1,275,306) agreement. Finally, the item declined (*) The figures for the year ended 31st December 2017 include staff costs of the New Banks due to the outlay for Directors and from 1st April 2017. Statutory Auditors (-€2.4 million) as a Other administrative expenses: composition result of to the completion of the Single 2016 Stand- Bank Project; 2017 Alone UBI (*) Banca Group Figures in thousands of euro • other administrative expenses A. Other administrative expenses (745,032) (684,296) (considered net of the components Rent payable (71,626) (49,589) Professional and advisory services (118,653) (101,932) relating to the implementation of the Rentals hardware, software and other assets (44,419) (31,406) Business Plan) increased by €53 million Maintenance of hardware, software and other assets (51,466) (42,942) to €787.6 million (inclusive of the Tenancy of premises (48,220) (42,969) positive impact of the badwill reversal of Property maintenance (27,365) (21,477) Counting, transport and management of valuables (13,745) (11,814) €3.7 million): the aggregate includes the Membership fees (83,630) (144,095) amounts of the aforementioned ordinary Information services and land registry searches (12,315) (8,661) and extraordinary contributions to the Books and periodicals (1,308) (1,109) Postal (12,397) (11,047) Resolution Fund and DGS. Insurance premiums (30,039) (30,533) Excluding these items, other Advertising (24,456) (25,491) administrative expenses were up by Entertainment expenses (1,556) (1,405) €114.9 million, essentially due to the Telephone and data transmission expenses (52,642) (42,026) Services in outsourcing (62,898) (42,858) inclusion of the New Banks, which had Travel expenses (16,175) (14,176) an impact of approximately €138 Credit recovery expenses (39,699) (37,464) million. The table shows a general Forms, stationery and consumables (6,927) (5,959) Transport and removals (8,338) (6,085) increase in the items due to the Security (6,190) (6,602) expansion of the Group. The only two Other expenses (10,968) (4,656) items that declined were “membership B. Indirect taxes (42,598) (50,358) fees”, which in 2016 included an Indirect taxes and duties (15,212) (24,132) Stamp duty (210,222) (196,258) extraordinary contribution to the Municipal property tax (23,167) (20,975) Resolution Fund of €74.7 million, and Other taxes (23,383) (21,409) “advertising and promotion”, down by Reclassification of "tax recoveries" 229,386 212,416 Total (787,630) (734,654)
(*) The figures for the year ended 31st December 2017 include expenses for the New Banks from 1st April 2017. 10 The estimated ordinary portion of the contribution to the Resolution Fund of €31.6 million was recorded in the first quarter of 2017 and then adjusted to €28.2 million in the second quarter (€27.7 million for the “stand-alone” scope) following official notice from the Bank of Italy. An initial estimate of the ordinary contribution to the DGS for 2017 of €33.6 million (€25.2 million for the “stand- alone” scope) was recognised in the third quarter of 2017, raised to €41.7 million in the fourth quarter following notice of the definitive amount from the Interbank Deposit Protection Fund received on 15th December. 11 The ordinary portion of the contribution to the Resolution Fund for 2016 of €32 million had been recognised in the second quarter of 2016, whereas the annual contributions to the Deposit Guarantee Scheme of €25.2 million and additional (non-recurring) contributions to the Resolution Fund of €74.7 million had been booked in the fourth quarter. 12 During the year, voluntary redundancy schemes resulted in the departure of 1,379 employees. Redundancy expenses amounted to €324.4 million in 2016, compared with €61.5 million in all of 2017, of which €57.9 million in the fourth quarter.
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€1 million year-on-year. At the level of indirect taxes, which fell to €42.6 million from the previous €50.4 million, there was a decline in “Indirect taxes and duties” (-€8.9 million) due to the absence of intra-Group VAT on service fees following the establishment of the Single Bank; • depreciation, amortisation and net impairment losses on property, plant and equipment and intangible assets increased to €158.5 million from €143.5 million at the end of 2016. The item includes a negative impact of €6.1 million related to the “badwill reversal” associated with the New Banks' intangibles. In addition to the expansion of the Group's scope, the item's performance also reflected increased depreciation of IT assets (primarily software and central hardware), partially offset by lower depreciation of real estate assets.
A quarterly examination shows a modest increase in operating expenses (€637.5 million from the previous €631.3 million), a sign of the Group's efforts to contain costs. Staff expenses, which rose to €384.3 million from €379.8 million in July-September (+€4.5 million), primarily reflected the effects of the national trade union agreement, promotions, training and internal communication, and provisions relating to company agreements, only partially offset by the decreased outlay relating to variable remuneration and the change in headcount. Other administrative expenses declined to €209.8 million from the previous €211.8 million. The two quarters include the contribution made to the DGS, amounting to €33.6 million in the third quarter and to €8.2 million in the fourth. Net of these payments, the aggregate would have increased by €23.4 million, essentially due to greater planning costs, credit recovery expenses and legal consulting fees incurred in the fourth quarter. depreciation, amortisation and net impairment losses on property, plant and equipment and intangible assets rose from €39.6 million to €43.5 million following the increase in depreciation and amortisation expense incurred in the fourth quarter due to investments that entered into production and write-offs relating to branch closures following the integration of the New Banks.
As a result of the performance reported above, net operating income increased by 19.2% to €1,151.4 million. At the quarterly level, net operating income amounted to €345.6 million, compared to €225.1 million in the third quarter: this performance benefited from an increase in revenue while costs remained essentially stable.
Net impairment losses on loans for the year amounted to €728.3 million (inclusive of the positive “badwill reversal” of €64 million), down from €1,565.5 million in 2016, which included the impairment losses recognised in accordance with the forecasts presented in the 2019/2020 Business Plan. As may be seen from the table, the item was composed of specific net impairment losses on non-performing loans of €749.1 million[, which, additionally, benefited from reversals (exclusive of time reversal) of €271.1 million (€227.1 million in 2016)] and net reversals on the performing portfolio of €20.8 million. The year and, more specifically, the fourth quarter, were affected by: • at a case-by-case level, the recognition of even more prudential impairment losses, partly in view of discussions with the ECB, still in progress, within the framework of the Credit File Review of the Group's corporate portfolio (Specialised Lending, Large Corporate, Corporate and Small Business, but excluding Retail Businesses). In addition, the fourth quarter also included the impairment losses necessitated by the alignment undertaken during the merger with the New Banks; • at the collective level, the reversals attributable to the Product Companies and Banca Teatina. UBI Banca recorded collective impairment losses of €9.4 million during the year (of which €3.1 million in the fourth quarter), reflecting the adverse impact of the extension of the historical series, substantially offset by the reversals on synthetic securitisations 13 occured in December and reduced volume of lending. As a result of the foregoing, the loan loss rate (calculated as total net impairment losses as a percentage of the portfolio of net loans to customers) stood at 0.79%, down from 1.91% in the previous year (in reference to the “stand-alone” UBI Banca Group).
13 The two synthetic securitisations involved €3 billion of unsecured mortgage loans. Benefiting from a guarantee from the European Investment Fund on part of the portfolio (€1 billion) and a cash deposit partially securing the remaining €2 billion, the transaction gave rise to reversals of the impairment losses previously recognised on the underlying assets.
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Net impairment losses on loans: composition
Impairment losses/reversals of Impairment losses/reversals of impairment losses, net 2017 impairment losses, net 4th Quarter Specific Portfolio(*) Specific Portfolio 2017 Figures in thousands of euro Loans and advances to banks - - - 1 - 1 Loans and advances to customers (749,135) 20,792 728,343 (322,198) 11,534 (310,664) Total (749,135) 20,792 728,343 (322,197) 11,534 (310,663) (*) The figures for the year ended 31st December 2017 include impairment losses/reversals for the New Banks from 1st April 2017.
Net impairment losses on loans: composition
Impairment losses/reversals of Impairment losses/reversals of 4th Quarter 2016 impairment losses, net impairment losses, net 2016 Stand-Alone Stand-Alone Specific PortfolioUBI Banca Specific Portfolio UBI Banca Group Group Figures in thousands of euro Loans and advances to banks (127) - (127) (127) - (127) Loans and advances to customers (1,582,605) 17,205 (1,565,400) (208,897) 17,251 (191,646) Total (1,582,732) 17,205 (1,565,527) (209,024) 17,251 (191,773)
At the quarterly level, net impairment losses were contained in the first three quarters of 2017: only the fourth quarter posted a contrasting performance, due to the factors cited above. Accordingly, the loan loss rate amounted to 1.34% in the fourth quarter (0.58% in the third quarter).
Net impairment losses/reversals of impairment losses on loans: quarterly performance
Figures in 1st 3rd 4th Specific PortfolioSpecific Portfolio2nd Quarter Specific PortfolioSpecific Portfolio thousands of Quarter Quarter Quarter euro
2017 (*) (131,363) (3,439) (134,802) (148,868) 1,042 (147,826) (146,707) 11,655 (135,052) (322,197) 11,534 (310,663) 2016 (150,151) (5,188) (155,339) (1,045,673) (5,361) (1,051,034) (177,884) 10,503 (167,381) (209,024) 17,251 (191,773) 2015 (199,326) 9,134 (190,192) (207,544) 8,637 (198,907) (184,540) 16,006 (168,534) (231,544) (13,469) (245,013) 2014 (212,210) 13,584 (198,626) (237,289) 6,814 (230,475) (210,219) 13,169 (197,050) (242,443) (60,023) (302,466) 2013 (155,657) (2,085) (157,742) (212,689) (13,461) (226,150) (192,435) (314) (192,749) (347,302) (19,035) (366,337) 2012 (122,221) (8,949) (131,170) (225,562) 22,381 (203,181) (161,535) 1,207 (160,328) (373,308) 20,773 (352,535) 2011 (96,010) (9,364) (105,374) (142,877) (15,271) (158,148) (110,779) (24,364) (135,143) (195,114) (13,299) (208,413) 2010 (105,366) (26,493) (131,859) (184,080) (5,765) (189,845) (124,200) (9,811) (134,011) (217,327) (33,890) (251,217) 2009 (122,845) (36,728) (159,573) (176,919) (58,703) (235,622) (178,354) (18,995) (197,349) (281,668) 9,001 (272,667) 2008 (64,552) 4,895 (59,657) (85,136) (8,163) (93,299) (77,484) (25,384) (102,868) (219,512) (90,887) (310,399) (*) The figures for the second, third and fourth quarters of 2017 include those relating to the New Banks.
We report the following other items recognised in the income statement: • €134 million (items 130 b) and d) of net impairment losses on other financial assets/liabilities14, essentially attributable to the impairment loss on the Atlante Fund of €89.3 million and charges for commitments to the Interbank Deposit Protection Fund in relation to the intervention to assist Cassa di Risparmio di Cesena, Cassa di Risparmio di Rimini and Cassa di Risparmio di San Miniato15 of €42 million (of which €9.6 million in the fourth quarter; both items have been normalised). In 2016 impairment losses amounted to €130 million, primarily (€73 million, non-recurring) attributable to the impairment of the Atlante Fund, to the substantial elimination of the residual credit risk tied to financial instruments deriving from non-performing positions of UBI Banca, the former Banco di Brescia and the former Banca Popolare di Bergamo (€47.4 million) and to impairment of the equity stake in the Voluntary Scheme of the Interbank Deposit Protection Fund relating to the intervention to assist Cassa di Risparmio di Cesena (€3.9 million, non-recurring);
14 The investment in the Atlante Fund had already been written down by €38.1 million in the first quarter of the year, as recognition of further impairment after a write-down of €19.4 million in December 2016 for an adjustment to the commitment to make a payment at the beginning of January 2017. Impairment of this fund totalling €108.7 million was recognised in 2017 (item 130 b, €38.1 million in the first quarter and €70.6 million in the second quarter, offset by a reversal of €19.4 million – item 130d – for the adjustment to the commitment recognised in 2016). 15 Following the planned purchase of the three banks by Crédit Agricole Cariparma, completed on 21st December 2017, and the related additional capital requirement presented by the acquirer on conclusion of the due diligence, on 7th September 2017 an extraordinary shareholders' meeting of the banks participating in the voluntary scheme approved an increase from €700 million to €795 million in the capital of the scheme itself. See in this respect the information given in the Notes to the consolidated financial statements, Part A – Accounting policies
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• €9 million of net provisions for risks and charges: the item benefits from the “badwill reversal” of €5.3 million relating to the penalties for the disposal of the New Banks' software; the table shows releases of provisions for staff and provisions relating to revocation (claw-back) actions involving the New Banks. In 2016, the item, which amounted to €42.9 million, in addition to the customary provisions for revocation actions and legal Net provisions for risks and charges disputes, included provisions for complaints and potential risks 2016 identified according to a specific 2017 Stand-Alone statistical procedure installed (*) UBI Banca during the year, as well as €9.4 Figures in thousands of euro Group million attributable UBI Factor, Net provisions for revocation clawback risks (310) (5,756) intended to cover the risk of Net provisions for staff costs 4,958 - recourse legal action connected with Net provision for bonds in default (499) (137) factoring business. Net provisions for litigation (8,231) (8,232) Other net provisions for risks and charges (4,927) (28,760) • €859 thousand of net profit on Total (9,009) (42,885) the disposal of investments, (*) The figures for the year ended 31st December 2017 include provisions for the New primarily real estate (branches), Banks from 1st April 2017. compared with the €23 million recorded in 2016, of which €20.7 million from the disposal of the property located on Via della Moscova in Milan and €1.3 million from certain properties owned by the former Banca Carime.
The following amounts were recognised in the fourth quarter: . €3.6 million of net impairment losses on other financial assets/liabilities attributable to the additional expenses (€9.6 million) for commitments to the Interbank Deposit Protection Fund for the intervention to assist Cassa di Risparmio di Cesena, Cassa di Risparmio di Rimini and Cassa di Risparmio di San Miniato, recorded in the final part of the year; in the third quarter of the year, €32.4 million of costs for commitments to the Interbank Deposit Protection Fund were recognised; . €1.5 million of net releases of provisions for risks and charges: the item benefited from the aforementioned “badwill reversal” of €5.3 million relating to contract penalties for the New Bank (recorded in the fourth quarter): net of this entry, impairment losses of -€3.9 million were recognised, compared to -€5.1 million in the third quarter. . €221 thousand of gains on the disposal of equity investments.
As a result of the performance reported above, current operations before tax generated a profit of €281 million, compared with a loss of €749.5 million in 2016. On the quarterly level, profit on continuing operations amounted to €32.6 million in the fourth quarter compared with €53.8 million in the preceding three months. During the year, taxes on income for the period from continuing operations amounted to €120.4 million (compared to a positive €182.4 million in 2016), resulting in a tax rate of 42.8% (compared with a theoretical rate of 33.07%), affected by the losses recognised by the New banks, without considering the tax effect (8.6 percentage points). Net of that effect, the tax rate was affected mainly by the combined effects of IRES (corporate income tax) and IRAP (regional production tax), due to: - non tax-deductible impairment losses, expenses, costs and provisions (2.5 percentage points); - the total non-deductibility for IRAP purposes of provisions for risks and charges and impairment losses on AFS securities and the partial non-deductibility of staff costs (staff employed on temporary contracts), other administrative expenses and depreciation and amortisation (4.4 percentage points).
These impacts were only partially mitigated: - by the ACE (aid to economic growth – allowance for corporate equity) concessions (2.3 percentage points), for which the benefit in 2017 has nevertheless been significantly reduced due to the reduction in the coefficient for the notional return (down from 4.75% in 2016 to 1.6% in 2017); - by the valuation of equity investments according to the equity method, not significant for tax purposes (2.8 percentage points);
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- by untaxed dividends and by reversals of impairment and gains on the disposal of shareholdings that benefit from the participation exemption regime (0.6 percentage points).
In the fourth quarter taxes on income for the period from continuing operations amounted to €8.2 million, compared to €32.8 million in the third quarter: the decline was due to the decrease in profit before taxation and the impact of the losses recognised by the New Banks during the three preceding months, without accounting for the related tax effect.
As a result of the performance reported and also of the profits earned by Group companies, in the fourth quarter profit for the period attributable to non-controlling interests (inclusive of the effects of consolidation entries) came to €8.2 million (€6.4 million in the third quarter).
The annual profit for the year attributable to minority interests amounted to €27 million, compared to a loss of €1.3 million in 2016.
* * *
Finally, the following items (subject to normalisation) have been stated separately net of tax and non-controlling interests; - redundancy expenses of €41.1 million, of which €37.5 million attributable to the fourth quarter (€61.5 million gross of taxes and non-controlling interests of €57.9 million in relation to the agreement dated 26th October 2017); - other administrative expenses, consisting of expenses incurred for the completion of the Single Bank Project of €6.6 million (€9.9 million gross), of which €160 thousand relating to the fourth quarter; - other administrative expenses, consisting of expenses relating to the acquisition of the New Banks of €33.2 million, of which €12.1 million recognised in the fourth quarter (€49.9 million gross, of which €18.1 million in the fourth quarter); - net impairment losses on property, plant and equipment of €2.9 million (€4.3 million gross), recognised in the fourth quarter and relating to properties owned by BPB Immobiliare and UBI Banca; - negative consolidation difference of €640.8 million (€24.6 million in the fourth quarter).
In 2016, the impacts on the income statement of factors designed to enable the achievement of the goals set in the 2019/2020 Business Plan were stated under separate items net of taxes and non-controlling interests. In detail: - redundancy expenses (€207.8 million), essentially referring to the voluntary redundancies provided for in the Trade Union Agreement of 11th December 2016; - net impairment losses on intangible assets (€37.9 million) relating to the former network bank brands; - other administrative expenses (€15.5 million) for project expenses connected with the implementation of the Single Bank Project. The components stated net of taxes and the share attributable to non-controlling interests included, within the framework of impairment tests on owned properties, depreciation, amortisation and net impairment losses of €3.1 million (normalised).
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The comments that follow are based on items in the consolidated balance sheet contained in the reclassified consolidated financial statements on which the relative tables furnishing details are also based. The section “Consolidated companies: the principal figures” may be consulted for information on UBI Banca and other Group companies.
General banking business with customers: funding
In order to render the figures as at 31st December, as at 30th September and as at 30th June 2017 comparable, the figures as at 31st December 2016 have been restated on an aggregate basis in order to take account of those relating to the New Banks which were included in the scope of consolidation from 1st April 2017.
Total banking funding
Within sector nationally, the total funding of Italian banks was essentially stable year-on-year, with a rise in current account funding and a reduction in bonds and term deposits up to two years. Net inflows into open mutual funds more than doubled in 2017, with investors' preferences largely concentrated in bond, flexible, balanced and equity funds, whereas there were net outflows from money-market funds. Within this scenario, the UBI Banca Group recorded (i) an increase in short-term current account funding, which, despite being a form of investment that offers essentially no return, is also a reflection of confidence in the new management on the part of the customers of the New Banks and the form of temporary investment of liquidity chosen by customers, in some cases only for brief periods while awaiting reinvestment in asset management and insurance products better suited to their risk-return profiles, and (ii) a decrease in term deposits, which are no longer subject to renewal at maturity. The bonds issued by the Group declined in accordance with the strategic guidelines set in the 2017-2020 Business Plan. On the institutional market, public placements were successfully completed for covered bonds amounting to €1,250 million nominal and for EMTNs amounting to €1,355 million nominal, issuances on which UBI Banca Bank was able to obtain competitive pricing since investors view it as creditworthy. Indirect funding performed positively, driven by the managed component.
Total banking funding from customers
Changes A/D 31.12.2017 30.9.2017 30.6.2017 31.12.2016 % % % % A B C aggregate amount % Figures in thousands of euro D
Direct banking funding 94,449,770 49.5% 96,554,059 49.4% 98,474,600 50.7% 103,258,237 53.5% -8,808,467 -8.5% Indirect funding 96,465,661 50.5% 98,806,557 50.6% 95,829,633 49.3% 89,782,736 46.5% 6,682,925 7.4% of which: assets under management 65,443,496 34.3% 63,741,153 32.6% 62,043,961 31.9% 58,580,569 30.3% 6,862,927 11.7%
Total banking funding 190,915,431 100.0% 195,360,616 100.0% 194,304,233 100.0% 193,040,973 100.0% -2,125,542 -1.1% Total banking funding net of CCG and institutional fundingyp 176,880,521 181,406,499 179,425,735 176,064,253 816,268 0.5% customers 176,412,836 180,931,274 178,951,387 175,589,978 822,858 0.5%
Total Group banking funding – consisting of all amounts administered on behalf of customers – totalled €190.9 billion as at 31st December 2017, down €2.1 billion on December 2016. The sale of UBI Banca International to EFG International was finalised in the fourth quarter of 2017, resulting in an impact on total funding of €4.1 billion (-€1 billion for direct funding and -€3.1 billion for indirect funding). As shown in the table, if the total is considered net of institutional components (inclusive of the Cassa di Compensazione e Garanzia – CCG, a central counterparty clearing house) and of non- captive totals (the former Centrobanca), then funding from ordinary captive customers stood at approximately €176.4 billion, an improvement of approximately €823 million over twelve months.
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The decline in the item over the year was driven by the reduction in direct banking funding (- €8.8 billion to €94.4 billion), chiefly attributable to debt securities subscribed by non- institutional customers, despite the increase in indirect funding (+€6.7 billion to €96.5 billion), and in the managed component in particular (+€6.9 billion). In accordance with the Business Plan objectives and also with a view to protecting customers in the context of the bail-in rules, a process is in progress to transform maturing bond funding into assets under management. This is also encouraged by low market interest rates.
Direct banking funding
As at 31st December 2017 the UBI Banca Group's direct banking funding amounted to €94.4 billion, down by 8.5% from €103.3 billion at the end of 2016.
During the year, the main short-term items were subject to opposing tendencies: current account balances rose constantly and repurchase agreement declined, particularly in the fourth quarter, when business with the CCG ceased. Turning to the longer-term components, direct funding instruments subscribed by ordinary captive customers (bonds and term deposits) continued to decline progressively, as part of the ongoing shift towards indirect funding instruments.
Amounts due to customers stood at €68.4 billion (€71 billion at the end of 2016), down by 3.6% year-on-year, and were primarily composed of: current accounts and free deposits (€64.3 billion from €61.3 billion in December 2016), an increase of approximately €3 billion over the year, due in part to the confidence shown in UBI Banca's management by the customers of the acquired New Banks. The item reflected a decrease of approximately €1 billion as a result of the balances transferred due to finalisation of the sale of UBI Banca International in the fourth quarter of 2017; term deposits (€2.4 billion in December and €4 billion at the end of 2016), originating almost entirely with the New Banks, underwent a gradual decline of €1.7 billion because they are no longer subject to renewal on maturity; repurchase agreements with the Cassa di Compensazione e Garanzia, a central counterparty clearing house (nil at year end from €3.1 billion in December 2016), confirmed their volatile nature as a tool used to cover temporary liquidity requirements and, when necessary, to finance the securities portfolio. However, reverse repurchase agreements with customers other than the CCG amounted to €167.2 million at year-end (€525.4 million twelve months before), of which €126.2 million attributable to institutional customers of the Parent Company; “financing – other” and “other payables” totalling €1.6 billion (approximately €2 billion at the end of 2016). The former item includes in particular the funds (approximately €277 million) made available to UBI Banca by Cassa Depositi e Prestiti (CDP – a state controlled fund and deposit institution) as part of its programme in support of SMEs, whereas €1.1 billion of the latter refers to UBI Banca.
Debt securities issued declined to €26 billion, a decrease of €6.3 billion from €32.3 billion in December 2016. The item was composed as follows: - bonds of €24.9 billion (€29.9 billion in December 2016), down by €5 billion due to bonds subscribed by ordinary customers that were not renewed at maturity; - certificates of deposit of €1.1 billion (€2.4 billion at the end of 2016), consisting almost totally of instruments relating to customers of the New Banks. The institutional component,
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Direct banking funding from customers
Changes 31.12.2017 31.12.2016 % % aggregate Figures in thousands of euro amount %
Current accounts and deposits 64,258,153 68.0% 61,328,124 59.4% 2,930,029 4.8% Term deposits 2,364,594 2.5% 4,017,886 3.9% -1,653,292 -41.1% Financing 513,627 0.6% 4,118,888 4.0% -3,605,261 -87.5% - repurchase agreements 167,157 0.2% 3,674,740 3.6% -3,507,583 -95.5% of which: repos with the CCG - - 3,149,387 3.1% -3,149,387 -100.0% - other 346,470 0.4% 444,148 0.4% -97,678 -22.0% Other payables 1,298,453 1.4% 1,524,560 1.4% -226,107 -14.8% Total amounts due to customers (item 20 liabilities) 68,434,827 72.5% 70,989,458 68.7% -2,554,631 -3.6% Bonds 24,865,262 26.3% 29,846,361 28.9% -4,981,099 -16.7% Certificates of deposit (a)+(b) 1,144,777 1.2% 2,422,418 2.4% -1,277,641 -52.7% Other certificates 4,904 0.0% - - 4,904 - Total debt securities issued (*) (item 30 Liabilities) 26,014,943 27.5% 32,268,779 31.3% -6,253,836 -19.4% of which: (*) Within the item, subordinated securities, securities subscribed by institutional customers: 14,034,910 14.9% 13,827,333 13.4% 207,577 1.5% consisting of Lower Tier 2 The EMTN programme (**) 4,552,668 4.8% 4,298,583 4.2% 254,085 5.9% issues, amounted to €2,994 Negotiable European Commercial Paper million as at 31st December Programme (former French CD) (a) - - 100,015 0.1% -100,015 -100.0% 2017 (of which €1,272 million consisting of two The covered bond programme 9,482,242 10.1% 9,428,735 9.1% 53,507 0.6% EMTNs) and to €3,012 securities subscribed by ordinary customers: 11,975,129 12.7% 18,366,220 17.8% -6,391,091 -34.8% million as at 31st December of the Group: 2016 (of which €768 million - Certificates of deposit (b) 1,144,777 1.2% 2,322,403 2.2% -1,177,626 -50.7% consisting of one EMTN). (**) The corresponding - bonds 10,362,667 11.0% 15,569,542 15.1% -5,206,875 -33.4% nominal amounts were external distribution networks: €4,496 million as at 31st - Bonds issued by the former Centrobanca 467,685 0.5% 474,275 0.5% -6,590 -1.4% December 2017 (of which €1,250 million nominal Total direct funding 94,449,770 100.0% 103,258,237 100.0% -8,808,467 -8.5% subordinated) and €4,212 million as at 31st Due to customers net of the CCG 68,434,827 67,840,071 594,756 0.9% December 2016 (of which Total direct funding net of the CCG and institutional €750 million nominal funding 80,414,860 86,281,517 -5,866,657 -6.8% subordinated).
(the former French certificates of deposit), amounting to €100 million in December 2016, matured in January 2017 and was not renewed in view of the disposal of UBI Banca International, the issuer company for the programme, with effect from 1st November 2017.
In terms of type of customer, FUNDING IN SECURITIES FROM INSTITUTIONAL CUSTOMERS was composed as follows: Euro Medium Term Notes (EMTNs) amounting to €4.6 billion (+€254.1 million during the year), listed in Dublin and issued by UBI Banca as part of a programme with an issuance ceiling of €15 billion. Total placements of €1,355 million nominal were recorded in the twelve months, two in March (a subordinated public issuance of €500 million and a private placement of €105 million) and one in October (a five-year unsecured senior public issuance of €750 million), against maturities and repurchases of over €1,071 million nominal (€1,038 million of maturities and €33 million of repurchases). In the fourth quarter alone, bonds were placed for a total of €750 million nominal, against total maturities and repurchases of €163.2 million. It should be noted that the figures shown in the table also incorporate the effects of accounting adjustments on the securities; covered bonds amounting to €9.5 billion (+€53.5 billion for the year). During the year bonds were placed for €1,250 million nominal in October, offset by maturities of €1 billion and amortisation instalments of €22.7 million referring to the total amounts matured (in June and December) on an “amortising” bond entered into with the EIB. It should be noted that the changes shown in the table were also affected by the impacts of accounting adjustments on the securities. UBI Banca issued 6.5-year and 12-year “dual tranche” covered bonds, both fixed-rate, with a value date of 15th January 2018, for a total of €1 billion, as part of its First Covered Bond Programme. UBI Banca currently has eleven covered bonds in issue under the first “multioriginator” programme backed by residential mortgages with a €15 billion ceiling for a nominal amount
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of €10,102 million, net of amortisation totalling €148 million nominal (nine bonds for €9,102 million nominal at the end of 2017)1. The bonds are traded in Dublin. As at 31st December 2017 the residential mortgage asset pool formed at UBI Finance to back the issuances amounted to €14.1 billion, of which 98.7% originated by UBI Banca and 1.3% by IW Bank. The portfolio continued to show a high degree of fragmentation, including over 184 thousand mortgages with average remaining debt of €76.3 thousand, distributed with 67.1% in North Italy and in Lombardy especially (47.4% of the total). With effect from 1st May, a transfer of residential mortgages to the programme was made by UBI Banca of remaining debt amounting to approximately €1.7 billion.
A second UBI Banca programme, again “multioriginator”, is also operational with a ceiling of €5 billion, backed by commercial mortgages and by residential mortgages not used in the first programme. So far this programme, listed on the Dublin stock exchange, has only been used for self-retained issuances2. At the end of December the commercial and residential asset pool formed at UBI Finance CB 2 to back these issuances stood at €2.9 billion, of which 99.3% originated by UBI Banca and 0.7% by IW Bank. The portfolio includes approximately 27 thousand mortgages with average residual debt of over €108 thousand, distributed, as for the first programme, with a high concentration in North Italy (68.1%) and in Lombardy especially (46.3% of the total). With effect from 1st June, a transfer of mortgages to the programme was made by UBI Banca of remaining debt amounting to €307 million.
As a consequence of the process to change the mix of investment choices currently in progress, SECURITIES FUNDING FROM ORDINARY CUSTOMERS fell to €12 billion (from €18.4 billion at the end of 2016), approximately 90.4% of which consisting of bonds. In detail: - bonds – almost entirely issued by UBI Banca – amounted to €10.4 billion3 (-€5.2 billion compared to December 2016). This business has focused since the beginning of the year on the issuance of social bonds for €121.8 million nominal, which allowed the Bank to donate part of the funding acquired to support projects of high social value, while securities totalling €4.3 billion nominal (of which €0.7 billion referring to the New Banks) matured and repurchases of €1.2 billion nominal (of which €67 million relating to the New Banks) were made; - residual funding from non-captive customers declined slightly to €467.7 million (€474.3 million at the end of 2016). It consists of securities issued by the former Centrobanca and placed through indirect banking networks.
The table below summarises maturities for bonds in issue at the end of 2017.
Maturities of bonds outstanding as at 31st December2017 *
Subsequent Nominal amounts in millions of euro 2018 2019 2020 2021 2022 Total years
UBI BANCA 6,415 6,336 2,319 1,153 767 6,772 23,762 Bonds ordinary customers 5,026 4,208 771 130 6 23 10,164 Bonds institutional customers 1,389 2,128 1,548 1,023 761 6,749 13,598 of which: EMTNs 1,366 1,105 25 - 750 1,250 4,496 Covered bonds 23 1,023 1,523 1,023 11 5,499 9,102 IW Bank 1 - - - - - 1 Banca Teatina 23 8 - - - 1 32 Total 6,439 6,344 2,319 1,153 767 6,773 23,795
* The table does not include maturities of bonds (approximately €412 million nominal) issued as part of the securitisations of the New Banks acquired. The table does not include bonds matured and not yet reimbursed as at end December 2017.
1 Three self-retained issuances for €2.25 billion nominal also exist under that same programme, one for €0.5 billion nominal made in December 2015, a second for €1 billion concluded at the end of March 2016 and a third for €750 million concluded in June 2016. Because these were repurchased by UBI Banca itself, these liabilities have not been recognised, in accordance with IFRS. A complete list is given in Part E, Section 1 of the Notes to the Consolidated Financial Statements. 2 Overall, €2.130 billion nominal: two issuances in 2012 totalling €680 million (net of the amortisation instalments matured in the interim), an issuance of €200 million undertaken in March 2014, a fourth for €650 million finalised in July 2015, a fifth for €300 million concluded in June 2016 and a sixth for €300 million carried out in December 2017 (further information is given in the Notes to the Consolidated Financial Statements, Part E, Section 1). Because these were repurchased by UBI Banca itself, these liabilities have not been recognised, in accordance with IFRS. 3 The amount also encompasses the bonds issued by the New Banks, which also included the approximately €412 million nominal issued as part of outstanding securitisations.
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Listed securities (at the date of this report)
Bonds listed on the MOT (electronic bond market) Nominal amount of Book value as at issue ISIN number 31.12.2017 31.12.2016 IT0001197083 Centrobanca zero coupon 1998-2018 L. 800 billion € 166,395,581 € 166,717,021 IT0001267381 Centrobanca 1998/2018 reverse floater capped L. 320 billion € 117,279,852 € 121,574,887 IT0001300992 Centrobanca 1999/2019 step dow n indicizzato al tasso sw ap euro 10 anni € 170,000,000 € 110,046,907 € 110,886,763 IT0001312708 Centrobanca 1999/2019 step dow n eurostability bond € 60,000,000 € 69,208,519 € 69,610,842 IT0004457070 UBI subordinato low er tier 2 fix to float con rimborso anticipato 13.3.2009-2019 € 370,000,000 € 371,775,757 € 369,626,864 IT0004497050 UBI subordinato low er tier 2 fix to float con rimborso anticipato 30.6.2009-2019 € 365,000,000 € 365,028,583 € 362,550,663 IT0004718489 UBI subordinato low er tier 2 tasso fisso 5.50% con ammortamento 16.6.2011-2018 Welcome Edition € 400,000,000 € 80,927,393 € 163,019,951 IT0004723489 UBI subordinato low er tier 2 tasso fisso 5.40% con ammortamento 30.6.2011-2018 € 400,000,000 € 80,822,384 € 162,883,120 IT0004767742 UBI subordinato low er tier 2 tasso misto 18.11.2011-2018 Welcome Edition € 222,339,000 € 222,520,100 € 220,855,267 IT0004841778 UBI subordinato low er tier 2 tasso misto 8.10.2012-8.10.2019 Welcome Edition € 200,000,000 € 202,144,081 € 201,259,465 IT0004842370 UBI subordinato low er tier 2 tasso fisso 6% con ammortamento 8.10.2012-8.10.2019 € 970,457,000 € 394,350,200 € 590,634,510
Covered bonds listed on the Dublin stock exchange Nominal amount of Book value as at issue ISIN number 31.12.2017 31.12.2016 IT0004558794 UBI Covered Bonds due 16 December 2019 4% guaranteed by UBI Finance Srl € 1,000,000,000 € 1,062,925,270 € 1,093,981,991 IT0004599491 UBI Covered Bonds due 30 April 2022 floating rate amortising guaranteed by UBI Finance Srl € 250,000,000 € 102,054,096 € 124,680,820 IT0004682305 UBI Covered Bonds due 28 January 2021 5.25% guaranteed by UBI Finance Srl € 1,000,000,000 € 1,143,124,745 € 1,174,810,790 IT0004966195 UBI Covered Bonds due 14 October 2020 3.125% guaranteed by UBI Finance Srl € 1,500,000,000 € 1,577,298,362 € 1,606,300,247 IT0004992878 UBI Covered Bonds due 5 February 2024 3.125% guaranteed by UBI Finance Srl € 1,000,000,000 € 1,121,336,354 € 1,135,825,924 IT0005067076 UBI Covered Bonds due 7 February 2025 1.25% guaranteed by UBI Finance Srl € 1,000,000,000 € 1,012,961,934 € 1,027,194,534 IT0005140030 UBI Covered Bonds due 27 January 2023 1.00% guaranteed by UBI Finance Srl € 1,250,000,000 € 1,277,719,717 € 1,291,331,975 IT0005215147 UBI Covered Bonds due 14 September 2026 0.375% guaranteed by UBI Finance Srl € 1,000,000,000 € 945,829,872 € 954,145,426 IT0005283491 UBI Covered Bonds due 4 October 2027 1.125% guaranteed by UBI Finance Srl € 1,250,000,000 € 1,238,991,994 - IT0005320673 UBI Covered Bonds due 15 July 2024 0.50% guaranteed by UBI Finance Srl € 500,000,000 - - IT0005320665 UBI Covered Bonds due 15 January 2030 1.25% guaranteed by UBI Finance Srl € 500,000,000 - -
The list does not include the EMTN issues listed in Dublin and securities generated by securitisations performed for internal purposes by UBI Banca (as the survivor of the mergers of the former network banks), the former B@nca 24-7 and UBI Leasing, all listed on the Dublin stock exchange. It also excludes securities issued by the SPEs relating to the New Banks acquired.
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Geographical distribution of direct funding from customers by region of location of the branch Finally, the table, “Geographical distribution of (excluding repurchase agreements and bonds)(*) direct funding from customers by region of location of the branch”, gives the geographical Percentage of total 31.12.2017 distribution of conventional funding in Italy Lombardy 51.27% (consisting of current accounts, savings deposits Marches 12.67% and certificates of deposit). Latium 7.80% Piedmont 6.50% Apulia 3.52% The entry of the New Banks, which carry on their Calabria 3.21% business in central Italy, within the scope of the Campania 2.95% Tuscany 2.84% consolidation brought the Group's share of Abruzzo 2.56% funding from that geographical area to 24.3%. The Emilia Romagna 1.86% predominant concentration in Northern Italy Liguria 1.52% Veneto 1.07% (62.5% of the total) and in regions of the North- Umbria 1.01% West (59.3%) in particular nevertheless continued. Basilicata 0.73% Friuli Venezia Giulia 0.25% Molis e 0.21% Valle d'Aosta 0.02% Trentino Alto Adige 0.01% Total 100.00%
North 62.5% - North West 59.3% - North East 3.2% Central 24.3% South 13.2%
(*) The aggregates relate to banks only.
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Indirect banking funding and assets under management
Indirect banking funding from ordinary customers
31.12.2016 Changes 31.12.2017 % % Figures in thousands of euro aggregate amount %
Assets under custody 31,022,165 32.2% 31,202,168 34.8% -180,003 -0.6% Assets under management 65,443,496 67.8% 58,580,569 65.2% 6,862,927 11.7% Customer portfolio management 6,787,847 7.0% 7,724,176 8.6% -936,329 -12.1% of which: fund based instruments 1,844,685 1.9% 1,869,697 2.1% -25,012 -1.3% Mutual investment funds and Sicav’s 37,051,878 38.4% 32,430,680 36.1% 4,621,198 14.2% Insurance policies and pension funds 21,603,771 22.4% 18,425,712 20.5% 3,178,059 17.2% of which: Insurance policies 21,393,136 22.2% 18,004,079 20.1% 3,389,057 18.8%
Total 96,465,661 100.0% 89,782,736 100.0% 6,682,925 7.4%
The UBI Banca Group's indirect funding amounted to €96.5 billion at year-end, an increase of €6.7 billion over twelve months. The aggregate continued to rise without interruption throughout the year, offset in the fourth quarter by the elimination of the assets (€3.1 billion, almost all assets under custody) attributable to UBI Banca International SA, disposed of with effect from 1st November. As a result, despite the further increase in the managed component as a whole, indirect funding declined by €2.3 billion in the October-December period.
The extraordinary low levels reached by interest rates and yields to maturity on government securities, expected to remain stable in coming months, continued to favour a growing allocation of household investments to asset management and insurance products, in a context of good performance by prices on financial markets.
Assets under management amounted to €65.4 billion, accounting for 67.8% of the total aggregate, up by €6.9 billion on an annual basis (+11.7%), of which €1.7 billion attributable to the fourth quarter. The table shows that the item's performance was driven above all by mutual funds and Sicavs, which climbed to €37.1 billion (+€4.6 billion over twelve months; +€1 billion in the fourth quarter) due to the results of the placement of several new products/sub-fund of UBI Pramerica and UBI Sicav during the year (for a total of approximately €2.1 billion of mutual funds4 and €2.5 billion of Sicav5, of which nearly €1.3 billion overall in the fourth quarter), in addition to the positive response from customers to the launch starting on 18th April 2017 of the new range of funds included in the long-term Individual Savings Schemes (ISSs)6. Two new Sicav funds have been placed since 12th December 2017 (UBI Sicav Euro High Yield Class B and UBI Sicav Obiettivo Equilibrio Class B) for a total of €706.6 million, which are not included in the end of December totals because they were settled with a value date of 6th February 2018.
A significant contribution to the growth in assets under management was also made by insurance policies which increased progressively in the twelve months to €21.4 billion (+€3.4 billion), in line with the good performance by this business which saw inflows of premiums for the year of €4.3 billion. On the other hand, customer portfolio management declined to €6.8 billion from €7.7 billion at the end of 2016, a decrease of €0.9 billion that was mainly due to the conversion of assets
4 UBI Pramerica Cedola Certa 2023 Fund; UBI Pramerica Euro Multifund Fund; UBI Pramerica Global Multiasset II Fund; Arca 2022 Reddito Multivalore Plus II Fund (Classes P and R); UBI Pramerica Euro Multifund II Fund; UBI Pramerica Global Inflation Linked Fund; UBI Pramerica Bilanciato Etico Fund; UBI Pramerica Global Multiasset 30 Fund. 5 UBI Sicav Global Multiasset 15 (Class 2); UBI Sicav Global Stars (Class 2); UBI Sicav Euro Corporate Bond High Potential (Class 1 and Class 2); UBI Sicav Obiettivo Stabilità (Class 1 and Class 2); UBI Sicav Strategic Bond (Class A) and UBI Sicav Obiettivo Controllo (Class 1 and Class 2). 6 See the section “Other information” attached to this report for a definition of “ISSs”. UBI Pramerica SGR, by agreement with UBI Banca, has established the new UBI Pramerica MITO Funds range, which currently includes two funds: UBI Pramerica MITO 25 Fund and UBI Pramerica MITO 50 Fund.
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originating with the former Banca Adriatica into other managed products (funds and Sicavs) in the third quarter.
Assets under custody – €31 billion at the end of December – were essentially stable year-on- year (-€180 million), despite the decline of €4 billion in the fourth quarter, due chiefly to the aforementioned disposal of UBI Banca International SA (which had an impact on restricted deposits of €2.9 billion). This decline more than offset the increase in the first nine months of the year, driven by a recovery of market prices, particularly for equities, despite the underlying trend towards a shift in customers' portfolios to favour asset management instruments.
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At year-end, Assogestioni7 data relating to the UBI Banca Group asset management company for mutual funds and Sicav’s, was as follows for ASSETS UNDER MANAGEMENT8: net inflows of €3.4 billion, amounting to 12.1% of assets under management at the end of 2016 (net inflows for the sector nationally on the other hand were €76.7 billion9, amounting to 8.6% of assets managed at the end of the previous year); a percent increase in assets over twelve months (+€3.7 billion; +13.2%) in line with the positive performance by the banking sample (+€120 billion; +13.4%); assets of €31.7 billion, which puts the Group in ninth place with market share of 3.13% (3.14% in December 2016). It must nevertheless be considered that Assogestioni’s sample also includes non-banking operators. Consequently, market shares for the UBI Banca Group in the asset management sector (mutual investment fund business) are naturally smaller than those for direct funding, lending and number of branches. If the analysis is restricted to banks only, the Group’s market share as at 31st December 2017 was 6.09% – an improvement on 5.91% one year earlier – placing UBI Banca stably in fourth position among Italian operators in the sector. The summary figures given in the table confirm the prudential approach of Group customers: a percentage of lower risk funds (monetary funds and bonds) that is always higher than the figure for the sector, but which has decreased more sharply over twelve months (down from 54.3% to 50.9%) compared with the Assogestioni sample (down from 45.9% to 44.1%); at the same time a greater percentage of balanced funds – up from 27.9% to 33.1% compared with an average figure for the sector nationally up from 8.5% to 9.7% – also to be seen in relation to the new products (funds and Sicav’s) placed in 2017; a percentage of equity funds essentially stable yet constantly lower than the benchmark sample (9.8% compared to 22.1%); a fall in the percentage of flexible funds (6.2%) compared with a figure very much higher for the sector nationally (23.7%); no investment in hedge funds (0.4% of the Assogestioni sample).
7 “Monthly map of assets under management”, December 2017. For companies not included in the “Quarterly map of assets under management”, September 2017. 8 As previously reported, as part of the periodic surveys performed by Assogestioni, since June 2012 the figure for assets under management for the UBI Banca Group also includes, in consideration of their nature, the management mandates granted to Pramerica Financial – the brand name used by Prudential Financial Inc. (USA) – a UBI Banca partner through UBI Pramerica SGR (€6.3 billion of mutual funds and Sicav’s, of which €1.9 billion in equities and €4.4 billion in bonds as at 31st December 2017). This presentation provides a more consistent account of the actual assets under management of the UBI Banca Group. 9 On the basis of Assogestioni data, over 79% of net inflows nationally are attributable to foreign registered funds (+€60.9 billion) and to a residual extent to Italian registered funds (+€15.8 billion). In terms of type of fund, the performance was driven by bond funds (+€29.5 billion), flexible funds (+€21.9 billion) and balanced funds (+€17.7 billion), while the contribution from equity funds was lower (+€8.2 billion), and monetary funds (-€0.3 billion) and hedge funds (-€0.3 billion) were more or less stable.
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Fund assets (including assets managed for the UBI Banca Group under a mandate)
UBI Banca Group Changes 31.12.2017 % 31.12.2016 % Figures in millions of euro amount %
Equities 3,122 9.8% 2,762 9.9% 360 13.0% Balanced 10,515 33.1% 7,831 27.9% 2,684 34.3% Bond 15,615 49.2% 14,360 51.2% 1,255 8.7% Monetary funds 532 1.7% 867 3.1% -335 -38.6% Flexible 1,951 6.2% 2,219 7.9% -268 -12.1%
TOTAL (a) 31,735 100.0% 28,039 100.0% 3,696 13.2%
Sector Changes 31.12.2017 % 31.12.2016 (*) % Figures in millions of euro amount %
Equities 223,594 22.1% 189,874 21.2% 33,720 17.8% Balanced 97,821 9.7% 75,700 8.5% 22,121 29.2% Bond 414,775 40.9% 376,359 42.1% 38,416 10.2% Monetary funds 32,641 3.2% 33,843 3.8% -1,202 -3.6% Flexible 240,228 23.7% 213,110 23.9% 27,118 12.7% Hedge funds 4,273 0.4% 4,517 0.5% -244 -5.4%
TOTAL (b) 1,013,332 100.0% 893,403 100.0% 119,929 13.4% Market share of the UBI Banca Group (a)/(b) 3.13% 3.14% Market share of the UBI Banca Group limited to banks only 6.09% 5.91%
(*) The differences compared with the data published previously was due not only to the periodic revision of data carried out by Assogestioni (national association of asset management companies), but also to the disappearance of data reported by an asset management company with a marginal impact on total fund managed assets.
* * *
As concerns, on the other hand, assets under management net of Group funds (which includes collective instruments and customer portfolio management), at year-end the UBI Banca Group was positioned in seventh place in the sector (in fifth place among Italian banking groups) with total assets for both ordinary and institutional customers amounting to €55.2 billion and a market share of 2.94%, up in the comparison with December 2016 (2.78%). If the analysis is limited to banks only, the Group’s market share in December 2017 was 6.70%, up on 6.30% at the end of 2016, placing the UBI Banca stably in fourth position among operators in the sector.
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Insurance funding and technical reserves
Direct deposits from insurance business and technical reserves
Changes 31.12.2017 31.12.2016 % % aggregate amount % Figures in thousands of euro
Insurance business financial liabilities designated at fair value (item 50 liabilities ) 43,021 2.4% 40,329 2.4% 2,692 6.7% of which: Pension fund 13,436 0.8% 11,248 0.7% 2,188 19.5% Unit-linked products 29,585 1.6% 29,081 1.7% 504 1.7% Technical reserves (item 130 liabilities) 1,780,701 97.6% 1,675,012 97.6% 105,689 6.3% Life business 1,778,702 97.5% 1,672,395 97.4% 106,307 6.4% of which: mathematical reserves 1,766,645 96.9% 1,666,229 97.1% 100,416 6.0% reserves for sums to b e paid 11,499 0.6% 5,535 0.3% 5,964 107.8% other reserves 558 0.0% 631 0.0% -73 -11.6% Non-life business 1,999 0.1% 2,617 0.2% -618 -23.6% Direct deposits from insurance business and technical reserves 1,823,722 100.0% 1,715,341 100.0% 108,381 6.3%
Direct insurance funding and technical reserves stood at €1.8 billion as at 31st December 2017, an overall increase over of 6.3% compared to the end of 2016.
Financial liabilities relating to insurance business designated at fair value, which represent the value of positions relating to Sector III (unit-linked products) and Sector VI (pension fund products) insurance policies, increased by 6.7% to €43 million. The growth reflects both the effect of movements in the market prices of the securities contained in the insurance portfolios and also the contribution of net positive inflows recorded by BancAssurance Popolari during the year, which amounted to €8.4 million.
Technical reserves referred to the value as at 31st December 2017 of insurance positions relating to Sector I, Sector V, and, to a residual extent, non-life policies. The balance amounted to €1.8 billion and represented 97.6% of the item, accounting for 97.5% of the overall increase. The increase during the year should primarily be viewed in relation to the net inflows into Sectors I and V of €93.3 million, and, to a lesser extent, the revaluation of insurance positions.
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General banking business with customers: lending
In order to allow a consistent comparison with the loan portfolio at 31st December 2017, the figures as at 31st December 2016 have been restated in aggregate form, neutralising the effect of the amounts for the non-performing loans disposed of by the New Banks in the first half of 2017 and also the effect of the transfer of the first tranche of bad loans to REV that took place in 2016 and which were present in the financial position at the end of 2016 as a performing loan to that special purpose vehicle.
Performance of the loan portfolio
Composition of loans to customers
of which non- 31.12.2016 of which non- Changes 31.12.2017 (*) % % Figures in thousands of euro performing aggregate performing amount %
Current account overdrafts 8,824,184 9.6% 1,108,633 9,703,254 10.4% 1,425,008 -879,070 -9.1% Reverse repurchase agreements - - - 120,991 0.1% - -120,991 -100.0% Mortgage loans and other medium to long-term financing 61,920,712 67.1% 4,895,678 61,913,199 66.0% 6,214,324 7,513 0.0% Credit cards, personal loans and salary- backed loans 3,168,732 3.4% 124,734 3,004,871 3.2% 162,673 163,861 5.5% Finance leases 6,546,092 7.1% 1,004,204 7,303,772 7.8% 1,532,435 -757,680 -10.4% Factoring 2,435,004 2.6% 250,180 2,465,964 2.6% 270,071 -30,960 -1.3% Other transactions 9,436,700 10.2% 776,060 11,724,356 12.5% 908,529 -2,287,656 -19.5% Debt instruments: 6,659 0.0% 1,254 18,274 0.0% - -11,615 -63.6% - structured instruments 3 0.0% - 3 0.0% - - - - other debt instruments 6,656 0.0% 1,254 18,271 0.0% - -11,615 -63.6% Effect of disposals in first half of 2017 (**) - - - -2,485,370 -2.6% -1,255,445 - -
Total 92,338,083 100.0% 8,160,743 93,769,311 100.0% 9,257,595 -1,431,228 -1.5%
(*) The figures include the impact of the definitive purchase price allocation (PPA) on the New Banks' non-performing portfolio of €565.5 million as at 31st March 2017, followed by an overall positive reversal of €64 million in the second, third and fourth quarters. (**) To permit a uniform comparison, the figures at 31st December 2016 – reconstructed in aggregate form – have been sterilised to exclude the following effects, primarily through reclassification to “Cash and cash equivalents” and, to a marginal extent, to “Loans and advances to banks” and “Other loans”: - the performing loan of the New Banks (€1.2 billion) to the special purpose vehicle Gestione Crediti Spa (REV), in relation to the transfer of a first tranche of bad loans that took place in January 2016, which was extinguished in the first quarter of 2017; - the transfer to REV of the second tranche of bad loans that took place on 1st January 2017 and the subsequent transfer of non-performing loans to the Atlante II Fund concluded in the second quarter of 2017 (for a total of €1.3 billion).
As at 31st December 2017 the UBI Banca Group's had outstanding loans of €92.3 billion, down by €1.4 billion (-1.5%) YEAR-ON-YEAR. However, this change reflects a considerable decline in outstanding net non-performing loans (-€1.1 billion, approximately one-half of which is attributable to the fair value accounting of the New Banks' non-performing assets), alongside a marginal change in exposures to Cassa di Compensazione e Garanzia (CCG), a central counterparty clearing house (repurchase agreements and margin deposits for a total of -€128.7 million)1. Net of both components, lending to the real economy in the form of net performing loans (excluding the CCG) amounted to €84 billion, essentially stable compared to twelve months earlier (€84.2 billion at the end of 2016; -0.2%), reflecting positive trends in several components, but also the fact that the New Banks – committed to preparing for their IT migration and integration into the Parent Company – were not yet able to realise their full commercial potential. By maturity, the item's stability reflects an increase in the medium-to-long term component, which rose to €65.6 billion or 78.1% of the total, while short-term facilities remained weak, declining to €18.4 billion. This business continued to be affected by modest demand for
1 At the end of 2017, the total exposure to CCG was €140.2 million and consisted solely of margin deposits backing repurchase agreements involving Italian government bonds, correlated with the performance of average transaction volumes (€268.9 million in December 2016, of which repos of €121 million and margin deposits of €147.9 million).
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working capital from enterprises, which in many cases preferred to replace short-term loans with financing granted from the TLTRO loan pool. The rise in medium-to-long term facilities was driven by new grants drawing on TLTRO funds (for an increase in outstanding loans of +€2.6 billion) and by the sound performance of consumer lending, as a reflection of the increase in business with customers, but also of the stronger signs of a recovery by Prestitalia, in the light of the commercial enhancement initiatives undertaken as part of its business plan. Of the €61.9 billion total mortgage and other medium-to-long term loans outstanding at the end of 2017, according to management accounting records residential mortgage loans amounted to €27.9 billion, of which €25.7 billion granted to consumer households and €2.2 billion to enterprises (for a total of €26.1 billion performing loans, of which €24.5 billion granted to consumer households and €1.6 billion to enterprises).2
In the FOURTH QUARTER, the total loan portfolio (performing and non-performing) declined by €1.5 billion (-1.6%), due in part to the decrease in non-performing loans (-€0.3 billion), whereas the Parent Company's business with CCG remained essentially unchanged compared with the end of September (-€37.1 billion)3 . Net of both components, lending to the real economy declined by €1.2 billion (-1.5%), reflecting decreases in both short-term and medium- to-long term facilities. The accounting figures refer to the end of the period and thus do not reflect the true performance of business with customers: according to management accounting records, the average balances of gross interest-bearing loans (i.e., not including bad loans) remained stable (-€45 million; -0.1%), reflecting an increase in longer-term facilities (+€0.4 billion), which effectively offset the decline in short-term lending.
Given the trends of the two aggregates, the ratio of loans to deposits reached 97.8%, compared to 90.8% at the end of 2016.
As concerns “large exposures”, the December 2017 supervisory report prepared on the basis of the provisions of the new Basel 3 rules, in force since 1st January 20144, shows four positions for an amount equal to or greater than 10% of the qualifying capital, for a total of €24.63 billion. In detail:
Large exposures
31.3.2017 31.12.2016 31.12.2017 30.9.2017 30.6.2017 Stand-Alone UBI Stand-Alone UBI Banca Group Banca Group Figures in thousands of euro
Number of positions 4 6 7 6 3 Exposure 24,630,887 27,340,149 31,990,503 31,724,314 22,324,759 Risk positions 474,455 409,940 1,796,607 323,115 25,368
• €15.99 billion relates to the Ministry of the Economy and Finance, primarily for investments in government securities by the Parent and the remaining amount relates to current and deferred tax assets (€16.62 billion in September; €16.8 billion in June); • €6 billion to funds deposited with the Bank of Italy (€5.26 billion; €8.2 billion); • €1.42 billion to investments in securities issued by the United States Treasury (€1.37 billion; €1.4 billion); • €1.22 billion to business with a major banking counterparty (mainly for repurchase agreements). This figure was €1.1 billion in September and €1 billion in June. In addition to the above, the following were also reported in September: an exposure of €1.89 billion relating to Cassa di Compensazione e Garanzia (€1.9 billion in June) and an exposure of €1.1 billion relating to investments in Spanish government bonds (€1.4 billion in June). At the end of the first half of the year, an exposure of €1.3 billion was reported relating to the existence of credit facilities extended to a major (large corporate) group of companies. The reports at 31st March 2017 and 31st December 2016 for the stand-alone UBI Banca Group also referred to the same types of exposure.
2 It is underlined that although the impact was not significant, the figures for Banca Teatina include other types of lending, such as mortgage accounts and non-residential mortgages. 3 As at 30th September 2017 exposure to CCG totalled €177.3 million, of which €1 million in repos and €176.3 million for margin deposits. 4 Bank of Italy Circulars No. 285 and No. 286 of 17th December 2013 and subsequent updates.
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In consideration, amongst other things, of the application of a zero weighting factor for transactions with the government, only three actual risk positions for the Group existed, after weightings, for an amount of €0.5 billion, mainly attributable to the banking counterparty mentioned. The percentage of the qualifying capital is well below the limit of 25% set for banking groups for each of the exposures reported.
In terms of concentration, even in Concentration of risk (largest customers or groups as a percentage of total loans and guarantees – management its new configuration, the Group accounting figures) continues to show low levels of 31.3.2017 31.12.2016 Customers or concentration, which confirms 31.12.2017 30.9.2017 30.6.2017 Stand-Alone UBI Stand-Alone UBI Groups the constant attention that it Banca Group Banca Group pays to this aspect. Largest 103.7% 3.9% 3.9% 4.1% 3.8% Largest 206.1% 6.3% 6.2% 6.6% 6.4% Largest 307.8% 7.8% 7.6% 8.1% 8.1% Largest 409.1% 8.9% 8.7% 9.2% 9.2% Largest 50 10.0% 9.8% 9.6% 10.1% 10.2%
Distribution of loans by economic sector and ATECO code (Bank of Italy classification)
31.12.2017
of which of w hich Total non- performing bad loans
Manufacturing and service companies (non-financial companies and producer households) 55.3% 11.2% 6.7% of which: manufacturing activities: 14.5% 2.1% 1.4% - Metallurgy, fabrication of metal products and processing of non-metallic minerals 3.9% 0.7% 0.4% - Foodstuff, beverage and tobacco industries 1.9% 0.2% 0.1% - Fabrication of machinery 1.7% 0.1% 0.1% - Textile industries, tailoring of articles in leather and fur, fabrication of articles in leather and 1.3% 0.3% 0.2% - Fabrication of oil refinery, chemical and pharmaceutical products 1.3% 0.1% 0.0% - Fabrication of electronic products, electrical and non-electrical equipment 0.9% 0.1% 0.1% - Fabrication of articles in rubber and plastic 0.9% 0.1% 0.1% - Timber industry and fabrication of furniture 0.8% 0.2% 0.1% - Fabrication of paper and paper products, printing and reproduction of recorded media 0.6% 0.1% 0.1% - Fabrication of motor vehicles, trailers, semitrailers and other means of transport 0.6% 0.1% 0.1% - Other manufacturing industries 0.6% 0.1% 0.1% Real estate activities 9.4% 2.4% 1.2% Wholesale and retail commerce, repair of motor vehicles and motorcycles 8.4% 1.3% 1.0% Constructions 7.4% 3.4% 2.0% Professional, scientific and technical activities 3.0% 0.3% 0.2% Supply of electricity, gas, steam and air conditioning 2.7% 0.2% 0.0% Accommodation and catering services 1.9% 0.4% 0.3% Agriculture, forestry and fishing 1.8% 0.3% 0.2% Transport and warehousing 1.8% 0.4% 0.2% Information and communication services 1.2% 0.1% 0.0% Hire, travel agency, business support services 1.2% 0.1% 0.1% Water supply; sewerage, waste management and cleanup activities 0.6% 0.0% 0.0% Financial and insurance activities 0.2% 0.0% 0.0% Extraction of minerals from quarries and mines 0.1% 0.0% 0.0% Residual activities 1.1% 0.2% 0.1% Consumer households 36.5% 3.4% 2.1% Financial companies 3.8% 0.2% 0.1% Public administrations 1.0% 0.2% 0.0% Other (not-for-profit institutions and the rest of the world) 3.4% 0.4% 0.2% Total 100.0% Source: management accounting database (ICAAP). Total gross lending w ith ATECO codes inclusive of partial w rite-offs of bad loans (€99.98 billion as at 31st December 2017). The amount does not include the book restatement in accordance w ith IFRS 3 of the gross non-performing loans of the New Banks carried out in the fourth quarter (greater details are given in the reconciliation schedule given later in this section). The contribution of the New Banks to the consolidated statistics are based on estimates until the migration of Banca Teatina onto the target IT system.
As may be seen from the table that provides a management accounting reconstruction of the distribution of lending by economic sector and ATECO code of consolidated on-balance sheet loans gross of impairment losses, as at 31st December 2017 approximately 91.8% of
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outstanding loans continued to be granted to manufacturing companies and households, reaffirming the Group's traditional focus on the communities it serves.
A summary of the geographical distribution of lending in Geographical distribution of loans to customers by region of location of the Italy is given in the table “geographical distribution of (*) loans to customers by region of location of the branch”. branch Percentage of total 31.12.2017 Even though the entry of the New Banks to the Group contributed to the 18.1% increase in the percentage of Lombardy 60.28% loans to central regions of the country 5 , the Marches 8.33% predominant share of the Group's loan portfolio Latium 6.97% continues to be with borrowers in northern regions Piedmont 5.11% Emilia Romagna 3.20% (72.9% of the total) and in the North West in particular Campania 2.53% (67.6%). Liguria 2.22% Abruzzo 2.14% Apulia 2.13% At year-end, the guarantees granted to customers by the Veneto 1.71% Calabria 1.60% Group totalled €5.1 billion, down €0.9 billion from €6 Tuscany 1.49% billion at the end of 2016 (-14.6%) at the level of the Umbria 1.32% stand-alone UBI Banca Group. In detail, the decline Basilicata 0.37% was essentially due to guarantees of a financial nature, Friuli Venezia Giulia 0.32% which fell to €0.4 billion from €1.7 billion one year Molise 0.25% Valle d'Aosta 0.03% earlier, while guarantees of a commercial nature Trentino Alto Adige 0.00% increased (+€0.4 billion) to over €4.7 billion. Total 100.00%
North 72.9% - North West 67.6% - North East 5.3% Central 18.1% South 9.0% (*) The aggregates relate to banks only.
Financing with funds provided by the European Central Bank (TLTRO)
With regard to targeted longer-term refinancing operations (TLTROs), as already reported, on 10th March 2016 the ECB approved a new programme entitled “New series of targeted longer-term refinancing operations (TLTRO II)”, which involves four quarterly operations (from June 2016 to March 2017) each with a life of four years. The UBI Banca Group applied for funds under that programme totalling €12.5 billion, against a maximum of €14.5 billion that could be applied for.6 Details are given as follows: in June 2016 the Group took part in the first of four auctions. It fully repaid funds obtained from the previous TLTRO operations totalling €8.1 billion7 and was allotted new funds amounting to €10 billion with the due date on 24th June 2020. in March 2017 the Group took part in the fourth and last auction and obtained liquidity of €2.5 billion maturing on 24th March 2021.
Financing granted to customers drawn from those funds amounted to €12.5 billion as at 31st December 2017, with a remaining outstanding debt of €9.5 billion (€6.9 billion at the end of 2016). Loans approved and not yet granted as at that same date amounted to €2.5 billion.8
5 The share for the Latium Region may be affected by seasonal factors relating to business with companies controlled by central government organisations. 6 As communicated by the Bank of Italy. 7 The total amount that had been allotted to the Group with its participation in three of the seven TLTRO I auctions held by the ECB. 8 Financing granted to customers drawn from those funds had risen to €14 billion as at 31st January 2018 with a residual debt of €10.8 billion, while financing approved, but not yet granted, amounted to €1.9 billion.
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Risk
Following the definitive conclusion of the PPA process in the fourth quarter, in accordance with the provisions of IFRS 3 on business combinations, the New Banks' non-performing loans have been stated at their “acquisition date fair value”, i.e. the purchase amount (that is to say, net of provisions for impairment recognised at the time of purchase and additional provisions due to the PPA). This accounting policy affected the amount of gross non-performing loans and impairment losses, which therefore are not comparable with the figures as at 31st December 2016 presented for comparative purposes, but did not have any impact on net non-performing loans. The effects of this treatment according to IFRS 3 are detailed in a specific illustrative table.
At the end of December, gross non-performing loans amounted to €12.7 billion, accounting for 13.01% of total gross loans. As stated above, gross non-performing loans in 2017 are not comparable with the comparative figures as at 31st December 2016. The change over twelve months (-€1.7 billion, of which -€1.4 billion in the fourth quarter) reflects, first and foremost, the effect of the accounting treatment at year-end of the non-performing assets of the New Banks, net of provisions for impairment and the definitive PPA (€651.3 million and €501.5 million, respectively)9. Without considering the effects of this accounting treatment, the decline was primarily due to internal operating results, and, to a marginal extent, disposals of bad loans and unlikely-to-pay positions during the year (with a gross value according to management accounting records of approximately €268 million, of which €154 million in the fourth quarter).
Loans and advances to customers as at 31st December 2017 (*) Impairment Figures in thousands of euro Gross exposure Carrying amount Coverage (**) losses
Non-performing exposures (13.01%) 12,652,004 4,491,261 (8.84%) 8,160,743 35.50% - Bad loans (7.55%) 7,343,564 3,307,950 (4.37%) 4,035,614 45.05% - Unlikely-to-pay loans (5.29%) 5,142,704 1,172,769 (4.30%) 3,969,935 22.80% - Past due loans (0.17%) 165,736 10,542 (0.17%) 155,194 6.36% Performing loans (86.99%) 84,588,483 411,143 (91.16%) 84,177,340 0.49% Total 97,240,487 4,902,404 92,338,083 5.04% The item as a percentage of the total is given in brackets.
Loans and advances to customers as at 31st December 2016 aggregate (***) Impairment Figures in thousands of euro Gross exposure Carrying amount Coverage (**) losses
Non-performing exposures (14.47%) 14,374,296 5,116,701 (9.87%) 9,257,595 35.60% - Bad loans (7.54%) 7,491,940 3,416,967 (4.35%) 4,074,973 45.61% - Unlikely-to-pay loans (6.53%) 6,485,754 1,605,085 (5.20%) 4,880,669 24.75% - Past due loans (0.40%) 396,602 94,649 (0.32%) 301,953 23.86% Performing loans (85.53%) 84,972,335 460,619 (90.13%) 84,511,716 0.54% Total 99,346,631 5,577,320 93,769,311 5.61% The item as a percentage of the total is given in brackets.
(*) Non-performing exposures as at 31st March 2017 were subject to the definitive PPA of €565.5 million, which was followed by an overall positive reversal of €64 million in the third and fourth quarters. The net amount as at 31st December 2017, €501.5 million, was allocated as a direct reduction in the New Banks' gross exposures (primarily unlikely-to-pay loans and, to a marginal extent, bad loans), and to the provisions for impairment recognised for these same exposures (€651.3 million). Accordingly, the gross non-performing loans and the related impairment losses are not directly comparable with the comparative figures as at 31st December 2016. For further information, refer to the reconciliation table with the details of the application of IFRS 3 at the end of the year. (**) Coverage is calculated as the ratio of impairment losses to gross exposure. For bad loans only, consistent with Group policies, impairment losses and gross exposures are shown net of write-offs of positions still subject to ongoing bankruptcy proceedings. (***) To permit a uniform comparison, the figures at 31st December 2016 – reconstructed in aggregate form – have been sterilised to exclude the following effects, primarily through reclassification to “Cash and cash equivalents” and, to a marginal extent, to “Loans and advances to banks” and “Other loans”: - the performing loan of the New Banks (€1.2 billion) to the special purpose vehicle Gestione Crediti Spa (REV), in relation to the transfer of a first tranche of bad loans that took place in January 2016, which was extinguished in the first quarter of 2017; - the transfer to REV of the second tranche of bad loans that took place on 1st January 2017 and the subsequent transfer of non-performing loans to the Atlante II Fund concluded in the second quarter of 2017 (for a total of €1.3 billion).
9 For further details, see the Notes to the Consolidated Financial Statements, Part G – Business combination transactions concerning companies or lines of business.
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IFRS 3: book exposures of loans and advances to customers as at 31st December 2017 Netting of bad will allocated 31.12.2017 Derecognition 31.12.2017 IFRS3 (inclusive of open balances of provisions with balances closed reversals until Figures in thousands of euro 31.12.17) Gross exposure 7,620,742 (217,607) (59,571) 7,343,564 Impairment losses (3,585,128) 217,607 59,571 (3,307,950) BAD LOANS Net carrying amount 4,035,614 4,035,614 Coverage 47.04% 45.05% Coverage incl. of write-offs 59.51% 58.36% Gross exposure 6,018,317 (433,649) (441,964) 5,142,704 UNLIKELY-TO-PAY Impairment losses (2,048,382) 433,649 441,964 (1,172,769) LOANS Net carrying amount 3,969,935 3,969,935 Coverage 34.04% 22.80% Gross exposure 165,736 165,736 PAST-DUE Impairment losses (10,542) (10,542) EXPOSURES Net carrying amount 155,194 155,194 Coverage 6.36% 6.36% Gross exposure 13,804,795 (651,256) (501,535) 12,652,004 TOTAL NON- Impairment losses (5,644,052) 651,256 501,535 (4,491,261) PERFORMING Net carrying amount 8,160,743 8,160,743 EXPOSURES Coverage 40.88% 35.50% Coverage incl. of write-offs 49.47% 45.59% Gross exposure 84,588,483 84,588,483 PERFORMING Impairment losses (411,143) (411,143) LOANS Net carrying amount 84,177,340 84,177,340 Coverage 0.49% 0.49% Gross exposure 98,393,278 (651,256) (501,535) 97,240,487 TOTAL LOANS AND Impairment losses (6,055,195) 651,256 501,535 (4,902,404) ADVANCES TO Net carrying amount 92,338,083 92,338,083 CUSTOMERS Coverage 6.15% 5.04%
total gross non-performing exposures / total gross loans 14.03% 13.01% net non-performing loans / total net loans 8.84% 8.84%
Gross non-performing exposures: quarterly changes 2017 2016
1Q 4Q 3Q 2Q 1Q of which of which of which of which of which (*) 4Q 3Q 2Q Stand-Alone Stand-Alone Stand-Alone Stand-Alone Stand-Alone Figures in thousands of euro UBI Banc a UBI Banca UBI Banc a UBI Banc a UBI Banc a Group Group Group Group Group Bad loans -224,796 30,790 79,975 -34,345 -230,607 275,816 93,509 134,280 Unlikely-to-pay loans -1,024,031 -164,671 -59,821 -94,527 -450,255 -292,211 -249,520 -68,819 Exposures past due and/or in arrears -132,214 26,394 -138,860 13,814 -29,078 -32,391 -60,142 -3,437 Gross non-performing exposures -1,381,041 -107,487 -118,706 -115,058 -709,940 -48,786 -216,153 62,024 transfers from performing exposures 509,681 458,812 398,891 317,061 354,871 267,711 281,768 389,236 transfers into performing exposures -142,529 -91,137 -142,208 -92,886 -84,807 -103,664 -182,921 -86,351
(*) The figures for the fourth quarter include the net effect of the derecognition of provisions for impairment and the definitive PPA, amounting to €1.1 billion, of which €277.2 million relating to bad loans and €875.6 million to unlikely-to-pay loans.
As concerns new inflows from performing status, the table of quarterly changes shows net inflows for the year of €1.7 billion, of which €509.7 million in the fourth quarter. The increase from the €1.3 billion recorded in 2016 at the level of the stand-alone UBI Banca Group should not be regarded as a reversal of the previous trend: the total amount in 2017 includes, for nine of the twelve months, inflows relating to the acquired Banks' non-performing loans, whereas inflows for the fourth quarter were also affected by the “status alignment” required for the migration of the first four banks to the target IT system.
The improvement in credit quality is becoming possible due to an improvement in the economic situation, but above all as a consequence of the following:
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- a favourable risk profile for the Total performing portfolio - Risk Profile Group's performing portfolio, with Management accounting figures for the internal rating perimeter the highest risk classes now below 80.0% the threshold of 4% of the total 75.0% 70.0% and the lower classes accounting 65.0% for as much as 78.8%; 60.0% - numerous initiatives taken in 55.0% recent years in terms of internal 50.0% reorganisation and operating 45.0% processes to improve credit risk 40.0% management and the ability to 35.0% 30.0% recover non-performing positions. 25.0% In accordance with its NPL 20.0% Strategic Plan, presented to the 15.0% ECB in March 2017, the Group 10.0% reinforced these safeguards 5.0% 0.0% during the year by completing the High Risk Medium Risk Low Risk Non rated project for the centralised December 2017 3.7% 13.1% 78.8% 4.4% December 2016 Stand-Alone UBI management of problem loans, 4.4% 14.0% 77.5% 4.1% Banca Group which, similarly to what was done in 2009 for bad loans, involves specialised management of unlikely-to-pay loans with support from dedicated managers. This model is progressively being rolled out at the New Banks with the conclusion of the respective mergers.
At year-end, net non-performing loans had declined to €8.2 billion, near the targets set for 2020 in the Business Plan. The decrease of €1.1 billion compared with twelve months earlier (- €0.3 billion compared with September) is correlated with the decrease in gross outstanding loans, made possible by internal management and, to a marginal extent, the disposals undertaken during the year, as well as the positive impact of the definitive PPA (€501.5 million, primarily affecting the New Banks' unlikely-to-pay loans, to adjust their carrying amounts to their estimated fair values). The item therefore declined to 8.84% of the total portfolio from 9.87% at the end of 2016. In terms of types of loan, the table “Composition of loans to customers” shows that most of net non-performing loans are concentrated in the item “Mortgage loans and other medium to long-term loans”, backed moreover by collateral and prudent loan-to-value (LTV) ratios, which results automatically in a lower level of coverage.
The share of net non-performing positions backed fully or partially by collateral and personal guarantees rose to 88.50% from 87.73% at the end of 2016 for the “stand-alone” perimeter, with real-estate collateral (mortgages and finance leases) accounting for 82.16% of total guarantees (81.86% one year earlier in reference to the old perimeter)10.
As regards the objective of progressively reducing the ratio of net non-performing loans to tangible equity (the “Texas Ratio”11), this indicator had declined to 99.2% as at 31st December 201712, rapidly approaching the target set for 2020 in the Business Plan (109.4% at the end of 2016, for the stand-alone perimeter only). Due to the application of IFRS 3 to the acquired Banks' non-performing loans, coverage of non-performing loans amounted to 35.50%, closely correlated with the high level of positions backed by collateral typical of the Group's loan portfolio. After adjustments to account for the loans written off to reflect ongoing insolvency proceedings, coverage amounted to 45.59%13. As shown by the IFRS 3 table, on the basis of the “pre-closing” figures at 31st December 2017 , coverage of total non-performing loans amounted to 40.88% (40.01% in September 2017), up from 35.60% at the end of 2016[ 49.47% inclusive of loan write-offs (48.57% in September), compared with 44.62% in December 2016)].
10 For further information, refer to “Table A.3.2 Banking Group – Guaranteed/secured credit exposures to customers” in Part E of the Notes to the Consolidated Financial Statements. 11 See the glossary attached to this report for a definition of the Texas Ratio. This indicator is calculated according to the following ratio: total net non-performing loans/[book equity (exclusive of profit (for the part not relating to badwill)/inclusive of loss for the period) + non-controlling interests - total intangible assets]. 12 It is 100.2% if calculated excluding non-controlling interests. 13 As at 31st December 2017, loans written off in connection with ongoing insolvency proceedings amounted to approximately €2.3 billion, in line with September 2017 and December 2016.
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Coverage of performing loans was 0.49% at the end of December, down marginally from 0.54% at the end of 2016 and from 0.50% in September, reflecting the increased weight of low-risk positions.
Forborne exposures gross of impairment losses amounted to €6.2 billion at year-end14, whereas net forborne exposures came to €5.2 billion, representing a small proportion of non-performing exposures (45.05%) than for the stand-alone Group at the end of 2016 (47.69%).
As already reported, the performance of the item and its composition are also affected by forbearance regulations15 introduced in September 2014. Non-performing positions must pass a minimum period of one year (cure period), after which the return of the customer’s credit quality is assessed before it can be reclassified among performing positions. On the other hand forborne positions classified as performing must pass a minimum period of two years (“probation period”) before a position can be released from its “forborne” status and therefore be eliminated from the category in supervisory reports.
Forborne exposures as at 31st December 2017(*)
Impairment Figures in thousands of euro Gross exposure Carrying amount Coverage (**) losses
Non-performing exposures (61.51%) 3,824,634 958,829 (54.95%) 2,865,805 25.07% - Bad loans (14.76%) 917,800 335,244 (11.17%) 582,556 36.53% - Unlikely-to-pay loans (46.41%) 2,885,422 621,580 (43.41%) 2,263,842 21.54% - Past due loans (0.34%) 21,412 2,005 (0.37%) 19,407 9.36% Performing loans (38.49%) 2,393,253 44,177 (45.05%) 2,349,076 1.85% Total 6,217,887 1,003,006 5,214,881 16.13% The item as a percentage of the total is given in brackets.
Forborne exposures as at 31st December 2016 - Stand-Alone UBI Banca Group
Impairment Figures in thousands of euro Gross exposure Carrying amount Coverage (**) losses
Non-performing exposures (58.33%) 3,382,817 778,454 (52.31%) 2,604,363 23.01% - Bad loans (11.17%) 647,704 226,924 (8.45%) 420,780 35.04% - Unlikely-to-pay loans (46.78%) 2,712,955 550,273 (43.44%) 2,162,682 20.28% - Past due loans (0.38%) 22,158 1,257 (0.42%) 20,901 5.67% Performing loans (41.67%) 2,416,725 42,408 (47.69%) 2,374,317 1.75% Total 5,799,542 820,862 4,978,680 14.15% The item as a percentage of the total is given in brackets.
(*) The New Banks' gross non-performing loans and impairment losses were accounted for in accordance with IFRS 3. As a result, forborne exposures gross of impairment losses are not directly comparable with the comparative figures as at 31st December 2016. (**) Coverage is calculated as the ratio of impairment losses to gross exposure.
BAD LOANS
At year-end gross bad loans amounted to €7.3 billion, down from €7.5 billion at the end of 2016, a decline of -€148.4 million, although the figures are not comparable. As may be observed from the quarterly changes table, in the fourth quarter this category decreased by €224.8 million, principally owing to the application of IFRS 3 to the New Banks' bad loans (derecognition of provisions for impairment and PPA, for a total impact of -€277.2 million), and, to a marginal extent, to the disposals undertaken during the period, despite an increase in transfers from other categories of non-performing loans, essentially unlikely-to-pay loans. As previously reported, disposals of bad loans, mainly unsecured, were carried out over the twelve months calculated on management accounting figures at approximately €107 million gross, of which €62 million relating to the fourth quarter.
Net bad loans of €4 billion remained essentially stable during the year (-€39.4 million compared with the end of 2016; -€41.6 million compared with September), benefiting from part of the PPA (€59.6 million) to the exposures originating with the New Banks.
14 The New Banks' gross non-performing loans and impairment losses were accounted for in accordance with IFRS 3. As a result, forborne exposures gross of impairment losses as at 31st December 2017 are not directly comparable with the comparative figures as at 31st December 2016. 15 This term is used to indicate a situation in which a debtor is not considered able to meet due dates and comply with contractual terms and conditions as a result of financial difficulties. Because of those difficulties the creditor decides to modify the due date and the terms and conditions of the contract in order to allow the debtor to honour the debt or to refinance it, either fully or partially.
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At the level of the new Group (not including Banca Teatina), management accounting figures for December 2017 show net bad loans backed by collateral of €3.2 billion, accounting for 79.4% of the total (€3.1 billion or 78.7% of the total at the end of 2016 for the stand-alone scope). Net bad loans not backed by any collateral or personal guarantees came to 12% (12.9% at the end of 2016 for the historical Group).
An analysis of migrations within the stand-alone Group in 2017 compared with 2016 shows a 15.7% decrease in new classifications, despite including the new classifications relating to the acquired Banks for nine of the twelve months. The decrease was attributable to new classifications from the performing category, which remained marginal, but above all to transfers from other categories of non-performing exposures, primarily unlikely-to-pay loans.
The ratio of bad loans to loans was 7.55% in gross terms and 4.37% in net terms (4.34% in September 2017; 4.35% at the end of 2016).
Coverage – which incorporates the effects of the application of IFRS 3 – stood at 45.05% at year-end. If positions written-off to the income statement relating to creditor actions still in progress are also considered, coverage would in reality be 58.36%.
As shown by the specific table furnishing details, on the basis of the “pre-closing” figures as at 31st December 2017, coverage of bad loans amounted to 47.04% (46.13% in September 2017), up from 45.61% at the end of 2016[ 59.51% inclusive of loan write-offs (58.83% in September and 58.56% in December 2016)].
The management accounting records for the Group (not including Banca Teatina) – which do not reflect the application of IFRS 3 to the New Banks' bad loans – indicate coverage of 78.1% of bad loans not backed by collateral, inclusive of loan write-offs, at year-end.
“UNLIKELY-TO-PAY” LOANS
Unlikely-to-pay loans amounted to €5.1 billion at the end of 2017. Although the figures are not comparable, the decline on December 2016 (-€1.3 billion, of which €1 billion referring to the fourth quarter) is primarily to be attributed to the application at year-end of IFRS 3 to the positions originating with the recently acquired Banks (derecognition of provisions for impairment and the PPA, for a total impact of -€875.6 million), and, to a lesser extent, to the disposals undertaken during the year. The Group disposed of positions amounting to €161 million gross according to management accounting records, of which over €92 million in the fourth quarter. An analysis of migrations within the stand-alone Group in 2017 compared with 2016 shows a decline in transfers from exposures past due and in arrears, alongside an increase in new classifications from the performing category, reflecting above all the changes relating to the New Banks, included in the item for nine of the twelve months, but also the “status alignments” that followed the integration of the first four banks in the fourth quarter.
Net unlikely-to-pay loans fell to €4 billion, down significantly compared to December 2016 (-€910.7 million; -18.7%), primarily due to the effect of the PPA on the positions originating with the recently acquired Banks (€442 million). Quarter-on-quarter, the decline was -€99.1 million (-2.4%).
As a result of the above accounting treatment, coverage was 22.80%. As shown by the IFRS 3 table, on the basis of the “pre-closing” figures as at 31st December 2017, coverage of unlikely-to-pay loans was 34.04%, up significantly from 24.75% at the end of 2016 (34.02% in September).
At the level of the UBI Banca Group (not including Banca Teatina), according to management accounting figures net unlikely to pay loans backed by collateral amounted to €3.3 billion at the end of 2017 (€2.9 billion at the end of 2016 at the stand-alone level), accounting for 76.4% of the total (74.7% at the end of 2016 for the historical Group).
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EXPOSURES PAST DUE AND/OR IN ARREARS
Gross exposures past due and/or in arrears – subject by nature to a certain variability – were down 58.2% over twelve months, falling from €396.6 million to €165.7 million, a reduction of - €230.9 million. Of the latter, -€132.2 million may be attributed to the fourth quarter, due in part to the reclassification of a significant position attributable to UBI Factor (€50 million) relating to the healthcare sector to performing status in October. At year-end, net exposures past due and/or in arrears came to €155.2 million.
At the level of the stand-alone Group, an analysis of migrations in 2017 compared with 2016 shows: - a modest decline in new classifications from performing status, despite including the changes relating to the acquired Banks for nine of the twelve months, marking the continuation of the underlying trend that has characterised the stand-alone Group since the beginning of 2013; - a reduction in transfers to other categories of non-performing loans, mainly to unlikely-to-pay loans; - an increase in outflows to performing status, correlated in part with the reclassification of the above position attributable to UBI Factor as performing in the fourth quarter. Net of this position, the item fell as a result of the progressive decline in new classifications to this category.
Coverage fell to 6.36% from 23.86% in December 2016. This latter figure was affected by the higher coverage that characterised the positions of the New Banks in view of the closing of the acquisition.
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Loans to customers: changes in non-performing gross exposures in 2017 (*)
Bad loansUnlikely-to-pay loans Past-due exposures Total Figures in thousands of euro
Initial gross exposure as at 1st January 2017 Stand-Alone UBI Banca Group 7,260,761 5,119,194 141,477 12,521,432 Increases 2,605,057 3,804,946 589,671 6,999,674 transfers from performing exposures 81,948 1,161,103 441,394 1,684,445 transfers from other classes of non-performing exposures 1,157,830 338,767 1,932 1,498,529 other increases 1,365,279 2,305,076 146,345 3,816,700 Decreases -2,522,254 -3,781,436 -565,412 -6,869,102 transfers into performing exposures -3,791 -346,863 -118,106 -468,760 write-offs (**) -1,628,913 -714,332 -1 -2,343,246 payments received -456,134 -1,088,115 -72,855 -1,617,104 disposals -421,723 -483,409 -293 -905,425 transfers to other classes of non-performing exposure -11,561 -1,113,755 -373,213 -1,498,529 other decreases -132 -34,962 -944 -36,038 Final gross exposure as at 31st December 2017 7,343,564 5,142,704 165,736 12,652,004
Loans to customers: changes in gross non-performing exposures in 2016 - Stand-Alone UBI Banca Group
Bad loansUnlikely-to-pay loans Past-due exposures Total Figures in thousands of euro
Initial gross exposure as at 1st January 2016 6,987,763 6,179,999 266,525 13,434,287 Increases 1,576,125 1,704,769 464,331 3,745,225 transfers from performing exposures 99,748 742,738 451,100 1,293,586 transfers from other classes of non-performing exposures 1,371,045 415,388 168 1,786,601 other increases 105,332 546,643 13,063 665,038 Decreases -1,303,127 -2,765,574 -589,379 -4,658,080 transfers into performing exposures -1,728 -373,137 -82,878 -457,743 write-offs (**) -850,132 -42,084 -16 -892,232 payments received -387,818 -941,435 -55,827 -1,385,080 disposals -48,160 -20,645 - -68,805 transfers to other classes of non-performing exposure -11,068 -1,335,806 -439,727 -1,786,601 other decreases -4,221 -52,467 -10,931 -67,619 Final gross exposure as at 31st December 2016 Stand-Alone UBI Banca Group 7,260,761 5,119,194 141,477 12,521,432
(*) The figures stated include the entrance on 1st April 2017 of the non-performing positions of the New Banks within the item “other increases” and the sales made by the acquired Banks to the Atlante II Fund shown within “other decreases” (write-offs and disposals). In the fourth quarter, the item “other increases” includes the effects of the application of IFRS 3 to the acquired Banks' non-performing assets. (**) The item includes “write-offs”, and that is write-offs subject to bankruptcy proceedings that are still ongoing and to true debt cancellations, and that is write- offs relating to bankruptcy proceedings that have been concluded in the period.
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The interbank market and the liquidity position
Net interbank position
31.12.2016 31.12.201730.9.2017 30.6.2017 Figures in thousands of euro aggregate
Loans and advances to banks 7,836,002 6,109,768 8,793,116 4,820,974 of which: loans to central banks 5,799,045 3,485,261 6,010,582 1,452,927 Due to banks 16,733,006 16,569,895 16,530,503 14,458,089 of which: due to central banks 12,428,723 12,496,310 12,492,078 10,113,625 Net interbank position -8,897,004 -10,460,127 -7,737,387 -9,637,115
Loans and advances excluding central banks 2,036,957 2,624,507 2,782,534 3,368,047 Due to banks excluding central banks 4,304,283 4,073,585 4,038,425 4,344,464 Net interbank position net of central banks -2,267,326 -1,449,078 -1,255,891 -976,417
As at 31st December 2017, the UBI Banca Group's net interbank position was debt of -€8.9 billion, down compared with both the end of 2016 (-€9.6 billion) and the end of September (- €10.5 billion): the annual comparison shows both greater loans and borrowings from the central bank due to an increase in the funds obtained by participating in the fourth and final TLTRO II operation in March 2017 (a total of €12.5 billion nominal) and to an increase in liquidity in the compulsory reserve. Net of business with central banks, while still negative, the net interbank position was much smaller in size at -€2.3 billion compared with approximately -€1 billion before (-€1.4 billion at the end of September).
Even following the acquisition of the New Banks, the Group continues to maintain a more than positive position in terms of liquidity buffers, demonstrated, amongst other things, by specific short-term (liquidity coverage ratio) and structural (net stable funding ratio) Basel 3 indicators, both greater than 100%1. It must also be stated that these indicators would be greater than one even in the presence of an ordinary funding structure not based on TLTRO II support.
A commentary on the trends recorded during the year is given below.
Loans and advances to banks increased to €7.8 billion from €4.8 billion in the comparative period due to the increased liquidity held with central banks, particularly in the central compulsory reserve account, which rose to €5.8 billion from €1.5 billion at the end of 2016: over twelve months, the balance included both the surplus liquidity of the stand-alone UBI Banca Group and the liquidity contributed in the second quarter by the New Banks (in the latter case, pre-acquisition, following the sale to the Atlante II Fund of non-performing loans of €2.2 billion, a condition precedent of the purchase and sale agreement).
Loans to other banks declined to €2.04 billion from the previous €3.37 billion. The decrease is primarily attributable to the items: - “Current accounts and free deposits”, -€743 million, of which -€358.8 million attributable to the closure in December of the margin accounts held with BNP Paribas Securities Services following the early unwinding of the swaps entered into between the Parent Company and the vehicle UBI Finance, and the remainder to ordinary interbank business;
1 The Commission Delegated Regulation (EU) 2015/61 established the introduction of the LCR indicator from 1st October 2015 with a minimum level requested initially set at 60%; 70% from 1st January 2016; 80% from 1st January 2017; and 100% from 1st January 2018.
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- “Other loans” (-€534 million), which includes a credit exposure to banking companies owned by industrial and/or financial groups operating in the consumer credit sector, as well as the International Desk's business in support of foreign clients' commercial transactions. The figure as at 31st December 2016 included approximately €248 million attributable to the partial reclassification from the item “Loans and advances to customers” of the amounts relating to the sales of non-performing loans to REV and the Atlante II fund by the acquired Banks2; - “term deposits” (-€54 million), which amounted to €20 million, representing an entirely marginal share of the item.
Loans to banks: composition
31.12.2017 %31.12.2016 % Changes aggregate Figures in thousands of euro amount %
Loans to central banks 5,799,045 74.0% 1,452,927 30.1% 4,346,118 n.s. Compulsory reserve requirements 5,799,045 74.0% 1,452,927 30.1% 4,346,118 n.s. Loans and advances to banks 2,036,957 26.0% 3,368,047 69.9% -1,331,090 -39.5% Current accounts and deposits 823,602 10.5% 1,566,213 32.5% -742,611 -47.4% Term deposits 19,924 0.3% 73,879 1.6% -53,955 -73.0% Other financing: 1,193,220 15.2% 1,727,650 35.8% -534,430 -30.9% - reverse repurchase agreements 10,363 0.1% - - 10,363 - - other 1,182,857 15.1% 1,727,650 35.8% -544,793 -31.5% Debt instruments 211 0.0% 305 0.0% -94 -30.8% Total 7,836,002 100.0% 4,820,974 100.0% 3,015,028 62.5%
At year-end interbank funding had risen to €16.7 billion (from €14.5 billion at the end of 2016).
Due to banks: composition
31.12.2017 %31.12.2016 % Changes aggregate Figures in thousands of euro amount %
Due to central banks 12,428,723 74.3% 10,113,625 70.0% 2,315,098 22.9% Due to banks 4,304,283 25.7% 4,344,464 30.0% -40,181 -0.9% Current accounts and deposits 1,023,954 6.1% 811,843 5.6% 212,111 26.1% Term deposits 62,532 0.4% 99,422 0.6% -36,890 -37.1% Financing: 3,156,438 18.9% 3,392,151 23.5% -235,713 -6.9% - repurchase agreements 1,665,484 10.0% 1,519,740 10.5% 145,744 9.6% - other 1,490,954 8.9% 1,872,411 13.0% -381,457 -20.4% Other payables 61,359 0.3% 41,048 0.3% 20,311 49.5%
Total 16,733,006 100.0% 14,458,089 100.0% 2,274,917 15.7%
Funding continued to include €12.4 billion 3 obtained from unconventional refinancing operations with the ECB (i.e., TLTRO IIs, targeted refinancing operations designed to expand lending to businesses and households): UBI Banca was awarded €10 billion nominal of funds with a value date of 29th June 2016 and an additional €2.5 billion nominal with a value date of 29th March 2017.
Net of that source of funding, amounts due to banks remained stable at €4.3 billion and performed as follows:
2 See the section “General banking business with customers: lending” for further information. 3 The carrying amount includes interest expense accruing.
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as part of ordinary business, current accounts and term deposits increased to €1.1 billion (+€175.2 million); repurchase agreements increased by €146 million to €1.7 billion and refer almost entirely to financing for investments in U.S. Treasuries provided by market counterparties; “financing – other” declined by €381 million to €1.5 billion. The item includes EIB loans, i.e. medium to long-term funding transactions with the European Investment Bank for investments designed to support SMEs, which at the end of 2017 had declined to €1.48 billion from €1.75 billion in 2016 due to amortisation for the year; other payables, largely funds relating to credit card settlement arrangements with Istituto Centrale Banche Popolari (€50 million from the previous €20.5 million), were up €20 million.
* * *
Available liquidity reserve
31.12.2016 31.12.2017 Changes %%Stand-Alone UBI Banca Group amount % Management accounting figures in millions of euro - net of haircuts
ECB pool 19,692 63.1% 16,102 57.6% 3,590 22.3% of which government securities (A) 5,225 16.7% 2,917 10.4% 2,308 79.1% of which Italian government securities (A) 4,856 15.6% 2,917 10.4% 1,939 66.5% Liquid securities not included in the ECB pool 4,937 15.8% 8,284 29.6% -3,347 -40.4% of which government securities (B) 4,937 15.8% 8,284 29.6% -3,347 -40.4% of which Italian government securities (b) 3,910 12.5% 7,498 26.8% -3,588 -47.9% Government securities refinanced (C) 1,379 4.4% 3,574 12.8% -2,195 -61.4% of which Italian government securities (c) - - 2,080 7.4% -2,080 -100.0% Liquid part of compulsory reserve 5,200 16.7% - - - - Total liquidity reserve (*) 31,208 100.0% 27,960 100.0% 3,248 11.6% ECB auctions (portion pledged) -12,500 -40.1% -10,000 -35.7% 2,500 25.0% Government securities refinanced -1,379 -4.4% -3,574 -12.8% -2,195 -61.4%
Available liquidity reserve 17,329 55.5% 14,386 51.5% 2,943 20.5% of which Available reserves eligible for the purposes of the LCR 16,472 52.8% 11,201 40.1% 5,271 47.1%
(*) Eligible assets (ECB collateral pool, marketable securities not included in the ECB collateral pool and refinanced government bonds) amounted to €26,008 million as at 31st December 2017 and included government bonds of €11,541 million (of which Italian government bonds of €8,766 million). Eligible assets came to €27,960 million as at 31st December 2016, including government bonds of €14,775 million (of which Italian government bonds of €12,495 million). The composition of eligible assets by type of underlying assets is provided in the table “Eligible assets: composition by type of underlying assets”. (**) Available reserves eligible for the purposes of the LCR indicator are liquid assets that satisfy the general and operational requirements set respectively by articles 7 and 8 of Commission Delegated Regulation (EU) No. 2015/61 of 10th October 2014 (which added to Regulation (EU) No. 575/2013 of the Parliament) and the eligibility criteria set in Chapter 2 of that same regulation.
As at 31st December 2017 the Group's liquidity reserve4 amounted to €31.2 billion (net of haircuts), up €3.2 billion year-on-year, and it was composed as follows: • €19.7 billion of assets deposited with the ECB collateral pool to back access to the TLTRO II programme already mentioned: the increase of €3.6 billion shown in the table was due to the growth of eligible government bonds (from €2.9 to €5.2 billion) and the increase of €1 billion in loans eligible for refinancing through the “ABACO” procedure (for bank assets eligible as collateral); • €4.9 billion of readily marketable spot and forward assets (mainly Italian government securities), not lodged with the collateral pool available to the Parent treasury for short- term liquidity management. The change over twelve months is attributable to the inclusion of government securities in the pool to back increased ECB transactions;
4 An asset is considered liquid or marketable if the credit institution is able to convert it into cash rapidly without encountering practical or legal difficulties.
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• €1.4 billion of refinanced government bonds (at the end of 2017, only positions payable attributable to the refinancing of U.S. Treasuries); • the available compulsory reserve of €5.2 billion (the share exceeding the mandatory share), formed in the first half of the year in connection with the March TLTRO II auction and the liquidity contributed by the New Banks, as detailed above. The Group pursues a policy to gradually lighten and diversify the portfolios (by geographical area and by sovereign and corporate issuer), designed nevertheless to maintain sufficiently large investments in domestic government securities to ensure optimum management of liquidity by means of the eligibility of these.
The liquidity buffer amounts to 40.5% of on demand direct funding consisting of current accounts and sight deposits as at 31st December 2017.
In terms of composition by category of financial instruments, during the year the liquidity reserve (€26 billion) underwent the following major changes: a decline in eligible or readily marketable instruments in the securities portfolio of -€3.4 billion, in keeping with the reduction of the AFS and HTM portfolios (and due to the new haircuts applied by the ECB to Italian sovereign debt following the downgrade of DBRS in January 2017[ from A (low) to BBB (high)]; an increase in self-retained securitisations (net of the related amortisation) of +€0.5 billion: it is underlined that the figure at the end of 2017 includes €0.39 billion relating to the Marche M6 Srl securitisation attributable to the former Banca delle Marche; an increase of +€1 billion in loans eligible as a result of participation in “ABACO” due to the contribution of new loans.
As at 31st December 2017, in view of the portion to back TLTRO II funding (€12.5 billion) and of the portion to back repurchase agreements (€1.4 billion), with account also taken of available liquidity and the available part of the compulsory reserve (€5.2 billion) in terms of value net of the haircut, the margin of available liquidity stood at €17.3 billion, inclusive of €16.5 billion of reserves eligible for the purposes of the LCR indicator.
The margin available amounts to approximately 27% of on demand direct funding consisting of current accounts and sight deposits as at 31st December 2017.
Assets eligible: composition by type of underlying assets
31.3.2017 31.12.2016 31.12.2017 30.9.2017 30.6.2017 Stand-Alone UBI Banca Stand-Alone UBI Banca (*) (*) (*) Group Group nominal amount net of nominal amount net of nominal amount net of nominal amount net of nominal amount net of Figures in billions of euro amount haircuts amount haircuts amount haircuts amount haircuts amount haircuts
Proprietary securities (AFS, HTM and L&R) (1) 11.98 11.94 12.67 12.43 12.04 12.37 13.10 13.38 13.82 15.36 Covered bonds ("self-retained" issues) 4.38 3.82 4.26 3.73 4.26 3.72 4.44 3.88 4.44 3.87 B@nca 24-7 0.68 0.60 0.70 0.62 0.73 0.65 0.76 0.68 0.97 0.66 Marche M6 Srl securitisation 0.43 0.39 ------UBI Leasing assets securitisation 2.10 1.90 2.10 1.88 2.10 1.87 2.10 1.87 2.10 1.77 Securitisation of performing residential mortgages 2.09 1.80 2.09 1.78 2.09 1.78 2.09 1.77 2.09 1.74 Loans eligible due to participation in ABACO (2) 8.90 5.55 8.43 5.31 8.04 5.06 7.26 4.59 7.16 4.56 Assets eligible for refinancing 30.56 26.00 30.25 25.75 29.26 25.45 29.75 26.17 30.58 27.96
(*) The figures are for the new perimeter of the UBI Banca Group from 30th June 2017.
(1) Proprietary securities, stated both at nominal value and net of haircuts, include the amount for refinanced government securities. The item is therefore fully comparable with the figures reported in the table “Available liquidity reserve”, where the allocation (pool, non-pool, refinanced) of the government securities included here is reported. These represent the most significant part of the Group's liquid assets.
(2) ABACO (bank assets eligible as collateral) is the name given to procedures drawn up by the Bank of Italy for the management of loans eligible for refinancing. In order to qualify as eligible, an asset must meet specific requirements contained in Bank of Italy regulations concerning the following: type of debtor (public sector, non-financial company, international and supranational institutions), credit rating (set by external ratings, rating tools of approved providers and internal ratings [for banks authorised by the Bank of Italy to use internal rating models]), minimum amount (€0.03 million for domestic loans) and type of asset.
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Financial activities
As at 31st December 2017, financial assets of the Group amounted to €16.8 billion, down €21.9 billion compared with the end of 2016. If financial liabilities held for trading are considered, consisting solely of financial derivatives, then net assets came to €16.4 billion (€21.1 billion).
During the year, we continued the strategic action that began at the end of 2015 towards a gradual reduction in Italian government securities – while maintaining an optimal level for liquidity management purposes – within the scope of a broader adjustment and diversification of investments. After the first initiatives at the time of the acquisition, further actions were undertaken in the third quarter of 2017 to optimise the portfolios by disposing of the Italian government investments of the New Banks (not those used in the insurance operations), which were then partially reinvested by the Parent at the same time.
As shown in the table, the largest portfolios falling under the item financial assets are the AFS and HTM portfolios, which account for 58.6% and 35.3% of the total, respectively. In terms of type of financial instrument, 66.4% of the portfolios were composed of Italian government securities, a reduction compared to the 75.7% at the end of 2016 due to the actions taken. On the other hand, a reduction to 27.2% (17.5%) was recorded for other debt securities due to the diversification of investments towards government and corporate securities, particularly in Europe, but also in emerging nations. Both equity instruments and units of UCITS, now marginal in amount, fell year on year to an overall level of 3.9%.
Financial assets/liabilities
31.12.2016 31.12.2017 30.9.2017 30.6.2017 aggregate Changes A/D Carrying Carrying Carrying Carrying Figures in thousands of euro amount % amount % amount % amount % amount % A B C D
Financial assets held for trading 924,475 5.5% 761,622 4.3% 671,482 3.7% 881,457 4.0% 43,018 4.9% of which: financial derivatives contracts 421,113 2.5% 546,954 3.1% 534,046 3.0% 669,197 3.1% -248,084 -37.1% Financial assets designated at fair value 92,290 0.6% 115,811 0.7% 161,374 0.9% 218,743 1.0% -126,453 -57.8% Available-for-sale financial assets 9,861,978 58.6% 10,662,618 60.9% 11,128,949 62.0% 13,516,860 61.6% -3,654,882 -27.0% Held-to-maturity investments 5,937,872 35.3% 5,982,945 34.1% 5,993,150 33.4% 7,327,544 33.4% -1,389,672 -19.0%
Financial assets (a) 16,816,615 100.0% 17,522,996 100.0% 17,954,955 100.0% 21,944,604 100.0% -5,127,989 -23.4% of which: - debt instruments 15,742,588 93.6% 16,277,812 92.9% 16,644,509 92.7% 20,444,241 93.2% -4,701,653 -23.0% - of which: Italian government securities 11,160,614 66.4% 12,038,147 68.7% 11,893,379 66.2% 16,613,349 75.7% -5,452,735 -32.8% - equity instruments 318,824 1.9% 385,209 2.2% 449,936 2.5% 426,734 1.9% -107,910 -25.3% - Units in UCITS. 334,090 2.0% 313,021 1.8% 326,464 1.8% 404,432 1.8% -70,342 -17.4%
Financial liabilities held for trading (b) 411,653 100.0% 717,358 100.0% 710,665 100.0% 861,478 100.0% -449,825 -52.2% of which: financial derivatives contracts 411,653 100.0% 717,358 100.0% 710,665 100.0% 861,478 100.0% -449,825 -52.2%
Net financial assets (a-b) 16,404,962 16,805,638 17,244,290 21,083,126 -4,678,164 -22.2%
Management accounting figures1 for 31st December 2017 show the following: - in terms of type of financial instrument, the Group’s securities portfolio was composed as follows: 91.1% (92.6% at the end of 2016 related solely to the stand-alone UBI Banca perimeter) of government securities; 5.4% (5.7%) of corporate securities (equally divided between the financial sector and corporate issuers; 97% of these investments have an investment-grade rating, of which 57% concentrated in the BBB segment and 36% in the A segment); the remaining 3.5% (1.7%) of hedge funds, funds and equities (which included the stakes held in the Atlante Fund and in the Bank of Italy); - from a financial viewpoint, floating-rate securities accounted for 52.1% (51.8% in December 2016 related solely to the stand-alone UBI Banca perimeter) of the portfolio and fixed-rate securities for 47.8% (47.2%), as the remainder was composed of subordinated and convertible securities;
1 The management accounting analysis relates to a smaller portfolio than that stated in the consolidated financial statements, because they exclude “longer-term” AFS assets, some smaller portfolios and also financial derivatives contracts held for trading. Securities relating to insurance business are not included.
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- as regards the currency of denomination, 87.7% (89.7% at the end of 2016 related solely to the stand- alone UBI Banca perimeter) of the securities were denominated in euro and 12.3% (10.3%) in dollars with natural hedges to cover currency risk, while in terms of geographical distribution, 85.9% (88.8%) of the investments (excluding hedge funds) were issued from countries within the euro area; - an analysis by rating (for the bond portfolio only) shows no changes compared with the end of the year, and 99.9% of the portfolio continued to consist of investment-grade securities.
Available-for-sale financial assets
“Available-for-sale financial assets” (AFS), asset item 40, are measured at fair value with the recognition of changes in a separate fair value reserve in equity, except for losses due to reductions in value that are considered significant or prolonged. In this case the reduction in value that occurred in the period is recognised through profit or loss, the amount being transferred from the negative or positive reserve that may have been recognised in equity previously. Following the recognition of impairment losses, recoveries in value continue to be recognised in the separate fair value reserve in equity if they relate to equity instruments and through profit and loss if they relate to debt instruments. Any decreases below the level of the previous impairment losses are recognised through profit and loss. Definitions relating to the fair value hierarchy (levels one, two and three) are given in Section A.4 of Part A – Accounting Policies in the Notes to the Consolidated Financial Statements.
Available-for-sale financial assets: composition
31.12.2016 31.12.2017 Changes aggregate Carrying Carrying Figures in thousands of euro L 1 L 2 L 3 amount L 1 L 2 L 3 amount amount %
Debt instruments 9,188,135 106,452 16,809 9,311,396 12,629,470 270,618 23,191 12,923,279 -3,611,883 -27.9% of which: Italian government securities 5,165,432 - - 5,165,432 9,098,427 - - 9,098,427 -3,932,995 -43.2% Equity instruments 17,119 477 273,852 291,448 27,110 9,808 296,044 332,962 -41,514 -12.5% Units in UCITS 94,734 131,819 32,581 259,134 35,843 110,648 114,128 260,619 -1,485 -0.6% Financing ------
Total 9,299,988 238,748 323,242 9,861,978 12,692,423 391,074 433,363 13,516,860 -3,654,882 -27.0%
At 31st December 2017, available-for-sale financial assets totalled €9.9 billion, a reduction of €3.6 billion year on year.
The table shows debt securities in the amount of €9.3 billion, of which €5.2 billion in Italian government securities, a reduction of over €3.9 billion for the year, a nominal -€1.7 billion due to the zeroing of the investments of the acquired New Banks in BTPs, CTZs and CCTs. This trend reflects the following transactions governed by UBI Banca:2 - in the first quarter, the sale of BTPs for €1.33 billion nominal; - in the second quarter, the sale of BTPs, CCTs and CTZs for a net €947.5 million nominal (-€426 million nominal related to the New Banks); - in the third quarter, the purchase of securities for a nominal €1.3 billion and the near zeroing of the investments of the acquired banks with the sale of BTPs, CCTs, and CTZs for €1.252 billion nominal; - in the fourth quarter, the sale of BTPs for €856 million nominal. The stock of other debt securities increased by €321.1 million to €4.1 billion due mainly to the purchase in the latter part of 2017, with a view towards portfolio diversification, of French OATs for €500 million nominal and U.S. treasury notes for €100 million nominal against net divestments of Spanish Bonos for €275 million nominal (€1.0 billion purchased and €1.275 billion sold, of which -€525 million nominal in the fourth quarter). Government securities from emerging and other nations posted a net increase of €95.4 million nominal during the year, while other corporate securities were sold/redeemed for a net total of €248.3 million nominal along with the purchase at the same time of over $100 million nominal. Debt securities also include €1.7 billion (of which €1 billion in Italian government securities, €0.4 billion in government securities of other nations, and €0.3 billion in bank, financial-service and
2 Excluding transactions in the insurance segment for the twelve months, as well as those of the New Banks in the first quarter.
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corporate bonds) related to the insurance segment (BancAssurance Popolari and BancAssurance Popolari Danni), which were acquired with the addition of the New Banks to the Group. As already reported, the changes shown in the tables take account of end-of-period accounting adjustments.
Equity instruments fell by €41.5 million to €291.4 million. The securities were classified almost totally in fair value level three. Full write-downs were recorded in the third quarter amounting to €16.4 million of an AFS shareholding held in the Voluntary Scheme of the Interbank Deposit Protection Fund (IDPF) representing an investment made in the Cassa di Risparmio di Cesena (UBI Banca Group’s share equal to €12.2 million at 31st December 2016 and the share of the New Banks equal to €4.2 million). In the fourth quarter, there was also a partial write-down of €10.9 million of an AFS shareholding held in the Voluntary Scheme related to the investment in the junior tranche of the securitisation of non-performing loans of the banks subject to support (Cassa di Risparmio di Rimini, Cassa di Risparmio di San Miniato, and Cassa di Risparmio di Cesena), for which the Group had previously recognised under asset item no. 40 a profit- participating equity instrument with the IDPF as the counterparty representing both the junior tranches and the mezzanine class. At 31st December 2017, the remaining balance was €2.1 million. Part B, Assets, of the Notes to the Consolidated Financial Statements provides details on the main securities classified in fair value level three, which represent 94% of the total, while Part A.4.5., Fair value hierarchy, provides descriptions of the changes that took place.
Units in UCITS remained essentially unchanged at €259 million. Only the Polis Fund was recognised in fair value level one because the two ETF funds, held in portfolio in December, totalling €14.5 million, were sold in the third quarter. On the other hand, stakes relating to the Atlante Fund were recognised in fair value level three amounting to €22 million (€13.2 million relating to the contributions paid in the second quarter and €8.8 million in the fourth quarter).3 The total also includes units subscribed relating to the insurance business acquired with the entrance of the New Banks in the amount of €99.1 million and classified in fair value levels one and two.
Held-to-maturity investments
“Held-to-maturity investments”, asset item 50, are comprised of financial instruments that an entity intends and is able to hold to maturity. These assets are measured at amortised cost with the recognition of impairment losses, or reversals of the impairment when the reason for it no longer exists, through profit or loss.
The portfolio settled at €5.9 billion (€5.335 billion nominal), a decrease of €1.4 billion for the twelve-month period (-€1.05 billion nominal). The change is attributable to transactions in the second quarter consisting of the purchase of BTPs amounting to €1 billion nominal with maturity in 2027 and the sale of BTPs amounting to €2.05 billion nominal with maturity in 2020.
Held-to-maturity investments: composition
31.12.2016 31.12.2017 Changes aggregate
Fair Value Fair Value Carrying Carrying amount % Figures in thousands of euro amount L 1 L 2 L 3 Total amount L 1 L 2 L 3 Total
Debt instruments 5,937,872 6,029,517 - - 6,029,517 7,327,544 7,440,786 - - 7,440,786 -1,389,672 -19.0% of which: Italian government securities 5,937,872 6,029,517 - - 6,029,517 7,327,544 7,440,786 - - 7,440,786 -1,389,672 -19.0%
Financing ------
Total 5,937,872 6,029,517 - - 6,029,517 7,327,544 7,440,786 - - 7,440,786 -1,389,672 -19.0%
3 The shares subscribed in the Atlante Fund in December 2016 had been recognised for an amount of €65.5 million, which rose to €70.6 million at the end of March following a payment made at the beginning of January and net of further impairment that had been recognised on them in first quarter. At the end of June 2017, the value of the units relating to the Veneto banks was zeroes, so the investment had a carrying value of €13.2 million and represented deposits made during the second quarter.
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Financial instruments held for trading
Financial assets held for trading
Asset item 20, “Financial assets held for trading” (HFT), comprises financial trading instruments “used to generate a profit from short-term fluctuations in price”. These are measured at fair value through profit or loss (FVPL). Definitions relating to the fair value hierarchy (levels one, two and three) are given in Section A.4 of Part A – Accounting Policies in the Notes to the Consolidated Financial Statements.
At the end of December, financial assets held for trading amounted to €924.5 million (€881.5 million in December 2016), composed of on-balance sheet assets of €503.4 million (€212.3 million) and financial derivatives amounting to €421.1 million (€669.2 million), for which the performance and amount must be interpreted in strict relation to the corresponding item recognised within financial liabilities held for trading.
As shown in the table, debt securities, in the amount of €482.1 million, are the main component of on-balance sheet assets and include Italian government securities in the amount of €50.2 million, which is a significant reduction compared to a year ago due to the following transactions governed by the Parent:4 - purchases of BTPs for €23.3 million nominal against redemptions of BTPs and BOTs for €105 million nominal in the first quarter; - purchases of BTPs and BOTs for €27 million nominal against sales of BTPs for €23.3 million nominal in the second quarter; - purchases of BTPs for €100 million nominal against sales for €24.5 million nominal in the third quarter; - sales of CTZs related to Banca Teatina for €19 million nominal in the fourth quarter. Other debt securities, on the other hand, increased by €427.6 million due to the purchase, in December 2017, of €175 million nominal in French OATs and of €250 million nominal in German Bund. It should also be noted that, in the first half of the year, Spanish Bonos for €47 million nominal were purchased and then sold. As already reported, the changes shown in the tables take account of end of period accounting adjustments.
Equity instruments, in the amount of €17.8 million, decreased by €3.5 million during the year and mainly include investments made by companies of the Group in the insurance segment (€10.5 million).
Units in UCITS, which were of negligible amount (€3.5 million), decreased by €5.7 million due almost entirely to the activities of the Group’s insurance companies.
Finally, with regard to derivative instruments, at 31st December 2017 the amount of level-three financial derivatives, in the amount of €75.4 million, were entirely related to options on the equity portfolio of UBI Banca (€15.1 million at the end of 2016).
4 Excluding transactions in the insurance segment for the twelve months, as well as those of the New Banks in the first quarter of the year.
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Financial assets held for trading: composition
31.12.2016 31.12.2017 Changes aggregate Carrying Carrying Figures in thousands of euro L 1 L 2 L 3 L 1 L 2 L 3 amount % amount amount
On-balance sheet assets Debt instruments 481,606 343 100 482,049 181,108 602 100 181,810 300,239 165.1% of which: Italian government securities 50,208 - - 50,208 177,584 - - 177,584 -127,376 -71.7% Equity instruments 17,730 - 54 17,784 21,183 41 44 21,268 -3,484 -16.4% Units in UCITS 1,801 1,728 - 3,529 853 6,513 1,816 9,182 -5,653 -61.6% Financing ------Total (a) 501,137 2,071 154 503,362 203,144 7,156 1,960 212,260 291,102 137.1% Derivative instruments Financial derivatives 1,873 343,868 75,372 421,113 1,408 635,817 31,972 669,197 -248,084 -37.1% Credit derivatives ------Total (b) 1,873 343,868 75,372 421,113 1,408 635,817 31,972 669,197 -248,084 -37.1%
Total (a+b) 503,010 345,939 75,526 924,475 204,552 642,973 33,932 881,457 43,018 4.9%
Financial liabilities held for trading
Financial liabilities held for trading, in the amount of €411.7 million in December (€861.5 million in December 2016), continue to be entirely in the form of financial derivatives. The amounts and performance of these derivative instruments must be interpreted in relation to those for the corresponding item recognised within financial assets held for trading. Although the relative liabilities do not appear in end-of-period figures, UBI Banca has taken limited uncovered short positions on Italian and European government securities.
Financial liabilities held for trading: composition
31.12.2017 31.12.2016 Changes aggregate
Carrying Carrying Figures in thousands of euro L 1L 2L 3 L 1 L 2 L 3 amount % amount amount
On-balance sheet liabilities Due to banks ------Due to customers ------Debt instruments ------Total (a) ------
Derivative instruments Financial derivatives 81 411,524 48 411,653 76 861,036 366 861,478 -449,825 -52.2% Credit derivatives ------Total (b) 81 411,524 48 411,653 76 861,036 366 861,478 -449,825 -52.2%
Total (a+b) 81 411,524 48 411,653 76 861,036 366 861,478 -449,825 -52.2%
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Financial assets designated at fair value
The item “financial assets designated at fair value” is comprised of financial instruments classified as such in application of the fair value option (FVO). These financial assets are recognised at fair value through profit or loss. Definitions relating to the fair value hierarchy (levels one, two and three) are given in Section A.4 of Part A – Accounting Policies in the Notes to the Consolidated Financial Statements.
Financial assets designated at fair value: composition
31.12.2016 31.12.2017 Changes aggregate
Carrying Carrying Figures in thousands of euro L 1 L 2 L 3 L 1 L 2 L 3 amount % amount amount
Debt instruments 11,271 - - 11,271 11,608 - - 11,608 -337 -2.9% of which: Italian government securities 7,102 - - 7,102 9,794 - - 9,794 -2,692 -27.5% Equity instruments 4,794 2,000 2,798 9,592 1,555 3,000 67,949 72,504 -62,912 -86.8% Units in UCITS 71,427 - - 71,427 134,610 21 - 134,631 -63,204 -46.9% Financing ------
Total 87,492 2,000 2,798 92,290 147,773 3,021 67,949 218,743 -126,453 -57.8%
Financial assets designated at fair value, in the amount of €92.3 million, decreased by €126.4million for the twelve-month period as follows: - equity instruments (held as part of the private-equity business): down €62.9 million to €9.6 million resulting mainly from the disposal by UBI Banca, at the end of September, of the stake held in Immobiliare Mirasole (€41.7 million in carrying value at the end of 2016) and from the sale of shares in E.C.A.S. SpA (€2.8 million), as well as, in December, of the stake held in Humanitas (€20.5 million), all classified in level three; - units in UCITS: down €63.2 million to €71.4 million. In the second quarter, UBI Banca sold a portion of the Tages funds recognised in fair value level one (€115.9 million in carrying value at the end of 2016, down to €46.4 million at the end of the half-year period). In the fourth quarter, UBI Banca made a further divestment from the Tages Multistrategy fund, along with a reinvestment in the UBI Pramerica Global Multi Asset Allocation fund (€43.4 million), which was also recognised in fair value level one and is subject to changes tied to market values. As at 31st December 2007 the Tages fund remained in existence for a residual amount of €2.2 million. The €40 million of financial assets designated at fair value existing at the end of the year consisted of securities and units relating to the insurance business.
There are no developments to report with regard to the Madoff affair: UBI Banca is monitoring the class actions brought in the USA and the liquidation proceedings in progress in the British Virgin Islands in order to protect its creditor rights in relation to the three funds involved in the affair, which are Fairfield Sigma Ltd, Kingate Euro Ltd, and Kingate Global Ltd. An official claim has been filed for compensation to the Madoff Victim Fund with regard to all the UBI Banca positions in Madoff funds. This fund was created by the U.S. Attorney’s Office for the Southern District of New York and the Department of Justice. Its purpose is to compensate the victims of the investments in funds involved in the Madoff affair by distributing the sums so far recovered through various criminal, civil and confiscation actions initiated against the various parties involved in the fraud. With regard to the Dynamic Decisions Growth Premium 2X fund, which is being liquidated, recovery efforts are still under way.
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Exposure to sovereign debt risk
The specific table (presented with separate figures for the insurance business given the different nature of the underlying risk) shows that the carrying value of the sovereign debt risk exposures of the Group as at 31st December 2017 amounted to €15.5 billion, of which €14.1 billion consisting of securities held in portfolio by Group banks and €1.4 billion attributable to securities held in portfolio by the insurance companies. At the individual country level, the risk remains concentrated mainly in Italy, accounting for 78% of the total (€12 billion), in the United States with 9% (€1.4 billion), and in Spain accounting for 5% (€811 million).
As already reported, details of Group exposures are given on the basis that, according to the instructions issued by the European supervisory authority, (European Securities and Markets Authority, ESMA), “sovereign debt” is defined as debt instruments issued by central and local governments and by government entities and also as loans granted to them.
The table below “Maturities of Italian Government Securities” shows the distribution by maturity of the Italian government securities.
Maturities of Italian government securities
31.12.2017
Financial Financial Available-for- Held-to- assets Carrying Figures in thousands of euro assets held sale financial matur ity % designated at amount for trading assets investments fair value
Up to 6 months 17,233 123,068 - 802 141,103 1.3% Six months to one year - 45,824 - 733 46,557 0.4% One year to three years 22,693 133,917 - 3,008 159,618 1.4% Three years to five years 3 241,181 4,322,040 858 4,564,082 40.9% Five years to ten years 10,267 2,639,792 1,615,832 1,469 4,267,360 38.2% Over ten years 12 1,981,650 - 232 1,981,894 17.8%
Total 50,208 5,165,432 5,937,872 7,102 11,160,614 100.0%
There is a predominant concentration of investments in the three to five year range (40.9%) and in the five to ten year range (38.2%), which reflects both the movement of a portion of the HTM portfolio due to the approaching maturity and the effects of the buying and selling of AFS securities during the year. Net of securities relating to the insurance business of the New Banks acquired (€1.05 billion) the average life of the AFS portfolio at the end of December was 10.95 years, that of the HTM portfolio was 5.59 years, while that of government securities classified in the HFT portfolio was 2.10 years.
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UBI Banca Group: exposures to sovereign debt risk
Country/portfolio of classification 31.12.2017 Consolidated without insurance Insurance Nominal Carrying Nominal Carrying Figures in thousands of euro Fair value Fair value amount amount amount amount
- Italy 9,676,744 10,965,269 11,034,289 982,496 1,052,226 1,052,226 financial assets and liabilities held for trading (net exposure) 50,203 50,208 50,208 - - - available-for-sale financial assets* 3,436,997 4,125,553 4,125,553 975,603 1,045,124 1,045,124 held-to-maturity investments 5,335,000 5,937,872 6,029,517 - - - financial assets designated at fair value - - - 6,893 7,102 7,102 loans and receivables 854,544 851,636 829,011 - - - - Spain 475,000 504,163 504,163 275,155 306,737 306,737 available-for-sale financial assets 475,000 504,163 504,163 274,250 305,758 305,758 financial assets designated at fair value - - - 905 979 979 - United States 1,417,495 1,420,464 1,420,464 755 712 712 financial assets and liabilities held for trading (net exposure) 1 1 1 - - - available-for-sale financial assets 1,417,494 1,420,463 1,420,463 - - - financial assets designated at fair value - - - 755 712 712 - Austria - - - 240 277 277 financial assets designated at fair value - - - 240 277 277 - Bulgaria - - - 2,000 2,323 2,323 available-for-sale financial assets - - - 2,000 2,323 2,323 - France 675,000 677,439 677,439 3,289 3,836 3,836 financial assets and liabilities held for trading (net exposure) 175,000 176,974 176,974 - - - available-for-sale financial assets 500,000 500,465 500,465 3,000 3,486 3,486 financial assets designated at fair value - - - 289 350 350 - Germany 250,000 253,058 253,058 985 1,074 1,074 financial assets and liabilities held for trading (net exposure) 250,000 253,058 253,058 - - - financial assets designated at fair value - - - 985 1,074 1,074 - Latvia - - - 2,000 2,222 2,222 available-for-sale financial assets - - - 2,000 2,222 2,222 - Holland 10 10 10 18 18 18 financial assets designated at fair value - - - 18 18 18 loans and receivables 10 10 10 - - - - Portugal - - - 12,000 14,126 14,126 available-for-sale financial assets - - - 12,000 14,126 14,126 - Rumania 26,015 29,243 29,243 2,000 2,358 2,358 available-for-sale financial assets 26,015 29,243 29,243 2,000 2,358 2,358 - Abu Dhabi 10,840 10,756 10,756 - - - available-for-sale financial assets 10,840 10,756 10,756 - - - - Qatar 10,663 10,687 5,880 - - - loans and receivables 10,663 10,687 5,880 - - - - Saudi Arabia 7,254 7,135 7,135 - - - available-for-sale financial assets 7,254 7,135 7,135 - - - - Chile 3,752 3,857 3,857 - - - available-for-sale financial assets 3,752 3,857 3,857 - - - - Colombia 17,927 20,314 20,314 - - - available-for-sale financial assets 17,927 20,314 20,314 - - - - Philippines 12,507 16,544 16,544 - - - available-for-sale financial assets 12,507 16,544 16,544 - - - - Indonesia 31,852 34,958 34,958 - - - available-for-sale financial assets 31,852 34,958 34,958 - - - - Israel 11,340 11,474 11,474 - - - available-for-sale financial assets 11,340 11,474 11,474 - - - - Kazakhstan 9,589 10,496 10,496 - - - available-for-sale financial assets 9,589 10,496 10,496 - - - - Lithuania 7,504 8,737 8,737 - - - available-for-sale financial assets 7,504 8,737 8,737 - - - - Morocco 11,257 11,903 11,903 - - - available-for-sale financial assets 11,257 11,903 11,903 - - - - Algeria 5,295 5,244 5,244 - - - loans and receivables 5,295 5,244 5,244 - - - - Mexico 28,725 29,957 29,957 - - - available-for-sale financial assets 28,725 29,957 29,957 - - - - Oman 3,544 3,590 3,590 - - - available-for-sale financial assets 3,544 3,590 3,590 - - - - People's Republic of China 1,167 1,159 1,159 - - - available-for-sale financial assets 1,167 1,159 1,159 - - - - Panama 27,183 28,970 28,970 - - - available-for-sale financial assets 27,183 28,970 28,970 - - - - Peru 9,589 12,739 12,739 - - - available-for-sale financial assets 9,589 12,739 12,739 - - - - Poland 14,175 15,136 15,136 - - - available-for-sale financial assets 14,175 15,136 15,136 - - - - Slovak Republic 3,335 3,614 3,614 - - - available-for-sale financial assets 3,335 3,614 3,614 - - - - Slovenia 834 969 969 - - - available-for-sale financial assets 834 969 969 - - - - Uruguay 7,921 8,719 8,719 - - - available-for-sale financial assets 7,921 8,719 8,719 - - - - Argentina 629 490 490 - - - financial assets and liabilities held for trading (net exposure) 629 490 490 - - - Total on-balance sheet exposure 12,757,146 14,107,094 14,171,307 1,280,938 1,385,909 1,385,909
* The carrying amount for the AFS Italian securities is different from that reported in the line “Italian government securities” in the table relating to “Available-for-sale financial assets” due to the presence in this table of bonds issued by Cassa Deposito e Prestiti (a state controlled fund and deposit institution – a government issuer) amounting to €5.2 million.
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* * *
With a view to greater transparency on credit risk exposures consisting of debt instruments other than sovereign debt – as requested by the European Securities and Markets Authority (ESMA) in Document No. 725/2012 of 12th November 2012 – a table has been provided summarising total debt instruments other than sovereign debt recognised among the assets of the UBI Banca Group as at 31st December 2015 (available-for-sale financial assets, financial assets held for trading, loans and advances to banks, and loans and advances to customers).
Debt instruments other than government securities recognised within consolidated assets
31.12.2017 figures in thousands of euro Carrying Nominal Issuer Nationality Fair value amount amount
Corporate Italy 124,138 124,138 151,212 Corporate United States 132,327 132,327 124,974 Corporate United Kingdom 124,580 124,580 119,422 Corporate Holland 61,338 61,338 58,332 Corporate France 56,563 56,563 53,057 Corporate Spain 36,809 36,809 34,900 Corporate Germany 35,397 35,397 33,100 Corporate Ireland 31,165 31,165 31,601 Corporate Mexico 12,207 12,207 11,100 Corporate Denmark 11,786 11,786 10,500 Corporate Finland 10,782 10,782 9,900 Corporate Norway 9,533 9,533 9,000 Corporate Japan 9,374 9,374 9,420 Corporate Panama 8,995 8,995 8,500 Corporate Luxembourg 7,545 7,545 9,213 Corporate Switzerland 5,402 5,402 5,295 Corporate Jersey 5,209 5,209 5,350 Corporate Cayman Islands 5,156 5,156 5,000 Corporate Sweden 4,332 4,332 4,100 Corporate Belgium 3,804 3,804 3,694 Corporate Canada 3,758 3,758 3,500 Corporate Guernsey 2,603 2,603 2,500 Corporate Cyprus 2,087 2,087 2,000 Corporate Czech Republic 1,083 1,083 1,000 Corporate Brazil - - 62 Total Corporate 705,973 705,973 706,732 Banking Italy 168,068 168,068 162,958 Banking France 59,630 59,630 58,751 Banking United Kingdom 43,742 43,742 41,836 Banking Germany 34,204 34,204 39,930 Banking United States 23,693 23,693 22,244 Banking Spain 23,178 23,178 22,500 Banking Austria 13,927 13,927 14,970 Banking Holland 11,233 11,233 10,750 Banking Switzerland 6,219 6,219 4,907 Banking Belgium 5,954 5,954 6,000 Banking Norway 5,409 5,409 5,000 Banking Sweden 5,119 5,119 5,000 Banking Finland 3,231 3,231 3,000 Banking Ireland 2,080 2,080 2,000 Banking Japan 1,336 1,336 1,251 Banking Cyprus - - 9,500 Total Banking 407,023 407,023 410,597 Total debt instruments 1,112,996 1,112,996 1,117,329
To complete the disclosures required by the ESMA, at the end of 2017 (as also in December 2016) the Group held no credit default products, nor did the Group carry out any transactions in those instruments during the year, either to increase its exposure or to acquire protection.
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Derivative financial instruments
The management of interest-rate risk (IRRBB) within the UBI Banca Group is, first and foremost, centred around a natural-hedge model, i.e. the natural offsetting of risks on both sides of the balance sheet, using derivative instruments only when this offsetting is deemed to be inadequate or unacceptable. In 2017 specifically, management focused on reducing exposure in the longer time buckets. To that end, medium and long-term, fixed-rate assets (typically mortgages issued to customers) were covered, both for existing, uncovered positions and for newly issued products.
Trading activities As shown in table A.1, “Supervisory trading portfolio: notional, end of period and average figures”, in the Notes to the Consolidated Financial Statements, Part E, the notional value of the derivatives recognised in the trading portfolio existing at the end of 2017 was €37.1 billion (€32.1 billion at the end of 2016). At 31st December 2017, the gross positive fair value of this portfolio, prior to offsetting in accordance with the provisions of IAS 32, came to €476.5 million, while the gross negative fair value came to €641.2 million.
Hedging activities As detailed in table A.2.1, “Banking portfolio: notional end of period and average amounts – For hedging”, in the Notes to the Consolidated Financial Statements, Part E, the notional value of hedging derivatives held in December 2017 was €30.9 billion (€27.7 billion at the end of 2016 relating to the stand-alone UBI Banca Group). These mainly consisted of instruments to hedge interest rate risk relating to debt securities and in particular to fixed-rate bonds and securities classified as available-for-sale. At 31st December 2017, the gross positive fair value of this portfolio, prior to offsetting in accordance with the provisions of IAS 32, came to €393.1 million, while the gross negative fair value came to €469.3 million. For a proper understanding of overall trading in these instruments, their measurement at fair value must be considered in combination with the fair value of the corresponding hedged assets/liabilities.
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Exposures to certain types of products
This section provides an update of the position of the UBI Banca Group with regard to some types of financial instruments, which are considered at high risk since the subprime mortgage crisis in 2007.
Special purpose entities
The involvement of the UBI Banca Group in special purpose entities (SPEs5) concerns the following types: 1. conventional securitisation transactions 6 performed by Group member companies in accordance with Law No. 130 of 30th April 1999; 2. synthetic securitisations;7 3. the issue of covered bonds, in accordance with Art. 7 bis of Law No.130/1999.
1. The list of SPEs used for the traditional securitisations in which the Group is involved is as follows: 24-7 Finance Srl; UBI SPV Lease 2016 Srl; UBI SPV Group 2016 Srl. The operations concerning 24-7 Finance Srl, UBI SPV Lease 2016 Srl and UBI SPV Group 2016 Srl were performed in order to create a portfolio of assets eligible as collateral for refinancing with the European Central Bank, consistent with Group policy for the management of liquidity risk. They were carried out on the following: performing residential mortgages of the former B@nca 24-7 (24-7 Finance Srl); UBI Leasing lease contracts (UBI SPV Lease 2016 Srl); performing residential mortgages granted to individuals and sole traders by the former Banca Popolare Commercio e Industria, the former Banca Regionale Europea, UBI Banca, the former Banca Popolare di Bergamo, the former Banco di Brescia, forma Banca Popolare di Ancona and Banca Carime (UBI SPV Group 2016 Srl).
In 2017, assets related to UBI SPV Lease 2016 Srl were sold within the scope of the revolving period. The first sale was completed in January and concerned a portfolio totalling €260 million (in remaining principle balance), while the second was completed in July for a total of €223 million (in remaining principle balance). For the sake of full disclosure, it should be noted that a further revolving sale was conducted in January 2018 for a total of €187 million. Furthermore, assets regarding the UBI SPV Group 2016 Srl securitisation were repurchased again in 2017 relating to mortgages consisting of bad loans, unlikely-to-pay loans and mortgages with payments in arrears.
Although Group investment in the ownership capital of the SPEs is limited, the entities listed above are included in the consolidated accounts because these companies are in reality controlled, since their assets and liabilities were originated by Group companies. In the securitisations in question, the senior securities issued by the entities – assigned a rating – are listed on the Dublin Stock Exchange.
2. In 2017, in addition to the traditional securitisations, synthetic securitisations were executed with the goal of optimising regulatory capital by reducing the level of credit risk of the underlying portfolios.8
5 Special Purpose Entities (SPEs) are special companies formed to achieve a determined objective. 6 With normal securitisations the originator sells the portfolio to a special purpose entity which then issues tranches of asset-backed securities in order to purchase it. 7 With a synthetic securitisation, the originator purchases protection for a pool of assets and transfers the credit risk attaching to the portfolio – either fully or in part – by using credit derivatives such as CDSs (credit default swaps) and CLNs (credit-linked notes) or by means of personal guarantees. 8 For further details, see the specific section of the notes to the financial statements, Part E, C.1 “Securitisations”.
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3. With regard to the issue of covered bonds, the creation of the SPEs UBI Finance Srl (in 2008) and UBI Finance CB 2 Srl (in 2011) was performed for the purchase of loans from banks in order to create cover pools for covered bonds issued by the Parent9. The issuance of covered bonds is designed to diversify sources of funding and to contain its cost as well as to increase eligible reserves. Transfers were made in 2017 to the SPEs UBI Finance Srl and UBI Finance CB2 Srl involving assets held by UBI Banca for €1,687 million (with effect for accounting purposes from May 2017) and €307 million (with effect for accounting purposes from 2017), respectively. At the date of this report, UBI Banca has issued covered bonds totalling €11.35 billion nominal (of which €2.25 billion relating to retained issuances) under the “first programme” (residential mortgages) for a maximum issuance of €15 billion and for a total of €2.13 billion nominal (all retained issuances) under the “second programme” (mainly commercial mortgages) with a maximum issuance of €5 billion. The originator banks issued subordinated loans to the SPE UBI Finance Srl and to the SPE UBI Finance CB 2 Srl, equal to the value of the loans progressively transferred, in order to fund the purchase. As at 31st December 2017, these loans amounted to €14.2 billion for UBI Finance Srl (€14.3 billion in December 2016) and to €3 billion for UBI Finance CB 2 (€3.1 billion in December 2016).
Ordinary lines of liquidity existed at the end of the year granted by the Parent to the SPE 24-7 Finance Srl for a total of €97.6 million, which had been entirely drawn on (€97.6 million entirely drawn on also in December 2016).
In December 2017, the swaps established between the Parent and the SPE UBI Finance Srl were extinguished ahead of schedule. Following this transaction, the related margin deposits held at BNP Paribas Securities Services were closed, with the deposited liquidity (roughly €380 million) returning to the Group.
No exposures exist to SPEs or other conduit operations with underlying securities or investments linked to United States subprime and Alt-A loans.
The total assets of SPEs relating to securitisations and to covered bonds amounted to €23.3 billion (€23.9 billion at the end of 2016 related to the “stand-alone” UBI Banca Group). The table below reports details by asset class:
SPE underlying assets
31.12.2016 Classification of underlying assets of the securitisation 31.12.2017 Stand-Alone UBI Banca Group Figures in millions of euro
Measurement Gross of Net of Gross of Net of EntityTotal Class of underlying asset Accounting criteria impairment impairment impairment impairment assets classification adopted losses losses losses losses
24-7 Finance 1,051.8 Mortgages L&R AC 892.1 889.8 997.7 995.5 UBI SPV Lease 2016 2,827.0 Leasing L&R AC 2,810.7 2,793.1 2,807.3 2,786.0 UBI Finance 14,169.7 Mortgages L&R AC 13,619.8 13,598.7 13,733.1 13,715.6 UBI Finance CB 2 2,863.9 Mortgages L&R AC 2,608.0 2,597.6 2,799.8 2,788.3 UBI SPV GROUP 2016 2,418.7 Mortgages L&R AC 2,406.7 2,402.2 2,674.7 2,670.3
Total impaired assets, mortgages and loans 1,336.4 1,015.8 1,267.7 982.9 Total impaired assets, leasing 36.9 33.9 6.3 5.9
TOTAL 23,331.1 23,710.6 23,331.1 24,286.6 23,944.5
* * *
The securitisations originated by the New Banks outstanding at year and attributable to UBI Banca following the mergers in the fourth quarter of 2017 are summarised in the next page:
9 The transfers are designed to create segregated portfolios to back the issues and do not involve derecognition of the assets in the financial statements of the originators.
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Mecenate 200710, securitisation of performing residential mortgages of the SPV Mecenate Srl (“Mecenate”), 95% of which is held by UBI Banca (the former Nuova Banca dell-Etruria e del Lazio). -It should be noted that, in October 2017, Mecenate 2009 and Mecenate 2011, securitisations executed by way of the SPV Mecenate, were closed. -Finally, on 15th September 2017, the securitisation Etruria Securitisation SPV Srl (“Etruria SPV”) was closed. Marche Mutui 2 Società per la Cartolarizzazione a r.l. 11 , a securitisation of residential mortgage backed securities (RMBS) concerning residential and commercial mortgages originally of the former Nuova Banca delle Marche; Marche M6 Srl 12 , a securitisation of residential mortgage backed securities (RMBS) concerning residential and commercial mortgages originally of the former Nuova Banca delle Marche; It should be noted that the securitisation Medioleasing Finance Srl was closed in the first half of 2017, and the securitisations Marche M5 Srl and Marche Mutui 4 Srl were closed in July and August 2017, respectively. Finally, with regard to the former Nuova Cassa di Risparmio di Chieti, the only active securitisation of residential mortgages, the Creso 2, originated in 2012, was closed down early at the end of June 2017.
For a detailed description of the securitisations, see the interim financial report as at 30th June 2017.
Exposures in ABS, CDO, CMBS and other structured credit products
As at 31st December 2017, the Group held a direct investment in ABS instruments with zero value, whereas there were no indirect exposures in CDO and CMBS structured credit products.
Other subprime, Alt-A and monoline insurer exposures
As at 31st December 2017, there were no indirect exposures in subprime or Alt-A mortgages or in monoline insurers.
Leveraged Finance
The term leveraged finance is used by the UBI Banca Group to refer to finance provided for a company or an initiative which has debt that is considered higher than normal on the market and is therefore considered a higher risk. Usually this finance is used for specific acquisition purposes [e.g. the acquisition of a company by other companies – either directly or through vehicles/funds – owned by internal (buy-in) or external (buy-out) management teams] They are characterised by “non investment grade” credit ratings (less than BBB-) and/or by remuneration that is higher than normal market levels. This definition coincides essentially with acquisition finance (AF) business.
10 A securitisation originated on 29th March 2007 with the transfer en bloc and without recourse of loans, classified as performing, and the relative legal relations attaching to a portfolio of ordinary and regulated mortgage loans, granted to private individual customers in the period between 31st March 1998 and 30th June 2006. In the May 2007 Mecenate issued notes as a consequence (99.5% of which had been assigned a rating and were listed on the Dublin stock exchange), all at floating rate and with quarterly coupons. The securities were subscribed by institutional investors when they were issued. 11 An RMBS market securitisation, structured in October 2006, with a portfolio of performing loans as the underlying, originated from regulated mortgages backed by first mortgage agreements. The senior and mezzanine classes were listed on the Irish stock exchange and placed with domestic and foreign institutional investors. The junior tranche, on the other hand, was fully subscribed by the originator. The senior notes were assigned a rating. 12 An RMBS securitisation, structured in July 2013, with a portfolio of loans originating from performing residential mortgage loan agreements as the underlying. The three senior classes (A1, A2, A3) were listed on the Luxembourg stock exchange and repurchased by the bank to create a portfolio of assets eligible for principal refinancing operations with the European Central Bank. The junior class was also subscribed by the originator. The senior classes were assigned a rating. The classes A1 and A2 were sold on the market in June 2015.
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An acquisition involves a substantial change in the economic, financial and capital profile of the debtor. The main source of funds for the repayment of the debt contracted for the acquisition finance itself is from the future cash flows generated by the entity (a single company or a Group) after the acquisition.
The three requirements necessary for the identification and consequent classification of a customer as an acquisition finance client, consistent with the definition used in the validated internal models, are as follows: credit lines are granted to finance the acquisition of control of one or more third party companies and/or activities held by third parties and/or the refinancing of prior exposures relating to the same companies/activities subject to the acquisition (purpose requirement); the effect of the acquisition consists of an increase in the turnover of the “enlarged” group of companies, i.e. the sum of the turnover of the acquiring group and the turnover of the target group is 40% greater than that of the acquiring group alone (size requirement) 13; • no more than four years have passed since the date of the first grant of credit lines to finance the acquisition (“vintage” requirement)14. Once that time has passed the transactions are considered “conventional corporate” transactions and therefore in the presentation that follows, only transactions classified as “acquisition finance” as at the dates indicated have been considered.
UBI Banca leveraged finance business (Acquisition Finance)
On-balance sheet exposure Unsecured guarantees figures in millions of euro gross exposure to customers gross exposure to customers
used impairment used impairment
31 December 2017 378.2 -14.3 308.9 -0.7
The table summarises on- and off-balance sheet exposure for leveraged finance by UBI Banca at the end of December 2017. These loans (on-balance sheet and including related margins) accounted for approximately 0.35% of total UBI Banca Group loans, net of the insurance segment. The amounts shown (on- and off-balance sheet and margins) relate to 38 positions (counterparties) for a total average net exposure per position of €17 million. Six positions existed with net exposures of greater than €20 million, accounting for around 72% of total. The charts below show the distribution of leveraged exposures by geographical area and sector.
Distribution of UBI Banca leveraged exposures as at 31st December 2017
EXPOSURE BY GEOGRAPHICAL AREA EXPOSURE BY SECTOR
Commerce and services Other 0.3% 9%
Manufacturing sector 91% Italy 99.7%
13 The threshold has been set at 40% because on the basis of experience it is considered that this percentage of change in “dimension” involves a significant discontinuity for the Group after the operation compared with before it and therefore the official operating and financial documentation (consolidated/separate financial statements of the acquirer) will not be representative of the new reality. This threshold was also set along the same lines as the requirements for the “special procedure” set for other counterparties assessed using the corporate rating model. Where an acquisition is concluded by using a specially formed vehicle, a newco (and therefore usually irrelevant from the viewpoint of dimension), this second requirement is deemed always satisfied. 14 This is considered sufficient time to absorb the impacts of the discontinuity determined by the acquisition, described in footnote 7.
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Financial derivative instruments for trading with customers
The periodic analysis performed for internal monitoring purposes confirms that the risks assumed by customers continue to remain generally low and they outlined a conservative profile for UBI Group business in OTC derivatives with customers. A quantitative update as at 31st December 2017 showed the following: - the notional amount for existing contracts, totalling €7.1 billion, was attributable to interest rate derivatives amounting to €6.5 billion and currency derivatives amounting to €549 million plus a marginal notional amount for commodities contracts (€26 million); - transactions in hedging derivatives accounted for all the notional amount traded in the case of interest rate derivatives and 98.5% of the notional amount in the case of currency derivatives; - the total net mark-to-market value (interest rate, currency and commodities derivatives) amounted to approximately -€279 million. Those contracts with a negative mark-to-market for customers were valued at approximately -€287 million; - the total negative mark-to-market for customers stood at 4% of the notional amount of the contracts, compared with 5.8% at the end of 2016 related to the “stand-alone” Group.
The rules governing trading in OTC derivatives with customers are contained in the “Policy for the trading, sale and subscription of financial products” and in the relative documents to implement it, updated in 2017, which provide details of the following: • customer segmentation and classes of customers associated with specific classes of products, stating that the purpose of the derivatives transactions must be hedging and that transactions containing speculative elements must be of a residual nature; • rules for assessing the appropriateness of transactions, defined on the basis of the products sold to each class of customer; • principles of integrity and transparency on which the range of OTC derivatives offered to customers must be based, in compliance with the guidelines laid down by the Italian Banking Association (and approved by the Consob) for illiquid financial products and with the recent ESMA opinions and a Consob communication on complex products; • rules for assessing credit exposure, which grant credit lines with maximum limits for trading with “qualified”, “professional” and “non-individual retail” counterparties and provide credit lines for single transactions for trading with individual retail counterparties, while counterparty risk is assessed on the basis of Regulation EU 575/2013 (the “CRR”); • rules for managing restructuring operations, while underlining their exceptional nature; • the rules for the settlement of transactions in OTC derivative instruments with customers that are subject to verbal or official dispute; • the catalogue of products offered to customers and the relative credit equivalents.
OTC derivatives: first five counterparties by bank (figures in euro)
Data as at 31st December 2017 of which Bank Classification MtM negative MtM UBI Banca 2: Non private individual retail -54,497,005 -54,497,005 2: Non private individual retail -8,631,961 -8,631,961 3: Professional -7,675,004 -7,675,004 3: Professional -7,248,996 -7,248,996 2: Non private individual retail -5,234,360 -5,234,360 Banca Teatina 2: Non private individual retail -1,058,618 -1,058,618 2: Non private individual retail -36,491 -36,491
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OTC interest rate derivatives: details of instrument types and classes of customer (figures in euro) Data as at 31st December 2017 Product Number of of which Type of instrument Customer classification Notional MtM class transactions negative MtM 1 Purchase of caps Qualified 10 111,292,485 466,195 - 3: Professional 52 180,539,134 334,263 - 2: Non private individual retail 576 222,385,971 717,093 - 1: Private individual retail 478 53,011,529 121,862 - Purchase of caps Total 1,116 567,229,119 1,639,412 - Purchase of floors 3: Professional 3 68,671,551 267,939 - Purchase of floors Total 3 68,671,551 267,939 -
Capped swaps Qualified 2 13,642,823 -358,000 -358,000 3: Professional 40 139,820,607 -2,499,403 -2,499,403 2: Non private individual retail 685 405,230,979 -8,675,307 -8,675,307 1: Private individual retail 1,060 114,680,797 -2,011,867 -2,011,867 Capped swaps Total 1,787 673,375,206 -13,544,577 -13,544,577
IRS Plain Vanilla Qualified 13 101,845,385 -482,621 -667,090 3: Professional 379 2,216,259,320 -58,340,845 -59,255,784 2: Non private individual retail 1,395 1,812,253,182 -107,346,001 -108,442,508 1: Private individual retail 453 82,797,265 -2,594,926 -2,688,804 Plain Vanilla IRS Total 2,240 4,213,155,153 -168,764,393 -171,054,186
IRS Step up 3: Professional 7 24,582,843 -3,094,590 -3,094,590 2: Non private individual retail 40 259,106,989 -67,735,062 -67,735,062 IRS Step up Total 47 283,689,831 -70,829,652 -70,829,652 Floored Swaps 3: Professional 58 441,384,761 -1,743,841 -1,809,594 2: Non private individual retail 158 220,506,870 -1,296,242 -1,376,622 1: Private individual retail 23 6,178,292 -77,457 -80,680 Floored Swaps 239 668,069,922 -3,117,540 -3,266,896 Purchase of collars 2: Non private individual retail 2 6,364,859 -226,442 -226,442 Purchase of collars Total 2 6,364,859 -226,442 -226,442
Total Class 1: hedging derivatives 5,434 6,480,555,642 -254,575,252 -258,921,753 Class 1: % of Group total 99.8% 99.4% 96.5% 96.6% 2 Purchase of caps with KI/KO 3: Professional 1 9,042,553 -82,285 -82,285 2: Non private individual retail 1 448,854 -2,431 -2,431 Purchase of caps with KI/KO Total 2 9,491,408 -84,716 -84,716 Purchase of collars with KI/KO 2: Non private individual retail 4 26,969,701 -8,863,272 -8,863,272 Purchase of collars with KI/KO Total 4 26,969,701 -8,863,272 -8,863,272
IRS Convertible 3: Professional 1 1,750,000 -21,667 -21,667 2: Non private individual retail 2 1,139,213 -147,452 -147,452 IRS Convertible Total 3 2,889,213 -169,120 -169,120
Total Class 2: hedging derivatives with possible exposure 9 39,350,322 -9,117,108 -9,117,108 to contained financial risks Class 2: % of Group total 0.2% 0.6% 3.5% 3.4%
Total UBI Banca Group 5,443 6,519,905,964 -263,692,360 -268,038,861
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OTC currency derivatives: details of instrument types and classes of customer (figures in euro)
Data as at 31st December 2017 Product Number of of which Type of instrument Customer classification Notional MtM class transactions negative MtM 1 Forward synthetic 3: Professional 67 152,529,807 -3,432,306 -3,719,479 2: Non private individual retail 13 5,986,462 -162,197 -167,144 Forward synthetic Total 80 158,516,269 -3,594,503 -3,886,623
Plafond 3: Professional 152 145,133,222 -5,248,332 -6,068,612 2: Non private individual retail 371 127,045,475 -5,793,444 -6,132,046 Plafond Total 523 272,178,697 -11,041,776 -12,200,658
Currency collars 3: Professional 4 1,965,203 29,483 -5,440 Currency collars Total 4 1,965,203 29,483 -5,440
Vanilla currency options purchased 3: Professional 2 12,507,296 229,916 - 2: Non private individual retail 2 589,666 942 - Vanilla currency options purchased 4 13,096,962 230,858 -
Total Class 1: hedging derivatives 611 445,757,131 -14,375,938 -16,092,721 Class 1: % of Group total 90.3% 81.2% - 88.2% 2 Bonus forwards 3: Professional 1 625,365 233 - Bonus forwards Total 1 625,365 233 -
Knock in collars 3: Professional 8 19,519,445 577,761 - Knock in collars Total 8 19,519,445 577,761 -
Knock in forwards 3: Professional 23 59,278,117 -1,104,219 -1,153,176 2: Non private individual retail 8 8,270,971 -21,830 -78,934 Knock in forwards Total 31 67,549,088 -1,126,048 -1,232,111
Plafond with accelerated condition 3: Professional 4 1,616,112 -135,641 -135,641 2: Non private individual retail 12 6,791,537 -703,797 -703,797 Plafond with accelerated condition Total 16 8,407,649 -839,438 -839,438
Total Class 2: hedging derivatives with possible exposure 56 96,101,547 -1,387,492 -2,071,549 to contained financial risks Class 2: % of Group total 8.2% 17.5% - 11.3% 3b Knock out knock in forwards 3: Professional 5 3,972,439 -8,948 -13,459 1 1,083,456 -2,109 -2,109 Knock out knock in forwards Total 6 5,055,895 -11,057 -15,568
Knock out forwards 3: Professional 1 954,100 2,357 - Knock out forwards 1 954,100 2,357 -
Vanilla currency options sold by the customer 3: Professional 3 1,375,583 -79,581 -79,581 Vanilla currency options sold by the customer Total 3 1,375,583 -79,581 -79,581
Total Class 3: derivatives not for hedging 10 7,385,578 -88,280 -95,149 Class 3: % of Group total 1.5% 1.3% - 0.5%
Total UBI Banca Group 677 549,244,256 -15,851,711 -18,259,419
OTC commodities derivatives: details of instrument types and classes of customer (figures in euro)
Data as at 31st December 2017 Product Number of of which negative Type of instrument Customer classification Notional MtM class transactions MtM 2 Commodity swaps 3: Professional 164 25,906,741 656,697 -589,665 2: Non private individual retail 2 84,135 5,970 - Commodity swaps Total 166 25,990,876 662,667 -589,665
Total Class 2: hedging derivatives with possible exposure 166 25,990,876 662,667 -589,665 to contained financial risks Class 2: % of Group total 100.0% 100.0% - 100.0%
Total UBI Banca Group 166 25,990,876 662,667 -589,665
TOTAL UBI BANCA GROUP 6,286 7,095,141,096 -278,881,404 -286,887,945
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Equity and capital adequacy
Changes in consolidated shareholders’ equity
In order to make the changes that occurred to consolidated equity more comprehensible, a twelve-month analysis has been conducted on the basis of figures for the end of December 2016 relating to the Stand- Alone UBI Banca Group instead of the aggregate equity at the end of the year presented in the reclassified consolidated statements.
Reconciliation between equity and profit for the year of the Parent with consolidated equity as at 31st December 2017 and profit for the year then ended
of which: Net profit for Figures in thousands of euro Equity the year
Equity and profit for the year as in the financial statements of the Parent 9,451,398 -12,023 Effect of the consolidation of subsidiaries including joint ventures 586,790 -35,963 Effect of measuring other significant equity investments using the equity method 18,336 23,391 Dividends received during the year - -90,205 Other consolidation adjustments (including the effects of the PPA and of badwill) -131,341 805,357 Equity and profit for the year as in the consolidated financial statements 9,925,183 690,557
Changes in consolidated equity of the Group in 2017
Balances as Changes year 2017 31.12.2017 Allocation of prior year at profit Equity 31.12.2016 Equity transactions Consolidated attributable to Stand-Alone Changes in Dividends comprehensive the UBI Banca reserves New share Reservesand other Stock options income shareholders of Group issues Figures in thousands of euro uses the Parent
Share capital: 2,440,751 - - - 402,426 - - 2,843,177 a) ordinary shares 2,440,751 - - - 402,426 - - 2,843,177 b) other shares ------
Share premiums 3,798,430 -493,425 - -1 1,623 - - 3,306,627
Reserves 3,664,366 -336,725 -107,163 -3,153 -7,865 - - 3,209,460 Valuation reserves -73,950 - - 160 - - -41,030 -114,820
Treasury shares -9,869 - - 51 - - - -9,818
Loss for the year -830,150 830,150 - - - - 690,557 690,557 Equity attributable to the shareholders of the Parent 8,989,578 - -107,163 -2,943 396,184 - 649,527 9,925,183
The equity of the UBI Banca Group as at 31st December 2017 (inclusive of profit for the nine- month period for the Stand-Alone UBI Banca Group and for the three quarters for the New Banks) amounted to €9,925.2 million, an increase compared with €8,989.6 million at the end of 2016, before the acquisition. Valuation reserves attributable to the Group: composition
As shown in the table “Changes in the 2016 Stand-Alone Figures in thousands of euro 31.12.2017 consolidated equity of the Group in UBI Banca 2017”, the increase of approximately Group €935.6 million is the result of the Available-for-sale financial assets -62,939 -26,860 following: Cash flow hedges 13 285 Currency translation differences -243 -243 Actuarial losses for defined benefit pension plans -112,452 -107,773 the allocation of €107.16 million to Special revaluation laws 60,801 60,641
dividends and other uses drawn from Total -114,820 -73,950 the extraordinary reserve1;
1 Due to the loss incurred by the Parent in 2016, amounting to €830.2 million (-€845.1 million inclusive of non-controlling interests), the share premium reserve was reduced by €493.4 million and a remaining change of over €336.7 million was then made to the value of retained earnings.
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a fall of €40.87 million in the balance on valuation reserves, generated mainly by the impact of comprehensive income as follows: -€36.08 million for available-for-sale financial assets; -€4.68 million for actuarial gains/losses relating to defined benefit pension plans; -€0.27 million for cash flow hedges. Furthermore reserves relating to special revaluation laws increased by €0.16 million; an increase in the share capital of €402.43 million as a result of the following: €399.98 million from the recognition (at €2.395 per share2) of the 167,006,712 ordinary shares issued to implement the share capital increase that took place in July; roughly €2.45 million from the issue of 937,399 ordinary shares (at a value of €2.50) in the first quarter arising from the merger by incorporation into the Parent of Banca Popolare di Ancona, Banca di Valle Camonica and Banca Carime and from the issue of 40,640 ordinary shares in the fourth quarter arising from the merger of CARILO into UBI Banca; an overall decrease of €11.02 million in other reserves, the aggregate result of increases of various nature3, offset by the negative impact of the changes in the investment structure that took place with the completion of the “Single bank” project and by the costs for the share capital increase (-€7.6 million net of tax); an increase of €1.62 million in the Share Premium Reserve for the proceeds from the sale on the market of 6,676,180 option rights that were not exercised during the offer period; an increase of €0.7 million following the grant of treasury shares to the “Identified Staff” (key personnel) of the Group in relation to the 2012 and 2014 incentive schemes for a total of 197,094 shares; a decrease of €0.7 million related to the purchase of 150,000 treasury shares – at a weighted-average price of €4.39381 – for the 2017-2019/2020 long-term incentive scheme to support the Business Plan and intended for the Group’s “Identified Staff”; recognition of profit for the year of €690.56 million.
Fair value reserves of available-for-sale financial assets attributable to the Group: composition
2016 31.12.2017 Stand-Alone UBI Banca Group Figures in thousands of euro Positive reserve Negative reserve Total Positive reserve Negative reserve Total
1. Debt instruments 23,304 -155,450 -132,146 68,846 -158,922 -90,076 2. Equity instruments 60,374 -683 59,691 53,688 -727 52,961 3. Units in UCITS 116,415 -106,899 9,516 10,505 -250 10,255 4. Financing ------Total 200,093 -263,032 -62,939 133,039 -159,899 -26,860
Fair value reserves of available-for-sale financial assets attributable to the Group: annual changes
Equity Figures in thousands of euro Debt instruments Units in UCITS Financing Total instruments
1. Opening balances al 1st January 2017 Stand-Alone UBI Banca Group -90,076 52,961 10,255 - -26,860
2. Positive changes 89,352 11,576 10,851 - 111,779 2.1 Increases in fair value 72,399 6,140 6,626 - 85,165 2.2 Transfer to income statement of negative reserves 9,130 1,763 1,882 - 12,775 - following impairment losses 165 1,437 1,882 - 3,484 - from disposal 8,965 326 - - 9,291 2.3 Other changes 7,823 3,673 2,343 - 13,839
3. Negative changes -131,422 -4,846 -11,590 - -147,858 3.1 Reductions in fair value -61,479 -1,464 -6,433 - -69,376 3.2 Impairment losses - -98 -31 - -129 3.3 Transfer to income statement of positive reserves: from disposal -65,047 -168 -2,755 - -67,970 3.4 Other changes -4,896 -3,116 -2,371 - -10,383 4. Closing balances as at 31st December 2017 -132,146 59,691 9,516 - -62,939
As shown in the table, the decrease mentioned above of €36.08 million in the “fair value reserve for available-for-sale financial assets” was generated by debt instruments held in portfolio (for which the balance fell by €42 million to -€132.1 million, net of tax and non- controlling interests) and by Italian government securities in particular. The relative reserve, which was negative by €119.7 million, did in fact fall €53.6 million over the twelve months (it
2 The subscription price of the new ordinary shares incorporated a discount of approximately 26.1% on the theoretical ex-rights price (TERP) of UBI Banca ordinary shares on the basis of the official stock market price on the 7th June 2017. 3 These included an increase of €3 million due to the partial release of a negative reserve recognised as at 31st December 2016 as a consequence of the reclassification of €3.3 billion nominal of BTPs out of the AFS portfolio into the HTM portfolio.
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stood at -€66.1 million in December 2016), nearly entirely attributable to the Parent’s portfolio.
Over the twelve-month period, the reserve related to debt securities experienced increases in fair value in the amount of €72.4 million, mainly attributable to the Parent (€29.9 million) and to Lombarda Vita (€42.4 million, nearly entirely in Italian government securities). The table also shows “transfers to the income statement of negative reserves” amounting to €9.1 million, of which €9 million from disposals consisting of €4.1 million relating to Banca Teatina, €4.3 million relating to the Parent, and the remaining part to Lombarda Vita. Other increases amounting to €7.8 million included €6.4 million relating to Lombarda Vita. Decreases include the following: reductions in fair value amounting to €61.5 million, of which: €21.9 million relating to UBI Banca (mainly on Italian government securities) and €39.6 million to Lombarda Vita; “transfers to the income statement from positive reserves from disposals” amounting to €65.1 million, of which: €60.6 million by UBI Banca due primarily to the disposal of Italian government securities; €4.3 million by Lombarda Vita; and €0.2 million by Banca Teatina; other decreases in the amount of €4.9 million, mainly relating to Banca Teatina.
With regard to equity instruments, the main increases include the following: increases in fair value in the amount of €6.1 million, of which €1.1 million relating to Lombarda Vita, €4 million relating to the Parent, and the remainder relating to Banca Teatina and IW Bank; “transfers to the income statement from negative reserves” for impairment in the amount of €1.4 million, mainly attributable to Banca Teatina; other increases in the amount of €3.7 billion relating entirely to the Parent.
Reductions in fair value were also recorded totalling €1.5 million, of which €1.2 million by Lombarda Vita, along with “transfers to the income statement from positive reserves from disposals” amounting to €0.2 million relating totally to the Parent as well as other decreases amounting to €3.1 million essentially relating to the Parent.
Finally, the following was recorded in relation to units of UCITS: fair value increases of €6.6 million [€1.9 million by UBI Banca (mainly in private-equity funds), €4.5 million by Lombarda Vita, and €0.2 million by Banca Teatina]; transfers of negative reserves to the income statement for impairment of €6.4 million (attributable primarily to Lombarda Vita); and transfers of positive reserves to the income statement for disposals in the amount of €2.8 million relating to a number of funds of the Parent that were liquidated during the year.
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Capital adequacy
The new prudential rules for banks and investment companies contained in EU Regulation 575/2013 (the Capital Requirements Regulation, known as the CRR) and in the EU Directive 2013/36/EU (the Capital Requirements Directive, known as CRD IV), came into force on 1st January 2014. These transpose standards defined by the Basel Committee on Banking Supervision (known as the Basel 3 framework) into European Union regulations. The CRR came directly into force in member states, while the regulations contained in CRD IV were implemented in national legislation with Legislative Decree No. 72 of 12th May 2015, which came into force on 27th June 2015. On conclusion of a public consultation process started in November 2013, on 17th December the Bank of Italy published Circular No. 285 “Regulations for the prudential supervision of banks”, which updated, within the scope of its remit, the new EU regulations, together with Circular No. 286 “Instructions for compiling supervisory reports for banks and stock brokerage firms” and an update to Circular No. 154 “Supervisory reporting for credit and financial institutions. Tables for data and instructions for filing reports”. As already reported, the introduction of Basel 3 rules is subject to a transitional regime during which, in most cases, the new rules will be applied to an increasing degree until 2019, when they will reach full application. At the same time, capital instruments that no longer qualify will be gradually excluded from total capital for regulatory purposes by 2021.
Consolidated capital requirements for the UBI Banca Group for 2017, reported in the correspondence received on 12th December 2016 from the ECB are as follows: • a minimum phased-in CET1 ratio requirement of 7.5%;4 • a minimum SREP Total Capital ratio requirement of 9.75%5. If the capital conservation buffer of 1.25% is added, this then gives a minimum ratio requirement in terms of the Overall Total Capital Requirement of 11%.
At 31st December 2016, the UBI Banca Group’s Common Equity Tier 1 (CET1) capital amounted to €7,754.5 million, up on the amounts reported at the end of 2016 relating to the stand-alone UBI Banca Group. The performance of CET1 capital over the twelve months was influenced significantly by recognition of the impacts resulting from the acquisition of Nuova Banca delle Marche, Nuova Banca dell’Etruria e del Lazio, and Nuova Cassa di Risparmio di Chieti as well as the related increase in capital. The increase of €925 million is due to following main factors: +€556 million relating to 2017 profits eligible for regulatory-capital purposes [€691 million (-€830 million in December 2016)] taking account of the dividends to be distributed, in the amount of €125 million, and the reduction in reserves related to the allocation of earnings for the previous year; +€402 million for the following: €400 million relating to the increase in capital connected with the acquisition of the New Banks and aimed at maintaining a level of fully loaded CET1 for the Group of greater than 11%; €2 million following the increases in capital for the repurchase, by way of swap, of the minority interests held by third parties in the former Banca Carime, Banca Popolare di Ancona, and Banca di Valle Camonica within the scope of completion of the Single Bank Project and in the former Cassa di Risparmio di Loreto within the scope of its merger into the Parent; +€114 million relating to the reduced deduction from capital following the disposal of the investment in hedge funds; +€48 million relating to the change in shortfall6 taking account of both the dynamics and the quotas for inclusion in CET1 in accordance with the transitional provisions adoptable in 2017 (80% in 2017 as compared to 60% in 2016); -€95 million relating to the greater deduction of DTAs that depend on future profits, taking account of the dynamics of the transitional provisions (80% in 2017 as compared to 60% in 2016); -€37 million relating to a change in valuation reserves, which included -€32 million for changes in the fair value reserve for available-for-sale financial assets and approximately - €5 million for a reduction in actuarial losses.
4 The result of the sum of the minimum Pillar 1 capital requirement (4.5%), the Pillar 2 requirement (1.75%) and the capital conservation buffer (1.25%), calculated according to the transitional phased-in rules laid down by the Bank of Italy. 5 The result of the sum of the minimum Pillar 1 Regulatory Capital Ratio (own funds: 8%) and the Pillar 2 requirement (1.75%). 6 i.e. the excess of expected losses compared to the impairment losses used in calculating own funds.
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Over the twelve months, the aggregate of Tier 2 capital increased to €1,721 million due mainly to the greater provisions compared to the expected losses on the portfolio of non-performing loans based on AIRB models (+€143 million) and the reduced deduction of the shortfall (+€17 million).
Total own funds therefore came to €9.5 billion, compared with €8.4 billion at the end of 2016 relating to the stand-alone perimeter.
Capital ratios (Basel 3) Following the authorisations 2016 received from the Bank of Italy, Stand-Alone Figures in thousands of euro 31.12.2017 the UBI Banca Group uses UBI Banca internal models to calculate Group capital requirements to meet credit risk relating to the Common Equity Tier 1 capital net of prudential filters 7,789,237 6,912,245 corporate segment (exposures to Deductions from Common Equity Tier 1 capital in relation to negative items for companies) and to operational shortfall of provisions to expected losses inclusive of the application of risks from the consolidated transitional provisions* -34,735 -82,962 supervisory report as at 30th Common Equity Tier 1 capital 7,754,502 6,829,283 June 2012 and relating to the retail regulatory segment Additional Tier 1 capital before deductions - 286 (exposures to small and medium- Deductions from Additional Tier 1 capital - 286 size enterprises and exposures of which: negative items due to shortfall of provisions to expected losses, backed by residential properties) inclusive of the application of transitional provisions - -286 from the consolidated supervisory report as at 30th Additional Tier 1 capital - - June 2013. Tier 1 capital (Common Equity Tier 1 + Additional Tier 1) 7,754,502 6,829,283 It should be noted that the absorption of capital relating to Tier 2 capital before transitional provisions 1,775,601 1,606,204 Banca Teatina and the portfolios Effects of grandfathering provisions on Tier 2 instruments - - coming from the former Banca Tier 2 capital after transitional provisions 1,775,601 1,606,204 Adriatica and former Banca Deductions from Tier 2 capital -54,630 -46,382 Tirrenica is determined using standard models. of which: negative items due to shortfall of provisions to expected losses,
inclusive of the application of transitional provisions -3,859 -20,812
Tier 2 capital after specific deductions 1,720,971 1,559,822 Total own funds 9,475,473 8,389,105
Credit risk 4,946,639 4,351,066 Credit valuation adjustment risk 4,943 11,987 Market ris k 75,680 112,356
Operational risk 337,033 283,300 Total prudential requirements 5,364,295 4,758,709
Risk weighted assets 67,053,683 59,483,864 Common Equity Tier 1 ratio (Common Equity Tier 1 capital after filters and deductions / Risk w eighted assets) 11.56% 11.48% Tier 1 ratio (Tier 1 capital after filters and deductions / Risk w eighted assets) 11.56% 11.48% Total capital ratio (Total ow n funds / Risk w eighted assets) 14.13% 14.10% T he figures at 31st December 2017 are for the new perimeter of the UBI Banca Group.
As already reported, on the basis of the provisions of EU Regulation 445/2016, from 1st October 2016 unrealised profits or losses relating to exposures to central governments classified within “available-for-sale financial assets” are included in CET1 capital, in compliance with transitional provisions concerning own funds contained in Part II, Chapter 14 of Bank of Italy Circular No. 285. Previously, unrealised profits or losses on those exposures were not included in any item of own funds as a result of the option exercised in January 2014 applied at both separate company and consolidated level.
* The item includes the quota of the shortfall provisions to expected losses which are deducted from the Additional Tier 1 Capital as a result of the transitional provisions applicable. As there was no capital of that type, the entire quota was deducted from the CET1 capital.
Risk-weighted assets (RWAs) increased to €67.1 billion from the €59.5 billion for the stand- along Group as at December 2016 (+€7.6 billion) due mainly to the absorption of capital relating to the New Banks. Compared to 30th September 2017, RWAs decreased by €236 million despite the update to the historical data series in the latter months of the year. The related negative impact was more than offset by the reduction in RWAs made possible by the synthetic securitisations completed in December and, to a lesser extent, by the restored eligibility of guarantees on retail exposures backed by property, which had a positive effect on their weighting.
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At the end of 2017, the capital ratios of the UBI Banca Group included a Common Equity Tier 1 ratio and a Tier 1 ratio of 11.56% (11.48% in December 2016 relating to the stand-alone perimeter), which was amply higher than the SREP requirement in effect and to the requirement for 2018, which also takes account of inclusion of the banks acquired in May 2017.7 The Total Capital ratio came to 14.13%, which is also comfortably above required levels. The pro forma CET1 ratio, calculated on the basis of the rules that will be in force at the end of the transitional period (known as the fully phased in CET1 ratio) is estimated at 11.43% (and 13.99% for the Total Capital ratio).
It is also reported that from 1st January 2016 banks are obliged to hold a countercyclical capital buffer. If it is considered that, as reported in the press release of 22nd September 2017, the Bank of Italy set the countercyclical capital buffer for the fourth quarter of 2017 at 0% for exposures to counterparties resident in Italy and also that the Group mainly has exposures to domestic counterparties, then the Group’s countercyclical capital buffer is not significant. With a communication dated 22nd December 2017, the Bank of Italy also confirmed a coefficient of 0% for the anti-cyclical buffer for the first quarter of 2018. Finally, the leverage ratio according to Basel 3, stood at 5.85%, while the fully loaded indicator stood at 5.78%.8
With regard to the insurance business, we report that management accounting measurements of the solvency ratio comply with Solvency II regulations.
7 For further details on consolidated capital requirements for 2018, see the section “Significant events in 2017” of this report. 8 Under Basel 3, leverage is calculated as the ratio of Tier 1 capital to total on- and off-balance sheet assets, with a minimum requirement of 3%. The ratio was calculated according to the provisions of the CRR, as amended by the Delegated Act (EU) No. 62/2015.
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Research, development and innovation activity
In consideration of the banking nature of the Group, research, development and innovation activities are primarily focused on studying the possible application of new technologies to customer relationships, in order to improve and/or expand the range of products and services, as well as their to simply and increase the efficiency of internal company processes. These activities are managed centrally by UBI Sistemi e Servizi.
In 2017 a new organisational unit dedicated solely to innovation was established within UBI Sistemi e Servizi. This new unit, which in its principles and methods is inspired by the open innovation mindset, is tasked with managing the most innovative projects and monitoring major trends in technology.
A structured approach was taken to collaborating with the Fintech1 ecosystem during the year. In particular, the Group began to sponsor two fintech accelerator initiatives, one in Milan and the other in London, and also to cultivate a network of contacts with accelerators, incubators and brokers at the international level.
The main innovation themes managed were: artificial intelligence, open banking, blockchain2 and branch innovation.
In research and experimentation involving artificial intelligence, launched during the year, partners were sought to develop solutions and use cases. Text- and voice-based chat system technology was tested. In particular, this technology was used to create a virtual assistant known as a “chatbot” that provided support to staff at the New Banks during the migration from their IT systems to those of UBI Banca, in addition to various tests and verification of the use of the technology with end customers. Research activities focused on two lines of development: support for the Bank's customers and internal assistance with operational activities for Group personnel.
PSD23 compliance is just the first step of a broader strategy that calls for the Group to adopt systems and governance that will allow it to take advantage of the opportunities offered by opening bank data to third parties. During the year, work focused on researching and designing an application platform that will be developed in 2018 to manage and monetise external data exchange services: application programming interfaces (APIs).
With regard to blockchain, following the successful testing of the technology in 2016 to handle UBI PAY transactions, in 2017 work centred on developing use cases involving relationships and transactions with other banks. The Group sponsored and participated in two consortium initiatives involving all major Italian banks with the goal of creating the first industry blockchain for Italian banks, with development of the first use cases expected to take place in 2018.
As regards branch innovation, at the beginning of the year the first two pilot branches were opened to the public. These branches, which feature cutting-edge technologies, are also based on a new customer service model and floorplan. The technologies in question were tested during the year and confirmed for inclusion in the model that will be used for planned future renovations. Assisted self-service ATMs that allow customers to complete most transactions involving cash on their own at branches, tablets provided for customers to use to encourage
1 The term “Fintech” refers to “financial innovation driven by technological innovation, which may take the form of new business models, processes or products, with a decisive impact on financial markets, institutions or the services offered”. 2 This is an emerging technology – on which Bitcoin is based – that allows information, payments, goods and services to be exchanged over the Internet, according to a distributed, protected approach. Blockchain is a secure transaction database shared by all participants in a defined user network; it records and stores all transactions that take place within the network, eliminating the need for a “trusted” central third party. 3 For further information, see the paragraph “Developments in the regulatory context” of the section “Other information”.
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digital migration, large-format displays for communication, Wi-Fi for customers, flexible workstations for advisors, video rooms where remote specialists can provide support and the constant expansion of paperless technology. Innovation continues in pursuit of additional technologies to be used in branches to provide customers with an increasingly personal and distinctive customer experience.
The internal control system
The “Report on the Corporate Governance and Ownership Structure of UBI Banca Spa” included in this publication may be consulted for a description of the architecture, rules and organisational units of the system of internal controls. In an attachment, it also gives the specific information required under article 123-bis, paragraph 2, letter b) of the Consolidated Finance Act (Legislative Decree No. 58/1998) concerning the main characteristics of the risk management and internal control systems that govern the financial reporting process.
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Transactions with related parties and with connected parties
Related parties
With Resolution No. 17221 of 12th March 2010 – amended by the subsequent Resolution No. 17389 of 23rd June 2010 – the Consob (Italian securities market authority) approved a Regulation concerning related-party transactions. The regulations concern the procedures to be followed for the approval of transactions performed by listed companies and the issuers of shares with a broad shareholder base with parties with a potential conflict of interest, including major or controlling shareholders, members of the management and supervisory bodies and senior managers including their close family members.
The regulations currently apply within the UBI Banca Group to the Parent, UBI Banca Spa, only, as a listed company. In November 2010 the Supervisory Board had already appointed a specific committee from among its members to which transactions falling within the scope of the regulations must be submitted in advance. In order to implement Art. 2391-bis of the Italian Civil Code and the Consob (Italian securities market authority) regulation on related parties, UBI Banca has adopted a special “Regulation to govern the Related Party Transactions of UBI Banca”, available on the corporate website of the Bank 1 , which lays down rules for the identification, approval and implementation of related-party transactions performed, either directly or through its subsidiaries, in order to ensure their transparency and substantive and procedural fairness.
In compliance with Consob recommendations, transactions with related-parties of UBI Banca performed by subsidiaries are also subject to the regulations in question if, under the provisions of the Articles of Association or internal regulations adopted by the Bank, the Management Board, the Supervisory Board, in response to a proposal of the Management Board, or even an officer of the Bank on the basis of powers conferred on that officer, must preliminarily examine or approve a transaction to be performed by subsidiaries.
Transactions of greater importance
In accordance with Art. 5, paragraph 8 of Consob Resolution No. 17221/12 March 2010, “Public disclosures on related-party transactions”, the following related-party transactions of greater importance concluded in 2017 were excluded from the scope of application of the “Regulations for related-party transactions with UBI Banca”, because they were concluded with subsidiaries: the approval of two credit lines of the type “extension of credit on an ordinary current-account” for UBI Leasing on 24th May for €639.8 million and on 18th July for €639.8 million; approval of 20 credit lines of the type “subordinated unsecured for securitisation” of which 16 on 23rd May for UBI Finance Srl for a total of €15,081 million and four on 28th June for Finance CB 2 Srl for a total of €3,198.1 million; approval of four credit lines of the “unsecured” type for UBI Leasing on 23rd 2017 for a total of €880 million; approval of credit lines of the type “other industrial unsecured” as follows: one for Nuova Banca Marche on 23rd August for €732.6 million; for UBI Leasing two on 28th August for a total €908.6 million, three on 3rd November for a total of €600 million, three on 6th November for a total of €600 million and three on 21st November for a total of €720 million; the approval of one transfer of assets by UBI Banca on 1st May to the special purpose entity UBI Finance Srl, to back the first covered bond programme for €1,684.9 million;
1 Corporate website at “www.ubibanca.it in the section “Corporate Governance, Corporate Documents”.
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the approval of the repurchase of assets from the special purpose entity Marche Mutui 4 Srl to Nuova Banca Marche, on 1st July 2017 amounting to €497.5 million; two repurchase agreement transactions by UBI Banca with the former Banca Popolare di Bergamo as the counterparty, relating to the senior tranche of the securitisation UBI SPV Group 2016 amounting to €670.3 million nominal each on 5th January and 7th February 2017; 13 repurchase agreement transactions by UBI Banca, with UBI Leasing as the counterparty relating to the senior tranche of the securitisation UBI SPV Group 2016 amounting to €2.1 billion nominal each on 3rd January, 1st February, 1st March, 30th March, 28th April, 1st June, 3rd July, 1st August, 31st August (two), 2nd October, 2nd November and 30th November 2017; approval of credit lines of the “very short-term lending” type for UBI Leasing numbering five on 18th July for a total of €1,957 million, one on 23rd August for €732.6 million and one on 20th October for €732.6 million; and for UBI Factor numbering 17 on 1st September for a total of €1,675 million; approval of three credit lines of the “very short term lending - 48 hours advance notice” type for UBI Factor on 1st September for a total of €660.9 million; approval of one credit line of the “commercial portfolio maximum” type for UBI Leasing on 18th July for €508.5 million; approval of one credit line of the “industrial credit” type for Banca Adriatica on 24th August for €732.6 million.
We also report that: - information was given in a press release dated 20th February 2017 on the conclusion, well ahead of schedule with respect to Business Plan forecasts, of the “Single Bank Project” with the conclusion of the operations for the merger into UBI Banca of Banca Popolare di Bergamo, Banca Popolare di Ancona, Banca Carime, Banco di Brescia San Paolo CAB and Banca di Valle Camonica, which took effect for accounting and tax purposes from 1st January 2017; - information was given in a press release dated 2nd November 2017 concerning the disposal of the investment in UBI Banca International; - with regard to the New Banks acquired in May 2017, information was given in a press release dated 17th October 2017 on the mergers into UBI Banca of Banca Adriatica (former Nuova Banca delle Marche and its subsidiary CARILO - Cassa di Risparmio di Loreto) and in a press release dated 16th November 2017 on the merger into UBI Banca of Banca Tirrenica (former Banca dell’Etruria e del Lazio and its subsidiary Banca Federico del Vecchio). As on the other hand concerns Banca Teatina (former Cassa di Risparmio di Chieti), its merger into UBI Banca is scheduled for February 2018.
We report that no other transactions with related parties were performed in the reporting period, as defined within the meaning of Art. 2427, paragraph 2 of the Italian Civil Code, which influenced the capital position or the results of the companies.
Finally, as already reported, the Related and Connected Parties Committee of UBI Banca: - on several occasions addressed the subject of its role in transactions of greater importance in accordance with Art. 136 of Legislative Decree No. 385/1993, following a structured procedure for the analysis; - maintained continuous and very careful monitoring of “Bank of Italy Connected Parties”, with careful oversight in particular of project activities designed for the adoption of the relative Group Rule Book, which entered into force on 3rd July 2017, by all Group companies involved and also of the implementation of the new regulations concerning the prompt definition of market conditions of transactions; - it carried out its activities in compliance with the principle of circulating information and on the basis of the involvement of the Group’s Corporate Affairs, Compliance and Organisation units.
In compliance with IAS 24, Part H of the Notes to the Consolidated Financial Statements and Part H of the Notes to the Separate Financial Statements provide information on balance sheet and income state transactions between related parties of UBI Banca and Group member companies and also on balance sheet and income statement transactions between UBI Banca
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and its own related parties, as well as those items as a percentage of the total for each item in the consolidated financial statements and in the separate financial statements.
Connected parties
In implementation of article 53, paragraphs 4 et seq of the Consolidated Banking Act and Inter-Ministerial Credit Committee Resolution No. 277 of 29th July 2008, on 12th December 2011 the Bank of Italy issued the ninth update of the “New regulations for the prudential supervision of banks” (published in the Official Journal of 16th January 2012) regarding risk assets and conflicts of interest concerning parties connected to banks or banking Groups, where connected parties are defined as a related party and all the parties connected to it. The regulations are designed to guard against the risk that the closeness of persons to decision-making centres might compromise the objectivity and impartiality of decisions concerning loans to and/or other transactions with those persons. The first measure therefore regards the introduction of supervisory limits for risk assets (of a bank and/or of a group) lent to connected parties. These limits differ according to the type of related party, with stricter levels for relations between banks and industry. The supervisory limits have been supplemented in the regulations with special approval procedures, together with specific recommendations concerning organisational structure and internal controls.
In compliance with the provisions of Title V, Chapter 5 of Circular No. 263 of 27th December 2006, UBI Banca has adopted specific “Regulations for transactions with Connected Parties of the UBI Group” containing measures concerning “risk assets and conflicts of interest with regard to connected parties”, available on the corporate website of the Bank, which regulates procedures designed to preserve the integrity of decision-making processes concerning transactions with connected parties carried out by UBI Banca and by the banking and non- banking members of the Group that it controls including foreign subsidiaries, compatibly with the laws and regulations of the country in which these are registered.
The regulations also require the bodies of Group companies with strategic supervisory responsibility to oversee (with support from the competent functions) the proper application of the provisions of the regulations governing transactions carried out by the respective companies.
In order to achieve this, each of those bodies shall update, on at least a quarterly basis, a list of all the transactions concluded in the previous quarter, inclusive of those not subject to a prior opinion from the committee in accordance with the regulations. It shall specify the connected party, the type of transaction and its value and, if the transaction has not been subjected to prior examination by the committee, the reasons given for the exemption, the maximum limit set for the “General Approvals” and a detailed report on its periodic use.
Also in order to allow the Parent to constantly comply with the consolidated limit on risk assets, the Supervisory Board oversees compliance of the Regulations with the principles recommended in the Supervisory Provisions and also observance, at consolidated level, of the procedural and substantive rules contained in them and it reports to shareholders in accordance with Art. 153 of the Consolidated Finance Law. To achieve this, bodies of other Group companies with responsibility for strategic supervision submit lists quarterly to the Supervisory Board, through the Management Board, of all transactions with connected parties concluded in the previous quarter.
Finally, as already reported, the Related and Connected Parties Committee of UBI Banca examined the profile of the new connected parties relating to the New Banks acquired in May 2017, reported in interim financial reports.
The UBI Banca Group has always been within the time limits laid down by supervisory regulations in all the consolidated quarterly reports to the Supervisory Authority in 2017 (in
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March, June, September and December) (Bank of Italy Circular No. 263 of 27th December 2006 “New Regulations for the Prudential Supervision of banks” and subsequent amendments).
* * *
Further information is given on the Related and Connected Parties Committee of UBI Banca in the “Report on corporate governance and the ownership structure of UBI Banca Spa” contained in another part of this publication in which information is also given on internal policies on controls for risk assets and conflicts of interest relating to connected parties.
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Consolidated companies: the principal figures
Net profit for the year
Figures in thousands of euro 2017 2016 Change % change
Unione di Banche Italiane Spa (*) (12,023) (493,425) (481,402) (97.6%) Banca Popolare di Bergamo Spa (*) - (11,936) (11,936) (100.0%) Banco di Brescia Spa (*) - (158,739) (158,739) (100.0%) Banca Popolare di Ancona Spa (*) - (113,995) (113,995) (100.0%) Banca Carime Spa (*) - (58,315) (58,315) (100.0%) Banca di Valle Camonica Spa (*) - (3,425) (3,425) (100.0%) Banca Teatina Spa (**) (1,978) - (1,978) - Centrobanca Sviluppo Impresa SGR Spa (362) (159) 203 127.7% IW Bank Spa (5,434) (6,913) (1,479) (21.4%) UBI Banca International Sa (***) 142 (5,408) 5,550 n.s. UBI Pramerica SGR Spa 74,098 63,587 10,511 16.5% Zhong Ou Asset Management Co. Ltd (****) 6,294 7,317 (1,023) (14.0%) UBI Leasing Spa (794) (54,917) (54,123) (98.6%) UBI Factor Spa 2,209 (8,656) 10,865 n.s. Prestitalia Spa 10,647 (14,310) 24,957 n.s. BPB Immobiliare Srl (736) (716) 20 2.8% UBI Sistemi e Servizi SCpA (1) - - - - Aviva Vita Spa (20%) 8,240 5,460 2,780 50.9% Lombarda Vita Spa (40%) 8,531 11,525 (2,994) (26.0%) UBI Management Co. Sa (***) 1,093 1,850 (757) (40.9%) UBI Trustee Sa (***) 5 104 (99) (95.2%)
CONSOLIDATED 690,557 (830,150) 1,520,707 n.s.
(*) On 15th November 2016 the deeds for the merger by incorporation of Banca Popolare Commercio e Industria and Banca Regionale Europea into the Parent UBI Banca were signed (with legal effect from 21st November 2016 and with effect for accounting and tax purposes from 1st January 2016), while on 2nd February 2017 the deeds were signed for the merger by incorporation into the Parent of the remaining network banks: Banca Popolare Di Bergamo, Banca Popolare di Ancona, Banca Carime, Banco di Brescia and Banca di Valle Camonica (with effect from 20th February 2017 with regard to third parties and from 1st January 2017 for accounting and tax purposes). UBI Banca’s net result for the year ended 31st December 2016, restated to account for the aforementioned mergers was a loss of €820,874 thousand. (**) On 10th May 2017 UBI Banca concluded the purchase from the National Resolution Fund of 100% of the share capital of Nuova Banca delle Marche (in possession, as at that date, of 94.65% of CARILO - Cassa di Risparmio di Loreto), Nuova Banca dell'Etruria e del Lazio (in possession amongst other things of 100% Banca Federico del Vecchio) and Nuova Cassa di Risparmio di Chieti, in implementation of the purchase and sale agreement signed on 18th January 2017 with the Bank of Italy, as the manager of and on behalf of the National Resolution Fund. On 10th and 11th May 2017, the Management Board and the Supervisory Board of UBI Banca respectively, approved a merger project for the integration into the Parent of the five banks mentioned above. On 6th September the new company names became effective as follows: Banca Adriatica for Nuova Banca delle Marche, Banca Tirrenica for Nuova Banca dell’Etruria e del Lazio and Banca Teatina for Nuova Cassa di Risparmio di Chieti. On 23rd October and 20th November 2017 respectively, the mergers by acquisition took effect of Banca Adriatica e CARILO - Cassa di Risparmio di Loreto and of Banca Tirrenica e Banca Federico del Vecchio. Because the New Banks entered the scope of consolidation from 1st April 2017, the net result for Banca Teatina relates solely to the second, third and fourth quarters of the year. (***) The result shown is from the financial statements prepared for the consolidation according to the accounting policies followed by the Parent. On 1st November 2017 the sale of 100% of the share capital of UBI Banca International to EFG International became effective. The net result reported for UBI Banca International therefore relates to the first ten months of the year only. (****) On 12th September 2017 UBI Banca concluded the sale of 10% of the share capital to the management team, thereby reducing the total stake held from 35% of the share capital to the 25% currently held. (1) Since this is a consortium company with mutual, not-for-profit objects, UBI Sistemi e Servizi ends the year with a break-even result.
The “consolidated” figure for 2016 relates to the Stand-Alone UBI Banca Group.
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Net loans and advances to customers
Figures in thousands of euro 31.12.2017 31.12.2016 Change % change
Unione di Banche Italiane Spa (*) 90,499,872 37,111,384 53,388,488 143.9% Banca Popolare di Bergamo Spa (*) - 18,831,193 -18,831,193 -100.0% Banco di Brescia Spa (*) - 11,732,362 -11,732,362 -100.0% Banca Popolare di Ancona Spa (*) - 7,638,165 -7,638,165 -100.0% Banca Carime Spa (*) - 4,036,265 -4,036,265 -100.0% Banca di Valle Camonica Spa (*) - 1,729,589 -1,729,589 -100.0% Banca Teatina Spa 1,064,689 1,219,555 -154,866 -12.7% Prestitalia Spa 1,317,283 1,231,530 85,753 7.0% UBI Banca International Sa (**) - 336,658 -336,658 -100.0% IW Bank Spa 597,166 647,373 -50,207 -7.8% UBI Factor Spa 2,460,340 2,468,928 -8,588 -0.3% UBI Leasing Spa 6,885,787 6,347,210 538,577 8.5%
CONSOLIDATED 92,338,083 93,769,311 -1,431,228 -1.5%
Risk indicators
Total net non-performing loans/net Net bad loans/net loans loans
Percentages 31.12.2017 31.12.2016 31.12.2017 31.12.2016
Unione di Banche Italiane Spa (*) 3.47% 2.85% 7.37% 6.60% Banca Popolare di Bergamo Spa (*) - 4.13% - 6.87% Banco di Brescia Spa (*) - 3.65% - 10.09% Banca Popolare di Ancona Spa (*) - 6.33% - 12.26% Banca Carime Spa (*) - 5.99% - 10.78% Banca di Valle Camonica Spa (*) - 3.96% - 8.84% Banca Teatina Spa 0.78% n.d. 11.15% n.d. Prestitalia Spa 0.59% 0.76% 4.36% 6.54% UBI Banca International Sa (**) - 3.99% - 15.60% IW Bank Spa 1.73% 1.77% 3.61% 3.57% UBI Factor Spa 8.42% 8.46% 10.44% 11.11% UBI Leasing Spa 9.57% 10.81% 15.65% 18.47%
CONSOLIDATED 4.37% 4.35% 8.84% 9.87%
(*) On 2nd February 2017 the deeds were signed for the merger into the Parent of the five network banks: Banca Popolare Di Bergamo, Banca Popolare di Ancona, Banca Carime, Banco di Brescia and Banca di Valle Camonica (with effect from 20th February 2017 with regard to third parties and from 1st January 2017 for accounting and tax purposes). Net loans to customers of UBI Banca as at 31st December 2016, restated to take account of the merger of the five network banks, stood at €81,112,931 thousand and the ratio of bad loans to net loans was 3.77%, while the ratio of total net performing loans to net loans was 7.96%. (**) On 1st November 2017 the sale of 100% of the share capital of UBI Banca International to EFG International became effective.
The “consolidated” figure as at 31st December 2016 has been restated in aggregate form to include the New Banks, in order to allow a comparison with the figures as at 31st December 2017 on a consistent basis. More specifically, when loans and advances to customers were restated, some of the effects were sterilised, details of which are given in the section “General banking business with customers: lending”.
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Direct banking funding from customers
Figures in thousands of euro 31.12.2017 31.12.2016 Change % change
Unione di Banche Italiane Spa (*) 92,808,856 44,160,639 48,648,217 110.2% Banca Popolare di Bergamo Spa (*) - 16,445,137 -16,445,137 -100.0% Banco di Brescia Spa (*) - 8,653,781 -8,653,781 -100.0% Banca Popolare di Ancona Spa (*) - 5,171,558 -5,171,558 -100.0% Banca Carime Spa (*) - 5,871,976 -5,871,976 -100.0% Banca di Valle Camonica Spa (*) - 1,041,859 -1,041,859 -100.0% Banca Teatina Spa 1,575,543 2,689,526 -1,113,983 -41.4% UBI Banca International Sa (**) - 1,701,873 -1,701,873 -100.0% IW Bank Spa 2,812,196 2,757,347 54,849 2.0%
CONSOLIDATED 94,449,770 103,258,237 -8,808,467 -8.5%
Direct funding from customers includes amounts due to customers and debt securities issued, with the exclusion of bonds and other securities subscribed directly by companies in the Group.
(*) On 2nd February 2017 the deeds were signed for the merger into the Parent of the five network banks: Banca Popolare Di Bergamo, Banca Popolare di Ancona, Banca Carime, Banco di Brescia and Banca di Valle Camonica (with effect from 20th February 2017 with regard to third parties and from 1st January 2017 for accounting and tax purposes). UBI Banca’s direct funding from customers as at 31st December 2016, restated to take account of the mergers of the five network banks, stood at €81,344,950 thousand. (**) On 1st November 2017 the sale of 100% of the share capital of UBI Banca International to EFG International became effective.
The “consolidated” figure as at 31st December 2016 has been restated in aggregate form to include the New Banks, in order to allow a comparison with the figures as at 31st December 2017 on a consistent basis.
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Indirect banking funding from ordinary customers (market prices)
Figures in thousands of euro 31.12.2017 31.12.2016 Change % change
Unione di Banche Italiane Spa (*) 84,841,154 18,374,907 66,466,247 n.s. Banca Popolare di Bergamo Spa (*) - 31,818,308 -31,818,308 -100.0% Banco di Brescia Spa (*) - 16,546,418 -16,546,418 -100.0% Banca Popolare di Ancona Spa (*) - 5,238,305 -5,238,305 -100.0% Banca Carime Spa (*) - 6,641,983 -6,641,983 -100.0% Banca di Valle Camonica Spa (*) - 1,529,069 -1,529,069 -100.0% Banca Teatina Spa 703,044 585,197 117,847 20.1% UBI Pramerica SGR Spa 34,758,665 31,476,373 3,282,292 10.4% UBI Banca International Sa (**) - 2,640,060 -2,640,060 -100.0% IW Bank Spa 9,666,216 8,833,568 832,648 9.4% Lombarda Vita Spa (1) 7,205,714 6,360,382 845,332 13.3% Aviva Vita Spa (1) 12,271,377 10,453,930 1,817,447 17.4%
CONSOLIDATED 96,465,661 89,782,736 6,682,925 7.4%
Assets under management (at market prices)
Figures in thousands of euro 31.12.2017 31.12.2016 Change % change
Unione di Banche Italiane Spa (*) 57,125,189 12,250,894 44,874,295 n.s. Banca Popolare di Bergamo Spa (*) - 18,542,143 -18,542,143 -100.0% Banco di Brescia Spa (*) - 8,940,263 -8,940,263 -100.0% Banca Popolare di Ancona Spa (*) - 2,786,946 -2,786,946 -100.0% Banca Carime Spa (*) - 4,354,020 -4,354,020 -100.0% Banca di Valle Camonica Spa (*) - 798,692 -798,692 -100.0% Banca Teatina Spa 478,882 348,316 130,566 37.5% UBI Pramerica SGR Spa 34,758,665 31,476,373 3,282,292 10.4% UBI Banca International Sa (**) - 146,610 -146,610 -100.0% IW Bank Spa 6,564,264 6,175,632 388,632 6.3% Lombarda Vita Spa (1) 7,205,714 6,360,382 845,332 13.3% Aviva Vita Spa (1) 12,271,377 10,453,930 1,817,447 17.4%
CONSOLIDATED 65,443,496 58,580,569 6,862,927 11.7%
(*) On 2nd February 2017 the deeds were signed for the merger into the Parent of the five network banks: Banca Popolare Di Bergamo, Banca Popolare di Ancona, Banca Carime, Banco di Brescia and Banca di Valle Camonica (with effect from 20th February 2017 with regard to third parties and from 1st January 2017 for accounting and tax purposes). As at 31st December 2016 UBI Banca’s indirect funding from ordinary customers, restated to take account of the mergers of the five network banks, stood at €69,534,091 thousand, while assets under management stood at €47,166,828 thousand. (**) On 1st November 2017 the sale of 100% of the share capital of UBI Banca International to EFG International became effective. (1) The figure shown on this line is for total assets managed by the Company. It should be remembered that the calculation of consolidated funding is based solely on the portion placed by companies in the UBI Banca Group.
The “consolidated” figure as at 31st December 2016 has been restated in aggregate form to include the New Banks, in order to allow a comparison with the figures as at 31st December 2017 on a consistent basis.
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Information on Banca Teatina and the main product companies
Summary financial statements containing the main income statement and balance sheet figures for Banca Teatina and the main product companies are given in order to provide a disaggregated view of the performance of general banking business analysed at consolidated level.
(*) BANCA TEATINA SPA
31.12.2017 31.12.2016 Change % change
Figures in thousands of euro
Balance sheet Loans and advances to customers 1,064,689 1,219,555 -154,866 -12.7% Direct funding 1,575,543 2,689,526 -1,113,983 -41.4% Net interbank debt 381,723 41,875 339,848 n.s. Financial assets held for trading 49,341 68,771 -19,430 -28.3% Available-for-sale financial assets 20,805 1,398,242 -1,377,437 -98.5% Equity (inclusive of loss/excluding profit for the year) 101,179 111,772 -10,593 -9.5% Total assets 1,789,473 2,964,519 -1,175,046 -39.6% Indirect funding from customers (inclusive of insurance investment and UBI Banca bon 703,044 585,197 117,847 20.1% of which: assets under management 478,882 348,316 130,566 37.5%
Income statement Net interest income 23,389 Dividends and similar income 971 Net fee and commission income 17,782 Net loss from trading, hedging and disposal/repurchase activities (4,401) Other net operating income/(expense) 763 Operating income 38,504 Staff costs (27,326) Other administrative expenses (12,146) Depreciation, amortisation and net impairment losses on property, plant and equipment and intangible assets (1,500) Operating expenses (40,972) Net operating income (2,468) Net impairment losses on loans (4,404) Net impairment losses on other assets/liabilities (2,484) Net provisions for risks and charges 9,306 Profit (loss) on the disposal of equity investments - Loss on continuing operations before tax (50) Taxes on income for the year from continuing operations 264 Integration costs (2,192) of which: staff costs (1,619) other administrative expenses (447) depreciation, amortisation and net impairment losses on property, plant and equipment and intangible assets (126) Post-tax profit (loss) from discontinued operations - Loss for the year (**) (1,978)
Other information Number of branches 60 Total work force (actual employees+staff on leasing contracts) 494
Financial ratios Cost:income ratio (operating expenses/operating income) 106.41% Net bad loans/net loans to customers 0.78% Total net non-performing loans/net loans to customers 11.15%
Capital ratios Common Equity Tier 1 ratio 11.77% Tier 1 ratio 11.77% Total capital ratio 11.77%
(*) The table only reports balance sheet figures as at 31st December 2016, which in the consolidated accounts have been restated in aggregate form, in order to allow a consistent comparison with balance sheet items on an annual basis. Income statement figures on the other hand are not reported because in 2016 this bank, a Bridge Bank formed from a resolution procedure, was under different management. The income statement figures are therefore neither comparative nor representative of performance. (**) Because the bank entered the scope of consolidation from 1st April 2017, the net result relates solely to management under UBI Banca and therefore relates to the second, third and fourth quarters of the year.
The share capital of Banca Teatina was wholly owned by UBI Banca as at 31st December 2017.
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IW BANK SPA
31.12.2017 31.12.2016 Change % change Figures in thousands of euro
Balance sheet Loans and advances to customers 597,166 647,373 -50,207 -7.8% of which: non-performing loans 21,533 23,085 -1,552 -6.7% Direct funding (*) 2,822,201 2,767,365 54,836 2.0% Net interbank debt 2,282,318 2,176,220 106,098 4.9% Financial assets held for trading 2 1 1 100.0% Available-for-sale financial assets 1,832 2,088 -256 -12.3% Equity (including loss for the year) 139,174 144,072 -4,898 -3.4% Total assets 3,211,916 3,178,190 33,726 1.1% Indirect funding from customers (inclusive of insurance investment and UBI Banca bonds) 9,666,216 8,833,568 832,648 9.4% of which: assets under management 6,564,264 6,175,632 388,632 6.3%
Income statement Net interest income 17,346 24,033 (6,687) (27.8%) Dividends and similar income 13 3 10 n.s. Net fee and commission income 60,478 55,229 5,249 9.5% Net income (loss) from trading, hedging and disposal/repurchase activities (**) 16 5,489 (5,473) (99.7%) Other net operating income/(expense) (796) 1,016 (1,812) n.s. Operating income 77,057 85,770 (8,713) (10.2%) Staff costs (21,312) (20,461) 851 4.2% Other administrative expenses (***) (51,985) (64,882) (12,897) (19.9%) Depreciation, amortisation and net impairment losses on property, plant and equipment and intangible assets (869) (884) (15) (1.7%) Operating expenses (74,166) (86,227) (12,061) (14.0%) Net operating income 2,891 (457) 3,348 n.s. Net impairment losses on loans (1,591) (3,181) (1,590) (50.0%) Net impairment losses on other assets/liabilities (****) (2,293) (81) 2,212 n.s. Net provisions for risks and charges (*****) (5,578) (4,996) 582 11.6% Profit (loss) on the disposal of equity investments (1) - (1) - Loss on continuing operations before tax (6,572) (8,715) (2,143) (24.6%) Taxes on income for the year from continuing operations 1,138 1,802 (664) (36.8%) Loss for the year (5,434) (6,913) (1,479) (21.4%)
Other information Number of branches 21 21 - Total work force (actual employees+staff on leasing contracts) 298 305 -7
Fina nc ia l r a tios Cost:income ratio (operating expenses/operating income) 96.25% 100.53% Net bad loans/net loans to customers 1.73% 1.77% Total net non-performing loans/net loans to customers 3.61% 3.57%
Capital ratios Common Equity Tier 1 ratio 18.09% 20.98% Tier 1 ratio 18.09% 20.98% Total capital ratio 20.08% 23.13%
(*) The figure as at 31st December 2017 includes bonds subscribed by the Parent amounting to €10 million, unchanged compared with 31st December 2016. (**) The finance result for 2016 included a gain of €5.9 million on the disposal of an investment. (***) The figure for 2017 was down on that for 2016 primarily due to the lower expenses for advertising campaigns (-€4.6 million), outsourced services (-€1.8 million) and intercompany charges (-€4.3 million). (****) In 2017 the item included €2.2 million of impairment losses on equity investments and the relative commitments to the IDPF (Interbank Deposit Protection Fund) Voluntary Scheme for intervention regarding Cassa di Risparmio di Cesena, Cassa di Risparmio di Rimini and Cassa di Risparmio di San Miniato. (*****) In 2017 the item included €2.5 million of provisions relating to investment services and banking contracts and €0.8 million of provisions for other matters. In 2016 provisions totalling €2.2 million had been set aside for these types of risk.
The share capital of IW Bank as at 31st December 2017 was wholly owned by UBI Banca.
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UBI PRAMERICA SGR SPA
31.12.2017 31.12.2016Change % change Figures in thousands of euro
OWN "RETAIL CUSTOMERS" 6,787,847 6,857,465 -69,618 -1.0% Of which: customer portfolio management 4,943,162 5,040,878 -97,716 -1.9% Fund based instruments 1,844,685 1,816,587 28,098 1.5% FUNDS 16,663,929 15,326,138 1,337,791 8.7% of which: Pramerica funds included in fund based instruments 619,623 706,368 -86,745 -12.3% Other duplications 92,814 97,019 -4,205 -4.3% SICAV’s and other (net of duplications) 12,019,326 10,096,157 1,923,169 19.0% TOTAL ASSETS UNDER MANAGEMENT 34,758,665 31,476,373 3,282,292 10.4%
Income statement Net interest income 26 45 (19) (42.2%) Dividends and similar income 44 153 (109) (71.2%) Net fee and commission income 117,425 105,664 11,761 11.1% Performance fees 22,359 24,371 (2,012) (8.3%) Net income (loss) from trading, hedging and disposal/repurchase activity (49) 57 (106) n.s. Other net operating income/(expense) 771 (222) (993) n.s. Operating income 140,576 130,068 10,508 8.1% Staff costs (17,688) (17,848) (160) (0.9%) Other administrative expenses (18,110) (16,416) 1,694 10.3% Depreciation, amortisation and net impairment losses on property, plant and (52) (82) (30) (36.6%) Operating expenses (35,850) (34,346) 1,504 4.4% Net operating income 104,726 95,722 9,004 9.4% Net provisions for risks and charges 20 25 (5) (20.0%) Pre-tax profit from continuing operations 104,746 95,747 8,999 9.4% Taxes on income for the year from continuing operations (30,648) (32,160) (1,512) (4.7%) Profit for the year 74,098 63,587 10,511 16.5%
Other information Total work force (actual employees+staff on leasing contracts) 160 154 6
As at 31st December 2017, UBI Banca held 65% of the share capital of UBI Pramerica SGR and the remaining 35% was held by Prudential International Investments Corporation.
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UBI LEASING SPA
31.12.2017 31.12.2016Change % change Figures in thousands of euro
Balance sheet Loans and advances to customers 6,885,787 6,347,210 538,577 8.5% of which: non-performing loans 1,077,309 1,172,513 -95,204 -8.1% Due to customers 153,585 158,304 -4,719 -3.0% Net interbank debt -6,638,908 -6,117,672 521,236 8.5% Available-for-sale financial assets 25,335 27,891 -2,556 -9.2% Equity (including loss for the year) 440,889 463,700 -22,811 -4.9% Total assets 7,427,539 6,913,488 514,051 7.4%
Income statement Net interest income 103,085 93,526 9,559 10.2% Net fee and commission income 435 489 (54) (11.0%) Net income (loss) from trading, hedging and disposal/repurchase activities (52) 15 (67) n.s. Other net operating income/(expense) 9,336 8,930 406 4.5% Operating income 112,804 102,960 9,844 9.6% Staff costs (15,769) (16,253) (484) (3.0%) Other administrative expenses (19,276) (20,667) (1,391) (6.7%) Depreciation, amortisation and net impairment losses on property, plant and equipment and intangible assets (1,444) (1,498) (54) (3.6%) Operating expenses (36,489) (38,418) (1,929) (5.0%) Net operating income 76,315 64,542 11,773 18.2% Net impairment losses on loans (*) (83,020) (145,450) (62,430) (42.9%) Net impairment losses on other assets/liabilities (**) 1,534 (2,326) (3,860) n.s. Net provisions for risks and charges 1,902 445 1,457 n.s. Profit (loss) on the disposal of equity investments 6 2 4 200.0% Loss on continuing operations before tax (3,263) (82,787) (79,524) (96.1%) Taxes on income for the year from continuing operations 2,469 27,870 (25,401) (91.1%) Loss for the year (794) (54,917) (54,123) (98.6%)
Other information Total work force (actual employees+personnel on leasing contracts) 227 207 20
Financial ratios Cost:income ratio (operating expenses/operating income) 32.35% 37.31% Net bad loans/net loans to customers 9.57% 10.81% Net non-performing exposures/net loans to customers 15.65% 18.47%
Capital ratios Common Equity Tier 1 ratio 6.73% 7.88% Tier 1 ratio 6.73% 7.88% Total capital ratio 7.12% 8.47%
(*) In 2017 the item showed a marked improvement, because in December 2016 the write-downs incorporated an initiative approved as part of the UBI Banca Group Business Plan, designed to increase the percentage of loan coverage. (**) In 2017 the item included reversals on the item 130 d) “other financial transactions” amounting to €3.9 million, as a result of an appreciable improvement in annual default rates.
The share capital of UBI Leasing as at 31st December 2017 was wholly owned by UBI Banca.
PERFORMANCE BY BUSINESS SECTOR
2017 2016 % change
Figures in thousands of euro number amount number amount number amount
Auto 2,245 113,336 2,495 116,941 -10.0% -3.1% of which: - motor vehicles 956 36,992 1,151 42,993 -16.9% -14.0% - commercial vehicles 707 17,198 812 20,103 -12.9% -14.5% - industrial vehicles 582 59,146 532 53,845 9.4% 9.8% Machinery and equipment 2,305 357,834 2,172 318,956 6.1% 12.2% Aeronautical 16 15,327 9 12,427 77.8% 23.3% Property 355 273,072 377 378,420 -5.8% -27.8% Energy 2 5,973 1 2,714 100.0% 120.1% Total 4,923 765,542 5,054 829,458 -2.6% -7.7%
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UBI FACTOR SPA
31.12.2017 31.12.2016Change % change Figures in thousands of euro
Balance sheet Loans and advances to customers 2,460,340 2,468,928 -8,588 -0.3% of which: non-performing loans 256,884 274,226 -17,342 -6.3% Due to customers 3,983 5,528 -1,545 -27.9% Net interbank debt -2,319,767 -2,323,313 -3,546 -0.2% Equity (excluding profit for the year/including loss for the year) 128,761 128,722 39 0.0% Total assets 2,695,165 2,551,340 143,825 5.6%
Income statement Net interest income 22,959 22,117 842 3.8% Net fee and commission income (*) (235) 14 (249) n.s. Other net operating income/(expense) 750 658 92 14.0% Operating income 23,474 22,789 685 3.0% Staff costs (11,594) (12,202) (608) (5.0%) Other administrative expenses (**) (11,082) (9,352) 1,730 18.5% Depreciation, amortisation and net impairment losses on property, plant and equipment and intangible assets (32) (55) (23) (41.8%) Operating expenses (22,708) (21,609) 1,099 5.1% Net operating income 766 1,180 (414) (35.1%) Net impairment losses on loans (***) 2,933 (4,383) 7,316 n.s. Net impairment losses on other assets/liabilities 21 (17) 38 n.s. Net provisions for risks and charges (****) (422) (9,133) (8,711) (95.4%) Profit (loss) on continuing operations before tax 3,298 (12,353) 15,651 n.s. Taxes on income for the year from continuing operations (1,089) 3,697 (4,786) n.s. Profit (loss) for the year 2,209 (8,656) 10,865 n.s.
Other information Total work force (actual employees+staff on leasing contracts) 145 144 1
Financial ratios ROE [profit for the year/equity (excluding profit for the year)] 1.72% n.s. Cost:income ratio (operating expenses/operating income) 96.74% 94.82% Net bad loans/net loans to customers 8.42% 8.46% Net non-performing exposures/net loans to customers 10.44% 11.11%
Capital ratios Common Equity Tier 1 ratio 8.30% 8.26% Tier 1 ratio 8.30% 8.26% Total capital ratio 8.30% 8.26%
(*) The change in net fee and commission income is attributable both to lower fee and commission income for factoring services and also to an increase in fee and commission expense for guarantees on loans provided by the Parent. (**) In 2016 the item included redundancy expenses amounting to €1.3 million. (***) In 2017 the item included net reversals of impairment losses on non-performing loans amounting to €1.4 million, net reversals on performing loans amounting to €1.3 million and net reversals on the present value component of non-performing loans amounting to €0.2 million. In 2016 the item included impairment losses amounting to €13.1 million resulting from the write-down of two positions relating to hospitals in receipt of government contracts which were partially offset by specific reversals of impairment amounting to €8.7 million, of which €8.3 million relating to a S. Raffaele hospital position following an agreement to redefine the exposure which transferred the relative risk to the Local Health Authority debtors. (****) As mentioned in the previous note, in May 2016 the company signed an agreement to redefine the S. Raffaele position, on the basis of which the relative risk was transferred to the Local Health Authority debtors, with the consequent elimination of the position for the transferor of the receivables. Therefore in the accounts the write-down provision made in 2015 amounting to €8.3 million was released and at the same time a provision for risks and charges was made amounting to €9.4 million.
The share capital of UBI Factor as at 31st December 2017 was wholly owned by UBI Banca.
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PRESTITALIA SPA
31.12.2017 31.12.2016 Change % change Figures in thousands of euro
Balance sheet Loans and advances to customers 1,317,283 1,231,530 85,753 7.0% of which: non-performing loans 57,489 80,601 -23,112 -28.7% Due to customers 12 382 -370 -96.9% Net interbank debt -1,078,220 -1,004,332 -73,888 7.4% Equity (excluding profit for the year/including loss for the year) 213,735 213,742 -7 0.0% Total assets 1,452,553 1,403,376 49,177 3.5%
Income statement Net interest income 53,874 46,740 7,134 15.3% Net fee and commission income (2,633) (4,546) (1,913) (42.1%) Other net operating income/(expense) (419) (3,628) (3,209) (88.5%) Operating income 50,822 38,566 12,256 31.8% Staff costs (10,248) (10,511) (263) (2.5%) Other administrative expenses (18,512) (19,406) (894) (4.6%) Depreciation, amortisation and net impairment losses on property, plant and equipment and intangible assets (46) (65) (19) (29.2%) Operating expenses (28,806) (29,982) (1,176) (3.9%) Net operating income 22,016 8,584 13,432 n.s. Net impairment losses on loans (*) 1,083 (11,476) 12,559 n.s. Net impairment losses on other assets/liabilities 63 621 (558) (89.9%) Net provisions for risks and charges (**) (7,640) (20,557) (12,917) (62.8%) Loss on the disposal of equity investments - (2) (2) (100.0%) Loss on continuing operations before tax 15,522 (22,830) 38,352 n.s. Taxes on income for the year from continuing operations (4,875) 8,520 (13,395) n.s. Loss for the year 10,647 (14,310) 24,957 n.s.
Other information Total work force (actual employees+staff on leasing contracts) 173 170 3
Financial ratios ROE [profit for the year/equity (excluding profit for the year)] 4.98% n.s. Cost:income ratio (operating expenses/operating income) 56.68% 77.74% Net bad loans/net loans to customers 0.59% 0.76% Net non-performing exposures/net loans to customers 4.36% 6.54%
Capital ratios Common Equity Tier 1 ratio 16.28% 16.87% Tier 1 ratio 16.28% 16.87% Total capital ratio 16.28% 16.87%
(*) In 2016 the item included specific impairment losses amounting to €9.7 million relating to a single position. (**) In 2017 the item included a provision of €6.5 million against claims received and expected identified by a specific statistical procedures and €1 million to meet legal defence risks, while the figure for 2016 included a provision of €19.6 million to meet claims received and expected.
The share capital of Prestitalia as at 31st December 2017 was wholly owned by UBI Banca.
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Other information
Treasury shares
The companies included in the consolidation did not hold any of their own shares in portfolio, nor those of the Parent, during the course of 2017. As at 31st December 2017 UBI Banca held 2,984,880 treasury shares with no nominal value, accounting for 0.26% of the share capital (further details are given in the UBI Banca Management Report, which may be consulted).
Litigation
Full information is reported on tax and other Group litigation as well as on anti-money laundering affairs in the Notes to the Consolidated Financial Statements, Part B – Section 12 of Liabilities.
Inspections
As a result of the IT RISK inspections conducted into the UBI Banca Group by a team of senior officers from the Bank of Italy and the ECB between 30th March and 19th June 2015, on 17th November 2015 a report was received which gave a fully satisfactory opinion on the overall management of IT risk within the UBI Banca Group, although it outlined areas for refinement and improvement (e.g. on business continuity, preventing cyber-attacks and computer fraud). Following the preliminary remarks provided in the last days of 2015, on 24th February 2016 UBI Banca sent a full reply to the ECB containing, amongst other things, a detailed action plan for the intervention requested with a time schedule for implementation. Subsequently, quarterly detailed updates of actions either completed or initiated have been sent to the authority, in keeping with the timetable submitted. The last update was provided on 26th January 2018, regarding the situation as at 31st December 2017, stating that the action plan has been completed.
On 26th February 2016 the European Central Bank commenced inspections into the Parent, UBI Banca, on the subject of BUSINESS MODEL AND PROFITABILITY. These inspections concluded on 20th May 2016 with a 'pre-closing meeting', during which the Company’s senior managers were informed of the main results of the inspections conducted. On the following 25th May, UBI Banca sent the inspection team some preliminary considerations on the specific matters discussed in the pre-closing meeting. On 12th October 2016 a “closing meeting” took place, during which the related findings were discussed. Based on the results contained in the final inspection report received on 10th January 2017, UBI Banca's Management Board and Supervisory Board assessed an initial response on 7th February, containing observations and planned mitigation actions. On 10th March 2017 UBI Banca submitted a compliance proposal and on the following 31st March replied to some of the questions posed on this matter by the authority. Further information contained in documents was submitted on 25th July and 19th September 2017.
On 13th May 2016, the ECB gave notice that it had begun inspections of the UBI Banca Group into INTERNAL AND EXTERNAL REPORTING QUALITY. The main focus of this inspection is on data aggregation processes, with particular regard to credit risk. The inspections were concluded on 28th July 2016.
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The “exit meeting” took place on 23rd November 2016, where the results of the inspection were discussed in depth. Areas for improvement were identified, particularly with regard to financial reporting (FINREP), common reporting (COREP), reporting large exposures, and the operational report on credit risk that is submitted to the government bodies. Details of further areas for improvement were also provided for which the Group has planned the relative action. On 12th December 2016, the final report was received, in which the ECB officially noted the corrective actions requested of the UBI Banca Group in the areas cited above. On 11th January 2017, the Parent made a reply giving formal details of the corrective action taken for 2017, followed by updates on 1st February, 8th March, 4th May and 5th July 2017. At the date of this report, UBI Banca is taking steps to send periodic updates on the basis of the deadlines requested for each individual action, as set in the letter accompanying the ECB’s observations.
In a letter dated 22nd June 2016, the ECB ordered new inspections in the areas of GOVERNANCE, REMUNERATION AND INTERNAL CONTROLS, with a particular focus on how the Bank and the Group deal with conflicts of interest and verify policies and procedures to identify and manage Group related parties and therefore potential conflicts of interest and the adequacy of internal control systems to detect such conflicts. These inspections were completed on 5th August 2016. On 27th January 2017, the ECB notified the Bank of the results of the inspections performed, directing the Bank to draw up an action plan to implement the requested solutions and suggested actions. On 7th March the Parent replied to the authority by submitting a plan of action. On 2nd May an update was submitted to the ECB on the state of progress on implementing the action at the end of the first quarter (in detail: the state of progress on activities to formulate policies for oversight of possible conflicts of interest and of the “fit and proper” process, an extension of rules for connected parties to include the “identified staff” of the bank and computerisation activity). On 1st August 2017 the second update was submitted to the supervisory authority on the state of progress of action taken in the first half of 2017 (in detail: the finalisation of policies, publication of the new “Bank of Italy Connected Parties Rulebook”, alignment of the IT systems in foreign branches with the Group target system). The third update on the situation regarding action taken as at 30th September 2017 was submitted to the ECB on 23rd October.
In a letter dated 17th November 2016, the ECB gave notice of the start of an inspection on the subject of CAPITAL POSITION CALCULATION ACCURACY. The inspections were concluded on 3rd March 2017, while the official presentation of the preliminary results took place on the following 12th April. These reported room for improvement on internal control processes and areas for study on credit risk mitigation techniques for use on financial instruments issued by the bank. On the 3rd July 2017 the ECB sent its final report together with the draft of a letter containing the supervisory authority’s recommendations, which were discussed in the “closing meeting” on 7th July. The final version of the aforementioned letter was received on 20th July. The bank sent its written reply to the ECB on 14th August, followed by a progress update on the actions implemented on 30th November 2017.
In a letter sent on 11th January 2017, the European Central Bank gave notice of an inspection on the INTERNAL MODEL of organisation following an application to extend the IRB perimeter consistent with the Group's roll-out plan. The on-site investigations began on 6th February and concluded on 7th April. On 23rd September 2017 the authority sent a draft assessment report, to be discussed in the “closing meeting” on 29th September. The Bank submitted its observations on the contents of the report on 11th October and received the final version of the assessment report from the ECB on the following 23rd October 2017. Authorisation to apply the new models is expected by the end of the third quarter of 2018.
Also, on 6th February 2017 the Federal Reserve Bank of New York and the New York State Department of Financial Services commenced fact-finding activity on the situation as at 31st December 2016 relating to the recently opened NEW YORK REPRESENTATIVE OFFICE. Their inspection, which covered, amongst other things, organisational units, the activities carried out and the policies pursued, was concluded on 26th April 2017 with the delivery of the relative report and the assignment of a “satisfactory” rating. Further refinement activities are planned
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in order to comply with specific recommendations made by the authorities notified to the Bank in a letter dated 11th May.
On 31st March 2017 the Bank of Italy gave notice of the start of inspections on the subject of TRANSPARENCY at IW Bank. The inspection activity, which commenced on 3rd April, was concluded on 7th April. With a letter dated 17th July the supervisory authority gave the results of the inspections carried out which revealed certain shortcomings. IW Bank submitted the reply requested to the Bank of Italy on 14th September 2017, which included the following: (i) a progressive improvement in average response times to customer complaints; (ii) the prompt correction of two discrepancies detected between contract documents and periodic summary documents; and also (iii) the development of new functionalities for the dynamic update of pre- contractual, contractual and periodic documents required by the regulations on transparency, designed to reduce the risk of discrepancies.
With a letter dated 26th June 2017 the European Central Bank announced the start of an inspection on the subject of counterparty risk management and risk control system. This inspection regards both the performing and non-performing portfolio of loans to businesses (Specialised Lending, Large Corporate, Corporate and Small Business, but not including Retail businesses) of the Group (UBI Banca, UBI Leasing and UBI Factor). It began on 18th September 2017, is still ongoing and is scheduled to be completed within the first half of this year. Based on the evidence gathered so far by UBI Banca, the classification of the loans under examination, both performing and non-performing, seems to be confirmed as appropriate.
On the 9th October 2017 a Bank of Italy inspection commenced, following on from a communication sent by that authority on the preceding 22nd September entitled “THE INTRODUCTION ONTO THE MARKET AND THE REVISION OF RETAIL BANKING PRODUCTS”. The inspection is into the stages of the production and distribution process and governance and control mechanisms. This inspection ended on 10th November 2017 and the Bank is currently awaiting the results.
On 6th November 2017 the Bank of Italy commenced inspections designed to assess: (i) the state of implementation of corrective action requested following the latest inspections on ANTI- MONEY LAUNDERING; as well as (ii) the suitability of the organisational structure for producing accurate reports of overall average effective interest rates and preventing violations of USURY regulations. As at the publication date of this report, the inspection is still in progress.
Finally, in a letter dated 22nd December 2017 the ECB declared that it would shortly begin an inspection (scheduled to begin on 19th February 2018) in the context of its TARGETED REVIEW OF INTERNAL MODELS.
* * *
The aforementioned inspections, which take place in the form of on-site inspections by ECB inspectors at UBI Banca, are accompanied (as part of the Supervisory Examination Plan formulated periodically by the supervisory authority) by many remote inspection activities conducted by means of email exchanges and periodic meetings which have taken the form to date of initiatives entitled "Thematic Review", "Deep Dive" and "Quality Assessment".
The thematic reviews currently in progress in the UBI Banca Group regard the following areas: - IFRS 9 (for the purpose of learning the latest developments in the process of adopting this new accounting standard): the review was concluded on 31st March 2017. The preliminary results of the analysis were discussed with the ECB on 13th July and on 22nd August the supervisory authority delivered its relative draft letter, on which UBI Banca submitted its comments on the following 18th September. On 12th October the ECB sent its final letter containing the results of its review. The authority's findings were that management involvement in the project to implement the new standards was adequate, but that the formalisation of the methodological and implementation choices could be improved. The Bank was asked to provide a reply within four weeks giving details of the action identified to follow the recommendations formulated
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by the authority. UBI Banca replied to the ECB on 15th November, followed by two updates on the initiatives identified, on 21st December 2017 and 12th January 2018. - Risk Data Aggregation and Risk Reporting [with respect to the standards set by the Basel Committee on Banking Supervision (BCBS) for the development of an early warning system given the possibility of exceeding the risk considered acceptable under the Risk Appetite Framework adopted by the Bank also in terms of forecasts]: commenced in 2016, the first results were discussed with the ECB in a meeting held on 30th March 2017. On 5th May a preliminary reply was submitted to the draft of the report received in April. On the 19th May the supervisory authority delivered the results of the activities carried out and asked for action to be taken to implement the recommended solutions and actions. The Bank submitted a reply on 26th September 2017, which was met with some comments formulated by the ECB on 6th December regarding the role of the Compliance function in the Data Governance Framework; UBI Banca responded to these comments on the following 22nd December. - Profitability Drivers – Business Model and Profitability (business model examination as part of SREP assessments): this analysis got underway on 9th March 2017, and on 22nd March a request was received to fill out a template, which will also be used for Thematic Review assessments; this template was submitted on 3rd April. The ECB then formulated several requests on 24th October 2017, to which the Bank replied on 26th October. UBI Banca now awaits the results of the Thematic Review.
* * *
Details are given below of updates on specific issues. • As already reported in the 2015 Annual Report, on 29th January 2015 the Consob had informed the former Banca Popolare di Bergamo of concerns that had emerged following a follow-up inspection carried out between 4th February and 7th August 2014 and asked in particular for a programme of organisational and IT action designed to resolve those concerns. At the beginning of April 2015 the former BPB sent a reply that illustrated the assessments made and initiatives taken and/or programmed and also responded to the subsequent requests for further clarifications and updates made by the Consob in August 2015 and in June 2016 (the latter were addressed also to the Parent). With notes dated 6th December 2016, the Consob requested: (i) from the former Banca Popolare di Bergamo, further details on action planned by UBI Banca with specific regard to the commercial programming system, procedures for providing advisory services through the internet channel and processes for classifying customers with the adoption of a new customer profiling questionnaire; (ii) from UBI Banca, assessments and considerations concerning aspects underlined in the request made to the BPB also in view of the programmed implementation of the Single Bank Project, completed in February 2017, and of the standardisation of processes relating to the provision of investment services existing at individual Group banks. After the former Banca Popolare di Bergamo and UBI Banca provided responses on 23rd January and 16th February 2017, respectively, each according to its own set of responsibilities, no further requests were received on this matter from Consob. • On the question of the proceedings opened by the Consob with a letter dated 30th April 2014, in accordance with Art. 195 of the Consolidated Finance Law (concerning possible infringement of Art. 149 of the Consolidated Finance Law relating to aspects of the disclosures made in corporate governance reports published from 2009 until 2013), on the conclusion of which in October 2015 the supervisory authority decided to impose administrative fines in an amount equal to or close in percentage terms to the minimum penalty allowed on those members of the Supervisory Board who were in office in the year 2009 or who were appointed to the board in subsequent years, but were members of the Management Board in 2009: UBI Banca, as jointly liable, and the individuals concerned, lodged separate appeals against the Consob decision. With ruling No. 879/2017 of 17th May 2017, published on the 19th June 2017, the Brescia Court of Appeal annulled the Consob fine, finding under a variety of aspects that no objective evidence existed of the infringement. More specifically, the judgement found, amongst other things, that:
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- the “equal partnership principle”, expressly provided for in the Articles of Association (until 10th May 2014) is of a programme-based nature; - the Memorandum of Intent signed before UBI Banca was established, attached to the merger project and the merger deed, cannot be considered as one of those external agreements forbidden by the Articles of Association; - no inconsistencies exist between the Articles of Association and the Regulations of the Appointments Committee and the existence of circumstances which might lead the market to believe that those regulations were no longer current must be excluded; - the version of the Regulations of the Appointments Committee disclosed to the market in 2007 was sufficiently adequate to allow the procedures for the functioning of the committee to be understood. Therefore the members of the Supervisory Board, cannot be considered to have failed in their duty to supervise with regard to the absence of relevant information pursuant to Art. 13 bis of the Consolidated Finance Law in Corporate Governance Reports from 2009 to 2013, because the market had already been informed of the rules contained in the Regulations mentioned). On 14th November 2017, UBI Banca received notification that Consob was appealing court ruling No. 879/2017 with the Supreme Court of Cassation, and promptly submitted a counter-appeal. • On conclusion of the investigations commenced in 2014 by the Public Prosecutor’s Office of Bergamo, in November 2016 a “Notice of conclusion of the preliminary investigations – Concomitant notification of investigation and right to defence – articles 369, 369 bis and 415 bis of the Italian Code of Criminal Procedure” was notified to current senior officers of the Bank in which the crimes of “Hindrance of the Public Supervisory Authorities in the exercise of their duties” (Art. 2638 of the Italian Civil Code and Art. 170 bis of the Consolidated Finance Law) and “Illicit influence on a shareholders meeting” (article 2636 of the Italian Civil Code) in relation to the meeting held in April 2013, were alleged against various suspects on various grounds. In that notice, accusations were also made against additional persons for “Fraud” (article 640 of the Italian Criminal Code) and for “Failure to comply with regulations regarding the duties of senior officers of banks” (Art. 136 of the Consolidated Banking Law), in addition to some infringements of tax laws. Altogether this notification was addressed to 39 persons, including 28 directors and interim senior managers of the UBI Banca Group and senior officers of UBI Leasing. At the same time, the Public Prosecutor also notified UBI Banca of the conclusion of preliminary investigations alleging that the Institution has an 'administrative' liability under Legislative Decree No. 231/2001, in relation to the offence of "hindrance of the public supervisory authorities in the exercise of their duties" (article 2638 of the Italian Civil Code) and "illicit influence on a shareholders' meeting" (article 2636 of the Civil Code). As part of the proceedings in question, on 1st August 2017 UBI Banca received a notification of committal for trial and consequent notification of the date set for the preliminary hearing on 10th November 2017 for the administrative violations provided for by article 25 ter, letter q) and letter s) of Legislative Decree No. 231/2001. The Public Prosecutor's Office of Bergamo asked in particular for committal to trial for the administrative violations mentioned in relation to the offences pursuant to articles 2636 and 2638 of the Italian Civil Code for which charges have been brought against, amongst others, some senior officers currently in office; these officers received subpoenas for preliminary hearings to begin on 10th November 2017. The preliminary hearings are currently in progress, with hearings scheduled until March 2018. In these preliminary hearings, the only application to join the proceedings as a plaintiff that was admitted by the judge is the one submitted by Consob, and only with respect to those accused of violations of article 2638 of the Civil Code. UBI Banca has not been charged as a civilly liable party. On the 2nd October 2017 the Public Prosecutor’s Office of Bergamo made an official request for the case regarding the charges of fraud and failure to comply with provisions regarding the duties of senior officers of banks and infringements of tax laws, originally brought against (amongst others) some senior officers of UBI Leasing and which are now no longer included in the application for committal to trial, to be closed with no further action taken. The judge presiding over the preliminary hearing issued a decree to close the hearing on 4th January 2018.
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The Bank stresses that it has conducted itself properly and is confident that its compliance with the provisions of the law and with organisational regulations will be confirmed in the courts at all levels, as already clearly demonstrated by the decision reached on 19th June 2017 by the Court Appeal of Brescia which recognised UBI Banca’s proper conduct and that of its senior officers in their relations with the supervisory authorities and with the market. In consideration of the nature of the matter, it is considered that it can have no repercussions on Group assets. • On 30th May 2017 a search was carried out, ordered by the Public Prosecutor’s Office of Brescia, in various offices of the Bank as part of the investigations concerning allegations of acting as an accomplice in the crime of hindrance of the public supervisory authorities in the exercise of their duties (Art. 2638 of the Italian Civil Code), in relation to reports on suspect transactions concerning anti-money laundering and the obligation to make adequate checks on customers. These investigations are still in progress at the date of publishing this report. • With regard to IW Bank, as reported in the previous annual financial statements, on 3rd December 2015, some current and former IW Bank directors and managers received notification of a search and seizure warrant, also informing them they are suspects in investigations under the Milan Public Prosecutor, pursuant to articles 366 and 369 of the Italian Penal Code. The alleged offences are: criminal conspiracy (Criminal Code Art. 416), money-laundering and conspiracy to launder money (ibid, art. 110 and 648-bis), self-money laundering, conspiracy to commit self-money laundering (ibid, Art. 110 and 648.1-ter), as well as the criminal tax offence (and relative conspiracy offence as per Criminal Code Art. 110) of “fraudulent concealment of assets in relation to the payment of taxes” (pursuant to Art. 11 of Legislative Decree No. 74/2000). Finally, criminal violation of customer due diligence obligations was alleged (pursuant to Art. 55 of Legislative Decree No. 231/2007). In relation to the proceedings in question, on 20th July 2017 the Guardia di Finanza (finance police) notified the Bank that it was a suspect in investigations, with the closure at the same time of the preliminary investigations in which the Public Prosecutor alleged liability of the members of IW Bank’s Board of Directors and its Board of Statutory Auditors in the period running from May 2008 to May 2014 for the offence of hindrance of the public supervisory authorities in the exercise of their duties (pursuant to Art. 2638) and in particular to have failed to make full reports to the Bank of Italy on alleged shortcomings regarding anti-money laundering controls and procedures. With regard to that same predicate offence of hindrance of the public supervisory authorities in the exercise of their duties, the public prosecutor’s office charged IW Bank with administrative liability in accordance with Legislative Decree No. 231/ 2001 (pursuant to Art. 25 ter of the aforementioned decree). With sole reference to the alleged offence of hindrance of the public supervisory authorities in the exercise of their duties (pursuant to Art. 2638 of the Italian Civil Code), on 26th October 2017 the Office of the Judge for the preliminary hearing at the Court of Milan notified IW Bank, in its capacity as the entity responsible pursuant to legislative Decree No. 231/2001, of an order setting the date for the preliminary hearing for 12th April 2018, following a request for committal to trial filed by the Public Prosecutor on 17th October 2017. It is underlined that the more serious offences cited in the search warrant executed in December 2015 do not appear in both the notice of the closure of the preliminary investigations and in the subsequent application for committal to trial.
Developments in the regulatory framework
In 2017 the UBI Banca Group started and/or continued to monitor developments in the complex, supranational and national regulatory framework and make changes as a consequence. It has employed specialist resources over a multi-year time frame in order to comply correctly with the supervisory authorities’ provisions.
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Generally speaking the areas of intervention mainly addressed by regulators are those of “sound and prudent management” with a particular focus on the fundamental value of transparency and integrity in conduct with customers, the quality of governance and the need to frame a solid and efficient corporate governance structure which is attentive to the qualitative profiles of senior officers and is able to formulate appropriate strategies, guarantee adequate management and risk oversight and to encourage sound relationships with customers. Developments in the regulatory context also involve specific aspects related to technological processes of production and service provision and set conditions to also successfully meet the new challenges set by Fintech and to fight the growing threat of cybernetic risks. The major regulatory aspects of particular significance for the UBI Banca Group – both those that took effect in 2017 and those to be implemented in 2018 – are summarised below.
GOVERNANCE To implement the principles outlined in the EU Capital Requirements directive (CRD IV), on 26th September 2017 the European Securities and Markets Authority (ESMA) and the European Banking Authority (EBA) issued joint guidelines on the notion of the 'suitability' of company representatives and key control functions, providing standard criteria to assess the individual and collective knowledge, skills and experience of management bodies, as well as to assess their reputation, honesty, integrity and independence. In Italy, these guidelines will be supplemented by provisions in a Ministry of Economy and Finance decree on the requirements for company representatives, for which a final version is not yet available. In order to align banks' governance oversight and processes across the EU, in line with the requirements set forth in CRD IV and in keeping with the principle of proportionality, the EBA also issued specific indications on internal governance. These indications aim to place more emphasis on the duties and responsibilities of bank management and on the specific risk supervision role of committees, further reinforcing the regulatory framework for company management with greater attention to the culture of risk, the code of conduct and the resolution of potential conflicts of interest. A final notable piece of legislation is Legislative Decree No. 254 of 30th December 2016, which implements Directive 2014/95/EU of the European Parliament and of the Council, amending Directive 2013/34/EU. This decree, in force since 1st January 2017, requires large companies and groups of companies to report non-financial information related to financial statements and reports carried out as from the 2017 financial year. The Declaration of a non-financial nature must contain at least information about environmental and social issues, personnel, respect for human rights, and the fight against active and passive corruption, to an extent that enables an understanding of the business's performance in these areas, the situation in which it is operating, and the impact of its activities. For the first time this legislation is applied, a qualitative summary only with a comparison with previous years may be provided.
INVESTMENT PRODUCTS AND SERVICES AND FINANCIAL MARKET STABILITY The 2017 Legge di stabilità (“stability law” – annual finance law) (law of 11th December 2016, Art. 1, paragraphs 100 to 114) introduced into Italy along the lines of similar products existing in other countries, (e.g. France and Great Britain) long-term “Individual Savings Schemes” (ISS) in order to incentivise investments also in medium-size companies. The ISS is a savings instrument consisting of a special legal relationship (with particular characteristics and subject to a special conditional tax exemption regime) within which savers (natural persons only) can allocate sums of cash or valuables in compliance with constraints set by the legislation. The new legislation on financial instruments markets – namely Directive 2014/65/EU (MiFID II) and EU Regulation No. 600/2014 (MiFIR) – seek to strengthen the rules on transparency in transactions and oversight to protect investors. In 2017, numerous implementation measures for MiFID II requirements were passed, while some other aspects are still in the process of being adopted and implemented in related Consob regulations on the provision of investment services. The EU regulations, which aim to oversee the honesty and accuracy of intermediaries' operations and to enhance protections to ensure that they act in the customer's best interest, emphasise following the rules of conduct and have imposed precise organisational and
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governance requirements. The Bank has therefore undergone exceptional efforts to adapt to these requirements within the timeframe requested by the Authority. With regard to protecting investors, the most notable new aspects are as follows: Product Governance The rules introduced not only set out organisational oversight and a governance mechanism for investment businesses, but also establish general principles for providing investment services. Product Governance, in keeping with Italian and European regulatory measures to strengthen investor protection, dictates that intermediaries must consider the best interest of the potential client- investor as central throughout the life cycle of a financial product, from its creation to its distribution; Advisory Services Financial advisory services are formulated differently depending on whether the advice is independent, on the diversity and breadth of financial instruments related to the service, as well as on the periodic assessment of the appropriateness of these instruments. Regardless of the UBI Banca Group's choices, an intermediary may provide both independent and non-independent advisory services, as long as the organisational requirements are met and controls are implemented so as to guarantee that the operating models will remain separate; Adequacy and Appropriateness The new aspects are in particular related to: i) use of a profiling survey to acquire information to determine a 'target market'; ii) new drivers to assess the adequacy of service packages offered, as well as the customer's risk tolerance and capacity to sustain losses; iii) within advisory and portfolio management services, the need to perform cost/benefit analysis before switching investments, so as to demonstrate that the expected benefits outweigh the costs; iv) the need to evaluate the costs and complexity of any similar alternative products, in keeping with the customer profile. Other specific rules are also in place on services provided to legal persons or groups of people, including an obligation to state the reasons why a certain product is deemed appropriate for the type of client in question; Transparency on costs and incentives Costs and charges, including those connected to investment services and financial instruments, must be presented to the customer in aggregate format, so that the customer will know the total cost and its overall effect on returns; if requested by the customer, costs and charges may also be presented in analytical format. Costs and charges are to be shown both in absolute amount and as a percentage; the initial statement of costs and charges must also include details regarding performance incentives. Such information is to be provided to the customer on a regular basis, at least annually; Execution-Only Services Finally, the new regulations restrict the scope of financial instruments for which intermediaries may operate on an execution-only basis, that is, without carrying out an appropriateness assessment. Also on the issue of protection and transparency for retail investors, it is worth mentioning European Commission Delegated Regulation 2017/653 of 8th March 2017 on packaged retail and insurance-based investment products (PRIIPs) and consequent regulatory technical standards. PRIIPs are pre-packaged retail investment products and life insurance products whose value is subject to fluctuations in market indexes or to the returns on assets not directly purchased by the retail investors. The aim of this regulation, which came into force on 1st January 2018, is to make PRIIPs more transparent by means of clear information documents to enable comparability between financial instruments before they are purchased. In order to ensure greater protection for this category of investors, the main new aspect introduced under this regulation is a requirement to draft and provide a Key Information Document (KID), in a standard format, containing precise information about the risks and costs associated with each product. Lastly, Consob has approved amendments to its regulations on issuers, markets and related party transactions, in order to adapt second-level Italian regulations to the new European legislation on market abuse in effect since 3rd July 2017 under EU Regulation No. 596/2014 (Market Abuse Regulation – MAR) and related delegated acts. Directive 2014/57/EU (the Market Abuse Directive, or MAD II) along with the MAR establish a harmonised regulatory framework in the EU on market abuse, on the illicit disclosure of information and on market manipulation; the directive also provides specific measures to prevent such market abuse. These amendments also institute coordination between European regulations and national provisions regarding, among other things, the application of continuous disclosure obligations for the issuers of securities with broad shareholder bases as well as the application of
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transparency obligations in transactions made by significant stakeholders on the securities of listed issuers.
BANKING PRODUCTS AND SERVICES AND SOUND AND PRUDENT MANAGEMENT With the entry into force on 3rd January of the new Payment Services Directive (PSD2), the process of creating a single integrated payment services market has been achieved; the rules are now uniform for both banking institutions and the recently conceived payment service providers (PSPs), which have arisen along with the advent of digital technology. PSD2 will knock down entry barriers to new operators, help enhance system security, enable new payment services, ensure transparency and encourage healthy competition, to the advantage and in the best interest of consumers. Measures to implement PSD2 and associated technical regulations have certain effects on the Bank's technological infrastructure, as well as on the business and the competitive scenario in terms of opportunities for new product developments and partnerships, opportunities to increase market shares and to offer value-added services. With regard to 'sound and prudent management', one particularly notable recent development is in the regulatory scenario on lending and associated risk management. On 20th March 2017, the ECB published the final draft of its guidelines on non-performing loans (NPLs). This document, whose purpose is to help strengthen banks' balance sheets, clarifies supervisory authority expectations in terms of identifying, managing, measuring and derecognising NPLs under the regulations, directives and provisions in force. Subsequently, in October the ECB opened an Addendum to these guidelines for consultation until 8th December 2017. This Addendum proposes that as from 1st January 2018, banks must, for supervisory purposes, write off the full amount of the unsecured portion of new NPLs after two years at the latest and write off the secured portion after seven years. Due to the numerous comments sent during the consultation period, the date on which the new guidance will take effect has had to be postponed; according to the Supervisory Authority's indications, the document should be finalised by the end of the first quarter of 2018. Still on the issue of credit management, significant regulatory measures have also been issued regarding supervisory reporting, through the AnaCredit or 'analytical credit dataset' initiative. This is a project initiated by the European System of Central Banks (ESCB) in 2011 that aims to establish a database on loans granted within the eurozone banking system, in order to meet the need for more detailed and better quality statistics in support of corporate policy decision- making. On the subject of record-keeping of basic customer details, the EBA has also issued specific guidelines, indicated a new supervisory approach to surveying groups of customers. These guidelines pertain to 'connected clients' as per Article 4, paragraph 1 of Regulation 2013/575/EU, defining the relationships of control and economic dependency whereby two or more clients should be considered as constituting a single risk. For the purpose of assessing control relationships, the guidelines also clarify the concept of 'single risk' and confirm that in exceptional cases the burden of proof lies with the institutions to show that despite a relationship of control, two clients do not constitute a single risk.
SECOND-LEVEL UNSECURED DEBT INSTRUMENTS Consistent with the EU Directive published at the end of December, Italy's 2018 Budget (Law No. 2015 of 27th December 2017) envisages creating a new debt instrument that lies between subordinated bonds and senior bonds on the hierarchy of assets subject to the 'bail-in' mechanism, that is, to the internal rescue of a bank in financial crisis. So, if a bank were to go bankrupt, the new class of bonds would become involved in loss absorption after capital and subordinated bonds, but before senior bonds. The Italian government has stipulated that second-level unsecured debt instruments must be issued for a minimum duration of twelve months and must not be derivative instruments. As a form of further protection for retail investors, such second-level bonds must be for at least €250,000 per issuance and the placements must be to institutional investors only. It should also be kept in mind that this type of bond is included in the set of financial instruments that count towards the Minimum Requirement for own funds and Eligible Liabilities (MREL).
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PRODUCT GOVERNANCE AND CONTROL FOR INSURANCE BUSINESSES AND INSURANCE PRODUCT DISTRIBUTORS Monitoring the newly issued regulations from the competent insurance sector authorities, a substantially evolving overall framework is emerging, moving more in line with the risk monitoring and management system in place in the banking sector. One notable example is the consultation that closed on 17th October 2017 is the regulatory scheme with corporate governance measures. This scheme would revise the current provisions contained under ISVAP Regulation 20 of 26th March 2008 and ISVAP Regulation 39 of 9th June 2011. The new scheme originates from the Solvency II Directive (2015/35/EU) and from EIOPA guidelines1 on corporate governance. It should also be highlighted that two delegated regulations supplementing the European Insurance Distribution Directive (IDD) were published in the Official Journal of the European Union (No. 341) on 20th December 2017. The purpose of the new regulations are to strengthen consumer protection and ensure that insurance products match consumers' needs. More specifically, the regulations aim to set organisational requirements with regard to product oversight and governance (POG), introducing specific instructions borrowed from MiFID II - for the producers and distributors of insurance products. Oversight to protect consumers is to extend throughout the life of a product, with monitoring over time established to guarantee that it continues to reflect the interests of the type of client for which it was designed.
PRIVACY The European Regulation on Personal Data Protection, which came into force on 25th May 2016 and is applicable as from 25th May 2018, introduces important new aspects to the Italian legal framework on this subject (based on Legislative Decree No. 196/2003). It stipulates that the Data Controller must adopt a technical and organisational model compliant with the General Data Protection Regulation (GDPR) and be able to guarantee that personal data remains protected by conducting a preventive assessment of the risks involved in each instance of data processing, and by outlining appropriate risk containment measures when planning any activities that require the processing of personal data. This regulation also introduces the new role of Data Protection Officer (DPO), which will be mandatory for the UBI Banca Group.
ANTI-MONEY LAUNDERING On 4th July 2017, Italian Legislative Decree No. 90/2017 took effect, implementing both EU Directive 2015/849 (on the prevention of the use of the financial system for the purposes of money laundering or terrorist financing) and Regulation 2015/847/EU (which prescribes appropriate measures to protect the integrity of the economic and financial system and to ensure sound conduct by the operators that must respect those measures). The goal of the new legislation is to make the Italian system more effective in combating the increasingly diverse criminal market by: i) establishing stricter provisions against money laundering and terrorist financing; ii) setting standards for informational requirements regarding the payer and payee in funds transfers; iii) introducing significant new obligations in terms of reporting, disclosures and customer due diligence, in accordance with a risk-based approach; iv) changing the criminal and administrative penalty structure.
MANAGEMENT, ORGANISATION AND CONTROL MODEL PURSUANT TO LEGISLATIVE DECREE NO. 231/2001 The changing regulatory context has affected the UBI Banca Group's management, organisation and control model (its ‘231 Model') after the entry into force on 14th April 2017 of Legislative Decree No. 38 of the 15th March 2017 which led to the introduction of the crime of incitement to corruption between individuals to the Italian Civil Code and the same offence added to the list of crimes entailing administrative liability for institutions. Another change to this model is that the set of individuals considered 'active' has been extended to cover not only those in the highest positions in a company (i.e. directors, general managers, managers responsible for preparing company financial statements, statutory auditors and receivers), but
1 European Insurance and Occupational Pensions Authority (EIOPA).
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also those who perform other managerial functions in companies). It should be noted that the crime of incitement to corruption includes the undue solicitation of money or other benefits by an individual qualified as active (even if indirectly through another person) wherever a corrupt agreement ensues. Another topic of interest for the “231 model” is whistleblowing: the aim is to promote a corporate culture shaped by lawfulness and characterised by honest behaviour, as well as to protect employees who report illegal behaviour from discrimination, retaliation or any other measures that penalise them at work.
BASEL 3 In the international regulatory framework, the Group of Central Bank Governors and Heads of Supervision (GHOS) reached an agreement on 7th December 2017 to finalise the package of regulatory reforms known as 'Basel 3'. These reforms involve revising methodologies used to calculate risk-weighted assets (RWA), especially in terms of credit risks, operational risks and market risks. The main new aspects of these rules, which are part of the 'Basel IV' framework, are as follows: • limits on the use of internal rating based (IRB) models to calculate capital requirements to cover credit risk for some types of loan portfolios (such as low default portfolios) and instruments (such as capital instruments), in favour of stricter, standard calculation methodology; • a new standard approach to calculating capital requirements to cover operational risk, which will replace all current approaches based on internal models, including the advanced measurement approach (AMA); • both internal models and more sophisticated and rigorous standard models to calculate capital requirements to cover market risk; • an additional capital buffer for institutions considered to be of systemic global importance in the context of the financial leverage ratio; • un 'output floor', or minimum level for capital requirements calculated based on internal models, equivalent to 72.5% of the level calculated based on standardised methods. Applying this minimum capital requirement level will help reduce excessive variations in RWA calculations, thus promoting transparency and fair competition between credit institutions. These reforms will take effect on 1st January 2022. The new rules will be applied gradually by means of a five-year transitional scheme. It was also announced last December that the Basel Committee had completed its review of the regulatory treatment of exposures to sovereign debt; the Committee published a discussion paper on this topic. However, because no consensus was reached on whether to revise the treatment currently in force (which therefore remains unchanged at present), the Committee elected not to open up the potential regulatory options illustrated in the paper for public consultation.
Tax Aspects
Numerous fiscal measures were introduced in Italy during the year. The most significant of these are contained in Decree Law No. 50 of 24th April 2017, converted with amendments into Law No. 96 on 21st June 2017, as well as in two pieces of legislation that together make up the government's budgetary manoeuvres for 2018: Decree Law No. 148 of 16th October 2017 (converted with amendments into Law No. 172 on 4th December 2017) and Law No. 205 of 27th December 2017 (the Budget Law for 2018).
Decree Law No. 50 of 24th April 2017 “Urgent measures on finance, initiatives to help local authorities, further action for areas hit by earthquakes and measures for development” This decree, converted with amendments into Law No. 96 of 21st June 2017, contains several provisions concerning financial institutions. The following aspects of this legislation should be noted in particular: - the subjective scope has been extended for applying the special 'split payment' mechanism to make VAT payments to the tax authorities. As from 1st July 2017, this mechanism will also apply to sales of
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goods and services to companies listed on the FTSE-MIB index of the Italian Stock Exchange and, therefore, to UBI Banca SpA, the only Group company subject to the 'split payment' provisions. This change brought about a need to adjust IT procedures to the new law, based on the indications provided in the implementation decree issued on 27th June 2017; - the time limit allowed by law to deduct VAT paid on goods and services purchased has been reduced. Due to these changes, which apply only to invoices and customs declarations issued on or after 1st January 2017, the right to deduct VAT may only be exercised in the VAT declaration for the same year in which that right arises; - stricter rules for tax credit compensations have also been introduced, in an effort to prevent undue compensation; - revisions in the rates applied to increases in corporate equity for the purpose of calculating ‘allowance for corporate equity' (ACE) concessions; - the scope of jurisdiction has been extended, on notifications sent as from 1st January 2018, for claims and mediation on tax disputes for amounts not exceeding €50,000; - outstanding tax disputes of any status with the Italian Tax Office where an introductory appeal was submitted by 24th April 2017, including those pending with the Court of Cassation even if following a deferment, may be settled for a reduced amount (not including fines and interest on arrears); - a tax credit has been introduced, as from 2018, for businesses that invest in advertising campaigns in daily newspapers, periodicals, and/or local radio and television networks, under certain terms and conditions; - the deadline for suspending income tax withholdings on employees who are residents of the towns affected by the earthquakes of 2016 and 2017 has been extended to 31st December 2017; - transfer pricing regulations have been amended, eliminating the need to adhere to the domestic normal value criteria in the measurement of income components relating to transactions made with non-resident parties who either directly or indirectly control a resident company, are controlled by them, or are controlled by a party which in turn also controls the resident company; - some practical fiscal aspects of Individual Savings Schemes (ISS), introduced in the 2017 Budget Law, have been better clarified.
Decree Law No. 148 of 16th October 2017 ("Urgent fiscal measures for immediate funding needs") This decree, converted into law (No. 172/2017) with amendments on 4th December, contains various different measures pertaining to credit institutions. The following aspects of this legislation should be noted in particular: - the possibility of closing outstanding tax burdens included in registers assigned to collection agents, without having to pay fines, interest on arrears or additional sums on pension contributions, has been reintroduced. This pertains to registered burdens assigned to collection agents between 2000 and 2016 that have not previously been defined, as well as those assigned between 1st January and 30th September 2017; - the reporting of data contained in invoices issued and received (for the 'VAT spendometer') has been simplified: once in full effect, this data may be reported on a semi-annual basis instead of quarterly, and cumulative summary documents may be sent for data on invoices for under €300; - the subjective scope for applying the special 'split payment' mechanism for VAT has been extended further: for transactions invoices as from January 2018 and for companies listed on the FTSE-MIB index of the Italian Stock Exchange (which includes UBI Banca SpA), the split payment will apply wherever the counterparty is identifiable for VAT purposes in Italy; - it has been clarified that the tax credit introduced in Decree Law No. 50 of 24th April 2017 – for companies that invest in advertising campaigns in daily newspapers, periodicals and/or local television and radio – may be claimed as from 2017 (assuming that significant advertising expenses were incurred between 24th June and 31st December 2016) and that this credit does apply to investments in online advertising; - it was clarified that the fiscal provisions contained in the Third Sector Code in Legislative Decree No. 117 of 2nd August 2017 will come into force in January 2018, when the previous regulations are no longer applicable. Based on the new regulations, donations in cash or in kind made by companies to third sector institutions are deductible for corporate income tax purposes in the amount of up to 10% of total gross income declared, while amounts in excess may be carried over to subsequent fiscal years but no later than the fourth year. Furthermore, in order to encourage funding and support for the socially beneficial activities performed by third sector institutions, credit institutions may issue specific 'solidarity bonds' exempt from placement fees. Issuers of such solidarity bonds may make donations to third sector institutions in proportion to the nominal bond amount issued; if these donations are at least 0.60% of that amount, then they are allowed a tax credit for 50% of the donation amount. Also in the non-profit sector, Legislative Decree no. 112 of 3rd July 2017 reformed the notion of 'social business' pursuant to Law No. 18 of 13th June 2005 and Legislative Decree No. 155 of 24th March 2006, introducing significant fiscal measures designed to promote and develop such businesses, such as a 30% corporate income tax deduction on amounts invested in corporations that have acquired social business status as from 21st July 2017 and at that date had not been
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established for more than 36 months, for a maximum deductible investment of €1.8 million per fiscal year, while the investment must be maintained for at least three years); - a procedure has been introduced to legalise assets held abroad in violation of fiscal monitoring obligations for residents of Italy who previously resided abroad and were officially registered as foreign residents, or continuously worked abroad in border areas or in bordering countries. This amnesty procedure pertains to financial assets that have not been declared in income tax returns, were held in current accounts or savings accounts abroad as at 6th December 2017, and were obtained from employed or self-employed work, as well as assets deriving from the sale of property owned in the foreign country where the work was performed. In order to legalise these assets, including related income, a payment must be made equal to 3% of the value of the assets as at 31st December 2016, for taxes, fines and interest. Asset legalisation requests must be submitted by 31st July 2018; - it has been established that electronic VAT registers for invoices issued and for purchases are to be considered legitimate even if they are not accompanied by transcriptions on paper within the legal time limit, as long as whenever these registers are accessed, inspected or verified, they are found to be up-to-date in electronic systems and can be printed upon request by the inspectors.
Law No. 205 of 27th December 2017 "Government Budget Forecast for 2018 and Three- Year Budget for 2018-2020" (the 2018 Budget Law) The notable changes introduced in the 2018 Budget Law are as follows: - ‘safety’ clauses, which would otherwise have triggered automatic increases in VAT rates as from 1st January 2018, have been deactivated. As a result, VAT rates will remain at 10% and 22% for all of 2018, to then increase gradually in subsequent years; - corporate and personal income tax deductions on expenses incurred for building energy efficiency works (the 'eco-bonus' deduction) has been confirmed for all of 2018. This incentive can be used in the same way as in 2017, with deductions of either 65% or 50% of the costs incurred, depending on the type of works. New types of works eligible for deductions have been added, such as purchasing and installing micro-cogenerators and combustible biomass heat generation systems. A greater deduction of 80-85% is granted on works in common areas of condominiums located in areas of high seismic activity, for the purpose of encouraging both energy upgrades and reducing earthquake damage risk by one or two risk classes; - the 50% personal income tax deduction on expenses incurred for residential building renovations, and for furniture purchased in relation to such renovations, has been confirmed for all of 2018. The conditions for using this incentive are the same as in 2017; - incentives for investments in capital goods (the 'super-depreciation' measures) have been extended for all of 2018, as have the 'hyper-depreciation' incentives encouraging businesses to make the technological and digital transition to 'Industry 4.0'. The 'super-depreciation' has been set at 30% of the purchase price of the goods, while the 'hyper-depreciation' remains 150% of the purchase price. The 'super-depreciation' incentive still excludes company vehicles, while for the 'hyper-depreciation', a 40% incentive has been confirmed even for the purchase of intangible fixed assets that serve to help companies complete the technological and digital transformation; - a tax credit has been introduced for companies that incur expenses in 2018 for employee technological training as outlined in the national Business 4.0 plan. This tax credit is granted on 40% of the hourly personnel expense for staff members occupied in such training, up to a maximum amount of €300,000 per beneficiary; - it has been stipulated that Individual Savings Schemes (ISS) may invest in financial instruments issued by companies that conduct real estate businesses; - it has been agreed that tax breaks pursuant to Article 15 of Decree Law No. 185 of 29th November 2008 may be claimed on purchases of controlling equity stakes in companies that do not have their tax residence in Italy, as from fiscal year 2017. Based on this rule, recognition of 'realignment' is permitted for tax purposes, via the payment of a substitute tax on the incremental value attributed on the balance sheet to goodwill, trademarks and other intangible fixed assets as a result of extraordinary operations such as mergers and acquisitions; - Article 20 of Presidential Decree No. 131 of 26th April 1986, regarding the fiscal interpretation of official deeds and records brought for registration, has been reformulated, now stipulating that registration tax must be applied based on the nature and legal effects of the documents themselves, regardless of documents related to them. Any tax benefits obtained may be assessed as potential misuse of the law; - a specific tax regulation has been formulated for capital gains from the sale of shares offered to employees as an alternative to productivity bonuses, which are subject to a substitute flat tax: the taxable capital gain is equal to the price at which the shares were sold minus the value of the alternative bonus; - in 2019, a standard mandatory electronic invoicing system will be introduced for VAT entities resident in or effectively established in Italy, to be transmitted through the Italian Tax Office's Interchange System. Also as from 2019, it will be mandatory to provide the Italian tax authorities with the relevant information pertaining to transactions made with foreign counterparties that are not documented with a bill of export or transmitted through the electronic interchange system;
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- entry into force of fiscal reliability indicators, which will gradually replace the old "sector of activity studies", has been postponed to fiscal year 2018; - the deadline to submit the Income, IRAP and 770 tax return forms for fiscal year 2017 has been set for 31st October 2018; - European Court of Justice indications contained in Judgement No. C-7/13 of 17th September 2014 have been accepted and adopted: in light of this ruling, transactions between a parent company and one of its stable foreign organisations are to be considered significant transactions for VAT purposes if at least one of the two is part of a VAT group; - as from 1st March 2018, invoice payments due from Italian public bodies will be blocked for amounts over €5,000, for a period of 60 days, in cases where the tax authorities have registered tax arrears against the beneficiary; - the tax authorities have been given the option of suspending, for up to 30 days, execution of payments via form F24 in cases where the tax credit amounts declared to reduce the amount paid present a certain level of risk; - individuals and non-commercial institutions continue to have the option of redetermining the fiscal cost of purchasing land and unlisted equity stakes held as at 1st January 2018, by paying a substitute tax; - taxation has changed on unearned income and other income from qualified equity shares held by individuals outside of their business activities. Such income is now subject to a flat substitute tax rate of 26%, which is the rate already in place on income and capital gains from non-qualified equity shares. The new rate will be applied to amounts received as dividends from 1st January 2018 onwards, while for other income the new rate will be applied to capital gains realised from 1st January 2019 onwards. Income from qualified equity stakes generated up until 31st December 2017, for which dividend distributions may be approved up until 31st December 2022, will remain subject to the previous tax rate; - amendments have been made to taxation rules on dividends from shares in subsidiary or associate companies with tax residence in countries or territories classified as tax havens: 50% of the amount of such dividends will not be considered income of the recipient company or institution only if it is demonstrated, via consultation or otherwise, that the non-resident company effectively runs an industrial or commercial business as its main activity within its tax haven country of residence. An accrual criterion has also been introduced in order to verify whether the income derives from companies with tax residence in countries or territories classified as tax havens, by stipulating that the earnings received from 2015 onwards, having accrued in previous years, are considered to have come from tax havens if the foreign subsidiary or associate was located in that country or territory during the time those earnings accrued, regardless of the location at the time they were distributed. This criterion applies to earnings accrued from fiscal year 2015 onwards. For the purpose of this rule, a country is classified as a tax haven if its nominal tax rate is at least 50% lower than the applicable rate in Italy; - the notion of 'stable organisation' for the purpose of income tax has been redefined: a stable personal organisation exists when an individual physically operates within a country on behalf of a non- resident company and regularly concludes contracts, or seeks to do so, without any substantial changes by the non-resident company; - a tax on digital transactions, or 'web tax', has been instituted for services provided by electronic means to Italian residents (including to stable organisations in Italy operating on behalf of non- resident companies), who act as withholding agents. This tax, which will be applied to service providers that during a calendar year execute more than 3,000 transactions, will be equal to 3% of the value of each transaction, regardless of where the transaction takes place. The withholding will be carried out by the customer when payment is made.
Ministry of Economy and Finance Decree of 23rd February 2017 on country-by-country reporting This decree implements the provisions contained in Law No. 208 of 28th December 2015 (Legge di stabilità 2016, the 2016 'Stability Law' or annual finance law), which introduced country-by-country reporting provided for at OECD level, into Italian law. As from 2017, multinational groups of companies must provide the Italian tax authorities with specific quantitative information about their transnational activities. In turn, the Italian tax authorities must send the information received to the tax authorities of the other EU member states. When fully in place, country-by-country reporting will allow the various financial administrations rapid access to concise, quantitative data on multinational groups, thereby improving the process of assessing risks related to transfer pricing and the use of resources available in monitoring activities. On 28th November and 11th December 2017, the Director of the Italian Tax Office issued two provision to complete the country-by-country reporting system. Specifically, the first provision contains the instructions and deadlines for sending annual country-by- country reports. In the second provision, the tax authorities clarified that notifications on the taxes and activities of multinational groups for the first year of reporting (i.e., for the fiscal year beginning 1st January 2016 or later and ending before 31st December 2016) are considered validly submitted if sent to the tax authorities within 60 days of 11th December 2017.
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Tax Office Director's Provision No. 47944 of 9th March 2017 on implementation of the financial transactions tax (FTT), and Tax Office Director's Provision No. 294475 of 15th December 2017 approving the FTT form for financial transactions tax filings Provision No. 47944 of 9th March 2017 concerns regulations for the tax on financial transactions, such as transfers of shares and other equity instruments, transactions on derivatives and other securities, as well as high-frequency trading, providing details on return filing obligations and the relative necessary practical obligations related to the management of the tax itself. The implementation measures introduced by this provision include a new obligation to register, as from 1st June 2017, most transactions that are exempt or excluded from the financial transactions tax, in specific registers envisaged under the regulation in question. Due to these changes to the financial transactions tax, the UBI Banca Group was required to update its IT systems. Provision No. 294475 of 15th December 2017 approved the FTT form for financial transactions tax filings. The new form replaces the previous one as from 1st January 2018 and takes into account the amendments to transaction statements established in the 9th March 2017 Tax Office Director's Provision. On 19th December 2017, lists of the companies residing in Italy that are issuers of shares traded on regulated markets or multilateral trading systems, with average capitalisation of under €500 million in November 2017, were published on the Ministry of Economy and Finance website. Transactions in the shares of those companies are exempt from the financial transactions tax in 2018.
Tax Office Director's Provision No. 101573 of 26th May 2017 on co-operative compliance This provision implemented the measures on cooperative compliance introduced under Legislative Decree No. 12 of 5th August 2015. In particular, the provision stipulates the procedures and means by which communications must take place between taxpayers and the tax authorities. Adherence of UBI Banca to co-operative compliance procedures is not possible at present due to the size limits set for access to this regime.
QI, FATCA regulations and automatic exchange of tax information at international level Qualified Intermediary (QI) – As from 2017, under the QI contract, some payments equivalent to dividends coming from a USA source are subject to a 30% US withholding tax. The withholding may be reduced from 30% to 15% if the recipient is a resident of Italy, that is, duplicate withholdings may be avoided, by taking up the role of Qualified Derivative Dealer (QDD), although this entails rather substantial administrative and procedural expenses. Due to the magnitude of costs associated with the QDD role and the limited scope of business affected, UBI Banca and IW Bank (the only Group companies potentially interested in this matter) decided not to take up the role of QDD. FATCA (Foreign Account Tax Compliance Act) – In a Provision issued on 23rd March 2017 by the Director of the Italian Tax Office, the deadline to submit FATCA notifications for 2016 was extended from 30th April to 31st May 2017, on account of the changes made to the FATCA forms by US tax authorities. INFORMATION EXCHANGE – Provision of the Director of the Tax Authorities No. 125650 of 4th July 2017 set a deadline of 21st August 2017 for filing notifications with the Tax Authorities on financial accounts for withholding taxes relating to customers resident for tax purposes in (or also in) countries other than Italy, according to the Common Reporting Standard (CRS). The provision also defined details of the CRS form to be used to file that notification.
Tax Office Director's Provision No. 270335 of 23rd November 2017 approving the filing form for the substitute tax on medium/long-term financing transactions This provision approves the form drafted for filings on the substitute tax due for medium/long-term financing transactions, which must be filled out pursuant to Article 20 of Presidential Decree No. 601 of 29th September 1973. Decree Law No. 193 of 22nd October 2016, converted with amendments into Law No. 225 of 1st December 2016, changed the rules for filing and paying the substitute tax on financing transactions, stipulating that a statement must be filed annually, within four months of the end of the period of reference (i.e., by 30th April if the financial year coincides with the calendar year), and that the filing is not valid unless completed on a form that is keeping with that approved by the Director of the Italian tax Office. These measures are to be applied starting with transactions executed in 2017. The above provision also stipulates that payment of the tax must be made via self-assessment by the filing deadline (i.e. by 30th April of the subsequent year if coinciding with the calendar year) for the balance due plus a first deposit on tax for the following year, while a second deposit is due within six months of the filing deadline (by 31st October if coinciding with the calendar year).
Tax Office Director's Provision No. 305134 of 28th December 2017 approving the form for declarations of succession and land registry transfer requests This provision approves a new electronic form for declarations of succession and requests for land registry transfers, replacing the form previously in use; the new form may be used as from 15th March 2018, for successions opened no earlier than 3rd October 2006. The paper form may still be used until
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31st December 2018. With regard to electronic declarations of succession submitted using the new form, a certificate for proof of submission may be requested once the stamp duty and special tax have been paid. This proof of submission is made available to users who have submitted the form, after it has been verified that the payment has been made and the form has been filled out correctly.
Tax Office Director's Provision No. 306346 of 29th December 2017 approving the form for statements regarding stamp duties paid electronically and establishing how to exercise the electronic stamp duty payment option for banker's drafts This provision approves the form for statements regarding stamp duties paid electronically. With the new form, the option of paying stamp duties on banker's drafts electronically can be exercised, as an alternative to the traditional statement and payment methods. The new form replaces the one previously in use as from January 2018.
European Court of Justice Judgements on 21st September 2017 on Cases C-326/15 and C-605/15 regarding exemption from VAT of services provided by independent associations of persons to their members In these judgements, the ECJ examined Article 132(1)(f) of Directive 2006/112/EC, which exempts from VAT services provided by independent associations of persons who are carrying out activities exempt from VAT or in relation to which they are not taxable persons. The Court clarified that this exemption pertains only to associations of persons operating in sectors of activity that are in the public interest (these sectors are listed in the same Article 132) and thus does not include the sectors of activity listed in Article 135 of the same Directive, or "exemptions for other activities", which among other activities cites credit, banking, financial and insurance activities. The exemption stipulated in Article 132(1)(f) of Directive 2006/112/EC had been adopted by Italy under Article 10, paragraph 2 of Presidential Decree No. 633/1972 on services provided by associations or cooperative companies in favour of their own associates or members. In light of the interpretation of the law given by the European Court of Justice, the Italian law appears to be inconsistent with the EU law in the area of services provided by cooperatives to their members in cases where the cooperatives operate in the banking, financial or insurance sectors. Therefore, the Italian legislature will need to amend the law.
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The circulars worthy of mention issued in 2017 are as follows: • Circular 4/E/2017: the Italian tax authorities clarified certain aspects of the 'super-depreciation' and 'hyper-depreciation' tax incentives; • Circular 16/E/2017: following reforms of the sanctioning system for reverse accounting VAT regime, the tax authorities specified operational details on this matter; • Circulars 27/E/2017 and 28/E/2017: in two procedural documents, the tax authorities illustrated some aspects of the 'split payment' system, which applies to UBI Banca as from 1st July 2017; • Circular 30/E/2017: the tax authorities provided clarifications and operational instructions regarding claims and arbitration applicable to tax disputes for amounts not exceeding €50,000.
Investor relations and external communication
Relations with investors, handled by a specialist area at UBI Banca, are covered in the separate UBI Banca Management Report, in the section entitled “Share performance and shareholder structure”. Relations with the media are handled by the same unit, which also takes care of planning and organising institutional events and corporate sponsorships by the Parent, as well as supporting the communications activities of Group companies. For complete information on communications activities carried out in 2017, please see the “Consolidated non-financial statements pursuant to Decree Law No. 254 of 30th December 2016 (Sustainability Report)”, published along with the present Report.
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The “Italian Responsible Payments Code”
The UBI Banca Group has adhered to the “Italian Responsible Payments Code” organised by Assolombarda (Lombard employers’ association) since 15th October 2014. As a consequence, the Group is committed to rigorously complying with the terms and conditions of payment agreed in each purchase contract. At present UBI Banca Group suppliers have signed contracts involving payment terms ranging from a minimum of upon receipt of invoice to a maximum of 90 days from the invoice date, with the latter accounting for a negligible 0.13% of the total. The average days payables outstanding to suppliers in 2017 was approximately 29.7 days.
Social and environmental responsibility
The UBI Banca Group pursues policies oriented towards the creation of sustainable value, in compliance with the values and principles set out in its Charter of Values and Code of Ethics and with the ethical, social and environmental expectations of its stakeholders. It does this through a strong and distinctive corporate identity, the pursuit of a climate of trust with its staff, its shareholder base and markets and through its robust control of risks, including reputational risks. For more details on the Group's social and environmental responsibility, please see the “Consolidated non-financial statements pursuant to Decree Law No. 254 of 30th December 2016 (Sustainability Report)”, published along with the present Report.
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Principal risks and uncertainties to which the UBI Banca Group is exposed
Risks
The UBI Banca Group attributes primary importance to the measurement, management and monitoring of risk, as activities necessary to the sustainable creation of value over time and to the consolidation of its reputation on its markets. Consequently, it has a system of risk governance and management in place which takes account of organisation, regulations and methods in order to ensure consistency in its operations and its relative risk appetite (RAF - Risk Appetite Framework). More specifically, the Group has defined a risk management framework consistent with Group regulations and strategies which has evolved over the years, consistent with developments in the regulatory framework. The main parts of the current structure regard the following: • the definition of the risk appetite (Risk Appetite Statement - RAS); • definition of the framework to verify future risk as an integral part of the strategic planning process; • definition of the stress test framework; • definition of risk management policies; • definition of RAF-related methodologies; • definition of the non-viability risk management framework associated with the Group Recovery Plan; • interpretation and management of the RAF in Group companies; • definition of the framework and criteria for the identification of transactions of greater significance (TGS). • definition of the risk monitoring and self-assessment framework from an SREP viewpoint.
Articles 97 and following of Section III of Directive 2013/36/EU (“CRD IV”) regulate the Supervisory Review and Evaluation Process (SREP), and that is the regulatory control, review and assessment process for which the supervisory authority is responsible by which it formulates an overall opinion on the bank and institutes corrective measures if necessary. To achieve this, in accordance with Art. 107 (3) of CRD IV, the European Banking Authority (EBA) has published “Guidelines”1 with the objective of generating procedures and methodologies common to the competent authorities in order to support the Supervisory Review and Evaluation Process (SREP).
Internal processes make a considerable contribution to the calculation and assessment of capital adequacy (Internal Capital Adequacy Assessment Process – ICAAP) and liquidity adequacy (Internal Liquidity Adequacy Assessment Process – ILAAP) and on the basis of these the Group carries out a self-assessment each year focused on identifying risks and the conditions of its current and future capital and liquidity adequacy including under stress conditions2.
With regard to these processes, very careful identification of risks to be subjected to measurement is carried out on a continuous basis Risk identification activity is designed to verify the magnitude of risks already subject to measurement and to detect signals of other types of risk which may manifest. Identification involves precise conceptual definition of the risks to which the Group is exposed, an analysis of the factors which combine to generate
1 Cf “Guidelines – on common procedures and methodologies for the supervisory review and evaluation process (SREP)”, EBA/GL/2014/13 of 19th December 2014 These guidelines are currently being revised. See in this respect the document “Consultation on Guidelines for common procedures and methodologies for SREP”, EBA/CP/2017/18 of 31st October 2017. 2 Cf Final Report “Guidelines on ICAAP and ILAAP information collected for SREP purposes”, EBA/GL/2016/10 of 3rd November 2016.
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them and a description of the relative manner in which they manifest. This activity is achieved by means of a centralised process of analysis supplemented by self-assessment conducted on all the entities of the Group.
Once the activity to identify significant risks is completed, the ICAAP process involves measuring the risks to which internal capital is attributed and calculating the “available financial resources” (AFR)3 required to meet them (capital adequacy), both at present and in the future. Use is also made of specific (by assessing impacts on a single risk) and global (by assessing impacts on all risks at the same time) stress tests to perform a better assessment of exposure to risk and of systems for mitigating and monitoring it and calculating capital requirements.
In consideration of its mission, its operations and also the market context in which it operates, the risks to be subjected to measurement in the ICAAP and ILAAP assessment processes have been identified and divided into the categories: First Pillar and Other Pillar risks.
First pillar risks – already managed under the requirements of supervisory regulations – are as follows: • credit risk: the risk of incurring losses resulting from the default by a counterparty with whom a position of credit exposure exists. This also comprises counterparty risk in the definition, which constitutes a particular type of credit risk. It is the risk that a counterparty to a transaction defaults before final settlement of the cash flows on the transaction4; • market risk: risk of changes in the market value of financial instruments held, due to unexpected changes in market conditions and in the credit rating of the issuer5; • operational risk: the risk of incurring losses resulting from the inadequacy or malfunction of procedures, human resources and internal events or from exogenous events. This includes losses resulting from fraud, human error, business disruption, system failure, non-performance of contracts and natural disasters. Within this category information technology risk6, legal risk, and conduct risk are also measured7.
In addition to first pillar risks, other risks were identified, consisting of the following: - measurable risks, for which established quantitative methods have been identified, which lead to the determination of internal capital and which, combined with qualitative measurements, allow allocation and monitoring processes to be defined; - risks subject to quantitative limits, for which operational limits can be defined consistent with the risk appetite (of a quantitative nature and on which there is a broad consensus including in the literature, or subject to regulatory requirements) for their measurement and monitoring and mitigation. - non-measurable risks (or risks subject to assessment), for which policies and measures for control, reduction or mitigation are considered more appropriate because no established approaches exist for the measurement of internal capital that are useful for allocation purposes.
3 Available financial resources (AFR) or alternatively total capital, is defined as the sum of the capital items that the Group considers can be used to meet “internal capital” and “total internal capital” requirements. “Internal capital” is defined as risk capital, the capital requirement for a determined risk that is considered necessary to cover losses above a given expected level. “Total internal capital” is defined as internal capital required for all significant risks assumed by the Group, including possible internal capital requirements due to considerations of a strategic character. 4 Exposure to country risk (risk of losses caused by events occurring in a country other than Italy) and transfer risk (the risk that a bank, exposed to a counterparty which is financed in a currency that is different from that in which it receives its main sources of income, incurs losses due to the difficulties of a debtor in converting its currency into the currency in which the exposure is denominated) are also monitored as part of credit risk. 5 In this respect basis risk is also assessed, which represents the risk of losses caused by changes that are out of line with positions of the opposite sign, that are similar but not identical and sovereign risk which regards the ability, or the willingness, of a sovereign debtor to honour its payment commitments. 6 The increasingly more determining role played by Information and Communication Technology (ICT) systems in achieving long-term business and strategic objectives has shown the very clear need to have more stringent controls over and more effective management of the risks associated with them. These needs have led the regulator to define specific regulatory updates in order to strengthen oversight and governance tools for the ICT system. As concerns aspects relating to the measurement and management of IT risk, the new regulatory framework has defined specific criteria based on the measurement of potential risk and on the management of residual risk. In compliance with these regulatory requirements UBI Banca Group has defined its IT risk framework as the risk of incurring economic loss and loss of reputation and market share in relation to the use of information and communication technology. This definition also includes cybercrime phenomena defined as the abuse of information technology (both hardware and software) in order to commit crimes. Within an integrated view of corporate risks this type of risk is considered according to specific aspects of operational, reputational and strategic risks. 7 Legal risk is defined as the risk of losses resulting from violations of laws or regulations, from contractual or non-contractual responsibilities or from other litigation, while conduct risk is defined as the risk of incurring the economic losses resulting from the violation of the laws and from intentional or negligent actions and/or omissions.
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The Other Risks subject to analysis are as follows8:
MEASURABLE RISKS • concentration risk: risk resulting from (i) exposures to counterparties, including central counterparties, groups of connected counterparties and counterparties in the same economic sector, in the same geographical region or who carry on the same activity or deal in the same goods and (ii) the application of credit risk mitigation techniques including, in particular, risks resulting from indirect exposures such as for example with regard to single suppliers of guarantees; • interest rate risk arising from activities other than trading: the current or future risk of a change in net interest income and in the economic value of the Group following unexpected changes in interest rates which have an impact on the banking book; • business risk: the risk of adverse and unexpected changes in commission margins with respect to forecasts, connected with volatility in volumes of business due to competitive pressures and market conditions; • equity risk: the risk of losses incurred in equity investments that are not fully consolidated on a line- by-line basis. • fixed asset risk: the risk of changes in the value of the tangible fixed assets of the Group; • insurance risk: the risk associated with the uncertainty over the amount and timing of commitments of an insurance nature relating to the activities of the insurance companies; • risks resulting from securitisations: the risk that the underlying economic substance of a securitisation is not fully reflected in decisions made to measure and manage risk.
RISKS SUBJECT TO QUANTITATIVE LIMITS • liquidity risk: the risk of the failure to meet payment obligations which can be caused either by an inability to raise funds or by raising them at higher than market costs (funding liquidity risk), or by the presence of restrictions on the ability to sell assets (market liquidity risk) with losses incurred on capital account9; • excessive leverage risk: the risk that too high a level of debt with respect to its own funds would make a bank vulnerable thereby making the adoption of corrective action to its business plan necessary, inclusive of the sale of assets with the realisation of losses, which could result in the recognition of impairment losses on the remaining assets; • asset encumbrance risk: risk associated with encumbered assets, resulting from potential ownership claims to these assets by a third party non-owner, which could have an impact on the transferability and use of these assets.
NON-MEASURABLE RISKS, (OR RISKS SUBJECT TO ASSESSMENT) • compliance risk: the risk of incurring legal or administrative penalties, substantial financial losses or damage to reputation resulting from violations of laws and mandatory external regulations or internal regulations (by-laws, codes of conduct and voluntary codes); • reputational risk: the present or future risk of incurring loss of profits or capital resulting from a negative perception of the image of a bank by customers, counterparties, shareholders of the bank, investors or supervisory authorities; • residual risk: the risk that established methods of mitigating credit risk used by a bank are less effective than expected; • strategic risk: the current or future risk of a fall in profits or in capital resulting from changes in the operating context, errors in corporate decision-making, inadequate implementation of decisions, failure to react to change in a competitive environment.
Details are given below of risks which have significant impacts for the UBI Banca Group and the action taken to mitigate them. It is considered that risks other than those reported below, which are of marginal importance within the Group, will not change during the course of the year.
8 In addition to the risks described in this sub-section, we report that money- laundering and finance of terrorism risk, the issuance of covered bond risk and connected party risk are also governed by internal regulations. 9 Liquidity risk as defined above also comprises consideration of medium to long-term (structural) risk resulting from a mismatch between the sources of funding and lending.
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Credit risk
Credit risk, which consists of the risk of incurring losses resulting from the default of counterparties with whom credit exposure exists, constitutes the most important characteristic risk of the UBI Banca Group. On a historical basis it absorbs over 90% of the regulatory risk capital. The Group has always considered the quality of its loan portfolio and efficient management of non-performing loans to be one of its top strategic priorities. In this sense, the development of credit monitoring and credit recovery models has produced a profound organisational overhaul in terms of processes and support instruments and it has allowed the Group to come to terms with the difficult economic environment existing in recent years. The main strengths included the following: • making the credit process more robust by means of organisational initiatives designed to oversee credit quality and the management of problem and bad loans. More specifically, a new problem loan model has been in operation since 2017 which involves centralised management, not only of bad loans but also of unlikely-to-pay loans with reporting direct to the Chief Lending Officer; • the definition and introduction of strategies for the grant, management and monitoring of loans customised by type of customer on the basis of the level of risk and sector outlook, as well as by means of innovative digital support in credit areas in order to support the growth of lending with high standards for the selection of credit quality; • the development, as support for the new credit governance model (divided into “Performing Processes” and “Non-performing Processes”), of a new reporting system (a “Credit Control Framework”) which allows data to be presented in a standardised manner with an adequate level of detail and showing divergences from budget figures, Strategic NPL Plan figures and Business Plan figures; • improvement of the credit recovery model by refining the rules for the dividing positions into portfolios for customers classified as “bad loan” status in order to render the management of these positions by credit recovery units faster and more effective.
In 2018, in accordance with indications contained in the 2017-2020 Business Plan, the UBI Banca Group intends to further develop its infrastructure to support activities to manage loans through the different stages of their life cycle by means of specific intervention designed to: • integrate corporate processes and procedures to adapt them to regulatory changes resulting from new guidelines issued by the European Central Bank (ECB) and the European Banking Authority (EBA); • further improve the efficiency of the monitoring process for performing positions by introducing further new early warning indicators designed to intercept customer problem events as early as possible to the benefit of performing loan monitoring; • to further support the growth of loans with high standards of credit quality selection by monitoring loan grant strategies that are customised by type of customer, based on the level of risk and on recently introduced sector outlooks; • to make the credit process even more effective, with particular reference to “regularising” non-performing positions by means, amongst other things, of the recent introduction of centralised Problem Loan Management (unlikely-to-pay loans); • to further optimise the credit recovery model by taking IT action designed to render both administrative and management activities more efficient.
Business risk
The current scenario of a slow and moderate economic recovery is continuing to influence operating conditions in the banking sector, against a backdrop of a strongly expansionary monetary policy in a scenario of continuously falling interest rates, now at minimum levels. In this context there is strong competition on prices with regard to the loans granted by banks
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which is heightened following access to forms of funding regulated by the European Central Bank (i.e. Targeted Longer Term Refinancing Operations - TLTROs). The macroeconomic environment, the extreme volatility on markets and the pressure of competition resulting from the substantial liquidity flooding credit markets has compressed margins and the profitability of operators. The UBI Banca Group is therefore continuing to take appropriate action on its distribution network designed to achieve goals identified in terms of volumes and pricing of loans consistent with targets set for the quality of credit and for risk-adjusted profitability and in terms of increasing the contribution from the fee and commission income, especially with regard to assets under management and under custody.
Sovereign risk
The Group’s sovereign risk exposure continues to be concentrated in Italy consisting of national government securities10. As concerns this risk in the banking book, the UBI Banca Group is taking action to increase portfolio diversification and to gradually reduce concentration in accordance with the goals and strategic guidelines set out in the Business Plan, which was updated after the acquisition of the New Banks. The Group’s securities portfolio has been reduced and diversified precisely by decreasing the concentration in Italian government securities over the course of the Business Plan.
Uncertainties
An uncertainty is defined as a possible event for which the potential impact, attributable to one of the risk categories just mentioned, cannot be determined and therefore quantified at present.
The Group is operating in a scenario in which growth expectations are confirmed as favourable, but which is nevertheless overshadowed by specific risk factors that are potentially negative for growth. These factors of uncertainty could manifest with impacts attributable primarily to credit, but without affecting the capital strength of the UBI Banca Group.
In detail, the main uncertainties identified for 2018 are linked to the following aspects: - developments in the macroeconomic situation. The statistics published in recent months – which are to be interpreted against a global macroeconomic backdrop of uncertainty that is less than that of last year, – have shown a pace of expansion in the world economy that is increasing. In this regard, a mature phase of the economic cycle is progressively being reached, especially in the USA, but it does not yet seem to be matched by an adequate trend for inflation. As more specifically concerns the euro area, the consolidation of growth which is being confirmed, is leading to a progressive reduction in the differences between individual national realities. Final figures issued by Eurostat for the third quarter of 2017 showed GDP up 0.6% quarter-on-quarter and 2.6% year-on-year (compared with +0.7% quarter-on-quarter and +2.3% year-on-year in the previous quarter). The contribution from domestic demand was certainly positive, while that from net exports was only marginal due to the international appreciation of the euro. For investments, which were also significant, the extremely low interest rates guaranteed by the ECB remain essential, notwithstanding the process to reduce extraordinary stimuli. As concerns Italy, the final figure for third quarter GDP in 2017 showed growth of 0.4% quarter-on-quarter and of 1.7% year-on-year (the highest since the second quarter of 2011). This statistic, which is the result above all of expansion in sectors in industry and services, is very reassuring in terms of the details of the components: investments in machinery accelerated strongly to record an increase of 6% quarter-on-quarter and domestic consumption, which although not accelerating, maintained the average performance seen over the last two years. Nevertheless, significant structural problems remain, one of which is a still weak labour market, which could
10 See the sub-section “Exposure to sovereign debt risk” in the section “Financial Activities” of this report for details of the value of sovereign debt risk exposures.
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penalise the rate of growth in the medium to long-term compared with the rest of the eurozone. The Italian growth rate is therefore forecast to stand at a level close to 1.5% year- on-year; - political developments. Against a generally favourable backdrop we report the presence of certain risk factors for the main scenario resulting from the following: (i) still unsolved political and geopolitical problems, where the non-European geopolitical risks are definitely the most serious (USA-North Korea relations and tensions in the Middle East), while European variables are progressively losing their importance (Brexit); (ii) the progressive impact of the elimination of extraordinary stimulus measures by some major central banks; (iii) changes in the trade balances between major international partners. On the Italian scene, considering the question mark hanging over the result of the elections in coming months, it must be underlined that the most accredited hypothesis of a weak coalition government should not have significant repercussions on the national economy, especially in an expansionary global and European context. Nevertheless, it will be necessary to continue with reforms and respect for commitments made towards EU, because otherwise growth prospects and the disappearance of ECB quantitative stimulation could cause spreads to widen. In this respect the scenario would change radically if autonomous political forces with regard to the EU came to the forefront and did not soften their relative programmes. - developments in the regulatory framework. The regulatory context is subject to various processes of change following both the issue of a number of regulatory provisions at European and national level, with the introduction of the relative regulations to implement them, relating to the provision of banking services and also the related legal recommendations. This scenario requires particular effort both in terms of interpretation and implementation and has at times directly affected the profits of banks, and/or costs for customers. The UBI Banca Group continuously studies action designed to pursue the greatest efficiency in its internal processes. With regard to aspects of immediate and future importance, we confirm the adoption of the new IFRS 9 financial reporting standard from the beginning of 2018 and proposals to amend supervisory regulations with potential impacts on capital adequacy. As regards the management of non-performing loans (NPLs), we report the uncertainty over the contents that will be defined as part of the addendum to the ECB NPL guidance. Proposals have also emerged concerning the following: - the revision of the calculation of regulatory requirements with the objective of greater alignment at European level of some regulations through the reduction of national discretion and changes to internal models relating to credit risk by the supervisory authorities. In this respect we report an ECB initiative commenced at the end of 2015 and to be concluded by the end of 2019 consisting of a “Targeted Review of Internal Models” (TRIM) designed to assess the compliance of internal models currently in use by banks with regulatory requirements, as well as their reliability and comparability. The proposals could lead to changes to internal rating and LGD models with possible impacts on capital adequacy and on loan write-downs. - a revision of the Basel 3 regulatory framework concerning methods for calculating risk weighted assets, credit risk, operational risk and market risk. The definition of these rules, which fall within the “Basel 4” framework, is intended: to limit the use of internal models and return to a more stringent standard methodology for credit risk on some types of portfolio (i.e. low default portfolios) and instruments (i.e. capital instruments); to eliminate the use of internal models for the management of operational risk; and to introduce more sophisticated and stringent models, both internal and standardised, for market risk; - the revision of guidelines on stress testing and the supervisory review and evaluation process conducted by the supervisory authority (SREP)11. Operational and reputational difficulties and implementation costs could also arise from the forthcoming adoption of the new Payment Services Directive (PSD2), by the Interchange Fee Regulation (IFR) on multilateral interchange fees and by recently passed regulations governing the compounding of interest and transparency in banking (MEF Decree
11 Cf. the document “Consultation on Guidelines for common procedures and methodologies for SREP”, EBA/CP/2017/18 of 31st October 2017.
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343/2016). More specifically the PSD2 regulations involve raising levels of competition between banks and introducing a new threat of disintermediation in favour, amongst other things, of new types of competitor permitted to operate in the financial sector.
* * *
The risks and uncertainties described above were subject to a process of assessment designed, amongst other things, to examine the impacts of changes in market parameters and conditions on corporate performance. The Group does in fact possess instruments to measure the possible impacts of risks and uncertainties on its operations (sensitivity analysis and stress tests in particular), which allow it to rapidly and continuously adapt its strategies – in terms of its distribution, organisation and cost management systems – to changes in the operating context. Risks and uncertainties are also under constant observation through the implementation of the policies and regulations to manage risk adopted by the Group: policies are updated in relation to changes in strategy, context and market expectations. Periodic monitoring of policies is designed to verify their state of implementation and their adequacy. The findings of the analyses performed show that the Group is able to meet the risks and uncertainties to which it is exposed, which therefore confirms the assumption that it is a going concern.
Risks relating to health and safety at the workplace th (Legislative Decree No. 81 of 9 April 2008)
Information on the above is reported in the “Consolidated declaration of a non-financial nature prepared in accordance with Legislative Decree No. 254 of 30th December 2016 (“Sustainability Report)”, published at the same time as this report.
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Subsequent events and the business outlook for consolidated operations
Part A, Section 4 of the Notes to the Financial Statements may be consulted for significant events occurring after the end of the year.
* * *
With regard to the business outlook for operations, we report the forecasts given below on the basis of information currently available.
The trend for operating income is one of improvement compared with 2017, as a result of the effect of the following main components: • growth in net interest income as a result, amongst other things, of a further reduction in the cost of funding; • a further growing contribution from fees and commissions both with regard to asset management business and general banking business with customers.
The path taken to optimise operating expenses will continue as a result in particular of the benefits related to incentive schemes and the full integration of the New Banks, following amongst other things the relative IT migration.
It is also forecast that risk will remain particularly low in the performing portfolio, inflows of new non-performing loans will reduce and the performance of credit recovery will improve, with a consequent reduction of loan losses.
On the basis of these trends, the net normalised result for 2018 is expected to show important growth compared with the previous year.
The following is also envisaged during the course of 2018: • with the migration of Banca Teatina by the end of February, the completion of the integration of the new banks on time and within the budgeted integration costs; • the disposal of a first tranche of the portfolio of non-performing loans, within the context of the first time adoption of the international standard IFRS 9 in force from 1st January 2018.
Bergamo, 8th February 2018.
THE MANAGEMENT BOARD
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Statement of the
Chief Executive
Officer and of the
Senior Officer
Responsible for
preparing the
corporate
accounting documents
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Certification of the separate financial statements pursuant to Art. 81-ter of the Consob Regulation 14th May 1999, No. 11971 and subsequent modifications and integrations
1. The undersigned Victor Massiah, Chief Executive Officer, and Elisabetta Stegher, Senior Officer Responsible for preparing the company accounting documents of UBI Banca Spa, having taken account of the provisions of paragraphs 3 and 4 of article 154 bis of Legislative Decree No. 58 of 24th February 1998, hereby certify:
. the adequacy in relation to the characteristics of the company and . the effective application of the administrative and accounting procedures for the preparation of the consolidated financial statements during the course of 2017.
2. The model employed
The assessment of the adequacy of the administrative and accounting procedures for the preparation of the consolidated financial statements as at and for the year ended 31st December 2017 was based on an internal model defined by UBI Banca Spa and developed in accordance with the framework drawn up by the Committee of Sponsoring Organisations of the Treadway Commission (COSO) and with the framework Control Objectives for IT and related technology (COBIT) which represent the generally accepted international standards for internal control systems.
3. Furthermore, it is certified that:
3.1 the consolidated financial statements:
. were prepared in compliance with the applicable international financial reporting standards recognised by the European Community in accordance with the Regulation No. 1606/2002 (EC) issued by the European Parliament on 19th July 2002; . correspond to the records contained in the accounting books; . give a true and fair view of the capital, operating and financial position of the issuer and of the group of companies included in the consolidation.
3.2 the management report comprises a reliable analysis of the performance, operating results and position of the issuer, together with a description of the main risks and uncertainties to which it is exposed.
Bergamo, 8th February 2018
Victor Massiah Elisabetta Stegher (signed on the original) (signed on the original)
Chief Executive Officer Senior Officer Responsible for preparing the company accounting
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Independent Auditors’ Report
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Consolidated Financial Statements
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Consolidated Balance Sheet
ASSETS (figures in thousands of euro) 31.12.2017 31.12.2016
10. Cash and cash equivalents 811,578 519,357 20. Financial assets held for trading 924,475 729,616 30. Financial assets designated at fair value 92,290 188,449 40. Available-for-sale financial assets 9,861,978 9,613,833 50. Held-to-maturity investments 5,937,872 7,327,544 60. Loans and advances to banks 7,836,002 3,719,548 70. Loans and advances to customers 92,338,083 81,854,280 80. Hedging derivatives 169,907 461,767 90. Fair value change in hedged financial assets (+/-) (2,035) 23,963 100. Equity investments 243,165 254,364 110. Technical reserves of reinsurers 347 - 120. Property, plant and equipment 1,811,743 1,648,347 130. Intangible assets 1,728,328 1,695,973 of which: - goodwill 1,465,260 1,465,260 140. Tax assets: 4,170,387 3,044,044 a) current 1,497,551 435,128 b) deferred 2,672,836 2,608,916 - of which pursuant to Law No. 214/2011 1,817,819 1,956,572 150. N on current assets and disposal groups held for sale 962 5,681 160. Other assets 1,451,059 1,297,151 Total assets 127,376,141 112,383,917 Table 1: 100O|1 - NOTA1 ai “Criteri di redazione” .
LIABILITIES AND EQUITY (figures in thousands of euro) 31.12.2017 31.12.2016
10. Due to banks 16,733,006 14,131,928 20. Due to customers 68,434,827 56,226,416 30. Debt securities issued 26,014,943 28,939,597 40. Financial liabilities held for trading 411,653 800,038 50. Financial liabilities at fair value 43,021 - 60. Hedging derivatives 100,590 239,529 80. Tax liabilities: 223,397 232,866 a) current 68,565 59,817 b) deferred 154,832 173,049 100. Other liabilities 2,742,088 1,962,806 110. Post employment benefits 350,779 332,006 120. Provisions for risks and charges: 536,265 457,126 a) pension and similar obligations 137,213 70,361 b) other provisions 399,052 386,765 130. Technical reserves 1,780,701 - 140. Valuation reserves (114,820) (73,950) 170. Reserves 3,209,460 3,664,366 180. Share premiums 3,306,627 3,798,430 190. Share capital 2,843,177 2,440,751 200. Treasury shares (-) (9,818) (9,869) 210. Non-controlling interests(+/-) 79,688 72,027 220. Profit (loss) for the year (+/-) 690,557 (830,150) Total liabilities and equity 127,376,141 112,383,917 ldi di confronto al 31 dicembre 2006 si riferiscono al solo ex Gruppo BPU Banca.ai “Criteri di redazione” .
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Consolidated Income Statement
Items figures in thousands of euro 31.12.2017 31.12.2016
10. Interest and similar income 2,261,451 2,161,121 20. Interest expense and similar (610,213) (663,230) 30. Net interest income 1,651,238 1,497,891 40. Fee and commission income 1,744,216 1,508,992 50. Fee and commission expense (197,425) (173,959) 60. Net fee and commission income 1,546,791 1,335,033 70. Dividends and similar income 13,684 9,678 80. Net trading income (loss) 122,368 69,947 90. Net hedging income (loss) (419) 415 100. Income (from disposal or repurchase of: 130,432 91,770 a) loans and receivables (47,056) (31,482) b) available-for-sale financial assets 134,996 149,014 c) held-to-maturity investments 55,937 - d) financial liabilities (13,445) (25,762) 110. Net income (loss) on financial assets and liabilities designated at fair value 12,722 (8,421) 120. Gross income 3,476,816 2,996,313 130. Net impairment losses on: (862,306) (1,695,584) a) loans and receivables (728,343) (1,565,527) b) available-for-sale financial assets (165,624) (111,643) d) other financial transactions 31,661 (18,414) 140. Net financial income 2,614,510 1,300,729 150. Net insurance premiums 155,128 - 160. Other income/expense of insurance operations (173,384) - 170. Net income from banking and insurance operations 2,596,254 1,300,729 180. Administrative expenses (2,619,278) (2,570,182) a) staff costs (1,542,463) (1,599,717) b) other administrative expenses (1,076,815) (970,465) 190. Net provisions for risks and charges (9,009) (42,885) 200. Net impairment losses on property, plant and equipment (87,971) (80,823) 210. Net impairment losses on intangible assets (68,713) (125,197) 220. Other net operating income/(expense) 319,825 306,541 230. Operating expenses (2,465,146) (2,512,546) 240. Profits of equity investments 23,391 24,136 265. Negative consolidation difference 640,810 - 270. Profits on disposal of investments 859 22,969 280. Pre-tax profit (loss) from continuing operations 796,168 (1,164,712) 290. Taxes on income for the year from continuing operations (79,176) 319,619 300. Post-tax profit (loss) from continuing operations 716,992 (845,093) 320. Profit (loss) for the year 716,992 (845,093) 330. (Profit) loss attributable to non-controlling interests (26,435) 14,943 340. Profit (loss) for the year attributable to the Parent 690,557 (830,150)
In considerazione dell’allineamento delle prassi contabili resesi necessarie a seguito della fusione tra gli ex Gruppi BPU e Bana Lombarda, nonché della variazione del principio contabile relativo ai piani a benefici definiti per i dipendenti, i
rispetto a quelli già pubosito si rimanda a quanto I Iesposto nella sezione relativa ai “Criteri di redazione” .
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Consolidated statement of comprehensive income
Figures in thousands of euro 31.12.2017 31.12.2016
10. PROFIT (LOSS) FOR THE YEAR 716,992 (845,093) Other comprehensive income net of taxes w ithout transfer to the income statement - 40. Defined benefit plans (4,637) (17,005) Other comprehensive income net of taxes w ith transfer to the income statement - 90. Cash flow hedges (272) 570 100. Available-for-sale financial assets (41,960) (315,491) 120. Share of valuation reserves of equity-accounted investees 5,919 (81) 130. Total other comprehensive loss net of taxes (40,950) (332,007) 140. COM PREHENSIVE INCOM E (LOSS) (item 10 + 130) 676,042 (1,177,100) CONSOLIDATED COMPREHENSIVE (INCOME) LOSS ATTRIBUTABLE TO NON- 150. CONTROLLING INTERESTS 26,516 (10,526) CONSOLIDATED COM PREHENSIVE INCOM E (LOSS) ATTRIBUTABLE TO THE 160. SHAREHOLDERS OF THE PARENT 649,526 (1,166,574)
Comprehensive income for the financial year 2016 does not reflect the impacts resulting from the transfer of AFS securities to the HTM portfolio carried out by the Parent.
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Statement of changes in consolidated equity
(figures in thousands of euro) to 31st December 2017
Changes during the year Allocation of prior year profit Equity transactions Reserves dividends Stock options Changes in reserves in Changes New share issues share New Balances as at 31/12/2016 at as Balances 01/01/2017 at as Balances interests as at 31/12/2017interests at as Total equity as at 31/12/2017 at as equity Total Change in equity stakes equity in Change Restatement of opening balances of opening Restatement of the Parent as at 31/12/2017 at as Parent the of Dividends and other uses other and Dividends Extraordinary distribution of distribution Extraordinary Equity attributable to non-controlling non-controlling attributable to Equity Change in equity in instrumentsChange Derivatives on treasury shares treasury on Derivatives Repurchase of treasury shares treasury of Repurchase Equity attributable to the shareholders attributable the to Equity Consolidated comprehensive income comprehensive Consolidated Share capital: 2,451,729 - 2,451,729 - - - 402,426 - - - - - 5,102 - 2,843,177 16,080 2,859,257 - ordinary shares 2,451,729 - 2,451,729 - - - 402,426 - - - - - 5,102 - 2,843,177 16,080 2,859,257 - other shares ------Share premiums 3,817,846 - 3,817,846 (493,425) - - 1,623 - - - - (2,723) - 3,306,627 16,694 3,323,321 Reserves 3,720,909 - 3,720,909 (351,668) (129,387) 1,409 (7,865) - - - - - (3,413) - 3,209,460 20,525 3,229,985 - of profits 1,810,697 - 1,810,697 (351,668) (129,387) ------1,250,070 79,572 1,329,642 - other 1,910,212 - 1,910,212 - - 1,409 (7,865) - - - - - (3,413) - 1,959,390 (59,047) 1,900,343 Valuation reserves (73,917) - (73,917) ------1 (40,950) (114,820) (46) (114,866) Equity instruments ------Treasury shares (9,869) - (9,869) - - 710 - (659) ------(9,818) - (9,818) Profit (loss) for the year (845,093) - (845,093) 845,093 ------716,992 690,557 26,435 716,992 Equity: 9,061,605 - 9,061,605 - (129,387) 2,119 396,184 (659) - - - - (1,033) 676,042 9,925,183 79,688 10,004,871 - attributable to shareholders of the Parent 8,989,578 - 8,989,578 - (107,163) 2,119 396,184 (659) - - - - (4,403) 649,527 X X 9,925,183 - attributable to non- control l ing interests 72,027 - 72,027 - (22,224) ------3,370 26,515 X X 79,688
The figures presented in this statement of changes in equity correspond to those reported in Table B.1 (Consolidated equity by type of company) contained in Details of valuation reserves: Part F of the Notes to the Financial Statements 3 1/ 12 / 2 0 16 3 1/ 12 / 2 0 16 3 1/ 12 / 2 0 17 3 1/ 12 / 2 0 17 Non- Non- Sharehol ders controllin Shareholders of controlling of the Parent g interests the Parent interests
a) available-for-sale -26,860 1 -62,939 39 b) cash flow hedge 285 0 13 0 c) foreign currency differences -243 0 -243 0 d) actuarial gains/losses -107,773 -127 -112,452 -85 e) special revaluation laws 60,641 159 60,801 0 -73,950 33 -114,820 -46
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(figures in thousands of euro) to 31st December 2016
Changes during the year Allocation of prior year profit Equity transactions
f ution o ution b istri d dividends Reserves Stock options inary inary d Changes in reserves in Changes New share issues share New Balances as at 31/12/2015 at as Balances 01/01/2016 at as Balances Change in equity stakes equity in Change interests as at 31/12/2016 at interests as Total equity as at 31/12/2016 at as equity Total of the Parent as at 31/12/2016 at as of Parent the Restatement of opening balances of opening Restatement Change in equity instruments in Change Dividends and other uses other and Dividends Derivatives on treasury shares treasury on Derivatives Extraor Equity attributable to non-controlling non-controlling to attributable Equity Repurchase of treasury shares of treasury Repurchase Equity attributable to the shareholders shareholders the to attributable Equity Consolidated comprehensive income comprehensive Consolidated Share capital: 2,565,936 - 2,565,936 - - - 186,380 - - - - - (300,587) - 2,440,751 10,978 2,451,729 - ordinary shares 2,520,829 - 2,520,829 - - - 186,380 - - - - - (255,480) - 2,440,751 10,978 2,451,729 - other shares 45,107 - 45,107 ------(45,107) - - - - Share premiums 3,818,024 - 3,818,024 ------(178) - 3,798,430 19,416 3,817,846 Reserves 3,737,499 - 3,737,499 144,466 (132,151) (25,558) ------(3,347) - 3,664,366 56,543 3,720,909 - of profits 1,806,092 - 1,806,092 144,466 (132,151) (7,710) ------1,734,770 75,927 1,810,697 - other 1,931,407 - 1,931,407 - - (17,848) ------(3,347) - 1,929,596 (19,384) 1,910,212 Valuation reserves 256,993 - 256,993 ------1,097 (332,007) (73,950) 33 (73,917) Equity instruments ------Treasury shares (5,155) - (5,155) - - 7,710 - (13,175) - - - 751 - - (9,869) - (9,869) Profit (loss) for the year 144,466 - 144,466 (144,466) ------(845,093) (830,150) (14,943) (845,093) Equity: 10,517,763 - 10,517,763 - (132,151) (17,848) 186,380 (13,175) - - - 751 (303,015) (1,177,100) 8,989,578 72,027 9,061,605 - attributable to shareholders of the Parent 9,981,862 - 9,981,862 - (104,098) (17,848) 186,380 (13,175) - - - 751 122,280 (1,166,574) X X 8,989,578 - attributable to non- control l ing interests 535,901 - 535,901 - (28,053) ------(425,295) (10,526) X X 72,027
The figures presented in this statement of changes in equity correspond to those reported in Table B.1 (Consolidated equity by type of company) contained in Part F of theDetail Notes s ofto valthe uationFinancial reserves: Statements 31/12/2015 31/12/2015 31/12/2016 31/12/2016
Non- Non- Sharehol ders controlling Sharehol ders controlling of the Parent interests of the Parent interests
a) available-for-sale 288,538 175 -26,860 1 b) cash flow hedge -285 0 285 0 c) foreign currency differences -243 0 -243 0 d) actuarial gains/losses -86,177 -4,718 -107,773 -127 e) special revaluation laws 59,015 688 60,641 159 260,848 -3,855 -73,950 33
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Consolidated Statement of Cash Flows (Indirect Method)
Figures in thousands of euro 31.12.2017 31.12.2016
A. OPERATING ACTIVITIES 1. Ordinary activities 938,768 95,094 - pro fit (lo s s ) fo r the year (+/-) 716,992 (845,093) - gains/losses on financial assets held for trading and on financial assets/liabilities at fair value (-/+) (135,090) (61,526) - gains/losses on hedging activities (-/+) 419 (415) - net impairment losses on loans (+/-) 862,306 1,695,584 - net impairment losses on property, plant and equipment and intangible assets (+/-) 156,684 206,020 - net provisions for risks and charges and other expense/income (+/-) 9,009 42,885 - net premiums not received (-) (155,128) - - other insurance income/expense not received (+/-) 173,384 - - outstanding taxes, duties and tax credits (+/-) (32,347) (468,809) - net impairment losses on disposal groups held for sale after tax (+/-) - - - o ther adjus tments (+/-) (657,461) (473,552) 2. Net cash flows from/used by financial assets 3,489,194 3,304,450 - financial as s ets held fo r trading 78,108 247,950 - financial assets designated at fair value 130,065 (963) - available-fo r-s ale financial as s ets 3,321,576 2,149,730 - loans to banks: repayable on demand - - - loans to banks: other loans (3,109,077) (289,611) - loans to customers 2,505,129 1,166,393 - other assets 563,393 30,951 3. Ne t c as h flo ws fro m/us e d by financ ial liabilitie s (7,051,326) (3,163,876) - amounts due to banks repayable on demand - - - amounts due to banks: other payables 2,377,113 3,677,625 - due to customers (2,646,678) 961,945 - debt securities issued (5,735,513) (7,308,331) - fina nc ia l lia bilitie s he ld fo r tra ding (449,983) 268,226 - fina nc ia l lia bilitie s de s igna te d a t fa ir va lue - - - o the r lia bilitie s (596,265) (763,341) Net cas h flo ws from/us ed in o perating activities (2,623,364) 235,668 B . IN VE S T IN G A C T IVIT IE S 1. Cas h flo ws generated by 2,334,616 13,894 - disposals of equity investments 4,301 - - dividends received on equity investments 13,684 9,678 - disposals of held-to-maturity investments 2,274,404 - - disposals of property, equipment and investment property 899 3,214 - disposals of intangible assets 471 1,002 - disposals of subsidiaries and lines of business 40,857 - 2. Cash flows used in 308,651 (114,977) - purchases of equity investments - - - purchases of held-to-maturity investments (995,371) - - purchases of property, plant and equipment (71,137) (50,222) - purchases of intangible assets (60,165) (64,755) - purchases of subsidiaries and lines of business 1,435,324 - Net cas h flo ws from/us ed in inves ting activities 2,643,267 (101,083) C. FINANCING ACTIVITIES - - - issues/repurchases of treasury shares 401,705 (13,175) - issues/purchases of equity instruments - - - distribution of dividends and other uses (129,387) (132,151) Net cas h flo ws from/us ed in financing activities 272,318 (145,326) CASH FLOWS GENERATED/USED DURING THE YEAR 292,221 (10,741) Key: (+) generated (-) abs o rbed
(*) The item "Purchases of subsidiaries and lines of business" includes the price paid for the purchase of the New Banks amounting to €1.00, net of cash and cash equivalents of €1.4 billion.
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Reconciliation
Carrying amounts 31.12.2017 31.12.2016 (figures in thousand euro) Cash and cash equivalents at beginning of year 519,357 530,098 Total net cash flows generated/used during the year 292,221 (10,741) Cash and cash equival ents at end of year 811,578 519,357
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PART A – Accounting policies A.1 – General Part A.2 – The main items in the financial statements A.3 – Information on transfers between portfolios of financial assets A.4 – Information on fair value A.5 – Information on “Day One Profit/Loss”
PART B – Notes to the consolidated balance sheet
Assets
Liabilities
Other information
PART C – Notes to the consolidated income statement Notes to the PART D – Consolidated statement of comprehensive income Consolidated PART E – Information on risks and the relative hedging policies Financial
PART F – Information on consolidated equity Statements PART G – Business combination transactions concerning companies or lines of business
PART H – Transactions with related parties
PART I – Share-based payments
PART L – Segment Reporting
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Part A – Accounting policies
A.1 – GENERAL PART
Section 1 Statement of compliance with IFRS
This consolidated annual report of the Unione di Banche Italiane Group has been prepared in compliance with the international financial reporting standards (IFRS)1 issued by the International Accounting Standards Board (IASB) and with the relative interpretations of the International Financial Reporting Interpretations Committee (IFRIC) as endorsed by the European Commission and in force as at 31st December 2017, implemented in Italian law by Legislative Decree No. 38/2005, which exercised the option under EC Regulation 1606/2002 concerning international accounting standards. No exceptions have been made in the application of IFRS international accounting standards.
The consolidated financial statements, consisting of the balance sheet, income statement, statement of comprehensive income, statement of cash flows, statement of changes in equity and the notes to the financial statements, accompanied by the consolidated management report, include the Parent, UBI Banca Spa and its subsidiaries included in the scope of consolidation details of which are given in the section entitled “The Scope of Consolidation”. They have been prepared on the basis of the positions of the single companies, corresponding to the relative individual company financial statements, examined and approved by their respective governing bodies and appropriately modified and reclassified, where necessary, for compliance with the accounting policies adopted by the Group.
The consolidated management report on operations and the notes to the financial statements furnish information required by international reporting standards, by law, by the Bank of Italy and by the Commissione Nazionale per le Società e la Borsa (Consob – National Commission for Companies and the Stock Exchange), in addition to other information which is not compulsory, but is considered equally necessary for the purposes of a true and accurate presentation of the accounts of the Group.
The consolidated financial statements approved by the Management Board on 8th February 2018 and submitted to the Supervisory Board for approval on 6th March 2018 contain a statement by the Chief Executive Officer and the Senior Officer Responsible pursuant to Art. 154 bis of Legislative Decree No. 58/1998 and they have been subjected to audit by the independent auditors Deloitte & Touche Spa.
Section 2 Basis of preparation
These financial statements have been prepared in accordance with measurement criteria, adopted on the basis of a going concern assumption and in compliance with accrual accounting principles, the relevance of the information and the predominance of substance over form.
The financial statements have been clearly stated and give a true and fair view of the capital and financial position, the result for the year, the changes in equity and the cash flows.
Unless otherwise indicated, the information contained in this annual report is expressed in as the accounting currency and the financial information, the balance sheet and income statement, the notes and comments and the explanatory tables are presented in thousands of euro. The relative rounding of the figures has been performed on the basis of Bank of Italy instructions.
1 Those standards and the relative interpretations are applied on the basis of events occurring that are disciplined by them from the date on which their application becomes compulsory, unless specified otherwise. See the following section “List of IAS/IFRS standards endorsed by the European Commission” for full details.
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The mandatory financial statements used in this annual report comply with those defined in Bank of Italy Circular No. 262/2005 and subsequent amendments2. We underline that as a result of the acquisition of the New Banks by UBI Banca Spa which took effect for accounting purposes from 1st April 2017, the income statement presentation for the year ended 31st December 2017 comprises the operating results recorded in the period 1st January-31st March 2017 for the Stand-Alone Group and those for the subsequent three quarters of 2017 relating to the UBI Banca Group in its new configuration. Both the balance sheet and the income statement figures for 2016, reported for comparative purposes, relate exclusively to the Stand-Alone UBI Banca Group. The effects of the purchase price allocation attributable to the business combination in question have been recognised in the relevant items in the balance sheet and in the income statement. Since the figures presented in the financial statements for the year ended 31st December 2017 are not perfectly comparable with those of the previous year, “aggregate” balance sheet and income statement figures as at and for the year ended 31st December 2016, the period subject to comparison, have been reported in the Consolidated Management Report.
The financial statements as at and for the year ended 31st December 2016 relating to the Stand-Alone UBI Group did not require any modifications with respect to the figures published in those financial statements.
The statements do not include items for which there was no data for the current and the previous year.
To complete the information, account was also taken in particular of the following documents in the preparation of this annual report: - the joint Bank of Italy/Consob (securities market authority)/Isvap (insurance authority) Document No. 4 of 3rd March 2010, with particular reference to information on the impairment of goodwill and available-for-sale financial assets: - the ESMA3 document of 5th October 2015 “Guidelines – Alternative Performance Measures” designed to encourage the usefulness and transparency of alternative performance measures4 included in prospectuses and regulated information; - the ESMA document of 27th October 2017, “European common enforcement priorities for 2017 financial statements”, designed to promote uniform application of IFRS to ensure transparency and the proper functioning of financial markets by identifying certain issues considered particularly significant for the financial statements for the year ended 31st December 2017 of listed European companies, in consideration, amongst other things, of current market conditions5;
Accounting policies
The accounting policies set out in Parte A.2 relating to the classification, measurement and derecognition of items are the same as those pursued for the preparation of the 2016 financial statements, except for additions relating to the recognition of assets and liabilities of an insurance nature (as detailed in the subsequent section “Other aspects”), following the acquisition of the New Banks, in order to include certain specific aspects of the assets acquired.
2 More specifically the reference is to the fourth update of 15th December 2015. For full information, we report that on 22nd December 2017 the Bank of Italy issued the fifth update, the application of which will be compulsory from 1st January 2018 3 European Securities Market Authority. 4 The document in question defines an alternative performance measure as “a financial measure of historical or future financial performance, financial position, or cash flows, other than a financial measure defined or specified in the applicable financial reporting framework”. 5 The priorities identified for the financial year 2017 are as follows: a. information on the expected impacts of the future introduction of new accounting standards; b. specific issues relating to the standard IFRS 3 “Business Combinations”; c. specific issues relating to the standard IAS 7 “Statement of cash flows ”. For full information we report that the document in question also references the following ESMA documents: - “Issues for consideration in implementing IFRS 15: Revenue from Contracts with Customers” dated 20th July 2016; and - “Issues for consideration in implementing IFRS 9: Financial Instruments” dated 10th November 2016.
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Where it is impossible to measure items in the financial statements with precision, the application of those policies involves the use of estimates and assumptions which may have a significant effect on the amounts recognised in the balance sheet and in the income statement. The use of reasonable estimates forms an essential part of the preparation of financial statements and we have listed here those items in the financial statements in which the use of estimates and assumptions is most significant: - measurement of loans and receivables; - measurement of financial assets not listed on active markets; - measurement of indefinite useful life intangible assets and equity investments; - quantification of provisions for risks and charges; - quantification of deferred taxes; - definition of the depreciation and amortisation charges for property, plant and equipment and intangible assets with finite useful lives; - measurement of the provision for post-employment benefits; - measurement of technical reserves.
An adjustment may be made to an estimate following a change in the circumstances on which it was based or if new information is acquired or yet again on the basis of greater experience. A change in an estimate is applied prospectively and it therefore generates an impact on the income statement in the year in which it is made and, if it is the case, also in future years. No changes were made in 2017 to the criteria previously employed for estimates in the financial statements as at 31st December 2016.
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The following is reported with regard to changes in IFRS accounting standards.
International accounting standards in force from 2017
The European Commission published the following Regulations on 9th November 2017: - Regulation (EU) No. 1989/2017 which endorses certain amendments to IAS 12 “Income taxes” with specific reference to the recognition of deferred tax assets and more specifically in order to clarify the accounting treatment of these assets related to debt instruments measured at fair value; - Regulation (EU No. 1990/2017 which endorses certain amendments to IAS 7 “Statement of cash flows” in order to promote the improvement of disclosures relating to the financing activities of an entity.
The adoption of the above-mentioned provisions have had no appreciable impacts on the financial statements of the UBI Group.
International reporting standards applicable subsequent to 2017
On 29th October 2016 the European Commission published Regulation (EU) No. 1905/2016, which endorsed the standard IFRS 15 “Revenue from contracts with customers”, published by the IASB on 28th May 2014.
On 29th November 2016, the European Commission published Regulation (EU) No. 2067/2016 which endorsed the standard IFRS 9 “Financial instruments”, published by the IASB on 24th July 2014.
Details of the provisions of these standards are given later in this section.
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The European Commission published the following Regulations on 9th November 2017: - Regulation (EU) No. 2017/1986 which adopts IFRS 16 “Leases” designed to improve the financial reporting of lease contracts6. Detailed information is given later in this section; - Regulation (EU) No. 2017/1987 which adopts amendments to IFRS 15 Revenue from contracts with customers – Clarifications of IFRS 15. The amendments are designed to clarify certain requirements and to further facilitate the transition for companies that apply the standard7; - Regulation (EU) No. 2017/1988 which adopts amendments to IFRS 4 “Joint application of IFRS 9 Financial Instruments” and IFRS 4 “Insurance Contracts”8. The amendments to IFRS 4 designed to solve the problems of the temporary accounting consequences of the differences between the date of entry into force of IFRS 9 and the date of entry into force of the new accounting standard on insurance contracts (IFRS 17) which will replace IFRS 4 from 1st January 2021. More specifically financial groups which constitute “financial conglomerates”9 may opt for none of its entities operating in the insurance sector to apply IFRS 9 to their consolidated financial statements (termed a “deferral approach”) for financial years commencing prior to 1st January 2021, if the following conditions are met: a) no financial instruments are transferred after 29th November 2017 between the insurance sector and other sectors of the financial conglomerate other than financial instruments measured at fair value for which the changes in fair value are recognised through profit or loss for the year by both sectors involved in the transfers; b) the financial conglomerate discloses those insurance entities in the Group that apply IAS 39 in its financial statements; c) the additional disclosures requested by IFRS 7 are provided separately for the insurance sector that applies IAS 39 and for the rest of the group which applies IFRS 9. The option in question is also granted to companies whose activities are predominantly connected with insurance activities.
For companies that issue insurance contracts (required to apply IFRS 9), the Regulation allows resort to an “overlay approach”, when these companies adopt IFRS 9 for the first time. That option allows the amount needed for the income statement result to be the same as it would have been had the company applied the provisions of IAS 39 in place of IFRS 9 to be reclassified from the income statement to the statement of OCI (i.e. in equity). Only those financial assets can be designated for the aforementioned approach which:
- are measured at fair value and recognised through profit and loss, but would not have been measured in that manner in accordance with IAS 39; - are not held in relation to activities with no connection (e.g. banking activities) with contracts that fall within the scope of application of IFRS 4.
Finally, the Regulation introduces a temporary exemption from some of the provisions of IAS 28. In other words, controlling entities that apply IFRS 9 are permitted for the financial years that commence prior to 1st January 2021 to maintain the accounting standards applied by associates (and joint ventures) for the purposes of accounting according to the equity method, if those companies do not apply IFRS 9 making use of the “deferral approach”.
Companies shall apply the amendments to IFRS 4 from the date of the start of the first financial year beginning 1st January 2018 or on a subsequent date. Nevertheless, while the conditions mentioned above still apply, financial conglomerates can choose to apply the amendments to IFRS 4 from the date of the start of the first financial year beginning 1st January 2018 or on a subsequent date.
6 Compulsory application from 1st January 2019. 7 Compulsory application from 1st January 2018. 8 Compulsory application from 1st January 2018. 9 As defined in Art. 2, point 14 of Directive 2002/87/EC.
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International accounting standards not endorsed as at 31st December 2017
Standard (IAS/IFRS) Amendments Date of publication Interpretation (SIC/IFRIC) IFRS 14 Regulatory deferral accounts 30/01/2014 Sale contribution of assets between an investor and its IFRS 10, IAS 28 11/09/2014 Associate or Joint Venture Amendments to IFRS 2: Classification and Measurement of IFRS 2 20/06/2016 Share-based Payment Transaction IFRIC Interpretation 22 Foreign Currency Transaction and IFRIC 22 08/12/2016 Advance Consideration
IAS 40 Amendments to IAS 40: Transfers of Investment property 08/12/2016
IFRS 17 Insurance Contracts 18/05/2017
IFRIC 23 Uncertainty over Income Tax Treatments 07/06/2017
Amendments to IFRS 9: Prepayment Features with Negative IFRS 9 12/10/2017 Compensation Amendments to IAS 28: Long Term Interests in Associates IAS 28 12/10/2017 and Joint Ventures
IFRS 3, IFRS 11, IAS 12, IAS 23 Annual improvements to IFRS Standards 2015-2017 Cycle 12/12/2017
The standards listed above are not applicable for the purposes of the preparation of the 2017 consolidated annual report because their application is subject to endorsement by the European commission through the issue of specific EU Regulations10. To complete the information we report that on 7th February 2018 the IASB issued the document “Amendment to IAS 19: Plan Amendment, Curtailment or Settlement”. Furthermore, on 8th February 2018 the European Commission published Regulation (EU) No. 2018/182 which endorses the “Annual improvements to IFRS Standards 2014-2016 Cycle” with some marginal amendments to the following reporting standards: IFRS 1 “First-time adoption of international financial reporting standards”, IFRS 12 “Disclosure of interests in other entities”11 and IAS 28 “Investments in associates and Joint ventures”.
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The IFRS 9 Project in the UBI Group
Publication in the Official Journal of the European Union (No. 323, 29th November 2016) of EU Commission Regulation 2016/2067 completed the process of endorsing the IFRS 9 accounting standard “Financial Instruments”12, which will replace IAS 39 “Financial Instruments: Recognition and Measurement” as from 1st January 2018.
At the time of the first quarterly financial report for the period ended 31st March 2018 (the first consolidated accounting position prepared in compliance with the provisions of IFRS 9), the first complete financial information of a qualitative and quantitative nature relating to the transition to the standard in question will be provided by the question of the overall impacts defined on first-time adoption.
10 With regard to IFRS 14, we report that the European Commission has decided to suspend the endorsement process for the standard while waiting for the definition of the new standard relating to “rate regulated activities”. 11 These amendments were already applicable for financial statements for the year ended 31st December 2017. 12 Issued by the IASB on 24th July 2014.
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The following information, which fulfils requirements under the ESMA document entitled European common enforcement priorities for 2017 financial statements, as well as IAS 813, therefore provides the most significant details that have emerged from the various phases of the transition project, along with an indication of the major qualitative effects and a provisional estimate of quantitative effects (the latter expressed as a range of basis points impact on the CET1 ratio as at 31st December 2017), subdivided by the standard’s topics.
IFRS 9, with regard to financial instruments, sets new rules for:
- “Classification and Measurement”; - “impairment;” and - “General Hedge Accounting”.
With reference to previous disclosures regarding the main provisions of the new standard, we report that the UBI Banca Group’s IFRS 9 transition project, which began in the second half of 2015, has now been essentially completed, with the exception of some activities related to the implementation of the transition towards first-time adoption of the new standard and to the full operation of this standard, which are currently being finalised. The transition project has been divided into three main stages: 1. Assessment; 2. Design; 3. Implementation.
Assessment Stage The assessment stage, which is designed to assess the potential impacts of the new standard with respect to regulatory aspects, risk models, administration, organisation, IT software and business, was commenced in the second half of 2015 and was concluded in the first quarter of 2016. The main aims of this stage were to: - identify the regulatory and accounting changes and, consequently, decide the preliminary accounting approaches for the necessary aspects; - identify the preliminary impacts in terms of business, risk models, organisation and IT systems; - define the criteria for the recognition and transfer of financial instruments and for loans and receivables in particular, among the three stages laid down by IFRS 9 on the basis of credit quality, with consequent different estimates of the respective carrying amounts (twelve month expected credit loss vs. lifetime expected credit loss).
Design Stage The design stage, which was carried out throughout 2016, involved performing the following activities: - detailed definition of accounting policies; - preparation of risk models; - definition of technical specifications for IT systems and processes; - management of regulatory updates and specifications requested by regulators; - definition of detailed specifications in organisational terms.
Implementation Stage According to the architecture of the project, the final stage was that of implementation which began in 2017. Its aim is to execute the actions identified and defined during the previous stages. It was designed to carry out the following: - share the analysis and results that emerged from the design stage with all operational units involved; - implement the choices and interpretations of the standard made during the assessment and design stages into company processes and procedures;
13 “Accounting Policies, Changes in Accounting Estimates and Errors”
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- establish detailed accounting policies in accordance with the evidence that emerged and with the regulatory clarifications provided by the Supervisory Authorities; - carry out preparatory activities for first time adoption of the standard in question.
Currently, certain IT activities are being finalised in connection with the methodological choices established during the fourth quarter of 2017.
In light of the above, we illustrate the most significant qualitative and quantitative details below.
. Classification and Measurement With specific regard to the new provisions on the classification of financial assets contained in IFRS 9, project activities concentrated mainly on the following: - on the definition of the business model with which the Group intends to manage financial assets recognised in its balance sheet; and also - on a detailed examination of the financial instruments held in portfolio in order to identify any financial assets for which the characteristics of the cash flows do not allow classification at amortised cost and must therefore be measured at fair value with an impact on the income statement.
Regarding the business models, it should be noted that, having completed the analysis and survey of the various ways in which financial instruments are managed in order to generate cash, the Group defined business models for management of financial assets, broadly confirming the portfolio management strategy adopted to apply IAS 39, consistent with the Group’s Risk Appetite; each of the various portfolios of financial instruments was associated with one of these business models based on specific parameters. On this matter, given the strategic significance of post- IFRS 9 business models, the Group has adopted a specific policy on defining them14. More specifically, in terms of securities, the following points should be noted: - debt securities: the Group holds these instruments based on a ‘hold to collect’ and ‘hold to collect and sell’ approach, except for those securities held for trading, which are therefore associated with the ‘Others’ model. These securities are allocated to the various post- IFRS 9 portfolios based on the aforementioned management approach, while also taking the following factors into account: the size of the banking book as per the 2017-2020 Business Plan, the characteristics of the securities (e.g. in terms of residual life), and company factors in terms of staff remuneration. This allocation process, in terms of deciding the size of the portfolios associated with each of the various business models, is decided in keeping with the measures for capital allocated as per the Group’s Risk Appetite Framework (RAF). Lastly, we note that only an extremely limited portion of debt securities do not exceed, based on their objective characteristics, the ‘Solely Payments of Principal and Interest Test’ (SPPI Test)15 and will therefore be classified as FVTPL and thus necessarily measured at fair value, with an impact on profit and loss; - equities. These securities are associated with the ‘Others’ business model and are consequently measured at fair value, with changes in fair value having an impact on profit and loss, except for securities belonging to the portfolio of shareholdings that constitute ‘ownership interests’16, for which the Group has elected to employ the ‘other comprehensive income’ (OCI) option, that is, to measure these instruments at fair value, and to recognise changes in value through other comprehensive income (which is to say in equity17), as the Group believes that this measurement method is the most appropriate to reflect the purpose and rationale for which these equities were subscribed.
14 According to IFRS 9, financial instruments must be classified based on both how they are managed and their objective defining characteristics. 15 That test, which is qualitative in nature and designed to verify whether a financial instrument involves payments consisting solely of principal and interest, is used in preparation for the classification of loans and receivables and debt instruments within the accounting category “amortised cost” and “FVOCI”. In other words, if the test result is negative, then the financial instrument is classified under the “fair value through profit or loss” category. 16 In addition to a limited number of equity instruments not acquired through conversions of loans. 17 In this case, the impact on profit and loss is only in terms of recognition of income from dividends.
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To provide complete information, we report that the Group’s stakes in investment funds, whether open or closed, are associated with the ‘Others’ business model, because the Group manages those assets with a view to obtaining value from them based on their fair value.
As regards loans and receivables, considering that the UBI Group conducts mainly traditional banking business and holds a portfolio of loans originated in order to finance individuals and companies in their business activities as well as to finance households, ‘hold to collect’ is the predominant business model for the management of nearly all loans, essentially in continuity with what was adopted in applying IAS 39. Furthermore, the Group has decided to associate with the ‘hold to collect and sell’ business model all future syndicated loans that it intends to transfer to third parties and for which, consequently, the relative loan approval decisions entail such a business model.
Sales consistent with the ‘hold to collect’ business model The Group has established, in a specific Internal Regulation, operational rules for determining the parameters for considering sales of financial instruments, whether they are debt or equity securities, as consistent with the ‘hold to collect’ business model. The UBI Group’s rules, which specifically refer to the ‘significance’ of the securities, set very strict criteria to consider as admissible any sales executed for reasons other than those specifically envisaged under the accounting standard18.
Solely Payments of Principal and Interest (SPPI) Test Regarding the objective characteristics of the financial instruments, financial assets are put through the Solely Payments of Principal and Interest (SPPI) Test, as well as, to the existence of clauses involving the “modified time value of money”, through the Benchmark Test19. The Group’s approach to the SPPI Test, for the loan portfolio, is to divide it into: 1) standard products, those typically marketed through the distribution network, and 2) non-standard products, which are generally customised to fit specific needs of the counterparty. This division was also useful for identifying the most efficient solutions in terms of organisation and application. The UBI Group envisages carrying out this test when the standard is fully phased in as follows: - for standard products, tests are carried out by type of product and therefore tests are introduced when products are created and the result of the test is automatically called up for each grant of that type of credit; - for non-standard products, the test is carried out for each single credit agreement; - for debt securities, the test is carried out for each single security. The procedures for conducting tests are based on the use of a “lending tool”, which is to say a structured questionnaire with a “decision-making tree”, which on the basis of the answers given provides output on the possibility of classifying a financial asset in the “hold to collect” category, with the consequent measurement of the amortised cost.
With regard to the Benchmark Test, for all financial assets with contract clauses requiring such verification, it is executed through essentially automatic methods, by building a grid that accounts for results in each possible case of inconsistency or mismatch between the interest rate repricing period and the payment period as per the contract. This grid is subject to periodic updates and can be consulted when the loan is disbursed.
18 This specifically refers to sales of financial instruments nearing maturity, or due to a deterioration in related credit risk or in order to meet an unforeseen need for liquidity. 19 This quantitative test is an integral part of the SPPI whenever the financial instrument displays traits of “modified time value of money”, that is, where there is an imperfect relationships between the reference interest rate (e.g. Euribor 3M) and the actual passage of time in payments (e.g. monthly repayments). In this case, the goal of the test is to determine whether there is a significant difference in cash flow as compared to the cash flows of a ‘benchmark’ instrument that does not involve a modified time value of money. If the test result is negative, then the financial instrument is classified under the “fair value through profit of loss” category.
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Given the characteristics of the current product portfolio, and because the Group has not made fundamental revisions to its current financial asset management rationale, classification changes are not significant. The quantitative effects of these changes, estimated approximately, relate mainly to the accounting reclassification of certain debt securities: - those previously classified as “available-for-sale financial assets” which post- IFRS 9 are associated with the ‘hold to collect’ business model and are therefore measured at amortised cost; - those previously classified as “held-to-maturity investments” which post- IFRS 9 are associated with the ‘hold to collect and sell’ model, and are therefore measured at fair value (with changes in value recognised in other comprehensive income). The impacts are absolutely minimal attributable to the fair value measurement of debt securities and loans that do not pass the SPPI Test and must therefore be measured at fair value.
Modifications On the subject of modifications to contractual cash flows, IFRS 9 stipulates that when the cash flows are renegotiated or otherwise modified and the renegotiation or modification does not result in the derecognition of the financial asset, then the entity shall calculate the present value of the renegotiated or modified cash flows20 of the financial asset and recognise the difference between that value and the gross book value prior to the modification in profit or loss. Otherwise, when there is a “substantial” modification in these cash flows, the entity must derecognise the financial asset modified and then recognise a new financial asset based on the new contract terms. As for the meaning of ‘substantial’ modification in this context, the UBI Group has defined it as follows: . for modifications where the counterparty displays financial difficulties21, ‘substantial’ is considered a qualitative term, given that the modification aims to maximise recovery of the original exposure; . for commercially motivated modifications22: ‘substantial’ is considered both a qualitative and quantitative term, as such modifications are normally (often as a result of Italian legislation in force, namely the Bersani Law) applicable to mortgage loans to individuals and relate to changes in the interest rate applied in order to realign it with current market rates. Specifically regarding the quantitative aspect of the term, the UBI Group assesses the significance of contract modifications based on the percentage change in cash flow from the financial instrument before and after the modification.
Application of the rules pertaining to modifications entails, for first-time adoption, approximate estimates of the impact of derecognising these assets, based on how substantial the contract modifications are and, more specifically, on recognising the residual amortised cost of those assets in a special reserve on the balance sheet.
. Impairment The most discretionary aspects of the standard, as identified during design stage activities, are related to how impairment of financial assets (whether loans or securities) is to be calculated that are associated with either the ‘hold to collect’ business model (and thus classified as financial assets measured at amortised cost) or the ‘hold to collect and sell’ model (and thus measured at fair value, with the impact of changes in value recognised through other comprehensive income). Specifically, the two major aspects pertain to: - the stage allocation of financial instruments following the determination of a significant increase in credit risk; and - incorporation of ‘forward-looking’ scenarios in definition of both stage allocation and the expected credit loss (ECL)23.
20 These flows must be discounted at the effective original interest rate of the financial asset. 21 The reference is to forbearance measures, for bot performing and non-performing counterparties 22 In other words, situations where the counterparty is not in financial difficulty 23 The standard defines expected credit losses as the “weighted average of credit losses with the respective risks of a default occurring as the weights”. Expected losses must be estimated by considering possible scenarios and therefore by considering the best available information on past events, current conditions and supportable forecasts of future events, known as a “forward looking approach”.
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Stage Allocation For the purpose of allocating exposures to the various stages on first-time adoption of the accounting standard, performing exposures are classified in stages 1 and 2, whereas non- performing exposures are allocated in stage 3. For the latter, we specify that the UBI Group has adopted the definition provided in Bank of Italy Circular No. 262/2005, according to which non-performing exposures are the sum of all exposures considered past due, unlikely to pay or bad, as defined under supervisory regulations in force.
That said, we specify that the Group’s stage allocation model, based on a case-by-case method, involves both qualitative and quantitative criteria in order to measure a significant increase in credit risk between the date of initial recognition for the financial instrument and the measurement date. In more detail, moving a financial instrument from stage 1 to stage 2 is caused, for example, by one of the following: - payment becomes past due by more than 30 days; - a forbearance measure has been agreed; - lifetime probability of default (PD) changes.
Furthermore, the Group has decided to: - refute the assumption that a position at least 30 days past due should automatically be classified in stage 2, though only with respect to loans pertaining to certain business areas; - exercise, both on first-time adoption and once fully operative, the “low credit risk exemption”24 on the sovereign bond portfolio only, considering the characteristics of those securities in the portfolio; - use the “first in, first out” (FIFO) method to compare, for each instalment of debt securities acquired, the instrument’s original credit rating to its rating on the reporting date.
Estimating the expected credit loss (ECL) and incorporating forward-looking scenarios For financial assets that are not impaired at the time they are acquired (or originated), IFRS 9 stipulates that expected credit losses (ECL) are to be recognised based on one of the following methods: - assets classified in stage 1: by adjusting it for the amount of expected credit losses over the next 12 months (expected losses resulting from default events on the financial asset that are considered possible within 12 months of the period of reference). This method must be applied when the credit risk at the balance sheet date has not increased significantly since initial recognition or is considered to be low (“low credit risk exemption”); or - assets classified in stage 2 or 3: by adjusting it for the amount of credit losses expected over the full lifetime of the instrument (expected losses resulting from default events on financial assets considered possible over the full lifetime of the financial asset). This method must be applied, for each single exposure, when the credit risk has increased significantly since initial recognition.
Stages 1 and 2 Regarding the accounting standard’s guidance to incorporate forward-looking scenarios, including macroeconomic outlooks, into ECL estimates, the UBI Group has opted to include these, as well as geo-sectoral trend forecasts (in sectors where the counterpart does business), in its internal models, which are already available, having been developed for stress tests on credit risk and adjusted as needed to make them compatible with the specific guidance under the new standard. These models consider the use of ‘most likely’ scenarios combined with ‘upside’ and ‘downside’ scenarios, each of which is assigned a percentage likelihood. These scenarios are consistent with those adopted for budget and capital allocation purposes.
24 Instruments that as at the FTA date are deemed to have low credit risk, in this case defined as those with an investment grade credit rating, are classified in stage 1. Thereafter, if those securities were to lose their investment grade rating, they would be transferred to another stage only in the event of a significant increase in credit risk since the initial recognition date.
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Stage 3 Specifically regarding the incorporation of forward-looking aspects in ECL estimates, we note that for bad loans, the case-by-case measurement rules for these positions, carried out with a “gone concern” approach, include forward-looking aspects for estimating the percentage impairment of real estate pledged as collateral (as estimated via up-to-date appraisals or based on the report of a court-appointed expert), along with, for the adoption of IFRS 9, the introduction of specific alternative exposure recovery scenarios, considering that the Group intends to sell, within a reasonable timeframe, a certain amount of its bad loans to third parties, both in order to maximise cash flows and to pursue a specific non-performing loan management strategy. Consequently, the ECL estimates reflect not only the expected recovery amount through ordinary credit management activity, but also a sale scenario that would lead to cash flows. The choice of including such a sale scenario in the IFRS 9 impairment model is due partly to the longstanding corporate credit recovery strategy, but mainly to the future strategy, consistent with UBI Group’s future “NPL strategy”.
The guidance on impairment under the new standard, for first-time adoption, entails approximately estimated effects pertaining to: . the ECL on performing positions classified in stages 1 and 2; . the ECL on non-performing positions classified in stage 3; . the ECL on debt securities25.
. Hedge accounting With specific regard to new guidance on general hedge accounting, the UBI Banca Group, pending completion by the IASB of new macro-hedging rules, has taken the opt-out option, that is, it has elected to continue applying IAS 39 (carve out) principles26.
Lastly, in the interest of providing complete information, we note that: - regarding the transitional period in which accounting systems and procedures will simultaneously manage data in accordance with IAS 39 and in accordance with IFRS 9, we report that over the fourth quarter of 2017, the UBI Banca Group ran a series of simulations on the various aspects of implementing IFRS 9, so as to measure the impact and verify that they will operate effectively; - for first-time adoption of the standard relating to the restatement of figures for prior periods, not requested by IFRS 9, the UBI Group has opted not to provide these; - regarding transitional measures pursuant to EU Regulation 2017/2395, which seeks to mitigate the impact of the introduction of IFRS 9 on equity, especially as a result of higher provisions for estimated credit losses27, the UBI Group has selected the option to include a portion of them in the Common Equity Tier 1 (CET1) capital for the five-year transitional period.
Altogether the total negative impact of first time adoption on equity as at 1st January 2018 is preliminarily estimated at approximately €930 million, before the theoretical tax effect. The recognition of taxes will be performed in compliance with the applicable accounting standards and the accounting policies of the Group. The following table illustrates the effects on the fully-loaded Common Equity Tier 1 (CET1) Ratio, with the overall impact estimated at -12 basis points. The expected trend in regulatory capital in 2018, particularly in light of the expected validation of new internal credit risk assessment models, as well as the roll out of these models in the banks acquired by the Group in 2017, will almost entirely absorb this impact from the first-time adoption of IFRS 9.
25 Not subject to measurement at fair value with the impact of changes in value recognised through profit and loss (FVTPL). 26 IAS 39 rules on macro-hedging. 27 To provide complete information, we note that the Regulation in question also contains transitional measures for exemptions from the “large exposures” limits.
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Fully loaded Aspects of the standard CET1 ratio Basis points
Classification & Measurement + 30 bp Modification Accounting - 29 bp Impairment - 13 bp Total impacts - 12 bp (before tax)
As stated earlier, the interim report for the period ended 31st March 2018 will include information on the overall qualitative and quantitative effects of first-time adoption.
IFRS 15 (REVENUE FROM CONTRACTS WITH CUSTOMERS) Accounting standard IFRS 15 – Revenue from Contracts with Customers28 – has superseded, effective from 1st January 2018, standards IAS 18 (Revenue) and IAS 11 (Construction Contracts), as well as interpretations IFRIC 13 (Customer Loyalty Programmes), IFRIC 15 (Agreements for the Construction of Real Estate), IFRIC 18 (Transfers of Assets from Customers) and SIC 31 (Revenue - Barter Transactions Involving Advertising Services). The standard sets a new model for recognising revenue, based on five steps that are to be applied to all contracts signed with customers, with the exception of: - leases within the scope of IAS 17; - insurance contracts within the scope of IFRS 4; - financial instruments and other rights and obligations within the scope of IFRS 9, IFRS 10, IFRS 11, IAS 27 and IAS 28, respectively.
The five “fundamental steps” in the accounting treatment of revenues according to the new standard are as follows: - the identification of a contract with the customer; - the identification of the performance obligations of the contract; - determination of the price; - allocation of the price to the performance obligations of the contract; - the criteria for the recognition of revenue when an entity satisfies each performance obligation.
Furthermore, to apply IFRS 15 for those income components, mainly commissions and fees, that stem from contracts with customers and do not fall within the scopes of application described above, the following assessments must be carried out to determine if: - the prices of the relative transactions including the variable components, which will have to be allocated to one or more performance obligations; - the performance obligations are satisfied “over time” or at a “point in time”; - the revenue will have to be presented on a gross or net basis depending on the “principal” or “agent” role played by the entity in the transaction.
Based on an analysis of the regulatory measures in the standard, as well as of the main types of contracts that lie within the scope of those measures, the provisionally estimated quantitative impact of first-time adoption of IFRS 15 is not significant. Therefore, the main impact of the new standard will come in the form of increased reporting requirements. In the Interim Report for the period ended 31st March 2018, the first accounting period under IFRS 15, detailed information will be provided on the quantitative impact of first-time adoption of this standard.
28 Published by the IASB on 28th May 2014 and approved by the European Commission on 29th October 2016
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IFRS 16 (Leases)
Accounting standard IFRS 16 (Leases)29 will supersede IAS 17 (Leases) on 1st January 2019. Specifically, the new standard introduces new accounting rules for leasing contracts for the lessees (i.e. the users of the goods under contract in the lease). These rules are based on the definition of ‘lease’ as a contract in which the right to control the use of an identified asset is granted for a specified period of time, in exchange for payment. As a result of this definition, the lessee must recognise the right-of-use of the underlying asset as an asset on the balance sheet, and that asset will subsequently be subject to depreciation; the lessee must then also recognise the present value of lease payments (to be made over the full lifetime of the contract) as a liability. The Group has conducted an analysis of the key new elements introduced by this accounting standard and, over the course of the 2018 financial year, will proceed with more detailed analysis on contracts stipulated in which the Group acts as lessor or lessee, i.e. on contracts that can be considered leases according to IFRS 16. Once this analysis is complete, the Group will move on to the design and implementation stages, which are to be completed by the end of 2018, in order to then adopt the new standard as from 2019. Updates on this analysis activity will be provided in the half-year Interim Report as at 30th June 2018.
SECTION 3 Consolidation scope and methods
The consolidated financial statements include the financial and operating results of UBI Banca Spa and the companies either directly or indirectly controlled by it, including within the scope of consolidation companies which operate in sectors different from that to which the Parent belongs and the special purpose entities, when the conditions of effective control exist, even in the absence of an equity stake, but in relation to what is termed “business”.
On 10th and 11th May 2017 respectively, the Management Board and the Supervisory Board of UBI Banca Spa approved the mergers into the Parent, UBI Banca Spa, of Nuova Banca Marche, Nuova Banca dell’Etruria e del Lazio and Nuova Cassa di Risparmio di Loreto, to be carried out in more than one operation. In view of the very many activities, especially of an IT nature, needed to implement the entire integration project, it was decided to carry it out in three steps: the first regarded Banca Adriatica (former Nuova Banca delle Marche) and its subsidiary, Cassa di Risparmio di Loreto, which took place on 23rd October 2017; the second involved Banca Tirrenica (former Nuova Banca dell’Etruria e del Lazio) and its subsidiary, Banca Federico del Vecchio, which took place on 27th November 2017 and the third involves Banca Teatina (former Nuova Cassa di Risparmio di Chieti), scheduled for February 2018.
Details of the equity investments reported below take account of the events described above.
Further information on the changes described above is given in the section “The scope of consolidation” contained in the Management Report, which may be consulted.
With regard to the consolidation methods used, companies subject to control are consolidated using the full line-by-line method, while those interests over which the Group exercises significant influence are measured using the equity method.
29 Published by the IASB on 13th January 2016 and approved by the European Commission on 9th November 2017
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Changes in the consolidation scope
The following transactions occurred in 2017 which changed the scope of consolidation of the Group:
- Banca Popolare di Bergamo Spa, Banca Carime Spa, Banca Popolare di Ancona Spa, Banca di Valle Camonica Spa and Banco di Brescia Spa were merged into UBI Banca Spa on 20th February 2017 (with effect for accounting and tax purposes from 1st January 2017); - UBI Lease Finance 5 Srl was removed from the Company Register on 6th March 2017; - UBI Finance 3 Srl was removed from the Company Register on 19th April 2017; - on 10th May 2017 the acquisition was concluded of 100% of the share capital of Nuova Banca Marche Spa, Nuova Banca dell’Etruria e del Lazio Spa and Nuova Cassa di Risparmio di Chieti Spa (with effect for accounting and tax purposes from 1st April 2017). With the acquisition of the aforementioned banks the scope of the consolidation broadened during the year to include the relative equity investments (banks and other companies). In detail the following companies joined Group: - Nuova Banca Marche Spa (merged into UBI Banca Spa on 23rd October 2017, with effect from 1st October 2017); - Nuova Banca Etruria Spa (merged into UBI Banca Spa on 27th November 2017, with effect from 1st October 2017); - Nuova Carichieti Spa (company name changed to “Banca Teatina Spa) - Banca Federico del Vecchio Spa (merged into UBI Banca Spa on 27th November 2017, with effect from 1st October 2017); - Cassa di Risparmio di Loreto Spa (merged into UBI Banca Spa on 23rd October 2017, with effect from 1st October 2017); - Bancassurance Popolare Spa; - Bancassurance Popolare Danni Spa; - Oro Trading Srl (subsequently placed into liquidation); - Etruria Informatica Srl (sold on 1st November 2017 to UBI Sistemi e Servizi Scpa) - Mecenate Srl; - Focus Gestioni SGR – in liquidation (wound up on 5th July 2017); - Etruria Securitization SPV Srl (the relative securitisation was closed down on 15th September 2017 and as a consequence the UBI Group lost control of the company de facto); - Marche Mutui 2 Società per la Cartolarizzazione a responsabilità limitata; - Marche Mutui 4 Srl (the relative securitisation was closed down in August 2017 and as a consequence the UBI Group lost control of the company de facto); - Marche M5 Srl (the relative securitisation was closed down in July 2017 and as a consequence the UBI Group lost control of the company de facto); - Marche M6 Srl; - Focus Impresa; - Assieme Srl; - Montefeltro Sviluppo Scarl. - On 1st November 2017 the company UBI Banca International SA was sold to EFG International AG. In preparation for the sale, two foreign branches were transferred to UBI Banca Spa with effect from 1st April 2017, one in Munich (Germany) and one in Madrid (Spain).
Further details relating to transactions which modified the ownership structure of the Group in 2017 are given in section “The scope of consolidation” in the consolidated management report.
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1. Equity investments in companies subject to exclusive control
Type o f De tails o f inve s tme nt Operating Name Registered address ownership % of vo tes (2) headquarters (1) Investing company % held
1. Unione di Banche Italiane Spa - UBI Banca Bergamo PARENT 2. 24-7 Finance Srl Brescia Brescia 4 UBI Banca Spa 10.000% 10.000% 3. BP B Immobiliare Srl Bergamo Bergamo 1 UBI Banca Spa 100.000% 100.000% 4. Centrobanca Sviluppo Impresa SGR Spa Milan Milan 1 UBI Banca Spa 100.000% 100.000% 5. IW Bank Spa Milan Milan 1 UBI Banca Spa 100.000% 100.000% 6.P restitalia Spa Bergamo Rome 1 UBI Banca Spa 100.000% 100.000% 7. UBI Factor Spa Milan Milan 1 UBI Banca Spa 100.000% 100.000% 8. UBI Finance Srl Milan Milan 1 UBI Banca Spa 60.000% 60.000% 9. UBI Finance 2 Srl (in liquidazione) Brescia Brescia 4 UBI Banca Spa 10.000% 10.000% 10. UBI Leasing Spa Brescia Brescia 1 UBI Banca Spa 100.000% 100.000% 11. UBI Management Company Sa Luxembourg Luxembourg 1 UBI Pramerica SGR Spa 100.000% 100.000% 12. UBI Pramerica SGR Spa Milan Milan 1 UBI Banca Spa 65.000% 65.000% 13. UBI Sistemi e Servizi Scpa Brescia Brescia 1 UBI Banca Spa 91.936% 98.562% IW Bank 4.315% UBI Pramerica SGR Spa 1.438% UBI Factor Spa 0.719% UBI Academy 0.010% Bancassurance P opolari Spa 0.072% P restitalia Spa 0.072% 14. UBI Trustee Sa Luxembourg Luxembourg 1 UBI Banca Spa 100.000% 100.000% 15. UBI Finance CB 2 Srl Milan Milan 4 UBI Banca Spa 60.000% 60.000% 16. UBI SP V BBS 2012 Srl Milan Milan 4 UBI Banca Spa 10.000% 10.000% 17. UBI SP V BP CI 2012 Srl Milan Milan 4 UBI Banca Spa 10.000% 10.000% 18. UBI SP V BP A 2012 Srl Milan Milan 4 UBI Banca Spa 10.000% 10.000% 19. UBI SP V GROUP 2016 Srl Milan Milan 4 UBI Banca Spa 10.000% 10.000% 20. UBI SP V LEASE 2016 Srl Milan Milan 4 UBI Banca Spa 10.000% 10.000% 21. Kedomus Srl Brescia Brescia 1 UBI Banca Spa 100.000% 100.000% 22. UBI Academy Scrl Bergamo Bergamo 1 UBI Banca Spa 88.000% 100.000% IW Bank Spa 3.000% UBI Factor Spa 1.500% UBI Pramerica SGR Spa 1.500% UB I S is te m i e S e rvizi S pa 3.000% UBI Leasing Spa 1.500% P restitalia Spa 1.500% 23. Banca Teatina Spa Bergamo Chieti 1 UBI Banca Spa 100.000% 100.000% 24. Oro Italia Trading Srl Arezzo Arezzo 1 UBI Banca Spa 100.000% 100.000% 25. Etruria Informatica Srl Arezzo Arezzo 1 UBI Sistemi e Servizi Spa 100.000% 100.000% 26. Mecenate Srl Arezzo Arezzo 1 UBI Banca Spa 95.000%To be 95.000%continued
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27. Bancassurance P opolari Spa Arezzo Rome 1 UBI Banca Spa 89.534% 89.534% 28. Bancassurance P opolari Danni Spa Arezzo Rome 1 UBI Banca Spa 50.765% 100.000% Bancassurance P opolari Spa 49.235% 29. Focus Impresa Ancona Ancona 1 UBI Banca Spa 80.769% 80.769% 30. Assieme Srl Arezzo Arezzo 1 Bancassurance P opolari Spa 90.000% 90.000% 31. Marche Mutui 2 Società per la Cartolarizzazione a r.l. Rome Rome 4 (*) 0.000% 0.000% 32. Marche M6 Srl Conegliano Veneto (TV) Conegliano Veneto (TV) 4 (*) 0.000% 0.000%
(*) Companies that fall within the scope of consolidation because they are in reality controlled, since their assets and liabilities were originated by a Group member company. The Group holds no equity interests in the companies.
Legend (1) Type of ownership: 1 = majority of voting rights in ordinary general meetings 2 = dominating influence over ordinary general meetings 3 = agreements with other shareholders 4 = other forms of control 5 = joint control (2) (Votes available at ordinary shareholders’ meetings, distinguishing between actual and potential)
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2. Assessments and significant assumptions to determine scope of consolidation
The full line-by-line consolidation method
Subsidiaries subject to control are consolidated using the full line-by-line method. In compliance with IFRS 10, the concept of control goes beyond a majority percentage interest in the share capital of an investee and it arises when an entity is exposed to variable returns or holds rights on those returns resulting from its relationship with the subsidiary and at the same time it has the ability to influence those returns by exercising its power over that entity. The line-by-line consolidation method involves summing the items of the income statements and balance sheets of subsidiaries on a line-by-line basis The following adjustments are made for this purpose: (a) the carrying amounts of the subsidiaries held by the Parent and the corresponding part of the equity are eliminated; (b) the proportion of equity and of profit or loss for the year attributable to other shareholders is stated under a separate item.
If the results of the above adjustments are positive, then they are recognised (after first allocating them if possible to the assets or liabilities of the subsidiary) as goodwill within item 130 “Intangible assets” on the date of the first consolidation, if the necessary conditions apply. If the resulting differences are negative they are normally charged to the income statement. Intragroup balances and transactions, including revenues, costs and dividends are completely eliminated. The operating results of a subsidiary that is acquired during the year are included in the consolidated balance sheet starting from the date on which it is acquired. Similarly, the operating results of a subsidiary that is disposed of are included in the consolidated balance sheet until the date on which control over the company is released. The accounts used in the preparation of consolidated financial statements are stated as of the same date. The consolidated financial statements have been prepared using uniform accounting policies for like transactions and events. If a subsidiary uses different accounting policies from those employed in the consolidated financial statements for like transactions and other events in similar circumstances, adjustments are made to its accounts for the purposes of the consolidation.
The equity method
Equity investments over which the Group exercises significant influence or has joint control, as defined in IAS 28 and IFRS 11, are measured using the equity method. Under this method an equity investment is initially recorded at cost and the carrying amount is increased or decreased to reflect the investor's share of the profit or loss of the associate after the acquisition date. The proportion of the profit or loss for the year made by the investee attributable to the investor is stated in the income statement of the latter. Dividends received from an investee reduce the carrying value of the investment; adjustments to the carrying amount may also be required arising from a change in the portion of the investee's equity attributable to the investor that have not been recognised in the income statement. These changes include changes arising from the revaluation of property, plant and equipment from exchange rate differences on items in foreign currency. The portion of those changes attributable to the investor are recorded directly in its equity. Where potential voting rights exist, the investor's share of profit or loss of the investee and of changes in the investee's equity is determined on the basis of present ownership interests and does not reflect the possible exercise or conversion of potential voting rights. Where the investee incurs continued losses, if these exceed the carrying value of the investee, then this is written off and further losses are only recognised if the investor has contracted legal or implicit obligations or has made payments on behalf of the investee. If the investee subsequently realises a profit, the investor resumes recognition of its share of the profits only after reaching the share of the profit which was previously not recognised. For the purposes of consolidating investments in associates and/or companies subject to joint control, the figures from the financial statements prepared and approved by the boards of directors of the individual companies are used. Where accounts prepared according to
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international standards are not available those prepared according to national accounting standards are used after first verifying that there are no significant differences. The consolidating entity ceases use of the equity method from the date on which it ceases to exercise significant influence or joint control over the investee and it is recognised within either “financial assets held for trading” or “available-for-sale financial assets”, in accordance with the treatment reported in part A.2 of these Notes to the Financial Statements, starting from that date on condition that the associate or company subject to joint control does not become a subsidiary.
3. Equity investments in companies subject to exclusive control with significant non- controlling interests
For the purposes of preparing the tables that follow, an interest was considered significant when:
the non-controlling interest is greater than or equal to 10% of the share capital of the investee and the accounting data of the investee are significant for a reader of the consolidated financial statements.
3.1 Non-controlling interests, availability of non-controlling interest votes and dividends distributed to non-controlling interests
Dividends Percentage of Percentage of distributed to non-controlling non-controlling non-controlling interests Name of companies interest votes (1) interests
1. UBI Pramerica SGR SpA 35.000% 35.000% 22,224
(1) Availability of votes in ordinary shareholders' meetings
3.2 Equity investments with significant non-controlling interests: accounting figures
Property, Profit (loss) Post tax Post-tax Other plant and Cash and on profit (loss) profit (loss) Profit (loss) comprehensi Comprehen- Total Financial equi p ment Financial Net interest Gross Operati ng Name cash Equity continuing from from for the year ve income sive income assets assets and liabilities income income exp enses equi val ents op erati ons continuing discontinued (1) net of taxes (3) = (1) + (2) intangible before tax op erati ons op erati ons (2) assets
1. UBI Pramerica 295,609 1 243,375 85 92,222 152,310 26 139,805 -35,059 104,746 74,098 0 74,098 -5 74,093
4. Significant restrictions
As concerns regulatory requirements we report (i) that the UBI Group is a banking group subject to the regulations contained in Directive 2013/36/EU on “access to the activity of credit institutions and the prudential supervision of credit institutions and investment firms” (CRD IV) and in Regulation (EU) No. 575/2013 relating to “Prudential requirements for credit institutions and investment firms” (CRR) and (ii) that it controls financial institutions subject to those same regulations. The ability of the subsidiary banks to distribute capital or dividends is restricted therefore to compliance with those regulations both in terms of the amount of minimum own funds they may hold and in terms of the maximum amount of the profits they may distribute. Furthermore, the Parent has commitments contained in its Articles of Association which require it to allocate part of its profits to specific charitable initiatives.
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As concerns liquidity within the Group no restrictions exist of a company ownership or legal nature to its transfer. Information on liquidity risk is given in Part E - Information on risks and hedging policies, Section 3 - Liquidity Risk.
5. Other information
Companies in which no equity investment is held, but for which shares have been received as pledges are excluded from the scope of the consolidation, in consideration of the purpose of possession, which is to secure the loan granted and not to exercise control and determine financial and operating policies in order to obtain the economic benefits deriving from them. The balance sheet, income statement and statement of cash flows of consolidated companies which operate with a reference currency other than the euro are translated at the exchange rate ruling at the end of the year. All the exchange rate differences resulting from the translation are recognised in a separate reserve in equity. If an investment is disposed of, this reserve is eliminated with a simultaneous profit or loss in the income statement at the time of disposal. International financial reporting standards require the recognition in the financial statements of corporate events in a manner which reflects the underlying economic substance of them. No equity investments held directly or indirectly by the Parent with an interest of less than 20%, or for which voting rights below that threshold were held, over which it is considered it exerted significant influence, existed as at the balance sheet date. Furthermore, with the exception of equity investments held for merchant banking activities classified within item 30 “Assets designated at fair value”, no equity investments held directly or indirectly by the Parent with an interest of more than 20% are held over which it is considered it did not exert significant influence. No significant restrictions existed as at the balance sheet date on the capacity of associate companies to transfer funds to the investing company in payment of dividends or repayment of loans or advances. The balance sheet dates of the companies measured according to the equity method were the same as that of the Parent.
SECTION 4 Subsequent events
With regard to the provisions of IAS 10, subsequent to 31st December 2017, the reporting date for the consolidated financial statements, and until 8th February 2018, the date on which the proposed separate company and consolidated Annual Report was authorised by the Management Board for submission to the Supervisory Board, no events occurred sufficient to make adjustments to the figures presented in the report necessary.
For information purposes, the following events are mentioned: . 8th January 2018: “dual tranche” 6.5-year and 12-year covered bonds were issued, both at a fixed rate, for a total amount of €1 billion, as part of the Group’s ongoing €15 billion covered bond programme, underwritten by UBI Finance Srl. The orders received amounted to around €1.3 billion, or 30% above the intended issue amount, demonstrating investors’ confidence. After the bonds were allocated proportionally to the various investors, this operation was executed as follows: - a €500 million tranche of 6.5-year bonds was issued with settlement date 15th January 2018 and maturity date 15th July 2024, carrying a coupon of 0.5% (equivalent to ten basis points above the 6.5-year mid-swap rate and 69 basis points below the corresponding Italian government bond) which is payable in arrears on 15th July of each year; the final price was set at 99.473%; - a €500 million tranche of 12-year bonds was issued with settlement date 15th January 2018 and maturity date 15th January 2030, carrying a coupon of 1.25% (equivalent to 30 basis points above the 12-year mid-swap rate and about 93 basis points below the
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corresponding Italian government bond) which is payable in arrears on 15th January of each year; the final price was set at 98.932%; . 11th January 2018: based on the Memorandum of Intent dated 11th December 2016, which envisaged standardising job contracts amongst the companies of the UBI Banca Group, an agreement was reached with trade unions regarding a contract addendum for IW Bank, Prestitalia, UBI Factor, UBI Leasing and UBI Pramerica SGR. The new terms will be applied as from 1st March 2018 for all Group companies except Prestitalia (1st July 2018); . 1st February 2018: in light of the Framework Agreement reached on 26th October 2017, which stipulated that the second-level contract terms currently in force at UBI Banca would be applied to employees of the newly acquired banks, with the methods and time frame to be determined through an agreement with the trade unions, a specific memo was signed establishing that gradual harmonisation of company regulations will take place by 2020; . 7th February 2018: in order to simplify the Group’s organisational structure, a procedure was begun to merge Etruria Informatica, a company whose purpose is to provide information technology services, into UBI Sistemi e Servizi: the related merger project was drawn up as per Article 2501 of the Italian Civil Code by the two companies’ Boards of Directors.
SECTION 5 Other aspects
Accounting Consequences of the Merger of the New Banks into the UBI Banca Group
Alignment of accounting practices and processes As already specified in the half-year interim report for the period ended 30th June 2017, as part of the process of integrating the newly acquired banks, the UBI Banca Group performed detailed analysis on the measurement criteria used by these banks, from which it emerged that they are broadly consistent with those applied by the UBI Group. For further information, we note that this analysis highlighted a need to realign accounting practices and processes that do not constitute modifications in accounting policies pursuant to IAS 8 (Accounting Policies, Changes in Accounting Estimates and Errors). The action taken as part of the process to align the accounting practices concerned has been essentially concluded.
Integrating measurement criteria for the main financial statement items . Technical reserves These refer only to contracts that fall within the scope of IFRS 4 (Insurance Contracts). A shadow accounting system has been adopted, where the fair value component of the assets in separate management portfolios, originally recognised in other comprehensive income, is ascribed to the reserves. Indeed, paragraph 30 of IFRS 4 states: “In some accounting models, realised gains or losses on an insurer’s assets have a direct effect on the measurement of some or all of (a) its insurance liabilities, (b) related deferred acquisition costs and (c) related intangible assets. An insurer is permitted, but not required, to change its accounting policies so that a recognised but unrealised gain or loss on an asset affects those measurements in the same way that a realised gain or loss does. The related adjustment to the insurance liability shall be recognised in other comprehensive income if, and only if, the unrealised gains or losses are recognised in other comprehensive income.” Based on these indications, it is permissible to attribute to insurance policyholders the income/expense resulting from the measurement at fair value of financial instruments assigned to separate management portfolios. The value adjustment must be calculated by applying the minimum withheld to the balance of the unrealised capital gains and losses on the securities in each separate portfolio, recognised in the fair value reserve. A liability adequacy test (LAT) conducted in keeping with IFRS 4 shows that the requirements are met. Any additional reserves in case of death in Sector III policies are reported as other comprehensive income.
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. Net insurance premiums This is comprised of premiums income from insurance policy contracts in Life (Business I) and Non-Life (Business V).
. Other net profit (loss) on insurance operations This component includes the following items: - commissions and other acquisition costs from insurance policy contracts in Life (Business I) and Non-Life (Business V) only; - management fees on investments related to securities management charges; - charges related to insurance claims, including amounts disbursed for claims settlements, net of reinsurance and inclusive of liquidation expenses pertaining to contracts subject to IFRS 4. Amounts disbursed and related liquidation expenses in insurance Sectors III and VI are not included, as they are instead classified as administrative expenses, nor are changes in mathematical reserves for segment III and VI policies, which according to IAS are defined as financial liabilities.
Valuation of shares in the Atlante Fund As highlighted in the Notes to the Interim Financial Report for the period ended 30th June 2017, as at 1st January 201730 the carrying amount of the Group’s investment in the Atlante Fund, recognised under “available-for-sale financial assets”, was €89.3 million, in addition to a commitment of €37.731 million. In the second and fourth quarters of 2017, out of the aforementioned residual commitment the Group paid €22 million, intended to cover the Fund’s further operations32. On 23rd June, following the prolonged troubles of Veneto Banca and Banca Popolare di Vicenza in meeting supervisory capital requirements, the ECB declared both to be failed or at risk of failing, notifying the Single Resolution Board (SRB) of its decision. The SRB reached the conclusion that the conditions for launching resolution action for the two banking institutions were not met and, consequently, that the two banks would be liquidated in accordance with Italian insolvency procedures. Subsequently, after the compulsory liquidation procedure commenced, the Intesa Sanpaolo banking group signed a contract with the two north-east Italian banks’ respective receivers for the purchase at the symbolic price of one euro of certain assets and liabilities, as well as some legal relationships held by the two institutions. Due to these events and the consequent drop in the value of the prices of the shares held by the Atlante Fund to zero, the UBI Banca Group has written down, as at 31st December 2017, the value of its stake in the Atlante Fund associated with the Fund’s investment in Veneto Banca and in Banca Popolare di Vicenza, by €89.3 million33.
As at 31st December 2017, the residual carrying amount of the Group’s investment in the Atlante Fund, recognised under “available-for-sale financial assets”, is €22 million, attributable solely to the contributions paid in the second and fourth quarters of 201734.
30 This comes after impairment losses of €73 million (€53.6 million under “available-for-sale financial assets” and €19.4 million for the commitments) recognised in the 2016, out of a total exposure of €162.3 million. 31 Compared to an initial total commitment of €200 million. 32 €12.5 million of that amount is related to “Project Cube” financed by the Atlante II Fund (in which the Atlante Fund is a direct investor), which involves the Group’s newly acquired banks. 33 This impairment loss, which had already been recognised in the Interim Financial Report for the period ended 30th June 2017, is the difference between an impairment loss of €108.7 million in “available for sale financial assets” and a reversal of €19.4 million, recognised under item 130d, relating to provisions for commitments to the Atlante Fund which had been recognised as at 31st December 2016. 34 Along with a residual commitment of €15.7 million.
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BRRD Directive (Bank Recovery and Resolution Directive – 2014/59/EU) - Accounting treatment of the contribution to the Single Resolution Fund In April, the Bank of Italy, in its capacity as resolution authority, addressed a communication as usual to all Italian banks subject to the BRRD Directive (Bank Recovery and Resolution Directive – 2014/59/EU)35, specifying the ordinary contribution due for the financial year 2017, calculated according to European Commission Delegated Regulations 2015/63 and 2015/81. This contribution was decided by the Single Resolution Board in partnership with the Bank of Italy, and under normal circumstances, pursuant to the aforementioned Regulation 2015/81, at least 15% of the amount may be paid by stipulating irrevocable commitments to pay. In this respect, in line with the provisions for 2016, the aforementioned communication allows banks the option to pay 85% of the contribution in cash and the remaining 15% by means of an irrevocable commitment backed by cash collateral. In continuity with the financial year 2016, the UBI Banca Group opted to pay the contribution 85% in cash and 15% via a commitment36 and on 1st June 2017 proceeded to pay the full amount due. Given the above, UBI Banca recognised the total contribution of €33 million37 in the income statement, of which €28.2 million under “other administrative expenses” 38 and €4.8 million “below the line” pertaining to the irrevocable commitment39 fully guaranteed by cash collateral.
Deposit Guarantee Scheme (DGS) Directive – 2014/49/EU - Accounting for DGS contributions On 15th December 2017 the UBI Group received notification from the Interbank Deposit Protection Fund stating the final amount due as its contribution to the DGS for 2017. As a result, an expense of €41.7 million for the year 2017 was recognised in the income statement within the item “other administrative expenses”. A best estimate of the annual contribution due, of €33.6 million, had already been recognised, in accordance with the aforementioned IFRIC 21, rules, in the interim income statement for the third quarter and financial statements as at 30th September 201740.
Valuation of the quota for adherence to the “Voluntary Scheme” of the Interbank Deposit Protection Fund As already described in the Interim Financial Report for the period ended the 30th September 2017, in view of the purchase by Crédit Agricole Cariparma of Cassa di Risparmio di Cesena, Cassa di Risparmio di Rimini and Cassa di Risparmio di San Miniato, subsequently completed on 21st December, on 7th September 2017 an extraordinary shareholders’ meeting of the banks participating in the Voluntary Scheme approved an increase from €700 million to €795 million in the capital of the scheme itself41. As a consequence, the UBI Group made a payment of €4.3 million for a future increase in the share capital of Cassa di Risparmio di Rimini and Cassa di Risparmio di San Miniato. Subsequently, on the 7th December, following the definition of the overall action to support the aforementioned three banks, the UBI Banca Group received a communication from the Interbank Deposit Protection Fund (IDPF) and took steps to pay a further €34.9 million.
In view of the above, as at 31st December 2017 the UBI Banca Group recognised the following: - a write-down of the AFS shareholdings held in the Voluntary Scheme by the amount relating to the investment in Cassa di Risparmio di Cesena which was €16.4 million;
35 This directive set new resolution rules applicable since 1st January 2015 for all banks in the European Union. Its measures are funded by the National Resolution Fund, which was merged into the Single Resolution Fund on 1st January 2016. 36 This option was not exercised by the newly acquired banks. 37 The contribution (for which the estimated value had already been recognised in application of IFRIC 21 “Levies”, in the Interim Financial Report for the period ended 31st March 2017) is inclusive of €0.8 million recognised in the second quarter, relating to marginal additions to the expenses of the New Banks. 38 In compliance with the provisions of Art. 8 of the above mentioned Commission Delegated Regulation of the European Commission No. 2015/81. 39 In compliance with the provisions of the Bank of Italy communication cited and pending further announcements by the supervisory authorities. 40 The ‘obligating event’ from which the obligation arises, is that of being a bank participating in the deposit guarantee scheme as at 30th September, the date of reference for calculating contributions based on the amount of protected deposits. 41 In relation to the connected additional capital requirement reported by the acquirer on conclusion of the due diligence activities.
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- a partial write-down of the AFS shareholdings held in the Voluntary Scheme relating to the investment in the junior tranche42 amounting to €10.9 million; - a full write-down, amounting to €0.8 million, of Banca Tirrenica’s AFS shareholding; - a €25.7 million value adjustment against the payments made. The total impact was €53.8 million, of which €42 million was recognised within expenses in the income statement and the remainder, amounting to €11.8 million, was allocated as part of the purchase price allocation (PPA), because it relates to the commitments and assets of the New Banks. The following remained as at 31st December 2017: - a shareholding in the Voluntary Scheme, recognised within “available-for-sale financial assets” amounting to €2.1 million; - a commitment amounting to €0.4 million43.
Impairment of available-for-sale securities In the 2017 financial statements, the fair value measurement of available-for-sale securities resulted in the recognition of impairment losses through profit and loss of approximately €165.6 million relating mainly to UBI Banca. These impairment losses were attributable exclusively to the following: - €109.9 million for investments in UCITS44; - €55.7 million of equity instruments of an “ownership interest” nature. Impairment losses on equity instruments45 are recognised, in compliance with Group policy on the impairment of available-for-sale equity instruments, when the fair value of the instruments either remains below the historical cost of purchase for a period of longer than 18 months or falls below that level by more than 35% or in cases of impairment following the recognition of previous impairment losses46.
The national consolidated tax option The Testo Unico delle Imposte sui Redditi (Consolidated Income Tax Act) grants the option for companies belonging to the same Group to calculate a single total income corresponding, generally speaking, to the algebraic sum of the taxable income of the different companies (the Parent and companies directly and/or indirectly controlled by more than 50% according to certain requirements) and as a consequence to calculate a single tax on the income of the companies in the Group (known as a “national tax consolidation”, regulated by articles 117- 129 of the Consolidated Income Tax Act). In view of this option, the Italian companies in the Group adhered to the national tax consolidation of the Parent, UBI Banca, and calculated the tax expense relating to them by transferring the corresponding taxable income to the Parent.
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42 Relating to the securitisations of non-performing loans of the banks in receipt of support. 43 Together with a credit held with the IDPF for payments made in excess of the quota due, amounting to €0.5 million. 44 Of which €108.7 million relating to the stakes held in the Atlante Fund, details of which have already been given in the information reported on the valuation of the aforementioned fund. 45 The reference here is to both equity instruments of an “investment” nature and to investments in UCITS. 46 An exception was made to this for the impairment loss on the stakes held in the Atlante Fund and also in the Voluntary Scheme formed at the Interbank Deposit Protection Fund (IDPF) for which it was considered that the conditions pursuant to IAS 39 were met for the recognition of an impairment loss.
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List of the main IFRS standards endorsed by the European Commission47
IAS/IFRS ACCOUNTING STANDARDS ENDORSEMENT IAS 1 Presentation of financial statements Reg. 1274/08, 53/09, 70/09, 494/09, 243/10, 149/11, 475/12, 1254/12, 1255/12, 301/13, 2113/15, 2173/15, 2406/15, 1905/16, 2067/16, 1986/17 IAS 2 Inventories Reg. 1126/08, 1255/12, Reg. 1905/16, 2067/16, 1986/17 IAS 7 Statement of cash flows Reg. 1126/08, 1274/08, 70/09, 494/09, 243/10, 1254/12, 1174/13, 1986/17, 1990/17 IAS 8 Accounting policies, changes in accounting estimates and errors Reg. 1126/08, 1274/08, 70/09, 1255/12, 2067/16 IAS 10 Events after the reporting date Reg. 1126/08, 1274/08, 70/09, 1142/09, 1255/12, 2067/16 IAS 11 Construction contracts Reg. 1126/08, 1274/08 IAS 12 Income taxes Reg. 1126/08, 1274/08, 495/09, 475/12, 1254/12, 1255/12, 1174/13, 1905/16, 2067/16, 1986/17, 1989/17 IAS 16 Property, plant and equipment Reg. 1126/08, 1274/08, 70/09, 495/09, 1255/12, 301/13, 28/15, 2113/15, 2231/15, 1905/16, Reg. 1986/17 IAS 17 Leases Reg. 1126/08, 243/10, 1255/12, 2113/15 IAS 18 Revenue Reg. 1126/08, 69/09, 1254/12, 1255/12 IAS 19 Employee benefits Reg. 1126/08, 1274/08, 70/09, 475/12, 1255/12, 29/15, 2343/15 IAS 20 Accounting for government grants and disclosure of government assistance Reg. 1126/08, 1274/08, 70/09, 475/12, 1255/12, 2067/16 IAS 21 The effects of changes in foreign exchange rates Reg. 1126/08, 1274/08, 69/09, 494/09, 149/11, 475/12, 1254/12, 1255/12, 2067/16, 1986/17 IAS 23 Borrowing costs Reg. 1260/08, 70/09, 2113/15, 2067/16, 1986/17 IAS 24 Related party disclosures Reg. 632/10, 475/12, 1254/12, 1174/13, 28/15 IAS 26 Retirement benefit plans Reg. 1126/08 IAS 27 Consolidated and separate financial statements Reg. 1254/12, 1174/13, 2441/15 IAS 28 Investments in associates Reg. 1254/12, 2441/15, 1703/16, 2067/16 IAS 29 Financial reporting in hyperinflationary economies Reg. 1126/08, 1274/08, 70/09 IAS 32 Financial instruments: presentation Reg. 1126/08, 1274/08, 53/09, 70/2009, 495/09, 1293/09, 149/11, 475/12, 1254/12, 1255/12, 1256/12, 301/13, 1174/13, 1905/16,2067/16, 1986/17 IAS 33 Earnings per share Reg. 1126/08, 1274/08, 495/09, 475/12, 1254/12, 1255/12, 2067/16 IAS 34 Interim financial reporting Reg. 1126/08, 1274/08, 70/09, 495/09, 149/11, 475/12, 1255/12, 301/13, 1174/13, 2343/15, 2406/15, 1905/16 IAS 36 Impairment of assets Reg. 1126/08, 1274/08, 69/09, 70/09, 495/09, 243/10, 1254/12, 1255/12, 1374/13, 2113/15, Reg. 1905/16,2067/16 IAS 37 Provisions, contingent liabilities and contingent assets Reg. 1126/08, 1274/08, 495/09, 28/15, Reg. 1905/16, 2067/16, 1986/17 IAS 38 Intangible assets Reg. 1126/08, 1274/08, 70/09, 495/09, 243/10, 1254/12, 1255/12, 28/15, 2231/15, 1905/16, Reg. 1986/17 IAS 39 Financial instruments: recognition and measurement Reg. 1126/08, 1274/08, 53/2009, 70/09, 494/09, 495/09, 824/09, 839/09, 1171/09, 243/10, 149/11, 1254/12, 1255/12, 1174/13,
47 To provide full information we report that on 8th February 2018, the European Commission published Regulation (EU) No. 2018/182 which endorses certain marginal modifications to the following accounting standards IFRS 1, IFRS 12 and IAS 28.
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1375/13, 28/15, 1905/16, 2067/16, 1986/17 IAS 40 Investment property Reg. 1126/08, 1274/08, 70/09, 1255/12, 1361/14, 2113/15, 1905/16, 1986/17 IAS 41 Agriculture Reg. 1126/08, 1274/08, 70/09, 1255/12, 2113/15, 1986/17 IFRS 1 First-time adoption of international financial reporting standards Reg. 1126/09, 1164/09, 550/10, 574/10, 662/10, 149/11, 475/12, 1254/12, 1255/12, 183/2013, 301/13, 313/13, 1174/13, 2343/15, 2441/15,1905/16, 2067/16, 1986/17 IFRS 2 Share-based payment Reg. 1126/08, 1261/08, 495/09, 243/10, 244/10, 1254/12, 1255/12, 28/15, 2067/16 IFRS 3 Business combinations Reg. 495/09, 149/11, 1254/12, 1255/12, 1174/13, 1361/14, 28/15, 1905/16, 2067/16, 1986/17 IFRS 4 Insurance contracts Reg. 1126/08, 1274/08, 1165/09, 1255/12, 1905/16, 2067/16, 1986/17, 1988/17 IFRS 5 Non-current assets held for sale and discontinued operations Reg. 1126/08, 1274/08, 70/09, 494/09, 1142/09, 243/10, 475/12, 1254/12, 1255/12, 2343/15, 2067/16 IFRS 6 Exploration for and evaluation of mineral resources Reg. 1126/08 IFRS 7 Financial instruments: disclosures Reg. 1126/08, 1274/08, 53/09, 70/2009, 495/09, 824/09, 1165/09, 574/10, 149/11, 1205/11, 475/12, 1254/12, 1255/12, 1256/12, 1174/13, 2343/15, 2406/15, 2067/16, Reg. 1986/17 IFRS 8 Operating segments Reg. 1126/08, 1274/08, 243/10, 632/10, 475/12, 28/15 IFRS 9 Financial instruments Reg. 2067/16, Reg. 1986/17 IFRS 10 Consolidated financial statements Reg. 1254/12, 313/13, 1174/13, 1703/16 IFRS 11 Joint arrangements Reg. 1254/12, 313/13, 2173/15 IFRS 12 Disclosure of interests in other entities Reg. 1254/12, 313/13, 1174/13, 1703/16 IFRS 13 Fair value measurement Reg. 1255/12,1361/14,2067/16, Reg. 1986/17 IFRS 15 Revenue from contracts with customers48 Reg. 1905/16, 1986/17, 1987/17 IFRS 16 Leases49 Reg. 1986/17
SIC/IFRIC INTERPRETATION DOCUMENTS ENDORSEMENT Reg. 1126/08, 1274/08, IFRIC 1 Changes in existing decommissioning, restoration and similar liabilities 1986/17 Reg. 1126/08, 53/09, 1255/12, IFRIC 2 Members' shares in co-operative entities and similar instruments 301/13, 2067/16 Reg. 1126/08, 70/09, 1255/12 IFRIC 4 Determining whether an arrangement contains a lease Rights to interests arising from decommissioning, restoration and environmental Reg. 1126/08, 1254/12, IFRIC 5 rehabilitation funds 2067/16 Liabilities arising from participating in a specific market - waste electrical and Reg. 1126/08 IFRIC 6 electronic equipment Applying the restatement approach under IAS 29 “Financial reporting in Reg. 1126/08, 1274/08 IFRIC 7 hyperinflationary economies” Reg. 1126/08, 495/09, 1171/09, IFRIC 9 Reassessment of embedded derivatives50 243/10, 1254/12 Reg. 1126/08, 1274/08, IFRIC 10 Interim financial reporting and impairment 2067/16 Reg. 254/09, 1905/16, 2067/16, IFRIC 12 Service concession arrangements 1986/17 IFRIC 13 Reg. 1262/08, 149/11, 1255/12 Customer loyalty programmes IFRIC 14 Reg. 1263/08, 1274/08, 633/10, Prepayments of a minimum funding requirement 475/12 IFRIC 15 Reg. 636/09 Agreements for the construction of real estate
48 From 1st January 2018, the date on which application of the standard becomes compulsory, the provisions of the following standards and interpretations were no longer applicable: IAS 11 and 18, IFRIC 13, 15 and 18 and SIC-31. 49 From 1st January 2019, the date on which application of the standard becomes compulsory, the provisions of the following standards and interpretations will no longer be applicable: IAS 17, IFRIC 4, SIC 15 and 27. 50 From 1st January 2018, the date on which application of IFRS 9 becomes compulsory, that interpretation is considered repealed.
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IFRIC 16 Reg. 460/09, 243/10, 1254/12, Hedges of a net investment in a foreign operation 2067/16 IFRIC 17 Reg. 1142/09, 1254/12, Distributions of non-cash assets to owners 1255/12 IFRIC 18 Reg. 1164/09 Transfers of assets from customers IFRIC 19 Reg. 662/10, 1255/12, 2067/16 Extinguishing financial liabilities with equity instruments IFRIC 20 Reg. 1255/12 Stripping costs in the production phase of a surface mine IFRIC 21 Reg. 634/14 Levies Reg. 1126/08, 1274/08, 494/09 SIC 7 Introduction of the euro Reg. 1126/08, 1274/08 SIC 10 Government assistance – no specific relation to operating activities Reg. 1126/08, 1274/08 SIC 15 Operating leases – Incentives Reg. 1126/08, 1274/08 SIC 25 Income taxes – Changes in the tax status of an enterprise or its shareholders Reg. 1126/08, 1905/16, SIC 27 Evaluating the substance of transactions in the legal form of a lease 2067/16 Reg. 1126/08, 1274/08, 70/09, SIC 29 Service concession arrangements: disclosures 1986/17 Reg. 1126/08 SIC 31 Revenue – Barter transactions involving advertising services Reg. 1126/08, 1274/08, SIC 32 Intangible assets – Website costs 1905/16, 1986/17
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A.2 – THE MAIN ITEMS IN THE FINANCIAL STATEMENTS
1. Financial assets and liabilities held for trading and financial assets and liabilities designated at fair value
This category includes:
1.1. Definition of financial assets and liabilities held for trading
A financial asset or liability is classified as held for trading (at fair value through profit or loss – FVPL) and is stated within either item 20 “Financial assets held for trading” or item 40 “Financial liabilities held for trading”, if it is: . acquired or incurred for sale or repurchase in the short term; . part of a portfolio of identified financial instruments which are managed together and for which there is evidence of a recent and effective strategy of short term profit taking; . a derivative (except for derivatives designated and effective as a hedging instrument – see the relative section below).
1.1.1. Derivative financial instruments A “derivative” is defined as a financial instrument or other contract with the following characteristics: . its value changes in response to the change in an interest rate, in the price of a financial instrument, in a commodity price, in a foreign currency exchange rate, in a price, interest rate or credit rating index, or credit worthiness index or other specific variable; . it requires no initial investment, or a net initial investment that is smaller than would be required for other types of contract from which a similar response to changes in market factors would be expected; . it is settled at a future date.
The UBI Group holds derivative financial instruments for both trading and for hedging purposes (see the relative section below for information on the latter).
1.1.2. Embedded derivative financial instruments An "embedded derivative financial instrument" is defined as a component of a hybrid (combined) instrument which also includes a “host” non derivative contract such that some of the cash flows of the combined instrument behave in a way similarly to the derivative as a stand-alone instrument. The embedded derivative is separated from the host contract and treated in the accounts as a stand-alone derivative if and only if: . the economic risks and characteristics of the embedded derivative are not closely related to the economic risks and characteristics of the host contract; . a separate instrument with the same conditions as the embedded derivative would satisfy the definition of a derivative; . the hybrid (combined) instrument is not recognised within financial assets or liabilities held for trading.
1.2. Definition of financial assets and liabilities designated at fair value
Financial assets and liabilities may be designated on initial recognition within “financial assets and liabilities designated at fair value” and recognised within items 30 “Financial assets designated at fair value” and 50 “Financial liabilities designated at fair value”.
A financial asset/liability is designated at fair value through profit or loss on initial recognition only when:
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a) it is a hybrid contract containing one or more embedded derivatives and the embedded derivative significantly alters the cash flows that would otherwise be generated by the contract; b) the designation at fair value through profit or loss allows better information to be provided because: . it eliminates or considerably reduces an asymmetry in the measurement or in the recognition, which would otherwise result from the valuation of assets or liabilities or from recognition of the relative profits and losses on a different basis; or . a group of financial assets, financial liabilities or of both is managed and its performance is measured on the basis of its fair value according to a documented risk management procedure or investment strategy and the information on the group is provided internally on that basis to senior managers with strategic responsibilities.
1.3. Recognition criteria
The financial instruments “Financial assets and liabilities held for trading and financial assets and liabilities designated at fair value” are recognised either: . at the time of settlement if they are debt or equity instruments; or, . on the trade date if they are derivative contracts. Measurement on initial recognition is at cost considered to be the fair value of the instrument without considering any transaction costs or income directly attributable to the instruments themselves.
With specific reference to derivative financial instruments, these are subject to netting of current positive and negative values in the balance sheet where they relate to the same counterparty if the legal right currently exists to offset those amounts and they are then settled on a net basis.
1.4. Measurement criteria
Subsequent to initial recognition, the financial instruments in question are measured at fair value with changes recognised in the income statement within item 80 “Net trading income (loss)”, for assets/liabilities held for trading and within item 110 “Net income/expense on financial assets and liabilities designated at fair value” for financial assets/liabilities designated at fair value”. The measurement of the fair value of the assets and liabilities in question is based on prices quoted on active markets or on internal valuation models which are generally used in financial practice as described in greater detail in Part A.4 “Information on fair value” of the Notes to the financial statements.
1.5. Derecognition criteria
“Financial assets and liabilities held for trading and financial assets and liabilities designated at fair value” are derecognised in the accounts when the rights to the cash flows from the financial assets or liabilities expire or when the financial assets or liabilities are transferred with the substantial transfer of all the risks and rewards deriving from ownership of them. The result of the transfer of financial assets or liabilities held for trading is recognised in the income statement within item 80 “Trading income (loss)”, while the result of the transfer of financial assets or liabilities designated at fair value is recognised within item 110 “Net income/expense on financial assets and liabilities designated at fair value.
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2. Available-for-sale financial assets
2.1 Definition
Available-for-sale financial assets (AFS) are defined as non-derivative financial assets designated on initial recognition as such or that are not classified as: (1) loans and receivables (see section below); (2) financial investments held until maturity (see section below); (3) financial assets held for trading and measured at fair value recognised through profit or loss (see section below).
These financial assets are recognised within item 40 “Available-for-sale financial assets”.
2.2 Recognition criteria
Available-for-sale financial assets are recognised initially when, and only when, the company becomes a party in the contract clauses of the instrument and that is on the date of settlement, at fair value which generally coincides with the cost of them. This value includes costs or income directly connected with the instruments themselves. The recognition of available-for-sale financial assets may result also from the reclassification out of “held-to-maturity investments” or, but only and only in rare circumstances and in any case only if the asset is no longer held for sale or repurchase in the short term, out of “financial assets held for trading”; in this case the recognition value is the same as the fair value at the moment of reclassification.
2.3 Measurement criteria
Subsequent to initial recognition, available-for-sale financial assets continue to be recognised at fair value with interest (resulting from application of the amortised cost) recognised through profit or loss and changes in fair value recognised in equity within item 140 “Valuation reserves”, except for losses due to impairment, until the financial asset is derecognised, at which time the profit or loss previously recognised in equity must be recognised through profit or loss. Equity instruments for which the fair value cannot be reliably measured are recognised at cost.
The measurement of the fair value of available-for-sale financial assets is based on the prices quoted on active markets or on internal measurement models which are generally used in financial practice as described in greater detail in Part A.4 “Information on fair value” of the Notes to the financial statements.
At the end of each financial year or interim reporting period, objective evidence of impairment is assessed, which in the case of equity instruments is also held to be significant or prolonged.
As concerns the significance of the impairment, significant indications of impairment exist where the market value of an equity instrument is less than 35% of its historical cost of acquisition. In this case impairment is recognised through profit or loss without further analysis. If the impairment is less then it is recognised only if the measurement of the instrument performed on the basis of its fundamentals does not confirm the soundness of the company, which is to say its earning prospects. As concerns the permanence of the impairment, it is defined as prolonged when the fair value remains below its historical cost of purchase for a period of longer than 18 months. In this case the impairment is recognised through profit or loss without further analysis. If the fair value continues to remain below its historical purchase cost for periods shorter than 18 months, then the impairment to be recognised through profit or loss is determined by considering, amongst other things, whether the impairment is attributable to general negative
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performance by stock markets rather than to the specific performance of the individual counterparty.
If there is permanent impairment, the cumulative change, including that previously recognised in equity under the aforementioned item, is recognised directly in the income statement within item 130 “Net impairment losses on b) available-for-sale financial assets”. Permanent impairment loss is recognised when the acquisition cost (net of any repayments of principal and amortisation) of an available-for-sale financial asset exceeds its recoverable amount. Any recoveries of value, which are only possible when the causes of the original permanent impairment no longer exist are treated as follows: . if they relate to investments in equity instruments, then with a balancing entry directly in the equity reserve; . if they relate to investments in debt instruments, they are recognised in the income statement within item 130 “Net impairment losses on b) available-for-sale financial assets”.
The amount of the reversal of the impairment loss may not in any case exceed the amortised cost which, in the absence of previous impairment losses, the instrument would have had at that time.
Because the UBI Group applies IAS 34 “Interim financial reporting” to its half year interim reports with consequent identification of a half year “interim period”, any impairment incurring is recognised historically at the end of the half year.
2.4 Derecognition criteria
Available-for-sale financial assets are derecognised in the accounts when the contractual rights to the cash flows from the financial assets expire or when the financial assets are sold with the substantial transfer of all the risks and benefits deriving from ownership of them. The result of the disposal of available-for-sale financial assets is recognised in the income statement within item 100 “Income/expense from the disposal or repurchase of b) available- for-sale financial assets”. Upon derecognition, any corresponding amount of what was previously recognised in equity under item 140 “Valuation reserves” is written off against the income statement”.
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3. Held-to-maturity investments
3.1 Definition
Held-to-maturity investments (HTM) are defined as non-derivative financial assets with fixed or determinable payments and fixed maturity that an entity intends and is able to hold to maturity. Exception is made for those:
(a) held for trading and those designated upon initial recognition at fair value through profit or loss (see previous section); (b) designated as available for sale (see previous section); (c) which satisfy the definition of loans and receivables (see section below).
When annual and interim reports are prepared the intention and ability to hold financial assets until maturity is assessed.
The assets in question are recognised under item 50 “Held-to-maturity investments”.
3.2 Recognition criteria
Held-to-maturity investments are recognised initially when, and only when, the company becomes a party in the contract clauses of the instrument and that is on the date of settlement, measured at cost inclusive of any costs and income directly attributable to it. If the recognition of assets in this category is the result of the reclassification out of “available-for- sale financial assets” or, but only and only in rare circumstances if the asset is no longer held for sale or repurchase in the short-term, out of the “financial assets held for trading”, the fair value of the assets as measured at the time of the reclassification is taken as the new measure of the amortised cost of the assets.
3.3 Measurement criteria
Held-to-maturity investments are valued at amortised cost using the criteria of the effective interest rate (see the section below “loans and receivables” for a definition). The result of the application of this method is recognised in the income statement within item 10 “Interest and similar income”.
When annual financial statements or interim reports are prepared, objective evidence of the existence of an impairment of the value of the assets is assessed. If there is permanent impairment, the difference between the recognised value and the present value of expected future cash flows discounted at the original effective interest rate is included in the income statement under the item 130 “Net impairment losses on c) held-to-maturity investments”. Any recoveries of value recorded, should the cause that gave rise to the previous recognition of impairment loss no longer exist, are recognised under the same item in the income statement.
The fair value of held-to-maturity investments is measured for disclosure purposes or where effective currency or credit risk hedges exist (in relation to the risk hedged) and it is estimated as described in greater detail in Part A.4 “Information on fair value” of the Notes to the financial statements.
3.4 Derecognition criteria
Held-to-maturity investments are derecognised when the rights to the cash flows from the financial assets expire or when the financial assets are sold with the substantial transfer of all the risks and rewards deriving from ownership of them. The result of the disposal of held-to-
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maturity financial assets is recognised in the income statement under the item 100 “Income/expense from disposal or repurchase of c) held-to-maturity investments”.
4. Loans and receivables
4.1 Definition
Loans and receivables (L&R) are defined as non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. The following are exceptions:
(a) those which it is intended to sell immediately or in the short-term, that are classified as held for trading and those that may have been designated on initial recognition as at fair value through profit or loss; (b) those designated upon initial recognition as available for sale; (c) those for which the holder may not recover substantially all of its initial investment, other than because of credit deterioration; in this case they are classified as available-for-sale.
Loans and receivables are recognised under the items 60 “Loans and advances to banks” and 70 “Loans and advances to customers”.
4.2 Recognition criteria
Loans and receivables are initially recognised in the accounts when the company becomes part of a loan contract, which is to say when the creditor acquires the right to the payment of the sums agreed in the contract. That moment corresponds to the date on which the loan is granted. Recognition in this category may result also from the reclassification out of “available-for-sale financial assets” or, but only and only in rare circumstances if the asset is no longer held for sale or repurchase in the short term, out of “financial assets held for trading”. The amount initially recognised is that of the fair value of the financial instrument which is the same as the amount granted inclusive of costs or income directly attributable to it and determinable from the outset, independently of when they are paid. The amount of the initial recognition does not include all those expenses that are reimbursed by the debtor counterparty or that are attributable to internal expenses of an administrative character. If the recognition is the result of reclassification, the fair value of the asset recognised at the time of the reclassification is taken as the new measure of the amortised cost of the assets. For loans not granted under market conditions, the initial fair value is calculated by using special measurement techniques described below; in these circumstances the difference between the fair value that is calculated and the amount granted is included directly in the income statement within the item interest. Contango and repo agreements with the obligation or right to repurchase or resell at term are recognised in the accounts as funding or lending transactions. For transactions with a spot sale and forward repurchase, the spot cash received is recognised in the accounts as borrowings, while the spot purchase transactions with forward resale are recognised as lending for the spot amount paid.
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4.3 Measurement criteria
Loans and receivables are measured at amortised cost using the criteria of effective interest. The amortised cost of a financial asset or financial liability is the amount at which the financial asset or financial liability was measured upon initial recognition net of principal repayments, plus or minus the cumulative amortisation using the effective interest criterion on any difference between that initial amount and the maturity amount, minus any reduction (arising from an impairment or uncollectibility). The effective interest criterion is a method of calculating amortised cost of an asset or liability (or group of assets and liabilities) and of allocating the interest income or expense over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash payments or receipts through the expected life of the financial instrument. To determine the effective interest rate, the cash flows must be estimated considering all the contractual terms of the financial instrument (e.g. prepayment, call and similar options), but future credit losses shall not be considered. The calculation includes all fees and basis points paid or received between parties to the contract that are an integral part of the effective interest rate, the transaction costs and all other premiums or discounts.
At each reporting date or when interim reports are prepared, any objective evidence that a financial asset or group of financial assets has suffered impairment loss is assessed. This circumstance occurs when it is probable that a company may not be able to collect amounts due on the basis of the original contracted conditions or, for example, in the presence of:
(a) significant financial difficulties of the issuer or obligor; (b) a breach of contract such as a default or delinquency in interest or principal payments; (c) the lender, for economic or legal reasons relating to the borrower’s financial difficulty, granting to the borrower a concession that the lender would not otherwise consider; (d) the probability of the beneficiary declaring procedures for loan restructuring; (e) the disappearance of an active market for that financial asset due to financial difficulties; (f) observable data indicating an appreciable decrease in estimated future cash flows from a similar group of financial assets since the time of the initial recognition of those assets, although the decrease cannot yet be identified with the individual financial assets of the group.
The measurement of non-performing loans (termed “deteriorated loans” in previous financial reports) (in accordance with the definitions contained in current Bank of Italy supervisory regulations divided into: bad-loans (termed “non-performing” previously), unlikely to pay, past due) is performed on a case-by-case basis. The remaining loans are measured using, collective, statistical methods which group uniform classes of risk together.
The method for calculating the impairment losses recognised on non-performing loans is based on discounting expected future cash flows for principal and interest, taking account of any guarantees attached to positions and of any advances received. The basic elements for determining the present value of cash flows are the identification of the estimated receipts, the relative maturity dates and the discount rate to apply. The amount of the loss is equal to the difference between the recognised value of the asset and the present value of expected future cash flows, discounted at the original effective interest rate.
The measurement of performing loans relates to asset portfolios for which no objective evidence of impairment exists and which are therefore valued collectively. Percentage rates of loss calculated from historical data series are applied to the estimated cash flows from the assets, grouped into uniform classes with similar characteristics in terms of credit risk for the Parent and the network banks of the Group, according to Basel 2 regulations, to which appropriate corrective factors are applied to give a measurement consistent with the relative accounting standard.
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If a loan is subject to individual measurement and shows no objective impairment loss, it is placed in a class of financial assets with similar credit risk characteristics and subjected to collective measurement.
Permanent impairment that is found is immediately recognised in the income statement under the item 130 “Net impairment losses on a) loans” as are reversals of part or all of the impairment losses previously recognised. Reversals of impairment losses are recognised where there is an improvement in credit quality sufficient to provide reasonable certainty of prompt collection of the principal and the interest according to the original conditions of the original loan contract, or in the presence of a progressive reversal of the present value calculated at the time of recognising the impairment loss. Where loans are measured on a collective basis, any upward value adjustments or reversals of impairment losses are recalculated on a differential basis in relation to each performing loan at the measurement date.
The methods used to determine the fair value of loans and receivables are described in Part A.4 “Information on fair value” of the Notes to the financial statements. The fair value is measured for all loans for information purposes only. For loans and receivables subject to effective hedging, the fair value is calculated in relation to the risk that is hedged for measurement purposes.
4.4 Derecognition criteria
Loans are derecognised from the balance sheet when the rights to the cash flows from the financial assets expire or when the financial assets are sold with the substantial transfer of all the risks and rewards deriving from ownership of them and also when events to extinguish the debt occur, in accordance with the definition provided in the supervisory regulations in force. Otherwise loans continue to be recognised on the balance sheet for an amount equal to the remaining involvement, even if legal title has been transferred to a third party. The assets in question are derecognised in the balance sheet even when the Bank maintains the contractual right to receive cash flows from them, but when at the same time it has a contractual obligation to pay those cash flows to a third party. If it results from disposals, the profit or loss from the derecognition of loans and receivables is recognised in the income statement within item 100 “Income (loss) from the disposal or repurchase of a) loans”, or if it results from the aforementioned events to extinguish debt, within item 130 “Net impairment losses on a) loans and receivables”. In the latter case the events to extinguish debt consist of either official actions taken by the competent bodies of the Bank from which the total or partial non-recoverability of the financial asset results or the waiver of recovery activities for reasons of financial expediency.
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5. Hedging derivatives
5.1 Definition
Hedging transactions are designed to neutralise potential losses on a specific item (or group of items) attributable to a determined risk, by means of the gains realised on another instrument or group of instruments if that particular risk should actually result in losses. The UBI Group uses the following type of hedging transactions, appropriately represented in the accounts and described below: . a fair value hedge: the objective is to offset adverse changes in the fair value of the asset or liability hedged; . a cash flow hedge: the objective is to hedge against the exposure to variability in expected cash flows with respect to the initial expectations.
Derivative contracts stipulated with external counterparties are designated as hedging instruments.
5.2 Recognition criteria
As with all derivatives, derivative financial instruments used for hedging are initially recognised and subsequently measured at fair value and are classified in the balance sheet under assets within item 80 “Hedging derivatives” and under liabilities within item 60 “Hedging derivatives”.
A relationship qualifies as a hedge and is appropriately represented in the accounts if, and only if, all the following conditions are satisfied: . at the start of the hedging transaction the relationship is formally designated and documented, including the company’s risk management objective and strategy for undertaking the hedge. This documentation includes identification of the hedging instrument, the item or transaction hedged, the nature of the risk being hedged, and how the entity will assess the hedging instrument's effectiveness in offsetting the exposures to changes in the fair value of the item hedged or in the cash flows attributable to the risk hedged; . the hedging is expected to be highly effective; . the planned transaction hedged, for hedging cash flows, is highly probable and presents an exposure to changes in cash flows that could have effects on the income statement; . the effectiveness of the hedging can be reliably measured; . the hedging is measured on an ongoing basis and is considered highly effective for all the financial years in which it was designated.
5.2.1 Methods for testing effectiveness
A hedge relationship is judged effective, and as such is appropriately represented in the accounts, if at its inception and during its life the changes in the fair value or cash flows of the hedged item attributable to the hedged risk are expected and have almost always been completely offset by the changes in the fair value or cash flows of the hedging instrument. This conclusion is reached when the actual result falls within a range of between 80% and 125%. The effectiveness of a hedge is tested at inception and at each reporting date by means of a prospective test designed to demonstrate the expected effectiveness of the hedge during its life. Further retrospective tests are conducted monthly on a cumulative basis where the objective is to measure the degree of effectiveness of the hedge in the reporting period and therefore to verify whether the hedge has actually been effective in the period.
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Derivative financial instruments that are considered hedges from a profit and loss viewpoint but which do not satisfy the requirements to be considered effective instruments for hedging are recognised under item 20 “Financial assets held for trading” or under item 40 “Financial liabilities held for trading” and the profits and losses under the corresponding item 80 “Trading income (loss)”. If the above tests do not confirm the effectiveness of the hedge, then if it is not derecognised, the derivative contract is reclassified within derivatives held for trading and the instrument hedged is again measured according to the criterion applied for its balance sheet classification.
5.3 Measurement criteria
5.3.1 Fair value hedging Fair value hedging is treated as follows: . the profit or loss resulting from measuring a hedging instrument at fair value is included in the income statement under item 90 “Net hedging income (loss)”; . the profit or loss on the item hedged attributable to the hedged risk adjusts the value in the accounts of the hedged item and is recognised immediately, regardless of the type of asset or liability hedged, in the income statement within the aforementioned item.
Hedge accounting is discontinued prospectively in the following cases: 1. the hedging instrument expires or is sold, terminated, or exercised; 2. the hedge no longer meets the hedge accounting criteria described above; 3. the entity revokes the designation.
If the asset or liability hedged is measured at amortised cost, the higher or lower value resulting from measuring them at fair value as a result of the hedge becoming ineffective is recognised through profit or loss, according to the effective interest rate method or at constant rates in the event of a hedge on a portfolio of assets and liabilities where that method is not feasible, or in a single amount if the hedge has been derecognised. The methods used for measurement of the fair value of the risk hedged in the assets or liabilities subject to hedging are described in Part A.4 “Information on fair value” of the Notes to the financial statements.
5.3.2 Cash flow hedging When a derivative is designated as a hedge of exposure to changes in expected cash flows from an asset or liability in the balance sheet or a future transaction considered highly probable, the accounting treatment of the hedge is as follows:
. the profits or losses (from the valuation of the hedging derivative) attributable to the effective portion of the hedge are recognised in a special reserve in equity termed 140 “Valuation reserves”; . the profits or losses (from measurement of the hedging derivative) attributable to the ineffective portion of the hedge are recognised directly in the income statement under item 90 “Net hedging income (loss)”; . the asset or liability hedged is measured according to the class of asset or liability to which it belongs.
If a future transaction occurs which involves recognising non financial assets and liabilities, the corresponding profits or losses initially recognised under item 140 “Valuation reserves” are then transferred from that reserve and included as an initial cost of the asset or liability that is recognised. If the future hedged transaction subsequently involves recognition of a financial asset or liability, the associated profits or losses that were originally recognised under the item 140 “Valuation reserves” are reclassified to the income statement in the same reporting period or periods during which the assets acquired or liabilities incurred have an effect on the income
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statement. If a portion of the profits or losses recognised in the aforementioned reserve are not considered recoverable, it is reclassified into the income statement within item 80 “Net trading income (loss)”.
In all cases other than those already described, the profits or losses initially recognised under the item 140 “Valuation reserves” are transferred to the income statement to reflect the time and manner in which the future transaction is recognised in the income statement.
An entity must discontinue hedge accounting prospectively in each of the following circumstances:
(a) the hedging instrument expires or is sold, terminated, or exercised (for this purpose the replacement or exchange of one hedging instrument with another hedging instrument is not a conclusion or termination if that replacement or exchange forms part of an entity’s documented hedging strategy). In this case the total profit (or loss) on the hedging instrument continues to be recognised directly in equity until the reporting period in which the hedge became effective and it continues to be recognised separately until the programmed hedging transaction occurs; (b) the hedge no longer satisfies the criteria for hedge accounting. In this case the total profit or loss on the hedging instrument continues to be recognised directly in equity starting from the reporting period in which the hedge became effective and it continues to be recognised separately in equity until the programmed hedging transaction occurs; (c) it is no longer considered that the future transaction should occur, in which case any related total profit or loss on the hedging instrument recognised directly in equity starting from the reporting period in which the hedge became effective must be recognised through profit or loss; (d) the entity revokes the designation. For hedges of a programmed transaction, total profits or losses on the hedging instrument recognised directly in equity starting from the reporting period in which the hedge became effective continues to be recognised separately in equity until the programmed transaction occurs or it is expected that it will no longer occur.
If it is expected that the transaction will no longer occur the total profit (or loss) that had been recognised directly in equity is transferred to the income statement.
5.3.3 Hedging portfolios of assets and liabilities
Hedging of portfolios of assets and liabilities (“macrohedging”) and appropriate accounting treatment is possible after first: - identifying the portfolio to be hedged and dividing it by maturity dates; - designating the risk to be hedged; - identifying the interest rate risk to be hedged; - designating the hedging instruments; - determining the effectiveness.
The portfolio for which the interest rate risk is hedged may contain both assets and liabilities. This portfolio is divided on the basis of expected maturity or repricing dates of interest rates after first analysing the structure of the cash flows. Changes in the fair value of the hedged instrument are recognised in the income statement under item 90 “Net hedging income (loss)” and in the balance sheet under item 90 “Fair value change in hedged financial assets” or under item 70 “Fair value change in hedged financial liabilities”. Changes occurring in the fair value of the hedging instrument are recognised in the income statement within item 90 “Net hedging income (loss)” and under assets in the balance sheet within item 80 “Hedging derivatives” or under liabilities side within item 60 “Hedging derivatives”.
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6. Equity investments
6.1 Definition
6.1.1 Subsidiaries
A “subsidiary” is defined as a company over which the Parent exercises control. Such a condition occurs when the latter is exposed to variable returns or holds rights on those returns resulting from its relationship with the subsidiary and at the same time it has the ability to influence those returns by exercising its power over that entity. The existence of control is also determined by considering the presence of potential voting rights and contractual rights which empower the owner to significantly influence the returns of the subsidiary.
6.1.2 Companies subject to joint control
A “company subject to joint control” is defined as a company governed by a contractual arrangement whereby the parties to it that hold joint control enjoy rights over the net assets of the arrangement. Joint control assumes that control over the arrangement is shared contractually and that it only exists when the unanimous consent of all the parties that share the control is required for decisions that regard important activities.
6.1.3 Associates
An “associate” is defined as a company in which the investor exercises significant influence. Significant influence is the power to participate in the financial and operating policy decisions of the company invested in but not to control or have joint control of it.
6.2 Recognition criteria
Equity investments in associates or joint ventures are recognised at cost of purchase plus any accessory costs.
6.3 Measurement criteria
In the consolidated financial statements equity investments in subsidiaries are fully consolidated line-by-line. Investments in associates and companies subject to joint control are measured by adopting the equity method. Any objective evidence that an equity investment has been subject to impairment is assessed as at each annual or interim reporting date. The recoverable amount is then calculated, considering the present value of the future cash flows which may be generated by the investment, including the final disposal value. If the recoverable amount calculated in this way is less than the carrying value, the difference is recognised in the income statement under 240 “Profits (losses) of equity investments (valued at equity)”. Any future reversals of impairment are also included in the item where the reasons for the original impairment no longer apply.
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6.4 Derecognition criteria
Equity investments are derecognised in the balance sheet when the contractual rights to the cash flows from the financial assets expire or when the financial assets are sold with the substantial transfer of all the risks and rewards deriving from ownership of them. The result of the disposal on investments valued using the equity method recognised in the income statement under item 240 “Profits (losses) of equity investments (valued at equity)”; the result of the disposal of equity investments other than those valued using the equity method is recognised in the income statement under item 270 “Profits (losses) on the disposal of investments
7. Property, plant and equipment
7.1 Definition of assets for functional use
“Assets for functional use” are defined as tangible assets possessed to be used for the purpose of carrying on a company’s business and where the use is planned to last longer than one year. Assets for functional use also include properties rented to employees, ex employees and their heirs, as well as works of art.
7.2 Definition of investment property
“Investment property” is defined as properties held in order to earn rentals or for capital appreciation. As a consequence, investment property is to be distinguished from assets held for the use of the owner because they generate cash flows that are very different from the other assets held by the banking group.
Finance lease contracts are also included within tangible assets (for functional use and held for investment) even if the legal title to the assets remains with the leasing company.
7.3 Recognition criteria
Tangible assets, functional and other, are initially recognised at cost (item 120 “Property, plant and equipment”), inclusive of all costs directly connected with bringing it to working condition for the use of the assets and of purchase taxes and duties that are not recoverable This amount is subsequently increased to include expenses incurred from which it is expected future benefits will be obtained. The costs of ordinary maintenance are recognised in the income statement at the time at which they are incurred, while extraordinary maintenance costs (improvements) from which future benefits are expected are capitalised by increasing the value of the relative asset. Improvements and expenses incurred to increase the value of leased assets from which future benefits are expected are recognised:
- under the most appropriate category of item 120, “Property, plant and equipment” if they are independent and can be separately identified, whether they are leased assets the property of others or whether they are held under a financial leasing contract; - under item 120 “Property, plant and equipment” if they are not independent and cannot be separately identified as an increase to the type of assets concerned if held by means of a financial lease contract or under item 160 “Other assets” if they are held under an ordinary lease contract.
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The cost of property, plant and equipment is recognised as an asset if, and only if: . it is probable that the future economic benefits associated with the asset will flow to the enterprise; . the cost of the asset can be reliably determined.
7.4 Measurement criteria
Subsequent to initial recognition, items of property, plant and equipment for use in operations are recognised at cost, as defined above, net of accumulated depreciation and any permanent cumulative impairment. The depreciable amount, equal to cost less the residual value (i.e. the amount that would be normally obtained from disposal, less disposal costs, if the asset was normally in the conditions, including age, expected at the end of its useful life), should be allocated on a systematic basis over the asset's useful life by adopting the straight line method of depreciation. The useful life of an asset, which is reviewed periodically to detect any significant change in estimates compared to previous figures, is defined as: . the period of time over which it is expected that the asset can be used by a company or, . the quantity of products or similar units that an entity expects to obtain from the use of the asset.
Since property, plant and equipment may consist of items with different useful lives, land, whether by itself or as part of the value of a building is not depreciated since it constitutes a fixed asset with an indefinite life. The value attributable to the land is deducted from the total value of a property for all buildings in proportion to the percentage of ownership. Buildings, on the other hand, are depreciated according to the criteria described above. Works of art are not depreciated because they generally increase in value over time. Depreciation of an asset starts when it is available for use and ceases when the asset is written off the accounts, which is the most recent of when it is classified as for sale and the date of elimination from the accounts. As a consequence depreciation does not stop when an asset is left idle or is no longer in use, unless the asset has already been fully depreciated. Improvements and expenses which increase the value are depreciated as follows: . if they are independent and can be separately identified, according to the presumed useful life as described above; . if they are not independent and cannot be separately identified, then if they are held under an ordinary leasing contract, over the shorter of the period in which the improvements and expenses can be used and that of the remaining life of the contract taking account of any individual renewals, or if the assets are held under a finance lease contract, over the expected useful life of the assets concerned. The depreciation of improvements and expenses to increase the value of leased assets recognised under item 160 “Other assets” is recognised under item 220 “Other operating income (expense)”.
At the end of each annual or interim reporting period the existence of indications that demonstrate the impairment of the value of an asset are assessed. The loss is determined by comparing the carrying amount of the tangible asset with the lower recoverable amount. The latter is the greater of the fair value, net of any sales costs, and the relative use value intended as the present value of future cash flows generated by the asset. The loss is immediately recognised in the income statement under item 200 “Net impairment losses on property, equipment and investment property”; the item also includes any future recovery in value if the causes of the original write down no longer exist.
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7.4.1 Definition and measurement of fair value
7.4.1.1 Properties The methods used to determine the fair value of properties are described in Part A.4 “Information on fair value” of the Notes to the financial statements.
7.4.1.2 Determination of the value of land The methods used to determine the fair value of land are described in Part A.4 “Information on fair value” of the Notes to the financial statements.
7.5 Property, plant and equipment acquired through finance leases
A finance lease is a contract that substantially transfers all the risks and rewards incident to ownership of an asset. Legal title may or may not be transferred at the end of the lease term.
The beginning of the lease term is the date on which the lessee is authorised to exercise his right to use the asset leased and therefore corresponds to the date on which the lease is initially recognised. When the contract commences, the lessee recognises the financial lease transactions as assets and liabilities in its balance sheet at the fair value of the asset leased or, if lower, at the present value of the minimum payments due. To determine the present value of the minimum payments due, the discount rate used is the contractual interest rate implicit in the lease, if practicable, or else the lessee’s incremental borrowing rate is used. Any initial direct costs incurred by the lessee are added to the amount recognised for the asset.
The minimum payments due are apportioned between the finance charges and the reduction of the residual liability. The former are allocated over the lease term so as to produce a constant rate of interest on the residual liability. The finance lease contract involves recognition of the depreciation charge for the asset leased and of the finance charges for each financial year. The depreciation policy used for assets acquired under finance leases is consistent with that adopted for owned assets. See the relative paragraph for a more detailed description.
7.6 Derecognition criteria
Property, plant and equipment are derecognised in the balance sheet when they are disposed of or when they are permanently retired from use and no future economic benefits are expected from their disposal. Any gains or losses resulting from the retirement or disposal of the property, equipment and investment property, calculated as the difference between the net consideration on the sale and the carrying amount of the asset are recognised in the income statement under item 270 “Profit (loss) on the disposal of investments”.
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8. Intangible assets
8.1 Definition
An intangible asset is defined as an identifiable non-monetary asset without physical substance that is used in carrying on a company’s business. The asset is identifiable when: . it is separable, which is to say capable of being separated and sold, transferred, licensed, rented, or exchanged; . it arises from contractual or other legal rights, regardless of whether those rights are transferable or separable from other rights and obligations.
An asset possesses the characteristic of being controlled by the enterprise as a result of past events and the assumption that its use will cause economic benefits to flow to the enterprise. An entity has control over an asset if it has the power to obtain future economic benefits arising from the resource in question and may also limit access by others to those benefits. Future economic benefits arising from an intangible asset might include receipts from the sale of products or services, savings on costs or other benefits resulting from the use of the asset by an enterprise.
An intangible asset is recognised if, and only if: (a) it is probable that the expected future economic benefits attributable to the asset will flow to the entity; (b) the cost of the asset can be measured reliably.
The probability of future economic benefits occurring is assessed on the basis of reasonable and supportable assumptions that represent the best estimate of the economic conditions that will exist over the useful life of the asset. The degree of probability attaching to the flow of economic benefits attributable to the use of the asset is assessed on the basis of the sources of information available at the time of initial recognition, giving greater weight to external sources of information.
In addition to goodwill and software used mainly over several years, intangible assets related to assets under management, assets under custody and core deposits recognised following business combination operations are also considered as intangible assets.
8.1.1 Intangible assets with a finite useful life A finite useful life is defined for an asset where it is possible to estimate a limit to the period over which the related economic benefits are expected to be produced. Intangible assets recognised considered as having a finite useful life include software, intangible assets related to assets under management and assets under custody and core deposits.
8.1.2 Intangible assets with an indefinite useful life An indefinite useful life is defined for an asset where it is not possible to estimate a predictable limit to the period over which the asset is expected to generate economic benefits for the Bank. The attribution of an indefinite useful life to an asset does not arise from having already programmed future expenses which restore the standard level of performance of the asset over time and prolong its useful life. Intangible assets considered as having an indefinite useful life include goodwill.
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8.2 Recognition criteria
Assets recognised under the balance sheet item 130 “Intangible assets” are stated at cost and any expenses subsequent to the initial recognition are only capitalised if they are able to generate future economic benefits and only if those expenses can be reliably determined and attributed to the assets. The cost of an intangible asset includes: . the purchase price including any non-recoverable taxes and duties on purchases after commercial discounts and bonuses have been deducted; . any direct costs incurred in bringing the asset into use.
8.3 Measurement criteria
Subsequent to initial recognition intangible assets with a finite useful life are recognised at cost net of total amortisation and any losses in value that may have occurred. Amortisation is calculated on a systematic basis over the best estimate of the useful life of the asset (see definition in the section “Property, plant and equipment) using the straight line method for all intangible assets except for intangible assets relating to customer accounts recognised following the purchase price allocation resulting from business combination operations. In this case the amortisation is calculated on the basis of the estimated average life of the customer relationships.
Amortisation begins when the asset is available for use and ceases on the date on which the asset is eliminated from the accounts.
Intangible assets with an indefinite useful life (see, goodwill, as defined in the section below if positive) are recognised at cost net of any impairment loss resulting from periodic reviews when tests are performed to verify the appropriateness of the carrying amount of the assets (see section below). As a consequence amortisation of these assets is not calculated.
No intangible assets arising from research (or from the research phase of an internal project) are recognised. Research expenses (or the research phase of an internal project) are recognised as expenses at the time at which they are incurred.
An intangible asset arising from development (or from the development phase of an internal project) is recognised if, and only if the following can be demonstrated: (a) the technical feasibility of completing the intangible asset so that it becomes available for sale or use; (b) the intention of the company to complete the intangible asset to use it or sell it; (c) the capacity of the company to use or sell the intangible asset.
At the end of each annual or interim reporting period the existence of potential impairment of the value of intangible assets is assessed. The impairment is given by the difference between the carrying value of the assets and the recoverable amount and is recognised, as are any recoveries of value, under the item 210 “Net impairment losses on intangible assets”, with the exception of impairment losses on goodwill which are recognised under item 260 “Net impairment losses on goodwill”.
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8.4 Goodwill
Goodwill is defined as the difference between the purchase cost and the fair value of assets and liabilities acquired as part of a business combination which consists of the union of separate enterprises or businesses in a single entity required to prepare financial statements. The result of almost all business combinations consists in the fact that a sole entity, an acquirer, obtains control over one or more separate businesses of the acquiree. When an entity acquires a group of activities or net assets that do not constitute a business it allocates the cost of the group to individual assets and liabilities identified on the basis of their relative fair value at the date of acquisition. A business combination may give rise to a holding relationship between a parent company and a subsidiary in which the acquirer is the parent company and the acquiree is the subsidiary.
All business combinations are accounted for using the purchase method of accounting. The purchase method involves the following steps: (a) identification of the acquirer (the acquirer is the combining enterprise that obtains control of the other combining enterprises or businesses); (b) determination of the acquisition date; (c) determination of the cost of the business combination, intended as the consideration transferred by the purchaser to the shareholders of the acquiree; (d) the allocation, as at the acquisition date, of the cost of the business combination by means of the recognition, classification and measurement of the identifiable assets acquired and the identifiable liabilities assumed; (e) recognition of any existing goodwill.
Business combinations performed with subsidiary undertakings or with companies belonging to the same group are recognised on the basis of the significant economic substance of the transactions. In application of that principle, the goodwill arising from those transactions in the separate financial statements is recognised: (a) within asset item 120 of the balance sheet if significant economic substance is found; (b) as a deduction from equity if it is not found.
These transactions are eliminated from the consolidated financial statements and are therefore recognised solely as the relative costs incurred in relation to parties external to the Group.
The goodwill recognised in the consolidated financial statements of the Group (“goodwill arising on consolidation” resulting from the elimination of the equity investments in subsidiaries) is the result of all the goodwill and positive consolidation differences relating to some of the companies controlled by the Parent. Any changes in the share of ownership which do not result in the loss or acquisition of control are to be considered, in compliance with IFRS 10, as transactions between shareholders and as a consequence the relative effects must be recognised as either an increase or a decrease in equity.
8.4.1. Allocation of the cost of a business combination to assets and liabilities and contingent liabilities The acquirer: (a) recognises the goodwill acquired in a business combination as assets; (b) measures that goodwill at its cost to the extent that it is the excess of the cost of the business combination over the acquirer's share of interest in the net fair values of the acquiree's identifiable assets, liabilities and contingent liabilities.
Goodwill acquired in a business combination represents a payment made by the acquirer in the expectation of receiving economic future benefits from the asset which cannot be identified individually and recognised separately. After initial recognition, the acquirer values the goodwill acquired in a business combination at the relative cost net of cumulative impairment.
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The goodwill acquired in a business combination must not be amortised. The acquirer tests the asset for impairment annually or more frequently if specific events or changed circumstances indicate that it may have suffered a reduction in value, according to the relative accounting standard.
The standard states that an asset (including goodwill) has suffered an impairment loss when the amount recognised in the accounts exceeds the recoverable amount understood as the greater of the fair value, net of any sales expenses and its value in use, defined by section 6 of IAS 36. In order to test for impairment, goodwill must be allocated to cash generating units or to groups of cash generating units, in observance of the maximum aggregation limit which cannot exceed the operating segment identified in accordance with IFRS 8.
8.4.2. Negative goodwill If the acquirer’s share of the net fair value of the identifiable assets, liabilities and contingent liabilities exceeds the cost of the business combination the acquirer: (a) reviews the identification and measurement of the identifiable assets, liabilities and contingent liabilities of the acquiree and the determination of the cost of the business combination; (b) immediately recognises any excess existing after the new measurement in the income statement.
In view of its importance in the 2017 financial statements, negative goodwill (badwill) has been recognised within a separate item in the income statement: “265 Negative consolidation difference”.
8.5 Derecognition criteria
Intangible assets are derecognised in the balance sheet following disposal or when no economic future benefit is expected from its use or disposal.
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9. Liabilities, debt securities issued (and subordinated liabilities)
The various forms of interbank and customer funding are recognised within the balance sheet items 10 “Due to banks”, 20 “Due to customers” and 30 “Debt securities issued”. These items also include liabilities recognised by a lessee in financial leasing operations.
9.1 Recognition criteria
The liabilities in question are recognised in the balance sheet at the time when the funding is received or when the debt securities are issued. The amount initially recognised is the fair value, which is normally the same as either the consideration received or the issue price, inclusive of any additional expenses or income that are directly attributable to the transaction and determinable from the outset, regardless of when they are paid. The amount of the initial recognition does not include all those costs that are reimbursed by the creditor counterparty or that are attributable to internal costs of an administrative character.
9.2 Measurement criteria
After initial recognition medium to long-term financial liabilities are measured at amortised cost using the effective interest method as defined in previous paragraphs. Short-term liabilities, for which the time factor is insignificant, are measured at cost. The methods used to determine the fair value of liabilities and debt securities issued, performed for information purposes only, are described in Part A.4 “Information on fair value” of the Notes to the financial statements.
9.3 Derecognition criteria
Financial liabilities are derecognised in the balance sheet when they mature or are extinguished. The repurchase of own securities issued results in derecognition of the securities with the consequent redefinition of the liability for debt instruments issued. Any difference between the repurchase value of the own securities and the corresponding carrying value of the liabilities is recognised in the income statement under the item 100 “Income from the disposal or repurchase of d) financial liabilities”. Any subsequent re-issue of the securities previously subject to derecognition in the accounts constitutes a new issue for accounting purposes with the consequent recognition at the new issue price without any effect in the income statement.
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10. Tax assets and liabilities
Tax assets and liabilities are stated in the balance sheet under the items 140 “Tax assets” and 80 “Tax liabilities”.
10.1. Current tax assets and liabilities
Current tax for the current and prior periods is recognised as a liability to the extent that it has not yet been settled; any excess compared to the amount due is recognised as an asset.
Current tax liabilities (assets) for the current and prior years, are measured at the amount expected to be paid to/recovered from taxation authorities, using the tax rates and tax laws in force. Current tax assets and liabilities are derecognised in the accounts in the year in which the assets are realised or the liabilities are extinguished.
10.2. Deferred tax assets and liabilities
Deferred tax liabilities are recognised for all taxable temporary differences unless the deferred tax liability arises from: . goodwill for which amortisation is not deductible for tax purposes or . the initial recognition of an asset or a liability in a transaction which: is not a business combination and at the time of the transaction, affects neither the accounting nor the taxable profit. Deferred tax assets are not calculated for higher values of assets for which the tax regime has been suspended relating to equity investments and to reserves for which the tax regime has been suspended because it is considered there are no reasonable grounds to assume they will be taxed in future.
Deferred tax liabilities are recognised within the balance sheet item 80 “Tax liabilities b) deferred”. A deferred tax asset is recognised for all deductible temporary differences if it is probable that a taxable income will be used against which it will be possible to use the deductible temporary difference, unless the deferred tax asset arises from: . negative goodwill which is treated as deferred income; . the initial recognition of an asset or liability in a transaction which: is not a business combination and affects neither the accounting profit nor the taxable profit at the time of the transaction. Assets for prepaid taxes are recognised under the balance sheet item 140 “Tax assets b) deferred”.
Deferred tax assets and deferred tax liabilities are subject to constant monitoring and are measured using the tax rates that it is expected will apply in the period in which the tax asset will be realised or the tax liability will be extinguished on the basis of the tax regulations established by laws currently in force.
Deferred tax assets and deferred tax liabilities are derecognised in the accounts in the year in which: . the temporary difference which gave rise to them becomes payable with regard to deferred tax liabilities or deductible with regard to deferred tax assets; . the temporary difference which gave rise to them is no longer valid for tax purposes.
Deferred tax assets and deferred tax liabilities must not normally be discounted to present values nor offset one against the other,
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11. Non-current assets and disposal groups held for sale – Liabilities associated with disposal groups held for sale
Non-current assets and liabilities and groups of non-current assets and liabilities for which it is presumed that the carrying value will recovered by selling them rather than by continued use are classified respectively under items 150 “Non-current assets and disposal groups held for sale” and 90 “Liabilities associated with disposal groups held for sale”. In order to be classified within these items the assets or liabilities (or disposal groups) must be immediately available for sale and there must be active, concrete programmes to sell the assets or liabilities in the short term. These assets or liabilities are measured at the lower of the carrying amount and their fair value net of disposal costs. Profits and losses attributable to groups of assets or liabilities held for sale are recognised in the income statement under item 310 “Pre-tax profit from discontinued operations”. Profits and losses attributable to individual assets held for disposal are recognised in the income statement under the most appropriate item.
12. Provisions for risks and charges
12.1. Definition
A provision is defined as a liability of uncertain timing or amount.
A contingent liability, however, is defined as: . a possible obligation, the result of past events, the existence of which will only be confirmed by the occurrence or (non-occurrence) of future events that are not totally under the control of the enterprise; . a present obligation that is the result of past events, but which is not recognised in the accounts because: it is improbable that financial resources will be needed to settle the obligation; the amount of the obligation cannot be measured with sufficient reliability.
Contingent liabilities are not recognised in the accounts, but are only reported, unless they are considered a remote possibility.
12.2. Recognition criteria and measurement
A provision is recognised if and only if: . there is a present obligation (legal or implicit) that is the result of a past event and . it is probable that the use of resources suitable for producing economic benefits will be required to fulfil the obligation; and . a reliable estimate can be made of the amount arising from fulfilment of the obligation.
The amount recognised as a provision represents the best estimate of the expenditure required to settle the present obligation at the reporting date and reflects the risks and uncertainties that inevitably characterise a number of facts and circumstances. The amount of a provision is measured by the present value of the expenditure that it is assumed will be necessary to settle the obligation where the effect of the present value is a substantial aspect. Future events that might affect the amount required to settle the obligation are only taken into consideration if there is sufficient objective evidence that they will occur.
Provisions made for risks and charges include those for the risk attaching to any existing tax litigation.
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12.3. Derecognition criteria
The provision is reversed when it becomes improbable that the use of resources suitable for producing economic benefits will be required to settle the obligation.
13. Foreign currency transactions
13.1. Definition
A foreign currency is a currency other than the functional currency of the entity, which is the currency of the primary economic environment in which an entity operates.
13.2. Recognition criteria
A foreign currency transaction is recorded at the time of initial recognition in the functional currency applying the spot exchange rate between the functional currency and the foreign currency ruling on the date of the transaction.
13.3. Measurement criteria
At each reporting date: (a) foreign currency monetary51 amounts are translated using the closing rate; (b) non-monetary items52 measured at historical cost in foreign currency are translated using the exchange rate at the date of the transaction; (c) non-monetary items carried at fair value in a foreign currency are translated using the exchange rates that existed on the dates when the fair values were determined.
Exchange rate differences arising from the settlement of monetary items, or from the translation of monetary items at rates different from those at which they were translated when initially recognised during the year or in previous financial statements, are recognised in the income statement for the period except for exchange rate differences arising on monetary items that form part of a net investment in a foreign operation. Exchange rate differences arising from a monetary item that forms part of a net investment in a foreign operation of an entity that prepares financial statements are recognised in the income statement of the individual company financial statements of the entity that prepares the financial statements or the individual company financial statements of the foreign operation. These exchange rate differences in the financial statements that include the foreign operation (e.g. in the consolidated accounts when the foreign operation is a subsidiary) are initially recognised as a separate component in equity and are recognised in the income statement at the time of the disposal of the net investment. When a profit or loss on a non-monetary item is recognised directly in equity, each change in that profit or loss is also recognised directly in equity. However, when a profit or loss on a non- monetary item is recognised in the income statement each change in that profit or loss is recognised in the income statement.
The financial statements of foreign subsidiaries and associates which employ an accounting currency that is different from that of the Parent are translated using the exchange rates ruling at the reporting date.
51 “Monetary” items are defined as relating to determined sums in foreign currency, which is to say to assets and liabilities which must be received or paid for a determined amount in foreign currency. The defining characteristic of a monetary item is therefore the right to receive or an obligation to pay a set or calculable number of foreign currency units. 52 See the note on “monetary” items for the contrary.
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14. Other information
14.1 Treasury shares
Treasury shares present in the UBI Group portfolio are deducted from equity. No profit or loss arising from the purchase, sale, issue or cancellation of treasury shares is recognised in the income statement. The differences between the purchase and sale price arising from these transactions are recorded in equity reserves.
14.2 Provisions for guarantees granted and commitments
Provisions made on a cases by case and collective basis to estimate possible payments to be made connected with the assumption of credit risks attaching to guarantees granted and commitments assumed are calculated by applying the same criteria as that reported for loans. These provisions are recognised within the item 100 “Other liabilities” against the item in the income statement 130d “Net impairment losses on: other financial transactions”.
14.3 Employee benefits
14.3.1 Definition
Employee benefits are defined as all forms of consideration given by an enterprise in exchange for services rendered by employees. Employee benefits can be classified as follows: . short-term benefits (not including benefits due to employees for end of contract) which it is planned to pay entirely within twelve months from the end of the year in which the employees provided their services; . post-employment benefits at the end of an unemployment contract due after the contract of employment has terminated; . benefits due to employees for the ending of an employment contract; . other long-term benefits, other than the previous, which it is not planned to pay entirely within the twelve months from end of the financial year in which employee rendered the relative employment service.
14.3.2 Post employment benefits and defined indemnities
14.3.2.1 Recognition criteria
Following the reform of supplementary pensions pursuant to Legislative Decree No. 252/2005, portions of post-employment benefit funds maturing from 1st January 2007 constitute a “defined benefit plan”. The liability relating to those portions is measured on the basis of the contributions due without the application of any actuarial methods. However, post-employment benefits maturing up until 31st December 2006 continue to constitute a “post-employment benefit” belonging to the “defined benefit plan” series and as such require the amount of the obligation to be determined on an actuarial basis and to be discounted to present values because the debt may be extinguished a long time after the employees have rendered the relative service.
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The amount is accounted for as a liability amounting to: (a) the present value of the defined benefit obligation as at the reporting date; (b) plus any actuarial gains (less any actuarial losses) recognised in a separate reserve in equity; (c) less the fair value at the reporting date of any assets at the service of the plan.
14.3.2.2 Measurement criteria
“Actuarial gains/losses”, recognised in a special valuation reserve in equity, comprise the effects of adjustments arising from the reformulation of previous actuarial assumptions as a result of actual experience or from changes in the actuarial assumptions themselves.
The “Projected Unit Credit Method” is used to calculate the present value. This considers each single period of service as giving rise to an additional unit of severance payment and therefore measures each unit separately to arrive at the final obligation. This additional unit is obtained by dividing the total expected service by the number of years that have passed from the time service commenced until the expected payment date. Application of the method involves making projections of future payments based on historical analysis of statistics and of the demographic curve and discounting these flows on the basis of market interest rates. The rate used for present value discounting purposes is determined by making reference to market yields observed as at the reporting date for “high quality corporate bonds” or to yields on securities with a low credit risk.
14.3.2.3 Stock Options/Stock Grants
Stock option and stock grant plans are defined as personnel remuneration schemes where the service rendered by an employee (or a third party) is remunerated by using equity instruments (including options on shares). The cost of these transactions is measured at the fair value of equity instruments granted and is recognised in the income statement under item 180 “Administrative expenses a) personnel expense” on a straight line basis over the vesting period of the plan. The fair value determined relates to the equity instruments granted at the time of grant and takes account of market prices, if available, and the terms and conditions upon which the instruments were granted.
14.4 Segment reporting
Segment reporting is defined as the manner in which financial information on an enterprise is reported by operating segment. An operating segment is intended as a component of an entity: . that engages in business activities that generate revenues and expenses; . whose operating results are reviewed regularly by the entity’s chief operating decision maker, to make decisions about the resources to be allocated to the segment and assess its performance; and . for which discrete financial information is available.
Segment reporting is based on elements that senior management uses to make operating decisions (a “management approach”) and consequently the identification of operating segments is performed on the basis of the current system of reporting to management which is based primarily on management analysis of legally recognised entities. Segment reporting is completed by information on the geographical areas in which revenues are produced and assets are held.
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14.5 Revenue
14.5.1 Definition
Revenues are the gross inflow of economic benefits resulting from business arising from the ordinary operating activities of an enterprise when these inflows create an increase in equity other than an increase resulting from payments made by shareholders.
14.5.2 Recognition criteria
Revenues are measured at the fair value of the consideration received or due and are recognised in the accounts when they can be reliably estimated.
The result of the rendering of services can be reliably estimated when the following conditions are met: . the amount of revenue can be measured reliably; . it is probable that the economic benefits arising from the transaction will flow to the company; . the stage of completion of the operation as at the reporting date can be measured reliably; . the costs incurred, or to be incurred, to complete the transaction can be measured reliably.
Revenue recognised in return for services rendered is recognised by reference to the stage of completion of the transaction. Revenue is only recognised when it is probable that the economic benefits arising from the transaction will be enjoyed by the company. Nevertheless when the recoverability of an amount already included within revenues is uncertain, the amount not recoverable or the amount for which recovery is no longer probable is recognised as a cost instead of adjusting the revenue originally recognised.
Revenue arising from the use by third parties of the company’s assets which generate interest or dividends are recognised when: . it is probable that the economic benefits arising from the transaction will be received by the enterprise; . the amount of the revenue can be reliably measured.
Interest is recognised on an accruals basis that takes into account the effective yield of the asset. In detail: . interest income includes the amortisation of any discounts, premiums or other differences between the initial carrying amount of a security and its value at maturity. Negative components of income accruing on financial assets are recognised within the item “Interest and similar expense”, while positive components accruing on financial liabilities are recognised within the item “Interest and similar income”; . arrears of interest that are considered recoverable are recognised within the item 10 “Interest and similar income”, but only the part considered recoverable.
Dividends are recognised when shareholders acquire the right to receive payment.
Expenses or revenues resulting from the sale or purchase of financial instruments, determined by the difference between the amount paid or received for the transaction and the fair value of the instrument are recognised in the income statement on initial recognition of the financial instrument when the fair value is determined: . by making reference to current and observable market transactions in the same instrument; . by using measurement techniques which use, as variables, only data from observable markets.
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14.6 Expenses
Expenses are recognised in the accounts at the time at which they are incurred while following the criteria of matching expenses to revenues that result directly and jointly from the same transactions or events. Expenses that cannot be associated with revenues are recognised immediately in the income statement. Expenses directly attributable to financial instruments measured at amortised cost and determinable from the outset, regardless of the time at which they are settled, flow to the income statement by applying the effective interest rate, a definition of which is given in the section “Loans and receivables”. Impairment losses are recognised through profit and loss in the year in which they are measured.
15 Insurance sector products
15.1 Technical reserves
These relate solely to contracts falling within the scope of application of IFRS 4. A shadow accounting treatment has been adopted, with the recognition of the fair value of separately managed assets originally recognised in equity within reserves. Paragraph 30 of IFRS 4 states the following: “In some accounting models, realised gains or losses on an insurer’s assets have a direct effect on the measurement of some or all of (a) its insurance liabilities, (b) related deferred acquisition costs and (c) related intangible assets. An insurer is permitted, but not required, to change its accounting policies so that a recognised but unrealised gain or loss on an asset affects those measurements in the same way that a realised gain or loss does. The related adjustment to the insurance liability shall be recognised in other comprehensive income if, and only if, the unrealised gains or losses are recognised in other comprehensive income.” On the basis of those provisions it is permitted to attribute income and expenses resulting from the fair value measurement of financial instruments assigned to separate management portfolios. The value adjustment must be calculated by applying the minimum withheld to the balance of the unrealised capital gains and losses on the securities in each separate management portfolio, recognised in the fair value reserve. A liability adequacy test (LAT) conducted in keeping with IFRS 4 shows that the requirements are met. Any additional reserves in case of death relating to Sector III policies are reported in equity.
15.2 Net insurance premiums
Comprises premiums relating to Business I and V contracts
15.2 Other net profit (loss) on insurance operations
This includes the following items: . commissions and other acquisition costs from insurance policy contracts relate to Business I and V only; . management fees on investments related to securities management charges; . charges related to insurance claims, including amounts disbursed for claims settlements, net of reinsurance and inclusive of liquidation expenses relating to contracts subject to IFRS 4. Amounts disbursed and related liquidation expenses in insurance Business III and VI are not included, as they are classified as administrative expenses, nor are changes in mathematical reserves for Business III and VI policies, while according to IAS they are defined as financial liabilities.
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A.3 – INFORMATION ON TRANSFERS BETWEEN PORTFOLIOS OF FINANCIAL ASSETS
Amendments to IAS 39 and IFRS 7 “Reclassification of financial assets” approved by the IASB in 2008 make it possible, following initial recognition, to reclassify determined financial assets out of the “held-for-trading” and “available-for-sale” portfolios. The table below reports the carrying amounts and fair values as at 31st December 2017 of the assets subject to reclassification in the second half. It also reports the components of profit relating to those assets, distinguishing between the amounts that would have been recorded if the reclassification had not been made and those that were actually recognised through profit and loss and in equity. These items of profit, before tax, are further distinguished as “valuation” and “other” items, the latter being inclusive of interest generated by the reclassified assets.
A.3.1 Reclassified financial assets: carrying amount, fair value and effects on comprehensive income
Components of profit if Components of profit not transferred (before recognised for the year Type of financial Carrying tax) (before tax) Portfolio of origin Destination portfolio Fai r Val u e instrument amount
Valuation Other Valuation Other
A. Debt instruments 3,828,426 3,853,584 (8,374) 70,968 - 32,655 Available-for-sale financial Held-to-maturity 3,828,426 3,853,584 (8,374) 70,968 - 32,655 assets investments To t a l 3,828,426 3,853,584 (8,374) 70,968 - 32,655 The components of profit from the assets transferred into the “held-to-maturity” portfolio relate to debt instruments issued by the Italian government.
A.3.2 Reclassified financial assets: effects on comprehensive income before the transfer No items of this type exist because no transfers between portfolios of financial assets took place during the year.
A.3.3 Transfer of financial assets held for trading No transfers of assets held for trading to report.
A.3.4 Effective interest rate and expected cash flows from reclassified assets
Name of security Effective interest rate Interest cash flows Capital cash flows
Btp maturity November 2023 9% 0.98% 267,750 425,000
Btp maturity November 2022 5.5% 0.86% 363,000 1,100,000
Btp maturity September 2022 1.45% 0.77% 157,470 1,810,000
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A.4 INFORMATION ON FAIR VALUE
Qualitative information
IFRS 13 – “Fair Value Measurement” defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. This value is therefore what is known as an “exit price” which reflects the properties of the asset or liability subject to measurement from the perspective of a third party market participant. A fair value measurement relates to an ordinary transaction carried out or which could be carried out between market participants, where, the market is defined as: . the principal market, which is the market with the highest volume and level of transactions for the asset or liability in question to which the Bank has access; . or, in the absence of a principal market, the most advantageous market, which is that in which it is possible to obtain the highest price for the sale of an asset or the lowest purchase price for a liability with account taken of transaction and transport costs. To increase consistency and comparability in fair value measurements and related disclosures, IFRS 13 establishes a fair value hierarchy that categorises into three levels the inputs to valuation techniques used to measure fair value. The objective of this classification is to establish a hierarchy in terms of the objectivity of the fair value as a function of the degree of discretion adopted, by giving priority to observable market inputs which reflect the assumptions that market participants would use in the measurement of assets and liabilities.
The fair value hierarchy is defined on the basis of the data inputs (with reference to their origin, type and quality) using the models for determining fair value and not on the basis of the measurement models themselves. In this perspective the highest priority is given to input level one.
Fair value determined on the basis of level one inputs: Fair value is determined on the basis of observable inputs, i.e. quoted prices in active markets for the financial instrument, that the entity can access at the measurement date of the instrument. The existence of quoted prices in an active market is the most reliable evidence of fair value and therefore these quoted prices shall be given priority as the input to be used in the valuation process.
According to IFRS 13, a market is defined as active when transactions for the asset or liability take place with sufficient frequency and volume to provide pricing information on an ongoing basis.
More specifically, equities and bonds quoted on a regulated market (e.g. MOT/MTS – electronic corporate/government bond markets) and those not quoted on regulated markets for which prices are available on a continuous basis from the main information platforms which represent actual and orderly market transactions. The fair value of listed securities on regulated markets is normally given by the reference price published on the last trading day of the reporting period on the respective markets on which they are quoted. For securities not quoted on regulated markets, the fair value is given by the price on the last transaction date considered representative on the basis of internal policies.
As concerns other financial instruments that may be held with a level one input such as, for example, derivatives, exchange traded funds and listed property funds, the fair value is given by the closing price on the respective listed markets on the measurement date or in the case of listed UCITS, mutual funds, Sicav’s and hedge funds, it is given by the official NAV (net asset value), if this is considered representative according to internal policies.
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Fair value determined on the basis of level two inputs Where no prices are available on active markets, the fair value is measured by using prices observable on inactive markets or by using measurement models which make use of market inputs.
The valuation is performed by using inputs that are either directly or indirectly observable, such as for example: . prices listed on active markets for identical assets or liabilities; . observable inputs such as interest rates or yield curves, implicit volatilities, early repayment risk, default rates and illiquidity factors. On the basis of the above, the valuation resulting from the technique adopted involves marginal use of unobservable inputs because the most important inputs used in the valuation are taken from the market and the results of the calculation methods used replicate quotations on active markets.
The following are included in level two: . OTC derivatives; . equity instruments; . bonds; . shares of funds (e.g. private equity funds)53. Assets and liabilities measured at cost or at amortised cost, for which the fair value is given in the notes to the financial statements purely for information purposes, are classified in level two only if the unobservable inputs do not have a significant impact on the result of the valuation. Otherwise they are classified in level three.
Fair value determined on the basis of level three inputs The valuation is determined by the use of significant inputs not taken from the market, which therefore involve the adoption of estimates and internal assumptions.
The following are included in level three of the fair value hierarchy: . OTC derivatives; . equity instruments measured: a. with the use of significant unobservable inputs; b. using methods based on an analysis of the fundamentals of the investee; c. at cost. . hedge funds, for which consideration is given not only to the official NAVs but also to liquidity and/or counterparty risk; . options on financial equity investments; . bonds resulting from the conversion of loans and receivables. Finally, fair value is classified in level three as a result of the use of market inputs that have been adjusted significantly to reflect valuation aspects inherent to the instrument measured.
53 For which the fair value is given by the NAV.
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A.4.1 Fair value levels two and three This sub-section provides information on the measurement techniques and inputs used to determine the fair value of assets and liabilities subject to measurement in the balance sheet and those for which the fair value is given purely for information purposes.
Assets and liabilities subject to fair value measurement OTC derivatives
The method adopted to calculate the fair value of OTC derivatives involves the use of closed formula models. In detail, the main pricing models used for OTC derivatives are: Black Yield, Black Fwd, Black Swap Yield, Cox Fwd, Trinomial, Lnormal, Normal and CMS Convexity Analytical. Derivative instruments that are not managed in the target software applications, relating to instruments used to hedge some types of embedded options in structured bonds issued, are measured using internal models (stochastic models with MonteCarlo simulations). The pricing models implemented for derivatives are used on an ongoing basis and are subject to periodic verification designed to assess their reliability over time.
The market data used to calculate the fair values of derivatives is classified, according to its availability, as follows: the prices of quoted instruments: all products quoted by major international exchanges or on the main data provider platforms; market inputs available on info provider platforms: all instruments which, although not quoted on an official market, are readily available on info provider networks by means of guaranteed ongoing contributions from brokers and market makers. The inputs used to calculate the fair value of OTC derivatives include yield curves and Cap&Floor volatilities for major currencies (euro, US dollar, GBP, yen, CHF), the main exchange rates and the relative volatilities and the FX swap points. As explained later in greater detail, the fair value of some types of OTC derivatives takes counterparty risk into account. The calculation of this component is carried out by using default probabilities and the percentage of credit recovery from counterparties.
As concerns credit risk, market practice is to adopt two measures capable of identifying the impacts of possible changes in counterparty credit rating and incorporating this in the fair value: credit value adjustment (CVA - counterparty non-performance risk) and debt value adjustment (DVA - own non-performance risk). The method currently adopted by the UBI Group to determine CVA and DVA is based on Monte Carlo simulations to estimate the future value of over-the-counter (OTC) derivatives. This methodology involves the following implementation steps: . the parameters are determined for the calculation using the Monte Carlo approach; . the relative PD and LGD curves are associated with each corporate counterparty on the basis of a combination of the sector and the rating; . market CDS curves are used for counterparties for which no internal PD curves exist; . the future exposure is calculated for each derivative falling within the calculation perimeter. In the absence of collateral, the future exposure at time t is defined as the expected MtM value at the time t.
CVA and DVA are calculated for OTC derivatives entered into with counterparties outside the Group for whom no CSA agreements with complete daily or weekly margin calculations are present. On the other hand, for OTC derivatives backed by CSAs with complete daily or weekly margin calculation, counterparty and own credit risk is considered not significant, and this therefore logically also reduces the CVAs and the DVAs to nil, which as a consequence are not calculated for these types of instruments. Similar considerations are also applicable to intragroup derivatives for the considerations reported above.
Given the predominant use of unobservable inputs, the fair value of OTC derivatives is classified in level two of the hierarchy, except for those derivatives where the CVA (estimated internally) is important for determination of the fair value. The fair value of these instruments is classified in fair level three of the hierarchy.
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The UBI Banca Group’s policy for options on equities is to measure the fair value with account taken of the probability of exercise given the particular nature of the options in question. The fair value calculated in this way is classified in level three of the hierarchy.
Equity instruments
As concerns the methods used to measure the fair value of equity instruments not quoted on an active market, the UBI Banca Group has identified the following hierarchy of valuation techniques: 1) the direct transactions method; 2) the comparable transactions method; 3) the stock market multiples method 4) financial and earnings methods; 5) balance sheet methods. Equity instruments are measured by considering the applicability of the methods in the order given above. In the final instance, where it is impossible to use the above techniques, these instruments are measured at cost. The characteristics of the valuation techniques used as at 31st December 2017 are given below.
The direct transactions method; Application of the direct transactions method involves applying the implicit value resulting from the most recent significant transaction recorded on the shares of the investee. By using observable inputs, the fair value thereby obtained is classified in level two of the hierarchy.
If the transaction that occurred on the market involved a controlling stake or one which gave significant influence over the investee by the acquirer, then it is possible that the price paid incorporated a premium for control. This aspect is considered by a possible adjustment to the value of the investment. Therefore the pro rata value of the economic capital of the company is reduced by between 25% and 35%. That adjustment, resulting from the use of unobservable and significant inputs results in classification of the fair value in level three of the hierarchy.
The comparable transactions method Application of the comparable transactions method involves analysis of transactions to purchase shares in companies with operating and capital characteristics of the same type as those of the investee and the subsequent calculation of an implicit multiple given by the transaction price. By using observable inputs, the fair value thereby obtained is classified in level two of the hierarchy.
If the transaction that occurred on the market involved a controlling stake or one which gave significant influence over the investee by the acquirer, then it is possible that the price paid incorporated a premium for control. This aspect is considered by a possible adjustment to the value of the investment. Therefore the pro rata value of the economic capital of the company is reduced by between 25% and 35% to reflect the lack of powers within the investee. That adjustment, resulting from the use of unobservable and significant inputs results in classification of the fair value in level three of the hierarchy.
The stock market multiples method This method allows a company to be valued on the basis of data derived from quotations of comparable companies (in terms of sales turnover, equity, leverage) observed on the relative stock market in a period within the last 30 days and last year prior to the measurement date. It is performed by processing the most significant multipliers (stock market multiples) resulting from the ratio between the value that the stock market attributes to these companies and those of their operating and capital performance indicators that are considered most significant. By using observable inputs, the fair value thereby obtained is classified in level two of the hierarchy.
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The need to adjust the valuations obtained, which is not infrequent, when applying the stock market multiple methods in order to take account of possible differences in the comparability of the companies used and the liquidity of the instruments measured, the pro rata value of the economic capital of the company is generally reduced by between 10% and 40% to reflect, for example, the limited liquidity of the investment and/or significant differences in size between the investee and the companies in the sample. This adjustment, resulting from the use of unobservable and significant inputs results in the classification of the fair value in level three of the hierarchy.
Balance sheet methods Balance sheet methods provide a calculation of the fair value of an investee based on balance sheet figures, adjusted in the light of gains and losses implicit in the assets and liabilities of the investee and the possible valuation of intangible components. The fair value determined by using these methods, based on unobservable inputs, is classified in level three of the hierarchy.
Bonds The procedure for estimating the fair value adopted by the UBI Banca Group for bonds involves the use of a specific valuation model, the discounted cash flow model. The valuation process in question can be summarised in the following steps: . an estimate of the cash flows paid by the instrument both in terms of interest and repayment of capital; . an estimate of the spread which represents the credit rating of the issue of the instrument; . an estimate of a spread which represents the illiquidity of the instrument in order to take account of the low liquidity which characterises the pricing of a “non-contributed” instrument (not officially quoted). Given the predominant use of unobservable inputs, the fair value thereby calculated is classified in level two of the hierarchy, except for those instruments where the component of the spread that represents the illiquidity is important for determining the fair value and for some bonds resulting from the conversion of loans and receivables, which are classified in level three of the hierarchy.
The following are comprised within the inputs used to calculate the fair value of bonds: interest rate curves of major currencies (euro, US dollar, GBP, yen, CHF), the credit spreads of the issuers of the bond subject to measurement (taken from instruments quoted on markets considered active) and a spread representative of the illiquidity of the instrument measured, calculated on the basis of the credit spread of the issuer.
Shares of private equity funds The fair value of shares in private equity funds is calculated on the basis of the last NAV available and considering the various communications received from the fund (e.g. redemptions, dividend distributions) from the date of the last available NAV until the measurement date. The NAV is then adjusted if necessary to take into consideration situations of particular risk and non-performance associated with the investment.
Shares of hedge funds The fair value of shares of hedge funds is classified in level three of the hierarchy and is calculated on the basis of the official NAV adjusted by a percentage of at least 20% to take account of liquidity and/or counterparty risks.
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Assets and liabilities, the fair value of which is given in the notes to the financial statements
Loans and receivables Determination of the fair value of loans and advances to customers, calculated for disclosure in the notes to the financial statements, is carried out by using valuation techniques, except for those loans and receivables for which the book value is considered an adequate representation of the fair value, such as for example defaulted loans, transactions with no repayment schedules (current account overdrafts and unsecured guarantees) and loans due in less than one year which for that reason are classified in level three of the hierarchy.
The method adopted by the UBI Banca Group to estimate the fair value of loans and receivables involves discounting cash flows, defined as the sum of the principal and interest resulting from the different due dates of the repayment schedule, reduced by the amount of the expected loss and discounted at a rate which incorporates the risk-free component and a spread representing the cost of capital and funding.
More specifically, the following inputs are used: . a base discount rate, based on the Euribor yield curve; . default risk and risk of potential loss, expected and unexpected, measured on the specific loan during its entire life. These values are represented by internal credit risk measurement parameters such as the rating, the PD and LGD, differentiated by customer segment. The PD associated with each rating is measured on a multi-year basis. Finally, the unexpected loss component takes account of the Group’s cost of equity; . the funding spread is calculated using a blended curve. For each maturity date this curve represents the marginal cost of funding calculated as the weighted average of the market curves for the cost of the Bank’s funding from customers (retail curve) and on wholesale markets (initial wholesale curve). The weights used for each funding curve are calculated at least annually when the Funds Transfer Pricing Regulation is updated on the basis of new inflows forecast by the Funding Plan.
In order to identify the correct level in the fair value hierarchy obtained using the above valuation technique, the level of significance of the unobservable inputs must be properly assessed. In this respect, the fair value resulting from the application of the method described above is compared with a benchmark that is calculated which employs a discount curve composed from observable market data. If the comparison shows that the fair value is significantly different from that calculated using the aforementioned benchmark, the fair value is classified in level three. Otherwise it is classified in fair value level two.
The fair value of loans and advances to banks is normally calculated for the purposes of disclosure in the notes to the financial statements for on-balance sheet transactions with a time horizon of longer than one year. The method adopted involves calculating the net present value of the cash flows from these instruments on the basis of the current market interest rate for transactions of the same duration, inclusive of the risk factors implicit in the transaction. Because this method is based on observable inputs, it results in classification of the fair value in level two of the hierarchy.
For transactions with no repayment schedules (current account overdrafts and unsecured guarantees), for defaulted loans and for transactions with a maturity of shorter than one year, the book value is considered an adequate approximation of the fair value, which as a consequence results in classification in level three of the hierarchy.
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Tangible assets held for investment Reference is made for the determination of the fair value of investment properties to the market value, determined mainly by means of outside appraisers, defined as the highest price at which the sale of a property might reasonably be expected to have been concluded unconditionally for cash consideration on the measurement date between independent counterparties. The procedures adopted for determining the market value are based on the following methods: . the direct comparative or market method, based on a comparison between the asset in question and other similar assets subject to sale or currently on sale on the same market or on competing markets. The quotations obtained are subject to adjustments designed to incorporate the specific characteristics of the asset. More specifically, the value attributed to the asset considers its location, accessibility, quality and the possible presence of unique aspects; . the income method based on the present value of potential market incomes for a similar property, obtained by capitalising the income at a market interest rate. This method is based on the existence of a direct relationship between an asset and the income that it is able to generate. For the purposes of identifying the income, reference is usually made to the average ordinary gross income calculated on the basis of the total gross commercial area. The above methods are carried out individually and the values obtained are appropriately averaged.
The method used for identifying the percentage of the market value attributable to land is based on an analysis of the location of the property, taking account of the type of construction, the state of conservation and the cost of rebuilding the entire building.
The fair value determined in this manner is classified in level three of the hierarchy due to the absence in the Italian market of reference indicators which might confirm the reliability of the valuation. As a consequence, the inputs used cannot be classified in level two.
Borrowings and payables The fair value of amounts due to banks and customers is normally calculated for the purposes of disclosure in the notes to the financial statements for liabilities due after one year. The valuation is carried out by discounting future cash flows using an interest rate that incorporates the component relating to its own credit risk. Since it is based on observable inputs from the relative market, this method results in the classification of the fair value in level two of the hierarchy.
For liabilities due within one year or with an indeterminate due date, the book value recognised can be considered an adequate approximation of the fair value, which as a consequence results in classification in level three of the hierarchy. This classification is also adopted for amounts due to the European Central Bank.
Securities issued As these are liabilities issued, held as assets by third parties, the valuation techniques used have been developed from the perspective of a market participant who holds the debt securities as assets. In this specific case the components considered are as follows: . the time value of the money, measured by the risk-free yield curve; . the risk of failing to satisfy own obligations, measured by own credit spread. The inputs used to measure the fair value include the yield curves of major currencies (euro, US dollar, GBP, yen, CHF) and UBI Banca Spa’s issue spreads, measured from the funding conditions existing as at the reporting date, classified by type of counterparty for whom the security issued is destined.
The inputs used are observable and involve classification in level two of the hierarchy, except for cases in which UBI Banca Spa issue spreads are not available, an aspect which involves an internal estimate of those spreads and classification of the securities in level three of the
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hierarchy and of bonds issued by the Bank to loans granted to customers, for which the fair value is calculated using the loan parameters. In this case both instruments are classified within fair value level three of the hierarchy.
A.4.2 Valuation processes and sensitivities
The UBI Banca Group has set a special policy for the determination of fair values officially set out in special regulations approved by the members of governing bodies. The purpose of these policies is to ensure proper and consistent application of the provisions of IFRS 13.
An analysis is given below of the sensitivity of equity instruments for which the fair value measurement is classified in level three of the hierarchy as a result of the use of unobservable significant inputs. This analysis was conducted by formulating a stress test for the inputs in question, which takes account of the minimum and maximum value that these inputs can take, reported for each valuation technique used in the previous sub-section A.4.1 “Fair value levels two and three”. For equity instruments classified within the AFS portfolio for which sensitivity analysis is possible, on the basis of the valuation model used, if the maximum impairment value for the unobservable inputs is used, the gross valuation reserve would be €5 million lower than the book value recognised if no further impairment was detected. Otherwise, if the minimum impairment value is used, the gross valuation reserve would be €4.1 million higher than the book value recognised.
It is underlined that all the securities involved in the analysis reported above form part of the AFS portfolio (item 40) because application of the measurement methods for securities included in the FVO portfolio (item 30) did not require the use of any non-observable inputs.
As concerns other financial instruments subject to fair value measurement and classified within level three of the fair value hierarchy (OTC derivatives, hedge funds, bonds resulting from the conversion of loans and options on equity investments), no sensitivity analysis is conducted either because the methods of quantifying the fair value do not allow alternative hypotheses to be made concerning the unobservable inputs used for the purposes of valuation, or because the effects of changing those inputs are not considered important.
A.4.3 Fair value hierarchy
With regard to assets and liabilities subject to fair value measurement on a recurring basis, classification in the right level of the fair value hierarchy is carried out by making reference to rules and methods contained in Bank regulations. Possible transfers to a different level of the hierarchy are identified on a monthly basis. Examples might be transfers resulting from the “disappearance” of an active market on which they are quoted or the use of a different method of measurement not previously applicable.
A.4.4 Other information
No situations exist in the UBI Banca Group in which the maximum or best use of a non- financial asset is different from its current use. Furthermore, no situations exist in which financial assets and liabilities managed on a net basis in relation to market or credit risk are subject to fair value measurement on the basis of the price that would be received from the sale of a net long position or from the transfer of a net short position.
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Quantitative information
A.4.5 Fair value hierarchy
A.4.5.1 Assets and liabilities measured at fair value on a recurring basis: distribution by fair value level
31.12.2017 31.12.2016 Assets/liabilities measured at fair value Level 1 Level 2 Level 3 Level 1 Level 2 Level 3 1. Financial assets held for trading 503,010 345,939 75,526 114,507 599,890 15,219 2. Financial assets designated at fair value 87,492 2,000 2,798 117,500 3,000 67,949 3. Available-for-sale financial assets 9,299,988 238,748 323,243 9,145,463 206,602 261,768 4. Hedging derivatives - 167,028 2,879 - 461,767 - 5. Property, plant and equipment ------6. Intangible assets ------Total 9,890,490 753,715 404,446 9,377,470 1,271,259 344,936 1. Financial liabilities held for trading 81 411,524 48 76 799,931 31 2. Financial liabilities designated at fair value - 43,021 - - - - 3. Hedging derivatives - 100,590 - 239,241 287 Total 81 555,135 48 76 1,039,172 318
The impact of CVA and DVA on the determination of the fair value of derivative financial instruments at consolidated level came to €11.5 million and €0.2 million respectively.
No transfers were made between level one and two in the fair value hierarchy for assets and liabilities measured at fair value on a recurring basis.
A.4.5.2 Annual changes in assets measured at fair value on a recurring basis (level three)
Financial assets Property, Financial assets Avai l abl e-for-sal e Hedging Intangi bl e designated at fai r pl ant and held for trading financial assets derivatives assets value equipment
1. Opening bal ances 15,219 67,949 261,768 - - - 2. Increases 70,071 12,120 247,369 2,879 - - 2.1. Purchases 25 - 77,981 - - - 2.2. Profits recognised in: 2.2.1. Income statement 63,189 12,120 330 2,879 - - - of which gains 63,123 - 44 2,879 - - 2.2.2. Equity X X 6,446 - - - 2.3. Transfers from other levels 6,805 - 50 - - 2.4. Other increases 52 - 162,562 - - 3. Decreases (9,765) (77,271) (185,894) - - - 3.1.Sales (43) (75,499) (2,107) - - - 3.2. Redemptions (26) (1,720) (10,000) - - - 3.3. Losses recognised in: 3.3.1. Income statement (7,720) (52) (162,585) - - - - of which losses (3,286) (52) (158,379) - - - 3.3.2. Equity X X (1,347) - - - 3.4. Transfers to other levels (1,976) - - - - - 3.5. Other decreases - - (9,855) - - - 4. Cl osing bal ances 75,525 2,798 323,243 2,879 - -
- Financial assets held for trading
The increases in “financial assets held for trading” are due mainly to fair value changes in equity options.
The main losses recognised through profit and loss related to write-downs on derivative contracts amounting to €3.3 million and to losses on derivatives trading amounting to €4.4 million.
- Financial assets designated at fair value
The €12.1 million increase mainly regards profits on the sale of stakes held in Humanitas Spa (€5.0 million) and in Immobiliare Mirasole Spa (€4.7 million). These transactions resulted in a reduction in the item by €71.9 million.
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- Available-for-sale financial assets
Increases in “available-for-sale financial assets” included subscriptions of the Atlante Fund amounting to €65.2 million (€119.1 million subscribed in 2016) and financial assets (“junior”) acquired following intervention in the Voluntary Scheme of the Interbank Deposit Protection Fund to assist Cassa di Risparmio di Cesena amounting to €12.1 million.
Losses recognised through profit and loss amounting to €156.2 million relate mainly to the write-down of the Atlante Fund (€108.7 million), to the impairment of financial assets acquired following intervention in the Voluntary Scheme of the Interbank Deposit Protection Fund to assist Cassa di Risparmio di Cesena (€53.8 million).
A.4.5.3 Annual changes in liabilities measured at fair value on a recurring basis (level three)
Financ ial liabilitie s Financ ial liabilitie s designated at fair Hedging derivatives held fo r trading value
1. Opening balances 31 - 287 2. Increases 48 - - 2.1. Is s ues - - - 2.2. Losses recognised in: 2.2.1. Income statement 16 - - - o f whic h lo s s e s 16 - - 2.2.2. Equity X X - 2.3. Transfers from other levels 32 - - 2.4. Other increases - - - 3. Decreases (31) - (287) 3.1.Redemptions - - - 3.2. Repurchases - - - 3.3. P ro fits re c o gnis e d in: 3.3.1. Income statement - - (287) - o f whic h ga ins - - (287) 3.3.2. Equity X X - 3.4. Transfers to other levels (31) - - 3.5. Other decreases - - - 4. Closing balances 48 - -
A.4.5.4 Assets and liabilities not measured at fair value or measured at fair value on a non-recurring basis: distribution by fair value level
Assets and l iabil ities not measured at fair val ue or measured 31.12.2017 31.12.2016 at fair val ue on a non-recurring basis BV Level 1 Level 2 Level 3 BV Level 1 Level 2 Level 3 1. Held-to-maturity investments 5,937,872 6,029,517 - - 7,327,544 7,440,786 - - 2. Loans and advances to banks 7,836,002 - 422,641 7,495,904 3,719,548 - 1,160,364 2,561,924 3. Loans and advances to customers 92,338,083 - 30,412,371 63,361,901 81,854,280 - 28,968,668 54,486,150 4. Investment property 260,699 - - 324,696 196,800 - - 269,880 5. Non-current assets and disposal groups held for sale 962 - - - 5,681 - - - Total 106,373,618 6,029,517 30,835,012 71,182,501 93,103,853 7,440,786 30,129,032 57,317,954 1. Due to banks 16,733,006 - - 16,808,680 14,131,928 - 15,177 14,128,463 2. Due to customers 68,434,827 - - 68,449,661 56,226,416 - 1,683,948 54,533,948 3. Debt securities issued 26,014,943 15,287,729 11,188,099 23,432 28,939,597 15,069,835 2,226,747 12,091,872 4. Liabilities associated w ith assets held for sale ------Total 111,182,776 15,287,729 11,188,099 85,281,773 99,297,941 15,069,835 3,925,872 80,754,283
A.5 – Information on “Day One Profit/Loss”
The information relates to paragraph 43 of IAS 39 which concerns differences between transaction prices and the value obtained by using measurement techniques that emerge on initial recognition and that are not immediately recognised through profit and loss on the basis of paragraph AG76 of the aforementioned standard. Where this type of event occurs, indication must be given of the accounting policies adopted by the bank for recognition through profit or loss of the differences that arise in this manner subsequent to initial recognition of the instrument. The Group has not performed any transactions for which a difference between the purchase price and the value of the instrument obtained using internal measurement techniques has arisen on initial recognition.
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PART B – Notes to the consolidated balance sheet
ASSETS
SECTION 1 Cash and cash equivalents – Item 10
1.1 Cash and cash equivalents: composition
31.12.2017 31.12.2016 a) Cash in hand 710,606 519,357 b) Deposits with central banks 100,972 - To tal 811,578 519,357
SECTION 2 Financial assets held for trading – Item 20
2.1 Financial assets held for trading: composition by type
It e m s / A m o u n t s 31.12.201731.12.2017 31.12.2016 31.12.2016 L 1L 2L 3 L 1L 2L 3
A. On-balance sheet assets 1. Debt instruments 481,606 343 100 482,049 107,483 210 100 107,793 1.1 Structured instruments 877 29 100 1,006 1,698 20 100 1,818 1.2 Other debt instruments 480,729 314 - 481,043 105,785 190 - 105,975 2. Equity instruments 17,730 - 54 17,784 4,949 - 2 4,951 3. Units in UCITS 1,801 1,728 - 3,529 672 - - 672 4. Financing ------4.1 Reverse repurchase agreements------4.2 Other ------Total A 501,137 2,071 154 503,362 113,104 210 102 113,416 B. Derivative instruments 1. Financial derivatives 1,873 343,868 75,372 421,113 1,403 599,680 15,117 616,200 1.1 for trading 1,873 343,868 12,672 358,413 1,403 599,680 15,117 616,200 1.2 connected with fair value options - - 1.3 other 62,700 62,700 - 2. Credit derivatives ------2.1 for trading ------2.2 connected with fair value options------2.3 other ------Total B 1,873 343,868 75,372 421,113 1,403 599,680 15,117 616,200 Total (A+B) 503,010 345,939 75,526 924,475 114,507 599,890 15,219 729,616
Debt instruments (level one) reported significant growth compared with the previous year, the result of the purchase in December 2017 of €175 million of French OAT and €250 million of German Bund. Equity instruments (level one) were composed mainly of investments made as part of insurance business. Financial derivatives (level two) relate mainly to OTC transactions connected with trading activity and were composed mainly of interest rate swaps, options, forwards and swaps on commodities. The balance in December 2017 on level three financial derivatives consists entirely of an option on equity investments.
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2.2 Financial assets held for trading: composition by debtors/issuers
31.12.2017 31.12.2016
A. ASSETS 1. Debt ins truments 482,050 107,793 a) Governments and central banks 480,712 105,966 b) Othe r public a utho ritie s 18 1
c) Banks 288 2 d) Other issuers 1,032 1,824 2. Equity ins truments 17,783 4,951 a) Banks 835 -
b) Other issuers: 16,948 4,951 - insurance companies 1,148 -
- fina nc ia l c o m pa nie s 1,788 820 - no n fina nc ia l c o m pa nie s 14,012 4,099
- o ther - 32 3. Units in UCITS 3,529 672 4. Financing - - a) Governments and central banks - - b) Othe r public a utho ritie s - -
c) Banks - - d) Other - - To tal A 503,362 113,416 B. DERIVATIVE INSTRUMENTS - a) Banks 50,679 168,131
- fa ir va lue 50,679 168,131
b) Customers 370,434 448,069 - fa ir va lue 370,434 448,069 Total B 421,113 616,200 Total (A+B) 924,475 729,616
SECTION 3 Financial assets designated at fair value – item 30
3.1 Financial assets designated at fair value: composition by type
Items /Amo unts 31.12.2017To tal 31.12.2016 To tal
L 1L 2L 3 L 1L 2L 3
1. Debt instruments 11,271 - - 11,271 - - - - 1.1 Structured ins truments ------1.2 Other debt instruments 11,271 - - 11,271 - - - - 2. Equity instruments 4,794 2,000 2,798 9,592 1,555 3,000 67,949 72,504 3. Units in UCITS 71,427 - 71,427 115,945 - 115,945 4. Financing ------4.1 Structured ------4.2 Other ------Total 87,492 2,000 2,798 92,290 117,500 3,000 67,949 188,449 Cost 88,058 1,654 23,415 113,127 117,088 2,481 84,941 204,510
: 103000O|1 – NOTA The debt instruments constitute the underlying assets of the insurance companies which joined the Group during the year. The reduction recorded in equity instruments (level three) is attributable mainly to disposals during the course of the year of shareholdings in Immobiliare Mirasole, in Ecas and in Humanitas. Level one investments in units of UCITS consisted of shares in hedge funds managed by UBI Pramerica Spa.
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3.2 Financial assets designated at fair value: composition by debtors/issuers
Items/Amounts 31.12.2017 31.12.2016
1. Debt instruments 11,271 - a) Governments and central banks 10,513 - b) Other public authorities - - c) Banks 434 - d) Other issuers 324 - 2. Equity instruments 9,592 72,504 a) Banks 79 - b) Other issuers: 9,513 72,504 - insurance companies 129 - - financial companies 3,781 2,850 - non financial companies 5,603 69,654 - other - - 3. Units in UCITS 71,427 115,945 4. Financing - - a) Governments and central banks - - b) Other public authorities - - c) Banks - - d) Other - - Total 92,290 188,449
SECTION 4 Available-for-sale financial assets – Item 40
4.1 Available-for-sale financial assets: composition by type
Items/Amounts31.12.2017 Total 31.12.2016 Total L 1L 2L 3 L 1L 2L 3 1. Debt instruments 9,188,135 106,452 16,809 9,311,396 9,094,524 157,437 13,347 9,265,308 1.1 Structured instrum 431,393 49,118 16,794 497,305 307,439 157,437 13,332 478,208 1.2 Other debt instrum 8,756,742 57,334 15 8,814,091 8,787,085 - 15 8,787,100 2. Equity instruments 17,119 477 273,852 291,448 25,098 - 182,892 207,990 2.1 At fair value 17,119 477 217,868 235,464 25,098 - 150,198 175,296 2.2 At cost - - 55,984 55,984 - - 32,694 32,694 3. Units in UCITS 94,734 131,819 32,581 259,134 25,841 49,165 65,529 140,535 4. Financing - - Total 9,299,988 238,748 323,242 9,861,978 9,145,463 206,602 261,768 9,613,833
The “debt instruments” were composed as follows: - €5.2 billion of Italian government securities (of which €1.1 billion, relating to the insurance business, acquired when the New Banks joined the Group); - €3 billion of foreign government securities (of which €0.4 billion relating to insurance business); - €1.1 billion of other bonds issued by major national and international banks, financial institutions and companies (of which €0.3 billion relating to insurance business) which in level three includes bonds issued by Nuova Sorgenia Holding held by UBI Banca Spa.
Units of UCITS (level one) relate to the Polis Fund and to units subscribed as part of the Group’s insurance business (€86.5 million).
Equity instruments and units of UCITS (level three) measured at fair value are composed mainly of investments in the following companies:
- Shares in Banca d’Italia Spa: €99.2 million; - Shares in Società Aeroporto Civile di Bergamo Orio al Serio Spa: €54.2 million; - Shares in Atlante Fund: €22 million; - Shares in Istituto Centrale Banche Popolari Italiane Spa: €21.6 million - Shares in SFP Calvi Holding: €3.1 million; - Shares in Fondo Interbancario Tutela Depositi Spa: €2.1 million.
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4.2 Available-for-sale financial assets: composition by debtors/issuers
Items/Amounts 31.12.2017 31.12.2016
1. Debt instruments 9,311,396 9,265,308 a) Governments and central banks 8,169,174 8,304,849 b) Other public authorities 27,830 - c) Banks 443,811 325,008 d) Other issuers 670,581 635,451 2. Equity instruments 291,448 207,990 a) Banks 126,036 53,288 b) Other issuers: 165,412 154,702 - insurance companies 2,825 2,825 - financial companies 28,552 30,778 - non financial companies 125,278 120,834 - other 8,757 265 3. Units in UCITS 259,134 140,535 4. Financing - - a) Governments and central banks - - b) Other public authorities - - c) Banks - - d) Other - - Total 9,861,978 9,613,833
|1 - NOTA 4.3 Available-for-sale financial assets: subject to specific hedging
Items/Components 31.12.2017 31.12.2016
1. Financial assets subject to fair value specific hedge 7,199,944 8,542,745 a) interest rate risk 7,199,944 8,542,745 b) price risk - - c) currency risk - - d) credit risk - - e) multiple risks - - 2. Financial assets subject to cash flow specific hedge a) interest rate risk - - b) currency risk - - c) other - - Total 7,199,944 8,542,745
The assets subject to specific fair value hedges on interest rate risk consisted mainly of debt instruments issued by the Italian government and by major Italian banks. Fair value changes in the instruments in question and the relative hedging contracts are recognised within item 90 of the income statement – Net hedging income.
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SECTION 5 Held-to-maturity investments – Item 50
5.1 Held-to-maturity investments: composition by type
31.12.2017 31.12.2016 Type of transaction / Group Carrying Fair value Fair value items Carrying Amount Amount L 1L 2L 3 L 1L 2L 3 1. Debt instruments 5,937,872 6,029,517 - - 7,327,544 7,440,786 - - 1.1 Structured ------1.2 Other debt instruments 5,937,872 6,029,517 - - 7,327,544 7,440,786 - - 2. Financing ------
This item is composed of government securities acquired with a view to supporting net interest income. The reduction compared with the previous year is attributable to the net effect of the sale of €2.05 billion nominal of BTPs with maturity in 2020 and the purchase of €1 billion nominal of BTPs with maturity on 2027.
5.2. Held-to-maturity investments: debtors/issuers
Type of transaction/Amounts 31.12.2017 31.12.2016
1. Debt instruments 5,937,872 7,327,544 a) Governments and central banks 5,937,872 7,327,544 b) Oth er publi c auth ori ties - - c) Banks - - d) Other issuers - - 2. Financing - - a) Governments and central banks - - b) Oth er publi c auth ori ties - - c) Banks - - d) Other - - Total 5,937,872 7,327,544 Total fair value 6,029,517 7,440,786
5.3 Held-to-maturity investments subject to specific hedging
No items of this type exist in the UBI Group.
ble 2: 105030O|1 - NOTA
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SECTION 6 Loans and advances to banks – Item 60
6.1 Loans and advances to banks: composition by type
31.12.2017 31.12.2016 Type o f trans actio n/Amo unts FV FV BV BV Level 1 Level 2 Level 3 Level 1 Level 2 Level 3
A. Loans to central banks 5,799,045 - - 5,799,045 1,064,303 - - 1,064,303 1. Term deposits - XXX- XXX 2. Compulsory reserve requirement 5,799,045 XXX1,064,303 XXX 3. Reverse repurchase agreements - XXX- XXX 4. Other - XXX- XXX B. Loans to banks 2,036,957 - 422,433 1,696,859 2,655,245 - 1,160,364 1,497,621 1: Loans 2,036,746 - 422,433 1,696,859 2,655,245 - 1,160,364 1,497,621 1.1 Current accounts and deposits 823,602 XXX1,348,754 XXX 1.2. Term deposits 19,924 XXX21,305 XXX 1.3. Other financing 1,193,220 XXX1,285,186 XXX - Reverse repurchase agreements 10,363 XXX- XXX - Finance leases 16 XXX- XXX - other 1,182,841 XXX1,285,186 XXX 2. Debt instruments 211 - 208 - - - - - 2.1 Structured securities - XXX- XXX 2.2 Other debt instruments 211 X X X - X X X Total 7,836,002 - 422,641 7,495,904 3,719,548 - 1,160,364 2,561,924
6.2 Loans and advances to banks subject to specific hedging
No items of this type exist in the UBI Group.
6.3 Finance leases
No items of this type exist in the UBI Group.
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SECTION 7 Loans and advances to customers – Item 70
7.1 Loans and advances to customers: composition by type
31.12.2017 31.12.2016
Carrying amount Fair value C a rrying a m o unt Fair value Type o f trans actio n/Amo unts No n-perfo rming No n-perfo rming Performing L1 L2 L3 Performing L1 L2 L3 Purchased Other Purchased Other
Financing 84,171,935 - 8,159,489 - 30,412,371 63,355,991 73,791,644 - 8,055,608 28,968,668 54,479,317 1. Current account overdrafts 7,715,551 - 1,108,633 XX X6,867,723 - 1,071,247 XXX 2. Reverse repurchase agreements - - - XX X120,991 - - XXX 3. Mortgages 57,025,034 - 4,895,678 XX X48,076,059 - 4,715,396 XXX 4. Credit cards, personal loans and salary-backed XX X XXX loans 3,043,998 - 124,734 2,663,133 - 153,221 5. Finance leases 5,541,888 - 1,004,204 XX X4,957,386 - 1,066,486 XXX 6. Factoring 2,184,824 - 250,180 XX X2,195,893 - 270,071 XXX 7. Other financing 8,660,640 - 776,060 XX X8,910,459 - 779,187 XXX Debt ins truments 5,405 - 1,254 - - 5,910 7,028 - - 6,833 8. Structured securities 3 - - XX X3 - - XXX 9. Other debt instruments 5,402 - 1,254 XX X7,025 - - XXX Total 84,177,340 - 8,160,743 - 30,412,371 63,361,901 73,798,672 - 8,055,608 - 28,968,668 54,486,150 The increase in loans and advances to customers (current accounts and mortgages in particular) is attributable to the new banks which joined the Group on 1st April 2017. Mortgages include assets to back covered bond issuances amounting to €16.8 billion (of which €0.8 billion non-performing), assets subject to securitisation amounting to €4.9 billion year (of which €0.2 billion non-performing) and also assets subject to synthetic securitisations amounting to €3 billion. Other financing includes transactions with retail and institutional customers by UBI Banca and banks in the Group.
7.2 Loans and advances to customers: composition by debtors/issuers
31.12.2017 31.12.2016
Type o f trans actio n/Amo unts No n-perfo rming No n-perfo rming Performing Performing Purchased Other Purchased Other
1. Debt instruments 5,405 - 1,254 7,028 - - a) Governments ------b) Other public authorities 5,402 - - 5,771 - - c) Other issuers 3 - 1,254 1,257 - - - non financial companies 3 - 1,254 1,257 - - - financial co mpanies ------ins urance co mpanies ------o ther ------2. Financing to 84,171,935 - 8,159,489 73,791,644 - 8,055,608 a) Governments 125,257 - 1,737 111,993 - 1,525 b) Other public authorities 645,235 - 34,650 550,536 - 32,696 c) Other 83,401,443 - 8,123,102 73,129,115 - 8,021,387 - non financial companies 44,813,880 - 5,787,653 39,961,434 - 5,800,702 - financial companies 4,742,971 - 117,254 4,379,176 - 124,922 - insurance companies 171,038 - 71 148,497 - 78 - other 33,673,554 - 2,218,124 28,640,008 - 2,095,685 Total 84,177,340 - 8,160,743 73,798,672 - 8,055,608
7.3 Loans and advances to customers: assets subject to specific hedging
Type of transaction/Amounts 31.12.2017 31.12.2016 1. Loans subject to fair value specific hedge: 111,004 22,261 a) interest rate risk 111,004 22,261 c) currency risk - - d) credit risk - - e) multiple risks- - 2. Loans subject to cash flow specific hedge: a) interest rate risk - - b) currency risk - - c) other - - Total 111,004 22,261
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7.4 Finance leases
minimum payments gross investment capital portion non- of which of which Life performing interest secured exposures portion unsecured remaining remaining amount amount on demand 6,917 66,109 13,132 13,454 79,563 - up to 3 months 111,819 128,558 5,463 33,496 162,054 - 3 months to 1 year 507,633 520,206 20,992 132,178 652,384 - 1 year to 5 years 377,835 2,253,360 209,309 516,683 2,770,043 - more than 5 years - 2,528,916 723,959 343,872 2,872,788 -
indeterminate maturity - 44,739 - - 44,739 - total 1,004,204 5,541,888 972,855 1,039,683 6,581,571 -
Net receivables from customers for finance leases, net of intercompany eliminations, totalled €6,581,571 thousand of which €1,004,204 thousand were non-performing assets.
The lending portfolio for the finance leases of UBI leasing consisted of 34,380 contracts, composed, by remaining debt, as follows: - 79% property sector; - 11% machinery and equipment sector; - 6 % energy sector; - 3% auto sector; - 1 % nautical sector. The ten most significant exposures had a total remaining value amounting to €256,416 thousand.
A negative balance for potential lease instalments (relating to the index value of the instalments) was recognised during the year amounting to €84,861 thousand.
SECTION 8 Hedging derivatives – Item 80
8.1 Hedging derivatives: composition by type of hedge and hierarchical level
FV 31.12.2017 FV 31.12.2016 NA NA L 1 L 2 L 3 L 1 L 2 L 3
A) Financial derivatives - 167,028 2,879 19,888,992 - 461,767 - 15,771,457 1) F a ir va lue - 167,028 - 19,864,542 - 461,697 - 15,767,762 2) Cash flow - - 2,879 24,450 - 70 - 3,695 3) Fo reign inves tments ------B) Credit derivatives ------1) F a ir va lue ------2) Cas h flo w ------Total - 167,028 2,879 19,888,992 - 461,767 - 15,771,457
Leg end
FV= fair value NA = not ional amount Financial derivatives consist mainly of interest rate hedges of the interest rate swap type on the bonds issued. The result of fair value movements is recorded in item 90 of the income statement – Net hedging income.
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8.2 Hedging Derivatives: composition by portfolios hedged and type of hedge
Fair Value Cash flow
S pe c ific Macro -hedge Specific Macro -hedge Transactions /Type of Foreign hedging inve s tme nts Inte re s t ra te C urre nc y Multiple Cre dit ris k P ric e ris k ris k ris k ris ks
1. Available-fo r-s ale financial 10,288 - - - - X 2,879 X X assets 2. Loans - - - X - X - XX
3. Held-to-maturity investments X - - X - X - X X
4. P o rtfo lio X X X X X - X - X 5. Other transactions - - - - - X - X - To tal as s ets 10,288 - - - - - 2,879 - - 1. Fina nc ia l lia bilitie s 156,740 - - X - X - X X 2. P o rtfo lio X X X X X - X - X To tal liabilities 156,740 ------1. Expected transactions X X X X X X - XX 2. P o rtfo lio o f financial as s ets XXXXX - X- - a nd lia bilitie s
SECTION 9 Fair value change in hedged financial assets – Item 90
9.1 Fair value change in hedged assets: composition by portfolios hedged
Fair value change in hedged assets/Group components 31.12.2017 31.12.2016
1. Positive changes 50,761 56,112 1.1 of s pecific po rtfo lio s : 50,761 56,112 a) loans and receivables 50,761 56,112 b) available-for-sale financial assets - - 1.2 general - - 2. Negative changes (52,796) (32,149) 2.1 of s pecific po rtfo lio s (52,796) (32,149) a) loans and receivables (52,796) (32,149) b) available-for-sale financial assets - - 2.2 general - - To tal (2,035) 23,963 09000O|1 – NOTA
9.2 Assets subject to interest rate risk macro hedge
Hedged as s ets 31.12.2017 31.12.2016
1. Lo a n s 6,049,807 3,028,248 2. Available-for-sale assets - - 3. P ortfolio - - To tal 6,049,807 3,028,248
Total assets subject to fair value macro hedges on interest rate risk consisted of loans, the change in value of which together with that of the relative hedging contracts, is recognised within item 90 of the income statement – “net hedging income”.
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SECTION 10 Equity investments – Item 100
10.1 Equity investments: information on investments
The balance sheet as at 31st December 2017 includes equity-accounted investees only.
10.2 Significant investments: book value, fair value and dividends received
Carrying Dividends Name Fair value (*) amount received
B. Companies subject to considerabl e infl uence 1. Lombarda Vita Spa 153,301 8,598 2. Aviva Vita Spa 60,838 21,700 TOTAL 214,139 - 30,298
(*) The fair value of the equity investments is not given in the table because they are companies that are not listed.
The larger equity investments, for which the carrying amount includes goodwill arising on consolidation, were tested for impairment, using the average of the multiples of a sample of comparable companies.
The market value for the insurance companies Aviva Vita Spa and Lombarda Vita Spa was calculated on the basis of a sample of companies quoted on active European stock markets considering the price/book value (P/BV) multiple adjusted for non-controlling interests and for intangible assets. The source for the amounts used was Bloomberg. The value (pro rata) was compared with the carrying amount of the equity investments in the consolidated financial statements. - Aviva Vita Spa: the equity attributable to the Parent, amounting to €60.8 million, inclusive of 2017 profit and also of a positive consolidation difference amounting to €1.1 million; - Lombardi Vita Spa: the equity attributable to the Parent, amounting to €153.3 million, inclusive of the 2017 result and also of a positive consolidation difference amounting to €29.4 million;
Testing of the amounts recognised for the equity investments in the consolidated financial statements against the “pro rata” fair value found no evidence of impairment losses as at 31st December 2017.
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10.3 Significant investments: accounting information
d Other ent and ent and Profit (loss) comprehens Comprehensive e
Name an osses
l for the year ive income income
t (1) net of taxes (3) = (1) + (2) en reversals on property, property, on reversals plant equipm and assets intangible Profit (Loss) on continuing tax before operations taxPost profit(loss) from operationscontinuing from (loss) profit Post-tax discontinued operations rm (2) i pa m Cash and cash equivalents cash and Cash Financial assets Non-financial assets Financial liabilities liabilities Non-financial I revenues Total incom interest Net
B. Companies subject to considerable influence
1. Lombarda Vita Spa X 7,916,984 313,745 7,729,236 191,657 1,692,196 X X 35,104 23,058 - 23,058 (1,096) 21,962 (*) Profit (loss) for the year as in the reporting package prepared by the insurance companies for the preparation of the consolidated financial statements and subject to audit
2. Aviva Vita Spa X 12,930,800 258,700 12,373,400 517,300 2,248,300 X X 58,400 41,200 - 41,200 - 41,200
10.4 Non-significant investments: accounting information
Post-tax Other Carrying profit Compreh- Post tax profit Profit compreh- amount of (loss) from ensive Total Total Total (loss) from (loss) for ensive Name the equity discontin income assets liabilities revenues continuing the year income invest- ued (3) = (1) + operations (1) net of ments operation (2) taxes (2) s
Companies subject to joint control ------
Companies subject to considerable influence 29,026 244,856 119,537 176,178 29,987 - 29,987 645 30,632
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The accounting information relates to the following investments: Zhong Ou Fund Management Co.; Polis Fondi Sgr; UFI Servizi Srl; SF Consulting Srl; Montefeltro Sviluppo Scarl.
10.5 Annual changes in equity investments
31.12.2017 31.12.2016
A Opening bal ances 254,364 260,812 B Increases 23,993 27,856 B.1 Purchases - - B.2 Reversals of impairment losses - - B.3 Revaluations - - B.4 Other changes 23,993 27,856 C Decreases (35,192) (34,304) C.1 Sales - - C.2 Impairment losses - - C.3 Other changes (35,192) (34,304) D Final balances 243,165 254,364 E Total revaluations - - F Total impairment losses - -
The amount recognised on line B.4 “Other changes” consists mainly of the following:
- profits for the year totalling €23,801 thousand. In detail these included: Zhong Ou Fund Management Co. €6,704 thousand Lombarda Vita SpA €8,531 thousand Aviva Vita SpA €8,240 thousand
The amount recognised on line C.3 “Other changes” consists mainly of the following:
- dividends of €8,598 thousand received from Lombarda Vita Spa, of €21,700 thousand from Aviva Vita Spa and of €4,313 thousand from Zhong Ou Fund Management Co
10.6 Significant assessments and assumptions to establish the existence of joint control or significant influence
Part A, Section 3 of these notes to the financial statements may be consulted for further information.
10.7 Commitments relating to equity investments in companies subject to joint control
Commitments relating to the possible exercise of options Nothing to report.
Commitments connected with the possible payment of further tranches of a price
Nothing to report.
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10.8 Commitments relating to equity investments in companies subject to significant influence
Commitments relating to the possible exercise of options
Lombarda Vita Spa: as part of the renewal of life banc assurance agreements with the Cattolica Assicurazioni Group concluded on 30th September 2010, the options on the respective investments in the Lombarda Vita joint venture were reformulated with purchase options only, exercisable on the basis of the occurrence of predetermined conditions. Aviva Vita Spa: as part of the definition of the new partnership agreements between the Aviva Group and the UBI Group in the life insurance distribution sector concluded on 22nd December 2014, purchase options were agreed on the respective stakes held in the two life insurance companies, exercisable on the basis of the occurrence of predetermined conditions. Zhong Ou Asset Management Company (formerly Lombarda China Fund Management Company): a partnership agreement entered into as part of asset management business focused on the Chinese market signed between UBI Banca and the current shareholders, which involves a series of call options which can be exercised if determined trigger events occur concerning the respective investment held in Zhong Ou Fund Asset Management Company. UBI Banca holds an approximately 1.7% stake in the total share capital of the company classified within non-current assets held for sale according to IFRS 5, because it is subject to future disposal on the basis of agreements entered into between the shareholders and the management of the company.
Recapitalisation commitments
Nothing to report.
10.9 Significant restrictions
Nothing to report.
10.10 Other information
Nothing to report.
SECTION 11 Technical reserves of reinsurers – Item 110
31.12.2017 31.12.2016
A. Non-l i fe sector 347,358 - A.1 Premium reserves 143,176 - A.2 Claims reserves 204,182 - A3. Other reserves - - B. Life sector - - B.1 Mathematical reserves - - B.2 Reserves amounts to be paid - - B3. Other reserves - - C. Technical reserves where the investment risk is borne by the insurers - - C1. Reserves relating to contracts on which performance is linked to investment funds and market - - C2. Reserves resulting from the management of pension funds - - D. Total techni cal reserves of rei nsurers 347,358 -
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SECTION 12 Property, plant and equipment – Item 120
12.1 Property, plant and equipment for functional use: composition of assets valued at cost
Assets/amounts 31.12.2017 31.12.2016
1. Ow ned assets 1,521,362 1,421,282 a) land 810,387 764,341 b) bui l di n gs 569,438 549,199 c) furnishings 35,840 26,568 d) electronic equipment 62,567 46,951 e) other 43,130 34,223 2. Assets acquired through finance l eases 29,682 30,265 a) land 16,546 16,546 b) bui l di n gs 13,136 13,719 c) furnishings - - d) electronic equipment - - e) other - - Total 1,551,044 1,451,547
12.2 Tangible assets held for investment: composition of assets valued at cost
Assets/amounts 31.12.2017 31.12.2016
Carrying Fair Value Carrying Fair Value amount L1 L2 L3amount L1 L2 L3 1. Ow ned assets 260,508 - - 324,509 196,605 - - 269,698 - land 153,784 - - 184,635 130,914 - - 144,767 - buildings 106,724 - - 139,874 65,691 - - 124,931 2. Assets acquired through fi nance leases 191 - - 187 195 - - 182 a) land 33 - - 32 33 - - 27 b) buildings 158 - - 155 162 - - 155 Total 260,699 324,696 196,800 269,880
12.3 Property, plant and equipment for functional use: composition of assets revalued
No property, plant and equipment for functional use revalued are held.
12.4 Tangible assets held for investment: composition of assets measured at fair value
No tangible assets held for investment recognised at fair value are held.
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12.5 Property, plant and equipment for functional use: annual changes
Electronic Land Buildings Furnishings Other Total equipment A. Gross opening bal ances 806,404 1,246,528 189,065 440,867 374,641 3,057,505 A.1 Total net reductions in value (25,517) (683,610) (162,498) (393,916) (340,418) (1,605,959) A.2 Net opening bal ances 780,887 562,918 26,567 46,951 34,223 1,451,546 B. Increases 68,895 84,387 13,986 38,197 21,647 227,112 B.1 Purchases 62,419 70,179 13,986 38,147 21,632 206,363 B.2 Capitalised improvement expenses - 2,573 - - - 2,573 B.3 Reversal of impairment losses ------B.4 Positive changes in fair value recognised in: ------a) equity ------b) income statement ------B.5 Positive exchange rate differences ------
B.6 Transfers from properties held for investment 6,476 11,635 - - - 18,111 B.7 Other changes - - - 50 15 65 C. Decreases (22,849) (64,731) (4,713) (22,581) (12,740) (127,614) C.1 Sales (243) (506) - (52) (17) (818) C.2 Depreciation - (34,852) (4,360) (21,293) (12,151) (72,656) C.3 Impairment losses recognised in: (1,037) (1,686) - - - (2,723) a) equity ------b) income statement (1,037) (1,686) - - - (2,723) C.4 Negative changes in fair value recognised in: ------a) equity ------b) income statement ------C.5 Negative exchange rate differences ------C.6 Transfers to: (2,858) (2,925) - - - (5,783) a) tangible assets held for investment (478) (497) - - - (975) b) assets held for sale (2,380) (2,428) - - - (4,808) C.7 Other changes (18,711) (24,762) (353) (1,236) (572) (45,634) D. Final net bal ances 826,933 582,574 35,840 62,567 43,130 1,551,044 D.1 Total net reductions in value (128,008) (952,163) (264,232) (316,217) (499,175) (2,159,795) D.2 Final gross bal ances 954,941 1,534,737 300,072 378,784 542,305 3,710,839 E. Value at cost ------
12.6 Tangible assets held for investment: annual changes
Total Land Buildings A. Openi ng bal ances 130,947 65,853 B. Increases 30,661 64,721 B.1 Purchases 13,746 41,586 B.2 Capitalised improvement expenses - 299 B.3 Positive changes in fair value - - B.4 Reversals of impairment losses - - B.5 Positive exchange rate differences - - B.6 Transfers from properties used in operations 478 497 B.7 Other changes 16,437 22,339 C. Decreases (7,791) (23,692) C.1 Sales (79) (2) C.2 Depreciation - (10,859) C.3 Negative changes in fair value - - C.4 Impairment losses (789) (944) C.5 Negative exchange rate differences - - C.6 Transfers to other asset portfolios (6,901) (11,887) a) properties for functional use (6,476) (11,635) b) non-current assets held for disposal (425) (252) C.7 Other changes (22) - D. Final balances 153,817 106,882 E. Fair value 184,667 140,029
Since land and buildings are recognised at cost, the Group arranged for expert external appraisers to estimate the fair value of all property assets for the purposes of the annual impairment test on the carrying amounts.
The estimate was based on generally accepted valuation principles, by applying the following measurement criteria:
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the direct comparative or market method, based on a comparison between the asset in question and other similar assets subject to sale or currently on sale on the same market or competing markets; the income method, based on the present value of potential market incomes for a property, obtained by capitalising the income at a market rate. The above methods were performed individually and the values obtained or each one were appropriately averaged. The results of the appraisal method described resulted in a write-down of real estate property positions amounting to approximately €4.5 million.
12.7 Commitments for the purchase of property, plant and equipment
Assets/amounts 31.12.2017 31.12.2016
A. Assets for functional use 1.1 owned 4,618 6,092 - land - - - buildings 66 233 - furnishings - 611 - electronic equipment 550 133 - other 4,002 5,115 1.2 Finance lease - 7 - land - - - buildings - 7 - furnishings - - - electronic equipment - - - other - - Total A 4,618 6,099 B. Assets held for investment 2.1 owned - - - land - - - buildings - - 2.2 Finance lease - - - land - - - buildings - - Total B - - Total (A+B) 4,618 6,099
SECTION 13 Intangible assets – Item 130
13.1 Intangible assets: composition by type of asset
31.12.2017 31.12.2016 Assets/amounts Finite Finite Indefinite Indefinite Indefinite useful life useful life useful life useful life useful A.1 Goodw il l X 1,465,260 X 1,465,260 A.2 Other intangibl e assets 263,031 37 230,676 37 A.2.1 Assets measured at cost: 263,031 37 230,676 37 a) Internally generated intangible assets - - - - b) Other assets 263,031 37 230,676 37 A.2.2 Assets at fair value: - - - - a) Internally generated intangible assets - - - - b) Other assets - - - - Total 263,031 1,465,297 230,676 1,465,297
Details of the item “Goodwill” are given below.
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Figures in thousands of euro 31.12.2017 31.12.2016 changes UBI Banca Spa (*) 1,195,840 315,815 880,025 Banco di Brescia Spa - 570,392 ( 570,392) Banca Popolare di Ancona Spa - 166,364 ( 166,364) UBI P ramerica SGR Spa 170,284 170,284 - Banca Popolare di Bergamo Spa - 100,045 ( 100,045) IW Bank Spa 88,754 88,754 - Banca di Valle Camonica Spa - 43,224 ( 43,224) UBI Factor Spa 8,260 8,260 - UBI Sistemi e Servizi SCpA 2,122 2,122 -
TOTAL 1,465,260 1,465,260 -
(*) In 2017 Banco di Brescia Spa, Banca Popolare di Ancona Spa, Banca Popolare di Bergamo Spa and Banca di Valle Camonica Spa were merged into UBI Banca Spa.
The goodwill recognised in the consolidated financial statements of the UBI Banca Group (“goodwill arising on consolidation” resulting from the elimination of the equity investments in subsidiaries) is the result of all the goodwill items relating to UBI Banca and to some of the companies controlled by it. In 2017 the Group performed purchase and/or sales transactions of shareholdings which led to a change in the scope of consolidation for subsidiaries, as explained in more detail in the section “The scope of consolidation”. These transactions did not cause any goodwill to arise or to be derecognised. In compliance with IAS 36, an impairment test is performed at the end of each year (or more frequently if an analysis of internal or external circumstances should give rise to doubts that the value of the assets can be recovered). The result of the impairment test as at 31st December 2017 did not find any need to proceed to recognition of impairment losses on the item goodwill.
“Other finite life intangible assets” amounting to €263 million were comprised mainly of the assets: . resulting from the purchase price allocation carried out on 1st April 2007 following the merger of the former Banca Lombarda e Piemontese Group into the former BPU Banca Group on 1st April 2007, for a total of €71.1 million relating to: - “asset under management” consisting both of the asset management and the relative distribution activities and totalling €38.7 million. These assets are amortised over the useful remaining life of the customer relationships. The amortisation for the year amounted to €3.7 million (€3.8 million for the year full year 2016); - “assets under custody” business totalling €32.4 million with total amortisation of €2.1 million (€2.6 million for the full year 2016); . resulting from the purchase price allocation carried out on 1st April 2017 following the merger of the New Banks for a total of €34.6 million relating to: - “asset under management” consisting both of the asset management and the relative distribution activities and totalling €16 million. These assets are amortised over the useful remaining life of the customer relationships. The amortisation for the period 1st April to 31st December amounted to €2.8 million; - “assets under custody” business totalling €2.6 million with total amortisation for the period 1st April to 31st December amounting to €0.5 million; - “core deposits”, which constitute intangible assets relating to customer relationships totalling €16 million with total amortisation for the period 1st April to 31st December amounting to €2.8 million.
The remaining balance consists almost exclusively of software, allocated mainly to UBISS Scpa, the UBI Group service company.
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All the specific intangible assets of the UBI Banca Group (core deposits, intangible assets connected with assets under management and under custody) have a finite useful life. Therefore in accordance with IAS 38 there is no obligation to subject those assets to impairment tests on an annual basis, but only each time evidence appears of impairment that is greater than the amortisation. Intangible assets associated with assets under management and assets under custody arising from the merger of the former BPU Banca and Banca Lombarda banking groups were not tested for impairment because no changes were recorded in the relative assets which determine the value of the intangible assets associated with them (within the perimeter of the PPA) by an amount greater than the annual amortisation rate and no changes occurred in terms of the profitability of those assets.
13.2 Annual changes in intangible assets
Other intangible assets: Other intangible assets: other internally generated Bal ances as at Finite useful Indefinite Finite useful Indefinite Goodwill 31.12.2017 life useful life life useful life A Opening gross bal ances 2,780,406 - - 1,518,617 37 4,299,060 A.1 Total net reductions in value ( 1,315,146) ( 1,287,941) ( 2,603,087) A.2 Net opening bal ances 1,465,260 - - 230,676 37 1,695,973 B. Increases - - - 103,183 - 103,183 B.1 Purchases - - - 61,603 - 61,603 B.2 Increases in intangible internal assetsX----- B.3 Reversal of impairment lossesX----- B.4 Positive changes in fair value ------in equity X------in the income statement X----- B.5 Positive exchange rate differences------B.6 Other changes - - - 41,580 - 41,580 C. Decreases - - - ( 70,828) - ( 70,828) C.1 Sales - - - ( 471) - ( 471) C.2 Impairment losses - - - ( 68,713) - ( 68,713) - Amortisation X - - ( 68,705) - ( 68,705) - Impairment losses - - - ( 8) - ( 8) + equity X----- + income statement - - - ( 8) - ( 8) C.3 Negative changes in fair value ------in equity X------in the income statement X - - - - C.4 Transfers to non-current assets held for ------sale. C.5 Negative exchange rate differences------C.6 Other changes - - - ( 1,644) - ( 1,644) D. Final net bal ances 1,465,260 - - 263,031 37 1,728,328 D.1 Total net impairment losses ( 1,315,146) - ( 1,289,111) ( 2,604,257) E. Final gross bal ances 2,780,406 - - 1,552,142 37 4,332,585 F. Value at cost ------
13.3 Other information
Software
The useful life of software considered for the purposes of amortisation is five years. The figure for contractual commitments to purchase intangible assets amounted to €21,706 thousand for the acquisition of software.
Impairment tests on goodwill
The goodwill recognised in the consolidated balance sheet of UBI Banca is the result of all the goodwill items and all the positive consolidation differences relating to some of the subsidiaries controlled by UBI Banca, as reduced by prior year impairment losses. The criterion followed in the allocation of goodwill in the UBI Group considers the minimum level at which it is monitored which coincides with the banking segment (pursuant to IFRS 8) with regard to banking activities and to legal entities for other businesses (non-banking
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financial segment). A second level impairment test is conducted on consolidated cash flows to test the general integrity of the goodwill recognised in the consolidated balance sheet. The allocation criterion followed since the balance sheet as at 31st December 2016, is a consequence of the reorganisation commenced in 2016 designed to simplify the structure of the Group’s banking business. This reorganisation involved the following: - the merger by incorporation of the former network banks (Banca Popolare di Bergamo, Banco di Brescia, Banca Popolare Commercio e Industria, Banca Regionale Europea, CARIME, Banca Popolare di Ancona and Banca di Valle Camonica) during the last quarter of 2016 and in 2017; - the merger of Banca Adriatica (former Nuova Banca delle Marche) and Banca Tirrenica (former Nuova Banca dell’Etruria), acquired in 2017, into UBI Banca. The merger by incorporation of Banca Teatina (former Nuova Carichieti), on the other hand, is forecast for the first quarter of 2018. The 2018 budget and the projections for 2019-2022 are based on the 2017/2020 Business Plan detailed and developed using a business segment view: Individuals and Households, Affluent and Private banking, and Corporate. The UBI Group has not changed its operating segments (pursuant to IFRS 8) for accounting purposes and following its reorganisation (consisting of banking, non-banking financial, and finance and corporate centre), because the reorganisation affected the banking operating segment only and did not modify (except marginally) the other segments. The Group Business Plan redesigned the business model and the organisational structure. The Group proceeded to reallocate the goodwill of the “former network banks” to the banking segment (this segment comprises the results of the “target bridge institutions”, inclusive of Carichieti). More specifically, the Single Bank’s structure involved the division of general banking activities into two main segments (individuals and corporate), but the detailed implementation and the pursuit of strategic objectives was accomplished by means of the constitution of “macro geographical areas” in order to create unified management in the various local areas of the two segments. This meant that the recoverability of goodwill took place by means of the unified and co-ordinated management of the commercial segments insofar as they are intrinsically related to each other. For that reason, the banking segment constitutes the Group CGU on which the recoverability of goodwill is tested because it is the minimum level at which: (i) the Group’s strategy aims at recovering the goodwill (and that monitoring its recoverability); (ii) the allocation of goodwill is not arbitrary. It should be considered here that international accounting standards identify the segment as the maximum limit at which goodwill can be tested and monitored. The value measurement used to calculate the recoverable amount of the CGUs to which goodwill is allocated is the value in use. Making the value measurement (IAS 36.31) requires an estimate of the “future cash inflows and outflows to be derived from continuing use of the asset and from its ultimate disposal” and the application of “the appropriate discount rate to those future cash flows”. The financial measurement criterion adopted by the UBI Group to calculate the value in use is the “Excess Capital” variant of the “Dividend Discount Model”. The value in use was therefore estimated on the basis of the financial criterion. The carrying amount of the legal entities belonging to the non-banking financial segment and carrying amount of the banking segment was calculated in a manner consistent with the criterion with which the recoverable amount was estimated. For the CGUs belonging to the non- banking financial segment, the notional carrying amount of each CGU to which goodwill was allocated corresponded to the sum of the following: 1) the equity plus the profit of the legal entity, inclusive of goodwill, net of i) dividends currently being paid, calculated on the profit earned in 2017 and ii) the carrying amounts of the equity investments; 2) adjustments to the purchase price allocation (PPA former Banche Popolari Unite Group and former Banca Lombarda e Piemontese Group), inclusive of the write-ups of real estate properties, loans and receivables and obligations and intangible assets identified in the PPA; 3) any consolidation differences there may be, “grossed up” on a notional basis. As already reported, for CGUs that are not wholly owned, for impairment purposes goodwill is restated on a notional basis including the goodwill attributable to non-controlling interests (not recognised in the consolidated financial statements) by means of “grossing up” (i.e. goodwill attributable to the Parent/percentage ownership attributable to the Parent) in
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consideration, amongst other things, of example seven in IAS 36. This adjustment regards consolidation differences relating to UBI Pramerica. For the banking segment, the carrying amount is obtained starting from the following: 1) the equity in the separate balance sheet of UBI Banca (to which the banking segment relates), inclusive of goodwill; 2) the equity absorbed by other activities relating to UBI Banca. These are a. the equity absorbed by “corporate centre” activities (inclusive of consolidated equity investments); b. the equity absorbed by the finance activities. The impairment test, for which the procedure was defined prior to the approval of the financial statements, made use of methodological support from an external appraiser of high standing. The projections on which the value in use estimate is based: a) are founded on reasonable and consistent assumptions, which represent the best estimate that can be made by management of the possible economic conditions that may manifest over the useful life of the asset in question; b) use the 2018 budget and 2019-2022 projections as a starting point which incorporate the most recent macroeconomic and regulatory trends and make use of the best estimates available to management; c) use a time horizon of five years as the explicit forecast period in compliance with IAS 36; d) are only adopted for the purposes of measurement after appropriate analysis has been carried out of gaps between preliminary 2017 final figures and 2017 budget figures to find the causes of the gaps and after making sure that those gaps are incorporated in the projections; e) with due prudence, involve a gradual return to normal market conditions in the medium-term as a result of: i. an estimate of short-term interbank interest rates (3-month Euribor rate) consistent with forward/future interest rates. The average annual three-month interbank rate (3-month Euribor rate) is 0.677% for 2021 and 0.927% for 2022 (compared with a 3-month Euribor of 0.295% used in the test 31/12/2016 impairment test for the year 2021). The 3-month Euribor rate is forecast to be negative until 2019 when it will reach higher levels. The size of the rise in interest rates ensures a progressive normalisation of markups and markdowns, even if still lower than levels observed historically; ii. Projections for loans show a scenario of moderate growth (an average annual growth rate of 1.85% in the period 2017-2022). Projections for growth in direct funding are a little higher than those for lending (CAGR 2017-2022 = 2.41%). The hypotheses formulated lead to growth in operating income at a compound annual growth rate that is greater proportionally to growth in volumes (6%) as a result of the forecast rise in interest rates and a rise in net fee and commission income (attributable to growth of 7.27% in volumes of indirect funding as a result amongst other things, of specific action undertaken on the target bridge institutions); iii. the trend for operating expenses incorporates recent corporate ownership action designed to contain them, as a result, amongst other things, of the implementation of the Single Banca Project. Operating expenses will fall in the explicit forecast period at a rate of 0.9% per year; iv. the cost of risk (net impairment losses on loans/loans to customers) is forecast to fall in 2022 (0.58%) compared with the figures observed in 2017 (0.79%) and forecast for 2018 (0.64%), although it will still be higher than the levels observed historically before the crisis. The estimate of the value in use involves an estimate of the terminal value, which consists of the calculation of the present value of the cash flows freely distributable to shareholders after the explicit forecast period, based on the net profit forecasts for the last year of the forecast (2022). The sustainability of those cash flows is supported by comparison of profits estimated by management with the forecasts of analysts that follow the UBI share up until 2020 (the last year for which projections are made by equity analysts who follow the share). For the purposes of calculating freely available cash flows, a preliminary calculation was made of the minimum regulatory Capital, in line with minimum requirements set by the European Central Bank in terms of the Common Equity Tier 1 Capital Ratio following the
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“Supervisory Review and Evaluation Process” (SREP). That requirement corresponds to the sum of the following: - the minimum requirement requested for 2018 in terms of the Common Equity Tier 1 Ratio, which is 8.625% and was disclosed to markets on 28th December 2017; - a supplementary “capital conservation buffer” of 2.50% to be achieved by 2019 (compared with a level of 1.875% for 2018; the forecast addition is 0.625%) in terms of the Common Equity Tier 1 Ratio; - an additional requirements in terms of the Common Equity Tier 1 Ratio in order to meet the “Pillar II Capital Guidance” target.
The cash flow freely distributed to shareholders beyond the specific forecast period is capitalised at a rate that represents the difference between the opportunity cost of equity (“ceo”) and the estimated perpetual growth rate (g). The terminal value for the cash flow growth rate is assumed to be 1.35%, up on that used in the previous year which was 1.00%, due to a rise in i) consensus long-term estimates of the inflation scenario and ii) interest rates. Finally, the value in use is based on the opportunity cost of capital (cost of equity – “coe”) estimated consistent with the provisions of accounting standard IAS 36 and “Guidelines for impairment tests on goodwill in contexts of financial and real crisis” issued by the Organismo Italiano di Valutazione (OIV – Italian Valuation Body) on the basis of a capital asset pricing model (CAPM): coe = Risk Free + b x Equity Risk Premium
The opportunity cost of capital is equal to the sum of the risk free rate and a risk premium corresponding to the product of the beta of the share and the overall market risk premium (equity risk premium): a) the specific yield to maturity of the interbank rate for each year of the forecast was assumed as the risk free rate, in accordance with paragraph A21 of IAS 36, plus a spread between the corresponding yield to maturity of the benchmarks on Italian government securities and the same interbank interest rate. The risk free rate used to estimate the cost of equity is consistent with future interest rates forecast by management and assumed for the estimate of future cash flows used in the measurement. The risk free rate assumed in the terminal value is 2.07% (i.e. the sum of the interbank rate of 0.83% and a spread of 1.24%, obtained from the daily difference observed in the course of 2017 between the ten-year government securities rate and the interbank rate) which is consistent (a little less) with the estimates for risk free rates used by management for long-term forecasts of net interest income (average annual 3- month Euribor rate forecast for 2022 = 0.927%). The risk free rate rose 0.62% compared with impairment measurements made as at 31.12.2016 (the amount assumed for the terminal value as at 31.12.2016 was 1.45%); b) the equity risk premium is 5.0% in line with the consensus reported by equity analysts. The measurement of the equity risk premium as at 31.12.2017 was 5.0%, which is less than that used as at 31.12.2016. The reduction of 0.50% in the equity risk premium that took place between 31.12.2016 and 31.12.2017, was offset by the rise in the risk- free rates up from 1.45% to 2.07%); c) for the banking segment and for the Group as a whole (second level impairment test), the beta was estimated at 1.60x (1.60x as at 31.12.2016) and is based on historical returns on the share over five years and the FTSE Italia All Share market index. The beta estimate as at 31.12.2017 (1.60x) based on historical returns over five years (calculated on a monthly basis) is: - in line with the beta estimates, based on historical one-year returns on the UBI share (on a daily basis), of 1.574 and - less than the beta estimate based on historical two-year returns (on a weekly basis) and the FTSE Italia All Share market index. d) for the other companies, the beta was estimated using the same method as that used in the previous year, on the basis of the returns for comparable European companies.
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On the basis of the parameters reported above, the opportunity cost of own capital for the banking segment (banks) and for the UBI Group was 10.09%, a value a little less than that adopted in the previous year (coe = 10.24%).
A growth rate for long-term income of 1.35 % was assumed for the banking segment, up compared with that of 1.00% used the year before due to a rise in long-term consensus estimates of the inflation scenario and of the risk-free rates. The growth rate for companies that do not carry out conventional banking activities was assumed to be 0%.
Therefore the rate of capitalisation (coe – g) for the banking segment as at 31.12.2017 was 8.74%, (10.09% -1.35%), down compared with the measure of 9.24% assumed for the 2016 impairment test. The table below shows estimates of the opportunity cost of capital and of growth for the different CGUs to which goodwill was allocated. The same measures assumed for the impairment test as at 31.12.2016 are given in brackets and in italics. Consistent with the procedures employed for previous impairment tests, the fundamental estimate of the opportunity cost of capital for the banking segment and the UBI Group, based on market parameters, is reconciled with the consensus estimate made by the equity analysts who follow the UBI Banca share (10.09% vs analysts’ average = 9.9%; analysts’ median = 10.0%).
Nominal growth rate Rate of capitalisation of Initial discount in income for the income for the CGU Final discount rate rate calculation of the calculation of the terminal value terminal value
7.60% 10.09% 1.35% 8.74% Banks (8.42%) (10.24%) (1.00%) (9.24%)
UBI Factor, 4.77% 7.26% 0.00% 7.26% Leasing, Prestitalia (5.16%) (6.98%) (0.00%) (6.98%)
4.75% 7.25% 0.00% 7.25% UBI Pramerica (5.78%) (7.60%) (0.00%) (7.60%)
IW Bank Private 4.75% 7.25% 0.00% 7.25% Investment n.a.* n.a.* n.a.* n.a.*
* The recoverable amount as at 31.12.2016 was based on an estimate of the fair value less cost to sell
As a consequence of all the above, the impairment tests performed on the single CGUs resulted in no need to recognise impairment losses on goodwill.
The second level impairment test showed recoverable amounts greater than equity. The value in use of the Parent is greater than the stock market capitalisation. Considering that the impairment test uses expected cash flows for profit and discount rates consistent with the consensus reported by analysts, the difference between the value in use and the stock market capitalisation can be explained by the fact that in the current context, the stock market prices-in the expected short-term results of listed banks (representing an outlook for minority shareholders) rather than longer-term result outlooks (also consensus based) on which, however, the value in use estimate is based.
A sensitivity analysis was performed in compliance with IAS 36 to identify the variation in key variables (cost of equity, cost of risk, income growth rate in the terminal value, cost:income ratio) that would render the recoverable amount of the different banking segment CGUs equal to their carrying amounts in the consolidated financial statements.
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The analysis shows that for the banking segment an increase of 1.56% in the cost of risk, a rise of 3.26% in the cost of equity, a fall of 5.16% in the terminal value for the income growth rate and finally a rise of 29.08% in the cost:income ratio (operating expenses divided by operating income) would bring the recoverable amount into line with the carrying amount.
For the other companies, the analysis shows that for UBI Factor an increase of 0.03% in the cost of risk, a rise in the cost of equity of 0.39%, a fall in the income growth rate in the terminal value of 0.75% and finally a rise of 2.17% in the cost:income ratio would bring the recoverable amount into line with the carrying amount.
Sensitivity
Rise in the Rise in the cost Rise in the cost of cost:income ratio of equity Growth rate risk required to required to required to needed to obtain: obtain: value in obtain: value in obtain: value in value in use = use = carrying use = carrying use = carrying carrying amount amount amount amount
Bank Banking Segment 1.56% 29.08% 3.26% -5.16% UBI Pramerica n.s. 51.82% 18.65% -89.53% IW Bank Private 0.10% 0.33% 0.12% -0.15% Investment UBI Factor 0.03% 2.17% 0.39% -0.75%
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SECTION 14 Tax assets and tax liabilities – Asset item 140 and Liability item 80
14.1 Deferred tax assets: composition
31.12.2017 31.12.2016
Balancing entry in the income statement 2,539,381 2,508,921 Balancing entry in equity 133,455 99,995 Total 2,672,836 2,608,916 for the following reasons: - impairment losses on loans to customers not deducted 790,355 898,664 - impairment losses on loans to banks and unsecured guarantees not deducted 24,405 20,822 - losses 322,501 283,543 - to cover merger of New Banks 165,811 - - adjustment of Single Bank amortised cost 19,238 - - to cover Single Bank mergers 8,183 - - intangible assets and goodwill 1,027,463 1,067,391 - post employment benefits 11,081 17,267 - application of IFRS (amortised cost in particular) 27,947 61,996 - advance depreciation and amortisation 5,480 4,485 - property, plant and equipment 45,649 40,796 - staff costs 42,084 82,975 - provisions for risks and charges not deducted 83,305 39,777 - sales price adjustments, long term costs and non-recurring transactions - 232 - fair value change in securities and equity investments 84,289 82,307 - cash flow hedges - 22 - other 15,045 8,639
14.2 Deferred tax liabilities: composition
31.12.2017 31.12.2016
Balancing entry in the income statement 131,674 104,761 Balancing entry in equity 23,158 68,288 Total 154,832 173,049
O|1 – NOTA
14.3 Changes in deferred tax assets (balancing entry in the income statement)
31.12.2017 31.12.2016 1. Opening bal ance 2,508,921 2,190,154 2. Increases 462,552 378,889 2.1 Deferred tax assets arising during the year 77,465 378,694 a) relating to previous years 917 223 b) due to changes in accounting policies - - c) reversals of impairment losses - - d) other 76,548 378,471 2.2 New taxes or increases in tax rates - 195 2.3 Other increases 385,087 - 3. Decreases (432,092) (60,122) 3.1 Deferred tax assets derecognised during the year (117,721) (52,604) a) reversals of temporary differences (116,603) (52,256) b) impairment losses on non-recoverable items - - c) due to changes in accounting policies - - d) other (1,118) (348) 3.2 Reductions in tax rates (13) (32) 3.3 Other decreases (314,358) (7,486) a) transformation in tax credits pursuant to Law 214/2011 (287,732) (4,449) b) oth er ch an ges (26,626) (3,037) Final balance 2,539,381 2,508,921
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Tax assets are measured on the basis of the tax rates that it is expected will apply in the year in which the tax asset will be realised and therefore at a rate of 27.5% for the purposes of corporate income tax and at a rate of 5.57% the purposes IRAP (regional production tax) . In this respect, as already reported, Law No. 208 of 28th December 2015 (2016 Legge di stabilità – “stability law” – annual finance law) established a reduction in the tax rate for IRES from 27.5% to 24% in effect from 2017. Nevertheless, for banks and financial companies only, the reduction in the IRES rate was “neutralised” by the introduction of a surtax on IRES of 3.5%, again applicable from the current year 2017 (“IRES surtax”).
As a result of the introduction of the surtax on IRES, the rate for IRES on the income of banks and financial companies remains substantially unchanged at 27.5% also for future years.
Deferred tax assets are recognised on the basis of the probability of there being sufficient future taxable income and also taking into account the consolidated tax regime adopted in accordance with articles 117 et seq of Presidential Decree No. 917/86. They also depend on the ability, under determined conditions, to convert deferred tax assets into tax credits, that were recognised in the balance sheet relating to write-downs and losses on loans to customers and also to realign the value of goodwill and other intangible assets. The ability to recognise deferred tax assets and IRES (corporate income tax) tax losses is also grounded on current legislation which allows IRES tax losses to be carried forward with no limit on time in accordance with Art. 84, paragraph 1 of the Consolidated Income Tax Act.
See Section 14.7 “Probability test and deferred taxes” for further details on the conversion into tax credits of deferred tax assets (IRES and IRAP) recognised in the balance sheet against the deferred deduction of temporary differences relating to impairment losses on loans to customers and on goodwill already mentioned (Art. 2, paragraph 56-bis et seq, Decree Law No. 225 of 29th December 2010, introduced by Art. 9, Decree Law No. 201 of 6th December 2011, converted by Law No. 214/2011).
With regard to changes in 2017, the increase in deferred tax assets during the year amounting to €77,465 thousand, is mainly the consequence of the recognition of deferred tax assets on tax losses incurred in the period by Group companies participating in the tax consolidation and on provisions for risks and charges and amortisation and depreciation that will be tax-deductible in subsequent years. The other increases amounting to €385,087 thousand relate essentially to “qualified” deferred tax assets already recognised in the financial statements of the New Banks merged during the year and to deferred tax assets relating to the “purchase price allocation” allocated to loans and receivables and to property, plant and equipment.
14.3.1 Changes in deferred tax assets pursuant to Law No. 214/2011 (balancing entry in the income statement)
31.12.2017 31.12.2016
1. Opening bal ance 1,956,572 1,966,054 2. Increases 161,217 27,538 3. Decreases (299,970) (37,020) 3.1 Reversals of temporary differences (12,238) (32,249) 3.2 Transformation in tax credits (287,732) (4,449) a) resulting from losses for the year (247,540) (4,449) b) resulting from tax losses (40,192) - 3.3 Other decreases - (322) 4. Final bal ance 1,817,819 1,956,572
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14.4 Changes in deferred tax liabilities (balancing entry in the income statement)
31.12.2017 31.12.2016
1. Opening bal ance 104,761 100,884 2. Increases 70,748 8,609 2.1 Deferred tax liabilities arising during the year 11,316 7,900 a) relating to previous years 54 - b) due to changes in accounting policies - - c) other 11,262 7,900 2.2 New taxes or increases in tax rates 29 709 2.3 Other increases 59,403 - 3. Decreases (43,835) (4,732) 3.1 Deferred tax liabilities derecognised during the year (33,164) (4,732) a) reversals of temporary differences (31,075) (4,447) b) due to changes in accounting policies - - c) other (2,089) (285) 3.2 Reductions in tax rates - - 3.3 Other decreases (10,671) - 4. Final bal ance 131,674 104,761 14040O|1 - NOTA
Deferred taxes are recognised on the basis of temporary differences between the financial accounting value of an asset or liability and its value for tax purposes. That recognition was made on the basis of the tax legislation in force.
14.5 Changes in deferred tax assets (balancing entry in equity)
31.12.2017 31.12.2016 1. Opening bal ance 99,995 19,009 2. Increases 71,834 83,262 2.1 Deferred tax assets arising during the year 33,050 80,971 a) relating to previous years 2 4 b) due to changes in accounting policies - c) other 33,048 80,967 2.2 New taxes or increases in tax rates 84 1,462 2.3 Other increases 38,700 829 3. Decreases (38,374) (2,276) 3.1 Deferred tax assets derecognised during the year (36,901) (2,269) a) reversals of temporary differences (36,894) (2,269) b) impairment losses on non-recoverable items - - c) due to changes in accounting principles - - d) other (7) - 3.2 Reductions in tax rates (114) (1) 3.3 Other decreases (1,359) (6) 4. Final bal ance 133,455 99,995
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14.6 Changes in deferred tax liabilities (with balancing entry in equity)
31.12.2017 31.12.2016
1. Opening bal ance 68,288 200,060 2. Increases 14,110 5,482 2.1 Deferred tax liabilities arising during the year 12,070 5,482 a) relating to previous years - - b) due to changes in accounting policies - - c) other 12,070 5,482 2.2 New taxes or increases in tax rates 1,024 - 2.3 Other increases 1,016 - 3. Decreases (59,240) (137,254) 3.1 Deferred tax liabilities derecognised during the year (32,312) (137,254) a) reversals of temporary differences (32,308) (137,251) b) due to changes in accounting policies - - c) other (4) (3) 3.2 Reductions in tax rates - - 3.3 Other decreases (26,928) - 4. Final bal ance 23,158 68,288
14.7 Other information
The tables above contain the aggregate figures giving all the information on the single companies and banks fully consolidated line-by-line. The tables 14.3 “Changes in deferred tax assets (balancing entry in income statement)” and 14.4 “Changes in deferred tax liabilities (balancing entry in income statement)” record movements due to the consolidation entries which determined changes in the consolidated profit. Finally, taxes of €2,424 thousand in respect of dividends that will be paid by subsidiaries in 2017 have been recognised within deferred tax liabilities with the balancing entry in the income statement (€1,719 thousand as at 31st December 2016).
Probability test on deferred taxes
As reported in Part A – Accounting Policies in these notes to the financial statements – the recognition of deferred tax liabilities and assets is performed in compliance with the criteria set out in IAS 12, as follows: - with account taken of all taxable temporary differences, for deferred tax liabilities, except in some specific cases; - with account taken of all taxable temporary differences, for deferred tax assets, if it is probable that future taxable income will be earned, against which the temporary difference may be used. The effects, amongst other things, of article 117 et seq of the Consolidated Income Tax Act (Tax Consolidation) are taken into consideration in the calculation of taxable income.
As is known, tax assets are measured on the basis of the tax rates that it is expected will apply in the year in which the tax asset will be realised. They are tested periodically to measure the degree of recoverability and to verify the level of the rates applicable as well as the obligation to measure assets not recognised or derecognised because they did not satisfy the requirements in prior years (“reassessment”).
In this respect, as already reported, the 2016 Legge di stabilità (“stability law” – annual finance law) introduced an IRES surtax as of 2017 for credit institutions with a rate of 3.5% which, limited to the banking sector only, therefore determines a total rate for IRES in future years of 27.5%.
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As at 31st December 2017 deferred tax assets recognised within the item “140 Tax assets b) deferred” totalled €2,672.8 million and were generated by the following: excess of impairment losses recognised on loans pursuant to Art. 106, paragraph 3, of the Consolidated Income Tax Act: €790.4 million; goodwill and other intangible assets, subject, amongst other things, to tax relief in accordance with the law, for which the amortisation is deductible in subsequent years: €1,027.5 million, with regard to the amounts reported in both the separate and the consolidated financial statements (article 15 paragraph 10 bis of Decree Law No. 185/2008 introduced by Decree Law No. 98/2011 converted by Law No. 111/2011); impairment losses on the AFS securities portfolio, loans and advances to banks, unsecured guarantees and other provisions and expenses not deductible for accrual reasons in accordance with Consolidated Income Tax Act amounting to €532.4 million. tax losses incurred in 2016 and 2017 relating to the UBI Group tax consolidation amounting to €322.5 million.
When the probability test was carried out on deferred tax assets recognised in the balance sheet as at 31st December 2017, those resulting from deductible temporary differences relating to write-downs and losses on loans, goodwill and other indefinite useful life intangible assets (known as “qualified deferred tax assets”) amounting to €1,817.8 million were considered separately.
Since the tax year ended 31st December 2011, it has in fact been possible to convert into tax credits deferred tax assets (IRES –corporate income tax) recognised in the balance sheet against tax losses resulting from the deferred deduction of temporary differences relating to impairment losses on loans to customers and on goodwill (Art. 2, paragraph 56-bis, Decree Law No. 225 of 29th December 2010, introduced by Art. 9, Decree Law No. 201 of 6th December 2011). A similar conversion has been allowed with effect from the tax year 2013, if an IRAP (regional production tax) return declares a net negative value for production, relating to the deferred tax assets for IRAP which relate to the aforementioned temporary differences that led to the determination of a net negative value for production (Art. 2, paragraph 56-bis 1, Decree Law No. 225 of 29th December 2010, introduced by Law No. 147/21013). These conversion hypotheses – which are in addition to that already provided where an individual balance sheet records a loss for the year (Art. 2, paragraphs 55 and 56, Decree Law No. 225/2010, as last amended by Law No. 147/2013) – have introduced an additional and supplementary procedure for recovery designed to ensure the recovery of the deferred tax assets in question in all situations, independently of the future profits of a company.
The convertibility of deferred tax assets on IRES tax losses and on a net negative value of production for IRAP purposes which are determined by qualified temporary differences therefore amount to a sufficient condition for the recognition of the aforementioned deferred tax assets in the balance sheet which makes the relative probability test obsolete. This approach is also confirmed in a joint document No. 5 issued by the Bank of Italy, the Consob (securities market authority) and Isvap (insurance authority) on 15th May 2012 (issued in respect of a co-ordination committee on the application of the IFRS) relating to the tax accounting treatment for tax assets resulting from law No. 214/2011 and in the subsequent IAS Italian Banking Association document No. 112 of 31st May 2012 (“Tax credit resulting from the transformation of deferred tax assets: Bank of Italy, Consob and ISVAP clarifications on the application of IFRS”).
On the basis of those assumptions, UBI Banca has carried out the following tests: identification of deferred tax assets, other than those relating to write-downs and losses on loans, goodwill and other indefinite useful life intangible assets (“non- qualified deferred tax assets”) recognised in the balance sheet amounting to €855 million; analysis of those non-qualified deferred tax assets separately distinguishing them as follows: o those which depend on future profits and arise from temporary differences (“residual non-qualified deferred tax assets”) which, at the time when the
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deferred taxation is recognised, are distinguished by probable type and timing of use; o those which depend on future profitability, but do not arise from temporary differences (“deferred tax assets arising from IRES tax losses”); forecasts of future income designed to verify its capacity to absorb deferred tax assets specified in the preceding points.
Whether they are recognised is in fact strictly dependent on the Group’s ability to generate future taxable income to absorb them, with account taken, with regard to IRES tax losses, that current tax law allows them to be carried forward with no limit on time (Art. 84, paragraph 1 of the Consolidated Income Tax Act).
The analysis carried out shows that with regard to IRES, the forecasts for future consolidated profits for the period 2018-2021 are such as to allow future taxable income for IRES purposes to fully recover the residual deferred tax assets.
As concerns deferred tax assets relating to tax losses that can be carried forward but are not yet recognised in the balance sheet, the amount relating to the Group is approximately €550 million.
In this respect, as already reported, in accordance with IAS 12, whether these deferred tax assets can be recognised is strictly dependent on the Group’s ability to generate sufficient future taxable income to absorb them, over the time frame considered, in compliance with the tax policies pursued by the UBI Group.
In the case in question, we report that following the probability test carried out as at 31st December 2017, the UBI Group considered it advisable not to recognise any benefit on the above amount (which concerns the deferred tax assets relating to the tax losses of the three banks acquired) while account is taken of the fact that the necessary conditions for their recognition will manifest in future. The possibility of recognising these amounts in future years remains if the necessary conditions set by IAS 12 and the policies pursued by the UBI Group in this respect are satisfied.
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SECTION 15 Non-current assets and liabilities and groups of assets and the associated liabilities held for disposal – Asset item 150 and Liability item 90
15.1 Non-current assets and disposal groups held for sale: composition by type of asset
31/12/2017 31/12/2016
A. Single assets A.1 Financial assets - - A.2 Equity investments 614 4,507 A.3 Property, plant and equipment 348 1,174 A.4 Intangible assets - - A.5 Other non-current assets - - Total A 962 5,681 of w hich measured at cost 962 5,681 of which measured at fair value level 1 of which measured at fair value level 2 of which measured at fair value level 3 - - B. Groups of assets (discontinued operating units) B.1 Financial assets held for trading - - B.2 Financial assets designated at fair value - - B.3 Available-for-sale financial assets - - B.4 Held-to-maturity investments - - B.5 Loans and advances to banks - - B.6 Loans and advances to customers - - B.7 Equity investments - - B.8 Property, plant and equipment - - B.9 Intangible assets - - B.10 Other assets - - Total B - - of w hich measured at cost - - of which measured at fair value level 1 of which measured at fair value level 2 of which measured at fair value level 3 C. Liabil ities associated w ith si ngl e assets hel d for sale C.1 Borrow ings - - C.2 Securities - - C.3 Other liabilities - - Total C - - of w hich measured at cost of which measured at fair value level 1 - - of which measured at fair value level 2 - - of which measured at fair value level 3 - - D. Liabi l i ti es associated w i th groups of assets held for sale D.1 Due to banks - - D.2 Due to customers - - D.3 Debt securities issued - - D.4 Financial liabilities held for trading - - D.5 Financial liabilities designated at fair value - - D.6 Provisions - - D.7 Other liabilities - - Total D - - of w hich measured at cost of which measured at fair value level 1 - - of which measured at fair value level 2 - - of which measured at fair value level 3 - -
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15.2 Other information
Nothing to report.
15.3 Information on equity investments in companies subject to significant influence not accounted for using the equity method
No items of this type exist in the UBI Group.
SECTION 16 Other assets - Item 160
16.1 Other assets: composition
Description/Amounts 31.12.2017 31.12.2016
Balance of illiquid portfolio items 178,500 151,641 VAT tax credits and payments on account 2,489 11,613 Payments on account for stamp duty on banking documents and deeds 232,604 236,529 Tax credits on withholding tax 4,010 89,601 Items in transit 352,892 202,918 Debtor items in transit not yet posted to destination accounts 334,735 248,363 Bills, securities, coupons and fees to be debited to customers and correspondents 82,385 165,573 Cheques drawn on the bank 9,233 2,720 Improvements to third party leased assets 28,452 24,034 Accrued income not attributed to specific items 14,564 15,026 Prepaid expenses not attributed to specific items 23,066 33,381 Sundry debtor items 188,129 115,752 Total 1,451,059 1,297,151
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LIABILITIES
SECTION 1 Due to banks – Item 10
1.1 Amounts due to banks: composition by type
Type of transacti on/Val ues 31.12.2017 31.12.2016
1. Due to central banks 12,428,723 9,993,625 2. Due to banks 4,304,283 4,138,303 2.1 1. Current accounts and deposits 1,023,954 772,773 2.2 Term deposits 62,532 63,830 2.3 Financing 3,156,438 3,267,745 2.3.1 Repurchase agreements 1,665,484 1,519,740 2.3.2 Other 1,490,954 1,748,005 2.4 Amounts due for commitments to repurchase own equity instruments - - 2.5 Other payables 61,359 33,955 Total 16,733,006 14,131,928 Fair value - level 1 - Fair value - level 2 - 15,177 Fair value - level 3 16,808,680 14,128,463 Total fair value 16,808,680 14,143,640
The item 1 “Due to central banks” consists of the carrying amount of the TLTRO financing received from the ECB.
The item “2.3.2 Financing Other” income includes €1,480 million relating to outstanding transactions with the EIB.
1.2 Details of item 10 “Due to banks”: subordinated liabilities
No subordinated liabilities due to banks have been recognised.
1.3 Details of item “Due to banks”: structured debts
No structured debts due to banks have been recognised.
1.4 Amounts due to banks subject to specific hedge
Description/Amounts 31.12.2017 31.12.2016
1. Liabilities subject to fair value specific hedge: 3,257,528 3,253,625 a) interest rate risk 3,257,528 3,253,625 b) currency risk - - c) multiple risks - - 2. Li abil ities subject to sp eci fi c cash fl ow hedge: - - a) interest rate risk - - b) currency risk - - c) other - - Total 3,257,528 3,253,625
1.5 Amounts due for finance leases
No amounts due to banks for finance leases have been recognised.
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SECTION 2 Due to customers – Item 20
2.1 Amounts due to customers: composition by type
Type of transaction/Val ues 31.12.2017 31.12.2016
1. Current accounts and deposits 64,258,153 52,404,432 2. Term deposits 2,364,594 125,315 3. Financing 513,627 2,957,962 3.1 repurchase agreements 167,157 2,605,052 3.2 other 346,470 352,910 4. Amounts due for commitments to repurchase own equity instruments - - 5. Other payables 1,298,453 738,707 Total 68,434,827 56,226,416 Fair value - level 1 - - Fair value - level 2 - 1,683,948 Fair value - level 3 68,449,661 54,533,948 Total fair value 68,449,661 56,217,896
Item “3.1 Repurchase agreements” shows the zeroing of repurchase agreements with the Cassa di Compensazione e Garanzia (a central counterparty clearing house) (€3.1 billion in December 2016). Item 3.2 “Financing – other” includes €290 million with the Cassa Deposito e Prestiti (CDP – state controlled fund and deposit institution).
2.2 Details of item 20 “Due to customers”: subordinated liabilities
No subordinated liabilities due to customers have been recognised.
2.3 Details of item 20 “Due to customers”: structured debts
No structured debts due to customers have been recognised.
2.4 Amounts due to customers subject to specific hedge
No amounts due to customers subject to specific hedge have been recognised. Ù
2.5 Amounts due for finance leases
No amounts due to customers for finance leases have been recognised.
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SECTION 3 Debt securities issued – Item 30
3.1 Debt securities issued: composition by type
31.12.2017 31.12.2016 Type o f s ecurities / Fair Value Fair Value Amounts Carrying Carrying Amount Level 1 Level 2 Level 3Amo unt Level 1 Level 2 Level 3 A. Securities 1. bonds 24,865,262 15,287,729 10,042,696 18,367 28,714,317 15,069,835 2,001,467 12,091,872 1.1 structured 3,923,231 2,394,436 1,566,979 17,285 3,549,233 1,725,747 1,642,477 177,698 1.2 other 20,942,031 12,893,293 8,475,717 1,082 25,165,084 13,344,088 358,990 11,914,174 2. other securities 1,149,681 - 1,145,403 5,065 225,280 - 225,280 - 2.1 structured ------2.2 other 1,149,681 - 1,145,403 5,065 225,280 - 225,280 - Total 26,014,943 15,287,729 11,188,099 23,432 28,939,597 15,069,835 2,226,747 12,091,872
As at 31st December 2017 bonds issued in relation to covered bond operations amounted to €9.1 billion nominal (the carrying amount inclusive of the amortised cost and the delta fair value of the hedge was €9.5 billion). Bond issues consisting of issues on the EMTN market totalled €4.5 billion.
3.2 Details of item 30 “Debt securities issued”: subordinated securities
Description/Amount 31.12.2017 31.12.2016
Subordinated securities issued 2,994,437 3,011,606
A list of the individual bond issues is given in the table on the following page.
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NOM INAL AMOUNT IA S A M O U N T M ATURITY EARLY REDEM PTION ISSUER COUPON 31.12.2017 31.12.2016 31.12.2017 DATE CLAUSE
2011/2018 - m ixed rate Quarterly fixed rate 6.25% until 2014 and subsequently 1 ISIN IT0004767742 - Currency euro 18-11-2018 222,339 222,339 222,520 floating Euribor 3M +1% . Listed on MOT (electronic bond m arket)
Re d e m p tio n b y f ix e d 2010/2017 - fixed rate rate annual amortisation 2 ISIN IT0004645963 - Currency euro Half year fixed rate 4.30%. 5-11-2017 0 80,000 0 schedule from 5-11- Listed on MOT (electronic bond m arket) 2013
2016/2026 - floating rate Annual fixed rate 4.25% until 2021; subsequently floating R e p a id in a s in g le 3 ISIN XS1404902535 - Currency euro - 05-05-2026 750,000 750,000 768,514 rate swaps 5Y + 4.182%. p a y m e n t o n m a tu rity EMTN
2009/2019 - m ixed rate ISIN IT0004457070 Half year fixed rate 4.15% until 2014; subsequently 4 13-3-2019 From 13-3-2014 370,000 370,000 371,776 Currency euro - Listed on MOT (electronic floating rate Euribor 6M + 1.85%. bond m arket) 2009/2019 - m ixed rate ISIN IT0004497050 Half year fixed rate 4% until 2014; 5 30-6-2019 From 30-6-2014 365,000 365,000 365,029 Currency euro - Listed on MOT (electronic subsequently floating Euribor 6M + 1.85%. bond m arket)
2010/2017 - fixed rate Re d e m p tio n b y f ix e d ISIN IT0004572878 rate annual amortisation 6 Half year fixed rate 3.10%. 23-2-2017 0 60,000 0 Currency euro - Listed on MOT (electronic schedule from 23-2- bond m arket) 2013 UNIONE DI BANCHE Re d e m p tio n b y f ix e d 2010/2017 - floating rate IT A L IA N E rate annual amortisation 7 ISIN IT0004572860 - Currency euro Half year floating rate Euribor 6M + 0.40% 23-2-2017 0 30,517 0 schedule from 23-2- Listed on MOT (electronic bond m arket) 2013 Re d e m p tio n b y f ix e d 2011/2018 - fixed rate ISIN IT0004718489 rate annual amortisation 8 Currency euro - Listed on MOT (electronic Half year fixed rate 5.50%. 16.6.2018 80,000 160,000 80,927 schedule from 16-6- bond m arket) 2014 Re d e m p tio n b y f ix e d 2011/2018 - fixed rate rate annual amortisation 9 ISIN IT0004723489 Currency euro Half year fixed rate 5.40% 30-6-2018 80,000 160,000 80,822 schedule from 30-6- Listed on MOT (electronic bond m arket) 2014
2012/2019 - fixed rate Re d e m p tio n b y f ix e d ISIN IT0004842370 - Currency euro rate annual amortisation 10 H a lf ye a r fixe d ra te 6 % 08-10-2019 388,183582,274 394,350 Listed on MOT (electronic bond m arket) schedule from 08-10- (*) 2015
2012/2019 - m ixed rate Quarterly fixed rate 7.25% until 2014 and subsequently 11 ISIN IT0004841778 - Currency euro 08-10-2019 200,000 200,000 202,144 floating Euribor 3M + 5% Listed on MOT (electronic bond m arket)
R e p a id in a s in g le 2017/2027 - m ixed rate p a y m e n t o n m a tu rity Annual fixed rate 4.45% until 2022; subsequently floating 12 ISIN XS1580469895 - Currency euro - 15-09-2027 unless an early 500,000 0 503,451 rate EUSA5 + 4.24%. EMTN redemption option is exercised on 15/09/2022 2014/2019 - fixed rate R e p a id in a s in g le 13 Annual fixed rate 6.50% 29-09-2019 3,150 0 3,204 ISIN IT0005055436 - Currency euro - p a y m e n t o n m a tu rity B a n ca ssu ra n ce Popolari 2014/2019 - fixed rate R e p a id in a s in g le 14 ISIN IT0005072324 Annual fixed rate 6.50% 30-12-2019 1,700 0 1,700 p a y m e n t o n m a tu rity Currency euro -
2,960,3722,980,130 2,994,437
(*) The security in question is not eligible for inclusion in the regulatory capital due to contract clauses concerning the security itself.
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3.3 Debt securities issued subject to specific hedge
31.12.2017 31.12.2016
1. Securiti es subject to speci fi c fair val ue hedge: 14,070,794 12,929,982 a) interest rate risk 14,070,794 12,929,982 b) currency risk - - c) multiple risks - - 2. Securi ti es subject to speci fi c cash fl ow hedge: 16,289 34,662 a) interest rate risk - - b) currency risk 16,289 34,662 c) other - - A
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SECTION 4 Financial liabilities held for trading – Item 40
4.1 Financial liabilities held for trading: composition by type
31.12.2017 31.12.2016 Type o f trans actio n / Group items FV FV NA FV* NA FV* L1 L2 L3 L1 L2 L3 A. On-balance sheet liabilities 1. Due to banks ------2. Due to cus to mers ------3. Debt ins truments ------3.1 Bo nds ------3.1.1 Structured - - - - X - - - - X 3.1.2 Other bo nds - - - - X - - - - X 3.2 Other securities ------3.2.1 Structured - - - - X - - - - X 3.2.2 Other - - - - X - - - - X To tal A ------B. Derivative instruments 1. Financial derivatives - 81 411,524 48 411,653 76 799,931 31 800,038 1.1 For trading X 81 411,524 48 X X 76 799,931 31 X 1.2 Co nnected with fair value o ptio ns X - - - X X - - - X 1.3 Other X - - - X X - - - X 2. Credit derivatives ------2.1 Fo r trading X - - - X X - - - X 2.2 Co nnected with fair value o ptio ns X - - - X X - - - X 2.3 other X - - - X X - - - X Total B X 81 411,524 48 X X 76 799,931 31 X Total (A+B) X 81 411,524 48 X X 76 799,931 31 X bella 1:
Legend
FV = fair value FV* = Fair value calculated excluding changes in value resulting from a change in the credit rating of the issuer since the date of issue NA = nominal or notional amount
The financial derivatives (level two) relate mainly to OTC transactions connected with trading activity and were composed mainly of interest rate swaps. The changes should be interpreted in relation to the corresponding item recognised within financial assets held for trading.
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4.2 Details of item 40 “Financial liabilities held for trading”: subordinated liabilities
No subordinated financial liabilities held for trading have been recognised.
4.3 Details of item 40 “Financial liabilities held for trading”: structured debt
No structured debt financial liabilities held for trading have been recognised.
SECTION 5 Financial liabilities designated at fair value – Item 50
5.1 Financial liabilities designated at fair value: composition by type
31/12/2017 31/12/2016 Type o f FV FV trans actio n/Amo unts NA FV NA FV* L1 L2 L3 L1 L2 L3
1. Due to banks ------1.1 Structured - - - - x - - - - - 1.2 Other - - - - x - - - - - 2. Due to customers 43,021 - 43,021 - 43,021 - - - - - 2.1 Structured - - - - x - - - - - 2.2 Other 43,021 - 43,021 - x - - - - - 3. Debt ins truments ------3.1 Structured - - - - x - - - - - 3.2 Other - - - - x - - - - - Total 43,021 - 43,021 - 43,021 - - - - -
SECTION 6 Hedging derivatives – Item 60
6.1 Hedging derivatives: composition by type of hedge and by level
Type o f derivative / Fair value 31.12.2017Nominal Fair value 31.12.2016 Nominal Underlying as s ets L1 L2 L3amount L1 L2 L3 amount
A. Financial derivatives - 100,590 - 11,053,513 - 239,241 287 10,525,447 1) Fair value - 99,464 - 11,036,554 - 237,218 - 10,464,649 2) Cash flow - 1,126 - 16,959 - 2,023 287 60,798 3) Fo reign inves tments ------B. Credit derivatives ------1) Fair value ------2) Cas h flo w ------Total - 100,590 - 11,053,513 - 239,241 287 10,525,447
Financial derivatives consist mainly of interest rate hedges of the interest rate swap type.
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6.2 Hedging derivatives: composition by portfolios hedged and type of hedge
Fair value Cash flow
Specific Foreign Transactions /Type of hedge Macro- Macro- inves tments Int e re s t ra t e Curre nc y Credit Multiple hedg e Specific hed g e Price risk ris k ris k ris k ris ks (generic) (generic)
1. Available-for-sale financial assets 53,709 - - - - X - X X 2. Loans 10 - - X - X - X X
3. Held-to-maturity investments X - - X - X - X X
4. Portfolio XXXXX45,716 X- X
5. Other transactions - - - - - X - X -
Total assets 53,719 - - - - 45,716 - - - 1. Financial liab ilit ies 2 9 - - X - X 1,126 X X
2. Portfolio XXXXX- X- X
Total liabilities 29 - - - - - 1,126 - - 1. Expected transactions XXXXXX- X X 2. Portfolio of financial assets and liabilities XXXXX- X- -
With regard to specific hedges, the amount for hedging derivatives on available-for-sale financial assets relates mainly to positions on debt instruments issued by the Italian government.
SECTION 7 Fair value change in macro-hedged financial liabilities – Item 70
No items of this type exist.
SECTION 8 Tax liabilities – Item 80
Details of tax liabilities are reported in assets section 14.
SECTION 9 Liabilities associated with assets held for disposal – Item 90
See assets section 15 for details
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SECTION 10 Other liabilities – Item 100
10.1 Other liabilities: composition
Description/Amounts 31.12.2017 31.12.2016
Balance of illiquid portfolio items - - Credit items in transit in departments or branches pending posting to accounts 847,864 511,869 Sums available to customers and banks for transactions in the course of payment 16,069 8,966 Items payable to tax authorities on behalf of third parties 32,319 23,915 Items in transit 128,143 60,338 Tax withheld on income paid to third parties 118,014 167,857 Indirect taxes payable 29,611 35,668 Social security contributions for third parties in the course of payment 1,030 2,410 Dividends and sums due to shareholders 290 260 Amounts due to staff pension funds, inclusive of accessory costs 30,087 15,457 Accrued expenses not attributed to specific items 8,960 7,137 Deferred income not attributed to specific items 31,199 33,858 Payables for educational, cultural, charitable and social purposes 4,720 8,772 Debt for post-employment benefit/welfare schemes 240 9 Doubtful overall outcomes on guarantees granted and commitments 47,344 69,900 Due to personnel 586,333 272,990 Residual creditor items 859,865 743,400 Total 2,742,088 1,962,806 210000O|1 - NOTA
SECTION 11 Post-employment benefits – Item 110
11.1 Annual changes in post-employment benefits
31.12.2017 31.12.2016
A. Opening bal ances 332,006 340,954 B. Increases 88,827 18,748 B.1 Allocation for the year 1,667 503 B.2 Other changes 87,160 18,245 C. Decreases (70,054) (27,696) C.1 Payments made (61,506) (26,665) C.2 Other changes (8,548) (1,031) D. Final balances 350,779 332,006
“Part A – Accounting policies - Section 14.3.2” gives further details on the accounting policies pursued.
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11.2 Other information
The demographic and actuarial hypotheses adopted to value the post-employment benefit provision as at 31/12/2017 Mortality rate 2016 SIM (Italian male statistics) and SIF (Italian female statistics) tables (Italian National Office of Statistics data) were used . Post-employment benefit The probability of advance payments, calculated on the basis of historical data for advances the Group, is 2% while the average amount requested is between 45% and 100% of the available provision. Inflation rates Long term forecasts of the scenario for inflation led to the use of a rate of 1.5%. Discount rates A discount rate of 1.0783%, was used, calculated as the weighted average of the EUR Composite AA curve as at 31.12.2017, using, as weights, the ratios between the amount paid and advanced for each maturity date and the total amount to be paid and advanced until the extinction of the population considered. This was performed because IAS 19 states that reference should be made to the market yields of “high quality corporate bonds”, or to yields on securities with a low credit risk. By making reference to the definition of “investment grade” securities, where a security qualifies for that classification if its rating is equal to or higher than BBB for S&P or Baa2 for Moodys, it was decided to consider only securities issued by corporate issuers with a class “AA” rating with the assumption that this class identifies an average level for “investment grade” securities and thereby excludes higher risk securities. Since IAS 19 makes no explicit reference to a specific market sector for the bonds, it was decided to opt for a “composite” market curve which therefore summarises the prevailing market conditions on the valuation date for securities issued by companies belonging to different sectors, including utilities, telephone, financial, banking and industrial sectors. The area was used for the geographical area.
The demographic and actuarial hypotheses adopted to value the post-employment benefit provision as at 31/12/2016 Mortality rate 2014 SIM (Italian male statistics) and SIF (Italian female statistics) tables (Italian National Office of Statistics data) were used . Post-employment benefit The probability of advance payments, calculated on the basis of historical data for advances the Group, is 2% while the average amount requested is between 45% and 100% of the available provision. Inflation rates Long term forecasts of the scenario for inflation led to the use of a rate of 1.5%. Discount rates A discount rate of 1.0892%, was used, calculated as the weighted average of the EUR Composite A curve as at 31.12.2016, using, as weights, the ratios between the amount paid and advanced for each maturity date and the total amount to be paid and advanced until the extinction of the population considered. This was performed because IAS 19 states that reference should be made to the market yields of “high quality corporate bonds”, or to yields on securities with a low credit risk. By making reference to the definition of “investment grade” securities, where a security qualifies for that classification if its rating is equal to or higher than BBB for S&P or Baa2 for Moodys, it was decided to consider only securities issued by corporate issuers with a class “AA” rating with the assumption that this class identifies an average level for “investment grade” securities and thereby excludes higher risk securities. Since IAS 19 makes no explicit reference to a specific market sector for the bonds, it was decided to opt for a “composite” market curve which therefore summarises the prevailing market conditions on the valuation date for securities issued by companies belonging to different sectors, including utilities, telephone, financial, banking and industrial sectors. The area was used for the geographical area.
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SECTION 12 Provisions for risks and charges – Item 120
12.1 Provisions for risks and charges: composition
Items/Components 31.12.2017 31.12.2016
1. Company pension funds 137,213 70,361 2. Other provisions for risks and charges 399,052 386,765 2.1 litigation 117,111 78,730 2.2 costs for staff 80,562 236,153 2.3 other 201,379 71,882 Total 536,265 457,126
Provisions made for litigation risks mainly concern disputes over claims concerning compound of interest, derivatives and credit instruments. Provisions for staff costs consisted mainly of provisions for company bonuses, liabilities still uncertain in the amount and the best estimate of redundancy expenses. For further information see Part A – Accounting Policies – Section 5 – “Other aspects” in these notes to the financial statements Other provisions for risks and charges mainly included provisions for “clawback” revocatory actions and provisions for litigation concerning financial investments.
12.2 Provisions for risks and charges: annual changes
Total Items/Components Pension funds Other provisions
A. Opening bal ances 70,361 386,765 B. Increases 79,535 310,060 B.1 Allocation for the year 919 81,876 B.2 Changes due to passage of time 789 - B.3 Changes due to changes in discount rate - 190 B.4 Other changes 77,827 227,994 C. Decreases (12,683) (297,773) C.1 Use for the year (10,503) (59,897) C.2 Changes due to changes in discount rate - (1) C.3 Other changes (2,180) (237,875) D. Final balances 137,213 399,052
12.3 Defined benefit company pension funds
As concerns defined benefit company pension funds the entry on the balance sheet is composed of defined benefit obligations subject to periodic actuarial measurement in accordance with the applicable sector regulations in force, the rules laid down in the relative company regulations and the provisions of IAS 19.
The following demographic assumptions, valid for all the funds described below, were assumed: for the annual probabilities of death of pensioners and their surviving spouses and close family members, SI 2016 tables were used, modified to take account of the link with the progressive increase in life expectation; for the annual probabilities of death of personnel in service, where these cases occur, the SI 2016 tables were used, separately by gender and appropriately modified to take account of the historical mortality data for UBI Group employees in service, and of data for larger similar groups; for the probabilities of leaving a family, those adopted in the INPS (national insurance institute) model, separately by gender; account was taken of the latest legislation for the maximum retirement age.
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A detailed description is given below of the funds of which the item is composed. The following is given: movements occurring during the year; the specific economic and financial hypotheses for each one; the duration in years, and that is the average financial life as at the date of the measurement of future cash flows; sensitivity analysis of the DBO, which is to say the value of the liability obtained with shifts of plus or minus 50 bps in the hypothesised discount rate and inflation rate used for measurement purposes.
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12.3.1 Description of the funds
Former Banca Regionale Europea former CARIME Spa former Banca Adriatica Spa Spa former Banca former C.R. Ca.Ri.Ma. former Pesaro former transferred Mediocredito former transferred former former former former former former former C.R. former CariChieti Banca to former Fondiario C.R. Jesi to former Total Centrobanca B.M.L. C.R.C. CARICAL CARIPUGLIA CARISAL Pesaro (4) CARILO Fund Ca.Ri.Ma. (1) Se.Ri.Ma. (2) SE.RI.T. (6) (tax collection Centrale (5) (tax collection Italia (3) busi n ess) business)
A. OPENING BALANCES 1,026 10,250 12,260 36,856 9,565 404 ------70,361 B. INCREASES 11 177 370 327 349 291 17,654 522 2,605 8,793 8,375 296 934 38,828 79,532 B.1 Interest expense 11 133 157 327 85 3 33 1 5 16 15 1 2 - 789 B.2 Actuarial losses - - 213 - 264 288 1,016 - - 509 606 18 - - 2,914 B.3 Provisions - 44 ------875 919 B.4 Other changes ------16,605 521 2,600 8,268 7,754 277 932 37,953 74,910 - of which business combination transactions ------16,605 399 2,471 8,268 7,754 277 932 36,970 73,676 C. DECREASES (63) (625) (1,059) (4,262) (899) (67) (943) (112) (142) (505) (539) (17) (62) (3,385) (12,680) C.1 Benefits paid (62) (578) (1,059) (3,388) (899) (67) (505) (12) (70) (250) (244) (8) (30) (3,331) (10,503) C.2 Actuarial gains (1) (47) - (874) - - (100) (72) (16) - (1,110) C.3 Other changes ------(438) (255) (295) (9) (16) (54) (1,067) (*) For the funds labelledD. FINAL 1), BALANCES 3), 4) and 5) investments were made 974 in securities, 9,802 11,571 liquidity 32,921 and real 9,015estate properties, 628 16,711financ ed entirely 410 from 2,463 the Bank’s 8,288 own capital. 7,836 The fund 279 labelled 872 2) 35,443is governed 137,213 by the regulations for the “Fund to supplement payments from the pension fund for office employees of direct tax collection and payment service providers pursuant to Law No. 377 of 2.4.1958, and subsequent amendments”. Since the tax collection service was transferred on 1st January 1990 to the former Banca Se.Ri.Ma, now Equitalia, from the former Banca Ca.Ri.Ma., as a result of trade union and similar agreements the bank agreed to pay an amount equal to that portion of the supplementary pensions attributable to it relating to the period of service provided to the former Banca Ca.Ri.Ma. by employees of the former Se.Ri.Ma., currently retired pensioners. The fund labelled 6) relates to liabilities of the Bank for years of service provided to the former Cassa di Risparmio di Pesaro by employees in the tax collection sector, currently receiving a pension, as a result of agreements entered into as of 1st January 1990 when the tax collection service was transferred to Serit Spa.
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Former Centrobanca
This is a supplementary pension fund for the staff of the company Centrobanca (Banca Centrale di Credito Popolare S.p.A.) in which there are now seven remaining pensioners participating. The fund provides the following types of direct pension benefits: a direct supplementary pension for old-age and length of service at the time when requirements for access to benefits paid by INPS (national insurance Institute) are met and provided the participant has participated in the fund for at least 15 years; a direct supplementary pension for invalidity at the time when requirements for access to benefits paid by INPS (national insurance Institute) are met and provided the participant has participated in the fund for at least five years;
Description of the main actuarial assumptions
fo rmer Centrobanca
a) Annual discount rate (*) 0.99%
b) Annual pension revaluation rate 1. 2 0 %
c) Inflation rate 1. 5 0 %
d) Expected rate of wage increase n.a.
Direct pensioners 7
Indirect pensioners 0
In service and redundant n.a.
To tal 7
Average financial duration (in years) 10 . 2 6
Sensitivity analysis on the DBO: +0,50% -0,50%
Discount rate 928,561 1,022,841
Inflation rate 1,014,484 935,418
(*) calculated as the weighted average of the EUR Composite AA interest rate curve as at 29.12.2017.
UBI BANCA SPA (former BANCA REGIONALE EUROPEA Spa)
As at 31.12.2017 a fund existed to supplement compulsory invalidity, old age and survivors insurance for the staff of Banca Regionale Europea (merged with effect from November 2016), originally from the former Banca del Monte di Lombardia and from the former Cassa di Risparmio di Cuneo.
The fund pays the following pension benefits as a direct pension for: old age, when the participants have reached the age limits set in the contracts in force at the time, provided that they have participated in the fund for at least 15 years; length of service, when the participants have reached the minimum age limits set in the contracts in force at the time; invalidity when, having obtained recognition of the condition of invalidity and whatever the age, a length of service of at least five years has been served, or whatever the length of service, if the invalidity is permanent and caused by work.
Furthermore, survivors of participants receive an ‘indirect pension’ if a participant dies while in service after one year of participation in the fund or after any period if death was caused by work and a surviving dependent’s pension if a participant dies, provided a direct pension has been paid.
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Description of the main actuarial assumptions
former B.M.L. former C.R.C.
a) Annual discount rate (*) 1. 2 1% 1. 2 1%
b) Annual pension revaluation rate 1.20% 1.20%
c) Inflation rate 1.50% 1.50%
d) Expected rate of wage increase 3.00% n.a.
Direct pensioners 36 35
Indirect pensioners 21 41
In service and redundant 17 n.a.
To tal 74 76
Average financial duration (in years) 15.09 9.70
Sensitivity analysis on the DBO: +0,50% -0,50% +0,50% -0,50%
Discount rate 9,159,115 10,528,469 11,066,505 12,119,909
Inflation rate 10,298,823 9,339,471 12,028,253 11,140,376
(*) calculated as the weighted average of the EUR Composite AA interest rate curve as at 29.12.2017.
UBI BANCA Spa (former CARIME Spa)
As a result of the merger by incorporation of Banca Carime Spa (with legal effect from February 2017), the following funds were acquired by UBI Banca: 1. the fund to supplement INPS (national insurance institute) benefits for compulsory invalidity, old age and survivors insurance for retired staff of the former Cassa di Risparmio di Calabria e Lucania (Registration No. 9059 in the Pension Fund Register); 2. the fund to supplement INPS (national insurance institute) benefits for compulsory invalidity, old age and survivors insurance for retired staff of the former Cassa di Risparmio di Puglia (Reg. No. 9124 in the Pension Fund Register); 3. The fund to supplement INPS (national insurance institute) benefits for compulsory invalidity, old age and survivors insurance for retired staff of the former Cassa di Risparmio Salernitana (Reg. No. 9053 in the Pension Fund Register).
The funds pay the following pension benefits as a direct pension for: old age, when the participants have reached 60 years of age if men and 55 years of age if women, provided that they have provided at least 15 years of service; length of service, when the participants have provided 35 years of service if men, or 30 years, if women, independently of their age; invalidity at any age when permanently and completely unable to work through disability and participating in the fund (in addition, for the fund of the former Cassa di Risparmio di Puglia the invalidity must be caused by work and for the fund of the former Cassa di Risparmio Salernitana participation for at least 5 years is required). Furthermore, survivors of participants receive an ‘indirect pension’ if a participant dies while in service and a surviving dependent’s pension if a participant dies, provided a direct pension has been paid.
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Description of the main actuarial assumptions
former CARICAL former CARIPUGLIA former CARISAL
a) Annual discount rate (*) 0.84% 0.84% 0.84%
b) Annual pension revaluation rate 1.20% 1.20% 1.20%
c) Inflation rate 1.50% 1.50% 1.50%
d) Expected rate of wage increase n.a. n.a. n.a.
Direct pensioners 12 3 3 9 3
Indirect pensioners 14 2 3 8 3
In service and redundant n.a. n.a. n.a.
To tal 265 77 6
Average financial duration (in years) 9.47 8.58 7.66
Sensitivity analysis on the DBO: +0,50% -0,50% +0,50% -0,50% +0,50% -0,50% Discount rate 31,517,044 34,450,773 8,667,088 9,390,626 607,043 651,744 Inflation rate 34,191,884 31,725,060 9,329,341 8,717,309 648,151 610,049
(*) calculated as the weighted average of the EUR Composite AA interest rate curve as at 29.12.2017.
UBI BANCA Spa (former Banca Adriatica Spa)
As at 31.12.2017 six types of defined benefit pension schemes existed following the merger by incorporation of Banca Adriatica Spa (with legal effect from October 2017):
1. Pension fund for staff belonging to the credit sector of the former Cassa di Risparmio di Macerata Spa (former Banca Ca.Ri.Ma); 2. pension fund for the former employees of Banca Ca.Ri.Ma transferred to Se.Ri.Ma. (now Equitalia Servizi di Riscossione Spa.); 3. Pension fund for the staff of the former Mediocredito Fondiario Centro Italia Spa; 4. Pension fund for the staff of the tax collection service of the former Cassa di Risparmio di Pesaro; 5. Pension fund for the staff of the former Cassa di Risparmio di Jesi; 6. Pension fund for the staff of the tax collection service of the former Cassa di Risparmio di Pesaro transferred to the former SE.RI.T. Spa. The purpose of the aforementioned funds is to ensure that the participants receive benefits to supplement the pensions paid by the “invalidity, old-age and survivors insurance” operated by INPS (national insurance institute) in the amount and according to the procedures set by the individual sets of regulations.
Description of the main actuarial assumptions
fo rmer Banca fo rmer former C.R. Pesaro fo rmer Banca Ca.Ri.Ma. trans ferred Mediocredito trans ferred to former C.R. Pesaro former C.R. Jesi Ca.Ri.Ma. to fo rme r Se.Ri.Ma. (tax Fo ndiario Centrale fo rmer SE.RI.T. (tax collection business) Italia collection business)
a) Annual discount rate (*) 0.86% 0.86% 0.86% 0.86% 0.86% 0.86%
b) Annual pension revaluation rate 1.20% 1.20% 1.20% 1.20% 1.20% 1.20%
c) Inflation rate 1.50% 1.50% 1.50% 1.50% 1.50% 1.50%
d) Expected rate of wage increase n.a. n.a. n.a. n.a. n.a. n.a.
Direct pensioners 90 3 14 85 42 1
Indirect pensioners 14 3 5 4 5 7 5 2 4
In service and redundant n.a. n.a. n.a. n.a. n.a. n.a.
To tal 2 3 3 8 18 14 2 9 4 5
Average financial duratio n (in years ) 9.95 8.02 8.26 9.11 9.03 7.77
S ens itivity analys is o n the DB O: +0,50% -0,50% +0,50% -0,50% +0,50% -0,50% +0,50% -0,50% +0,50% -0,50% +0,50% -0,50% Discount rate 15,962,650 17,530,943 395,174 425,690 2,371,048 2,560,845 7,947,733 8,655,874 7,517,681 8,181,313 269,485 289,617
Inflation rate 17,389,929 16,074,652 423,256 397,209 2,545,095 2,384,116 8,594,598 7,997,625 8,123,887 7,564,186 287,995 270,846
(*) calculated as the weighted average of the EUR Composite AA interest rate curve as at 29.12.2017.
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UBI BANCA Spa (former Cassa di Risparmio di Loreto Spa)
This is a supplementary pension fund regulated by the Company Agreement of 1st July 1974 and subsequent amendments and additions and by the applicable regulations for the sector in force. The purpose of the fund is to ensure that the participants, or those holding their rights, receive benefits to supplement the pensions paid from time to time, and for any reason, by INPS (national insurance institute). The aforementioned agreement is an integral part of the regulations for the “Cassa Di Risparmio di Loreto Pension Fund” (version dated 5th September 2013) which contains two sections: - Section I which represents a portion of the fund reserved for the payment of defined benefits of a supplementary nature compatibility with the provisions of the applicable laws in force; - Section II which operates under a defined contribution individual capitalisation regime for personnel in service on 1st January 1997 or subsequently appointed.
The fund provides the following types of direct pension benefits: a direct supplementary pension for old-age when the participant has reached 60 years of age, if a man, or 55 years of age if a woman, and provided they have provided at least 15 years of service; a direct supplementary pension for length of service when the participant has provided 35 years of service if a man, or 30 years if a woman, independently of their age.
The information reported below relates solely to pension costs determined under a defined benefit regime.
With regard to the defined contribution section, since no legal or substantial guarantees exist regarding the return of the capital and/or other returns to the beneficiaries, the capital of the fund is not recognised in any way on the balance sheet of the Bank, whose sole obligation consists of paying defined contributions to the separate capital on a contractual basis.
Description of the main actuarial assumptions
former CARILO
a) Annual discount rate (*) 0.86%
b) Annual pension revaluation rate 1.20%
c) Inflatio n rate 1.50%
d) Expected rate of wage increase n.a.
Direct pensioners 5
Indirect pensioners 4
In service and redundant n.a.
To tal 9
Average financial duration (in years) 7.98
S e ns itivity analys is o n the DB O: +0,50% -0,50%
Discount rate 840,921 905,717
Inflation rate 900,402 845,320
(*) calculated as the weighted average of the EUR Composite AA interest rate curve as at 29.12.2017.
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Banca Teatina Spa
As at 31.12.2017 a pension fund existed with no legal personality with separate and independent capital. Until 31.12.1998 the Fund was exclusively of a supplementary pension nature (Section 1); subsequently it was transformed into a defined contribution fund (Section 2). That transformation involved the following: for personnel already retired as at 31.12.1998, the maintenance of the supplementary pension benefits by carving out a portion of the mathematical reserves existing as at that date; for personnel already participating in the fund as at 27.04.1993, the transformation of the “supplementary treatment” into “complementary treatment” by dividing up the remaining portion of the mathematical reserve existing as at 31.12.1998, which constitutes the initial endowment of each participant and is fed into by a further contribution from both the company and the worker; for personnel appointed subsequent to 27.04.1993, the formation of a complementary fund with equal contributions from the company and personnel in accordance with the provisions of Legislative Decree No. 124/93.
With regard to Section 1, only 26 former Carichieti Spa pensioners now remain as participants in the fund (of which 11 direct). Section 1 of the fund regards employees who retired up until 31.12.1998. The fund pays the following benefits: 1) a direct pension to the participant; 2) an indirect pension to survivors of the participant; 3) a survivor’s pension for survivors of a deceased participant after retirement.
In accordance with Art. 11, the fund pays pension benefits that are supplementary to amounts paid by INPS (national insurance institute) as a direct old-age, length of service or invalidity pension when, having obtained recognition of the condition of invalidity and whatever the age, a length of service of at least five years has been served, or whatever the length of service, if the invalidity is permanent and caused by work. Furthermore, in accordance with Art. 16, survivors of participants receive an ‘indirect pension’ if a participant dies while in service after five years of participation in the fund or after any period if death was caused by work, or a surviving dependent’s pension if a participant dies. With regard to Section 2, in view of the way in which this works there is no additional cost over and above the payment of the contractually agreed contributions.
Description of the main actuarial assumptions Banca Teatina
a) Annual discount rate (*) 0.82%
b) Annual pension revaluation rate 1.20%
c) Inflation rate 1.50%
d) Expected rate of wage increase n.a.
Direct pensioners 11
Indirect pensioners 15
In service and redundant n.a.
To tal 26
Average financial duration (in years) 9.18
Sensitivity analysis on the DBO: +0,50% -0,50%
Discount rate 2,386,961 2,601,853
Inflation rate 2,582,901 2,401,960 (*) calculated as the weighted average of the EUR Composite AA interest rate curve as at 29.12.2017.
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12.3.3 Description of the funds
No “plan assets” exist which meet the requirements of IAS 19. That standard states that this must be assets held by an entity that is legally separate from the reporting entity. Since there are no “plan assets” and because the actuarial gains and losses are recognised entirely in the year in which they occur, the current value of the funds is the same as the liabilities recognised in the balance sheet.
12.4 Provisions for risks and charges – other provisions
31.12.2017 31.12.2016
1. Provision for revocation (clawback) risks 12,849 13,130 2. Provision for bonds and default 5,526 2,160 3. Other provisions for risks and charges 183,004 56,592 Total 201,379 71,882
12.5 Contingent liabilities
31.12.2017 31.12.2016
for personnel litigation 480 100 for revocation risks 8,566 - for bonds in default - - for compounding of interest - - for claim risks - - for tax litigation 140,372 142,506 for other litigation 411,489 263,928 Total 560,907 406,534
The liabilities regulated by IAS 37, characterised by the absence of certainty over the timing or the amount of future expense required to settle presumed liabilities, can be classified as being of the following types:
. probable liabilities; . contingent liabilities (possible or remote).
The correct identification of the nature of liabilities is of fundamental importance because it determines whether or not the risk deriving from an obligation must be recognised in the financial statements.
The recognition of a provision for risks and charges in the financial statements represents a probable liability of uncertain timing or amount1 and the amount recognised in the accounts represents the best estimate of the expenditure required to settle the obligation existing as at the reporting date and reflects the risks and uncertainties that inevitably characterise a number of different facts and circumstances.
The amount of a provision is measured by the present value of the expenditure that it is assumed will be necessary to settle the obligation where the effect of the present value is significant.
Future events that might affect the amount required to settle the obligation are only taken into consideration if there is sufficient objective evidence that they will occur.
The measurement of provisions is periodically reviewed to verify that they are reasonable.
1 Details of the criteria for recognising provisions are given in Part A.2 of the notes to the financial statements “The main items in the financial statements”, sub-section 12 “Provisions for risks and charges”, which may be consulted.
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The general and theoretical legal parameters which govern the process of determining the present value of provisions, which is performed for each single case of litigation and for the relative residual life, are given below:
• type/nature of the litigation, to be assessed in the light of the legal claims formulated by the counterparty. Various “macro-families” are identifiable in this respect such as corporate litigation, labour law cases, financial intermediation litigation, litigation generically definable as compensation for damages (resulting from non-performance of contract obligations, illegal actions, violation of regulations) etc.;
• degree of “innovation” in the litigation, to be assessed by considering whether the issues turn on matters already known and “weighed” by the Bank or on completely new matters which therefore require study (e.g. resulting from a change in the legislation or in legal orientations);
• degree of “strategic importance” of the litigation to the bank: for commercial reasons the Bank might for example decide to end a case very rapidly even if it had grounds of defence that would allow it to resist in court for a long time;
• average length of litigation, to be weighted taking account of geographical factors, which is to say the location of the jurisdiction in which the case is tried and the state of progress of the trial. In this respect a decision must be taken on the source of the statistics from which data is obtained and assistance can be obtained from the lawyers who represent the Bank in litigation and who have direct knowledge of the jurisdictions concerned for each case;
• the “nature” of the counterparty (e.g. a private individual or a legal entity, a professional operator or not, a consumer or not, etc.).
A contingent liability is defined as: . a possible obligation, the result of past events, the existence of which will only be confirmed by the occurrence or (non-occurrence) of future events that are not totally under the control of the enterprise; . a present obligation that is the result of past events, but which is not recognised in the accounts because: it is improbable that financial resources will be needed to settle the obligation; the amount of the obligation cannot be measured with sufficient reliability.
Contingent liabilities are not recognised in the accounts, but if they are considered “possible”, they are reported only. On the other hand, in compliance with IAS 37, contingent liabilities that are considered remote require no disclosure.
As occurs for amounts relating to provisions (for probable liabilities), the amounts for contingent liabilities are also subject to periodic verification because it is possible that events may occur which make them remote or probable with the possible need, in the latter case, to make a provision for them in the financial statements.
A detailed report on both ordinary litigation and tax litigation, for which provisions were made or for which contingent liabilities were identified, is given in the following sub-sections which may be consulted.
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Litigation
Ordinary litigation
The Group is party to a number of legal proceedings arising from the ordinary performance of its business. In order to meet the claims received, appropriate provisions have been made on the basis of a reconstruction of the amounts potentially at risk and an assessment of the risk in terms of the degree of “probability” and/or “possibility” as defined in the accounting standard IAS 37. Therefore, while it is not possible to predict final outcomes with certainty, it is considered that an unfavourable conclusion of these proceedings, both taken singly or as a whole, would not have a significant effect on the financial and operating position of the Group.
Significant litigation (claims of greater than or equal to €5 million) for which the probable risk has been estimated by Group banks and companies are as follows: 1. “revocation” bankruptcy clawback actions against UBI Banca (former Banca Popolare di Ancona), brought by Napoli Calcio Spa; 2. a “revocation” bankruptcy clawback action against UBI Banca (former Banca Popolare Commercio e Industria), brought by FDG Spa; 3. an action brought against UBI Banca involving a claim for damages for contractual liability, resulting from withdrawal from a contract concerning the development of software. A ruling was issued against the Bank as jointly liable with another bank summoned for an amount less than the existing provision made. The case is still open and will remain so until the final verdict is given; 4. a summons served on UBI Banca (former Banca Carime) to claim back payments made for compounding of interest, interest, charges, remunerations and costs not agreed. A ruling was issued on 29th July 2017, notified on 30th September 2017, throwing out the claims ordering the claimant to pay costs. The case is still open and will remain so until the final verdict is given; 5. an action brought against UBI Banca (former Banca Popolare di Ancona) disputing various matters concerning loan transactions and damages for contractual and non- contractual liability; 6. arbitration proceedings initiated by a company operating in the naval sector involving a dispute over a derivatives transaction concluded with the UBI Banca (former Banco di Brescia), with a claim for the return on the one hand of the negative differentials paid by the customer and on the other hand the “implicit costs”. The board of arbitrators has set the date of 26th May 2018 as the deadline for issuing its decision; 7. an action with a party transferring receivables brought against UBI Factor relating to a request for the transfer of receivables carried out in 2006 to be ineffective or unenforceable due to the absence of advances or the non-existence of a connection between the advances made and the documents relating to the transfer of the receivables. A consequent request for the return of the amounts collected against the receivables transferred and revocation of the payments made by the transferor from April 2011. The proceedings are currently before the court of first instance.
Significant litigation (claims of greater than or equal to €5 million) for which a possible risk (or contingent liability) has been estimated by Group banks and companies are as follows: UBI Banca • a compensation action, now at the Supreme Court of cassation stage following a ruling in favour of the Bank at the courts of first and second instance, originating from the former Centrobanca for claimed damages brought by the official receiver of a company concerning the content of declarations made by the former Centrobanca to third parties regarding the availability of securities held on deposit at that bank;
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• an action brought by a beneficiary of public contributions in relation to which UBI Banca Spa (which took the place of the former Centrobanca in arrangements the latter had entered into with authorities that subsidised loans to manage formalities connected with processing applications) was been summoned jointly and severally with those concessionary authorities in its capacity as the “concessionary bank” appointed by those same authorities. More specifically, this is a case pending before the Civil Court of Rome in which the other party has applied for the annulment of a ministerial provision revoking subsidies granted (due to persistent arrears in the repayment of the loan granted by the Ministry of Economic Development, in compliance with the clearly stated regulations governing the matter) and the consequent commencement of the enforced recovery of the subsidies amounting to €4.3 million in addition to a claim for consequent damages, quantified at €24 million caused by revocation of the presumed credit lines granted by banks to the company. The formalities for the subsidy application contested here were processed by Banca Popolare dell’Emilia Romagna, a member of a “Temporary Grouping of Businesses” led by UBI Banca which should hold the Bank free from any resulting expense and risk; • claims regarding securities trading made by a corporate counterparty, originating from the former Banca Popolare Commercio e Industria. The case was won by the Bank in the court of first instance in 2011 and also on appeal in 2015. In July 2015 the counterparty appealed to the Supreme Court of Cassation. A date for the hearing has not yet been set; • a writ of summons, served on UBI Banca by a fund, a shareholder of the Bank (the claimants were originally three, but the two of these withdrew their claims) containing claims for compensation in relation to the amount of the redemption paid on shares subject to withdrawal following the transformation of UBI Banca into an ordinary joint- stock company which occurred in the context of the “reform of ‘popular’ co-operative banks” [pursuant to Art. 28, paragraph 2 ter of the Consolidated Banking Act – introduced with Decree Law No. 3/2015, converted into law with Law No. 33/2015 – which establishes that “the right in ‘popular’ banks (…) to the redemption of shares in the event of withdrawal, even following transformation (…) is limited according to the provisions made by the Bank of Italy, even as an exception to the provisions of the law, where that is necessary to ensure the inclusion of the shares in the Common Equity Tier 1 regulatory capital of the bank”]. The bank considers that the position taken on the subject of the redemption of the shares of shareholders that have withdrawn is sound in view, amongst other things, of legal opinions received from advisers and it has filed a defence asking for the claims made to be rejected. The case is currently at the preliminary stage. On 15th December 2016, when hearing the appeal against the ruling by the TAR (administrative Court) which had rejected claims submitted by some consumer associations and the shareholders of some “popular” co-operative banks, the Council of State considered certain doubts over the constitutionality of the aforementioned legislation to be clearly groundless for the following reasons: (1) assumptions concerning the necessity and urgency which legitimise the issue of a decree law; (2) the possibility that the redemption paid to the withdrawing shareholders may be limited/excluded and not merely deferred in time, with payment of interest; (3) assignment to the Bank of Italy of regulatory powers even as an exception to the law. UBI Banca filed a defence in both actions before the Council of State in order to be able to also file a defence before the Constitutional Court, which in fact occurred in April 2017. The President of the Court has set 20th March 2018 as the date for the hearing to debate the case. It is not known when a ruling will be issued by the Constitutional Court. However, a ruling was made on 21st December 2016 by the Constitutional Court (issued with regard to a different action brought by the Region of Lombardy) which rejected, amongst other things, the first reason. Work is currently in progress to examine if there will be any impact on the operating and financial position of UBI Banca resulting from the rulings of the Council of State and the Constitutional Court and what they might be, with account also taken of the applicable EU regulatory framework. More specifically it is not possible to establish if there could be any payout by UBI Banca or what the amount might be, nor what negative
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impacts there might be on the operating and financial position of UBI Banca, both because we must wait for a ruling to be issued by the Constitutional Court and know the relative grounds and also because the legal question concerning the impacts on UBI Banca of a possible ruling which declares the unconstitutionality of the legislation in question is complex and there are no precedents. In this context possible legislative intervention which might be adopted in this respect will also have to be considered; • a provision of 15th May 2017 with which the Autorità Garante della Concorrenza e del Mercato (AGCM – Italian Competition Authority) ruled that no penalties should be imposed on the Italian Banking Association and 11 Banks (including UBI Banca) involved in the origination and definition of an interbank agreement for the service named “Sepa- compliant Electronic Database Alignment” (SEDA2) service, due to the non-serious nature of the violation relating to a presumed agreement restricting competition. This was also in view of the regulatory and economic framework in which the conduct occurred (see previous financial reports for greater details on the proceedings). The final provision of the proceedings ruled that the parties involved should in any event cease their current conduct, abstain in future from similar conduct and present a special report to give an account of the measures adopted by 1st January 2018. Compliance with the provision was ensured by revising the interbank agreement in question and making changes to the general contract and the remuneration provided for in it, in order to change to a different system, previously already agreed upon with the AGCM, based on the application of multilateral interchange fees (MIF) linked to costs. Implementation of the new general contract, co-ordinated by the Italian Banking Association, which supervised the various stages with its circulars, involved the implementation of a set of changes to the structure of the contracts and to the software apps, and this required, amongst other things, the termination of all existing contracts and the need for the banks that held contractual agreements for the delivery of the beneficiary side of the SEDA service (i.e. the alignment PSP) to sign new contracts with customers who wanted to continue to use the service under the new conditions. The new general contract came into operation on 1st January 2018; all the activities carried out were promptly reported to the AGCM in a report prepared by the Italian Banking Association, to which UBI Banca adhered. As already reported, UBI Banca appealed against the provision of 15th May 2017 before the administrative courts, disputing the entire basis of the existence of an agreement to restrict competition. A date has not yet been set at present for the hearing to debate the case before the TAR (regional administrative tribunal) of Latium. • a summons, originating from the former Banco di Brescia, served on 30th June 2014 by the receivership of a corporate counterparty which went bankrupt in 2010, with which a claim for damages against banks (including the former Banco di Brescia) is proposed for alleged improper credit support which it is claimed delayed the winding up of the company with consequent damages to creditor claims and the assets of the company. The bank has undertaken its defence and filed this with the court opposing the request because it is without grounds both in terms of its legitimacy and merit. An expert has been appointed by the court. Activities are still currently in progress after the various extensions were granted by the judge for filing of the experts report, initially scheduled for May 2017 that now extended until March 2018; • claim for damages against UBI Banca, originating from the former Banca Popolare di Ancona, relating to alleged irregularities in the credit granting process. The receiver of the bankrupt company appealed against a ruling of the court of first instance in favour of the Bank; • an action brought against UBI Banca (former Banca Popolare di Ancona) by a bankrupt shipping company claiming alleged damages caused by the official receiver of the company acting together with former Banca Popolare di Ancona (and with all the other
2 The SEDA (SEPA-compliant Electronic Database Alignment) is an optional service provided to customers to fill gaps in the new SEPA DD direct debit schemes, introduced in the SEPA area since February 2014, with respect to the previous RID direct debit domestic service.
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banks operating in the financial centre against which similar actions have been brought). This case regards the issue of the debt securities which had the appearance of bonds issued by the shipping company but which on the contrary had no legal connection with that company; • an action brought by beneficiaries of government subsidies in relation to which UBI Banca (which took the place of Centrobanca Spa), in its capacity as the “concessionary bank”, was summoned jointly and severally before the Civil Court of Rome (after similar proceedings initiated before the Latium TAR [administrative tribunal] – were terminated due to lack of jurisdiction) together with the “concessionary authorities” concerned, for which it is the agent, for a concessionary position under Law No. 46/1992 processed by a third party bank belonging to its “RTI” (temporary grouping of companies); • a case originating with the former Banca Carime for contractual and other liabilities resulting from the revocation of credit facilities. The ruling in favour of UBI Banca in the court of first instance was appealed against by the claimants. The appeal proceedings are currently in progress. The case has been adjourned to a hearing set for 13th November 2018 for final pleadings.
UBI Leasing • litigation relating to ownership of finance leased assets.
UBI Factor • legal proceedings with a local health authority relating to receivables collected following an injunction of 2001 (this injunction is temporarily executive). As a result of a ruling of 25th November 2015 by the Supreme Court of Cassation, confirmed again on 30th January 2017 by a ruling of the Court of Appeal of Rome which had resumed the case, the risk of possible losses was limited to the greater interest received compared with the amount calculated by applying the legal interest rate. The decision on the amount of the interest is still pending with the Supreme Court of Cassation. In the event of an adverse result for the appeal to the Court of Cassation the amount not acknowledged may be recovered from the transferor.
* * *
With respect to the information reported in the previous Notes to the financial statements in the 2016 Annual Report we report, as a significant case concluded, a revocation clawback bankruptcy action brought against UBI Banca (former Banca Carime), previously classified as a probable risk, with the return by the Bank, against a significant claim, of the sums actually claimed back amounting to approximately €630,000. With respect to the information reported as at 31st December 2016, the following actions have been reclassified as “remote risks”: - a claim for damages brought against UBI Leasing for claimed failure to meet obligations under finance lease contracts relating to a property under construction. The assessment of the likelihood of losing the case was changed on the basis of testimony submitted by the court-appointed expert during the course of the hearings which found no failure to meet obligations on the part of UBI Leasing itself which in reality was a substantial creditor of the client; - claim for damages, originating from the former Banka Popolare di Bergamo, against presumed failure to comply with contractual obligations undertaken in relation to credit transactions; The assessment of the likelihood of losing the case was changed on the basis of an opinion received from an external legal advisor. - a summons served (originally against the former Banco di Brescia) by a company with a bankruptcy case which began in 1999 and is still in progress, which in the person of the receiver has requested the return of amounts drawn/used in the period September
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1997-June 1998 by the sole director who ceased to be a director in September 1997 without the Bank being informed. In December 2012 the Judge accepted the objections raised by the bank and dismissed the case. The counterparty resumed the case within the relative time limits. In November 2017 a ruling was made by the Court of Trani rejecting the claims of the claimant and ordering the counterparty to pay costs. The ruling was notified to the counterparty in order to impose short time limits for an appeal. The case was appealed on 9th January 2018; - claim for damages against UBI Banca, originating from the former Banca Popolare di Ancona, relating to alleged irregularities in the credit granting process. The assessment of the likelihood of losing the case was changed on the basis of an opinion received from an external legal advisor.
* * * To complete the information we report the following: - an action brought against UBI Banca, originating from the former Banca Popolare di Bergamo, consisting of a claim brought by heirs in which both pre-contractual and contractual liability of the bank is claimed for investment transactions carried out by the counterparty. Following a ruling in favour of the Bank in the court of first instance, the claim was reduced below the significance threshold; - an action brought and concluded in the first half of 2017 (already reported in the interim financial report for the period ended 31st March 2017), which regarded a claim for damages against UBI Banca (the successor to Banca Popolare di Ancona), in the context of an objection to a court injunction. Following negotiations commenced immediately with the counterparty, the settlement agreement was reached with the waiver of any objections.
* * * As concerns the activities arising from the merger of the New Banks (Banca Adriatica, Banca Tirrenica, Banca Teatina and the relative subsidiaries), we report some of the litigation and proceedings of a legal nature arising from the ordinary performance of their business. The purchase contract contains specific guarantees and releases from liability provided by the Seller (National Resolution Fund) in favour of UBI Banca3 and also in relation to relations with REV Gestioni Crediti Spa and with the Atlante Fund II (as the transferors of the loans and receivables of those banks classified as bad and unlikely-to-pay4), regarding risks of a legal nature or risks in general relating to existing or threatened legal action, which is to say regarding violations of the law and any contingent liabilities.
* * * Finally, on 25th January 2018 the Bank was notified by the administrator of a company in receivership, of a summons with a claim for compensation on a non-contractual basis relating to the role that the bank is claimed to have played in the financing of a tender offer. The operation contested in the summons is the same that had been contested in two previous compensation actions started in 2011 against the Bank, but in this case on both a contractual and a non-contractual basis, by the official receivers of another two companies belonging to the same Group as the current claimant. The risk attached to these cases was again considered “potential” by the legal advisors engaged by the Bank and they had then been abandoned in 2016 by the official receiver of the claimants. The legal advisor to conduct the Bank’s defence will be engaged shortly and will assess the risk attaching to the case.
3 The guarantees and releases from liability relate also to the period prior to the formation of the “Bridge Institutions” (23rd November 2015) and therefore also cover liabilities that may have arisen from activities carried out by these banks (the “Old Banks”) before being subject to the resolution procedures. 4 The disposals of these loans took place on a “without recourse” basis and therefore the transferee assumed all the risks and benefits attached to the transferred loan (IAS 39 – Derecognition).
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Anti money-laundering disputes
In 2017 the UBI Banca Group was served with no “Written notifications of findings” for failure to report suspect transactions in accordance with “Anti-Money Laundering” law. We report the following with regard to notifications currently ongoing: - in January 2017 the UBI Banca Group received5 a notification from the Ministry of the Economy and Finance (MEF), concerning the violation of Art. 51, paragraph 1 of Legislative Decree No. 231/2007, for a report made after the legal time limit to the competent State Territorial Accounting Office concerning a financial transaction carried out in violation of Art. 49, paragraph 5 of the aforementioned decree. The maximum fine is €3,000 and the relative defence statements were deposited immediately; - in June 2017 a manager of a branch of the former, Banca Popolare di Ancona was notified to together with the Bank jointly of administrative proceedings carrying a fine of €36,000 relating to a failure to make a report notified by the Guardia di Finanza (finance police) in the 2015. For this position, relating to movements totalling €360 thousand, the Bank decided to oppose the decision within the legal time limits (within 30 days of the notification) and is waiting for developments before making the payment.
Details are given below of positions for which updates have taken place during the year: - a fine of €57,000 imposed in 2016 (contested in 2011), notified to a manager of a branch of the former Banco di Brescia, regarding total transactions of €566 thousand. The date of 23rd March 2018 was set for the hearing for the debate and a ruling before the court of first instance. As of today no fine has yet been paid. - a fine of €131,000 imposed in 2016 (contested in 2011), notified to a manager of a branch of the former Banca Popolare Commercio e Industria, regarding total transactions of €1.3 million, for which debate in court has been adjourned until 2018. The judge suspended execution of the ruling that was opposed and adjourned the hearing for debate until 14th December 2018, setting date of 30th November 2018 as the time limit for final pleadings; - a fine of €122,000 imposed in 2015 (contested in 2010) notified to a former branch manager of the former Banca Popolare di Ancona, regarding transactions totalling €2.4 million, for which in September 2016 the court of Rome annulled the order-injunction against the former BPA, while fully confirming the decision against the employee. The MEF appeared before the court of appeal, but did not appeal also against the adverse decision of the court of first instance which had annulled the fine imposed on the Bank. The hearing for the ruling is set for 16th March 2021 and the application to suspend the fine was rejected. In 2017 the fine was paid together with MEF’s legal costs. - a fine of €25,000 imposed in 2014 (contested in 2010) notified to a former branch manager of the former Banca Popolare di Ancona, regarding transactions totalling €576 thousand. An application to suspend the fine was rejected by the Court of Appeal and the hearing for final pleadings was adjourned until 27th March 2020. As of today no fine has yet been paid. - a fine of €100 thousand imposed in 2014 (contested in 2010) notified to a former branch manager of the former Banca Popolare di Ancona, regarding transactions totalling €1 million, for which an adverse ruling was made in the court of first instance in October 2016. It was possible to Lodge an appeal until April 2017. An application to suspend the fine was declared inadmissible because the court considered that the harmful effect was attributable to the decision for which suspension had not been ruled possible in the court of first instance and not to the ruling appealed against. The first hearing in this respect is set for 16th January 2018. Payment of the fine was made in August 2017; - a fine of €47 thousand imposed in 2015 (contested in 2010), notified to a former branch manager of the former Banca Popolare di Ancona, regarding transactions totalling €973
5 Addressed to the Manager of UBI Investigations, jointly with the Manager of UBI Anti-Money Laundering and Claims and the Bank.
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thousand, for which an adverse ruling was made in the court of first instance against both the Bank and the employee. An appeal was lodged for which the first hearing was set for September 2017, to discuss an application to suspend the fine. On conclusion of the hearing, the Court of Appeal of Rome rejected the application and the judge adjourned the hearing for debate until 22nd April 2018. Payment of the fine was made in November 2017; - a fine of €35 thousand imposed in 2014 (contested in 2010), notified to a former branch manager of the former Banca Popolare di Ancona, regarding transactions totalling €358 thousand, for which an adverse ruling was made in the court of first instance against both the Bank and the employee. An appeal was lodged for which the first hearing was set for September 2017, to discuss an application to suspend the fine. On conclusion of the hearing, the Court of Appeal of Rome rejected the application and the judge adjourned the hearing for debate until June 2020. Payment of the fine was made in November 2017; - a fine of €137 thousand imposed in 2015 (contested in 2010), notified to a former branch manager of the former Banca Popolare di Ancona, in retirement since 2012, regarding transactions totalling €2,700 thousand, for which a ruling was made in the court of first instance in favour of the Bank, but adverse for the employee. The Bank paid the fine while the appeal is pending. An appeal was lodged in the interests of the employee.
A brief examination is given below of notifications regarding the New Banks acquired:
The former Nuova Banca Adriatica: No notifications of failure to report suspect transactions, nor significant compliance infringements and/or violations regarding the applicable regulations were received in 2017.
Having stated that, with regard to notifications still in progress but which arose prior to this bank joining the UBI Banca Group, we report that six notifications of failure to report suspect transactions, or significant compliance infringements and/or violations regarding the applicable regulations had been received.
We report the following with regard to notifications for which updates have taken place during the year: - in May 2017, payment of an anti-money laundering fine was decided (approximately €254 thousand, while provisions had been made for €500 thousand) imposed on the bank as jointly liable with an employee (notification of findings received in 2012). It was decided to waive the right of appeal (by reserving the right to review the decision if a contrary opinion is given already requested of the legal advisor engaged for the case) and the right to take action against the employee in receipt of the fine, for which the internal audit function has already acknowledged that he has no connection with the matters contested.
The former Nuova Banca Tirrenica: No notifications of failure to report suspect transactions, nor significant compliance infringements and/or violations regarding the applicable regulations were received in 2017.
Having stated that, with regard to notifications still in progress, but which arose prior to this bank joining the UBI Banca Group, we report that seven notifications had been received, three of which are pending or currently being settled before the courts of the various instances. We report the following with regard to notifications for which updates have taken place during the year:
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- on 27th April 2017 a fine was imposed on a branch manager, with the Bank held jointly liable, amounting to €797 thousand, regarding total transactions of approximately €8 million. This bank opposed the fine and made the relative application to suspend it. The first hearing was set for 8th November 2017. In this hearing the judge suspended execution of the ruling and adjourned the hearing for debate until 10th October 2018.
Nuova Banca Teatina: No notifications of failure to report suspect transactions, nor significant compliance infringements and/or violations regarding the applicable regulations have been received.
Tax litigation
Tax inspections and other investigative activities On 4th October 2016 the Guardia di Finanza (finance police) commenced a tax inspection into the former Banco di Brescia relating to the tax year 2012 in general and to the tax year 2016 for withholding taxes only. The inspection was concluded on 17th March 2017 with no irregularities found. On 29th May 2017 the Central Assessment Department of the tax authorities commenced a general tax inspection into UBI Banca regarding the tax year 2014. The inspection is still in progress. On 6th December 2017 the Arezzo Police Tax Unit of the Guardia di Finanza commenced a general tax inspection into Oro Italia Trading S.p.A. in liquidation for the tax years 2013, 2014 and 2015. The inspection is still in progress. Finally, as already reported, in 2015 the Guardia di Finanza had notified the Luxembourg subsidiary UBI Management Company of an assessment report. At the time of those events UBI Management Company had replied with the submission of reasoned observations to the tax authorities. There are no further developments to report.
Assessment notices
PREFERENCE SHARES – UBI BANCA AND BANCO DI BRESCIA – AND REGISTRATION DUTIES BRANCH TRANSFER TRANSACTIONS – UBI BANCA, BANCA POPOLARE DI BERGAMO, BANCO DI BRESCIA, UBI BANCA FORMER BANCA POPOLARE COMMERCIO E INDUSTRIA, FORMER BANCA REGIONALE EUROPEA Both the “branch switching” and the preference share affairs have been entirely concluded as far as court proceedings are concerned. More specifically, the last ruling of no case to answer on the matter was deposited by the Regional Tax Commission of Lombardy on 19th September 2017 (UBI Banca for itself and for the merged Banca Popolare Commercio Industria on the “branch switching” affair). Activities are continuing to recover taxes and fines paid provisionally during the course of the proceedings relating to the “branch switching” affair and not due in view of the reconciliation agreements concluded following the general settlement agreement signed on 4th February 2016. On the other hand, the amounts due regarding the “preference shares” affair have been fully repaid.
UBI BANCA (FOR ITSELF AND FOR THE MERGED BANCA CARIME AND BPB IMMOBILIARE): THE CONTRIBUTION OF IMMOBILIARE SERICO
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This is litigation brought by companies in UBI Banca Group (UBI Banca for itself and for the merged Banca Carime and BPB Immobiliare) against action taken by the Tax authorities designed to reclassify operations to contribute lines of property business carried out in 2003 to the company Immobiliare Serico as the disposal of real estate properties. The reclassification carried out by the tax authorities resulted in a demand for additional IRPEG (former corporate income tax) and VAT and the relative fines totalling €82.8 million. The actions brought by companies in the UBI Banca Group were successful before the courts of both first and second instance, but going through the State Attorney the tax authorities appealed the rulings made before the court of second instance to the Supreme Court of Cassation. All the Group companies officially filed applications to appear and the dates of the relative hearings have not yet been set. On the basis, amongst other things, of expert opinion received, it is considered that the risk of losing the case is “unlikely”, in view also of the favourable rulings before the courts of first and second instance. Finally the amounts paid when provisional demands were made have been fully repaid as result of the successful rulings.
VALUE ADDED TAX – LOAN COLLECTION AND MANAGEMENT COMMISSIONS: THE FORMER NETWORK BANKS AND UBI FINANCE This litigation has been substantially concluded, considering that all the competent tax commissions have declared that there is no case to answer, following the annulment under applications for internal review of the tax assessment notices as a consequence of the tax authorities’ Resolution No. 106 of 17th November 2016 which clarifies that, with regard to the operations regulated by Law No. 130 of 30th April 1999, the servicing activities carried out by the party that granted the loan constitutes the provision of services exempt from VAT because they are classified as “loan management services provided by those granting the loan”. In one sole case did the tax authorities not annul a ruling in favour of UBI Banca (the former Banca Regionale Europea), which has now become a “final judgement” with no need for further actions. Activities are continuing to recover taxes and fines paid provisionally during the proceedings and not due in view of the annulments under internal review procedures. Finally, with a ruling deposited on 8th May 2017 the Tax Commission of the Province of Milan declared that there was no case to answer following the annulment under internal review procedures of the demands for the payment of fines relating to the tax years 2009 and 2010 imposed on UBI Finance Srl, the counterparty for the securitisations carried out by the banks involved in the litigation.
UBI BANCA: 2003 IRPEG (FORMER CORPORATE INCOME TAX) In November 2011 UBI Banca (the former BPU Banca) was served with a notice of assessment in relation to its tax treatment for IRPEG (former corporate income tax) purposes of the contribution of a bank made on 1st July 2003 to the then newly formed Banca Popolare di Bergamo and Banca Popolare Commercio e Industria. In particular, the full deduction by the transferor BPU Banca of the taxed provisions for risks and charges set aside in previous years was disputed. In 2015, the Province of Milan Tax Commission accepted the Bank’s appeal, acknowledging that the notice of assessment had been notified after the ordinary term had expired and in the absence of the necessary conditions for full assessment. As a result of that ruling the tax authorities issued a provision agreeing to withdraw the payment demand for €8.3 million notified in 2014 to UBI Banca, which had already been suspended by the Tax Commission. The tax authorities lodged an appeal on 19th October 2015 to the Regional Tax Commission of Lombardy against which UBI Banca promptly filed its defence.
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With a ruling filed on 1st March 2017 the Regional Tax Commission of Lombardy rejected the tax authorities appeal and ordered it to reimburse UBI Banca for the costs of the appeal. The tax authorities appealed going through the State Attorney before the Supreme Court of Cassation on 8th May 2017 and UBI Banca applied to appear in its defence within the legal time limits. The date for the hearing has not yet seen set.
UBI BANCA (FORMER BANCA POPOLARE COMMERCIO E INDUSTRIA): 2014 “TARI” (REFUSE TAX) On 6th July 2016 the City of Milan notified the former Banca Popolare Commercio e Industria of a demand for the payment of refuse tax for the year 2014 totalling €234 thousand. On the basis of an assessment carried out, the tax demand was inaccurate by approximately €114 thousand. As a consequence, the merged Banca Popolare Commercio e Industria lodged a partial appeal on 16th September 2016 with the Provincial Tax Commission of Milan. The hearing was last adjourned until 12th March 2018 in order to allow the parties to arrive at an out-of-court settlement agreement at amounts less that those assessed. On 30th January 2018 the UBI Banca’s Management Board announced that it was in favour of the settlement agreement proposal.
UBI BANCA – 2014 “TARI” (REFUSE TAX) On 23rd November 2017 the City of Milan notified UBI Banca of a demand for the payment of refuse tax for the year 2014 totalling €92 thousand. On the basis of an assessment carried out, the tax demand was inaccurate by approximately €42 thousand. As a consequence, UBI Banca lodged an appeal with the Provincial Tax Commission of Milan.
UBI BANCA FORMER BANCA DI VAL CAMONICA: IRPEG-ILOR (FORMER CORPORATE INCOME TAX AND FORMER LOCAL INCOME TAX) 1977 AND 1980 The Office for Direct Taxes of Breno issued notices of assessment for payment of greater IRPEG and ILOR (tax years 1977 and 1980) by the merged Banca di Valle Camonica, which duly appealed against them. The merged bank lost the case in the court of first instance. On appeal, the Tax Commission of second instance of Brescia partly confirmed the arguments made by the tax authorities, declaring the assessment of greater taxable income for IRPEG and ILOR to be correct and disputing the full deductibility of certain costs because they did not relate entirely to fully taxable revenues. As a result of those rulings, greater taxation totalling €51 thousand became due, in addition to fines and interest. Both the tax authorities and the former Banca di Valle Camonica lodged appeals with the Central Tax Commission of Rome against the rulings of the court of second instance. With rulings issued on 14th and 15th July 2010 the latter confirmed the partially unfavourable rulings of the court of second instance. On 29th July 2011 the merged bank appealed to the Supreme Court of Cassation against the decisions of the Central Tax Commission. The hearing for the two appeals was held on 19th April 2017. With rulings deposited on 13th October 2017 the Court of Cassation fully accepted the appeals of the taxpayer and as a consequence annulled the tax assessment notices.
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UBI BANCA FORMER BANCA POPOLARE DI ANCONA: 2016 REGISTRATION TAX The Pesaro office of the tax authorities notified UBI Banca of the following payment demands: - in March 2017, for registration tax claimed on a debt restructuring agreement with a corporate client, with the increased tax calculated at €34 thousand; - in April 2017, for registration tax claimed on a debt restructuring agreement with another corporate client, with the increased tax calculated at €90 thousand. These same demands were also served in the same period on the merged Banca Adriatica and other banks participating in a debt restructuring agreement as jointly and severally liable with UBI Banca with regard to the tax authorities. In both cases the tax authorities applied registration tax at a rate of 1% on the acknowledgement of the debt as an action listed in the restructuring agreements covered by Art. 182 bis of the bankruptcy law. UBI Banca and the other banks, including Banca Adriatica jointly with the other corporate clients, appealed against the two tax demands before the Tax Commission of the Province of Pesaro within the legal time limits. The relative hearings were held on 6th October 2017. The Tax Commission of the Province of Pesaro rejected the appeals and confirmed the tax claims ordering the appellants to pay costs. The appropriate assessments are currently being made on the possibility of appealing against the rulings within the time limit of six months from the date of the deposit of those rulings (22nd December 2017).
UBI BANCA: 2016 REGISTRATION TAX On 2nd August 2017 the Bari office of the tax authorities served a demand for payment of registration tax on UBI Banca, presumably due in relation to Centrobanca’s (merged into UBI Banca in 2013) acceptance as an official creditor in a bankruptcy case. The additional taxation was calculated at €84 thousand. UBI Banca promptly lodged an appeal before the Tax Commission of the Province of Bari, objecting that the legislation underlying the issue of that demand was declared unconstitutional with ruling No. 177 of 13th July 2017 of the Constitutional Court. The date for the hearing has not yet seen set.
UBI LEASING: VAT 2004 In December 2009 the Regional Department for Lombardy of the tax authorities served a tax assessment notice contesting the VAT regime applied in 2004 to three finance leasing transactions regarding boats carried out by UBI Leasing Spa (the former SBS Leasing Spa) (increased VAT of €517 thousand plus tax and fines), in addition to an IRAP (regional production tax) infringement for the non-deductibility of depreciation instalments on assets allegedly considered as non-existent (€4 thousand approx. plus interest and fines). UBI Leasing appealed against the tax assessment notice and won in the courts of first and second instance. The tax authorities appealed before the Court of Cassation and the company applied to appear in its defence within the legal time limits. After careful consideration, on 29th September 2017 the Board of Directors of UBI Leasing decided to take advantage of procedures for the settlement of pending tax litigation at reduced cost. The case was then settled with the payment of approximately €478 thousand (net of the amount already paid provisionally) and administrative activities were set in motion conclude the matter.
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UBI LEASING: 2010 VAT On 10th December 2015, UBI Leasing received a tax assessment report which concluded a tax inspection concerning the tax year 2010 conducted by the finance police of Brescia tax unit. More specifically, the latter alleged illegitimate deduction of VAT and consequent filing of an unfaithful annual VAT return for an undue deduction of VAT, in relation to a transaction objectively presumed to be non-existent (purchase of various industrial equipment subject to a finance lease contract). On 20th December 2016, the tax authorities, who considered irregularities contained in the tax assessment report to be well-grounded, served a notice of assessment demanding payment of increased VAT amounting to €396 thousand plus interest and an administrative fine of €495 thousand. In May 2017 UBI Leasing ended the affair by agreeing to a tax assessment by consent and paid the additional VAT demanded (€396 thousand) and a fine equal to one sixth of the minimum (€82 thousand) plus interest. The affair has therefore been concluded.
UBI BANCA (FORMER BANCA ADRIATICA): 2003 VAT The Department of the Province of Ancona of the tax authorities served a notice of assessment on Banca delle Marche on 23rd December 2008 with a demand for additional VAT of €210 thousand plus interest with the imposition of an administrative fine at the same time of €263 thousand. The assessment was based on the presumed reclassification of a nautical leasing contract which had an initial “maxi instalment” as the sale and purchase of the asset. In February 2009 the then Banca delle Marche appealed before the Tax Commission of the Province of Ancona, which was fully successful. In May 2012 the tax authorities appealed the ruling before the Tax Commission of the Marches Region. The Bank consequently filed defence statements. The date for the hearing has not yet seen set.
UBI BANCA (FORMER BANCA ADRIATICA IN ITS CAPACITY AS THE SURVIVOR OF THE MEDIOLEASING MERGER): 2005 VAT On 2nd December 2010 the Department of the Province of Ancona of the tax authorities served a notice of assessment on the former Medioleasing with a demand for additional VAT of €740 thousand plus interest with the imposition of an administrative fine at the same time of €925 thousand. The assessment was based on the presumed reclassification of nautical leasing contracts which had an initial “maxi instalment” as the sale and purchase of the asset and also as sale and lease back real estate operations. The former Medioleasing lost before the courts of first and second instance and in November 2013 lodged an appeal before the Supreme Court of Cassation. In the meantime the company made payments totalling €1,677 thousand for taxes, fines and interest in relation to the original demand for payment. The date for the hearing has not yet seen set.
UBI BANCA (FORMER BANCA ADRIATICA IN ITS CAPACITY AS THE SURVIVOR OF THE MEDIOLEASING MERGER): SUBSTITUTE TAX ON MEDIUM TO LONG-TERM FINANCING PURSUANT TO PRESIDENTIAL DECREE NO. 601/1973, TAX YEAR 2008 On 21st December 2012 the Department of the Province of Ancona of the tax authorities served a notice of payment on both the former Medioleasing and the then Banca delle Marche (jointly liable) containing a demand for payment of a substitute tax pursuant to Presidential Decree No. 601/19734 of approximately €1 million, plus fines of €1.2 million and interest, in relation to a contract for financing from the bank to the leasing company of €400 million stipulated on 27th December 2007 in the Republic of San Marino.
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Both companies lodged appeals before the Tax Commission of the Province of Ancona, which were rejected in full. In the meantime the former Medioleasing made payments totalling €2,599 thousand for taxes, fines and interest in relation to the original demand for payment. Both companies appealed against the ruling before the Tax Commission of the Marches Region within the legal time limits and the tax authorities officially applied to appear at the hearing also within the legal time limits. The date for the hearings has not yet been set.
UBI BANCA (FORMER BANCA ADRIATICA IN ITS CAPACITY AS THE SURVIVOR OF THE MEDIOLEASING MERGER): MORTGAGE AND LAND REGISTRATION TAXES, TAX YEAR 2010 On 28th May 2015 Department I of the Province of Rome of the tax authorities served a notice of adjustment and demand for payment of mortgage and land registration taxes relating to the purchase of a real estate property, which was then let under a finance lease. The notice of adjustment and demand payment was also served on the seller of the property as jointly liable with the former Medioleasing and which at the time of the sale had issued a full release from liability in favour of the company. The amount of the mortgage and land registration taxes demanded by the tax authorities was €132 thousand plus a fine for the same amount and interest. The then Medioleasing appealed against the payment demand within the legal time limits before the Tax Commission of the Province of Rome. The relative hearing, originally set for 5th May 2017, was adjourned with no date set.
UBI BANCA (FORMER BANCA TIRRENICA): 2008 REGISTRATION TAX On 21st October 2010 the tax authorities Department of the Province of Milan served three notices of adjustment and payment demand on the former Banca Popolare dell’Etruria e del Lazio, demanding payment of additional registration tax totalling €110 thousand (plus interest) in relation to the sale and purchase of bank branches by Unicredit, for which the procedures for calculating the related goodwill connected with the disposal were contested. This bank promptly lodged appeals against the three notices served before the Tax Commission of the Province of Milan which ruled partially in favour of the bank by recalculating the tax demands at approximately €55 thousand (plus interest). The bank lodged an appeal against those rulings before the Tax Commission of the Region of Lombardy, which gave an adverse ruling. The bank appealed to the Supreme Court of Cassation against those three rulings in March 2013. The date for the hearings has not yet been set.
NUOVA BANCA DELL’ETRURIA E DEL LAZIO AND ORO ITALIA TRADING: 2014 VAT As part of payment of Group VAT, on 28th December 2015 Nuova Banca dell’Etruria e del Lazio and Oro Italia Trading submitted an application to the Department of the Region of Tuscany of the tax authorities for a VAT rebate for the tax year 2014 amounting to approximately €3.2 million, which prudentially had not been deducted due to possible contestations of an alleged “carousel fraud”. The tax authorities denied the right to the rebate and in April 2016 the two companies appealed to the Tax Commission of the Province of Florence. The hearing, originally set for May 2017, was adjourned with no date set.
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UBI BANCA (FORMER BANCA TIRRENICA IN ITS CAPACITY AS THE SURVIVOR OF THE ETRURIA LEASING MERGER): 2010 MORTGAGE TAXES On 23rd April 2012 the tax authorities (Department I of the Province of Rome) served an adjustment and payment notice on the former Etruria Leasing regarding the sales value of a real estate property purchased in 2010 by the leasing company and demanded additional mortgage tax of €181 thousand and additional land registry tax of €60 thousand, plus interest and fines. In view of the adverse result of an application for tax assessment by consent submitted by the seller of the property (jointly liable) in November 2012 the former Etruria Leasing lodged an appeal before the Tax Commission of the Province of Rome, which was fully successful. The tax authorities appealed that ruling before the Tax Commission of the Region of Latium in 2016 and the then Nuova Banca Popolare dell’Etruria e del Lazio applied to appear at the hearing within the legal time limits. The case was heard on 10th April 2017 and the deposit of the relative ruling is still pending.
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SECTION 13 Technical reserves – Item 130
13.1 Technical reserves: composition
Direct work Indirect work 31.12.2017 31.12.2016
A. Non-l ife sector 1,999 - 1,999 -
A.1 Premium reserves 1,525 - 1,525 -
A.2 Claims reserves 474 - 474 -
A3. Other reserves - - - -
B. Life sector 1,778,702 - 1,778,702 -
B.1 Mathematical reserves 1,766,645 - 1,766,645 -
B.2 Reserves for sums to be paid 11,499 - 11,499 -
B3. Other reserves 558 - 558 - C. Technical reserves w here the investment risk is supporter by the - - - - insurers C1. Reserves relating to contracts on which performance is linked to - - - - investment funds and market indexes
C2. Reserves resulting from the management of pension funds - - - -
D. Total technical reserves 1,780,701 - 1,780,701 -
13.2 Technical reserves: annual changes
No items of this type exist because insurance operations became part of the Group with effect from 1st April 2017.
SECTION 14 Redeemable shares – Item 150
14.1 Redeemable shares: composition
No shares have been issued with redemption clauses.
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SECTION 15 Equity attributable to the Parent – Items 140, 160, 170, 180, 190, 200 and 220
15.1 “Share capital” and “Treasury shares”: composition
31.12.2017 31.12.2016
Number of ordinary shares 1,144,285,146 976,300,395
Number of treasury shares 2,984,880 3,031,974 - NOTA The share capital of UBI Banca Spa as at 31st December 2017 amounted to €2,843,177,160 divided into 1,144,285,146 shares with no nominal value.
15.2 Share capital – Number of shares of the Parent: annual changes
Items/type Ordinary Other A. Shares existing at the beginning of the year 976,300,395 - - fully paid up 976,300,395 - - not fully paid up - - A.1 Treasury shares (-) (3,031,974) - A.2 Outstanding shares: initial number 973,268,421 - B. Increases 168,181,845 - B.1 New issues 167,984,751 - - by payment: 167,984,751 - - business combinations 978,039 - - conversion of bonds - - - exercise of warrants - - other 167,006,712 - - free of charge: - - - in favour of employees - - - in favour of directors - - - other - - B.2 Sale of treasury shares 197,094 B.3 Other changes - C. Decreases (150,000) - C.1 Cancellation - - C.2 Purchase of treasury shares (150,000) - C.3 Company disposal operations - - C. 4 Other changes - - D. Outstanding shares: cl osing bal ances 1,141,300,266 - D.1 Treasury shares (+) 2,984,880 - D.2 Shares outstanding at the end of the year 1,144,285,146 - - fully paid up 1,144,285,146 - not fully paid up
15.3 Share capital: other information
A total of 197,094 treasury shares were granted during the year, as part of “UBI Banca Group 2017 Remuneration and Incentive Policies”. For further details see “Part I – Share- based payments”.
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15.4 Reserves of profits: other information
Reserves of profits in the consolidated financial statements decreased by €444.3 million as a result of the allocation of €107.6 million to dividends drawn from the extraordinary reserve and the partial capitalisation of losses recorded in 2016 amounting to €336.7 million.
15.5 Other information
Nothing to report.
SECTION 16 Non-controlling interests – Item 210
16.1 Details of the item 210 “non-controlling interests”
Name of companies 31/12/2017 31/12/2016 Equity investments in consol i dated companies w i th signi ficant non-control l ing 1. UBI Pramerica 66,617 63,390 Other equity investments 13,071 8,637 Total 79,688 72,027
16.2 Capital instruments: composition and annual changes
Nothing to report.
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OTHER INFORMATION
1. Guarantees granted and commitments
Transactions 31.12.2017 31.12.2016
1) Guarantees granted of a financial nature 530,787 1,839,939 a) Banks 141,240 122,746 b) Customers 389,547 1,717,193 2) Guarantees granted of a commercial nature 5,026,082 4,527,503 a) Banks 268,293 214,788 b) Customers 4,757,789 4,312,715 3) Irrevocable commitments to pay funds 5,675,527 4,533,222 a) Banks 9,605 6,571 i) of certain use 9,605 6,571 ii) of uncertain use - - b) Customers 5,665,922 4,526,651 i) of certain use 284,878 725,327 ii) of uncertain use 5,381,044 3,801,324 4) Commitments underlying credit derivatives: protection sales - - 5) Assets pledged to guarantee obligations to third parties - - 6) Other commitments 5,295 5,270 Total 11,237,691 10,905,934 bella 2: 301000O|
1 – NOTA
2. Assets pledged to secure own liabilities and commitments
Portfolios 31.12.2017 31.12.2016 1. Financial assets held for trading 11,854 59,258 2. Financial assets designated at fair value - - 3. Available-for-sale financial assets 4,057,692 4,167,691 4. Held-to-maturity investments 4,149,818 3,712,757 5. Loans and advances to banks - - 6. Loans and advances to customers 25,473,138 26,335,002 7. Property, plant and equipment - - Total 33,692,502 34,274,708
The table summarises assets recognised in the balance sheet pledged by the UBI Group to secure its liabilities. The amount shown in line item 6 “Loans and advances to customers" includes €14,169.7 million relating to mortgages transferred to the special purpose entity UBI Finance Srl as part of programmes to issue covered bonds and €1,382.2 million relating to mortgages used to back own securitisations. The above is summarised as follows:
31.12.2017 31.12.2016
- UBI Banca Spa - 5,591,787 - UBI Finance Srl 14,169,727 14,246,891 - UBI Finance CB2 Srl - 3,039,327 - Own securitisation operations 1,382,161 - Total 15,551,888 22,878,005
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The assets reported in the table used to back covered bond operations relate to the UBI Finance programme, for which UBI Banca is the covered bond issuer. The assets reported that are used to back own securitisations relate to “conventional securitisation” operations, with all or part of the notes sold on the market, where UBI Banca takes the role of the originator following the mergers by incorporation of Banca Tirrenica and Banca Adriatica: - 2007 Mecenate securitisation: €78.8 million; - Marche Mutui 2 securitisation: €70.49 million; - Marche M6 securitisation: €1,232.8 million.
The tables to not include assets to back the UBI Finance CB2 covered bond operation because the relative notes, issued by UBI Banca, have all been repurchased by the issuer and therefore do not appear among liabilities in the balance sheet. Similarly loans used to back “self-retained securitisations” do not appear in the table where the notes are entirely repurchased by UBI Banca or by Group companies. These consist of the following operations: - 24-7 Finance securitisation: €1,051.8 million of assets transferred against securities issued by 24-7 Finance Srl and entirely retained by UBI Banca; - UBI SPV Group 2016 securitisation: €2,418.7 million, against securities issued by UBI SPV Group 2016 Srl and entirely retained by UBI Banca; - UBI SPV Lease 2016 securitisation: €2,821.2 million, against securities issued by UBI SPV Lease 2016 Srl and subscribed entirely by UBI Leasing Spa.
Reference is made to the special section in these notes for further details on the securitisations and covered bonds mentioned above.
The financial assets contained in the table relate to securities owned, pledged to guarantee liabilities and commitments of the Group as follows:
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Portfolios Guarantees of l iabil ities or commitments
Financial assets held for trading Repurchase agreements 11,854
11,854
Available-for-sale financial assets Bank of Italy Advances 2,118,692 Repurchase agreements 1,697,533 Credit Card Issuance - EIB Financing 139,063 Other transactions 102,404
4,057,692
Held-to-maturity investments Bank of Italy Advances 4,070,069 EIB Financing 61,195 Repurchase agreements 594 Other transactions 17,960
4,149,818
Loans and advances to banks Repurchase agreements
-
Loans to customers Bank of Italy Advances 8,788,674 EIB Financing 1,123,000 Mortgages to back covered bonds 14,169,727
Mortgages to guarantee own securitisations 1,382,161
CDP financing 9,576 Other transactions -
25,473,138
In addition to the assets reported above, securities were also pledged as guarantees as follows:
Nominal amount of securities To guarantee Liabilities and Commitments issued by third parties
Bank of Italy Advances 5,297,216
In the table above the securities lodged with the Bank of Italy to back advances, acquired by means of reverse repurchase agreements, were issued by the special purpose entity UBI Lease 2016 for €2.1 billion (senior tranches) and acquired by the originator UBI Leasing Spa. Furthermore the notes issued as part of the securitisations originated by UBI Banca included notes owned lodged as security with the Bank of Italy against advances relating to the following operations: - 24-7 Finance: €677.1 million; - UBI SPV Group 2016: €2.086 billion; - Marche M6: €434.5 million.
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3. Information on operating leases
No items of this type exist.
4. Composition of investments for unit-linked and index-linked policies
As at 31.12.2017 the UBI Group held no index-linked policies in portfolio. Investments relating to unit-linked policies were composed mainly of units of UCITS (64.4% of the item), debt securities (28.2% of the item) and equity instruments to a minor extent.
5. Management and intermediation on behalf of third parties
Type of servi ces Amounts
1. Execution of orders on behalf of customers 64,092,912 a) P urchases 32,009,949 1. Settled 31,943,746 2. Not settled 66,203 b) Sales 32,082,963 1. Settled 32,031,933 2. Not settled 51,030 2. Portfol i o managements 60,925,505 a) Individual 27,234,291 b) Collective 33,691,214 3. Custody and administration of securi ti es 81,027,609 a) Securities of third parties held on deposit: connected with depository bank activity (not including portfolio management) 1. Securities issued by companies included in the consolidation 2. Other securities b) Securities of third parties held on deposit (not including portfolio management): other 62,364,033 1. Securities issued by companies included in the consolidation 17,731,648 2. Other securities 44,632,385 c) Securities belonging to third parties, deposited with third parties 60,725,154 d) Own securities deposited with third parties 18,663,576 4. Other transactions 190,588,564
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6. Financial assets subject to offsetting in the financial statements, or subject to master netting arrangements or similar agreements.
Related amounts not offset in the accounts
Amount of the Net amount of Gross amount financial the financial Net amount of the Net amount Type of instrument liabilities assets reported 31.12.2017 financial 31.12.2016 offset in the in the accounts (f=c-d-e) assets (a) accounts (b) (c=a-b) Financial Cash deposits instruments recei ved as (d) col l ateral (e)
1. Derivatives 570,898 341,313 229,585 90,024 136,249 3,312 16,361 2. Repurchase agreements 10,363 - 10,363 10,284 - 79 1,493 3. Stock lending ------4. Other transactions ------Total 31.12.2017 581,261 341,313 239,948 100,308 136,249 3,391 X Total 31.12.2016 867,741 37,150 830,591 496,974 315,763 X 17,854
7. Financial liabilities subject to offsetting in the financial statements, or subject to master netting arrangements or similar agreements.
Related amounts not offset in the accounts
Amount of Net amount of Gross amount financial the financial Net amount of the Net amount Type of instrument assets offset liabilities 31.12.2017 financial 31.12.2016 in the reported in the (f=c-d-e) liabilities (a) accounts (b) accounts (c=a-b) Financial Cash deposits instruments l odged as (d) col l ateral (e)
1. Derivatives 834,754 341,313 493,441 90,024 395,636 7,781 13,576 2. Repurchase agreements 1,152,994 - 1,152,994 1,144,525 6,315 2,154 2,836 3. Stock lending ------4. Other transactions ------Total 31.12.2017 1,987,748 341,313 1,646,435 1,234,549 401,951 9,935 X Total 31.12.2016 5,030,268 37,149 4,993,119 4,314,333 662,374 X 16,412
With regard to derivatives, offsetting has been carried out in the accounts between the same counterparties for an amount of €341.3 million, where all of the criteria laid down by IAS 32 are met. This offsetting involved certain classes of OTC derivatives (IRS Plain Vanilla) in line with the provisions of European Regulation No. 648/2012 (European Market Infrastructure Regulation – “EMIR”). The following has been reported in the columns for related amounts not subject to offsetting: the value of the related derivative by single counterparty up to the full amount under financial instruments, while the margin deposits are given up to the full amount, again for single related counterparty under the column for deposits received or made.
As a consequence, given the related items for derivatives assets and liabilities and the amount of the respective margin deposits received or made, the column for the net amount (table 6) represents the residual exposure solely of the Parent by counterparty of €3.3 million, while the residual exposure of third parties (table 7) is €7.8 million.
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The conditions set by IAS 32 were not met for offsetting asset and liability repo positions with the same counterparties in the financial statements. The following has been reported in the columns for related amounts not subject to offsetting: the fair value of the underlying security by single counterparty up to the full amount under financial instruments, while the margin deposits are given similarly up to the full amount (table 6, assets of €0.1 million and table 7 liabilities of €2.2 million) also by single related counterparty under the column for deposits received.
8. Stock lending transactions
The UBI Banca Group offers a stock lending service through the company IW Bank Spa for both institutional and retail counterparties. For retail counterparties this service allows customers to both borrow securities (against payment of commission) and to lend securities (in return for consideration paid by IW Bank). As concerns institutional counterparties, on the other hand, IW Bank lends securities to counterparties in return for a commission.
9. Information on joint arrangements
Nothing to report.
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PART C – Notes to the consolidated income statement
SECTION 1 Interest – Items 10 and 20
1.1 Interest income and similar: composition
Debt Other Items/Type Financing 2017 2016 instruments transactions
1. Financial assets held for trading 881 - 1,424 2,305 2,889 2. Financial assets designated at fair value - - - - - 3. Available-for-sale financial assets 152,568 - - 152,568 302,247 4. Held-to-maturity investments 76,657 - - 76,657 45,773 5. Loans and advances to banks 175 77,679 30 77,884 8,807 6. Loans and advances to customers 7,479 1,823,389 109 1,830,977 1,733,117 7. Hedging derivatives X X 120,658 120,658 67,247 8. Other assets X X 402 402 1,041 Total 237,760 1,901,068 122,623 2,261,451 2,161,121
Interest on non-performing assets relates almost entirely to loans to customers and totalled €183.7 million. The item loans to banks includes €68.8 million consisting of the income, in agreement with Group policies, earned on amounts due to banks for TLTRO II.
1.2 Interest income and similar: hedging differentials
Items 2017 2016
A. Positive differentials on hedging transactions 171,615 232,110 B. Negative differentials on hedging transactions (50,957) (164,863) C. Bal ance (A-B) 120,658 67,247
1.3 Interest and similar income: other information
1.3.1 Interest income on financial assets held in foreign currency
1.3.2 Interest income on finance lease transactions
Items/Amounts 2017 2016
Interest income on financial assets held in foreign currency 54,997 50,785 Interest income on finance lease transactions 115,589 112,992 ble 3: 501030O|1 - NOTA
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1.4 Interest expense and similar: composition
Other Items/Type Borrow ings Securities '2017 '2016 transactions
1. Due to central banks (16,931) X - (16,931) (3,792) 2. Due to banks (22,400) X - (22,400) (14,013) 3. Due to customers (87,675) X (946) (88,621) (46,324) 4. Debt securities issued X (481,616) - (481,616) (596,433) 5. Financial liabilities held for trading (566) - - (566) (2,593) 6. Financial liabilities designated at fair value - - - - - 7. Other liabilities and provisions X X (79) (79) (75) 8. Hedging derivatives X X - - - Total (127,572) (481,616) (1,025) (610,213) (663,230)
The item interest expense payable to central banks consists mainly of interest accruing during the year on financing obtained from the ECB. e5020 00O|1 - NOTA3_ALTRE 1.5 Interest expense and similar: hedging differentials
The interest relating to hedging transaction differentials recorded a positive balance of €120.7 million for the year ended 31st December 2017. Details are given in Table 1.2 earlier in this section.
1.6 Interest expense and similar: other information
1.6.1 Interest expense on liabilities held in foreign currency
1.6.2 Interest expense on liabilities for finance lease transactions
Items/Amounts 2017 2016
Interest expense on liabilities held in foreign currency (26,792) (16,862) Interest expense on finance lease transactions (476) (301)
Table 4: 502020O|1 - NOTA
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SECTION 2 Commissions – Items 40 and 50
2.1 Fee and commission income: composition
Type of services/Segments 2017 2016
a) guarantees granted 46,115 44,042 b) credit derivatives - - c) management, trading and advisory services: 945,016 838,063 1. trading in financial instruments 14,351 16,572 2. foreign exchange trading 8,455 6,953 3. portfolio management 388,719 343,372 3.1. individual 78,519 74,660 3.2. collective 310,200 268,712 4. custody and administration of securities 9,543 8,733 5. depository banking - - 6. placement of securities 260,491 233,396 7. receipt and transmission of orders 34,290 35,621 8. advisory activities 8,744 6,789 8.1 on investments 8,744 6,789 8.2 on financial structure - - 9. distribution of third party services 220,423 186,627 9.1. portfolio management 366 22 9.1.1. individual 366 22 9.1.2. collective - - 9.2. insurance products 191,910 160,872 9.3. other products 28,147 25,733 d) collection and payment services 179,114 146,234 e) servicer activities for securitisation transactions 132 - f) services for factoring transactions 12,559 13,937 g) tax collection and payment services - - h) management of multilateral trading systems - - i) current account administration 239,475 193,141 j) other services 321,805 273,575 Total 1,744,216 1,508,992
The item j) “Other services” for 2017 includes “Other commission income” consisting of: - customer finance €206.5 million - foreign transactions €12.6 million
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2.2 Fee and commission expense: composition
Servi ces/Segments 2017 2016
a) guarantees received (1,182) (1,419) b) credit derivatives - - c) management and trading services: (98,434) (85,082) 1. trading in financial instruments (10,969) (10,691) 2. foreign exchange trading (1) (36) 3. portfolio management (8,981) (8,311) 3.1. own (63) - 3.2. on behalf of third parties (8,918) (8,311) 4. custody and administration of securities (6,648) (5,357) 5. placement of financial instruments (8,701) (5,996) 6. financial instruments, products and services distributed through indirect networks (63,134) (54,691) d) collection and payment services (52,246) (44,649) e) other services (45,563) (42,809) Total (197,425) (173,959) ble 5: 505000O|1 - NOTA1_BANCHE
SECTION 3 Dividends and similar income – Item 70
3.1 Dividends and similar income: composition
2017 2016
Items/Income Income from Income from Dividends Dividends UCITS units UCITS units A. Financial assets held for trading 767 7 94 - B. Available-for-sale financial assets 10,619 1,256 3,627 1,759 C. Financial assets at fair value 1,035 - 4,198 - D. Equity investments - X - X Total 12,421 1,263 7,919 1,759
Item B “available-for-sale financial assets” includes dividends received on shareholdings of €2.5 million in Cedacri, approximately €1.4 million in the Bank of Italy, approximately €1.2 million in Sacbo, approximately €1 million in Istituto Centrale Banche Popolari and of €0.9 million in Immobiliare Mirasole.
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SECTION 4 Net trading income (loss) – Item 80
4.1 Net trading income (loss): composition
Income from Losses from Gains Losses Net income Transactions/Components of income trading trading (A) (C) [(A+B) - (C+D)] (B) (D) 1. Financial assets held for trading 2,506 31,670 (1,594) (8,676) 23,906 1.1 Debt instruments 263 4,622 (496) (1,036) 3,353 1.2 Equity instruments 1,630 3,516 (911) (2,588) 1,647 1.3 Units in UCITS 14 107 (187) (52) (118) 1.4 Financing - - - - - 1.5 Other 599 23,425 - (5,000) 19,024 2. Financial liabilities held for trading - 419 - (164) 255 2.1 Debt instruments - 419 - (164) 255 2.2 Payables - - - - - 2.3 Other - - - - - 3. Other financial assets and l i abi l i ties: exchange rate XXXX309 4. Derivative instruments 310,554 506,884 (392,413) (341,026) 97,898 4.1 Financial derivatives 310,554 506,884 (392,413) (341,026) - - on debt instruments and interest rates 244,810 486,744 (390,738) (327,439) 13,377 - on equity instruments and share indices 63,991 10,092 (61) (3,720) 70,302 - on currencies and gold XXXX13,899 - other 1,753 10,048 (1,614) (9,867) 320 4.2 Credit derivatives - - - - - Total 313,060 538,973 (394,007) (349,866) 122,368
The amount recognised in item 1.5 “Other” relates principally to the exchange rate differences, connected, amongst other things, with certificates of deposit denominated in yen and it is linked to the amount recognised in item 4.1 “Financial derivatives on currencies and gold”.
SECTION 5 Net hedging income (loss) – Item 90
5.1 Net hedging income (loss): composition
Income components/Amounts 2017 2016
A. Income relating to: A.1 Fair value hedge derivatives 183,090 269,629 A.2 Hedged financial assets (fair value) 51,020 340,982 A.3 Hedged financial liabilities (fair value) 160,010 120,979 A.4 Cash flow hedge financial derivatives - - A.5 Assets and liabilities in foreign currency - - Total income from hedging activity (A) 394,120 731,590 B. Expense relating to: B.1 Fair value hedge derivatives (238,620) (460,354) B.2 Hedged financial assets (fair value) (151,966) (178,469) B.3 Hedged financial liabilities (fair value) (3,953) (92,352) B.4 Cash flow hedge financial derivatives - - B.5 Assets and liabilities in foreign currency - - Total expense from hedging activity (B) (394,539) (731,175) C. Net hedgi ng income (l oss) (A-B) (419) 415
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SECTION 6 Income (loss) from disposals/repurchases – Item 100
6.1 Income (loss) from disposals/repurchases: composition
2017 2016 Items/Income components Profits Losses Net profit Profits Losses Net profit
Financial assets 1. Loans and advances to banks 4 - 4 - - - 2. Loans and advances to customers 7,042 (54,102) (47,060) 4,540 (36,022) (31,482) 3. Available-for-sale financial assets 144,517 (9,521) 134,996 149,392 (378) 149,014 3.1 Debt instruments 131,383 (9,206) 122,177 121,166 (352) 120,814 3.2 Equity instruments 1,258 (275) 983 16,943 (26) 16,917 3.3 Units in UCITS 11,876 (40) 11,836 11,283 - 11,283 3.4 Financing ------4. Held-to-maturity investments 55,937 - 55,937 - - - Total assets 207,500 (63,623) 143,877 153,932 (36,400) 117,532 Financial liabilities 1. Due to banks ------2. Due to customers 72 - 72 - - - 3. Debt securities issued 1,052 (14,569) (13,517) 381 (26,143) (25,762) Total liabil ities 1,124 (14,569) (13,445) 381 (26,143) (25,762)
With regard to item 3.1, “available-for-sale financial assets – debt instruments”, the net profits were mainly attributable to disposals of government securities and amounted to €77.8 million. Item 4 “held-to-maturity investments” represents the partial disposal of the HTM portfolio which took place in June.
SECTION 7 Net income (loss) on financial assets and liabilities designated at fair value – Item 110
7.1 Net change in financial assets/liabilities designated at fair value: composition
Gains Profit on sale Losses Losses on sale Net income Transactions/Components of income (A) (B) (C) (D) [(A+B) - (C+D)]
1. Financial assets 551 13,728 (1,113) (327) 12,839 1.1 Debt instruments 13 20 (570) (110) (647) 1.2 Equity instruments 420 10,667 (118) (34) 10,935 1.3 Units in UCITS 118 3,041 (425) (183) 2,551 1.4 Financing - - - - - 2. Financial liabilities held for trading - - (117) - (117) 2.1 Debt instruments - - - - - 2.2 Due to banks - - - - - 2.3 Due to customers - - (117) - (117) 3. Other financial assets and l iabil ities: exchange rate XXXX - 4. Credit and financial derivatives - - - - - Total 551 13,728 (1,230) (327) 12,722
Profit-taking on equity instruments consisted mainly of €5 million on Humanitas and €4.7 million on Immobiliare Mirasole.
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SECTION 8 Net impairment losses on loans – Item 130
8.1 Net impairment losses on loans: composition
Impairment losses Reversals
Specific Specific P o rtfo lio Trans actio ns /Co mpo nents o f inco me 2017 2016 P o rtfolio Other Other Write -o ffs Othe r Of interes t Of interes t reversals re v e rs a ls
A. Loans and advances to banks ------(127) - Financing ------(127) - Debt instruments ------B. Loans and advances to customers (254,488) (986,310) - 220,577 271,086 - 20,792 (728,343) (1,565,400) Non-performing loans purchased ------Financing - - X - - X X - - - Debt instruments - - X - - X X - - Other loans and receivables (254,488) (986,310) - 220,577 271,086 - 20,792 (728,343) (1,565,400) - Financing (254,488) (986,310) - 220,577 271,086 - 20,792 (728,343) (1,565,400) - Debt instruments ------C. Total (254,488) (986,310) - 220,577 271,086 - 20,792 (728,343) (1,565,527)
Table 6: 514000O|1 - NOTA1_BANCHE Table 7: 514000O|1 - NOTA3_ALTRE
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8.2 Net impairment losses on available-for-sale financial assets: composition
Impairment lo s s es Reversals Trans actio ns /Co mpo nents o f S pe c ific S pe c ific 2017 2016 inc o me Write -o ffs Othe r o f inte re s t o the r re v e rs a ls
A. Debt instruments - - - - (14,449) B. Equity instruments - (55,677) X X (55,677) (42,475) C. Units in UCITS - (109,947) X - (109,947) (54,719) D. Lo ans to banks ------E. Lo ans to cus to mers ------To tal - (165,624) - - (165,624) (111,643)
Impairment losses on equity instruments included €42 million of impairment recognised on the shareholdings acquired in connection with the intervention to support Cassa di Risparmio di Cesena, CARIM and CARISMI resolved by the Management Board of the Interbank Deposit Protection Fund (IDPF). Impairment losses on UCITS units relate almost entirely to the impairment loss on the Atlante Fund amounting to €108.7 million. Greater details are provided in Part A, Section 5, “Other Aspects” of the notes to the consolidated financial statements.
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8.3 Net impairment losses on held-to-maturity investments: composition
This type of item is not present for the UBI Group.
8.4 Net impairment losses on other financial transactions: composition
Impairment losses Reversals Trans actio ns / Specific S pe c ific po rtfo lio 2017 2016 Components of income po rtfolio Write -o ffs Othe r o f inte re s t o the r re v e rs a ls o f inte re s t o the r re v e rs a ls
A. Guarantees granted (99) (4,405) (122) - 10,753 - 1,973 8,100 1,430 B. Credit derivatives ------C. Commitments to pay funds - (75) (859) - 19,444 - 3,943 22,453 (19,834) D. Other transactions - 1,031 - - 77 - 1,108 (10) Total (99) (3,449) (981) - 30,274 - 5,916 31,661 (18,414)
The amount of €19.4 million under specific reversals relates to a commitment to the Atlante Fund1.
1 To be interpreted in conjunction with net impairment losses on available-for-sale financial assets in Table 8.2.
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SECTION 9 Net premiums – Item 150
9.1 Net premiums: composition
Premiums from insurance activiti es Direct w ork Indi rect w ork '2017 '2016
A. Life A.1 Gross premiums recognised (+) 153,876 - 153,876 - A.2 Premiums reinsured (-) (63) X (63) - A.3 Total 153,813 - 153,813 - B. Non-life B.1 Gross premiums recognised (+) 1,301 - 1,301 - B.2 Premiums reinsured (-) (325) X (325) -
B.3 Change in gross premiums reserve (+/-) 346 - 346 -
B.4 Change in reinsurer premium reserves (+/-) (7) - (7) -
B.5 Total 1,315 - 1,315 - C. Total net premiums 155,128 - 155,128 -
The item comprises premiums for the year net of reassurance transfers which fall within the scope of application of IFRS 4 – “Insurance contracts”. The balance is composed primarily of life insurance premiums.
SECTION 10 Other income/expense of insurance operations – Item 160
10.1 Balance of other income/expense of insurance operations: composition
Items 2017 2016
1. Net change in technical reserves (90,395) - 2 Claims paid during the year (80,858) - 3. Other income and expense on insurance operations (2,131) - Total (173,384) -
10.2 Composition of the sub-item “Net change in technical reserves”
Net change in techni cal reserves 2017 2016
1. Life - - A. Mathematical reserves (91,041) - A.1 Gross annual amount (91,041) - A.2 (-) Portion borne by reinsurers - - B. Other technical reserves 647 - B.1 Gross annual amount 647 - B.2 (-) Portion borne by reinsurers - - C. Technical reserves where the investment risk is borne by the insurers - - C.1 Gross annual amount - - C.2 (-) Portion borne by reinsurers - - Total reserves life sector (90,394) - 2. Non life - - Changes in other non life technical reserves other than claims reserves net of reinsurance (1) - Total (90,395)
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10.3 Composition of the sub-item “Claims paid during the year”
Costs for cl aims 2017 2016
Life sector: costs of cl aims net of reinsurance A. Amounts paid (74,746) - A.1 Gross annual amount (74,796) - A.2 (-) Portion borne by reinsurers 50 - Change in mathematical reserves - - B. Change in reserves for sums to be paid (6,131) - B.1 Gross annual amount (6,131) - B.2 (-) Portion borne by reinsurers - - Total life sector claims (80,877) -
Non l ife sector: cost of cl aims, net of recoveries and reinsurance C. Amounts paid (145) - C.1 Gross annual amount (254) - C.2 (-) Portion borne by reinsurers 109 - D. Change in recoveries net of portion borne by reinsurers - - E. Changes in the claims reserve 164 - E.1 Gross annual amount 215 - E.2 (-) Portion borne by reinsurers (51) - Total non-l ife sector cl aims 19 - (80,858)
The balance for the item is composed of income and expense from insurance operations that fall within the scope of application of IFRS 4 – “Insurance contracts” and which are not included in item 150 “Net insurance premiums” in the income statement. In particular it includes amounts paid to insureds, net of transfers to reassurance, the change in net technical reserves and other components of insurance income and expenses relating principally to commissions paid to the distribution network for the sale and maintenance of insurance policies with customers.
SECTION 11 Administrative expenses – Item 180
11.1 Staff costs: composition
Type of expense/Sectors 2017 2016
1) Employees (1,530,448) (1,585,351) a) Wages and salaries (1,035,532) (893,779) b) Social security charges (276,406) (237,614) c) Post-employment benefits (54,804) (49,511) d) Pension expense (79) - e) Provision for post-employment benefits (2,425) (1,694) f) Provision for pension and similar: (2,543) (1,140) - defined contribution (1,709) - - defined benefit (834) (1,140) g) Payments to external supplementary pension plans: (44,060) (40,912) - defined contribution (43,031) (40,535) - defined benefit (1,029) (377) h) Expenses resulting from share based payments - - i) Other employee benefits (114,599) (360,701) 2) Other staff in service (1,415) (1,484) 3) Directors and statutory auditors (10,433) (12,882) 4) Expenses for retired staff (167) - Total (1,542,463) (1,599,717)
An analysis of changes that occurred compared with the previous year is given in the section “The income statement” in the Consolidated Management Report, which may be consulted.
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11.2 Average number of employees by category
2017 2016
EM PLOYEES 19,429 16,488 a) senior managers 372 346 b) middle managers 8,179 7,200 c) remaining employees 10,878 8,942 OTHER PERSONNEL 134 177
“Other personnel” also includes the directors and statutory auditors of Group member companies.
11.3 Defined benefit company pension funds: expenses and income
See section 12.3 “Defined benefit company pension funds” in the balance sheet liabilities section.
11.4 Other benefits for employees
The item “other employee benefits” consists mainly of expenses relating to the redundancy scheme amounting to €61.5 million (€324.4 million in 2016), expenses for luncheon vouchers amounting to €21 million and insurance expenses of €17 million. Details of redundancy schemes are given in the “Consolidated Management Report” in the sections “Human resources” and the “2019-2020 Business Plan”, which may be consulted.
11.5 Other administrative expenses: composition
2017 2016
A. Other administrative expenses (804,831) (707,691) Rent payable (71,626) (49,589) Professional and advisory services (164,126) (123,083) Rentals hardware, software and other assets (45,547) (31,648) Maintenance of hardware, software and other assets (54,158) (43,140) Tenancy of premises (48,531) (42,974) Property maintenance (29,935) (21,702) Counting, transport and management of valuables (13,781) (11,828) Membership fees (83,630) (144,095) Information services and land registry searches (12,315) (8,661) Books and periodicals (1,308) (1,109) Postal (15,365) (11,374) Insurance premiums (30,633) (30,604) Advertising (24,537) (25,491) Entertainment expenses (1,556) (1,420) Telephone and data transmission expenses (53,071) (42,058) Services in outsourcing (63,811) (43,446) Travel expenses (16,175) (14,177) Credit recovery expenses (39,699) (37,464) Forms, stationery and consumables (8,295) (6,333) Transport and removals (9,316) (6,101) Security (6,190) (6,602) Other expenses (11,226) (4,792) B. Indirect taxes (271,984) (262,774) Indirect taxes and duties (15,212) (24,132) Stamp duty (210,222) (196,258) Municipal property tax (23,167) (20,975) Other taxes (23,383) (21,409) Total (1,076,815) (970,465)
Table 8: 519000bO|1 - The item ‘Membership fees’ includes the ordinary contribution to the National Resolution Fund for 2017, (€28.2 million) and to the DGS (€41.7 million), as required by the respective EU directives recently issued. Further information is given in a special section of the Management Report.
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SECTION 12 Net provisions for risks and charges – Item 190
12.1 Net provisions for risks and charges: composition
Net provisions Net provisions Provisions Releases in 2017 in 2016
Additions to and uses of revocation clawback (1,252) 942 (310) (5,756) provisions
Additions to and uses of staff cost provisions (387) 5,345 4,958 -
Additions to and uses of provisions for bonds in (697) 198 (499) (137) default
Additions to and uses of litigation provisions (27,971) 19,740 (8,231) (8,232)
Other additions to and uses of provisions for risks (11,207) 6,280 (4,927) (28,760) and charges Total (41,514) 32,505 (9,009) (42,885) Table 9: 520000O|1 - NOTA
SECTION 13 Net impairment losses on property, plant and equipment – Item 200
13.1 Net impairment losses on property, plant and equipment: composition
Imp ai rment Reversals of Depreciation Net result Assets/Components of income losses impairment (a) (a+b-c) (b) losses (c)
A. Property, plant and equipment A.1 Owned (82,733) (4,456) - (87,189) - for functional use (72,378) (2,723) - (75,101) - for investment (10,355) (1,733) - (12,088) A.2 Acquired through finance lease (782) - - (782) - for functional use (278) - - (278) - for investment (504) - - (504) Total (83,515) (4,456) - (87,971) : 521000O|1 - NOTA3_ALT The column “net impairment losses” relates to the results of impairment tests on property, plant and equipment. See section 12.6 of Part B of these notes to the consolidated financial statements for further information.
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SECTION 14 Net impairment losses on intangible assets – Item 210
14.1 Net impairment losses on intangible assets: composition
Imp ai rment Reversals of Depreciation Net result Assets/Components of income losses impairment (a) (a+b-c) (b) losses (c)
A. Intangible assets A.1 Owned (68,705) (8) - (68,713) - Internally generated by the company (2,559) - - (2,559) - other (66,146) (8) - (66,154) A.2 Acquired through finance lease - - - - Total (68,705) (8) - (68,713)
Further details are given in the section 13.1 “intangible assets” in Section B of the assets part of these notes to the consolidated financial statements.
SECTION 15 Other net operating income/expense – Item 220
15.1 Other operating expense: composition
2017 2016
Other operating expenses (84,624) (62,502) Fines and charges for late tax payments (7) (56) Depreciation of improvements to third party leased assets (6,091) (4,925) Ordinary maintenance of investment properties - - Other expenses and prior year expense (78,526) (57,521) - of which costs relating to finance lease contracts (10,978) (11,124) Table 10: 523000O|1 - NOTA1
15.2 Other operating income: composition
2017 2016
Other operating income 404,449 369,043 Charges to third parties for expenses on deposit and current accounts 25,984 20,550 Recovery of insurance premiums 19,758 19,923 Other income for property management 219 222 Recovery of taxes 229,386 212,416 Rent income 6,117 4,676 Other income, expense recoveries and prior year income 122,985 111,256 - of which recoveries on lease contracts 15,679 16,483 Table 11: 523000O|1 - NOTA2
Recoveries of other expenses include “fast credit processing fees”, which came to €35.8 million (€45 million in 2016).
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SECTION 16 Profits (losses) of equity investments – Item 240
16.1 Profits (losses) of equity investments: composition
Income components/sectors 2017 2016
1) Jointl y control l ed entiti es A. Income - - 1. Revaluations - 2. Profits on sale - 3. Reversals of impairment losses - 4. Other income - B. Expense - - 1. Write-downs - 2. Impairment losses - 3. Losses on sale - 4. Other expense - Net income - - 2) Companies subject to signifi cant i nfl uence A. Income 23,801 24,464 1. Revaluations - 2. Profits on sale 3. Reversals of impairment losses - 4. Other income 23,801 24,464 B. Expense (410) (328) 1. Write-downs - 2. Impairment losses due to deterioration - 3. Losses on sale (410) 4. Other expense (328) Net income 23,391 24,136 Total 23,391 24,136 able 12: 525000O|1 - NOTA The amount in item A.4 “other income” of section 2 represents the profits of equity- accounted investees. Details of the contribution to profits of the main companies consolidated using the equity method are given in the note at the foot of Table 10.5 entitled “Equity investments: annual changes” in the balance sheet section.
SECTION 17 Net result of changes in the fair value of property, plant and equipment and intangible assets – Item 250
17.1 Net result of fair value measurement (or revaluation) of plant, property and equipment and intangible assets: composition
No “Net result of changes in the fair value of property, plant and equipment and intangible assets” was recognised
SECTION 18 Net impairment losses on goodwill – item 260
18.1 Net impairment losses on goodwill: composition
No net impairment losses on goodwill were recognised in 2017.
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SECTION 19 Profits (losses) on disposal of investments – Item 270
19.1 Profits (losses) on disposal of investments: composition
Income components/sectors 2017 2016
A. Properties 1,734 23,097 - Profits on disposal 1,872 23,109 - Losses on disposal (138) (12) B. Other assets (875) (128) - Profit on disposal 49 11 - Losses on disposal (924) (139) Net income 859 22,969
SECTION 20 Taxes on profit for the year from continuing operations – Item 290
Income components/sectors 2017 2016
A. Properties 1,734 23,097 - Profits on disposal 1,872 23,109 - Losses on disposal (138) (12) B. Other assets (875) (128) - Profit on disposal 49 11 - Losses on disposal (924) (139) Net income 859 22,969
20.1 Taxes on profit for the year from continuing operations: composition
Income components/sectors 2017 2016
1. Current taxes (-) (40,033) 248,474 2. Change in current taxes of prior years (+/-) 1,849 419 3. Reduction in current taxes for the year (+) 2,015 28,550 3.a Reduction in current taxes for the year for tax credits pursuant to Law 214/2011 (+) 276,918 4,449 4. Change in deferred tax assets (+/-) (340,864) 12,879 5. Change in deferred tax liabilities (+/-) 20,939 24,848 6. Taxation for the year (-) (-1+/-2+3+3a+/-4+/-5) (79,176) 319,619
The reduction in current taxes in 2017, by €274.6 million, is reported to show the transformation of deferred tax assets into tax credits as a result of the losses for 2016 recognised by UBI Banca Spa, Banca Popolare di Bergamo Spa, Banca Carime Spa, Banco di Brescia Spa, Banca Popolare di Ancona Spa, Banca di Valle Camonica Spa, UBI Leasing Spa, UBI Factor Spa and Prestitalia Spa.
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20.2 Reconciliation between theoretical taxation and actual taxation recorded in the accounts
IRES IRES (CORPORATE INCOME TAX) Taxable income (CORPORATE % INCOM E TAX) Theoreti cal IRES payabl e 280,990 (77,272) 27.50% Permanent i ncreases - Impairment of AFS equity investments, losses and other prior year expense 8,922 (2,453) 0.87% - Non-deductible expenses (Municipal property tax - auto - interest in arrears) 12,113 (3,331) 1.19% - Taxes on dividends of UBI subsidiaries (4,457) 1.59% - "New Bank" tax losses with no tax effects 72,972 (20,067) 7.14% Permanent decreases - Valuation of equity-accounted investees (23,391) 6,433 -2.29% - Untaxed dividends (11,080) 3,047 -1.08% - ACE (economic growth law) (23,764) 6,535 -2.33% - FVO movements and PEX gains (6,566) 1,806 -0.64% Effecti ve IRES payabl e 310,195 (89,761) 31.94%
IRAP (REGIONAL PRODUCTION TAX) Taxabl e income IRAP %
Theoreti cal IRAP payabl e 280,990 (15,651) 5.57%
Permanent increases - Administrative expenses not deductible for IRAP purposes 97,805 (5,448) 1.94% - Impairment of tangible and intangible assets not deductible for IRAP purposes 15,846 (883) 0.31% - Impairment losses on AFS securities not deductible for IRAP purposes 133,963 (7,462) 2.66% - Provisions for risks and charges not deductible for IRAP purposes 9,009 (502) 0.18% - "New Banks" unrecoverable IRAP tax losses 72,972 (4,065) 1.45% Permanent decreases - Dividends (6,545) 365 -0.13% - Untaxed other operating income (31,175) 1,736 -0.62% - Valuation of equity-accounted investees (23,391) 1,303 -0.46% Effecti ve IRAP payabl e 549,474 (30,606) 10.89%
Total effective IRES and IRAP tax expense 280,990 (120,367) 42.84%
The figures given in the table are taken from the reclassified financial statements presented in the Management Report.
SECTION 21 Profit (loss) after tax from discontinued operations – Item 310
21.1 Profit (loss) after tax from discontinued operations: composition
No “profit (loss) after tax from discontinued operations” was recognised.
21.2 Details of taxes on income in relation to discontinued operations
No “taxes on income in relation to discontinued operations” was recognised.
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SECTION 22 Profit (loss) for the year attributable to non-controlling interests – Item 330
22.1 Details of the item 330 “Profit for the year attributable to non-controlling interests”
Profit attributable to non-controlling interests, inclusive of the effects of consolidation entries, totalled €26,435 thousand and was composed as follows:
Name of companies 2017 2016
Consolidated equity investments with significant non-controlling interests
1. UBI Pramerica (25,555) (21,897) 2. Banca Popolare Commercio e Industria Spa - 7,002 3. Banca Carime Spa - 6 4. Banca Popolare di Ancona Spa - 472 5. Banca Regionale Europea Spa - 29,729 6. Banca Valle Camonica Spa - 74 7 . Bancassurance Popolari Spa (505) 8 . Bancassurance Popolari Danni Spa (10) Other equity investments (365) (443) Total (26,435) 14,943
SECTION 23 Other information
No situations exist which require further information.
SECTION 24 Earnings per share
Introduction
With the adoption of international accounting standards, all listed companies, or companies for which listing is in progress, which are required to prepare separate company and/or consolidated financial statements in compliance with IFRS (Legislative Decree No. 38/2005), must report the calculation of their earnings per share (EPS) in their financial statements in accordance with IAS 33. More specifically that standard requires both basic earnings per share and diluted earnings per share to be reported: (i) basic EPS has been calculated by dividing the profit attributable to the ordinary equity holders of the Parent (numerator) by the weighted average number of ordinary outstanding shares (denominator) during the year; (ii) diluted EPS has been calculated by taking into account the dilutive effect of potential ordinary shares, i.e. financial instruments and/or contracts which assign rights to the holders to acquire ordinary shares.
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Earnings per share in 2017
Calculation of basic EPS
On the basis of what has been stated above, the numerator for calculating basic EPS amounts to €690,557 thousand. With regard to the denominator of this indicator, the weighted average number of outstanding ordinary shares as at 31st December 2017 was 1,060,142,511. In this respect: (i) ordinary shares of UBI Banca outstanding as at 1st January 2017 numbered 973,268,421; (ii) as at 31st December 2017 UBI Banca held 2,984,880 treasury shares in portfolio following movements resulting from the sales and further purchases and grants for a total of -47,094 shares in 2017; (iii) as a result of the above changes, the ordinary shares outstanding of UBI Banca numbered 1,141,300,266 as at 31st December 2017.
Calculation of diluted EPS
For the purposes of calculating diluted EPS, as already stated, account must be taken of the dilutive effect on the ordinary shares of the Parent resulting from the presence of “potential” ordinary shares that are outstanding, such as for example: (i) instruments representing debt or equity, including preference shares, that are convertible into ordinary shares; (ii) options and warrants; (iii) shares to be issued if the conditions defined in contractual agreements are met.
To summarise:
2016 EPS 2017 2016 restated (*) Consolidated profit attributable to the Parent (thousands of euro) 690,557 (830,150) (830,150) Weighted average number of ordinary shares outstanding 1,060,142,511 907,428,838 1,060,142,511 Basic earnings per share (in euro) 0.6514 (0.9148) (0.7831) Diluted earnings per share (in euro) 0.6514 (0.9148) (0.7831)
The table that follows contains: (i) a reconciliation of consolidated profit attributable to the Parent and profit attributable to ordinary equity holders and also (ii) the dilutive effect on the average number of outstanding ordinary shares.
2016 EPS 2017 2016 restated (*)
EPS with recognised profits Consolidated net profit attributable to the Parent (thousands of euro) 690,557 (830,150) (830,150) Profit not attributable to owners of ordinary equity instruments (thousands of euro) - - - Consolidated profit attributable to the Parent (thousands of euro) 690,557 (830,150) (830,150) N umber of shares in issue at the beginning of the year 973,268,421 900,316,743 900,316,743 N umber of shares issued during the year 168,031,845 72,951,678 240,983,523 N umber of shares in issue at the end of the year 1,141,300,266 973,268,421 1,141,300,266 Weighted average number of ordinary shares outstanding 1,060,142,511 907,428,838 1,060,142,511 Weighted average number of ordinary shares for diluted capital 1,060,142,511 907,428,838 1,060,142,511 Basic earnings per share (in euro) 0.6514 (0.9148) (0.7831) Diluted earnings per share (in euro) 0.6514 (0.9148) (0.7831)
(*) The figure has been restated to take account of capital transactions which took place in 2017, in accordance with IAS 33.
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SECTION 25 Negative consolidation difference
A negative consolidation difference was present as at 31st December 2017, arising from the first consolidation of the New Banks, which amounts to €640.8 million. Further details are given in Part G – “Business combination transactions concerning companies or lines of business” of these notes to the financial statements.
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Part D – Consolidated statement of comprehensive income
Detailed statement of consolidated comprehensive income
31.12.2017 Items Gross amount Tax on income Net amount
10. Profit for the year XX716,992 Other comprehensive income without transfer to the income statement: (6,352) 1,715 20. Property, plant and equipment - - - 30. Intangible assets - - - 40. Defined benefit plans (6,352) 1,715 (4,637) 50. Non-current assets held for sale. - - - 60. Share of valuation reserves of equity-accounted investees - - - Other comprehensive income with transfer to the income statement: 70. Foreign investment hedges: - - - a) changes in fair value - - - b) transfer to the income statement - - - c) other changes - - - 80. Currency translation differences: - - - a) changes in value - - - b) transfer to the income statement - - - c) other changes - - - 90. Cash flow hedges: (407) 135 (272) a) changes in fair value (407) 135 (272) b) transfer to the income statement - - - c) other changes - - - 100. Available-for-sale financial assets: (65,133) 23,173 (41,960) a) changes in fair value 19,927 (5,372) 14,555 b) transfer to the income statement (80,777) 27,114 (53,663) - impairment losses 1,535 (144) 1,391 - profits and losses from sale (82,312) 27,258 (55,054) c) other changes (4,283) 1,431 (2,852) 110. Non-current assets held for sale: - - - a) changes in fair value - - - b) transfer to the income statement - - - c) other changes - - - 120. Share of valuation reserves attributable to equity-accounted investees: 8,788 (2,869) 5,919 a) changes in fair value 1,871 (633) 1,238 b) transfer to the income statement (2,492) 833 (1,659) - impairment losses 2,917 (952) 1,965 - profits and losses from sale (5,409) 1,785 (3,624) c) other changes 9,409 (3,069) 6,340 130. Total other comprehensive income items (63,104) 22,154 (40,950) 140. Comprehensive income (item 10+130) (63,104) 22,154 676,042 150. Consolidated comprehensive income attributable to non-controlling interests - - 26,515
160. Consolidated comprehensive income attributable to the shareholders of the Parent - - 649,527
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Part E - Information on risks and the relative hedging policies
SECTION 1 - Banking Group Risks
In compliance with current regulations, the UBI Group has adopted a risk control system which disciplines and integrates the organisational, regulatory and methodological guidelines of the system of internal controls with which all Group member companies must comply in order to allow the Parent to perform its activities of strategic, management and operational control in an effective and economical manner.
Group member companies co-operate pro-actively in identifying risks to which they are subject and in defining the relative criteria for measuring, managing and monitoring them. The key principles on which Group risk analysis and management are based for the pursuit of an increasingly more knowledgeable and efficient allocation of economic and regulatory capital are as follows: - rigorous containment of financial and credit risks and strong management of all types of risk; - the use of a sustainable value creation approach to the definition of risk appetite and the allocation of capital; - definition of the Group’s risk appetite with reference to specific types of risk and/or specific activities in a set of policy regulations for the Group and for the single entities within it.
The appetite for risk helps to define the strategic positioning of the Group and it is defined in compliance with its mission and its strategy and its business and value creation objectives. The definition of the UBI Group’s appetite for risk includes quantitative and qualitative factors:
from a quantitative viewpoint, the risk appetite is given by the amount of capital that the Bank is willing to put at risk and it helps to define the strategic positioning of the Group;
from a qualitative viewpoint, risk appetite relates to the Group’s desire to strengthen its management and monitoring systems and the efficiency and effectiveness of its system of internal controls. Risk objectives and governance and risk-taking policies are set by the Supervisory Board, with support from specific committees (which have policy-formulation, consultative and fact-finding functions) and from the Chief Risk Officer (CRO), who reports directly to the Chief Executive Officer. The Management Board is responsible for implementing the risk management process. More specifically, it is the duty of the CRO to formally identify the relative framework of reference in order to determine the Group’s “risk appetite framework”. He is responsible for implementing governance and risk management system policies and for the measurement and monitoring of the Group’s exposure to different types of risk. He also helps develop and foster a control culture within the Group and oversees the detection and monitoring of potential failure to comply with legislation and regulations. Management of the risks to which the Group is exposed is carried out by means of a set of policies and the relative regulations to implement them which the Group has developed. The policies that
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govern different types of risk must comply with the definition of the target measures for measurable risk, while measures of an organisational nature must be specified for non-measurable risks. The regulations to implement the management of each type of risk defined in the policies contain details of the risk-taking model, the characteristics of the measurement and monitoring system, the roles and responsibilities of personnel and the operational limits and rules used to determine them.
With Provisions No. 689988 of 19th July 2013 and No. 423940 of 16th May 2012, the Bank of Italy authorised the UBI Banca Group to use the advanced internal rating based (AIRB) approach to calculate capital requirements to meet credit risk for the sub-classes of the retail regulatory segment “exposures backed by residential real estate” and “other exposures (SME-retail)” and for the corporate regulatory segment. The authorisation allows the use of internal estimates for probability of default (PD) and loss given default (LGD) parameters for the RRE (Residential Real Estate - Individuals and Retail Businesses), Retail Other (Retail Businesses) and the Corporate portfolios.
As at the reporting date, the scope of application, in terms of companies, for the approaches authorised is as follows: AIRB: IW Bank1 and UBI Banca2; the remaining legal entities in the Group as well as the new exclusive customers acquired following the merger of the “Bridge Banks” will continue to use the standardised approach until the date of the respective roll-out.
The application for validation, which was approved by the Bank of Italy involves a roll-out plan for the portfolios subject to the AIRB approach which, for each legal entity, contains set deadlines for each supervisory customer segment (“corporate”, “retail – RRE” and “retail – other”) and for different risk indicators (PD, LGD, exposure at default - EAD, maturity - M). The roll-out plan covers the period 2018-2022, while permanent exemption from the application of AIRB was requested for the Group’s foreign banks and branches and also for the following exposures: exposures to central governments and central banks; exposures to supervised intermediaries; exposures to nonprofit institutions; exposures to members of the banking Group; exposures to equity instruments; exposures secured by collateral and counter-guarantees issued by the government, recognised in accordance with the legislation and regulations on credit risk mitigation; exposures backed by credit protection provided by the parties listed above (central governments, central banks and supervised intermediaries); generic types of exposure to economic counterparties not directly attributable to single debtor/creditor counterparties, but mainly to special purpose entities formed for covered bond operations and self-securitisations.
1 In 2015 the company IW Bank Spa was merged into UBI Banca Private Investment Spa and the new company was subsequently renamed IW Bank Spa. 2 The corporate ownership procedures for the creation of a Single Bank were completed with effect from 21/11/2016 for Banca Popolare Commercio e Industria Spa and Banca Regionale Europea Spa and from 20/02/2017 for Banca Popolare di Bergamo Spa, Banco di Brescia Spa, Banca di Valle Camonica Spa, Banca Popolare di Ancona Spa and Carime Spa, with the incorporation of the network banks into UBI Banca which was followed on 10/05/2017 with the acquisition from the Resolution Fund of the “Bridge Banks” (Nuova Banca delle Marche, Nuova Banca Popolare dell’Etruria e del Lazio and Nuova Carichieti) and the subsequent merger as part of the same Single Bank Project of Banca Adriatica (the former Nuova Banca delle Marche) on 23/10/2017 and of Banca Tirrenica (the former Nuova Banca Popolare dell’Etruria e del Lazio) on 20/11/2017 as approved on 11th May 2017 by the Supervisory Board. The stage for the merger of Banca Teatina (the former ex Nuova Carichieti) will be completed in February 2018). 364
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In April 2018 the ICAAP Report and the ILAAP Report as at 31st December 2017 on the capital adequacy self-assessment process and on liquidity respectively are to be sent to the supervisory authority.
When this document is published, the Pillar Three Disclosures will be published at the same time on the corporate website of UBI Banca (www.ubibanca.it – Investor Relations Section). The regulations3 have introduced obligations to publish information on capital adequacy, exposure to risks and the general characteristics of the systems designed to identify, measure and manage them. The information to be provided favours greater transparency in the ways in which banks manage risk. The Bank of Italy has made special tables available in this respect in which the quantitative and qualitative information which banks must publish is classified, thereby making the data comparable.
This part – sections 1 to 44 - furnishes information on the risk profiles listed below, on the relative management and hedging policies pursued by the Group and its activities relating to financial derivative instruments: a) credit risk; b) market risks: − interest rate, − price; − currency; c) liquidity risks; d) operational risks.
Sections 5 and 6 also provide information on the risks pertaining to the insurance companies and other companies in the consolidation.
A report on the general framework of the risks and uncertainties to which the UBI Group is exposed is given in a special section of the Management Report, prepared in compliance with Legislative Decree No. 32 of 2nd February 2007, which implements EC Directive No. 2003/51/EC.
3 Pillar 3 Disclosures are regulated by Part Eight and Part Ten (Title I, Chapter 3) of Regulation EU 575/2013 (the "CRR") and by regulatory and implementation provisions issued by the European Commission. 4 Sections 1 to 4 provide information for the banking group only, except in cases where explicit reference is made to all the companies in the consolidation. 365
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1. CREDIT RISK
Qualitative information
1.1 General aspects
The strategies, policies and instruments for the assumption and management of credit risk are defined at the Parent by the Chief Risk Officer in co-operation with the Chief Lending Officer, with the support and co-ordination of the relative specialist units.
There is a particular focus in the formulation of policies to manage credit risk on maintaining an appropriate risk-yield profile and on assuming risks that are consistent with the risk appetite defined by senior management and, more generally, with the mission of the UBI Group. The priorities in the orientation of the Group's credit management policies are to support local economies, families, businessmen, professionals and small to medium-sized enterprises. The particular attention paid to maintaining relationships established with customers and to developing them over the years is one of the strong points of the Group and it helps to eliminate information asymmetries and offers continuity in customer relationships with a view to long term support. Even in the continuing and difficult current economic situation, the Bank is ensuring that the economy has adequate access to credit by participating, amongst other things, in “Agreements” stipulated between the Italian Banking Association, the Ministry of Finance and trade associations, while preserving the quality of its assets and by employing an extremely selective approach to “non- core” exposures.
With regard to “business” customers in particular, lending rules have been formulated and are being followed for the grant and management of loans, which in operational terms translate into action which ranges from the development to the containment of exposures. These rules are based on a number of drivers as follows: internal counterparty rating (average weighted rating for Groups of companies), linked to the degree of protection provided by any accessory guarantees there may be; degree of engagement of the UBI Group with the counterparty or Group of companies; the economic sector to which the counterparty or Group of companies belongs with a view to: the level of sector risk; the overall level of concentration of the UBI Group in individual economic sectors (with verification also at the level of individual Geographical Macro Area/Business Line/Bank [until the conclusion of the process to merge Banca Teatina into UBI Banca]/Company).
Finally, particular attention is paid to the definition of guidelines for the treatment of new products, with adequate reporting to senior management concerning observance of risk-yield objectives, the calculation of minimum interest rates for granting loans, the quality of borrowers, guarantees received and expected rates of recovery in cases of insolvency.
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1.2 Policies for the management of credit risk
1.2.1 Organisational aspects
In the performance of its traditional banking business, the Group is exposed to the risk that the loans it grants will not be repaid by borrowers when they are due and that partial or full impairment losses must be recognised on them. More specifically the risk profile for lending is sensitive to the performance of the economy as a whole, to the deterioration in the financial position of counterparties (shortage of liquidity, insolvency, etc.), or to changes in their competitiveness, to structural or technological changes in corporate debtors and to other external factors (e.g. changes in legislation, deterioration in the value of financial guarantees and mortgages connected with market performance). A further risk factor to which the Group pays particular attention is the degree of diversification in the lending portfolio among different borrowers and among the different sectors in which they operate.
The organisational model on which the units which manage lending activity is based is as follows: Parent units for centralised monitoring and co-ordination of the other banks/product companies; central units for the grant and monitoring of UBI Banca loans; lines of business specialising in specific customer segments (Top Private Banking, Corporate & Investment Banking, Remote Channels, Global Transaction Banking, etc.); Macro Geographical Areas (hereinafter MGAs) and the General Managements of subsidiaries, to which the following report: - Credit Areas present in each MGA, both with regard to central management units (Loan Grant and Central Credit) and local units (Local Loan Approval Committees and Local Credit Units); - Local Departments; - Branches; - Credit Departments of the product companies.
A Problem Loan Area has been created at the Parent, reporting to the Chief Lending Officer, which is separate and independent of the Credit Recovery Area responsible for bad loan management. Its purpose is for the centralised management of default loans and to strengthen credit management and improve focus on non-performing loans.
As a whole the characteristics of that organisational model ensure strong standardisation between the central units and the corresponding units in the MGAs/Business Lines, with consequent linearity in the processes and the optimisation of information flows. Loan granting activity is also differentiated, at local level, by customer segment (retail/private banking/corporate and institutional) and specialised by the status of the loan: “performing” (managed by retail, private banking and corporate lending units) and “default” (managed by problem loan units). The Parent oversees policy management, overall portfolio monitoring, the refinement of assessment systems, problem loan management and compliance with regulations through the units which report to the Chief Lending Officer, the Chief Risk Officer, the Chief Financial Officer and the Chief Audit Executive.
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For all those entities (individual companies or groups) with authorised credit from banks and companies in the Group (including risk assets involving issuer and related risks), which totals more than €50 million (€25 million for single entities or groups of companies classified as “high-risk” and €35 million for single entities or groups of companies classified as “medium risk”), the Parent must set an operational limit which is the maximum credit that may be authorised (defined as the maximum amount of the credit facilities that meet be extended) for the counterparty at UBI Group level. The responsibility for approving the grant, change, renewal or revocation of operational limits on the basis of specific thresholds lies with the Management Board or the Credit Committee, with the obligation to report to higher bodies in cases of approvals that are significant within the meaning of the “Credit Risk Management Policy”. With regard to possible changes to the operational limits for significant parties within the meaning of Art. 136 of the Consolidated Banking Law, these are subject to compliance with supervisory regulations and therefore required unanimous approval of the Management Board and the vote in favour of all members of the Supervisory Board. The banks and companies of the Group must also request a prior, consultative, non-binding opinion from the Parent for combinations of a) amounts of authorised credit and b) determined internal rating classes. It is the Parent’s duty to assess whether it is consistent with the credit policies of the Group, according to the criteria and parameters laid down in the credit authorisation regulations of the Group. A prior opinion is not required for credit authorisations for single counterparties or groups of companies which fall within the operational limits that have been set.
In consideration of the specific organisation of the UBI Group, the Group decided to adopt a “focused” model for the management of corporate customers in common operating also with Banca Teatina on the basis of which, briefly: - a lead bank, termed the Pivot bank (this is usually UBI Banca) works to centralise decisions relating to credit risk management, pricing and the formulation of commercial policies for customers common to two or more banks, thereby avoiding the generation of a decrease in the overall profitability on the counterparty; - non-Pivot banks abstain from opening new accounts and/or from granting new credit facilities.
A Pivot Bank may be defined as the bank which has the best chances, with its own business units, of arranging new business and/or intensifying existing business with the shared customer, in order to draw the greatest possible benefit for the whole Banking Group. It therefore directs the other banks involved with regard to the most appropriate conduct to follow to improve business with the customer as a whole. The various organisational units in banks and product companies are responsible for credit and commercial activities and they also hold responsibility for monitoring both the activity they perform directly and that performed by those units which report to them. More specifically, responsibility for managing and monitoring performing loans lies in the first instance with the account managers who handle daily relationships with customers and who have an immediate perception of any deterioration in credit quality. Nevertheless, all employees of Group member companies are required to promptly report all information that might allow difficulties to be identified at an early stage or which might recommend different ways of managing accounts, by concretely participating in the monitoring process. In the second instance, the local organisational units responsible for monitoring credit risk are the Credit Quality Management and Monitoring Units of the MGAs5, which carry out monitoring, supervision and analysis of performing positions on both a case by case and a collective basis, where the intensity and degree of detail of the analysis is a function of the risk class attributed to the
5 The credit unit at IW Bank acts both as a credit quality monitoring unit and as a problem loan unit. 368
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counterparties and the seriousness of the performance problems. It is assisted by Local Credit Units. This unit, not involved in loan approval procedures, either on its own initiative or on submission of a proposal, may assess a position and decide (or propose to a superior decision-making unit through its own Credit Area, when the decision does not lie within its powers), to change the classification of performing counterparties to a more serious status. Within the unit reporting to the Chief Lending Officer, the Lending Policies and Monitoring Area supports the Chief Lending Officer in the definition of policies and guidelines for the management and oversight of the Group’s loan portfolio (performing or non-performing) and monitors its quality. It also manages the single loan reporting system at Group level and ensures co-ordination of credit governance for changes in the performance of credit management. Furthermore an “arrears management” system is operational, designed to preserve and protect customer relationships through the prompt structural resolution of lending irregularities (late repayments/unauthorised overdrafts) detected on performing private individual and “small economic operator” customers by providing centralised support contact with customers to normalise problem loan positions.
Management of UBI Banca6 “bad” positions is entrusted to UBI Banca’s Problem Loan and Credit Recovery Area, within the unit reporting to the Chief Lending Officer. This unit has undergone substantial organisational change in recent years, characterised by the following: – segmentation approaches and division into portfolios of bad loans, on the basis of the size and complexity of the loan; – specialisation of recovery processes and the units responsible for it, consistent with the segments and portfolios identified; – monitoring of processes for the management of positions; – setting recovery objectives for account managers and assessment of results; – introduction of strategies designed to optimise recovery on specific portfolios, such as for example, recourse to property operators to value the properties which back mortgage loans.
The credit recovery area consists of services that specialise in work on specific segments: – Small Sum Recovery Service, to manage bad unsecured loans to private individuals for amounts of less than €25,000; – Large Loan Recovery Service, specialising in the management of non-performing loans to both private individuals and businesses for amounts of over €1 million, or with a net book value of over €500,000. Particularly complex types of position are also managed by this service (e.g. pool financing, etc.); – Private Individual and Corporate Recovery Service, for the management of other types of loan which are not included within the scope of the two services just mentioned. This unit is organised into six specialist functions according to geographical criteria. The Problem Loan Area consists of services and functions that specialise in the following: - the Problem Loan Support Function responsible for monitoring the problem loan portfolio (not including bad loans) and for providing support to the Head of the Problem Loan Area; - the Restructuring and Significant Exposures service for the management of counterparties being restructured or classified as “unlikely-to-pay” restructured loans of UBI Banca6 and of UBI Leasing;
6 Except for those generated by Banca Teatina which remain independent until the date of the merger scheduled for February 2018. 369
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- the Individuals, Businesses and Small Sums Credit Service responsible for the management of other non-performing counterparties (with the exclusion of bad loans).
The organisational area headed by the Chief Risk Officer contains the following areas: Capital & Liquidity Risk Management and Credit Risk Management which, through the specific functions that report to them and each within their own areas of responsibility, perform the following: – define criteria and methodologies for the development of internal rating models – probability of default (PD), loss given default (LGD) and exposure at default (EAD) – in line with regulatory requirements and best practices; – define corporate methods for assigning counterparty ratings; – produce periodic analyses which illustrate the risk profile of the total loan portfolio and the commercial sub-portfolios at Group level and at the level of individual legal entities, in terms of distribution by rating class, LGD and Expected Loss, rates of loan deterioration and concentration in the largest customers; – develop methods, in co-operation with the unit that reports to the Chief Financial Officer, for calculating collective provisions to be recognised in the financial statements on the basis of internal credit ratings (in application of IFRS accounting standards and the new standard IFRS 9 introduced with effect from 01/01/2018) for UBI Banca and loan default rates for the other Group companies; – calculate default rates for the Group and define the relative calculation methods for individual legal entities; – provide input parameters (PD and LGD) for product pricing activities.
A specific unit is also in place with regard to credit risk for non-performing loans, in light, amongst other things, of the new “Guidance to banks on non-performing loans”7 issued in March 2017 by the European Central Bank which requires banks to formulate a strategy for non-performing loans8 with the aim of defining governance to manage them and reduce their amount. With regard to the risk control function in particular, the guidance outlines a specific role of second level control both with regard to overall management of the NPL portfolio and with regard to banks putting remediation plans place. Furthermore, with regard to regulations on controls9, the risk control function is also responsible for monitoring the overall portfolio both by large-scale verifications and also by analysing individual positions with regard to credit processes for the monitoring, classification and write down of loans and credit recovery. In order to ensure compliance with Group regulations, a unit is in place under the Chief Risk Officer to carry out second level controls. Furthermore, the units headed by the Chief Risk Officer play a key role within the Basel 2 project: – they formulate guidelines on credit risk matters generally and also with regard to periodic reporting to the Supervisory Authority; – they draw up roll-out plans for models implemented at the Parent; – they monitor the extent to which regulatory provisions are covered by internal rating models; – they co-ordinate activities for the development and maintenance of internal rating processes and systems; – the formulate policies for the assumption and management of credit risk.
7 Guidance to banks on non-performing loans (NPLs), the European Central Bank, March 2017. 8 Non-performing loans include, past due, unlikely-to-pay and bad loans. 9 Cf Circular No. 263/2006 (15th update) and Circular No. 285 of 17th December 2013. 370
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More specifically, the Credit Risk Management Area formulates the operational details of policies by preparing regulations to implement them and also detailed documents, both for the Parent and for the single legal entities, which illustrate aspects relating to the definition, use, monitoring and reporting of risk in relation to compliance with the guidelines and the indicators that are set. These documents are implemented by the corporate units in the various legal entities of the Group, which must have a knowledge of the risk profile and the risk management policies defined by the senior management of the Parent and which must contribute, each within the scope of their responsibilities, to the implementation, consistent with their corporate realities, of the risk management strategies and policies decided by the senior management of the Parent. Finally, the Area also provides specialist support for the operational implementation of the policies and regulations for them, concerning the assumption and management of credit risk and it periodically monitors their consistency with Group operations, and proposes corrective action if necessary.
Lastly, the units that report to the Chief Risk Officer then define in detail, and undertake, active credit portfolio management action in order to take initiatives to mitigate, monitor and transfer credit risk, assessing its impact on economic capital and on regulatory capital requirements.
1.2.2 Management, measurement and control systems
The Credit Risk Management Area is responsible for Group reporting on credit risk in order to monitor changes in the risk attached to lending for individual Macro Geographical Areas (MGAs)/Lines of Business/regulatory portfolios. The reports of single Group companies are submitted quarterly to Boards of Directors. For UBI Banca and the main product companies those reports describe the distributions by regulatory portfolio and by internal rating classes and risk parameters. They also show changes in average risk connected with the Corporate Market (Core and Large portfolios), the Retail Market (Business and Individuals portfolio) the Private Banking Market, and Other markets, while for the product companies the reports describe risks attaching to the various types of exposure and products marketed. Special reports on specific matters are also prepared on the main components of credit risk.
The set of models which constitute the Group’s internal rating system is managed by the area that reports to the Risk Management Officer with the support of the Credit Area.
The system at present involves the use of automatic models for medium to large-size businesses, private individuals and small-sized businesses.
Ratings are calculated using a counterparty approach and they are normally reviewed and updated once a year. For the “exposures to corporates” supervisory portfolio, the PD models developed by the UBI Group provide an overall assessment of counterparty risk through a combination of a quantitative and a qualitative component. The quantitative component is developed and processed statistically: the technique selected is that of logistic regression, normally used to assess cases where the dependent variable (target) is dichotomous, either default or performing. The qualitative component of the rating model is based on information acquired by the account manager or a central
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unit of UBI Banca10 for large corporate positions and it meets the need to incorporate qualitative factors and information on the client that cannot be automatically standardised in ratings which accompanies and completes the quantitative analyses, in order to detect trends and assess creditworthiness more accurately. The same considerations described above apply to retail exposure classes (for retail businesses and private individuals) except that the qualitative component is not considered. The quantitative component for granting and monitoring loans assesses the credit rating for small-size companies, by integrating it with geo-sectoral, economic and financial, and internal and external performance type assessments. The quantitative component for granting mortgages to private individuals assesses counterparty risk by integrating it with information on personal details and on the product, while the quantitative component for monitoring mortgages to private individuals assesses the credit rating by integrating it with information on personal details and external and internal performance.
The output of the models consists of nine rating classes that correspond to the relative PDs, calibrated by comprising default positions up to December 2015.
The determining parameters for LGD are as follows: 1) Bad Loan LGD 2) Downturn LGD 3) Danger Rate. 1) Bad Loan LGD is calculated as the one’s complement of the ratio of the net recoveries observed during the life of a bad loan position and exposure when the classification as bad loan occurs inclusive of the principal reclassified and the interest that has been capitalised. In accordance with the definition of economic LGD given in supervisory regulations, credit recoveries are discounted to present values at a risk-adjusted rate, which reflects the time value of money and a risk premium calculated on the basis of the volatility of credit recoveries observed compared to a preset market benchmark. The historical depth of the data observations for the estimate of Network Bank and UBI Banca Non-performing LGD always guarantees at least eight years of closed non-performing loans. The date on which the last bad loan position was closed is 31/12/2015. 2) The approach adopted for the Downturn LGD was designed to take account of adverse economic conditions for recovery expectations, based on the identification of a period of recession on the basis of the current economic scenario and incorporating historical and prospective macroeconomic trends. 3) The Danger Rate parameter is used to correct the LGD estimated on bad loans only, by considering the following factors: 1) the composition of defaulted loans, because not all new expected defaults are bad loan positions that come directly from the performing category; 2) migration between default categories, because not all defaults that are not in the bad loan category arrive at the most serious and loss-incurring bad loan status; 3) change in the exposure because the exposure may change over time for defaulted positions which migrate to the bad loan category. The historical depth of the data observed for estimating the Danger Rate corresponds to the period January 2007 – December 2015 for the corporate segment and January 2009 – December 2015 for the retail regulatory segment. Credit processes within the Group work with information channelled from the rating system as described in detail below.
10 This solution was adopted in order to ensure centralised management by specialists in the assessment of large corporate positions in conformity with internal Group assessments. 372
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The operational units involved in the loan grant and renewal process use internal credit ratings, which constitute necessary and essential evaluation factors for credit authorisations when these are assessed and revised. Powers to authorise loans are based on the risk profiles of the customers or the transactions given by the credit rating and by the expected loss, while they are managed using Pratica Elettronica di Fido (electronic credit authorisation) software. The credit ratings are used, amongst other things, to monitor loans both by the management reporting system and in the information made available to units involved in the lending process. The assignment to rating classes that are different from those calculated by the internal rating system on the basis of the models adopted is made by proposing an override on the rating for which the methods of presentation, examination and validation are different for cases of: higher (or better) rating override; lower (or worsen) rating override.
These changes are made on the basis of information not already considered by the rating model, not adequately weighted by the model or where it is intended to anticipate the future influence of the information.
In addition to the process for the disbursement, renewal and monitoring of credit and to the departmental reporting process just described, the processes directly affected by internal ratings or in which internal estimates of PD and LGD are described below.
The calculation of collective impairment losses on performing loans The International Accounting Standards Board (IASB) is the body responsible for issuing international accounting standards. With the objective of revising procedures for calculating impairment losses in order to overcome the limits found in the past (late recognition of losses) and in order to simplify decisions relating to the classification and recognition of financial instruments, it decided it was necessary to amend international accounting rules for financial instruments and on 24th July 2014 it issued a new standard, IFRS 9 “financial instruments”, to replace IAS 39.
The Group therefore launched substantial projects designed to identify the strategic and operational impacts and consequently to make changes to processes and procedures to make them compliant with the new standard as of 01/01/2018, the date on which it comes into force.
The new IFRS 9 standard introduces substantial changes in the lending area:
changeover from the present loss approach calculated over a 12 month time horizon to an expected loss approach calculated over the entire useful lifetime of the loan; classification of loans in three different stages for which different methods for calculating losses to be recognised are used. Stage one contains performing positions which have undergone no significant increase in credit risk11 and which are otherwise positioned in stage two. Stage three contains all positions classified as non-performing according to the current rules employed by the Group.
11 The main factors defined by the UBI Group to identify a significant increase in credit risk with respect to the origination (approval of the extension of credit) and which therefore determine the passage to stage two are linked to the occurrence of one or more staging trigger events, verified monthly (deterioration of the lifetime probability of default; classification as forborne; the existence of an exposure continuously past due or in arrears at counterparty level for at least 30 days, with the amount 5% higher than the overall exposure of the position). 373
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One of the changes introduced by the new IFRS 9 standard is the inclusion of forward looking factors in the procedures for assessing performing positions.
With regard, on the other hand, to activities for assessing loans in 2017, the calculations methods used to quantify collective impairment losses on performing loans are still those that are compliant with the IAS 39 standard and they are different for Banca Teatina, which is soon to be merged into the Parent, and for UBI Banca and the main product companies of the Group.
More specifically a method is employed for loans (and unsecured guarantees) to customers at UBI Banca based on internal estimates of probability of default (PD) associated with internal ratings and estimates of loss given default (LGD). The latter uses operational corrective factors with respect to the parameters used for regulatory purposes. It should be noted that the percentages of impairment resulting from the application of the PD and LGD are also used for “irrevocable commitments of uncertain use” to which the supervisory credit conversion coefficient is also applied.
For write-downs at Banca Teatina, collective impairment on non-performing positions is based on expected losses, where the PD and LGD parameters are calculated by an operational internal rating system provided by the outsourcer CSE and they are integrated with a case-by-case assessment for positions with total gross exposure of greater than a determined limit (currently set at €2 million).
An approach based on default rates for loans calculated internally and on non-regulatory internal estimates of LGD is used for those Product Companies most subject to credit risk and for a portion of UBI Banca positions relating to personal loans of the former B@nca 24-7. More specifically with regard to LGD, different internal estimates are used at UBI Leasing for different types of product and sales channel, while expert values are applied for UBI Banca – former B@nca 24-7, estimated on former B@nca 24-7’s own data where significant and in other cases values are borrowed from similar products sold by the Parent.
Calculation of minimum theoretical price levels for loans to customers The minimum theoretical price is the break-even price which ensures remuneration of lending risk such as expected loss and unexpected loss, or in other words the cost of the capital absorbed in accordance with prudential supervisory regulations. The minimum theoretical price corresponds to a level of profit adjusted for risk consistent with value creation approaches in place in the UBI Banca Group.
Value creation, capital allocation and incentive schemes As part of its capital allocation processes, the UBI Group applies methodologies to assess risk adjusted performance that are designed to measure and summarise the effects of economic, asset, risk (recognition of impairment) and capital (risk weighted assets and expected loss net of impairment losses recognised) variables that impact the creation of wealth for shareholders. The creation of value is fully incorporated in incentive schemes as a determining factor in triggering incentives.
Stress tests In order to assess vulnerabilities in its capital and liquidity management, the UBI Banca Group has developed a set of quantitative and qualitative techniques with which it assesses its exposure to 374
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exceptional, but plausible events. These techniques, termed stress tests, measure impacts for the bank in terms of risk resulting from combined changes in operating and financial variables, under adverse scenario hypotheses. The tests regard credit risk to a large extent. Stress tests allow the Group’s resilience to be measured by simulating and estimating the impacts of adverse situations with account taken of “propagation” mechanisms. They furnish intermediaries with important indications of their exposure to risks and to instruments, the adequacy of the relative mitigation and control systems and their ability to withstand unexpected losses also from a forward looking and planning viewpoint.
The UBI Banca Group performs three types of stress test: global stress tests: these are tests organised by the supervisory authorities (EBA, ECB, etc.) designed to test the resilience of banks under adverse market conditions following a methodological framework common to all the institutions involved and applied to the different types of risk simultaneously. That common basis, both in terms of the relative macroeconomic scenario and the methodological framework, allows the competent authorities to carry out a standard assessment across different legal entities that undergo the stress tests; regulatory stress tests: the UBI Banca Group carries out internal stress tests as part of the preparation of its recovery plan and its ICAAP-ILAAP report (at least annually) as required by the applicable regulations; specific stress tests: the Group assesses the impact that stress on a single risk may have on capital adequacy, liquidity and profitability. Specific stress tests are conducted by using sensitivity analysis to assess the impacts of changes in the risk factors that are tested.
Activity also continued in 2017 to revise, update and adopt policies and regulations for credit risk management. Existing policies are listed below together with the principal contents.
Credit risk management policy “UBI Group credit risk management policies” exist within the Group, inclusive of the relative regulations to implement them and documents to set limits both for the Group and for single banks and companies. This regulation allows a common approach to be followed for the assumption of risk and procedures to manage it across the entire Group and it standardises risk indicators, while taking account of the specifics of each class of risk. The policy gives details of limits and it defines the procedures for assuming risk for the following types of risk:
- Credit risk: the risk of incurring losses resulting from the default by a counterparty with whom a position of credit exposure exists. Credit risk can be divided into the following two types:
- credit risk relating to business with ordinary customers, with a specific focus on credit risk for structured finance operations; - credit risk relating to business with institutional customers and with ordinary customers resident in high risk countries; - concentration risk: risk resulting from the existence of large exposures to single counterparties or groups of companies.
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The drivers used for monitoring were updated for 2017 in view of the project to merge the network banks into UBI Banca in order to consider the reorganisation of the Group’s geographical structure (Macro Geographical Areas), the lines of business specialised on the basis of customer segments (Top Private Banking, Corporate and Investment Banking), the management of specific business areas (Remote Channels and Global Transaction Banking) and the maintenance of product companies in specialised business areas.
Ordinary customers Standards, principles and limits to manage credit risk are set for ordinary customers both at consolidated level and for individual legal entities, on the basis of the availability of risk drivers generated by the internal rating model (rating class, probability of default and loss given default). The definition of the limits is based on a series of indicators expressed in terms of: capital allocation, values for maximum risk (defined as maximum expected loss and target [early warning threshold] and as credit loss), limits on the assumption of risks in terms of the distribution of exposures by credit rating class and the management of credit quality. The Credit Risk Management Area prepares quarterly reports on compliance with the indicators set for all the areas concerned and for the governing bodies of the Parent and the companies in the Group.
Structured Finance A specific focus was placed on structured finance business. The term structured finance operations refers to non-standard finance operations, formulated on the basis of the specific requirements of customers, usually performed for industrial or infrastructure investments, or for the acquisition of listed and unlisted companies that may be organised by institutional investors. For these operations, amounts are set for the total and at the level of the sub-portfolios consisting of acquisition finance transactions, assigned a rating by the internal corporate model, and of project finance specialised lending, assigned a rating in terms of target risk and maximum risk (early warning threshold), along the lines of the criteria applied to ordinary customers. Limits, early warning thresholds and targets have been identified on the basis of internal ratings, distinguishing between acquisition finance transactions and project finance operations and they are classified into three categories: “investment grade”, “speculative grade” and “highly speculative grade”.
Institutional counterparties and country risk For institutional and ordinary customers resident in high risk countries, the risk management policy, the relative regulations to implement it and the documents containing the limits set standards, principles and limits designed to ensure proper management of the entire process of the assumption, management and monitoring of credit risk in this area. Limits are set for maximum exposure to credit risk as follows: a maximum limit in terms of the degree of risk (minimum rating) for institutional counterparties and for countries;
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maximum exposure limits: an overall exposure limit (total amounts drawn) formulated by the different risk classes of the exposures (combinations of counterparty ratings and country ratings) at Group and individual company level;
single name concentration limits: maximum limits on total authorised credit for each borrower for the different risk classes (combinations of counterparty ratings and country of residence ratings) defined at group level;
country concentration limits: maximum limits on total authorised credit for each country defined at Group and individual company level.
Concentration risk Concentration risk is dealt with as part of second pillar risks. The policy sets a specific capital requirement to take account of the higher sensitivity of a more concentrated portfolio. Single name concentration risk is addressed by setting maximum exposure limits for single counterparties in order to limit risks of instability that would arise from high rates of concentration for loans to major borrowers if one of these should default. The limits set are based on counterparty ratings and the type of transaction.
The contents of the policy are set out in regulations and in a document which gives details of limits, the latter approved by the Management Board.
Policy for the distribution of mortgages through brokers This policy regulates the procedures for the use of external distribution networks for granting mortgages to non-captive customers in order to mitigate potential credit, operational and reputational risks. The policy defines the following:
minimum capitalisation limits for the brokerage companies and a prohibition on direct agreements with mortgage brokers and real estate agents;
minimum contents for agreements between distribution networks and UBI Group companies including, for example, the specification of a minimum list of risk indicators to be monitored for which there must be a provision in the agreement that requires the network to remain within certain limits. Once those limits are exceeded penalties are applied (if maximum risk limits are exceeded) or bonuses are paid (if particularly low levels of risk are achieved) to the distribution network;
an obligation by banks entering into agreements to put a process in place to monitor changes in the risk indicators just mentioned, with support from the Parent.
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Policy on risks resulting from securitisations
The “Policy on risks resulting from securitisations”12 sets guidelines for the Group to manage risks relating to securitisations defined as “the risk that the underlying economic substance of a securitisation is not fully reflected in decisions made to measure and manage risk”. This risk relates to both conventional and synthetic securitisations originated by the Group which involve the transfer, at least partial, of the risk attaching to the securitised assets. The process of implementing a securitisation must involve formally stating the objective of the transaction and the role played by the UBI Group in it, quantification of the impacts on the financial statements and the tax aspects, consistency with development guidelines for the loan portfolio and verification that it is fully compliant with the requirements contained in supervisory regulations and other internal and external regulations. The UBI Group will make sole use of agencies recognised by the Bank of Italy (ECAI – External Credit Assessment Institution) when assigning ratings to bonds and/or the tranches issued.
Policy for the management of guarantees acquired for credit risk mitigation purposes The UBI Group used a “Policy on residual risk” for 2017 which formulates strategic orientations relating to the management of “residual risk”, defined as the risk of incurring losses resulting from the unforeseen ineffectiveness of established methods of mitigating credit risk used by the UBI Group. The policy contains a definition of the process of control over the acquisition and use of techniques to reduce credit risk in order to mitigate that risk. That process is centred on the definition of appropriate risk management processes designed firstly to ensure the verification of compliance with supervisory regulations, distinguishing between:
“general requirements”, such as “legal certainty”, the “speed of implementation” and “organisational requirements”;
“specific requirements”, with particular attention to revaluation and monitoring of collateral and guarantees and verification of the absence of substantial correlation between the ability of the debtor to repay and the collateral. For 2018, the Credit Risk Management Area will introduce a new “Policy for the management of guarantees acquired for credit risk mitigation purposes” to replace the current “residual risk” policy. By making reference to risks identified in the documents “RAF - Risk appetite framework” and “RAF - Risks in the UBI Banca Group” this policy will establish guidelines for the governance of guarantees acquired both at the initial stage and at the management and monitoring stage. The policy will also establish the monitoring process and the relative reference indicators for “residual” risk (i.e. guarantees relating to credit risk mitigation), which will fall within the risks envisaged by supervisory regulations with reference to Pillar II considered not measurable and therefore not subject to the allocation of internal capital. With regard to credit risk mitigation, the policy will verify the following: the consistency with the regulations that govern the management of credit risk mitigation instruments, both before their
12 With the update of the 2017 Risk Appetite Framework, amendments will be made to this policy in a specific section of the “Policy on Residual credit risk”. 378
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approval by the competent governing bodies and continuously, in compliance with the guidelines set; the effective application of internal regulations “ex post”; and the effectiveness and efficiency of the management model for guarantees within the framework of second level credit control activities. In this context strategic orientations will be defined relating to compliance with prudential criteria for the admissibility of guarantees, the minimum requirements for the management of those acquired and the indicators to be monitored as significant for the proper management of CRM activities.
Policy on internal controls to manage risk assets and conflicts of interest with regard to connected parties.
The “Policy on internal controls to manage risk assets and conflicts of interest with regard to connected parties”, which implements Bank of Italy recommendations on “risk weighted assets and conflicts of interest with regard to connected parties”. Connected counterparty risk arises from the fact that “the closeness of persons to the decision-making centres of a bank might compromise the objectivity and impartiality of decisions concerning the grant of loans to, and other transactions with, those persons, which may result in possible distortions in the resource allocation process, the exposure of the bank to inadequately measured or monitored risks, and potential harm to depositors and shareholders”. The policy defines guidelines and criteria for the adoption by the Group as a whole of appropriate organisational structures, internal control systems and specific internal policies to manage that risk within two areas defined by the regulations: prudential limits and approval procedures. Finally, in order to take account of potential risks of conflicts of interest caused by counterparties that do not, strictly speaking, fall under the definition of connected parties, but whose work could in any case have a significant impact on the bank’s risk profile (e.g. “key staff”, which is to say employees or associate workers of Group companies who are not related parties, but to fall within the perimeter of the “identified staff”), the UBI Group has adopted – in line with provisions on connected counterparties – appropriate processes to manage transactions in which such parties could have a direct or indirect interest, personally or otherwise.
Policy to manage equity risk
The “Policy to manage equity risk” completes the adoption of policies to manage the various risks to which the UBI Group is exposed in terms of its operating and organisational characteristics and it incorporates provisions issued by the Bank of Italy on the subject of “Equity investments that may be held”. Equity risk is defined as “Exposures to equity instruments” assumed by the Group in relation to the following: - equity investments held directly, indirectly and synthetically within financial and non- financial companies (equities, UCITS with equity shares as the underlying instruments, hedge funds, options and derivatives on equity instruments, etc.); - private equity activities; - debt instruments that constitute subordinated liabilities in financial companies; 379
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- other equity instruments, and that is debt and non-debt exposures that confer a residual subordinated credit.
With the adoption of this policy the Group has put appropriate controls in place designed to: - contain the risk of locking up too much liquidity as a result of making equity investments in financial and non-financial companies; - with specific reference to non-financial companies, promote risk and conflicting interest management that complies with the criterion of sound and prudent management.
Finally, a specific focus was placed on private equity business which consists of acquiring stakes in a target company either by purchasing existing shares from third parties or by subscribing new share issues to bring new capital to the target company. More specifically the mission and relative strategies are specified, distinguishing between the acquisition of direct interests and the subscription of units in private equity funds formed by entities within the Group or outside it.
1.2.3 Techniques for mitigating credit risk
The Group employs standard risk mitigation techniques used in the banking sector by acquiring collateral such as properties and financial instruments as well as personal guarantees from counterparties for some types of loan. Determination of the total amount of credit that can be granted to a given customer and/or group of companies to which the customer belongs takes account of special criteria for assigning weightings to the different categories of risk and to guarantees. Prudent "haircuts" are applied to the estimated value of collateral depending on the type of security.
The main types of security accepted by the Group are as follows: - real estate mortgage; - pledge.
In the case of mortgage collateral, a distinction is made between specially regulated “land” mortgage loans and ordinary mortgage loans with regard to the amount of the loan, which in the former case must comply with limits set in relation to the value or the cost of the assets used as collateral. Pledges represent the second general class of collateral used and different possible types of pledge exist within the Group depending on the instrument which is used as the collateral. They are as follows: - pledges on dematerialised financial instruments such as for example government securities, bonds and shares in listed companies, customer portfolio managements, bonds of the Group, etc.; - pledges of material securities, e.g. valuables and/or sums deposited on current accounts or bearer or named savings accounts, certificates of deposit, units in mutual funds, shares and bonds issued by unlisted companies; - pledges on insurance policies; - pledges of quotas held in limited liability companies, which by law must take the form of a notarial deed and are subject to registration.
A pledge on the value of financial instruments is performed using defined measurement criteria and special “haircuts” which reflect the variability in the value of the security pledged. In the case of
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financial instruments denominated in foreign currency, the “haircut” applied for the volatility of the exchange rate must be added to that for the volatility of the security. As concerns pledges on rights arising from insurance policies, these may only be constituted on life insurance policies for which the regulations expressly allow the possibility of a pledge in favour of the Bank and only if determined conditions are met (e.g. once the time limit for exercising redemption rights has expired, policies which pay only in “case of death” must be excluded, and so forth). Special measurement criteria and “haircuts” are also defined for insurance policies.
In order to ensure that general and specific requirements are met for recognition of collateral, as part of its credit risk mitigation techniques (CRM) in accordance with supervisory regulations, for prudent purposes the UBI Group has performed the following: - redefined credit processes relating to the acquisition and management of collateral. With particular regard to mortgages, it is compulsory to enter all data on a property needed to render collateral eligible in account manager software systems. Particular attention was paid to the compulsory nature of expert appraisals and to the prompt recovery of the relative information, including notarial information (details of registrations), essential for guarantees to be accepted; - retrieved, for existing mortgages, all the information required to ensure that they are admissible, in line with regulations in terms of specific requirements.
1.2.4 Non-performing financial assets
The classification of the problem loan portfolio complies with official regulations and can be summarised as follows: "Non-performing exposures past due and/or in arrears", "Unlikely-to-pay loans", "Bad loans". This classification was revised at the beginning of 2015 in line with supervisory provisions.
In addition to those classes, there remains a type of problem loan in respect of “country risk” for unsecured exposures to institutional and ordinary customers belonging to countries considered as “at risk” as defined by the supervisory authority. Exposures previously classified as “impaired” and “restructured” are now comprised within the “unlikely-to-pay” class. These subdivisions nevertheless remain for management purposes. With regard to unlikely-to-pay exposures (formerly “impaired”), in order to optimise management and solely for operational purposes, these are divided into positions defined as: (i) "Unlikely-to-pay Operational”, for which it is considered that a temporary situation of objective difficulty can be overcome in a very short period of time; (ii) "Unlikely-to-pay Recoverable”, for which it is felt best to disengage from the account with credit recovery out-of-court over a longer period of time; and (iii) "Unlikely-to-pay Restructured" defined as exposures for which as a result of a deterioration in their financial and economic conditions the borrower obtains changes to the original contracted terms and conditions which in formal concrete terms consist of restructuring measures (normally arrangements with creditors, agreements to restructure debts and turnaround plans).
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Furthermore, “Non-performing exposures past due and/or in arrears” are subject to monitoring to decide, within a maximum operational period of 180 days, whether to reclassify them as either “performing” or into another problem loan class.
The management of problem loans is performed on the basis of the level of risk. It is normally performed by the organisational units responsible for the management of problem loans of the banks (UBI Banca Spa and IW Bank Spa) and the product companies (UBI Leasing Spa, UBI Factor Spa and Prestitalia Spa). With specific reference to the problem loans of UBI Banca Spa (i.e. non-performing loans, but excluding bad loans), for management of positions classified as follows: "non-performing exposures past due and/or in arrears" and positions classified as “unlikely- to-pay” small amount (less than €1,000 for the UBI Group) is the responsibility of units in the distribution network; “unlikely-to-pay” for amounts equal to or greater than €1,000 are managed centrally by the UBI Problem Loan Area (which reports to the Chief Lending Officer). In this respect, a new approach has been introduced since February 2017 (when the operation to merge the former network banks into UBI Banca Spa was completed) for the centralised management of non- performing counterparties which involves specialised treatment of the positions based on the “clusters” to which they belong, with dedicated account managers (“NPL Account Managers”) who operate with the aim of regularising the positions and supervising the credit quality of the portfolios assigned to them. We also underline that the Problem Loan Area at the Parent manages counterparties of UBI Banca Spa undergoing restructuring classified as Restructured Unlikely-to-pay (as well as those of UBI Leasing on the basis of a specific mandate). In this respect specialist units operate within the Problem Loan Area named UBI- Restructuring Units, which manage each individual area of the country.
Management of UBI Banca Banca “bad loans” is carried out by the UBI Credit Recovery Area (which reports to the Chief Lending Officer), which also manages the bad loan positions of IW Bank Spa and Prestitalia Spa on the basis of a specific mandate. As on the other hand concerns the “bad loan” positions of the remaining product companies (UBI Leasing Spa and UBI Factor Spa), management of these is carried out by the relative units in the Credit Departments of these companies, which are required to request a consistency opinion from the Parent UBI Banca Spa on operational proposals where the exposures are considerable. As already mentioned in the preceding pages, in order to ensure greater effectiveness in recovery action these units are highly specialised both in terms of credit recovery processes and the staff responsible for credit recovery activities. Assessment of the appropriateness of impairment losses recognised is performed on a case-by-case basis for individual positions to ensure adequate levels of cover for expected losses. The analysis of non-performing exposures is performed continuously by the single operational units which manage risks and by the Parent. The resolution of difficulties by counterparties is a determining factor for the return of positions to “performing” status. This event occurs principally and above all for accounts which are classified as "Non-performing exposures past due and/or in arrears" and as “Unlikely to pay”.
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Quantitative information
A. Credit quality
A.1 Non-performing and performing credit exposures: amounts, impairment losses, changes, economic and geographical distribution
A.1.1 Distribution of financial assets by portfolio and according to credit quality (carrying amount)
Non- Performing Unlikely-to -pay perfo rming Performing P o rtfo lio /quality B ad lo ans pas t-due To tal lo ans pas t-due assets exposures exposures 1. Available-for-sale financial assets - 16,793 - - 9,294,603 9,311,396
2. Held-to-maturity investments - - - - 5,937,872 5,937,872
3. Loans and advances to banks - - - 42,338 7,793,664 7,836,002
4. Loans and advances to customers 4,035,614 3,969,935 155,194 6,023,526 78,153,814 92,338,083
5. Financial assets designated at fair value - - - - 11,271 11, 2 7 1
6. Financial as s ets held fo r s ale ------
31.12.2017 4,035,614 3,986,728 155,194 6,065,864 101,191,224 115,434,624
31.12.2016 3,987,303 3,948,245 133,394 4,043,395 90,054,343 102,166,680
As at 31st December 2017, forborne exposures amounted to €5.2 billion net (of which €2.9 billion non-performing and €2.3 billion performing) and they related to “Loans and advances to customers”. See table A.1.6 for further details.
The following table shows the composition by age of past due performing loans to customers:
P erfo rming pas t-due expo s ures to cus to mers To tal Past due Past due 3 Past due P o rtfo lio s /Cre dit quality P as t due o ver (net under 3 months to 6 over 6 1 ye a r exposure) months months months to 1 ye ar T o t a l 3 1. 12 . 2 0 17 5,610,722 240,576 105,031 67,197 6,023,526
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A.1.2 Distribution of credit exposures by portfolio and by credit quality (gross and net amounts)
No n-perfo rming as s ets P erfo rming as s ets To tal P o rtfo lio s /quality Portfolio S pe c ific impairme nt (net expo s ure) Gros s expo s ure Net exposure Gross exposure impairment Net exposure losses losses
1. Available-for-sale financial assets 31,193 (14,400) 16,793 9,294,603 - 9,294,603 9,311,396
2. Held-to-maturity investments - - - 5,937,872 - 5,937,872 5,937,872
3. Loans and advances to banks - - - 7,836,002 - 7,836,002 7,836,002
4. Loans and advances to customers 12,652,004 (4,491,261) 8,160,743 84,588,484 (411,144) 84,177,340 92,338,083
5. Financial assets designated at fair value - - - X X 11,271 11,271
6. Financial as s ets held fo r s ale ------
31/12/2017 12,683,197 (4,505,661) 8,177,536 107,656,961 (411,144) 107,257,088 115,434,624
31/12/2016 12,549,293 (4,480,351) 8,068,942 94,476,608 (378,870) 94,097,738 102,166,680
Assets with markedly poor credit Other assets quality P o rtfo lio s /quality Accumulated Net exposure Net exposure losses
1. Financial assets available for trading 1,983 7,745 895,418 2. Hedging derivatives - - 169,907 31/12/2017 1,983 7,745 1,065,325
Details of write-offs performed during the year on the various portfolios of non-performing financial assets are given in table A.1.7.
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A.1.3 Banking Group - On- and off-balance sheet exposures to banks: gross and net amounts, by time past due
Gross exposure
No n-perfo rming as s ets S pe c ific P o rtfolio Type o f expo s ure/amo unts impairme nt impairme nt Net exposure Performing lo s s e s losses More assets 3 months to 6 6 mo nths to 1 Up to 3 mo nths than 1 mo nths ye ar ye ar
A. On-balance sheet exposure a) Bad loans - - - - X - X - - o f which: fo rbo rne expo s ures - - - - X - X - b) Unlike ly to pa y lo a ns : - - - - X - X - - o f which: fo rbo rne expo s ures - - - - X - X - c) Exposure past due non-performing (previously termed "dete - - - - X - X - - o f which: fo rbo rne expo s ures - - - - X - X - d) P erforming past due exposures X X X X 42,338 X - 42,338 - o f which: fo rbo rne expo s ures X X X X - X - - e) Other performing exposures X X X X 8,006,334 X - 8,006,334 - o f which: fo rbo rne expo s ures X X X X - X - - To tal A - - - - 8,048,672 - - 8,048,672 B. Off-balance s heet expo s ures a) No n-perfo rming - - - - X - X - b) P erfo rming X X X X 576,220 X (494) 575,726 To tal B - - - - 576,220 - - 494 575,726 To tal A+B - - - - 8,624,892 - (494) 8,624,398
A.1.4 Banking Group - On-balance sheet credit exposures to banks: changes in gross non- performing exposures
Non- Unlikely-to -pay Des criptio n/catego ries Bad lo ans perfo rming lo ans pas t-due exposures A. Initial gross exposure - 129 - - o f which: expo s ures trans ferred no t dereco gnis ed - - - B. Increases - - - B.1 transfers from performing exposures - - - B.2 transfers from other categories of deteriorated exposures - - - B.3 other increases - - C. Decreases - (129) - C.1 transfers to performing exposures - (129) - C.2 write-offs - - - C.3 payments received - - - C.4 from disposals - - - C.5 losses on the disposal - - - C.6 transfers to other classes of non-performing (previously termed "deteriorat - - - C.7 other decreases - - - D. Final gros s expo s ure - - - - o f which: expo s ures trans ferred no t dereco gnis ed - - -
A.1.4.a Banking Group - On-balance sheet credit exposures to banks: changes in gross forborne exposures by credit quality
No items of this type exist in the UBI Banca Group.
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A.1.5 Banking Group - On-balance sheet non-performing credit exposures to banks: changes in total impairment losses
Des criptio n/catego ries Bad lo ans Unlikely-to -pay lo ans No n-performing pas t-due expo s ures
Of which: Of which: Of which: fo rbo rne To tal fo rbo rne To tal fo rbo rne To tal exposures exposures exposures
A. To tal initial ne t impairme nt - - (127) - - - - of which: exposures transferred not derecognised ------B. Increases ------B .1 impa irm e nt lo s s e s ------B.2 losses on the disposal ------B.3 transfers from other classes of non-performing exposure ------B.4 other increases ------C. Decreases - - 127 - - - C.1 unrealised reversals of impairment losses ------C.2 realised reversals of impairment losses ------C.3 profits on the disposal ------C.4 write-offs ------C.5 transfers to other categories of non-performing exposures ------C.6 other decreases - - 127 - - - D. To tal c lo s ing ne t impairme nt ------of which: exposures transferred not derecognised ------
A.1.6 Banking Group - On- and off-balance sheet exposures to customers: gross and net amounts, by time past due
Gross exposure Specific impairment P o rtfo lio Type o f expo s ure/amo unts No n-perfo rming as s ets Net exposure losses impairme nt lo s s e s Up to 3 3 mo nths to 6 6 mo nths to 1 More than 1 Performing mo nths months ye ar ye ar assets A. On-balance sheet exposure a) Bad loans 13,327 20,270 34,632 7,275,335 X (3,307,950) X 4,035,614 - o f which: fo rbo rne expo s ures 3,419 9,284 10,555 894,542 X (335,244) X 582,556 b) Unlikely to pay loans: 1,940,900 248,134 663,419 2,321,444 X (1,187,169) X 3,986,728 - of which: forborne exposures 1,311,760 162,030 406,976 1,034,024 X (635,980) X 2,278,810 c) Non-performing past-due exposures 31,830 53,016 58,938 21,952 X (10,542) X 155,194 - of which: forborne exposures 2,041 6,728 11,509 1,134 X (2,005) X 19,407 d) P erforming past-due exposures X X X X 6,082,754 X (59,226) 6,023,528 - of which: forborne exposures X X X X 530,485 X (10,121) 520,364 e) Other performing exposures X X X X 92,282,732 X (351,918) 91,930,814 - of which: forborne exposures X X X X 1,862,768 X (34,056) 1,828,712 Total A 1,986,057 321,420 756,989 9,618,731 98,365,486 (4,505,661) (411,144) 106,131,878 B. Off-balance sheet exposures a) Non-performing 366,266 - - - X (15,484) X 350,782 b) P erforming X X X X 10,815,833 X (19,765) 10,796,068 Total B 366,266 - - - 10,815,833 (15,484) (19,765) 11,146,850 Total A+B 2,352,323 321,420 756,989 9,618,731 10 9 , 18 1, 3 19 (4,521,145) (430,909) 117,278,728
The past due range “up to 3 months” contains forborne non-performing positions which contain the past due positions in the “cure period” but not past due in that period amounting to €1,033 million gross (net exposure of (€802.7 million).
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A.1.7 Banking Group - On-balance sheet credit exposures to customers: changes in gross non- performing exposures
Non- Unlikely-to -pay D e s c riptio n/ c a te g o rie s B a d lo a ns perfo rming lo ans pas t-due exposures A. Initial gross exposure 7,260,761 5,146,926 141,477 - o f which: expo s ures trans ferred no t dereco gnis ed - - - B. Increases 2,605,057 3,808,407 591,967 B . 1 f r o m p e r f o r m in g lo a n s 8 1, 9 4 8 1, 16 1, 10 3 4 4 1, 3 9 4 B.2 transfers from other categories of deteriorated exposures 1,157,830 338,767 1,932 B.3 other increases 1,365,279 2,308,537 148,641 C. De c reas e s (2,522,254) (3,781,436) (567,708) C.1 trans ferred to perfo rming lo ans (3,791) (346,863) (118,106) C.2 write-o ffs (1,628,913) (714,332) (1) C.3 payments received (456,134) (1,088,115) (72,855) C.4 from disposals (404,935) (441,869) (173) C.5 losses on the disposal (16,788) (41,540) (3,263) C.6 trans fers to o ther clas s es o f no n-perfo rming (previo us ly termed "deteri ( 11, 5 6 1) ( 1, 113 , 7 5 5 ) ( 3 7 3 , 2 13 ) C.7 o ther decreas es (132) (34,962) (97) D. Final gross exposure 7,343,564 5,173,897 165,736 - o f which: expo s ures trans ferred no t dereco gnis ed - - -
A.1.7.a Banking Group - On-balance sheet credit exposures to customers: changes in gross forborne exposures by credit quality
Forborne Forborne exposures: Des criptio n/catego ries exposures: no n- perfo rming perfo rming A. Initial gross exposure 3,410,548 2,416,725 - of which: exposures transferred not derecognised - - B. Increases 2,435,795 1,579,357 B.1 transfers from non-forborne performing exposures 38,671 855,593 B.2 transfers from forborne performing exposures 502,897 X B.3 transfers from non-performing forborne exposures 236,052 B.4 other increases 1,894,227 487,712 C. Decreases (1,992,341) (1,602,829) C.1 transfers to non-forborne performing exposures X (573,602) C.2 transfers to forborne performing exposures (236,052) X C.3 transfers to non-performing forborne exposures X (502,897) C.4 write-offs (670,722) (239) C.5 payments received (649,850) (509,836) C.6 disposals (343,044) (172) C.7 losses on the disposal (11,881) - C.8 other decreases (80,792) (16,083) D. Final gross exposure 3,854,002 2,393,253 - of which: exposures transferred not derecognised - - A.1.8 Banking Group - On-balance sheet credit exposures to customers: changes in total net impairment losses 387
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No n-perfo rming pas t-due B ad lo ans Unlike ly-to -pay lo ans exposures
Des criptio n/catego ries Of which: Of which: Of which: To tal fo rbo rne To tal fo rbo rne To tal fo rbo rne exposures exposures exposures
A. Total initial net impairment (3,273,458) (226,924) (1,198,683) (564,672) (8,083) (1,257) - o f which: expo s ures trans ferred no t dereco gnis ed ------B. Increases (2,550,833) (204,383) (1,847,267) (729,908) (42,081) (2,953) B.1 impairment losses (780,353) (69,873) (458,207) (246,377) (11,745) (2,817) B.2 losses on the disposal (21,452) - (33,509) - - - B.3 transfers from other classes of non-performing exposure (339,844) (83,326) (27,027) (1,587) (1,118) (2) B.4 other increases (1,409,184) (51,184) (1,328,524) (481,944) (29,218) (134) C. Decreases 2,516,341 96,063 1,858,781 658,601 39,622 2,205 C.1 unrealised reversals of impairment losses 142,368 43,444 133,268 35,026 2,280 125 C.2 realised reversals of impairment losses 85,116 823 89,720 55,582 7,760 282 C.3 profits on the disposal 584,970 - 480,289 155,704 - - C.4 write-o ffs 1,628,913 51,567 714,332 282,912 1 - C.5 transfers to other categories of non-performing exposures 4,309 225 335,931 83,141 27,749 1,549 C.6 other decreases 70,665 4 105,241 46,236 1,832 249 D. Total closing net impairment (3,307,950) (335,244) (1,187,169) (635,979) (10,542) (2,005) - of which: exposures transferred not derecognised ------
A.2 Classification of exposures on the basis of external and internal ratings
A.2.1 Banking Group - Distribution of on- and off-balance sheet credit exposures by class of external rating
Exposures External rating classes Unrated Total Class 1 Class 2 Class 3 Class 4 Class 5 Class 6 A. On-bal ance sheet exposure 2,504,994 1,892,257 13,210,917 1,368,306 178,259 104,832 95,130,214 114,389,779 B. Derivatives 3,365 16,011 3,158 597 - - 426,923 450,054 B.1 Financial derivatives 3,365 16,011 3,158 597 - - 426,923 450,054 B.2 Credit derivatives ------C. Guarantees granted 17,621 1,320 807,931 - 363 600 4,729,034 5,556,869 D. Commitments to grant funds 57,418 26,243 610,738 5,819 408 20,294 4,954,827 5,675,747 E. Other 1,741 38,166 39,907 Total 2,583,398 1,937,572 14,632,744 1,374,722 179,030 125,726 105,279,164 126,112,356
The following table gives the relationship between external rating classes reported in the table and the classes of Moody’s the agency concerned.
Class Moody's Rating
1 Aaa,Aa,Aa1 ,Aa2,Aa3 2 A,A1,A2,A3 3 Baa,Baa1 ,Baa2,Baa3 , 4 Ba,Ba1 ,Ba2,Ba3 5 B.B1.B2.B3 Caa,Caa1 ,Caa2,Caa3, 6 Ca,C,DDD,DD,D
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A.2.2 Banking Group - Distribution of on- and off-balance sheet exposures by class of internal rating
Exposures Internal rating classes unrated TOTAL Rating1 Rati ng2 Rati ng3 Rating4 Rating5 Rati ng6 Rating7 Rati ng8 Rati ng9 Rating10 Rati ng11 Rati ng12 Rating13 Rati ng14 A. On-bal ance sheet exposure 2,333,352 10,133,043 12,643,556 7,468,988 14,757,691 1,602,262 6,314,346 6,362,963 2,000,978 3,149,374 1,582,401 536,138 542,407 338,759 33,652,819 103,419,077 B. Derivatives 2,028 13,364 4,105 23,368 37,937 12,520 111,371 24,383 7,050 13,525 1,703 144 179 1,271 197,106 450,054 B.1 Financial derivatives 2,028 13,364 4,105 23,368 37,937 12,520 111,371 24,383 7,050 13,525 1,703 144 179 1,271 197,106 450,054 B.2 Credit derivatives ------C. Guarantees granted 236,191 1,129,020 99,088 1,407,687 1,015,989 56,628 323,230 181,525 35,953 285,094 21,233 2,866 4,568 5,793 948,505 5,753,370 D. Commitments to grant funds 79,758 743,513 123,208 1,050,452 438,032 50,907 488,088 131,546 20,880 38,375 7,221 2,710 972 9,150 1,909,120 5,093,932 E. Other ------39,907 39,907 Total 2,651,329 12,018,940 12,869,957 9,950,495 16,249,649 1,722,317 7,237,035 6,700,417 2,064,861 3,486,368 1,612,558 541,858 548,126 354,973 36,747,457 114,756,340
The classes on the “Master Scale” consist of probability of default (PD) intervals within which PDs corresponding to the single classes of the different internal rating models are mapped. The rating classes are presented in decreasing order of creditworthiness: the best creditworthiness in rating class 1; the worst creditworthiness in rating class 14. The distribution shows the aggregates of exposures, net of intercompany eliminations, to the ordinary customers of UBI Banca and IW Bank to which internal credit ratings have been assigned.
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A.3 Distribution of guaranteed/secured credit exposures by type of guarantee
A.3.1 Banking Group – Guaranteed/secured credit exposures to banks
P ersonal guarantees (2) Secured (1) Credit derivatives Unsecured guarantees Other derivatives
Total (1)+(2) leases CLNS Other Banks mortgages Other Banks Securities authorities and central Properties - - Properties Other public Other Governments Governments central banks central authorities Other collateral Other Amount of net exposure Other public Other Governments and and Governments Properties - finance finance - Properties
1. on-balance sheet secured/guaranteed credit exposures: 1.1. fully guaranteed/secured 28,427 8,993 - 10,284 9,048 ------7 - 28,332 - of which non-performing ------1.2. partially guaranteed/secured 2 ------2 - 2 - of which non-performing - - - - - 2. Off-balance sheet guaranteed/secured credit exposures: - 2.1. fully guaranteed/secured 3,807 - - - 3,807 ------3,807 - of which non-performing ------2.2. partially guaranteed/secured 48,378 - - - 34,969 ------34,969 - of which non-performing -
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A.3.2 Banking Group – Guaranteed/secured credit exposures to customers
P ersonal guarantees (2) Secured (1) Credit derivatives Unsecured guarantees Other derivatives
Total (1)+(2) CLNS Other leases Banks mortgages Securities Other Banks authorities and central Properties - - Properties Other public Governments Governments central banks central authorities Other collateral Amountof net exposure Other public Governments and and Governments Properties - finance finance - Properties 1. on-balance sheet secured/guaranteed credit exposures: 1.1 fully guaranteed secured 65,305,688 45,091,256 5,104,479 1,695,663 2,757,185 - - - - - 817,080 209,378 183,082 8,001,565 63,859,688 - of which non-performing 6,965,481 4,842,905 900,003 26,561 308,767 - - - - - 38,605 33,569 2,490 708,954 6,861,854 1.2 partially guaranteed/secured 4,254,122 39,920 - 310,620 138,056 - - - - - 425,280 66,333 165,685 572,161 1,718,055 - of which non-performing 256,753 16,697 - 13,161 863 - - - - - 11,134 7,844 1,521 96,834 148,054 2. Off-balance sheet guaranteed/secured credit exposures: 2.1 fully guaranteed secured 2,379,475 537,742 - 155,220 233,069 - - - - - 60,585 811 4,768 1,218,188 2,210,383 - of which non-performing 175,851 65,216 - 4,835 38,829 - - - - - 27 590 373 45,419 155,289 2.2 partially guaranteed/secured 241,060 8,990 - 34,680 24,951 - - - - - 4,650 282 672 37,042 111,267 - of which non-performing 16,003 724 - 167 283 ------5,375 6,549
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B. Distribution and concentration of credit exposures
B.1 Banking group - Distribution by sector of on- and off-balance sheet exposures to customers (carrying amount)
Governments Other public authorities Financial companies Insurance companies Non-financial companies Other
Exposures/Counterparties Net exposure Net exposure Net exposure Net exposure Net exposure Net exposure Specific losses impairment Specific losses impairment Specific losses impairment Specific losses impairment Specific losses impairment Specific losses impairment Portfoliolosses impairment Portfoliolosses impairment Portfoliolosses impairment Portfoliolosses impairment Portfoliolosses impairment Portfoliolosses impairment
A. On-bal ance sheet exposure A.1 Bad loans 1,518 (23) X 4,956 (3,902) X 60,063 (57,648) X 67 (31) X 2,766,641 (2,205,098) X 1,202,369 (1,041,248) X - of which: forborne exposures - - X - - X 11,191 (8,434) X - - X 410,631 (225,578) X 160,734 (101,232) X A.2 Unlikely-to-pay loans - - X 5,744 (3,461) X 55,629 (25,151) X 4 - X 2,959,637 (931,809) X 965,714 (226,748) X - of which: forborne exposures - - X - - X 35,596 (13,692) X - - X 1,744,694 (547,151) X 498,520 (75,137) X A.3 Non-performing past-due exposures 219 (6) X 23,950 (634) X 1,561 (122) X - - X 79,422 (6,311) X 50,042 (3,469) X - of which: forborne exposures - - X - - X 44 (2) X - - X 11,417 (1,539) X 7,946 (464) X A.4 Performing loans 13,358,351 (583) 650,655 (3,906) 4,951,042 (18,393) 183,464 (87) 45,162,333 (304,108) 33,648,497 (84,067) - of which: forborne exposures 249 - - 4,985 (3) 16,836 (184) - - 1,384,123 (34,370) 942,883 (9,620) TOTAL A 13,360,088 (29) (583) 685,305 (7,997) (3,906) 5,068,295 (82,921) (18,393) 183,535 (31) (87) 50,968,033 (3,143,218) (304,108) 35,866,622 (1,271,465) (84,067) B. Off-bal ance sheet exposures B.1 Bad loans - - X - - X 21 - X - - X 36,200 (5,866) X 2,666 (54) X B.2 Unlikely-to-pay loans - - X 3,701 - X 254 (4) X - - X 300,633 (9,392) X 4,488 (152) X B.3 Other non-performing assets - - X 563 - X 10 - X - - X 2,199 (15) X 47 (1) X B.4 Performing loans 7,820 X - 1,837,567 X (478) 1,122,635 X (1,854) 8,731 X (64) 7,187,617 X (15,577) 629,060 X (1,792) TOTAL B 7,820 - - 1,841,831 - (478) 1,122,920 (4) (1,854) 8,731 - (64) 7,526,649 (15,273) (15,577) 636,261 (207) (1,792) 31.12.2017 13,367,908 (29) (583) 2,527,136 (7,997) (4,384) 6,191,215 (82,925) (20,247) 192,266 (31) (151) 58,494,682 (3,158,491) (319,685) 36,502,883 (1,271,672) (85,859) 31.12.2016 15,863,554 (61) (73) 1,911,979 (7,183) (5,018) 6,595,274 (96,214) (39,176) 165,758 (19) (67) 53,331,011 (3,101,567) (290,191) 31,462,362 (1,289,162) (85,094)
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B.2 Banking group – Geographical distribution of on- and off-balance sheet credit exposures to customers (carrying amount)
OTHER EUROPEAN ITALY AMERICA ASIA REST OF THE WORLD COUNTRIES
Exposures/Geographical areas Total Total Total Total Total Total Total Total Total Total losses losses losses losses losses impairment impairment impairment impairment impairment Net exposure Net Net exposure Net Net exposure Net Net exposure Net Net exposure Net A. On-bal ance sheet exposure A.1 Bad loans 4,018,197 (3,283,973) 17,376 (23,888) 40 (89) - - 1 - A.2 Unlikely-to-pay exposures 3,940,400 (1,155,873) 46,322 (31,293) 5 (1) - - 1 (2) A.3 Non-performing past-due exposures 155,114 (10,539) 19 (2) 61 (1) - - - - A.4 Performing loans 92,544,244 (400,573) 3,355,972 (10,276) 1,730,785 (40) 296,490 (249) 26,851 (6) TOTAL 100,657,955 (4,850,958) 3,419,689 (65,459) 1,730,891 (131) 296,490 (249) 26,853 (8) B. Off-bal ance sheet exposures B.1 Bad loans 38,873 (5,920) 14 ------B.2 Unlikely-to-pay exposures 308,165 (9,548) 911 ------B.3 Other non-performing assets 2,819 (16) ------B.4 Performing loans 10,335,411 (19,571) 272,770 (93) 39,438 (37) 144,775 (63) 1,036 (1) TOTAL 10,685,268 (35,055) 273,695 (93) 39,438 (37) 144,775 (63) 1,036 (1) 31.12.2017 111,343,223 (4,886,013) 3,693,384 (65,552) 1,770,329 (168) 441,265 (312) 27,889 (9) 31.12.2016 104,059,126 (4,826,819) 3,168,506 (86,370) 1,831,726 (199) 224,211 (430) 46,369 (7)
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B.2 Banking group – Geographical distribution (in Italy) of on- and off-balance sheet credit exposures to customers (carrying amount)
Italy North West Italy North East Italy Central Italy South and Islands
Exposures/Geographical areas Net Net Net Net Total Total Total Total Total losses losses losses losses exposure exposure exposure exposure impairment impairment impairment impairment impairment A. On-bal ance sheet exposure A.1 Bad loans 1,977,455 (1,625,371) 285,729 (297,608) 1,054,363 (672,178) 700,650 (688,816) A.2 Unlikely-to-pay exposures 1,856,471 (581,699) 298,879 (99,352) 1,063,804 (209,217) 721,246 (265,605) A.3 Non-performing past-due exposures 37,161 (3,201) 4,554 (298) 77,673 (4,092) 35,726 (2,948) A.4 Performing loans 45,668,857 (197,230) 7,279,714 (36,748) 29,436,950 (109,043) 10,158,723 (57,552) TOTAL 49,539,944 (2,407,501) 7,868,876 (434,006) 31,632,790 (994,530) 11,616,345 (1,014,921) B. Off-bal ance sheet exposures B.1 Bad loans 17,039 (3,005) 1,961 (206) 15,092 (2,134) 4,781 (575) B.2 Unlikely-to-pay exposures 194,781 (7,804) 12,215 (46) 84,315 (1,168) 16,854 (530) B.3 Other non-performing assets 706 (4) 26 - 1,463 (7) 624 (5) B.4 Performing loans 5,743,237 (9,961) 701,299 (2,139) 3,282,635 (6,361) 608,240 (1,110) TOTAL 5,955,763 (20,774) 715,501 (2,391) 3,383,505 (9,670) 630,499 (2,220) 31.12.2017 55,495,707 (2,428,275) 8,584,377 (436,397) 35,016,295 (1,004,200) 12,246,844 (1,017,141)
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B.3 Banking group – Geographical distribution of on- and off-balance sheet credit exposures to banks (carrying amount)
OTHER EUROPEAN ITALY AMERICA ASIA REST OF THE WORLD COUNTRIES
Exposures/Geographical areas Total Total Total Total Total Total losses losses losses losses losses impairment impairment impairment impairment impairment impairment Net exposure Net exposure Net exposure Net exposure Net exposure A. On-bal ance sheet exposure A.1 Bad loans ------A.2 Unlikely-to-pay exposures ------A.3 Non-performing past-due exposures ------A.4 Performing loans 6,732,611 - 765,106 - 465,272 - 80,246 - 5,437 - TOTAL 6,732,611 - 765,106 - 465,272 - 80,246 - 5,437 - B. Off-bal ance sheet exposures B.1 Bad loans ------B.2 Unlikely-to-pay exposures ------B.3 Other non-performing assets ------B.4 Performing loans 192,075 - 205,941 (256) 7,203 (3) 90,010 (207) 43,240 (28) TOTAL 192,075 - 205,941 (256) 7,203 (3) 90,010 (207) 43,240 (28) 31.12.2017 6,924,686 - 971,047 (256) 472,475 (3) 170,256 (207) 48,677 (28) 31.12.2016 2,159,591 (2) 1,603,222 (189) 547,369 (3) 143,068 (62) 79,909 (59)
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B.4 Large exposures
On the basis of updates to Bank of Italy Circular No. 263 of 27th December 2006 and subsequent regulatory clarifications issued by the supervisory authority, the number of large risks presented in the table was determined by making reference to the non-weighted “exposures”, including those towards Group counterparties, with a nominal value equal to or greater than 10% of the regulatory capital, where “exposures” are defined as the sum of on- balance sheet risk assets and off-balance sheet commitments (excluding those deducted from regulatory capital) to a customer of group of connected customers, without the application of weighting factors. These exposure criteria result also in the inclusion in the balance sheet table of large risk positions which – although they have a weighting factor of 0% - have a non-weighted exposure of greater than 10% of the capital valid for the purposes of large risks.
31.12.2017 Number of positions 4 Exposure 24,630,887 Risk position 474,455
“Large exposures” consisted of the following:
€15,994 million to the Ministry of the Economy and Finance (€4 million considering weighting factors), relating mainly to investments in government securities by the Parent and to a residual extent to current and deferred tax assets;
€5,998 million to the Bank of Italy (€99 million considering weighting factors), relating to business by the Parent;
€1,420 million to the United States Treasury (€0 million considering weighting factors), regarding new investments in United States treasuries;
€1,219 million to a major banking counterparty (€372 million considering weighting factors).
The percentage of consolidated regulatory capital is well below the limit of 25% set for banking groups for each of the exposures reported.
396 WorldReginfo - 443ee11b-e188-477f-9b0d-38a07c5d7da1 C. Securitisations and the transfer of assets
C.1 Securitisation transactions
Qualitative information
Underlying objectives strategies and processes of securitisations
Third party securitisation transactions
As at 31st December 2017, the UBI Group held no positions in instruments related to third- party securitisations (ABS and and other structured credit products).
Own securitisations
Law No. 130/99 “Measures on the securitisation of loans” introduced the possibility into national legislation of performing securitisation transactions using specially formed Italian registered companies (termed special purpose vehicles), which allow an entity to acquire funding by securitising part of the assets which it owns. This operation involves the transfer of assets (usually loans and receivables) recognised in the balance sheet of an entity (termed the “originator”) to a special purpose entity which in order to fund the purchase issues bonds which it then sells on the market and pays the proceeds back to the transferor. The redemption and return on the notes issued depend on the cash flows generated by the assets transferred.
On the other hand, with “self-retained securitisation” transactions it is the originator itself (banks or companies in the UBI Group) which fully subscribes the various tranches of notes issued by the special purpose entity to fund the purchase of the loans. The senior notes assigned a rating are listed and can be used for refinancing operations with the ECB. The “own” securitisations of the UBI Group as at the reporting date of these financial statements this report were of both types as follows:
- conventional securitisations with notes sold on the market. These consisted of the Marche Mutui 2, Marche M6 and Mecenate 2007 securitisations resulting from the acquisition of Nuova Banca delle Marche and Nuova Banca dell’Etruria e del Lazio, which had been created by these banks in prior years by transferring their assets to them; - “self retained securitisations”: these are securitisations of the assets of companies belonging to UBI Group carried out in 2016 (UBI SPV Group 2016 and UBI SPV Lease 2016) or in prior years (24-7 Finance) and they were formed for the purpose of generating assets eligible for refinancing operations with the European Central Bank, in order to strengthen the Group’s liquidity position in accordance with the provisions of internal policies, in order to maintain a high counterbalancing capacity. In 2017 synthetic securitisations were added to these two types of conventional securitisations. There were formed in order to optimise use of capital, by freeing up regulatory capital through the reduction of the credit risk of one or more of the underlying portfolios. In order to provide full information we report that in the second quarter of 2017 Nuova Banca delle Marche and its subsidiary CariLoreto, Nuova Banca dell’Etruria together with its subsidiary Banca Federico del Vecchio and Nuova Carichieti took part as the originators in three securitisations of non-performing loans (SPV Fedaia S.r.l., Rienza S.r.l., Gardenia S.r.l.), the notes of which were subscribed entirely by parties outside the Group.
The sub-sections below provide the required disclosures of a qualitative and quantitative nature for the conventional and synthetic securitisations mentioned above. As allowed by regulations for “self-retained securitisations”, the relative sections of the notes to the financial statements have not been compiled. For full information the main characteristics of the transactions existing at the time of preparing these notes to the financial statements have nevertheless been reported.
397 WorldReginfo - 443ee11b-e188-477f-9b0d-38a07c5d7da1
The table below summarises the stakes held in securitisation special purpose entities existing as at 31st December 2017:
Securitisation name/ Special Registered address Group stakes Type of securitisation purpose entity
24-7 Finance Via XX Settembre, 8 - Brescia 10.00% Retained securitisation
UBI Finance 2 in Liquidation Via XX Settembre, 8 - Brescia 10.00% Operation closed down
UBI SPV BBS 2012 Srl Via Foro Bonaparte, 70 - Milan 10.00% Operation closed down
UBI SPV BPCI 2012 Srl Via Foro Bonaparte, 70 - Milan 10.00% Operation closed down
UBI SPV BPA 2012 Srl Via Foro Bonaparte, 70 - Milan 10.00% Operation closed down
Self-Retained UBI SPV GROUP 2016 Srl Via Foro Bonaparte, 70 – Milan 10.00% securitisation Self-Retained UBI SPV LEASE 2016 Srl Via Foro Bonaparte, 70 – Milan 10.00% securitisation
Marche Mutui 2 Srl Via Barberini, 47 – Rome 0.00% Market securitisation
Marche M6 Srl Via Alfieri, 1 - Conegliano Veneto 0.00% Market securitisation
Mecenate Srl Via Calamandrei, 255 – Arezzo 95.00% Market securitisation
The securitisations UBI Finance 2, UBI SPV BPA 2012, UBI SPV BPCI 2012 and e UBI SPV BBS 2012 were closed down in advance in prior years in consideration of the small remaining value of the underlying portfolios: UBI Finance 2 closed down and redeemed its notes in 2014 and the special purpose entity was therefore put into liquidation in the first quarter of 2015. UBI SPV BPA 2012, UBI SPV BPCI 2012 and UBI SPV BBS 2012 were closed down in advance in 2016 and the notes were redeemed in November 2016.
398 WorldReginfo - 443ee11b-e188-477f-9b0d-38a07c5d7da1 Securitisations: entities and roles
The entities of the UBI Banca Group involved in the securitisation transactions existing as at the reporting date and the respective roles played are listed below:
24-7 Finance Originator UBI Banca Spa Issuer 24-7 Finance Srl Servicer UBI Banca Spa English Account Bank The Bank of New York Mellon London Branch Italian Account Bank The Bank of New York (Luxembourg) SA Italian Branch Additional Transaction Bank UBI Banca Spa Additional Cash Manager The Bank of New York Mellon London Branch Paying Agent The Bank of New York (Luxembourg) SA Italian Branch Calculation Agent The Bank of New York Mellon London Branch Swap Counterparty JPMorgan Chase Bank, National Association Representative of the Noteholders BNY Corporate Trustee Services Limited
UBI SPV Lease 2016 Originator UBI Leasing Spa Issuer UBI SPV Lease 2016 Srl Servicer UBI Banca Spa Sub-Servicer UBI Leasing Spa Back-up Servicer Facilitator Zenith Service Spa Account Bank UBI Banca Spa Cash Manager UBI Banca Spa Calculation Agent UBI Banca Spa Payment Account Bank BNP Paribas Securitiers Services, Milan Branch Paying Agent BNP Paribas Securitiers Services, Milan Branch Representative of the Noteholders Zenith Service Spa
UBI SPV Group 2016 Originator13 UBI Banca Spa Banca Carime Spa Banco di Brescia Spa Banca Regionale Europea Spa Banca Popolare di Ancona Spa Banca Popolare di Bergamo Spa Banca Popolare Commercio e Industria Spa Issuer UBI SPV Group 2016 S.r.l. Master Servicer UBI Banca Spa Back-up Servicer Facilitator Zenith Service Spa Italian Account Bank UBI Banca Spa Cash Manager UBI Banca Spa Paying Agent The Bank of New York (Luxembourg) SA Italian Branch Calculation Agent UBI Banca Spa Representative of the Noteholders Zenith Service Spa
13 The original originator banks are shown (subsequently merged into UBI Banca in November 2016 and in February 2017) because the first transfer of assets was completed prior to the mergers into UBI Banca.
399 WorldReginfo - 443ee11b-e188-477f-9b0d-38a07c5d7da1 Mecenate Originator UBI Banca Spa14
Issuer Mecenate S.r.l. Master Servicer UBI Banca Spa Italian Account Bank UBI Banca Spa Paying Agent BNP Paribas Securities Services – Milan Branch Computation Agent BNP Paribas Securities Services – Milan Branch Representative of the Noteholders BNP Paribas Securities Services – Milan Branch Transaction Bank BNP Paribas Securities Services – London Branch Arranger and Lead Manager UBS Ltd Swap Counterparty UBS Ltd
Marche Mutui 2 Originator UBI Banca Spa15
Issuer Marche Mutui 2 Società per la Cartolarizzazione S.r.l. Master Servicer UBI Banca Spa Italian Account Bank UBI Banca Spa Paying Agent Deutsche Bank AG – London Branch Computation Agent Deutsche Bank AG – London Branch Representative of the Noteholders Deutsche Trustee Company Limited Transaction & English Transaction Bank BNP Paribas Securities Services – Milan Branch Swap Counterparty Société Générale
Marche M616 Originator UBI Banca Spa
Issuer Marche M6 S.r.l. Master Servicer UBI Banca Spa Italian Account Bank BNP Paribas Securities Services – Milan Branch Paying Agent BNP Paribas Securities Services – Milan Branch English Account Bank BNP Paribas Securities Services – London Branch Calculation Agent Securitisation Services S.p.A. Representative of the Noteholders Securitisation Services S.p.A. Swap Counterparty J.P.Morgan Securities PLC
14 UBI Banca performed the role of originator following the merger by acquisition of Banca Tirrenica Spa. Reference is made for further details on the roles filled by the different counterparties and the relative changes over the time to the information given in the relative sub-section that follows. 15 See note 14. 16 See note 14.
400 WorldReginfo - 443ee11b-e188-477f-9b0d-38a07c5d7da1 Securitisations: financial support from the UBI Banca Group In addition to the roles reported in the paragraphs above, in order to ensure that the management of securitisations functions properly, the companies in the UBI Banca Group also have the duty to provide further financial support to securitisations in order to cover certain specific or generic risks. A report is given below of the quantification of the financial support given as at 31st December 2017, by UBI Banca or by subsidiaries on the basis of existing contractual agreements and divided on the basis of the type of risk underlying each financing:
SUBORDINATED FINANCING BY UBI GROUP BANKS TO SECURITISATION SPEs - TOTAL REMAINING PRINCIPAL DEBT AS AT 31/12/2017
Item in balance Purpose of financing Financing Entity Total as at Total as at sheet of financing To cover To cover bank financed 31/12/2016 31/12/2017 Purchase bank liquidity comminglin of loans risks g risk Banc@ 24-7 BS asset item 150 (then 247 Finance (recognised net of 24,422,348 24,422,348 24,422,348 merged into Srl (1) securitisation and UBI Banca) CB operations) BS asset item 150 247 Finance (recognised net of UBI BANCA 73,132,224 73,132,224 73,132,224 Srl (1) securitisation and CB operations) Banca BS liability item 20 Tirrenica Mecenate Srl (Liabilities related to (then n.a. 394,068 394,068 (2) assets transferred merged into not derecognised) UBI Banca) Banca BS liability item 20 Tirrenica Mecenate Srl (Liabilities related to (then n.a. 5,732,710 5,732,710 (3) assets transferred merged into not derecognised) UBI Banca) Banca Tirrenica Mecenate Srl (then n.a. 4.968.404 BS asset item 60 4,968,404 (4) merged into UBI Banca) Banca BS liability item 20 Adriatica Marche (Liabilities related to (then n.a. 8.208.664 8,208,664 Mutui 2 (5) assets transferred merged into not derecognised) UBI Banca)
TOTAL SECURITISATIONS 97,554,572 116,858,418 5,732,710 106.157.304 4,968,404
Notes:
(1) The currently outstanding loan granted by UBI Banca to 24-7 Finance Srl was disbursed in two tranches: an initial tranche paid when the notes were issued by the originator B@nca 24-7 (which was then merged into UBI Banca) and a second tranche paid by UBI Banca when the securitisation was restructured at the time of the merger of B@nca 24-7 into UBI Banca.
(2) A loan granted by Banca Tirrenica (former Banca dell’Etruria e del Lazio) to Mecenate for the Mecenate 2007 securitisation to cover the general liquidity risks of the operation.
(3) Part of the price for the transfer of the original portfolio transferred by (former Banca dell’Etruria e del Lazio) to Mecenate for the Mecenate 2007 securitisation, corresponding to the portion of the interest earned on the portfolio transferred as at the transfer date, not financed by the issue of notes, but by deferment of payment of the amount to a subsequent time when the notes issued are fully redeemed, in accordance with the contractual provisions of the securitisation.
(4) Sums deposited by Banca Tirrenica (former Banca dell’Etruria e del Lazio) with BNP Paribas to cover commingling risk underlying the Mecenate 2007 securitised portfolio.
(5) A loan granted by Banca Adriatica (former Banca delle Marche) to Marche Mutui 2 to cover the general liquidity risks of the operation.
401 WorldReginfo - 443ee11b-e188-477f-9b0d-38a07c5d7da1 The underlying reasons for the financing reported in the table are given below. a) To cover liquidity risk With regard to the 24-7 Finance securitisation, the originator B@nca 24-7 also filled the role of subordinated loan provider, having granted a subordinated loan designed to create a debt reserve amount to meet possible shortages of liquidity for the operation. At the time of the merger into UBI Banca in 2012, a subordinated loan of approximately €24.4 million was outstanding, which was subsequently increased in 2013 by a further €73.1 million. The financial support provided by UBI Banca to the securitisation, given that no repayments of the loan had been made since 2012 amounted to €97.5 million.
Also for those securitisations that had been structured by Nuova Banca delle Marche and Nuova Banca dell’Etruria, the originators had in some situations taken the role of subordinated lender, in order to create debt reserve amounts to guarantee noteholders against possible liquidity difficulties. As at 31st December 2017 subordinated loans were still outstanding granted by Nuova Banca delle Marche and Nuova Banca dell’Etruria e del Lazio to the securitisations Marche Mutui 2 and Mecenate 2007 respectively as follows: - €8.2 million for Marche Mutui 2; - €394 thousand for Mecenate 2007.
b) Purchase of Loans: Again for Mecenate 2007, the originator also provided another form of financial support to the securitisation by deferred payment of part of the amount for the loans transferred corresponding to the interest accruing on the portfolio (but not yet due) as at the transfer date. Further details are given in the information reported in the sub-sections relating to each securitisation. c) To cover commingling risk The risk of commingling relates to the account bank role performed by the Parent or by other Group companies that are depositories of the securitisation’s liquidity. It represents the risk that, in the event of a downgrade which rendered the depository bank no longer eligible as a depository for the sums received, it would be unable to make an immediate transfer of the sums received by the servicer to another credit institution. Coverage of that risk by means of a supporting loan is currently only provided for the Mecenate 2007 securitisation. In fact in 2010 Banca dell’Etruria e del Lazio made a deposit (a “commingling reserve”), currently with BNP Paribas Securities Services, for an initial amount of €9.2 million. Following quarterly adjustments, as at 31st December 2017 that deposit amounted to approximately €5 million.
The new securitisations, UBI SPV Lease 2016 and UBI SPV Group 2016, structured in 2016, do not involve any form of direct financial support provided by the grant of subordinated loans as in the case of those described above. For both these transactions, the subscription of junior notes by the originators made it possible to create a cash reserve amounting to €31.5 million for UBI SPV Lease 2016 and a total of €83.4 million for UBI SPV Group 2016. These sums have not yet been drawn on and remained entirely available in the two securitisations at the reporting date of this financial report.
402 WorldReginfo - 443ee11b-e188-477f-9b0d-38a07c5d7da1 Internal risk measurement and monitoring systems connected with securitisation transactions including measurement, for those transactions originated by the Group, where risks were transferred to third parties. Illustration of the organisational structure for managing securitisation transactions including systems for reporting to senior management or to a similar body.
To complete the information given in the preceding pages on the management of the securitised portfolios and the parties internal to and external to the Group who fill the various roles, we report the following with regard to the corporate servicing activities of the SPVs: - it was decided to outsource these activities to TMF Management Italy Srl for the securitisations UBI SPV Lease 2016 and UBI SPV Group 2016 and also, following the conclusion of the merger of Banca Tirrenica into UBI Banca, for the special purpose entity Mecenate; - corporate servicing activities were carried out by Zenith Service Spa for the 24-7 Finance securitisation; - for the Marche Mutui 2 and Marche M6 securitisations, acquired with the acquisition of Nuova Banca delle Marche, the corporate servicing activities are carried out by F2A - FIS Antex and Securitisation Services S.p.A. respectively.
Furthermore, taking a prudential approach, in order to comply with the eligibility requirements even under market stress scenario conditions, a backup service facilitator was also appointed for the 2016 UBI SPV Lease 2016 and UBI SPV Group 2016 securitisations. That role is performed by Zenith Service Spa for both securitisations.
On the other hand, it was decided not to outsource IT and accounting operations related to servicer activities. The management of cash collection activities for the portfolios continues to be performed by the originators, in their capacities as servicers or sub-servicers, who may make use, amongst other things, of the main Group accounting platform. This was also useful for reconstructing movements in the accounts of the securitisation companies and therefore for providing them with the information needed by the corporate servicers for preparing financial statements. In order to ensure continuity and effectiveness in the performance of their servicer functions, the servicers have created appropriate technical and organisational units to monitor the various phases of the securitisation process. Accounting and reporting systems in particular have been put in place with account taken of the need to be able to reconstruct all transactions at any moment.
At the level of the Parent, UBI Banca, the main organisational units responsible for managing the securitisations were the Finance Area and the units under the Chief Financial Officer and the Chief Risk Officer. The roles and tasks relating to the performance of the various operational phases of servicing and also those relating to monitoring performance data and, where required, those of the calculation agent, were defined in those units. More specifically, a special set of quarterly reports are prepared to monitor each individual securitisation transaction. With the merger of Banca Adriatica and Banca Tirrenica into UBI Banca, the model described above was extended to also cover the securitisations originated by these banks: Marche Mutui 2, Marche M6 and Mecenate 2007.
Description of the hedging policies adopted to mitigate risks connected with securitisations, including the strategies and processes adopted to continuously monitor the effectiveness of these policies.
All the securitisations carried out until the end of 2011 had been hedged by swap derivative contracts where the main objective was to stabilise the flow of interest generated by the securitised portfolio and to protect the special purpose entity from interest rate risk. Only one of these securitisations existed at the end of 2017, and this was the 24-7 Finance securitisation where the swap contracts were concluded between the SPE and the respective swap counterparty, who then signed contracts identical in form but opposite in their effects (“backup swaps”) with UBI Banca (which following the merger of B@nca 24-7 in 2012, also filled the role of originator of the securitisation).
403 WorldReginfo - 443ee11b-e188-477f-9b0d-38a07c5d7da1 As at 31st December 2017 that same approach was in use for the Marche Mutui 2 and Marche M6 securitisations, which had a swap contract structure and mirror backup swaps which for the latter the Parent took the place of the counterparty following the merger of Banca Adriatica into UBI Banca. For the Mecenate 2007 transaction, the securitisation was backed by swap contracts with an outside counterparty, but no back-up swap contracts existed between that counterparty and the originator, as occurred on the other hand in the approach described above. On the other hand, the last two securitisations created by the UBI Group in 2016, UBI SPV Lease 2016 and UBI SPV Group 2016, were structured without the use of swaps. This method of structuring the securitisations was possible because of the lower ratings assigned at the time of issue (A1 for Moody’s and A(low) for DBRS for both of them), compared with AAA ratings required in the past for eligibility for refinancing with the European Central Bank, since the eligibility criteria had been lowered by the ECB itself.
Finally for full information we report that in 2009 the UBI Group set a specific policy for the management of securitisation risk in compliance with supervisory regulations (Circular No. 263/06). Sub-section 1 of Section 1, “Credit Risk”, in these Notes to the financial statements may be consulted for further information.
Further information on Group activities concerning securitisation transactions is given in the Management Report which may be consulted.
Securitisations: details of the individual transactions
SECURITISATIONS ORIGINATED BY BANCA ADRIATICA
Information is reported below on securitisations carried out by Banca delle Marche S.p.A. (Originator). Following the issue of Decree No. 183 of 22/11/2015, which resulted in the formation of bridge institutions in accordance with Art. 42 of Legislative Decree No. 180 of 16/11/2015, Nuova Banca delle Marche S.p.a. took the place of Banca delle Marche S.p.a., with no interruption, in all the roles performed regarding contractual agreements for the securitisation. Similarly, by virtue of the merger of Banca Adriatica S.p.a. (former Nuova Banca delle Marche S.p.a) into UBI Banca S.p.a. concluded in October 2017, the latter took over all the roles performed in the same securitisations originally performed by Banca delle Marche that were still existing as at the merger date.
Marche Mutui 2 Securitisation The Marche Mutui 2 securitisation was created in October 2006, with a portfolio of performing loans as the underlying, originated from regulated mortgages with maturity of not later than 31st December 2031 backed by first mortgage agreements and with the original amount of the mortgage registration at least twice the amount of the original amount disbursed. This securitisation had been structured by Banca delle Marche for the purpose of broadening the range of its funding with respect to that provided by the conventional issue of both domestic and international bonds.
The securitisation was completed according to the following approach: the transfer without recourse of loans to the special purpose entity Marche Mutui 2 S.r.l. amounting to €631.436 million; financing of the operation by the issue of five classes of notes (two senior, classes A1 and A2, two mezzanine, classes B and C, and one junior, class D). These senior notes (class A1 for €88.4 million and class A2 for €511.45 million) and the mezzanine notes (class B for €12 million and class C for €15.8 million) were listed on the Irish Stock Exchange and subscribed by institutional investors. The junior note (class D, amounting to €3.786 million) was subscribed by the Bank and was held by UBI Banca as at 31st December 2017;
404 WorldReginfo - 443ee11b-e188-477f-9b0d-38a07c5d7da1 the grant to the SPE by Banca delle Marche of a subordinated loan of €8.2 million for the purpose of forming a cash reserve at the service of the securitisation. As at 31st December 2017 that loan is still outstanding and the role of subordinated lender is filled by UBI Banca.
The notes have been assigned ratings by the agencies Moody’s and Standard & Poor’s. The table below reports the position for the notes as at 31st December 2017 and the relative rating assigned in force at that date.
Amount Remaining Marche Mutui Nominal amount redeemed as nominal % Moody’s S&P ISIN Number 2 Srl when issued at amount as at redeemed Ratings Ratings 31/12/2017 31/12/2017
Class A1 IT0004124944 88,400,000 88,400,000 0 100.00% - - Class A2 IT0004124977 511,450,000 472,296,594 39,153,406 92.34% Aa2 AA Class B IT0004125008 12,000,000 0 12,000,000 0.00% Aa2 A+ Class C IT0004125024 15,800,000 0 15,800,000 0.00% A1 A+
Class D IT0004125065 3,785,725 0 3,785,725 0.00% n.a. n.a
Total 631,435,725 560,696,594 70,739,131
As at the reporting date, 31st December 2017, the portfolio amounted to €74.4 million (remaining principal debt). As already reported, in compliance with the international accounting standards in force, the securitised assets remained recognised on the balance sheets of the originators as assets transferred not derecognised. The related liabilities associated with the assets transferred not derecognised amounting to €58.5 million are recognised at the same time within amounts due to customers. The related profit and loss item is recognised in item 20 in the income statement. For further information, reference is made to the specific sub-sections in these notes to the financial statements.
The tables below give the distribution of the securitised portfolio by the quality of the loans as at 31st December 2017 on the basis of the classification in the balance sheet of the originator (in terms of the net book amount) and the reporting classification of the transaction (in terms of the remaining principal debt “customer view”).
Remaining Carrying principal amount as at debt as at TYPE OF LOAN 31/12/2017 TYPE OF LOAN 31/12/2017 (thousands (thousands of euro) of euro)
Performing loans 54,067 Performing loans 64,578
Performing past-due exposures 13,058 Arrears loans 1,167
Non-performing past-due exposures 596 Collateral Portfolio 65,745
Unlikely-to-pay 1,648 Defaulted Loans 8,649
Bad loans 1,116 Total Marche Mutui 2 portfolio 74,394 TOTAL assets transferred to Marche Mutui 2 70,485
The role of “servicer” for the securitised portfolios performed by Banca delle Marche, is now carried out by the Parent, UBI Banca.
Fees paid for servicing activities carried out in 2017 were due to Nuova Banca delle Marche for the period 1st April until 30th September 2017 and amounted to €29 thousand, while fees due to UBI Banca from 1st October amounted to €19 thousand. The total amounts received for servicing activity for the financial year 2017 amounted to €15.1 million, of which €3.5 million earned following the date of the merger into UBI Banca.
405 WorldReginfo - 443ee11b-e188-477f-9b0d-38a07c5d7da1 Marche M6 Securitisation The Marche M6 SRL securitisation was performed by Banca delle Marche in June 2013 on a portfolio of performing loans consisting of residential mortgages. The portfolio transferred was composed of approximately one third of new grants of residential mortgages and two thirds of loans previously transferred to the SPE Marche Covered Bond S.r.l. for the creation of the cover pool with appropriate characteristics for the new transfer. The first stage of the operation therefore involved the early redemption of the two series of covered bonds issued by the bank, the repurchase of the loans transferred under the covered bond programme and the repayment at the same time by Marche Covered Bond S.r.l. of the subordinated loan that had been granted for the purchase of the securitised loans. The covered bond programme was closed down by the bank permanently in December 2013. The securitisation was therefore completed according to the following structure: the transfer without recourse of loans to the special purpose entity Marche M6 S.r.l. amounting to €2,128.735 million; financing of the operation by the issue of four classes of notes: three senior, classes A1 and A2 and one junior, class J). The securitisation was initially structured in order to acquire securities eligible for refinancing with central institutions. Consequently, the entire issuance was subscribed by the originator bank. The senior classes were initially used by Banca delle Marche as securities eligible for principal refinancing operations with the European Central Bank and/or repurchase agreement transactions with institutional counterparties. In June 2015 the A1 and A2 classes were sold in the market while the class A3 and the subordinated J classes remained in Banca delle Marche’s portfolio and are still held by UBI Banca.
The notes have been assigned ratings by the agencies Fitch and DBRS. The table below reports the position for the notes as at 31st December 2017 and the relative rating assigned in force at that date.
Remaining Nominal Amount nominal % Fitch DBRS Marche M6 Srl ISIN Number amount when redeemed as at amount as at redeemed Ratings Ratings issued 31/12/2017 31/12/2017
Class A1 IT0004941271 966,000,000 952,233,824 13,766,176 98.57% AA AAA Class A2 IT0004941297 300,000,000 0 300,000,000 0.00% AA AAA Class A3 IT0004941305 434,500,000 0 434,500,000 0.00% AA AAA
Class J IT0004940992 496,566,000 0 496,566,000 0.00% n.a. n.a
Total 2,197,066,000952,233,824 1,244,832,176
To complete the information we report that as at the payment date of 29th January 2018, the Class A1 note had been redeemed further, equal to the remaining amount, and therefore had been fully redeemed. At the same time redemption of the Class A2 notes commenced for approximately €22.4 million.
As at the reporting date, the securitised portfolio amounted to €1.252 billion (remaining principal debt). For this securitisation too, the securitised assets remained recognised on the balance sheets of the originators as assets transferred not derecognised, in compliance with the international accounting standards in force. The related liabilities associated with the assets transferred not derecognised amounting to €230 million were recognised within amounts due to customers. The related profit and loss item is recognised in item 20 in the income statement. For further information, reference is made to the specific sub-sections in these notes to the financial statements.
The tables below give the distribution of the securitised portfolio by the quality of the loans as at 31st December 2017 on the basis of the classification in the balance sheet of the originator (in terms of the net book amount) and the reporting classification of the transaction (in terms of the remaining principal debt “customer view”).
406 WorldReginfo - 443ee11b-e188-477f-9b0d-38a07c5d7da1 Remaining Carrying principal debt amount as at as at TYPE OF LOAN 31/12/2017 TYPE OF LOAN 31/12/2017 (thousands (thousands of euro) of euro)
Performing loans 962,950 Performing loans 1,183,803 Performing past-due exposures 240,723 Arrears loans 21,801 Non-performing past-due exposures 4,291 Collateral Portfolio 1,205,604 Unlikely-to-pay 21,614 Defaulted Loans 46,396 Bad loans 3,270 Total Marche M6 portfolio 1,252,000 TOTAL assets transferred to Marche M6 1,232,848
In this case too, the role of “servicer” for the securitised portfolios had been performed by Banca delle Marche and is now carried out by the Parent, UBI Banca.
Fees paid for servicing activities carried out in 2017 were due to Nuova Banca delle Marche for the period 1st April until 30th September 2017, and amounted to €476 thousand, while fees due to UBI Banca from 1st October amounted to €192 thousand. The total amounts received for servicing activity for the financial year 2017, amounted to €205 million17, of which €37.7 million earned following the date of the merger into UBI Banca.
Securitisations Marche Mutui, Marche Mutui 4, Marche M5 and Medioleasing (closed down)
To complete the information, details are reported below on securitisations carried out by Banca delle Marche S.p.A. (originator) which were closed down during the course of 2017, subsequent to it joining the UBI Banca Group and before the merger of Banca Adriatica S.p.A by UBI Banca S.p.A. which occurred in October 2017.
Marche Mutui Securitisation In March 2003 Banca delle Marche carried out its first RMBS securitisation, with the transfer without recourse to the SPE Marche Mutui S.r.l.18 (specially formed pursuant to Law No. 130/99) of a portfolio of performing loans consisting of registered mortgages backed by first mortgage guarantees for an amount of €344.4 million. Payment of the transfer price for the loans was financed by the issue by the SPE of notes totalling €353.01 million. This sum also allowed the creation of a cash reserve of €8.61 million designed to prevent liquidity difficulties from arising for the SPE. The notes were divided into five tranches on the basis of the redemption priority: two senior (classes A1 and A2), two mezzanine (Classes B and C) and one junior (Class D). The senior and mezzanine classes had been assigned ratings by the agencies Moody’s and Standard & Poor’s. The senior and mezzanine classes were listed on the Luxembourg Stock Exchange and placed with domestic and foreign institutional investors. The junior tranche, on the other hand, which was unrated, was fully subscribed by the originator.
In the third quarter of 2017 the securitisation was closed down early by exercising a “clean-up call19” clause. The repurchase of the portfolio by the originator was concluded with effect for
17 Inclusive, where applicable, of the amount resulting from the repurchase transactions. 18 As already reported, in the absence of stakes held by UBI Banca in the share capital of the company and because the underlying securitisation has been closed down, SPV Marche Mutui has not therefore been included in the Group’s consolidated financial statements. 19 The option could be exercised once the securitised portfolio had reached an amount less than 10% of the original portfolio.
407 WorldReginfo - 443ee11b-e188-477f-9b0d-38a07c5d7da1 operating and accounting purposes on 1st June 2017, and consequently on the payment date of 25th July, Marche Mutui S.r.l. carried out the following:
- the full redemption of the senior notes; - settlement of amounts to close the swap contracts; - payment of the excess spread and full redemption of the junior notes.
The table that follows reports the situation for the notes as at 31st December 2017:
Remaining Amount Marche Mutui Nominal amount nominal % Moody’s S&P ISIN Number redeemed as at Srl when issued amount as at redeemed Ratings Ratings 31/12/2017 31/12/2017
Class A1 IT0003444590 35,000,000 35,000,000 0 100.00% n.a. n.a Class A2 IT0003444608 281,800,000 281,800,000 0 100.00% n.a. n.a Class B IT0003444616 16,200,000 16,200,000 0 100.00% n.a. n.a Class C IT0003444624 11,400,000 11,400,000 0 100.00% n.a. n.a
Class D IT0003444632 8,610,000 8,610,000 0 100.00% n.a. n.a
Total 353,010,000 353,010,000 0
Because the original transfer of loans to the SPE Marche Mutui was concluded before 1st January 2004, in accordance with international accounting standards no obligation was triggered to apply “no derecognition” rules. Consequently these loans were derecognised from the financial statements of the originator.
Marche Mutui 4 Securitisation The Marche Mutui 4 securitisation was performed in June 2009 on a portfolio of performing loans consisting of residential and commercial mortgages.
The securitisation was completed according to the following procedures and structure: the transfer without recourse of loans to the special purpose entity Marche Mutui 420 amounting to €1.88 billion; financing of the operation by the issue of two notes (one senior, class A, and one junior, class J), for a total of €1,960 million (this amount allowed a cash reserve of €65.868 million to be formed in order to guarantee the transaction against possible liquidity difficulties. The senior class notes, assigned a rating by the agencies Moody’s and Fitch, were initially subscribed by Banca delle Marche to be used in principal refinancing operations with the European Central Bank and/or in repurchase agreement transactions with institutional counterparties. In June 2015 the entire class A notes were then sold in the market. The class J notes were subscribed by Banca delle Marche and they remained in the portfolio of the originator until the securitisation was closed down in the third quarter of 2017.
The early close down of the transaction, made possible by the existence of an early redemption option on the notes that could be exercised by the SPE at the time of the payment date, was concluded in August 2017. The repurchase of the portfolio by the originator was concluded with effect for operating and accounting purposes on 1st July. Subsequently on the payment date of 25th August, in compliance with the contractual terms for the transaction, Marche Mutui 4 carried out the following:
- the full redemption of the senior notes; - settlement of amounts to close the swap contracts; - payment of the excess spread and full redemption of the junior notes.
20 As already reported, in the absence of stakes held by UBI Banca in the share capital of the company and because the underlying securitisation has been closed down, SPV Marche Mutui 4 has not therefore been included in the Group’s consolidated financial statements.
408 WorldReginfo - 443ee11b-e188-477f-9b0d-38a07c5d7da1 The table that follows reports the situation for the notes as at 31st December 2017:
Remaining Amount Marche Mutui Nominal amount nominal % Fitch DBRS ISIN Number redeemed as at 4 Srl when issued amount as at redeemed Ratings Ratings 31/12/2017 31/12/2017
Class A IT0004515794 1,505,550,000 1,505,550,000 0 100.00% n.a. n.a
Class J IT0004515802 454,450,000 454,450,000 0 100.00% n.a. n.a
Total 1,960,000,000 1,960,000,000 0
Marche M5 securitisation The Marche M5 securitisation was performed in February 2012 on a portfolio of performing loans consisting of commercial mortgages and unsecured loans.
The securitisation was completed according to the following structure: the transfer without recourse of loans to the special purpose entity Marche Mutui 5 Srl21 amounting to €1.9 billion; financing of the operation by the issue of two notes (one senior, class A, and one junior, class J), for a total of €1,945.9 million (this amount allowed a cash reserve of €35.85 million to be formed in order to guarantee the transaction against possible liquidity difficulties). The senior class notes, assigned a rating by the agencies Moody’s and DBRS, were initially subscribed by Banca delle Marche to be used in principal refinancing operations with the European Central Bank and/or in repurchase agreement transactions with institutional counterparties. Also for this transaction the entire class A notes were then sold in the market in June 2015. The class J notes were subscribed by Banca delle Marche and they remained in the portfolio of the originator until the securitisation was closed down in the third quarter of 2017.
The early close down of the transaction, made possible by the existence of an early redemption option on the notes that could be exercised by the SPE at the time of the payment date, was concluded in July as follows: repurchase of the portfolio by the originator (with effect for operating and accounting purposes from 1st June); close down of the swap contracts and redemption of the securitised notes which took place on the payment date of 27th July. Consequently, as at that date, in compliance with the contractual terms of the securitisation, Marche M5 S.R.L., carried out the following: - the full redemption of the senior notes; - settlement of amounts to close the swap contracts; - payment of the excess spread and full redemption of the junior notes.
The table that follows reports the situation for the notes as at 31st December 2017:
Remaining Amount Marche M5 Srl Nominal amount nominal % Fitch DBRS ISIN Number redeemed as at when issued amount as at redeemed Ratings Ratings 31/12/2017 31/12/2017
Class A IT0004825417 1,195,000,000 1,195,000,000 0 100.00% n.a. n.a
Class J IT0004825227 750,900,000 750,900,000 0 100.00% n.a. n.a
Total 1,945,900,000 1,945,900,000 0
21 As already reported, in the absence of stakes held by UBI Banca in the share capital of the company and because the underlying securitisation has been closed down, SPV Marche Mutui 5 has not therefore been included in the Group’s consolidated financial statements.
409 WorldReginfo - 443ee11b-e188-477f-9b0d-38a07c5d7da1 Medioleasing Finance Securitisation This securitisation, for which Medioleasing Spa was the originator, was carried out in April 2008 with the transfer without recourse to Medioleasing Finance (a limited liability company formed in accordance with Law No. 130/9922) of a portfolio of receivables arising from finance lease contracts amounting to approximately €400 million. Medioleasing Finance financed the payment of the purchase price of the portfolio by the issue of notes amounting to €411.5 million, of which €300 million were sold by means of a private placement to the European Investment Bank (EIB).
The participation of the EIB in the securitisation as a subscriber of notes with an AAA rating was aimed at the promotion of investment projects carried out by small to medium-size companies operating within the territory of the Italian Republic. In this respect the funds received by Medioleasing were used to finance initiatives with predetermined characteristics. Details of the issue are given below.
- Senior Class Series A for €300,000,000 – subscribed by the European Investment Bank; - Senior Class Series B for 105,400,000 – subscribed by Medioleasing Spa; - Junior Class for €6,100,000 – subscribed by Medioleasing Spa.
The senior class A and B notes were assigned a rating by the agency Moody’s.
In order to ensure the proper functioning of the securitisation Banca delle Marche intervened in the securitisation as Liquidity Guarantor in order to ensure that Medioleasing Finance fulfilled its obligations relating to interest payments and redemption of the capital on the notes. Medioleasing and later Nuova Banca delle Marche23 also performed the role of servicer for the SPE.
In the second quarter of 2017, when the necessary conditions were met, Nuova Banca delle Marche exercised its option to repurchase the securitised portfolio (with effect for operating and accounting purposes from 1st April). Consequently on the payment date of 24th April, the notes issued were fully redeemed and the securitisation was closed down.
SECURITISATIONS ORIGINATED BY BANCA TIRRENICA The securitisations carried out by Banca Tirrenica Spa (former Nuova Banca dell’Etruria e del Lazio Spa) (originator) which was merged into UBI Banca Spa in November 2017 are reported below. Following the issue of Decree No. 183 of 22/11/2015, which resulted in the formation of bridge institutions in accordance with Art. 42 of Legislative Decree No. 180 of 16/11/2015, Nuova Banca dell’Etruria e del Lazio Spa took the place of Banca dell’Etruria e del Lazio Scpa, with no interruption, in all the roles performed regarding contractual agreements for the securitisation. Similarly, by virtue of the merger of Banca Tirrenica Spa (former Nuova Banca dell’Etruria e del Lazio Spa) into UBI Banca Spa concluded in November 2017, the latter took over all the roles performed in the same securitisations originally performed by Banca dell’Etruria e del Lazio (hereinafter Banca Etruria) that were still existing as at the merger date.
22 As already reported, in the absence of stakes held by UBI Banca in the share capital of the company and because the underlying securitisation has been closed down, SPV Medioleasing Finance Srl has not therefore been included in the Group’s consolidated financial statements. 23 With a provision dated 19/1/2016, approved by the Ministry of the Economy and Finance with a Ministerial Decree dated 18/2/2016, the Bank of Italy made an amendment to the Resolution Programme in order to allow the merger of the subsidiary Medioleasing into Nuova Banca delle Marche, which took place with a merger deed signed on 24/6/2016. As a result of the merger, Nuova Banca delle Marche became the successor to all the assets, rights and obligations relating to Medioleasing Spa inclusive of those arising from the securitisation in question, and in particular in the roles of originator and servicer.
410 WorldReginfo - 443ee11b-e188-477f-9b0d-38a07c5d7da1 MECENATE 2007 Securitisation Mecenate Srl (“Mecenate”), is the special purpose vehicle with which the Banca Etruria carried out a total of four securitisations of performing residential mortgages one of which is currently still in existence (Mecenate 2007) and two of which were closed down in 2017 (Mecenate 2009 and Mecenate 2011). All of the aforementioned securitisations were carried out in accordance with and as a result of the combined provisions of Art. 4 of Law No. 130/1999 and Art. 58 of the Consolidated Banking Law. Each securitised portfolio is managed completely separately with its own regulations for each securitisation and with specific contracts signed between the parties involved. Mecenate engaged Nuova Banca Etruria: (i) with a mandate for the management, administration and cash receipt services (servicing agreement) for each of the 2007, 2009 and 2011 mortgages securitised; (ii) with a mandate for the administrative and corporate management (corporate services agreement); and (iii) with a mandate to manage current accounts relating to receipts from securitised loans relating to each portfolio (Agency and Account Agreement). The Mecenate 2007 securitisation, created in May 2007, was implemented to optimise the management of the loan portfolio and to diversify sources of funding. The securitisation was structured as follows: - on 29th March 2007 Banca Etruria transferred en bloc and without recourse loans, classified as performing, and the relative legal relations attaching to a portfolio of ordinary and regulated mortgage loans, granted to private individual customers for a total amount of €633 million24. - on 11th May 2007 Mecenate issued notes for a total amount of approximately €633 million of which €630.1 million (classes A, B and C) assigned a rating, all at floating rate and with quarterly coupons. Those notes to which ratings had been assigned were listed on the Dublin stock exchange and when issued they were subscribed by institutional investors. On the other hand the Class D notes, which were unrated, were subscribed by Banca Etruria. The characteristics of the notes issues are as follows:
UBI SPV Lease 2016 Securitisation
Tranches Amount issued % Rating Maturity €(million) composition Moody's Fitch Class A 577.85 91.27 Aaa AAA 2048 Class B 13.60 2.15 Aa2 AA- 2048 Class C 39.75 6.28 Baa2 BBB 2048 Class D 1.89 0.30 unrated unrated 2048 Total 633.09 100.00
In accordance with the contractual agreements the class A notes commenced amortisation (redemption) in January 2009. Over the years the bank repurchased part of the senior and mezzanine notes sold in the market. More specifically, a part of the senior notes were repurchased between July 2008 and August 2014, and a part of the mezzanine tranche was repurchased between March 2010 and November 2013.
24 This amount of €633.092 million does not include interest accruing on the loans transferred, but not yet due as at the transfer date. That portion of the interest amounting to €5.7 million was financed by the SPE by deferment of the payment of the relative amount to the originator in accordance with the provisions of the transfer contract and with the payment priorities of the securitisation set contractually.
411 WorldReginfo - 443ee11b-e188-477f-9b0d-38a07c5d7da1 The table below reports the situation for the notes as at 31st December 2017:
Nominal Amount Remaining MECENATE amount when redeemed as nominal amount % Moody’s Fitch ISIN Number SERIES 2007 issued - at as at redeemed Ratings Ratings 11/05/2007 31/12/2017 31/12/2017
IT0004224116 Aa2 AA A. SENIOR 577,850,000 567,860,591 9,989,409 98.3%
IT0004224124 Aa2 AA B. MEZZANINE 13,600,000 - 13,600,000 0.0%
IT0004224132 Aa2 AA C. MEZZANINE 39,750,000 - 39,750,000 0.0%
IT0004224173 D. JUNIOR 1,892,000 - 1,892,000 0.0% n.a. n.a
TOTAL 633,092,000 567,860,591 65,231,409 89.7% and the amounts for the Mecenate notes held in the UBI Banca portfolio as at 31st December 2017:
Remaining Notes held by Notes held by MECENATE % UBI ISIN Number nominal amount investors as at UBI Banca as at SERIES 2007 ownership as at 31/12/2017 31/12/2017 31/12/2017
IT0004224116 A. SENIOR 9,989,409 6,257,966 3,731,442 37.4%
IT0004224124 B. MEZZANINE 13,600,000 8,300,000 5,300,000 39.0%
IT0004224132 C. MEZZANINE 39,750,000 17,150,000 22,600,000 56.9%
IT0004224173 D. JUNIOR 1,892,000 - 1,892,000 100.0%
TOTAL 65,231,409 31,707,966 33,523,442 51.4%
To complete the information we report that as at the payment date of 22nd January 2018, the Class A notes had been further redeemed by a nominal €2.264 million (of which €846 thousand relating to notes held by UBI Banca).
As at the reporting date, 31st December 2017, the Mecenate 2007 securitised portfolio amounted to €83.6 million of remaining principal debt. As already reported, the securitised assets remained recognised on the balance sheets of the originators as assets transferred not derecognised in compliance with the international accounting standards in force. The related liabilities associated with the assets transferred not derecognised amounting to €24.2 million were recognised at the same time within amounts due to customers. The related profit and loss item is recognised in item 20 in the income statement. For further information, reference is made to the specific sub-sections in these notes to the financial statements.
A description is given below of the composition of the portfolio transferred to Mecenate “2007 portfolio”, on the basis of the classification in the balance sheet of the originator (in terms of the net book amount) and in terms of the remaining principal receivables, according to the classification adopted in the transaction:
Remaining Carrying amount principal debt as as at 31/12/2017 TYPE OF LOAN TYPE OF LOAN at 31/12/2017 (thousands of (thousands of euro) euro) Performing loans 58,667 Performing loans 70,130
Performing past-due exposures 15,614 Arrears loans 3,910
Non-performing past-due 624 COLLATERAL PORTFOLIO 74,040 exposures Unlikely-to-pay 2,585 Defaulted loans 9,549 Bad loans 1,337 TOTAL 83,589
TOTAL assets transferred to 78,827 MECENATE SRL
412 WorldReginfo - 443ee11b-e188-477f-9b0d-38a07c5d7da1 In order to support the securitisation the bank granted Mecenate a subordinated loan of approximately €15 million of which €50 thousand was used to create a specific expense fund and the remaining €14.9 million to contribute towards the formation of a cash reserve. The cash reserve, which constitutes a guarantee for the subscribers of Mecenate 2007 portfolio notes, amounted as at the issue date to 2.87% of the amount issued. The current balance stands at approximately €8.9 million, equal to 13.6% of the notes outstanding as at 31st December 2017. The subordinated loan was partially repaid on the basis of the payment priorities set by the contracts and the balance on it as at 31st December 2017 was €394 thousand.
Furthermore, in compliance with requests from the rating agencies, in order to cover commingling risks for the securitisation, in 2010 Banca Etruria made a deposit (a “commingling reserve”) currently held with BNP Paribas, for an initial amount of €9.2 million. That reserve is subject to quarterly adjustment on the basis of the average amount of the sums received by Mecenate 2007 portfolio, in relation to the repayments on the securitised mortgages: that deposit stood at €5 million as at 31st December 2017.
As already mentioned above, the role of servicer for the securitised portfolios, which had been assigned to Banca Etruria, is now performed by the Parent UBI Banca as a result of the merger of Banca Tirrenica into UBI Banca. Fees paid for servicing activities carried out in 2017 were due to Nuova Banca Etruria for the period 1st April until 30th September 2017, and amounted to €17 thousand, while fees due to UBI Banca from 1st October amounted to €8 thousand. The total amounts received for servicing activity for the financial year 2017, amounted to €20.5 million, of which €3.04 million earned following the date of the merger into UBI Banca. Consistent with UBI Banca’s organisational procedures and processes regarding securitisation, an outside corporate servicer was engaged to replace the corporate servicer role for Mecenate performed by Banca Etruria, in order to carry out the administrative, corporate and accounting activities of the SPE. As already stated, TMF Management Italy S.r.l. (“TMF”) was engaged for this mandate, in line with what had already been put in place for other securitisations originated by UBI Banca.
Securitisations Mecenate 2009, Mecenate 2011 and Etruria Securitisation 2012 To complete the information, details are reported below on securitisations carried out by Banca dell’Etruria e del Lazio Scpa (originator) which were closed down during the course of 2017, subsequent to it joining the UBI Banca Group and before the merger of Banca Tirrenica Spa by UBI Banca S.p.A. which occurred in November 2017.
MECENATE 2009 Securitisation The objective of the Mecenate 2009 securitisation, created in the first quarter of 2009, was to diversify and increase sources of funding by transforming the loans transferred into securitised notes eligible for refinancing operations with central institutions.
The securitisation was structured as follows: - on 7th January 2009 Banca Etruria concluded the transfer without recourse to the SPE Mecenate, of a portfolio of performing loans consisting of ordinary and regulated residential mortgage loans amounting to approximately €497 million (the “Mecenate 2009 portfolio”). - on 2nd February 2009 Mecenate issued notes (RMBS), against the purchase of the loans, for a total amount of €497 million divided into three classes, two of which assigned ratings from the agency Fitch Ratings.
Those notes to which ratings had been assigned were listed on the Dublin stock exchange. The issue was fully subscribed by Banca Etruria. The class A notes were inserted in a list of securities eligible for refinancing operations with the ECB.
413 WorldReginfo - 443ee11b-e188-477f-9b0d-38a07c5d7da1 The second rating was assigned in January 2011 to comply with eligibility criteria for the use of senior notes in refinancing operations with the European Central Bank, which came into force in March 2011. The characteristics of the “Mecenate 2009 portfolio” are as follows:
Tranches Amount issued % Rating Maturity €(million) Composition Fitch Moody’s Class A 401.3 80.74 AAA Aaa 2047 Class B 82.7 16.65 BBB- 2047 Class C 13.0 2.61 unrated 2047 Total 497.0 100.00
In order to support the securitisation the bank granted Mecenate an initial loan of approximately €10.5 million, €50 thousand of which was used to create a specific expense fund, while the remaining part, amounting to €10.4 million, was used to create a cash reserve. In January 2011, following the assignment of a second rating to the Class B notes, the bank granted a further loan to Mecenate of €10.7 million to increase the cash reserve.
Amortisation (redemption) of the Class A notes began in October 2010, 18 months after the issue date. On 25th November 2014 the Class A notes, initially subscribed by Banca Etruria, were sold to institutional investors.
In the second half of 2017, the securitisation was closed down early as part of the rationalisation of securitisation transactions in the context of integration into the UBI Banca Group.
On 15th September 2017 contracts were signed for the repurchase of the outstanding loans in the Mecenate 2009 portfolio. The transfer took effect for legal purposes on 15th September 2017 and for operating purposes on 9th September 2017. The liquidation was completed as at the payment date of 23rd October 2017, when: - the swap contracts to back the operation were closed down; - all classes of the notes issued were fully redeemed; - the sums borrowed by Banca Etruria in the form of subordinated loans were repaid. Finally the securitisation was closed down with a “junior notes additional interest amount” of approximately €20 million, paid to Banca Tirrenica in its capacity as a junior noteholder.
The table that follows reports the situation for the notes as at 31st December 2017:
Nominal amount Remaining MECENATE Amount redeemed as % ISIN Number when issued - nominal amount as SERIES 2009 at 31/12/2017 redeemed 02/02/2009 at 31/12/2017
IT0004446602 401,300,000 401,300,000 A. SENIOR - 100%
IT0004446909 82,750,000 82,750,000 B. MEZZANINE - 100%
IT0004446917 12,954,000 12,954,000 D. JUNIOR - 100%
TOTAL 497,004,000 497,004,000 - 100%
As mentioned above, the role of servicer for the Mecenate 2009 securitised portfolio was performed by Banca Etruria. Fees paid for servicing activities carried out in 2017 by Nuova Banca Etruria (for the period 1st April until the date of the repurchase of the loans) amounted to €23 thousand, while the total amounts received for servicing activity for the financial year 2017 amounted to €17.6 million25.
25 Inclusive, where applicable, of the amount resulting from the repurchase transactions.
414 WorldReginfo - 443ee11b-e188-477f-9b0d-38a07c5d7da1 MECENATE 2011 Securitisation The objective of the Mecenate 2011 securitisation, created at the end of the first half of 2011 was not only to diversify the sources of medium to long-term funding, but also to achieve diversified management of the cost of funding. The securitisation was structured as follows: - on 7th June 2011, Banca Etruria concluded the transfer without recourse to the SPE Mecenate, of a portfolio of performing loans consisting of ordinary and regulated residential mortgage loans to private individuals totalling approximately €465.8 million (the “Mecenate 2011 portfolio”). - on 26th July 2011 Mecenate issued notes (RMBS), against the purchase of the loans, for a total amount of €465.8 million divided into four classes, three of which assigned ratings from the two agencies, Fitch Ratings and Moody’s.
The notes issued by “Mecenate 2011 portfolio” possessed the following characteristics:
Amount issued Tranches €(million) % Rating Maturity Composition Fitch Moody’s Class A1 160,000 34.35 AAA Aaa 2060 Class A2 90,000 19.32 AAA Aaa 2060 Class A3 99,400 21.34 AAA Aaa 2060 Class Z (junior) 116,406 24.99 unrated unrated 2060 Total 465,806 100.00
Those notes to which ratings had been assigned were listed on the Dublin stock exchange. The class A notes were inserted in a list of securities eligible for refinancing operations with the ECB.
All the notes were fully subscribed on issue by the bank. The Mecenate 2011 securitisation was initially structured as a public transaction involving the sale of the class A1 and A2 notes on the institutional market. Nevertheless a decision was taken by Banca Etruria close to the issue date, in consideration of negative performance by markets, to purchase all the classes issued by the SPE and to use them as securities eligible for refinancing operations with central institutions.
On 4th December 2012, the date on which the notes were structured, it was possible to sell the class A1 notes to an institutional investor at a price of 100.10% for an amount totalling €115.6 million thereby allowing the bank to recover net liquidity of approximately €27 million calculated as the difference between the amount obtained from the sale and the amount paid by the ECB on a repurchase agreement, to which recourse is normally made. In December 2014 all the class A2 notes (€90 million) and some of the class A3 notes totalling €20 million were sold to institutional investors. Two further sales of class A3 notes were concluded, again to institutional investors, for €25 million in February 2015 and for €9.1 million in November 2015.
Furthermore, in order to support the securitisation the bank granted Mecenate a subordinated loan of approximately €17.5 million to form a cash reserve used as a guarantee to creditors to satisfy their claims in case the cash flows from the repayments of the mortgages were insufficient for that purpose and also to form an expense fund of €50 thousand.
In the second half of 2017, this securitisation was also closed down early as part of the rationalisation of securitisation transactions in the context of integration into the UBI Banca Group and on 15th September 2017 contracts were signed for the repurchase of the outstanding loans in the Mecenate 2011 portfolio. The transfer took effect for legal purposes on 15th September 2017 and for operating purposes on 9th September 2017.
The liquidation was completed as at the payment date of 24th October 2017, when: - the swap contracts to back the operation were closed down; - the senior classes of the notes issued were fully redeemed; - the sums borrowed by Banca Etruria in the form of subordinated loans were repaid.
415 WorldReginfo - 443ee11b-e188-477f-9b0d-38a07c5d7da1 On the other hand the junior notes amounting to €116.4 million were partially redeemed in the amount of €110.4 million because of a shortfall in the funds available for the payments. Nevertheless all the notes, including the junior notes, were cancelled and the relative pool factor was set to zero. Banca Tirrenica, in its capacity as the junior noteholder, therefore received the partial redemption of the notes held, in compliance with the contracts for the 2011 securitisation.
The table that follows reports the situation for the notes as at 31st December 2017:
Remaining Nominal amount Amount MECENATE nominal amount ISIN Number when issued - redeemed as at % redeemed SERIES 2011 as at 07/06/2011 31/12/2017 31/12/2017
A. SENIOR IT0004750078 160,000,000 160,000,000 100% -
A2. MEZZANINE IT0004750094 90,000,000 90,000,000 100% - A3. MEZZANINE IT0004750086 99,400,000 99,400,000 100%
Z. JUNIOR IT0004749807 116,406,000 116,406,000 100% -
TOTAL 465,806,000465,806,000 100% -
As mentioned above, the role of servicer for the Mecenate 2011 securitised portfolio was performed by Banca Etruria. Fees paid for servicing activities carried out in 2017, by Nuova Banca Etruria (for the period 1st April until the date of the repurchase of the loans) amounted to €37 thousand, while the total amounts received for servicing activity for the financial year 2017, amounted to €26.7 million26.
ETRURIA SECURITISATION 2012 Securitisation Etruria Securitisation SPV Srl (“Etruria SPV”) is the SPE with which Banca Etruria carried out a securitisation in October 2012 of ordinary and regulated mortgage loans and unsecured loans to small to medium-sized businesses and to “small economic operators”. This securitisation was structured with the aim of pursuing dynamic management of capital assets and to increase the bank’s liquidity profile. In view of the different types of assets securitised compared with previous securitisations it was considered best to form a new SPE (in accordance with Law No. 130/99) rather than add an additional portfolio to the Mecenate SPE. It was named Etruria Securitisation SPV Srl, registered in Italy with the share capital held by a sole shareholder, Stichting Etruria, a company subject to Dutch law with headquarters in Holland27.
The securitisation was structured as follows: - on 12th July 2012 Banca Etruria transferred a portfolio of loans, en bloc and without recourse, to Etruria Securitisation SPV Srl, classified as performing, originating from ordinary and regulated mortgage loan and unsecured loan agreements granted to small to medium-sized businesses and to “small economic operators” for a total remaining principal debt of €643.9 million. - in order to finance the purchase, on 10th October 2012 Etruria SPV issued ABS notes for a total of €643,987,000 nominal, divided into senior class A notes assigned ratings by the agencies Moody’s and DBRS, and junior class B notes, unrated. Details of the notes issued are given below: Tranches Amount issued % Rating Maturity €(million) Composition DBRS Moody’s Class A 427.000 66.31 A (high) (sf) A2(sf) 2055 Class B 216.987 33.69 Unrated Unrated 2055 Total 643.987 100.00
26 Inclusive, where applicable, of the amount resulting from the repurchase transactions. 27 As already reported, in the absence of stakes held by UBI Banca in the share capital of the company and because the underlying securitisation has been closed down, SPV Etruria Securitisation has not therefore been included in the Group’s consolidated financial statements.
416 WorldReginfo - 443ee11b-e188-477f-9b0d-38a07c5d7da1 Those notes to which ratings had been assigned were listed on the Luxembourg stock exchange. The notes were fully subscribed on issue by Banca Etruria. The class A notes were inserted in a list of securities eligible for refinancing operations with the ECB.
Redemption of the class A notes began on the first interest payment date which was 28th January 2013. On 2nd December 2014 the class A notes outstanding as at that date (€174 million) were sold to institutional investors. The class A notes were fully redeemed on the payment date in July 2016.
When the notes were issued, Banca Etruria granted the company a loan of €24 million used to form the following reserves: (i) a cash reserve of €10.9 million to guarantee creditors in the event of the insufficiency of the receipts resulting from repayments of the securitised mortgages; (ii) a commingling reserve of €13 million to be used as a guarantee should the sums received from the mortgage portfolio be temporarily unavailable due to the insolvency of the servicer; (iii) an expenses fund of €80 thousand.
The aforementioned two reserves were subject to periodic amortisation on each interest payment date. In accordance with the provisions in the contracts the two reserves were reduced to zero after the full redemption of the senior notes.
Furthermore, in order to strengthen the bank’s liquidity position, on 7th January 2016 the class B junior notes, amounting to €217 million (the “Original Junior Notes”) were restructured by dividing the class B notes into two new classes of notes, a mezzanine class amounting to €125 million, assigned a rating and listed on the Luxembourg stock exchange, and a new junior class amounting to €92 million, unrated and unlisted.
The characteristics of the two new classes, for which the legal maturity is on the interest payment date, which is in October 2055, are illustrated in the table that follows:
Nominal amount Notes €(million) DBRS Moody's Class Mezzanine 57.61% 125.000 BBB (high) (sf) Baa2 (sf) Class C (Junior) 42.39% 91.987 unrated unrated Total 100.0% 216.987
The new mezzanine notes and the new junior notes were fully subscribed on issue (7th January 2016) by Nuova Banca Etruria, in accordance with a contract entitled “Notes Exchange Agreement”.
In order to restructure the original junior notes, Nuova Banca Etruria granted a further loan to Etruria SPV, amounting to €6.65 million, to create a junior cash reserve, with a provision made that this reserve could be used solely for the payment of interest on the mezzanine class notes until the senior notes had been fully redeemed.
In the second half of 2017, the Etruria securitisation was also closed down early as part of the rationalisation of securitisation transactions in the context of integration into the UBI Banca Group and on 15th September 2017 contracts were signed for the repurchase of the outstanding loans in the Etruria SPV portfolio. The transfer took effect for legal purposes on 15th September 2017 and for operating purposes on 9th September 2017. The liquidation was completed as at the payment date of 26th October 2017 when: - all classes of the notes issued were fully redeemed; - the sums borrowed by Banca Etruria in the form of subordinated loans were repaid.
Finally the securitisation was closed down with a “junior notes additional interest amount” of approximately €27 million, paid to Banca Tirrenica in its capacity as a junior noteholder.
417 WorldReginfo - 443ee11b-e188-477f-9b0d-38a07c5d7da1 The table that follows reports the situation for the notes as at 31st December 2017:
Amount Remaining ETRURIA Nominal amount % Retranching - redeemed as nominal SECURITISATI ISIN Number when issued - redeeme 07/01/2016 at amount as at ON SPV 10/10/2012 d 31/12/2017 31/12/2017
A. SENIOR IT0004855299 100% 427,000,000 427,000,000 -
B. JUNIOR IT0004855307 0% 216,987,000 -
B. MEZZANINE IT0005157760 100% - 125,000,000 125,000,000
Z. JUNIOR IT0005157778 100% - 91,987,000 91,987,000 -
100% TOTAL 643,987,000 216,987,000 643,987,000 -
As mentioned above, the role of servicer for the securitised portfolio was performed by Banca Etruria. Fees paid for servicing activities carried out in 2017, by Nuova Banca Etruria (for the period 1st April until the date of the repurchase of the loans) amounted to €57 thousand, while the total amounts received for servicing activity for the financial year 2017, amounted to €55 million28.
To complete the information, following the close down of the securitisation, Etruria Securitisation SPV Srl was put into voluntary liquidation in November 2017. Completion of the liquidation procedure is planned for the first months of 2018.
SECURITISATIONS ORIGINATED BY BANCA TEATINA
Information is reported below on the securitisation carried out by Cassa di Risparmio della Provincia di Chieti Spa (originator) in prior years and closed down in 2017 after Nuova Cassa di Risparmio di Chieti Spa joined the UBI Banca Group. As already reported, following the issue of Decree No. 183 of 22/11/2015, which resulted in the formation of bridge institutions in accordance with Art. 42 of Legislative Decree No. 180 of 16/11/2015, Nuova Cassa di Risparmio di Chieti Spa took the place of Cassa di Risparmio della Provincia di Chieti Spa, with no interruption, in all the roles performed regarding contractual agreements for the securitisation.
Creso 2 Srl Securitisation (closed down) In 2012 Cassa di Risparmio della Provincia di Chieti carried out a securitisation as the originator bank, in accordance with Law No. 130 of 1st April 1999, of a portfolio of loans amounting to approximately €375 million consisting of ordinary and regulated mortgages granted by the bank to its customers. The aforementioned loans were transferred by the bank to Società Veicolo Creso 2 Srl in accordance with the provisions of a transfer contract signed on 2nd July 2012. The servicer engaged by the SPE for this securitisation was Cassa di Risparmio della Provincia di Chieti.
As part of the securitisation, the SPE Creso 2 Srl financed the purchase of the aforementioned loans by issuing senior class A notes amounting to €274.4 million, assigned a rating and listed on the Luxembourg stock exchange, and junior class B notes amounting to €101.4 million not assigned a credit rating by agencies and unlisted.
28 Inclusive, where applicable, of the amount resulting from the repurchase transactions.
418 WorldReginfo - 443ee11b-e188-477f-9b0d-38a07c5d7da1
The table below summarises the characteristics of the notes issued:
Nominal Name amount when Maturity issued
Class A Asset Backed Floating Rate Notes 274,400,000 2060 Class B Asset Backed Floating Rate Notes 101,389,000 2060 Total 375,789,000
Both classes of notes were subscribed by the originator bank on the issue date. The securitisation Creso 2 did in fact originate as a “self-retained securitisation”: the relative notes were used by the bank as collateral for financing operations with central institutions. In the January 2015, the senior tranche of the securitisation, which had been amortised by over €100 million, was sold to third parties, while the bank maintained ownership of the junior notes only. In the second quarter of 2017 the bank exercised a call option provided for in the contracts for the securitisation and it repurchased the remaining loans in the portfolio. Subsequently it closed down the securitisation early with the early redemption of the securitised notes. To complete the information, we report that in compliance with international accounting standards in force, the securitisation, which originated as a “self-retained securitisations”, did not involve any derecognition of the loans which remained recognised within assets on the balance sheet of the originator.
SECURITISATIONS FEDAIA SPV SRL, RIENZA SPV SRL AND GARDENIA SPV SRL
As part of the activities connected with the acquisition by UBI Banca Spa of Nuova Banca delle Marche Spa, Nuova Banca dell’Etruria e del Lazio Spa, Nuova Cassa di Risparmio di Chieti Spa, Carilo Cassa di Risparmio di Loreto Spa, Banca Federico del Vecchio Spa and the relative companies either directly or indirectly controlled by them (the “New Banks”), three securitisations were structured by means of the transfer of non-performing loans held by the “New Banks” to three new SPVs controlled by Credito Fondiario S.p.A., according to the following scheme:
loans and receivables arising from financing contracts (unsecured and mortgage), extensions of credit facilities and other contractual relationships of various nature and form (excluding lease contracts) relating to positions classified as “bad” to Fedaia SPV Srl, for a total of €1.001 billion gross (a net value of €291.3 million); loans and receivables arising from financing contracts (unsecured and mortgage), extensions of credit facilities and other contractual relationships of various nature and form (excluding lease contracts) relating to positions classified as “unlikely-to-pay” to Rienza SPV Srl, for a total of €626.5 million gross (a net value of €252 million); receivables arising from lease contracts relating to positions classified as “bad” and “unlikely-to-pay” to Gardenia SPV Srl, for a total of €566.7 million gross (a net value of €218.7 million).
The portfolios reported above, together with the assets and the relative legal relationships, formed three separately managed portfolios within the three SPVs to structure three different securitisation transactions.
The transfers were completed on 7th April 2017, with effect for legal purposes from 1st May 2017 and for operating purposes from the previous 1st January 2017.
The distribution of the portfolios transferred are reported below by originator and credit quality, together with the relative carrying amount in the balance sheet of each transferor.
419 WorldReginfo - 443ee11b-e188-477f-9b0d-38a07c5d7da1 Banca Nuova Nuova Nuova Fedaia Srl Federico Total Banca CariLoreto Banca Carichieti Securitisation del Marche Etruria (*) Vecchio Unlikely-to-pay ------Bad loans 291,316 158,432 34,960 59,843 11,559 26,522 Total 291,316 158,432 34,960 59,843 11,559 26,522
To complete the information, we report that Nuova Cassa di Risparmio di Chieti also transferred unsecured guarantees amounting to €20 thousand.
Banca Nuova Nuova Rienza Srl Federico Nuova Total Banca CariLoreto Banca Securitisation del Carichieti Marche Etruria Vecchio Unlikely-to-pay 251,962 143,545 4,104 93,402 3,570 7,342 Bad loans ------Total 251,962 143,545 4,104 93,402 3,570 7,342
Banca Nuova Nuova Gardenia Srl Federico Nuova Total Banca CariLoreto Banca Securitisation del Carichieti Marche Etruria Vecchio Unlikely-to-pay 154,584 151,080 0 3,504 0 0 Bad loans 64,160 60,326 0 3,834 0 0 Total 218,744 211,407 0 7,338 0 0
Banca Nuova Nuova Federico Nuova Total Securitisation Total Banca CariLoreto Banca del Carichieti Marche Etruria Vecchio Unlikely-to-pay 406,546 294,625 4,104 96,905 3,570 7,342 Bad loans 355,477 218,759 34,960 63,677 11,559 26,522 Total 762,023 513,384 39,064 160,583 15,129 33,863
Compared with the amounts indicated above, the originators practiced a total sale price of: - €466.56 million, for Nuova Banca delle Marche, which resulted in a loss for the originator of €46.83 million; - €38.69 million for Cariloreto, which resulted in a loss for the originator of €372 thousand; - €156.24 million, for Nuova Banca delle Marche, which resulted in a loss for the originator of €4.34 million; - €15.2 million for Banca Federico del Vecchio, which generated a profit of €68 thousand for the originator; - €36.34 million for Nuova Carichieti, of which €20 thousand of unsecured guarantees, which resulted in a profit for the originator of €2.45 million.
The tables below report the distribution of the portfolio transferred by type of loans and receivables transferred, geographical distribution and economic sector of the counterparties for each securitisation and for each originator.
420 WorldReginfo - 443ee11b-e188-477f-9b0d-38a07c5d7da1 Percentage distribution of assets transferred by type of financing
Nuova Nuova Banca Nuova Fedaia Srl Securitisation Total Banca CariLoreto Banca Federico del Carichieti Marche Etruria Vecchio mortgage loans 73.28% 77.74% 64.80% 64.16% 71.98% 78.97% unsecured loans 2.88% 2.15% 4.18% 5.13% 2.68% 0.63% personal loans 0.47% 0.08% 0.25% 0.24% 0.02% 3.83% current accounts 21.76% 19.44% 26.55% 28.73% 21.45% 13.66% portfolio and other 0.83% 0.59% 4.16% 0.00% 0.00% 0.00% advances leases 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% other non-material 0.78% 0.00% 0.06% 1.74% 3.87% 2.91% transactions Total 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%
Nuova Nuova Banca Nuova Rienza Srl Securitisation Total Banca CariLoreto Banca Federico del Carichieti Marche Etruria Vecchio mortgage loans 94.63% 97.75% 96.60% 89.37% 100.00% 96.99% unsecured loans 5.26% 2.25% 3.40% 10.59% 0.00% 0.00% personal loans 0.09% 0.00% 0.00% 0.00% 0.00% 3.01% current accounts 0.02% 0.00% 0.00% 0.04% 0.00% 0.00% portfolio and other 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% advances leases 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% other non-material 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% transactions Total 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%
Nuova Nuova Banca Gardenia Srl Nuova Total Banca CariLoreto Banca Federico del Securitisation Carichieti Marche Etruria Vecchio mortgage loans 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% unsecured loans 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% personal loans 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% current accounts 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% portfolio and other 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% advances leases 100.00% 100.00% 0.00% 100.00% 0.00% 0.00% other non-material 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% transactions Total 100.00% 100.00% 0.00% 100.00% 0.00% 0.00%
421 WorldReginfo - 443ee11b-e188-477f-9b0d-38a07c5d7da1
Percentage distribution of assets transferred by geographical location
Nuova Nuova Banca Nuova Fedaia Srl Securitisation Total Banca CariLoreto Banca Federico del Carichieti Marche Etruria Vecchio North West 0.92% 0.00% 0.00% 3.65% 0.29% 1.77% North East 5.70% 9.20% 0.00% 3.40% 0.00% 0.00% Central Italy 81.36% 84.94% 96.33% 91.36% 99.65% 9.62% South and Islands 12.02% 5.86% 3.67% 1.59% 0.06% 88.61% Total 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%
Nuova Nuova Banca Nuova Rienza Srl Securitisation Total Banca CariLoreto Banca Federico del Carichieti Marche Etruria Vecchio North West 2.14% 0.00% 0.00% 5.77% 0.00% 0.00% North East 10.07% 4.57% 0.00% 20.14% 0.00% 0.00% Central Italy 83.41% 91.50% 100.00% 73.69% 100.00% 31.39% South and Islands 4.38% 3.93% 0.00% 0.40% 0.00% 68.61% Total 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%
Nuova Nuova Banca Gardenia Srl Nuova Total Banca CariLoreto Banca Federico del Securitisation Carichieti Marche Etruria Vecchio North West 0.02% 0.00% 0.00% 0.54% 0.00% 0.00% North East 4.14% 4.28% 0.00% 0.00% 0.00% 0.00% Central Italy 93.49% 93.49% 0.00% 93.50% 0.00% 0.00% South and Islands 2.35% 2.23% 0.00% 5.96% 0.00% 0.00% Total 100.00% 100.00% 0.00% 100.00% 0.00% 0.00%
Percentage distribution of assets transferred by economic sector
Nuova Nuova Banca Nuova Fedaia Srl Securitisation Total Banca CariLoreto Banca Federico del Carichieti Marche Etruria Vecchio Financial companies 0.09% 0.09% 0.07% 0.00% 0.00% 0.32% Non-financial companies 73.62% 70.05% 78.76% 86.74% 67.64% 61.19% Other 26.29% 29.86% 21.17% 13.26% 32.36% 38.49% Total 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%
Nuova Nuova Banca Nuova Rienza Srl Securitisation Total Banca CariLoreto Banca Federico del Carichieti Marche Etruria Vecchio Financial companies 0.16% 0.03% 0.00% 0.37% 0.00% 0.00% Non-financial companies 87.74% 85.00% 80.71% 92.93% 89.24% 78.60% Other 12.10% 14.97% 19.29% 6.70% 10.76% 21.40% Total 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%
422 WorldReginfo - 443ee11b-e188-477f-9b0d-38a07c5d7da1 Nuova Nuova Banca Gardenia Srl Nuova Total Banca CariLoreto Banca Federico del Securitisation Carichieti Marche Etruria Vecchio Financial companies 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% Non-financial companies 99.02% 99.26% 0.00% 92.10% 0.00% 0.00% Other 0.98% 0.74% 0.00% 7.90% 0.00% 0.00% Total 100.00% 100.00% 0.00% 100.00% 0.00% 0.00%
At the time when the financing was transferred a servicing contract was also signed by which originating banks took the role of “Interim Special Servicer” to carry out the activities specified in contracts for the management and collection of the loans and receivables transferred for the portfolios pertaining to them, while Nuova Banca Marche also took the role of “Interim Master Servicer”, with overall responsibility for the contractual services in question. The servicing contract ended on 24th September 2017 when Credito Fondiario S.p.A. took over these activities. For those services provided until that date, the originator banks received total fees of €711 thousand: €501 thousand received by Nuova Banca Marche (inclusive of €106 thousand for the role of Interim Master Servicer); €140 thousand by Nuova Banca Etruria; €37 thousand by CariLoreto; €31 thousand by Nuova Cari Chieti; and €1,600 by Banca Federico del Vecchio.
The notes were issued by the SPVs on the following 10th May 2017. Details are reported below of the notes issued for each securitisation:
issuances by Fedaia SPV o Class A notes: €78,600,000 nominal, floating rate, maturity 2037; o Class B notes: €201,500,000, nominal, maturity 2037; o issuances by Rienza SPV o Class A notes: €62,600,000, nominal, floating rate, maturity 2037; o Class B notes: €160,700,000, nominal, maturity 2037; o issuances by Gardenia SPV o Class A notes: €58,800,000, nominal, floating rate, maturity 2037; o Class B notes: €150,900,000, nominal, maturity 2037;
as summarised in the following table:
Nominal amount SPV ISIN Number when issued FEDAIA SPV Class A IT0005253510 78,600,000 FEDAIA SPV Class B IT0005253528 201,500,000 RIENZA SPV Class A IT0005253627 62,600,000 RIENZA SPV Class B IT0005253635 160,700,000 GARDENIA SPV Class A IT0005253577 58,800,000 GARDENIA SPV Class B IT0005253585 150,900,000
The notes issued by the three SPVs were subscribed by Quaestio Capital Management SGR Spa Unipersonale on behalf of the Atlante II fund.
In compliance with the applicable regulatory provisions, the originating banks (Nuova Banca delle Marche Spa, Nuova Banca dell’Etruria e del Lazio Spa, Cassa di Risparmio di Loreto Spa, Banca Federico del Vecchio Spa, Nuova Cassa di Risparmio di Chieti Spa) agreed to retain the “net economic interest” electing for the option pursuant to Art. 405(1) lett.c) of Reg. EU 575/2013 (the “Retention Rule”). The regulation referred to requires the originator banks to retain a randomly selected subset of exposures within the original perimeter of the securitisation, equal to not less than 5% of the nominal value of the securitised exposures.
423 WorldReginfo - 443ee11b-e188-477f-9b0d-38a07c5d7da1 The table below reports the amount of the total exposures retained by the originator and the percentage of retention guaranteed for the transfer for each securitisation.
Gross amount of the % Entity retained exposures Retention Fedaia SPV 52,883,486 5.27% Rienza SPV 31,391,574 5.01% Gardenia SPV 32,717,720 5.67%
At UBI Banca, the management and monitoring of the retained exposures is subject to a specific process designed to ensure compliance with the regulatory retention requirements over time.
To complete the information we report that neither the originator banks nor UBI Banca have issued credit lines, guarantees or other forms of financial support to the securitisations in question. Except for the information reported above regarding compliance with the retention rule, as at 31st December 2017 the UBI Banca Group no longer had any interests in the securitisations reported above.
SELF-RETAINED SECURITISATIONS Securitisations with underlying portfolios originated by UBI Banca and companies in the Group UBI are not reported in this section, because all the securitised notes were fully subscribed by each originator at the time of issue. As provided for by regulations, the relative sections of the notes to the financial statements have therefore not been compiled. For full information the main characteristics of the transactions existing at the time of preparing these notes to the financial statements have nevertheless been reported.
24-7 Finance Srl Securitisation
The securitisation 247 Finance Srl was performed in 2008 with the underlying assets held by B@nca 24-7 Spa, a company which, as is known, was merged into UBI Banca in 2012. The assets types which were securitised by transfer to a single special purpose entity, 24-7 Finance Srl29, consisted of three different portfolios:
1) mortgages: performing loans resulting from mortgages granted to private individuals resident in Italy, secured by a prime grade mortgages on residential properties located in Italy all fully built;
2) salary backed loans: performing loans resulting from salary backed loans to private individuals resident in Italy, secured by a “deducted for non-payment” clause and by a loss of employment insurance policy;
3) consumer loans: performing loans resulting from personal loans and dedicated loans to private individuals resident in Italy.
29 The company is subject to full consolidation by the Parent, UBI Banca according to the accounting standards in force.
424 WorldReginfo - 443ee11b-e188-477f-9b0d-38a07c5d7da1 Three different issuances of securitised notes were structured by the special purpose entity 24-7 Finance Srl on those assets. The securitisation transaction for salary backed loans was wound up in advance in 2011. Similarly the securitisation transaction with consumer loans for the underlying portfolio was also closed down in advance in 2012. Therefore as at 31st December 2017 only the mortgages securitisation was still in existence for which the portfolio amounted on that date to €1.09 billion (remaining principal debt). As already reported, in compliance with the international accounting standards in force, the securitised assets remained recognised on the balance sheets of the originators.
The tables below give the distribution of the securitised portfolio by the quality of the loans as at 31st December 2017 on the basis of the classification in the balance sheet of the originator (in terms of the net book amount) and the reporting classification of the transaction (in terms of the remaining principal debt “customer view”).
Carrying TYPE OF LOAN Remaining TYPE OF LOAN amount as at (classification for principal debt as at (balance sheet 31/12/2017 the purposes of the 31/12/2017 classification) (thousands of transaction) (thousands of euro) euro) Performing loans 749,614 Performing Loans 842,534 Performing past-due 140,160 Arrears Loans 33,754 exposures Non-performing past-due COLLATERAL 2,282 876,288 exposures PORTFOLIO Unlikely-to-pay 77,746 Defaulted Loans 211,471 TOTAL 24-7 Bad loans 81,966 FINANCE 1,087,759 PORTFOLIO TOTAL assets transferred from UBI 1,051,768 Banca to 24-7 Finance
The characteristics of the notes issued were as follows: class A notes (senior notes): nominal amount €2,279,250,000 at floating rate, initially assigned a rating of Aaa by Moody’s; in order to comply with eligibility requirements a second rating was added in 2011 by DBRS which initially stood at A (high); the current rating level is Aa3 for Moody’s and AA(high) for DBRS. class B notes (junior notes): nominal amount €225,416,196, maturity 2055, unrated and with a yield equal to the additional return on the underlying portfolio.
The securitised notes are wholly owned by UBI Banca which uses the senior tranches as collateral eligible for the refinancing operations with central institutions.
The amortisation of the class A notes began from February 2010. The table below reports total amortisation and the remaining value of the notes as at 31st December 2017:
Remaining 24/7 FINANCE Srl - Amount Nominal amount nominal % TITOLI ISIN Number redeemed as at when issued amount as at redeemed CARTOLARIZZATI 31/12/2017 31/12/2017 Class A IT0004376437 2,279,250,000 1,602,133,874 677,116,126 70.30% Class B IT0004376445 225,416,196 0 225,416,196 0.00% Total 2,504,666,196 1,602,133,874 902,532,322 64.00%
425 WorldReginfo - 443ee11b-e188-477f-9b0d-38a07c5d7da1 The roles of cash manager, calculation agent and paying agent are performed for the securitisation by The Bank of New York Mellon which also acts as the account bank. In 2017 UBI Banca joined Bank of New York in the roles of “Additional Transaction Bank” and “Additional Cash Manager”, as depositary banks for the liquidity generated by the portfolio. In addition to the role of originator, Banca 24-7 also functioned as the servicer for the transaction, a role that is now carried out by UBI Banca following the merger of the two entities. Fees due to UBI Banca for servicing activities carried out in 2017 totalled €414 thousand, while total amounts received in respect of servicing activities in 2017 amounted to €128.7 million.
For full information we report that Banca 24-7 Finance also filled the role of subordinated loan provider, having granted a subordinated loan designed to create an initial cash reserve to meet possible shortages of liquidity for the operation. At the time of the merger into UBI Banca in 2012, a subordinated loan of approximately €24.4 million was outstanding, which was subsequently increased in 2013 by a further €73.1 million. The financial support provided by UBI Banca to the securitisation, given that no repayments of the loan had been made since 2012, amounted to €97.5 million.
UBI SPV Lease 2016 Securitisation
Following the close down in 2016 of the UBI Lease Finance 5 transaction described above, this was immediately followed by the structuring of a new securitisation transaction with lease financing disbursed by UBI Leasing as the underlying. This transaction was also created for the purpose of generating notes eligible for refinancing with central institutions. A new SPE30, named UBI SPV Lease 2016 Srl, was therefore formed to which the performing receivables and the relative lease contracts were transferred amounting to €3.065 billion (in terms of principal receivables). The transfer was concluded on 23rd June 2016 with effect for accounting and operating purposes backdated to 31st May. As at 31st December 2017 the securitised portfolio, which in this case too remains recognised among the assets of the originator, amounted to €2.8 billion of remaining principal debt. A description is given below of the composition of the portfolio transferred to UBI SPV Lease 2016, on the basis of the classification in the balance sheet of the originator (in terms of the net book amount) and in terms of the remaining principal receivables, according to the classification adopted in the transaction:
Amount as at TYPE OF LOAN Remaining TYPE OF LOAN 31/12/2017 (classification for principal debt as at (balance sheet (thousands the purposes of 31/12/2017 classification) of euro) the transaction) (thousands of euro) Performing loans 2,804,911 Performing Loans 2,795,650 Doubtful loans 36,905 Arrears Loans 33,650 COLLATERAL of which: 2,829,300 PORTFOLIO Non-performing past-due 1,861 Defaulted Loans 17,606 exposures TOTAL UBI SPV Unlikely-to-pay 24,034 LEASE 2016 2,846,906 PORTFOLIO Bad loans 11,010 Total assets transferred by UBI Leasing to UBI 2,841,816 SPV LEASE 2016
30 The company is subject to full consolidation by the Parent, UBI Banca according to the accounting standards in force.
426 WorldReginfo - 443ee11b-e188-477f-9b0d-38a07c5d7da1 At the time when the financing was transferred a servicing contract was also signed by which UBI Banca, along the same lines as the model described above, filled the role of servicer and UBI Leasing that of sub-servicer for the management and collection of payments relating to the securitised financing, inclusive of positions classified as bad debt.
The fees due to UBI Banca for servicing activity carried out in 2017, amounted to €113 thousand, while the total payments received by the servicer and sub-servicers for the activities for which they are responsible amounted to €523.4 million in 2017.
UBI Banca, in its capacity as the Parent, also fills the role of cash manager, Italian account bank and calculation agent while the role of paying agent and English account bank is carried out by BNP Paribas Securities Services. Furthermore, taking a prudential approach in order to comply with the eligibility requirements even under adverse market stress scenario conditions, a backup servicer facilitator has been appointed. This function is carried out by the company Zenith Service Spa, which also fills the role of noteholder representative for the operation.
The notes were issued on the following 28th July 2016. The characteristics of the securities issued are as follows:
class A notes (senior tranches): nominal amount €2,100,000,000, at floating rate, maturity in 2050, assigned an A1 rating by Moody’s and A (low) by DBRS; class B notes (junior tranches): nominal amount €1,000,900,000 maturity 2050, unrated and with a yield equal to the additional return on the transaction. The subscription of the junior notes also made it possible to form, as part of the securitisation, a cash reserve of €31.5 million, still fully available at the reporting date of these notes to the financial statements.
Amortisation of the notes has not yet begun and therefore the situation of these as at 31st December 2017 is as follows:
UBI SPV LEASE 2016 Nominal Remaining Amount redeemed as % - SECURITISED ISIN Number amount when nominal amount at 31/12/2017 redeemed NOTES issued as at 31/12/2017
Class A IT0005204463 2,100,000,000 0 2,100,000,000 0,0%
Class B IT0005204471 1,000,900,000 0 1,000,900,000 0,0%
Total 3,100,900,000 0 3,100,900,000 0,0%
The UBI Lease 2016 securitisation is a “revolving” operation. The “revolving” period will last at the latest until May 2018, during which the originator, UBI Leasing, is able to transfer additional receivables to the special purpose entity, which will finance their purchase using the amounts received from the portfolio securitised previously. The first “revolving” transfer was completed in the first quarter of 2017 (effective for legal purposes as of 24th January 2017 and for operating and accounting purposes from 1st January 2017). The transfer was comprised of a portfolio totalling €260 million (in terms of remaining principal debt). A second “revolving” transfer was completed in July 2017 (effective for legal purposes as of 21st July 2017 and for operating and accounting purposes from 1st July 2017). The transfer was comprised of a portfolio totalling €223 million (in terms of remaining principal debt). To complete the information we report that a further “revolving” transfer was carried out in January 2018 (effective for legal purposes as of 23rd January 2018) for €187 million of remaining principal debt.
427 WorldReginfo - 443ee11b-e188-477f-9b0d-38a07c5d7da1 UBI SPV GROUP 2016 Securitisation The structuring of a new securitisation was also launched in the second quarter of 2016 with residential mortgages classified as performing as the underlying. This is also designed to issue notes eligible for refinancing with central banks, along the same lines as the other securitisations currently in existence in the UBI Group, which are described above.
This transaction, named UBI SPV Group 2016, is a multi-originator securitisation in which the following participated as transferors: the Parent UBI Banca and the six network banks of the Group (subsequently merged into UBI Banca), Banco di Brescia, Banca Popolare di Bergamo, Banca Popolare di Ancona, Banca Carime, Banca Regionale Europea and Banca Popolare Commercio e Industria. The transferee company is a new special purpose entity, UBI SPV Group 2016 Srl, that has been specially formed31.
The operation was concluded in two stages as follows:
1) the transfer of mortgages to the special purpose entity UBI SPV Group 2016 S.r.l. by the originators, which took place on 30th June 2016 (but with effect for operating and accounting purposes backdated to 13th June), for a total amount of approximately €2.748 billion. In accordance with the accounting standards currently in force, that portfolio remained recognised among the assets of each of the transferor banks.
2) the issue of notes by UBI SPV Group 2016 Srl, concluded on 11th August 2016 and the subscription at the same time of those notes by each originator, in proportion to the size of the relative portfolio transferred. Details of the notes subscribed and the relative characteristics are as follows:
class A notes (senior tranches): nominal amount €2,085,600,000, at floating rate, maturity in 2070, assigned on issuance an A1 rating by Moody’s and A (low) by DBRS, subscribed on a pro rata basis by all the originator banks participating in the securitisation. The class A notes subscribed by the network banks were then made available to the Parent by means of repurchase operations for the purpose of being used in refinancing operations with central banks. Following the merger of the network banks into UBI Banca, all the class A notes are now held directly by UBI Banca. class B notes (junior tranches) with maturity in 2070, unrated and with a yield equal to the additional return on the transaction, distributed among the seven originator banks as follows: - class B1 subscribed by UBI Banca for €113,800,000; - class B2 subscribed by Banca Popolare di Ancona for €62,700,000 nominal; - class B3 subscribed by Banca Popolare Commercio e Industria for €133,900,000 nominal; - class B4 subscribed by Banco di Brescia for €95,400,000 nominal; - class B5 subscribed by Banca Popolare di Bergamo for €244,400,000 nominal; - class B6 subscribed by Banca Carime for €51,000,000 nominal; - class B7 subscribed by Banca Regionale Europea for €59,100,000 nominal. Following the merger of all the network banks into UBI Banca, the B2 and B7 notes were unified within the B1 class, which as at 31st December 2017 amounted to €760.3 million and were held entirely by UBI Banca. Subscription of the junior notes by the originators also made it possible to form a cash reserve totalling €83.4 million. This sum has not yet been drawn on and is fully available to the securitisation at the reporting date of these notes to the financial statements.
31 The company is consolidated by UBI Banca in the Consolidated Annual Report for the Group, according to the accounting standards in force.
428 WorldReginfo - 443ee11b-e188-477f-9b0d-38a07c5d7da1 The table below reports the situation for the notes issued as at 31st December 2017:
UBI SPV GROUP Amount Remaining 2016 SRL - SUBSCRIBED Nominal amount redeemed nominal amount % ISIN Number SECURITISED BY when issued as at as at amortised NOTES 31/12/2017 31/12/2017
Originator pro Class A IT0005209967 2,085,600,000.00 0.00 2,085,600,000.00 0.00% quota (all UBI)
Class B1 UBI IT0005209983 760,300,000.00 0.00 760,300,000.00 0.00%
TOTAL 2,845,900,000.00 0.00 2,845,900,000.00 0.00%
As at 31st December 2017 the rating assigned to the class A notes was unchanged compared to that assigned on the issue date.
At the time when the mortgages were transferred, a general servicing and sub-servicing contracts were also signed by which UBI Banca, in its capacity as the Parent, fills the master servicer role, while activity for the collection of payments and the management of relations with customers was delegated to the various originators in their capacities as sub-servicers for the respective portfolios transferred. Following the merger of all the network banks, completed in February 2017, the fees for sub-servicing activities were paid entirely to UBI Banca in its capacity as servicer. In compliance with Group practices, also for this new transaction any positions reclassified as bad loans will be managed by the Credit Recovery Area of the Parent.
The total fees earned by UBI Banca for servicing activity in 2017 amounted to €918 thousand, while for that of master servicer activity and also for credit recovery activities for “bad” exposures the total was €175 thousand.
The amount recognised for the fees relating to the year for servicing is recognised within item “220 Other operating income/expense” in the income statement.
Total amounts collected as part of servicing activities carried out in 2017 amounted to €186.6 million and also included amounts collected on the portfolios of the network banks merged in February 2017.
At the time when the notes were issued, the remaining contracts for the securitisation were also concluded, on the basis of which UBI Banca in its capacity as Parent fills the role of Italian account bank and calculation agent, while the role of paying agent is filled by The Bank of New York Mellon. Also for this operation, in order to comply with eligibility requirements even under adverse market stress scenario conditions, the company Zenith Service S.p.A. has been assigned the role of backup service facilitator. For full information we report that Zenith Service Spa also fills the role of noteholder representative. The UBI SPV Group 2016 securitisation is a “revolving” operation. A maximum period of 36 months following the issue date of the notes has been set during which the originator may transfer additional loans to the special purpose entity. The special purpose entity will purchase those loans and finance the purchase from the amounts received generated by the portfolio securitised previously. At the date of publication of these notes to the financial statements, no transfer of subsequent portfolios has yet been made. On the other hand we report that in the first quarter of 2017 the first repurchase of loans classified as bad or unlikely-to-pay, which is to say loans “in arrears”, was completed for a total of €44.3 million of remaining principal debt, effective for legal purposes as of 24th March and for operating and accounting purposes backdated to 26th February.
429 WorldReginfo - 443ee11b-e188-477f-9b0d-38a07c5d7da1 With account taken of the repurchase mentioned above and of the natural amortisation of the loans, the total portfolio transferred by the originator banks now merged into UBI Banca, which as already mentioned remains recognised on the balance sheets of the originators, stood at €2.4 billion of remaining principal debt as at 31st December 2017.
The table below reports, as at 31st December 2017, the composition of the total portfolio transferred to UBI SPV Group 2016 by type of credit quality on the basis of the reporting classification of the securitisation (in terms of the remaining principal debt):
TYPE OF LOAN – figures as at 31.12.2017 TOTAL Remaining principal debt (thousands of euro) PORTFOLIO (*)
Performing loans 2,327,717 Arrears loans 14,263
Collateral Portfolio 2,341,980
Defaulted Loans 16,614 Total UBI SPV Group 2016 portfolio 2,358,594
(*) The total portfolio includes the portfolios transferred by the companies merged into UBI Banca in 2016 in 2017.
The table below, on the other hand, shows the distribution of the portfolio transferred according to the amount recognised under the asset item “70 loans and advances to customers” in the balance sheet by type of credit quality on the basis of the balance sheet classification of the originator.
Carrying amount as at TYPE OF LOAN 31/12/2017 (balance sheet classification) (thousands of euro) (*) Performing loans 2,189,130 Performing past-due exposures 213,118 Non-performing past-due exposures 1,623 Unlikely-to-pay 12,200 Bad loans 2,657 Total UBI SPV Group 2016 2,418,728 securitised portfolio
(*) The total portfolio includes the portfolios transferred by the companies merged into UBI Banca in 2016 in 2017.
SYNTHETIC SECURITISATIONS The main purpose of a synthetic securitisation is to create value and optimise the use of capital by freeing up regulatory and economic capital as a consequence of reducing the level of credit risk in the underlying portfolio (“significant risk transfer”). Generally a synthetic securitisation involves the purchase of protection for the credit risk underlying a loan portfolio for which the originator retains full ownership by signing guarantee contracts. Synthetic securitisations are therefore designed to transfer credit risk from the originator to an external counterparty. The transfer does not involve the derecognition of the assets and therefore the assets are maintained on the balance sheet of the originator.
430 WorldReginfo - 443ee11b-e188-477f-9b0d-38a07c5d7da1 The legislation applicable to these transactions is Regulation EU 575/2013 (Capital Requirements Regulation, "CRR"). Article 245 of this regulation lays down the conditions on the basis of which the significant risk transfer (SRT) criterion is satisfied, which is to say the transfer of significant risk to third parties by means of either collateralised or unsecured credit protection. More specifically, the SRT must be constantly monitored even during the life of the transaction in order to verify that the criteria set by the regulations are met. Again in compliance with the regulations (article 405 of CRR), the originator must retain a portion of the net economic interest amounting to at least 5% of the nominal amount of the securitised portfolio. This means, in the structure of the securitisations chosen by the Group, that at least 5% of each securitised loan is considered unsecured (vertical slice or vertical retention). The structure of the securitisation is based on tranching (normally Junior-J, Mezzanine-M, Senior-S) according to the risk of the portfolio.
The UBI Group implemented two synthetic securitisations in 2017, both concluded in December 2017, named “UBI2017- SME FEI” and “UBI2017 - RegCap-1”, as part of a long- term programme of synthetic securitisations designed to optimise capital and create value. Reference is made to the information provided in the sub-sections that follow for details of the two securitisations.
UBI2017 - SME FEI Securitisation The "UBI2017 - SME FEI" securitisation implemented in 2017 consists of a portfolio of medium to long-term loans to performing counterparties consisting of SMEs (over 80%) and small mid cap companies, mainly located in southern Italy. This securitisation is the result of a positive evaluation made by the Group in 2017 of adhering to "SME Initiative Italy". The tender documents were published on 21st October 2016 by the European Investment Fund (EIF). The EIF initiative is very innovative with a specific focus on southern Italy and it is financed with structural funds, European resources, national resources and resources of the EIB Group to cover the junior and mezzanine risk of the securitised portfolio at competitive pricing conditions. The securitisation involves the grant by the UBI Group within the following three-year period of a portfolio of loans that are in addition to those covered under subsidised conditions reserved to SMEs located in southern Italy at the same time as the risk is covered on the securitised portfolios. Three tranches of guarantees have been issued for this securitisation: a senior tranche subscribed by UBI Banca, a mezzanine tranche divided into three sub tranches and a junior tranche. As stated the mezzanine and junior tranches have been subscribed by the EIF.
UBI2017 - RegCap-1 Securitisation The “UBI2017 - RegCap-1” securitisation, also implemented at the end of 2017, is the first market securitisation carried out by the Group. The underlying portfolio is composed of medium to long-term loans granted to performing counterparties consisting of corporates and corporate SMEs located mainly in northern Italy. Two tranches of guarantees have been issued for this securitisation: a senior tranche, subscribed by UBI Banca, and a junior tranche subscribed by a market counterparty. As opposed to the preceding securitisation, this transaction is funded and it involves the deposit by the subscriber of the junior tranche of the entire amount of the guarantee. “The deposit is recognised under item 20 “Amounts due to customers” in the balance sheet; references is made to the specific section in these notes to the financial statements for details.
431 WorldReginfo - 443ee11b-e188-477f-9b0d-38a07c5d7da1 The table below gives the main qualitative and quantitative characteristics of the two securitisations to which reference is made for further details.
Name of Securitisation UBI2017 - SME FEI UBI2017 - RegCap-1 Type of transaction synthetic securitisation synthetic securitisation Originator UBI BANCA Spa UBI BANCA Spa Depository Bank n.app. UBI BANCA Spa Servicer UBI BANCA Spa UBI BANCA Spa Calculation Agent UBI BANCA Spa UBI BANCA Spa Guarantee Provider European Investment Fund "EIF" Protection seller Objectives of the transaction to hedge credit risk to hedge credit risk Type of assets securitised loans to SMEs and Corporate customers loans to SMEs and Corporate customers Quality of the securitised assets performing performing Closing date 18/12/2017 18/12/2017 Nominal amount of the portfolio 1,122,607,166 1,996,773,687 50% 5% percentage of the economic interest retained (retention) Portfolio Guaranteed 561,303,583 1,896,935,002 guarantee in the form of a pledge on a Guarantees issued by third parties personal unfunded guarantee term deposit Regulatory Event, Time Call, Clean-Up Early termination clauses Regulatory Event, Time Call, Clean-Up Call, Tax Event Call, Tax Event Time Call 30/09/2020 30/06/2020 Rating agencies none (*) none (*)
Tranching amount and conditions: Upper Middle Low Senior Junior Senior Junior - type Mezzanine Mezzanine Mezzanine - legal maturity n.app.Dec-32 n.app. Dec-37 - Amount at closing date 524,257,547 2,806,518 561,304 16,839,107 16,839,107 1,794,435,002 102,500,000 - % of Guaranteed Portfolio 93.40% 0.50% 0.10% 3% 3% 94.60% 5.40% - Subscriber UBI BANCA SpAGuarantee Provider UBI BANCA SpA Guarantee Provider - Guarantee Amount not guaranteed37,046,036 not guaranteed 102,500,000
Breakdown of securitised portfolio by geographical area: - North Italy 39.39% 77.43% - Central 9% 17.00% - South and Islands 51.61% 5.57%
Breakdown of securitised portfolio by type of customer: - Corporate 19.00% 59.88% - SME 81.00% 40.12%
(*) In the absence of an external rating, the CRR (Art. 259) states that the calculation of the capital requirements for the various tranches of the retained securitisations should be carried out using the "Supervisory Formula Approach SFA" (Art. 262)
432 WorldReginfo - 443ee11b-e188-477f-9b0d-38a07c5d7da1 Internal risk measurement and monitoring systems connected with securitisation transactions including measurement, for those transactions originated by the Group, where risks were transferred to third parties. Illustration of the organisational structure for managing securitisation transactions including systems for reporting to senior management or to a similar body.
To complete the information given in the preceding pages, we report in relation to the organisational aspects and to internal control systems, that the UBI Banca Group has made a positive assessment of the structuring of the two synthetic securitisations described above as initiatives to optimise capital and create value. Research into the regulatory framework and the preparatory activities carried out by the competent units in the Group allowed the feasibility of the securitisation, the economic advantages and the expected benefits in terms of capital to be assessed. It also enabled the software architecture and the main areas for technological intervention to be identified in order to plan the necessary IT developments.
The main organisational units responsible for managing the securitisations are the units under the Chief Financial Officer (CFO) and under the Chief Risk Officer (CRO). The roles and the responsibilities relating to the implementation of the various steps involved in structuring activity and those involved in ongoing monitoring and management of the securitisations have been defined in those units, as set out in a dedicated circular. The significant risk transfer (SRT) must be constantly monitored during the life of the transaction in order to verify that the criteria set by the CRR Regulation (Art. 244) on the effective transfer of credit risk are satisfied. The securitisation will also be monitored by the competent units with regard to the economic advantages for the Bank. Senior Management will be informed if difficulties or significant changes with respect to forecasts are encountered. It is underlined in this respect that the contracts contain early close-down clauses (“time calls” and “clean up calls”) and early termination clauses (which may be applied in the event of significant changes in the regulatory and/or legislative framework).
Securitisations: accounting policies
The loans subject to synthetic securitisation are not derecognised assets and therefore they remain recognised in the balance sheet of the originator bank which maintains full ownership. The premium paid by the Bank to the investor for the protection of credit risk is recognised within fee and commission expense in the income statement. The enforcement of the financial guarantee received from the investor if the conditions laid down in the contracts manifest (i.e. a “Credit Event”), will contribute to the recognition of impairment losses or reversals of them on the securitised loans.
433 WorldReginfo - 443ee11b-e188-477f-9b0d-38a07c5d7da1 Quantitative information
C.1 Banking Group - Exposures resulting from the principal “own” securitisation transactions by type of securitised assets and by type of exposure
SeniorOn-balance Mezzanine sheet exposures Junior Senior Guarantees Mezzanine granted Junior Senior Mezzanine Credit lines Junior
Type of securitised assets/exposures
t t t t t rmen rmen rmen rmen rmen i i i i i Impairment Impairment Impairment mpa mpa mpa mpa mpa I I I I I Impairment Impairment Impairment Impairment losses/reversals losses/reversals losses/reversals losses/reversals losses/reversals losses/reversals losses/reversals Carrying amount Carrying amount Carrying amount Carrying amount Carrying Carrying amount Carrying amount Carrying losses/reversals losses/reversals Carrying amount Carrying Carrying amount Carrying Carrying amount Carrying
A. Subject to ful l derecognition ------Asset type ------
B. Subject to partial derecognition ------Asset type ------
C. Not derecognised 2,248,911 - 21,683 - 23,311 ------6,127 -
3,555 - 21,683 - 23,311 ------6,127 - C.1 M ecenatedentia 2007l mortgages securitisation 3,555 - 21,683 - 23,311 ------6,127 - - Resi C.2 Synthetic securitisation - Transaction UBI2017 - EIF 504,958 ------Loans to SMEs 504,958 ------
C.3 Synthetic securitisation - Transaction UBI2017 - RegCap 1 1,740,398 ------d sma ll corporates 1,740,398 ------Loans to corporates an
The table above shows the amount of retained risk (line items C.2 and C.3) for the synthetic securitisations structured in December 2017.
434 WorldReginfo - 443ee11b-e188-477f-9b0d-38a07c5d7da1 C.2 Banking Group - Exposures resulting from the principal “third party” securitisation transactions by type of securitised assets and by type of exposure
Following the merger of Banca Adriatica into UBI Banca, the Group acquired a floating rate Senior Class B Note with maturity in 2022, a zero carrying amount and a nominal value of €1.5 million.
C.3 Banking Group - Interests held in securitisation special purpose entities
Assets Liabilities Name of securitisation/special purpose entity Registered address Consol idation Loans and D ebt instrument s Other Senior Mezzanine Junior receivables
Mecenate 2007 SPV Srl Via Calamandrei, 255 - Arezzo Full 82,774 - 14,029 10,149 53,350 33,304
C.4 Banking Group - Securitisation special purpose entities not included in the consolidation
No items of this type exist for the UBI Group.
C.5 Banking Group - Servicer activity – only own securitisations: payments received on securitised loans and redemptions of securities issued by the special purpose entity
Securitised assets (end Payments received on Percentage of securities redeemed (end of period figure) of period figure) loans during year Senior Mezzanine Junior Servicer Special purpose entity Non- Non- Non- Non- Non- Performing Performin Performin Performin Performin performing performing performin performin performin assets g assets g assets g assets g assets assets assets g assets g assets g assets The amounts shown relate to the sums collected as part of servicing activity and do not include the amounts received by the SPE for the return of loans to the originator. UBI Banca Spa Mecenate 2007 SPV Srl 8,583 74,191 1,505 18,869 2.88% 95.39% 0.00% 0.00% 0.00% 0.00%
C.6 Banking Group - Consolidated securitisation special purpose entities
No items of this type exist for the UBI Group.
D. Information on structured entities not included in the consolidated accounts (other than securitisation special purpose entities)
No items of this type exist for the UBI Group.
435 WorldReginfo - 443ee11b-e188-477f-9b0d-38a07c5d7da1 E. Transfers
A. Financial assets transferred and not fully derecognised
Quantitative information
E.1 Banking Group - Financial assets transferred not derecognised: carrying amount and full value
Financial assets designated T ype of asset / P ortfolio Financial assets held for trading Available-for-sale financial assets Held-to-maturity investments Loans to banks Loans to customers Total at fair value
fully partially fully partially partially pa rtia lly pa rtia lly partially partially fully re c o gnis e d partially partially partially fully recognised partially recognise fully recognised pa rtia lly recognised recognised recognised fully recognised recognised recognised recognise recognised recognised (carrying recognised recognised recognised (carrying recognised (full d (carrying recognised 31.12.2017 31.12.2016 (carrying (carrying (carrying (carrying amount) (carrying (carrying d (carrying (full (carrying amount) (full amo unt ) (full amo unt ) (full amount ) amount) amount ) (carrying amount) (full amount ) amount) amount) amount) amount) amount) amount) amount ) amount) amount) A. On-balance sheet assets 11,854 - - - - - 1,697,533 - - 594 ------3,092,142 3,845,019 1. Debt instruments 11,854 - - - - - 1,697,533 - - 594 ------1,709,981 3,845,019 2. Equity instruments ------X X X X X X X X X - - 3. UCIT S ------X X X X X X X X X - - 4. Financing ------1,382,161 - - 1,382,161 - B. Derivative instruments - - - X X X X X X X X X X X X X X X - - 31.12.2017 11,854 - - - - - 1,697,533 - - 594 ------3,092,142 X of which non-performing ------X 31.12.2016 37,211 - - - - - 3,311,444 - - 496,364 ------X - of which non-performing ------X -
436 WorldReginfo - 443ee11b-e188-477f-9b0d-38a07c5d7da1 E.2 Banking Group - Financial liabilities resulting from financial assets transferred not derecognised: carrying amount
Financial Total Held-to- Financial assets assets Available-for-sale Loans to Liabilities / Asset portfolio maturity Loans to banks held for trading designated at financial assets customers investments 31.12.2017 fair value
1. Due to customers 11,861 - 127,088 594 - 312,669 452,212 a) against fully recognised assets 11,861 - 127,088 594 - 312,669 452,212 b) against partially recognised assets ------2. Due to banks - - 1,570,178 - - - 1,570,178 a) against fully recognised assets - - 1,570,178 - - - 1,570,178 b) against partially recognised assets ------3. Debt securi ties issued ------a) against fully recognised assets ------b) against partially recognised assets ------31.12.2017 11,861 - 1,697,266 594 - 312,669 2,022,390 31.12.2016 37,208 - 3,350,703 503,879 - - 3,891,790
E.3 Banking Group - Transfers with liabilities backed exclusively by the assets transferred: fair value
Financial assets held for Financial assets Available-for-sale Held-to-maturity Loans to banks (fair Loans to customers (fair Total trading designated at fair value financial assets investments (fair value) value) value) Type of asset / Portfolio fully partially fully partially fully partially fully partially fully partially fully partially recognised recognised recognised recognised recognised recognised 31.12.2017 31.12.2016 recognised recognised recognised recognised recognised recognised (FV) (FV) (FV) (FV) (FV) (FV) A. On-bal ance sheet assets - - - - 1,697,533 - 598 - - - - - 1,698,131 3,851,646 1. Debt instruments - - - - 1,697,533 - 598 1,698,131 3,851,646 2. Equity instruments ------X X X X X X - - 3. UCIT S ------X X X X X X - - 4. Financing ------B. Derivative instruments- - XXXXXXXXXX - - Total assets - - - - 1,697,533 - 598 - - - - - 1,698,131 3,851,646 C. Associated liabilities - - - - 1,697,266 - 594 - - - - - X X 1. Due to customers - - - - 127,088 - 594 - - - - - XX 2. Due to banks - - - - 1,570,178 ------XX 3. Debt securities issued ------XX Total liabil ities - - - - 1,697,266 - 594 - - - - - 1,697,860 3,891,790 Net amount 31.12.2017 - - - - 267 - 4 - - - - - 271 X Net amount 31.12.2016 3 - - - (39,259) - (888) - - - - - X (40,144)
437 WorldReginfo - 443ee11b-e188-477f-9b0d-38a07c5d7da1 B. Financial assets transferred and fully derecognised with recognition of the continuous involvement
There are no financial assets transferred and fully derecognised with recognition of the continuous involvement to report.
E.4 Banking Group – Covered bond operations
Objectives
In 2008 the Management Board of UBI Banca passed a resolution to proceed to implement a structured programme for the issuance of covered bonds designed to produce benefits in terms of funding while containing the cost at the same time.
In detail, the Management Board performed the following:
it identified the objectives of the programme; it identified the basic structure of an operation to issue covered bonds in the light of the legislation and explained and examined the main elements, including the portfolio of loans, the criteria for selecting them, the structure of the financial transaction and the relative tests; it assessed and approved the impacts and the organisational, IT and accounting changes that would be required. These changes were performed to ensure proper risk management by the Parent and also by the single banks participating. Account was also taken, in drawing up the procedures, of the requirements set by regulations issued by the Bank of Italy; assessed the risks connected with the operation to issue covered bonds; it assessed the organisational and operating structure of the special purpose entity concerned in order to ensure that the contracts involved in the operation contained clauses that would guarantee the proper and efficient performance of the functions of the special purpose entity itself; it assessed the legal aspects through an in-depth examination of the parties and contract documents used, with particular attention paid to the nature of the guarantees given by the special purpose entity and the relations between the issuing bank, the originator banks and the special purpose entity.
The main objectives of the programme are as follows:
- the acquisition of long-term institutional funding at more competitive costs than funding acquired using alternative instruments such as the EMTN programmes or securitisation transactions; - access through the issuance of covered bonds to specialist investors who currently do not invest in the funding instruments used and which may be used by the UBI Banca Group.
438 WorldReginfo - 443ee11b-e188-477f-9b0d-38a07c5d7da1 The structure
The basic structure of the operation to issue covered bonds involved the performance of the following activities:
one bank (the originator) transfers a set of assets with determined characteristics to a special purpose entity to form a separate set of assets termed a “cover pool”. However, in compliance with international accounting standards in force, those assets are not derecognised from the financial statements of the originator bank; that same originator bank (acting here as a financing bank) grants a subordinated loan to the special purpose entity designed to fund the purchase of the assets by the entity; the bank (the issuing bank) issues covered bonds backed by a primary, unconditional and irrevocable guarantee given by the special purpose entity to the sole benefit of the holders of the covered bonds and the hedging counterparties involved in the transaction. The guarantee is backed by all the assets transferred to the special purpose entity and which form part of the cover pool.
In the context of the procedures described above, the UBI Banca Group launched a covered bond programme (hereinafter the “CBP”) with a ceiling on issuances of €10 billion which was increased in 2014 to €15 billion. The structure that was adopted also allows the transfer of the portfolios which constitute the segregated assets of the special purpose entity from more than one originator bank.
To achieve this, a special purpose entity, UBI Finance Srl was formed, in accordance with Law No. 130/1999, 60% held by UBI Banca32, which as the guarantor of the issue performed by UBI Banca acquired a portfolio of residential mortgages transferred to it from network banks of the Group, which participated in the programme both as originator banks and as financing banks. These were added to in 2013 with UBI Banca as an originator and financing bank, which as the Parent, also fills the role of master servicer, calculation agent and cash manager for the operation. UBI Banca then delegated responsibility for servicing activity, consisting of collecting payments and managing relations with customers for the portfolio transferred by each originator (except for positions reclassified as bad loans, handled by the Problem Loans and Credit Recovery Area of the Parent), to the originator banks as sub-servicers.
The role of account bank and paying agent is filled by The Bank of New York Mellon (Luxembourg) Sa, while the representative of the bondholders is BNY Corporate Trustee Services Limited. The role of Asset Monitor, explicitly required by regulations for this type of transaction, is carried out by BDO Italia Spa. This €15 billion programme is also assigned ratings by two agencies: Moody’s, used since the first issuance under the programme, and DBRS, which replaced Fitch in the last quarter of 2015.
A summary of the main features of the structure of UBI Banca’s covered bond programme is given on the next page.
32 The company is consolidated by UBI Banca in the Consolidated Annual Report for the Group, according to the accounting standards in force.
439 WorldReginfo - 443ee11b-e188-477f-9b0d-38a07c5d7da1
A) Covered bonds. UBI Banca issues covered bonds under the programme.
B) Bond Loan. In order to allow the funding acquired on institutional markets from the issue of covered bonds to flow back to the originator banks, these banks may issue bonds and the right to require subscription of them by UBI Banca, within the limits of their quota of participation in the programme. These bonds shall have the same maturity as the covered bonds and a yield established on the basis of the Bank’s funding policies.
C) Subordinated Loan. In order to fund the purchase of mortgages by the special purpose entity, the originator banks grant subordinated loans to it. The yield on these loans is calculated as a “premium” or “extra spread” equal to the amount of the interest received, which remains in the accounts of the special purpose entities once priority amounts in the chain of payments have been deducted, relating to items such as the expenses incurred by the entity, payments to swap counterparties and allocations to the “reserve account”.
D) Swaps to hedge interest rate risk. If the covered bonds are issued at a fixed rate, UBI Banca may hedge the interest rate risk by entering into swap contracts with market counterparties, thereby transforming the exposure to a variable rate. These swaps lie outside the perimeter of the covered bond programme and the decision to use them if made is made with a view to interest rate risk management as part of the Parent’s ALM.
E) Liability swaps: also a liability swap contract was entered into between UBI Banca and UBI Finance for each covered bond fixed rate issue. These are designed to protect against interest rate risk, which might affect the cash flows received from the special purpose entity and the amounts due from the special purpose entity to investors (fixed rate coupons on the covered bonds) in the event of default by UBI Banca and the need by the special purpose entity to intervene to pay the coupons to the investors. The notional amount of the liability swaps must be sufficient to hedge the interest rate risk related to the floating interest rate return portion of the underlying segregated assets of UBI Finance,
440 WorldReginfo - 443ee11b-e188-477f-9b0d-38a07c5d7da1 since the fixed-rate component of the mortgage portfolio constitutes a partial natural hedge in itself with respect to fixed-rate covered bonds. The percentage of hedging required by the rating agencies using liability swaps is 70% of the covered bonds (at fixed rate) issued. The structure of the liability swaps only requires the exchange of cash flows between UBI Banca and the special purpose entity in the event of default by UBI Banca or when UBI Banca assigns a swap contract to another eligible counterparty. For full information we report that the liability swap involves margin account obligations for UBI Banca. In order to diversify the counterparty risk BNP Paribas Securities Services was selected for the role of account bank for those margin deposits. The changes that have occurred since 2008 in the methods of analysis used by rating agencies, which have gone hand-in-hand with changes in the economic and financial backdrop, have led to a reconsideration of the real usefulness of equipping the programme with hedging instruments of this type. For some time now both in Italy and in Europe programmes to issue covered bonds similar to that of UBI Banca have not used similar hedging structures, considering that only the potential presence of liability swaps in covered bond programmes does not seem to have prejudiced or harmed the interests of investors, nor would it affect the ratings given by agencies. Furthermore, from the viewpoint of margin deposits for contingent liability swaps, early termination of these would allow a reduction in the risks currently allocated to UBI Banca as the liability swap counterparty, such as for example the volatility of the amount on which the margin is based, the risk attaching to the counterparty role and in particular the risk of assigning the derivative33 to another party. Steps were therefore taken in 2017 to make the necessary changes to the contracts for the early close-down of the existing contingent liability swap contracts, which was concluded in December 2017. At the same time the margin deposit obligations no longer existed and the deposit made with BNP for that purpose was withdrawn.
F) Current accounts. The programme involves a complex system of current accounts to pay and receive the cash flows involved in the operation. A series of accounts were opened in the name of the special purpose entity for each originator bank as follows:
. collection account at UBI Banca linked to each originator bank into which sums received are paid consisting of interest and principal on the portfolios of each originator, and, where applicable, other assets transferred to the special purpose entity under the programme (e.g. eligible assets and top-up assets);
. interest account with Bank of New York Mellon, London Branch linked to each originator bank into which all interest paid into the collection accounts is paid on a daily basis and also all amounts paid to the special purpose entity by the counterparties of the swap contracts;
. principal account with The Bank of New York Mellon, London Branch linked to each originator bank into which all the principal repayment amounts paid into the collection account will be paid on a daily basis;
. a reserve fund account, with The Bank of New York Mellon, London Branch into which interest accruing on the covered bonds is paid monthly in order to guarantee the payment of current coupons;
. an expense account, into which the amounts required to meet the expenses of the special purposes entity are paid, drawn from interest accounts, in proportion to the quota of participation in the programme of each originator bank.
33 See the information contained in the specific sub-section: The risks connected with the operation – 1. Risk of a UBI Banca downgrade / 3. Risks connected with continuous management of the programme.
441 WorldReginfo - 443ee11b-e188-477f-9b0d-38a07c5d7da1 Effectiveness tests
“Effectiveness tests” are performed monthly on the whole cover pool and separately on the portfolios transferred by each originator, in order to determine the financial integrity of each bank’s portfolio. As required by the regulations, because it is a multi-originator programme, with cross- collateralisation of the originator banks’ portfolios, the only valid test for investors is that performed on the whole cover pool, while the tests performed on the individual portfolios are used to determine the integrity of each originator’s portfolio for the purposes of cross-collateralisation between the different originator banks. In detail:
- the nominal value test verifies whether the nominal value of the loans in the transferred portfolio is greater than the nominal value of the covered bonds issued. In order to ensure an adequate degree of over collateralisation in the portfolio, while the covered bonds are considered at their nominal value, the loans in the portfolio are weighted on the basis of the relative collateral backing them and the total amount is further reduced by an asset percentage. The calculation of the nominal value test may also take account, according to the situation, of potential additional risks, such as for example “set-off” risk or “commingling risk”;34 - the net present value test verifies whether the present value of the loans remaining in the portfolio is greater than the present value of the covered bonds issued;35 - the interest cover test verifies over a twelve month time frame whether the interest received and held in accounts and the cash flows from interest to be received net of the entity’s expense is greater than the interest to be paid to the holders of the covered bonds; - the amortisation test similar to the nominal value test, but only performed if UBI Banca is downgraded by rating agencies; - the top-up assets test verifies whether, before UBI Banca defaults, the total amount of additional assets and liquidity is not 15% greater than the nominal value of the loans remaining in the portfolio transferred, in compliance with the Ministry of the Economy and Finance and Bank of Italy instructions.
If all the tests36 are passed simultaneously then the special purpose entity may proceed to pay all the parties involved in the programme, including the originator banks as the lenders of the subordinated loan, in the order of priority indicated in the “payment chain”. However, if the results of the tests are negative, then the contract states that the UBI Banca Group must increase the collateral of the portfolio by transferring new mortgages to it and that is “top up” with extra assets. In order to ensure greater efficiency in the process of topping up assets in cover pools, changes were made to contracts in the second half of 2017 and the ability was introduced to the programme to also transfer among the top up assets securities issued by public authorities held in the portfolios of the originators, which meet the eligibility requirements set by the applicable regulations37. Failure to pass the tests, once the time limit allowed for the Group to add assets has passed, results in an “issuer event of default” with a consequent enforcement of the guarantee issued by UBI Finance. In this event the originator banks would only receive the repayments of the subordinated loans granted after the redemption of the covered bonds by the special purpose entity and within the limits of the remaining funds.
34 The calculation of commingling risk may be requested in determined situations on the basis of the methodologies applied by the rating agencies that assess the programme. It is a type of risk related to the account bank role filled by the Parent and represents the risk that if a downgrade which resulted in the transfer of the SPE’s current accounts from the UBI Group to a third-party company, the immediate transfer to the new accounts of sums received by the servicer might not occur. At present, commingling risk together with the set-off risk already mentioned are not included in the calculation of the nominal value test required contractually, but they are considered in specific tests (e.g. asset coverage test) calculated for the purpose of rating agencies’ assessments. 35 For full information we report that the competent units at UBI Banca carry out a further internal test on at least a half-yearly basis, designed to verify that the interest due on the cover pool is sufficient to cover the senior expenses and the payment of interest on the bonds outstanding from the relative calculation date until the most distant legal maturity date of the bond. 36 The calculation of the first three tests mentioned above is consistent with the requirements contained in supervisory regulations (Bank of Italy Circular No. 285/2013) on the question of the partial weighting of collateral positions which should exceed the loan to value ratio set (80% for residential mortgages and 60% for commercial mortgages). See below Property Risk guarantees. 37 The covered bond programmes do in fact allow for the transfer, amongst other things, of (i) loans granted to specific government institutions or loans guaranteed by them, valid for the purposes of mitigating credit risk (“Loans to Public Institutions”) and (ii) securities issued or backed by public institutions (“Securities issued by Public Institutions”).
442 WorldReginfo - 443ee11b-e188-477f-9b0d-38a07c5d7da1 In accordance with the relative regulations, on a quarterly basis the asset monitor checks the accuracy and precision of the calculations carried out by the calculation agent, UBI Banca, in order to carry out the effectiveness tests.
Organisational action and control procedures
Summary information is given below on the new organisational structure and operational processes for the covered bond programme approved in 2013. This information was prepared on the basis of that contained in the Programme Report submitted to the Management Board on 15/1/2013, 28/1/2014 and 24/2/2015 and also that given in Group Circular No. 415/2013 “Review of processes related to the first covered bond programme”.
The organisational system currently adopted in the UBI Group for the structuring and management of covered bond programmes is the result of a general organisation revision carried out in 2013, following the development of management and issuance processes experimented with in the first years of the life of the programme.
A distinction is made in that system between two areas of activity:
1) the first area concerns the activity needed to set up a programme, carried out once only in the period preparatory to the issuance of bonds, which can be described briefly as follows: proposals for the structuring of a new programme are assessed by the competent internal committees of UBI Banca and the underlying general policies are approved by the Supervisory Board. This is followed by the identification of external parties who must assist the Parent in the structuring and issuance of the programme (legal firms, arrangers, asset monitors, rating agencies). The assets which will form part of the portfolio are then defined together with the contracts relating to the operation for units internal and external to the Bank; Subsequently, the following is carried out: - form the special purpose entity and carry out the activities needed to transfer assets to that entity and segregate the assets of the cover pool appropriately; - assign a rating to the programme, inclusive of the site visit by the rating agency; - present a compliance report for the programme.
2) the second area, on the other hand, regards recurring activities for management, monitoring and control, which are organised in four macro processes described as follows:
A. annual planning: a plan for the issuance of covered bonds to be carried out during the year is drawn up by the competent units at UBI Banca as part of a more general definition of the procedures to cover liquidity requirements on the basis of strategic policies and in accordance with the growth and risk objectives set by the competent corporate bodies. The annual planning of issuances is followed by an annual analysis stage designed to set the amount of the collateral that the Group must be able to post in the future in order to back existing and planned future issuances. After internal committees have carried out verifications, the Management Board of the Parent is then called upon, annually, to decide on: - disposals of new mortgages by originator banks participating in the programme and possible repurchases; - new covered bond issuances.
B. periodic disposals of assets to the special purpose entity. Portfolios of assets to be transferred are identified in detail on the basis of the guidelines defined in the previous point. With the support of legal firms and arrangers – where necessary – the competent units at the Parent prepare the contracts, carry out prior controls and proceed to comply with the technical requirements needed for the segregation and proper management of the portfolios by the servicers and sub-servicers. The originator banks also top up the subordinated financing as necessary in relation to the amount of the new portfolios transferred;
443 WorldReginfo - 443ee11b-e188-477f-9b0d-38a07c5d7da1
C. issuance of new covered bonds: as part of the issuance planned in accordance with the previous points, the competent units of UBI Banca decide on the characteristics of the issuance syndicated by the dealer banks participating in the issue. The issuance then commences with the acquisition of orders from institutional investors, which concludes with the official announcement of quantities and issue prices. This is followed by the preparation of the legal documentation with the support of legal advisors and arrangers and it will be signed by the parties involved before the value date of the issuance.
D. ongoing management of the issuance programme: this general process governs the activities needed for the daily management of the portfolios transferred to the SPE, the settlement of the cash flows, implementation of the controls required by regulations and the preparation of compulsory disclosures and other reports to markets38. The main sub-processes, carried out by the competent units of the Parent (which acts as the master servicer, calculation agent and cash manager for the programme) or of the network banks (as subservicers), are as follows: - daily settlement of cash flows from the cover pool; - monthly performance of effectiveness tests; - calculation of the sequence of monthly payments and liquidity management; - preparation of periodic reports to the various counterparties, investors and rating agencies (in compliance with disclosure requirements requested by supervisory regulations for the prudential treatment of the CBPs); - settlement of coupons on outstanding issues (on an annual or interim basis depending on the issue); - determination (half yearly) of the controls set by regulations to monitor requirements to ensure the quality and integrity of the cover assets transferred and assessment of any need to repurchase assets no longer eligible.
Internal Group rules and regulations specify the persons involved in the individual activities and the processes outlined above in detail.
The risks connected with the operation
In 2012 and 2013 the Bank revised its analysis of the risks identified with the programme when it was approved in June 2008 and it prepared a new map of those risks. Subsequently, on an annual basis, the Bank reviewed and updated the risk analysis in consideration, amongst other things, of regulatory developments in this area. The risks identified, listed below, are derived from the current regulatory framework (EU and Italian) and they are based on the current methodologies used by rating agencies. The different types of risk are attributable to the following four general categories:
. Risk of UBI Banca downgrade, which includes the risk relating to the swap contracts to which UBI Banca is a counterparty and the risk relating to the account bank activities performed by UBI Banca, because in both cases a downgrade could result in UBI Banca losing
38 In this respect, as already reported recent amendments to supervisory regulations (Bank of Italy Circular No. 285/2013 already mentioned) extended control duties not only to include the competent internal risk control units of the issuer but also to the asset monitor for controls of the completeness, accuracy and appropriateness of the information made available to investors and also to ensure compliance with the loan to value ratio limits at the time of transfer and when property values are updated (see Property Guarantee Risks below).
444 WorldReginfo - 443ee11b-e188-477f-9b0d-38a07c5d7da1 its status as an “eligible” counterparty in the roles just mentioned. More specifically, with regard to the account bank role, if a downgrade involved the transfer of the SPE’s current accounts to a third-party company, the failure to immediately transfer sums received onto those accounts would represent a “commingling risk”, account of which is taken, according to that which is indicated in the ratings assigned by agencies and, under certain conditions, when calculations for regulatory tests are carried out39.
. Risk relating to the underlying mortgages (collateral). The issuance of covered bonds bases its rating on the credit enhancement provided by the portfolio of mortgages transferred to back the special purpose entity. The criteria used by the rating agencies require the amount of the mortgage portfolio that provides the guarantee to be maintained at levels higher than the value of the bonds issued (known as over-collateralisation). A decrease in the level of over-collateralisation would lead primarily to a downgrade of the operation and, in the most serious cases, to a default of the issuer, if the minimum level provided for in the contracts were not guaranteed and/or the regulatory tests were not passed. Various mechanisms are provided within the programme to address these risks. They include the following: a nominal value test and various degrees of over-collateralization, designed to ensure that the special purpose entity is able to fully guarantee the covered bonds issued even in the event of some defaults on the underlying assets; the ability to inject liquidity in order to guarantee the issues (within the limits of 15% of the total amount of the assets held by the special purpose entity); the ability to also insert assets with a higher rating in the cover pool; finally, with regard to redemption by the special purpose entity (or by UBI Banca in the event of its default) of the capital maturing, the maturity of the covered bonds may be extended by one year (termed a “soft bullet maturity”). In any event, the units responsible at UBI Banca periodically verify the adequate availability of mortgages among the assets of Group banks in order to ensure the necessary over- collateralization for covered bonds already issued and for those to be issued in the coming year.
. Risks connected with continuous management of the programme: the programme involves various third parties (asset monitors, bank account providers, trustees, possible swaps providers), for each of which there is a risk of default. Counterparty replacement rules have been put in place to limit that risk if determined events occur. The programme also requires continuous management of matters which include servicing activities, investment activities, the management of possible swap contracts, the calculation of regulatory tests and the production of reports. The adoption of the organisational model reported in the preceding pages led to a further improvement in the management of processes and the related operating risks. This increased the oversight and control points as a result of a more detailed official assignment of responsibilities to the competent units of the Parent.
. Legal risks, which, due to the particular multi-originator structure of the UBI Banca programme, include the risk of cross-collateralisation. The participation of a number of originator banks in the programme mean that all the transferor banks are subordinated creditors on an equal basis of the special purpose entity and above all, they assume the obligation to top up the portfolio to the levels specified by the tests if these are failed, even if the failure is not caused by the assets for which they are responsible. To mitigate that risk, the contract documents state that if the transferor bank required to top up assets does not meet that obligation, in the first instance the Parent will be required to top up the cover pool in its place until the required level of over-collateralization is reached, while the transferor banks will only be required to top up the cover pool if the Parent fails to do so.
In order to take account, amongst other things, of regulatory developments that had occurred, when the 2015 Programme Report was drawn up two further risk Categories were formally introduced as follows:
39 See the sub-section “Effectiveness tests”.
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. Tax Risks: tax impacts on the transfer of assets: the law which introduced covered bonds (Law No. 130/1999, Art. 7 bis) stated that transfers of assets to special purpose entities are considered as not taking place from a tax viewpoint where, amongst other things, the purchase price and the last amount recognised for the transferred assets in the financial statements of the transferor bank are identical. Since transfers of assets generally take place at a time subsequent to the reporting date of the last approved financial statements of the transferor banks, the prevalent interpretation adopted was that in order to determine the transfer price, reference has to be made to the carrying amount, reduced by the capital repayments received in the meantime and increased by the interest accruing as at the date of transfer in order to take account of the natural financial changes in the assets transferred40.
. Property Guarantee Risk: in accordance with legislation and regulations the bank updates the values of the properties that back the assets transferred on a half yearly basis. The risk in question lies in the possible decrease in the value of the guarantees which can lead to total or partial exclusion of the loan from the calculation of tests. The updated value of the guarantees is in fact used to calculate the current loan to value ratio (the remaining debt as a ratio of the current value of the guarantee) and if that indicator is greater than the 80% limit, then the part of the loan above that limit cannot be used in the calculation of the tests. Furthermore, if the ratio of the updated value of the guarantee to that of the most recent property appraisal is lower than 70%, the loan must be totally excluded from the calculation tests unless a new appraisal is carried out within three months. In this respect we also report that in addition to the periodic controls carried out in accordance with regulations by the asset monitor, Risk Control Units in the UBI Group check the loan to value ratios monthly and organisational processes result in prompt reporting of problem situations to the competent units for the necessary corrective action to be taken.
The “Single Bank” merger project and changes to the Programme
The “Single Bank” merger Project, illustrated more fully in other sections of this financial report, involved a few changes to the structure of the Covered Bond Programme as described above. More specifically, only two entities, UBI Banca and IW Bank continue to form part of the programme as originator banks and subordinated lenders. Furthermore, UBI Banca continues to fill the role of master servicer and IW Bank of sub-servicer under the terms of the General Servicing Contract. Therefore UBI Banca continues to carry out management, administration and repayment collection activities for the loans included in the UBI Banca portfolio (as resulting from the acquisition of the portfolios transferred by each of the merged network banks following the relative mergers) and IW Bank will continue to carry out those activities by virtue of the delegation conferred by the Master Servicer under the General Servicing Contract in relation to the portfolios transferred by that same bank.
40 See Supervisory Regulations for banks – Circular No. 285/2013 – Part Three – Chapter 3.
446 WorldReginfo - 443ee11b-e188-477f-9b0d-38a07c5d7da1 History of the UBI Banca Residential Covered Bond Programme
In the context of the procedures described above, the UBI Banca Group launched a ten-billion euro programme for the issue of covered bonds in July 2008, with the first transfers of mortgages performed by two banks in the Group, Banco di Brescia and Banca Regionale Europea, for a total amount, as at that time, of approximately €2 billion. Subsequently, in the years 2008 – 2010, all the Group’s network banks joined the programme progressively transferring portions of their assets. Further transfers of assets were then concluded in each of the following years. More specifically, with regard to the financial year 2017, we report that on 30th April 2017, with effect for accounting and operating purposes from the following 1st May, a new transfer of assets was concluded for a total of €1.687 billion.
ASSETS TRANSFERRED TO UBI FINANCE – TOTAL originated by originated by YEAR 2017 (figures in thousands of euro) TRANSFERS UBI Banca IW Bank
transfer on 01/05/2017 1,686,979 1,686,979 0 total transfers in 2017 1,686,979 1,686,979 0
As at 31st December 2017 the cover pool of mortgages for the issues, which for accounting purposes is recognised within the assets of each originator bank, amounted to a total of €14.058 billion in terms of the remaining principal debt.
The table below gives the distribution of the portfolio (remaining principal debt) by class of credit quality as at 31st December 2017, according to the classification used in the documentation for the CBP:
TYPE OF LOAN - data as at 31/12/2017 originated TOTAL originated by (Remaining principal debt - by UBI PORTFOLIO IW Bank in thousands of euro) Banca (*) Performing loans 12,225,578 12,092,652 132,926 Arrears loans 1,145,119 1,111,603 33,516 Collateral Portfolio 13,370,697 13,204,255 166,442 Defaulted Loans 687,320 676,149 11,171 Total UBI Finance cover pool 14,058,017 13,880,404 177,613
* The portfolio transferred by UBI Banca includes the portfolios transferred by the companies merged in 2016 and 2017.
In 2017 this portfolio generated total payments received of approximately €2 billion, distributed as follows between UBI Banca and IW Bank:
originated PAYMENTS RECEIVED TOTAL originated by by UBI (figures in thousands of euro) PORTFOLIO IW Bank Banca (*) payments received in 2017 1,967,970 1,940,562 27,408
* The payments received for the portfolio transferred by UBI Banca also includes the payments received for the portfolios transferred by the banks merged in 2016 and and 2017.
447 WorldReginfo - 443ee11b-e188-477f-9b0d-38a07c5d7da1 Within the ceiling on the issues set under the programme, which as already mentioned was raised from an initial €10 billion to €15 billion, UBI Banca has issued covered bonds for a total of €11.352 billion (bonds in issue as at 31st December 2017). The table below gives details of the individual issues:
Series Maturity ISIN Number Name Issue Date Principal (**) No. (*) date Market 2 IT0004558794 UBI BANCA 4.000% CB due 16/12/2019 16/12/2009 16/12/2019 1,000,000,000 Institutional investors
3 IT0004599491 UBI BANCA TV CB due 30/04/2022 30/04/2010 30/04/2022 102,272,732 Private - EIB
6 IT0004682305 UBI BANCA 5.250% CB due 28/01/2021 28/01/2011 28/01/2021 1,000,000,000 Institutional investors
12 IT0004966195 UBI BANCA 3.125% CB due 14/10/2020 14/10/2013 14/10/2020 1,500,000,000 Institutional investors
14 IT0004992878 UBI BANCA 3.125% CB due 05/02/2024 05/02/2014 05/02/2024 1,000,000,000 Institutional investors
17 IT0005067076 UBI BANCA 1.25% CB due 07/02/2025 07/11/2014 07/02/2025 1,000,000,000 Institutional investors
18 IT0005140030 UBI BANCA 1% CB due 27/01/2023 27/10/2015 27/01/2023 1,250,000,000 Institutional investors
19 IT0005155673 UBI BANCA TV CB due 14/12/2022 14/12/2015 14/12/2022 500,000,000 Retained
20 IT0005175465 UBI BANCA TV CB due 31/03/2022 31/03/2016 31/03/2022 1,000,000,000 Retained
21 IT0005202343 UBI BANCA TV CB due 23/12/2018 23/06/2016 23/12/2018 750,000,000 Retained
22 IT0005215147 UBI BANCA 0.375% CB due 14/09/2026 14/09/2016 14/09/2026 1,000,000,000 Institutional investors
23 IT0005283491 UBI BANCA 1.125% CB due 04/10/2027 04/10/2017 04/10/2027 1,250,000,000 Institutional investors
Total issues outstanding as at 31/12/2017 11,352,272,732
Notes: (*) Only issues outstanding at the reporting date are shown. For full information we report with regard to the series closed down that issues numbers 9, 10 and 11 (retained) were closed down due to natural maturity in February 2014. Issues numbers 13 and 16 (both retained) were closed down early in 2015, while issue number 5 (public) matured naturally in October 2015. The public Issues numbers 1 and 7 matured in 2016, while issues number 8 (private EIB) and 15 (retained) were closed down early.
Issue number 4 was closed down in 2017 (15/09/2017).
(**) For bonds subject to amortisation, the remaining nominal amount is given as at the reporting date.
To complete the information we report that a new issuance was made on the 15th January 2018 in two tranches, the first for €500 million maturing in July 2024 and the second for the same amount maturing in January 2030. The table below reports the details of the individual issues:
Series ISIN Number Name Issue Date Maturity date Principal Market No. UBI BANCA 0.50% CB due 24 IT0005320673 15/01/2018 15/07/2024 500,000,000 Institutional investors 15/07/2024
UBI BANCA 1.250% CB due 25 IT0005320665 15/01/2018 15/01/2030 500,000,000 Institutional investors 15/01/2030
As at 31st December 2017, all the bonds listed above had received an Aa2 rating from Moody’s and AA (low) from DBRS.
448 WorldReginfo - 443ee11b-e188-477f-9b0d-38a07c5d7da1 Relations with the special purpose entity UBI Finance As already reported above, in compliance with IFRS international accounting standards the accounting treatment employed requires non-derecognition of the loans transferred to the special purpose entity in the balance sheets of the originator banks. Similarly, the income statement and valuation entries relating to the loans transferred but not derecognised continued to appear in the specific items of expense and income in the income statement as if the transfer operation had not been carried out. Consistent with that accounting treatment, other asset and liability and income statement items relating to the bank and the special purpose entity are stated as balancing entries in the “residual” items of the balance sheet and income statement (“160 other assets” in the balance sheet, “100 other liabilities” in the balance sheet and “220 other operating income/expense” in the income statement) and the relative balance is shown among the net asset/liability and expense/income items of the bank in relation to the special purpose entity in addition to those already recognised in relation to the loans transferred but not derecognised stated in a separate item. Reference may be made to the relative sections of the notes on financial statements for the amounts of the items mentioned above, recognised within other assets/liabilities and other operating income/expense. In compliance with regulations the pages that follow report detailed information on the main stakes held by the bank in the special purpose entity UBI Finance in relation to the €15 billion covered bond programme.
Assets transferred – carrying amount The table below shows the amount for the securitised portfolio transferred to UBI Finance by the originator banks, according to the amount shown under asset item “70 loans and advances to customers” in the balance sheet. The classification follows the distribution of the transferred portfolio on the basis of the balance sheet classification of each originator.
TYPE OF LOAN Carrying amount as at 31/12/2017 TOTAL UBI BANCA IW BANK (thousands of euro) Performing loans 12,416,911 12,280,979 135,932 Performing past-due exposures 1,181,827 1,147,144 34,683 Non-performing past-due exposures 12,884 12,637 247 Unlikely-to-pay 319,002 314,687 4,315 Bad loans 239,103 235,590 3,513 TOTAL assets transferred to UBI Finance 14,169,727 13,991,037 178,690
See the preceding sub-sections for the amount of the assets transferred during the year.
Subordinated Loans As already indicated earlier, at the time of each transfer of assets, each transferor bank, in its capacity as a financing bank, grants to the special purpose entity, a portion of the subordinated loan designed to finance the payment by the SPE itself of the purchase price of the assets transferred in its capacity as originator bank.
The table on the next page shows the amounts of the loans granted by the originator banks to UBI Finance against the transfers for the year 2017:
449 WorldReginfo - 443ee11b-e188-477f-9b0d-38a07c5d7da1 Subordinated loans granted in 2017 TOTAL TRANSFERS by UBI Banca by IW Bank (in thousands of euro)
Loan granted for 01/05/2017 transfer 1,684,901 1,684,901 0
total granted in 2017 1,684,901 1,684,901 0 for an amount of the subordinated loans outstanding granted as at 31st December 2017 by each originator to UBI Finance as follows (in terms of remaining principal debt):
Amount of subordinated loans as at 31/12/2017 TOTAL by UBI Banca by IW Bank (in thousands of euro)
Remaining principal debt 14,193,526 14,012,065 181,461
The carrying amount of the subordinated loans as at 31st December 2017 forms part of the net balance of the amounts recognised within item “160 Other Assets” in the balance sheet, and represents the maximum exposure to loss resulting from participation by the banks (originators and financers) in the covered bond programme in the event that the guarantee given by the special purpose entity and the cash flows from the portfolios transferred as collateral were used to the reimburse investors and would not therefore be available, wholly or in part, to return the subordinated loans to the originators. The ability to repay that loan depends on the receipt of repayments on the loans in the segregated portfolio transferred to the special purpose entity by each bank. Consistent with the accounting treatment adopted, the underlying portfolio recognised within item “70 Loans and advances to customers”, in the balance sheet was posted to directly as indicated above. In consideration of the performance of repayments by the issuer UBI Banca, no risk in this respect currently exists. The interest for 2017, on those subordinated loans, which as mentioned, is recognised within item “220 other operating income/expense” in the income statement, amounted to a total of €558 million inclusive of the income of the banks merged into UBI Banca, while the amount of the loans repaid in the year drawn from the capital repayments available to the special purpose entity totalled €1.745 billion.
The following tables show the aforementioned sums by lending bank:
Subordinated loans – interest paid and accrued TOTAL by UBI Banca by IW Bank in 2017 (in thousands of euro)
Total interest in 2017 (*) 558,416 547,957 10,459
Subordinated loans – sums repaid in 2017 TOTAL by UBI Banca by IW Bank (thousands of euro)
Total repayments in 2017 (*) 1,745,000 1,718,500 26,500
(*) The figures as at 31/12/2017 for UBI Banca include the sums paid separately to network banks before they were merged (February 2017)
450 WorldReginfo - 443ee11b-e188-477f-9b0d-38a07c5d7da1 Servicing activities – Sub-servicing For servicing activities relating to the management of payment collections and relations with customers for the portfolio transferred and for the management of accounts classified as bad loans, the Parent received fees totalling €6.7 million from the special purpose entity UBI Finance, for that which was due to it for the year 2017, (inclusive of sub-servicing activities on the portfolios of the merged banks), while the fees received in its capacity as master servicer and calculation agent came to €619 thousand. At the same time IW Bank received fees totalling €72 thousand from the special purpose entity UBI Finance for sub-servicing activities performed in 2017 relating to the management of payments received and relations with customers with regard to the portfolios transferred.
The amount for the fees relating to the year for servicing and sub-servicing activities is recognised within item “220 Other operating income/expense” in the income statement.
Five-billion euro covered bond programme – “Retained programme”
In the first half of 2012, a new covered bond programme was structured for the issue of new bonds to be retained, and that is to be subscribed by UBI Banca itself, which will be used as collateral for posting with the European Central Bank in order to strengthen the pool of assets eligible for refinancing available to the Group.
To achieve this, a specific new special purpose entity, named UBI Finance CB2 Srl was formed, in which UBI Banca41 also holds a 60% stake, to function as the guarantor of the issues of the new series of covered bonds. Mainly commercial mortgages and, in addition, residential mortgages eligible according to national legislation and regulations, but not covered by the rating agency methodologies for the first programme, are transferred by Group banks to UBI Finance CB2 Srl. In fact, as opposed to the residential programme, the retained programme was initially structured without assessment by the rating agencies and therefore it benefited only from the senior rating of the Parent UBI Banca. At the end of 2013 the agency Fitch also assigned a rating to the five-billion euro programme. The rating assigned was BBB+. In 2015 the agency Fitch was replaced by the agency DBRS, which assigned a rating of “A (low)”, which was then raised in 2016 to “A”. UBI Banca will be able to issue covered bonds under that programme for a total amount, from time to time, of not greater than €5 billion. Again, for this second programme, the Management Board has: identified the objectives of the programme and of the first issuance; identified the basic structure of the operation, examining the initial loan portfolio and the criteria used to select it as well as the financial structure of the transaction and the tests; assessed and approved the impacts and the organisational, IT and accounting changes that would be required, considering that those actions had already been carried out to ensure proper risk management for the first programme; assessed the risks connected with the operation to issue covered bonds; assessed the organisational and operating structure of the special purpose entity; assessed the legal aspects of the programme.
Reference is made to what has already been reported above concerning the residential programme for that which regards the structural, organisational and risk aspects of the operation42, while here we report only those points where the five-billion euro programme differs from that which has already been reported:
41 The company is consolidated by UBI Banca in the Consolidated Annual Report for the Group, according to the accounting standards in force. 42 For full information we report that the loan to value ratio limit for the eligibility of the guarantees is 60% for commercial mortgages.
451 WorldReginfo - 443ee11b-e188-477f-9b0d-38a07c5d7da1 A. liability swaps: at present no fixed rate issuances have been made and therefore no liability swap contracts exist between the special purpose entity and third party counterparties; B. current accounts: interest and principal collection accounts for the second programme were initially opened with UBI Banca International, but they were transferred in August 2015 to BNP Paribas Securities Services – London Branch. C. the liquidity generated by the programme. In consideration of the type of operation performed by the Group with the retained programme, designed to increase the quantity of assets available for refinancing operations with the Eurosystem, no issuance of bonds has been put in place, in this case, to channel funds back to the originator banks. If, on the other hand, “public” issuances should be made, as indicated above, each originator bank will be given the right, within the limits of its share of participation in the programme, to issue bonds and the right to ask for them to be subscribed by UBI Banca in the same way as occurs for the fifteen-billion euro programme.
The “Single Bank” merger project and changes to the Programme
Also for the retained programme the “Single Bank” merger project involved a few changes to the structure. Along the same lines as already indicated for the €15 billion programme, on conclusion of the merger process only UBI Banca and IW Bank remained as the originators and subordinated lenders. UBI Banca will continue to fill the role of master servicer and IW Bank that of sub-servicer under the terms of the General Servicing Contract, as already indicated for the €15 billion programme.
History of the UBI Banca Retained Covered Bond Programme
The initial cover pool to back the issues of the retained programme was transferred in two tranches in the first half of 2012 and it consisted of assets totalling €3 billion. The following banks transferred assets: Banca Regionale Europea, Banca Popolare di Ancona, Banca Popolare Commercio ed Industria, Banca di Valle Camonica Banca Popolare di Bergamo, Banco di Brescia, Banco di San Giorgio (which was then merged into Banca Regionale Europea) and Banca Carime, while UBI Banca and IW Bank made the first transfer of assets in December 2015. A new transfer of portfolios took place in 2017, concluded at the end of May (with effect for accounting purposes from 1st June). That transfer involved assets totalling €307.3 million, transferred exclusively by UBI Banca.
The table below gives details of the amounts transferred in 2017:
ASSETS TRANSFERRED TO UBI FINANCE CB2 – originated by originated by TOTAL TRANSFERS YEAR 2017 (figures in thousands of euro) UBI Banca IW Bank
transfer on 01/06/2017 307,311 307,311 0
total transfers in 2017 307,311 307,311 0
The portfolio transferred, which – as already was the case for the first programme – continued to be recognised as assets under a separate item, amounted to €2.89 billion as at 31st December 2017. The table below gives the distribution of the portfolio (remaining principal debt) for each originator bank and the total by class of credit quality as at 31st December 2017:
452 WorldReginfo - 443ee11b-e188-477f-9b0d-38a07c5d7da1 TYPE OF LOAN - data as at 31/12/2017 originated by originated by TOTAL PORTFOLIO (Remaining principal debt - in thousands of euro) UBI Banca IW Bank
Performing loans 2,357,596 2,339,639 17,957
Arrears loans 224,855 223,509 1,346
Collateral Portfolio 2,582,451 2,563,148 19,303
Defaulted Loans 311,390 311,384 6
Total UBI Finance CB2 portfolio 2,893,841 2,874,532 19,309
Also for the portfolio transferred to UBI Finance CB2, the master servicer, UBI Banca, delegated responsibility for servicing activity to the originator banks as sub-servicers. This consisted of collecting payments and managing relations with customers for the portfolio transferred by each originator except for loans from UBI Banca’s own portfolio and positions reclassified as bad loans (previously termed “non-performing”), handled by the Credit Recovery Area of the Parent.
The total sums received in payments on the portfolio in 2017 are given below:
PAYMENTS RECEIVED originated by originated by TOTAL PORTFOLIO (figures in thousands of euro) UBI Banca (*) IW Bank
payments received in 2017 509.653 506.943 2.710
* The payments received for the portfolio transferred by UBI Banca also includes the payments received for the portfolios transferred by the merged banks.
Two covered bond issuances were made under the programme in 2012 and one in 2014, which was added to by a fourth issuance in the second half of 2015. A fifth issuance was made in 2016, concluded in June, while in 2017 a sixth issuance was made in December. Therefore, as at the reporting date of these notes to the financial statements, the total notes issued stood at €2.130 billion (the remaining nominal amount as at 31st December 2017). No public issues have been made to date and therefore all the issues outstanding at present are self-retained held in portfolio by UBI Banca.
Details are given below of the individual issues: Maturity Series No. ISIN Number Name Issue Date date Principal (*) UBI BANCA TV CB2 due 1 (private) IT0004818701 28/05/2012 28/05/2018 180,000,000 28/05/2018
UBI BANCA TV CB2 due 2 (private) IT0004864663 29/10/2012 29/10/2022 500,000,000 29/10/2022
UBI BANCA TV CB2 due 3 (private) IT0005002842 05/03/2014 05/03/2019 200,000,000 05/03/2019
UBI BANCA TV CB2 due 4 (private) IT0005122418 14/07/2015 14/07/2021 650,000,000 14/07/2021
UBI BANCA TV CB2 due 5 (private) IT0005202400 24/06/2016 24/06/2022 300,000,000 24/06/2022
UBI BANCA TV CB2 due 6 (private) IT0005318560 21/12/2017 21/12/2023 300,000,000 21/12/2023
Total issues outstanding as at 31/12/2017 2,130,000,000
(*) For bonds subject to amortisation, the remaining nominal value is given as at the reporting date.
As at 31st December 2017, all the bonds listed above had received an A rating from DBRS.
453 WorldReginfo - 443ee11b-e188-477f-9b0d-38a07c5d7da1 Relations with the special purpose entity UBI Finance CB2 Assets transferred – carrying amount As occurred for the first covered bond programme, this section has been prepared, insofar as the information has not already been given in the previous sub-sections, in relation to the SPE UBI Finance CB2 Srl, in compliance with the requirements of IFRS 12 for disclosures on relations with unconsolidated structured companies, considering that the relative consolidation is carried out as part of the Parent’s consolidated financial statements.
Assets transferred – carrying amount The table below shows the amount for the securitised portfolio transferred by the originator banks to the special purpose entity UBI Finance CB2, according to the amount shown under the asset item “70 loans and advances to customers” in the balance sheet of each originator. The classification follows the distribution of the transferred portfolio on the basis of the balance sheet classification of the originator.
TYPE OF LOAN Carrying amount as at 31/12/2017 TOTAL UBI BANCA IWBANK (thousands of euro)
Performing loans 2,370,388 2,352,259 18,129
Performing past-due exposures 227,194 225,834 1,360
Non-performing past-due exposures 4,081 4,081 0
Unlikely-to-pay 132,685 132,680 5
Bad loans 129,595 129,595 0
Total UBI Finance CB2 securitised 2,863,943 2,844,449 19,494 portfolio
Subordinated Loan The table below shows the amounts of the loans granted by the originator banks to UBI Finance CB 2 against the transfers for the year 2017:
Subordinated loans granted in 2017 Originated by Originated by TOTAL TRANSFERS (in thousands of euro) UBI Banca IW Bank
transfer on 01/06/2017 307,018 307,018 0
total granted in 2017 307,018 307,018 0
Note: the amount of the loans granted by UBI Banca includes the loans granted by the banks merged in 2016 and 2017 for an amount of the subordinated loans outstanding granted as at 31st December 2017 by each originator to UBI Finance CB 2 as follows (in terms of remaining principal debt):
Amount of subordinated loans as at 31/12/2017 TOTAL by UBI Banca by IW Bank (in thousands of euro)
Remaining principal debt 2,952,865 2,932,133 20,732
As for the €15 billion programme, the carrying amount of the subordinated loans as at 31st December 2017 forms part of the net balance of the amounts recognised within item “150 Other Assets” in the balance sheet, and represents the maximum exposure to loss resulting from participation by the banks (originators and financers) in the covered bond programme in the event that the guarantee
454 WorldReginfo - 443ee11b-e188-477f-9b0d-38a07c5d7da1 given by the special purpose entity and the cash flows from the portfolios transferred as collateral were used to the reimburse investors and would not therefore be available, wholly or in part, to return the subordinated loans to the originators. The ability to repay that loan depends on the receipt of repayments on the loans in the segregated portfolio transferred to the special purpose entity by each bank. Consistent with the accounting treatment adopted, the underlying portfolio recognised within item “70 Loans and advances to customers”, in the balance sheet was posted to directly as indicated above.
For the “retained” programme also, in consideration of the performance of repayments by the issuer UBI Banca, no risk in this respect currently exists. The interest for 2017, on those subordinated loans, which as mentioned, is recognised within item “190 other operating income/expense” in the income statement, amounted to a total of €44.6 million for all the Group banks participating in the programme, while the amount of the loans repaid in the year drawn from the capital repayments available to the special purpose entity totalled €496 million.
The following tables show the aforementioned sums by single originator bank:
Subordinated loans – interest paid and accrued in originated by originated by IW TOTAL 2017 (in thousands of euro) UBI Banca Bank
Total interest in 2017 (*) 44,555 44,277 278
(*) The figures as at 31/12/2017 for UBI Banca include the sums paid separately to all the banks merged in 2016 and 2017
Subordinated loans – sums repaid in 2017 TOTAL by UBI Banca by IW Bank (thousands of euro)
Total repayments in 2017 496,000 494,000 2,000
(*) The figures as at 31/12/2017 for UBI Banca include the sums paid separately to all the banks merged in 2016 and 2017
Servicing activities – Sub-servicing
For servicing activities relating to the management of payment collections and relations with customers for the portfolio transferred and for the management of accounts classified as bad loans, the Parent received fees totalling €1.58 million from the special purpose entity UBI Finance CB 2, for that which was due to it for the year 2017, (inclusive of that relating to the portfolio’s transferred by the companies that were merged in February 2017), while the fees received in its capacity as master servicer and calculation agent came to €382 thousand. At the same time IW Bank received fees totalling €8 thousand from the special purpose entity UBI Finance CB 2 for sub-servicing activities performed in 2017 relating to the management of payments received and relations with customers with regard to the portfolios transferred.
The amount for the fees relating to the year for servicing and sub-servicing activities is recognised within item “190 Other operating income/expense” in the income statement.
455 WorldReginfo - 443ee11b-e188-477f-9b0d-38a07c5d7da1 F. Banking group - Models for the measurement of credit risk
The UBI Group has internal rating and LGD models in place (see sub-section 1.2.2 “Management, measurement and control systems” for further details) in order to assess credit risk from a management and regulatory viewpoint (where the appropriate validations by the supervisory authority have been obtained as described in further detail in Section 1-Banking Group Risks). These models have been subject to an internal validation process by the Internal Validation Unit and to third level controls by units reporting to the Chief Audit Executive. The control functions produce an annual report on compliance of the models with supervisory regulations for the Bank of Italy and the ECB as part of checks for divergences between ex-ante estimates and actual ex-post figures. This report, approved by the Management and Supervisory Boards, certifies continued satisfaction of compliance requirements.
1.2. BANKING GROUP - MARKET RISK
1.2.1 Interest rate risk and price risk - supervisory trading book
Qualitative information
A. General aspects
The considerations that follow relate exclusively to the “trading book”, as defined by supervisory regulations. Transactions designed to affect sensitivity at Group level and equity investments in other companies classified as for trading according to IAS are excluded.
Management of Group financial risk is centralised in general at the Parent and is performed by the Finance Area.
B. Processes for the management and methods of measurement of interest rate risk and price risk
The guidelines for the assumption and monitoring of financial risk in the UBI Banca Group are defined in the Policy to Manage Financial Risks of the UBI Banca Group and in the relative documents to implement it (Regulations and document setting operational limits) with particular reference to market risk on the trading book and to interest rate, currency and liquidity risks on the banking book. More specifically the policy defines the capital allocated (maximum acceptable loss) to trading book activities, equal to 1% of the available first and second level financial resources (with an early warning threshold for amounts greater than 80% of the capital allocated), and it sets an early warning threshold on the Expected Shortfall (ES), which must not exceed 20% of the capital allocated.
Within the trading book, the monitoring of the consistency of the risk profiles of Group portfolios with respect to risk-return objectives is based on a system of limits which involves the combined use of various indicators. The following are defined for each portfolio of the Group: mission, maximum acceptable loss limit VaR limit
456 WorldReginfo - 443ee11b-e188-477f-9b0d-38a07c5d7da1 possible limits on the type of financial instruments permitted possible limits on composition.
Consistent with the limits set by the Policy, the Document setting operational limits defines operational limits for the trading book of the UBI Group in 2017, both at general level and for counterparties and single portfolios. The main operational limits for 2017 are as follows: Maximum acceptable loss for the UBI Group trading book €60 million One day ES limit for the UBI Group trading book €15 million
Observance of the limits set for each portfolio is monitored daily.
The summary measurement used to assess the exposure of the Bank to financial risks is the expected shortfall (ES). It is a statistical measurement used to estimate the loss that might occur following adverse changes in risk factors. The ES of the UBI Banca Group is measured using a confidence interval of 99% and a holding period of one day. This value is defined in terms of limits consistent with the time horizon for the possible disinvestment of the portfolios. The ES is the daily loss threshold that exceeds the VaR. The latter in turn gives the “threshold” of the daily loss which, on the basis of probability hypotheses could only be exceeded in 1% of cases. The method used for calculating the ES is that of historical simulation. With this approach the portfolio is revalued by applying all the changes in risk factors recorded in the two previous years (500 observations). The values thus obtained are compared with the present value of the portfolio to give a hypothetical series of gains or losses. The ES corresponds to the average of 1% of the worst results (confidence interval of 99%) of those obtained.
The Group employs a stress testing programme to identify events or factors which could have a significant effect on positions to supplement the risk indicators obtained from the use of the ES. Stress tests are by nature both quantitative and qualitative and they consider not just market risks but also the effects on liquidity generated by market turbulence. They are based on both specially created theoretical shocks and market shocks actually observed in a predetermined historical period.
The predictive power of the model adopted for risk measurement is currently monitored using daily backtesting analysis, which uses an actual P&L calculated by the front office systems of the Group. Retrospective tests consider changes in the value of the portfolio resulting from the front office systems of the Group, determined on day t with respect to positions present at t-1. The actual P&L is generated from all the transactions opposite in sign to the initial position for a total amount less than or equal to the total of the position t-1 without considering transactions of the same sign as the initial position that may have arisen during the day.
The risk of losses caused by unfavourable changes in the price of traded financial instruments due to factors related to the issuer can be the result of daily trading activity (idiosyncratic risk) or of a sudden change in price with respect to general market trends (event risk, such as the risk of default by the issuer caused by a change in the market’s expectation that an issuer itself will default).
The UBI model for monitoring specific risk for debt securities is capable of detecting the first of the two components (idiosyncratic risk) because it considers spread curves by economic sector and rating as risk factors. Total risk on equity instruments (and UCITS) is measured by considering single shares as risk factors and it includes both the generic risk component (i.e. the risk of losses caused by unfavourable trends in the prices of the financial instruments traded in general) and a specific component relating to the situation of the issuer.
457 WorldReginfo - 443ee11b-e188-477f-9b0d-38a07c5d7da1 Quantitative information
1.1 Supervisory trading portfolio: distribution by residual maturity (repricing date) of on-balance sheet financial assets and liabilities and financial derivatives. Denominated in: Euro
3 months to 6 6 months to 1 5 years to 10 Indeterminate Type/Residual maturity On demand Up to 3 months 1 year to 5 years Over ten years months year years maturity
1. On-bal ance sheet assets 154 14,730 2,787 13 453,575 10,274 503 - 1.1 Debt instruments 154 14,730 2,787 13 453,575 10,274 503 - - with early redemption option - - - - 851 5 - - - other 154 14,730 2,787 13 452,724 10,269 503 - 1.2 Other assets ------2. On-bal ance sheet liabil ities 21 11,840 ------2.1 Repurchase agreements 21 11,840 ------2.2 Other liabilities ------3 Financial derivatives (91,358) (272,947) (88,207) 1,302,812 (908,407) 694,844 334,419 - 3.1 With underlying security - (1,387) 266 155 964 1 8 - - Options ------+ Long positions ------+ Short positions ------Other - (1,387) 266 155 964 1 8 - + Long positions - 32,869 7,743 256 1,378 3 8 - + Short positions - 34,256 7,477 101 414 2 - - 3.2 Without underlying security (91,358) (271,560) (88,473) 1,302,657 (909,371) 694,843 334,411 - - Options 34,460 335,408 70,307 13,388 (163,700) (230,595) (8,107) - + Long positions 34,460 416,224 182,098 141,098 95,817 9,267 14,504 - + Short positions - 80,816 111,791 127,710 259,517 239,862 22,611 - - Other (125,818) (606,968) (158,780) 1,289,269 (745,671) 925,438 342,518 - + Long positions 53,648 11,161,003 2,988,876 2,874,526 7,200,656 4,225,005 955,859 - + Short positions 179,466 11,767,971 3,147,656 1,585,257 7,946,327 3,299,567 613,341 -
458 WorldReginfo - 443ee11b-e188-477f-9b0d-38a07c5d7da1
1.2 Supervisory trading portfolio: distribution by residual maturity (repricing date) of on-balance sheet financial assets and liabilities and financial derivatives. Denominated in: other currencies
3 months to 6 6 months to 1 5 years to 10 Indeterminate Type/Residual maturity On demand Up to 3 months 1 year to 5 years Over ten years months year years maturity
1. On-balance sheet assets - - - - 1 1 - - 1.1 Debt instruments - - - - 1 1 - - - with early redemption option ------other - - - - 1 1 - - 1.2 Other assets ------2. On-balance sheet liabilities ------2.1 Repurchase agreements ------2.2 Other liabilities ------
3 Financial derivatives (34,133) (924,472) 3,055 (15,873) (13,538) - - - 3.1 With underlying security - (9,668) ------Options ------+ Long positions ------+ Short positions ------Other - (9,668) ------+ Long positions ------
+ Short positions - 9,668 ------3.2 Without underlying security (34,133) (914,804) 3,055 (15,873) (13,538) - - - - Options (34,133) (18,143) (5,307) (16,771) (15,897) - - - + Long positions - 54,464 99,788 119,145 38,444 - - - + Short positions 34,133 72,607 105,095 135,916 54,341 - - - - Other - (896,661) 8,362 898 2,359 - - - + Long positions - 2,042,056 142,259 42,695 56,349 - - - + Short positions - 2,938,717 133,897 41,797 53,990 - - -
459 WorldReginfo - 443ee11b-e188-477f-9b0d-38a07c5d7da1 2. Supervisory trading portfolio: distribution of exposures in equities and share indices by the principal markets in which they are listed
Listed Type of operation/Where listed United States Unlisted Italy Germany Other of America A. Equity instruments 6,945 - 8 - 54 - long positions 6,945 - 8 - 54 - short positions - - - - - B. Trades in equity instruments 37 - - - - not yet settled - long positions 83 - - - - - short positions 46 - - - - C. Other derivatives on equity 133 - - - - instruments - long positions 133 - - - - - short positions - - - - - D. Derivatives on share indices - (35) - - - - long positions - 5,214 - - - short positions - 5,249 - - -
3. Trading portfolio: internal models and other methods of sensitivity analysis
The graph below shows the changes in expected shortfall that occurred in 2017 for the UBI Group trading portfolios.
6,000,000 Change in market risk: daily ES for the banking portfolios of the UBI Banca in 2017
5,000,000
4,000,000
3,000,000
2,000,000
1,000,000
0
460 WorldReginfo - 443ee11b-e188-477f-9b0d-38a07c5d7da1
Change in market risk: daily ES for the UBI Group in 2017
ES by risk factor calculated on the total UBI Group trading book as at 31st December 2017 is given below.
Trading book of the UBI Banca Group 31.12.2017 Average Minimum Maximum 30.06.2017 31.12.2016 Currency risk 289,380 371,259 69,796 1,018,608 133,008 106,460 Interest rate risk 724,507 1,369,729 665,436 4,675,432 751,281 2,440,228 Equity risk 441,458 1,455,232 168,039 5,933,798 171,338 310,179 Credit risk 444,282 593,767 13,799 2,684,112 445,184 183,196 Volatility risk 75,267 363,374 60,214 1,159,354 70,247 626,326 Diversification effect (1) (672,652) (317,933) (1,054,825) Total (2) 1,302,242 2,383,575 996,750 5,644,687 1,253,125 2,611,565
(1) The diversification effect is due to the imperfect correlation between the different risk factors present in the Group’s portfolio. (2) The maximum ES was recorded on 20th April 2017, the minimum ES on 24th August 2017.
Backtesting analyses
Backtesting analysis is designed to test the predictive power of the VaR model adopted. It uses an actual profit and loss calculated on the basis of returns on positions in the portfolio on the previous day.
The backtesting analysis for the trading book of the UBI Group for 2017 is given below.
6 Millions of euro UBI Group - Trading Book - Backtesting 4 2 0 -2 -4 Profit & Loss VaR/ES -6 2/1/17 2/3/17 2/5/17 2/7/17 2/9/17 2/11/17
Actual backtesting analysis of the supervisory portfolios of the UBI Group identified no days, when the P&L was worse than the VaR calculated by the risk management system.
461 WorldReginfo - 443ee11b-e188-477f-9b0d-38a07c5d7da1
Theoretical stress tests
The Group has a stress testing programme designed to analyse the reaction of portfolios to risk factor shocks with the objective of verifying the ability of the regulatory capital to absorb very large potential losses and to identify possible measures needed to reduce risks and conserve the capital itself. Stress tests based on theoretical shocks consist of specially created extreme shifts in interest rate (short, medium and long-term), credit spread, exchange rate, equity price and volatility curves. A brief description of the most significant stress tests is given below. • Bull/Bear Steepening: a shock on the yield curve where the decrease/increase in short term interest rates is greater/smaller than that for long term rates. • Bull/Bear Flattening: a shock on the yield curve where the decrease/increase in short term interest rates is smaller/greater than that for long term rates. • Shock Credit Spread: a widening in the credit spread of 100 basis point for corporate and government securities with a rating of less than AAA. • Flight to quality: this simulates a shift from investment in high risk to low risk assets. The shock applied is a decrease of 100bp in the interest rates for AAA government securities, an increase of 100bp in the credit spread on other government securities, an increase of 100 bp in the credit spread on corporate and banking securities and a depreciation in equity instruments of 10%.
The table below gives the results of the theoretical stress tests performed on the portfolios of the UBI Group.
The effect of theoretical shocks on the trading book and banking book of the UBI Group
UBI BANCA GROUP UBI BANCA GROUP TOTAL UBI BANCA GROUP Regulatory Trading Book Banking Book 31st 31st December 2017 Data as at 31st December 2017 31st December 2017 December 2017 in who le e uro Change in NAV Change in NAV Change in NAV
Risk Factors IR Shock Shock +1bp 68,258 0.02% -714,514 -0.01% -646,256 -0.01% Risk Factors IR Shock Shock -1bp -66,134 -0.02% 714,152 0.01% 648,018 0.01% Risk Factors IR Shock Bear Steepening 5,849,208 1.39% -42,915,535 -0.51% -37,066,327 -0.46% Risk Factors IR Shock Bull steepening -4,495 0.00% 33,590,510 0.40% 33,586,015 0.42% Risk Factors IR Shock Bear Flattening 634,472 0.15% -30,814,115 -0.37% -30,179,644 -0.37% Risk Factors IR Shock Bull Flattening -1,317,147 -0.31% 44,099,418 0.52% 42,782,271 0.53% Risk Factors Equity Shock -10% -1,117,340 -0.26% -12,358,328 -0.15% -13,475,667 -0.17%
Risk Factors Credit Spread Shock -126,211 -0.03% -39,435,948 -0.47% -39,562,160 -0.49%
Flight to quality scenario -1,761,632 -0.42% -434,861,425 -5.16% -436,623,058 -5.41%
462 WorldReginfo - 443ee11b-e188-477f-9b0d-38a07c5d7da1
The analysis shows a heightened sensitivity of the portfolios to credit spread shocks (consistent with the presence of Italian government securities) and to interest rate shocks (consistent with the presence of bonds and interest rate derivatives in Group portfolios).
The limits set for the trading book are also used for the portfolios in the banking book, which contain assets classified for IFRS purposes as available-for-sale (the UBI available-for-sale portfolio, the Centrobanca corporate portfolio and the IW Bank available-for-sale portfolio) and under the fair value option (UBI hedge funds portfolio). The main operational limits for the banking book of the UBI Group decided for 2017, including the reallocations and the new limits set in the second half of the year, are as follows: . maximum loss for UBI banking book portfolios €660 million . one day ES limit for UBI banking book portfolios €100 million
The graph below shows the changes in ES that occurred in 2017 for the UBI Group banking book portfolios.
Banking book of the UBI Banca Group 31.12.2017 Average Minimum Maximum 30.06.2017 31.12.2016 Currency risk 244,866 110,972 751 276,769 95,411 21,231 Interest rate risk 5,623,488 7,790,592 5,623,488 9,939,303 9,545,009 7,754,231 Equity risk 2,648,987 1,535,952 559,518 2,858,621 1,293,724 2,191,078 Credit risk 62,111,816 73,353,619 62,111,816 89,626,806 68,600,009 87,618,599 Volatility risk - 62,651 - 165,581 61,960 137,132 Diversification effect (1) (6,352,209) - - - (11,969,115) (8,247,646) Total (2) 64,276,948 73,861,793 62,014,518 91,614,056 67,626,998 89,474,624
(1) The diversification effect is due to the imperfect correlation between the different risk factors present in the Group’s portfolio. (2) The maximum ES was recorded on 12th January 2017, the minimum ES on 4th October2017.
1.2.2 Interest rate risk and price risk – Banking book
Qualitative information
A. General aspects, management processes and methods of measurement of interest rate risk and price risk
Interest rate risk consists of changes in interest rates which have the following effects: • on net interest income and consequently on the profits of the bank (cash flow risk); • on the net present value of assets and liabilities, which has an impact on the present value of future cash flows (fair value risk). The control and management of structural interest rate risk - fair value and cash flow – is performed centrally by the Parent within the framework, defined annually, of the Policy to Manage Financial Risks of the UBI Banca Group, which identifies measurement methods and models and limits or early warning thresholds in relation to net interest income and the sensitivity of the economic value of the Group. Measurement, monitoring and reporting of interest rate risk exposure is performed at consolidated and individual level by the Capital & Liquidity Risk Management Area of the Parent, which performs
463 WorldReginfo - 443ee11b-e188-477f-9b0d-38a07c5d7da1 the following on a monthly basis: • a sensitivity analysis designed to measure changes in the value of assets • a simulation of the impact on net interest income for the current year by means of a static gap analysis (i.e. assuming that the positions remain constant during the period). On the basis of the periodic reports produced, the ALM service of the Parent Bank takes appropriate action to prevent the limits and early warning thresholds from being exceeded. Exposure to interest rate risk is measured by using gap analysis and sensitivity analysis models on all those financial instruments, assets and liabilities, not included in the trading book, in accordance with supervisory regulations. Sensitivity analysis of economic value includes an estimate of the impacts resulting from the early repayment of mortgages and long-term loans, regardless of whether early repayment options are contained in the contracts. This is accompanied by an estimate of the change in net interest income. The analysis of the impact on net interest income is over a time horizon of twelve months, with account taken of both the variation in the profit on demand items (inclusive of viscosity phenomena) and that variation for items held to maturity. This analysis also includes an estimate of the impact of reinvesting/refinancing maturing interest flows.
At consolidated level, the 2017 Policy to Manage the Financial Risks of the UBI Banca Group defines a system of early warning thresholds on exposure to interest rate risk based on indicators measured in various scenarios of changes in the yield curves, both deterministic and historical, and parallel and non-parallel, assuming rises and falls in interest rates. More specifically, a sensitivity early warning threshold of €200 million is set and an early warning threshold of a change in net interest income of €220 million is set. The Management Board has also set an early warning threshold on sensitivity of €170 million. The amounts to compare with the early warning thresholds are the absolute figure for the greater negative exposure in terms of sensitivity and the absolute figure for the greater negative exposure in terms of the change in the profit margin resulting from the application of interest rate scenarios. A negative interest constraint of -75 bps has been set for downward interest rate shift scenarios.
Furthermore, that same policy also sets a limit on the total exposure, measured in the standard scenario set by the supervisory regulations in force from time to time. The current standard scenario is one of an instantaneous and parallel shock of +/- 200 bps on all items in the banking book, assuming a non-negative constraint on interest rates. If the economic value of a bank falls by over 20% of its own funds, then the European Central Bank and the Bank of Italy will examine the results and they may decide to take appropriate action. At individual company level the 2017 Policy to Manage Financial Risks of the UBI Banca Group sets a target level for the sensitivity of term and on demand items represented by the behaviour model equal to 7.5% of individual company total own funds and an early warning threshold of 10%. The amount to compare with the early warning threshold is the absolute figure for the negative sensitivity resulting from the application of the two different interest rate scenarios (parallel shock of +/-100 b.p. of the yield curve). A negative interest constraint of -75 bps has been set for the downward interest rate shift scenario. Furthermore, a limit on the total exposure is also set for individual legal entities, described above, measured in the standard scenario set by the supervisory regulations in force from time to time. Compliance with individual limits is pursued by Group member companies by means of hedging derivative contracts entered into with the Parent. UBI Banca may then close the position with
464 WorldReginfo - 443ee11b-e188-477f-9b0d-38a07c5d7da1 counterparties outside the Group, acting in accordance with strategic policies and within the consolidated limits set by the governing bodies. B. Fair value hedging
In order to reduce exposure to adverse changes in fair value (fair value hedges) due to interest rate risk, hedges had been taken out as at 31st December 2017 in the UBI Group using financial derivative instruments. In detail outstanding hedges were as follows: specific hedges on fixed interest rate available-for-sale securities amounting to approximately €6.44 billion nominal ; specific hedges on fixed interest rate loans amounting to approximately €98 million nominal; macro hedges on fixed interest rate loans amounting to approximately €3.97 billion nominal; macro hedges on financing of the multimix/prefix type (this type of financing sets a cap on the rate paid by the customer) amounting to approximately €1.11 billion nominal; specific hedges on bonds amounting to approximately €13.05 billion notional; specific hedges for €3.26 billion on financing received (liabilities) from the European Central Bank (TLTRO programme).
The derivative contracts used are of the interest rate swap and cap type. Activity to test the effectiveness of hedges is performed by the Capital & Liquidity Risk Management Area of the Parent. Tests for effectiveness are performed, in compliance with international accounting standards, prospectively when a hedge is first implemented followed by monthly prospective and retrospective tests.
C. Cash flow hedging
As at 31st December 2017, UBI Banca had an outstanding cash flow hedge for approximately €24 million nominal. Furthermore, the results of cash flow hedges are recognised in the financial statements of the UBI Group in relation to issues of certificates of deposit denominated in Japanese currency (JPY), which are hedged by domestic currency swaps (DCS).
465 WorldReginfo - 443ee11b-e188-477f-9b0d-38a07c5d7da1 Quantitative information
1.1 Banking portfolio: distribution by residual life (repricing date) of the financial assets and liabilities. Denominated in: Euro
3 months to 6 6 months to 1 5 years to 10 Indeterminate Type/Residual maturity On demand Up to 3 months 1 year to 5 years Over ten years months year years maturity
1. On-bal ance sheet assets 16,570,359 55,952,971 5,809,169 2,020,634 12,059,948 11,611,141 6,403,887 - 1.1 Debt instruments 80,215 17,610 49,103 11,732 4,608,691 4,852,357 2,139,128 - - with early redemption option 1,281 - - 10,128 39,612 117,601 - - - other 78,934 17,610 49,103 1,604 4,569,079 4,734,756 2,139,128 - 1.2 Financing to banks 831,906 6,559,493 146,448 57,294 49,063 1,022 6,370 - 1.3 Customer finance 15,658,238 49,375,868 5,613,618 1,951,608 7,402,194 6,757,762 4,258,389 - - current accounts 8,236,048 - - - 921 578,835 - - - other financing 7,422,190 49,375,868 5,613,618 1,951,608 7,401,273 6,178,927 4,258,389 - - with early redemption option 1,448,180 37,758,148 2,820,202 1,675,263 6,472,253 3,076,645 3,983,225 - - other 5,974,010 11,617,720 2,793,416 276,345 929,020 3,102,282 275,164 - 2. On-bal ance sheet l iabil ities 66,463,114 6,942,763 4,612,459 2,201,018 21,892,575 6,196,422 41,858 - 2.1 Due to customers 64,950,885 997,815 672,011 542,885 175,450 84,189 35,281 - - current accounts 62,067,914 27,813 9,309 6,166 19,362 4,648 - - - other 2,882,971 970,002 662,702 536,719 156,088 79,541 35,281 - - with early redemption option ------other 2,882,971 970,002 662,702 536,719 156,088 79,541 35,281 - 2.2 Due to banks 1,191,227 686,504 635,141 22,824 12,484,622 7,145 3,966 - - current accounts 757,337 ------other payables 433,890 686,504 635,141 22,824 12,484,622 7,145 3,966 - 2.3 Debt instruments 320,880 5,258,444 3,305,307 1,635,309 9,232,503 6,105,088 2,611 - - with early redemption option 28,162 1,457,968 753,156 10,184 62,817 499,299 2,611 - - other 292,718 3,800,476 2,552,151 1,625,125 9,169,686 5,605,789 - - 2.4 Other liabilities 122 ------with early redemption option ------other 122 ------3 Financial derivatives 22,439 (13,308,205) 1,709,890 1,614,123 14,025,656 (324,948) (4,428,219) - 3.1 With underlying security - 203 - 1,615 (358,150) (315,058) 112 - - Options - 203 - 1,615 (358,150) (315,058) 112 - + Long positions - 203 - 1,615 - - 112 - + Short positions - - - - 358,150 315,058 - - - Other ------+ Long positions ------+ Short positions ------3.2 Without underlying security 22,439 (13,308,408) 1,709,890 1,612,508 14,383,806 (9,890) (4,428,331) - - Options (21,765) 130,693 (14,091) 3,684 (36,541) 9,551 (27,225) - + Long positions 122,669 263,337 9,291 6,676 16,816 11,849 10,073 - + Short positions 144,434 132,644 23,382 2,992 53,357 2,298 37,298 - s (1,456,412) 190,904 821,431 16,660 271,326 73,761 82,288 - - Other 44,204 (13,439,101) 1,723,981 1,608,824 14,420,347 (19,441) (4,401,106) - + Long positions 3,176,107 190,904 821,431 16,660 271,326 73,761 82,288 - + Long positions 64,940 3,921,694 1,760,638 1,758,692 15,651,877 4,575,000 - - + Short positions 4,632,519 ------+ Short positions 20,736 17,360,795 36,657 149,868 1,231,530 4,594,441 4,401,106 - 4 Other off-bal ance sheet transaction
466 WorldReginfo - 443ee11b-e188-477f-9b0d-38a07c5d7da1 1.2 Banking portfolio: distribution by residual life (repricing date) of the financial assets and liabilities. Denominated in: other currencies
3 months to 6 6 months to 1 5 years to 10 Indeterminate Type/Residual maturity On demand Up to 3 months 1 year to 5 years Over ten years months year years maturity
1. On-bal ance sheet assets 329,028 1,077,926 83,098 532 1,501,991 258,896 8,831 - 1.1 Debt instruments 11,782 8,055 826 - 1,501,179 257,840 - - - with early redemption option 741 5,965 826 - 9,115 63,982 - - - other 11,041 2,090 - - 1,492,064 193,858 - - 1.2 Financing to banks 121,641 43,770 3,249 418 - - - - 1.3 Customer finance 195,605 1,026,101 79,023 114 812 1,056 8,831 - - current accounts 8,375 - - - - 5 - - - other financing 187,230 1,026,101 79,023 114 812 1,051 8,831 - - with early redemption option 1 10,927 ------other 187,229 1,015,174 79,023 114 812 1,051 8,831 - 2. On-bal ance sheet liabil ities 633,816 1,756,683 ------2.1 Due to customers 542,816 126,066 ------current accounts 536,284 ------other 6,532 126,066 ------with early redemption option ------other 6,532 126,066 ------2.2 Due to banks 73,430 1,630,617 ------current accounts 3,974 ------other payables 69,456 1,630,617 ------2.3 Debt instruments 17,570 ------with early redemption option ------other 17,570 ------2.4 Other liabilities ------with early redemption option ------other ------3 Financial derivatives 664 520,246 308,542 (55,593) (775,759) (31,685) - - 3.1 With underlying security - - - - (1,644) - - - - Options - - - - (1,644) - - - + Long positions ------+ Short positions - - - - 1,644 - - - - Other ------+ Long positions ------+ Short positions ------3.2 Without underlying security 664 520,246 308,542 (55,593) (774,115) (31,685) - - - Options ------+ Long positions ------+ Short positions ------Others (30,651) 664 520,246(68,769) 308,54299,419 (55,593) - (774,115) - (31,685) - - - - - + Long+ Long positions positions 66471,801 520,2462,725 308,54299,419 653,154 ------+ Short+ Short positions positions 102,452 - 71,494- - - 708,747 - 774,115 - 31,685 - - - - - 4 Other off-balance sheet transaction
467 WorldReginfo - 443ee11b-e188-477f-9b0d-38a07c5d7da1 2. Banking portfolio: internal models and other methods of sensitivity analysis.
The exposure of the UBI Group to interest rate risk as at 31st December 2017, measured in terms of core sensitivity43 was approximately -€30.91 million, thereby remaining within the limits set by the Policy to Manage Financial Risks. In detail, the sensitivity originated by Banca Teatina was -€6.50 million and the sensitivity generated by the product companies was approximately -€19.05 million, while the Parent contributed a total of -€5.36 million.
In compliance with the Policy to Manage Financial Risks, the exposure includes an estimate of the impact of early repayments and modelling of on-demand items on the basis of the internal model.
On the basis of the standard scenario set by supervisory regulations, the end of period measurements as at 31st December 2017, 30th September 2017, 30th June 2017, 31st March 2017 and 31st December 2016, as well as the average measurements for the period December 2017-December 2016, September 2017-September 2016, June 2017-June 2016, March 2017-March 2016 and the full year 2016, showed increases in economic value in both the scenarios considered. The exposure recorded is strongly influenced by the non-negative constraint imposed on interest rates in compliance with regulatory recommendations.
Sensitivity analysis of net interest income focuses on changes in profits resulting from a set of scenarios for changes in interest rates measured over a time horizon of twelve months. UBI Banca Group exposure to interest rate risk as at 31st December 2017, estimated in terms of an impact on net interest income of a reduction in reference interest rates of -100 basis points, was -€86.77 million, a figure which fell within the limits set by Group policy. The total level of exposure includes an estimate of the impact of early repayments and of the viscosity of demand items. The impact on net interest income shows the effects of changes in interest rates on the portfolio monitored, excluding hypotheses of future changes in the mix of assets and liabilities. These factors mean that the indicator cannot be used to assess the Bank’s future strategy.
43 The component relating to the AFS portfolio is excluded from the calculation.
468 WorldReginfo - 443ee11b-e188-477f-9b0d-38a07c5d7da1 1.2.3 Currency risk
Qualitative information
A. General aspects, management processes and methods of measuring currency risk
Currency risk is calculated on the basis of mismatches existing between assets and liabilities in foreign currency (spot and forward), relating to each currency other than euro. The main sources of risk are as follows:
lending and funding in foreign currency with corporate and retail customers;
holding financial instruments denominated in foreign currency;
holding units in UCITS for which, even if they are denominated in , it is not possible to determine the composition in foreign currency of the underlying investments and/or for which the maximum limit on investment in foreign currency is not known and binding;
trading in foreign bank notes.
Foreign currency risk in the UBI Group regards banking book exposures originated by the banks and/or by the product companies – resulting from their commercial activities – and their positions relating to trading in foreign currency.
Trading on foreign exchange markets is performed by the Group treasury function which operates by using instruments such as forward trades, forex swaps, domestic currency swaps and currency options, thereby optimising risks resulting from Group positions in foreign currency.
Exposure to currency risk is calculated starting from the net foreign currency position using a method based on supervisory regulations. Equity investments and tangible assets are not included in the calculation of the net foreign currency position.
B. Currency risk hedging
Foreign currency risk arising from exposures in the banking book is mitigated by systematically hedging them with funding and lending transactions in the same currency as the original transaction. This activity to contain risk is also performed by the product companies for their own banking book positions. The remaining exposures and trading portfolio exposures are fully and precisely hedged with spot forex positions.
469 WorldReginfo - 443ee11b-e188-477f-9b0d-38a07c5d7da1 Quantitative information
1. Distribution of assets, liabilities and derivatives by foreign currency in which they are denominated
Currencies Items US Dollars UK sterling Yen Canadian dollars Sw iss Francs Other currencies
A. Financial assets 2,849,193 14,142 8,409 7,204 527,930 156,454 A.1 Debt instruments 1,779,683 - - - - - A.2 Equity instruments 6,288 - - - - - A.3 Financing to banks 134,968 2,347 5,917 7,144 14,751 11,360 A.4 Financing to customers 928,254 11,795 2,492 60 513,179 144,696 A.5 Other financial assets - - - - - 398 B. Other assets 38,375 5,229 580 1,173 6,391 2,096 C. Financial l iabil ities 2,525,546 25,909 19,020 6,065 41,184 72,047 C.1 Due to banks 1,935,453 3,104 65 281 823 63,468 C.2 Due to customers 589,475 22,805 2,002 5,784 40,361 8,579 C.3 Debt instruments 618 - 16,953 - - - C.4 Other financial liabilities ------D. Other liabil ities 1,237 264 - - - 230,416 E. Financial Derivatives (411,369) 6,019 9,697 (2,207) (497,783) (84,771) E.1 Options (78,122) 4,576 (3,854) - (9,458) (3,394) E.1.1 Long positions 253,161 5,692 - - 15,501 3,354 E.1.2 Short positions 331,283 1,116 3,854 - 24,959 6,748 E.2 Other derivatives (333,247) 1,443 13,551 (2,207) (488,325) (81,377) E.2.1 Long positions 1,390,603 333,527 274,660 3,041 34,272 31,144 E.2.2 Short positions 1,723,850 332,084 261,109 5,248 522,597 112,521 Total assets 4,531,332 358,590 283,649 11,418 584,094 193,048 Total l iabil ities 4,581,916 359,373 283,983 11,313 588,740 421,732 Balance (+/-) (50,584) (783) (334) 105 (4,646) (228,684)
2. Internal models and other methods of sensitivity analysis.
Exposure to foreign currency risk, calculated using the methodology just described in the similar section relating to “Interest rate and price risk” (sub-section 1.2.2 – 2) was zero as at 31st December 2017.
470 WorldReginfo - 443ee11b-e188-477f-9b0d-38a07c5d7da1 1.2.4 Derivative instruments
A. Financial derivatives
A.1 Supervisory trading portfolio: end of period and average notional amounts
31.12.2017 31.12.2016 Underlying assets/type of derivative Over the counter Central counterparties Over the counter Central counterparties
1. Debt instruments and interest rates 30,935,878 - 26,663,850 - a) Options 4,119,237 - 3,275,724 - b) Swaps 26,685,945 - 22,971,379 - c) Forw ards - - - - d) Futures 130,696 - 416,747 - e) Other - - - - 2. Equity instruments and share i ndi ces 10,467 - 4 - a) Options 4 - 4 - b) Sw aps - - - - c) Forw ards - - - - d) Futures 10,463 - - - e) Other - - - - 3. Currencies and gol d 6,063,007 - 5,349,250 - a) Options 1,374,300 - 870,869 - b) Sw aps - - - - c) Forwards 4,688,707 - 4,478,381 - d) Futures - - - - e) Other - - - - 4. Commodities 51,847 - 53,623 - 5. Other underlying - - - - Total 37,061,199 - 32,066,727 -
471 WorldReginfo - 443ee11b-e188-477f-9b0d-38a07c5d7da1 A.2 Banking portfolio: notional, end of period and average amounts
A.2.1 For hedging
31.12.2017 31.12.2016 Underlying assets/type of derivative Over the counter Central counterparties Over the counter Central counterparties
1. Debt instruments and interest rates 30,901,096 - 27,628,871 - a) Options 1,702,608 - 1,855,723 - b) Swaps 29,198,488 - 25,773,148 - c) Forw ards - - - - d) Futures - - - - e) Other - - - - 2. Equi ty i nstruments and share i ndices - - - - a) Options - - - - b) Sw aps - - - - c) Forw ards - - - - d) Futures - - - - e) Other - - - - 3. Currencies and gol d 41,409 - 64,493 - a) Options - - - - b) Swaps 41,409 - 64,493 - c) Forw ards - - - - d) Futures - - - - e) Other - - - - 4. Commodities - - - - 5. Other underlying - - - - Total 30,942,505 - 27,693,364 -
A.2.2 Other derivatives
31.12.2017 31.12.2016 Underlying assets/type of derivative Over the counter Central counterparties Over the counter Central counterparties
1. Debt instruments and interest rates - - - - a) Options - - - - b) Sw aps - - - - c) Forw ards - - - - d) Futures - - - - e) Other - - - - 2. Equity instruments and share indices 972,517 - 562,264 - a) Options 972,517 - 562,264 - b) Sw aps - - - - c) Forw ards - - - - d) Futures - - - - e) Other - - - - 3. Currenci es and gol d - - - - a) Options - - - - b) Sw aps - - - - c) Forw ards - - - - d) Futures - - - - e) Other - - - - 4. Commodities - - - - 5. Other underlying - - - - Total 972,517 - 562,264 -
472 WorldReginfo - 443ee11b-e188-477f-9b0d-38a07c5d7da1 A.3 Financial derivatives: gross positive fair value – by type of product
Fair value positivo
Portafogli/tipologie derivati 31.12.2017 31.12.2016
Over the counter Controparti centrali Over the counter Controparti centrali
A. Portafogl i o di negozi azi one di vi gil anza 476,518 - 645,797 - a) Opzioni 39,057 - 20,108 - b) Interest rate swap 411,860 - 598,166 - c) Cross currency swap - - 24,016 - d) Equity swaps - - 31 - e) Forward 23,563 - 3,476 - f) Futures 79 - - - g) Altri 1,959 - - - B. Portafogl io bancario - di copertura 393,115 - 469,320 - a) Opzioni - - - - b) Interest rate swap 390,236 - 469,250 - c) Cross currency swap 2,879 - - - d) Equity swaps - - - - e) Forward - - - - f) Futures - - - - g) Altri - - 70 - C. Portafoglio bancario - altri derivati 62,700 - - - a) Opzioni 62,700 - - - b) Interest rate swap - - - - c) Cross currency swap - - - - d) Equity swaps - - e) Forward - - - - f) Futures - - - - g) Altri - - - - Total e 932,333 - 1,115,117 -
473 WorldReginfo - 443ee11b-e188-477f-9b0d-38a07c5d7da1 A.4 Financial derivatives: gross negative fair value – by type of product
Negative fair value
Portfolio/type of derivative 31.12.2017 31.12.2016
Over the counter Central counterparties Over the counter Central counterparties
A. Supervisory trading portfol io 641,218 - 808,989 - a) Options 12,342 - 15,351 - b) Interest rate swaps 605,121 - 762,570 - c) Cross currency swaps - - 27,675 - d) Equity swaps - - 32 - e) Forwards 21,889 - 3,361 - f) Futures 81 - - - g) Other 1,785 - - - B. Banking portfol io - for hedging 212,338 - 267,727 - a) Options - - - - b) Interest rate swaps 211,212 - 265,417 - c) Cross currency swaps - - 287 - d) Equity sw aps - - - - e) Forw ards - - - - f) Futures - - - - g) Other 1,126 - 2,023 - C. Banking portfolio - other derivatives - - - - a) Options - - - - b) Interest rate sw aps - - - - c) Cross currency swaps - - - - d) Equity sw aps - - - - e) Forw ards - - - - f) Futures - - - - g) Other - - - - Total 853,556 - 1,076,716 -
474 WorldReginfo - 443ee11b-e188-477f-9b0d-38a07c5d7da1 A.5 OTC financial derivatives: supervisory trading portfolio – notional amounts, gross positive and negative fair values by counterparty – contracts not covered by clearing agreements
Contracts not covered by clearing agreements Banks Other authorities companies Other public central banks Non-financial Governments and Financial companies Financial Insurance companies Insurance 1) Debt instruments and interest rates - notional amount - 4,593 14,480 504,702 - 6,968,379 431,562 - positive fair value - 39 1 4,099 - 243,727 7,158 - negative fair value - - 1,141 689 - 3,442 218 - future exposure - - 108 2,900 - 34,944 1,139 2) Equity instruments and share indices - notional amount - - 2 - - - 2 - positive fair value ------1,667 - negative fair value ------future exposure ------3) Currencies and gold - notional amount - - 1,501 1,645,314 9,001 1,152,851 5,467 - positive fair value - - 45 3,223 35 20,850 6 - negative fair value - - 45 6,472 32 3,761 92 - future exposure - - 15 16,453 90 9,799 55 4) Other securities - notional amount - - 17,871 7,985 - 25,991 - - positive fair value - - 1,124 245 - 590 - - negative fair value - - 303 230 - 1,252 - - future exposure - - 1,869 865 - 2,749 -
475 WorldReginfo - 443ee11b-e188-477f-9b0d-38a07c5d7da1 A.6 OTC financial derivatives: supervisory trading portfolio – notional amounts, gross positive and negative fair values by counterparty – contracts covered by clearing agreements
Contracts covered by clearing agreements Other Banks companies authorities Other public Non-financial central banks Governments and and Governments Financial companies Insurance companies Insurance 1) Debt instruments and interest rates - notional amount - - 9,045,637 13,966,525 - - - - positive fair value - - 103,953 71,710 - - - - negative fair value - - 368,049 233,716 - - - 2) Equi ty instruments and share i ndices - notional amount - - 10,463 - - - - - positive fair value - - 54 - - - - - negative fair value - - 61 - - - - 3) Currencies and gol d - notional amount - - 2,843,587 405,286 - - - - positive fair value - - 17,099 893 - - - - negative fair value - - 17,982 3,733 - - - 4) Other securities - notional amount ------positive fair value ------negative fair value ------
476 WorldReginfo - 443ee11b-e188-477f-9b0d-38a07c5d7da1 A.7 OTC financial derivatives: banking portfolio – notional amounts, gross positive and negative fair values by counterparty – contracts not covered by clearing agreements
Contracts not covered by clearing agreements Other Banks companies authorities Other public Non-financial Non-financial central banks Governments and and Governments Financial companies Financial Insurance companies Insurance 1) Debt instruments and interest rates - notional amount - - 38,656 - - - - - positive fair value - - 13,048 - - - - - negative fair value ------future exposure ------2) Equity instruments and share indices - notional amount - - - 241,778 253,019 469,649 8,071 - positive fair value - - - 62,700 - - - - negative fair value ------future exposure - - - 26 20,242 46,965 - 3) Currencies and gold - notional amount - - 24,450 - - 578 16,381 - positive fair value - - 2,879 - - - - - negative fair value - - - - - 61 1,065 - future exposure - - 1,223 - - 6 207 4) Other securities ------notional amount ------positive fair value ------negative fair value ------future exposure ------
477 WorldReginfo - 443ee11b-e188-477f-9b0d-38a07c5d7da1 A.8 OTC financial derivatives: banking portfolio – notional amounts, gross positive and negative fair values by counterparty – contracts covered by clearing agreements
Contracts covered by clearing agreements Other Banks companies authorities Other public Non-financial Non-financial central banks Governments and Financial companies Financial Insurance companies Insurance 1) Debt instruments and interest rates - notional amount - - 11,803,437 19,059,003 - - - - positive fair value - - 241,109 136,079 - - - - negative fair value - - 136,288 74,924 - - - 2) Equity instruments and share indices - notional amount ------positive fair value ------negative fair value ------3) Currencies and gol d - notional amount ------positive fair value ------negative fair value ------4) Other securities - notional amount ------positive fair value ------
- negative fair value ------
478 WorldReginfo - 443ee11b-e188-477f-9b0d-38a07c5d7da1 A.9 Residual maturity of OTC financial derivatives: notional amounts
Underlying asset/Residual maturity Up to 1 year 1 year to 5 years More than 5 years Total
A. Supervisory trading portfol io 9,135,607 16,213,904 11,711,688 37,061,199 A.1 Financial derivatives on debt instruments and interest rates 3,223,329 16,000,862 11,711,687 30,935,878 A.2 Financial derivatives on equity instruments and share indices 10,463 3 1 10,467 A.3 Financial derivatives on exchange rates and gold 5,864,874 198,133 - 6,063,007 A.4 Financial derivatives on other securities 36,941 14,906 - 51,847 B. Banking portfol io 3,303,644 13,359,183 15,252,195 31,915,022 B.1 Financial derivatives on debt instruments and interest rates 3,283,165 12,835,398 14,782,533 30,901,096 B.2 Financial derivatives on equities and share indices 3,520 499,335 469,662 972,517 B.3 Financial derivatives on exchange rates and gold 16,959 24,450 - 41,409 B.4 Financial derivatives on other securities - - - - Total 31.12.2017 12,439,251 29,573,087 26,963,883 68,976,221 Total 31.12.2016 11,022,284 26,801,978 22,498,093 60,322,355
A.10 OTC financial derivatives: counterparty risk/financial risk – Internal models
The UBI Banca Group does not use internal models to measure counterparty risk and financial risk for OTC financial derivatives.
479 WorldReginfo - 443ee11b-e188-477f-9b0d-38a07c5d7da1 B. Credit derivatives
B.1 Credit derivatives: end of period notional amounts
No items of this type exist in the UBI Banca Group.
B.2 OTC credit derivatives: gross positive fair value – by type of product
No items of this type exist in the UBI Banca Group.
B.3 OTC credit derivatives: gross negative fair value – by type of product
No items of this type exist in the UBI Banca Group.
B.4 OTC credit derivatives: gross fair value (positive and negative) by counterparty – contracts not covered by clearing agreements
No items of this type exist in the UBI Banca Group.
B.5 OTC credit derivatives: gross fair value (positive and negative) by counterparty – contracts covered by clearing agreements
No items of this type exist in the UBI Banca Group.
B.6 Residual maturity of credit derivatives: notional amounts
No items of this type exist in the UBI Banca Group.
B.7 Credit derivatives: counterparty risk/financial risk – internal models
The UBI Banca Group does not use internal models to measure counterparty and financial risk for credit derivatives.
480 WorldReginfo - 443ee11b-e188-477f-9b0d-38a07c5d7da1 C. Financial and credit derivatives
C.1 OTC financial and credit derivatives: net fair value and future exposure by counterparty
Other Banks Financial Insurance companies companies companies authorities Other public Non-financial central banks central Governments and and Governments
1) Bilateral agreement financial derivatives - positive fair value - - 93,003 46,558 - - - - negative fair value - - 253,167 150,249 - - - - future exposure - - 102,283 319,056 - - - - net counterparty risk - - 195,286 364,694 - - - 2) Bi l ateral agreement credi t deri vatives - positive fair value ------negative fair value ------future exposure ------net counterparty risk ------3) "Cross product" agreements - positive fair value ------negative fair value ------future exposure ------net counterparty risk
481 WorldReginfo - 443ee11b-e188-477f-9b0d-38a07c5d7da1 3 BANKING GROUP - LIQUIDITY RISK
Qualitative information
A. General aspects, processes for the management and methods for the measurement of liquidity risk
Liquidity risk is defined in the UBI Group as the risk of the failure to meet payment obligations, which can be caused either by an inability to raise funds, by raising them at higher than market costs (funding liquidity risk), or by the presence of restrictions on the ability to sell assets (market liquidity risk) with losses incurred on capital account. Structural liquidity risk is defined as the risk resulting from a mismatch between the sources of funding and lending. The primary objective of the liquidity risk management system is to enable the Group to meet its payment obligations and to raise additional funding at a minimum cost and without prejudice to potential future income. The general principles on which liquidity management within the Group is based are as follows: • the adoption of a centralised management framework for Group Treasury; • diversification of the sources of funding and limits on exposure to institutional counterparties; • protection of Group capital in liquidity crisis situations; • a proper financial balance between assets and liabilities; • a proper level of eligible and/or liquid assets, sufficient to meet liquidity requirements even under stress conditions.
The reference framework for the measurement, monitoring and management of exposure to liquidity risk is defined annually as part of the Policy to Manage Financial Risks of the UBI Banca Group and the relative regulations to implement it and the Document setting operational limits approved by the corporate governance bodies. From 2017 the contingency funding plan (CFP) was merged into the Group’s Recovery Plan, which regulates measures and processes designed to recover its financial situation following a significant deterioration in it.
These documents set out rules for the pursuit and maintenance of an adequate degree of diversification in the sources of funding and a proper structural balance between the sources and uses of funds for Group companies, through the pursuit of co-ordinated and efficient funding and lending policies.
The following are responsible for liquidity risk management: • the units that report to the Chief Wealth and Welfare Officer (1st level control), which monitor liquidity daily and manage risk on the basis of defined limits; • the Capital & Liquidity Risk Management Area (2nd level control), responsible for periodically verifying that limits are observed.
The system for the management of short-term liquidity risk defined by the Policy to Manage Financial Risks of the UBI Banca Group is based on a system of early warning thresholds and limits consistent with the general principles on which liquidity management within the Group is based.
482 WorldReginfo - 443ee11b-e188-477f-9b0d-38a07c5d7da1 More specifically, liquidity risk is managed by means of the measurement, monitoring and management of the expected liquidity requirement, using a net liquidity balance model of analysis at consolidated level, supplemented with stress tests designed to assess the Group’s ability to withstand crisis scenarios characterised by an increasing level of severity.
The net liquidity balance is obtained from the daily liquidity ladder by comparing expected cash flow projections with counterbalancing capacity over a time horizon of up to three months. The cumulative sum of expected cash flows and of the counterbalancing capacity, for each time bucket, quantifies liquidity risk measured under different stress scenarios. The UBI Banca Group reports that indicator to the Bank of Italy on a weekly basis, following standard procedures set by that supervisory authority. The liquidity position reported to the Bank of Italy contains the following information: • the principal maturities, forecast over a time horizon of twelve months, both on the institutional and the retail market, with details according to the type of funding instrument (e.g. bond issues, repurchase agreements, commercial paper); • details of assets available for refinancing transactions with the central bank and of liquid assets; • the main providers of funds on the interbank market (largest ten counterparties); • details of securities eligible for refinancing with the ECB resulting from retained securitisations, retained covered bonds and government-backed UBI securities.
The objectives of stress tests are to measure the vulnerability of the Group to exceptional but plausible events and they provide a better assessment of exposure to liquidity risk, the systems for mitigating and monitoring them and the length of the survival period under hypotheses of adverse scenarios. The following risk factors that can alternatively affect the cumulative imbalance of cash inflows and outflows or the liquidity reserve are considered in the definition of stress scenarios, divided into base stress and internal scenarios: • wholesale funding risk: unavailability of unsecured and secured funding on the wholesale market; • retail funding risk: volatility of sight liabilities relating to ordinary customers and repurchases of own securities; • off-balance sheet liquidity risk: use of margins available on irrevocable credit lines granted; • market liquidity risk: fall in the value of securities which constitute a liquidity reserve and an increase in the margins requested for positions in financial derivative instruments.
Monitoring the level of cover to meet expected liquidity requirements through an adequate reserve of liquidity is accompanied by daily monitoring of exposure on the interbank market.
In compliance with supervisory provisions, the system for the management of liquidity risk employed by the Group also involves monitoring sources of funding both at consolidated and individual company level, by using a system of indicators. In this respect thresholds are set both for the maximum level of funding from institutional markets, considered more volatile under stress conditions, and the minimum levels of cover for lending activity with funding from ordinary customers or with medium to long-term funding from institutional customers.
Finally, the management of structural balance is performed by using models which measure the degree of stability of liabilities and the degree of liquidity of assets in order to mitigate risk associated with the transformation of maturities within a tolerance threshold considered acceptable by the Group. The model employed by the Group to monitor structural balance is designed to incorporate the general lines currently being defined in the process to revise supervisory regulations for liquidity risk with specific reference to medium to long-term indicators. Measurement of the degree of stability
483 WorldReginfo - 443ee11b-e188-477f-9b0d-38a07c5d7da1 of liabilities and the degree of liquidity of assets is based principally on criteria of residual life and on the classification of the counterparties which contribute to the definition of the weightings of assets and liabilities.
Further information on Group activities on the interbank market and details of the liquidity reserves are given in the Management Report which may be consulted.
484 WorldReginfo - 443ee11b-e188-477f-9b0d-38a07c5d7da1 Quantitative information
1.1 Distribution over time by residual contractual maturity of financial assets and liabilities – Denominated in euro
15 days to 1 1 month to 3 3 months to 6 6 months to 1 More than 5 Indeterminate Items/maturities On demand 1 to 7 days 7 to 15 days 1 year to 5 years month months months year years maturity
On-bal ance sheet assets 13,061,152 751,768 1,073,012 1,986,168 4,361,508 4,332,492 7,758,095 34,862,489 37,105,474 5,815,838 A.1 Government securities 339 - - - 40,036 59,656 170,305 4,373,812 5,788,882 - A.2 Other debt instruments 16,861 - - - 2,012 2,806 5,401 296,392 350,783 16,793 A.3 Units in UCIT S 208,944 ------A.4 Financing 12,835,008 751,768 1,073,012 1,986,168 4,319,460 4,270,030 7,582,389 30,192,285 30,965,809 5,799,045 - Banks 831,705 9,194 2,162 56,106 78,506 146,871 72,038 649,195 7,392 5,799,045 - Customers 12,003,303 742,574 1,070,850 1,930,062 4,240,954 4,123,159 7,510,351 29,543,090 30,958,417 -
On-bal ance sheet l iabil itiest 66,426,28864,838,553 555,182 10,754 75,239 20,410 687,438247,275 2,128,616556,953 2,564,518637,117 4,458,917547,743 24,489,830143,812 7,252,650 37,943 - - B.1 Deposits- Banks and current accoun 954,100 ------Customers 63,884,453 10,754 20,410 247,275 556,953 637,117 547,743 143,812 37,943 - B.2 Debt instruments 241,053 428,300 49,115 429,347 1,488,563 1,784,599 3,705,970 10,937,168 6,771,914 - B.3 Other liabilities 1,346,682 116,128 5,714 10,816 83,100 142,802 205,204 13,408,850 442,793 -
Off-balance sheet transactions (3,532,650) 81,222 346,573 225,335 543,834 428,178 301,499 1,492,488 419,235 - C.1 Financial derivatives with 34,460 76,164 204,830 193,198 456,429 (3,795) 12,993 (340,150) (314,934) - exchange of principal - Long positions 34,460 196,405 239,652 1,873,631 615,089 161,898 175,078 68,826 125 - - Short positions - 120,241 34,822 1,680,433 158,660 165,693 162,085 408,976 315,059 - C.2 Financial derivatives (178,998) 2,552 - 4,536 63,656 (6,070) 66,393 - - - without exchange of principal - Long positions 428,909 2,724 - 9,202 75,512 17,538 111,416 - - - - Short positions 607,907 172 - 4,666 11,856 23,608 45,023 - - - C.3 Deposits and financing to be ------received - Long positions ------Short positions ------C.4 Irrevocable commitments to (3,411,809) 2,506 141,743 27,009 22,136 437,959 220,924 1,829,661 729,830 - disburse funds - Long positions 1,354,262 2,506 141,743 27,009 22,136 437,959 220,924 1,829,661 729,830 - - Short positions 4,766,071 ------
C.5 Financial guarantees issued 23,697 - - 592 1,613 84 1,189 2,977 4,339 -
C.6 Financial guarantees ------received C.7 Credit derivatives with ------exchange of principal - Long positions ------Short positions ------C.8 Credit derivatives without ------exchange of principal - Long positions ------Short positions ------
485 WorldReginfo - 443ee11b-e188-477f-9b0d-38a07c5d7da1 1.2 Distribution over time of the residual contractual life of financial assets and liabilities – Denominated in: other currencies
15 days to 1 1 month to 3 3 months to 6 6 months to 1 More than 5 Indeterminate Items/maturities On demand 1 to 7 days 7 to 15 days 1 year to 5 years month months months year years maturity
On-bal ance sheet assets 256,236 179,048 39,553 99,261 109,239 37,811 55,504 1,853,568 635,548 - A.1 Government securities 295 - - - 2,361 4,717 16,156 1,484,950 177,687 - A.2 Other debt instruments - - - - 189 478 1,185 18,262 69,583 - A.3 Units in UCIT S 285 ------A.4 Financing 255,656 179,048 39,553 99,261 106,689 32,616 38,163 350,356 388,278 - - Banks 121,552 3,911 11,186 2,425 5,336 7,418 6,411 10,840 - - - Customers 134,104 175,137 28,367 96,836 101,353 25,198 31,752 339,516 388,278 - On-bal ance sheet liabil ities 617,093 41,631 451,224 460,985 814,200 3,866 1,512 - - - B.1 Deposits and current accounts 606,144 41,615 48 20,873 ------Banks 69,860 41,615 48 20,873 ------Customers 536,284 ------B.2 Debt instruments 886 - 183 2,672 8,454 3,866 1,512 - - - B.3 Other liabilities 10,063 16 450,993 437,440 805,746 - - - - - Off-bal ance sheet transactions (190,379) (83,419) (249,084) (218,601) (464,413) 4,444 (7,311) (41,886) 82,672 - C.1 Financial derivatives with (34,133) (86,144) (202,605) (193,586) (464,569) 4,035 (11,119) (41,886) (4) - exchange of principal - Long positions - 101,238 37,535 1,676,938 129,897 154,249 158,881 49,579 - - - Short positions 34,133 187,382 240,140 1,870,524 594,466 150,214 170,000 91,465 4 - C.2 Financial derivatives without (1,025) - - - 156 118 3,534 - - - exchange of principal - Long positions 2,449 - - - 166 142 3,832 - - - - Short positions 3,474 - - - 10 24 298 - - - C.3 Deposits and financing to be (71,494) - (46,479) (25,015) ------received - Long positions (71,494) ------Short positions - - 46,479 25,015 ------C.4 Irrevocable commitments to (85,693) 2,725 - - - 291 - - 82,676 - disburse funds - Long positions 12,504 2,725 - - - 291 - - 82,676 - - Short positions 98,197 ------
C.5 Financial guarantees issued 1,966 - - - - - 274 - - -
C.6 Financial guarantees received ------C.7 Credit derivatives with exchange ------of principal - Long positions ------Short positions ------C.8 Credit derivatives without ------exchange of principal Details- Long ofpositions “self-retained” securitisations - are given- in section- 1, sub-section- 1 –- Credit risk,- sub-section- C Securitisations”- - in these notes- to the - financialShort positions statements. These are- where the- Bank, in- its capacity- as the -originator, - subscribes- the total- debt issued- by the -special purpose entity at the time of issuance.
486 WorldReginfo - 443ee11b-e188-477f-9b0d-38a07c5d7da1
4 BANKING GROUP - OPERATIONAL RISKS
Qualitative information
A. General aspects, procedures for the management and methods for the measurement of operational risk
Operational risk is defined as the risk of incurring losses resulting from inadequate or failed processes, human resources and internal systems or from exogenous events. These risks include for example losses resulting from fraud44, human error, business disruption, system failure, non- performance of contracts and natural disasters. With regard to their financial manifestation this definition includes legal risk45, model risk46, operational risks that overlap with market risk47 and operational risks that overlap with credit risk48. The definition of operational risk does not include reputational risk49 and strategic risk50.
In order to guarantee a risk profile consistent with the risk appetite defined by the Strategic Supervisory Body, the Group has defined an organisational model based on the combination of various components identified according to the role filled and by the responsibility assigned in the organisation chart. The different components are identified centrally at the Parent and locally in the individual legal entities.
The model involves centralisation at the Parent of policy-setting functions and of second and third level internal controls. Various levels of responsibility have been identified in each legal entity, listed below, assigned on the basis of the operating area:
- Operational Risks Officer (ORO): this is the Chief Executive Officer for the Parent. In other legal entities it is the Managing Director, or the General Manager, or an equivalent role in the company depending on their corporate regulations. The Operational Risk Officer is responsible, within his/her legal entity for implementing the entire operational risk management system as defined by Group policy;
- Local Operational Risk Support Officer (LORSO): this role is the figure responsible for the unit in charge of risk control (or the equivalent person in the company according to its own internal regulations). Within his/her legal entity, this officer supports the Operational Risk Officer in the implementation and co-ordination of the operational risk management system as
44 At the stage where facts and responsibilities are investigated presumed frauds must be considered on a par with proven frauds. 45 Defined as the risk of incurring losses and/or additional costs as a result of violations of laws and regulations, legal proceedings or voluntary actions taken to prevent legal risk from arising (the definition of legal risk also includes losses arising from money laundering risks, misconduct events and compliance risks). 46 Defined as the risk of incurring losses and/or additional costs as a result of models used in decision-making processes (e.g. pricing models, models used to measure financial and/or hedging instruments, models use to monitor controls on risk limits, etc.). The definition of model risk does not include losses incurred due to underestimates of capital requirements calculated using internal models submitted to supervisory authorities for approval. 47 Defined as losses and/or additional costs connected with financial transactions including those relating to the management of market risk caused by inadequate and/or failures in processes, operational and or data entry errors, shortcomings in internal control systems, inadequacies of data quality processes, the unavailability of IT systems, unauthorised conduct and negligent and/or gross misconduct of persons and/or by other external events. 48 Defined as financial losses generated when a credit product is sold and/or as part of a credit process caused mainly by an operational risk. 49 Defined as the present or future risk of incurring loss of profits or capital resulting from a negative perception of the image of the Bank/Company by customers, counterparties, shareholders, investors or supervisory authorities. 50 Defined as the risk attaching to errors in decision-making concerning business strategies or bad timing in decisions relating to markets. 487
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defined by Group policy. In consideration of its organisational complexity, for the Parent only, this role is divided into two figures:
Territorial Operational Risk Support (TORS): this role is the figure responsible for the Support and Control Service on the staff of the head of the Macro Geographical Area and head of the Commercial Coordination Department on the staff of the head of Top Private Banking and Corporate & Investment Banking; Central Operational Risk Support (CORS): this role is the manager of the units that report to the Chief Lending Officer, Chief Commercial Officer, Chief of Wealth and Welfare Officer and Chief Operating Officer and the manager of units to which specialist activities are assigned51;
- Risk Champion (RC): this role is assigned to managers of units that report directly to the heads of Macro Geographical Areas and of Top Private Banking and Corporate & Investment Banking and to the managers of departments and managers of units that report directly to Central Operational Risk Support; for other companies to the Managing Director, General Management and Department Managers52.
The role of Risk Champion is also assigned, even in the absence of a specific organisational unit, to those with responsibility for specialist activities53.
Risk Champions report directly to Operational Risk Officers (OROs) through the Local Operational Risk Support Officers (LORSOs), Territorial Operational Risk Support (TORS) or Central Operational Risk Support (CORS). They are assigned responsibility for operational supervision of the proper performance of the operational risk management process in relation to the activity for which they are responsible and for co-ordinating the Risk Owners that report to them;
- Risk Owner (RO): this role is that of the managers of the units which report hierarchically to a Risk Champion. Their task is to recognise and report loss events, both actual and/or potential, attributable to operational risk factors which occur in the course of everyday operations;
- Accounting Assistant: this role is assigned to specific persons identified within the units responsible for operational accounting activities. Their task is to ensure full and accurate accounting of operational losses;
- Insurance Function: this role is assigned to specific persons identified within the units responsible for the management of claims for which insurance cover is provided. Their task is to ensure accurate and full records are kept of insurance compensation and all relative support information.
51 As an example but not limited to this, activities for the management of: prevention and protection at work as defined by the legislation 81/2008; anti-money laundering and anti-terrorism activities; claims; accounting controls as defined by Circular No. 262/2005 (administrative liability); legal and tax proceedings, etc. 52 In consideration of the operational complexity underlying the areas of activity for which these are responsible, in order to facilitate their activity of recording and updating the Loss Data Collection system, Joint General Managers and the Deputy General Managers (where they exist) are excluded from the role of Risk Champion. These receive periodic reports from the Risk Champions that report to them hierarchically. 53 For example but not limited to this, activity for the management of the following: securities brokering; logical and physical security; disaster recovery and business continuity, etc. 488
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The measurement system
The measurement system takes account of internal and external operational loss data, operational context factors and the system of internal controls, in a manner whereby it detects the main determinants of risk (especially those which impact on the distribution tail) and incorporates changes that occur in the risk profile. Further details on the functioning of the calculation model are given in the sub-section on the capital requirement which may be consulted.
The reporting system
Monitoring of operational risks is carried out by means of a standard reporting system organised on the basis of the same levels of responsibility present in the organisational model. Management reporting activities are carried out in-house by the operational risk control function of the Parent which periodically prepares the following:
– an analysis of changes in operating losses detected by the loss data collection system and of the relative recoveries obtained; – benchmark analyses with sector-wide data; – a summary of assessments of exposure to potential risks; – details of areas of vulnerability identified and the mitigation action undertaken.
As a consequence of the functions attributed by General Corporate Regulations, responsibility for monitoring the risk profile assumed by each company in the Group, its consistency with risk targets and compliance with operational limits lies with the Parent’s risk control units. On conclusion of risk profile monitoring, appropriate corrective action is identified which will form part of the annual projects programmed.
Legal risk
The companies in the Group are party to a number of legal proceedings arising from the ordinary performance of their business. In order to meet the claims received, the companies have made appropriate provisions on the basis of a reconstruction of the amounts potentially at risk, an assessment of the risk in terms of the degree of “probability” and/or “possibility”, as defined in the accounting standard IAS 37, and established legal opinion. Therefore, while it is not possible to predict final outcomes with certainty, it is considered that an unfavourable conclusion of these proceedings, both taken singly or as a whole, would not have a significant effect on the financial and operating position of the UBI Banca Group.
Specific sections of this financial report may be consulted for information on litigation.
489
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Quantitative information
From 1st January 2013 until 31st December 2017 the main sources of operational risk for the Group were “processes” (87% of frequencies and 80% of the total impacts detected) and “external causes” (11% of frequencies and 13% of the total impacts detected). The “process” risk driver includes, amongst other things, unintentional errors and incorrect application of regulations. The “external causes” risk driver includes, amongst other things, human actions performed by third parties and not directly under the control of the Bank.
Percentage of operational losses by risk driver (detection 1st January 2013 - 31st December 2017) Number of events Impact on profits
The types of event54 which recorded the greatest concentration of operational losses during the period examined were “customers, products and professional practices” (77% of frequencies and 53% of the total impacts detected), “execution, delivery and process management” (10% of frequencies and 27% of the total impacts detected) and “external fraud” (8% of frequencies and 11% of the total impacts detected).
Percentage of operational losses by type of event (detection from 1st January 2013 to 31st December 2017) Number of events Impact on profits
54 Reference is made to regulatory types of event laid down by EU Regulation 575/2013 as follows: internal fraud: losses due to acts of fraud, misappropriation of property, circumvention of the articles of association, laws, regulations or company policies, (excluding discrimination events or diversity events) which involve at least one internal party of the company; external fraud: losses due to acts of fraud, misappropriation of property, circumvention of the articles of association, laws regulations or company policies, (excluding discrimination events) carried out by third parties; employment and workplace safety: losses arising from acts inconsistent with employment, health or safety laws or agreements, from payment of personal injury claims or from diversity/discrimination events; customers, products and business practices: losses arising from the failure to meet professional obligations to specific clients (inclusive of fiduciary requirements and requirements to disclose information on investments) or from the nature or design of a product; damage from external events: losses arising from damage to, destruction or loss of physical assets, and from human and other losses due to natural disasters or other events; business disruption and system failures: losses arising from malfunctions and faults in systems and/or consequent business disruptions; execution, delivery and process management: losses arising from failed transaction processing or process management and from relations with trade counterparties and vendors.
490
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Operational losses during the year were concentrated on the following risk factors: “processes” (96% of frequencies and 77% of the total impacts detected) and “external causes” (3.5% of frequencies and 17% of the total impacts detected).
Percentage of operational losses by risk driver (detection 1st January 2017 - 31st December 2017)
Number of events Impact on profits
Last year operational losses were concentrated mainly in the following types of event: “customers, products and professional practices” (93% of frequencies and 69.7% of the total impacts detected), “external fraud” (1.5% of frequencies and 15% of the total impacts detected) and “execution, delivery and process management” (3% of frequencies and 10% of the total impacts detected).
Percentage of operational losses by type of event (detection from 1st January 2017 to 31st December 2017)
Number of events Impact on profits
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Capital requirement A provision issued by the Bank of Italy authorised the UBI Banca Group to use the advanced internal model (advanced measurement approach – AMA) in combined use with the standardised approach (TSA) and the basic indicator approach (BIA) from the supervisory report as at 30th June 2012. AMA: approach employed for the activities of the Parent, UBIS and IW Bank. For these banks, the measurement of operational risk is performed using an extreme value theory (EVT) approach, based on operational losses measured internally (loss data collection – LDC), empirical data acquired from outside the Group (IDOL - “Italian database of operational losses”) and potential losses evaluated using self risk assessment (SRA) scenarios. The first two information sources represent the quantitative component of the measurement model and furnish a historical view of the internal risk profile and of the Italian banking sector. On the other hand, the scenario analyses constitute a qualitative and quantitative information component, because they are derived from risk assessments provided as part of the internal self-risk assessment process, where the purpose is to provide a forward looking view of the internal risk profile, operational context factors and the system of internal controls. The model developed follows the loss distribution approach and it involves estimating severity distributions for each class of risk on two distinct components: a generalised pareto distribution (GPD) for the tail and an empirical distribution for the body. The estimates of severity obtained on the tails are subsequently integrated with risk information evaluated by means of a self risk assessment (SRA) process and with those of the done in the banking sector as a whole (IDOL). The probabilities of events occurring are described by using Poisson curves. The estimate of capital at risk is calculated to the 99.9th percentile of the annual loss curve resulting from a convolution between the curve of the probabilities of events occurring and the integrated severity curve. The consolidated capital requirement is calculated as the sum of the capital at risk estimated on each risk class. The robustness of the model and of the underlying assumptions is tested by employing a stress testing process, which provides an estimate of the impacts on measurements of expected loss and of VaR when particular stress conditions occur.
TSA: approach employed for the activities of Adriatica and Banca Tirrenica (merged into the Parent on 23rd October 2017 and 27th November 2017 respectively) and for the companies UBI Leasing, UBI Factor, UBI Pramerica, Prestitalia and UBI International. The capital requirement for the TSA component is calculated as the average over the last three years of the basic indicator, divided into supervisory lines of business, weighted with specific regulatory coefficients defined in the supervisory regulations.
BIA: approach employed for the activities of Banca Teatina and the other banking, financial and service companies. The capital requirement for this component is calculated as the average over the last three years of the significant indicator, weighted with an “alpha” coefficient (15%) defined in the supervisory regulations.
The risk capital calculated on a consolidated basis for each risk class is allocated to the various legal entities on the basis of a summary indicator determined by the historical and future risk measured and by the amount of the capital requirement calculated using the standardised methodology.
The capital requirement net of expected losses for which provisions for risks and charges had been made was €337 million, up 10% compared with €306 million in the previous half-year. Compared with the preceding half year, the capital requirement rose by €30 million. The increase is mainly 492
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caused by changes in the severity distribution parameters of the AMA component due to updates of the loss amounts for tail events.
As a form of risk mitigation, the UBI Banca Group has taken out adequate insurance policies to cover the principal transferable operational risks with due account taken of the requirements of supervisory regulations. The UBI Banca Group has not taken up the option available under the regulations in force to deduct the effects of insurance policies and other risk transfer mechanisms from the capital requirement.
Section 2 - Risks for insurance companies
As part of their internal control systems the life insurance company (BancAssurance Popolari Spa – BAP Vita) and the non-life insurance company (BancAssurance Popolari Danni Spa – BAP Danni) have adequate risk management systems in place in terms of the nature, size and complexity of the services they provide and these are compliant with the current sector regulations in force with specific reference to the provisions issued by IVASS (the insurance authority, formerly ISVAP) with Regulation No. 20 of 26th March 2008 on risk management and Regulation No. 36 of 31st January 2011 concerning guidelines on investments and assets to cover technical reserves.
In 2017 the activities of the risk management function focused on the identification, measurement, monitoring and reporting of the most significant company risks.
Policies for taking, measuring and managing risks are formulated and pursued on the basis of an integrated vision of balance sheet assets and liabilities in accordance with the new European Solvency II regulations in force from 1st January 2016.
The risk identification methodology, with which it is possible to map, measure and classify all potential risks to which the insurance companies are exposed, is validated by the Risk Committee with support from the Risk Management Function and the various risk owners. In addition to quantitative aspects it also involves qualitative assessments relating to external and internal factors to identify possible sources of current or future risk to which the companies might find themselves exposed on the basis of strategic choices.
As part of risk assessment, in compliance with the provisions of the European regulation Solvency II, appropriate measurements were carried out of the current and future capital requirement and of the assets in its possession using standard formulas. The risk profile is analysed on the basis of strategy, market scenarios and the development of business. This is conducted at least annually by means of an “own risk and solvency assessment” (ORSA) process which is to say by carrying out stress tests on a half-yearly basis on the most significant risks in order to improve capital allocation and periodic monitoring of changes in risks. Stress tests are developed consistent with the nature, dimensions and complexity of the risks attaching to the company’s activities. In addition to these stress tests, specific stress tests required by the supervisory authority are also carried out periodically.
Furthermore, as part of periodic controls, quarterly checks regarded monitoring of indicators of the most significant risks and compliance with operating limits relating to investment, risk-taking and reassurance activities.
The escalation process regards exceeding the risk appetite or the operating limits which, according to the size of the infringement detected by the Risk Management Function, necessarily involves reporting to and the involvement of the Risk Committee and/or the Boards of Directors. 493
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Finally, the risk reporting system involves the preparation of specific reports in relation to the information needs of the various recipients. The Risk Management Function is responsible for the preparation of reports to be submitted to management and supervisory bodies of the insurance companies (Board of Directors, Senior Management and the Risk Committee) and the Group regarding risk developments and infringements of operational limits.
Section 3 - Risks for other companies
No significant risks are reported for the remaining companies included in the consolidation that are not part of the banking Group and are not insurance companies.
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PART F – Information on consolidated equity
Section 1 – Consolidated equity
A. Qualitative information
Equity is defined by international financial reporting standards in a residual manner as “what remains of an entity’s assets after all the liabilities have been deducted”. The aggregate (the amounts of which are given in the tables that follow) is used to manage all the risks to which the Group is exposed, as specified below. The policies and processes employed in the management of equity concern the decisions made designed to define the size and optimum combination of the different capital instruments to ensure that the Group’s equity is consistent with the targets set for the Group’s risk appetite, in compliance with supervisory requirements. The following analysis metrics are used from the viewpoint of capital management to cover risks:
own funds, defined as a measure of regulatory capital – specified in supervisory regulations – to be held to cover capital requirements (Pillar 1 risks);
AFR (Available Financial Resources), or alternatively total capital, defined as the sum of capital items that the Group considers can be used to cover internal capital and total internal capital requirements for single types of risk1 (other risks).
Capital adequacy management is designed to govern the current and future capital strength of the Group both by verifying compliance with the supervisory requirements of Pillar 1 and by continuously monitoring the adequacy of the total capital to meet “other risks” (Pillar 2). This activity regards above all an analysis of capital requirements in relation to budget and business plan objectives and it is carried out at both consolidated and single legal entity level. Furthermore, following recent regulatory developments (CRR and CRD), capital adequacy is measured increasingly more in relation to the ability of the bank to resist severe shocks generated by hypothetical stress events occurring under particularly adverse conditions. The stress tests are carried out as part of planning processes to support work to formulate budgets and/or business plans, as part of periodic risk monitoring, annually in relation to the ICAAP Report and in response to specific exercises or requests coming from the supervisory authority.
As the Parent of the Group, UBI Banca performs supervision and co-ordination activities for the companies in the Group and, without prejudice to the independence of each of them in terms of their business and articles of association, lays down appropriate policies for them. The Parent assesses capitalisation requirements in both the strict sense and also through the issue of subordinated liabilities by subsidiaries. The Senior Management of the Parent submits proposals to its governing bodies which decide accordingly. The proposals, once approved by the governing bodies of the Parent, are then submitted to the competent bodies of the subsidiaries. In compliance with regulatory constraints and internal objectives, the
1 “Total internal capital” is defined as internal capital required for all significant risks assumed by the bank, including possible internal capital requirements due to considerations of a strategic character. “Internal capital” is defined as risk capital, the capital requirement for a determined risk that the bank considers necessary to cover losses above a given expected level.
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Parent analyses and co-ordinates capital requirements on the basis of the Budget and/or the Business Plan and the related risk profiles and it acts as a privileged counterparty in gaining access to capital markets applying an integrated approach to optimising capital strength.
The new prudential rules for banks and investment companies contained in EU Regulation 575/2013 (the Capital Requirements Regulation, known as the CRR) and in the EU Directive 2013/36/EU (the Capital Requirements Directive, known as CRD IV), came into force at the beginning of 2014. These transpose standards defined by the Basel Committee on Banking Supervision (known as the Basel 3 framework) into European Union regulations. The regulatory framework is completed with implementation measures contained in technical and implementation regulations (“Regulatory Technical Standard” – RTS and “Implementing Technical Standard” – ITS) adopted by the European Commission on the basis of a proposal by the European supervisory authorities. The CRR came into force directly in member countries, while the provisions of CRD IV were implemented in national regulations by the Bank of Italy on 17th December 2013 with the publication of Circular No. 285 “Regulations for the prudential supervision of banks” (subsequently updated several times), which implemented the new EU regulations, together with Circular No. 286 (“Instructions for compiling supervisory reports for banks and stock brokerage firms”) and an update to Circular No. 154 (“Supervisory reporting for credit and financial institutions. Tables for data and instructions for filing reports”). With specific reference to financial intermediaries, the registration on a single register in accordance with Circular No. 288 of 3/4/2015 entitled “Supervisory Regulations for Financial Intermediaries” was completed in 2016. This implemented the application of CRD IV in the national regulatory framework also for operators in the financial sector (pursuant to financial intermediaries Art. 107 or Art. 106 for those subject to consolidated banking supervision).
That framework introduced various changes to the current supervisory regulations as follows: a change in the composition of regulatory capital which privileges ordinary shares and retained earnings (common equity), in order to improve the quality; the adoption of more stringent criteria for the inclusion of other equity instruments in capital (the current innovative equity instruments and callable subordinated liabilities); greater standardisation of items to be deducted (with regard to some categories of deferred tax assets2 and to significant equity investments in banks and finance and insurance companies); the partial inclusion of non-controlling interests in common equity.
The introduction of Basel 3 rules is subject to a transitional regime during which the new rules will be applied to an increasing degree until 2019, when they will reach full application. At the same time, capital instruments that no longer qualify will be gradually excluded from total capital for regulatory purposes by 2021.
2 Deferred tax assets that depend on future profitability and arise from temporary differences (except for those transformed or which may be transformed into tax credits).
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B. Quantitative information
Please refer to the information given in Part B of these Notes to the financial statements in Liabilities Section 15 – Equity attributable to the Parent.
B.1 Consolidated equity by type of company
Consolidation Banking Insurance Other eliminations Equity items 31.12.2017 group companies corporates and adjustments
1. Share capital 4,183,829 66,581 9,084 (1,400,237) 2,859,257 2. Share premiums 3,373,190 - 72 (49,941) 3,323,321 3. Reserves 3,556,995 21,002 418 (348,430) 3,229,985 4. Equity instruments - 500 - (500) - 5. (T reasury shares) (9,818) - - - (9,818) a) parent (9,818) - - - (9,818) b) subsidiaries - - - - - 6. Valuation reserves: (136,248) 5,407 - 15,975 (114,866) - Available-for-sale financial assets (68,758) 460 - 451 (67,847) - Property, plant and equipment 13,162 - - 12,775 25,937 - Intangible assets ------Foreign investment hedges ------Cash flow hedges 13 - - - 13 - Foreign currency differences (243) - - - (243) - Non-current assets held for disposal ------Actuarial gains (losses) on defined benefit plans (114,870) - - 2,333 (112,537) - Share of fair value reserves of equity accounted - 4,947 - - 4,947 investees - Special revaluation laws 34,448 - - 416 34,864 7. Profit (loss) for the year attributable to the Parent (34,452) 21,784 (432) 730,092 716,992 and to non-controlling interests Total 10,933,496 115,274 9,142 (1,053,041) 10,004,871
For greater clarity and comprehension of the amounts relating to consolidated equity by type of company, we have included the following reconciliation between total equity and non-controlling interests and the equity attributable to the Parent.
Reconciliation schedule Group Non-controlling interests Total
Share capital 2,843,177 16,080 2,859,257 Share premiums 3,306,627 16,694 3,323,321 Reserves 3,209,460 20,525 3,229,985 Equity instruments - - - (Treasury shares) (9,818) - (9,818) Valuation reserves (114,820) (46) (114,866) Profit (loss) for the year (+/-) attributable to the 690,557 26,435 716,992 Parent and to non-controlling interests Equity 9,925,183 79,688 10,004,871
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B.2 Fair value reserves for available-for-sale financial assets: composition
31.12.2017 Insurance Insurance companies adjustments Consolidation Banking group Banking Other corporates Other Assets/amounts and eliminations Positive reserve Positive reserve Positive reserve Positive reserve Positive reserve Positive Negative reserve Negative reserve Negative reserve Negative reserve Negative reserve Negative
1. Debt instruments 17,803 (154,577) 5,808 (873) - - (5,616) 873 17,995 (154,577) 2. Equity instruments 58,886 (618) 20 (3) - - 1,447 (59) 60,353 (680) 3. Units in UCITS 10,654 (906) 106,447 (105,992) - - (107,134) 105,993 9,967 (905) 4. Financing ------Total as at 31.12.2017 87,343 (156,101) 112,275 (106,868) - - (111,303) 106,807 88,315 (156,162) Total as at 31.12.2016 127,362 (153,248) 5,679 (6,652) - - (5,681) 6,653 127,360 (153,247)
B.3 Fair value reserves for available-for-sale financial assets: annual changes
Debt Equity Units in Financing instruments instruments UCITS 1. Opening bal ances (88,863) 52,934 10,042 - 2. Positive changes 39,822 10,349 4,500 - 2.1 Increases in fair value 29,862 5,030 2,076 - 2.2 Transfer to income statement of negative reserves 8,380 1,689 81 - - following impairment losses - 1,437 81 - - from disposal 8,380 252 - - 2.3 Other changes 1,580 3,630 2,343 - 3. Negative changes (87,541) (3,610) (5,480) - 3.1 Decrease in fair value (21,902) (228) (343) - 3.2 Impairment losses - (98) (31) - 2.2 Transfer to income statement of positive reserves: from d (60,764) (168) (2,754) - 3.4 Other changes (4,875) (3,116) (2,352) - 4. Cl osing bal ances (136,582) 59,673 9,062 -
B.4 Valuation reserves for defined benefit plans: annual changes
31.12.2017
1. Opening balances 01.01.2017 (107,900) 2. Positive changes 10,401 Other changes 10,401 3. Negative changes (15,038) Other changes (15,038) 4. Cl osing bal ances 31.12.2017 (112,537)
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Section 2 – Own funds and capital ratios for banks
2.1 Scope of application of the regulations
The UBI Group in particular has adopted the regulations cited following the advanced approach. After receiving authorisation from the supervisory authority3, the Group now uses the internal models for the calculation of capital requirements to meet credit risk – the “credit exposures to businesses (corporate)” – and operational risk since the consolidated supervisory reports as at 30th June 2012. Furthermore, following Bank of Italy authorisation Provision No. 689988 of the 19th July 2013, from the supervisory report as at 30th June 2013, the UBI Banca Group now uses internal models to calculate capital requirements also to meet credit risk relating to the retail regulatory segment (sub-classes “Other retail exposures - SME Retail” and “Exposures backed by residential properties”). For operational risks the Group uses an internal model, the advanced measurement approach (AMA) in combined use with the traditional standardised approach (TSA) and the basic indicator approach (BIA) 4.
The consolidation scope used for regulatory capital and capital ratio (the “Banking Group”) purposes differs from the statutory accounting scope of consolidation used to prepare the financial reports in accordance with IFRS. More specifically the consolidation scope for statutory accounting purposes includes non-banking, non-financial and service companies which are excluded from the banking supervisory consolidation scope.
There are no hindrances within the Group, either legal or substantial, which might prevent the rapid transfer of capital resources or funds.
2.2 Own funds for banks
A. Qualitative information
Own funds are calculated as the algebraic sum of a series of positive and negative items, which are considered eligible for inclusion – with or without limitations - in relation to the ‘quality’ of the capital. Positive components of own funds must be fully available to the Bank, so that they can be used without restrictions to cover risks to which the intermediary is exposed.
In detail, own funds consist of the following aggregates: 1. Tier 1 (T1) capital, composed in turn of: a. Common Equity Tier 1 (CET1) capital; b. Additional Tier 1 capital (Additional Tier 1 – AT1); 2. Tier 2 capital (T2).
3 Bank of Italy provision No. 423940 of 16th May 2012. 4 Further information on the advanced methods is given in Part E of these Notes to financial statements.
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1. Common Equity Tier 1 (CET1) capital
The Common Equity Tier 1 capital (CET1) consists mainly of the share capital (just the ordinary shares), share premiums, retained earnings, valuation reserves, non-controlling interests that are eligible and retained profit for the period, net of “prudential filters” and deductions. The prudential filters consist of regulatory adjustments to the amounts recognised for items (positive or negative) of Common Equity Tier 1 capital; the deductions represent negative components of Common Equity Tier 1 capital. The requirements for capital instruments to qualify for inclusion in CET1 include the following:
they must be classified as equity in accordance with the applicable accounting standards; the nominal amount cannot be reduced except in the event of liquidation or buyback transactions carried out at the discretion of the issuer, subject to special prior authorisation by the supervisory authority; they are perpetual; the provisions that govern the instruments do not require the issuer to make compulsory distributions; no preferential treatment exists in the distributions; the annulment of distributions does not place any restrictions on the bank; they represent the most subordinate instruments in the event of insolvency or liquidation of the bank; they are not subject to guarantees or provisions in contracts which increase their seniority.
“Prudential filters” consist of valuation reserves generated by cash flow hedges, by gains or losses resulting from changes in the credit rating (liabilities in fair value options and derivative liabilities) and by impairment losses to take account of uncertainties in the supplementary parameters in relation to exposures recognised in the balance sheet at fair value (“prudent valuation”). The main deductions made to CET1 consist of intangible assets and the difference between expected losses and provisions (or the shortfall of total net provisions to expected losses), the latter relating to regulatory portfolios for which the validation of internal models has been obtained to estimate the credit requirement (corporate and retail). The regulations require additional deductions from CET1 as follows: deferred tax assets which are based on future profits; non-significant investments in CET1 instruments issued by companies in the financial sector (the part in excess of the allowance granted by the regulations is deducted); deferred tax assets which depend on future income and which result from temporary differences (the part in excess of the allowance granted by the regulations is deducted); investments in CET1 instruments issued by companies in the financial sector (the part in excess of the allowance granted by the regulations is deducted); possible deductions in excess of the total allowed for Additional Tier 1 capital.
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2. Additional Tier 1 (AT1) capital
Additional Tier 1 capital consists of Additional Tier 1 capital instruments and the relative share premiums, AT1 instruments that qualify in accordance with the previous supervisory regulations and that are subject to transitional (grandfathering) provisions and of negative items that are deductions (investments in own AT1 instruments, investments in the AT1 instruments of other banks, possible deductions in excess of the total allowed for Tier 2 capital).
The main requirements for AT1 instruments to qualify are as follows:
they are issued and paid up; they are perpetual and the rules that govern them provide no redemption incentives; call options, if they exist, may only be exercised at the discretion of the issuer and in any event not before five years unless authorised by the supervisory authority under particular circumstances; the rules that govern the instruments grant the issuer full discretionary power to annul distributions related to those instruments, at any time, for an unlimited period and on a non-cumulative basis; non-payment of the interest does not constitute default for the issuer; if a trigger event occurs the nominal amount is reduced either permanently or temporarily, or the instruments are converted into Common Equity Tier 1 capital instruments.
3. Tier 2 capital (T2)
Tier 2 capital consists of the following: subordinated loans; shortfalls of provisions to expected losses, limited to 0.60% of exposures weighted for credit risk; instruments that qualify as T2 capital in accordance with the previous supervisory regulations and that are subject to transitional (grandfathering) provisions; and negative items that are deductions (investments in own T2 instruments, investments in the T2 instruments of other banks).
The main requirements for T2 instruments to qualify included the following:
original duration of at least five years; no early redemption incentive; call options, if they exist, can only be exercised at the discretion of the issuer and in any event not before five years, unless authorised by the supervisory authority under particular circumstances; amortisation of instruments for the purposes of qualification for T2 in the last five years, calculated on a daily basis.
See Part B of these notes to the financial statements, in Section 3 of Liabilities, “Debt securities issued - item 30” for details and the characteristics of subordinated liabilities that qualify for inclusion in Tier 2 capital.
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B. Quantitative information
As opposed what was possible in the past, following the entry into force of Regulation (EU) No. 2016/445 of the European Central Bank of 14th March 2016 on the exercise of options and discretion under EU law (ECB/2016/4), the option to not include unrealised profits or losses relating to exposures to central governments classified within “available-for-sale financial assets” in any item of own funds5 (total sterilisation) has no longer been available since 1st October 2016, if this treatment had been applied before the entrance into force of the CRR. In accordance with the Bank of Italy clarification6, following the entrance into force of the ECB regulation, major banks must include in or deduct from the CET1 capital unrealised profits or losses respectively, resulting from exposures to central governments classified in the AFS portfolio according to the percentage of 80% set for the transitional period in 2017. The amounts that remain from the application of that percentage (i.e. 20% for 2017) are not included in the calculation of own funds and continue to be subject to sterilisation.
The impact on own funds resulting from the application of that sterilisation relating to part of unrealised profits and losses subject to phase-in was approximately +€25 million (+€26 million in December 2016).
As at 31st December 2017 the UBI Banca Group’s Common Equity Tier 1 (CET1) capital amounted to approximately €7.755 billion, an increase compared with €6.829 billion in December 2016. Own funds stood at €9.475 billion, up on €8.389 billion recorded last December.
The performance of the CET1 capital in 2017 was influenced significantly by recognition of the impacts resulting from the acquisition of Nuova Banca Marche, Nuova Banca dell’Etruria e del Lazio and Nuova Cassa di Risparmio di Chieti and the related increase in capital. The increase of approximately €926 million is attributable mainly to the following: • +€556 million in relation to the result for 2017, which qualifies for supervisory purposes, amounting to €691 million (a loss of €830 million in December 2016), with account taken of the quota for a dividend distribution amounting to €125 million and a reduction in equity reserves; • +€402 million resulting mainly from the inclusion of €400 million relating to the share capital increase that was fully subscribed carried out as part of the operation to acquire the New Banks to address a temporary requirement because the badwill was not fully eligible at the time of the operation and also in order to maintain the fully loaded CET1 capital ratio of the new Group above 11%. A further increase of €2 million following the share capital increases carried out for the acquisition by means of share exchanges of stakes held by non-controlling interests in Banca Carime Spa, Banca Popolare di Ancona Spa and Banca di Valle Camonica Spa as part of the second wave of the Single Bank Project and in Cassa di Risparmio di Loreto Spa as part of the merger of Banca Adriatica and Cassa di Risparmio di Loreto itself into UBI Banca; • +€114 million resulting from a small deduction from capital as a result of the disposal of an investment in hedge funds; • +€48 million resulting from a change in the provision shortfall based on changes and quotas for inclusion in the CET1 capital in accordance with transitional provisions7;
5 In compliance with the transitional provisions concerning own funds contained in Part II, Chapter 14 of the aforementioned Circular No. 285, that option had been exercised within the time limit set of 31st January 2014 and had been applied at separate company and at consolidated level. 6 Cf. “Clarifications on the regulatory treatment of unrealised profits and losses”, Bank of Italy, 23rd January 2017. 7 On the basis of the transitional provisions applicable in 2017, 80%, 10% and 10% of the shortfall of provisions was deducted from the CET1, AT1 and T2 capital respectively compared with 60%, 20%, 20% in 2016.
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• -€95 million in terms of the deduction of DTAs on future profits, with account taken of the changes in the transitional treatment8; • -€12 million resulting from a reduction in the calculation for minority interests following changes due to the transitional provisions9; • -€37 million relating to a change in valuation reserves, which included €32 million for changes in the fair value reserve for available-for-sale financial assets based on transitional provisions applicable for 201710, and approximately €5 million for a reduction in actuarial losses; • -€22 million resulting from the change recorded in other intangible assets; • -€28 million resulting from changes recorded in items deducted from capital relating to obligations to repurchase CET1 capital instruments.
The Tier 2 capital increased by approximately €161 million to stand at around €1.721 billion, mainly as result of the following:
• +€17 million resulting from a smaller deduction relating to the provision shortfall with account taken of the changes in that item and the application of the transitional provisions already mentioned; • +€143 million resulting from the inclusion of greater loan provisions recorded compared with the expected loss on the non-performing loan portfolio subject to advanced approaches (AIRB); • +€1 million of residual change resulting from the changes recorded in the Tier 2 instruments component, amounting to approximately +€12 million (new issues, maturities, regulatory amortisation and obligations to repurchase Tier 2 instruments), and from the contribution from the positive AFS reserve for debt instruments with account taken of transitional provisions and items deducted amounting to approximately -€11 million.
31.12.2017 31.12.2016 A. Common Equity Tier 1 capital (CET1) before the application of prudential filters 9,804,091 8,895,223 of which CET1 instruments subject to transitional provisions - - B. CET1 prudential filters (+/-) (7,638) (7,653) C. CET1 before items to be deducted and the impacts of the transitional regime (A +/- B) 9,796,453 8,887,570 D. Items to be deducted from CET1 2,138,030 2,574,634 E. Transitional regime – Impact on CET1 (+/-) 96,079 516,347
F. Total Common Equity Tier 1 capital (CET1) (C – D +/-E) 7,754,502 6,829,283 G. Additional Tier 1 capital (AT1) before items to be deducted and the impacts of the transitional regime - - of which AT1 subject to transitional provisions - - H. Items to be deducted from AT1 - - I. Transitional regime – Impact on AT1 (+/-) - - L. Total Additional Tier 1 capital (AT1) (G - H +/- I) - - M. Tier 2 capital (T2) before items to be deducted and the impacts of the transitional regime 1,775,601 1,606,204 of which T2 instruments subject to transitional provisions - - N. Items to be deducted from T2 57,644 38,441 O. Transitional regime - Impact on T2 (+/-) 3,014 (7,941)
P. Total Tier 2 capital (T2) (M - N +/- O) 1,720,971 1,559,822 Q. Total own funds (F + L + P) 9,475,473 8,389,105
8 A deduction of 80% of total DTAs must be made for 2017 based on future profits compared with 60% in 2016. 9 As concerns the gradual exclusion of minority interests not eligible when fully loaded (quota subject to phase-out), a further 20% is excluded compared with 2016 (exclusion of minority interests subject to phase-out of 80% in 2017 compared with 60% in 2016). 10 Inclusion of 80% of profits/losses compared with 60% in 2016.
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2.3 Capital adequacy requirement
A. Qualitative information
Capital adequacy is monitored constantly with a view to the present and the future to maximise its efficiency and at the same time to ensure that the Group achieves its capitalisation objectives and also constantly complies with minimum limits set by supervisory regulations. The main management tools employed to achieve this are the dividend policy, extraordinary operations (issuance of capital instruments, disposal of assets, etc.) and the optimisation of risk weighted assets (RWA). Compliance with capitalisation objectives is also monitored at both individual company and consolidated level and corrective action is immediately taken when objectives change in order to bring the various lines of business back into line with optimum risk/yield profiles. Further analysis is also carried out when the extraordinary operations occur (acquisitions, mergers, etc.), in order to verify capital adequacy in advance.
B. Quantitative information
The table below reports the amounts for risk-weighted assets and prudential requirements on the basis of the total capital adequacy requirement.
Compliance with that requirement at the end of 2017 involved a capital requirement of approximately €5,364 million (€4,759 million in December 2016), equal to total minimum capital requirements for credit, counterparty, credit valuation adjustment, market and operational risk, against which the Group recorded actual regulatory capital of €9,475 million (€8,389 million in December 2016). With regard to risk weighted assets (up to approximately €67 billion from the €59.5 billion at the end of 2016), an increase was recorded overall in 2017 amounting to €7.6 billion, mainly as a result of the acquisition of the New Banks. A decrease of approximately €236 million was recorded in RWAs since 30th September, due primarily to an increase in RWAs as result of an update of the credit risk parameters included in the internal rating model which was more than offset by the savings of RWAs resulting from a synthetic securitisation transaction and a recovery in the eligibility of guarantees on exposures backed by retail real estate properties with a positive impact on the weightings for these.
The table that follows also summarises compliance with requirements in terms of ratios. The following capital requirements must be satisfied for 2017, given as percentages of risk- weighted assets: - the Common Equity Tier 1 capital must be equal to at least 4.5% of total RWAs; - the Tier 1 capital must be equal to at least 6% of total RWAs; - own funds (the sum of Tier 1 and Tier 2 capital) must be equal to at least 8% of total RWA.
Additionally, banks are obliged to hold a capital conservation buffer equal, when fully loaded, to 2.5% of risk weighted assets. With the publication of the 18th update to Circular No. 285, the Bank of Italy amended the regulations for the capital conservation buffer. That amendment was determined by the requirement to align Italian national regulations with those of the majority of the countries in the Eurozone and to ensure equal treatment for
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banks in different countries. It states that at separate company and consolidated level banks are required to apply a minimum capital buffer ratio according to the following timetable: 1.25% from 1st January 2017 until 31st December 2017; 1,875% from 1st January 2018 until 31st December 2018; and 2.5% from 1st January 2019.
We report that following the Supervisory Review and Evaluation Process (SREP), in accordance with an ECB communication dated 12th December 201611, the UBI Group was required to comply with the following at consolidated level in 2017: a minimum phased-in CET1 capital ratio requirement of 7.5% (the result of the sum of the minimum Pillar 1 regulatory capital ratio (4.5%), the Pillar 2 requirement (1.75%) and the capital conservation buffer (1.25%); a minimum Total SREP Capital Requirement of 9.75% (the result of the sum of the minimum Pillar 1 regulatory capital requirement (8%) and the Pillar 2 requirement (1.75%)). If the capital conservation buffer of 1.25% is added, this then gives a minimum requirement in terms of the regulatory total capital ratio of 11% (the OCR – Overall Capital Requirement).
Furthermore, we also report now that in accordance with a communication dated 28th December 201712, the ECB set the following capital ratio requirements at consolidated level for the UBI Group in 2018: a new minimum phased-in CET1 capital ratio requirement of 8.625% (the result of the sum of the minimum Pillar 1 regulatory capital requirement (4.5%), the Pillar 2 requirement (2.25%) and the capital conservation buffer (1.875%)); a minimum Total SREP Capital Requirement of 10.25% (the result of the sum of the minimum Pillar 1 regulatory capital requirement (8%) and the Pillar 2 requirement (2.25%)). If the capital conservation buffer of 1.875% is added, this then gives a minimum requirement in terms of the regulatory total capital ratio of 12.125% (the OCR – Overall Capital Requirement).
As at 31st December 2017, the UBI Group fully complied with the regulatory thresholds requested, with a CET1 Ratio of 11.56% (up from 11.48% in December 2016), a Tier 1 Ratio of 11.56% (up from 11.48% in December 2016) and a Total Capital Ratio of 14.13% (up from 14.10% in December 2016). If Basel 3 rules on a full application basis were applied, Group capital ratios would be 11.43% in terms of the Common Equity Tier 1 ratio and the Tier 1 ratio (11.32% in December 2016) and 13.99% in terms of the Total Capital Ratio (13.94% in December 2016).
Furthermore, as of 1st January 2016 banks are obliged to hold a countercyclical capital buffer. If it is considered that, as reported in the press release dated 22nd September 2017, the Bank of Italy confirmed the countercyclical capital buffer for the fourth quarter of 2017 at 0% for exposures to counterparties resident in Italy and also that the UBI Group mainly has exposures to domestic counterparties13, then the Group’s countercyclical capital buffer is not significant.
11 See the press release dated 12th December 2016 available on the corporate website at http://www.ubibanca.it in the Investor Relations Section. 12 See the press release of 28th December 2017 in the Investor Relations Section of the corporate website at http://www.ubibanca.it. 13 The capital requirement for significant exposures to counterparties not resident in Italy is not very significant for the UBI Group compared with the overall requirement for significant exposures (below 5%).
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Categories/Amounts Amounts not weighted Weighted amounts/requirements 31/12/2017 31/12/2016 31/12/2017 31/12/2016 A. RISK ASSETS A.1 Credit and counterparty risk 134,108,737 119,760,658 61,832,988 54,388,329 1. Standardised approach 61,960,518 51,027,216 30,513,779 24,479,144 2. Method based on internal ratings 69,867,785 68,733,442 30,957,997 29,909,185 2.1 Basic - - - - 2.2 Advanced 69,867,785 68,733,442 30,957,997 29,909,185 3. Securitisations 2,280,434 - 361,212 - B. REGULATORY CAPITAL REQUIREMENTS
B.1 Credit and counterparty risk 4,946,639 4,351,066 B.2 Credit valuation adjustment risk 4,943 11,987 B.3 Settlement risk - - B.4 M arket risk 75,680 112,356 1. Standard approach 75,680 112,356 2.Internal models - - 3. Concentration risk - - B.5 Operational risk 337,033 283,300 1. Basic indicator approach 10,201 2,835 2. Standardised approach 101,426 47,676 3. Advanced measurement approach 225,406 232,789 B.6 Other cal cul ati on el ements - - B.7 Total prudential requirements 5,364,295 4,758,709 C. RISK ASSETS AND SUPERVISORY RATIOS C.1 Risk weighted assets 67,053,683 59,483,864 C.2 Common Equity Tier 1 capital/Risk weighted assets (CET1 capital ratio) 11.56% 11.48% C.3 Tier 1 capital/Risk weighted assets (Tier 1 capital ratio) 11.56% 11.48% C.4 Total own funds/Risk weighted assets (Total capital ratio) 14.13% 14.10%
Section 3 – Insurance capital and supervisory ratios
With regard to the insurance business, we report that management accounting measurements of the solvency ratio comply with Solvency II regulations.
Section 4 – Capital adequacy of financial conglomerates
No items of this type exist.
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Part G – Business combination transactions concerning companies or lines of business
SECTION 1 – BUSINESS COMBINATIONS PERFORMED DURING THE YEAR
Accounting aspects of the acquisition by the UBI Banca Group of the New Banks The operation to acquire the New Banks, illustrated in the section “Significant events in 2017”, is accounted for in the consolidated financial statements of the UBI Banca Group in compliance with the provisions of the international accounting standard IFRS 3 “Business combinations”. On the basis of that standard, the acquisition of the New Banks must be recognised in the accounts using the acquisition method, which involves the process of the purchase price allocation (PPA). In accordance with IFRS 3 the cost of the acquisition must be allocated, as at the acquisition date, to the assets (including intangibles) and liabilities (including contingent liabilities, inclusive of those that are not probable), recognising them at their fair value as at that date. The difference remaining between the cost of the acquisition and the value, measured at fair value, of the net assets (assets - liabilities) must be recognised as goodwill if it is positive, while if it is negative it is considered badwill or negative goodwill which, in accordance with IFRS 3, must be recognised immediately through profit and loss. As concerns the PPA process, it must first be reported that UBI Banca purchased the “New Banks”, which is to say the perimeter comprising of Nuova Banca Etruria Spa, Nuova Banca Marchess Spa and Nuova Cassa di Risparmio di Chieti Spa1, for a symbolic amount totalling €1.00 (the “consideration transferred”, which is to say the cost incurred for the acquisition of control), therefore equal to the cost of the acquisition, compared with total book equity as at the acquisition date of €995 million.
With specific regard to the “acquisition date” it is underlined that although the transaction in question took effect for legal purposes on 10th May 2017, in accordance with the provisions of IFRS 3 that date normally falls at the time in which the acquirer obtains control (and generally this is the date on which the transfer of the consideration takes place and the acquirer acquires the net assets of the company acquired [i.e. the “closing date”]), which was 1st April 2017. In this respect, because the preparation of the accounting position as at 10th May 2017 would have led to the reconstruction of inaccurate data, the UBI Group decided, in consideration of the short space of time elapsing compared with the acquisition date, to opt for that date as the reference. In order to provide greater guarantees of the completeness and accuracy of the balances as at 31st March 2017, the UBI Group had a full accounting audit performed on the asset and liability balances subject to acquisition.
1 Subsequently renamed Banca Tirrenica, Banca Adriatica and Banca Teatina respectively.
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Preliminary allocation of the cost of the acquisition in the consolidated balance sheet of the UBI Banca Group
The Group had already provided for the preliminary allocation of the cost of the acquisition with support from an independent appraiser for the purposes of preparing the condensed consolidated interim financial statements for the period ended the 30th June 2017, identifying the identifiable fair value of the assets, liabilities and contingent liabilities of the New Banks. In fact in view of the complexity of that process, in accordance with IFRS 3, the recognition of business combinations may be accurately completed in a final manner within 12 months of the acquisition date
Having stated that, when the financial statements as at and for the period ended 31st December 2017 were prepared, the allocation process was final. In other words, the amounts provisionally estimated as at 30th June 2017 were in some cases adjusted on the basis of greater and/or more accurate information which became available in the meantime. Details are therefore given below on the final results of the purchase price allocation (PPA) process.
In accordance with IFRS 3, the PPA process involves the restatement by the acquiring entity in its consolidated financial statements of the assets and liabilities acquired (including intangibles and contingent liabilities not recognised in the financial statements of the entities acquired) at fair value. The difference between the purchase price and the assets and liabilities restated at fair value (difference between assets and liabilities estimated at fair value as at the date of acquisition of control) measures the goodwill recognised in the purchase price. Since UBI Banca paid a price of one euro for book equity (prior to PPA adjustments) of the perimeter of the three entities acquired as at the acquisition date, negative goodwill, or “badwill”, arose from the PPA process2 amounting to €995 million. In accordance with IFRS international reporting standards, that component must be recognised through profit and loss by the acquirer as a profit.
The fair value is defined for assets as the market sales price (exit price) and for liabilities as the cost for the transfer of the obligation to a third party, both measured as at the acquisition date (i.e. as at the 01.04.2017). It should be underlined that the fair value cannot be estimated by adopting an “entity specific” viewpoint, and that is the viewpoint of the specific acquiring entity (including the expected benefits of the assets and liabilities for the specific acquirer). The fair value must be estimated from a market participant’s view3, which will be captured either by making use of market measurement criteria (based on prices paid for comparable assets) or vice versa using income criteria based on the cost structures of market participants.
In the PPA process relating to the New Banks: a) three different categories of intangibles relating to customer relationships were identified (core deposits, assets under management and assets under custody); b) deferred tax assets were identified in relation to provisions for future liabilities; c) new liabilities were identified in connection with: i. the contibutions due to voluntary scheme of the Interbank Deposit Protection Fund by the target bridge institutions; ii. expenses to be incurred from the early termination of service contracts with IBM Italia (by Nuova Banca Marche) and with CSE (Nuova Carichieti);
2 The size of this is based on the difference between the book value and the fair value of the net assets of the entities acquired. 3 IFRS international accounting standards state that estimates of the fair value of the liabilities shall consider the creditworthiness of the entity acquired. This means that the potential benefits resulting from an improvement in their credit rating as a result of a change of control cannot be considered.
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d) the following assets and liabilities have been restated at fair value: i. non-performing exposures; ii. medium to long-term performing loans. When the performing portfolio was restated at fair value, the previously existing assets held by Nuova Banca Marche consisting of the “value adjustment of financial assets subject to macrohedge consisting of the positive or negative balance (positive in the case in question) of the changes in value in assets subject to macrohedging against interest rate risk, were derecognised in application of IAS 39, paragraph 89A, for an amount of €14.8 million. This incorporates part of the difference between the fair value of the performing portfolio subject to hedging (the fixed rate securities portfolio subject to hedging) and the value stated at amortised cost; iii. medium to long-term funding; iv. equity investments in insurance companies held by Nuova Banca Etruria4; v. equity investments classified within “available-for-sale financial assets” consisting of the investments in Cedacri and in the Megas Fund; vi. software; vii. provisions for future liabilities relating to contracts connected with real estate property operations (“Consorzio Palazzo della Fonte” and “Fondo Conero”); e) with regard to Nuova Banca Etruria, provisions for future risks and charges in relation to potential litigation were derecognised and at the same time a provision was recognised representing the release clause on the guarantee granted by the Resolution Fund (i.e. the seller) to UBI Banca.
From the viewpoint of measurement methodologies the following criteria were adopted for each class of assets and liabilities: i. intangibles relating to customer relationships: the income criterion based on excess earnings calculated with reference to the cost:income ratio of market participants (source aggregate financial statements reprocessed by the Bank of Italy) for the remaining life of the customer relationships as estimated on the basis of the historical churn rate (i.e. the rate at which customers are lost); ii. non-performing exposures: market criterion based on the valuation of the non- performing loans transferred by the three banks to the Atlante Fund. More specifically, the non-performing loan portfolio existing as at the date of the PPA was divided into: secured unlikely-to-pay (UTP), unsecured UTP, secured bad loans, unsecured bad loans and lease contracts. A discount on the gross book value recognised in the transfer to the Atlante Fund was applied to each category. In order to verify the reasonableness of these amounts, the alignment was verified between the multiples (fair value of the loan/gross value of the loan) implicit in the transaction with the Atlante Fund (and used for the purposes of estimating the fair value of the non-performing loans) and those of comparable transactions occurring in the Italian banking market during the course of 2016; iii. medium to long-term performing loans: income criterion based on excess earnings calculated with reference to a cost:income ratio of a market participant (listed banks operating solely in the business of granting and managing loans) for the remaining life of each loan; iv. medium to long-term funding: income criterion based on the present value of coupons at the current market interest rate of issuers with the same credit rating; v. equity investments in insurance companies: cost of replacement criterion, measured on the basis of own funds (and their determinants) as at 31.03.2017 calculated for regulatory purposes (Solvency II);
4 The reference is to BancaAssurance Popolari Danni Spa and BancAssurance Popolari Spa.
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vi. provisions for future liabilities relating to contracts connected with real estate property operations in relation to the Consorzio Palazzo della Fonte: estimates made by third parties; vii. equity investments in unlisted AFS assets: market criterion based on the prices negotiated in the disposal of these.
The following specifications are made with regard to intangible assets arising from the PPA.
Core Deposits Core deposits represent an intangible asset connected with customer relationships. More specifically, the measurement perimeter identified included the following: sight deposits, repurchase agreements and CDs. The fair value of core deposits is estimated on the basis of an income criteria. This corresponds to the present value of expected income over the remaining life of the customer relationship (calculated on a behavioural and not a contractual basis). The annual income from this intangible is estimated on the basis of five key variables: a. the average annual volume of deposits multiplied by the interest markdown; b. the fee and commission income on deposits forecast in business plans for each specific year of the forecast. Subsequent to 2021 fees and commissions (as a percentage of deposits) are assumed to be equal to those for 2021; c. costs, calculated on cost:income ratios from a market participant’s view; d. taxes, calculated on the basis of the marginal rate (corporate income tax (IRES) + regional production tax (IRAP); e. the absorption of regulatory capital to cover operational risk, aligned with the product of 15% of gross annual income and the target Common Equity Tier 1 ratio which is 10%.
Given the close connection of core deposits with customer relationships, they have by definition a finite useful life and must therefore be systematically amortised over the remaining useful life of the customer relationships, estimated on the basis of the historical churn rate for them.
Assets under management and assets under custody As already described in relation to core deposits use is made of the income criterion for the estimate of the fair value of intangibles connected with assets under management and assets under custody.
The four key variables employed for the estimate of the fair value of intangibles connected with assets under management and assets under custody are as follows: a. the average annual volumes of assets under management multiplied by the management fees expressed as a percentage of the volumes; b. the cost:income ratio aligned to that used for estimating core deposits; c. taxes, calculated on the basis of the marginal rate (corporate income tax (IRES) + regional production tax (IRAP); d. the absorption of regulatory capital to cover operational risk, aligned with the product of 15% of gross annual income and the target Common Equity Tier 1 ratio assumed in its measurement which is 10%.
Intangible assets connected with assets under management and assets under custody are considered as having a finite useful life and are amortised over the remaining useful life of the customer relationships, estimated on the basis of the historical churn rate for them.
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The table below reports a summary of the final result of the PPA process.
€ (million)
A) Equity as at the Acquisition Date 995.3 Derecognition of macrohedging contracts -14.8 Fair value adjustment of non-performing portfolio -565.5 Fair value adjustment of performing loans 0.0 Fair value delta of medium to long-term funding -7.0 Fair value delta of insurance companies 4.8 Software fair value delta -12.5 Provisions for fair value adjustment of real estate property contracts connected -38.5 with the Palazzo della Fonte Consortium and the Conero Fund Intangible assets associated with assets under management 18.9 Intangible assets associated with assets under custody 3.1 Intangible assets associated with core deposits 18.8 Liabilities for greater IDPF contribution expenses -11.8 Net derecognition of provisions for risks and charges of the former Banca 12.9 Popolare dell'Etruria e del Lazio Impairment losses on unlisted AFS securities 11.8 Expenses associated with contract terminations -5.3 Deferred assets 45.3 Real estate property impairment -7.9 B) Total PPA adjustments gross of deferred tax liabilities -547.7 C) N et deferred tax liabilities -193.3
- DTAs from losses on assets recognised in the PPA/gains on the liabilities 208.3
- DTLs from new assets recognised in the PPA, asset revaluations, write- -15.0 downs of liabilities from the PPA
D) Total PPA adjustments net of deferred tax liabilities = B - C -354.5
E) Fair value of net assets acquired = A + D 640.8 F) Price paid 0 G) Profit from "badwill" bargain Purchase = E - F 640.8
In order to verify the overall reasonableness of the amount of the negative goodwill recognised through profit and loss (bargain purchase – badwill) as a result of the acquisition of the New Banks, a summary measurement of the fair value of the equity was made in the absence of the generation of goodwill and from a market participant’s view. The fair value of the equity obtained in this summary manner was then compared with the fair value of the equity (fair value of assets - fair value of liabilities) that arose from the purchase price allocation process. The criteria for the summary estimate of the fair value of the equity is based on the income approach which considers the following: a) the business plans of the entities acquired for the period 2017-2020, rendered consistent with a market participant’s view;
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b) the minimum regulatory capital that would be required of a hypothetical acquiring entity; c) the initial capital of the entity acquired expressed net of negative post tax adjustments to the value of non-performing loans; d) the cost of equity consistent with current market interest rates; e) the perpetual measurement view, assuming, for the purposes of the terminal value, an income on book equity and an income growth rate based solely on the revaluation rate of volumes, less than the inflation rate.
The analysis performed supported the conclusions reached by the purchase price allocation process.
The table below reports the aggregate value as at the acquisition date of the assets and liabilities acquired directly and indirectly through the New Banks and also the fair values for these in accordance with IFRS 3:
Restatement of Purchase Price figures in New Banks Allocation accordance with IFRS 3
ASSETS (figures in thousands of euro) 31.03.2017 31.03.2017 31.03.2017
10. Cash and cash equivalents 1,435,324 - 1,435,324 20. Financial assets held for trading 150,599 - 150,599 30. Financial assets designated at fair value 34,585 - 34,585 40. Available-for-sale financial assets 3,704,028 2,648 3,706,676 60. Loans and advances to banks 1,720,377 - 1,720,377 70. Loans and advances to customers 13,170,945 (565,508) 12,605,437 80. Hedging derivatives 4,833 - 4,833 90. Fair value change in hedged financial assets (+/-) 14,822 (14,822) - 100. Equity investments 20 - 20 110. Technical reserves of reinsurers 411 - 411 120. Property, plant and equipment 193,879 (7,883) 185,996 130. Intangible assets 17,339 28,200 45,539 of which: - - goodwill 3,548 - 3,548 140. Tax assets: 1,272,222 253,622 1,525,844 a) current 1,079,932 - 1,079,932 b) deferred 192,290 253,622 445,912 - of which pursuant to Law No. 214/2011 160,232 - 160,232 160. Other assets 352,702 - 352,702 Total assets 22,072,086 (303,743) 21,768,343
LIABILITIES AND EQUITY (figures in thousands of euro) 31.03.2017 31.03.2017 31.03.2017
10. Due to banks 223,965 - 223,965 20. Due to customers 14,855,089 - 14,855,089 30. Debt securities issued 2,595,062 6,945 2,602,007 40. Financial liabilities held for trading 61,598 - 61,598 50. Financial liabilities at fair value 242,417 - 242,417 60. Hedging derivatives 38,678 - 38,678 80. Tax liabilities: 10,599 15,031 25,630 a) current 145 - 145 b) deferred 10,454 15,031 25,485 100. Other liabilities 836,639 11,800 848,439 110. Post employment benefits 88,353 - 88,353 120. Provisions for risks and charges: 430,545 21,719 452,264 a) pension and similar obligations 74,076 - 74,076 b) other provisions 356,469 21,719 378,188 130. Technical reserves 1,683,220 (4,755) 1,678,465 Equity 995,293 (354,483) 640,810 210. Non-controlling interests(+/-) 10,628 - 10,628 Total liabilities and equity 22,072,086 (303,743) 21,768,343
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SECTION 2 TRANSACTIONS PERFORMED AFTER THE END OF THE YEAR
No business combinations were performed after the end of the year.
SECTION 3 RETROSPECTIVE ADJUSTMENTS
No retrospective adjustments to report for the UBI Banca Group.
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PART H – Transactions with related parties
1. Information on the remuneration of key management personnel
Information is provided in the notes to the separate company financial statements of UBI Banca Spa in Part H – Related-Party Transactions.
2. Information on transactions with related parties
In compliance with IAS 24, information is provided below on balance sheet and income statement transactions between related parties of UBI Banca and Group member companies, as well as those items as a percentage of the total for each item in the consolidated financial statements.
According to IAS 24, a related party is a person or entity that is related to the entity that is preparing its financial statements (the “reporting entity”). (a) A person or close family member of that person is related to the reporting entity if that person: (i) has control or joint control over the reporting entity: (ii) has significant influence over the reporting entity; or (iii) is a member of the key management personnel of the reporting entity or of a parent of the reporting entity.
(b) An entity is related to a reporting entity if any of the following conditions apply: (i) the entity and the reporting entity are members of the same group (which means that each parent, subsidiary and fellow subsidiary is related to the others); (ii) one entity is an associate or joint venture of the other entity (or an associate or joint venture of a member of a group of which the other entity is a member); (iii) both entities are joint ventures of the same third party; (iv) one entity is a joint venture of a third entity and the other entity is an associate of the third entity; (v) the entity is a post-employment defined benefit plan for the benefit of employees of either the reporting entity or an entity related to the reporting entity. If the reporting entity is itself such a plan, the sponsoring employers are also related to the reporting entity; (vi) the entity is controlled or jointly controlled by a person identified in (a); (vii) a person identified in (a)(i) has significant influence over the entity or is a member of the key management personnel of the entity (or of a parent of the entity). (viii) the entity, or any other member of a group of which it is a part, provides key management personnel services to the reporting entity or to the parent of the reporting entity.
In compliance with the regulations in force, we report that all transactions carried out by Group member companies with related parties were conducted in observance of correct principles both in substance and form, under conditions analogous to those applied for transactions with independent parties.
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More specifically, the Parent and its subsidiary UBI Sistemi e Servizi ScpA provide Group member companies with a series of services, governed by intragroup contracts drawn up in accordance with the principles of consistency, transparency and uniformity in line with the organisational model of the Group. Under this model, strategic, and management activities are centralised at UBI Banca and technical and operational activities in UBI Sistemi e Servizi ScpA. The prices agreed for the services provided under the contracts were determined on the basis of market prices or, where appropriate reference parameters could not be found in the marketplace, in accordance with the particular nature of the services provided and also in relation to the service contracts signed by UBI.S with its consortium shareholders, on the basis of the costs incurred for the services provided. The main intragroup contracts existing at the end of the year included those to implement the policy to centralise activities in the governance and business areas of the Parent, which involve the Parent and all the main Group companies, and also contracts to implement the “national tax consolidation” (in accordance with articles 117 to 129 of Presidential Decree No. 917/1986, the consolidated law on income tax) concluded by the Parent. There were also all the intragroup contracts which implement the centralisation in UBI Sistemi e Servizi of support activities for the principal companies in the UBI Group.
We report with regard to transactions between companies in the Group and all of its related parties, that no atypical and/or unusual transactions were performed; furthermore, no transactions of that type were even performed with counterparties that were not related parties. Atypical and/or unusual transactions, in compliance with Consob Communications No. 98015375 of 27th February 1998 and No. 1025564 of 6th April 2001, are intended to mean all those transactions which, because of their significance/importance, the nature of the counterparties, the content of the transaction (even in relation to ordinary operations), the way in which the transfer price is decided and the timing of the event (close to the end of the financial year) might give rise to doubts concerning: the correctness/completeness of the information in the accounts, a conflict of interests, the security of the company’s assets and the rights of non-controlling shareholders.
Further information is given in the “Report on corporate governance and the ownership structure of UBI Banca Spa” (Section 12 – Related and Connected Parties Committee) contained in an attachment to this document.
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Principal transactions with related parties in the balance sheet
Financial Financial Financial Loans and Loans and Debt Available-for-sale assets Due to liabilities Guarantees assets held for advances to advances to Due to banks securities financial assets designated at customers held for granted trading ban ks customers issued Figures in thousands of euro fair value trading Associates - 22,443 - - 151,986 - 68,989 - - - Senior managers (1) - - - - 4,111 - 9,237 709 - - Other related parties - - - - 42,686 - 151,215 4,520 - 95,078 Total - 22,443 - - 198,783 - 229,441 5,229 - 95,078
(1) A “senior manager” is intended as meaning “a manager with key management responsibilities of the entity or of its parent, where a manager with key management responsibility is intended to mean those
who have power and responsibility for the planning, management and control of the activities of the entity including its directors”
Percentage of related-party transactions in the consolidated balance sheet
Financial Financial Financial Loans and Loans and Debt Available-for-sale assets Due to liabilities Guarantees assets held for advances to advances to Due to banks securities financial assets designated at customers held for granted trading ban ks customers issued Figures in thousands of euro fair value trading With related-parties (a) - 22,443 - - 198,783 - 229,441 5,229 - 95,078 Total (b) 924,475 9,861,978 92,290 7,836,002 92,338,083 16,733,006 68,434,827 26,014,943 411,653 5,556,869 Percentage (a/b*100) 0.000% 0.228% 0.000% 0.000% 0.215% 0.000% 0.335% 0.020% 0.000% 1.711%
Principal transactions with related parties in the income statement
Net interest Dividends and Net fee and Operating Other Staff costs income/expens administrative Figures in thousands of euro income similar income commission i Associates 175 - 159,258 (10) 4,978 (3,196) Senior managers (1) 10 - 225 (10,605) - (110) Other related parties 998 - 1,565 (492) 3 (6,300) Total 1,183 - 161,048 (11,107) 4,981 (9,606) (1) A “senior manager” is intended as meaning “a manager with key management responsibilities of the entity or of its parent, where a manager with key management responsibility is intended to mean those who have power and responsibility for the planning, management and control of the activities of the entity including its directors”
Percentage of related-party transactions in the consolidated income statement
Net interest Dividends and Net fee and Operating Other Staff costs Figures in thousands of euro income similar income commission income/expens administrative i With related-parties(a) 1,183 - 161,048 (11,107 ) 4,981 (9,606 ) T otal (b) 1,651,238 13,684 1,546,791 (1,542,463 ) 319,825 (1,076,815 ) Percentage (a/b*100 ) 0.072% 0.000% 10.412% 0.720% 1.557% 0.892%
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Principal balance sheet items with associate companies subject to significant influence
Loans and Financial assets Available-for-sale Debt sec urities Financial liabilities Guarantees advances to Due to banks Due to customers held for trading financial assets issued held for trading granted customers Figures in thousands of euro Aviva Vita Spa - - 80,710 - 60,388 - - - Lombarda Vita Spa - - 70,364 - 1,727 - - - Polis Fondi SGR Spa - 22,443 3 - 352 - - - SF Consulting Srl - - 909 - 6,503 - - - UFI Servizi Srl ------Montefeltro Sviluppo ----19--- Total - 22,443 151,986 - 68,989 - - -
Principal income statement items with associate companies subject to significant influence
Net fee and Other Net interes t Dividends and Operating c ommis s ion Staff costs administrative income similar income income/expenses Figures in thousands of euro income expenses Aviva Vita Spa 173 - 105,601 (10) 3,780 - Lombarda Vita Spa - - 53,090 - 1,146 (3,196) Polis Fondi SGR Spa ------SF Consulting Srl 2 - 555 - 52 - UFI Servizi Srl ------12--- Montefeltro Sviluppo Total 175 - 159,258 (10) 4,978 (3,196)
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Part I – Share-based payments
A. Qualitative information
1. Description of payment agreements based on own balance sheet instruments In implementation of Supervisory Regulations for Banks, since 2011 a Shareholders’ Meeting of UBI Banca has approved the payment of a portion of bonuses earned under short- and long-term incentive schemes in the form of financial instruments and more specifically in ordinary shares of UBI Banca, for staff included in the “identified staff” perimeter, except for board members. The incentive schemes described from time to time in the Remuneration Report are subject to trigger conditions (“entry gates”) set at Group level defined in the document “UBI Banca Group RAF - Risk appetite - 2017 Risk Appetite Statement”. More specifically the indicators identified for 2017 are as follows: Common Equity Tier 1 (“CET 1”) Ratio > 10%; Net Stable Funding Ratio (“NSFR”) ≥ 1; Liquidity Coverage Ratio (“LCR”) ≥ 110%; Leverage ratio (“LR”) > 3.75%. The indicators are verified at the end of the relative measurement period, as at 31/12 of each year for the short-term incentive scheme and at the end of the reference period for long-term incentive schemes, consistent with the “Risk Appetite Framework”.
Short-term incentive scheme The budgeted amount (“bonus pool”) at the service of incentives schemes may be increased, without prejudice to the correct remuneration of capital and liquidity, up to a predetermined maximum, or reduced as far as zero (“malus”), both at the overall level and at the level of each legal entity, in accordance with pre-established limits on the basis of the performance in relation to the budget approved each year by the Management and Supervisory Boards, calculated at Group level using RORAC and at the level of the individual legal entity using “normalised net profit adjusted for the ‘delta cost’ between allocated and absorbed capital1”. If the available budget allocation is overrun, criteria have been set for the bonuses to be redistributed, down to the level of the budget allocated. In line with the principles laid down in the legislation and regulations, the structure of the bonus payout for “Identified Staff” involves the following2: 50% of the bonus is converted into ordinary shares of UBI Banca, subject to retention clauses that align the incentives with the Bank's long-term interests; 50%/40% of the bonus is deferred for three years (for the Chief Executive Officer of UBI Banca 60% is deferred for five years from 20153). As a consequence of the above, the first portion of share-based bonuses should be assigned in the third year following the year of the scheme, while the second portion should be assigned in the fifth year following the year of the scheme, except for the Chief Executive Officer for whom, the second portion will be paid in the seventh year following the year of the scheme.
1 For the asset management company with a low capital absorption, the indicator used is normalised net profit. 2 For the 2015 incentive scheme, for those staff belonging to the “Other Identified Staff” the payment rules involved the deferment of 30% of the bonus for two years, excluding the use of the financial instruments. 3 Except for 2017, for which the deferment is three years in consideration of the reduction of the short-term variable component, due to the effect of the start of the new 2017-2019/20 long-term incentive scheme.
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In order to ensure capital and liquidity stability over time, consistent with long-term strategic objectives, the deferred portion is paid on condition that adequate levels of capital stability (Common Equity Tier 1 Ratio) and liquidity stability (Net Stable Funding Ratio) are maintained at the end of the relative period, consistent with the “Risk Appetite Framework” defined in internal policies. The deferred portion of the bonus will not be paid if these conditions are not met (a “malus”). From 2015, if the bonus earned is below €50,000 gross and if the bonus earned individually is less than 15% of fixed remuneration, the payment is made entirely upfront, 50% being paid in cash at the time when the conditions are met and the remaining 50% as ordinary shares of UBI Banca with a two-year retention period4. In previous years the treatment just described was applied but did not consider the percentage of the remuneration. It only considered whether the bonus earned was lower than €50,000.
Long-term incentive schemes A new long-term incentive scheme (LTIS) for the period 2017-2019/2020 was introduced in 2017 to support the Business Plan and to supplement the current 2015-2017 long-term incentive scheme with the objective of bringing the interests of management into line with those of stakeholders, not only in the short term, but with a view to creating long-term value, in compliance with legislation and regulations in force and best market practices. The schemes are also intended, amongst other things, to make remuneration target levels more competitive, by leveraging on the variable component and balancing the pay mix in favour of performance, amongst other things by encouraging the loyalty of key personnel. The beneficiaries of the 2015-2017 scheme are comprised within the “Top” perimeter of “Identified Staff”. For the 2017-2019/2020 scheme that perimeter was extended to include the remaining “Identified staff”, except for board members and financial advisors with no employee contract of employment, Corporate Control Functions to whom economic and financial indicators are not directly linked and asset management company positions that report directly to senior management of the company, with account taken of the current pay mix and the specific applicable regulations. The bonuses are paid in UBI shares (performance shares), which are considered the most appropriate instruments for aligning the interests of stakeholders with those of management. While the preliminary trigger conditions (“entry gates”) remain in place, specific value creation objectives are set for each scheme, reported in the Remuneration Report, which may be consulted for further details. The structure of the bonus payout provides for the following payments: 60% is paid up-front in shares at the end of the performance measurement period (accrual), with a two-year retention period; 40% is paid in shares, deferred by two years and with a one-year retention period. With a view to compliance with legislation and regulations in force, this quota is awarded before the end of the deferment period, but subject to a further year of retention to verify that the conditions for the payment effectively exist. In order to ensure capital and liquidity stability over time, consistent with long-term strategic objectives, the deferred portion is paid on condition that adequate levels of capital stability (Common Equity Tier 1 Ratio) and liquidity stability (Net Stable Funding Ratio) are maintained at the end of the relative period, consistent with the “Risk Appetite Framework” defined in internal policies. The deferred portion of the bonus will not be paid if these conditions are not met (a “malus”).
4 Except for asset management positions and for the Financial Advisers of the company IW Bank, for which in 2017, in consideration of the specific markets involved and the composition of the current remuneration package, payment is made upfront in cash if the individual bonus earned is less than €50,000 and less than 33% of fixed remuneration.
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The timetable for the grant of portions of bonuses to be paid in financial instruments in relation to incentive schemes
For the above, the timetable for portions of bonus payments made in financial instruments is as follows: in 2017 the first portion of the shares relating to bonuses earned for the 2012 short-term incentive scheme was granted and the first portion of the shares relating to the 2014 short- term incentive scheme was granted; in 2018 the second portion of the shares relating to the 2013 short-term incentive scheme and the first portion of the shares relating to the 2015 short-term incentive scheme will be granted; in 2019 the second portion of the shares relating bonuses earned under the 2014 short-term incentive scheme and the first portion of the shares relating to the 2016 short-term incentive scheme will be granted; in 2020 the second portion of the shares relating to the 2015 short-term incentive scheme, the first portion of the shares relating to the 2017 short-term incentive scheme and the first portion of shares relating to bonuses earned for the 2015-2017 long-term incentive scheme will be granted; in 2021 the second portion of the shares relating to bonuses earned for the 2015-2017 long- term incentive scheme and for the 2016 short-term incentive scheme will be granted; in 2022 the second portion of shares relating to bonuses earned by the Chief Executive Officer for the 2015 short-term incentive scheme, the second portion of the shares relating to the 2017 short-term incentive scheme and the first portion of shares relating to bonuses earned for the 2017-2019 long-term incentive scheme will be granted; in 2023 the second portion of shares relating to bonuses earned for the 2017-2019 long-term incentive schemes and the first portion of shares relating to bonuses earned for the 2017- 2020 long term incentive schemes will be granted; in 2024 the second portion of shares relating to bonuses earned for the 2017-2020 long-term incentive schemes will be granted.
2. Quantitative information
Short- and long term incentive schemes According to IFRS 2 “share-based payments”, the schemes in question constitute an “equity settled” operation where payment is based on shares and made using equity instruments. On this basis, because the objective of IFRS 2 is to recognise the impact on profit and loss of the remuneration paid by means of equity instruments in the income statement in the form of personnel expense, UBI Banca and the subsidiaries involved in the schemes recognised the cost for the year within the item 150a “Administrative expenses: personnel expense” against an increase in equity made by posting the amount to a separate reserve in equity because the obligation of the company will be extinguished by the delivery of equity instruments and that obligation will be settled in any event by the Parent. As concerns in particular the quantification of the cost of the schemes, since it is impossible to measure the value of the services provided by employees with precision, in compliance with IFRS 2, it is calculated on the basis of the fair value of the UBI share on the grant date multiplied by the number of shares that it is estimated will be vested.
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More specifically, the fair value of the equity instruments granted is calculated with account taken of the circumstance that the grant of the instruments will take place over a period starting in 2014 and continuing until 2024. Those estimates are based on the market price of the shares, less the present value of dividends distributable by the UBI Group in the period immediately prior to the grant of the shares, and, in general they adequately weight the terms and conditions governing the grant of the instruments. The total estimated cost of the short-term incentive schemes for shares that will be granted from 2017 is €3,393 thousand, and is composed as follows: ● up-front portions as follows: - 162,852 shares granted in the 2017, equivalent to €908 thousand; - 128,042 shares to be granted in 2018, equivalent to €898 thousand. - 79,067 shares to be granted in 2019, equivalent to €227 thousand; - 29,345 shares to be granted in 2020, equivalent to €79 thousand;
● deferred portions (if the conditions to which the deferment is subject are met) as follows: - 34,242 shares granted in the 2017, equivalent to €108 thousand; - 12,989 shares to be granted in 2018, equivalent to €57 thousand. - 86,457 shares to be granted in 2019, equivalent to €451 thousand; - 70,485 shares to be granted in 2020, equivalent to €467 thousand; - 17,247 shares to be granted in 2021, equivalent to €44 thousand. - 34,215 shares to be granted in 2022, equivalent to €154 thousand. In accordance with the vesting conditions hypothesised, the cost of the scheme is spread over the whole of its vesting period, with the portion for the year recognised in the income statement, which for the reporting year amounted to €691.1 thousand. Furthermore, any change in the cost will only occur if the vesting requirements are not met and the shares are not delivered as a consequence, either because the result conditions set by the plan are not satisfied or the person is no longer employed and not also as a result of changes in the fair value of UBI shares. The total estimated cost of the long-term incentive scheme introduced in 2015 is €3,699 thousand and, as for the short-term scheme, it is distributed throughout the whole of the vesting period set for it with recognition in the income statement of the portion for the year, which for the current year amounts to €632 thousand, composed as follows: - 338,405 shares to be granted in 2020, equivalent to €2,244 thousand; - 225,603 shares to be granted in 2021, equivalent to €1,456 thousand.
The total estimated cost of the long-term incentive scheme introduced in 2017 is €10,346 thousand and it is distributed throughout the whole of the vesting period set for it with recognition in the income statement of the portion for the year, which for the current year amounts to €1,644 thousand, composed as follows: - 1,166,322 shares to be granted in 2022, equivalent to €3,293 thousand; - 1,943,870 shares to be granted in 2023, equivalent to €5,132 thousand; - 777,548 shares to be granted in 2024, equivalent to €1,922 thousand.
Remuneration to be agreed in the event of the early termination of an employment relationship For one member of staff belonging to the “Identified Staff” perimeter with an employee contract working in a former network bank of the Group, on leaving the position occupied and consequently ending the employment relationship as a result of the merger of the network banks into UBI Banca which occurred in February 2017, it was decided to grant the person an amount equal to 6 months salary in UBI Banca shares in application of the provisions of the job security agreement in place and in compliance with Supervisory Regulations in force on the matter. A provision was made for the total cost in 2016 and involves the grant of: - 33,959 shares to be granted upfront in 2019, equivalent to €97 thousand; - 33,959 shares deferred to be granted in 2021, equivalent to €86 thousand.
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Part L – Segment Reporting
As at 31st December 2017 the Single Bank reorganisation project had been completed and defined in full detail and the organisational units and the operational responsibilities on the basis of the Business Plan had been identified. Furthermore, on 1st April 2017 the scope of consolidation was changed following the purchase of the New Banks. In consideration of the fact (i) that the reorganisation relating to the Single Bank Project mainly affected the banking operating segment which incorporated within it the Corporate and Investment Banking perimeter (CIB) and the remaining portfolio of medium-term loans granted through indirect networks no longer operational (i.e. B@nca 24-7) and (ii) that the acquisitions made in the first half mainly regarded two banking groups and a commercial bank, then for the purposes of the consolidated financial statements, the UBI Banca Group has not modified its operating segments pursuant to IFRS 8, which are as follows: banking, non-banking financial (consisting of the product companies of the Group); the corporate centre except for the introduction of the insurance segment which comprises BancAssurance Popolari Spa, BancAssurance Popolari Danni Spa and the interests held in the Banc assurance companies, Aviva Vita Spa and Lombarda Vita Spa, consolidated with the equity method and until 31st December 2016, included in the corporate centre segment.
The banking segment comprises the banking line of business attributable as at 31st December 2017 to UBI Banca Spa relating to the former Banca Regionale Europea Spa, the former Banca Popolare Commercio e Industria Spa, the former Banca Popolare di Bergamo Spa, the former Banco di Brescia Spa, the former Banca Popolare di Ancona Spa, the former Banca di Valle Camonica Spa, the former Banca Carime Spa, the CIB perimeter and the former B@nca 24-7 as well as IW Bank and UBI Banca International Sa and, from 1st April 2017, the following New Banks acquired: Banca Tirrenica Spa, Banca Adriatica Spa, Banca Teatina Spa, Banca Federico del Vecchio Spa and Cassa di Risparmio di Loreto Spa. We report that with effect for tax purposes from 1st October 2017, the merger took place in the fourth quarter of Banca Adriatica Spa, Cassa di Risparmio di Loreto Spa, Banca Tirrenica Spa and Banca Federico del Vecchio Spa into UBI Banca Spa. The non-banking financial segment mainly comprises UBI Leasing Spa, UBI Factor Spa, UBI Pramerica SGR Spa and Prestitalia Spa. The corporate centre segment comprises UBI Banca Spa (net of its banking business, as specified above), UBI Sistemi e Servizi Scpa, BPB Immobiliare Srl, Kedomus Srl and UBI Academy Scrl and, from 1st April 2017, also the following companies: Oro Italia Trading Spa, Etruria Informatica Spa, Focus Impresa Spa and Assieme Srl. Furthermore, that segment includes all the consolidation entries except for those relating to the purchase price allocation and to goodwill, which have been allocated to the individual segments to which they belong, and also those relating to the final allocation of badwill – regarding the acquisition of the New Banks –allocated to the relative segments to which it belongs. The algebraic sum of the four segments identified in this manner represents the income statement and balance sheet of the UBI Banca Group as at and for the year ended 31st December 2017.
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Distribution by operating segment: income statement
Figures in thousands of euro
Corporate Centre (UBI, UBIS, BPB Immobiliare, Non-banking Banking Insurance Kedomus and UBI item/operating segment financial Total 31.12.2017 (Aggregate) (Aggregate) Academy + all (Aggregate) intercompany and consolidation entries) Net interest income 1,158,012 179,929 24,464 288,833 1,651,238 Net fee and commission income 1,474,050 140,755 212 (68,226) 1,546,791 Net income from trading, hedging and disposal/repurchase activities and from assets/liabilities designated at fair value - - 12,490 252,613 265,103 Dividends 4,294 44 594 8,752 13,684 Gross income 2,636,356 320,728 37,760 481,972 3,476,816 Net impairment losses on loans and financial assets (655,687) (77,385) - (129,234) (862,306) Net financial income 1,980,669 243,343 37,760 352,738 2,614,510 Net income from insurance operations - - (25,894) 7,638 (18,256) Net income from banking and insurance operations 1,980,669 243,343 11,866 360,376 2,596,254 Administrative expenses (1,908,023) (129,170) (5,722) (576,363) (2,619,278) Net provisions for risks and charges 1,312 (6,139) - (4,182) (9,009) Depreciation, amortisation and net impairment losses on property, plant and equipment and intangible assets (64,488) (3,237) (576) (88,383) (156,684) Other net operating income/expense 233,559 15,064 264 70,938 319,825 Operati ng expenses (1,737,640) (123,482) (6,034) (597,990) (2,465,146) Profits (losses) of equity investments (222) - (80) 23,693 23,391 Negative consolidation difference 640,810 - - - 640,810 Profits (losses) on disposal of investments 244 6 - 609 859 Pre-tax profi t (l oss) from continuing operations 883,861 119,867 5,752 (213,312) 796,168 Taxes on income for the period/year from continuing operations (71,106) (33,952) (1,057) 26,939 (79,176) Post-tax profit (loss) from discontinued operations - - - - - Profit (loss) for the period attributable to non-controlling interests 11 (25,938) (383) (125) (26,435) Profit/loss for the year 812,766 59,977 4,312 (186,498) 690,557
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Distribution by operating segment: balance sheet
Figures in thousands of euro
Corporate Centre (UBI, UBIS, BPB Immobiliare, Non-banking Banking Insurance Kedomus and UBI item/operating segment financial Total 31.12.2017 (Aggregate) (Aggregate) Academy + all (Aggregate) intercompany and consolidation entries)
Loans and advances to banks - - 20,072 1,528,442 1,548,514 Due to banks - 10,445,518 - - 10,445,518 Net financial assets - 24,106 1,873,004 14,575,134 16,472,244 Loans and advances to customers 81,549,871 10,787,702 510 - 92,338,083 Due to customers 68,227,951 206,876 - - 68,434,827 Debt securities issued 21,629,132 110,081 10,020 4,265,710 26,014,943 Technical reserves - - 1,780,701 - 1,780,701 Equity-accounted investees - 35 214,139 28,991 243,165 Non-controlling interests 35 55,617 9,415 14,621 79,688
The items "loans and advances to banks" and "due to banks" have been stated in the four segments on the basis of the prevailing balance and show an overall net interbank balance of -€8.897 million. The items "loans and advances to banks" and "due to banks" for the banking segment have been included, together with the relative consolidation entries, in the corporate centre segment.
The item "non-controlling interests" in the "Banking" and "Non-banking financial" segments is the only portion of equity and of the profit for the period of the companies not wholly owned. It does not include non-controlling interests and the part of consolidated items attributable to non-controlling interests which have been attributed to the "corporate centre".
Absolute amounts are reported for liability items.
The balance sheet figures as at 31st December 2016 have been restated applying the same methodology used from the first half of 2017.
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Distribution by operating segment: balance sheet
Figures in thousands of euro Corporate Centre (UBI, UBIS, BPB Immobiliare, Non-banking Kedomus and Banking item/operating segment financial UBI Academy + Total 31.12.2016 (Aggregate) (Aggregate) all intercompany and consolidation entries)
Loans and advances to banks --- - Due to banks - 9,374,179 1,038,201 10,412,380 Net financial assets 177,421 28,564 17,099,620 17,305,605 Loans and advances to customers 71,671,833 10,182,447 - 81,854,280 Due to customers 53,733,653 224,504 2,268,259 56,226,416 Debt securities issued 24,465,773 110,082 4,363,742 28,939,597 Equity-accounted investees - 35 254,329 254,364 Non-controlling interests 5,037 53,386 13,604 72,027
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Disclosures concerning the fees of the independent auditors and services other than auditing in compliance with Art. 149 duodecies of Consob Issuers’ Regulations
Information pursuant to letters a), b) and c) Attachments of Attachment A to Part One, Title III, Chapter 2 of Bank of Italy Circular No. 285 of 17th December 2013 to the
Consolidated
Financial
Statements
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Disclosures concerning the fees of the independent auditors and services other than auditing in compliance with Art. 149 duodecies of Consob Issuers’ Regulations
In accordance with Art. 149 duodieces of Consob Issuers’ Regulations, information concerning payments made to the independent auditors Deloitte & Touche Spa and companies belonging to the same network for the following services is given in the table below.
1) Auditing services which include: audit of the annual accounts for the purposes of expressing a professional opinion; review of the interim accounts.
2) Certification services which include appointments where the auditor assesses a specific element, the determination of which is performed by another who is responsible for it, by employing appropriate criteria in order to furnish a conclusion which gives the recipient a measure of the reliability of that specific element. 3) Tax consultancy services. 4) Other services.
The fees presented in the table relating to the financial year 2017, are those contractually agreed, inclusive of any indexing (but not of out-of-pocket expenses, nor of supervisory authority contributions and VAT). Firm that provided the Recipient of the Fees Type of service service service figures in thousands of euro Deloitte & Touche Spa, Audit services Deloitte Audit Sarl, (*) 4,176 Deloitte Polska Sp.K
Certification services Deloitte & Touche Spa (**) 1,558
Tax consul tancy services -
Other services 166
Methodological support for the internal rating system Deloitte Consulting Srl UBI Banca Spa 164 for the measurement of credit risk
Other services Deloitte & Touche Spa (***) 2
5,900 Total
(*) UBI Banca Spa, BPB Immobiliare Srl, Centrobanca Sviluppo Impresa SGR Spa, Kedomus Srl, UBI Academy Scrl, UBI Factor Spa, UBI Leasing Spa, UBI Management Company Sa, UBI Pramerica SGR Spa, UBI Sistemi e Servizi Scpa, UBI Trustee Sa, UBI Banca International Sa, UBI Finance Srl, UBI Finance CB 2 Srl, UBI SPV BPA, UBI SPV BBS 2012 Srl, UBI SPV BPCI 2012 Srl, UBI SPV Group 2016 Srl, UBI SPV LEASE Srl, 24-7 Finance Srl, Bancassurance Popolare Spa, Bancassurance Popolare Danni Spa, Etruria Informatica Srl, Prestitalia Spa, IW Private Investment Bank Spa, Mecenate SPV Srl, Etruria Securitization Srl, Marche Mutui 2 Srl, Marche M6 Srl, Marche Mutui 4 Srl, Marche M5 Srl. (**) UBI Banca Spa, Banca Adriatica Spa, Cassa di Risparmio di Loreto Spa, UBI Academy Scrl, UBI Leasing Spa, UBI Pramerica SGR Spa, Centrobanca Sviluppo e Impresa SGR Spa, UBI Factor Spa. (***) UBI Factor Spa.
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Information pursuant to letters a), b) and c) of Attachment A to Part One, Title III, Chapter 2 of Bank of Italy Circular No. 285 of 17th December 2013
Situation as at 31st December 2017
Letter a) - Name of the companies formed and the type of business
State in which they are located Brief description of the main activities carried out Italy France Luxembourg Spain Germany Poland
Banks UBI Banca SpA (Capogruppo) xx xx Deposit-taking and lending through a branch network, trading on behalf of others, receipt and transmission of orders, placement of financial instruments, payments and settlements, custody and administration. IW Bank SpA x Deposit-taking and lending through a branch network and a network of financial advisors, trading on behalf of others, receipt and transmission of orders, placement of financial instruments, payments and settlements, custody and administration. Banca Teatina SpA x Deposit-taking and lending through a branch network, trading on behalf of others, receipt and transmission of orders, placement of financial instruments, payments and settlements, custody and administration. Banca Adriatica SpA * x Deposit-taking and lending through a branch network, trading on behalf of others, receipt and transmission of orders, placement of financial instruments, payments and settlements, custody and administration. Banca Tirrenica SpA * x Deposit-taking and lending through a branch network, trading on behalf of others, receipt and transmission of orders, placement of financial instruments, payments and settlements, custody and administration. Banca Federico Del Vecchio SpA * x Deposit-taking and lending through a branch network, trading on behalf of others, receipt and transmission of orders, placement of financial instruments, payments and settlements, custody and administration. Cassa di Risparmio di Loreto SpA * x Deposit-taking and lending through a branch network, trading on behalf of others, receipt and transmission of orders, placement of financial instruments, payments and settlements, custody and administration. UBI Banca International S.A. ** x Deposit-taking and lending through a branch network, trading on behalf of others, receipt and transmission of orders, placement of financial instruments, payments and settlements, custody and administration, ass et management.
Financial companies UBI Factor SpA x x Factoring business UBI Leasing SpA x Leasing business Prestitalia SpA x Salary-backed and deducted-from-salary lending UBI Finance Srl x Covered bond collateral pursuant to Law No. 130/1999 UBI Finance CB 2 Srl x Covered bond collateral pursuant to Law No. 130/1999 24/7 Finance Srl x Securitisation of loans and receivables pursuant to Law No. 130/1999 UBI Finance 2 Srl in liquidation x Securitisation of loans and receivables pursuant to Law No. 130/1999 UBI SPV BBS 2012 Srl x Securitisation of loans and receivables pursuant to Law No. 130/1999 UBI SPV BPA 2012 Srl x Securitisation of loans and receivables pursuant to Law No. 130/1999 UBI SPV BPCI 2012 Srl x Securitisation of loans and receivables pursuant to Law No. 130/1999 UBI SPV GROUP 2016 Srl x Securitisation of loans and receivables pursuant to Law No. 130/1999 UBI SPV LEASE 2016 Srl x Securitisation of loans and receivables pursuant to Law No. 130/1999 Mecenate SPV Srl x Securitisation of loans and receivables pursuant to Law No. 130/1999 Marche Mutui 2 SPV Srl x Securitisation of loans and receivables pursuant to Law No. 130/1999 Marche Mutui 6 SPV Srl x Securitisation of loans and receivables pursuant to Law No. 130/1999
Asset management and trust companies UBI Pramerica SGR SpA x Management of open-ended mutual investment funds Centrobanca Sviluppo Impresa SGR SpA x Management of closed-end mutual investment funds UBI Management Company SA x Asset management advisory service UBI Trustee SA x Trustee activities
Other companies UBI Sistemi e Servizi ScpA x Provision of the following: IT services, property management and purchasing, back office and logistics services to support the Group’s activities BPB Immobiliare Srl x Sale, purchase and management of the Group’s operating properties UBI Academy Scrl x Staff training services KEDOMUS Srl x Sale and purchase of real estate properties not used in the Group's operations Oro Italy Trading Srl in liquidation x Wholesale trading in gold and jewellery Etruria Informatica Srl x Provision of the following: IT services, property management and purchasing, back office and logistics services to support the Group’s activities Assieme Srl x Insurance brokerage Focus Impresa x Investment fund Bancassurance Popolari SpA x Provision of life insurance services Bancassurance Popolari Danni SpA x Provision of non-life insurance services
* Banks merged into UBI Banca Spa with effect from 1st October 2017 ** Bank sold on 1st November 2017
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Letter b) - UBI Banca Group revenues by country of location and type of business (gross income as recognised in item 120 of the mandatory income statement, in thousands of euro)
State in which they are located
Italy France Luxembourg Spain Germany Poland T O T A L
Banks 3,144,362 3,300 15,774 2,593 1,744 - 3,167,773 Financial companies 175,389 - - - - 2,041 177,430 Asset management and trust companies 140,843 - 2,350 - - - 143,193 Other companies 38,263 - - - - - 38,263 Adjustment and elimination entries ------(49,843) T O T A L 3,498,857 3,300 18,124 2,593 1,744 2,041 3,476,816
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State in which they are located
Letter c) - Number of employees on a full-time equivalent basis
Italy France Luxembourg Spain Germany Poland
Number of employees 20,671 17 10 14 10 5
Letter d) - Pre-tax profit or loss State in which they are located
Italy France Luxembourg Spain Germany Poland T O T A L
Banks (110,657) (131) 609 1,330 244 - (108,605) Financial companies 13,739 - - - - 1,750 15,489 Asset management and trust companies 104,410 - 1,415 - - - 105,825 Other companies 3,160 - - - - - 3,160 Adjustment and elimination entries ------780,299 T O T A L 10,652 (131) 2,024 1,330 244 1,750 796,168
Letter e) - Taxes on profit or loss
State in which they are located
Italy France Luxembourg Spain Germany Poland T O T A L
Banks (10,764) - (467) - - - (11,231) Financial companies (3,016) - - - - (484) (3,500) Asset management and trust companies (30,668) - (322) - - - (30,990) Other companies (18) - - - - - (18) Adjustment and elimination entries ------(33,437)
T O T A L (44,466) - (789) 0 - (484) (79,176)
Letter f) – Government grants received
The Group has received no government grants in 2017 nor in previous years. We also report that, in compliance with the instructions for compiling this disclosure, this does not include operations with central banks for financial stability purposes nor operations carried out with the objective of facilitating the transmission of monetary policy.
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