Annual Report 2008 Annual Report December 2008 Banca IMI S.p.A. Piazzetta Giordano Dell’Amore 3 – 20121 Milan (Italy) – Share capital 662,464,000 Euro – ABI Code 3249.0 – Member of the Interbank Deposit Protection Fund – Registered with the Milan Business Registry – Registration number and tax ID 04377700150 – e-mail: info@ bancaimi.com – www.bancaimi.com – Telephone +39 02.72611 – Company subject to management and control of the sale shareholder Intesa Sanpaolo S.p.A. – Banca IMI is a bank of Intesa Sanpaolo Group Contents Officers 5 Summary information 7 Executive summary 8 Report by the Board of Directors on the Company’s situation and management trends 11 Business plan and management guidelines 13 Macroeconomic outlook and financial markets 15 Results by business area 17 Results in 2008 22 Equity aggregates 32 Equity investments and holdings 39 Capital adequacy 42 Operations support and organizational change 45 Human resources 47 Management and coordination by Intesa Sanpaolo 49 Dealings with other Group companies 50 Business outlook 51 Proposals to the Shareholders’ Meeting 52 Certification by the executive in charge of accounting documents 53 Report of the Independent Auditors 55 Report of the Board of Statutory Auditors 59 Financial statements of Banca IMI 63 Balance sheet 64 Income Statement 66 Statement of changes in shareholders’ equity 67 Statement of cash flows 69 Notes 71 Part A – Accounting policies 73 Part B – Information on the balance sheet 83 Part C – Information on the Income Statement 117 Part E – Information on risks and hedging policies 133 Credit risk 134 Market risk 154 Liquidity risk 183 Operational risks 187 Part F – Information on capital 190 Part H – Transactions with related parties 193 Attachments 195 • Auditors’ fees 197 • Earnings and financial position figures of subsidiaries IMI Investments (Luxembourg) 198 IMI Finance (Luxembourg) 200 IMI Capital Markets (USA) 202 IMI Securities (USA) 203 • Details of bond issued 205 3 Officers Board of Directors (in office for the period 2007-2009) President Emilio OTTOLENGHI Vice-president Giangiacomo NARDOZZI TONIELLI Managing Director Gaetano MICCICHÈ Board Members Giuliano ASPERTI Aureliano BENEDETTI Stefano DEL PUNTA Luca GALLI Massimo MATTERA Pietro MODIANO (*) Marcello SALA Flavio VENTURINI Board of Statutory Auditors (appointed for the period 2007-2009) President Gianluca PONZELLINI Full auditors Stefania MANCINO Riccardo ROTA Substitute auditors Paolo Andrea COLOMBO Paolo GIOLLA General Management General Manager Andrea MUNARI Indipendent Auditors Reconta Ernst & Young S.p.A. (appointed for the period 2007-2011) (*) Resigned on 16 December 2008 5 Financial highlights (million euro) 31.12.2008 31.12.2007 changes amount % Income statement Core business results 605.6 480.6 125.0 26.0 Net non-recurring results 121.3 133.4 (12.1) -9.1 Net interest and other banking income 726.9 614.0 112.9 18.4 Operating costs (250.1) (300.1) 50.0 -16.7 of which: personnel expenses (84.4) (121.9) 37.5 -30.8 Operating Income 476.8 313.9 162.9 51.9 Allocations and adjustments (41.9) (28.4) (13.5) 47.5 Taxes on income (159.0) (88.0) (71.0) 80.7 Net income 293.4 210.7 82.7 39.3 Balance sheet Securities 9,315.0 14,744.6 (5,429.6) -36.8 Repurchase agreements and securities lending 9,767.0 16,611.8 (6,844.8) -41.2 Structured finance assets 1,306.2 2,061.8 (755.6) -36.6 AFS and equity investments 276.8 283.7 (6.9) -2.4 Total assets 81,697.4 56,234.2 25,463.2 45.3 Net interbank position 13,247.0 (3,576.0) 16,823.0 470.4 Bond and subordinate issues 21,701.3 7,592.1 14,109.2 185.8 Guaranties given 889.9 1,106.0 (216.1) -19.5 Notional amount of financial derivatives 2,911,752.6 1,814,171.8 1,097,580.8 60.5 Notional amount of credit derivatives 91,217.6 51,985.9 39,231.7 75.5 Shareholders' equity (1) 1,788.1 1,497.5 290.6 19.4 Profitability and risk ratios (%) Cost/Income ratio 41.3% 48.9% Average Var for the period 12.5 6.9 5.6 81.2 Net income/ Average shareholders’ equity (ROE) (2) 17.9% 14.1% Net income / Capital absorbed (3) 29.3% 13.0% Basic erning per share (EPS basic) - euro 0.443 0.318 EVA ® 211.1 105.70 Capital ratios (%) Tier 1 Capital Ratio 11.0% 5.3% Tier Total Capital Ratio 12.1% 7.7% Operating structure Total dedicated resources 571 594 (23) Long-term rating Moody's Aa3 Fitch AA- Standard & Poors AA- 1) Including net profits for the period. 2) Profits for the period in relation to the average capital, reassessment reserves and other reserves. 3) Profits, stripped of the yield of free capital, in relation to the average absorbed capital (RWA). 7 Executive summary At 31 December 2008 Banca IMI closed its first full year of operation with a net profit of 293.4 million. This result marks a sharp increase (+39%) on 31 December 2007, determined solely in the fourth quarter by the current corporate perimeter arising from the merger of Banca d’Intermediazione Mobiliare IMI into Banca Caboto. All operating margins – core results, non-recurring results, and operating costs – contributed to the achievement of this positive result. Core business results generated by the capital markets and investment banking segments exceeded 600 million, up by 26% on the previous year, showing a distribution by quarter only partly influenced by the overall economic and market scenario. Net non-recurring results came to 121 million (133 million at 31 December 2007), substantially unchanged in its contribution to the bottom line. During the periods compared, this revenue, as is typical of revenue not attributable to operating desks, showed different compositions. At 31 December 2007 the item had benefited from revenue earned on the merger between Borsa Italiana and the London Stock Exchange, whereas one year later, in the fourth quarter, it suffered the effects of the deterioration of the credit spreads of financial institutions on Banca IMI’s statement of income. The bid prices of asset classes attributable to banks in portfolio, including the domestic mortgage-backed securities and securitizations originated by the government system and the Group, were severely affected by this phenomenon. Similarly, the general widening of credit spreads following the bankruptcy of the investment bank Lehman Brothers was reflected in the measurement of the structured liabilities issued by Banca IMI at fair value. The creditworthiness of the issuer and the Group, which had always played an accessory role with respect to the value of the financial assets in which funding was invested, was a primary factor in the fourth quarter, when it depressed the values of these liabilities. Net interest and other banking income, which came to 727 million, was shaped by the results of the Capital Markets business (639 million) and the Investment Banking business (88 million). The above figure does not include the revenue reported by the foreign subsidiaries based in New York (Capital Markets) and Luxembourg (Investment Banking), which came to 12 and 21 million, respectively. The trend in operating costs, which fell by 17%, is a reflection of the focus on monitoring the aggregate and structural containment of the items directly controlled by the Company, particularly consulting, logistics and general overhead. Personnel expenses fell by 38 million, confirming the stability of ordinary wage items, essentially due to the decline in human resources employed. The result of operational management came to 477 million (314 million at 31 December 2007), resulting in a cost/income ratio of 41.3%, compared to 48.9% in the previous year. The monitoring of the risks implicit in assets led to adjustments of 37 million, of which 29 million was attributable to the overall net exposure on financial transactions with companies of the Lehman Brothers Group. A further 8 million in adjustments pertained to the portfolio impairment of on-balance sheet exposures lending commitments. The statement of income was also affected by 16 million in credit risk adjustments to OTC derivatives exposures. This amount was directly deducted from “Profits (losses) on trading”. 8 Provisions for risks and charges, which in 2007 referred to the resolution of the Parmalat dispute and the expenses associated with the integration progress, were less significant in 2008. The positive balance of other income in both periods originates in the recognition of out-of-period items due to expenses previously charged in amounts exceeding the effective outlay or liability. Income before tax came to 452 million compared to 299 million at 31 December 2007. Income taxes, under the increased tax rate (35.1% compared to 29.5%), were affected by the larger taxable base in connection with the full taxation of dividends collected on trading securities for the purposes of IRES (corporate income tax) and 50% for the purposes of IRAP (regional production tax), in addition to the inability to deduct all interest expenses. These factors more than offset the nominal decrease in tax rates. The lesser effective tax rate in 2007 was also due to the more favourable taxation of the Borsa-LSE capital gain. The Bank’s capital solidity was confirmed in Q4 2008, with a Tier I capital ratio of 11% and a Tier Total of 12.1%, despite the redemption of subordinated Tier III loans in the amount of 530 million and the allocation of 74% of distributable profits to dividends during the year. The constant improvement in the liquidity situation, most notably the increase in bond funding by 14 billion over the year (over 6 billion in the fourth quarter alone), resulted in the inversion of the interbank position held by Banca IMI, typically a borrower, and now a net lender.